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OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 

SCHOOL  OF  LAW 


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in  2008  with  funding  from 

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CASES 


ON 


BUSINESS  LAW 


BY 

WILLIAM  EVERETT  BRITTON 

PROFESSOP   OF   LAW,    INDIANA    UNIVERSITY 
AND 

RALPH  STANLEY  BAUER 

ASSISTANT  PROFESSOR   OF   BUSINESS   I.AW 
UNIVERSITY   OF  ILLINOIS 


ST.   PAUL 

WEST    PUBLISHING    CO. 

1922 


Copyright,  1921-1922 

BT 

WEST  PUBLISHING  COMPANY 
(B.&B.Bus.Law) 


\  i  V.  ?, 


PREFACE 


This  collection  of  cases  is  designed  for  the  use  of  students  in  schools 
of  commerce  and  business  administration. 

The  scope,  content,  and  method  of  treatment  of  materials  for  such  a 
course  depends  largely  upon  the  ends  sought  to  be  accomplished 
thereby.  If  the  acquisition  of  specific  legal  information  were  the  chief 
goal  toward  which  the  nonprofessional  law  student  were  to  direct  his 
efforts,  the  treatment  of  the  subject  intended  for  his  study  would  be 
extensive,  perhaps,  over  the  greater  portion  of  the  entire  field  of  the 
law.  On  the  other  hand,  if  the  chief  end  of  such  study  were  the  ade- 
quate equipment  of  the  student  for  acting  as  his  own  legal  adviser,  a 
complete  course  in  a  law  school  would  be  necessary. 

The  ends  to  be  attained  from  the  study  of  law  by  this  class  of  non- 
professional law  students  lies  somewhere  between  these  two  extremes. 
The  future  business  man  may  well  obtain  such  a  knowledge  of  law 
as  will  be  of  value  to  him  in  avoiding  some  litigation.  From  its  study, 
he  should  be  enabled  to  appreciate  with  greater  certainty  the  time  and 
the  circumstances  under  which  the  guidance  of  competent  counsel  is 
needed,  and  his  knowledge  should  constitute  additional  equipment  for 
intelligent  co-operation  with  counsel.  As  a  student,  irrespective  of  his 
future  work,  he  may  well  be  permitted  to  gain  whatever  of  educational 
value  there  may  be  in  the  study  and  discussion  of  legal  problems.  As 
a  citizen,' he  should  know  something  of  the  nature  and  development  of 
the  methods  by  which  organized  society  encourages  initiative,  controls 
human  action,  and  advances  individual  and  social  interests  through  the 
administration  of  justice. 

An  extensive  treatment  of  law,  it  is  believed,  is  not  calculated  to 
produce  the  best  results.  Some  intensive  work  is  indispensable,  for 
otherwise  some  of  the  chief  ends  of  the  study  are  likely  to  be  defeated. 
The  materials  placed  in  his  hands  and  the  nature  of  his  study  should 
emphasize,  upon  the  mind  of  one  who  spends  but  a  short  time  in  the 
study  of  law,  the  truth  that  he  has  surveyed  but  a  limited  portion  of  a 
broad  field  of  study  and  that  his  observation  thereof  has  not  pene- 
trated to  any  great  depth.  But  this  same  material  and  his  work  upon 
it  should,  however,  umnistakably  reveal  to  the  student  some  of  the 
chief  sources  of  controversy  and  litigation,  and  should  impart  to  him 
a  knowledge  of  the  problems  involved  in  the  formulation  and  inter- 
pretation of  legal  principles  and  of  the  difficulty  inherent  in  their  ap- 
plication to  the  limitless  variety  of  economic  and  social  facts.  The 
picture  drawn  cannot  be  complete,  but  it  should  be  true  as  far  as  it 
moves  within  the  range  of  vision.  There  exist  just  as  strong  reasons, 
therefore,  for  the  belief  that  judicial  decisions  constitute  the  materials 
best  suited  for  conveying  to  the  business  student  some  definite  notions 

iii 


IV  PREFACE 

concerning  the  nature  of  law  and  its  relation  to  linman  affairs,  as 
there  are  for  the  belief  that  the  same  materials  are  best  adapted  to 
equip  one  for  the  legal  profession. 

But  there  is  a  possibility  of  error  in  the  direction  of  too  intensive 
treatment.  The  business  student  will  not  as  a  rule  be  justified  in 
spending  as  much  time  in  the  study  of  law  as  is  spent  by  a  professional 
law  student  in  one  semester's  work.  If  he  does  choose  to  go  this  far, 
it  is  believed  that  professional  law  courses  are  better  suited  to  his 
needs.  Whatever  time  is  allotted,  he  could,  with  profit,  employ  this 
time  in  taking  one  or  two  regular  law  school  courses.  But  it  is  be- 
lieved that  the  average  business  student  may  spend,  with  greater  value 
to  himself,  the  same  amount  of  time  upon  a  larger  number  of  law 
subjects.  By  so  doing  there  is  some  loss  in  educational  value,  in  the 
knowledge  of  the  law's  historical  development  and  in  other  respects ; 
but  there  is  a  gain  in  acquaintance  with  a  greater  variety  of  legal 
problems  common  to  modern  business,  which,  it  is  believed,  exceeds 
these  losses. 

Confronted,  therefore,  with  the  problems  of  selection  and  apportion- 
ment of  topics,  the  present  compilers  have  thought  that  the  law  of 
contracts  in  its  general  and  some  of  its  special  aspects  and  the  law 
relating  to  business  associations  should  be  treated,  that  approximately 
one-third  of  the  time  should  be  devoted  to  the  general  law  of  contracts, 
about  one-fifth  to  partnerships  and  corporations,  and  the  principal 
portion  of  the  remainder  to  agency,  negotiable  instruments,  and  sales. 

This  material  has  been  organized  with  the  view  of  aiding,  as  much 
as  possible,  the  student's  understanding  of  the  subjects  presented. 
The  subjects  are  introduced  in  a  natural  order.  The  law  of  sales  could 
have  been  taken  up  before  negotiable  instruments ;  but  the  reverse 
order  was  selected,  so  that  the  sections  dealing  with  negotiable  docu- 
ments of  title  would  appear  more  intelligible.  Each  part,  obviously, 
deals  with  a  particular  legal  relation  or  group  of  closely  related  legal 
relations.  In  each  part,  as  a  rule,  the  cases  first  taken  up  are  concerned 
with  the  question:  What  facts  will  operate  to  produce  the  particular 
relation  under  discussion  and  what  facts  will  not  so  operate?  When 
we  have  once  established  what  facts  are  essential  to  create  a  certain 
relation,  cases  dealing  with  the  nature  of  the  relation  and  the  effects  of 
facts  subsequent  to  its  creation  are  taken  up. 

Obviously  there  is  a  fairly  wide  range  of  possibilities  in  determining 
the  order  of  treatment  of  facts  subsequent  to  the  creation  of  a  particu- 
lar relation.  In  fixing  this  order  the  compilers  have  been  influenced 
chiefly  by  the  desire  so  to  arrange  the  topics  that  the  student  will  be 
aided  in  visualizing  the  subject  in  its  constituent  parts  and  as  a  whole, 
and,  it  is  hoped,  in  gaining  some  real  knowledge  concerning  it.  In  the 
general  law  of  contracts,  after  the  development  of  the  topics  of  offer, 
acceptance,  and  consideration,  these  ideas  have  led  to  the  treatment  of 
the  important  facts  relating  to  perfonnance  and  breach  as  they  affect 
the  normal  contract.  After  noting  the  collateral  operative  effect  of  the 
contract  upon  third  parties,  attention  is  then  paid  to  the  facts  that 
operate  to  discharge  the  relation,  thus  completing  the  picture  of  the 


PREFACE  V 

origin,  nature,  and  termination  of  the  normal  contractual  relation. 
With  these  ideas  in  the  background,  the  student  is  then  led  to  note  the 
variation  in  operative  effect  caused  by  the  introduction  of  the  ab- 
normal elements  of  fraud,  mistake,  duress,  illegality,  incapacity,  and 
the  noncompliance  with  the  statute  of  frauds.  The  same  ideas  have 
been  carried  out  in  the  other  parts  of  the  book,  each  chapter  featuring 
either  some  distinctive  and  closely  related  groups  of  facts,  or  the 
nature,  extent,  and  operation  of  a  particular  relationship  between  two 
parties. 

It  has  also  been  thought  desirable  to  introduce,  very  briefly  indeed, 
some  aspects  of  the  pledge,  the  bailment,  the  contracts  of  affreight- 
ment, insurance,  and  suretyship,  and  some  leading  ideas  of  the  law  of 
damages  and  legal  remedies,  including  a  short  summary  of  the  Bank- 
ruptcy Act.  It  is  conceded  that,  in  the  absence  of  a  fairly  extended 
development  of  some  special  topics,  this  fragmentary  introduction  of 
other  special  topics  would  be  ill-advised.  But  it  is  believed  that,  with 
these  correctives  in  plain  view,  there  is  some  value  in  permitting  the 
business  student,  for  example,  to  read  a  few  cases  dealing  with  the 
special  defenses  of  the  surety,  his  rights  of  reimbursement,  contribu- 
tion, subrogation,  and  exoneration,  and  in  taking  some  note  of  the 
nature  and  operation  of  common-law,  equitable,  and  statutory  remedies. 

Here  and  there  throughout  the  volume,  the  opportunity  presenting 
itself,  cases  drawn  from  other  branches  of  the  law  were  availed  of, 
in  part  to  illustrate  the  main  subject  then  being  developed,  and  in  part 
to  show  concretely  the  existence  of  other  departments  of  the  law 
not  taken  up.  This  policy  it  was  thought  would  tend  to  widen  the 
student's  perspective  of  the  field  of  the  law  and  also  to  make  that  por- 
tion of  it  which  was  selected  for  more  intensive  cultivation  to  appear 
in  its  true  light,  as  a  portion  only  of  a  legal  system.  This  policy  ex- 
plains the  use  of  several  cases  in  agency  dealing  with  various  kinds 
of  torts,  the  insertion  of  a  case  in  the  sections  on  assignment  of  con- 
tracts dealing  with  the  declaration  of  trust,  and  it  explains  the  use,  in 
the  chapter  on  performance  of  contracts,  of  a  case  concerned  with  the 
right  of  specific  performance  against  a  vendor  of  land  whose  wife  re- 
fused to  release  her  dower.  A  few  cases  from  quasi  contracts  and 
equity,  particularly  on  its  remedial  side,  were  set  out  for  the  same 
reason.  Obviously  there  are  many  such  topics  of  equal,  perhaps 
greater,  importance,  which  might  have  been  dealt  with  in  like  manner. 
The  law  relating  to  the  delivery  of  deeds  is  certainly  of  as  much  im- 
portance as  the  law  relating  to  the  delivery  of  a  negotiable  instru- 
ment, but  no  case  dealing  with  the  former  problem  was  inserted.  The 
idea,  however,  was  not  to  bring  into  the  discussion  from  other  de- 
partments of  the  law  only  those  cases  which  were  deemed  to  be  of 
more  importance  than  those  omitted,  but  rather  to  introduce  a  suffi- 
cient number  of  cases  from  other  branches,  to  show  that  there  were 
other  fields  of  the  law,  and  also  to  mark  out  some  of  the  boundary 
lines  of  the  legal  system  as  a  whole. 

The  various  sections  have  not  all  been  developed  to  the  same  de- 
gree.    To  some  has  been  given  a  more  intensive  treatment  than  to 


VI  PREFACE 

others,  not  always  because  of  the  actual  or  supposed  importance  of  the 
matters  involved  over  those  not  so  intensively  developed,  but  because 
of  a  desire  to  impress  upon  the  mind  of  the  student  the  fact  that  the 
legal  aspects  of  any  particular  group  of  circumstances  is  capable  of 
a  much  more  extended  study.  If  the  leading  idea  were  to  impart  in- 
formation as  to  what  should  be  done  in  certain  eventualities,  then  the 
organization  of  materials  would  have  been  quite  different ;  but  it  is  be- 
lieved that  the  value  in  such  treatment  would  be  of  a  transitory  nature, 
obtained  at  too  great  a  sacrifice  of  the  scientific  principle  to  be  desir- 
able. 

In  the  selection  of  cases,  the  compilers  have  been  guided  by  several 
considerations.  In  the  first  place,  limitations  of  space  prevent  the  de- 
velopment of  the  law  historically  and  comparatively.  Occasionally, 
however,  modern  cases  have  been  inserted  which  contain  historical 
discussions  of  the  rules  involved,  and  also  some  cases  have  been  used 
to  present  conflicts  of  authority,  enough,  it  is  hoped,  to  show  that  the 
history  of  the  law  is  a  part  of  it,  and  that  courts  may  differ,  in  a  given 
case,  as  to  what  the  rule  should  be,  or  as  to  the  interpretation  of  an 
accepted  rule,  or  as  to  its  application  to  facts. 

As  a  rule  the  older  cases  have  been  omitted,  although  they  may  be 
leading  cases,  and  modern  cases  included,  which  discuss  the  leading 
authorities  and  show  how  they  have  been  applied.  This  policy  has 
caused  the  omission  of  such  cases  as  Shadwell  v.  Shadwell,  Price  v. 
Neal,  and  Northern  Pacific  R.  R.  Co.  v.  Boyd.  But  it  has  not  always 
been  found  possible  to  do  this.  INIany  cases  have  been  inserted  be- 
cause of  their  facts,  facts  with  which  the  student  is  likely  to  be  familiar, 
or  because  of  their  present-day  business  importance,  their  dramatic 
value,  or  merely  because  they  were  modern.  In  the  editing  of  cases, 
citations  of  authorities,  as  a  rule,  have  been  omitted.  In  the  selection 
of  all  cases  the  compilers  have  kept  in  mind  the  important  fact  that 
the  student  is  engaged  in  his  study  to  learn  something  of  the  law  as 
it  is,  and  it  is  hoped  that  the  cases  selected  will  be  found  well  adapted 
to  this  end. 

Fully  aware  of  the  objections  which  may  be  raised  to  the  use  of  the 
texts  of  the  Uniform  Acts  relating  to  Negotiable  Instruments,  Sales, 
and  Partnership  as  the  points  of  departure  for  the  study  of  these  sub- 
jects, the  compilers  have  nevertheless  felt  that  the  policy  of  setting  out 
portions  of  the  text  at  the  beginning  of  chapters  or  sections  before  the 
introduction  of  cases  was  not  only  justifiable,  but  desirable.  It  is  be- 
lieved that  this  method  makes  for  clearness,  and  also  tends  to  facilitate 
the  student's  comprehension  of  the  subject  as  a  whole.  Even  in  juris- 
dictions which  have  not  enacted  these  Uniform  Acts,  it  is  believed 
that  the  common-law  rules  there  in  force  may  just  as  easily,  if  not 
more  easily,  be  taught  in  this  way.  Moreover,  the  use  of  this  method 
in  the  codified  subjects,  appearing  alongside  the  development  of  un- 
codified branches,  calls  attention  to  the  difference  in  juridical  method, 
shows  that  concepts  behind  a  statute  are  not  solids,  but  fluids,  that 
codification  does  not  arrest  development,  and,  perhaps,  may  furnish  the 
occasion  for  noting  -the  existence  of  some  of  the  problems  of  juristic 


PREFACE  Vll 

science.  Most  of  the  cases  dealing  with  negotiable  instruments  and 
sales  have  been  cases  decided  under  the  Uniform  Acts.  Out  of  a  total 
of  580  cases  contained  in  the  volume  379  have  been  decided  since  1900. 

The  compilers  have  also  thought  that  it  would  be  of  some  assistance 
to  the  student,  in  understanding  the  cases  and  in  organizing  the  results 
of  his  work,  to  make  some  comments  at  the  beginning  of  each  subject, 
and  also  at  the  beginning  of  some  of  the  chapters  and  sections,  not, 
however,  for  the  purpose  of  informing  him  with  respect  to  certain 
principles  of  law  to  be  taken  up,  but  rather  to  indicate  the  nature  of 
the  legal  problems  with  which  the  material  immediately  following  is 
concerned.  The  short  statement  used  as  an  introduction  to  the  study 
of  law  was  included  for  the  purpose  of  giving  the  student  some  ad- 
vance information  as  to  the  nature  of  the  subject,  the  material  used, 
the  methods  of  study,  and  also  to  designate  that  portion  of  the  law 
with  which  the  book  deals.  A  fairly  extended  list  of  definitions  of 
legal  terms  was  added  for  the  convenience  of  the  student. 

In  the  preparation  of  this  volume  the  compilers  have  been  much 
assisted  by  the  works  of  Professors  Williston,  Corbin,  Mechem,  God- 
dard,  Brannan,  Gilmore,  Wormser,  and  Richards.  A  large  part  of  the 
merit  which  this  collection  may  possess  is  traceable  to  their  scholarship 
and  to  the  scholarly  w^orks  of  many  others  who  have  made  contribu- 
tions to  the  subjects  surveyed  in  this  book.  A  special  debt  is  owed  to 
Professor  Corbin,  whose  writings  have  influenced  to  a  marked  degree 
the  character  of  the  introductory  statements  and  the  organization  of 
material  throughout  the  book.  Grateful  acknowledgment  is  also  due 
Professor  Lewis  for  his  kind  permission  to  reprint  his  scholarly  notes 
to  the  Uniform  Partnership  Act  and  to  the  members  of  the  faculty  of 
the  College  of  Commerce  and  Business  Administration  of  the  Univer- 
sity of  Illinois,  for  their  helpful  suggestions. 

W.  E.  B. 
R.  S.  B. 

-  :Makch,  1922. 


TABLE  OF  CONTENTS 


Part 


Page 

Introduction    } 

I.     Contracts    ^'^ 


II.     Agency 


484 


III.     Negotiable    Instruments ^1 


1 V.     Sales 
^'.     Partnership 


D51 
.1215 


VI.    Corporations    ^"^^^ 


Introduction  to  the  Study  of  Law 

Section 

1.  Nature  of  Law 1 

2.  Systems  of  Law ^ 

?>.     Objects  of  Law ^ 

4.  Legal    Relations ^ 

5.  Divisions   of   Law '^ 

6.  Legal    Procedure 12 

7.  Judicial  Decisions I'J 

S.    History  and  Development  of  tlie  Law 19 


PART  I 

Contracts 

Chapter 

I.     Offer  and  Acceptance 23 

II.     Consideration    ^3 

III.     Performance  of  Contracts 140 

IT.     Rights  of  Third  Parties  in  Contracts 245 

Y.     Discharge  of  Contracts 274 

YL     Effect  of  Mistalie,  Fraud,  Duress  and  Undue  Influence 289 

YII.     Illegality 314 

YIII.     Capacity  344 

IX.     Contracts  Required  to  be  in  Writing 362 

X.     Remedies   388 

XI.     Special  Types  of  Contracts 443 

CHAPTER  I 

Offer  and  Acceptance 


OO 


Section 

1.  Introduction    

2.  What  Constitutes  an  Offer 28 

3.  Duration  of  Offers 37 

4.  Acceptance — Time  of  Taking  Effect 55 

5.  Nature  of  Acts  or  Language  Essential  to  Constitute  an  Acceptance. . .  62 

6.  Offer  and  Acceptance  Implied  in  Fact  or  in  Law 81 

B.&  B.Bus.Law  (ix) 


X  TABLE   OF   CONTENTS 

CHAPTER  II 

Consideration 
Section 

1.  lutroduction    93 

2.  Consideration  in  Unilateral  Contracts 95 

3.  Performance  of,  or  Promise  to  Perform,  a  Pre-existing  Legal  Duty . .  100 

4.  Promises  in  tlie  Nature  of  Gratuities 115 

5.  Illusory   Promises 120 

0.  Promises  to  Pay  for  a  Benefit  Previously  Received 129 

7.     Sealed   Instruments 137 

CHAPTER  III 

Performance  of  Contracts 

1.  Introduction  140 

2.  Inteiiiretation     141 

3.  Conditions  in   Contracts — General   Statement 154 

4.  Performance  on  Time  as  a  Condition 159 

5.  Performance  to  the  Satisfaction  of  Another  as  a  Condition 164 

6.  Procuring  Certificate  of  an  Architect  as  a  Condition 167 

7.  Substantial  Performance  in  Various  Other  Types  of  Contracts  as  Con- 

ditions       170 

S.     Tender  of  Performance  as  a  Condition 188 

9.     Divisible  Contracts 193 

10.  Conditions    Subsequent 200 

11.  Prevention  as  an  Excuse  for  Non-Performance 202 

12.  Waiver  as  an  Excuse  for  Non-Performance 205 

13.  Anticipatory  Breach  of  Contract 212 

14.  Right  of  a  Party  Materially  in  Default  to  Recover  for  His  Incomplete 

Performance    218 

15.  Impossibility  of  Performance  as  a  Condition 227 

CHAPTER  IV 

Rights  of  Third  Parties  in  Contracts 

1.  Introduction    . 245 

2.  Contracts  for  the  Benefit  of  a  Donee  of  the  Promisee 245 

3.  Contracts  for  the  Benefit  of  a  Creditor  of  the  Promisee 251 

4.  Nature  and  Requisites  of  an  Assignment 259 

5.  Intei-ests  Capable  of  Assignment 265 

6.  Nature  and  Extent  of  the  Interest  Acquired  by  the  Assignee 270 

CHAPTER  V 

Discharge  of  Contracts 

1.  Introduction    ' ii74 

2.  Discharge  by  Agreement,  Accord  and  Satisfaction,  Account  Stated, 

and    Merger 274 

3.  Discharge  by  Novation 279 

4.  Discharge  by  Release,  Cancellation,  and  Alteration 282 

5.  Discharge  in  Bankruptcy  Proceedings 283 

6.  Effect  of  Statutes  of  Limitations 288 

CHAPTER  VI 
Effect  of  Mistake,  Fraud,  Duress  and  Undue  Influence 

1.  Introduction    289 

2.  Mistiike    290 

3.  Fraud  299 

4.  Duress    307 

5.  Undue    Influence 311 


TABLE   OF   CONTENTS  XI 

CHAPTER  VII 

Illegality 
Section 

1.  Introduction • ^14 

2.  Contracts  in  Restraint  of  Trade 315 

3.  Contracts  Limiting  the  Liability  of  Bailees  and  Other  Persons 324 

4.  Gambling    Contracts 328 

5.  Other  Illustrations  of  Illegal  Contracts 330 

6.  Effect  of  Illegality 337 

7.  Sunday    Contracts 342 

CHAPTER  VIII 

Capacity 

1.  Introduction  '. 34t 

2.  Disaffirmance  345 

3.  Ratification    356 

4.  Contracts  for  Necessaries  359 


CHAPTER  IX 

Contracts  Required  to  be  in  Writing 

1.  Introduction   362 

2.  Contracts  of   Guaranty 363 

3.  Contracts  of  Executors  and  Administrators 367 

4.  Contracts  Made  in  Consideration  of  Marriage 368 

5.  Contracts  for  the  Sale  of  Lands 369 

6.  Contracts  Not  to  be  Performed  Within  the  Space  of  One  Year 374 

7.  Contracts  for  the  Sale  of  Personal  Property 376 

8.  Compliance  with   the   Statute 380 

9.  Effect  of  Non-Compliance  with   the  Statute 384 


CHAPTER  X 

Remedies 

1.  Introduction  388 

2.  Measure  of  Damages 389 

3.  Rescission   398 

4.  Judgments  and  Executions 401 

5.  Garnishment    403 

6.  Attachment  of  Property 406 

7.  Specific    Performance 410 

8.  Injunction  416 

9.  Enforcement  of  Decrees  by  Attachment  for  Contempt 419 

10.  Bankruptcy    421 

11.  Receiverships  440 


CHAPTER  XI 

Special  Types  of  Contracts 

1.  Introduction  443 

2.  Bailments    444 

3.  The  Contract  of  Carriage 451 

4.  The  Contract  of  Pledge 467 

5.  The  Contract  of  Suretyship 469 


xii  TABLE   OF   CONTENTS 

PART  II 

Agency 

Chapter 

Introduction    484 

I.  Source  and  Scope  of  the  Agent's  Power 489 

II.     Relations  of  tlie  Principal  and  Third  Persons 520 

III.     Termination  of  the  Relation 565 

IV.     Relations  of  the   Principal   and   Agent 579 

V.  Relations  of  the  Agent  and  Third  Persons 611 

CHAPTER)  I 

Source  and  Scope  of  the  Agent's  Power 
Section 

1.  Powers  Arising    from    Express,    Implied,   and   Incidental   Authority, 

Necessity  and  Estoppel,  Considered  Generally 489 

2.  Illustrations   496 

CHAPTER  Ix 
Relations  of  the  Principal  and  Third  Persons 

1.  Rights  and  Liabilities  of  the  Disclosed  Principal 520 

2.  Rights  and  Liabilities  of  the  Undisclosed  Principal 529 

3.  Ratification    537 

4.  Master's  Liability  for  Torts  of  the  Servant 547 

CHAPTER  III 
Termination   of  the   Relation 

1.  What  Constitutes  a  Termination  of  the  Relation 565 

2.  Irrevocable    Powers 573 

3.  Effect  of  Terminating  the  Relation 577 

CHAPTER  IV 
Relations  of  the  Principal  and  Agent 

1.  Rights  of  the  Principal  Against  the  Agent 579 

2.  Rights  of  the  Agent  Against  the  Principal 597 

CHAPTER  V 
Relations  of  the  Agent  and  Third  Persons 

1.  Rights  of  the  Agent  Against  Third  Persons 611 

2.  Rights  of  Third  Persons  Against  the  Agent 615 

PART  III 

Negotiable  Instruments 

Chapter 

I  ntroductlon    631 

I.     Formal    Requisites 638 

II.  Kight  of  the  Holder  to  Complete,  to  Sue  Upon,  and  to  Negotiate 

the    Instrument 725 

Til.     Who  are  Holders  in  Due  Course 748 

IV.  Rights  of  the  Holder  Against  the  Maker  and  Acceptor 798 

V.  Rights  of  the  Holder  Against  Indorsers  and  the  Drawer S74 

VI,  Presentment,  Notices  of  Dishonor,  and  Protest 903 

VII.     Discharge  ^^2 


TABLE   OF   CONTENTS  Xlll 

CHAPTER  1 

Formal  KEQUisiTKg 

Section 

1.  Introduction    63S 

2.  Writing  and    Signiiture 639 

3.  Necessity  for  a  Promise  or  Order 63!) 

4.  The  Promise  or  Order  Must  be  Unconditional 640 

5.  Time  of  Payment  Must  be  Cei'tain 656 

6.  The  Instrument  Must  be  Payable  in  Money 671 

7.  The  Sum  to  be  Paid  Must  be  Certain 684 

8.  The  Instrument  Must  be  Payable  to  Order  or  Bearer 688 

9.  I'rovisions   Not  Affecting  Negotiability 6!>2 

10.  Designation  of  Parties  to  Negotiable  Instruments 696 

11.  Date  of  the  Instrument 713 

12.  Interpretation   of  Ambiguous   Instruments 714 

]  3.     Consideration  714 

14.     Delivery    720' 

CHAPTER  II 

RrcTiT  OF  THE  Holder  to  Complete,  to  Sue  Upox,  and  to  Negotiate 
THE  Instrument 

1.  Introduction  725 

2.  Completion  of  the  Instrument 725 

3.  Right  to  Sue  Prior  Partie.s 726 

4.  What  Constitutes  a  Negotiation 731 

5.  Negotiation  by  Special  Indorsement 733 

6.  Negotiation  by  Blank  Indorsement 734 

7.  Negotiation  by  Restrictive  Indorsement 737 

8.  Negotiation  by  Qualified  Indorsement 741 

9.  Negotiation  by  Conditional  Indorsement 742 

10.  Transfer  of  Unindorsed  Paper  Payable  to   the  Order  of  the  Trans- 

feror    743 

11.  Surrender  to  the  Drawee 744 

12.  Other  Formal  Requisites  and  Aspects  of  Negotiation 746 

CHAPTER  III 

Wiro  ARE  Holders  in  Due  Course 

1.  Introduction  74S 

2.  Must  be  a  Purchaser  for  Value 74s 

3.  Must  be  a  Purchaser  Before  Maturity 754 

4.  Must  be  a  Purchaser  in  Good  Faith 761 

5.  Payee  may  be  a  Holder  in  Due  Course 777 

6.  Transferee  from  a  Holder  in  Due  Course  is  a  Holder  in  Due  Course. .  783 

7.  Rights  of  the  Reacquirer 78.5, 

8.  Rights  of  a  Transferee  from  a  Holder  in  Due  Course  of  Unindorsed 

Paper  Payable  to  the  Order  of  the  Transferor 793 

CHAPTER  IV 

RtGHTS   OF  THE    HOLDEB   AGAINST  THE   MAKER    AND    ACCEPTOR 

1.  Introduction  79s 

2.  Defenses  and  Claims  of  Ownership  Not  Available  Against  Holders  in 

Due   Course 800 

3.  Defenses  and  Claims  of  Ownership  Available  Against  Holder  in  Due 

Course , . . . .  826- 


XIV  TABLE   OF   CONTENTS 

Section 

4.  Right  of  the  Drawee  to  Recover  Money  Paid  to  the  Holder  under 

Mistake    8-40 

5.  Right  of  the  Drawee  with  Respect  to   Instruments  Payable  to  the 

Order  of  a  Fictitious  Payee 854 

6.  Relation  of  the  Drawee  Bank  to  the  Drawer 862 

7.  Rights  and  Liabilities  of  Parties  with   Respect  to  Acceptances  and 

Payments  for  Honor 871 

8.  Bills  in  a  Set 873 

CHAPTER  V 

Rights  of  the  Holder  Against  Indorsees  and  the  Drawer 

1.  Introduction    8^-4 

2.  Rights  of  the  Holder  Against  the  Unqualified  Indorser 875 

3.  Rights  of  the  Holder  Against  the  Qualified  Indorser  and  the  Trans- 

feror by   Delivery 877 

4.  Rights  of  the  Holder  Against  the  Accommodation  Indorser 885 

5.  Rights  of  the  Holder  Against  the  Restrictive  Indorser 898 

6.  Rights  of  the  Holder  Against  the  Drawer 899 


CHAPTER  VI 

Presentkent,  Notices  of  Dishonor,  and  Protest 

1.  Introduction  •  •  •  •  ^3 

2.  Time  of  Presentment  for  Payment  of  Demand  Notes 903 

3.  Time  of  Presentment  for  Payment  of  Demand  Bills  of  Exchange,  in 

Order  to  Charge  the  Drawer  and  Indorsers,  Drawers  of  Checks 

Excepted    904 

4.  Time  of  Pi-esentment  of  Checks  in  Order  to  Charge  the  Drawer 915 

5.  Time  of  Presentment  of  Instruments  Bearing  a  Fixed  Maturity 920 

6.  Other  Aspects  of  a  Due  Presentment  for  Payment 921 

7.  Presentment  for   Acceptance 923 

8.  Notice  of  Dishonor 926 

9.  Protest 9<i0 


CHAPTER  VII 

Discharge 

1.  Introduction 932 

2.  Discharge  of  the  Maker  and  Acceptor 932 

3.  Discharge  of  the  Regular  Indorsers 941 

4.  Discharge  of  a   Surety 942 


PART   IV 

Sales 

Chapter 

Introduction    951 

I.     Transfer  of  Title  in  Contracts  of  Sale  of  Ascertained  Goods 953 

II.     Transfer  of  Title  in  Contracts  to  Sell  Unascertained  Goods 989 

III.  Powers  of  Persons  Not  Owners  of  Goods  to  Trans'fer  Title  to  In- 

nocent Purchasers 1036 

IV.  Negotiable  Documents  of  Title 1063 

V.     Remedies  of  the  Seller 1093 

VI.     Warranties •  -1128 

VII.     Rights  and  Remedies  of  the  Buyer 1183 


TABLK   OF   CONTENTS  XV 


CHAPTER  I 

Transfer  of  Title  in  Contracts  of  Sale  of  Ascertained  Goods 

Sections 

1.  Introduction  , 953 

2.  Title  Passes  When  the  Parties  Intend  It  to  Pass 954 

3.  In  Contracts  to  Sell  Ascertained  (ioods  in  a  Deliverable  State,  Pre- 

sumptively Title  Passes  at  the  Time  the  Contract  is  Made 959 

4.  Further  Illustrations  of  the  Application  of  the  Presumption 96(> 

5.  Application  of  the  Presumption  Where  Acts  of  Weighing  or  Measur- 

ing Must  Alone  be  Done  to  Ascertain  the  Amount  of  the  Purchase 
Price 967 

6.  Presumption  That  Title  Passes  at  the  Date  of  the  Contract  is  Ap- 

plicable Where  the  Sale  is  a  Sale  on  Credit 968 

7.  Presumption  That  Title  Passes  at  the  Date  of  the  Contract  Overcome 

by  Proof  That  the  Parties  Intended  a  Cash  Sale 971 

8.  Contracts  on  Sale  or  Return  and  Contracts  to  Sell  on  Approval 976 

9.  Conditional    Sales 985 


CHAPTER  II 

Transfer  of  Title  in  Contracts  to  Sell  Unascertained  Goods 

1.  Introduction  989 

2.  Acts   of  Unconditional  Appropriation 991 

3.  Acts  of  Unconditional  Appropriation  with  Respect  to  Only  a  Portion' 

of  the  Goods '. 997 

4.  Acts  of  Unconditional  Appropriation  Not  Necessary  in  Sales  of  Fungi- 

ble Goods 1000 

5.  Passing  of  Title  to  Goods  Which  at  the  Date  of  the  Contract  are 

Not  in  Existence 1002 

6.  Passing  of  Title  to  Property  Contracted  to  be  Sold  upon  Its  Delivery 

to  a  Carrier  or  Other  Bailee 1006 

7.  Effect  of  the  Form  of  the  P.ill  of  Lading  upon  the  Pass-ing  of  Title. .  .1028 

CHAPTER  III 

Powers  of  Persons  not  Owners  of  Goods  to  Transfer  Title  to 
Innocent  Purchasers 

1.  Introduction    1036 

2.  Estoppel    of    the    Owner    to    Deny    Custodian's    Power    to    Transfer 

Title 1042 

3.  Sale  by  One  Having  a  Voidable  Title 1046 

4.  Sale  by  a  Seller  in  Possession  of  Goods  Already  Sold 10.50 

5.  Rights  of  Creditors  Against  Goods  Sold  in  Seller's  Possession 1054 

6.  Rights  of  Creditors  Against  Goods  Sold  in  Violation  of  Bulk  Sales 

Acts    1054 


CHAPTER  IV 

Negotiable  Documents  of  Title 

Introduction   1063 

Definition  of  a  Negotiable  Document  of  Title 1064 

Negotiation  of  Negotiable  Documents  of  Title 1066 

Rights  of  an  Indorsee  of  a  Negotiable  Document  of  Title 106S 

Rights  of  the  Indorsee  Against  Indorsers 1086 

Rights  of  Creditors  Against  Goods  Represented  by  Negotiable  Docu- 
ments of  Title 1090 

Rights  of  Transferees  of  a  Non-Negotiable  Document  of  Title 1090 

B.&  B.Bus.Law— b 


xvi  TABLE   OF   CONTENTS 

CHAPTER  V 

REirEDIES    OF   THE    SELLEK 

Section 

1.  Introduction  ' 1093 

2.  Action  for  the  Puvchase  Price lOOH 

3.  Seller's  Rights  Against  the  Goods  in  General 109S 

4.  Unpaid   Seller's   Lien 111'^ 

5.  Right  of  Resale 1120 

6.  Right  of   Rescission 1123 

7.  Right  to  Damages  for  Breach  of  Contract  to  Sell 1125 

CHAPTER  VI 

Wakranties 

1.  Introduction   1128 

2.  Express    Warranties 1130 

3.  Implied  Warranties  Considered  Generally 1143 

4.  Implied  Warranty  of  Title 1143 

5.  Implied  Warranty  That  the  Goods  Shall  Correspond  to  the  Descrip- 

tion    1146 

6.  Implied  Warranty  That  the  Goods  shall  Correspond  to  the  Sample. .  .1153 

7.  Implied  Warranty  of  Merchantability 1158 

8.  Implied  Warranty  of  Fitness  for  a  Particular  Purpose 1161 

9.  Implied  Warranties  May  Ai-ise  from  the  Usage  of  Trade 1171 

10.  Implied  Warranties  May  be  Negatived  by  Agreement 1173 

11.  Rights  of  Sub- Vendees  Against  Former  Warrantors 1177 


CHAPTER   VII 

Rights  and  Remedies  of  the  Buyer 

1.  Introduction    1183 

2.  Buyer's  Right  to  Examine  the  Goods 1183 

3.  Nature  and  Consequences  of  an  Acceptance  of  the  (ioods 1190 

4.  Buyer  under  No  Duty  to  Return  Goods  Not  Accepted.  Because  of  Non- 

Compliance  with  the  Contract 1193 

5.  Remedies  of  the  Buyer  for  Breach  of  Warranty 1195 

6.  Buyer's  Right  to  Recover  Damages  for  Breach  of  the  Contract  to 

Sell    1207 

7.  Right  of  the  Buyer  to  Sue  the  Seller  for  Conversion  of  the  Goods.  . .  .1211 

8.  Buyer's  Right  of  Specific  Performance 1212 


PART  V 
Partnership 

Chapter 

Introduction    1215 

I.     What  Constitutes  a  Partnership 1218 

II.     Relations  of  the  Partners  Between  Themselves 1241 

III.  Relations  of  Partners  to  Third  Persons 1298 

IV.  Causes  of  Dissolution 1318 

V.     Effect  of  Dissolution  upon  the  Relations  of  the  Partners  Between 

Themselves    1325 

VI.     Effect  of  Dis.solution  upon  the  Relations  of  the  Partners  to  Third 

I\Trties    1334 

VII.     Limited    Partnerships 1.36.1 


TABLE   OF   COXTKNTS  XVll 

CHAPTER  I  ^ 

What  Coxstitutks  a  Paktxersttip 
Section 

1.  Partnership  the  Result  of  Intention 1218 

2.  Partnership    by    Estoppel 1228 

3.  Partnership  by  Operation  of  Law  as  to  Tliird  Persons 1230 

4.  Partnerships  Distinguished  from  Trusts  for  Business  Purposes 1235 

CHAPTER  II 

Relations  of  the  Partners  Between  Themselves 

1.  Partner's  Interest  in  Specific  Partnership  Property 1241 

2.  What  Constitutes  Partnership  Property 1259 

3.  What  Constitutes  Partnership  Capital 1261 

4.  Acquisition  and  Transfer  of  Partnership  Realty 1264 

5.  Partnership   Name  and   Good  Will 1266 

6.  Partner's  Interest  in  the  Partnership 1274 

7.  Sharing  of  Profits  and  Losses 1275 

S.  Partner's  Right  to  Repayment  of  Contributions 127T 

9.  Partner's  Right  of  Indemnity 1278 

10.  Partner's  Right  to  an  Accounting 1278 

11.  Fiduciary  Relati(m  of  Partners 1284 

12.  Partner's  Right  to  Participate  in  Management 1292 

13.  Partner's  Rii:ht  to  Information 1295 

14.  Partner's  Right  to  Remuneration  for  Services 129G 

CHAPTER  III 

Relations  of  Partners  to  Third  Persons 

1.  Scope  of  a  Partner's  Power  in  General 1298 

2.  Particular  Powers 1302 

3.  Powers  with  Respect  to  Partnership  Realty 1303 

4.  Powers  Arising  by  Estoppel 1303 

5.  Liability  of  Partners,  When  Joint  or  Joint  and  Several 1305 

6.  Right  of  a  Creditor  of  a  Partner  in  the  Partner's  Individual  Capacity 

with  Respect  to   Partnership  Property 1312 

CHAPTER  IV 

Causes  of  Dissolution 

1.  Nature  of  Dissolution  in  General 1318 

2.  Causes  of  Dissolution  Not  Based  on  Breach  of  the  Partnership  Agree- 

ment     1318 

3.  Dissolution  Caused  by  Breach  of  Partnership  Agreement 1319 

4.  Dissolution   Caused  by  Business  Becoming  Illegal 1319 

5.  Dissolution  Effected  by  Court  Decree 1319 

6.  Effect  of  Assignment  of  a  Partner's  Interest 1323 


CHAPTER  V 

Effect  of  Dissolution  Upon  the  Relations  of  the  Partners 

Between   Themselves 

Effect,  as  Between  the  Partners,  of  a  Dissolution  Not  Caused  by  the 

Act,  Bankruptcy,  or  Death  of  a  Partner 1325 

Effect,  as  Between  the  Partners,  of  a  Dissolution  Caused  by  the  Act, 

Bankruptcy,  or  Death   of  a   Partner 1325 


xviii  a'ABLE  of  contexts 

Section 
3.     Liability  of  a  Partner  to  Jlis  Co-Partners  for  Wrongfully  Causing  a 

Dissolution 


1327 


4.  Power  of  the  Partners  to  Wind  up  tlie  Partnership  Affairs 1327 

5.  Rights  of  Partners  After  Dissolution  with  Respect  to  the  Disposition 

of  Partnership  Assets 1331 

6.  Relations  of  the  Partners  After  Dissolution  upon  Their  Election  to 

Continue  the  Business 1331 

7.  Right  of  a  Partner  Who  has  Wrongfully  Caused  a  Dissolution 1332 

8.  Right  of  a  Partner  Who  has  Rescinded  a  Partnership  Contract  for 

Fraud 13^3 


CHAPTER  VI 

Effect  of  Dissolution  Upon  the  Rei,ations  of  the  Partners 
10  Third    Parties 

1.  Effect,  as  to  Third  Parties,  of  a  Dissolution  upon  Partnership  Lia- 

bilities  Existing   Prior   to    Dissolution 1334 

2.  Effect,  as  to  Third  Parties,  of  a  Dissolution  upon  Transactions  Sub- 

sequent to  Dissolution 1340 

3.  Rights   of  Creditors   of  the  Dissolved  Partnership   Against   the   In- 

dividual or  Partnership  Continuing  the  Business 1345 

4.  Priorities    Among    Claimants    in    the    Settlement    of    a    Partnership 

Estate    13^9 


CHAPTER  VII 
Limited    Partnerships 13^^ 


PART   VI 

Corporations 

Chapter  _  ^^ 

Introduction   1377 

I.     Organization  of  a  Corporation 1380 

II.     Contracts  of  Promoters 139» 

III.     Corporate  Powers 1-i^''" 

IV.     The  Relation  of  Stockholders  to  the  Corporation 1414 

V.     The  Relation  of  Creditors  to  the  Corporation 1473 

VI.     Relation  of  the  Corporation  to  the  State 1500 


CHAPTER  I 

Organization  of  a  Corporation 

Section 

1.  Effect  of  Complete  Organization— The  Corporate  Entity 1380 

2.  When  Corporate  Entity  may  be  Disregarded 1387 

3.  Effect  of  Incomplete  Organization , 1391 


CHAPTER  II 

Contracts  of  Promoters 

1.  Relation  of  the  Promoter  to  the  Corporation 1309 

2.  Relation  of  the   Subscriber  to  the  Corporation  on  Promoters'    Con- 


tracts 


.1405 


TABLE   OF   CONTENTS  XIX 

CHAPTEIi  III 

COUrOKATIC    I'OWERS 

Section  tsm 

1.  Scope  of  Corporate  Powers ^-^^ ' 

2.  Ultra  Vires   Contracts l'*'^^ 

CHAPTER  IV 

The  Relation  of  Stockholders   to  the  Couporatiox 

1.  Nature  of  a  Share  of  Stock 1414 

2.  Rights  of  the  Preferred  Stockhoklers 1417 

3.  Right  to  Inspect  Corporate  Books 1419 

4.  Right  to  Participate  in  New  Issues  of  Stock 1421 

5.  Stockholders'    Meetings    1125 

G.     Voting   Ti-usts ^428 

7.     Rights  of  the  Minority • -.1433 

S.     Right  to  Maintain  Actions  upon  Corporate  Causes  of  .Action 1437 

9.     Rights  with  Respect  to  Declared  Dividends  and  Surplus 1442 

10      Apportionment   of   Interests   Between   Life  Tenant  and   Remainder- 

^  ^  1452 

man    

11.     Rights  of  the  Corporation  Against  OtRcers  and  Directors 1459 

12      Rights    and    Lialtilities    of    Parties    with    Respect    to    Transfers    of 


Stock 


.1465 


chaptp:r  V 

The  Relation  of  Creditors  to   the  Corporation 

1.  Rights  of  Corporation  Creditors  Against  a  Purchaser  of  the  Assets 

of  the  Debtor  Company H"-^ 

2.  Priorities  Among  the  Various  Classes  of  Creditors  in  General 1480 

3.  Current  Operating  Expenses  to  he  Paid  out  of  Current  Earnings  in 

Preference  to  Claims  of  Secured  Creditors 1481 

4.  Rights  of  Unsecured  Creditors  Arising  upon  Reorganization 1488 

5.  Rights  of  Creditors  Against  Stockholders 1493 

CHAPTER  VI 

Relation  of  the  Corporation  to  the  State 

1.  Power  to  Alter  the  Charter 1500 

2.  Police   Powers   of   the   State 1501 

3.  Taxing  Powers  of  the  State 1504 

4.  Powers  with  Respect  to  Foreign  Corporations 1510 


Dictionary  of  Li;gal  Terms 1513 

Indkx    1543 


TABLE  OF  CASES 


Cases  printed  in  ordinary  type  are  the  cases  reported  as  tlie  text  of  this 
volume.  Cases  printed  in  italics  are  found  in  tlie  footnotes  and  in  text;  they 
are  included  in  this  table  either  because  they  are  stated  and  discussed,  or 
because  they  are  printed  in  other  casebooks  and  have  become  known  to  many 
teachers  and  students,  who  will  thus  be  enabled  to  use  this  table  as  a  supple- 
mentary index. 


Page 

Abbott  V.  Doane   11- 

Abe  Stein  Co.  v.  Robertson 1138 

Abraham  v.  Karger    069 

Adams  v.  Burks  323 

Adams   v.   Guyandotte  Valley   R. 

Co 159 

Adams  P]xpress  Co.  v.  Croninger. .  458 

Aebi  v.  Bank  of  Evausville   909 

Agri  Mfg.  Co.  v.  Atlantic  Fertiliz- 
er Co 1025 

Ahem  v.  Baker 565 

Aiple-Hemmelmann    Real    Estate 

Vo.  V.  SpeVrrink 173,  175 

Alaska  Coast  Co.  v.  Alaska  Barge 

Co -454 

Alderman   Bros.   Co.   v.  Westing- 
house  Air  Brake  Co 1031 

Alger  V.  Thacher 316 

Allen,   In    re    1046 

Allen  V.  Bank  595 

Allen  v.   Bryson. 129 

Allen  Grocery  Co.  v.  Bank  of  Bu- 
chanan County   SOS 

Alsens  American  Portland  Cement 
Works    V.    Degnon    Contracting 

Co 207 

American    Soda    Fountain    Co.    v. 

Spring  Water  Carbonating  Co.  1167 
Anderson  v.  Board,  etc.,  of  Public 

Schodls    31 

Anderson  v.  May  229 

Andreios  v.  Diirant   993 

Angus  V.  Downs    807 

Anniug  v.  Anning 260 

Anonymous    746 

Appleton    V.    Citizens'    Cent.    >.'at. 

Bank    1408 

Aragon  Coffee  Co.  v.  Rogers 787 

Aragon  Coffee  Co.  v.  Rogers 789 

Ash  v.  Guie  1220 

Assets  Realization   Co.   v.   Ameri- 
can Bonding  Co.  of  Baltimore. .  479 
AtUmtic   Coast   Line  v.  Riverside 

Mills    459 

Atlantic    Coast    Line    R.    Co.    v. 
Goldsboro   1501 


Page 
Atlantic  Coast  Realty  Co.  v.  Town- 
send    577 

Austin  V.  Burge  82 

Automatic    Time-Table    Advertis- 
ing Co.  V.  Automatic  Time-Table 

Co 964 

Averett's  Adm'r  v.  Booker 642 

Avery  v.  Dougherty   522 

Ayer  v.  Eutchins 775 

Bacigalupo  v.  Parrilli 928 

Bacon  v.  Fourth  Nat.  Bank 602 

Bailey  v.  De  Crespigny  238 

Bailey  v.  Pardridge 540 

Baird  v.   Shipman   622 

Baker  v.  Drake   394 

Baker  Co.  v.  Broion 10  (4 

Baldnin  Bank  v.  Smith   934 

Bank  v.  Burkham 850 

Bank  v.  Burkhardt   850 

B.ank  v.  Morgan >>20 

Bank  of  America  v.  Way  dell 750 

Bank  of  Batavia  v.  New  York,  L. 

E.  &  W.  R.  Co 510 

Bar,k  of  Dearoorn  v.  Matney  ....  423 
Bank  of  Carrollton,  Miss.,  v.  Lat- 

tiug    136 

Bank    of   Monongahela    A'alley    v. 

Weston     1304 

Bartley  Co.  v.  Lee    1095 

Basket  V.  Moss  337 

Batchelder  v.  Council  Grove  Wa- 
ter Co 652 

Bauer  v.  O'Domiell  322,  323 

Baxendale  v.  Bennett   810 

Beach  v.  First  Methodist  Episco- 
pal Church 43 

Beck  V.  Wilkins-Ricks  Co 450 

Beck  &   Pauli  Lithographing  Oo. 
V.  Colorado  Milling  &  Elevutor 

Co 161 

Bergeron  v.  Hobbs   1391 

Berry,  Demoville  &  Co.  v.  Sowell .   296 

Beth'cll  V.  Clark  1116 

Bettiui  V.  Gye 177 


B.&  B.Bus.Law 


(xxi) 


xxu 


TABLE    OF    CASES 


Page 
B.  F.  Sturtevant  Co.  v.  Firoiirouf 

Film  Co 71 

Bingham  v.  Mears  475 

Bird  V.  Munroe oS4 

Birdsong  &   Co.   v.  Marty    V209 

Bishop  V.  Cliane 713 

Bishop  V.  Eaton   60 

Bissell  V.  Michigan  SoutJier)i  d-  A". 

/.  li.  Cos 1411 

Blalce     V.     Hamilton    Dime     Sav. 

Bank   Co 862 

Blanchard  v.  Blanchard 473 

Bloom  V.   Lofgren    1291 

Boatsman     v.     Stockmen's     Nat. 

Bank    802 

Boatmen's  Sav.  Bank  v.  Johnson.   470 

Bolton  Partners  v.  Lambert 545 

Boon'e  v.  Eyre 187 

Borden  v.  Fine   1154 

Borgnis  v.  Falk  Co 151 

Boston  Steel  t(-  Iron  Co.  v.  Hteiier  780 
Bowditch  V.  Jackson  Co.  ...  1432, 1433 
Bracken  v.  Fidelltu  Trust  Co.  686,  687 
Bradford  Piano  Co.  v.  Hacker   .  .^  963 

Brager  v.   Levy    501 

Brander  r.  Brandcr 1453 

Bretz  V.  Diehle    444 

Briggs  V.    Spaulding   1459 

Bristol     Mfg.     Co.     v.     Arkwright 

Mills     995 

British  Waggon  Co.  v.  Lea  &  Co.  266 

Britton  v.  Turner 219 

Broun  v.  Foster 165 

Brown  v.   Perera    675 

Brown    v.    Western    Maryland    R. 

Co.     * 414 

Buchanan  v.  Orange 176 

Bm:hanan  v.  Tlldcn 247.  250,  251 

Buffalo  &  L.  Land  Co.  v.  Bellevue 

Land  &  Improvement  Co 170 

Buffalo  t{-   Lancaster  Land  Co.  v. 

Bellevue,  L.  d-  /.   Co 240 

Bulkeleij  v.  House  478 

Burch  V.  Americus  Grocery  Co..  .  569 
Butehe-i-s'    Advocate    Co.    v.    Ber- 

kof 46 

Button  V.  Hoffman   1.3.S3 

California     Vegetable     Union     v. 

Crocker  Nat.  Bank    870 

CaJlanan  v.  K.,  A.  C.  d  L.   C.  R. 

.    Co 400 

Canales  v.  Earl 1043 

Canandaigua  Nat.  Bank  v.  Cleve- 
land. C.  C.  &  St.  L.  R.  Co 1083 

Capitol   Hill   State  Bank  v.   Raw- 
lins Nat.  Bank   743 

Capuano  v.  Italian   Importing  Co. 

of  New  York ms 

Caret/  r.  Dmwhue   4.33 

Carnegie  Steel  Co.  v.  U.  S 235 

Carroll  v.   Bowersock   242 

Carroll  v.  Haskins  960 

Case  r.  Beaure</ard 1245 

Cassidoi/  r.   McKenzie    571 

Castle  V.  Swift  &  Co 380 


Page 

Cellers  v.   Meacnem    945 

Central  Imp.  Co.  v.  Cambria  Steel 

Co ' 1488 

Central   Transp.   Co.  v.  Fullmati's 

Falace   Car  Co 1408 

Central   Trust   Co.   of  Illinois  v. 

Chicago  Auditorium  Ass'n 287 

Central  Trust  &  Safe  Depo.'Jit  Co. 

V.  Respass    1282 

Century    Electric    Co.    v.    Detroit 

Copper  &  Brass  Holding  Mills.  .1170 
C.  E.  AYhite  &  Co.  v.  Century  Sav. 

Bank    1091 

Challiss  V.  McCrum   878 

Chandelor  v.  Lopus  1131 

Chapman  v.  Cole  682 

Chapman  v.  Rose 831 

Charles   Moe   Co.   v.   J.   H.   Logue 

Co 504 

Cheevcr  v.  Pittsburg  R.  Co...  767,  774 
Chicago,  B.  d  Q.  R.  Co.  v.  Illinois  1503 
Chicago     Hansom     Cab     Co.     v. 

Yerkes   1435 

Chicago  R.  Co.  v.  Mcrcluxnts'  Bank  641 
Chicago   Railroad  Equipm-ent    Co. 

V.  Merchants'  Nat.  Bank  .  .650,  760 
Chicago  Washed  Coal  Co.  v.  Whit- 
sett  210 

Childers  v.  Neely   1322 

C,  H.  d  D.  R.  Co.  V.  Bank 864 

Citizen.^'  Banking  Co.  v.  Rarenna 

Xat.  Bank,  Ohio 429 

Citizens'  Nat.  Bank  v.  First  Nat 

Bank    760 

Citizens'  State  Bank  v.  Cowles  . .  751 
Citij  Bank  of  New  Haven  r.  Per- 
kins       729 

City    of    East    Grand    Forks    v. 

Steele  581 

Clatlin  v.  Lenheim  565 

Clark  V.  Bever   1493 

Clark  V.  Hovey   597 

Clark  V.  Marsiglia  217 

Clark  V.  O'Rourke  619 

Clark  V.  Thompson   712 

Clayton   v.   Merrett   571 

Cleary    v.    De    Beck    Plate    Glass 

Co 692 

Coates,  Appeal  of   961 

Coddington  v.  Bag 749 

Co/fin,  In  re 436 

Coicord  V.  Banco  De  Tamaulipas.   702 

Cole  V.  Harrison 765 

Collin   County  Nat.   Bank  v.  Har- 
ris &  Jaggers   1032 

Columbia  Grocery  Co.  v.  Marshall  938 
Columbia  Knickerbocker  Trust  Co. 

V.  Miller   934 

Columbian  Banking  Co.  v.  Bowen  906 
Columbus.   H.    V.   &   T.   R.   Co.   v. 

Gaftney    SI 

Commercial   Bank   v.  J.   K.  Arms- 

hy  Co 1073 

Commercial   Nat.   Bank  v.   Canal- 
Louisiana  Bank  &  Trust  Co.  . . .  1078 


TAP.LE    OF    CASES 


XXlll 


Page  I 
Commercial  Realty   &  Const.  Co. 

V.  Dorsey   11<jO 

Com.  V.  Illinois  Cent.  K.  Co loS j 

Comstock  V.  Buckley , TOO 

Coolidge  <&  McClaine  v.  .Saltmarsh  083 
Cooney,  Eckstein  &  Co.  v.  Sweat.  .1059 

Cooper   V.   Sonk    89G 

Cope's  Estate,  In  re  OGl 

Vorhctt  V.  Clark   Wl 

Corbin   v.  Tracy   412 

Courtney  Shoe  Co.  v.  E.  W.  Curd 

&  Son 66 

Cox  'V.  Hiclcman 1226,  1232 

Crompton  v.  B.-edle 305 

Culmer  v.  American  Grocery  Co. .  .   272 

Cumber  v.  HV^/ze 100.  101,  102 

Cummins  Amendment,  In  re 46."5 

CuiHh/  V.  Lindsay   1049 

Cushion  Heel  Shoe  Co.  v.  Hartt  . .  1402 

Daniel  v.  Buttner   697 

Daniels  v.  ?(cirton  214 

Darby  v.  Gilliiian  1362 

Darro\V  v.  Calkins 1247 

Dartmouth  CoUeye,  Case  of  1501 

Darthmouth     College     v.     Wood- 

nard    1502 

Davis    V.    Butler    301 

Davis  V.  First  Nat.  Bank 737 

Davis  V.  Van  Camp  Packing  Co. .  .  1180 
Davison  Chemical  Co.  of  Baltimore 
County  V.  Baugh   Chemical  Co. 

of  Baltimore  County 144 

Dean    v.    Dean    1261 

De  Cicco  V.  Schweizer Ill 

Deeves  &  Son  v.  Manhattan  Life 

Ins.    Co 205 

Dcitz  t\  Insurance  Co 513 

De  La  Chaumctte  v.  Bank  of  Eng- 
land     678,  680,  6S1 

Delaware  Trust  Co.  v.  Calm 188 

Deming   v.   Darling    1134 

Dempsey  v.  Chambers 537 

Derry  v.  Peek  629 

Dewey  v.   Union  School  Dist.  of 

City  of  Alpena 204 

Dick  r.  Page  571 

Dickey  v.  Waldo 1003 

Diebold  Safe  &  Lock  Co.  v.  Hus- 
ton     1148 

Diem  v.   Koblitz   1110 

Dinsmore  v.  Itice  983 

D.  M.  Ferry  &  Co.  v.  Hall 978 

Dr.  Miles  Medical  Co.  v.  John  D..    . 

Park  d-  Sons  Co 322 

Dodge  V.  Ford  Motor  Co 1443 

Doner  v.  Stauffer   1245,  1256 

Donovan  v.  Turtell   1389 

Downer  v.  Union  Land  Co.  of  St. 

Taul   1497 

Doyle  V.  Dixon 374 

Drake  v.  Markle    674 

Driggs  V.  Bush   382 

Drnmmond  &  Sons  v.  E.  II.  Van 

Ingen  &  Co 11!'8 

Du  Bose  V.  Kell   311 


Page 

Dunham  v.  Peterson   710 

Dunton  v.    Westchester   Fire   Ins. 

Co 330 

Dutton  V.  Pool   255 

Dyer  v.  Sebrcll 729 

Earp's  Appeal 1453,  1455 

Eastman  v.  Sunset  Park  Land  Co.  675 

Eaton  V.  Blackburn 1188 

Edmmidson\s  Estate,  Matter  of.  .  251 

Edtrards  r.  llarhen 1052 

E.  Eising  &  Co.  v.  American  Alco- 
hol Co 1156 

Eising  &  Co.  v.  American  Alcohol 

Co 1156 

Eisner  v.  Macomber  1452,  1505 

Ellas  V.  Whitney   765 

Eliason  v.  Hensluno 69 

Elkins  V.  Board  of  Coni'rs  of  Wy- 
andotte County 62 

Ellis  V.  Trust  Co 843 

Elton.,  Ex  parte   1354 

Engraving  Co.  v.  Moore    163 

Essex  Trust  Co.  v.  Enwright  ....   586 

Estes  V.  Levering  Shoe  Co 757 

Etheredge  v.  Barkley   64 

Everet  r.   Willianis   1283 

Eiran  r.  Brooks-Water  Field   Co.  889 

Exchange  Bank  v.  Thrower 503 

Exchange  Bank  v.  Gardner 1292 

Faber-Musser    Co.    v.    William    E. 

Dee  Clay  Mfg.  Co 496 

Fairbanks  v.  Snow 805 

Fairmount  Glass  Works  v.  Grun- 

den-Martin  Woodenware  Co.  ...     33 
Farmers'   Co-Operative  Trust   Co. 

V.  Floyd   615 

Farmers'    Loan   &    Trust    Coy    v. 

McCoy   687 

Farmers'    Nat.    Bank  v.   Farmers' 

&  Traders'  Bank 850 

Farmers'  Nat.  Bank  v.  McCall   .  .   651 
Farmers'   Produce  Co.  v.   INIcAles- 

ter  Storage  &  Commission  Co. .  .     56 

Farnsworth  v.  Burdick 731 

Farrell  v.  Manhattan  Market  Co.  1166 
Far  Rockaway  Bank  v.  Norton  .  .   891 
Farivell  v.  Boston  <£-  IF.  R.  Cor- 
poration       606 

Faucher  v.  Wilson  456 

Ferry  &  Co.  v.  Hall 978 

Field  V.  Kane   557 

Fillebrown  v.  Hayward   775 

Finley   v.   Smith    664.   684 

Finlc'u  V.  Smith 668,  660 

First  Nat.  Bank  v.  Allen 820 

First  yat.  Bank  v.  Allen 528 

First  Nat.  Bank  v.  Bank  of  Wyn-d- 

.   mere    843,  852 

First  Nat.  Bank  v.  Barnum 423 

First    Nat.    Bank    v.    Commercial 

Bank    ; 704 

First    Nat.    Bank    v.    Corporation 

Securities  Co 413 


XXIV 


TAHLI';    OF    CASES 


Page 
First    Nat.    Bank    v.    First    Nat. 

Bank    ''■40 

First  Nat.  Bank  v.  Kelgord 73:5 

First  Nat.  Hank  v.  Leach   'Ml 

First  Nat.  Bank  v.  Lightner 640 

First  Nat.  Bank  v.  McCullough  . .  797 
First  Nat.  Bank  v.  National  Park 

Bank  of  New  York  . ; 933 

First  Nat.  Bank  v.  Sprague 594 

First  Nat.  Bank  v.  Sullivan 643 

llrst  Nat.  Bank  v.  Watkins 59 

Fleming  v.  Sherwood  647 

Fletcher  v.  Keed   1327 

Foakes  v.   Beer    100 

Fogff  V.  Atliencum 83 

Foisom  V.  Marlette  1277 

Folwell  V.  Miller 624 

Ford  V.  People's  Bank 844 

Forrest  v.  Safety  Banking  &  Trust 

Co 689 

Fosdick  V.  ScJiall 1-182 

Foster  t\  Essex  Bank 447 

Foinitain  v.  Bigham  309 

Fowler  V.  Butterly   806 

Fox  V.  Bank  of  Kansas  City 753 

Fox  V.  Ryan   597 

Fradley  v.  Hyland 533 

Francis  v.  McNeal   423 

Frew  V.  Scovilar  477 

Gage  V.  Callauan  509 

G.  A.  Kelly  Plow  Co.  v.  London  .  .   583 

Gallagher    v.    Jones    392 

Galuslm  v.  Sherman  308 

Gandell  v.  Pontiyny   600 

Gardner  v.  Beacon  Trust  Co 824 

Gardner  v.   Watson    277 

Garrettson  v.  Bank  705 

Ga.scoigne  v.  Gary  Brick  Co 1155 

Gass  V.  Southern  Pac.  Co 1111 

Gay  V.  Householder 1296 

Ge'hl  V.  Peycke  Bros.  Commission 

Co 1008 

George  M.  West  Co.  v.  Lea  /iro.s..l349 

Gerard  v.  McCormick 774 

Gerli  &  Co.  v.  Mistletoe  Silk  Mills  1206 

Germania  Bank  v.  Boutcll   844 

Gerstein  v.  C.  F.  Adams  Co 556 

Gibbons  v.  Mahon 1452 

Gibson  v.  Cranage  165 

Gibson  v.  Holland   387 

Gieseke  v.  Johns<)n    475 

Gifford  V.  Corrigan 250 

Gillette  v.  Hodge   759 

Gillis  V.  Cobe 222 

Glantz  V.  Gardiner   1054 

Glenn  v.  Bossier    190 

Glennan    v.     Rochester     Trust    & 

Safe  Deposit  Co 865 

Globe   Mutual   Life  In.s.   Ass'n  v. 

Wagner    '>04 

Goddard  v.  Binney 377 

Goddard  v.  O'Brien 100,  101,  102 

Good  V.  Martin 895 

Oordon  v.  Aumiller 1300 

Oordon   v.  Levine    917 


Page 
Gore  V.  Canada  Life  Assur.  Co.  . .  498 

Gourd  V.  Healy 1001 

Gray  v.  Barton 102 

Green  v.  Gunsten 833 

Green  v.  Wilkie  830 

Greene  v.  McAuley  72^ 

Greenway  v.  Gaither   215 

Green-Wheeler  Shoe  Go.  v.  Chica- 
go, R.  I.  &  P.  R.  Co 452 

Greemcood  v.   Union  Freight   R. 

Co 1502 

Gregory  v.  Lee  360 

Griffiths  v.  Kellogg   831 

Grigsby  v.  Russell  334 

Guardian    Trust    Co.    v.    Cambria 
Steel  Co 1-188 

Haddock,  Blanchard  &  Co.  v.  Had- 
dock      891 

Hadlev  v.  Baxendale   389 

Hahuenfeld   v.   Wolff    508 

Hall  V.  Kansas  City  Terra  Cotta 

Co 404 

Hall  V.  Neiccomb  893 

Hall  V.  Page -467 

Hall  V.  Wright  238 

Hall      &      Brown      W(»odworking 
Mach.  Go.  V.  Haley  Furniture  & 

Mfg.  Co ; 526 

Hamer  v.  Sidway • .     95 

Hardy    Implement    Co.    v.    South 

Bend  Iron  Works 269,  270 

Harriman,  The  237 

Harris  v.  Independence  Gas  Co.  .  .1409 

Harrison  v.  Henderson    275 

Harbison  v.   Shirley    332 

Hart  V.  Pennsylvayiia  R.  R.  . .  .459,  463 
Hartington  Nat.  Bank  v.  Bre.slin.   770 

Harvey  v.    Childs    1231 

Havner  v.   Stephens    1320 

Hawes  v.   Oakland    1450 

Hawkes  v.  Kehoe  -   172 

Hawley  v.  Maiden   1504 

Haworth  v.  Jackson  1323 

H,ayicard  v.  Leonard  223,  224 

Heald  v.  Kenworthy  534 

Healy  v.  Healy 297 

Hebblethwaite  v.  Flint  683 

Hebert  v.  Dewey   168 

Helgar    Corporation    v.    Warner's 

Features   198 

Hcndrix  v.  Bauhard 710 

Henry  v.  Heeb  541 

Herrington  v.  Davitt   132 

Hertcr  v.  Mullen  240 

Hertzog  v.  Hertzog  82 

Uewes  &  Co.  v.  Jordan 381 

Heydon  v.  Hcydon 1245 

Hines,  In  re 431 

Hobart  v.  Young   1131 

Hobbs    V.    Hinton    Foundry,    Ma- 
chine &  Plumbing  Co 356 

Hobbs  V.  Massasoit  Whip  Co.   ...     80 
Hochster  v.  Be  La  Tour  .213,  214,  215 

Hodge  v.  Smith   723 

Hodge  Bros.  v.  Wallace   760 


TABLE    OF    CASES 


XXV 


Page  ^ 

Iloe  V.  Sanborn  S80 

Hoffman  &   Co.   v.   Bank  of  Mil- 

waulcee    846 

Ilogan  V.  Stophlet   105 

rioUiday   State   Bank   v.   Hoffman 

662,    684 
Holliday   State   Hank  v.  Hoffman 

666,    669 

Holmes  v.  Gilman   590 

Home,  The  v.  Selling   256 

Hopkins  V.  Rati  iff  85 

Hosmer  v.  Wilfion   217 

Hotclikiss  V.  National  City  iJank.     ?>0 
Hoyt  V.  Hainsworth  Motor  Co.  . .  .1162 

Hubbard  v.  Ten   Brook    5:16 

Hunt  V.  liousmatiicr  574 

Hunt  V.  Security  State  Bank 934 

Hunter  v.  Wilson 784 

Hussey  v.  Horne-Paime  70 

Ide  V.   Leiser    47 

Illinois  Cent.  R.  Co.  v.  Coley 621 

Illustrated  Postal  Card  &  Ni»velty 

Co.   V.   Holt    1096 

Imperial   Products  Co.  v.  Capitol 

Chemical    Co 1186 

IngersoU-Iiand  Co.  v.  U.  S.  Fideli- 
ty &  Guaranty  Co 148 

Inliabitants    of    Montclair    Tp.    v. 

Ramsdell     784 

Inland  Compress  Co.  v.  Simmons  324 
Interstate  Finance  Co.  v.  Schroe- 

der    800 

Interstate    Grocer    Co.    v.    George 

Wm.   Bentley    Co 1147 

Ireland  v.  Floyd 710,  711 

Irvine  v.   Watson  534 

Ives  V.  Mahoney    1357 

Ives  V.  South  Buffalo  R.  Co 604 

Jaffray  v.  Davis  100 

J.  A.  Kirscli  &  Co.  v.  Benyunes  .  .1140 
James  Drunnnond  &  Sons  v.  E.  H. 

Van  Ingen  &  Co 1158 

Jaquith  v.  Aldcn   428 

Jaquith  v.  Hudson  396 

J.  B.  Bradford  Piano  Co.  v.  Hack- 
er       9(53 

Jennings,  Appeal  of   1295 

Jensen  v.  Barbour  551 

J.  L.  Price-  Brokerage  Co.  v.  Chi- 
cago, B.  &  Q.  R.  Co 73 

Johnson  v.  Collier 435 

Johnson   v.   Northwestern   Mutual 

Life  Ins.  Co 347 

Johnson  v.   Wingfield    1312 

Johnston  &  Co.  v.  Button's  Adm'r  1293 

Jones  V.  Just  1160 

Joseph  V.  Catron   660 

Jump  V.  Sparling  698 

Kahn  v.  Walton 704 

Kauffman  v.  Raeder 185 

Keeble  v.  Keeble   397 

Keener  v.  Crull 134 

Keighley,    Maxsted   &   Co.    v.   Du- 
rant    545 


Page 

Keller  v.  Holderman 36 

Kelly  Plow  Co.  v.  London   583 

Kelsey  v.  J.  W.  Ringrose  Net  Co..  1202 

Kelso  &  Co.  V.  Ellis  749 

Kennedy  v.  Broderiek 666 

Kessler  v.  Ensley  Co 1437 

Kimberly  v.  I'atchin 1002 

King  V.  Duluth,  M.  &  N.  R.  Co.  .  .   106 

Kingan  &  Co.  v.  Silvers 547 

Kiuzer  Const.  Co.  v.  State  237 

Kirkpatrick  v.  Kepler    1144 

Kirksey  v.  Kirksey   98 

Kirsch  &  Co.  v.  Benyunes 1140 

Kline  Bros.  &  Co.  v.  Royal  Ins.  Co.  545 

Klinkoosten  v.  Mundt 280 

Knights  of  Modern  Maccabees   v. 

Sharp    246 

Knox  V.  Eden  Musee  Co 683 

Kost  V.  Bender  788 

Kronprinzessin  Ceoilie,  The 232 

Labinsks  v.  Hoist   598 

Lamkin  v.  Palmer  366 

Lancaster  v.  'Baltzell   727 

Landell  v.  Lybrand  624 

Langhorne  v.  Richmond  R.  Co.   ..1478 

Lassas  v.   McCarty    750 

Latta  V.  Kilbourn   1287 

iMwrence  v.  Fox   249,  254 

Leather  Manufacturers'   Bank   v. 

Morgan    871 

Lee  V.  Mathews   620 

Legal  Tender  Cases    677 

Lemmou  v.   Beeman    345 

Lester  v.  Jeicctt  189 

Lewis   V.    Browning    58 

Liberty  Trust  Co.  v.  Tilton  . .  .780,  808 

Lickbarrow  v.  Mason 1040 

Lill   V.    Gleason    791 

Lindquist  v.  Dickson  529 

Lindsey  v.    Strai,iahan    1296 

Linick  v.  A.  J.  Nutting  &  Co 835 

Linick  v.  Nutting  810 

Linn  County  Bank  v.  Davis 1058 

Lissberger  v.  Kellogg   1151 

Littauer  v.  Goldman  880 

Littauer  v.  Goldman 883,  884 

Livingston  v.  Page 330 

Lobdell  V.  Baker   878 

Lockwood  V.  Bobbins   599 

Lord  v.  Baldirin 1245 

Lord   V.    Hull    1278 

Lorillard    v.   Clyde    240 

Loring  v.  Boston   38 

Lucas  V.  Western  Union  Tel.  Co..  .  55 
Ludecke   v.    Des    Moines    Cabinet 

Co 1474 

Luthy  V.  Ream   1428 

Lutton   V.   Baker    764 

McCarthy    v.    Louisville  &    N.    R. 

Co 457 

McClay  v.  Harvey    57 

McClenathan  v.  Davis   658 

McClendon  v.  Bank  of  Advance.  .   847 

McComb  V.  Kit  fridge 110 

McCormick  v.  Kelly 1135 


TAT.LE    OF    CASES 


Page 

McCorniek  v.   Swem   b^^o 

McCullough  V.  Hitchcock    505 

Mackin  v.  Dwi/er 9'J 

McKiuney  v.  Boston  &  M.  K.  K.  . .     77 

Macleed  v.  Snce  041 

McMuUan  v.  Dickinson  Co 59'J 

McNary    v.    Farmers'    Nat.    Bank 

710,  711 
Maliar   v.    Hari-incton   Park    Villa 

Sites 1511 

Maker  v.  Taft HO 

Mani^hester  v.  Parsons  S-2 

Mangold   &    Glandt   Bank    v.   Ut- 

terback    709 

Marling  v.  Jones    720 

Martin    v.    Leeper    Bros.    Lumber 

Co 279 

Mason  v.  Eldred  1306 

Mauldin  v.  Southern  Shorthand  & 

Business   University    359 

Maurmair    v.    National'  Bank    of 

Commerce    827 

May  V.  Mitchell  508 

Mayo  V.  American  Malting  Co.  . .   183 

Meech  v.   Ensign    252 

Meehan  v.  Valentine  1223 

Meickley  v.  I'arsons   1136 

Melroy  v.  Kemmerer 104 

Melton  V.  Pensacola  Bank  dc  Trust 

Co 750 

Menagh   v.   Whit  well    1251 

Mercantile   Nat.    Bank    v.    Silver- 
man       860 

Merchants'  Nat.  Bank  v.  Cuilmar- 

tin     560 

Merchant's    Nat.    Bank    t.    Santa 

Maria  Sugar  Co 752 

Merriam  r.  Wolcott 883 

Meyer  v.   Krohn   1343 

Meyer  v.  Bichards  882 

Mick  V.  Royal  Exc.  Assur 562 

Miles  V.  Dodson   785 

Miles  Medical  Co.  v.  John  D.  Park 

<£  Sons  Co 322 

Miller  v.  Ball   3V2 

Miller  v.  Harvey   1012 

Miller  v.  Race  1038 

Miller  v.  Sutliff   303 

Miller    v.    Ti-ustees    of    Mariners" 

Church    391 

Miller  v.   Western   College  of  To- 
ledo       115 

Millikan  v.   Security  Trust  Co.    .  .   674 
]\linneai)olis  &  St.  L.  Ry.  v.  Colum- 
bus Rolling  Mill   53 

Minnesota  Linseed  Oil  Co.  v.  Col- 
lier White  Lead  Co 40 

Minot  V.  Paine 1453,  1455 

Minot  r.  Russ   901 

Mis.souri  Pac.  R.  'Co.  v.  Peru-Van 

Zandt  Implement  Co 612 

Mitchell  V.   Crassn'cUer   553 

Mitchell  V.  Reed    1284 

M.  M.  &  D.  D.  Brown  v.  Western 

Maryland  R.  Co 414 

Moe  Co.  v.  J.  n.  Logue  Co 504 


Page 

Moha  V.  Hudson  Boxing  Club 171 

Moody  V.  Amazon  Ins.  Co 200 

Moore  v.  Elmer 131 

Moore  v.  Norman  192 

Moore   v.   Small    370 

Moore    v.    Warner    Coal    &    Land 

Co 1403 

Moore  &  Tierney,  Inc.,  v.  Boxford 

Knitting   Co 233 

Moran  v.  Dunphy 614 

Morey  v.  Waketield  758 

Morrison    &   Co.    v.    Shaw,    Savill 

i<:  Alliion  Co 455 

Morse  v.  Tillotson  &  Wolcott  Co. .     69 

Moses,  Appeal   of    270 

Moss  v.  Hancock   679 

Motley  v.  Wickoff   1336 

Mugler  v.  Kansas  1503 

Munn  V.  Illinois  1503 

Munroe  v.  Perkins  108 

Murphy  v.  Coppieters 1311 

Murray  v.  Morris 1019 

Murray  v.  Murray  1356 

Murray  v.  Thompson 838 

Mvles  &  Co.  V.  A.  D.  Davis  Pack- 
ing Co 1246 

Naltner  v.  Dolan   588 

Namquit  Worsted  Co.  v.  Whitman -611 
National  Bank  v.  First  Nat.  Bank 

■  .739.  842 
National  Bank  v.  Wentworth  .  . .  642 
National    Bank   of    Commerce    v. 

Bussemeyer    738 

National    Bank    of    Commerce   v. 

Chicago,  B.  &  N.  R.  Co 511 

National    Bank    of    Commerce    v. 

Farmers'  &  Merchants'  Bank  .  .   745 
National    Bank    of    Commerce    v. 

Kenney    -. 661 

National    Bank    of    Commerce    v. 

Mechanics"  American  Nat.  Bank  739 
National  Cable  &  Mfg.  Co.  v.  Fil- 
bert       179 

National  Exch.  Bank  v.  Lester..  816 
National    Exch.    Bank    v.    Lester 

819,  836 
National  Park  Batik  v.  Seaboard 

Bank    753 

National  Safe  Deposit  Savings  & 
Trust  Co.  of  District  of  Colum- 
bia V.  Hibbs 1465 

Neal,  Clark  &  Neal  Co.  v.  Tarby  . .   981 

Nebraska  Seed  Co.  v.  Harsh   30 

Nev.-ton  v.  ToUes   294 

New  York  Cent.  R.  Co.  v.  White  . .  603 

Nichols  V.  Rugylcs  641 

Nickell  V.  Bradshaw  667 

Nohle  v.  Beeman-Spauldiny-Wood- 

irard  Co 792 

Nolan  V.  Whitney   167 

Norfolk    Hardwood    Co.    v.     New 

York  Cent.  &  H.  R.  R.  Co 1114 

Norrington  v.  Wright  195 

Northern  Grain  Co.  v.  ^^'iffler  . . .  1113 
Northern  Pac.  R.  Co.  v.  Boyd  ...1489 


TABLE   OF   CASES 


XXVU 


Page 
JSlorthicestcrn  Nat.  Bank  v.  Bank 

of  Commerce   S-i'A,  844 

N.  1'.  Sloan  Corporation  v.  Linton  120S 
Nugent  V.   Wolfe   363 

O'Brien  v.    People 419 

O'Connor's  Adm'x  v.  Clark 1044 

O'Donnell   v.    Daily    News    Co.   of   ^^ 

Minneapolis    375 

Olcott  V.  McClure 35 

Olson  V.  Sawyer-Goodman  Co.  . . .  32S 
O'Neill  V    Supreme  Council  A.  L. 

of  H 212 

Osborne,  In  re   1453 

Oscar   Sclilegel  Mfg.   Co.  v    Peter 

Cooper's  Glue  Factory   123 

Owosso  Carriage  &   Sleigh  Co.  v. 

Mcintosh  &  Warren 1061 

Pabst  Brewing  Co.  v.  Milwaukee  .   205 

Paddock  v.  Davenport   412 

Page  v.  Edmunds  436 

Paige  V.  Faure   268 

Paine  v.  Meller 172 

Parker  v.  Russell  214 

Patterson  v.  Meyerhofer 203 

Pattillo  V.  Alexander   710 

Paul  Gerli  &  Co.  v.  Mistletoe  Silk 

Mills    1206 

Paulson  V.  Boyd 722 

Payne  v.  Potter   508 

Peacock  v.  Rhodes  1038 

Pelican  v.  Mutual  Life  Ins.  Co.  of 

New   York    ISi 

Pennington  v.  Howland   164 

Pennsylvania  Co.,  Appeal  of  ....  262 
Pennsvlvania  Sugar  Co.  v.  Czarni- 

kow-Eioiula   Co 149 

People  V.  North  River  Sugar  Re- 
fining Co 1387 

People  ex  rel.  Cams  v.  Matthies- 

sen    1425 

People  ex   rel.  National   Exp.  Co. 

v.  Coleman 1380 

Pepper  v.  Western  Union  Tel.  Co.     74 

Percy  v.  Milhiudon   1460 

Perkins  v.  Smith   620 

Phalcn  V.  V.  8.  Trust  Co 249 

Phelps  V.  McQuade 1048 

Philadelphia  Ball  Club  v.  Lajoie.  417 


Page 

Porter  v.  Gossell   68 

Powelson    v.    Tennessee     Eastern 

Electric  Co 1-119 

I'owers  v.  Briggs 1137 

Pratt    V.    Iligginson    693 

I'ratt  V.  S.  Freeman  &  Sons  Mfg. 

Co 1109 

Presbyterian  Church  of  Albany  v. 

Cooper   11^ 

President,  etc.,  Bank  of  Columbus 

V.  Hagner   189,  191 

Preston  v.  Garrard 1338 

Preston  v    I'rather    447 

Price  V.  Neal 843,  851,  852 

Price    Brokerage   Co.    v.    Chicago, 

B.  &  Q.  R.  Co 73 

Procter  v.  Atlantic  Fish  Cos.   ...1171 
Proctor  &   Gamble  Co.   v.    I'eters, 

White  &  Co 991 

Producers'  Coke  Co.  v.  Hillman  .  .   193 
Public  Bank  of  New  York  City  v. 

Knox-Burchard  Merc.  Co 814 

Pullen  V.  Placer  County  Bank  . . .   866 

Raftery  v.   World   Film   Corpora- 
tion      399 

Railroad  Tax  Cases 1500 

Ramey  Lumber  Co.  v.  John  Schroe- 

der  Lumber  Co 125 

R.  A.  Myles  &  Co.  v.  A.  D.  Davis 

Packing  Co 1246 

Ratclift'e  v.   Costello    789 

Ray  County  Sav.  Bank  v.  Huttou  626 

R.  C.  Bartley  Co.  v.  Lee 1095 

Regina    Co.    v.    Gately    Furniture 

Co 1205 

Rheinstrom  v.  Steiner  1193 

Rhoda  V.  Annis 563 

Rice  V.  Boyer 354 

Rich  V.  Doneghey ^ 127 

Richard  Deeves  &  Son  v.  :Manhat- 

ta}i  Life  Ins.  Co 205 

Richards  v.  Dclbridge 263 

Richards  v.  Market  Exch.  Bank.  .  945 

liichmond  v.   Moore    342 

Riegel  v.  American  Life  Ins.  Co.  .   291 
Riverside  Bank  v.  First  Nat.  Bank  849 
Robb  V.  Pennsylvania  Co.  for  In- 
surance  on    Lives    &    Granting 
Annuities    828 


Phillips  V.  A.  W.  Joy  Co ^12  t,       .    ^^     „r 

Phillips  V.   Phillips    1221)  Roberts  v.  Anheuser-Busch  Brew 

Phillips'  Estate,  In  re 270 

PhilpotVs  Estate,  In  re   764 

Piaggio  V.    Somerville    230 

Pickert  v.  Marston    506 

Pinnel,  Case  of  100 

Pittsburgh    Provision    &    Packing 

Co.  V.  Cudahy  Packing  Co 1020 

Plankinton  Packing  Co.  v.  Berry.  .  515 

Plant  V.  Woods 615 

Plate  V.   Durst   36 

Plover  Sav.  Bank  v.  Moodie 911 

Pollock  V.  Farmers'  Loan  d  Trust 

Co 1505 

Pond  V.  New  Rochelle  Water  Co.  250 


...„  Ass'n    11"9 

Roberts   v.    Smith    673 

Robinson  Bank  v.  Miller 1259 

Rohson  V.  Drummond    267,  268 

Rochester  &  C.  Turnpike  Ro:id  Co. 

v.   Paviour    771 

Rochester   &   Oleopolis  Oil   Co.   v. 

Hughey    999 

Rockfield  v.  First  Nat.  Bank 888 

Rock  Glen  Salt  Co.  v.  Segal 1014 

Rodgers  v.  Meranda    1350 

Rodijkeit  v.  Andrews   265 

Rochm  V.  Horst    214 

Rogers  v.  Bluenstein 333 


XXVlll 


TABLE   OF   CASKS 


Page 
Rohrbach  v.  Gennauia  Fire  Ins. 

Co 336 

Rohrbough  v.  U.  S.  Exp.  Co 512 

Roland  M.  Baker  Co.  v.  Browu  . .  .1074 

Rolin  V.  Steward   869 

Roseberry  v.  Hart-Parr  Co 538 

Rosensteiii  v.  Burns  1321 

Ross  V.  Northrup,  King  &  Co 1173 

Rowe  V.  Rand  611 

Royal  Ins.  Co.  v.  Beatty 78 

Rubin  V.  Hubn  450 

Rummell  v.   Blanchard    1117 

Sabine  v.  Paine 837 

Sackett  v.  Palmer  659 

St.   Clair  v.   Cox    1510 

St.  Louis  Gunning  Advertising  Co. 

V.  Wanamaker  »&  Brown   489 

St.  Louis  &  Southwestern  R.  Co.  v. 

James    707 

Saltus  V.  Everett  1037 

Sanders  v.  Brock  224 

San    Mateo    County    v.    Southern 

Pac.  R.  Co 1500 

Sash  d  Doo)'  Co.  v.  Banlc 913 

ScandinaVian-Amei'ican    Bank    v. 

Westby    945 

Sceva  V.  True  89 

Schlegel  Mfg.  Co.  v.  Peter  Coo])- 

er's  Glue  Factory  123 

Schultz  V.  Griffin  507 

Scraper  Co.  v.  Sadileh 913 

Scully    V.    Roche    84 

Seaboard  Air  Line  Ry.  v.  Mullin.  .  452 
Seaboard   Nat.   Bank   v.   Bank   uf 

America    858 

Searles  v.  Gebbie  1442 

Seaver  v.  Ransom   248 

Security  Trust  d  Savings  Banlc  v. 

Gleichmann 6S6,  688 

Sewell  V.  Underbill  172 

Shadwell  v.   Shadwell    112 

ShafEer  v.  Bond   715 

Shea  V.  Vahey 897 

Sheahan  v  Davis   791 

Sheahan  v.  National  S.  S.  Co.  ...  578 

Shelley,  Case  of  335 

Shepaug  Voting  Trust  Cases 1432 

Sherwin  v.   National  Cash  Regis- 
ter Co 51 

ShipnKin  v.  Banlc  of  State  of  New 

York    858 

Siegel  V.  Chicago  Trust  &  Saving 

Bank    645 

Silsbury  v.  McCoon   592 

Silver  v.  Graves ,99 

Silverthom  v.  Wylie 130 

Simonds  v.  Heard    520 

Simson  v.  Klipstein   1235 

Slaughter  House  Cases   1503 

Sleath  V.   Wilson  554 

Sloan  V.  McCarty 648 

Sloan  CoiTporation  v.  Linton 1208 

Smith  V.  Alexander 525 

Smith       V.       Herring-Hall-Miuvin 
Safe  Co 580 


Page 
Smith  V.    Nelson    Land   &    Cattle 

Co 795 

Smith  V.  Tracy 507 

Smith  V.   Utley  625 

Smith  Co.  V.  Marano 1022 

Smith  Premier  Typewriter  Co.  v. 

National  Hartel  Light  Co 505 

Smith's  Estate,  In  re 262 

Southern  Iron  &  Equipment  Co.  v. 

Vaughan   1212 

Southern  R.  Co.  v.  Carnegie  Steel 

Co 1481 

Spaldmg,  In  re  ...  430 

Spencer  Heater  Co.  v.  Abbott 1168 

Springs  v.  Hanover  Nat.  Bank  .  . .   845 
S.  S.  Allen  Grocery  Co.  v.  Bank  of 

Buchanan   County    808 

Staples  V.  Schinid   559 

Stapleton  v.  Independent  Brewing 

Co 555 

State  Bank,  In  re  740 

Stearns  Salt  &  Lumber  Co.  v.  Den- 
nis Lumber  Co 208 

Steinbrenner  v.  Minot  Auto  Co.  . .     65 

Stein  Co.  v.  Robertson   1138 

Steinmeyer  v.  Schroeppel   295 

Sternbergh  v.  Brock  1417 

Stewart  v.  Newbury 194 

Stewart  v.  Robinson 1328 

Stewart  v.-  Stone 239 

Stokes  v.  Continental  Trust  Co.  of 

City  of  New  York   1421 

Stone  V.  Hills  553 

Stout  V.  Baker   1309 

Straus   V.    Victor    Talking    Mach. 

Co 319 

Sturtevant  Co.  v.  Fireproof  Film 

Co 71 

Swift  V.  Tyson    749 

Swift  &  Co.  V.  Miller 920 

Tanner  v.  Merrill   104 

Taylor  v.   Caldwell    238 

Taylor  v.  Curry   643 

Taylor  v.  Florida,  etc.,  It.  Co.   ...  415 

Taylor  V.  Griswold 1430 

Taylor  V.  Jaques   806 

Tebeau  v.   Ridge    173. 

Terwilliger  v.  Ontario,  C.  &  S.  R. 

Co 573 

Thilmany  v.  Iowa  Paper  Bag  Co..   617 

Third  Nat.  Bank  v.  Ober 868 

Thomas  v.  Beaver  Dam  Mfg.  Co. . .  57^ 

Thompson  v.  Fairbanks 433 

Thompson  v.  First  Nat.  Bank 1229 

Thomson  v.  Davenpoi't 533,  616. 

Tho-rp  V.  Mindeman 651 

Tillis  V.   Smith    297 

Times   Square  Automobile   Co.   v. 

Rutherford  Nat.  Bank   901 

Tolerton  &   Stetson  Co.  v.   Anglo- 
California  Bank   1088 

Torkomian  v.  Russell 1126 

Towne  v.  Wason 729' 

Townsend  v.   Rackham    250 

Trentor  v.  Pothcn   528 


TABLE   OF   CASES 


XXIX 


Page 
Trust  Co.  of  America  v.  Conklin.  .  818 
Trutit  Vo.  of  Anwrlaa  v.  Voiih'lin..  83G 
Trust  Co.  of  America  v.  Hamilton 

Bank 857 

Tiveddle  v.  Atkinson 255 

Twitcliell-Champlin  Co.  v.  Kadov- 

sky    1022 

Twvman  v.  Avera  Loan  &  Invest- 
ment Co SW 

Twyne,  Case  of 1052 

Ullsperger  v.  Meyer    383 

Union  Nat.  Bank  v.  Maytield 686 

Union  Trust  Co.  v.  MeCinty   943 

U.  S.  V.  Adams  Exp.  Co 1010 

U.  S.  V.  Addystone  Pipe  &  Steel 

Co ' 315 

U.  S.  V.  Betlilehem  Steel  Co 397 

U.     S.     Radiator     Corporation    v. 

State    1414 

Upton  V.  Trlbilcock 1476 

Lttcraon  v.  Elmore •. 471 

Valley    Nat.    Bank    of   Chambers- 
burg  V.  Crowell 693 

Vandcrford  v.  Farmers'  Bank.   ...  945 

Van<Ier  Ploeg  v.  Van  Zuuk 782 

Van  Dyke  v.  Van  Dyke  531 

Vcnncr  v.  Chicago  City  R.  Co.  . .  .1429 
Vrooman  v.  Turner  255,  257 

Wadhams  v.  Page 1334 

Wadleigh  v.  Katabdin  Pulp  «fe  Pa- 
per Co 87 

Walker  v.  Bunk   616 

Walters  v.  Rock  767 

Ward  V.  Great  Atlantic  «&  I'acific 

Tea  Co 1164 

Wasco    County    v.    New    England 

Equitable  Ins.  Co 480 

Watson  V.  King   575 

Wa  ugh  v.  Carver  12:12 

Wcarc  V.  Gore   616 

Weare  Commission  Co.  v.  Druley  406 
Weather  ford.  M.  AV.  &  N.  W.   R. 

Co.  V.  Granger 1399 

Weber  v.  Hirsch 758 

Weeks  v.   Crie    378 

Wegman  Piano  Co.,  In  re  937 


Page 

Welch  V.  Owenby   649 

Weld   V.    i'ostal    Telegraph    Cable 

Co 326,  328 

Wells  V.  Calnun   173 

Welshausen     v.     Charles     Parker 

Co 1177 

West  Co.  V.  Lea 427,  430 

West  Co.  V.  Lea  Bros .1349 

Western  Union  Tel.   <-'o.   v.   U.  S. 

&  Mexican  Trust  Co 1480 

Westmoreland  Coal   Co.  v.   Syra- 
cuse Lighting   Co 1017 

Wetopsky     v.     New     Haven     Gas 

Light  Co 370 

Wheeler   v.    McGuire    518 

Whitcomb  v.  Converse 1275 

White  V.  Bluett 97 

White  V.  Rintoul  365 

White  V.  Schweitzer  1191 

White  &  Co.  V.  Century  Sav.  Bank 

of  Des  ISIoines,  Iowa    1091 

Whitlock  V.  Auburn  Lum))er  Co..  .  987 

Whitney  v.  Eliot  Nat.  Bank 642 

Whitney  v.  Wyman    523 

Wickham    &    Burton    Coal    Co.    v. 

Farmers"  Lumber  Co 120 

Wigent  V.  Marrs 216 

Williams  v.  Farrand 1266 

Williams  v.  Milton   1238 

Williamson-Halsell-Frazier  Co.   v. 

Ackerman  307 


Wilson  V. 
Wilson  V. 
Wilson  V 
Wiisoti  V. 
Wil.son  V. 


Hundley 301 

Mason   597 

Railroad   Co 774 

Tumrnan   543 

Walratb  1051 

Wilson  Bros.  r.  Xclsun 429 

Winship  v.  Bank  of  United  States  1298 

Winter  v.  Stock   1265 

Wood  V.   Boynton    293 

Wood  V.  Lucy.  Lady  Duff-Gordon.   125 
Wright  V.  Frank  A.  Andrews  Co..  .1119 
Wright     Bros.     v.     Merchants'     & 
Planter.s'  Packet  Co 1405 

Yoking  V.  Grote 810 


Zaleski  v.  Clark    

Ziemer  v.  C.  (i.  Bretting  Mft 


165 

Co..  1473 


CASES  ON  BUSINESS  LAW 


INTRODUCTION  TO  THE  STUDY  OF  LAW 

Section 

1.  Nature  of  Law. 

2.  Systems  of  Law. 

3.  Objects  of  Law. 

4.  Legal  Relations. 

5.  Divisions  of  Law. 

6.  Legal  Proceclnre. 

7.  Judicial  Decisions. 

8.  History  and   Development  of  the  Law. 


SECTION  L— NATURE  OF  LAW 

Law  exists  only  in  the  state.  Law  assumes  the  existence  of  a 
government,  and  of  agents  thereof,  through  whose  actions  law 
manifests  itself.  Wlien  a  governor  of  a  state  calls  an  extra  session 
of  the  legislature,  pardons  a  prisoner,  or  appoints  some  individual 
to  office ;  when  a  legislative  body  in  some  proper  form  registers  its 
will  that  certain  things  shall  or  shall  not  be  done ;  when  a  court,  as 
a  result  of  a  proceeding  before  it,  formally  declares  that  A.  owes 
B.  a  specified  sum  of  money ;  when  a  sheriff  seizes  A.'s  property  and 
delivers  it  to  C.  in  exchange  for  money  which  is  in  turn  given  to  B. 
in  payment  of  the  debt ;  when  a  policeman  halts  the  stream  of  traf- 
fic on  a  busy  thoroughfare — these  physical  acts  are  the  manifesta- 
tions of  state  life ;  they  are  manifestations  of  law.  It  is  only  in  a 
figurative  sense  that  we  speak  of  certain  words  as  constituting  a 
legal  principle,  or  that  law  is  to  be  found  in  certain  kinds  of  books. 

Law  is  a  science.  Like  all  sciences,  its  study  involves  the  ex- 
amination of  data  and  the  acquisition  of  all  possible  knowledge 
concerning  it,  with  the  view  of  determining  the  sequence  of  events 
which  are  certain  or  likely  to  follow  a  given  set  of  conditions. 
When  a  ball  is  thrown  into  the  air,  one  may  determine  the  equation 
of  the  curve  thus  described,  and  that  the  ball  will  strike  the  earth 
in  a  certain  number  of  seconds.  In  so  doing  one  is  studying  the 
sciences  of  physics  and  of  mathematics.  When  an  electric  current 
is  passed  through  water  under  certain  conditions,  the  liquid  sep- 
arates into  its  constituent  gases.  In  such  a  case  the  investigator 
is  studying  the  sciences  of  physics  and  of  chemistry.  When  one 
has  ascertained  the  relation  between  exports  and  imports  between 
two  countries,  the  quantity  of  gold  in  each,  the  amount  of  debts 
owed  by  persons  in  each  country  to  persons  in  the  other,  and  many 
other  analogous  facts,  and  his  problem  is  to  determine  what  the  ex- 
B.&  B.Bus.Law— 1 


2  INTRODUCTION   TO   THE   STUDY   OF  LAW 

change  rates  will  be,  the  inquirer  is  studying  the  science  of  eco- 
nomics. And  so  in  the  study  of  law  the  task  is  to  accumulate 
the  necessary  data,  to  learn  all  that  may  be  learned  about  it  for 
the  purpose  of  being  able  to  prophesy  with  a  fair  degree  of  ac- 
curacy what  the  agents  of  the  state  will  or  will  not  do  under  any 
particular  group  of  circumstances  out  of  the  multitudinous  facts  of 
human  life.  Under  what  circumstances  will  the  governor  pardon  a 
prisoner;  when  will  the  court  direct  the  sherifif  to  seize  a  person's 
property  and  deliver  it  to  some  other  person ;  when  will  the  sheriff 
confine  persons  in  the  jail  or  prison;  when  will  a  person  be  per- 
mitted to  exercise  dominion  over  property  which  theretofore  had 
been  within  the  control  of  another  person?  When  one  accumulates 
data  for  the  purpose  of  answering  these  questions,  he  is  studying 
law. 

Most  persons  know  a  great  deal  about  law,  although  they  may 
never  have  studied  law  books.  It  is  impossible  for  one  to  observe 
the  everyday  facts  of  life  without  being  able  to  prophesy  with  con- 
siderable accuracy  what  the  agents  of  government  will  do  under 
various  circumstances.  But  knowledge  derived  exclusively  in  this 
way,  however  extensive,  is  likely  to  be  disorganized,  and  the  data 
wholly  insufficient  as  a  basis  for  safe  prophecy  in  all  cases.  The 
average  case  of  theft  is  readily  recognizable  by  all  persons  as  a 
criminal  act,  but  there  would  be  a  difference  of  opinion  as  to 
whether  one  is  guilty  of  an  attempt  to  steal  by  thrusting  his 
hand  into  an  empty  cash  drawer  with  intent  to  steal  its  contents. 
Knowledge,  until  it  passes  beyond  the  stage  of  accumulated  details 
into  the  field  of  generalization,  is  not  scientific,  although  the  ac- 
quisition of  such  information  involves  the  study  of  science.  One 
does  not  become  an  astronomer  by  observing  the  movement  of 
the  heavenly  bodies,  nor  a  philosopher  by  conjuring  with  the  con- 
cepts of  time  and  space.  Nor  will  one  be  able  to  comprehend  the 
criminal  law  by  witnessing,  however  frequently,  the  incarceration 
of  offenders  in  the  state  prison  and  the  county  jail. 

Law,  while  a  science,  in  and  of  itself,  is  related  to  and  dependent 
upon  all  other  sciences  and  upon  philosophy.  Like  other  sciences, 
law  must  take  account  of  and  utilize  knowledge,  from  whatever 
source  derived.  The  determination  of  the  question  of  liability  to 
respond  in  damages  for  negligent  acts  may  involve  the  truths  of 
mathematics,  of  chemistry,  of  geology,  or  of  botany.  The  question 
as  to  the  existence,  performance,  or  discharge  of  contractual  rela- 
tions, under  a  given  state  of  facts,  may  be  largely  a  question  of 
geography,  of  biology,  or  of  the  rules  of  English  grammar.  In 
prosecutions  for  crime,  guilt  or  innocence  may  depend  upon  knowl- 
edge acquired  from  medical  science,  or  from  investigations  into  the 
pyschology  of  the  human  mind.  A  particular  science  is  not  de- 
veloped, nor  does  it  exist  as  a  field  of  knowledge,  independent  of 
other  fields  of  knowledge.  Each  makes  contributions  to  the  other. 
Each  in  turn  is  sustained  and  vitalized  by  truth  discovered  in  allied 
fields.     The  study  of  law,  therefore,  is  not  a  study  of  materials 


INTRODUCTION  TO  THE  STUDY  OF  LAW  A 

unrelated  to  the  materials  of  other  fields  of  study.  All  branches 
of  learning  possess  some  object  in  common.  Whether  in  scientific 
or  philosophical  study,  man,  in  some  sense,  is  the  central  figure. 
The  study  of  Mendel's  law  of  heredity,  of  the  Malthusian  theory  of 
population,  of  the  federal  law  for  the  taxation  of  incomes,  though 
pursued  in  volumes  widely  separated  from  each  other  on  the  shelves 
of  the  library,  leads  the  inquiring  mind  into  channels  of  investiga- 
tion which  converge  upon  a  common  point. 

But,  more  particularly,  law  is  one  of  the  social  sciences.  The 
facts  Avhich  make  it  what  it  is  are  in  great  measure  the  same  facts 
which  engage  the  attention  of  the  economist,  the  sociologist,  the 
political  scientist,  and  the  historian.  The  desirability  of  obtaining 
a  perspective  of  the  law  in  its  relations  to  other  branches  of  knowl- 
edge leads  us  in  this  connection  to  call  to  mind  the  larger  objects  of 
its  companion  sciences.  "Economics  is  the  social  science  which 
treats  of  that  portion  of  human  activity  which  is  concerned  with 
earning  a  living.  *  *  *  it  analyzes  wants,  classifies  goods  with 
reference  to  them,  and  considers  all  of  the  circumstances  which 
affect  the  production  and  distribution,  or  sharing,  of  goods  among 
the  individuals  who  compose  society."  ^  "Political  science  begins 
and  ends  with  the  state.  Its  fundamental  problems  include  an 
investigation  of  the  nature  of  the  state  as  the  highest  political 
agency  for  the  realization  of  the  common  ends  of  society  and  the 
formulation  of  fundamental  principles  of  state  lifej  an  inquiry 
into  the  nature,  history,  and  forms  of  political  institutions;  a  de- 
duction therefrom,  so  far  as  possible,  of  the  laws  of  political  growth 
and  development."  ^  "Sociology,  is  ethical,  regarding  the  weal  and 
woe  of  all  men  as  facts  to  be  accounted  for.  It  views  the  facts  of 
human  experience  as  caused,  and  belonging  to  the  orderly  course 
of  nature.  *  *  *  Sociology  sets  itself  to  the  task  of  synthesis, 
and  searches  out  those  principles  which  operate  throughout  the 
realm  of  social  realities.  In  the  study  of  these  facts,  it  aims  to 
dissolve  all  bonds  of  party,  sect,  and  prejudices.  *  *  *  Sociol- 
ogy aims  at  nothing  less  than  the  transfer  of  ethics  from  the  do- 
main of  speculative  philosophy  to  the  domain  of  objective  sci- 
ence." *  "History,  in  the  broadest  sense  of  the  word,  is  all  that 
we  know  about  everything  that  man  has  ever. done,  or  thought,  or 
hoped,  or  felt.  It  is  the  limitless  science  of  past  human  affairs,  a 
subject  immeasurably  vast  and  important,  but  exceedingly  vague,"  * 
With  these  notions  in  the  background,  the  declaration  that  "law 
is  the  body  of  principles  recognized  and  applied  by  the  state  in  the 
administration  of  justice"  ^  takes  on  a  fairly  definite  meaning. 
At  least,  law  cannot  be  conceived  of  as  a  system  created  for  the 
mere  preservation  of  the  peace,  or  as  the  establishment  of  the 

1  Seager,  Principles  of  Ecouomics,  p.  1. 

2  Garner,  Introduction  to  Political  Science,  p.  15. 

8  Hayes,  Introchictiou  to  the  Study  of  Sociology,  PP-  4  and  8. 

4  Robinson,  History  of  Western  Europe,  p.  1. 

5  Salmond,  Jurisprudence,  §  5. 


4  INTRODUCTION  TO  THE  STUDY  OF  LAW 

machinery  for  the  regulation  of  private  vengeance.  In  its  larger 
aspects,  the  administration  of  justice  will  mean  what  science  and 
philosophy  make  it  mean. 

SECTION  2.— SYSTEMS  OF  LAW 

There  are  two  great  systems  of  law  in  the  world  to-day;    the 
common  law,  and  the  civil  law.     The  common  law  is  that  system 
which  developed  in  England,  for  the  most  part,  after  the  Norman 
conquest.    This  system  of  law  is  in  force  quite  generally  through- 
out the  British  Empire  and  in  the  United  States.    The  civil  law  is 
that  system  which  developed  in  the  main  from  the  Roman  law, 
and  prevails  generally  throughout  the  world.     The  codes  of  con- 
tinental European  states,  and  of  South  American  countries,  are  ^ 
based  upon  the  Roman  law.    Some  portions  of  the  British  Empire,  ' 
Quebec  and  Scotland,  are  civil-law  countries.    In  the  United  States, 
Louisiana  has  adopted  the  civil  law.    These  two  great  systems  of 
law  should  not  be  conceived  of  as  different,  in  the  sense  that  legal 
controversies  are  decided  in  one  way  under  the  common  law  and  a 
different  way  under  the  civil  law.    The  larger  aspects  of  the  con- 
ception of  justice  are  very  much  the  same  everywhere.     There 
are  such  differences,  of  course.     Some  controversies  would  be  de- 
cided one  way  under  the  common  law  and  another  way  under  the 
civil  law.    For  that  matter,  there  are  differences  of  decision  on  the 
same  facts  in  different  civil-law  countries,  just  as  there  are  quite 
frequently  differences  in  the  decisions  of  particular  cases  in  the 
various  states  of  the  United  States.    The  same  court  may  even  de- 
cide a  case  in  one  way  on  one  occasion,  and  reach  a  contrary  re- 
sult in  the  same  kind  of  case  on  another  occasion.     As  a  general 
rule,  however,  there  is  not  this  kind  of  break  in  the  history  of  a 
rule  of  law.    The  two  systems  of  law,  like  nationalities,  oftentimes, 
are  dift'erent,  chiefly,  in  the  sense  that  they  have  had  different  his- 
tories. 

There  are  a  few  differences  of  a  rather  fundamental  character. 
The  Roman  law,  which  prior  to  the  time  of  Justinian  was  expressed 
in  the  decisions  of  the  courts,  in  statutes,  and  in  the  writings  of 
legal  scholars,  during  his  reign  passed  into  the  form  of  a  code,  cov- 
ering all  branches  of  the  law.  In  civil-law  countries  to-day,  the 
basic  principles  of  the  entire  field  of  the  law  are  expressed  in  the 
form  of  legislative  enactments.  In  deciding  particular  controversies 
the  courts  are  then  called  upon  to  interpret  and  apply  the  code. 
In  England  and  the  United  States  the  major  portion  of  the  law  is 
not  expressed  in  the  form  of  statutes,  but  is  to  be  found  expressed 
for  the  most  part  in  the  decisions  of  the  courts.  The  courts  in  Eng- 
land and  the  United  States  must  therefore  decide  controversies  up- 
on some  basis  other  than  by  interpreting  and  applying  some  statu- 
tory generalization  of  the  law.  It  should  be  remarked  that,  both  in 
England  and  in  the  United  States,  the  importance  of  statutes  in 
the  legal  system  has  been  growing  very  rapidly  since  the  middle 


INTRODUCTION  TO  THE  STUDY  OF  LAW  5 

of  the  nineteenth  century.  In  some  states  nearly  the  whole  field  of 
the  law  has  been  codified,  and  in  all  states  the  tendency  to  increase 
the  number  and  variety  of  governmental  functions,  and  a  similar, 
but  independent,  tendency  to  organize  and  systematize  existing 
law,  has  caused  a  notable  increase  in  legislation. 

There  is  a  further  difference  between  the  civil  law  and  the  com- 
mon law,  to  be  found  in  the  attitude  which  the  courts  under  the 
two  systems  assume  toward  former  decisions  involving  the  same 
or  analogous  facts.  Courts  which  are  a  part  of  the  civil  law  system 
are  chiefly  concerned  with  the  text  of  the  code.  They  apply  the 
code  directly,  or,  if  interpretation  is  necessary,  they  interpret  the 
language  according  to  some  accepted  standard  of  interpretation, 
and  then  apply  the  interpreted  statute  to  the  facts.  The  civil-law 
courts  do  not  regard  as  binding  upon  them  former  determinations 
of  the  meaning  of  the  code  as  reached  by  the  same  or  other  courts, 
just  the  contrary  is  true  under  the  system  of  the  common  law. 
If  a  court  once  decides  a  particular  question,  that  decision  is  re- 
garded thereafter  as  a  precedent  binding  upon  them.  This  atti- 
tude to  prior  decisions  is  called  the  doctrine  of  stare  decisis.  Much 
of  the  work  of  a  court  applying  common-law  principles  is  taken 
up  in  the  endeavor  to  ascertain  what  the  same  or  other  courts  have 
decided  on  the  same  or  analogous  set  of  facts.  The  decisions  of  the 
Supreme  Court  of  a  particular  state  are  regarded  as  binding  prece- 
dents in  that  state.  Decisions  of  the  Supreme  Courts  of  other 
states  are  not  deemed  binding  precedents,  but  they  are  often  re- 
lied upon  as  a  basis  of  decision.  Such  decisions  from  other  juris- 
dictions are  of  persuasive  authority,  varying  in  persuasiveness  ac- 
cording to  the  state  where  rendered,  to  the  strength  of  the  reasoning 
employed,  and  even  with  the  reputation  of  the  individual  judge  who 
wrote  the  opinion.  There  is  some  tendency  in  civil-law  countries  to 
regard  former  decisions  to  some  extent  as  binding  precedents, 
while  in  the  United  States  and  in  England  there  is  some  tendency, 
especially  in  certain  departments  of  the  law,  to  break  away  from 
precedent,  when  changed  economic  or  social  conditions  seem  to  de- 
mand a  change.  Thus  the  two  systems  tend  toward  the  same  gen- 
eral policy.  For  the  most  part,  change  in  the  law  comes  as  a 
result  of  legislation,  and  not  by  judicial  decisions,  but  the  process  of 
change  by  judicial  decisions  is  distinctly  traceable. 


SECTION  3.— OBJECTS  OF  LAW 

The  problems  of  the  law  are  not  all  of  the  same  nature.  They 
do  not  have  the  same  immediate  objects.  They  sustain  various  re- 
lations, one  to  the  other  and  to  the  conduct  of  human  affairs.  Some 
problems  of  the  law  are  primary  and  of  overshadowing  impor- 
tance. Others  are  secondary,  subordinate,  or  derivative.  The  broad 
concept  of  the  administration  of  justice,  as  a  primary  object,  breaks 
up  irito  a  number  of  more  detailed,  but  nevertheless  fundamental. 


6  INTRODUCTION   TO   THE   STUDY   OB"   LAW 

conceptions.  As  formulated  by  an  eminent  thinker,  Roscoe  Pound,® 
these  fundamental  conceptions  arrange  themselves  into  the  follow- 
ing jural  postulates: 

I.  In  civilized  society  men  must  be  able  to  assume  that  others 
will  commit  no  intentional  aggression  upon  them. 

Corollary  of  Jural  Postulate  I :  One  who  intentionally  does  any- 
thing which  on  its  face  is  injurious  to  another  must  repair  the  re- 
sulting damage,  unless  he  can  (1)  justify  his  act  under  some  so- 
cial or  pubHc  interest;  or  (2)  assert  a  privilege  because  of  a  coun- 
tervailing individual  interest  of  bis  own  which  there  is  a  social  or 
a  public  interest  in  securing. 

II.  In  civilized  society  men  must  be  able  to  assume  that  they 
may  control  for  beneficial  purposes  what  they  have  discovered  and 
appropriated  to  their  own  use,  what  they  have  created  by  their  own 
labor,  and  what  they  have  acquired  under  the  existing  social  and 
economic  order. 

III.  In  civilized  society  men  must  be  able  to  assume  that  those 
with  whom  they  deal  in  the  general  intercourse  of  society  will  act 
in  good  faith,  and  hence 

(a)  Will  make  good  reasonable  expectations  which  their  prom- 
ises or  other  conduct  reasonably  create ; 

(b)  Will  carry  out  their  undertakings  according  to  the  expecta- 
tions which  the  moral  sentiment  of  the  community  attaches  thereto ; 

(c)  Will  restore  specifically  or  by  equivalent  what  comes  to 
them  by  mistake  or  unanticipated  situation  whereby  they  receive 
what  they  could  not  reasonably  have  expected  to  receive  under 
the  actual  circumstances. 

IV.  In  civilized  society  men  must  be  able  to  assume  that  others, 
when  they  act  affirmatively,  will  do  so  with  due  care  with  respect 
to  consequences  that  may  reasonably  be  anticipated. 

V.  In  civilized  society  men  must  be  able  to  assume  that  others, 
who  maintain  things  likely  to  get  out  of  hand  or  to  escape  and  do 
damage,  will  restrain  them  within  their  proper  bounds. 

Hence  one  is  liable  in  tort  for — 

I.  Intentional  aggression  upon  the  personality  or  substance  of 
another. 

II.  Negligent  interference  with  person  or  property — i.  e.,  failure 
to  come  up  to  the  legal  standard  of  due  care  under  the  circum- 
stances, while  carrying  on  some  affirmative  course  of  conduct, 
whereby  injury  is  caused  to  the  person  or  property  of  another. 

III.  Unintended  non-negligent  interference  with  the  person  or 
property  of  another  through  failure  to  restrain  or  prevent  the  es- 
cape of  some  dangerous  agency  which  one  maintains. 

These  sweeping  generalizations  represent  the  ends  to  be  realized 
in  society.  They  mark  out  the  bold  headlands  of  the  substantive 
law.  The  preservation  of  the  institution-  of  private  property,  the 
guaranty  of  individual  liberty,  the  balancing  of  individual  and  so- 

6  An  Intrncliiction  to  American  Law,  pp.  36-44. 


INTRODUCTION  TO  THE  STUDY  OF  LAW  ? 

cial  interests  under  the  influence  of  social,  economic,  and  political 
controversy,  and  the  furtherance  of  the  public  welfare  generally,  are 
the  great  ends  of  the  existing  legal  system. 


SECTION  4.— LEGAL  RELATIONS 

Turning  our  attention  now  to  the  more  detailed  aspects  of  the 
problem,  it  will  appear  that  the  idea  of  law  involves  the  notion  of 
the  existence  of  legal  relations  between  persons.  Prominent  among 
them  is  that  relation  where  a  right  is  said  to  reside  in  one  person 
and  a  duty  in  some  other  person  or  persons.  For  example :  Where 
A.  and  B.  have  entered  into  a  contract,  A.  has  a  right  that  B. 
shall  perform;  B.  is  under  a  duty  of  performing.  A.  has  a  right 
not  to  be  struck  by  B.  B.  is  under  a  duty  of  refraining  from  strik- 
ing A.  In  both  cases  the  consequences  are  that,  if  B.  violates  his 
duty,  A.  may  successfully  sue  B,  for  damages,  or  he  may  be  enti- 
tled to  some  other  appropriate  legal  remedy.  Illustrations  might 
be  multiplied,  but  the  point  to  be  noted  is  that,  if  a  person  pos- 
sesses a  legal  right,  there  exists  another  person  or  persons  who 
are  under  correlative  legal  duties,  which,  if  violated,  will  enable  the 
person  possessing  the  right  to  obtain,  through  legal. proceedings, 
some  appropriate  remedy  against  the  person  who  violated  his  duty. 

A  legal  relation  of  different  character  exists  where  a  person, 
A.,  is  privileged  to  do  an  act  under  circumstances  where  another 
person,  B.,  or  perhaps  all  other  persons,  have  no  rights  that  A. 
shall  or  shall  not  exercise  his  privilege.  An  owner  of  land  may 
cultivate  it,  erect  buildings  upon  it,  or  do  many  other  physical  acts 
with  respect  to  the  land.  While  these  acts  are  often  spoken  of  as 
rights,  they  may  more  accurately  be  spoken  of  as  privileges.  B. 
might,  of  course,  by  physical  interference  prevent  the  exercise  of 
the  privilege.  This  act  of  B.,  however,  would  be  a  violation  of  his 
duty  not  to  assault  A. 

A  third  legal  relation  exists  where  A.,  by  an  act  of  his,  may  ena- 
ble B.,  by  an  act  of  his  own,  to  create,  alter,  or  extinguish  some 
legal  relation  then  existing  between  two  or  more  other  persons. 

A.  makes  an  offer  to  enter  into  a  contract  with  B.  By  accepting, 
B.,  by  an  act  of  his  own,  creates  a  contract  between  himself  and  A. 

B.  may  be  said  to  possess  a  power,  and  A.  is  under  a  correlative 
liability  to  have  his  relations  changed  by  B.'s  act.  An  owner  of 
property  has  power  to  transfer  his  interests  with  respect  to  the 
same  to  other  persons.  Frequently  the  term  "right"  is  employed  to 
describe  that  which  is  here  described  as  a  power. 

Finally,  a  legal  relation  of  different  nature  exists  where,  under  a 
given  state  of  facts,  one  person,  A.,  is  under  a  disability,  and  some 
other  person  possesses  a  correlative  immunity,  as,  for  example,  a 
person  in  rightful  possession  of  another's  chattels — a  bailee — has 
no  power  to  transfer  title  to  the  same  to  an  innocent  third  party. 


8  INTRODUCTION  TO  THE  STUDY  OF  LAW 

The  party  in  possession  is  under  a  disability.    The  owner  possesses 
an  immunity.' 


SECTION  5.— DIVISIONS  OF  LAW 

Having  adverted  briefly  to  the  fundamental  conceptions  of  the 
law,  we  may  now  proceed  to  indicate  in  a  somewhat  more  detailed 
manner  the  boundaries  of  the  field  of  legal  study,  for  the  primary 
purpose  of  noting  what  particular  portions  of  this  field  will  engage 
our  attention  in  this  book.  It  might  be  stated  that  we  shall  be 
concerned  largely  with  the  law  of  contracts,  and  of  the  special 
types  of  contracts,  agency,  negotiable  instruments,  and  sales,  and 
with  the  law  of  partnership  and  corporations,  but  that  the  law  of 
torts,  criminal  law,  personal  property,  real  property,  equity,  trusts, 
wills,  conflict  of  laws,  constitutional  law,  etc.,  are  not  taken  up  in 
this  book.  This  statement  would  be  true,  but  it  does  not  indicate 
very  definitely  the  subject-matter  of  the  courses  bearing  these  la- 
bels. It  may  aid  in  visualizing  the  field  of  legal  study  to  look  upon 
it  through  the  various  legal  relations  which  may  exist  between  per- 
sons. What  facts  give  rise  to  legal  relations?  What  is  their  con- 
tent? How  may  they  be  em'ployed;  how  protected,  altered,  or  ex- 
tinguished?- 

A  person  possesses  many  legal  rights  merely  because  of  his  ex- 
istence in  society.  One  has  a  right  not  to  have  his  physical  per- 
son interfered  with ;  a  right  not  to  be  defamed ;  a  right  to  enter 
into  legal  relations  with  others.  Such  rights  are  possessed  by  each 
against  all  other  persons.  Violations  of  these  personal  rights  are 
called  torts.  Accordingly,  assault,  assault  and  battery,  false  im- 
prisonment, malicious  prosecution,  libel  and  slander,  harms  to  one's 
person  resulting  from  negligent  acts,  constitute  special  kinds  of 
torts.  This  list  is  not  exhaustive.  A  person  possesses  rights  against 
all  other  persons  which  arise  out  of  the  existence  of  domestic  re- 
lations. The  law  protects  the  relation  of  husband  and  wife ;  of  par- 
ent and  child.  Interferences  therewith  are  torts.  The  same  act, 
therefore,  may  be  a  tort  tp  more  than  one  person.  A  person  also 
possesses  rights  against  all  other  persons  by  reason  of  his  owner- 
ship or  possession  of  real  and  personal  property.  Accordingly  tres- 
pass to  land  or  personal  property,  conversion  of  personal  property, 
the  obtaining  of  property  or  other  thing  of  value  by  fraud,  con- 
stitute torts.  The  law  of  torts  is,  therefore,  that  branch  of  the  law 
which  protects  legal  relations  which  one  has  with  respect  to  his 
physical  person,  his  reputation,  his  domestic  relations,  his  prop- 
erty, and  which,  to  a  large  extent,  protects  him  in  the  acquisition 
of  other  relations.  The  purpose  of  this  brief  paragraph  is  merely 
to  call  attention  to  the  existence  of  an  immensely  broad  field  of  the 

7  The  above  brief  reference  to  legal  relations  is  based  on  the  masterly  pa- 
pers of  the  late  Professor  AVesley  Ne\vconih  IlohfeUl  on  Fundamental  Legal 
Conceptions  as  Applied  in  Judicial  Reasoning  (1913)  2.3  Yale  Law  Journal, 
16,  and  (1917)  26  Yale  Law  Journal,  710. 


INTRODUCTION  TO  THE  STUDY  OF  LAW  9 

law,  which,  except  incidentally,  is  not  discussed  in  this  volume. 
Here  and  there  throughout  this  volume  a  case  appears  which  deals 
with  the  law  of  torts,  but  in  no  sense  is  there  any  attempt  here 
made  to  develop  this  broad  and  important  field  of  the  law. 

The  criminal  law,  closely  allied  to  the  law  of  torts,  is  not  taken 
up  in  this  book.  Often  an  act  which  constitutes  a  tort  will  also 
constitute  a  crime.  Crimes  are  acts,  usually  accompanied  by  some 
kind  of  mental  element,  called  criminal  intent,  which  are  more  seri- 
ous invasions  of  personal  and  property  rights  than  are  those  torts 
which  are  not  crimes.  There  are  some  kinds  of  crimes  which  are 
not  directed  against  any  particular  persons  or  property,  and  which 
are  not  torts,  as,  for  example,  gambling,  violation  of  the  laws  pro- 
hibiting the  manufacture  and  sale  of  intoxicating  liquor,  violations 
of  pure  food  laws,  treason,  violations  of  the  revenue  laws,  etc.  The 
list  is  a  long  one,  as  is  also  the  list  of  crimes  which  are  directed 
against  some  particular  person  or  property.  All  crimes  have  this 
element  in  common:  The  proceeding  in  the  courts  against  the  al- 
leged offender  is  instituted  by  some  officer  of  the  state,  and  is  un- 
der his  control,  and  is  not  under  the  control  of  the  person  who  may 
have  been  injured  by  the  act.  For  his  injury  he  has  his  independent 
remedy  against  the  wrongdoer. 

We  turn  now  to  another  field  of  the  law,  which  may  be  called 
the  law  of  property.  Having  noted  that  one  important  object  of 
the  law  is  to  protect  interests  with  respect  to  property,  the  ques- 
tion arises:  How  may  interests  with  respect  to  property  be  ac- 
quired? To  enumerate  some  of  the  methods:  Property  may  be  ac- 
quired by  gift;  by  contract  of  sale;  by  deed;  by  will;  by  inher- 
itance. Property  may  also  be  acquired  by  confusion ;  that  is,  where 
the  property  of  one  person  becomes  so  mixed  with  that  of  another 
that  it  cannot  be  separated.  The  whole  mass,  as  a  result,  may  be- 
long to  the  one  or  the  other,  depending  upon  circumstances.  So, 
also,  property  may  be  acquired  by  adverse  possession;  that  is, 
by  exercising  dominion  over  it  for  some  prescribed  period  of  time. 
A  riparian  owner  of  land  becomes  the  owner  of  the  land  added  to 
the  shore  line  by  accretion.  Ownership  in  things,  not  theretofore 
the  subject  of  ownership,  and  in  things  abandoned,  may  be  acquired 
by  asserting  and  maintaining  control  over  them.  This  field  of  the 
law,  and  it  is  but  dimly  and  partially  sketched  here,  occupies  a  most 
prominent  position  in  the  law  generally.  The  law  with  respect  to 
the  acquisition  and  transfer  of  titles  to  land,  the  law  with  respect  to 
wills,  and  of  intestate  succession  alone,  might  readily  engage  the 
attention  of  a  scholar  for  years.  But  this  branch  of  the  law,  like 
the  law  of  torts,  is  not  taken  up  in  this  book,  except  in  so  far  as 
titles  to  personal  property  may  be  acquired  by  sale,  and  of  negotia- 
ble instruments  by  negotiation. 

Another  portion  of  the  law  of  property,  in  itself  vast  in  extent, 
deals,  not  with  the  methods  of  acquiring  interests  in  property,  but 
rather  with  the  kinds  of  interests  which  may  be  acquired.  Owner- 
ship of  property  is  a  very  complex  set  of  legal  relations.    When  a 


10  INTRODUCTION   TO   THK   STUDY   OF   LAW 

person  owns  property,  his  dominion  over  it  reaches  its  highest 
stage.  He  possesses  all  legal  relations  with  respect  to  it.  He  has 
the  privilege  of  user.  He  has  the  power  to  substitute  other  per- 
sons in  the  position  which  he  occupies  with  respect  to  the  prop- 
erty. He  has  a  right  that  it  shall  not  be  injured  or  used  by  other 
persons.  If  other  persons  attempt  to  exercise  powers  with  respect 
to  the  property,  such  as  by  attempts  to  sell  it,  such  acts  do  not  af- 
fect the  owner's  position  with  respect  to  the  property.  All  of  these 
relations  are  involved  in  the  concept  of  ownership.  The  idea  that 
an  owner  of  property  may  dispossess  himself  of  all  of  his  legal  re- 
lations with  respect  to  his  property  is  a  fairly  simple  one.  The 
question  here  is :  How  may  the  owner  transfer  his  interests  ?  But 
the  further  question  arises:  May  an  owner  transfer  some  of  his 
relations  with  respect  to  his  property,  and  retain  all  other  rela- 
tions? May  he  transfer  some  relations  to  one  person,  and  other 
relations  to  other  persons?  Observation  shows  that  this  is  done 
constantly.  For  example,  the  mortgaging  or  pledging  of  property 
is  a  separation  of  the  total  relations  constituting  ownership,  and  a 
transfer,  in  some  mode  permitted  by  law,  of  some  of  these  relations, 
and  a  retention  of  those  remaining.  So,  also,  property  may  be  held 
in  trust  for  other  persons,  in  which  case  it  is  said  that  the  trustee 
possesses  the  legal  title  and  the  beneficiary  of  the  trust  has  the 
equitable  title.  This  statement  does  not  disclose  what  interests 
are  held  by  the  trustee,  and  what  interests  are  held  by  the  benefi- 
ciary ;  but  it  does  declare  that  the  sum  total  of  the  relations  con- 
stituting ownership  may  be  so  divided,  and  that  when  a  sufl'icient 
number  of  these,  of  the  appropriate  kind,  are  possessed  by  one  per- 
son, such  person  will  be  called  a  trustee,  and  the  persons  who  pos- 
sess the  remaining  interests  will  be  called  beneficiaries  of  the  trust, 
or  cestuis  que  trustent.  Possession  of  property  alone  may  be  trans- 
ferred under  various  circumstances.  The  party  in  possession  is 
called  a  bailee;  the  party  with  whom  he  dealt,  the  bailor.  Here 
again  we  have  a  division  of  the  interests  with  respect  to  property. 
There  are  various  other  terms  used  in  the  law  to  describe  par- 
ticular situations  when  interests  of  property  have  been  separated 
and  possessed  by  diflferent  persons.  Property  may  be  left  by  will 
to  A.,  and  upon  his  death  to  B.  The  possibilities  for  creating  vari- 
ous sorts  of  future  interests  in  property  are  numerous.  Property 
may  be  leased.  A  right  to  use  another's  land,  or  to  take  something 
of  value  from  it,  may  be  acquired.  These  interests  are  called  ease- 
ments and  profits.  The  point  of  emphasis  here  is  that  the  legal 
relations  with  respect  to  property  are  exceedingly  complex,  and  that 
the  possibilities  for  segregating  various  combinations  of  these  in- 
terests, and  of  transferring  them  to  different  persons,  is  limited 
only  by  man's  ingenuity  and  by  principles  of  public  policy.  Like 
the  law  of  torts,  the  law  relating  to  the  methods  of  acquiring  inter- 
ests in  property,  though  most  important  and  extensive,  does  not 
constitute  the  subject-matter  of  this  book.  For  answers  to  the 
questions  suggested  above,  we  would  be  obliged  to  consult  works 


INTRODUCTION   TO   Til  10   STUDY   OF   LAW  11 

on  the  law  of  mortgages,  leases,  pledges,  trusts,  bailments,  future 
interests,  and  easements.  There  will  appear,  in  the  volume,  an  oc- 
casional reference  to  some  aspect  of  the  law  of  mortgages,  of  pledg- 
es, of  trusts,  and  of  bailments ;  but  such  references  are  incidental 
to  the  main  theme. 

There  is  still  another  aspect  of  the  law  of  property,  likewise  not 
taken  up  in  this  book.  This  branch  of  the  law  marks  the  outer 
limits  of  the  relations  constituting  ownership.  How  much  water 
may  a  riparian  owner  take  from  the  stream?  May  he  drain  the 
surface  water  from  his  land  upon  adjoining  land?  May  one  use  his 
land  for  any  purpose  he  sees  fit?  Are  there  any  restrictions  with 
respect  to  the  manner  in  which  one  may  use  his  land?  A  riparian 
owner  does  not  own  the  water  that  flows  by  his  land,  although  he 
may  use  it;  in  some  states  only  a  reasonable  amount;  in  others, 
under  certain  circumstances,  he  may  take  all.  Likewise  there  are 
different  rules  with  respect  to  drainage.  In  some  states  one  may 
not  interfere  with  the  natural  flow  of  the  water;  in  others  he  may 
lawfully  build  dikes  against  it.  The  restrictions  upon  the  use  of 
land  are  numerous.  One  has  a  privilege  of  using  his  land  only  in 
a  reasonable  manner.  He  may  not  so  use  his  land  as  to  interfere 
with  a  reasonable  use  of  adjoining  land.  Certain  kinds  of  improper 
uses  are  called  nuisances.  Modern  legislation  has  added  greatly 
to  the  number  of  restrictions  upon  the  use  of  land.  The  height  of 
buildings  is  regulated  by  statute.  Certain  kinds  of  industry  can- 
not be  conducted  in  close  proximity  to  residential  districts.  These 
questions  open  up  broad  fields  of  inquiry  in  other  portions  of  the 
law  of  real  property,  into  modern  legislation  and  constitutional 
law.  In  this  connection  one  should  call  to  mind  the  various  stat- 
utory regulations  applicable  to  the  conduct  of  business  generally. 

This  brings  us  to  the  consideration  of  that  portion  of  the  law 
which  constitutes  the  subject-matter  of  this  volume.  It  has  been 
noted  above  that  legal  relations — legal  rights  and  duties,  and  other 
legal  relations — attach  to  individuals  by  the  edict  of  the  law  alone 
merely  because  they  are  individuals,  and  that  other  legal  relations 
arise  out  of  the  acts  of  parties  themselves.  In  both  cases,  of  course, 
the  legal  relations  exist  by  virtue  of  the  law,  but  in  the  first  group 
they  exist  independent  of  the  acts  of  the  parties,  while  in  the  sec- 
ond group  the  relations  do  not  arise  until  the  parties  have  done 
certain  acts.  A  particular  group  of  facts  which  operate  to  create  or 
change  existing  relations  may  constitute  a  will ;  another,  a  convey- 
ance ;  another,  a  license ;  another  may  be  a  contract,  and  so  on. 
The  first  four  parts  of  this  book  deal  with  the  various  groups  of 
facts,  called  contracts,  which  have  the  effect  of  creating  or  chang- 
ing existing  legal  relations  between  persons.  The  reason  for  throw- 
ing the  emphasis  upon  this  branch  of  the  law  is  because  the  greater 
volume  of  business  transactions  in  everyday  life  are  transactions 
which  do  create,  or  otherwise  concern,  contractual  legal  relations. 
While  the  average  person,  in  the  course  of  a  lifetime,  will,  no  doubt, 
be  interested  many  times  in  conveyances  of  land,  wills,  mortgages, 


12  INTRODUCTION  TO  THE  STUDY  OF  LAW 

pledge  agreements,  trusts,  etc.,  it  will  nevertheless  be  true  that 
the  number  of  these  transactions,  compared  with  the  number  of  con- 
tracts in  which  he  will  be  concerned,  will  be  relatively  few.  Hence 
the  emphasis  is  thrown  on  contracts.  Part  I  deals  with  the  gen- 
eral principles  applicable  to  all  contracts.  Parts  II,  III,  and  IV 
deal  with  special  kinds  of  contracts.  Parts  V  and  VI  are  devoted 
to  some  of  the  special  problems  which  arise  out  of  the  form  in 
which  business  is  done;   i.  e.,  the  partnership  and  the  corporation. 


SECTION  6.— LEGAL  PROCEDURE 

Some  attention  may  now  be  given  to  the  matter  of  legal  pro- 
cedure, to  the  end  that  it  may  contribute  something  to  the  under- 
standing of  the  materials  which  constitute  the  chief  basis  for  legal 
study ;  i.  e.,  the  decisions  of  the  courts.  The  party  who  institutes 
a  proceeding  at  law  is  called  the  plaintifif.  In  a  suit  in  equity  such 
party  is  usually  called  the  complainant.  In  either  case  the  party 
proceeded  against  is  called  the  defendant.  The  first  step  consists  in 
notifying  the  defendant  that  an  action  has  been  begun  against  him. 
For  very  just  reasons  the  law  does  not  permit  a  person  to  be  sued 
unless  such  person  has  notice  of  the  action.  The  defendant  is  noti- 
fied by  the  service  upon  him  of  a  document  usually  called  a  sum- 
mons. In  some  states  the  law  permits  the  plaintiff  or  his  counsel 
to  serve  the  summons.  In  other  states  the  law  requires  the  clerk  of 
the  court  to  issue  the  summons.  The  expression  "service  of  sum- 
mons" means  the  act  of  bringing  to  the  defendant  knowledge  of  the 
fact  that  a  suit  has  been  instituted  against  him.  Usually  statutes 
require  that  the  defendant  be  personally  served  with  the  summons ; 
that  is,  the  party  serving  the  same  will  be  required  either  to  read  the 
same  to  the  defenda^t  or  to  leave  a  copy  of  the  summons  with  him. 
Some  statutes  authorize  the  service  of  summons  upon  any  member 
of  the  family  wherein  the  defendant  resides,  and  sometimes  service 
may  be  made  by  publication.  The  next  step  consists  in  the  filing  of 
a  document,  variously  called  a  declaration,  a  statement  of  claim,  or 
petition,  by  the  plaintiff,  containing  an  orderly  statement  of  the 
essential  facts  out  of  which  the  litigation  developed. 

The  defendant  then  interposes  his  defense.  The  defense  may  be 
of  various  kinds:  First,  the  defendant  may  admit  the  truth  of  the 
facts  alleged,  but  contend,  as  a  matter  of  law,  that  they  do  not  en- 
title the  plaintiff  to  recover.  This  issue  is  raised  by  a  pleading 
known  as  a  demurrer.  The  question  as  to  whether  or  not  the  plain- 
tiff has  stated  a  cause  of  action  is  then  decided  by  the  judge.  A 
second  kind  of  defense  arises  when  the  defendant  denies  the  truth  of 
the  facts  alleged  by  the  plaintiff.  This  raises  an  issue  of  fact.  A 
third  type  of  defense  exists  when  the  defendant  admits  the  truth  of 
the  facts  alleged  in  the  declaration,  but  sets  up  other  facts  which  he 
contends  defeat  plaintiff's  cause  of  action.  This  raises  an  issue  of 
fact.    Issues  of  fact  are  tried  by  the  court,  with  or  without  a  jury. 


INTRODUCTION   TO   THE   STUDY   OF    LAW  13 

depending  upon  the  nature  of  the  action  and  desire  of  the  parties. 
It  may  here  be  mentioned  that  the  Constitutions  of  the  various 
states  contain  provisions  v^hich  guarantee  trial  by  jury.  This  guar- 
anty does  not  apply  to  all  kinds  of  actions.  In  general,  there  are 
three  kinds  of  cases  wherein  there  is  a  constitutional  guaranty  of 
jury  trial:  First,  criminal  cases;  second,  breaches  of  contract; 
third,  actions  of  tort.  In  all  other  cases,  as  a  rule,  there  will  not 
be  a  constitutional  guaranty  of  jury  trial,  although  statutes  may, 
in  some  instances,  give  the  right  of  jury  trial  where  there  was  no 
such  right  under  the  Constitution.  Unless  authorized  by  statute, 
there  is  no  right  to  jury  trial  in  proceedings  in  equity,  as  distin- 
guished from  proceedings  at  law. 

The  first  step  in  a  trial  consists  in  the  impaneling  of  the  jury. 
The  process  of  impaneling  the  jury  consists  in  questioning  the  pro- 
spective jurors  with  respect  to  their  competency  to  serve.  Statutes 
prescribe  what  the  qualifications  of  jurors  shall  be.  In  general,  a 
juror  will  be  competent  to  serve  if  he  has  no  fixed  opinion  with 
respect  to  the  cause  in  which  he  is  to  sit  as  a  juror,  and  if  he  has  no 
prejudices  for  or  against  either  of  the  parties  to  the  action  or  their 
counsel.  Following  the  impaneling  of  the  jury,  counsel  may  make 
an  opening  statement.  This  statement  is  merely  for  the  purpose  of 
informing  the  jury  of  the  general  nature  of  the  action  and  of 
what  the  parties  expect  to  prove.  Following  the  opening  state- 
ment comes  the  examination  of  witnesses.  Generally  the  plain- 
tiff is  required  first  to  introduce  his  evidence.  Upon  him,  as  a 
rule,  rests  the  burden  of  proof.  The  defendant  is  not  called  upon 
to  introduce  any  evidence  until  the  plaintiff  has  completed  his  case. 
The  evidence  is  then  heard. 

There  are  many  restrictions  with  respect  to  the  obtaining  of  evi- 
dence. A  witness  may  not  relate  on  the  witness  stand  every  fact 
which  he  may  deem  germane  to  the  case.  The  rules  of  the  sub- 
stantive law  of  property,  of  contract,  tort,  crimes,  etc.,  the  rules  of 
pleading,  and  the  rules  of  evidence  prescribe  the  circumstances  un- 
der which  evidence  may  be  given.  In  a  suit  upon  a  negotiable  in- 
strument by  a  holder  in  due  course  against  the  maker,  evidence 
that  the  instrument  was  not  delivered  to  the  payee  is  inadmissi- 
ble, because  a  rule  of  substantive  law  declares  that  this  fact  consti- 
tutes no  defense.  In  an  action  for  assault  and  battery  where  the 
only  issue  of  fact  tendered  by  the  pleadings  was  whether  the  de- 
fendant did  the  act,  evidence  tending  to  show  justification  or  excuse 
would  be  excluded.  The  law  of  pleading  fixes  the  issues.  Evidence 
of  facts  not  in  issue  is  inadmissible.  Only  that  evidence  relevant  to 
the  issues  as  framed  by  the  pleadings  is  admissible.  The  scope  of 
the  law  of  evidence  is  indicated  by  Professor  Wigmore  in  the  fol- 
lowing language:  "The  law  of  evidence  *  *  *  includes  the 
rules  applicable  when  any  knowable  fact  or  group  of  facts  is  offered 
before  a  legal  tribunal  for  the  purpose  of  producing  persuasion,  posi- 
tive or  negative,  on  the  part  of  the  tribunal,  as  to  the  truth  of  a 


14  INTEODUCTION  TO  THE  STUDY  OF  LAW 

proposition,  not  of  law  or  of  logic,  on  which  the  determination  of 
the  tribunal  is  to  be  given,"    Wigmore  on  Evidence,  §  1. 

Evidence  may  be  real,  testimonial,  or  circumstantial.  This  is  a 
broad  field  of  inquiry.  Not  all  evidence  which  satisfies  the  gen- 
eral requisites  of  relevancy  is  admissible.  Relevant  evidence  is 
sometimes  excluded  because  it  is  untrustworthy.  Oral  evidence  of 
the  contents  of  a  written  instrument  is  generally  inadmissible. 
The  best  evidence  of  its  contents  is  the  document  itself.  The  orig- 
inal writing  must  be  produced,  or  its  absence  accounted  for,  before 
secondary  evidence  is  admissible.  Hearsay  evidence  is  inadmissi- 
ble, although  there  are  many  exceptions  to  the  rule.  A  witness  is 
frequently  not  permitted  to  state  his  opinion  as  regards  the  truth 
of  certain  facts  in  issue.  Relevant  testimony  is  sometimes  ex- 
cluded, not  because  it  is  untrustworthy,  but  because  a  rule  of  public 
policy  forbids  its  admission.  Parol  evidence,  tending  to  vary  or 
contradict  the  terms  of  a  written  instrument,  is  generally  inadmis- 
sible. A  rule  of  substantive  law  forbids.  There  are  a  number 
of  real  or  apparent  exceptions  to  the  rule.  The  process  of  eliciting 
the  evidence  upon  the  issues  in  a  trial  is  therefore  hedged  about  by 
a  great  many  rules  of  law.  With  these  branches  of  the  law  this 
book  is  not  concerned.  Here  and  there  some  detailed  aspects  of 
these  rules  present  themselves  in  the  cases. 

At  the  close  of  the  taking  of  testimony,  the  controverted  ques- 
tions must  be  decided.  This  determination  involves  the  exercise 
of  two  functions:  (1)  The  finding  of  facts;  and  (2)  the  appli- 
cation of  the  law  to  the  facts.  The  facts  will  be  found  either  by  the 
court  without  a  jury  or  by  the  jury.  Where  a  court  sitting  without 
a  jury  decides  the  issues,  the  formal  entry  of  judgment  operates  both 
*as  a  finding  of  fact  and  as  the  application  of  the  law  to  the  facts. 
Sometimes  the  court  will  make  a  special  finding  of  fact,  separate  and 
distinct  from  the  entry  of  judgment.  Where  the  trial  is  by  jury,  the 
jury  will  be  directed  to  find  the  facts  ;  that  is,  to  make  necessary  in- 
ferences from  the  detailed  evidentiary  facts,  and,  in  the  event  of 
conflicts  in  the  testimony,  to  determine  whose  witnesses  are  to  be 
believed.  In  a  jury  trial,  the -jury,  as  a  rule,  applies  the  law  to  the 
facts.  The  usual  procedure  is  for  the  court  to  give  a  number  of 
instructions  to  the  jury  which  declare  what  the  law  is  with  respect 
to  the  various  possible  states  of  facts.  The  jury  then  determines 
what  the  facts  are,  and  applies  those  instructions  which  fit  the  facts 
as  found,  and  bring  in  their  verdict  accordingly.  Sometimes  the 
jury  is  directed  to  bring  in  a  special  verdict,  which  contains  a  recital 
of  the  facts  only,  in  which  case  the  court  applies  the  law  to  the 
facts  as  found.  When  the  jury  finds  the  facts,  and  applies  the 
law  as  given  them  by  the  court,  the  resulting  verdict  is  called  a 
general  verdict. 

Upon  the  return  of  a  verdict,  an  opportunity  is  given  to  the  trial 
court  to  correct  errors  which  may  have  occurred  during  the  course 
of  the  trial.  This  opportunity  formally  arises  upon  a  motion  for 
new  trial,  made  by  the  losing  party.    The  possible  errors  which  may, 


INTRODUCTION  TO  THE  STUDY  OF  LAW  15 

at  this  point,  be  urged  as  grounds  for  a  new  trial,  in  general,  are  as 
follows:  (1)  The  erroneous  admission  of  evidence;  (2)  the  er- 
roneous exclusion  of  evidence;  (3)  the  giving  of  erroneous  in- 
structions to  the  jury;  (4)  the  erroneous  refusal  to  give  correct  in- 
structions to  the  jury;  (5)  that  there  is  a  fatal  variance  between 
the  pleadings  and  the  proof;  (6)  that  the  evidence  is  insufficient 
to  support  the  verdict;  (7)  that  the  misconduct  of  the  court,  of 
counsel,  or  of  the  jury  during  the  course  of  the  trial  was  prejudicial 
to  the  losing  party.  If,  upon  the  argument  for  new  trial,  the  court 
believes  that  any  of  these  errors  occurred,  and  if  he  believes  that 
such  errors  were  so  far  prejudicial  that  the  losing  party  did  not  have 
a  fair  trial,  a  new  trial  will  be  granted.  Sometimes  the  court  will 
even  enter  judgment  for  the  losing  party  notwithstanding  the  ver- 
dict. If  the  court  overrules  the  motion,  judgment  on  the  verdict 
usually  follows  as  a  matter  of  course. 

This  action  terminates  the  cause  as  far  as  the  trial  court  is  con- 
cerned. If  the  losing  party  is  still  of  the  opinion  that  substan- 
tial error  occurred,  he  may  take  the  case  to  a  court  of  review,  some- 
times called  an  appellate  court,  or  Supreme  Court,  and  there  urge 
the  contentions  unsuccessfully  made  in  the  court  below.  This 
procedure  is  sometimes  called  an  appeal.  Sometimes  the  action  of 
the  losing  party  in  the  court  of  review  is  called  the  suing  out  of  a 
writ  of  error  to  review  the  action  of  the  trial  court.  There  are 
methods  of  reviev/  other  than  by  appeal  and  by  writ  of  error. 
In  any  event,  the  purpose  is  to  get  before  the  upper  court  a  complete 
record  of  what  occurred  in  the  trial  court,  for  the  purpose  of  making 
the  contention  that  the  trial  court  erred  in  entering  judgment 
against  the  appellant.  Sometimes  this  party,  instead  of  being  called 
the  appellant,  is  called  the  plaintiff  in  error.  The  party  who  won 
in  the  trial  court  is  called  the  appellee,  or  the  defendant  in  error. 

No  new  trial  is  had  in  the  court  of  review.  The  cause  is  submit- 
ted on  the  record.  The  reviewing  court  has  before  it  copies  of  all 
the  papers  filed  in  the  court  below,  copies  of  the  testimony,  the 
verdict,  judgment,  and  all  other  orders  entered  with  respect  to 
the  litigation.  Briefs  of  counsel  for  each  party  are  filed,  which  pre- 
sent arguments  in  support  of  their  respective  contentions.  The 
cause  is  then  decided  by  the  court,  and  to  one  of  the  members  of 
the  court  is  assigned  the  duty  of  preparing  a  written  opinion.  The 
opinion  sets  forth  the  reasons  for  the  affirmance,  modification,  or 
reversal  of  the  action  of  the  trial  court.  These  opinions  are  collect- 
ed and  printed  in  book  form,  and  are  called  reports.  The  reports  of 
the  courts  in  the  United  States  number  several  thousand. 


SECTION  7,— JUDICIAL  DECISIONS 

It  is  to  these  decisions  and  to  the  argument  advanced  in  support 
thereof  that  one  looks,  in  the  first  instance,  for  the  law  applicable 
to  any  situation  not  specifically  covered  by  statute.     Even  where 


16  INTRODUCTION  TO  THE  STUDY  OF  LAW 

there  is  a  statute,  the  decision  of  a  court  interpreting  that,  or  some 
closely  analogous  statute,  in  the  light  of  similar  situations  of  fact, 
will  be  the  index  as  to  what  the  law  is.  This  volume  consists  in 
a  compilation  of  judicial  decisions  which  develop  the  general  prin- 
ciples of  contracts,  agency,  negotiable  instruments,  partnership, 
and  corporations. 

A  final  word  may  be  added  with  respect  to  the  attitude  with  which 
one  should  approach  the  study  of  judicial  decisions.  This  attitude 
is  determined  by  an  appreciation  of  the  nature  of  a  judicial  deci- 
sion, by  a  knowledge  of  the  data  employed  by  the  court  in  arriving 
at  its  conclusion,  and  also  of  the  process  of  reasoning  by  which  the 
result  was  reached. 

As  a  practical  matter  to-day,  the  data  employed  by  a  court  in  de- 
ciding a  legal  controversy  consist  of  former  decisions  of  the  same 
or  other  courts.  The  principle  of  stare  decisis  leads  the  court  to 
assume,  at  the  start,  that  the  case  then  before  them  must  be  decided 
in  the  same  way  in  which  they  have  always  decided  such  cases. 
Where  a  former  decision  by  the  same  court  can  be  found  which  is 
identical  with  the  case  then  pending,  the  decision  is  readily  arrived 
at.  Where  there  is  no  such  decision,  the  search  among  the  prece- 
dents is  for  some  case  analogous  on  its  facts  and  issues  presented. 
The  process  of  reasoning  by  which  it  is  determined  that  a  particular 
decision  is  analogous  to  the  case  at  bar  is  a  process  of  noting 
similarities  and  differences  between  the  case  at  bar  and  the  prece- 
dent under  examination.  If,  in  accordance  with  the  established 
principles  of  inductive  reasoning,  the  similarities  strongly  predomi- 
nate, the  former  decision  will  be  deemed  to  control  the  decision 
of  the  case  at  bar.  The  process  of  determining  that  a  particular 
decision  is  analogous  to  a  given  case  is  not  entirely  a  process  of 
inductive  reasoning.  To  some  extent  it  is  deductive.  Where  no 
former  decision  analogous  on  its  facts  and  issues  can  be  discovered, 
the  first  process  of  reasoning  is,  by  induction,  to  discover  some 
wider  generalization  of  the  law  therein  involved,  a  testing  of  the 
validity  of  this  generalization  by  comparing  it  with  other  cases, 
and  a  final  formulation  of  the  generalization  by  induction.  This 
generalization  then  constitutes  the  major  premise  for  deductive 
argument.  The  minor  premise  will  then  consist  in  a  declaration 
that  the  facts  and  issues  in  the  case  at  bar  fall  within  and  are  com- 
prehended by  the  operative  facts  which  constitute  the  subject  of 
the  major  premise.  The  truth  of  this  subordinate  assertion  must 
have  first  been  proved,  largely  by  inductive  reasoning.  The  predi- 
cate of  the  major  premise  is  a  statement  of  the  legal  effect  of  the 
facts  generalized  in  the  subject.  The  decision  is  thus  arrived  at 
both  by  inductive  and  deductive  reasoning. 

Of  course,  this  is  b\it  a  theoretical  explanation  of  the  process  of 
judicial  reasoning.  The  actual  solution  of  a  legal  controversy,  aris- 
ing, as  it  does,  out  of  the  complicated  facts  of  economic  and  social 
life,  cannot  be  worked  out  by  the  mere  application  of  the  technical 
rules   governing   inductive   and   deductive   reasoning.     Too   many 


INTRODUCTION  TO  THE  STUDY  OF  LAW  17 

forces  beat  upon  the  situation  to  permit  the  confinement  of  the 
process  of  administering  the  law  to  the  straight-jacket  of  a  syllo- 
gism. And  it  is  well  that  this  is  so,  for  courts  are  established  in 
the  interests  of  the  administration  of  justice.  There  is  an  evolu- 
tion of  business  and  social  life,  just  as  there  is  an  evolution  of  plant 
and  animal  life.  The  present  cannot  be  understood  without  a 
knowledge  of  the  past.  Any  attempt  to  divorce  the  present  from 
the  past,  to  strike  out  on  new  lines,  without  regard  for  historical 
knowledge,  is  likely  to  prove  unfortunate.  And  yet  the  truths  of 
history  do  not  constitute  the  sole  data  for  the  formation  of  judg- 
ments in  the  law,  or  with  respect  to  any  other  phase  of  human 
activity.  The  courts  do  take  the  present  into  consideration,  and 
the  judicial  decision  is  the  result  of  an  appreciation  of  the  value  of 
historical  precedent,  of  logical  processes  of  thought,  and  of  present- 
day  affairs.  The  most  conspicuous  changes  in  the  law,  and  also 
by  far  the  more  numerous  changes,  are  the  result  of  legislation ; 
but  the  process  of  change  in  the  scope  and  content  of  common-law 
principles  does  go  on  as  a  result  of  judicial  action. 

In  the  study  of  judicial  decisions,  one  should  therefore  be  keen- 
ly aware  of  the  marked  differences  between  this  kind  of  material 
and  that  found  in  a  text-book.  The  study  of  judicial  decisions  is  a 
study  of  source  materials,  while  the  study  of  a  text-book  is  the 
study  of  secondary  materials.  A  writer,  in  developing  a  book,  will 
assert  general  propositions,  and  establish  their  truth  by  the  intro- 
duction of  the  detailed  evidence  which  has  led  him  to  these  con- 
clusions. The  material  is  well  organized  and  developed,  with  due 
regard  to  emphasis,  force,  and  clearness.  Immaterial  and  irrelevant 
matters  have  been  eliminated  as  a  result  of  the  research. 

The  study  of  original  materials,  such  as  decisions  of  the  courts, 
presents  quite  a  different  situation.  There  will  often  be  found, 
in  judicial  decisions,  matter  which  is  immaterial  to  the  issue,  or, 
if  material,  only  remotely  so.  They  will  not  always  be  carefully 
organized,  and  the  really  important  parts  may  not  stand  out  with 
proper  emphasis.  Occasionally  the  major  portion  of  the  opinion 
may  not  be  germane  to  the  issues.  In  explanation  of  this  situa- 
tion it  should  be  remembered  that  judicial  decisions  are  not  pre- 
pared with  a  view  to  their  use  as  materials  for  educational  purposes. 
A  decision  is  prepared  to  justify  some  action  taken  by  the  court, 
and  the  language  therein  is  directed  to  those  who  are  directly  con- 
cerned in  the  administration  of  the  law,  and  are  trained  in  it.  In 
the  study  of  judicial  decisions,  attention  is  not  directed,  in  the  first 
instance,  toward  the  generalizations  of  the  law  which  appear  in  the 
opinion  and  to  the  proof  introduced  to  support  them.  On  the  con- 
trary, the  successive  steps  necessary  to  the  understanding  of  a  ju- 
dicial decision  involve  the  ascertainment  of  (1)  the  ultimate  ma- 
terial facts  in  the  case ;  (2)  the  issues,  or  points  involved,  as  dis- 
closed by  the  errors  alleged  by  the  appellant  party;  (3)  the  judg- 
ment of  the  court,  whether  for  appellant  or  appellee ;    (4)  the  vari- 

B.&:  B.Bus.Law— 2 


18  INTRODUCTION  TO  THE  STUDY  OF  LAW 

ous  principles  of  law  necessarily  involved  in  aiid  to  be  inferred  from 
the  judgment  on  the  issues  as  raised. 

The  first  and  third  aspects  of  a  case — the  facts,  and  the  judg- 
ment— are  readily  discoverable.  The  real  problem  concerns  the 
determination  of  points  2  and  4:  What  are  the  issues?  And  what 
are  the  inferences  of  law  necessarily  involved  in  the  judgment? 
These  two  points  are  interrelated.  Point  2  merely  raises  a  question, 
or  series  of  questions,  of  law.  Point  4  is  an  inference,  or  series  of 
inferences,  which  contain  the  reply  to  the  questions  raised  in  point 
2.  It  appears,  therefore,  that  the  purpose  of  the  study  of  a  judi- 
cial decision  is  to  obtain  the  inference  of  law  which  arises  from 
the  force  of  the  judgment.  It  is  impossible  for  a  court  to  decide  a 
controversy  without  that  decision  giving  rise  to  necessary  infer- 
ences of  law.  Judicial  decisions  should  be  studied  with  the  end  in 
view  of  determining  what  is  involved  by  the  action  taken  by  the 
court.  This  inference  of  law,  arising  from  the  judgment,  is  some- 
times called  the  decision  of  the  court,  using  that  term  in  a  narrow 
sense.  The  terms  "judgment"  and  "decision"  are  not  always  em- 
ployed with  the  same  meaning.  In  this  discussion  the  term  "judg- 
ment" is  used  to  describe  the  order  of  affirmance,  reversal,  or  modi- 
fication of  the  final  orders  of  the  trial  court.  The  decision  is  the 
necessary  inference  of  law  arising  from  the  judgment.  This  aspect 
of  the  case  is  also  quite  commonly  called  the  "holding"  of  the 
court. 

It  will  be  noticed  that,  so  far,  but  little  mention  has  been  made 
of  the  discussion  which  the  court  advances  in  support  of  the  ac- 
tion taken.  This  portion  of  the  case  is  usually  called  the  opinion. 
The  opinion  is  the  argument  presented  by  the  court  in  reaching  the 
judgment.  In  addition  to  the  opinion  proper,  there  will  appear  in 
the  discussion  some  statements  w^hich  are  not  necessary  steps  in 
the  argument.  These  judicial  generalizations  or  expressions  are 
called  dicta,  or  obiter  dicta.  The  dicta  in  the  case  bear  no  neces- 
sary connection  with  the  decision.  The  dicta  are  of  secondary 
importance — at  least  this  is  so  from  a  standpoint  of  determining 
what  principle  of  law  the  case  actually  stands  for.  Other  consid- 
eration may  make  the  dicta  highly  valuable,  as,  for  instance,  the 
fact  that  it  was  expressed  by  a  particular  judge.  A  court  actually 
makes  law  by  what  it  does.  What  the  court  says  by  way  of  dicta, 
or  opinion,  is  not  necessarily  law. 

The  opinion,  however,  while  it  does  not  necessarily  express  law, 
is  more  important,  for  the  purpose  of  determining  what  the  case 
stands  for,  than  statements  made  by  w^ay  of  dicta.  The  opinion 
states  the  reasons  for  the  actions  taken  by  the  court.  But  it  should 
be  borne  in  mind  that  the  opinion  and  the  judgment  are  two  very 
different  things.  It  is  possible  that  the  opinion  may  not  express 
the  reasons  which  actuated  the  court  in  reaching  the  result.  There 
exist  the  strongest  of  reasons  for  believing  that  the  prepared  opin- 
ion does  state  the  reasons  which  did  bring  about  the  decision  and 
judgment.     Nevertheless  there  is  a  vital  difference  between  the  in- 


INTRODUCTION   TO   THE   STUDY   OF   LAW  19 

ference  of  law  necessarily  arising  from  the  judgment  and  the  opin- 
ion of  the  court  as  to  why  it  reached  that  judgment.  It  is  very 
common  to  find  courts  in  various  states  reaching  the  same  result 
in  cases  involving  the  same  issues,  but  upon  different  lines  of  argu- 
ment. Sometimes  the  arguments  differ  widely  from  each  other. 
It  occasionally  happens,  that  the  courts  wil,l  reach  a  particular  re- 
sult on  a  certain  course  of  argument,  and  later  repudiate  the  rea- 
sons and  support  the  decision  on  other  grounds. 

The  object  of  the  study  of  a  judicial  decision  is,  therefore,  to 
ascertain  what  the  case  actually  decides.  This  decision  springs 
from  the  judgment  in  the  light  of  the  issues  involved  in  the  case. 
The  opinion  and  dicta  constitute  evidence — in  fact,  the  strongest 
kind  of  evidence — of  what  that  decision  is;  but  still  there  is  a 
difference  between  the  decision,  the  necessary  inference  of  law 
arising  therefrom,  and  the  reasons  assigned  for  that  decision. 


SECTION  8.— HISTORY  AND  DEVELOPMENT  OF 
THE  LAW 

The  common  law  of  England,  so  far  as  the  same  is  applicable 
and  of  a  general  nature,  and  all  statutes  of  the  British  Parliament 
made  in  aid  of  and  to  supply  the  defects  in  the  common  law,  down 
to  and  including  a  part  of  the  colonial  period,  have  been  made  the 
rule  of  decision  by  the  various  states  of  the  United  States.  The 
history  of  American  law,  in  large  measure,  is  the  history  of  Eng- 
lish law.  English  law  is  not  a  direct  descendant  of  the  Roman 
law,  as  is  true  in  most  European  states.  The  long  period  of  Roman 
occupation  of  the  British  Isles,  from  55  B.  C.  to  the  middle  of  the 
fifth  century,  might  well  have  led  to  a  different  result ;  but  the  de- 
velopment of  a  strong  government  in  England  by  the  Normans  be- 
fore the  reception  of  the  Roman  law  by  European  states  caused 
an  independent  development  of  legal  institutions.  The  early  legal 
systems  of  the  English,  Saxons,  and  Danes,  such  as  they  were, 
which  prevailed  on  down  until  the  middle  of  the  eleventh  century, 
influenced  later  English  law, but  little.  The  Codes  of  Alfred  and 
Knut,  mere  fragments  in  comparison  with  a  complete  legal  system, 
did  not  survive  the  invasion  of  William  the  Conqueror. 

The  Norman  conquest  of  England  in  1066  caused  a  break  in  the 
continuity  of  the  governmental  and  legal  order,  and  an  independent 
development  began.  The  centralization  of  political  power  and  the 
reign  of  feudalism  under  the  Norman  and  Angevin  kings  estab- 
lished the  guiding  principles  of  the  law  during  the  two  centuries 
following  the  conquest.  The  Curia  Regis,  the  great  court  of  the 
Norman  kings,  forced  the  local  courts  of  the  Anglo-Saxons  into  the 
background,  and  maintained  its  sway  for  nearly  200  years.  Early 
law  did  not  have  for  its  objects  the  carrying  out  of  the  dictates  of 
ethics  and  of  economic  expediency.  The  early  forms  of  trial  bear 
ample  testimony  to  these  facts.     Trials  by  ordeal,  by  battle,  and 


20  INTRODUCTION  TO   TUB   STUDY   OF   LAW 

by  procuring  a  certain  number  of  witnesses  to  take  oath  to  the 
truth  of  a  litigant's  claim  were  not  calculated  to  terminate  con- 
troversy justly.  The  feudal  system  of  land  tienure,  representing  a 
fusion  of  economic  and  political  organizations,  produced  a  body  of 
law  quite  dissimilar  to  that  of  to-day.  The  bulk  of  the  law  re- 
lated to  tenures.  The  jlaw  of  torts  was  narrow.  Only  the  more  vio- 
lent injuries  to  person  and  property  were  the  subject  of  redress. 
Contracts  were  of  a  formal  character.  The  beginning  of  the  jury 
system  in  the  latter  half  of  the  twelfth  century  was  the  forerunner 
of  many  legal  reforms.  Magna  Charta,  in  1215,  made  great  con- 
tributions to  English  liberty.  The  breaking  up  of  the  Curia  Regis 
into  the  Courts  of  Common  Pleas,  King's  Bench,  and  Exchequer 
produced  a  better  judicial  organization.  Nevertheless  the  law  tend- 
ed to  formalism.  One's  legal  rights  were  measured  by  his  legal 
remedies,  and  his  legal  remedies  were  no  wider  or  more  numerous 
than  those  which  had  theretofore  been  allowed.  Growth  to  meet 
new  conditions  was  checked. 

Beginning  with  the  reign  of  Edward  I  (1272-1307),  a  number  of 
influences  became  operative,  which  greatly  expanded  the  scope  of 
legal  rights,  emphasized  individual  liberty  and  property  rights,  and 
tended  to  convert  the  administration  of  law  into  the  administra- 
tion of  justice;  that  is,  these  tendencies  are  traceable  to  that  time, 
although  their  development  cannot  be  said  to  have  reached  reason- 
able completeness  until  the  seventeenth  century.  Some  of  the  in- 
cidents of  feudalism  were  abolished  during  this  reign.  Statutes 
were  passed  which  had  a  tendency  to  expand  the  field  of  tort  lia- 
bility. 

-  The  most  notable  development  concerns  the  origin  and  estab- 
lishment of  the  principles  of  equity  by  the  king's  Chancellor,  and 
later  by  the  Court  of  Chancery.  Beginning  in  the  fourteenth  cen- 
tury, a  practice  grew  up  of  petitioning  the  king  for  relief  from  the 
rigors  of  the  hard  and  fast  rules  of  the  common  law.  Some  of  these 
petitions  were  referred  to  the  Chancellor  for  action.  The  right 
of  the  petitioner  was  frequently  recognized,  and  relief  accorded  to 
him  in  circumstances  where  the  rules  of  the  common  law  denied  him 
a  remedy.  The  Chancellor  usually  was  a  dignitary  of  the  church, 
learned  in  the  canon  and  Roman  law,  and  no  doubt  in  many  in- 
stances possessed  a  keen  appreciation  of  what  constituted  justice. 
This  process  of  the  amelioration  of  the  common  law,  at  first  by  the 
extrajudicial  action  of  the  Chancellor,  soon  developed  an  established 
court,  presided  over  by  the  Chancellor,  and  called  the  Court  of 
Chancery,  or  Court  of  Equity.  This  result  was  not  accomplished 
without  opposition  from  the  judges  of  the  courts  of  common  law, 
an  opposition  which  continued  and  reached  its  climax  in  the  early 
years  of  the  seventeenth  century,  when  it  became  established  that 
the  Court  of  Chancery  was  supreme. 

The  changes  in  the  law  accomplished  by  the  Court  of  Chancery 
were  of  two  kinds — changes  in  the  rules  of  the  substantive  law,  and 
changes  in  legal  remedies.     It  is  beyond  the  scope  of  this  book 


INTRODUCTION  TO  THE  STUDY  OF  LAW  21 

to  develop  independently  the  nature  of  these  changes  in  the  body 
of  legal  doctrine,  although  in  many  of  the  decisions  herein  collected 
the  nature  of  equitable  doctrines  and  equitable  remedies  is  dis- 
tinctly seen.  Some  of  the  leading  notions  of  equity  may,  however, 
be  indicated.  Some  of  the  so-called  maxims  of  equity,  in  accordance 
with  which  the  detailed  rules  have  been  developed,  are  as  follows : 
(1)  Equity  regards  that  as  done  which  ought  to  be  done.  (2)  Eq- 
uity looks  to  the  intent,  rather  than  to  the  form.  (3)  He  who  seeks 
equity  must  come  with  clean  hands.  (4)  He  who  seeks  equity 
must  do  equity.  (5)  Equality  is  equity.  (6)  Where  there  are 
equal  equities,  the  first  in  order  of  time  shall  prevail.  (7)  Where 
there  is  equal  equity,  the  law  must  prevail.  (8)  Equity  aids  the 
vigilant,  and  not  those  who  slumber  on  their  rights.  (9)  Equity 
follows  the  law.  (10)  Equity  will  not  suffer  a  wrong  without  a 
remedy. 

The  application  of  these  general  principles  worked  great  changes 
in  the  law  with  reference  to  the  consequences  of  accident,  fraud, 
and  mistake.  One  of  the  important  ends  of  equitable  jurisdiction 
is  to  afford  relief  from  eft'ccts  of  accident,  fraud,  and  mistake. 
Rights  with  respect  to  property,  particularly  real  property,  very 
early  engaged  the  attention  of  the  Court  of  Chancery.  New  inter- 
ests in  property  were  recognized  and  protected.  The  mortgagor's 
equity  of  redemption,  the  vendee's  interests  in  land  before  the  ex- 
ecution and  delivery  of  the  deed,  were  the  creation  of  courts  of  eq- 
uity. Equitable  doctrines  made  it  possible  for  one  person,  called 
a  trustee,  to  hold  all  the  incidents  of  ownership  for  the  benefit  of 
others,  called  cestuis  que  trustent.  The  equitable  remedies  of  spe- 
cific performance  and  of  injunction,  enforceable  by  fine  or  imprison- 
ment, added  to  the  common-law  remedies  of  money  damages,  and 
the  specific  restitution  of  property.  The  history  of  the  English 
Court  of  Chancery  is  the  history  of  great  fundamentals  of  English 
and  American  law. 

But  the  courts  of  common  law  were  by  no  means  oblivious  to  the 
necessity  of  extending  the  scope  of  legal  rights.  The  simple  con- 
tract, which  for  the  most  part  is  the  subject  of  this  book,  owes  its 
origin  and  development  to  the  common-law  courts.  The  field  of 
tort  liability  has  been  greatly  extended  by  the  evolutionary  process 
of  judicial  decisions  by  the  rivals  of  the  Court  of  Chancery.  The 
histories  of  these  two  great  courts,  and  of  the  respective  systems 
of  laws  recognized  and  applied  by  them,  down  to  the  time  of  their 
consolidation  near  the  middle  of  the  nineteenth  century,  contain 
within  their  pages  a  substantially  complete  declaration  and  exposi- 
tion of  the  principles  of  English  and  American  law  as  it  is  known 
at  the  present  time. 

The  sources  for  the  study  of  early  English  law,  which  appeared 
during  the  period,  are  the  reports  of  judicial  decisions,  court  rec- 
ords, the  great  abridgements  of  the  decisions,  and  text-books.  Glan- 
vil's  work  appeared  about  1187;  Bracton's  great  treatise,  about 
1259;    the  less  valuable  statement  bv  Fleta,  about  1290;    the  dec- 


22  INTRODUCTION  TO  THE  STUDY  OF  LAW 

laration  of  the  law  by  Britton,  about  1290;  the  contributions  of  Lit- 
tleton on  the  law  of  real  property,  in  1481  ;  the  Institutes  of  Lord 
Coke,  in  1628;  and  the  Commentaries  of  Blackstone,  in  1765.  The 
Year  Books,  beginning  during  the  reign  of  Edward  I,  1272,  and 
extending  into  the  reign  of  Henry  VIII,  1535,  containing  the  re- 
ports of  the  decisions  of  the  courts,  present  a  substantially  complete 
record  of  the  judicial  business  of  the  country  during  this  long  pe- 
riod. Beginning  with  Statham,  1495,  followed  by  Fitzherbert,  in 
1514,  Brooke,  1568,  Rolle,  1668,  Bacon,  1736,  Viner,  1741,  Comyns, 
1762,  there  appeared  the  famous  abridgements  of  the  Year  Books; 
the  later  ones  carrying  the  statement  of  the  law  beyond  the  period 
of  these  early  reports.  With  the  ending  of  the  series  of  the  Year 
Books,  the  system  of  private  reporting  of  judicial  decisions  began, 
which  continued  until  1865,  the  date  of  the  commencement  of  the 
oflficial  reports.  Researches  by  eminent  scholars  of  the  nineteenth 
century  and  of  the  present  time  have  added  a  wealth  of  knowledge 
of  the  origin  and  development  of  Anglo-American  legal  institu- 
tions. 

American  law,  therefore,  has  its  origin  in  English  law.  The 
common  law  is  the  law  in  the  United  States.  There  is  divergence 
here  and  there,  of  course.  Even  as  between  the  several  states, 
there  is  not  entire  harmony  in  the  application  of  the  principles  of 
the  common  law  to  varied  states  of  facts.  But  in  their  broader 
aspects  the  systems  of  law  in  the  two  countries  are  the  same. 
Even  to-day,  the  current  decisions  of  the  English  courts  are  some- 
times relied  upon  by  the  courts  in  the  United  States,  and,  con- 
versely, decisions  of  American  courts  are  occasionally  cited  by 
English  judges.  The  development  which  is  going  on  to-day  is  by 
the  slow  process  of  judicial  decision  and  by  legislative  enactment; 
statutes  being  a  much  more  prominent  factor  than  they  were  in 
earlier  days. 


PART  I 
CONTRACTS 


Chapter 

I.  Offer  and  Acceptance. 

II.  Consideration. 

III.  Performance  of  Contracts, 

IV.  Rights  of  Tliird  Parties  in  Contracts. 
V.  Discliarge  of  Contracts. 

VI.  Etleot  of  Mistalie,  Fraud,  Doiress,  and  Undue  Influence. 

VII.  Illegality. 

VIII.  Capacity. 

IX.  Contracts  Required  to  be  in  Writing. 

X.  Remedies. 

XI.  Special  Types  of  Contracts. 


CHAPTER  I 
OFFER  AND  ACCEPTANCE 

Section 

1.  Introduction. 

2.  What  Constitutes  an  Offer. 

3.  Duration  of  Offers. 

4.  Acceptance — Time  of  Taking  Effect. 

5.  TvTature  of  Acts  or  Language  Essential  to  Constitute  an  Acceptance. 

6.  Offer  and  Acceptance  Implied  in  Fact  or  in  Law. 


SECTION  1.— INTRODUCTION 

Anson  has  defined  a  contract  as  "an  agreement  enforceable  at 
law,  made  between  two  or  more  persons,  by  which  rights  are  ac- 
quired by  one  or  more  to  acts  or  forbearances  on  the  part  of  the 
other  or  others."  ^  It  is  to  be  noticed  that  this  definition  deals 
with  two  ideas.  In  the  first  place,  a  contract  is  said  to  be  a  par- 
ticular kind  of  an  agreement.  Attention  is  here  focused  upon  cer- 
tain physical  facts.  The  definition  then  proceeds  to  direct  atten- 
tion to  the  legal  effect  of  these  facts.  The  facts  constitute  one  idea ; 
their  legal  effects,  another.  The  former  may  be  seen  or  heard. 
The  latter  are  wholly  intangible.  An  agreement  made  in  New 
York  might  bring  about  a  certain  legal  result,  while  the  same  agree- 
ment entered  into  in  France  might  produce  quite  different  legal 
effects.  The  same  conversation  had  on  some  portions  of  the  earth's 
surface  not  claimed  by  any  organized  state  would  have  no  legal 
effect  there.  A  definition  of  a  contract  therefore,  must  deal  with 
the  facts  and  with  their  result.  Professor  Corbin's  very  carefully 
constructed  definition  of  a  contract  throws  the  emphasis  in  the  first 
instance  upon  the  legal  effect  of  the  facts.    Accordingly  Professor 

1  Anson  on  Contract   (Corbin's  Ed.)  §  9. 
B.&  B.Bus.Law  (23) 


24  CONTRACTS  (Part  1 

Corbin  defines  a  contract  as  "the  legal  relations  between  persons 
arising  from  voluntary  expression  of  intention,  and  including  at 
least  one  right  in  personam,  actual  or  potential,  with  its  correspond- 
ing duty."  ^ 

In  the  cases  following,  we  shall  be  concerned  both  with  the  facts 
and  their  legal  effect,  but  primarily  our  inquiry  will  be :  What  com- 
binations of  facts  will  bring  contractual  legal  relations  into  exist- 
ence? We  leave  for  later  chapters  the  consideration  of  the  ques- 
tions as  to  the  nature  of  the  legal  relations  created  by  these  facts. 
Professor  Anson  employs  the  word  "agreement"  to  refer  to  these 
operative  facts.  Professor  Corbin  refers  to  these  facts  by  the  phrase 
"voluntary  expression  of  intention."  The  word  "agreement"  obvi- 
ously has  a  broader  meaning  than  the  phrase  "voluntary  expression 
of  intention,"  for  the  former  does  not  necessarily  connote  action, 
while  the  latter  does.  What  is  a  voluntary  expression  of  intention? 
What  is  an  agreement?  How  may  we  identify  that  kind  of  an  agree- 
ment by  which  rights  are  acquired  by  one  or  more  to  acts  or  for- 
bearances on  the 'part  of  the  others  enforceable  at  law?  When  will 
"a  voluntary  expression  of  intention"  produce  "at  least  one  primary 
right  in  personam,  actual  or  potential,  with  its  corresponding 
duty"? 

Persons  may  agree  as  to  the  existence  or  non-existence  of  a  past 
fact  or  a  present  fact,  or  they  may  agree  that  a  specified  fact  or  some 
phenomenon  will  occur  in  the  future.  Suppose  the  parties  agree 
that  a  specified  phenomenon  shall  occur  in  the  future  as  the  result 
of  the  acts  of  one  of  the  parties,  or  that  some  specified  situation 
will  not  occur  as  the  result  of  a  conscious  limitation  upon  the  free- 
dom of  action  of  one  of  the  parties,  as  for  example,  that  B.  shall 
bring  his  horse  to  A.'s  stable  on  Tuesday  next,  or  that  B.  shall 
thereafter  refrain  from  keeping  his  store  open  on  Sunday.  This 
kind  of  an  agreement  comes  near  to  that  kind  of  an  agreement  which 
we  shall  call  a  simple  contract,  but  for  reasons  which  will  later  ap- 
pear, it  is  not  such.  Notice  in  these  cases  that  the  only  act  to  be 
done  or  refrained  from  being  done  concerns  but  one  of  the  parties 
alone.  The  agreement  contains  no  suggestion  that  the  other  will 
perform  any  act  or  refrain  from  acting.  Suppose,  again,  that  A. 
and  B.,  actuated  by  mutual  impulses  of  generosity,  while  walking 
along  the  street  together,  should  simultaneously  shout,  A.  announc- 
ing "I  will  give  you  $100  next  Tuesday,"  and  B.  declaring,  "I  will 
give  you  my  horse  next  Tuesday  and  bring  him  to  your  stable." 
Does  this  kind  of  agreement  create  a  contract?  This  case  differs 
from  the  preceding  in  that,  here,  the  agreement  does  contemplate 
action  by  each  party,  but  even  this  agreement  falls  short  of  being 
a  contract.  Suppose,  finally,  that  A.  says,  "B.,  I  will  give  you  $100 
for  your  horse  if  you  will  bring  him  to  my  stable  next  Tuesday." 
B.  replies,  "All  right,  I  will  do  that."  This  agreement  is  a  con- 
tractual agreement.     It   differs  from   the  preceding  agreement  in 

2  Professor  Arthur  L.  Corbin,  "Otfer  and  Acceptance,  and  Some  of  the  Re- 
sulting Legal  Relations,"  26  Yale  Law  Journal,  169. 


Ch.  1)  OFFER   AND   ACCEPTANCE  25 

that,  in  this  last  case,  the  agreement  that  on  next  Tuesday  two 
facts  will  come  into  existence — i.  e.,  the  bringing  of  the  horse  to 
A.'s  stable  and  the  handing  over  by  A.  of  $100  to  B.— possess  a  re- 
lationship not  found  in  the  other  case.  There  is  a  sort  of  connec- 
tive tissue  of  causal  relationship  between. the  two  acts.  We  could 
substitute  negative  acts,  i.  e.,  restraint  or  limitation  upon  freedom 
of  action,  and  our  result  would  be  the  same.  A.  could  say,  "I  will 
not  attend  the  sessions  of  the  Board  of  Trade  next  Tuesday,  if 
you  will  not,"  B.  saying,  "All  right,  I  will  stay  away  on  that  day." 
Or  the  agreement  might  forecast  an  affirmative  act  by  one  of  the 
parties  and  a  negative  act  by  the  other.  If  it  is  clear  in  these  last- 
mentioned  cases  that  the  parties  have  done  something  which  jus- 
tifies organized  society  in  saying  to  A.  and  B.,  through  the  medium 
which  we  call  law,  "You  have  now  gone  so  far  that  society  thinks 
that  these  two  acts  should  be  performed,  and,  moreover,  in  the 
event  that  one  of  the  parties  refuses  to  bring  into  existence  the 
fact  which  he  said  he  would  bring  into  existence,  and  the  other 
party  performs  his  act,  or  tenders  performance,  that  society,  through 
its  judicial  organization,  will  send  a  person,  called  the  sheriff,  to 
the  assistance  of  the  party  who  has  been  disappointed." 

The  kind  of  agreement  in  which  we  are  interested  here,  therefore, 
is  that  kind  of  agreement  which  suggests  future  human  action  or 
which  foreshadows  limitation  upon*  human  action.  The  parties  to 
the  agreement  have  each  manifested  their  determination  so  to  or- 
der their  future  conduct  that  their  present  intentions  pertaining  to 
these  future  acts  will  be  realized  objectively,  so  that  society,  through 
the  law,  will  say  that  these  facts  must  be  brought  into  existence, 
or  that  the  unjustifiable  failure  of  one  of  the  parties  to  perform  his 
act  shall  result  in  the  imposition  of  some  kind  of  penalty  upon  him, 
provided  that  there  exists  between  these  two  future  acts  a  kind 
and  degree  of  interrelationship,  which,  as  a  matter  of  broad  public 
policy,  justifies  society  in  taking  cognizance  of  them. 

The  question  of  practical  importance  then  arises  :  Under  what  cir- 
cumstances will  some  party  other  than  those  to  the  supposed  or 
actual  agreement  be  justified  in  concluding  that  these  parties  have 
actually  entered  into  an  agreement?  It  is  altogether  possible  for 
two  minds  to  be  in  agreement  as  to  future  acts,  it  is  possible  that 
these  two  persons  definitely  understand  that  each  is  to  do  some- 
thing in  the  future,  and  yet  the,  external  evidence  of  their  subjec- 
tive convictions  is  insufficient  to  convey  to  the  mind  of  another 
person  the  consciousness  that  these  two  parties  have  "agreed,"  and 
the  evidence  may  be  insufficient  to  transfer  to  such  other  party  the 
intelligence,  or  the  comprehension  of  the  nature  of  these  future  acts. 
Why  is  this  aspect  of  contract  important?  Subjective  truth  and 
objective  evidence  of  that  truth  are  quite  distinct.  The  parties  to 
the  .agreement  are  not  to  be  judges  in  their  own  cause.  Some 
other  person  is  to  be  judge  as  to  whether  they  entered  into  an  agree- 
ment. This  third  party,  the  judge  or  jury,  or  whoever  it  may  be, 
must  have  before  them  some  evidence,  consisting  of  language,  of 


26  CONTRACTS  (Part  1 

conduct,  or  of  attendant  circumstances,  which  will  enable  them  to 
arrive  at  a  conclusion  that  the  parties  did  or  did  not  enter  into  an 
agreement.  The  things  which  actually  took  place  in  the  minds  of 
the  parties  constitute,  in  a  sense,  the  object  of  the  search.  But  it 
is  impossible  to  find  out  what  actually  occurred  there.  External 
evidence  must  be  relied  upon  as  the  best  means  of  discovering  these 
things.  We  shall  find,  in  fact,  that  the  law  realizing  the  impossi- 
bility of  obtaining  an  external  reproduction  of  a  mental  state,  vir- 
tually makes  no  effort  to  find  out  what  the  parties  to  the  agreement 
actually  thought.  Instead  the  law  substitutes,  for  their  actual 
thought,  some  thought  which,  in  the  light  of  external  evidence,  the 
parties  most  likely  did  entertain. 

So  our  inquiry  into  the  circumstances  under  which  a  third  per- 
son will  be  justified  in  assuming  that  two  or  more  other  persons 
have  entered  into  an  agreement  is  not  a  journey  into  the  hidden  re- 
cesses of  the  human  mind  but  is  an  observation  directed  at  ex- 
ternal phenomena,  spoken  words,  acts,  and  circumstances,  from 
which  we  obtain  a  conclusion  as  to  what  the  parties  did  have  in 
mind.  It  is  this  conclusion  which  governs — the  conclusion  of  a 
third  party — hence  the  emphasis,  in  Professor  Corbin's  definition 
of  a  contract,  is  laid,  not  upon  "intention,"  but  upon  the  expression 
of  intention.  A  recognition  of  this  truth  will  explain  many  things 
in  the  law.  It  is  very  easy  to  employ  the  expression,  "What  did 
the  parties  intend?"  and  we  shall,  for  convenience,  use  this  ex- 
pression ;  but  we  should  realize  that  it  does  not  mean  exactly  what 
it  says. 

We  are  looking  at  the  acts  of  persons ;  that  is,  muscular  activity 
generated  by  the  exercise  of  volition — conduct,  their  spoken  and 
written  words,  and  figures,  to  ascertain  therefrom  whether  they 
have  entered  into  an  agreement.  What  brings  these  external  things 
into  existence?  In  the  first  instance,  it  is  the  desire  of  one  of  the 
parties,  and  later  on  the  desire  of  the  other  party.  A.  desires  to 
possess  B.'s  horse.  He  could  go  and  get  it,  without  asking  for  it ; 
but  this  he  knows  is  wrong.  In  the  nature  of  things,  if  A.  is  to 
gain  possession,  control,  over  the  horse,  which  is  B.'s,  he  must 
obtain  B.'s  consent  to  the  taking.  The  origin  of  agreement,  there- 
fore, is  to  be  found  in  transferring  to  the  mind  of  B.  the  knowledge 
of  A.'s  desire  to  have  B.'s  horse.  What  shall  we  call  the  act  of 
A.  in  communicating  to  B.  the  knowledge  of  A.'s  desire  for  B.'s 
horse?  There  is  no  singly  word  that  adequately  describes  what  has 
just  occurred,  but  it  is  safe  to  call  this  act  or  series  of  acts  "pre- 
liminary negotiations."  Suppose,  however,  that  in  addition  to  the 
act  of  communicating  A.'s  desire  for  B.'s  horse,  A.  promises  to  do 
some  act,  such  as  handing  to  B.  $100,  if  B.  will  consent  to  take  his 
horse  to  A.  Two  future  acts  are  now  the  subject  of  discussion, 
and  they  are  closely  related  to  each  other.  The  probabilities  are 
that,  if  one  of  them  comes  into  existence,  the  other  will  also,  and, 
if  one  fails,  so  will  the  other.  What  shall  we  call  this  act  of  A. 
in  making  known  to  B.  (1)   A.'s  desire  to  have  B.'s  horse  and  (2) 


Ch.  1)  OFFER   AND   ACCEPTAN-CB  27 

A.'s  willingness  or  intention  to  give  to  B.  $100?  In  the  law,  the 
expressions  used  by  A.  in  communicating  to  B.  his  desire  to  have 
B.  act,  and  his  own  willingness  to  act,  is  called  an  offer.  If  B. 
manifests  his  willingness  to  do  the  suggested  act,  and  his  own  de- 
sire to  have  A.  perform  the  act,  which  A.  said  he  would  perform,  the 
law  calls  B.'s  expression  an  acceptance.  Contractual  agreement  is, 
therefore,  a  compound  composed  of  two  elements:  Offer  and  ac- 
ceptance. 

Our  future  inquiry,  therefore,  is  to  be  directed  to  the  ascertain- 
ment of  the  circumstances  under  which  it  is  fair  to  assume  that  a 
person  has  made  an  offer,  and  a  person  to  whom  it  was  made  has 
accepted  this  offer.  We  live  in  a  busy  world.  We  do  not  always 
have  time  to  express  our  minds  as  accurately  as  we  should  like 
to,  and,  even  if  we  did,  it  is  not  certain  that  another  person  would 
always  understand  precisely  what  we  meant.  Contractual  agree- 
ments spring  out  of  circumstances,  as  well  as  out  of  spoken  and 
written  words.  A  great  deal  of  the  time  of  the  courts  is  taken  up 
in  trying  to  find  out  what  the  parties  intended — using  that  word 
as  we  have  heretofore  explained  its  use,  the  external  evidence  of  a 
mental  state  which  foreshadows  the  future  exercise  of  the  human 
will  in  such  a  way  as  to  bring  into  existence  some  external  reality. 
When  A.  leaves  his  home  in  the  morning  and  boards  a  street  car, 
a  contractual  agreement  is  formed.  What  were  its  terms?  Not  a 
word  was  spoken.  Arriving  down  town.  A.,  proceeds  to  the  bank 
and  pushes  some  bills,  checks,  and  coin  over  the  counter  to  the 
cashier.  A  contractual  agreement  was  formed.  What  was  it?  A 
moment  before  the  money  belonged  to  A.  Does  it  belong  to  A.  after 
the  cashier  picked  it  up?  Suppose  a  bank  robber  took  this  money 
at  that  moment,  whose  money  was  lost?  It  depends  upon  what  the 
parties  agreed  to.  A.  goes  across  the  street  and  enters  the  floor 
of  the  Stock  Exchange.  He  makes  signs.  B.  is  attracted,  and  B. 
makes  signs.  They  make  a  little  memorandum,  which  many  would 
not  understand,  but  they  may  have  entered  into  a  contractual  agree- 
ment. A.  spends  the  rest  of  the  morning  in  conference  with  C, 
and  at  the  end  of  the  conference  they  draw  up  a  lengthy  document 
and  sign.  It  may  have  been  a  contractual  agreement.  Enough  has 
been  said  to  show  that  the  questions :  (1)  Did  the  parties  enter  into 
any  agreement  at  all?  was  there  an  offer?  was  there  an  accept- 
ance? and  (2)  if  we  find  that  there  was  an  agreement,  what  were 
its  terms?  are  questions  which  may  be  very  difficult,  indeed,  to  an- 
swer. Yet  we  do  these  things  every  day.  We  cannot  always  take 
time  to  explain  carefully  what  we  should  like  to  have  done  and 
what  we  are  willing  to  do  in  return.  One  who  sat  down  at  a  table 
in  a  public  restaurant,  and  while  looking  over  the  menu  heard  the 
waiter  announce  in  solemn  tones,  "Sir,  we  offer  to  provide  for  you 
the  food  which  you  see  listed  here  at  the  prices  marked  opposite 
each  item,"  might  entertain  some  fleeting  notion  that  the  waiter's 
mental  faculties  were  not  functioning  normally.  We  are  forced 
to  take  some   things   for  granted.     While   certain   phases  of  this 


28  CONTRACTS  (Parti 

restaurant  transaction  are  so  obvious  that  no  language  is  neces- 
sary to  express  the  meaning,  who  can  say  whether  the  food  brought 
has  been  sold  to  the  patron  or  merely  placed  there  for  him  to  eat 
until  his  hunger  has  been  appeased.  If  some  one  stole  it  while  the 
customer  was  preparing  to  dine,  whose  food  was  stolen,  the  restau- 
rant keeper's  or  the  patron's?  Courts  have  taken  contrary  views 
on  this  question,  and  have  written  elaborate  opinions  in  support  of 
their  respective  contentions. 

In  some  cases  parties  are  willing  to  enter  into  contractual  agree- 
ments without  reducing  the  agreement  to  language.  In  other  cases 
the  parties  deem  it  advisable  to  spend  time  in  fixing  upon  the  terms 
of  a  contract.  Sound  judgment  will  indicate  when  it  is  safe  to  trust 
to  circumstances  and  to  implications,  and  will  also  indicate  when 
it  is  advisable  to  exercise  a  rather  high  degree  of  care  in  entering 
into  an  agreement  and  in  prescribing  its  terms.  The  study  of  this 
collection  of  cases  will  contribute  to  the  formation  of  a  judgment 
as  to  when  special  care  should  be  exercised  in  the  making  of  con- 
tracts, and  will  also  contribute  to  an  understanding  of' the  methods 
and  procedure  for  exercising  this  care,  and  to  indicate  the  circum- 
stances under  which  it  will  be  advisable  to  seek  the  advice  of  com- 
petent counsel.  With  this  preliminary  statement  we  may  now  take 
up  the  study  of  the  two  problems  presented  in  this  chapter:  (1) 
What  constitutes  an  offer?     (2)  What  constitutes  an  acceptance? 

In  going  into  these  questions,  and  into  others  into  which  the  first 
leads  us,  we  shall,  of  course,  focus  attention  upon  the  rules  of  law 
as  such,  to  understand  them ;  but  beyond  that,  and  from  a  practi- 
cal business  standpoint,  one  should  obtain  an  appreciation  of  the 
nature  and  of  the  causes  of  misunderstanding  and  of  litigation  which 
arise  out  of  the  formation  of  contracts.  The  exercise  of  care  be- 
forehand will  often  prevent  such  unfortunate  results,  but  care  can- 
not effectively  be  exercised  without  an  intelligent  understanding  of 
the  origin  and  nature  of  legal  controversy. 


SECTION  2.— WHAT  CONSTITUTES  AN  OFFER 

Viewing  an  offer  as  an  operative  fact,  as  distinguished  from  its 
legal  effect,  an  offer  is  a  communication  to  the  offeree  of  the  in- 
tention of  the  offeror  to  do  an  act,  or  to  refrain  from  acting  in  the 
future,  provided  that  the  offeree  will  likewise  in  the  future  perform 
some  act  or  refrain  from  acting.  However  phrased,  the  offer  will 
make  reference  to  two  future  acts,  one  usually  to  be  done  by  the 
offeror,  the  other  usually  by  the  offeree.  But  it  is  convenient,  and 
sometimes  necessary,  to"  distinguish  between  the  various  ways  in 
which  it  is  possible  to  refer  to  these  two  future  acts.  (1)  The  of- 
feror may  say,  "I  will  give  you  $500  if  you  will  arrest  and  obtain 
the  conviction  of  the  persons  who  burglarized  my  store  last  night." 
This  is-  an  offer  of  a  promise  for  an  act  other  than  a  promise.  The 
language  employed  by  the  offeror  is  called  an  offer,  but  in  the 
event  of  its  acceptance  this  language  is  then  converted  into  a  prom- 


Ch. 1)  OFFER   AND   ACCEPTANCE  29 

ise.  While  still  an  offer,  it  is  not  certain  that  the  act  which  the 
offeror  proclaims  his  willingness  to  perform  will  ever  be  performed. 
But,  after  acceptance,  his  language  is  then  an  unqualified  assertion 
that  he  will  perform.  The  "if"  has  disappeared.  For  this  reason 
we  speak  of  the  oft'er  after  its  acceptance  as  a  promiae.  In  the 
above  case,  the  offeree  cannot  accept  by  promising  to  arrest  and 
obtain  the  conviction  of  the  burglar.  He  may  accept  only  by  doing 
these  acts.  (2)  Or  an  offeror  may  say,  "I  will  arrest  and  obtain 
the  conviction  of  the  person  who  burglarized  your  store  last  night, 
if  you  will  pay  me  $500."  The  offeree  replies,  "All  right."  This 
is  an  offer  of  a  series  of  acts  for  a  promise.  In  each  of  these  cases, 
the  contract  will  not  come  into  existence  until  the  act  is  done.  It 
is  also  true  that,  at  the  moment  when  the  contract  does  come  into 
existence,  one  of  the  parties  has  fully  performed.  It  is  for  this 
reason  that  these  contracts  are  called  unilateral;  that  is,  that  just 
as  soon  as  there  is  a  contract  at  all  there  is  but  one  side  to  it  which 
is  unperformed.  (3)  The  offeror  may  say,  "I  will  pay  you  $10,000 
if  you  will  agree  to  erect  this  building  in  accordance  with  these 
specifications."  •  The  offeree  promises  to  construct  the  building. 
Here  we  have  an  offer  of  a  promise  for  a  promise.  This  type  of 
contract  is  called  bilateral,  meaning  that,  as  soon  as  the  contract 
comes  into  existence,  neither  of  the  parties  has  performed  his  prom- 
ise.    The  contract  imposes  obligations  upon  each. 

To  return  to  our  general  question:  What  constitutes  an  offer? 
People  may  do  a  great  deal  of  talking  without  making  offers.  They 
may  even  refer,  rather  definitely,  to  their  future  conduct  and  still 
no  offer  may  result.  What  test  may  be  applied  to  language  and 
conduct  by  means  of  which  offers  may  be  identified?  How  are 
we  to  draw  the  line  between  words  and  conduct  referring  to  future 
acts  amounting  to  offers  from  words  and  conduct  likewise  refer- 
ring to  future  acts  which  fail  to  be  offers? 

Words  and  conduct  will  fail  to  produce  an  offer  for  any  one  of 
four  reasons — reasons  which  are  not  wholly  mutually  exclusive :  (1) 
The  language  or  conduct  may  fail  to  refer  to  any  act  to  be  done 
by  the  offeree,  as,  for  example,  "I  will  give  you  $100,  if  you  will 
take  it."  It  is  possible,  of  course,  to  say  that  this  is  an  offer,  but 
that  a  contract  fails  to  result  for  other  reasons.  (2)  The  language 
or  conduct  may  make  such  an  indefinite  reference  to  the  nature 
of  the  acts  to  be  done  by  the  parties,  as  to  the  time  when  they 
should  be  done,  that  we  are  not  justified  in  concluding  that  a  true 
offer  was  made.  (3)  The  language  or  conduct  may  or  may  not 
refer  to  future  acts  with  sufficient  definiteness,'  but  there  may  also 
be  apparent  from  attendant  circumstances  unmistakable  evidence 
that  the  parties  intended  that  such  language  should  not  be  regarded 
as  an  offer.  (4)  The  offer,  while  it  may  conform  to  all  formal  req- 
uisites, may  fail  to  be  such  because  it  was  not  communicated  to  the 
oft'eree. 

Having  ascertained  what  words  or  conduct  amount  to  offers,  we 
next  meet  the  question:   What  is  its  legal  effect?    While  an  offer 


30  CONTRACTS  (Part  1 

is  but  one  of  the  essential  steps  in  the  formation  of  a  contract,  and 
accordingly  does  not  create  any  rights  or  duties,  the  ofifer  does  cre- 
ate a  legal  relation  between  the  offeror  and  offeree  which  has  not 
theretofore  existed ;  for,  by  making  and  communicating  the  offer, 
the  offeror  has  made  it  possible  for  the  offeree  to  create  a  contract 
between  them.  Hence  it  is  proper  to  say  that  the  legal  effect  of 
the  words  or  conduct  which  are  generalized  by  the  word  "offer"  is 
to  create  in  the  offeree  a  legal  power. 


HOTCHKISS    V.    NATIONAL   CITY    BANK    OF    NEW    YORK. 
(District  Court  of  the  United  States,  S.  D.  New  York,  1911.     200  Fed.  287.) 

Hand,  District  Judge.  *  *  *  /\  contract  has,  strictly  speaking, 
nothing  to  do  with  the  personal,  or  individual,  intent  of  the  parties. 
A  contract  is  an  obligation  attached  by  the  mere  force  of  law  to  cer- 
tain acts  of  the  parties,  usually  words,  which  ordinarily  accompany  and 
represent  a  known  intent.  If,  however,  it  were  proved  by  twenty  bish- 
ops that  either  party,  when  he  used  the  words,  intended  something  else 
than  the  usual  meaning  which  the  law  imposes  upon  them,  he  would 
still  be  held,  unless  there  were  some  mutual  mistake,  or  something 
else  of  the  sort.  Of  course,  if  it  appear  by  other  words,  or  acts,  of 
the  parties,  that  they  attribute  a  peculiar  meaning  to  such  words  as 
they  use  in  the  contract,  that  meaning  will  prevail,  but  only  by  virtue 
of  "the  other  words,  and  not  because  of  their  unexpressed  in- 
tent.    *     *     * 


NEBRASKA  SEED  CO.  v.  HARSH. 

(Supreme  Court  of  Nebraslca,  1915.    98  Neb.  89,  152  N.  W.  310, 
L.   R.  A.  19115F,   824.) 

MoRRissEY,  C.  J.  Plaintiff,  a  corporation,  engaged  in  buying  and 
selling  seed  in  the  city  of  Omaha,  Neb.,  brought  this  action  against 
the  defendant,  a  farmer  residing  at  Lowell,  Kearney  County, '  Neb. 
The  petition  'alleges : 

"That  on  the  26th  day  of  April,  1912,  the  plaintiff  purchased  of  and 
from  the  defendant  1,800  bushels  of  millet  seed  at  the  agreed  price  of 
$2.25  per  hundredweight,  F.  O.  B.  Lowell,  Neb.,  which  said  purchase 
and  contract  was  evidenced  by  writing  and  correspondence  passing  be- 
tween the  respective  parties  of  which  the  following  is  a  copy : 

"  'Neb.  Seed  Co.,  Omaha,  Neb.— Gentlemen :  I  have  about  1800  bu. 
or  thereabouts  of  millet  seed  of  which  I  am  mailing  you  a  sample.  This 
millet  is  recleaned  and  was  grown  on  sod  and  is  good  seed.  I  want 
$2.25  per  cwt.  for  this  seed  f.  o.  b.  Lowell. 

"  'Yours  truly,  _  H.  F.  Harsh.'  _ 

"Said  letter  was  received  by  the  plaintiff  at  its  place  of  business  in 
Omaha,  Neb.,  on  the  26th  day  of  April,  1912,  and  immediately  there- 
after the  plaintiff  telegraphed  to  the  defendant  at  Lowell,  Neb.,  a  copy 
of  which  is  as  follows : 

"  'H.  F.  Harsh,  Lowell,  Nebr.  Sample  and  letter  received.  Accept 
your  offer.  Millet  like  sample  two  twenty-five  per  hundred.  Wire  how 
soon  can  load.  The  Nebraska  Seed  Co.'  " 


Ch.  1)  OFFER   AND   ACCEPTANCE  31 

It  alleges  that  defendant  refused  to  deliver  the  seed,  after  due  de- 
mand and  tender  of  the  purchase  price,  and  prays  judgment  in  the  sirni 
of  $900.  Defendant  filed  a  demurrer,  which  was  overruled.  He  saved 
an  exception  to  the  ruling  and  answered,  denying  that  the  petition 
stated  a  cause  of  action ;  that  the  correspondence  set  out  constituted  a 
contract,  etc.  There  was  a  trial  to  a  jury  with  verdict  and  judgment 
for  plaintiff,  and  defendant  appeals. 

In  our  opinion  the  letter  of  defendant  cannot  be  fairly  construed  into 
an  offer  to  sell  to  the  plaintiff.  After  describing  the  seed,  the  writer 
says,  "I  want  $2.25  per  cwt.  for  this  seed  f.  o.  b.  Lowell."  He  does 
not  say,  "I  offer  to  sell  to  you."  The  language  used  is  general,  and 
such  as  may  be  used  in  an  advertisement,  or  circular  addressed  gener- 
ally to  those  engaged  in  the  seed  business,  and  is  not  an  offer  by  which 
he  may  be  bound,  if  accepted,  by  any  or  all  of  the  persons  addressed. 

"If  a  proposal  is  nothing  more  than  an  invitation  to  the  person  to 
whom  it  is  made  to  make  an  offer  to  the  proposer,  it  is  not  such  an  offer 
as  can  be  turned  into  an  agreement  by  acceptance.  Proposals  of  this 
kind,  although  made  to  definite  persons  and  not  to  the  public  generally, 
are  merely  invitations  to  trade ;  they  go  no  further  than  what  occurs 
when  one  asks  another  what  he  will  give  or  take  for  certain  goods. 
Such  inquiries  may  lead  to  bargains,  but  do  not  make  them.  They  ask 
for  offers  which  the  proposer  has  a  right  to  accept  or  reject  as  he 
pleases."    9  Cyc.  278e. 

The  letter  as  a  whole  shows  that  it  was  not  intended  as  a  final  propo- 
sition, but  as  a  request  for  bids.  It  did  not  fix  a  time  for  delivery, 
and  diis  seems  to  have  been  regarded  as  one  of  the  essentials  by  plain- 
tiff, for  in  his  telegram  he  requests  defendant  to  "wire  how  soon  can 
load." 

"The  mere  statement  of  the  price  at  which  property  is  held  cannot 
be  understood  as  an  offer  to  sell."     Knight  v.  Cooley,  34  Iowa,  218. 

We  do  not  think  the  correspondence  made  a  complete  contract.  To 
so.  hold  where  a  party  sends  out  letters  to  a  number  of  dealers  would 
subject  him  to  a  suit  by  each  one  receiving  a  letter,  or  invitations  to 
bid,  even  though  his  supply  of  seed  were  exliausted.  In  Lyman  v. 
Robinson,  14  Allen  (Mass.)  242,  254,  the  'Supreme  Court  of  Massa- 
chusetts has  sounded  the  warning : 

"Care  should  always  be  taken  not  to  construe  as  an  agreement  letters 
which  the  parties  intended  only  as  a  preliminary  negotiation." 

Holding,  as  we  do,  that  there  was  no  binding  contract  between  the 
parties,  it  is  unnecessary  to  discuss  the  other  questions  presented. 

The  judgment  of  the  district  court  is  reversed. 


ANDERSON  et   al.    v.   BOARD,   ETC.,    OF    PUBLIC    SCHOOLS. 
(Supreme  Court  of  Missouri,  1S94.    122  Mo.  61,  27  S.  W.  610,  26  L.  R.  A.  707.) 

Action  by  Anderson  and  others  against  the  Board  of  President  and 
Directors  of  Public  Schools.  From  a  judgment  sustaining  a  demurrer 
to  the  petition,  plaintiff's  appeal. 

Barclay,  J.  Plaintiffs  appealed  from  a  judgment  based  on  a  ruling 
sustaining  a  demurrer  to  their  petition.  The  substance  of  their  alle- 
gations is  as  follows :  Plaintiffs  are  copartners  in  the  business  of 
building,  and  defendant  is  a  corporation  having  charge  and  control  of 
the  public  schools  and  school  property  in  the  city  of  St.  Louis.     The 


32  CONTRACTS  (Part  1 

defendant  had  a  well-known  rule  in  regard  to  buildings,  by  which  it 
was  provided  that  all  new  buildings,  etc.,  should  be  "let  by  contract 
to  the  lowest  and  best  bidder,"  Defendant  being  desirous  of  erecting 
a  large  school  building  to  be  known  as  the  "New  High  School."  duly 
advertised  for  bids  for  the  erection  thereof.  The  advertisement  was 
this  :  "Proposals  for  the  Erection  of  the  New  High  School  Building  on 
Grand  Avenue.  Office  of  Board  of  President  and  Directors  of  the 
St.  Louis  Public  Schools.  St.  Louis,  August  28,  189L  Sealed  pro- 
posals will  be  received  at  the  office  of  the  secretary  on  or  before  Mon- 
day, September  7,  1891,  at  4  p.  m.,  for  the  erection  of  the  new  high 
school  on  Grand  avenue.  All  bids  are  to  be  addressed  to  John  W. 
O'Connell,  Esq.,  chairman  building  committee,  and  must  be  accom- 
panied by  a  certified  check,  payable  to  the  order  of  the  'Board  of  Presi- 
dent and  Directors  of  the  St.  Louis  Public  Schools,'  or  cash,  amount- 
ing to  $2,500,  which  is  to  be  forfeited  by  the  successful  bidder  if  he 
fails  or  refuses  within  five  days  after  the  award  of  contract  by  this 
board  to  enter  into  written  contract,  and  furnish  good  and  sufficient 
security,  for  the  faithful  performance  of  the  work."  Plaintiffs  sub- 
mitted a  bid  (in  accordance  with  the  above  advertisement)  to  build 
the  proposed  high  school  for  $196,965  ;  but  defendant  refused  to  ac- 
cept the  bid  of  plaintiff's,  but  "without  cause,  arbitrarily  and  capri- 
ciously, through  favoritism  and  bias,"  rejected  it,  and  then  accepted 
the  bid  of  another  for  $197,000.  Plaintiffs  alleged  a  loss  of  profits  in 
the  sum  of  $15,000,  and  prayed  judgment,  etc.  The  above  is  a  suf- 
ficient outline  of  the  facts  on  which  plaintiff's  rely. 

It  is  claimed  by  defendant  that,  as  the  plaintiff's  bid  for  the  erection 
of  the  high  school  building  related  to  public  work,  no  action  can  be 
maintained  for  the  refusal  to  allow  plaintiffs  to  execute  such  work. 
The  contention  is  that  bids  for  public  work  are  not  governed  by  the 
general  principles  of  the  law  of  contracts.  We  do  not  consider  it  nec« 
essary  to  examine  into  the  soundness  of  that  contention,  as  we  think 
the  ruling  of  the  trial  judge  was  obviously  correct,  even  conceding  to 
plaintiffs  that  the  transaction  should  be  treated  as  an  ordinary  one 
between  individuals,  irrespective  of  the  supposed  public  nature  of  its 
subject-matter.  That  binding  obligations  can  originate  in  advertise- 
ments addressed  to  the  general  public  may  be  assumed  as  settled  law 
to-day.  But  the  effect  to  be  given  to  such  an  advertisement  as  the  basis 
of  a  contract  depends  entirely  on  the  intent  manifested  by  its  terms.  A 
public  proposal  of  that  nature  may  be  so  expressed  as  to  need  but  an 
acceptance,  or  the  performance  of  some  act  by  a  person  otherwise  un- 
designated, to  constitute  an  enforceable  legal  agreement ;  while,  on  the 
other  hand,  the  proposal  may  amount  to  nothing  more  than  a  sugges- 
tion to  induce  offers  of  a  contract  by  others.  Proposals  of  contract  by 
advertisement  have  a  place  in  the  modern  common  law  of  England 
and  of  this  country,  though  they  have  not  been  so  definitely  classified 
in  our  jurisprudence  as  in  that  of  some  continental  nations.  Mr.  Pol- 
lock, in  his  valuable  treatise  on  the  Principles  of  Contract,  remarks  on 
this  point :  "We  have  no  special  term  of  art  for  a  proposal  thus  made 
by  way  of  general  request  or  invitation  to  all  men  to  whose  knowledge 
it  comes."  4th  Ed.  *p.  13.  Still  less  have  we  any  scientific  nomen- 
clature for  that  sub-division  of  the  class  of  public  proposals  with  which 
we  have  now  to  deal,  namely,  that  class  in  which  is  disclosed  the  in- 
tent to  invite  mere  offers  of  a  contract,  as  distinguished  from  an  intent 
to  propose  a  contract  for  a  direct  acceptance  by  whom  it  may  concern. 


Ch.  1)  OFFER   AXD   ACCEPTANCE  33 

But  the  principles  to  be  applied  by  our  law  to  such  proposals  are  not, 
on  that  account,  uncertain  or  obscure.  When  the  intent  expressed  in 
the  advertised  proposal  is  reduced  to  certainty  by  interpretation,  our 
system  of  administration  of  law  is  fully  capable  of  giving  effect  to  that 
intent. 

In  the  case  in  hand  the  advertisement  has  the  following  caption : 
"Proposals  for  the  erection  of  the  new  high  school  building  on  Grand 
avenue."  But  the  opening  lines  of  the  official  statement,  which  fol- 
lows, show  that  the  caption  refers  to  the  proposals  to  be  received,  and 
is  not  intended  to  describe  the  effect  of  the  advertisement  as  a  whole. 
If  there  was  otherwise  any  doubt  on  this  point,  it  is  set  at  rest  by  the 
last  sentence,  viz. :  "The  board  reserves  the  right  to  reject  any  or  all 
bids."  That  language  demonstrates  the  nature  of  the  advertisement 
as  a  mere  invitation  for  offers  for  a  contract.  As  such  it  did  not  lay 
the  foundation  of  a  completed  contract.  It  was  merely  the  opening 
of  negotiations  for  a  contract.  The  plaintiff's'  bid  was  a  proposal  to 
build,  which  the  defendant,  by  the  terms  of  its  statement,  had  the  right 
to  reject.  The  facts  in  judgment  are  wholly  unlike  those  considered 
in  McNeil  v.  Boston  Chamber  of  Commerce  (1891)  154  Mass.  277, 
28  N.  E.  245,  13  L.  R.  A.  559,  cited  on  behalf  of  the  plaintiffs.  In  that 
case  it  was  found  as  a  fact  that  the  defendant  had  agreed  with  the  bid- 
ders to  accept  the  lowest  bid,  and  accordingly  was  held  liable  for  a 
breach  of  that  agreement.  But  in  the  present  appeal  that  essential  fact 
is  wanting.  The  right  to  reject  the  bids  was  unconditional.  Defend- 
ant was  entitled  to  exercise  that  right  for  any  cause  it  might  deem 
satisfactory,  or  even  without  any  assignable  cause.  The  judgment  is 
afffrmed. 


UNIFORM  SALES  ACT,   SECTION  21.     SALE   BY   AUCTION 

Subsection  (2).  A  sale  by  auction  is  complete  when  the  auc- 
tioneer announces  its  completion  by  the  fall  of  the  hammer,  or  in 
other  customary  manner.  Until  such  announcement  is  made,  any 
bidder  may  retract  his  bid;  and  the  auctioneer  may  withdraw  the 
goods  from  sale  imless  the  auction  has  been  announced  to  be  with- 
out reserve. 


FAIRMOUNT  GLASS    WORKS    v.    GRUNDEN-MARTIN 
WOODENWARE  CO. 

(Court  of  Appeals  of  Kentucky,  1899.     106  Ky.  659,  51  S.  W.  196.) 

Action  by  the  Grunden-Martin  Woodenware  Company  against  the 
Fairmount  Glass  Works  to  recover  damages  for  breach  of  contract. 
Judgment  for  plaintiff,  and  defendant  appeals. 

HoBSON,  J.  On  April  20,  1895,  appellee  wrote  appellant  the  fol- 
lowing letter: 

"St.  Louis,  Mo.,  April  20,  1895.  Gentlemen:  Please  advise  us  the 
lowest  price  you  can  make  us  on  our  order  for  ten  car  loads  of  Mason 
green  jars,  complete,  with  caps,  packed  one  dozen  in  a  case,  either  de- 
livered here,  or  f.  o.  b.  cars  your  place,  as  you  prefer.  State  terms  and 
cash  discount.    Very  truly,  Grunden-Martin  W.  W.  Co.'' 

To  this  letter  appellant  answered  as  follows : 

"Fairmount,  Ind.,  April  23,  1895.  Grunden-Martin  Wooden  Ware 
B.&B.Bus.Law— 3 


34  CONTRACTS  (Part  1 

Co.,  St.  Louis.  Mo. — Gentlemen:  Replying  to  your  favor  of  April  20, 
we  quote  you  Mason  fruit  jars  complete,  in  one-dozen  boxes,  delivered 
in  East  St.  Louis,  111. :  Pints  $4.50,  quarts  $5.00,  half  gallons  $6.50,  per 
gross,  for  immediate  acceptance,  and  shipment  not  later  than  May  15, 
1895 ;   sixty  days'  acceptance,  or  2  off,  cash  in  ten  days.    Yours  truly, 

"Fairmount  Glass  Works." 

"Please  note  that  we  make  all  quotations  and  contracts  subject  to 
the  contingencies  of  agencies  or  transportation,  delays  or  accidents  be- 
yond our  control." 

For  reply  thereto,  appellee  sent  the  following  telegram  on  April  24, 
1895: 

"Fairmount  Glass  Works,  Fairmount,  Ind. :  Your  letter  twenty- 
third  received.  Enter  order  ten  car  loads  as  per  your  quotation.  Speci- 
fications mailed.  Grunden-Martin  W.  W.  Co." 

In  response  to  this  telegram,  appellant  sent  the  following: 

"Fairmount,  Ind.,  April  24,  1895.  Grunden-Martin  W.  W.  Co., 
St.  Louis,  Mo. :  Impossible  to  book  your  order.  Output  all  sold.  See 
letter.  Fairmount  Glass  Works." 

Appellee  insists  that,  by  its  telegram  sent  in  answer  to  the  letter  of 
April  23d,  the  contract  was  closed  for  the  purchase  of  10  car  loads  of 
Mason  fruit  jars.  Appellant  insists  that  the  contract  was  not  closed  by 
this  telegram,  and  that  it  had  the  right  to  decline  to  fill  the  order  at 
the  time  it  sent  its  telegram  of  April  24.  This  is  the  chief  question  in 
the  case.  The  court  below  gave  judgment  in  favor  of  appellee,  and 
appellant  has  appealed,  earnestly  insisting  that  the  judgment  is  er- 
roneous. 

We  are  referred  to  a  number  of  authorities  holding  that  a  quotation 
of  prices  is  not  an  oft'er  to  sell,  in  the  sense  that  a  completed  contract 
will  arise  out  of  the  giving  of  an  order  for  merchandise  in  accordance 
with  the  proposed  terms.  There  are  a  number  of  cases  holding  that 
the  transaction  is  not  completed  until  the  order  so  made  is  accepted. 
But  each  case  must  turn  largely  upon  the  language  there  used.  In  this 
case  we  think  there  was  more  than  a  quotation  of  prices,  although  ap- 
pellant's letter  uses  the  word  "quote"  in  stating  the  prices  given.  The 
true  meaning  of  the  correspondence  must  be  determined  by  reading  it 
as  a  whole.  Appellee's  letter  of  April  20th,  which  began  the  transac- 
tion, did  not  ask  for  a  quotation  of  prices.  It  reads :  "Please  advise 
us  the  lowest  price  you  can  make  us  on  our  order  for  ten  car  loads  of 
Mason  green  jars.  *  =i<  *  State  terms  and  cash  discount."  From 
this  appellant  could  not  fail  to  understand  that  appellee  wanted  to  know 
at  what  price  it  would  sell  it  ten  car  loads  of  these  jars;  so  when,  in 
answer,  it  wrote :  "We  quote  you  Mason  fruit  jars  *  *  *  pints 
$4.50,  quarts  $5.00,  half  gallons  $6.50,  per  gross,  for  immediate  ac- 
ceptance; *  *  *  2  off',  cash  in  ten  days,"— it  must  be  deemed  as 
intending  to  give  appellee  the  information  it  had  asked  for. 

We  can  hardly  understand  wdiat  was  meant  by  the  words  "for  im- 
mediate acceptance,"  unless  the  latter  was  intended  as  a  proposition  to 
sell  at  these  prices  if  accepted  immediately.  In  construing  every  con- 
tract, the  aim  of  the  court  is  to  arrive  at  the  intention  of  the  par- 
ries. In  none  of  the  cases  to  which  we  have  been  referred  on  behalf 
of  appellant  was  there  on  the  face  of  the  correspondence  any  such 
expression  of  intention  to  make  an  offer  to  sell  on  the  terms  indi- 
cated. In  Fitzhugh  v.  Jones,  6  Munf.  (Va.)  83,  the  use  of  the  ex- 
pression that  the  buyer  should  reply  as  soon  as  possible,  in  case  he  Vx-as 


Ch.  1)  OFFER   AND   ACCEPTANCE  35 

disposed  to  accede  to  the  terms  offered,  was  held  sufificient  to  show  that 
ihere  was  a  definite  proposition,  which  was  closed  by  the  buyer's  ac- 
ceptance. The  expression  in  appellant's  letter,  "for  immediate  accept- 
ance," taken  in  connection  with  appellee's  letter,  in  effect,  at  what 
price  it  would  sell  it  the  goods,  is,  it  seems  to  us,  much  stronger  evi- 
dence of  a  present  offer,  which,  when  accepted  immediately,  closed  the 
contract.  Appellee's  letter  was  plainly  an  inquiry  for  the  price  and 
terms  on  which  appellant  would  sell  it  the  goods,  and_  appellant's  an- 
swer to  it  was  not  a  quotation  of  prices,  but  a  definite  oft"er  to  sell 
on  the  terms  indicated,  and  could  not  be  withdrawn  after  the  terms 
had  been  accepted. 

Appellant  also  insists  that  the  contract  was  indefinite,  because  the 
quantity  of  each  size  of  the  jars  was  not  fixed,  that  10  car  loads  is  too 
indefinite  a  specification  of  the  quantity  sold,  and  that  appellee  had 
no  right  to  accept  the  goods  to  be  delivered  on  different  days.  The 
proof  shows  that  "10  car  loads"  is  an  expression  used  in  the  trade  as 
equivalent  to  1,000  gross,  100  gross  being  regarded  a  car  load.  The 
offer  to  sell  the  different  sizes  at  different  prices  gave  the_  purchaser 
the  right  to  name  the  quantity  of  each  size,  and,  the  off'er  being  to  ship 
not  later  than  May  15th,  the  buyer  had  the  right  to  fix  the  time  of  de- 
livery at  any  time  before  that.  The  petition,  if  defective,  was  cured 
by  the  judgment,  which  is  fully  sustained  by  the  evidence. 

Judgment  affirmed. 


OLCOTT  V.  McCLURB. 
(Appellate  Court  of  Imliana.  1012.     50  Ind.  App.  79.  98  N.  E.  S2.) 

Appellant,  plaintiff  in  court  below,  brought  action  for  a  commission 
on  a  sale  of  realty.  Plaintiff  alleged  that  defendant,  appellee,  made 
him  an  offer  of  such  a  commission  in  a  letter  reading  in  part  as  fol- 
lows: "Inclosed  you  will  find  description  of  a  Texas  farm,  offered 
for  sale  at  a  very  attractive  price.  To  the  agent  with  whose  buyer 
I  consummate  a  sale,  at  the  price  and  terms  mentioned,  I  will  pay  a 
commission  of  $1.00  an  acre  so  soon  as  the  terms  of  the  sale  are  com- 
plied with,  but  I  am  in  no  event  to  be  held  liable  for  more  than  one 
commission."    Judgment  below  for  defendant. 

Hotte;l,  J.  *  *  "■'  If  a  writing  contains  matter  sufficient  to  en- 
able the  court  to  ascertain  the  subject-matter  and  the  terms  and  condi- 
tions of  the  obligation  or  contract  to  vvhich  the  parties  intended  to 
bind  themselves,  it  is  sufficient.  The  effect  of  such  written  contract  is 
to  be  collected  from  "all  within  the  four  corners"  of  the  several  letters 
or  writings  which  go  to  make  up  the  same,  and,  if  it  can  be  so  collected, 
such  writings  v/ill  be  held  sufficient  to  constitute  a  contract. 

Under  the  averments  of  this  paragraph  of  complaint,  the  subjept- 
matter  of  the  contract,  namely,  the  farm  oft'ered  for  sale,  its  descrip- 
tion, the  terms  upon  which  it  was  offered,  the  amount  which  the  ap- 
pellee agreed  to  pay  to  the  agent  with  whose  buyer  he  might  consum- 
mate a  sale,  can  all  be  definitely  and  certainly  ascertained.  Appellee 
in  his  brief  says :  "The  primary  question  is  whether  the  correspondence 
shows  an  agreement  upon  which  the  minds  of  the  parties  met,  as  to 
description,  terms,  price,  and  commission,  or  whether  the  negotiations- 
are  inchoate  and  unperfected  until  something  should  intervene  and  be 
determined  in  order  to  give  it  full  effect."  J.  A.  Everett,  Seedsman 
V.  Bassler,  25  Ind.  App.  303-308,  57  N.  E.  560.    We  think  the  test  here 


36  CONTRACTS  (Part  1 

furnished  a  proper  one,  and  that  the  contents  of  letter  No.  1,  supple- 
mented by  the  averments  of  the  complaint  as  to  the  contents  of  appel- 
lant's letter  of  acceptance  and  the  lost  paper  and  letter,  meet  every  re- 
quirement of  the  rule  announced. 

It  is  insisted  by  appellee  that  his  first  letter  or  proposition  was  noth- 
ing more  than  an  invitation  to  the  person  to  whom  it  was  made  to  make 
an  offer  to  the  proposer.  This  contention  is  clearly  against  the  import 
and  meaning  of  the  language  of  the  proposition,  especially  that  part  of 
the  same  which  is  in  the  following  words :  "To  the  agent  with  whose 
buyer  I  consummate  a  sale  at  the  price  and  terms  named,  I  will  pay 
a  commission  of  $1.00  per  acre,  so  soon  as  the  terms  of  the  sale  are 
complied  with."  These  words  import  more  than  an  invitation  for 
an  offer.  They  are  a  definite,  certain  proposition,  the  acceptance  of 
which  should  bind  the  proposer.  Of  course,  standing  alone.  Exhibit 
A  is  nothing  more  than  a  proposition  which  is  unilateral ;  but  it  is  such 
a  proposition  as  may  become  binding  by  acceptance. 

Judgment  reversed. 


KELLER   V.  HOLDERMAN. 

(Supreme  Court  of  Michigan,  1SG3.     11  Mich.  248,  S?>  Am.  Dec.  737.) 

Action  by  Holderman  against  Keller  upon  a  check  for  $300.  drawn 
by  Keller,  and  not  honored.  The  check  was  given  for  an  old  silver 
watch  worth  about  $15.  Keller  took  the  watch  and  kept  it  till  the 
day  of  the  trial,  when  he  tendered  it  back  to  the  plaintiff,  who  refused 
to  receive  it.  The  whole  transaction  was  a  frolic  and  banter,  neither 
party  intending  to  enter  a  contractual  relation.  The  defendant,  when 
he  drew  the  check,  had  no  money  in  the  bank.  Judgment  below  for 
plaintiff. 

Martin,  C.  J.  When  the  court  below  found  as  a  fact  that  "the 
whole  transaction  between  the  parties  was  a  frolic  and  a  banter,  the 
plaintiff  not  expecting  to  sell,  nor  the  defendant  intending  to  buy,  the 
watch  at  the  sum  for  which  the  check  was  drawn,"  the  conclusion 
should  have  been  that  no  contract  was  ever  made  by  the  parties,  and 
the  finding  should  have  been  that  no  cause  of  action  existed  upon  the 
check  to  the  plaintiff. 

The  judgment  is  reversed,  with  costs  of  this  court  and  of  the  court 
below.    The  other  justices  concurred. 


PLATE  V.  DURST. 

(Supreme  Court  of  Appeals  of  West  Vircinia.  1S96.     42  W.  Va.  63, 
24  S.  E.  580,  32  L.  R.  A.  404.) 

Assumpsit  by  Amelia  C.  Plate  against  George  L.  Durst.  There  was 
a  judgment  for  plaintiff,  and  defendant  brings  error. 

Dent,  j.  *  *  *  The  material  facts  in  the  case  are  as  follows,  to- 
wit :  When  the  plaintiff  was  about  twelve  years  of  age,  in  the  absence 
of  other  home,  she  went  to  live  with  the  defendant,  her  brother-in-law. 
This  was  in  the  year  1885.  For  the  first  three  or  four  years  she  was 
sent  to  school,  and  during  the  whole  period  she  lived  in  the  family  as 
the  defendant's  own  daughter  might  have  done.  On  her  part,  the  plain- 
tiff rendered  services  such  as  might  have  been  required  and  expected 
from  a  daughter ;   attending  to  the  marketing,  and  assisting  in  the  care 


Ch.  1)  OFFER  AND   ACCEPTANCE  37 

of  the  young  children.  In  addition  to  these  services  the  plaintiff  as- 
sisted the  defendant  in  his  store,  attending  to  customers,  looking  after 
entertainments  the  defendant  had  in  charge,  and  doing  whatever  else 
the  exigencies  of  the  business,  and  her  own  capacities,  from  time  to  time 
suggested.  According  to  the  plaintiff's  testimony,  a  conversation  took 
place  four  years  before  August,  1894,  late  one  evening,  in  the  store 
of  the  defendant.  This  conversation  was  repeated  several  times  in 
the  plaintiff's  testimony,  and  was  given  by  her  as  follows :  "Mr.  Durst 
asked  me  if  I  was  tired.  I  said,  'Yes,  sir;'  and  he  said,  'How  long 
have  you  been  with  me  now'  ?  and  I  told  him,  'Five  years ;'  and  he  said, 
'Well,  when  you  are  with  me  ten  years,  I  will  give  you  one  thousand 
dollars."  "  On  another  occasion,  defendant  remarked  that  when  she 
(the  plaintiff)  should  get  married  he  would  give  her  $1,000,  and  a  $500 
diamond  ring.  Defendant  does  not  positively  deny  either  of  these 
conversations,  except  as  to  the  time  of  the  first,  but  intimates  that  he 
was  not  in  earnest,  but  jesting. 

It  must  be  admitted,  in  any  view  of  the  matter,  that  this  was  jesting 
on  a  very  serious  subject  to  this  unfortunate  and  parentless  young 
girl — still,  in  the  eyes  of  the  law,  an  infant — engaged  early  and  late, 
week  days  and  Sunday,  at  home  and  abroad,  actively,  earnestly,  and 
faithfully  endeavoring  to  promote  the  worldly  interests  of  the  defend- 
ant. Jokes  are  sometimes  taken  seriously  by  the  young  and  inex- 
perienced in  the  deceptive  ways  of  the  business  world,  and  if  such  is 
the  case,  and  thereby  the  person  deceived  is  led  to  give  valuable  services 
in  the  full  belief  and  expectation  that  the  joker  is  in  earnest,  the  law 
will  also  take  the  joker  at  his  word,  and  give  him  good  reason  to 
smile.  The  law  discountenances  deceit,  even  practiced  under  the 
form  of  a  jest,  if  the  weak,  immature,  or  confiding  are  thereby  im- 
posed on  to  their  injury.  Where  the  law  raises  a  presumption  of 
gratuitous  service,  because  of  the  relationship  of  the  parties,  the  person 
rendering  such  service  must  rebut  such  presumption  by  either  show- 
ing an  express  contract,  "or  such  facts  and  circumstances  as  will  au- 
thorize the  jury  to  find  the  services  were  rendered  in  expectation  by 
one  of  receiving,  and  by  the  other  of  making,  compensation." 

And  now  it  devolves  upon  us  to  say  whether  she  is  entitled  to  pay 
for.  what  her  services  were  actually  worth,  or  does  the  law,  from 
the  fact  that  he  was  only  misleading  her,  and  never  intended  to  pay 
her,  excuse  him  from  doing  so?  A  person  is  estopped  from  denying 
the  sincerity  of  his  conduct,  to  the  injury  of  a  person  misled  thereby. 
We  therefore  must  conclude  that  these  promises,  in  spite  of  the  dec- 
laration of  the  defendant  to  the  contrary,  were  made  in  sincerity,  as 
an  inducement  to  her  future  service.  As  these  promises  are  not  here 
sued  on,  the  question  of  the  statute  of  frauds  does  not  arise;  but,  the 
plaintiff  having  been  prevented  by  the  defendant  from  performing  her 
part  of  the  undertaking,  she  is  entitled  to  recover  for  the  services  al- 
ready rendered,  in  view  of  the  compensation  promised.  The  judgment 
is  therefore  affirmed. 


SECTION  3.— DURATION  OF  OFFERS 

It  will  usually  happen  that  an  offer  v/ill  not  be  accepted  at  the 
moment  it  is  made.  How  long  will  the  offer  survive  as  such?  The 
making  of  the  offer  alone  has  conferred  upon  the  offeree  a  power 


38  CONTRACTS  (Part  1 

to  create  contractual  relatioriF  between  the  parties.  Under  what  cir- 
cumstances may  it  be  said  that  this  power  continues  in  existence? 
Obviously  the  power  will  not  exist  indefinitely.  Moreover,  the 
offer  having-  been  made  by  one  of  the  parties  alone,  it  would  seem 
that  he  should  have  power  to  destroy  that  which  he  created.  The 
party  to  whom  the  offer  was  made  should  also  have  power,  not  only 
to  convert  the  oft'er  into  a  contract  but  also  to  destroy  it. 

Accordingly  there  are  three  w^ays  in  which  an  oft'er  may  be  termi- 
nated :  (1)  By  some  event  subsequent  to  the  offer,  not  then  within 
the  control  of  either  party;  (2)  by  an  act  of  the  offeror,  called 
revocation;    (3)  by  an  act  of  the  offeree,  called  rejection. 

Under  each  of  these  we  shall  consider  two  independent  problems  : 
What  is  the  nature  of  the  event  wdiich  may  have  the  effect  of  de- 
stroying the  offer ;  and  at  what  point  of  time  and  under  what  cir- 
cumstances will  it  take  effect? 


yn)  TEH]\riNATION  OF  AX   OFFER  BY  SOME  EVENT 

(1)  If  the  offeror  has  specified  a  definite  time  within  which  the 
offer  may  be  open  for  acceptance,  and  this  period  of  time  elapses 
before  acceptance,  the  offer  thereafter  is  non-existent — incapable 
of  acceptance.  (2)  If  no  time  is  specified  in  the  oft'er,  then  the 
offer  is  deemed  to  be  open  for  a  reasonable  time.  What  constitutes 
a  reasonable  time  will  depend  upon  the  circumstances  of  the  case. 
(3)  If  the  oft'eror  dies  or  becomes  insane  before  acceptance,  the 
offer  is  thereby  terminated. 


LORING  et  al.  v.  CITY  OF  BOSTON. 
(Supreme  .JudieiiU  Court  of  :\Tassachnsotts.  1S44.     7  >retc.  409.) 

Assumpsit  to  recover  a  reward  of  $1,000,  ofl'ered  by  the  defendants 
for  the  apprehension  and  conviction  of  incendiaries. 

In  May,  1837,  defendant  city  oft'ered  a  reward  of  $1,000,  by  adver- 
tisement in  daily  papers,  the  publication  of  the  advertisement  continu- 
ing about  a  week,  for  the  conviction  of  any  person  setting  fire  to  any 
building  within  the  city  limits.  In  Januar}-,  1841,  an  extensive  fire 
took  place.  Plaintiff's,  suspecting  one  Samuel  Marriott  of  having  set 
the  fire,  pursued  Marriott  to  New  York,  brought  him  back  to  Boston, 
and  secured  his  conviction  of  setting  said  fire.  The  only  question  in 
this  case  is,  whether  said  off'er  of  reward  continued  to  be  in  force  at 
the  time  of  this  fire.  There  had  been  no  express  revocation  of  the 
offer. 

Shaw,  C.  J.  There  is  now  no  question  of  the  correctness  of  the 
legal  principle  on  which  this  action  is  founded.  The  oft'er  of  a  re- 
ward for  the  detection  of  an  oft'ender  the  recovery  of  property,  and 
the  like  is  an  offer  or  proposal,  on  the  part  of  the  person  making  it,  to 
all  persons,  which  any  one  capable  of  performing  the  service  may  ac- 
cept at  any  time  before  it  is  revoked,  and  perform  the  service;  and 
such  offer  on  one  side,  and  acceptance  and  performance  on  the  other, 
is  a  valid  contract  made  on  good  consideration,  which  the  law  will  en- 


Ch. J)  OFFER  AND   ACCEPTANCE  39 

force.  That  this  principle  applies  to  the  offer  of  a  reward  to  the  pub- 
He  at  large  was  settled  in  this  Commonwealth  in  Symmes  v.  Frazier, 
6  Mass.  344,  4  Am.  Dec.  142,  and  it  has  been  frequently  acted  upon, 
and  was  recognized  in  the  late  case  of  Wentworth  v.  Day,  3  Mete. 
352,  37  Am.  Dec.  145. 

The  ground  of  defense  is  that  the  advertisement,  offering  the  re- 
ward of  $1,000  for  the  detection  and  conviction  of  persons  setting  fire 
to  buildings  in  the  city,  was  issued  almost  four  years  before  the  time 
at  which  the  plaintiff  arrested  Marriott  and  prosecuted  him  to  convic- 
tion ;  that  this  reward  was  so  off'ered  in  reference  to  a  special  emer- 
gency in  consequence  of  several  alarming  fires ;  that  the  advertisement 
was  withdrawn  and  discontinued ;  that  the  recollection  of  it  had  passed 
away;  that  it  was  obsolete,  and  by  most  persons  forgotten;  and  that 
it  could  not  be  regarded  as  a  perpetually  continuing  offer  on  the  part 
of  the  city. 

We  are  then  first  to  look  at  the  terms  of  the  advertisement,  to  see 
what  the  offer  was.  It  was  competent  to  the  party  offering  such  re- 
ward to  propose  his  own  terms;  and  no  person  can  entitle  himself  to 
the  promised  reward  without  a  compliance  with  all  its  terms.  The  first 
advertisement  offering  the  reward  demanded  in  this  action  was  pub- 
lished May  26,  1837,  offering  a  reward  of  $500 ;  and  another  on  the 
day  following,  increasing  it  to  $1,000.  No  time  is  inserted  in  the 
notice,  within  which  the  service  is  to  be  done  for  which  the  reward 
is  claimed.  It  is  therefore  relied  on  as  an  unlimited  and  continuing  of- 
fer. 

In  the  first  place,  it  is  to  be  considered  that  this  is  not  an  ordinance 
of  the  city  government,  of  standing  force  and  eft'ect ;  it  is  an  act  tem- 
porary in  its  nature,  emanating  from  the  executive  branch  of  the  city 
government,  done  under  the  exigency  of  a  special  occasion  indicated 
by  its  terms,  and  continued  to  be  published  but  a  short  time.  Although 
not  limited  in  its  terms,  it  is  manifest,  we  think,  that  it  could  not  have 
been  intended  to  be  perpetual,  or  to  last  ten  or  twenty  years  or  more ; 
and  therefore  must  have  been  understood  to  have  some  limit. 

Supposing,  then,  that  by  fair  implication  there  must  be  some  limit 
to  this  offer,  and  there  being  no  limit  in  terms,  then  by  a  general  rule 
of  law  it  must  be  limited  to  a  reasonable  time ;  that  is.  the  service  must 
be  done  within  a  reasonable  time  after  the  offer  made. 

What  is  a  reasonable  time,  when  all  the  facts  and  circumstances  are 
proved  on  which  it  depends,  is  a  question  of  law.  To  determine  it, 
we  are  first  to  consider  the  objects  and  purposes  for  which  such  reward 
is  offered.  The  principal  object  obviously  must  be  to  awaken  the  at- 
tention of  the  pumic,  to  excite  the  vigilance  and  stimulate  the  exertions 
of  police  officers,  watchmen,  and  citizens  generally,  to  the  detection 
and  punishment  of  offenders.  Possibly,  too,  it  may  operate  to  prevent 
offenses,  by  alarming  the  fears  of  those  who  are  under  temptation  to 
commit  them,  by  inspiring  the  belief  that  tlie  public  is  awake,  that 
any  suspicious  movement  is  watched,  and  that  the  crime  cannot  be 
committed  with  impunity.  To  accomplish  either  of  these  objects,  such 
offer  of  a  reward  must  be  notorious,  known  and  kept  in  mind  by  the 
public  at  large ;  and  for  that  purpose  the  publication  of  the  offer,  if 
not  actually  continued  in  newspapers,  and  placarded  at  conspicuous 
places,  must  have  been  recent.  After  the  lapse  of  years,  and  after  the 
publication  of  the  oft'er  has  been  long  discontinued,  it  must  be  pre- 
sumed to  be  forgotten  by  the  public  generally,  and  if  known  at  all. 


40  CONTRACTS  (Part  1 

known  only  to  a  few  individuals  who  may  happen  to  meet  with  it  in 
an  old  newspaper.  The  expectation  of  benefit  then  from  such  a  prom- 
ise of  reward  must  in  a  great  measure  have  ceased.  Indeed,  every 
consideration  arising  from  the  nature,  of  the  case  confirms  the  belief 
that  such  offer  of  reward,  for  a  special  service  of  this  nature,  is  not 
unlimited  and  perpetual  in  its  duration,  but  must  be  limited  to  some 
reasonable  time.  The  difficulty  is  in  fixing  it.  One  circumstance  (per- 
haps a  slight  one)  is  that  theact  is  done  by  a  board  of  oflicers,  who 
themselves  are  annual  officers.  But  as  they  act  for  the  city,  which  is 
a  permanent  body,  and  exercise  its  authority  for  the  time  being,  and 
as  such  a  reward  might  be  offered  near  the  end  of  the  year,  we  cannot 
necessarily  limit  it  to  the  time  for  which  the  same  board  or  mayor 
and  aldermen  have  to  serve;  though  it  tends  to  make  the  distinction 
betw^een  a  temporary  act  of  one  branch  and  a  permanent  act  of  the 
whole  city  government. 

We  have  already  alluded  to  the  fact  of  the  discontinuance  of  the 
advertisement,  as  one  of  some  weight.  It  is  some  notice  to  the  public 
that  the  exigency  is  passed  for  which  such  offer  of  a  reward  was  par- 
ticularly intended.  And  though  such  discontinuance  is  not  a  revoca- 
tion of  the  oft'er,  it  proves  that  those  who  made  it  no  longer  hold  it 
forth  conspicuously  as  a  continuing  offer ;  and.  it  is  not  reasonable  to 
regard  it  as  a  continuing  oft"er  for  any  considerable  term  of  time  after- 
w'ards. 

But  it  is  not  necessary,  perhaps  not  proper,  to  undertake  to  fix  a 
precise  time  as  reasonable  time;  it  must  depend  on  many  circum- 
stances. 

Under  the  circumstances  of  the  present  case,  the  court  are  of  the 
opinion  that  three  years  and  eight  months  is  not  a  reasonable  time 
within  which,  or  rather  to  the  extent  of  which,  the  offer  in  question 
can  be  considered  as  a  continuing  offer  on  the  part  of  the  city.  We 
are  therefore  of  opinion  that  the  offer  of  the  city  had  ceased  before 
the  plaintiffs  accepted  and  acted  upon  it  as  such,  and  that  consequently 
no  contract  existed  upon  which  this  action,  founded  on  an  alleged 
express  promise,  can  be  maintained. 

Plaintiffs  nonsuit. 


MINNESOTA  LINSEED  OIL  CO.  v.  COLLIER  WHITE   LEAD  CO. 

(United  States  Circuit  Coiirt,  D.   Minnesota,  1S76.     4  Dill.  4.31, 
Fed.  Cas.  No.  9.635.) 

This  action  was  removed  from  the  state  court  apid  a  trial  by  jury 
waived.  The  plaintiff  seeks  to  recover  the  sum  of  $2,151.50,  wath  in- 
terest from  September  20.  1875 — a  balance  claimed  to  be  due  for  oil 
sold  to  the  defendant.  The  defendant,  in  its  answer,  alleges  that  on 
August  3d,  1875,  a  contract  was  entered  into  between  the  parties, 
whereby  the  plaintiff  agreed  to  sell  and  deliver  to  the  defendant,  at 
the  city  of  St.  Louis,  during  the  said  month  of  August,  twelve  thou- 
sand four  hundred  and  fifty  (12,450)  gallons  of  linseed  oil  for  the 
price  of  fifty-eight  (58)  cents  per  gallon,  and  that  the  plaintiff  has 
neglected  and  refused  to  deliver  the  oil  according  to  the  contract ;  that 
the  market  value  of  oil  after  August  3d  and  during  the  month  was 
not  less  than  seventy  (70)  cents  per  gallon,  and  therefore  claims  a  set- 
off or  counter-claim  to  plaintiff's  cause  of  action.     The  reply  of  the 


Ch.  1)  OFFER   AND   ACCEI'TAXCE  41 

plaintiff  denies  that  any  contract  was  entered  into  between  it  and  de- 
fendant. 

The  plaintiff  resided  at  Minneapolis,  Minnesota,  and  the  defendant 
was  the  resident  agent  of  the  plaintiff,  at  St.  Louis,  Missouri.  The 
contract  is  alleged  to  have  been  made  by  telegraph. 

The  plaintiff  sent  the  following  dispatch  to  the  defendant :  "Minne- 
apolis, July  29,  1875.  To  Alex.  Easton,  Secretary  Collier  White  Lead 
Company,  St.  Louis,  Missouri :  Account  of  sales  not  enclosed  in  yours 
of  27th.  Please  wire  us  best  offer  for  round  lot  named  by  you— one 
hundred  barrels  shipped.    Minnesota  Linseed  Oil  Company." 

The  following  answer  was  received:  "St.  Louis,  Mo.,  July  30,  1875. 
To  the  Minnesota  Linseed  Oil  Company :  Three  hundred  barrels  fifty- 
five  cents  here,  thirty  days,  no  commission,  August  delivery.  Answer. 
Collier  Company." 

The  following  reply  was  returned:  "Minneapolis,  July  31.  1875. 
Will  accept  fifty-eight  cents  (58c.),  on  terms  named  in  your  telegram. 
^Minnesota  Linseed  Oil  Company." 

This  dispatch  was  transmitted  Saturday,  July  31,  1875,  at  9:15  p.  m., 
and  was  not  delivered  to  the  defendant  in  St.  Louis,  until  Monday 
morning,  August  2,  between  8  and  9  o'clock. 

On  Tuesday,  August  3,  at  8:53  a.  m.,  the  following  dispatch  was 
deposited  for  transmission  in  the  telegraph  office:  "St.  Louis,  Mo., 
August  3,  1875.  To  Minnesota  Linseed  Oil  Company,  Minneapolis: 
Oft'er  accepted — ship  three  hundred  barrels  as  soon  as  possible.  Col- 
lier Company." 

The  following  telegrams  passed  between  the  parties  after  the  last 
one  was  deposited  in  the  office  at  St.  Louis :  "Minneapolis,  August  3, 
1875.  To  Collier  Company,  St.  Louis :  We  must  withdraw  our  offer 
wired  July  31st.     Minnesota  Linseed  Oil  Company." 

Answered:  "St.  Louis,  August  3,  1875.  Minnesota  Linseed  Oil 
Company:  Sale  effected  before  your  request  to  withdraw  was  re- 
ceived.    When  will  you  ship?    Collier  Company." 

It  appeared  that  the  market  was  very  much  unsettled,  and  that  the 
price  of  oil  was  subject  to  sudden  fluctuations  during  the  month  pre- 
vious and  at  the  time  of  this  negotiation,  varying  from  day  to  day,  and 
ranging  between  fifty-five  and  seventy-five  cents  per  gallon.  It  is 
urged  by  the  defendant  that  the  dispatch  of  Tuesday,  August  3d,  1875, 
accepting  the  offer  of  the  plaintiff  transmitted  July  31st,  and  delivered 
Monday  morning,  August  2d,  concluded  a  contract  for  the  sale  of  the 
twelve  thousand  four  hundred  and  fifty  gallons  of  oil.  The  plaintiff, 
on  the  contrary,  claims,  1st,  that  the  dispatch  accepting  the  proposi- 
tion made  July  31st,  was  not  received  until  after  the  offer  had  been 
withdrawn ;  2d,  that  the  acceptance  of  the  offer  was  not  in  due  time ; 
that  the  delay  was  unreasonable,  and  therefore  no  contract  was  com- 
pleted. 

Nelson,  District  Judge.  It  is  well  settled  by  the  authorities  in  this 
country,  and  sustained  by  the  later  English  decisions,  that  there  is  no 
difference  in  the  rulgs  governing  the  negotiation  of  contracts  by  corre- 
spondence through  the  post  ofiice  and  by  telegraph,  and  a  contract  is 
concluded  when  an  acceptance  of  a  proposition  is  deposited  in  the  tele- 
graph office  for  transmission. 

The  reason  for  this  rule  is  well  stated  in  Adams  v.  Lindsell,  1  Barn. 
&  Aid.  681.  The  negotiation  in  that  case  was  by  post.  The  court 
said:     "That  if  a  bargain  could  not  be  closed  by  letter  before  the  an- 


42  CONTKACTS  (Part  1 

swer  was  received,  no  contract  could  be  completed  through  the  medium 
of  the  post  office;  that  if  the  one  party  was  not  bound  by  his  offer 
when  it  was  accepted  (that  is,  at  the  time  the  letter  of  acceptance  is 
deposited  in  the  mail),  then  the  other  party  ought  not  to  be  bound  un- 
til after  they  had  received  a  notification  that  the  answer  had  been  re- 
ceived and  assented  to,  and  that  so  it  might  go  on  ad  infinitum."  In  the 
case  at  bar  the  delivery  of  the  message  at  the  telegraph  office  signified 
the  acceptance  of  the  offer.  If  any  contract  was  entered  into,  the 
meeting  of  minds  was  at  8  :53  of  the  clock,  on  Tuesday  morning,  Aug- 
ust 3d,  and  the  subsequent  dispatches  are  out  of  the  case. 

This  rule  is  not  strenuously  dissented  from  on  the  argument,  and  it 
is  substantially  admitted  that  the  acceptance  of  an  offer  by  letter  or  by 
telegraph  completes  the  contract,  when  such  acceptance  is  put  in  the 
proper  and  usual  way  of  being  communicated  by  the  agency  employed 
to  carry  it ;  and  that  when  an  offer  is  made  by  telegraph,  an  acceptance 
b)'-  telegraph  takes  effect  when  the  dispatch  containing  the  acceptance 
is  deposited  for  transmission  in  the  telegraph  office,  and  not  when  it 
is  received  by  the  other  party.  Conceding  this,  there  remriins  only  one 
question  to  decide,  which  will  determine  the  issues  :  Was  the  acceptance 
of  defendant  deposited  in  the  telegraph  office  Tuesday,  August  3d, 
within  a  reasonable  time,  so  as  to  consummate  a  contract  binding  upon 
the  plaintiff? 

The  better  opinion  is,  that  what  is,  or  is  not,  a  reasonable  time,  must 
depend  upon  the  circumstances  attending  the  negotiation,  and  the  char- 
acter of  the  subject-matter  of  the  contract,  and  in  no  better  way  can 
the  intention  of  the  parties  be  determined.  If  the  negotiation  is  in  re- 
spect to  an  article  stable  in  price,  there  is  not  so  much  reason  for  an 
immediate  acceptance  of  the  oft'er,  and  the  same  rule  would  not  apply 
as  in  a  case  where  the  negotiation  related  to  an  article  subject  to  sud- 
den and  great  fluctuations  in  the  market. 

The  rule  in  regard  to  the  length  of  the  time  an  offer  shall  continue, 
and  when  an  acceptance  completes  the  contract,  is  laid  down  in  Parsons 
on  Contracts  (volume  1,  p.  82).  He  says:  "It  may  be  said  that 
whether  the  offer  be  made  for  a  time  certain  or  not,  the  intention  or 
understanding  of  the  parties  is  to  govern.  *  *  *  If  no  definite 
time  is  stated,  then  the  inquiry  as  to  a  reasonable  time  resolves  itself 
into  an  inquiry  as  to  what  time  it  is  rational  to  suppose  the  parties 
contemplated;  and  the  law  will  decide  this  to  be  that  time  which  as 
rational  men  they  oitght  to  have  understood  each  other  to  have  had  in 
mind."  Applying  this  rule,  it  seems  clear  that  the  intention  of  the 
plaintiff,  in  making  the  offer  by  telegraph,  to  sell  an  article  which  fluc- 
tuates so  much  in  price,  must  have  been  upon  the  understanding  that 
the  acceptance,  if  at  all,  should  be  immediate,  and  as  soon  after  the 
receipt  of  the  offer  as  would  give  a  fair  opportunity  for  consideration. 
The  delay  here  was  too  long,  and  manifestly  unjust  to  the  plaintiff,  for 
it  afforded  the  defendant  an  opportunity  to  take  advantage  of  a  change 
in  the  market,  and  accept  or  refuse  the  offer  as  would  best  subserve  its 
interests.  * 

Judgment  will  be  entered  in  favor  of  the  plaintiff  for  the  amount 
claimed.    The  counterclaim  is  denied.    Judgment  accordingly. 


Ch.  1)  OFFER   AND   ACCKPTANCB  43 

BEACH   et   al.   v.   FIRST   METHODIST   EPISCOPAL  CHURCH. 

(Supmue  Court  of  Illinois,  1880.     96  111.  177.) 

DiCKiCY,  C.  J.  The  record  shows  that  Lorenzo  Beach  had  presented 
to  him  a  subscription  paper  in  the  following  words : 

"Fairbury,  February  14,  1874. 

"We,  the  undersigned,  agree  to  pay  the  sum  set  opposite  our  re- 
spective names,  for  the  purpose  of  erecting  a  new  M.  E.  church  in 
this  place,  said  sums  to  be  paid  as  follows :  One-third  to  be  paid  when 
contract  is  let,  one-third  when  building  is  enclosed,  one-third  when 
building  is  completed.  Probable  cost  of  said  church  from  ten  thou- 
sand dollars  ($10,000)  to  twelve  thousand  dollars  ($12,000)." 

To  which  he  attached  and  subscribed  the  following : 

"Fairbury,  1874. 

"Dr.  Beach  gives  this  subscription  on  the  condition  that  the  re- 
mainder of  eight  thousand  dollars  is  subscribed. 

■'Lorenzo   Beach, $2,000.' 

On  the  20th  day  of  April,  1875.  Lorenzo  Beach  was  adjudged  by  the 
county  court  of  Livingston  county  insane,  and  Thomas  A.  Beach  and 
C.  C.^  Bartlett  were  appointed  conservators  of  his  person  and  prop- 
erty, and  they  continued  to  act  as  such  until  the  death  of  Dr.  Beach, 
which  occurred  in  August.  1878. 

This  action  was  brougiit  shortly  before  the  death  of  Dr.  Beach  for 
the  last  installment  of  the  subscription,  $666.  After  his  death,  his 
heirs  were  made  parties,  under  a  stipulation,  and  defended  theaction. 

In  the  circuit  court,  judgment  was  rendered  for  the  unpaid  one- 
third  of  the  subscription,  and  costs.  On  appeal  to  the  Appellate  Court, 
that  judgment  was  affirmed.     The  defendants  appeal  to  this  court. 

The  subscription  made  by  Dr.  Beach  was,  in  its  nature,  a  mere  offer 
to  pay  that  amount  of  money  to  the  church  upon  the  condition  therein 
expressed. 

There  is  nothing  in  the  record  tending  to  show  that  the  church,  in 
this  case,  took  any  action,  vipon  the  faith  of  this  subscription,  until 
after  Dr.  Beach  was  adjudged  insane,  or  that  the  church  paid  money, 
or  incurred  any  liability.  His  insanity,  by  operation  of  law,  was  a 
revocation  of  the  offer.  In  Pratt,  Administratrix,  etc.,  v.  Trustees 
of  the  Baptist  Society  of  Elgin,  93  111.  475,  34  Am.  Rep.  187,  this  court 
said,  in  relation  to  such  a  subscription :  "The  promise,  in  such  case, 
stands  as  a  mere  oft'er,  and  may,  by  necessary  implication,  be  revoked 
at  any  time  before  it  is  acted  upon.  It  is  the  expending  of  money,  etc., 
or  incurring  of  legal  liability  on  the  faith  of  a  promise,  which  gives 
the  right  of  action,  and  without  which  there  is  no  right  of  action. 
Until  acted  upon,  there  is  no  mutuality,  and,  being  only  an  oft'er,  and 
susceptible  of  revocation  at  any  time  before  being  acted  upon,  it  fol- 
lows that  the  death  of  the  promisor,  before  the  oft'er  is  acted  upon,  is 
a  revocation  of  the  oft'er.  '■■•  '■'  *  The  continuance  of  an  offer  is 
in  the  nature  of  its  constant  repetition,  which,  of  course,  necessarily 
requires  some  one  capable  of  making  a  repetition.  Obviously,  this 
can  be  no  more  be  done  by  a  dead  man  than  a  contract  can,  in  the  first 
instance,  be  made  by  a  dead  man." 

The  paper  signed  by  Dr.  Beach  was  of  such  a  nature  that  no  bind- 
ing contract  sprung  therefrom  until  the  church  had  accepted  the  same 
by  incurring  some  legal  liability,  or  expending  money  upon  the  faith 
of  it.     There  being  no  binding  contract  upon  Dr.  Beach  at  the  time 


44  CONTRACTS  (Part  1 

his  conservators  made  the  payments,  they  had  no  lawful  authority  to 
make  the  same,  and  the  estate  of  Dr.  Beach  was  not  bound  thereby. 

The  judgment  of  the  Appellate  Court  in  this  case  must  be  reversed 
and  the  cause  remanded.    Judgment  reversed. 


(b)  REVOCATION    BY    THE    OFFEROR 

There  are  four  independent  questions  pertaining  to  the  express 
revocation  of  offers :  (1)  Does  the  offeror  possess  the  legal  po\ver 
and  legal  privilege  of  revoking?  (2)  What  language  or  conduct 
will  amount  to  a  revocation?  (3)  Must  the  intention  to  revoke  be 
communicated  to  the  offeree,  and  what  amounts  to  a  communica- 
tion? (4)  Must  the  communication  be  transmitted  by  the  oft'eror, 
or  may  it  come  through  indirect  channels? 

(1)  In  answer  to  the  first  question  it  may  be  definitely  stated 
that  an  oft"eror  may  revoke  his  offer.  He  has  the  legal  powder  to 
do  so;  that  is,  he  may  make  it  impossible  for  the  offeree  thereafter 
to  accept.  An  attempted  acceptance  would  be  a  nullity,  or  at  most 
a  new  offer  to  the  former  oft'eror.  The  power  to  revoke  may  be 
exercised,  everr  though  the  offeror  has  promised  to  hold  the  offer 
open  for  a  specified  period  of  time  which  has  not  yet  elapsed.  It 
may  strike  one  as  somewdiat  unjust  for  the  law  to  permit  a  person 
who  has,  for  example,  oft'ered  to  sell  certain  land  to  the  offeree,  and 
has  told  the  oft'eree  that  he  would  give  him  ten  days  in  which  to 
make  up  his  mind,  to  revoke  his  offer  before  the  ten  days  are  up ; 
but  the  law  does  permit  this  to  be  done.  There  is  an  apparent  ex- 
ception, where  the  offeree  has  paid  the  oft'eror  a  sum  of  money 
for  the  privilege  of  accepting  or  rejecting  within  a  specified  time — 
the  case  of  an  option  contract.  Even  in  this  case  the  offeror  may, 
in  most  cases,  effectually  terminate  the  offeree's  power  to  accept, 
remaining  liable  in  damages  to  the  offeree  for  having  done  so. 
Not  only  does  the  oft'eror  have  the  legal  power  to  revoke,  but  he 
has  the  legal  privilege  of  revoking ;  that  is,  the  offeror  will  not  be 
compelled  to  respond  in  damages  to  the  offeree  for  having  re- 
voked. 

Certainly,  what  is  stated  above  is  true  with  respect  to  bilateral 
contracts;  that  is,  that  kind  of  contract  where  there  is  a  promise 
for  a  promise,  such  as  a  promise  to  convey  land,  given  in  exchange 
for  a  promise  to  pay  the  price  for  the  land. 

But,  should  there  be  the  same  power  to  revoke  an  offer  which 
contemplates  the  creation  of  a  unilateral  contract?  The  under- 
lying theory  which  enables  an  offeror  to  revoke  is  that  one  party 
cannot,  and,  in  justice,  should  not,  be  bound,  unless  the  other  is 
bound,  before  he  accepts,  and  therefore  the  oft'eror  is  not  bound. 
If  he  is  not  bound,  it  follows  that  he  should  be  able  to  destroy  his 
offer.  But  how  does  this  work  in  connection  with  unilateral  con- 
tracts? A.  offers  to  pay  B.  $25,  if  B.  will  plow  his  field.  Note  that 
B.  is  not  asked  to  promise  to  plow  the  field.  B.  may  accept  only 
by  performance,  and  his  acceptance  is  not  complete  until  the  work 


Ch.  1)  OFFER  AND   ACCEPTANCE  45 

is  finished.  B.  walks  away,  debating  the  matter  in  his  mind.  He 
is  not  bound.  He  decides  to  plow  the  field  and  to  that  end  begins 
the  work.  After  plowing  half  an  hour  he  decides  to  quit  and 
does  so.  May  A.  sue  B.  for  breach  of  contract?  Clearly  not, 
because  B.  has  never  promised  to  plow  the  field.  Suppose  the 
situation  be  reversed,  and  that  B.  begins  to  plow  the  field,  and 
when  B.  is  half  finished  A.  approaches  B.  and  says:  "B.,  I  re- 
voke my  ofTer.  Get  off  the  land."  May  B.  sue  A.  for  breach  of  con- 
tract? It  would  seem  not,  because  at  that  moment  B.  could  have 
stopped  work,  and  A.  would  have  had  no  right  of  action  against  him. 
Since  B.  was  not  bound.  A.  was  not  bound,  and  therefore  A.  could 
revoke.  The  injustice  to  B.,  many  people  would  say,  was  apparent; 
but  still  a  contrary  holding  would  probably  get  us  into  greater 
dii^culty.  In  this  particular  case,  however,  B.  does  obtain  a  sub- 
stantial measure  of  protection.  While  B.  cannot  sue  A.  on  A.'s 
promise,  there  is  another  principle  of  law  under  which  B.  could  re- 
cover from  A.  the  reasonable  value  to  A.  of  the  services  rendered  by 
B.  The  law  calls  this  a  quasi  contract.  It  is  not  a  contract,  and, 
for  that  reason,  it  is  called  an  obligation  "just  as  if  it  were  a  con- 
tract." 

The  law  imposes  this  obligation  irrespective  of  the  intention  of 
the  parties.  Offer  and  acceptance  form  no  part  of  it.  But  this 
quasi  contractual  obligation  cannot  be  imposed  upon  a  person  un- 
less that  person  has  been  enriched  by  the  acts  of  the  plaintiff; 
that  is,  obtained  some  pecuniary  or  proprietary  gain.  This  obliga- 
tion is  not  imposed  because  the  plaintiff  has  sustained  a  detriment. 
In  the  above  case,  A.  has  clearly  obtained  something  of  value,  and 
the  law  will  compel  him  to  pay  a  reasonable  sum,  not  necessarily 
at  the  contract  rate,  for  what  he  has  received.  There  will  be  many 
cases  of  unilateral  contracts  where  the  offeree  has  incurred  ex- 
pense and  expended  considerable  effort  with  no  corresponding  gain 
to  the  defendant.  A  revocation  in  this  case  leaves  the  offeree 
without  any  remedy.  Suppose  there  be  an  oft'er  of  reward  for  the 
apprehension  of  a  criminal,  and  a  detective  agency  begins  work  on 
the  case.  Agents  are  sent  to  various  parts  of  the  country.  Great 
expense  may  be  incurred.  The  offer  is  revoked.  Is  there  any 
remedy  against  the  oft'eror?  Most  of  the  cases  have  held  that  the 
offeror  may  still  revoke,  even  though  the  offeree  has  partly  per- 
formed. It  is  perhaps  possible  to  say  that  the  oft"eror  makes  two 
offers:  (1)  To  pay  for  the  performance  of  the  specified  act;  and 
(2)  by  implication,  an  offer  to  hold  the  first  offer  open  a  reason- 
able time,  which  second  offer  is  actually  accepted  by  the  oft"eree's 
beginning  his  performance.  This  result  would  be  more  just  to  the 
parties.  The  oft'eror  would  not  be  bound  to  pay  for  a  partial  per- 
formance ;  he  would  simply  be  bound  not  to  revoke  the  main  offer 
after  performance  started.  Professor  Corbin  suggests  that  this 
result  could  be  brought  about  by  the  adoption  of  the  following  rule: 
"Where  an  offer  has  been  made  so  that  it  can  be  accepted  only  by 
performing  a  series  of  acts  requiring  an  appreciable  length  of  time 


46  coxTKACTS  (Part  1 

and  effort  or  expense,  such  offer  shall  be  irrevocable  after  the  oft'eree 
has  begun  the  performance  of  the  requested  acts,  unless  the  offeror 
expressly  reserved  the  power  of  revocation."  ^ 


BUTCHERS'  ADVOCATE  CO.  v.  EERKOF  et  al. 

(Supreme  Court  of  New  York,  Appellate  Division,  1916.     94  Misc.  Rep.  299,. 

15S  N.  Y.  Supp.  160.) 

Action  by  the  Butchers'  Advocate  Company  against  Jacob  W.  Berkot 
and  another.  From  a  judgment  for  plaintiff,  and  an  order  denying 
defendants'  motion  for  new  trial,  defendants  appeal. 

Lehman,  J.  The  defendants,  on  or  about  August  1,  1914,  signed 
a  paper  which  reads  as  follows: 

"Brooklyn,  N.  Y.,  August  1,  1914. 

"Undersigned  hereby  authorizes  the  publishers  of  the  Butchers'  Ad- 
vocate to  insert  our  ad.  to  occupy  ^4  P'lge  in  Butchers'  Advocate  for 
one  year  and  thereafter  until  publishers  have  order  to  discontinue  the 
ad.,  for  which  we  agree  to  pay  $8.00  (eight  dollars)  per  insertion. 

"Safety  Auto  Trolley, 

"J.  W.  Berkof." 

The  plaintiff'  proceeded  under  this  authorization  to  publish  advertise- 
ments for  the  defendant.  Some  time  in  September  the  defendants 
notified  the  plaintiff  to  discontinue  the  advertisement,  but  the  plaintiff 
nevertheless  continued  to  insert  same  in  each  issue,  and  has  recovered 
a  judgment  for  the  sum  of  $416,  the  price  named  for  the  insertion 
of  the  advertisement  for  one  year. 

This  judgment  is  in  direct  conflict  with  the  decision  of  this  court  in 
the  case  of  White  v.  Allen  Kingston  Co.,  69  iMisc.  Rep.  627,  126  N.  Y. 
Supp.  150.  In  that  case  the  defendant  on  April  6.  1909,  signed  a  paper 
which  is  essentially  in  the  same  terms  and  must  be  given  the  same 
force  as  the  paper  signed  b}''  this  defendant.  The  plaintiff  in  that  case 
proceeded  to  publish  the  advertisement,  but  Avas  notified,  on  June  23, 
1909,  to  discontinue  the  advertisement.  Nevertheless  the  plaintiff"  con- 
tinued the  publication  thereafter.     The  court  there  held: 

"The  club  never  obligated  itself  to  publish  the  advertisement;  and 
in  the  absence  of  an  obligation  on  its  part,  there  being  no  other  con- 
sideration shown,  the  so-called  contract  is  wanting  in  mutuality  and 
is  not  enforceable.  To  constitute  an  agreement  there  must  be  a  propo- 
sition by  the  one  party  and  acceptance  by  the  other;  and,  when  the 
parties  are  not  together,  the  acceptance  must  be  manifested  by  some 
appropriate  act.  At  most  the  printed  order  was  a  unilateral  contract, 
or  a  mere  offer,  which  could  be  withdrawn  by  the  defendant.  In  so 
far  as  the  defendant's  order  had  been  executed  up  to  June  23,  1909, 
the  defendant  was.  liable ;  but,  in  so  far  as  the  order  was  executory 
and  unfulfilled  at  the  time  of  the  notification  to  suspend  the  publica- 
tion of  the  advertisement,  the  liability  of  the  defendant  to  pay  for  fu- 
ture publications  ceased." 

If  that  case  was  correctly  decided,  then  there  can  be  no  doubt  but 
that  the  trial  justice  erroneously  awarded  a  judgment  for  insertions 
after  the  time  when  the  defendant  notified  the  plaintiff  to  discontinue 
the  publication. 

3  "Offer  and  Acceptance,  and  Some  of  the  Resulting  Legal  Relations,"" 
Corbin,  26  Yale  Law  .Journal,  169. 


Ch,  1)  OFFER   AND   ACCEPTANCE  47 

The  plaintiff  does  not  attempt  to  distinguish  that  case  in  any  way, 
but  he  rehes  upon  the  opinion  of  the  Court  of  Appeals  in  the  case  of 
Grossman  v.  Schenker,  206  N.  Y.  466,  100  N.  E.  39,  which  was  decided 
after  the  case  of  White  v.  Allen  Kingston  Motor  Car  Co.,  supra.  The 
Court  of  Appeals  in  that  case  stated : 

"Even  when  the  obligation  of  a  unilateral  promise  is  suspended  for 
want  of  mutuality  at  its  inception,  still,  upon  performance  by  the 
promisee,  a  consideration  arises  'which  relates  back  to  the  making  of 
the  promise,  and  it  becomes  obligatory.'  *  *  *  A  contract  in- 
cludes, not  only  what  the  parties  said,  but  also  what  is  necessarily  to  be 
implied  from  what  they  said.  *  *  *  'What  is  implied  in  an  ex- 
press contract  is  as  much  a  part  of  it  as  what  is  expressed'  *  *  * 
for  'the  law  is  a  silent  factor  in  every  contract.'  " 

These  statements  in  the  opinion  of  the  Court  of  Appeals  obviously 
do  not  lay  down  any  new  rule  of  law,  but  are  statements  of  the  well- 
established  rules  which  that  court  found  applicable  to  the  case  before 
them.  They  are  not,  however,  applicable  to  the  case  before  us.  ^  In 
this  case  the  defendant  in  the  written  agreement  merely  authorizes 
the  plaintiff  to  publish  his  advertisement  for  one  year.  The  defend- 
ant at  that  time  did  not  expressly  nor  impliedly  in  any  form  agree 
to  do  anything.  It  was  evidently  a  mere  offer  or  unilateral  promise 
on  the  part  of  the  defendant,  which  could  ripen  into  a  mutual  contract 
only  when  the  offer  was  accepted  and  the  acceptance  evidenced  either 
by  an  express  promise  to  perform  or  by  performance.  Neither  of 
these  elements  exist  in  the  present  case.     *     *     * 

In  this  case,  as 'well  as  in  the  case  of  White  v.  Allen  Kingston  Co., 
supra,  the  offer  was  merely  to  pay  a  certain  sum  per  insertion,  which 
was  authorized  for  one  year,  and  in  such  cases  the  past  performance 
implied  only  an  acceptance  of  the  offer  to  pay  according  to  the  in- 
sertions. It  follows  that  the  plaintiff  is  entitled  to  no  recovery  for 
insertions  made  after  the  defendants  had  notified  it  to  cease  publi- 
cation. 

Judgment  should  therefore  be  reversed.     *     *     * 


An  apparent  exception  to  the  rule  that  an  offer  may  be  revoked 
arises  in  the  case  of  options.  If  (1)  A.  makes  an  offer  to  B.,  and 
(2)  offers  to  hold  the  offer  open  for  a  specified  time  if  B.  will  pay 

A.  a  specified  sum,  in  this  case  offer  (1)  cannot  be  revoked,  for 
offer  (2)  has  been  accepted,  thus  creating  a  contract.  If  A.  at- 
tempted to  revoke  the  first  offer,  A.  would  break  his  contract  with 

B.  The  next  case,  contains  a  discussion  of  option  contracts,  al- 
though, in  this  particular  case,  there  was  no  attempt  even  to  revoke. 


IDE  V.  L.EISBR. 
(Supreme  Court  of  Montana,  1S90.  10  Mont.  5,  24  Pac.  695,  24  Am.  St.  Rep.  17.) 
The  plaintiff  pleads  the  following  instrument  in  writing :  "For  and 
in  consideration  of  one  dollar  ($1.00)  to  me  in  hand  paid,  I  hereby 
agree  to  give  Frank  L.  Ide  the  sole  right  and  option  to  purchase  from 
me  at  any  time  within  ten  days  from  the  date  of  this  instrument  the 
following  described  property,  to-wit  (describing  the  property).  I  fur- 
thermore agree  to  furnish  a  good  and  sufficient  deed  of  conveyance  of 


48  CONTRACTS  (Part  1 

said  property,  and  of  the  whole  thereof.  The  price  of  said  property 
to  be  one  thousand  dollars  ($1,000).  Helena,  Montana,  September  24, 
1889.  J.  J.  Leiser."  "I  hereby  extend  the  above  option  for  a  period 
of  ten  days  from  this  date.  Helena,  Oct.  3,  1889.  J.  J.  Leiser."  The 
complaint  further  sets  forth  that  on  October  11,  1889,  the  plaintiff 
tendered  defendant  $1,000.  and  demanded  a  conveyance  of  the  prop- 
erty. That  defendant  refused  to  give  the  conveyance  and  still  refuses. 
That  plaintiff  is  still  willing  to  pay  said  $1,000.  Plaintiff  deinands 
judgment  that  defendant  make  conveyance  to  him  of  the  real  estate 
described.  The  defendant  demurred  to  the  complaint  on  the  ground 
that  it  did  not  set  forth  facts  sufficient  to  constitute  a  cause  of  action. 
Demurrer  was  sustained,  and  judgment  entered  for  the  defendant. 
Plaintiff  appeals  from  the  judgment.  The  question  raised  by  the 
record,  and  discussed  by  counsel,  is  whether  the  instrument  in  writing 
pleaded,  and  the  tender  of  $1,000  by  plaintiff  to  defendant,  October 
11,  1889,  are  sufficient  to  entitle  plaintiff  to  a  conveyance  as  demanded. 
No  tender  of  money  or  demand  for  a  deed  was  made  during  the 
10  days  limited  in  the  original  instrument;  but  w-ere  made  during  the 
period  defined  in  the  extension  indorsed  on  the  instrument. 

De  Witt,  J.  (after  stating  the  facts  as  above).  For  convenience  of 
terms  w^e  will  designate  the  original  document  pleaded  as  the  first  in- 
strument, and  the  option  therein  as  the  first  option,  and  the  indorse- 
ment extending  the  time  as  the  second  instrument  and  option.  We 
will  not  discuss  the  validity  of  the  first  instrument  as  a  foundation 
for  an  action  for  specific  performance.  We  will  assume,  for  the  pur- 
pose of  this  decison,  that  it  is  good.  The  option  assumed  to  be  granted 
therein  was  not  exercised  within  the  time  limited,  and  expired  October 
4.  The  consideration  for  this  option  was  one  dollar,  whether  paid  by 
Ide  to  Leiser,  or  still  a  debt  owing  from  Ide  to  Leiser.  is  immaterial. 
That  consideration  was  exhausted  by  the  expiration  of  the  option  on 
October  4.  Ide  paid  his  money,  the  one  dollar,  and  received  his  goods, 
the  option.  Leiser  took  the  one  dollar,  and  delivered  a  consideration 
therefor,  viz.,  the  option.  The  transaction  was  complete,  and  the 
terms  performed  by  each  party  to  the.  agreement. 

We  come  to  the  second  instrument  and  option.  No  consideration 
is  named  therein,  specifically  or  by  reference.  The  consideration  for 
the  first  option  cannot  do  service  for  the  second.  That  consideration 
was  functus  officio  in  the  first  instrument.  A  consideration  determined 
by  the  parties  to  be  the  consideration  for  the  sale  of  one  article  on  one 
day,  and  so  declared  in  writing,  cannot,  in  the  face  of  such  declara- 
tion, be  construed  by  the  court  as  a  consideration  for  the  sale  of 
another  article  on  another  day.  The  first  ten  days'  option  was  a  thing 
of  value,  and  paid  for  as  such.  The  second  was  another  separate  valu- 
able article.  Was  there  any  consideration  for  its  sale?  We  believe  the 
same  definitions  and  distinctions  wall  aid  this  discussion.  There  may 
be  (1)  a  sale  of  lands;  (2)  an  agreement  to  sell  lands;  and  (3)  what 
is  popularly  called  an  "option."  The  first  is  the  actual  transfer  of 
title  from  grantor  to  grantee  by  appropriate  instrument  of  conveyance. 
The  second  is  a  contract  to  be  performed  in  the  future,  and  if  fulfilled 
results  in  a  sale.  It  is  a  preliminary  to  a  sale,  and  is  not  the  sale. 
Breaches,  rescission,  or  release  may  occur  by  which  the  contemplated 
sale  never  takes  place.  The  third,  an  option,  originally  is  neither  a 
sale  nor  an  agreement  to  sell.  It  is  simply  a  contract  by  which  the 
owner  of  property  (real  estate  being  the  species  we  are  now  discussing) 


Ch.  1)  OFFER   AND   ACCEPTANCE  49 

agrees  with  another  person  that  he  shall  have  the  right  to  buy  his 
property,  at  a  fixed  price,  within  a  time  certain.  He  does  not  sell  his 
land;  he  does  not  then  agree  to  sell  it ;  but  he  does  then  sell  something, 
viz.,  the  right  or  privilege  to  buy  at  the  election  or  option  of  the  other 
party.  The  second  party  gets,  in  prsesenti,  not  lands,  or  an  agreement 
that' he  shall  have  lands,  but  he  does  get  something  of  value;  that  is, 
the  right  to  call  for  and  receive  lands  if  he  elects.  The  owner  parts 
with  his  right  to  sell  his  lands,  except  to  the  second  party,  for  a  limited 
period.  The  second  party  receives  this  right,  or  rather,  from  his  point 
of  view,  he  receives  the  right  to  elect  to  buy.  That  which  the  second 
party  receives  is  of  value,  and  in  times  of  rapid  inflations  of  prices, 
perhaps  of  great  value. 

A  contract  must  be  supported  by  a  consideration,  whether  it  be  the 
actual  sale  of  lands,  an  agreement  to  sell  lands,  or  the  actual  sale  of 
the  right  to  demand  the  conveyance  of  lands.  A  present  conveyance  of 
lands'is  an  executed  contract.  An  agreement  to  sell  is  an  executory 
contract.  The  sale  of  an  option  is  an  executed  contract;  that  is  to  say, 
the  lands  are  not  sold;  the  contract  is  not  executed  as  to  them;  but 
the  option  is  as  completely  sold  and  transferred  in  praesenti  as  a  piece 
of  personal  property  instantly  delivered  on  payment  of  the  price. 
Now  this  option,  this  article  of  value  and  of  commerce,  must  have  a 
consideration  to  support  its  sale.  As  it  is  distinct  from  a  sale  of  lands, 
or  an  agreement  to  sell  lands,  so  its  consideration  must  be  distinct; 
although,  if  a  sale  of  the  lands  afterwards  follows  the  option,  the 
consideration  for  the  option  may  be  agreed  to  be  applied,  and  often  is, 
a  part  payment  on  the  price  of  the  land.  But  there  must  be  some  con- 
sideration upon  which  the  finger  may  be  placed,  and  of  which  it  may 
be  said,  "This  was  given  by  the  proposed  vendee  to  the  proposed 
vendor  of  the  lands  as  the  price  for  the  option,  or  privilege  to  pur- 
chase." 

Examine  the  two  options  granted  in  the  cases  before  us.  L.  sold  I. 
an  option  for  ten  days  from  September  24th  for  one  dollar.  He  then 
gives  an  option  for  another  ten  days  from  October  3d,  for  what?  For 
nothing.  L.  transfers  this  option,  this  incorporeal  valuable  something, 
for  nothing.  The  transfer  of  the  option  was  nudum  pactum,  and 
void.  But,  the  point  just  discussed  being  conceded,  appellant  still 
contends  that  this  second  instrument  or  option  was  a  continuing  offer 
to  sell,  at  a  given  price,  and  was  accepted  by  respondent  before  re- 
tracted, and  that  such  acceptance,  evidenced  by,  and  accompanied  with, 
the  tender  of  the  price,  and  demand  for  a  deed,  constitute  an  agree- 
ment to  sell  land,  which  may  be  enforced  in  equity.  We  leave  behind 
now  our  views  of  options,  and  consideration  therefor,  and  meet  a 
wholly  different  proposition. 

Reading  the  two  instruments  together  we  find  that  on  October  3d 
L.  extended  to  I.  an  offer  to  sell  his  lands  at  the  price  of  $1,000.  There 
was  no  consideration  for  the  oft'er,  and  it  could  have  been  nullified  by 
L.  at  any  time  by  withdrawal.  But  it  was  accepted  by  I.,  while  out- 
standing, the  price  tendered,  and  deed  demanded.  It  must  be  plain 
from  the  previous  discussion  that  we  do  not  hold  that  the  offer,  when 
made,  or  at  any  moment  before  acceptance,  was  a  sale  of  lands,  an 
agreement  to  sell  lands,  or  an  option.  But  upon  acceptance  and  ten- 
der was  not  a  contract  completed?  If  one  person  oft'ers  to  another  to 
sell  his  property  for  a  named  price,  and  while  the  oft'er  is  unretracted 
.B.&  B.Bus.Law— 4 


:50  CONTRACTS  (Part  1 

the  other  accepts,  tenders  the  mone}^  and  demands  the  property,  that 
is  a  sale.  The  proposition  is  elementary.  The  property  belongs  to 
the  vendee,  and  the  money  to  the  vendor.  Such  is  precisely  the  situ- 
ation of  the  parties  herein.  L.  offered  to  sell  for  $1,000,  I.  accepted, 
tendered  the  price,  and  demanded  the  property.  Every  element  of  a 
contract  was  present,  parties,  subject-matter,  consideration,  meeting 
of  the  minds,  and  mutuality.  And  as  to  the  matter  of  mutuality  we  are 
now  beyond  the  defective  option.  We  have  simply  an  offer  at  a 
price,  acceptance,  payment  or  tender,  and  demand.  That  this  was  a 
valid  contract  we  cannot  for  a  moment  doubt. 

In  discussing  a  transaction  of  this  nature,  in  Gordon  v.  Darnell,  5 
Colo.  304,  Beck,  C.  J.,  in  one  of  his  clear  opinions,  says:  "Its  legal 
effect  is  .that  of  a  continuing  offer  to  sell,  which  is  capable  of  being 
converted  into  a  valid  contract  by  a  tender  of  the  purchase  money, 
or  performance  of  its  conditions,  whatever  they  may  be,  within  the 
time  stated,  and  before  the  seller  withdraws  the  offer  to  sell."  Lurton, 
J.,  in  Bradford  v.  Foster,  87  Tenn.  8,  9  S.  W.  195,  says:  "Before 
acceptance,  such  an  agreement  can  be  regarded  only  as  an  offer  in 
writing  to  sell  upon  specified  terms  the  lands  referred  to.  Such  an 
offer,  if  based  upon  no  consideration,  could  be  withdrawn  by  the  seller 
at  any  time  before  acceptance.  It  is  the  acceptance  while  outstanding 
which  gives  an  option,  not  given  upon  a  consideration,  vitality."  In 
Railroad  Co.  v.  Bartlett,  3  Cush.  (Mass.)  227,  we  find  the  following, 
by  Fletcher,  J.:  "In  the  present  case,  though  the  writing  signed  by 
the  defendants  was  but  an  offer,  and  an  offer  that  might  be  revoked, 
vet  while  it  remained  in  force  and  unrevoked  it  was  a  continuing  offer 
during  the  time  hmited  for  acceptance,  and  during  the  whole  of  thar 
time  it  was  an  offer  every  instant :  but  as  soon  as  it  was  accepted  it 
ceased  to  be  an  offer  merely,  and  then  ripened  into  a  contract."  This 
case  readily  distinguishes  Bean  v.  Burbank,  16  Me.  458,  33  Am.  Dec. 
681,  which  may  seem  to  hold  a  contrary  doctrine.  It  also  repudiates 
Cooke  V.  Oxley,  3  Term  R.  653,  and  claims  that  the  English  case  is 
said  to  be  inaccurately  reported,  and,  in  any  event,  entirely  disregard- 
ed in  the  later  decisions. 

We  cannot  but  conclude  that  the  transaction  in  the  case  at  bar  con- 
stituted a  valid  contract,  upon  which  specific  performance  may  be  had. 
*  *  *  'pj^g  judgment  of  the  district  court  is  reversed,  and  the  cause 
is  remanded,  with  directions  to  that  court  to  overrule  the  demurrer. 


(2)  As  regards  the  nature  of  the  language  or  the  conduct  of  the 
offeror,  the  question  whether  it  amounts  to  an  indication  of  an  in- 
tention to  revoke  is  the  same  kind  of  question  raised  in  determin- 
ing whether  certain  words  or  conduct  amount  to  an  offer.  Has 
the  offeror  clearly  manifested  his  desire  to  put  an  end  to  the  out- 
standing offer? 

(3)  The  intention  to  revoke  must  be  communicated.  It  would 
not  be  just  to  permit  an  offeror  to  terminate  an  offer  merely  by 
thinking  that  he  had  done  so.  But  what  is  meant  by  communica- 
tion? Would  the  act  of  mailing  a  letter  be  deemed  a  revocation? 
If  not,  would  the  receipt  of  the  letter  by  the  offeree  be  deemed  a 
communication,  even  though  the  offeree  lost  the  letter  before  he 
had  learned  its  contents?     Suppose  the  offeree  were   away  on  a 


Ch.  1)  OFFER   AND   ACCEl'TANCE  51 

business  trip  and  the  letter  reached  the  office  of  the  offeree,  would 
this  be  a  communication?  It  is  not  altogether  clear  just  what  the 
law  actually  means  by  requiring  a  communication.  Certainly  the 
law  cannot  require  that  the  offeree  be  made  actually  conscious  of 
the  intention  of  the  off'eror  to  revoke.  After  an  offeree  has  re- 
ceived a  letter  and  has  it  in  his  possession,  a  communication  has 
been  made,  even  though  the  letter  subsequently  be  lost  or  throw^n 
away  before  it  was  read.  But  where  the  letter  reaches  the  offeree's 
place  of  business,  he  being  away,  the  case  is  not  so  clear.  Certain- 
ly, from  a  practical  standpoint,  an  offeror  who  desires  to  revoke 
should  use  every  effort  actually  to  communicate  the  intelligence  to 
the  mind  of  the  offeree,  and  thus  ol>viate  the  possibility  of  a  future 
law  suit. 


SHBRWIN  V.   NATIONAL  CASH   REGISTER   CO. 
(Court  of   Appeals  of   Colorado.   1894.     5   Colo.   App.  162,    38   Pac.   392.) 

Action  by  the  National  Cash  Register  Company  against  John  J. 
Sherwin  for  goods  sold  and  delivered.  Judgment  for  plaintiff,  and 
defendant  appeals. 

Thomson,  J.  This  is  a  suit  by  the  appellee  against  the  appellant  to 
recover  the  value  of  a  cash  register  alleged  to  have  been  sold  and  de- 
livered by  the  plaintiff'  to  the  defendant,  at  his  instance  and  request. 

The  following. agreed  statement  was  filed  in  the  cause:  '"''  *  * 
That  on  the  8th  day  of  January,  1890,  one  Walter  McD.  Cool  visited 
the  store  of  defendant,  in  Idaho  Springs,  Colo.,  and  defendant  signed 
and  gave  him  an  order  for  a  cash  register.  '^'-  *  '■'  That  on  the  9th 
day  of  January,  1890,  the  said  defendant  wrote  and  signed  a  letter 
countermanding  or  withdrawing  his  said  order,  and  said  letter  was  on 
said  day  sealed  in  an  envelope  having  a  return  card  printed  on  the  out- 
side thereof,  and  directed  to  the  National  Cash  Register  Co.,  Dayton. 
Ohio,  and  the  postage  thereon  duly  prepaid,  and  then  deposited  in  the 
post  office  at  Idaho  Springs,  Colorado,  in  time  for  the  3  :30  p.  m.  mail 
of  said  day.  '■'  ■''  *  That  on  the  16th  day  of  January,  1890,  the 
])laintift*  shipped  by  freight  to  defendant  a  cash  register  of  the  kind, 
make,  and  description  mentioned  in  the  writing  referred  to  in  para- 
gra])h  three  thereof,  and  the  same  arrived  at  Idaho  Springs.  Colo.,  on  or 
before  two  weeks  from  the  date  of  shipment,  and  defendant  refused 
to  take  or  receive  the  same  from  the  railroad  company.  *  *  *" 
No  further  evidence  was  offered  on  either  side,  and  the  court  rendered 
judgment  against  the  defendant,  upon  the  agreed  statement,  for  $175. 
The  defendant  appealed. 

The  order  given  for  the  register  was  simply  an  oft'er  or  proposal 
which  required  the  acceptance  of  the  plaintiff'  to  constitute  a  contract. 
Until  such  acceptance  there  was  no  meeting  of  minds,  or  mutuality,  in 
respect  to  the  terms  proposed  or  the  subject-matter  of  the  contract. 
A  proposal,  while  it  remains  unaccepted,  is  of  no  binding  force,  and  is 
completely  under  the  control  of  the  person  who  makes  it.  At  anv 
time  before  acceptance,  he  may  withdraw  it,  and,  when  so  withdrawn, 
it  is  a  nullity ;  but,  to  render  the  withdrawal  effective,  it  must  be 
brought  to  the  knowledge  of  the  other  party  before  acceptance.  *  *  * 
We  agree  with  counsel  that  the  notice  of  the  withdrawal  of  an  off'er 


52  CONTRACTS  (Part  1 

must  be  actual,  and  must  be  received  before  the  ofifer  is  accepted ;  but 
we  think  the  admissions  concerning  the  posting  of  the  defendant's  let- 
ter are  at  least  prima  facie  evidence  of  actual  notice.  The  letter  v^'as 
deposited  in  the  post  office  on  January  9th,  in  time  for  the  out-going 
mail,  and  the  order  was  given  on  the  8th,  after  the  departure  of  the 
mail,  so  that  the  two  probably  went  out  together,  and  were  received 
at  the  same  time.  At  all  events,  the  letter  was  posted  in  time  to  have 
reached  the  plaintiff  one  or  two  days  before  the  date  of  its  letter  of 
acceptance.  The  presumption  is  that  the  letter  of  withdrawal  reached 
its  destination  within  the  time  usually  required  for  the  transmission  of 
letters  from  the  defendant's  to  the  plaintiff's  post  office.  The  pre- 
sumption that  the  letter  was  received  in  due  time  is  subject  to  rebuttal 
by  evidence  that  it  was  not  in  fact  received.  No  attempt  at  rebuttal 
was  made ;  and,  in  the  absence  of  rebutting  evidence,  the  presumption 
became,  for  the  purposes  of  the  case,  conclusive.     *     *     * 

In  this  case  the  presumption  of  the  receipt  of  the  letter  is  strength- 
ened by  the  fact  that  it  was  never  returned  to  the  defendant,  either 
in  obedience  to  the  direction  of  the  return  card  on  the  envelope,  or 
through  the  dead-letter  office.  There  was  ample  time  for  its  return 
between  the  date  of  its  posting  and  the  date  of  the  agreed  statement, 
and  the  presumption  also  is  that  it  would  have  been  returned  if  it 
had  not  been  delivered.  Upon  the  admitted  facts,  the  judgment  should 
have  been  for  the  defendant.  Having  been  given  otherwise,  it  must 
be  reversed. 


(4)  Suppose  A.  offers  to  sell  land  to  B.  and  to  keep  the  offer  open 
ten  days.  Two  days  after  the  making  of  the  offer,  A.  deeds  the  land 
to  C.  D.,  a  bystander,  knowing  of  the  prior  offer  to  B.,  goes  and 
tells  B.  of  the  sale  to  C.  Does  the  knowledge  thus  obtained  by 
B.  of  the  sale  to  C.  constitute  a  communication  of  the  revocation  of 
A.'s  offer?  Does  the  knowledge  thus  obtained  by  B.  from  D. 
amount  to  a  communication?  Could  B.,  by  manifesting  his  inten- 
tion to  accept,  create  a  contract  between  himself  and  A.?  The 
courts  hold  that  the  offer  is  revoked,  although  this  result  is  open 
to  criticism.  It  would  be  easier  to  support  this  result  if  the  law 
merely  required  notice  to  the  oft'eree  of  the  intention  to  revoke, 
instead  of  apparently  requiring  communication,  because  the  word 
"notice"  does  not  so  clearly  connote  that  the  information  should 
be  started  on  its  way  to  the  offeree  by  the  oft'eror,  as  does  the 
word  "communicate." 


(c)  RE,TECTIOX  BY  THE  OFFEREE 

(1)  What  is  the  nature  of  the  subject-matter  of  a  rejection?  (2) 
When  will  the  intention  to  reject  take  eft'ect?  The  subject-mat- 
ter of  a  rejection  must  reveal  an  unequivocal  intention  of  the  offeree 
of  refusing  the  oft'er.  Language  or  conduct  which  shows  that  he 
does  not  care  to  enter  into  that  kind  of  bargain  is  a  rejection. 
But  this  does  not  mean  that  any  further  discussion  between  offeror 
and  oft'eree  concerning  the  proposed  transaction  will  operate  as  a 
rejection.    However,  an  offeree  should  realize  strongly  that  a  mani- 


Ch.  1)  OFFKR  AND   ACCEPTANCE  53 

festation  of  a  present  unwillingness  to  close  the  deal  coupled  with 
any  discussion  looking  to  a  modification  of  the  terms  of  the  offer 
is  very  likely  to  be  regarded  as  a  rejection.  If  an  offer  has  been 
made,  and  the  offeree  is  really  interested,  and  if  he  fears  that  it  is 
likely  to  be  withdrawn  at  any  instant,  further  discussion  stimulated 
by  him  probably  will  be  a  rejection.  As  a  matter  of  practical  busi- 
ness, when  a  proposed  transaction  is  being  discussed,  the  probabili- 
ties are  that  there  are  numerous  offers,  numerous  rejections,  and 
counter  offers.  It  is  very  difficult  to  ascertain,  out  of  a  lengthy 
period  of  negotiation,  which  of  the  parties  made  the  final  offer,  if 
one  was  made,  because  many  of  them  have  been  rejected  during  the 
course  of  the  discussion.  A  counter  proposal  is  a  rejection;  so, 
also,  is  an  attempted  acceptance,  varying  from  the  terms  of  the 
offer. 

When  .does  an  intention  manifested  by  the  offeree  take  effect? 
When  the  evidence  of  the  intention  to  reject  is  sent  by  mail,  is 
the  offer  rejected  at  the  time  when  the  letter  is  deposited  in  the 
mails,  or  at  the  time  when  the  letter  is  received?  This  is  a  diffi- 
cult question,  and  it  is  not  certain  what  the  law  is.  If  the  letter  of 
rejection  is  like  an  acceptance,  the  intention  to  reject  would  take 
effect  when  the  letter  was  mailed.  On  the  contrary,  if  it  is  like  a 
revocation  from  the  offeror,  then  the  letter  must  be  received  by 
the  offeror  before  the  offer  is  rejected.  The  case  could  arise  in 
the  following  way :  If  the  offeree  deposits  in  the  mails  a  letter  of 
rejection  at  10  o'clock  in  the  morning,  and  at  11  o'clock  telegraphs 
an  acceptance,  is  there  a  contract?  There  would  be,  if  the  rejection 
did  not  become  operative,  as  such,  until  received.  In  this  case, 
justice  would  seem  to  call  for  the  holding  that  there  was  a  con- 
tract, for  the  contrary  result  would  enable  the  off'eree  to  go  back  on 
his  bargain,  under  circumstances  where  the  offeror,  who,  having 
actually  received  the  acceptance  before  he  learned  of  the  rejection, 
would  feel  justified  in  assuming  that  there  was  a  contract. 


INIINNEAPOLIS  &  ST.  L.  RY.  v.  COLUMBUS  ROLLING  MILL. 

(Supreme  Court  of  the  United   States.  18S0.     119  U.  S.   149,  7  Sup.  Ct.  IG?^, 

?,0  L.  Ed.  376.) 

This  was  an  action  by  a  railroad  corporation  established  at  Minneap- 
olis in  the  state  of  Minnesota  against  a  manufacturing  corporation  es- 
tablished at  Columbus  in  the  state  of  Ohio.  The  petition  alleged  that 
on  December  19,  1879,  the  parties  made  a  contract  by  which  the  plain- 
tiff agreed  to  buy  of  the  defendant  and  the  defendant  sold  to  the 
plaintiff,  two  thousand  tons  of  iron  rails  of  the  weight  of  fifty  pounds 
per  yard,  at  the  price  of  fifty-four  dollars  per  ton  gross,  to  be  deliv- 
ered free  on  board  cars  at  the  defendant's  rolling  mill  in  the  month  of 
March,  1880,  and  to  be  paid  for  by  the  plaintiff  in  cash  when  so  de- 
livered. The  answer  denied  the  making  of  the  contract.  It  was  ad- 
mitted at  the  trial  that  the  following  letters  and  telegrams  were  sent 
at  their  dates,  and  were  received  in  due  course,  by  the  parties,  through 
their  agents : 


54  CONTRACTS  (Part  1 

December  5,  1879.  Letter  from  plaintiff  to  defendant:  "Please 
quote  me  prices  for  500  to  3000  tons  50  lb.  steel  rails,  and  for  200O 
to  5000  tons  50  lb.  iron  rails,  March  1880  delivery." 

December  8,  1879.  Letter  from  defendant  to  plaintiff :  "Your  favor 
of  the  5th  inst.  at  hand.  We  do  not  make  steel  rails.  For  iron  rails, 
we  will  sell  2000  to  5000  tons  of  50  lb.  rails  for  fifty-four  ($54.00) 
dollars  per  gross  ton  for  spot  cash,  f.  o.  b.  cars  at  our  mill,  March 
delivery.  If  our  oft'er  is  accepted,  shall  expect  to  be  notified  of  same 
prior  to  Dec.  20th,  1879." 

December  16,  1879.  Telegram  from  plaintiff  to  defendant :  "Please 
enter  our  order  for  twelve  hundred  tons  rails,  March  delivery,  as  per 
3-our  favor  of  the  eighth.     Please  reply." 

December  16,  1879.  Letter  from  plaintiff  to  defendant:  "Yours 
of  the  8th  came  duly  to  hand.  I  telegraphed  you  today  to  enter  our 
order  for  twelve  hundred  ( 1200)  tons  50  lb.  iron  rails  for  next  March 
delivery,  at  fifty-four  dollars  ($54.00)  f.  o.  b.  cars  at  your  mill. 
Please  send  contract.     *     *     *" 

December  18,  1879.  Telegram  from  defendant  to  plaintiff,  received 
same  day :    "We  cannot  book  vour  order  at  present  at  that  price." 

December  19,  1879.  Telegram  from  plaintiff  to  defendant:  "Please 
enter  an  order  for  two  thousand  tons  rails,  as  per  your  letter  of  the 
eighth.     Please  forward  written  contract.     Reply." 

'December  22,  1879.  Telegram  from  plaintiff  to  defendant:  "Did 
you  enter  my  order  for  two  thousand  tons  rails,  as  per  my  telegram 
of  December  nineteenth?     Answer." 

After  repeated  similar  inquiries  by  the  plaintiff,  the  defendant,  on 
January  19,  1880,  denied  the  existence  of  any  contract  between  the 
parties. 

The  jury  returned  a  verdict  for  the  defendant,  under  instructions 
which  need  not  be  particularly  stated ;  and  the  plaintiff  alleged  excep- 
tions, and  sued  out  this  writ  of  error. 

Gray,  J.  The  rules  of  law  which  govern  this  case  are  well  settled. 
As  no  contract  is  complete  without  the  mutual  assent  of  the  parties, 
an  offer  to  sell  imposes  no  obligation  until  it  is  accepted  according  tu 
its  terms.  So  long  as  the  offer  has  been  neither  accepted  nor  rejected, 
the  negotiation  remains  open,  and  imposes  no  obligation  upon  either 
party;  the  one  may  decline  to  accept,  or  the  other  may  withdraw  his 
oft'er;  and  either  rejection  or  withdrawal  leaves  the  matter  as  if  no 
oft'er  had  ever  been  made.  A  proposal  to  accept,  or  an  acceptance, 
upon  terms  varying  from  those  offered,  is  a  rejection  of  the  oft'er,  and 
puts  an  end  to  the  negotiation,  unless  the  party  who  made  the  original 
offer  renews  it,  or  assents  to  the  modification  suggested.  The  other 
party,  having  once  rejected  the  offer,  cannot  afterwards  revive  it  by 
tendering  an  acceptance  of  it.  *  -*  '■'  If  the  offer  does  not  limit 
the  time  for  its  acceptance,  it  must  be  accepted  within  a  reasonable 
time.  If  it  does,  it  may,  at  any  time  within  the  limit  and  so  long  as  it 
remains  open,  be  accepted  or  rejected  by  the  party  to  whom,  or  be  with- 
drawn by  the  party  by  whom.,  it  was  made.     *     *     * 

The  defendant,  by  the  letter  of  December  8.  oft'ered  to  sell  to  the 
plaintiff  two  thousand  to  five  thousand  tons  of  iron  rails  on  certain 
terms  specified,  and  added  that  if  the  offer  was  accepted  the  defendant 
would  expect  to  be  notified  prior  to  December  20.  This  offer,  while 
it  remained  open,  without  having  been  rejected  by  the  plaintiff  or  re- 
voked bv  the  defendant,  would  authorize  the  plaintiff  to  take  at  his 


Ch.  1)  OFFER  AND   ACCEPTANCE  55 

election  any  number  of  tons  not  less  than  two  thousand  nor  more  than 
five  thousand,  on  the  terms  specified.  The  otTer,  while  unrevoked, 
might  be  accepted  or  rejected  by  the  plaintiff  at  any  time  before  De- 
cember 20.  Instead  of  accepting  the  offer  made,  the  plaintiff,  on  De- 
cember 16,  by  telegram  and  letter,  referring  to  the  defendant's  letter 
of  December  8,  directed  the  defendant  to  enter  an  order  for  twelve  hun- 
dred tons  on  the  same  terms.  The  mention  in  both  telegram  and  let- 
ter, of  the  date  and  the  terms  of  the  defendant's  original  order,  shows 
that  the  plaintift''s  order  was  not  an  independent  proposal,  but  an  an- 
swer to  the  defendant's  offer,  a  qualified  acceptance  of  that  offer,  vary- 
ing the  number  of  tons,  and  therefore  in  law  a  rejection  of  the  offer. 
On  December  18,  the  defendant  by  telegram  declined  to  fulfill  the  plain- 
tiff's order.  The  negotiation  between  the  parties  was  thus  closed,  and 
the  plaintiff  could  not  afterwards  fall  back  on  the  defendant's  original 
offer.  The  plaintift''s  attempt  to  do  so,  by  the  telegram  of  December 
19,  was  therefore  ineft'ectual  and  created  no  rights  against  the  de- 
fendnnt.  *  *  * 
Judgment  affirmed. 


SECTION  4.— ACCEPTANCE— TIME  OF  TAKING  EFFECT 


LUCAS  V.  WESTERN  UNION  TELEGRAPH  CO. 

(Supreme  Court  of  Iowa.  1906.     131  Iowa.  6G9,  109  N.  W.  191, 
6  L.  R.  A.  [N.  S.]  1016.) 

Action  for  damages  occasioned  by  delay  in  transmitting  a  telegram. 
Plaintiff  sought  to  recover  profits  he  would  have  made  in  an  exchange 
of  real  estate  but  for  the  negligence  of  the  defendant  in  failing  prompt- 
ly to  transmit  a  telegram.  The  telegram  in  question  was  an  attempted 
acceptance  of  an  offer  by  mail  to  make  a  certain  trade  in  real  estate,  , 
the  offeror  saying,  "I  will  have  to  know  at  once."  The  telegram  was 
handed  to  the  telegraph  company  on  the  morning  following  the  evening 
of  the  receipt  of  the  offer  by  mail,  and,  through  the  negligence  of  the 
company's  servants,  was  not  delivered  to  the  offeror  until  about  six 
p.  m.  of  that  day.  The  defendant  company  asserted  that  there  was  no 
loss  to  the  plaintiff,  because  plaintiff's  acceptance  reached  the  offeror 
in  time  to  complete  the  contract,  and  because,  further,  contract  was 
complete  upon  the  delivery  of  the  message  of  acceptance  to  the  tele- 
graph company.    Judgment  below  for  plaintiff. 

Ladd,  J.  *  *  *  Having  sent  the  proposition  by  mail  he  impliedly 
authorized  its  acceptance  through  the  same  agency.  Such  implication 
arises  (1)  when  the  post  is  used  to  make  the  offer  and  no  other  mode 
is  suggested,  and  (2)  when  the  circumstances  are  such  that  it  must 
have  been  within  the  contemplation  of  the  parties  that  the  post  would 
be  used  in  making  the  answer.  *  *  *  The  contract  is  complete  in 
such  a  case  when  the  letter  containing  the  acceptance  is  properly  ad- 
dressed and  deposited  in  the  United  States  mails.  *  *  *  This  is 
on  the  ground  that  the  offeror,  by  depositing  his  letter  in  the  post  of- 
fice, selects  a  common  agency  through  which  to  conduct  the  negotia- 
tions, and  the  delivery  of  the  letter  to  it  is  in  effect  a  delivery  to  the  of- 
feror. Thereafter  the  acceptor  has -no  right  to  the  letter  and  cannot 
withdraw  it  from  the  mails.    Even  if  he  should  succeed  in  doing  so  the 


56  CONTRACTS  (Part  1 

withdrawal  will  not  invalidate  the  contract  previously  entered  Into.  But 
plaintiff  did  not  adopt  this  course.  On  the  coiitrary  he  chose  to  indi- 
cate  his  acceptance  by  transTlittJ^^g  ^  tplpgr^''"  to  Sas  by  the  detendant^ 
cbnTpanyr""SarTTiad  done  nothing  to  indicate  lik_willingness  to  adopf" 
stich  agency  and  the_de_fendant  in  undertakimg  to  transmit  the  message 
w^TacIingJoIely^  the  agent  nf  plaintiff.  The  latter  might  have  witH- 
dHwnTTiemessage  or  stopped  its  delivery  at  any  time  before  it  actually 
reached  Sas.  It  is  manifest  that  handhig  the  message  to  his  own 
agent  was  not  notice  to  the  sendee  of  the  telegram.  The  most  formal 
declaration  of  an  intention  of  acceptance  of  an  offer  to  a  third  person 
will  not  constitute  a  contract.  A  written  letter  or  telegram,  like  an 
oral  acceptance,  must  be  communicated  to  the  party  who  has  made 
the  off"er  or  to  some  one  expressly  or  impliedly  authorized  to  receive 
it,  and  this  rule  is  not  complied  with  by  delivering  it  to  the  writer's 
own  agent  or  messenger  even  with  direction  to  deliver  to  the  of- 
feror.    *     *     * 

The  plaintiff  then  did  not  accept  the  oft'er  of  Sas  until  the  tele- 
gram was  received  by  the  latter,  a  few  minutes  after  6  o'clock  p.  m. 
of  the  day  after  the  letter  had  been  received  and  the  question  arises 
whether  this  was  "at  once"  within  the  meaning  of  the  offer  which  stated 
that  another  deal  was  pending.  Like  "forthwith"  and  "immediately," 
"at  once"  does  not  mean  instantaneously  but  requires  action  to  be  taken 
within  a  reasonable  time.  In  view  of  the  particular  circumstances  of 
the  case,  or,  as  said  in  Warder,  Bushnell  &  Glessner  Co.  v.  Home,  110 
Iowa,  285,  81  N.  W.  591,  it  is  synonymous  with  the  words  mentioned 
and  "as  soon  as  possible,"  and  i.s  "usually  construed  to  mean  within 
such  reasonable  time  as  shall  be  required  under  all  the  circumstances 
for  doing  the  particular  thing."  It  is  doubtful  whether  the  same  vigi- 
lance should  be  exacted  In  the  acceptance  of  an  offer  to  exchange  or 
purchase  real  estate  as  In  transactions  relating  to  the  transfer  of  chat- 
tel property.  *  *  *  The  circumstances  of  each  case  necessarily  have 
an  important  bearing.  There  was  no  evidence  of  the  time  a  letter,  if 
promptly  mailed,  might  have  reached  Sas.  He  has  indicated  in  his  let- 
ter that  he  was  contemplating  another  deal,  and  we  think  ordinary 
minds  fairly  differ  as  to  whether,  In  these  circumstances,  an  accept- 
ance 23  or  24  hours  after  the  letter  had  been  received  was  in  time  to 
bind  the  party  making  the  offer,  and  the  issue  was  for  the  jury  to  de- 
termine.    *     *     * 

Reversed. 


FARMERS'  PRODUCE  CO.  v.  McALESTER  STORAGE  &  COMMISSION  CO. 

(Supreme  Court  of  Oklahoma,  1915.    48  Okl.  488,  150  Pac.  483, 
L.  R.  A.  1916A,  1297.) 

RoBEKRTS,  C.  *  *  *  The  law  respecting  the  making  of  contracts 
by  correspondence  is  that  the  contract  Is  completed  when  the  proposal 
made  by  one  side  is  communicated  by  letter  or  telegram,  and  the  other 
party  wires  his  acceptance,  or  deposits  in  the  post  office  his  letter  of 
acceptance.  The  moment  the  telegram  is  delivered,  or  the  letter  mailed 
In  the  post  office,  and  not  until  then,  is  the  contract  completed  and  the 
parties  concluded  and  bound. 

But  plaintiff  in  error  contends  that  the  letter  of  acceptance,  and  in- 
structions to  ship,  was  not  binding  upon  it,  nor  did  It  close  the  contract, 
for  the  reason  that  It  was  not  sent  by  the  same  carrier  or  agent  through 


Ch.  1)  OFFER   AND   ACCEPTANCE  57 

which  the  other  correspondence  had  been  conveyed.  In  support  of 
that  contention,  counsel  call  our  attention  to  the  case  of  Lucas  v.  West- 
ern U.  Tel.  Co.,  131  Iowa,  669,  109  N.  W.  191,  6  L.  R.  A.  (N.  S.) 
1016.  On  examination  of  that  case,  w^e  must  admit  that  it  seems  to 
uphold  the  doctrine  contended  for  by  counsel ;  but,  on  examination  of 
other  authorities  on'  the  subject,  it  appears  to  us  that  the  case  cited 
stands  practically  alone.  After  a  careful  consideration  of  the  few 
authorities  we  have  been  able  to  find  on  the  subject,  we  are  of  the 
opinion  that  the  reasonable  and  best  rule  should  be,  where  there  is  no 
direction  as  to  the  mode  of  communicating  the  acceptance  it  may  be 
accomplished  trough  the  post  office,  unless  it  can  be  fairly  and  rea- 
sonably inferred  from  the  offer,  or  other  prior  communications,  that 
some  other  means  is  expected,  and  that  would  be  a  question  of  fact 
to  be  determined  by  the  jury  or  the  trial  court. 

As  stated  by  Lord  Herschell,  in  Henthorn  v.  Fraser,  [1892]  2  Chan. 
27 :  "Where  the  circumstances  are  such  that  it  must  have  been  within 
the  contemplation  of  the  parties  that,  according  to  the  ordinary  usages 
of  mankind,  the  post  might  be  used  as  a  means  of  communicating  the 
acceptance  of  an  offer,  "the  acceptance  is  complete  as  soon  as  it  is 
posted." 

And  as  stated  by  Justice  Kay  in  the  same  case,  supra :  "Posting  an 
acceptance  of  an  oft'er  may  be  sufficient,  where  it  can  be  fairly  inferred 
from  the  circumstances  of  the  case  that  the  acceptance  might  be  sent 
by  post." 

In  the  instant  case  one  party  lived  and  was  doing  business  in  Okla- 
homa, the  other  in  the  state  of  Wisconsin.  The  only  matter  to  be 
considered  was  a  question  of  time  to  fill  contract,  w^hen  no  time  was 
specified  in  the  offer.  We  are  of  opinion  that  both  parties  contem- 
plated that  the  letter  sent  by  post  was  a  means  by  which  an  acceptance 
might  be  communicated,  and  that  was  a  fact  upon  which  the  trial  court 
passed  and  should  not  be  disturbed  by  this  court.     *     *     * 


MAOLAY  V.  HARVEY. 
(Supreme  Court  of  Illinois,  1S76.     90  111.  525,  32  Am.  Rep.  35.) 

ScHOLFiELD,  J.  Appellant  brought  assumpsit  against  appellee,  in 
the  court  below,  on  an  alleged  contract  whereby  the  latter  employed 
the  former  to  take  charge  of  the  millinery  department  of  his  store  in 
Monmouth,  in  this  State,  for  the  season  commencing  in  April  and  end- 
ing in  July,  in  the  year  1876,  and  to  pay  her  therefor  $15  per  week. 

The  judgment  was  in  favor  of  appellee,  and  appellant  now  assigns 
numerous  errors  as  grounds  for  its  reversal. 

In  our  opinion,  the  case  may  be  properly  disposed  of  by  the  consid- 
eration of  a  single  question.  Appellant's  right  of  recovery  is  based 
entirely  upon  an  alleged  special  contract,  and  unless  there  "was  such  a 
contract,  the  judgment  below  is  right,  however  erroneous  may  have 
been  the  rulings  under  which  it  was  obtained.     *     *     * 

[After  some  preliminary  correspondence]  appellee  w-rote  appellant : 

"Monmouth.  111.,  March  21,  1876. 

"Miss  L.  Maclay.  Peoria,  111. :  *  *  *  I  will  give  you  $15  per  week, 
and  pay  your  fare  from  Chicago  to  Monmouth,  and  pay  you  the  above 
wages  for  your  actual  time  here  in  the  house  at  that  rate  per  season. 
*  *  *  You  will  confer  a  favor  by  giving  me  your  answer  by  return 
mail.  Yours,  ^  John  Harvey." 


58  CONTRACTS  (Part  1 

Appellant  says  she  received  this  in  the  afternoon,  and  replied  the 
next  day  by  postal  card,  addressed  to  appellee  at  Monmouth,  as  fol- 
lows : 

"Peoria,  March  23. 

"Mr.  Harvey:  Yours  was  promptly  received,  and  I  will  go  up  to 
Chicago  next  week,  and  when  my  services  are  recfuired  you  will  let  me 
know. 

'■'Very  respectfully,  L.  Maclay." 

Appellant  did  not  place  this  in  the  post  office  herself,  but  she  says 
she  gave  it  to  a  boy  who  did  errands  about  the  house  of  her  sister, 
with  whom  she  was  then  staying,  directing  him  to  plac^  it  in  the  office. 

The  postmark  on  the  card,  which  is  shown  to  be  always  placed  on 
mail  matter  the  same  day  it  is  put  in  the  office,  shows  that  the  card 
M^as  not  mailed  until  the  25th  of  March.     *     *     * 

If  a  contract  was  consummated  between  the  parties,  it  was  by  the 
mailing  of  appellant's  postal  card  on  the  25th  of  March.  *  =•=  *  It  is 
clear  here  that  the  nature  of  the  business  demanded  a  prompt  answer, 
and  the  words,  "You  will  confer  a  favor  by  giving  me  your  answer 
by  return  mail,"  do  in  effect  stipulate  for  an  answer  by  return 
mail.     *     *     * 

The  evidence  shows  that  there  were  two  daily  mails  between  Peoria 
and  Monmouth,  *  *  *  and  it  did  not  require  more  than  one  day's 
time  between  the  points.  Appellee's  letter  to  appellant  bears  date 
March  21st.  *  *  *  She  received  appellee's  letter  on  the  evening  of 
the  22d.  Appellee  was,  therefore,  entitled  to  expect  a  reply  mailed  on 
the  23d,  which  he  ought  to  have  received  on  that  day,  or  at  the  farthest, 
on  the  morning  of  the  24th,  but  appellant's  reply  was  not  mailed  until 
the  25th.  It  does  not  relieve  appellant  of  fault  that  she  gave  the  postal 
card  to  a  boy  on  the  23d  to  have  him  mail  it.  *  *  *  The  boy  was  her 
agent,  not  that  of  appellee,  and  his  negligence  *  *  *  ^^as  her  neg- 
ligence. 

Judgment  affirmed. 


LEWIS    V.    BROWNING. 

(Supreme  Judicial  Court  of  Massachusetts,  1S81.     1.30  Mass.  173.) 

Gray,  C.  J.  In  M'Culloch  v.  Eagle  Ins.  Co.,  1  Pick.  278,  this  court 
held  that  a  contract  made  by  mutual  letters  was  not  complete  until 
the  letter  accepting  the  offer  had  been  received  by  the  person  making 
the  offer;  and  the  correctness  of  that  decision  is  maintained,  upon  an 
able  and  elaborate  discussion  of  reasons  and  authorities,  in  Langdell 
on  Contracts  (2d  Ed.)  989-996.  In  England,  New  York  and  New 
Jersey,  and  in  the  Supreme  Court  of  the  United  States,  the  opposite 
view  has  prevailed,  and  the  contract  has  been  deemed  to  be  completed 
as  g'oon  as  the  letter  of  acceptance  has  been  put  into  the  post  office 
duly  addressed.     *     *     * 

But  this  case  does  not  require  a  consideration  of  the  general  ques- 
tion; for,  in  any  view,  the  person  making  the  oft'er  may  always,  if 
he  chooses,  make  the  formation  of  the  contract  which  he  proposes 
dependent  upon  the  actual  communication  to  himself  of  the  accept- 
ance. *  *  *  And  in  the  case  at  bar,  the  letter  written  in  the  plaintiff's 
behalf  by  her  husband  as  her  agent  on  July  8,  1878,  in  California,  and 
addressed  to  the  defendant  at  Boston,  appears  to  us  clearly  to  mani- 
fest such  an  intention.     After  proposing  the  terms  of  an  agreement 


Ch.  1)  OFFER  AND   ACCEPTANCE  59 

for  a  new  lease,  he  says :  "If  you  agree  to  this  plan,  and  will  telegraph 
me  on  receipt  of  this,  I  will  forward  power  of  attorney  to  Mr.  Ware," 
the  plaintiff's  attorney  in  Boston.  "Telegraph  me  'yes'  or  'no.'  If 
'no,'  I  will  go  on  at  once  to  Boston  with  my  wife,  and  between  us  we 
will  try  to  recover  our  lost  ground.  If  I  do  not  hear  from  you  by  the 
18th  or  20th,  I  shall  conclude  'no.'  "  Taking  the  whole  letter  together, 
the  offer  is  made  dependent  upon  an  actual  communication  to  the  plain- 
tiff of  the  defendant's  acceptance  on  or  before  the  20th  of  July,  and 
does  not  discharge  the  old  lease,  nor  bind  the  plaintiff"  to  execute  a 
new  one,  unless  the  acceptance  reaches  California  within  that  time. 
Assuming,  therefore,  that  the  defendant's  delivery  of  a  dispatch  at  the 
telegraph  offfce  had  the  same  effect  as  the  mailing  of  a  letter,  he  has 
no  ground  of  exception  to  the  ruling  at  the  trial. 
Exceptions  overruled. 


FIRST  NAT.  BANK  v.  WATKINS. 

(Supreme  Judicial  Court  of  Massacliusetts,  1891.    154  Mass.  385,  28  N.  E.  275.) 

Action  by  the  First  National  Bank  against  Eugene  C.  Watkins  on 
a  promissory  note.  Direction  of  verdict  for  plaintiff.  Defendant  ex- 
cepts. 

The  report  was  as  follows :  "This  is  an  action  of  contract.  At  the 
trial  the  plaintiff"  proved  the  execution  of  the  note,  and  the  indorse- 
ments thereon,  and  rested.  Thereupon  the  defendant  offered  to  prove 
that  the  note  was  made  to  one  H,  M.  Benedict  by  the  defendant,  and 
at  the  same  time  a  mortgage  of  personal  property  was  given  to  secure 
the  note.  The  note  was  made  payable  at  the  plaintiff  bank.  Benedict 
indorsed  the  note  in  the  bank,  and  made  over  his  interest  in  the  mort- 
gage to  the  plaintiff,  and  thereupon  both  became  the  property  of  the 
plaintiff.  The  defendant  afterwards  sold  his  equity  in  the  mortgaged 
property  to  a  third  party,  and  the  plaintiff  then  agreed  with  him  that 
it  would  look  to  the  mortgage  property  alone  for  payment  of  the  note. 
The  plaintiff  afterwards  extended  the  time  for  the  payment  of  the 
note,  as  appears  on  the  back  of  the  same,  without  the  knowledge  or  re- 
quest of  the  defendant.  On  the  4th  day  of  April.  1890,  the  sum  of 
$178.15  was  paid,  and  indorsed  upon  the  note.  The  defendant  did 
not  pay  this  sum  of  money,  but  claimed  it  was  the  amount  realized 
from  a  foreclosure  and  sale  of  the  mortgaged  property,  which  had 
greatly  depreciated  in  value  since  the  maturity  of  the  note,  and  which 
at  the  time  of  such  maturity  was  of  more  than  sufficient  value  to  pay 
the  note.  Thereupon,  at  the  request  of  plaintiff's  counsel,  the  court 
ruled  that  if  the  defendant  proved  what  was  stated  in  his  opening  it 
would  not  amount  to  a  defense  to  the  plaintiff"'s  claim,  and  ordered  a 
verdict  for  the  plaintiff"  for  the  full  amount,  and  the  case  is  now  re- 
ported. If  said  ruling  was  right  the  verdict  is  to  stand;  otherwise 
to  be  set  aside,  and  a  new  trial  ordered." 

Knowlton,  J.  *  *  *  The  contention  chiefly  relied  on  by  the 
plaintiff"  is  that  such  an  agreement  is  not  available  in  defense  to  a  suit  on 
the  note,  although  if  broken  it  would  furnish  a  good  foundation  for 
an  action  for  damages.  We  do  not  assent  to  this  proposition.  An 
agreement  "to  look  to  the  mortgaged  property  alone  for  the  payment 
of  the  note"  would  be,  in  eft'ect,  an  agreement  to  discharge  the  defend- 
ant from  all  liability  upon  it,  which,  if  made  upon  a  valuable  considera- 
tion, would  be  a  good  defense  to  a  sviit  for  payment  of  it.     Although 


60  CONTRACTS  (Parti 

a  new  and  independent  contract,  it  would  be  unreasonable  to  permit 
a  plaintiff,  who  had  made  such  an  agreement  to  collect  his  note  of  the 
maker,  and  to  compel  the  maker  to  seek  his  remedy  by  a  suit  to  recover 
back  from  the  payee  as  damages  the  sum  which  was  paid.  The  tend- 
ency of  the  modern  cases  is  to  allow  such  an  agreement  to  be  shown 
in  defense,  to  avoid  circuity  of  action.  *  *  *  If  there  was  an  agree- 
ment purporting  to  be  made  in  reference  to  the  defendant's  sale  of 
the  equity  of  redemption  in  the  mortgaged  property  in  the  form  of  an 
offer  that  the  defendant  might,  if  he  chose,  refrain  from  paying  the 
note,  and  from  taking  measures  to  secure  payment  of  it  out  of  the 
proceeds  of  the  mortgaged  property,  and  that  the  plaintiff  would  look 
to  the  property  alone  for  the  payment  of  it;  and  the  defendant,  relying 
upon  the  offer,  did  refrain  from  making  an  effort  to  have  the  property 
applied  to  the  payment  of  the  note  when  it  became  due,  and  thereby 
suffered  detriment — there  would  be  a  sufficient  consideration  for  the 
agreement.  It  would  be  an  ordinary  case  of  a  unilateral  contract, 
growing  out  of  an  offer  of  one  party  to  do  something  if  the  other  will 
do  or  refrain  from  doing  something  else.  If  the  party  to  whom  such 
an  offer  is  mside  acts  upon  it  in  the  manner  contemplated,  to  his  own 
disadvantage,  such  action  makes  the  contract  complete,  and  notice  of 
the  acceptance  of  the  offer  before  the  action  is  unnecessary.  *  *  * 
The  entry  should  be,  verdict  set  aside. 


BISHOP  V.  BATON. 

(Supreme  Judicial  Court  of  ISIa.ssachnsetts,  1894.    161  Mass.  496,  37  N.  E.  66D, 

42  Am.  St.  Rep.  437.) 

Knowlton,  J.  The  first  question  in  this  case  is  whether  the  con- 
tract proved  by  the  plaintiff  is  an  original  and  independent  contract  or 
a  guaranty.  The  judge  found  that  the  plaintiff  signed  the  note  relying 
upon  the  letter,  "and  looked  to  the  defendant,  solely,  for  reimburse- 
ment, if  called  upon  to  pay  the  note."  The  promise  contained  in  the 
letter  was  in  these  words:  "If  Harry  needs  more  money,  let  him  have 
it,  or  assist  him  to  get  it,  and  I  will  see  that  it  is  paid."  On  a  reason- 
able interpretation  of  this  promise,  the  plaintiff  was  authorized  to 
adopt  the  first  alternative,  and  to  let  Harry  have  the  money  in  such  a 
way  that  a  liability  of  Harry  to  him  would  be  created,  and  to  look  to 
the  defendant  for  payment  if  Harry  failed  to  pay  the  debt  at  maturity; 
or  he  might  adopt  the  second  alternative,  and  assist  him  to  get  money 
from  some  one  else  in  such  a  way  as  to  create  a  debt  from  Harry  to 
the  person  furnishing  the  money,  and,  if  Harry  failed  to  pay,  to  look 
to  the  defendant  to  relieve  him  from  the  liability.  The  words  fairly 
imply  that  Harry  was  to  be  primarily  liable  for  the  debt,  either  to  the 
plaintiff  or  such  other  person  as  should  furnish  the  money,  and  that 
the  defendant  was  to  guaranty  the  payment  of  it.  We  are  therefore 
of  opinion  that,  if  the  plaintiff  relied  solely  upon  the  defendant,  he 
was  authorized  by  the  letter  to  rely  upon  him  only  as  a  guarantor. 

The  defendant  requested  many  rulings  in  regard  to  the  law  appli- 
cable to  contracts  of  guaranty,  most  of  which  it  becomes  necessary  to 
consider.  The  language  relied  on  was  an  offer  to  guaranty  which  the 
plaintiff'  might  or  might  not  accept.  Without  acceptance  of  it,  there 
was  no  contract,  because  the  offer  was  conditional,  and  there  was  no 
consideration  for  the  promise.     But  this  was  not  a  proposition  which 


Ch. 1)  OFFER   AND   ACCEPTANCE  61 

was  to  become  a  contract  only  upon  the  giving  of  a  promise  for_  the 
promise,  and  it  was  not  necessary  that  the  plaintiff  should  accept  it  in 
words,  or  promise  to  do  anything  before  acting  upon  it.  It  was  an 
ofifer  which  was  to  become  efifective  as  a  contract  upon  the  doing  of 
the  act  referred  to.  It  was  an  offer  to  be  bound  in  consideration  of  an 
act  to  be  done,  and  in  such  a  case  the  doing  of  the  act  constitutes  the 
acceptance  of  the  offer,  and  furnishes  the  consideration.  Ordinarily, 
there  is  no  occasion  to  notify  the  offerer  of  the  acceptance  of  such  an 
offer,  for  the  doing  of  the  act  is  a  sufficient  acceptance,  and  the  prom- 
isor knows  that  he  is  bound  when  he  sees  that  action  has  been  taken 
on  the  .faith  of  his  offer.  But,  if  the  act  is  of  such  a  kind  that  knowl- 
edge of  it  will  not  quickly  come  to  the  promisor,  the  promisee  is  bound 
to  give  him  notice  of  his  acceptance  within  a  reasonable  time  after 
doing  that  which  constitutes  the  acceptance.  In  such  a  case  it  is  im- 
plied in  the  offer  that,  to  complete  the  contract,  notice  shall  be  given 
with  due  diligence,  so  that  the  promisor  may  know  that  a  contract  has 
been  made.  But  where  the  promise  is  in  consideration  of  an  act  to  be 
done,  it  becomes  binding  upon  the  doing  of  the  act  so  far_  that  the 
promisee  cannot  be  affected  by  a  subsequent  withdrawal  of  it,  if,  within 
a  reasonable  time  afterwards,  he  notifies  the  promisor. 

In  accordance  with  these  principles,  it  has  been  held,  in  cases  like 
the  present,  where  the  guarantor  would  not  know  of  himself  from  the 
nature  of  the  transaction  whether  the  offer  has  been  accepted  or  not, 
that  he  is  not  bound  without  notice  of  the  acceptance,  seasonably  giv- 
en after  the  performance  which  constitutes  the  consideration.  *  *  * 
In  the  present  case  the  plaintiff'  seasonably  mailed  a  letter  to  the  de- 
fendant, informing  him  of  what  he  had  done,  in  compliance  with  the 
defendant's  request,  but  the  defendant  testified  that  he  never  received 
it,  and  there  is  no  finding  that  it  ever  reached  him.  The  judge  ruled 
as  a  matter  of  law  that,  upon  the  facts  found,  the  plaintiff  was  en- 
titled to  recover,  and  the  question  is  thus  presented  whether  the  de- 
fendant was  bound  by  the  acceptance  when  the  letter  was  properly 
mailed,  although  he  never  received  it.  When  an  offer  of  guaranty  of 
this  kind  is  made,  the  implication  is  that  notice  of  the  act  which  con- 
stitutes an  acceptance  of  it  shall  be  given  in  a  reasonable  way.  What 
kind  of  a  notice  is  required  depends  upon  the  nature  of  the  transaction, 
the  situation  of  the  parties,  and  the  inferences  fairly  to  be  drawn  from 
their  previous  dealings,  if  any,  in  regard  to  the  matter.  If  they  are 
so  situated  that  communication  by  letter  is  naturally  to  be  expected, 
then  the  deposit  of  a  letter  in  the  mail  is  all  that  is  necessary.  If  that 
is  done  which  is  fairly  to  be  contemplated  from  their  relations  to  the 
subject-matter,  and  from  their  course  of  dealing,  the  rights  of  the  par- 
ties are  fixed,  and  a  failure  actually  to  receive  the  notice  will  not  affect 
the  obligation  of  the  guarantor. 

The  plaintiff  in  the  case  now  before  us  resided  in  Illinois,  and  the 
defendant  in  Nova  Scotia.  The  offer  was  made  by  letter,  and  the  de- 
fendant must  have  contemplated  that  information  in  regard  to  the 
plaintiff's  acceptance  or  rejection  of  it  would  be  by  letter.  It  would 
be  a  harsh  rule  which  would  subject  the  plaintiff  to  the  risk  of  the  de- 
fendant's failure  to  receive  the  letter  giving  notice  of  his  action  on  the 
faith  of  the  offer.  We  are  of  opinion  that  the  plaintiff,  after  assisting 
Harry  to  get  the  money,  did  all  that  he  was  required  to  do  when  he 
seasonably  sent  the  defendant  the  letter  by  mail,  informing  him  of 
what  had  been  done.     How  far  such  considerations  are  applicable  to 


02  CONTRACTS  (Part  1 

the  case  of  an  ordinary  contract  made  by  letter,  about  which  some 
of  the  early  decisions  are  conflicting,  we  need  not  now  consider.  The 
plaintiff  was  not  called  upon  under  his  contract  to  attempt  to  collect 
the  money  from  the  maker  of  the  note,  and  it  is  no  defense  that  he 
did  not  promptly  notify  the  defendant  of  the  maker's  default,  at  least 
in  the  absence  of  evidence  that  the  defendant  was  injured  by  the  de- 
lay.    *     *     * 

We  find  one  error  in  the  rulings  which  requires  us  to  grant  a  new 
trial.  It  appears  from  the  bill  of  exceptions  that,  when  the  note  be- 
came due,  the  time  for  the  payment  of  it  was  extended  without  the 
consent  of  the  defendant.  The  defendant  is  thereby  discharged  from 
his  liability,  unless  he  subsequently  assented  to  the  extension  and  rati- 
fied it.  *  *  *  The  court  should  therefore  have  ruled  substantially 
in  accordance  with  the  defendant's  eighth  request,  instead  of  finding 
for  the  plaintiff  as  a  matter  of  law  on  the  facts  reported.     *     *     * 

Exceptions  sustained. 


SECTION  5.— NATURE  OF  ACTS  OR  LANGUAGE  ESSEN- 
TIAL TO  CONSTITUTE  AN  ACCEPTANCE 


ETyKINS  V.  BOARD  OF  COM'RS  OF  WYANDOTTE  COUNTY 
(ZIMMER,  Intervener). 

(Supreme  Court  of  Kansas,  1914.     91  Kan.  51S,  13S  Pac.  578,  51  L.  R.   A. 
[N.  S.]  638,  Ann.  Cas.  1915D,  257.) 

Action  by  J.  W.  Elkins  against  the  Board  of  Commissioners  of 
Wyandotte  County,  in  which  Henry  T.  Zimmer  intervenes.  From 
judgment  for  Zimmer,  plaintiff  appeals. 

Mason,  J.  The  board  of  county  commissioners  of  Wyandotte  county 
offered  a  reward  for  the  "arrest  and  conviction"  of  the  person  who 
had  committed  a  murder.  J.  W.  Elkins  brought  action  against  the 
county  for  the  amount,  asserting  that  he  had  met  the  conditions.  H.  T. 
Zimmer  set  up  a  conflicting  claim,  which  he  sought  to  enforce  by  in- 
terpleading. The  county  admitted  its  liability  to  one  or  the  other  of 
the  claimants.  Upon  a  trial  the  court  sustained  a  demurrer  to  the  evi- 
dence of  Elkins  and  rendered  judgment  for  Zimmer,  which  was  re- 
versed on  appeal.  *  *  *  Upon  a  new  trial  judgment  was  again 
rendered  in  favor  of  Zimmer,  and  Elkins  again  appeals. 

There  was  evidence  tending  to  establish  these  facts:  Elkins,  learn- 
ing of  the  offer  of  the  reward,  began  an  investigation  of  the  case.  By 
talking  with  one  James  McMahon  he  induced  him  to  produce  and  turn 
over  some  articles,  including  a  gun,  which  were  hidden  in  a  cornfield. 
He  told  the  sheriff  of  this,  stating  that  McMahon  was  the  guilty  per- 
son. The  sheriff'  directed  the  undersheriff  and  Zimmer  to  send  and 
get  him.  McMahon  was  arrested,  and  on  being  confronted  with  the 
articles  found  in  the  field,  confessed.  Elkins  was  at  the  time  a  "spe- 
cial and  non-pay"  deputy  sheriff".  The  description  of  Elkins  as  a 
"special  and  non-pay"  deputy  seems  fairly  to  imply  that,  while  he  held 
a  commission  as  a  deputy  sheriff',  his  activities  in  that  connection  were 
limited  to  serving  such  papers  as  might  be  delivered  to  him,  or  per- 
forming such  other  acts  as  might  be  specifically  directed.  Clearly  he 
was  under  no  obligation  to  devote  time  to  the  investigation  of  criminal 


Ch.  1)  OFFER  AND   ACCEPTANCE  63" 

offenses.  This  was  evidently  the  view  of  the  trial  court,  for  the  mere 
fact  of  Elkins'  ofificial  character  was  not  held  to  prevent  his  recovering^ 
the  reward. 

A  reversal  is  asked  because  of  an  instruction  to  the  effect  that  it 
was  the  duty  of  any  one  seeking  to  earn  the  reward  to  do  all  he  legally 
had  a  right  to  do  towards  the  arrest  of  the  murderer ;  that,  if  Elkins 
was  a  deputy  sheriff',  he  had  a  legal  right  to  arrest  McMahon  upon  dis- 
covering him  to  be  the  murderer;  and  that  if,  having  the  right  and 
the  opportunity  to  make  such  arrest,  he  voluntarily  chose  not  to  do  so, 
and  Zimmer,  acting  for  his  own  benefit  and  for  himself,  arrested  Mc- 
Mahon, then  Zimmer  was  entitled  to  the  reward.  Public  policy  for- 
bids an  officer  to  claim  a  reward  for  merely  doing  his  duty,  but  that 
is  the  extent  to  which  his  official  character  affects  the  matter.  *  *  * 
If  Elkins  is  entitled  to  the  rew^ard,  it  is  because  of  voluntary  investiga- 
tions, not  required  by  his  office,  which  resulted  in  discoveries  leading 
to  the  arrest  and  conviction  of  McMahon.  His  official  character  can 
hardly  enter  into  the  matter,  because  as  a  private  citizen  he  had  author- 
ity to  make  the  arrest.  *  *  *  If  in  order  to  gain  the  reward  he  was 
required  to  do  all  he  legally  could  toward  the  arrest,  his  omission  to 
make  the  arrest  would  be  equally  fatal  to  his  recovery,  whether  he  was 
an  officer  or  a  private  citizen. 

In  some  circumstances  the  person  actually  making  an  arrest  might 
obviously  be  entitled  to  the  reward — for  instance,  where  a  known  and 
unconcealed  murderer  was  at  large,  and  the  difficulty  in  enforcing  the 
law  lay  in  taking  him  into  custody.  The  present  case  does  not  appear 
to  be  one  to  which  that  rule  applies.  The  jury  may  have  found  that 
the  only  real  difficulty  in  the  affair  was  to  ascertain  by  whom  the  mur- 
der was  committed  and  by  what  evidence  this  could  be  proved,  that 
Elkins  by  his  own  efforts  discovered  the  facts  that  made  it  known  that 
McMahon  was  the  murderer,  that  he  reported  these  facts  to  the  sher- 
iff, and  that  as  the  natural  result  of  this  report  the  arrest  was  made 
by  Zimmer.  Such  findings  in  the  opinion  of  this  court  would  require 
a  verdict  for  Elkins.  But  under  the  instruction  complained  of  such  n 
A^erdict  was  forbidden  if  the  jury  also  found  that  Elkins  could  have 
himself  arrested  McMahon,  but  omitted  to  do  so.  We  think  the  in- 
struction put  too  much  stress  upon  the  question  as  to  who  made  the 
arrest,  and  unduly  limited  the  effect  of  another  instruction,  in  the 
following  words,  which  correctly  stated  the  principle  by  which  the 
matter  in  dispute  should  be  determined :  "A  literal  compliance  with 
the  terms  of  the  reward  is  not  required,  neither  need  there  be  an  actual 
physical  arrest  by  a  claimant;  but  if  you  find  from  a  preponderance 
of  the  evidence  that  one  of  the  said  parties,  plaintiff  or  intervener, 
acting  with  a  knowledge  that  said  reward  had  been  offered  and  with 
a  view  to  obtain  it,  performed  substantially  the  terms  of  said  offer  of 
reward,  and  discovered  evidence  and  performed  services  which  were 
the  primary,  proximate,  procuring,  and  predominant  cause  of  the  ar- 
rest and  conviction  of  one  James  McMahon  for  the  crime  in  question, 
you  will  find  for  that  party."     *     *     * 

The  judgment  is  reversed,  and  a  new  trial  ordered.  All  the  Justices 
concurring. 


64  CONTRACTS  (Part  1 


ETHEREDGE  v.  BARKLET. 
(Supreme  Court  of  Florida,  1SS9.     25  Fla.  S14,  6  South.  861.) 

Mitchell,  J.  The  appellant,  complainant  below,  foreclosed  a  mort- 
gage in  the  circuit  court  of  Jackson  county  against  the  appellee  ^de- 
fendant below).  Decree  was  rendered  November  26,  1883,  for  $267.30. 
Subsequently  the  following  agreement  was  entered  into  : 

"January  29,  1886. 

"In  consideration  of  an  extension  granted  me  until  IMarch  1,  1886, 
I  do  hereby  agree  that  a  certain  decree  of  foreclosure  obtained  against 
me  in  the  circuit  court  of  Jackson  county,  Florida,  by  James  B.  Slade 
and  Charles  A.  Etheredge,  copartners  under  the  firm  name  and  style 
of  Slade  &  Etheredge,  bear  interest  at  the  rate  of  twelve  per  cent, 
per  annum,  instead  of  the  legal  rate,  and  I  promise  hereby,  for  the 
consideration  aforesaid,  to  pay  said  rate  of  interest  on  said  decree  from 
date  of  same.  It  is  understood  that  if  I  fail  to  make  payment  of 
said  decree  by  March  1,  1886,  but  shall  instead  give  Slade  &  Etheredge 
such  further  security  as  they  have  before  this  proposed  by  letter  to 
Liddon  &  Carter,  my  attorneys,  then  payment  of  said  decree  is  not 
to  be  enforced  before  October  1,  1886.  B.  B.  Barkley. 

"Witness:    Ben j.  S.  Liddon." 

The  defendant  failed  to  make  payment  by  the  first  of  March,  1886, 
and  the  plaintift'  commenced  suit  upon  the  said  agreement.     *     '^     ''' 

The  gravamen  of  the  case  is  whether  the  defendant,  Barkley,  was, 
under  the  circumstances,  liable  to  the  plaintift  upon  the  agreement 
to  pay  him  the  increased  rate  of  interest  therein  provided  for. 

Judge  Story  (1  Story,  Cont.  §  490)  says :  "In  order  to  create  a  con- 
tract, it  is  essential  that  there  should  be  a  reciprocal  assent  to  a  cer- 
tain and  definite  proposition.  So  long  as  any  essential  matters  are 
left  open  for  further  consideration,  the  contract  is  not  complete ;  and 
the  minds  of  the  parties  must  assent  to  the  same  thing,  in  the  same 
sense.  A  mere  offer  not  assented  to  constitutes  no  contract,  for  there 
must  be  not  only  a  proposal,  but  an  acceptance  thereof.  So  long  as  a 
proposal  is  not  acceded  to,  it  is  binding  upon  neither  party,  and  may 
l3e  retracted." 

The  intention  of  the  defendant  in  signing  the  agreement  is  patent. 
It  was  for  the  purpose  of  procuring  an  extension  of  time  in  which  to 
settle  his  indebtedness  to  Slade  &  Etheredge;  but  what  can  be  gath- 
ered from  the  alleged  agreement  as  to  the  intention  of  Slade  &  Ether- 
edge? They  did  not  sign  the  agreement,  nor  did  they,  by  any  act  of 
theirs,  show  that  they  intended  to  assent  to  the  terms  of  it.  On  the 
contrar}%  they  plainly  indicated  that  they  did  not  feel  bound  thereby, 
and  that  they  would  not  be  controlled  by  the  terms  thereof. 

Frank  Philips  was  appointed  master  by  the  court  to  sell  the  mort- 
gaged property,  and,  notwithstanding  the  agreement,  he  advertised 
the  property  for  sale  on  the  first  Monday  in  February,  1886,  just  a 
few  days  subsequent  to  the  date  of  the  agreement.  The  defendant 
went  to  him  and  showed  him  the  agreement,  but  he  said  that  there 
had  been  different  payments  made  on  the  decree  directly  to  Slade  & 
Etheredge ;  that  he  wanted  his  costs,  and  would  sell  the  land  if  the  de- 
fendant did  not  pay  them.  Before  sale  day  Philips  telegraphed  and 
wrote  to  Slade  &  Etheredge  (who  at  the  time  resided  at  Columbus, 
Ga.),  asking  for  instructions,  and  they  instructed  him  to  sell  if  the 
costs  were  not  paid  by  the  defendant,  and  thereupon  the  defendant 


Ch.  1)  OFFER  AND   ACCEPTANCE  65 

paid  the  costs,  as  he  says,  to  prevent  the  sale  of  his  property,  notwith- 
standing he  had  not  agreed  to  do  so. 

And,  now,  can  it  be  that  this  agreement  was  binding  upon  the  de- 
fendant? Can  it  be  that  he  is  Hable  upon  the  same,  and  the  other 
parties  to  the  agreement  are  not  bound  by  it,  or  only  bound  by  it  when 
they  think  it  is  to  their  interest  to  be  so  bound?  This  is  not  the  law. 
To  make  such  agreements  binding  upon  one  party,  it  must  be  binding 
upon  all,  and  if  a  party  bound  violates  the  agreement  it  releases  the 
other  party.     *     *     * 

Judgment  [for  defendant]  affirmed. 


STEINBREN'XER  v.  MINOT  AUTO  CO. 
(Supreme  Court  of  Montana,  1919.    56  Mont.  27,  ISO  Pac.  729.) 

Action  for  damages  for  breach  of  contract.  Defendant  prepared 
and  sent  to  plaintiff  an  agreement  giving  plaintiff  the  exclusive  right 
to  sell  Willys-Overland  automobiles  in  certain  territory  for  a  certain 
length  of  time.  The  agreement  provided  that  it  was  to  take  effect  from 
the  date  of  signature  by  Stearns,  defendant's  general  manager.  Plain- 
tiff signed  and'  returned  the  agreement.  Defendant  acted  as  if  the 
agreement  were  completed  and  so  indicated  by  its  correspondence,  but 
the  formal  contract  was  never  completed  by  the  manager's  signature. 
Defendant  later  broke  its  contract  by  giving  said  exclusive  right  to 
another  dealer. 

BrantIvY,  C.  J.  *  *  *  The  contention  is  that  the  contract, 
though  executed  by  both  plaintiff  and  defendant,  never  became  operative 
for  the  reason  that  it  amounted  to  no  more  than  an  offer  by  the  plaintiff 
to  enter  into  a  contract  until  it  had  been  formally  accepted  by  defend- 
ant, as  therein  provided ;  that  is  to  say,  until  the  acceptance  had  been 
evidenced  "by  the  signature  of  L.  C.  Stearns."  It  is  true,  as  counsel 
say,  that  in  order  to  form  a  contract  there  must  be  an  oft'er  by  one 
party  and  an  unconditional  acceptance  of  it  by  the  other  in  accordance 
with  its  terms.  *  *  *  It  is  also  settled  law  that  the  party  making 
the  offer  may  prescribe  the  mode  by  which  acceptance  must  be  made, 
if  at  all.  *  *  *  The  plaintiff,  however,  did  not  prescribe  any  mode 
by  which  the  defendant  should  accept.  The  mode  was  provided  by  the 
defendant  itself  and  for  its  own  benefit.  It  was  at  liberty,  therefore, 
to  waive  acceptance  by  the  mode  prescribed  and  accept  by  any  other 
mode.  "Anything  that  will  amount  to  a  manifestation  of  a  formal  de- 
termination to  accept  communicated  or  put  in  the  proper  way  to  be 
communicated  to  the  party  making  the  offer  will  complete  the  contract. 
The  principle  governing  the  matter  of  acceptance  is  that  there  must 
be  a  concurrence  of  the  minds  of  the  parties  upon  a  distinct  proposi- 
tion, manifested  by  an  overt  act."  1  Beach  on  the  Modern  Law  of 
Contracts,  §  49.  Where  a  contract  is  signed  by  one  of. the  parties 
only,  but  is  accepted  or  acted  upon  by  the  other  party,  it  is  just  as 
binding  as  if  signed  by  both  parties.    9  Cyc.  300. 

One,  reading  the  portions  of  the  correspondence  between  the  parties 
quoted  above,  cannot  entertain  any  doubt  that  from  and  after  the  time 
defendant  received  the  triplicate  copies  of  the  contract  for  its  accept- 
ance, accompanied  by  the  order  of  May  26th  it  regarded  plaintiff'  as 
its  authorized  sub-dealer  at  Missoula,  bound  to  it  by  all  the  obligations 
B.&  B. Bus. Law— 5 


66  CONTRACTS  (Part  1 

which  he  had  proposed  to  assume.  By  these  letters,  it  communicated 
its  acceptance  as  fully  and  conclusively  as  if  Stearns  had  formally 
approved  the  contract  and  returned  one  of  the  triplicate  copies  of  it 
to  the  plaintiff.  It  could  not  insist  thereafter  that  there  was  no  con- 
tract and  avoid  its  obligations  thus  assumed.  The  plaintiff  had  the 
right  to  conclude  *  ^  "  that  he  had  secured  the  exclusive  privilege 
for  the  following  year  of  selling  cars  manufactured  by  the  Willys- 
Overland  Company  of  the  models  therein  mentioned,  in  the  designated 
territory  and  to  supply  the  necessary  parts.  He  could  have  no  other 
understanding  than  that  he  was  at  liberty  to  contract  for  the  sale  of 
the  cars  which  defendant  had  promised  expressly  to  forward  as  soon 
as  the  manufacturer  could  furnish  them.  It  was  then  beyond  defend- 
ant's power  to  proceed  upon  the  assumption  that  there  was  no  contract 
because  Stearns  had  omitted  the  formality  of  signing  his  name  as  the 
contract  provided. 

No  question  is  made  as  to  the  authority  of  Smith  to  negotiate  the 
contract  in  the  first  instance,  subject  only  to  approval  by  Stearns.  Nor 
does  counsel  suggest  that  Stearns  did  not  have  authority  to  waive,  for 
the  defendant,  the  requirement  of  formal  approval.  The  argument  is 
wholly  without  merit.  .,, 

The  court  submitted  to  the  jury  the  question  whether  the  defendant 
had  accepted  the  contract.  There  was  no  controversy  that  Stearns 
wrote  the  letters  quoted,  nor  that  he  had  authority  to  do  so.  The  ques- 
tion whether  the  contract  had  been  accepted  was  therefore  one  arising 
upon  imcontroverted  evidence,  which  furnished  the  basis  for  but  a 
single  inference,  viz.,  that  the  defendant  had  accepted  the  contract 
and  become  fully  bound  by  it.  The  court  should  have  so  held  and 
required  the  jury  to  find  the  amount  of  damages  only.  The  error  in 
this  regard,  however,  was  in  favor  of  the  defendant,  resulting  in  no 
prejudice  to  it.     *     *     * 

The  judgment  [for  plaintiff]  and  order  affirmed. 


COURTNEY  SHOE  CO.  v.  E.  W.  CURD  &  SON. 

(Court  of  Appeals  of  Kentucky,  1911.     142  Ky.  219,  134  S.  W.  146, 
38  L.  R.  A.  [N.  S.]  903.) 

Action  by  the  Courtney  Shoe  Company  against  E.  W.  Curd  &  Son. 
Judgment  on  a  verdict  in  favor  of  defendant  on  a  counterclaim,  and 
plaintiff  appeals. 

HoBSON,  C.  J.  The  Courtney  Shoe  Company  is  a  wholesale  house 
doing  business  in  St.  Louis,  Mo.  E.  W.  Curd  &  Son  are  merchants 
doing  business  at  Cave  City,  Ky.  On  August  22.  1909,  Curd  &  Son 
gave  W.  B.  Yater,  a  traveling  salesman  of  the  Courtney  Shoe  Com- 
pany, two  orders,  one  for  stock  shoes  amounting  to  $49.15,  the  other 
for  sample  shoes  amounting  to  $1,772.35;  both  to  be  shipped  as  soon 
as  it  could.  The  order  though  made  on  the  22d,  was  dated  the  21st, 
as  the  22d  was  Sunday.  It  was  mailed  to  the  house  by  the  drummer, 
reaching  the  house  on  August  23d ;  the  house  then  wrote  Curd  &  Son 
the  following  card:  "St.  Louis,  Mo.,  August  23,  1909.  Dear  Sirs: 
Your  order  of  8/21 — 09  to  our  Mr.  Yater  is  at  hand  and  will  receive 
our  prompt  and  careful  attention.  Thanking  you  for  same,  and  hoping 
to  merit  your  future  favors,  we  are  Yours  truly,  The  Courtney  Shoe 
Co."  On  August  31st  the  Courtney  Shoe  Company  wrote  Curd  & 
Son  a  letter  in  which  they  rejected  the  order  for  sample  shoes  amount- 


Ch.  1)  OFFER  AND   ACCEPTANCK  67 

ing  to  $1,772.35,  telling  them  that  the  drummer  had  no  authority  to 
sell  the  samples,  and  that  they  could  not  accept  the  order.  The  stock 
shoes  to  the  amount  of  $49.15  were  shipped,  and,  Curd  &  Son  refusing 
to  pay  for  them,  the  Courtney  Shoe  Company  brought  this  suit  to  re- 
cover the  price.  Curd  &  Son  pleaded  as  a  counterclaim  the  failure 
of  the  plaintiff  to  fill  the  order  for  the  sample  shoes,  alleging  that  the 
order  was  accepted  by  the  house,  and  that  it  had  thereafter  refused 
to  fill  the  order  to  their  damage  in  the  sum  of  $1,083.20.  Issue  was 
joined  on  the  counterclaim,  and  on  a  trial  of  the  case  before  a  jury 
there  was  a  verdict  for  the  defendant  on  the  counterclaim,  fixing  the 
damages  at  $250.  The  court  entered  judgment  on  the  verdict,  and 
the  plaintiff  appeals.     *     *     * 

There  were  no  technical  words  used  in  the  card.  There  is  no  proof 
of  any  usage  of  trade  by  which  the  words  used  have  acquired  a  pe- 
culiar sense  distinct  from  their  popular  sense.  The  words  are  there- 
fore to  be  understood  in  their  plain,  ordinary,  and  popular  sense,  and 
what  they  mean  is  a  question  for  the  court.  In  Manier  v.  Appling, 
112  Ala.  663,  20  South.  978,  the  Supreme  Court  of  Alabama  had  before 
it  the  question  whether  a  card  acknowledging  the  receipt  of  an  order 
sent  in  by  a  drummer,  and  stating  that  "the  same  shall  receive  prompt 
attention,"  was  an  acceptance  of  the  order.  Holding  that  it  was  not, 
the  court  said :  "The  response,  and  the  only  response,  the  defendants 
made,  was  an  acknowledgment  by  postal  card  of  the  receipt  of  the 
order  or  proposal,  accompanied  by  the  expression,  'the  same  shall 
have  prompt  attention' ;  and  it  is  this  response,  it  is  insisted,  consti- 
tuted an  acceptance  of  the  proposal,  converting  the  proposal  and  ac- 
ceptance into  a  contract  of  sale.  Unless  these  words,  'the  same  shall 
have  prompt  attention,'  are  deflected  from  their  natural,  ordinary 
meaning,  they  cannot  be  construed  into  an  acceptance  of  the  proposal 
of  the  plaintiff",  converting  the  two  into  a  concluded  or  completed  con- 
tract. The  operative  words  are  'attention'  and  'prompt.'  The  latter, 
when  read  in  connection  with  the  terms  of  the  proposal  that  the  shoes 
should  be  shipped  on  the  succeeding  15th  of  June,  signifies,  and  was 
intended  to  signify,  no  more  than  that  attention  would  be  given  in  time 
to  meet  this  term.  If  given  within  that  time,  it  was  as  speedy  as  the 
nature  or  necessities  of  the  transaction  required.  Promise  to  give  the 
proposal  attention  was  not  a  promise  of  acceptance ;  it  was  not  an  as- 
sent to  it.  It  was  no  more  than  a  courteous  promise  to  give  it  con- 
sideration, and  this  we  do  not  doubt  is  the  sense  in  which  it  is  gener- 
ally, if  not  universally,  employed  in  transactions  of  this  charac- 
ter "     *     *     * 

In  the  case  at  bar,  if  the  plaintiff's  letter  of  August  23d,  rejecting 
the  order,  had  been  mailed  to  defendant  directly,  and  not  to  the  drum- 
mer, it  is  hard  to  believe  that  this  controversy  would  have  arisen.  It 
is  true  the  card  uses  the  words  "our  prompt  and  careful  attention"; 
but  the  addition  of  the  word  "careful"  adds  nothing  to  the  sense,  nor 
do  the  concluding  words  of  the  card  thanking  Curd  &  Son  for  the 
order  and  hoping  to  merit  future  favors.  These  are  simply  the  usual 
expressions  of  merchants  on  receiving  an  order,  and  throw  little  light 
on  the  question  of  its  acceptance  or  rejection.  The  promise  to  give 
the  order  attention  was  simply  a  promise  to  do  what  the  plaintiff  did. 
They  did  give  it  attention  and  rejected  it.     *     *     * 

In  determining  what  is  an  acceptance  where  there  is  nothing  in  the 
conduct  of  the  parties  to  show  an  acceptance  in  fact  of  the  order, 


G8  CONTRACTS  (Part  1 

we  think  it  is  a  safe  and  sound  rule  that  the  words  of  the  writing  shall 
be  taken  in  their  plain,  ordinary,  and  popular  sense,  and  that  they 
should  not  be  strained  to  express  a  meaning  they  do  not  naturally 
convey. 

We  therefore  conclude  that  there  was  no  acceptance  of  the  order 
for  the  sample  shoes,  and  that  the  court  should  have  instructed  the 
jury  peremptorily  to  find  for  the  plaintiff  the  amount  of  their  claims 
sued  for. 

Judgment  reversed. 


PORTER   V.  GOSSELL. 
(Supreme  Court  of  Arkansas,  1914.     112  Ark.  3S0,  1G6  S.  W.  .533.) 

Action  by  F.  L.  Gossell  against  J.  I.  Porter.  From  a  judgment  for 
plaintiff,  defendant  appeals. 

McCuLLOCH,  C.  J.  Appellee  instituted  this  action  below  against 
appellant  to  recover  damages  resulting  from  appellant's  failure  or  re- 
fusal to  perform  his  alleged  contract  whereby  he  sold  and  undertook 
to  deliver  to  appellee  a  car  load  of  oats.  The  case  was  tried  before 
the  court  sitting  as  a  jury,  and  the  only  question  we  have  to  determine 
is  whether  the  testimony,  viewing  it  in  the  light  most  favorable  to  ap- 
pellee, is  sufficient  to  sustain  the  finding  of  the  court.     *     *     * 

The  first  communication  on  the  subject  was  that  of  appellee  in  a  let- 
ter dated  June  23,  1911,  concerning  the  purchase  of  hay,  and  adding 
the  following  inquiry  about  purchase  of  a  car  load  of  oats :  "Do  you 
know  of  any  one  that  has  any  oats  which  they  might  offer  in  car  load 
lots  in  your  section  of  the  country?  If  so,  I  would  be  glad  to  have 
you  write  me  what  you  think  they  can  be  bought  at,  or  would  like 
to  have  vou  give  me  their  names,  and  I  will  write  them  concerning 
the  same." 

Appellant  replied  by  letter  on  the  same  day  as  follows :  "Yours  of 
23d  to  hand  and  noted.  I  have  no  oats  on  hand,  but  can  quote  you 
for  immediate  delivery,  car  load  lots,  bulk  oats,  at  42  cents,  or  sacked, 
45  cents,  f.  o.  b.  tracks  here.  This  is  a  close  price,  and,  if  you  are 
'in  the  market  for  any  oats  now,  would  be  glad  to  hear  from  you  right 
away  so  that  we  may  be  looking  out  for  them." 

That  letter  constituted  a  proposal  to  enter  into  a  contract  with  re- 
spect to  the  sale  of  a  car  load  of  oats  at  the  price  and  terms  therein 
named.  Appellee  replied  on  June  26th  as  follows:  "Your  favor  of 
the  23d  at  hand,  and  would  say,  if  the  oats  you  quote  are  No.  3  or 
better  red  oats,  destination  weights  and  grades  guaranteed,  I  could 
use  a  car  at  42  cents,  f.  o.  b.  your  track,  immediate  shipment.  I  think 
the  price  you  name  is  just  a  little  bit  high  though,  and  in  fact  have 
been  offered  No.  2  oats  from  Oklahoma  on  the  same  basis.  I  wish 
you  would  please  write  or  wire  me  immediately  upon  receipt  of  this 
if  you  will  ship  car  as  above." 

It  will  be  observed  that  this  letter  did  not  constitute  an  unconditional 
acceptance,  and  was  not  so  regarded  by  appellee.  He  stated  the  con- 
dition that,  if  the  oats  quoted  were  of  a  certain  grade  and  the  weights 
were  guaranteed  at  destination,  he  would  purchase  a  car  at  42  cents. 
The  letter  shows  that  he  did  not  intend  it  as  an  acceptance  of  appel- 
lant's offer,  but  intended  it  as  a  counter  proposition,  for  he  requested 
an  immediate  response  by  letter  or  wire  from  appellant,  indicating 
whether  the  latter  was  willing  to  accede  to  those  terms.    Negotiations 


Ch.  1)  •  OFFER   AND   ACCEPTANCE  69 

had  not  then  proceeded  to  a  contract,  for  the  minds  of  the  parties  had 
not  yet  met.     *     *     * 

Appellant  replied  to  the  last  letter  above  named  on  Jmie  28th  as 
follows:  "I  would  not  want  to  load  and  ship  the  oats  without  you 
would  take  the  city  scale  weights  here.  Oats  are  advancing  some ; 
but  I  can  get  you  a  car  of  bulk  oats  at  42  cents,  I  think,  if  you  will 
take  the  city  scale  weights."     *     *     * 

Appellee,  on  the  next  day  (June  29th),  replied  by  wire  as  follows: 
"Your  letter.  Rush  car  oats,  your  city  scale  weights,  affidavit  at- 
tached, satisfactory."  He  followed  this  up  with  letter,  written  on  the 
same  day,  saying:  "However,  as  advised  you,  please  furnish  me  with 
sworn  weight  certificate  at  your  end,  and  it  will  be  perfectly  satisfac- 
tory. I  ask  this  simply  because  I  know  party  doing  the  weighing 
will  necessarily  be  more  careful  in  furnishing  sworn  certificate." 

The  case  turns  on  the  question  whether  appellee's  letter  and  tele- 
gram constituted  an  unconditional  acceptance  of  appellant's  offer  so 
that  the  minds  of  the  parties  met  on  the  same  proposition,  or  whether 
they  constituted  a  new  oft'er  which  required  acceptance  upon  the  part 
of  appellant  before  a  contract  was  established. 

We  are  of  the  opinion  that  the  letter  and  telegram  were  not  an  ac- 
ceptance of  appellant's  offer,  but  constituted  a  proposal  containing 
another  condition  or  qualification,  namely:  That  an  affidavit  of  the 
weigher  should  be  furnished.  Now,  that  was  a  condition  to  which 
appellant  was  not  bound  to  accede.  There  having  been  no  uncondi- 
tional acceptance  of  his  offer,  he  had  the  right  to  recede  from  the  ne- 
gotiations. The  qualification  thus  imposed  by  appellee  was  a  material 
one,  for  the  reason  that  appellant  had  no  control  over  the  weigher  and 
could  not  require  him  to  furnish  an  affidavit.  If  it  had  been  merely 
a  matter  of  appellant  furnishing  his  own  affidavit  as  to  the  weights, 
the  case  might  be  different;  but  appellee  demanded  the  affidavit  of  the 
weigher,  a  person  over  whom  appellant  is  not  shown  to  have  had  any 
control,  and  therefore  it  was  an  important  qualification  of  the  terms 
originally  proposed  by  appellant.  It  changed  the  terms,  in  other 
words,  to  the  extent  that  it  prevented  the  minds  of  the  parties  from 
meeting,  and  the  negotiations,  therefore,  did  not  result  in  a  contract. 
*     *     * 

"It  is  an  undeniable  principle  of  the  law  of  contracts,"  said  the 
Supreme  Court  of  the  United  States,  "that  an  offer  of  a  bargain  by 
one  person  to  another  imposes  no  obligation  upon  the  former  until  it 
is  accepted  by  the  latter  according  to  the  terms  in  which  the  offer  was 
made.  Any  qualification  of,  or  departure  from,  those  terms  invalidates 
the  offer,  unless  the  same  be  agreed  to  by  the  person  who  made  it.  Un- 
til the  terms  of  the  agreement  have  received  the  assent  of  both  parties, 
the  negotiation  is  open,  and  imposes  no  obligation  upon  either." 
Eliason  v.  Henshaw,  4  Wheat.  225,  4  U  Ed.  556.     "*     *     * 

The  judgment  is  therefore  reversed,  and  the  cause  dismissed. 


MORSE  et  al.  v.  TIT.LOTSON  &  WOLCOTT  OO. 

(United  States  Circoait  Court  of  Appeals,  Second  Circuit,  1918.    253  Fed.  340, 
1G5  C.  C.  A.  122,  1  A.  L.  R.  14S5.) 

The  action  is  for  breach  of  contract.  The  complaint  alleges  that  the 
plaintiff  agreed  to  purchase  notes  of  a  corporation  to  be  organized 
by  defendants,  which  notes  were  to  amount  to  $555,084,  for  the  price 


70  CONTRACTS  (Part  1 

of  $518,000,  and  it  alleges  that  the  defendants  undertook  that  the 
transaction  should  be  carried  out  by  the  corporation,  and  afterwards 
repudiated  the  agreement. 

The  answer  is  a  general  denial,  except  it  states  that  "there  were 
negotiations  between  the  plaintiff  and  the  defendants,  for  the  purpose 
of  agreeing,  if  possible,  upon  a  contract  under  which  the  plaintiff  was 
to  make  a  loan  upon  the  credit  of  some  or  all  of  the  ships  named  in 
the  complaint;  but  the  plaintiff  and  the  defendants  failed  to  agree 
upon  the  terms  of  such  loan,  and  no  contract  was  entered  into  between 
the  plaintiff  and  the  defendants  with  respect  thereto." 

The  case  was  tried  before  Judge  Grubb  and  a  jury,  and  a  verdict 
was  returned- for  the  plaintiff  in  the  sum  of  $31,316,  with  interest  at 
6  per  cent,  from  March  16,  1916. 

Rogers.  Circuit  Judge.  *  *  *  The  defendants  assert  that  the 
minds  of  the  parties  never  met,  that  one  of  the  conditions  of  the  agree- 
ment was  that  the  attorneys  for  the  plaintiff  were  to  be  furnished  with 
abstracts  of  title  to  the  ships  and  that  they  were  to  examine  them,  and 
that  the  deal  was  not  to  be  consummated  until  the  title  was  approved. 
In  the  letter  dated  February  28,  1916,  written  by  the  president  of  the 
plaintiff  corporation  the  writer  stated  that,  when  the  attorneys  "advise 
us  that  the  title  is  good,  we  will  advance  up  to  $280,000  on  bonds  at 
92  and  interest."  And  there  is  no  evidence  in  the  case  that,  when  de- 
fendants on  March  16th  canceled  the  agreement,  the  plaintift''s  coun- 
sel was  satisfied  that  the  titles  were  good  or  that  he  had  rendered  any 
opinion  on  that  subject.  It  will  no  doubt  be  conceded  that  an  offer  to 
sell  implies  that  the  title  is  marketable.  And  if  an  offer  to  sell  is 
made  by  A.  and  accepted  by  B.,  subject  to  the  title  being  found  good 
upon  examination,  it  hardly  seems  that  the  words  "subject  to  the  title 
being  found  good"  import  any  new  term  into  the  acceptance,  so  as 
to  prevent  a  meeting  of  the  minds  upon  the  offer  as  made. 

In  Hussey  v.  Horne-Payne,  L.  R.  8  Ch.  Div.  670  (1878),  an  offer 
was  made  to  sell  land  for  a  specified  sum  of  money,  and  the  offer  was 
accepted  "subject  to  the  title  being  approved  by  our  solicitors."  The 
defendants  afterwards  declined  to  complete  the  sale,  the  title  not  yet 
having  been  approved,  and  the  plaintiff'  claimed  specific  performance. 
The  Vice  Chancellor  had  held  that  the  offer  had  been  unconditionally 
accepted,  and  the  demurrer  was  overruled.  The  case  was  carried  to 
the  Court  of  Appeal,  where  it  was  reversed,  and  the  demurrer  was 
sustained.     In  his  opinion  Jessel,  M.  R.,  said : 

"The  expression  'subject  to  the  title  being  approved  by  our  solicit- 
ors' appears  to  be  plainly  an  additional  term.  The  law  does  not 
give  a  right  to  the  purchaser  to  say  that  the  title  shall  be  approved  by 
any  one  either  by  his  solicitor,  or  his  conveyancing  counsel,  or  any 
one  else.  All  that  he  is  entitled  to  require  is  what  is  called  a  market- 
able title,  or,  as  it  is  sometimes  called,  a  good  title.  Therefore,  when 
he  puts  in  'subject  to  the  title  being  approved  by  our  solicitors,'  he 
must  be  taken  to  mean  what  he  says ;  that  is,  to  make  it  a  condition 
that  solicitors  of  his  own  selection  shall  approve  of  the  title." 

The  case  was  carried  to  the  House  of  Lords  (L.  R.  4  A.  C.  311). 
where  it  was  affirmed,  but  upon  different  ground.  The  House  of 
Lords  did  not  agree  with  the  Court  of  Appeal  upon  the  point  upon 
which  that  court  decided  the  case.  Upon  that  point  the  Lord  Chan- 
cellor (Earl  Cairns)  declared  that  he  was  disposed  to  look  upon  the 
words  "subject  to  the  title  being  approved  by  our  solicitors"  as  meaning 


Ch.  1)  OFFER  AND   ACCEPTANCE  71 

— "nothing  more  than  a  guard  against  its  being  supposed  that  the  title 
was  to  be  accepted  without  investigation,  as  meaning  in  fact  the  title 
must  be  investigated  and  approved  of  in  the  usual  way,  which  would 
be  by  the  solicitor  of  the  purchaser.  Of  course,  that  would  be  sub- 
ject to  any  objection  which  the  solicitor  made  being  submitted  to  deci- 
sion by  a  proper  court,  if  the  objection  was  not  agreed  to." 

The'  thing  sold  in  that  case  happened  to  be  land ;  but  the  decision 
would  have  been  the  same,  had  it  been  bonds  or  ships.     *     *     * 

There  is  a  clear  difference  between  an  agreement  to  sell  "subject  to 
the  approval"  of  title  by  counsel  and  an  agreement  which  declares  that 
the  entire  writing  is  not  to  be  binding  unless  a  certain  thing  happens 
which  never  happens.    *    *    * 

Judginent  affirmed. 


B.  F.  STURTEVAXT  CO.  v.  FIREPROOF  FILM  CO. 

(Court  of  Api^eals  of  New  York,  1915.    216  N.  Y.  199,  110  X.  E.  440,  L.  R.  A. 

1916D,  1069.) 

Action  by  the  B.  F.  Sturtevant  Company  against  the  Fireproof  Film 
Company.    From  a  judgment  for  plaintiff,  defendant  appeals. 

Seabury,  J.  This  action  is  brought  to  recover  damages  for  the 
breach  of  an  alleged  contract.  The  plaintiff  and  defendant  are  foreign 
corporations.  The  plaintiff'  is  a  designer  and  builder  of  heating  and 
ventilating  and  drying  apparatus.  The  defendant  was  engaged  in 
building  a  factory  for  the  manufacture  and  sale  of  motion  picture 
films.  On  December  29,  1911,  the  plaintiff  submitted  to  the  defend- 
ant an  elaborate  "proposal  and  specifications,"  which  had  been  pre- 
pared after  consultation  with  a  representative  of  the  defendant  for 
the  performance  by  the  plaintiff  of  the  work  therein  specified.  The 
"proposal  and  specifications"  was  in  the  form  of  a  letter  addressed 
to  the  defendant,  and  stated  that : 

"Supplementing  our  quotation  of  December  6th,  we  beg  to  quote 
you  upon  the  following  apparatus."  etc.  f 

The  letter  was  typewritten,  and  describes  in  detail  the  apparatus, 
and  specifies  the  terms,  price,  and  time  of  delivery.  The  specifications 
that  are  attached  to  the  letter  are  printed,  although  the  "dimensions 
and  data"  relating  to  the  apparatus  are  supplemented  by  typewritten 
statements.  The  letter  is  signed  "B.  F.  Sturtevant  Company,  by  J. 
L.  Williamson."     Upon  the  letter  is  indorsed  the  following: 

"Accepted:  The  Fireproof  Film  Company.  H.  Kuhn,  Vice  Presi- 
dent and  Treasurer.    Date,  December  30th,  1911." 

The  plaintiff'  actually  commenced  work  under  this  alleged  contract 
on  January  1,   1912.     *     *     * 

Several  letters  passed  between  the  parties,  and  on  February  10,  1912, 
the  defendant  wrote  to  the  plaintiff' :  "We  notify  you  herewith  that  we 
will  have  to  cancel  the  contract  for  fans  for  the  Fireproof  Film  Com- 
pany."    *     *     * 

The  principal  ground  urged  for  the  reversal  of  the  judgment  is  that 
there  was  no  contract  between  the  parties,  because  at  the  bottom  of 
the  first  page  of  the  plaintiff"'s  ofifice  stationery,  upon  which  the  pro- 
posal was  written,  appear  the  words :  "All  agreements  are  contingent 
upon  strikes,  fire,  accidents  or  delays  beyond  our  control.  All  prices 
are  subject  to  change  without  notice,  and  all  contracts  and  orders  taken 


72  CONTRACTS  (Part  1 

are  subject  to  the  approval  of  the  executive  office  at  Hyde  Park, 
Mass." 

These  sentences  are  printed  in  very  small  type,  and  the  first  type- 
written numeral  that  indicates  the  page  number  is  typewritten  over 
this  printed  matter.  The  appellant  claims  that  the  proposal  was  given 
"subject  to  the  approval  of  the  executive  office  at  Hyde  Park,  Mass." 
and  that,  as  there  was  no  proof  that  this  approval  was  given  and  com- 
municated to  it,  there  was  no  contract.  It  appears  clearly  that  Wil- 
liamson had  authority  to  make  the  contract,  and  that  his  action  in  so 
doing  was  ratified  by  the  executive  office  at  Hyde  Park,  Mass.  The 
plaintiff  actually  commenced  to  perform  the  work,  and  continued  work- 
ing under  the  contract  until  it  received  the  notice  of  the  defendant 
that  it  had  canceled  the  contract.  *  *  *  The  claim  that  is  now  urged 
rests  entirely  upon  the  contention  that  the  clause  "all  contracts  or  or- 
ders taken  are  subject  to  the  approval  of  the  executive  office  at  Hyde 
Park,  Mass.,"  is  to  be  deemed  a  part  of  the  proposal.  H  this  provi- 
sion was  a  part  of  the  proposal,  there  could  be  no  proof  of  a  contract 
in  the  absence  of  evidence  that  the  order  was  approved,  and  that  the 
defendant  had  been  notified  of  that  fact. 

In  view  of  the  manner  in  which  this  provision  is  printed  upon  the 
stationery  of  the  plaintiff,  it  cannot  be  held,  as  a  matter  of  law,  that  it 
was  incorporated  in  and  a  part  of  the  proposal.  The  language  of  the 
proposal  is  clear  and  explicit,  and  this  provision,  which  is  printed  in 
small  type,  cannot  be  allowed  to  change,  alter,  or  modify  it,  unless 
it  was  a  part  of  the  proposal.  It  was  not  incorporated  in  the  body  of 
the  proposal  or  referred  to  in  it.  No  suggestion  was  made,  either  in 
the  pleadings  or  the  proof,  that  it  was  a  part  of  the  proposal.  If  an  is- 
sue had  been  raised  upon  the  trial  whether  it  was  a  part  of  the  proposal, 
that  issue  would  have  presented  a  question  of  fact  to  be  determined 
by  the  jury.  As  no  such  cjuestion  was  raised  upon  the  trial,  and  as 
it  does  not  appear  from  an  inspection  of  the  proposal  that  this  pro- 
vision was  a  part  of  it,  the  defendant  is  not  now  in  a  position  to  se- 
cure the  reversal  of  this  judgment  upon  this  ground. 

When  an  offer,  proposal,  or  contract  is  expressed  in  clear  and  ex- 
plicit terms,  matter  printed  in  small  type  at  the  top  or  bottom  of  the 
office  stationery  of  the  writer,  where  it  is  not  easily  seen,  which  is  not 
in  the  body  of  the  instrument  or  referred  to  therein,  is  not  necessarily 
to  be  considered  as  a  part  of  such  oft'er,  proposal,  or  contract.  In 
Sturm  V.  Boker,  150  U.  S.  312,  327,  14  Sup.  Ct.  99,  103,  37  L.  Ed. 
1093,  it  was  said  that :  "The  contract  being  clearly  expressed  in  writ- 
ing, the  printed  billhead  of  the  invoice  can,  upon  no  well-settled  rule, 
control,  modify,  or  alter  it." 

In  Summers  v.  Hibbard  &  Co.,  153  111.  102,  109,  38  N.  E.  899,  901, 
46  Am.  St.  Rep.  872,  the  court  said :  "The  printed  words  were  not 
in  the  body  of  the  letter  or  referred  to  therein.  The  fact  that  they  were 
printed  at  the  head  of  their  letter  heads  would  not  have  the  effect  of 
preventing  appellants  from  entering  into  an  unconditional  contract  of 
sale." 

In  Menz  Lumber  Company  v.  McNeeley  &  Companv,  58  Wash.  223, 
229,  108  Pac.  621,  624,  28  E.  R.  A.  (N.  S.)  1007,  ft  was  said  that: 
"The  printed  matter  on  the  letter  heads  was  not  referred  to  in  either 
the  order  or  the  acceptance,  and  is  not  a  part  of  the  contract.  *  *  * 
The  construction  contended  for  by  the  respondent  would  make  that 
which  is  an  absolute,  unqualified  acceptance  upon  its  face  a  conditional 


Ch.  1)  OFFER  AND   ACCEPTANCE  ,     73 

one  by  reference  to  a  letter  head  which  was  not  referred  to  by  either 
parties."     *     *     * 
Judgment  affirmed. 


J.  L.  PRICE  BROKERAGE  CO.  v.  CHICAGO,  B.  &  Q.  R.  CO.  et  al. 

(Kansas  City  Court  of  Appeals,  Missouri,  1917.    199  S.  W.  732.) 

Action  by  the  J.  L.  Price  Brokerage  Company  against  the  Chicago, 
Burlington  &  Quincy  Railroad  Company  and  another.  Judgment  for 
plaintiff,  and  defendant  Powell  National  Bank  of  Powell,  Wyoming, 
appeals. 

Trimble,  J.  This  was  a  replevin  suit  brought  by  the  plaintiff  brok- 
erage company  at  St.  Joseph.  Mo.,  to  obtain  possession  of  a  carload 
of  potatoes  shipped  from  Wyoming  to  St.  Joseph,  Mo.,  by  the  de- 
fendant National  Bank  of  Powell,  Wyo.  There  was  a  finding  and 
judgment  for  plaintiff*,  from  which  the  defendant  bank  appealed. 

A  sale  of  the  potatoes  was  made  by  an  exchange  of  telegrams  be- 
tween the  Wyoming  bank  and  the  plaintiff.  The  bank  first  telegraphed 
an  offer  to  sell  on  certain  terms.  As  delivered  by  the  bank  to  the  tele- 
graph company,  the  telegram  read :  "Can  furnish  one  car  clean  white 
potatoes  at  one  thirty-five  per  hundred  f.  o.  b.  Powell." 

But,  through  a  mistake  in  the  transmission  of  the  telegram,  when 
delivered  to  the  plaintiff  it  read :  "Can  furnish  one  car  clean  white  po- 
tatoes at  once  thirty-five  per  hundred  f.  o.  b.  Powell." 

Plaintiff  immediately  telegraphed:  "Wire  just  received.  We  ac- 
cept car.     Ship  quick  as  possible."    *     *     * 

When  it,  in  the  first  place,  offered  by  telegram  to  sell  potatoes  to 
the  plaintiff,  it  made  the  telegraph  company  its  agent  to  convey  that 
oft'er,  and,  for  any  mistake  the  agent  made  in  doing  so,  the  appellant 
must  suft'er  the  loss  incurred.  The  contract  w^as  made  at  35  cents  per 
hundred.  It  called  for  delivery  on  board  cars  at  Powell,  Wyo.  The 
seller  appropriated  the  potatoes  to  the  contract,  and  placing  them  on 
board  the  cars  shipped  them  to  St.  Joseph.  In  shipping  the  potatoes 
and  directing  the  bill  of  lading  to  be  turned  over  upon  payment  for 
them,  the  seller  manifestly  intended  that  plaintiff's  should  have  pos- 
session of  the  potatoes,  the  only  thing  remaining  to  be  done  was  the 
payment  of  the  contract  price. 

It  is  true  the  seller  thought  the  contract  price  was  .$1.35,  but  un- 
fortunately for  the  seller,  that  was  its  mistake  so  far  as  the  purchaser 
was  concerned.  As  the  real  contract  stood,  there  was  nothing  further 
to  be  done  except  for  the  purchaser  to  pay  the  agreed  price,  and  when 
said  vendee  made  a  tender  thereof,  it  was  the  same  as  if  the  agreed 
price  had  been  paid.  When  the  tender  w^as  made,  the  title  passed  then 
even  if,  on  account  of  the  terms  of  the  bill  of  lading,  the  title  did  not 
pass  when  the  potatoes  w'ere  delivered  on  board  the  cars  at  Powell. 
When  the  tender  of  the  price  according  to  contract  was  made,  the  ven- 
dor had  no  right  to  withhold  possession.  The  situation  was  the  same  as 
if  the  vendee,  plaintiff",  had  gone  out  to  Powell,  Wyo.,  and  said  to  the 
vendor  bank :  "Here  is  a  contract  made  with  your  agent  for  this  car  of 
potatoes  at  35  cents  per  hundred  and  here  is  the  amount  of  money  due 
at  that  price." 

The  bank  would  have  no  right  to  say :  "I  have  the  potatoes  here  in  a 
car  for  you,  but  my  agent  made  a  mistake  in  contracting  with  you  at 


74  CONTRACTS  (Part  1 

35  cents,  and  therefore  I  will  not  turn  them  over  to  you  until  you  pay 
me  $1.35." 

Under  such  circumstances,  a  tender  of  the  contract  price  on  the 
part  of  the  vendee  would  make  its  right  of  possession  complete,  and 
replevin  would  lie.     *     *    * 

The  judgment  is  affirmed.    All  concur. 


PEPPER  V.   WESTERN  UNION  TELEGRAPH  CO. 

(Supreme  Court  of  Tennesi-ee,  1.SS9.     87  Tenn.  554,  11  S.  W.  783,  4  L.  R.  A. 
u60,  10  Am.  St.  Rep.  699.) 

FoLKES,  J.  This  is  a  suit  by  complainants  to  recover  damages  for 
a  breach  of  a  contract  to  deliver  correctly  a  certain  telegram  intrusted 
to  defendant  as  the  owner  and  operator  of  a  telegraph  line.  The  facts 
necessary  to  a  correct  understanding  of  the  case  are  as  follows:  On 
October  5,  1886.  R.  F.  Bugg  &  Co.,  produce  brokers  at  Birmingham, 
Ala.,  sent  by  defendant  company  to  complainants,  who  were  produce 
dealers  at  Memphis,  this  telegram :  "Quote  cribs  loose,  and  strips 
packed."  Thereupon  complainants  wrote  out  upon  the  usual  printed 
blanks  of  the  defendant  com.pany,  and  delivered  to  the  proper  agent 
of  the  defendant  for  transmission,  this  reply,  addressed  to  Bugg  & 
Co.,  at  Birmingham:  "Car  cribs  six  sixty,  c.  a.  f.,  prompt."  The 
word  "cribs"  meant  in  the  meat  trade  clear  ribs,  and  "c.  a.  f."  meant 
cost  and  freight.  These  terms  were  well  understood  in  the  trade  and 
by  the  defendant.  This  telegram,  as  delivered  by  the  company  to 
Bugg  &  Co.,  read  "six  thirty,"  instead  of  "six  sixty,"  being  in  other 
respects  correct.  Thereupon  Bugg  &  Co.  ordered  a  carload  of  the 
meat,  amounting  to  25,000  pounds.  Complainants  shipped  the  meat, 
and  drew  on  Bugg  &  Co.  for  $1,650,  the  price  of  the  meat  at  "six 
sixty."  Bugg  &  Co.  refused  to  pay  the  draft,  relying  on  the  telegram 
as  received  by  them ;  and  complainants  accepted  of  them  $1,575,  the 
value  of  the  meat  at  the  price  of  "six  thirty,"  making  a  loss  to  com- 
plainants of  $75.  Complainants  at  once  notified  the  company  of  the 
mistake,  and  that  the  same  had  entailed  upon  them  the  loss  of  $75,  and 

demanded  payment  of  this  sum,  which  the  company  declined  to  make. 
*    *    * 

There  was  judgment  for  the  complainants  for  the  sum  of  $75,  with 
interest  from  the  date  of  the  delivery  of  the  meat.  Defendant  has 
appealed,  assigning  errors. 

It  is  unnecessary  for  us  to  determine  what  is  the  measure  of  dam- 
?ges  for  error  ip.  the  transmission  of  a  telegram  written  in  cipher — 
a  question  upon  which  the  authorities  are  not  in  harmony,  and  one 
where  there  are  very  many  nice  distinctions  and  refinements.  The 
telegram  before  us  is  in  no  sense  a  cipher.  It  is  an  abbreviation  mere- 
ly, and,  from  the  proof  in  the  cause,  an  abbreviation  known  to  the  com- 
pany.    *     *     =i= 

This  brings  us  to  the  consideration  of  the  third  and  serious  ground 
of  defense — the  measure  of  damages  in  this  particular  case.  The 
contention  of  the  counsel  for  complainants  is — and  such  was  the  view 
of  the  learned  chancellor — that  the  company  was  the  agent  of  the 
complainants  as  the  sender  of  the  telegram,  and  that  the  complainants 
were  therefore  bound  to  let  Bugg  &  Co.  have  the  goods  at  $6.30,  the 
price  erroneously  named  in  the  dispatch  as  delivered;  and  tliat  the 
loss  must  be  measured  by  the  difference  between  the  price  at  which 


Ch.  1)  OFFER  AND   ACCEPTANCE  75 

they  were  willing  and  expected  to  sell  and  the  price  which  in  conse- 
quence of  the  error  of  such  agent  they  were  compelled  to  sell. 

In  our  opinion  this  contention  cannot  be  maintained,  either  upon 
principle  or  authority.  The  minds  of  the  party  who  sends  a  message 
in  certain  words  and  the  party  who  receives  the  message  in  entirely  dif- 
ferent words  have  never  met.  Neither  can  therefore  be  bound  the 
one  to  the  other,  unless  the  mere  fact  of  employment  of  the  telegraph 
company,  as  the  instrument  of  communication,  makes  the  latter  the 
agent  of  the  sender.  Upon  what  principle  can  it  be  said  such  an 
agency  arises?  The  telegraph  company  is  in  no  sense  a  private  agent. 
It  is  clothed  by  the  state  with  certain  privileges ;  it  is  allowed  to  exer- 
cise the  right  of  eminent  domain.  In  exchange  for  such  franchises 
it  is  onerated  with  certain  duties,  one  of  which  is  the  obligation  to  ac- 
cept, and  transmit  over  its  wires,  all  messages  delivered  to  it  for  that 
purpose.  The  parties  who  resort  to  this  instrumentality  have  no  other 
means  of  obtaining  the  benefits  of  rapid  communication,  which  is  the 
price  of  its  existence.  They  have  no  opportunity  and  no  power  to 
supervise  or  direct  the  manner  or  means  which  the  company  use  in  the 
discharge  of  their  duties  to  the  public  in  the  transmission  of  messages 
for  particular  individuals.  They  can  only  deliver  to  the  company  a 
legible  copy  of  w^hat  they  wish  communicated,  with  no  expectation 
that  such  paper  is  to  be  carried  to  the  party  addressed ;  and  their  con- 
nection with  the  company  there  and  then  ceases.  They  have  contract- 
ed with  the  company  to  transmit  the  words  of  the  message  to  the 
party  addressed,  through  its  own  agents,  and  with  its  own  means.  The 
party  receiving  the  message  knows  that  he  is  not  obtaining  any  com- 
munication direct  from  the  sender,  but  that  he  is  receiving  what  the 
company  has  taken,  and  changed  the  form  of,  from  the  paper  on 
which  it  was  written,  transmitted  by  electricity  over  the  wires  of  the 
company,  and  reduced  to  writing  at  its  destination  by  an  agent  of  the 
company ;  and  that  it  only  represents  what  is  written  by  the  sender, 
in  the  event  that  there  has  been  no  imperfection  in  the  mechanism  of 
the  company,  nor  negligence  in  the  servants  of  the  company. 

Knowing  the  scope  of  the  employment  and  the  methods  of  transmis- 
sion, the  receiver  should  be  held  to  know  that  the  sender  is  bound  by 
the  contents  of  the  telegram  as  received  only  so  far  as  it  is  a  faithful 
reproduction  of  what  is  sent.  He  knows,  furthermore,  that  if  he  acts 
on  the  telegram,  and  it  should  turn  out  to  have  been  altered  by  the 
negligence  or  wrongful  act  of  the  company,  the  lattei:  is  liable  to  him 
for  such  injury  as  he  may  sustain  thereby.  Ordinarily  there  is  no  rela- 
tion of  master  and  servant  between  the  sender  of  the  telegram  and  the 
company.  Where  this  relationship  does  not  exist  the  principal  is  not 
responsible  for  the  torts  of  the  agent,  and  the  negligent  delivery  of 
an  altered  message,  when  acted  on  by  the  receiver  to  his  detriment,  is 
a  tort  for  which  the  telegraph  company  alone  is  responsible.  The 
company  retaining  exclusive  control  of  the  manner  of  performance, 
and  of  its  own  employees  and  instrumentalities,  the  sender  of  the 
message  being  absolutely  without  voice  in  the  matter,  it  seems  to  ns 
that  the  position  of  the  company  to  its  employer  is  that  of  "independent 
contractor,"  as  defined  and  understood  in  the  well-settled  class  of  cas- 
es where  the  employer  is  held  to  be  not  responsible  for  the  negligence 
of  the  contractor  in  the  performance  of  his  work  or  undertaking.  The 
many  and  marked  differences  between  the  employment  of  such  com- 
panies to  transmit  a  dispatch  and  the  employment  of  a  private  person 


76  CONTRACTS  (Part  1 

to  deliver  a  verba!  message,  are  so  manifest  that  we  cannot  assume 
the  liabihty  of  the  sender  in  the  first  instance,  from  his  conceded  Ha- 
bihty  in  the  last  for  the  negligence  of  the  instrumentality  employed. 
Such  a  holding  not  only  does  violence  to  well-settled  principles  of  the 
law  of  agency,  but  may  lead  to  the  absolute  ruin  of  the  party  employ- 
ing this  useful,  and  now  necessary,  public  medium  of  rapid  transmis- 
sion of  intelligence ;  so  that  every  consideration  of  public  policy  would 
seem  to  point  to  a  dififerent  result,  unless  the  courts  find  themselves 
constrained  by  the  great  weight  of  authority  to  uphold  the  contention 
here  made. 

How  are  the  authorities?  In  England  and  Scotland  the  idea  of 
agency  in  the  company,  so  as  to  bind  the  sender  upon  a  telegram  negli- 
gently changed  in  the  transmission,  is  repudiated.  *  *  *  Mr.  Gray, 
in  his  work  on  Communication  by  Telegraphy,  while  stating  the  law 
to  be  in  England  and  Scotland  as  above,  says  that  in  this  country  the 
rule  is  in  general  otherwise,  citing  a  number  of  cases  in  note  3,  section 
104.  It  is  to  be  noticed,  however,  that  this  author,  after  making  the 
statement  above  given,  throws  the  weight  of  his  learning  and  research 
against  what  he  says  is  the  tendency  of  the  American  courts,  and  in 
an  instructive  discussion  of  the  question  seems  to  demonstrate  that  the 
English  rule  is  the  correct  one.     *     *     * 

Being  of  opinion,  then,  that  the  complainants  were  not  bound  to  let 
Bugg  &  Co.  have  the  goods  at  the  price  erroneously  communicated  by 
the  telegraph  company,  but  that  it  was  their  privilege  to  have  reclaimed 
them  when  Bugg  &  Co.  refused  to  pay  the  price  as  written  by  com- 
plainants, let  us  see  what  were  their  rights  and  duties,  and  what  is  the 
criterion  of  damage  in  such  a  case.  They  were  bound  to  have  taken 
just  such  steps  as  a  reasonably  prudent  man  would  take  to  save  him- 
self had  the  mistake  or  error  been  his  own.  A  man,  under  such  cir- 
cumstances, is  not  to  be  held  to  have  done  the  wisest  and  best  thing, 
but  to  the  exercise  of  reasonable  skill  and  diligence.     *     *     * 

Applying  these  principles  to  the  case  at  bar,  we  find  no  proof  in  the 
record  that  would  enable  us  to  ascertain  the  damages  fairly  resulting 
from  the  negligence  of  the  telegraph  company.  There  is  nothing  to 
show  what  was  the  market  value  of  the  meat  at  Birmingham,  nor  at 
Memphis,  unless  the  telegram  as  written  by  the  sender  is  to  be  consid- 
ered as  fixing  it.  This  is  evidence  of  what  the  sender  was  willing  to 
take  for  it,  and,  in  the  absence  of  proof  to  the  contrary,  may  be  said 
to  furnish  evidence  of  the  market  value  in  favor  of  the  party  making 
the  offer,  as  against  third  parties.  There  is  no  proof  as  to  freight 
either  way,  so  that  we  cannot  say  whether  the  complainants  have  acted 
prudently  in  selling  at  the  price  named  in  the  erroneous  telegram,  or 
whether  they  should  have  sought  other  purchasers  at  Birmingham,  or 
recalled  the  meat  to  Memphis,  or  taken  some  other  course.  In  the 
absence  of  some  such  proof  it  is  impossible  for  the  court  to  ascertain 
the  extent  of  the  injury  inflicted  by  the  company's  negligence,  so  as  to 
fix  and  determine  the  compensation  therefor  with  certainty.  But,  the 
negligence  being  established,  and  the  complainants  having  shown  that 
they  disposed  of  the  goods  at  the  price  named  in  the  erroneously  de- 
livered message,  which  was  one  of  the  means  open  to  the  shipper  of 
extricating  himself  with  the  smallest  loss,  and  there  being  no  proof 
whatever  tending  to  show  that  such  disposition  of  the  goods  was  not 
the  very  best  thing  to  be  done  under  the  circumstances,  we  are  of  opin- 
ion that  the  difference  between  the  price  named  in  the  telegram  as 


Ch.l)  OFFER  AND   ACCEPTANCE  77 

sent  and  as  delivered,  where  sale  is  actually  made  at  the  latter  price, 
may  be  taken  as  the  correct  measure  of  damages  where,  as  in  the  case 
at  bar,  the  difference  is  not  so  great  a^  to  excite  suspicion,  and  where 
from  the  character  of  the  goods  it  does  not  appear  unreasonable  and 
improper  to  make  such  disposition  of  the  goods.  *  *  * 
Let  the  decree  be  affirmed,  with  costs. 


McKIN'NEY  et  al.  v.  BOSTON  &  M.  R.  R. 

(Supreme  Judicial   Court  of  ^Massachusetts,    1914.     217   Mass.   274, 
104  N.  E.  446.) 

Action  by  Daniel  L.  McKinney  and  others  against  the  Boston  & 
Maine  Railroad. 

LoRiNG,  J.  The  plaintiffs  in  this  action  had  a  verdict  in  the  sum  of 
$300  for  negligence  in  the  transportation  of  a  horse  from  Newbury- 
port  to  Boston.  The  horse  was  shipped  at  Newburyport  by  a  sei-vant 
of  a  third  person  (who  shipped  the  horse  to  the  plaintiffs  in  their  be- 
half), one  Herlihy  by  name.  Herlihy  testified  that  he  could  not  read 
nor  "sign  his  name."  The  defendant  produced  a  contract  or  bill  of 
lading  signed:  "John  Herheley,  Shipper,  by  His  Mark,  Shipper's 
Agent.  F.  W.  Russell,  Witness."  The  words  "Shipper,"  "by,"  "Ship- 
per's Agent,"  and  "Witness"  were  printed  words  in  a  blank  used  by  the 
defendant  in  case  of  the  shipment  here  in  question.  The  other  words 
were  written.  Herlihy  further  testified  that  he  delivered  the  horse  to 
"Russell,  one  of  defendant's  agents,  for  shipment."  *  *  *  In  addi- 
tion Herlihy  testified  that  at  this  time  he  made  his  mark  on  two  pa- 
pers, one  of  which  the  defendant's  agent  Russell  kept  and  the  other 
Russell  gave  to  him ;  that  he  did  not  know  what  he  did  with  the  pa- 
per which  Russell  gave  him,  on  which  he  made  his  mark ;  he  did  not 
know  whether  he  kept  it  in  his  pocket  or  "put  it  in  the  office"  of  his 
employer,  who  was  shipping  the  horse  to  the  plaintiffs.  He  further 
testified  "that  Russell  did  not  read  over  the  live  stock  contract  to  him 
or  say  anything  about  it  and  asked  no  question  as  to  whether  he  want- 
ed the  high  rate  or  the  low  rate ;  that  he  didn't  know  whether  the  rate 
which  he  had  was  the  high  rate  or  the  low  rate."  It  was  the  conten- 
tion of  the  defendant  that  by  the  terms  of  the  contract  or  bill  of  lad- 
ing the  consignee  in  consideration  of  the  rate  of  freight  charged  agreed 
that  the  valuation  of  the  hoise  was  to  be  $100,  and  that  beyond  that 
valuation  it  (the  carrier)  was  not  to  be  liable  in  any  event.     *     *     * 

It  is  plain  that  the  plaintiff's  were  entitled  to  the  full  damage  done 
to  the  horse  unless  the  shipper  in  behalf  of  the  plaintiffs  had  entered 
into  a  special  contract  limiting  the  defendant's  liability. 

It  is  settled:  That  a  special  agreement  between  a  shipper  and  a 
carrier  by  which  in  consideration  of  the  rate  charged  the  value  of  the 
property  shipped  is  agreed  upon  in  case  of  injury  or  loss,  is  valid. 
*  *  *  That  one  who  receives  from  a  common  carrier  a  bill  of  lad- 
ing which  purports  on  its  face  to  set  forth, the  terms  of  carriage,  and 
accepts  and  acts  upon  it,  without  objection,  will  be  ordinarily  presumed 
as  in  other  cases  of  contract,  in  the  absence  of  fraud  or  other  sufficient 
excuse,  to  have  assented  to  its  terms,  as  far  as  the  provisions  therein 
contained  are  lawful  and  not  opposed  to  public  policy.  *  *  *  That 
a  person  who  signs  a  written  instrument  as  the  contract  between  him 
and  another  cannot  show  that  he  did  not  know  its  contents  "because 
of  his  limited  intelligence  and  inability  to  read  our  language."    *     *    * 


78  CONTRACTS  (Part  1 

It  was  held  in  Jones  v.  Cincinnati,  Selma  &  I\Iobile  R.  R.,  89  Ala. 
376,  8  South.  61,  that  the  effect  of  the  acceptance  of  a  bill  of  lading  by 
a  shipper  without  objection  is  not  affected  by  the  fact  that  the  shipper 
could  not  read  nor  write.    *    *    * 

Where  the  shipper  signs  the  bill  of  lading  the  carrier  has  a  right  to 
assume  that  he  can  read  and  that  he  understands  what  he  has  signed 
and  so  assents  to  the  terms  of  the  writing  as  a  contract.  As  matter 
of  business  fairness  it  is  not  open  to  the  shipper  in  such  a  case  to  show 
that  he  did  not  read  the  bill  of  lading  or  that  he  could  not  understand 
its  terms.  *  *  *  The  carrier  has  the  right  to  make  the  same  as- 
sumption when  a  shipper  who  cannot  read  or  write  accepts  a  receipt 
containing  the  terms  of  the  contract  of  carriage  without  disclosing  the 
fact  rhat  he  is  an  illiterate  person.  *  *  *  But  where  the  shipper 
tells  the  carrier  that  he  cannot  read  or  (as  in  the  case  at  bar)  that  fact  is 
otherwise  brought  home  to  the  carrier's  knowledge,  there  is  nothing 
which  gives  the  carrier  a  right  to  make  any  assumption.  In_  such  a 
case,  the  question  whether  a  contract  (limiting  the  carrier's  liability) 
has  or  has  not  been  made  depends  upon  the  fact  of  the  shipper's  hav- 
ing in  fact  known  and  agreed  to  it. 

In  the  case  at  bar  the  fact  that  the  shipper's  servant  was  an  illiter- 
ate person  was  brought  home  to  the  carrier  by  the  fact  that  the  servant 
executed  the  bill  of  lading  by  making  his  mark,  and  the  further  fact 
that  the  agent  who  acted  for 'the  carrier  in  arranging  for  the  shipment 
witnessed  the  mark  so  made.  Further  the  shipper's  servant  testified 
that  the  carrier's  agent  "did  not  read  over  the  live  stock  contract  to 
him  or  say  anything  about  it  and  asked  no  question  as  to  whether  he 
wanted  the  high  rate  or  the  low  rate;  that  he  did  not  know  whether 
the  rate  which  he  had  was  the  high  rate  or  the  low  rate."  And  lastly, 
there  was  no  evidence  that  the  bill  of  lading  ever  reached  the  shipper 
or  the  plaintiffs,  and  so  there  was  no  evidence  that  it  was  acted  upon 
as  the  contract  under  which  the  horse  was  accepted  by  the  carrier.  It 
is  to  be  noted  that  the  duplicate  original  of  the  bill  of  lading  put  in  evi- 
dence was  produced  by  the  defendant. 

The  presiding  judge  was  right  in  refusing  to  rule  under  these  cir- 
cumstances that  as  matter  of  law  the  shipper  in  behalf  of  the  plain- 
tiffs had  entered  into  a  special  contract  with  the  carrier  limiting  its 
common-law  liability. 

In  accordance  with  the  terms  of  the  report  the  verdict  is  to  stand. 


ROYAL  IXS.  CO.  V.  BEATTY. 

(Suri-eme  Court  of  Pennsylvania.  18SS.     119  Pa.  6,  12  Atl.  607, 
4  Am.  St.  Rep.  622.) 

This  was  an  action  by  William  Beatty  against  the  Royal  Insurance 
Company,  on  a  policy  of  fire  insurance,  averring  a  renewal,  and  that 
it  was  in  force  at  the  time  of  the  fire.  There  was  a  verdict  and  judg- 
ment for  plaintiff'.     Defendant  brings  error. 

Green,  J.  We  find  ourselves  unable  to  discover  any  evidence  of  a 
contractual  relation  between  the  parties  to  this  litigation.  The  contract 
alleged  to  exist  was  not  founded  upon  any  writing,  nor  upon  any 
words,  nor  upon  any  act  done  by  the  defendant.  It  was  founded  alone 
upon  silence.  While  it  must  be  conceded  that  circumstances  may  exist 
which  will  impose  a  contractual  obligation  by  mere  silence,  yet  it  must 
be  admitted  that  such  circumstances  are  exceptional  in  their  character, 


Ch.  1)  OFFER  AND   ACCEPTANCE  79 

and  of  extremely  rare  occurrence.  We  have  not  been  furnished  with 
a  perfect  instance  of  the  kind  by  the  counsel  on  either  side  of  the  pres- 
ent case.  Those  cited  for  defendant  in  error  had  some  other  element 
in  them  than  mere  silence  which  contributed  to  the  establishment  of 
the  relation.  But,  in  any  point  of  view,  it  is  difficult  to  understand 
how  a  legal  liability  can  arise  out  of  mere  silence  of  the  party  sought 
to  be  affected,  unless  he  was  subject  to  a  duty  of  speech,  which  was 
neglected,  to  the  harm  of  the  other  party.  If  there  was  no  duty  of 
speech,  there  could  be  no  harmful  omission  arising  from  mere  silence. 

Take  the  present  case  as  an  illustration.  The  alleged  contract  was 
a  contract  of  fire  insurance.  The  plaintiff  held  two  policies  against  the 
defendant,  but  they  had  expired  before  the  loss  occurred,  and  had  not 
been  formally  renewed.  At  the  time  of  the  fire  the  plaintiff'  held  no 
policy  against  the  defendant.  But  he  claims  that  the  defendant  agreed 
to  continue  the  operation  of  the  expired  policies  by  what  he  calls 
"binding"  them.  How  does  he  prove  this  ?  He  calls  a  clerk  who  took 
the  two  policies  in  question,  along  with  other  policies  of  another  person, 
to  the  agent  of  the  defendant  to  have  them  renewed,  and  this  is  the 
account  he  gives  of  what  took  place :  "The  Royal  Company  had  some 
policies  to  be  renewed,  and  I  went  in  and  bound  them.  I  went  into 
the  office  of  the  Royal  Company,  and  asked  them  to  bind  the  two  poli- 
cies of  Mr.  Beatty  expiring  tomorrow.  These  were  the  policies  in 
question.  I  renewed  the  policies  of  Mr.  Priestly  up  to  the  1st. of  April. 
There  was  nothing  more  said  about  the  Beatty  policies  at  that  time. 
They  did  not  say  anything,  but  I  suppose  that  they  went  to  their  books 
to  do  it.  They  commenced  to  talk  about  the  night  privilege,  and  that 
was  the  only  subject  discussed." 

It  will  be  perceived  that  all  that  the  witness  says  is  that  he  asked  the 
defendant's  agent  to  bind  the  two  policies,  as  he  states  at  first,  or  to 
renew  them,  as  he  says  last.  He  received  no  answer:  nothing  was 
said,  nor  was  anything  done.  How  is  it  possible  to  make  a  contract 
out  of  this?  It  is  not  as  if  one  declares  or  states  a  fact  in  the  presence 
of  another,  and  the  other  is  silent.  If  the  declaration  imposed  a  duty 
of  speech  on  peril  of  an  inference  from  silence,  the  fact  of  silence 
might  justify  the  inference  of  an  admission  of  the  truth  of  the  declared 
fact.  It  would  then  be  only  a  question  of  hearing,  which  would  be 
chiefly,  if  not  entirely,  for  the  jury.  But  here  the  utterance  was  a 
question,  and  not  an  assertion ;  and  there  was  no  answer  to  the  ques- 
tion. Instead  of  silence,  being  evidence  of  an  agreement  to  do  the 
thing  requested,  it  is  evidence,  either  that  the  question  was  not  heard, 
or  that  it  was  not  intended  to  comply  with  the  request.  Especially  is 
this  the  case  when,  if  a  compliance  was  intended,  the  request  would 
have  been  followed  by  an  actual  doing  of  the  thing  requested.  But 
this  was  not  done ;  how,  then,  can  it  be  said  it  was  agreed  to  be  done  ? 
There  is  literally  nothing  upon  which  to  base  the  inference  of  an  agree- 
ment, upon  such  a  state  of  facts.  Hence  the  matter  is  for  the  court, 
and  not  for  the  jury;  for,  if  there  may  not  be  an  inference  of  the  con- 
troverted fact,  the  jury  must  not  be  permitted  to  make  it. 

What  has  thus  far  been  said  relates  only  to  the  effect  of  the  non-ac- 
tion of  the  defendant,  either  in  responding,  or  doing  the  thing  re- 
quested. There  remains  for  consideration  the  eff'ect  of  the  plaintiff's 
non-action.  When  he  asked  the  question  whether  defendant  would 
bind  or  renew  the  policies,  and  obtained  no  answer,  what  was  his 
duty  ?     Undoubtedly,  to  repeat  his  question  until  he  obtained  an  an- 


80  CONTRACTS  (Part  1 

swer;  for  his  request  was  that  the  defendant  should  make  a  contract 
with  him,  and  the  defendant  says  nothing.  Certainly,  such  silence  is 
not  an  assent  in  any  sense.  There  should  be  something  done,  or  else 
something  said,  before  it  is  possible  to  assume  that  a  contract  was  es- 
tablished. There  being  nothing  done  and  nothing  said,  there  is  no  foot- 
ing upon  which  an  inference  of  agreement  can  stand.  But  what  was 
the  position  of  the  plaintiff?  He  had  asked  the  defendant  to  make  a 
contract  with  him,  and  the  defendant  had  not  agreed  to  do  so ;  he  had 
not  even  answered  the  question  whether  he  would  do  so.  The  plaintiff 
knew  he  had  obtained  no  answer,  but  he  does  not  repeat  the  question ; 
he,  too,  is  silent  thereafter,  and  he  does  not  get  the  thing  done  which 
he  asks  to  be  done.  Assuredly,  it  was  his  duty  to  speak  again,  and  to 
take  further  action,  if  he  really  intended  to  obtain  the  defendant's  as- 
sent ;  for  what  he  wanted  was  something  affirmative  and  positive,  and 
without  it  he  has  no  status.  But  he  desists,  and  does  and  says  nothing 
further.  And  so  it  is  that  the  whole  of  the  plaintiff's  case  is  an  unan- 
swered request  to  the  defendant  to  make  a  contract  with  the  plaintiff, 
and  no  further  attempt  by  the  plaintiff"  to  obtain  an  answer,  and  no 
actual  contract  made.  Out  of  such  facts  it  is  not  possible  to  make  a 
legal  inference  of  a  contract. 
Judgment  reversed. 


HOBBS  V.  MASSASOIT  WHIP  00. 

■  (Supreme  Judicial  Court  of  Massachusetts,  1893.    158  Mass.  194, 
33  N.  E.  495.) 

Action  by  Charles  A.  Hobbs  against  the  Massasoit  Whip  Company 
to  recover  for  eel  skins  alleged  to  have  been  sold  to  defendant  by 
plaintiff.     Judgment  for  plaintiff,  and  defendant  excepts. 

Holmes,  J.  This  is  an  action  for  the  price  of  eel  skins  sent  by  the 
plaintiff  to  the  defendant,  and  kept  by  the  defendant  some  months, 
until  they  were  destroyed.  It  must  be  taken  that  the  plaintiff  received 
no  notice  that  the  defendants  declined  to  accept  the  skins.  The  case 
comes  before  us  on  exceptions  to  an  instruction  to  the  jury  that,  wheth- 
er there  was  any  prior  contract  or  not,  if  skins  are  sent  to  the  de- 
fendant, and  it  sees  fit,  whether  it  has  agreed  to  take  them  or  not,  to 
lie  back,  and  to  say  nothing,  having  reason  to  suppose  that  the  man 
who  has  sent  them  believes  that  it  is  taking  them,  since  it  says  nothing 
about  it,  then,  if  it  fails  to  notify,  the  jury  would  be  warranted  in  find- 
ing for  the  plaintiff. 

Standing  alone,  and  unexplained,  this  proposition  might  seem  to 
imply  that  one  stranger  may  impose  a  duty  upon  another,  and  make 
him  a  purchaser,  in  spite  of  himself,  by  sending  goods  to  him,  unless 
he  will  take  the  trouble,  and  bear  the  expense,  of  notifying  the  sender 
that  he  will  not  buy.  The  case  was  argued  for  the  defendant  on  that 
interpretation.  But,  in  view  of  the  evidence,  we  do  not  understand 
that  to  have  been  the  meaning  of  the  judge,  and  we  do  not  think  that 
the  jury  can  have  understood  that  to  have  been  his  meaning.  The 
plaintiff  was  not  a  stranger  to  the  defendant,  even  if  there  was  no 
contract  between  them.  He  had  sent  eel  skins  in  the  same  way  four 
or  five  times  before,  and  they  had  been  accepted  and  paid  for.  On  the 
defendant's  testimony,  it  was  fair  to  assume  that  if  it  had  admitted 
the  eel  skins  to  be  over  22  inches  in  length,  and  fit  for  its  business,  as 
the  plaintiff  testified  and  the  jury  found  that  they  were,  it  would  have 


Ch.  1)  OFFER  AND   ACCEPTANCE  81 

accepted  them ;  that  this  was  understood  by  the  plaintiff ;  and,  indeed, 
that  there  was  a  standing  offer  to  him  for  such  skins. 

In  such  a  condition  of  things,  the  plaintiff  was  warranted  in  sending 
the  defendant  skins  conforming  to  the  requirements,  and  even  if  the 
offer  was  not  such  that  the  contract  was  made  as  soon  as  skins  corre- 
sponding to  its  terms  were  sent,  sending  them  did  impose  on  the  de- 
fendant a  duty  to  act  about  them ;  and  silence  on  its  part,  coupled  with 
a  retention  of  the  skins  for  an  unreasonable  time,  might  be  found  by 
the  jury  to  warrant  the  plaintiff  in  assuming  that  they  were  accepted, 
and  thus  to  amount  to  an  acceptance.  *  *  *  The  proposition  stands 
on  the  general  principle  that  conduct  which  imports  acceptance  or  as- 
sent is  acceptance  or  assent,  in  the  view  of  the  law,  whatever  may  have 
been  the  actual  state  of  mind  of  the  party — a  principle  sometimes  lost 
sight  of  in  the  case?.    *    *    * 

Exceptions  overruled. 


SECTION  6.— OFFER  AND  ACCEPTANCE  IMPLIED 
IN  FACT   OR  IN   LAW 


COLUMBUS,  H.  V.  &  T.  EY.  CO.  v.  GAFFNEY. 

(Supreme  Court  of  Ohio,  1901.    65  Ohio  St.  104.  61  N.  E.  152.) 

MiNSHALL,  C.  J-  ^=  *  *  There  is  some  confusion  in  the  state- 
ment of  the  law  applicable  to  what  are  frequently  called  "implied  con- 
tracts," arising  from  the  fact  that  obligations  generically  different  have 
been  classed  as  such,  not  because  of  any  real  analog}^  but  because, 
where  the  procedure  of  the  common  law  prevails,  by  the  adoption  of  a 
fiction  in  pleading — that  of  a  promise  where  none  in  fact  exists,  or  can 
in  reason  be  supposed  to  exist — the  favorite  remedy  of  implied  assump- 
sit could  be  adopted.  This  was  so  in  that  large  class  of  cases  where 
suit  is  brought  to  recover  money  paid  by  mistake,  or  which  has  been 
obtained  by  fraud.  Here  it  is  said  the  law  implies  a  promise  to  repay 
the  money,  when  it  is  well  understood  that  the  promise  was  a  mere 
fiction,  and  in  most  cases  without  any  foundation  whatever  in  fact. 
The  same  practice  was  adopted  where  necessaries  had  been  furnished 
an  insane  person,  or  a  neglected  wife  or  child.  In  all  these  cases  no 
true  contract  exists.  They  are,  by  many  authors,  termed  "quasi-con- 
tracts." a  term  borrowed  from  the  civil  law.  In  all  these  cases  no 
more  is  meant  than  that  the  law  imposes  a  civil  obligation  on  the  de- 
fendant to  restore  money  so  obtained,  or  to  compensate  one  who  has 
furnished  necessaries  to  his  wife  or  child,  where  he  has  neglected  his 
duty  to  provide  for  them,  or,  by  reason  of  mental  infirmity,  is  unable 
to  obtain  them  for  himself.  But  contracts  that  are  true  contracts  are 
frequently  termed  implied  contracts — as  Avhere,  from  the  facts  and 
circumstances,  a  court  or  jury  may  fairly  infer  as  a  matter  of  fact  that 
a  contract  existed  between  the  parties,  explanatory  of  the  relation  exist- 
ing between  them.  Such  implied  contracts  are  not  generically  different 
from  express  contracts.  The  difference  exists  simply  in  the  mode  of 
proof.  Express  contracts  are  proved  by  showing  that  the  terms  were 
expressly  agreed  on  by  the  parties,  while  in  the  other  case  the  terms 
are  inferred  as  a  matter  of  fact  from  the  evidence  offered  of  the  cir- 
B.&iB.Brs.LAW— 6 


82  CONTRACTS  (Part  1 

rumstances  surrounding  the  parties,  making  it  reasonable  that  a  con- 
tract existed  between  them  by  tacit  understanding.  In  such  cases  no 
fictions  are  or  can  be  indulged.  The  evidence  must  satisfy  the  court 
and  jury  that  the  parties  understood  that  each  sustained  to  the  other 
a  contractual  relation,  and  that  by  reason  of  this  relation  the  defendant 
is  indebted  to  the  plaintiff  for  services  performed  or  for  goods  sold 
and  delivered. 

In  the  leading  case  of  Hertzog  v,  Hertzog,  29  Pa.  465,  the  distinc- 
tion is  clearly  stated  by  Judge  Lowrie.  After  quoting  from  Black- 
stone,  and  observing  that  his  language  is  open  to  criticism,  he  says : 
"There  is  some  looseness  of  thought  in  supposing  that  reason  and 
justice  ever  dictate  any  contracts  between  parties,  or  impose  such  upon 
them.  All  true  contracts  grow  out  of  the  intentions  of  parties  to  trans- 
actions, and  are  dictated  only  by  their  mutual  and  accordant  Wills. 
When  the  intention  is  expressed,  we  call  the  contract  an  express  one. 
When  it  is  not  expressed,  it  may  be  inferred,  implied,  or  presumed 
from  circumstances  really  existing,  and  then  the  contract,  thus  ascer- 
tained, is  called  an  implied  one.  *  *  *  It  is  quite  apparent,  there- 
fore, that  radically  different  relations  are  classified  under  the  same 
term,  and  this  often  gives  rise  to  indistinctness  of  thought.  And  this 
was  not  at  all  necessary ;  for  we  have  another  well-autborized  tech- 
nical term  exactly  adapted  to  the  office  of  making  the  true  distinction. 
The  latter  class  are  merely  constructive  contracts,  while  the  former 
are  only  implied  ones.  In  one  case  the  contract  is  a  mere  fiction,  a 
form  imposed  in  order  to  adapt  the  case  to  a  given  remedy ;  in  the 
other  it  is  a  fact  legitimately  inferred.  In  one  the  intention  is  disre- 
garded ;  in  the  other  it  is  ascertained  and  enforced.  In  one  the  duty 
defines  the  contract ;  in  the  other  the  contract  defines  the  duty."  The 
subject  is  instructively  treated  by  Professor  Keener  in  chapter  I  of 
his  work  on  QuasirContracts.  He  expresses  the  diff'erence  between 
an  express  contract  and  a  true  implied  contract  as  follows :  In  the 
one  case  the  language  of  contract  is  in  terms  used,  and  because  of  the 
expressions  used  the  contract  is  called  an  express  contract ;  whereas 
in  the  other  case  the  contract  is  established  by  the  conduct  of  the  par- 
ties, viewed  in  the  light  of  surrounding  circumstances,  and  is  called  a 
contract  implied  in  fact."    *    *    * 


AUSTIN  V.  BURGE. 

(Kansas  Citv  Court  of  Appeals.  Missouri,  1911.     156  Mo.  App.   2S6, 
137  S.  W.  61S.) 

Action  by  O.  D.  Austin  against  Charles  Burge.  From  a  judgment 
for  defendant,  plaintiff  appeals. 

Ellison,  J.  This  action  was  brought  on  an  account  for  the  sub- 
scription price  of  a  newspaper.  The  judgment  in  the  trial  court  was 
for  the  defendant.  It  appears  that  plaintiff  was  publisher  of  a  news- 
paper in  Butler,  Mo.,  and  that  defendant's  father-in-law  subscribed 
for  the  paper,  to  be  sent  to  defendant  for  two  years,  and  that  the 
father-in-law  paid  for  it  for  that  time.  It  was  then  continued  to  be 
sent  to  defendant,  through  the  mail,  for  several  years  more.  On  two 
occasions  defendant  paid  a  bill  presented  for  the  subscription  price, 
but  each  timie  directed  it  to  be  stopped.  Plaintiff  denies  the  order  to 
stop,  but  for  the  purpose  of  the  case  we  shall  assume  that  defendant 
is  correct.     He  testified  that,  notwithstanding  the  order  to  stop  it,  it 


Ch.  1)  OFFER  AND  ACCEPTANCE  83 

was  continued  to  be  sent  to  him,  and  he  continued  to  receive  and  read 
it,  until  finally  he  removed  to  another  state. 

We  have  not  been  cited  to  a  case  in  this  state  involving  the  liability 
of  a  person  who,  though  not  having  subscribed  for  a  newspaper,  con- 
tinues to  accept  it  by  receiving  it  through  the  mail.  There  are,  how- 
ever, certain  well-understood  principles  in  the  law  of  contracts  that 
ought  to  solve  the  question.  It  is  certain  that  one  cannot  be  forced 
into  contractual  relations  with  another  and  that  therefore  he  cannot, 
against  his  will,  be  made  the  debtor  of  a  newspaper  publisher.  But 
it  is  equally  certain  that  he  may  cause  contractual  relations  to  arise 
by  necessary  implication  from  his  conduct.  The  law  in  respect  to 
contractual  indebtedness  for  a  newspaper  is  not  different  from  that 
relating  to  other  things  which  ha^'e  not  been  made  the  subject  of  an 
express  agreement.  Thus  one  may  not  have  ordered  supplies  for  his 
table,  or  other  household  necessities,  yet  if  he  continue  to  receive  and 
use  them,  under  circumstances  where  he  had  no  right  to  suppose  they 
were  a  gratuity,  he  will  be  held  to  have  agreed,  by  implication,  to  pay 
their  value.  In  this  case  defendant  admits  that,  notwithstanding  he 
ordered  the  paper  discontinued  at  the  time  when  he  paid  a  bill  for  it, 
yet  plaintiff  continued  to  send  it,  and  he  continued  to  take  it  from  the 
post  office  to  his  home.  This  was  an  acceptance  and  use  of  the  prop- 
erty, and,  there  being  no  pretense  that  a  gratuity  was  intended,  an  ob- 
ligation arose  to  pay  for  it. 

A  case  quite  applicable  to  the  facts  here  involved  arose  in  Fogg  v. 
Atheneum,  44  N.  H.  115,  82  Am.  Dec.  191.  There  the  Independent 
Democrat  newspaper  was  forwarded  weekly  by  mail  to  the  defendant 
from  May  1,  1847,  to  May  1,  1849,  when  a  bill  was  presented,  which 
defendant  objected  to  paying  on  the  ground  of  not  having  subscribed. 
Payment  was,  however,  finally  made,  and  directions  given  to  discon- 
tinue. The  paper  changed  ownership,  and  the  order  to  stop  it  was 
not  known  to  the  new  proprietors  for  a  year ;  but,  after  being  notified 
of  the  order,  they  nevertheless  continued  to  send  it  to  defendant  until 
1860,  a  period  of  11  years,  and  defendant  continued  to  receive  it 
through  the  post  office.  Payment  was  several  times  demanded  during 
this  time,  but  refused  on  the  ground  that  there  was  no  subscription. 
The  court  said  that :  "During  this  period  of  time  the  defendants  were 
occasionally  requested,  by  the  plaintiff's  agent,  to  pay  their  bill.  The 
answer  was,  by  the  defendants,  'We  are  not  subscribers  to  your  news- 
paper.' But  the  evidence  is  the  defendants  used  or  kept  the  plaintiff's 
*  *  *  newspapers,  and  never  offered  to  return  a  number,  as  they 
reasonably  might  have  done,  if  they  would  have  avoided  the  liability  to 
pay  for  them.  Nor  did  they  ever  decline  to  take  the  newspapers  from 
the  post  office."  The  defendant  was  held  to  have  accepted  the  papers, 
and  to  have  become  liable  for  the  subscription  price  by  implication  of 
law. 

In  Ward  v.  Powell,  3  Har.  (Del.)  379,  it  was  decided  that  an  implied 
agreement  to  pay  for  a  newspaper  or  periodical  arose  by  the  continued 
taking  and  accepting  the  paper  from  the  post  office,  and  that  "if  a  par- 
ty, without  subscribing  to  a  paper,  declines  taking  it  out  of  the  post 
office,  he  cannot  become  liable  to  pay  for  it ;  and  a  subscriber  may 
cease  to  be  such  at  the  end  of  the  year  by  refusing  to  take  the  papers 
from  the  post  office,  and  returning  them  to  the  editor  as  notice  of  such 
determination."  In  Goodland  v.  Le  Clair,  78  Wis.  176,  47  N.  W.  268, 
it  was  held  that  if  a  person  receives  a  paper  from  the  post  office  for  a 


84  CONTRACTS  (Part  1 

year,  without  refusing  or  returning  it,  he  was  liable  for  the  year's 
subscription.  And  a  like  obligation  was  held  to  arise  in  the  case  of 
Weatherby  v.  Bonham,  5  C.  &  P.  228. 

The  preparation  and  publication  of  a  newspaper  involves  much  men- 
tal and  physical  labor,  as  well  as  an  outlay  of  money.  One  who  ac- 
cepts the  paper,  by  continuously  taking  it  from  the  post  office,  re- 
ceives a  benefit  and  pleasure  arising  from  such  labor  and  expenditure 
as  fully  as  if  he  had  appropriated  any  other  product  of  another's  la- 
bor, and  by  such  act  he  must  be  held  liable  for  the  subscription  price. 
On  the  defendant's  own  evidence,  plaintiff  should  have  recovered. 

The  judgment  will  therefore  be  reversed,  and  the  cause  remanded. 


SCULLY  V.  EOCHE. 

(Supreme  Court  of  New  York.  Appellate  Division,  1912.     76  Misc.  Rep.  45S, 

135  N.  Y.  Supp.  633.) 

Action  by  Thomas  J.  Scully  against  Margaret  Roche.  From  a  judg- 
ment for  defendant  after  trial  by  the  court  without  a  jury,  plaintiff 
appeals. 

Page,  J.  Plaintiff's  assignor  entered  into  a  lease  with  the  defendant, 
dated  October  23,  1909,  for  certain  premises  therein  described,  for 
a  period  of  11  months  from  November  1,  1909,  at  a  rental  of  $462, 
payable  in  installments  of  $42  monthly  in  advance.  In  August  or  Sep- 
tember, 1910,  prior  to  the  expiration  of  the  lease,  a  new  lease  was 
prepared  for  one  year  at  a  rental  of  $540,  payable  $45  monthly.  This 
lease  was  not  signed. 

Defendant  testifies  that  she  told  the  agent  that  she  would  not  sign  the 
lease  at  that  rental  [and  was]  then  told  by  the  agent  she  would  hold' 
over.  On  the  1st  of  October,  however,  she  paid  the  increased  rent.  On 
the  1st  of  November  she  paid  the  increased  rent,  and  the  agent  inquired 
about  the  lease,  and  she  testifies  she  said:  "I  told  you  distinctly  I 
will  never  sign  a  lease  here.  In  the  first  place,  my  eyes  are  in  a  bad 
condition,  and  my  aunt  is  getting  weak,  and  I  don't  know  what  time  I 
will  have  to  give  the  place  up,"  and  "after  that  I  said  I  wouldn't  sign, 
and  under  no  considerations  would  I  stay.  He  told  me  at  the  time  it 
didn't  satisfy  him.  Then  I  said  to  him,  'When  I  move  I  will  always 
give  you  notice.'  " 

She  further  testified  that  she  paid  the  $45  each  month,  and — "noth- 
ing was  referred  to  again.  I  thought  my  terms  had  suited  him,  be- 
cause, if  they  didn't,  it  was  his  place  to  tell  me  then  and  there  to  get 
out." 

She  continued  in  possession  until  June  30th.  In  the  early  part  of 
June  she  notified  the  landlord  that  she  intended  to  move  on  June  30th, 
to  which  the  landlord  replied:  "Do  you  wish  me  to  try  and  rent  the 
apartment  for  you  ?  *  ""  *  Your  lease  does  not  expire  until  October 
1,  1911,  and  this  time  of  the  year  is  very  poor  for  renting.  If  you 
desired  moving  before  October  1st,  I  would  be  satisfied  if  you  moved 
September  1st,  but  at  present  time  it  would  be  hard  to  rent." 

Defendant,  without  replying  to  this  letter,  moved  June  30th.  The 
claim  for  rent  was  assigned  to  plaintiff,  and  this  action  brought  to  re- 
cover from  the  defendant  rent  for  the  months  of  July,  August,  and 
September,  on  the  theory  that  the  lease  was  renewed.  The  case,  how- 
ever, was  tried  upon  the  theory  that  the  defendant  was  liable  for  the 


Ch.  1)  OFFER  AND   ACCEPTANCE  85 

rent  of  July  and  August  as  a  tenant  holding  over  after  the  expiration 
of  her  term. 

The  court  gave  judgment  for  the  defendant.  This  was  erroneous. 
Where  a  tenant  holds  over  after  the  expiration  of  a  lease,  without  any 
other  or  new  agreement  with  his  landlord,  the  law  implies  a  continu- 
ance of  the  tenancy  on  the  same  terms  and  subject  to  the  same  cove- 
nants as  those  contained  in  the  original  lease,  and  the  option  was  with 
the  landlord  to  treat  him  as  a  trespasser  or  as  a  tenant.  The  tenant 
has  no  such  option  and  holds  over  at  his  peril.  *  *  *  jf^  however, 
the  tenant  has  notice  from  the  landlord  that  if  he  retains  possession 
he  must  pay  a  higher  rent,  he  must  be  deemed  to  assent  to  pay  such  in- 
creased rent.  He  cannot  hold  the  premises  after  such  notice  and  fix 
his  own  terms  for  the  rent.    *    *    * 

In  the  case  at  bar,  in  addition  to  the  new  lease  which  was  presented 
to  the  defendant,  a  written  notice  was  delivered  to  her,  notifying  her 
that  the  rent  was  to  be  at  the  increased  rate.  On  September  30th  the 
tenant  had  the  option  to  vacate  the  premises  or  hold  over.  She  elected 
to  hold  over,  and  on  October  1st  paid  the  increased  rent.  On  October 
1st  the  landlord  had  the  option  to  treat  her  as  a  trespasser  and  remove 
her  from  the  premises,  or  as  a  tenant  and  accept  the  rent.  They  both 
made  their  election.  The  tenant  paid  the  increased  rent  and  the  land- 
lord accepted  it.  Their  status  became  settled  and  determined.  Neither 
could  alter  the  situation  without  the  consent  of  the  other  and  making 
a  new  agreement.  Therefore  the  statement  by  the  tenant  as  to  the 
terms  upon  which  she  would  remain  on  November  1st  in  no  way  al- 
tered the  situation.  The  landlord  was  not  required  either  to  accept 
or  reject  the  proposition ;  therefore  his  silence  was  not  an  implied  as- 
sent. The  appellant  now  concedes  that  the  renewed  term  must  be 
for  11  months,  the  same  period  as  the  old  lease.  The  term,  therefore, 
would  expire  on  September  1st,  and  the  plaintiff  could  not  recover  for 
more  than  the  rent  for  the  months  of  July  and  August,  1911. 

The  judgment  will  be  reversed,  and  a  new  trial  ordered. 


.HOPKINS  V.  RATLIFF. 
(Supreme  Court  of  Indiana,  ISSS.     115  Ind.  213,  17  N.  E.  2S8.) 

MiTCHEi^L,  J.  *  *  ■''  The  question  is  whether  he  [the  defendant 
counter-claiming]  is  entitled  to  recover  as  upon  an  indebitatus  as- 
sumpsit for  the  improvements  made  on  his  father-in-law's  land  while 
in  possession  under  the  arrangement  disclosed  in  the  foregoing  sum- 
mary of  the  answer.  It  seems  clear  enough  to  us  that  the  question  must 
receive  a  negative  answer.  The  occupancy  of  land  under  an  agreement 
with  the  owner  to  pay  rent  presumably  creates  the  relation  of  landlord 
and  tenant.  This  relation  continues  as  long  as  the  land  is  occupied 
under  that  agreement.  It  is,  of  course,  true  that  a  person  who  goes 
into  possession  of  real  estate  under  a  contract  to  purchase  does  not 
there"by  become  a  tenant  of  the  vendor  so  as  to  become  liable  for  rent 
in  case  the  contract  is  rescinded.  *  *  *  ^  suit  for  use  and  occupa- 
tion, or  for  rent,  can  only  be  maintained  when  there  is  a  contract, 
express  or  implied,  which  creates  the  relation  of  landlord  and  tenant. 
*  *  *  The  defendant  in  the  present  case  went  into  possession  under 
an  arrangement  whereby  he  expected  ultimately  to  become  possessed 
of  the  land  as  purchaser  by  device,  which  could  only  take  effect  at 


86  CONTRACTS  (Part  1 

the  plaintiff's  death.  Until  the  happening  of  that  event,  the  legal  title 
and  ownership  was  to  remain  in  the  plaintiff,  and  the  defendant  was 
to  pay  rent.  This  created  no  other  legal  relation  between  the  parties 
except  that  of  landlord  and  tenant ;  and  so  long  as  the  defendant  oc- 
cupied he  did  so  as  tenant,  yielding,  or  under  contract  to  yield,  rent  to 
the  owner  of  the  land.  There  being  no  valid  contract  of  purchase, 
the  possession  and  improvements  can  only  be  referred  to  the  agree- 
ment to  take  possession  and  pay  rent. 

The  landlord  agreed  to  erect  a  small  house  with  four  rooms  on  the 
land.  This  he  neglected  to  do.  He  prevailed  upon  the  tenant  to  re- 
pair the  old  house ;  but  it  is  not  alleged  that  he  had  agreed  to  make 
repairs,  nor  does  it  appear  that  he  in  any  manner  promised  or  agreed 
to  pay  for  repairs  made  by  the  tenant.  In  respect  to  the  repair_  of 
the  old  house,  their  duties  and  obligations  were  such  as  the  law  im- 
posed upon  landlord  and  tenant.  There  is  no  implied  obligation  on 
the  part  of  the  landlord  to  make  repairs,  and,  in  the  absence  of  an 
express  contract,  the  duty  of  keeping  the  premises  in  repair  rests 
solely  upon  the  tenant.  The  tenant  must  determine  for  himself  the 
fitness  of  the  buildings  for  use,  or  whether  they  are  sufficiently  com- 
modious for  his  purposes.  If  he  repairs  or  enlarges  the  buildings  for 
his  own  convenience,  even  though  it  is  by  the  persuasion  of  the  land- 
lord, he  does  not,  in  the  absence  of  an  agreement  or  promise,  thereby 
acquire  a  right  to  charge  the  landlord  with  the  expense  of  repairs. 
*  *  *  Where  a  landlord  covenants  to  repair,  in  case  of  a  breach  of 
the  covenant  the  tenant  may  make  the  repairs,  and  charge  the  expense 
to  the  landlord,  or  he  may  recover  damages  for  the  breach.  *  *  * 
The  failure  of  the  landlord  to  erect  a  house  with  four  rooms,  in  com- 
pliance with  the  agreement,  did  not,  in  the  absence  of  a  contract  to  pay, 
authorize  the  tenant  to  charge  the  cost  of  repairing  another  house  to 
the  landlord.  If  the  failure  or  refusal  to  build  the  house  resulted  in 
damages  to  the  tenant  by  reducing  the  value  of  the  leasehold,  that  be- 
came a  matter  altogether  apart  from  the  subject  of  repairs.  *  *  '■' 
The  defendant  might  have  built  the  house  and  recovered  the  cost  there- 
of, or,  if  the  plaintiff"  refused  to  build,  after  notice  he  might  have  re- 
covered damages.  K  tenant  who  makes  improvements  of  a  permanent 
and  fixed  character,  which  are  annexed  so  as  to  become  part  of  the  re- 
alty, can  neither  remove  them  nor  recover  for  their  cost  without  a 
special  contract  with  the  landlord.  *  *  *  If  it  should  be  considered 
that  the  defendant  occupied  the  land  and  made  the  improvements,  not 
as  tenant,  but  in  part  performance  of  a  contract  of  purchase,  still, 
since  after  enjoying  the  possession  for  about  four  years,  he  cannot 
now  place  the  plaintiff  in  the  same  situation  he  was  in  before  the  con- 
tract was  made,  he  cannot  repudiate  the  contract  in  advance  of  the 
time  for  performance  on  the  part  of  the  plaintiff,  and  maintain  in- 
debitatus assumpsit  to  recover  the  cost  of  the  improvements. 

The  defendant  has  done  nothing  in  part  performance  of  a  contract 
except  to  take  possession  and  make  improvements.  These  acts,  as  we 
have  seen,  can  be  much  more  readily  referred  to  his  contract  of  ten- 
ancy than  to  the  contract  of  purchase,  which  was  not  to  be  performed 
on  either  side  until  after  the  plaintiff's  death,  and  which  is  wholly  uii- 
enforceable  until  it  shall  have  been  so  performed  as  to  be  taken  out  of 
the  statute.  Where  possession  has  been  taken  by  a  purchaser,  and 
lasting  and  valuable  improvements  have  been  made  under  and  in  re- 
liance upon  an  oral  contract  of  purchase,  if  the  circumstances  are  such 


Ch.  1  )  OFFER  AND   ACCEPTANCE  87 

as  to  show  that  the  vendor  repudiated  the  contract  with  a  fraudulent 
purpose  to  obtain  the  benefit  of  improvements  made  by  the  purchaser, 
the  contract  will  be  held  so  far  valid  as  to  support  an  action  for  dam- 
ages for  breach  of  the  contract.  In  such  a  case,  a  purchaser  who  has 
made  inprovements  on  land  with  the  knowledge  of  the  vendor,  in  re- 
liance on  a  contract;  which  improvement  the  latter  gets  the  benefit 
of  by  refusing  to  perform  on  his  part,  may  recover  the  value  of  the 
improvements  so  made,  deducting  the  value  of  the  rents  and  profits 
of  the  land.  *  *  *  Where  money  has  been  paid  on  a  contract  that 
is  wholly  void,  there  being  no  part  performance,  the  party  receiving 
the  money  having  repudiated  the  contract,  a  recovery  may  be  had  upon 
the  common  count.  Where,  however,  the  action  is  to  recover  for  im- 
provements made  while  in  possession,  and  in  part  performance  of  the 
contract  of  purchase,  the  action  must  be  for  damages  for  breach  of 
the  contract,  even  though  the  contract  may  be  so  far  invalid  as  not  to 
be  enforceable.  *  *  *  The  plaintiff,  according  to  the  averments  in 
the  complaint,  is  in  no  default.  He  agreed  to  make  a  will,  and  the  will 
cannot  speak  until  the  testator's  death.  The  defendant  avers  that  he 
is  informed  or  has  learned  that  the  plaintiff's  will,  as  it  is  now  pre- 
pared, does  not  conform  to  the  agreement.  This  is  not  sufficient  to 
authorize  him  to  repudiate  the  contract  and  maintain  an  action  on  ac- 
count of  improvements  made.  The  answer  was  not  sufficient.  The 
demurrer  should  have  been  sustained. 
Judgment  reversed,  with  costs. 


WADLEIGH  V.  KATAHDIN  PUDP  &  PAPER  CO. 
(Supreme  Judicial  Court  of  Maine,  1017.    116  Me.  107,  100  Atl.  150.) 

Action  by  Moses  B,  Wadleigh  against  the  Katahdin  Pulp  &  Paper 
Company.  Verdict  for  plaintiff,  and  defendant  excepts  and  moves 
for  new  trial. 

King,  J.  Action  to  recover  compensation  for  driving  certain  of  the 
defendant's  pulp  v/ood  down  the  Penobscot  river  to  its  destination, 
which  pulp  wood  had  become  intermixed  with  the  plaintiff's  logs  in 
said  river  so  it  could  not  be  conveniently  separated,  and  also  to  recover 
wages  and  expenses  of  the  plaintiff's  men  furnished  the  defendant  to 
assist  in  separating  the  pulp  wood  from  the  logs  at  the  sorting  gaps 
at  the  defendant's  booms.  The  verdict  w^as  for  the  plaintiff  for 
$912.24,  of  which  sum  $408  is  the  amount  found  by  the  jury  for  the 
driving  of  the  intermixed  pulp  wood.  The  case  comes  up  on  defend- 
ant's exceptions  and  motions  for  a  new  trial. 

R.  S.  c.  43,  §  6,  provides :  "Any  person,  whose  timber  in  any  waters 
of  the  state  is  so  intermixed  with  the  logs,  masts  or  spars  of  another, 
that  it  cannot  be  conveniently  separated  for  the  purpose  of  being  floated 
to  the  market  or  place  of  manufacture,  may  drive  all  timber  with 
which  his  own  is  so  intermixed,  toward  such  market  or  place,  when 
no  special  and  different  provision  is  made  by  law  for  driving  it,  and 
is  entitled  to  a  reasonable  compensation  from  the  owner,  to  be  re- 
covered after  demand  therefor  on  said  owner  or  agent,  if  known,  in 
an  action  on  the  case;  he  has  a  prior  lien  thereon  until  thirty  days 
after  it  arrives  at  its  place  of  destination,  to  enable  him  to  attach  it ; 
and  if  the  owner  cannot  be  ascertained,  the  property  may  be  libeled 


S8  CONTRACTS  (Part  1 

according  to  law,  and  enough  of  it  disposed  of  to  defray  the  expenses 

thereof ;   the  amount  to  be  determined  b}^  the  court  hearing  the  hbel." 
*     *     * 

It  is  a  well-settled  general  principle  that  where  one  party  renders 
services  beneficial  to  another,  under  circumstances  that  negative  the 
idea  that  the  services  were  gratuitous,  and  the  party  to  whom  the  serv- 
ices are  rendered  knows  it,  and  permits  it,  and  accepts  the  benefit  of 
those  services,  he  is  bovmd  to  pay  at  reasonable  compensation  therefor. 
That  is  because  such  facts  and  circumstances  justify  a  presumption 
that  the  party  to  whom  the  services  are  rendered  must  have  requested 
them,  and  must  intend  to  pay  for  them,  and  therefore  the  law  impHes 
a  promise  on  his  part  to  pay  for  them. 

But  we  think  the  case  at  bar  is  not  quite  within  the  scope  of  that  gen- 
eral principle.  The  plaintift"  had  a  right  by  statute  to  drive  the  defend- 
ant's pulp  wood  as  he  did,  if  it  had  become  so  intermixed  with  his  logs 
that  it  could  not  be  conveniently  separated  therefrom.  The  defendant 
could  not  prevent  it.  No  request  on  the  part  of  the  defendant  was 
necessary,  and  under  those  circumstances  we  think  it  is  not  to  be  in- 
ferred. "This  statute  gives  to  a  party  a  right  to  enforce  a  claim  for 
services,  supposed  to  be  rendered  for  the  benefit  of  another,  but  with- 
out his  request,  and  sometimes  without  his  knowledge,  and  possibly 
against  his  wishes.  Such  a  statute  is  in  derogation  of  the  common 
law,"  Lord  v.  Woodward,  42  Me,  497.  The  common  law  gives  no 
right  to  enforce  payment  for  services  rendered  without  a  request,  ex- 
press or  implied,  because  in  such  case  no  promise  to  pay  can  be  im- 
plied. It  is  not  to  be  doubted,  we  think,  that  the  plaintiff  drove  the 
defendant's  pulp  wood  because  he  had  a  right  to  do  so  under  the 
statute  provisions,  and  not  because  of  any  request  or  assent,  express 
or  implied,  on  the  part  of  the  defendant.  It  is  plain  from  the  record 
that  the  plaintiff's  claim  at  the  trial  was  to  recover  the  reasonable 
compensation  provided  for  in  the  statute  for  driving  the  pulp  wood 
under  the  authority  of  the  statute.  To  sustain  that  claim  it  was  in- 
cumbent upon  him  to  prove  the  demand  provided  for  by  the  statute. 
That  he  undertook  to  do.  But  the  jury  were  instructed  that  if  they 
did  not  find  that  a  demand  for  the  services  of  driving  was  made,  "then 
the  plaintiff  is  entitled  in  this  action  to  recover  of  the  defendant  what 
the  jury  would  consider  a  reasonable  compensation  for  these  sendees 
under  the  quantum  meruit  count  in  the  writ."  We  think  the  instruc- 
tions as  to  the  plaintiff's  right  to  recover  under  his  count  upon  a  quan- 
tum meruit  must  be  held  to  be  error  prejudicial  to  the  defendant,  and 
that  its  exceptions  thereto  must  be  sustained.  Those  instructions  en- 
abled the  jury  to  give  the  plaintiff  "reasonable  compensation"  for  driv- 
ing the  defendant's  pulp  wood,  under  the  authority  of  the  statute,  but 
without  proof  of  the  demand  therefor  required  by  the  statute.  And 
the  jury  may  have  done  so.     *    '*     * 

Exceptions  sustained  as  stated  in  the  opinion. 


Ch.  1)  OFFER  AND   ACCEPTANCE3  89 

SGEVA  V.  TRUE. 

(Supreme  Judicial  Court  of  New  Hampshire,  1873.     53  N.  H.   627.) 

Assumpsit  for  the  value  of  the  support  furnished  by  the  plaintiff's 
intestate,  Enoch  F.  Sceva,  to  Fanny  True,  his  sister-in-law,  who  was, 
and  for  more  than  a  quarter  of  a  century  had  been,  so  hopelessly  insane 
as  to  have  no  reason  or  understanding.  Prior  to  his  death,  August  11, 
1822,  William  True,  father  of  said  Fanny  and  her  sister  Martha,  wife 
of  said  intestate,  owned  a  farm  in  Andover  and  Hill,  with  a  house,  barn, 
and  outbuildings  thereon,  situate  in  said  Andover.  On  May  25,  1822, 
in  expectation  of  death,  William  True  made  the  following  disposition 
of  his  property :  He  gave,  by  an  instrument  in  writing  under  seal,  all 
his  personal  property,  upon  certain  conditions  and  subject  to  certain 
charges,  to  his  widow,  Betsey  True,  who  died  upon  said  premises  in 
May,  1844,  without  remarrying.  He  also  gave  her  on  the  same  day,  in 
the  same  way,  "the  use  and  occupation  of  said  real  estate,  both  o£ 
lands,  buildings,  and  tenements,  so  long  as  she,  the  said  Betsey,  remains 
my  widow."  He  also,  by  deed,  conveyed  on  the  same  day  one  undivid- 
ed half  of  all  said  real  estate  to  each  of  said  daughters.  Said  intes- 
tate carried  on  said  premises  in  1822,  and  married  said  Martha  in  De- 
cember, 1823,  and  lived  on  said  premises  till  about  one  month  before  his 
death.  All  the  parties,  save  Fanny,  treated  said  deeds  and  instru- 
ments as  valid,  and  supposed  they  were  valid;  and,  aside  from  the 
time  that  the  said  defendant  was  away  in  insane  asylums  and  infirma- 
ries for  treatment,  all  lived  together  on  said  premises  in  one  family 
till  they  died,  or  until  said  Enoch  F.  Sceva  refused  to  support  said 
Fanny  longer;  and  she  was  taken  away  about  said  November  1,  and 
when  said  Enoch  F.  Sceva  left,  the  month  prior  to  his  death.  Said 
Sceva  took  the  entire  charge  of  the  premises,  used  the  crops  and 
the  proceeds  of  the  lumber,  wood,  and  bark,  sold  off  the  whole  farm 
for  the  common  benefit  of  the  family,  and  paid  the  taxes  and  other 
bills  for  the  support  and  maintenance  of  the  family. 

No  administration  was  ever  had  upon  any  part  of  the  estate  of 
said  William  True,  nor  was  there  any  use  or  trust  for  the  benefit  of 
said  Fanny.  No  attempt  was  ever  made  to  make  any  contract  with 
said  Fanny  about  her  support  or  anything  else.  No  application  was 
made  for  the  appointment  of  a  guardian  in  the  interest  of  said  Enoch 
F,  Sceva,  because  of  the  opposition  of  his  wife  to  any  step  looking  to 
that  end.  She  has  been  supported  during  said  forty  years  by  said 
Sceva,  his  wife,  and  her  mother,  out  of  the  avails  of  said  real  estate 
taken  as  aforesaid,  and  out  of  their  own  funds.  Since  1844  her  chief 
support  has  been  from  said  Sceva.  Said  intestate  was  worth  nothing 
when  he  commenced  on  said  farm,  and  died  worth  about  $1,600. 

The  defendant  moved  to  dismiss.  For  the  purpose  of  raising  ques- 
tions of  law,  and  no  other,  the  parties  agreed  that  the  facts  are  as 
stated  above,  and  the  questions  were  reserved  for  the  whole  court. 

Ladd,  j.  *  *  *  We  regard  it  as  well  settled,  by  the  cases  re- 
ferred to  in  the  briefs  of  counsel,  *  *  *  that  an  insane  person,  an 
idiot,  or  a  person  utterly  bereft  of  all  sense  and  reason  by  the  sudden 
stroke  of  accident  or  disease,  may  be  held  liable,  in  assumpsit,  for  nec- 
essaries furnished  to  him  in  good  faith  while  in  that  unfortunate  and 
helpless  condition.  And  the  reasons  upon  which  this  rests  are  too  broad, 
as  well  as  too  sensible  and  humane,,  to  be  overborne  by  any  deductions 


90  CONTRACTS  .  (Part  1 

which  a  refined  logic  may  make  from  the  circumstance  that  in  such 
cases  there  can  he  no  contract  or  promise  in  fact — no  meeting  of  the 
minds  of  the  parties.  The  cases  put  it  on  the  ground  of  an  imphed  con- 
tract; and  by  this  is  not  meant,  as  the  defendant's  counsel  seems  to 
suppose,  an  actual  contract — that  is,  an  actual  meeting  of  the  minds  of 
the  parties,  an  actual,  mutual  understanding,  to  be  inferred  from 
language,  acts,  and  circumstances,  by  the  jury, — but  a  contract  and 
promise,  said  to  be  implied  by  the  law,  where,  in  point  of  fact,  th&re 
was  no  contract,  no  mutual  understanding,  and  so  no  promise.  The 
defendant's  counsel  says  it  is  usurpation  for  the  court  to  hold,  as 
matter  of  law,  that  there  is  a  contract  and  a  promise,  when  all  the 
evidence  in  the  case  shows  that  there  was  not  a  contract,  nor  the  sem- 
blance of  one.  It  is  doubtless  a  legal  fiction,  invented  and  used  for  the 
sake  of  the  remedy.  If  it  was  originally  usurpation,  certainly  it  has 
now  become  very  inveterate,  and  firmly  fixed  in  the  body  of  the  law. 

Suppose  a  man  steals  my  horse  and  afterwards  sells  it  for  cash.  The 
law  says  I  may  waive  the  tort,  and  recover  the  money  received  for 
the  animal  of  him  in  an  action  of  assumpsit.  Why?  Because  the 
law,  in  order  to  protect  my  legal  right  to  have  the  money,  and  en- 
force against  the  thief  his  legal  duty  to  hand  it  over  to  me,  implies  a 
promise — that  is,  feigns  a  promise,  when  there  is  none — to  support 
the  assumpsit.  In  order  to  recover,  I  have  only  to  show  that  the  de- 
fendant, without  right,  sold  my  horse  for  cash,  which  he  still  retains. 
Where  are  the  circumstances,  the  language  or  conduct  of  the  par- 
ties from  which  a  meeting  of  their  minds  is  to  be  inferred,  or  implied, 
or  imagined,  or  in  any  way  found  by  the  jury :  The  defendant  never 
had  any  other  purpose  but  to  get  the  money  for  the  horse  and  make 
off  with  it.  The  owner  of  the  horse  had  no  intention  to  sell  it,  never 
assented  to  the  sale,  and  only  seeks  to  recover  the  money  obtained  for  it 
to  save  himself  from  total  loss.  The  defendant,  in  such  a  case,  may 
have  the  physical  capacity  to  promise  to  pay  over  to  the  owner  the 
money  which  he  means  to  steal;  but  the  mental  and  moral  capacity  is 
wanting,  and  to  all  practical  intents  the  capacity  to  promise  according 
to  his  duty  may  be  said  to  be  entirely  wanting,  as  in  the  case  of  an 
idiot  or  lunatic.  At  all  events,  he  does  not  do  it.  He  struggles  to  get 
away  with  the  money,  and  resists  with  a  determination  never  to  pay 
if  he  can  help  it.  Yet  the  law  implies,  and  against  his  utmost  resist- 
ance forces  into  his  mouth  a  promise  to  pay. 

So,  where  a  brutal  husband,  without  cause  or  provocation,  but  from 
wanton  cruelty  or  caprice,  drives  his  wife  from  his  house,  with  no 
means  of  subsistence,  and  warns  the  tradesmen  not  to  trust  her  on  his 
account,  thus  expressly  revoking  all  authority  she  may  be  supposed  to 
have,  as  his  agent,  by  virtue  of  the  marital  relation,  courts  of  high  au- 
thority have  held  that  a  promise  to  pay  for  necessaries  furnished  het 
while  in  this  situation,  in  good  faith,  is  implied  by  law  against  the  hus- 
band, resting  upon  and  arising  out  of  his  legal  obligation  to  furnish  her 
support.     *     *     * 

So,  it  was  held  that  the  law  will  imply  a  promise  to  pay  toll  for 
passing  upon  a  turnpike  road,  notwithstanding  the  defendant,  at  the 
time  of  passing,  denied  his  liability  and  refused  payment.  *  *  '^ 
In  the  recent  EngHsh  case  of  Railway  Co.  v.  Swaffield,  L.  R.  6  Exch. 
132,  the  defendant  sent  a  horse  by  the  plaintiffs'  raihvay,  directed  to 
himself  at  S.  station.  On  the  arrival  of  the  horse  at  S.  station,  at 
night,  there  was  no  one  to  meet  it,  and  the  plaintiffs,  having  no  ac- 


Ch.  1)  OFFER   AND   ACCEPTANCE  91 

commodation  at  the  station,  sent  the  horse  to  a  Hvery  stable.  The  de- 
fendant's servant  soon  after  arrived  and  demanded  the  horse.  He 
was  referred  to  the  livery  stable  keeper,  who  refused  to  deliver  the 
horse,  except  on  payment  of  charges,  which  were  admitted  to  be  rea- 
sonable. On  the  next  day  the  defendant  came  and  demanded  the 
horse,  and  the  station  master  offered  to  pay  the  charges  and  let  the 
defendant  take  away  the  horse ;  but  the  defendant  decHned,  and  went 
away  without  the  horse,  which  remained  at  the  livery  stable.  The 
plaintiffs  afterwards  offered  to  deliver  the  horse  to  the  defendant  at 
S.  without  payment  of  any  charges,  but  the  defendant  refused  to 
receive  it  unless  delivered  at  his  farm,  and  with  payment  of  a  sum  of 
money  for  his  expenses  and  loss  of  time.  Some  months  after,  the 
plaintiffs  paid  the  livery  stable  keeper  his  charges,  and  sent  the  horse 
to  the  defendant,  Avho  received  it ;  and  it  was  held  that  the  defendant 
was  liable,  upon  the  ground  of  a  contract  implied  by  law,  to  the  plain- 
tiffs for  the  livery  charges  thus  paid  by  them.     *     *     * 

The  evidence  of  an  actual  contract  is  generally  to  be  found  either 
in  some  writing  made  by  the  parties,  or  in  verbal  communications  which 
passed  between  them,  or  in  their  acts  and  conduct  considered  in  the 
light  of  the  circumstances  of  each  particular  case.  A  contract  im- 
plied by  law,  on  the  contrary,  rests  upon  no  evidence.  It  has  no  ac- 
tual existence ;  it  is  simply  a  mythical  creation  of  the  law.  The  law 
says  it  shall  be  taken  that  there  was  a  promise,  when,  in  point  of  fact, 
there  was  none.  Of  course  this  is  not  good  logic  for  the  obvious  and 
sufficient  reason  that  it  is  not  true.  It  is  a  legal  fiction,  resting  wholly 
for  its  support  on  a  plain  legal  obligation,  and  a  plain  legal  right.  If 
it  were  true,  it  would  not  be  a  fiction.  There  is  a  class  of  legal  rights, 
with  their  correlative  legal  duties,  analogous  to  the  obligationes  quasi 
contractu  of  the  civil  law,  which  seems  to  lie  in  the  region  between 
contracts  on  the  one  hand  and  torts  on  the  other,  and  to  call  for  the 
application  of  a  remedy  not  strictly  furnished  either  by  actions  ex 
contractu,  or  by  actions  ex  delicto.  The  common  law  supplies  no 
action  of  duty,  as  it  does  of  assumpsit  and  trespass ;  and  hence  the 
somewhat  awkward  contrivance  of  this  fiction  to  apply  the  remedy  of 
assumpsit  where  there  is  no  true  contract,  and  no  promise  to  support  it. 

All  confusion  in  this  matter  might  be  avoided,  as  it  seems  to  me, 
by  a  suitable  discrimination  in  the  use  of  the  term  "implied  contract." 
In  the  discussion  of  any  subject  there  is  always  danger  of  spending 
breath  and  strength  about  mere  words,  as  well  as  of  falling  into 
error  when  the  same  term  is  used  to  designate  two  different  things. 
If  the  term  "implied  contract"  be  used  indifferently  to  denote  (1)  the 
fictitious  creation  of  the  law  spoken  of  above;  (2)  a  true  or  actual, 
but  tacit,  contract — that  is,  one  where  a  meeting  of  the  minds  or  mutual 
understanding  is  inferred  as  a  matter  of  fact  from  circumstances,  no 
words,  written  or  verbal,  having  been  used;  and  (3)  that  state  of 
things  where  one  is  estopped  by  his  conduct  to  deny  a  contract,  al- 
though, in  fact,  he  has  not  made  or  intended  to  make  one — it  is  not 
strange  that  confusion  should  result,  and  disputes  arise,  where  there 
is  no  dift'erence  of  opinion  as  to  the  substance  of  the  matter  in  con- 
troversy; whereas,  were  a  different  term  applied  to  each — as,  for  ex- 
ample, that  of  legal  duty  to  designate  the  first;  contract,  simply,  to 
designate  the  second;  and  contract  by  estoppel,  the  third — this  dif- 
ficulty would  be  avoided.  It  would,  of  course,  come  to  the  same  thing, 
in  substance,  if  the  first  were  always  called  an  implied  contract,  while 


92  CONTRACTS  (Part  1 

the  other  two  were  otherwise  designated  in  such  way  as  to  show  dis- 
tinctly what  is  meant.  This  is  not  always  done,  and  an  examination 
of  our  own  cases  would  perhaps  show  that  more  or  less  confusion 
has  arisen  from  such  indiscriminate  use  of  the  term.  A  better  nomen- 
clature is  desirable.  But  whatever  terms  are  employed,  it  is  indispens- 
able that  the  distinction,  which  is  one  of  substance,  should  be  kept 
clearly  in  mind,  in  order  that  the  principles  governing  in  one  class  of 
cases  may  not  be  erroneously  applied  to  another.     *     *     * 

It  by  no  means  follows  that  this  plaintiff  is  entitled  to  recover.  In 
the  first  place,  it  must  appear  that  the  necessaries  furnished  to  the 
defendant  were  furnished  in  good  faith,  and  with  no  purpose  to  take 
advantage  of  her  unfortunate  situation.  And  upon  this  question  the 
great  length  of  time  which  was  allowed  to  pass  without  procuring  the 
appointment  of  a  guardian  for  her  is  a  fact  to  which  the  jury  would 
undoubtedly  attach  much  weight.  Its  significance  and  importarice 
must,  of  course,  depend  very  much  on  the  circumstances  under  which 
the  delay  and  omission  occurred,  all  of  which  will  be  for  the  jury  to 
consider  upon  the  question  whether  everything  was  done  in  good  faith 
towards  the  defendant,  and  with  an  expectation  on  the  part  of  the 
plaintiff's  intestate  that  he  was  to  be  paid. 

Again,  the  jury  are  to  consider  whether  the  support  for  which  the 
plaintiff  now  seeks  to  recover  was  not  furnished  as  a  gratuity,  with 
no  expectation  or  intention  that  it  should  be  paid  for,  except  so  far 
as  compensation  might  be  derived  from  the  use  of  the  defendant's  share 
of  the  farm.  And  upon  this  point  the  relationship  existing  between  the 
parties,  the  length  of  time  the  defendant  was  there  in  the  family  with- 
out any  move  on  the  part  of  Enoch  F.  Sceva  to  charge  her  or  her 
estate,  the  absence  (if  such  is  the  fact)  of  an  account  kept  by  him 
wherein  she  was  charged  with  her  support  and  credited  for  the  use 
and  occupation  of  the  land — in  short,  all  the  facts  and  circumstances  of 
her  residence  with  the  family  that  tend  to  show  the  intention  or  ex- 
pectation of  Enoch  F.  Sceva  with  respect  to  being  paid  for  her  sup- 
port— are  for  the  jury.  *  *  *  if  these  services  were  rendered, 
and  this  support  furnished,  with  no  expectation  on  the  part  of  Enoch 
F.  Sceva  that  he  was  to  charge  or  be  paid  therefor,  this  suit  cannot  be 
maintained;  for  then  it  must  be  regarded  substantially  in  the  light  of 
a  gift  actually  accepted  and  appropriated  by  the  defendant,  without 
reference  to  her  capacity  to  make  a  contract,  or  even  to  signify  her  ac- 
ceptance by  any  mental  assent. 

In  this  view,  the  facts  stated  in  the  case  will  be  evidence  for  the 
jury  to  consider  upon  the  trial :  but  they  do  not  present  any  question  of 
law  upon,  which  the  rights  of  the  parties  can  be  determined  by  the 
court.    Case  discharged. 


Ch.  2)  CONSIDERATION  93 

CHAPTER  II ' 
CONSIDERATION 

Section 

1.  Introduction. 

2.  Consideration  in  Unilateral  Contracts. 

3.  Performance  of,  or  Promise  to  Perform,  a  Pre-existing  Legal  Duty. 

4.  Promises  in  the  Nature  of  Gratuities. 

5.  Illusory  Promises. 

6.  Promises  to  Pay  for  a  Benefit  Previously  Received. 

7.  Sealed  Instruments. 


SECTION  1.— INTRODUCTION 

We  have  observed  that  an  offer  and  an  acceptance  of  that  offer, 
either  express  or  implied,  are  requisites  to  the  existence  of  a  con- 
tract. It  is  possible,  however  for  the  parties  to  have  arrived  at  an 
agreement  through  an  offer  and  its  acceptance  under  circumstances 
where  no  contract  is  created.  There  is  a  third  requisite  to  the  ex- 
istence of  a  contract.  That  requisite  is  called  consideration.  The 
determination  of  the  nature  and  characteristics  of  consideration 
calls  for  a  re-examination  of  the  offer  and  the  acceptance  from  a 
somewhat  dift'erent  point  of  view.  If  A.  says  to  B.,  "I  will  sell  you 
my  bicycle  for  $25,"  and  B.  replies,  "I  accept  your  offer,"  common 
knowledge  tells  us  that  this  sort  of  agreement  is  a  contract.  If  we 
assume  that  consideration  is  necessary,  we  must  infer  that,  what- 
ever consideration  may  be.  it  must  be  present  in  this  case.  What 
is  it,  and  how  may  we  express,  in  general  terms,  what  constitutes 
consideration?  Before  stating  some  of  the  definitions  of  considera- 
tion, let  us  inquire  into  a  few  other  kinds  of  agreements.  A.  says 
to  B.,  "I  have  made  up  my  mind  to  give  my  horse  to  you,  if  you 
are  willing  to  accept  the  gift."  B.  replies,  ''I  shall  be  very  glad  to 
accept."  A.  later  changes  his  mind  and  decides  not  to  give  the  horse 
to  B.,  and  B.  sues  A.  Scarcely  an}'  one  would  be  surprised  to  learn 
that  the  law  would  not  permit  Bv  to  recover.  Why?  The  courts 
would  say,  "Because  there  was  no  consideration  for  A.'s  promise." 
Again,  suppose  A.  gives  the  horse  to  B.  as  a  gift,  and  subsequent- 
ly B.  promises  to  pay  A.  $100  for  the  horse,  and  then  repudiates 
the  promise,  and  is  sued  by  A.  Would  the  courts  enforce  this 
promise?  No;  because  there  is  no  consideration  for  the  promise 
to  pay  the  $100,  although  A.  agrees  to  accept  the  money.  Suppose 
a  bank  held  M.'s  note,  and  that,  before  maturity,  the  officers  of 
the  bank  requested  A.  to  indorse  the  note.  Is  A.  bound?  Would 
it  make  an}^  dift'erence  if,  at  the  time  A.  indorsed  the  note,  the 
holder  promised  not  to  sue  M.  until  six  months  after  the  date  of 
maturity  fixed  in  the  note?  Again,  suppose  A.  oft'ers  to  sell  his 
automobile  to  B.  for  $1,000,  but  adds  that  it  is  to  be  understood 
that,  if  he  changes  his  mind  within  the  next  three  days,  the  sale 
is  not  to  be  made,  and  B.  accepts.  Could  B.  sue  A.,  if  A.,  within  the 
time  specified,  expressed  his  intention  not  to  carry  out  the  trans- 


•^4  CONTRACTS  (Part  1 

action?    The  answer  to  these  questions  depends  upon  whether  or 
not  there  is  consideration  for  the  promise  sought  to  be  enforced. 

It  should  be  apparent  that,  as  a  matter  of  public  policy,  the  law 
should  not  hold  a  person  liable  for  refusing-  to  make  a  gift  which 
he  had  previously  promised  to  make,  or  for  his  failure  to  keep 
many  kinds  of  social  or  business  engagements.  This  does  not 
imply  that  society  should  sanction  the  deliberate  refusal  to  carry 
out  one's  promises.  In  fact,  just  the  contrary  is  true.  Every  one 
instinctively  expects  a  person,  who  has  said  that  he  would  do  a 
certain  thing,  actually  to  carry  out  his  promise.  Not  only  that, 
but  society  goes  further,  and  expects  that  a  person  will  do  a  great 
many  things;  that  he  will  conduct  himself  in  a  certain  manner, 
even  though  he  has  not  promised  to  do  so,  and  his  failure  so  to  do 
calls  forth  social  condemnation.  Social  and  business  life  would 
be  quite  different,  if  established  customs  were  not  almost  univer- 
sally complied  with.  But  it  is  quite  a  different  thing  for  the  law 
to  provide  that,  unless  a  person  does  keep  all  of  his  promises,  he 
must  pay  damages  to  the  individual  whose  expectations  have  been 
disappointed.  The  law  follows  custom,  but  never  catches  up  with 
all  customs.  It  is  well  that  this  is  so,  because  the  law  should  not 
undertake  to  do  the  impossible.  The  law  should  and  does  fix 
minimum  standards  of  conduct,  and,  for  violations  of  these  stand- 
ards, persons  guilty  thereof  are  subjected  to  various  penalties. 
And  so,  with  respect  to  the  liability  for  the  failure  to  perform  one's 
promise,  the  law  allows  one  to  break  some  promises.  It  permits  a 
violation  of  social  and  business  customs  and  of  promises  up  to  a 
certain  point ;  but,  beyond  that,  promises  cannot  be  broken  without 
liability  for  the  damage  caused.  Our  problem  in  this  chapter  is  to 
find  out  where  this  point  is.  This  involves  the  determination  of 
the  nature  of  consideration,  because  only  those  promises  founded 
upon  consideration  are  enforceable. 

The  question  what  constitutes  consideration  is  not  altogether 
free  from  difficulty.  In  the  ordinary  case,  no  doubt,  the  presence, 
or  absence,  of  consideration  is  easily  discoverable,  but  in  the 
border  line  cases  there  exists  greater  doubt.  A  great  deal  of  the 
difficulty  in  the  subject  of  consideration  arises  from  the  fact  that 
there  is  no  single  generalized  statement  of  the  doctrine  of  con- 
sideration that  has  received  universal  acceptance.  Courts  and 
writers  differ  in  their  phraseology  of  the  rule.  In  fact,  no  definition 
of  consideration  could  be  so  framed  as  to  convey  an  accurate  and 
complete  notion  of  the  nature  of  this  requisite  to  the  validity  of  a 
contract.  That  may  be  obtained  only  by  an  examination  of  the 
cases  where  the  doctrine  of  consideration  has  been  discussed  and 
applied.  But  at  this  point  it  will  be  of  some  assistance  to  note  a  few 
definitions  of  this  term. 

Sir  William  R.  Anson  has  defined  consideration  as  "something 
done,  forborne,  or  suffered,  or  promised  to  be  done,  forborne,  or 
suffered,  by  the  promisee,  in  respect  of  the  promise."  ^ 

1  Anson  on  Contract  (3(1  Am.  Ed.)  §  118. 


Ch.  2)  CONSIDERATION  95 

Professor  WilHston  has  stated  that  "there  may  still  be  found 
several  somewhat  distinct  and  conflicting  ideas  as  to  what  con- 
stitutes a  sufficient  consideration.  *  *  *  The  idea  that  the  con- 
sideration is  the  price  requested  and  received  by  the  promisor  for 
the  promise,  *  *  *  jg  undoubtedly  the  fundamental  and,  as  to 
most  cases,  the  generally  accepted  idea  of  consideration  at  the 
present  time."  ^ 

Professor  Corbin  has  said :  "No  single  definition  that  has  been 
given  serves  to  explain  all  the  currently  approved  decisions.  Con- 
sideration is  a  fact  other  than  a  seal,  which,  when  it  accompanies 
a  promise,  operates  to  create  a  legal  duty  in  the  promisor.  Courts 
may  give  operation  (1)  to  facts  long  antecedent  to  the  promise; 
(2)  to  contemporaneous  facts  regarded  as  the  equivalent  of  and  in 
exchange  for  the  promise ;  and  (3)  to  subsequent  facts  consisting 
of  acts  in  reliance  on  the  promise.  In  all  contract  law  our  problem 
is  to  determine  what  facts  will  operate  to  create  legal  duties  and 
other  legal  relations.  We  find  at  the  outset  that  bare  words  of 
promise  do  not  so  operate.  Our  problem  then  becomes  one  of 
determining  what  facts  must  accompany  words  in  order  to  create 
a  legal  duty  and  other  legal  relations.  We  must  know  what  these 
facts  are,  in  order  that  we  can  properly  predict  the  enforcement, 
reparation,  either  specific  or  compensatory,  in  case  of  non-per- 
formance. We  are  looking  for  a  sufficient  cause  or  reason  for  the 
legal  enforcement  of  a  promise.  This  problem  was  also  before  the 
Roman  lawyers,  and  it  must  exist  in  all  systems  of  law.  With 
us  it  is  called  the  problem  of  consideration."  ^ 

The  cases  following  present  a  series  of  problems  with  respect  to 
the  doctrine  of  consideration.* 


SECTION  2.— CONSIDERATION  IN  UNILATERAI^ 
CONTRACTS 


HAMEIi  V.  SID  WAY. 

(Court  of  Appeals  of  New  York.  1891.    124  N.  Y.  538,  27  N.  E.  25G, 
12  L.  R.  A.  463,  21  Am.  St.  Rep.  693.) 

Parker,  J.  The  question  which  provoked  the  most  discussion  by 
counsel  on  this  appeal,  and  which  lies  at  the  foundation  of  plaintiit's 
asserted  right  of  recovery,  is  whether  by  virtue  of  a  contract  defend- 
ant's testator,  William  E.  Story,  became  indebted  to  his  nephew,  Wil- 
liam E.  Story,  2d,  on  his  twenty-first  birthday  in  the  sum  of  $5,000. 
The  trial  court  found  as  a  fact  that  "on  the  20th  day  of  March,  1869, 
*  *  *  William  E.  Story  agreed  to  and  with  William  E.  Story,  2d, 
that  if  he  would  refrain  from  drinking  liquor,  using  tobacco,  swearing, 

2  Williston  on  Contracts,  §  100. 

3  "Does  a  Pre-existing  Dnty  Defeat  Consideration?"  by  Artliur  L.  Cor- 
bin, 27  Yale  Law  Journal,  362. 

*  For  a  bibliography  of  the  leading  discussions  of  the  doctrine  of  con- 
sideration, see  notes  to  chapter  IV  of  Anson  on  Contract,  Corbin's  Edition. 


96  CONTRACTS  (Part  1 

and  playing  cards  or  billiards  for  money  until  he  should  become  twenty- 
one  years  of  age,  then  he,  the  said  William  E.  Story,  would  at  that 
time  pay  him,  the  said  William  E.  Story,  2d,  the  sum  of  $5,000  for 
such  refraining,  to  which  the  said  William  E.  Story,  2d,  agreed,"  and 
that  he  "in  all  things  fully  performed  his  part  of  said  agreement."  The 
defendant  contends  that  the  contract  was  without  consideration  to  sup- 
port it  and  therefore  invalid.  He  asserts  that  the  promisee,  by  re- 
fraining from  the  use  of  liquor  and  tobacco,  was  not  harmed,  but  bene- 
fited ;  that  that  which  he  did  was  best  for  him  to  do,  independently  of 
his  uncle's  promise — and  insists  that  it  follows  that,  unless  the  prom- 
isor was  benefited,  the  contract  was  without  consideration,  a  conten- 
tion which,  if  well  founded,  would  seem  to  leave  open  for  controversy 
in  many  cases  whether  that  which  the  promisee  did  or  omitted  to  do 
was  in  fact  of  such  benefit  to  him  as  to  leave  no  consideration  to  sup- 
port the  enforcement  of  the  promisor's  agreement. 

Such  a  rule  could  not  be  tolerated,  and  is  without  foundation  in  the 
law.  The  Exchequer  Chamber  in  1875  defined  "consideration"  as  fol- 
lows: "A  valuable  consideration,  in  the  sense  of  the  law,  may  consist 
either  in  some  right,  interest,  profit,  or  benefit  accruing  to  the  one  par- 
ty, or  some  forbearance,  detriment,  loss,  or  responsibility  given,  suf- 
fered or  imdertaken  by  the  other."  Courts  "will  not  ask  whether  the 
thing  which  forms  the  consideration  does  in  fact  benefit  the  promisee 
or  a  third  party,  or  is  of  any  substantial  value  to  any  one.  It  is 
enough  that  something  is  promised,  done,  forborne,  or  suffered  by  the 
party  to  whom  the  promise  is  made  as  consideration  for  the  promise 
made  to  him."  Anson,  Cont.  63.  "In  general  a  waiver  of  any  legal 
right  at  the  request  of  another  party  is  a  sufficient  consideration  for 
a  promise."  Pars.  Cont.  *444.  "Any  damage,  or  suspension,  or  for- 
bearance of  a  right  will  be  sufficient  to  sustain  a  promise."  2  Kent, 
Comm.  (12th  Ed.)  *465.  Pollock  in  his  work  on  Contracts  (page  166), 
after  citing  the  definition  given  by  the  exchequer  chamber,  already 
quoted,  says:  "The  second  branch  of  this  judicial  description  is  really 
the  most  important  one.  'Consideration'  means  not  so  much  that  one 
party  is  profiting  as  that  the  other  abandons  some  legal  right  in  the 
present,  or  limits  his  legal  freedom  of  action  in  the  future,  as  an  in- 
ducement for  the  promise  of  the  first." 

Now,  applying  this  rule  to  the  facts  before  us,  the  promisee  used 
tobacco,  occasionally  drank  liquor,  and  he  had  a  legal  right  to  do  so. 
That  right  he  abandoned  for  a  period  of  years  upon  the  strength  of 
the  promise  of  the  testator  that  for  such  forbearance  he  would  give  him 
$5,000.  We  need  not  speculate  on  the  effort  which  may  have  been 
required  to  give  up  the  use  of  those  stimulants.  It  is  sufficient  that  he 
restricted  his  lawful  freedom  of  action  within  certain  prescribed  limits 
upon  the  faith  of  his  uncle's  agreement,  and  now,  having  fully  per- 
formed the  conditions  imposed,  it  is  of  no  moment  whether  such  per- 
formance actually  proved  a  benefit  to  the  promisor,  and  the  court  will 
not  inquire  into  it;  but,  were  it  a  proper  subject  of  inquiry,  we  see 
nothing  in  this  record  that  would  permit  a  determination  that  the 
uncle  was  not  benefited  in  a  legal  sense.  Few  cases  have  been  found 
which  may  be  said  to  be  precisely  in  point,  but  such  as  have  been, 
support  the  position  we  have  taken. 

[Judgment  for  plaintiff  affirmed.] 


Ch.  2)  CONSIDERATION  97 

WHITE,  Executor  of  Bluett,  v.    BLUETT. 
(Court  of  Exchequer,  1853.     2  C.  L.  R.  301.) 

Assumpsit  by  the  plaintiff,  as  surviving  executor  of  John  Bluett. 
The  first  count  wsls  on  a  promissory  note,  whereby  the  defendant  prom- 
ised to  pay  the  said  John  Bluett,  on  demand,  the  sum  of  £50,  with  in- 
terest. The  second  count  was  for  money  payable  by  defendant  to 
John  Bluett  in  his  lifetime,  for  money  lent  by  John  Bluett  to  the  de- 
fendant. Defendant  pleaded  that  the  said  John  Bluett  was  defend- 
ant's father,  and  that  after  the  accruing  of  the  causes  of  action,  the 
defendant  complained  to  John  Bluett,  that  he,  the  defendant,  had  not 
received  at  his  hands  so  much  money  or  so  many  advantages  as  the 
other  children  of  John  Bluett,  and  certain  controversies  arose  between 
John  Bluett  and  defendant  concerning  these  matters,  and  that  John 
Bluett  admitted  that  such  complaints  were  well  founded ;  and  there- 
upon afterwards  it  was  agreed  between  John  Bluett  and  defendant 
that  defendant  should  forever  cease  to  make  such  complaints,  and  that 
in  consideration  thereof,  and  in  order  to  do  justice  to  the  defendant, 
and  also  out  of  his  natural  love  and  affection  towards  the  defendant, 
he,  John  Bluett,  would  discharge  the  defendant  of  his  liability  on  said 
causes  of  action. 

Clarke,  counsel  for  defendant,  argued  that  a  promise  is  consideration 
for  a  promise. 

P01.LOCK,  C.  B.  I  am  of  opinion  that  the  plaintiff  is  entitled  to  judg- 
ment. I  think  the  plea  is  bad,  as  it  sets  up  an  agreement  totally  with- 
out consideration.  The  principle  contended  for  at  the  bar  on  behalf 
of  the  defendant  is  correct ;  but  it  has  been  pushed  to  the  extreme 
of  absurdity.  If  we  attend  to  mere  language — to  words  simply,  and 
not  to  reason — it  may  be  that  there  is  a  foundation  for  the  argument 
which  has  just  been  addressed  to  the  court.  Mr.  Clarke  says  that 
the  son  had  a  right  to  complain,  and  to  say  to  his  father,  "I  will  cease 
to  complain  if  you  will  give  up  your  claim  on  that  note ;"  and  that 
having  ceased  to  complain  on  his  father's  answering  "Yes,"  there  was 
a  binding  agreement,  with  a  good  consideration,  between  them.  If  this 
plea  can  be  supported,  there  are  many  cases  of  a  most  absurd  char- 
acter which  might  be  suggested  as  affording  equally  good  ground  of 
consideration  with  that  in  the  present  plea.  For  instance,  suppose  a 
man  to  be  in  the  habit  of  walking  a  great  deal  on  a  particular  highway, 
and  to  have  been  remonstrated  with  by  the  surveyor  because  he  used 
the  road  more  than  his  neighbors  and  gave  more  trouble — if  these  two 
were  to  agree  that  the  one  should  pay  a  sum  of  money,  and  the  other 
should  abstain  from  complaining  of  his  walking  on  the  highway  more 
than  other  people,  it  might  just  as  well  be  argued  that  that  would  be 
an  agreement  on  which  an  action  would  lie.  So,  again,  if  we  take  the 
case  of  a  bill  with  two  joint  makers,  one  of  whom  is  surety  for  the 
other ;  suppose  the  surety  to  be  always  complaining  to  the  holder  that 
he  is  only  surety,  and  not  answerable,  and  that  thereon  the  holder 
should  say  to  him,  "Very  well,  if  you  will  cease  from  pouring  these 
complaints  into  my  ears,  and  say  no  more  to  me  about  the  hardship  of 
being  sued  for  the  debt  of  another,  I  will  promise  not  to  sue  you," 
could  such  an  agreement  stand?  It  appears  to  me  that  it  could  not; 
and  when  you  examine  this  plea,  it  is  clear  that  no  consideration  for 
any  agreement  is  alleged  on  the  face  of  it.  If,  on  the  part  of  the 
B.&  B.Bus.Law— 7 


98  CONTRACTS  (Parti 

father,  there  was  nothing  more  than  an  unequal  distribution  of  his 
property,  he  had  a  perfect  right  to  do  that  as  he  pleases ;  and  the  son 
had  no  right  whatever  to  complain  of  it.  That  is  the  fallacy  of  Mr. 
Clarke's  argument,  which  assumed  that  the  son  had  a  right  to  com- 
plain. He  had  no  such  right ;  and  when  he  promised  to  abstain  from 
that  course,  he  only  promised  not  to  do  that  which  he  was  bound  with- 
out any  such  promise,  to  abstain  from  doing.  As  the  case  was  pressed 
on  our'  attention  in  the  argument  at  the  bar.  I  have  gone  thus  fully  into 
it,  to  show  that  I  entered  into  and  appreciated  that  argument;  but  I 
confess  that  I  never  met  with  a  clearer  case. 


KIRKSEY  V.  KIRKSET, 

(Supreme  Court  of  Alabama,  1S45.     8  Ala.  131.) 

Assumpsit  by  the  defendant,  against  the  plaintiff  in  error.  The  ques- 
tion is  presented  in  this  court,  upon  a  case  agreed,  which  shows  the 
following  facts : 

The  plaintiff  was  the  wife  of  defendant's  brother,  but  had  for  some 
time  been  a  widow.- and  had  several  children.  In  1840,  the  plamtiff 
resided  on  public  land,  under  a  contract  of  lease,  she  had  held  over, 
and  was  comfortablv  settled,  and  would  have  attempted  to  secure  the 
land  she  lived  on.  The  defendant  resided  in  Talladega  county,  some 
sixty  or  seventy  miles  off.  On  the  10th  October,  1840,  he  wrote  to  her 
the  following  letter: 

"Dear  Sister  Antillico :  Much  to  my  mortification  I  heard  that 
brother  Henry  was  dead,  and  one  of  his  children.  I  know  that  your 
situation  is  one  of  grief  and  difficulty.  You  had  a  bad  chance  before, 
but  a  great  deal  worse  now.  I  should  like  to  come  and  see  you,  but 
cannot  with  convenience  at  present.  *  *  '■'■'  I  do  not  know  whether 
you  have  a  preference  on  the  place  you  live  on  or  not.  If  you  had, 
i  would  advise  you  to  obtain  your  preference,  and  sell  the  land  and 
quit  the  country,  as  I  understand  it  is  very  unhealthy,  and  I  know  so- 
ciety is  very  bad.  If  you  will  come  down  and  see  me,  I  will  let  you 
have  a  place  to  raise  your  family,  and  I  have  more  open  land  than  I 
can  tend ;  and  on  the  account  of  your  situation,  and  that  of  your  fam- 
ily, I  feel  like  I  want  you  and  the  children  to  do  well." 

Within  a  month  or  two  after  the  receipt  of  this  letter,  the  plaintiff' 
abandoned  her  possession,  without  disposing  of  it,  and  removed  with 
her  family,  to  the  residence  of  the  defendant,  who  put  her  in  comforta- 
ble houses,  and  gave  her  land  to  cultivate  for  two  years,  at  the  end  of 
which  time  he  notified  her  to  remove,  and  put  her  in  a  house,  not  com- 
fortable, in  the  woods,  which  he  afterwards  required  her  to  leave. 

A  verdict  being  found  for  the  plaintiff',  for  two  hundred  dollars, 
the  above  facts  were  agreed,  and  if  they  will  sustain  the  action,  the 
judgment  is  to  be  affirmed,  otherwise  it  is  to  be  reversed. 

Ormond,  T-  The  inclination  of  my  mind  is,  that  the  loss  and  incon- 
venience, which  the  plaintiff'  sustained  in  breaking  up,  and  moving  to 
the  defendant's  a  distance  of  sixty  miles,  is  a  sufficient  consideration 
to  support  the  promise,  to  furnish  her  with  a  house,  and  land  to  culti- 
vate, until  she  could  raise  her  family.  My  brothers,  however,  think 
that  the  promise  on  the  part  of  the  defendant  was  a  mere  gratuity, 
and  that  an  action  will  not  lie  for  its  breach.  The  judgment  of  the 
court  below  must  therefore  be  reversed,  pursuant  to  the  agreement  of 
the  parties. 


Ch.  2)  CONSIDERATION  99 


SILVER  et  al.  V.  GRAVES. 

(Supreme  Judicial  Court   of  Massachusetts,  1911.     210  Mass.   26,  0.5   N.   E. 
948,  Ann.  Cas.  191 2D,  588.) 

Action  by  Lena  M.  Silver  and  others  against  Charles  L.  Graves. 
Verdict  for  plaintitfs,  and  defendant  excepts. 

RuGG,  J.  The  father  of  the  three  plaintiffs  and  of  the  defendant 
was  survived  by  them  and  a  widow.  By  his  will  each  of  the  plaintiffs 
was  given  $100,  the  widow  $1,000.  and  the  defendant  the  residue  of 
the  estate,  amounting  to  about  $7,500.  The  plaintiffs  appealed  from 
a  decree  of  the  probate  court  allowing  the  will.  There  was  evidence 
tending  to  show  that  during  the  pendency  of  the  appeal  there  were 
several  conferences  between  the  plaintiffs,  or  some  of  them,  and  the 
defendant,  at  which  the  defendant  promised  the  plaintiffs  that,  if  they 
would  withdraw  the  appeal  and  let  the  will  be  allowed,  he  would  "make 
it  right  *  *  *  with  a  certain  sum"  and  "give  a  certain  sum  which 
would  be  satisfactory."  He  declined  to  name  any  specific  sum  of 
money  which  he  would  pay  to  them.  As  a  consequence  of  his  prom- 
ise, the  plaintiff's  withdrew  their  appeal,  and  the  will  was  allowed 
finally.  This  action  is  brought  to  recover  [for]  the  breach  of  this 
agreement.     *     *    * 

There  is  no  doubt  that  the  forbearance  to  prosecute  a  genuine  con- 
test in  the  courts  is  a  sufficient  consideration  for  a  promise.  In  order 
that  it  may  have  this  effect,  however,  the  intention  must  be  sincere 
to  carry  on  a  litigation  which  is  believed  to  be  well  grounded  and  not 
false,  frivolous,  vexatious  or  vmlawful  in  its  nature.  The  abandon- 
ment of  an  honest  purpose  to  carry  on  a  litigation,  even  though  its 
character  be  not  such  either  in  law  or  fact  or  both,  as  ultimately  to 
commend  itself  to  the  judgment  of  the  tribunal  which  finally  passes 
upon  the  question,  is  a  surrender  of  something  of  value,  and  is  a  suf- 
ficient consideration  for  a  contract.  But  the  giving  up  of  litigation, 
which  is  not  founded  in  good  faith,  and  which  does  violence  to  an  en- 
lightened sense  of  justice  in  view  of  the  knowledge  of  the  one  making 
the  concession,  is  not  the  relinquishment  of  a  thing  of  value,  and  does 
not  constitute  a  sufficient  consideration  for  a  contract.  *  *  *  ,\g 
was  said  by  Mortan,  J.,  in  Mackin  v.  Dwyer,  205  Mass.  472,  at  476,  91 
N.  E.  893,  at  894 :  "A  threat  to  contest  the  will,  merely  for  the  pur- 
pose of  compelling  the  defendant  to  settle  with  her  and  buy  his  peace, 
without  any  intention  on  her  part  of  actually  contesting  the  will  if  no 
such  settlement  was  made,  would  not  be  sufficient  and  would  not  consti- 
tute a  valid  consideration  for  the  defendant's  promise."    *     *     * 

Moreover,  the  jury  saw  all  the  parties  to  the  controversy  upon  the 
witness  stand,  and  their  manner  of  testifying  may  have  furnished 
basis  for  an  opinion  as  to  the  purpose  of  the  plaintiffs  in  making  the 
contest.  These  and  all  the  other  circumstances  of  the  case,  together 
with  the  presumption,  which  exists  commonly  that  people  act  in  good 
faith  rather  than  corruptly,  *  *  "  rendered  improper  a  ruling  that 
a  jury  could  not  find  that  the  contest  which  the  plaintiff's  forbore  upon 
the  defendant's  promise  was  a  real  one  honestly  undertaken.    *    *    * 

Exceptions  overruled. 


100  CONTRACTS  (Part  1 

SECTION  3.— PERFORMANCE  OF,  OR  PROMISE  TO  PER- 
FORM, A  PRE-EXISTING  LEGAL  DUTY 


JAFFKAY  V.  DAVIS. 

(Court  of  Appeals  of  New  York.  1S91.     124  N.  Y.  1G4,  26  N.  E.  351, 
11  L.   R.  A.   710.) 

•  Potter,  J.  The  facts  found' by  the  trial  court  in  this  case  were 
agreed  upon.  They  are  simple,  and  present  a  familiar  question  of  law. 
The  facts  are  that  defendants  were  owing  plaintiffs,  on  the  8th  day  of 
December,  1886,  for  goods  sold  between  that  date  and  the  May  previ- 
ous, at  an  agreed  price,  the  sum  of  $7,714.37,  and  that,  on  the  27th 
of  the  same  December  the  defendants  delivered  to  the  plaintiffs  their 
three  promissory  notes  amounting,  in  the  aggregate,  to  $3,462.24,  se- 
cured by  a  chattel  mortgage  on  the  stock,  fixtures,  and  other  property 
of  defendant,  located  in  East  Saginaw,  Alich.,  which  said  notes  and 
chattel  mortgage  were  received  by  plaintiffs,  under  an  agreement  to 
accept  same,  in  full  satisfaction  and  discharge  of  said  indebtedness ; 
that  said  notes  have  all  been  paid,  and  said  mortgage  discharged  of 
record.  The  question  of  law  arising  from  these  facts,  and  presented 
to  this  court  for  its  determination,  is  whether  such  agreement,  with  full 
performance,  constitutes  a  bar  to  this  action,  which  was  brought  after 
such  performance  to  recover  the  balance  of  such  indebtedness  over 
the  sum  so  secured  and  paid. 

One  of  the  elements  embraced  in  the  question  presented  upon  this 
appeal  is,  viz.  whether  the  payment  of  a  sum  less  than  the  amount  of 
a  liquidated  debt  under  an  agreement  to  accept  the  same  in  satisfac- 
tion of  such  debt,  forms  a  bar  to  the  recovery  of  the  balance  of  the 
debt.  This  single  question  was  presented  to  the  English  court  in  1602, 
when  it  was  resolved,  if  not  decided,  in  Pinnel's  Case,  5  Coke,  117, 
"that  payment  of  a  lesser  sum  on  the  day  in  satisfaction  of  a  greater 
cannot  be  any  satisfaction  for  the  whole,"  and  that  this  is  so,  although 
it  was  agreed  that  such  payment  should  satisfy  the  whole.  This  simple 
question  has  since  arisen  in  the  English  courts,  and  in  the  courts  of  this 
country,  in  almost  numberless  instances,  and  has  received  the  same  so- 
lution, notwithstanding  the  courts,  while  so  ruling,  have  rarely  failed 
upon  any  recurrence  of  the  question  to  criticise  and  condemn  its  rea- 
sonableness, justice,  fairness,  or  honesty.  No  respectable  authority 
that  I  have  been  able  to  find  has,  after  such  unanimous  disapproval  by 
all  the  courts,  held  otherwise  than  was  held  in  Pinnel's  Case,  supra,  and 
Cumber  v.  Wane,  1  Strange,  26;  Foakes  v.  Beer,  L.  R.  9  App.  Cas. 
605;  Goddard  v.  O'Brien  (Q.  B.  Div.)  21  Amer.  Law  Reg.  637,  and 
notes.  The  steadfast  adhesion  to  this  doctrine  by  the  courts,  in  spite 
of  the  current  of  condemnation  by  the  individual  judges  of  the  court, 
and  in  the  face  of  the  demands  and  conveniences  of  a  much  greater 
business,  and  more  extensive  mercantile  dealings  and  operations,  dem- 
onstrate the  force  of  the  doctrine  of  stare  decisis.  Bvit  the  doctrine  of 
stare  decisis  is  further  illustrated  by  the  course  of  judicial  decisions 
upon  this  subject;  for,  while  the  courts  still  hold  to  the  doctrine  of  the 
Pinnel  and  Cumber- Wane  Cases,  supra,  they  have  seemed  to  seize  with 
avidity  upon  any  consideration  to  support  the  agreement  to  accept  the 
lesser  sum  in  satisfaction  of  the  larger,  or,  in  other  words,  to  extract, 
if  possible,  from  the  circumstances  of  each  case,  a  consideration  for 


Ch.  2)  CONSIDERATION  101 

the  new  agreement,  and  to  substitute  the  new  agreement  in  place  of 
the  old  and  thus  to  form  a  defense  to  the  action  brought  upon  the 
old  agreement. 

It  will  serve  the  purpose  of  illustrating  the  adhesion  of  the  court 
to  settled  law,  and  at  the  same  time  enable  us,  perhaps  more  satis- 
factorily, to  decide  whether  there  was  a  good  consideration  to  sup- 
port the  agreement  in  this  case,  to  refer  to  (the  consideration  in)  a 
few  of  the  numerous  cases  which  the  courts  have  held  to  be  sufficient 
to  support  the  new  agreement.  Lord  Blackburn  said,  in  his  opinion 
in  Foakes  v.  Beer,  supra,  and  while  maintaining  the  doctrine,  "that  a 
lesser  sum  cannot  be  a  satisfaction  of  a  greater  sum,"  "but  the  gift 
of  a  horse,  hawk,  or  robe,  etc.,  in  satisfaction,  is  good,"  quite  regard- 
less of  the  amount  of  the  debt ;  and  it  was  further  said  by  him,  in  the 
same  opinion,  "that  payment  and  acceptance  of  a  parcel  before  the 
day  of  payment  of  a  larger  sum  would  be  a  good  satisfaction  in  regard 
to  the  circumstance  of  time ;"  "and  so,  if  I  am  bound  in  twenty  pounds 
to  pay  you  ten  pounds  at  Westminster,  and  you  request  me  to  pay 
you  five  pounds  at  the  day,  at  York,  and  you  will  accept  it  in  full  satis- 
faction for  the  whole  ten  pounds,  is  it  a  good  satisfaction?"  It  was 
held  in  Goddard  v.  O'Brien,  9  Q.  B.  Div.  37 :  "A.,  being  indebted  to  B. 
in  il25  7s.  and  9d.  for  goods  sold  and  delivered,  gave  B.  a  check 
(negotiable  I  suppose)  for  ilOO,  payable  on  demand,  which  B. 
accepted  in  satisfaction,  was  a  good  satisfaction."  Huddleston,  B., 
in  Goddard  v.  O'Brien,  supra,  approved  the  language  of  the  opinion  in 
Sibree  v.  Tripp,  15  Mees.  &  W.  26:  "That  a  negotiable  security  may 
operate,  if  so  given  and  taken,  in  satisfaction  of  a  debt  of  a  greater 
amount;  the  circumstance  of  negotiability  making  it  in  fact  a  different 
thing,  and  more  advantageous,  than  the  original  debt,  which  was  not 
negotiable."  It  was  held  in  Bull  v.  Bull,  43  Conn.  455  :  "And,  although 
the  claim  is  a  money  demand,  liquidated,  and  not  doubtful,  and  it  can- 
not be  satisfied  w^ith  a  smaller  sum  of  money,  yet,  if  any  other  personal 
property  is  received  in  satisfaction,  it  will  be  good,  no  matter  what  the 
value."  And  it  was  held,  in  Cumber  v.  Wane,  supra,  that  a  creditor 
can  never  bind  himself  by  simple  agreement  to  accept  a  smaller  sum 
in  lieu  of  an  ascertained  debt  of  a  larger  amount,  such  agreement  being 
nudum  pactum,  but,  if  there  be  any  benefit,  or  even  any  legal  possi- 
bility of  benefit,  to  the  creditor  thrown  in,  that  additional  weight  will 
turn  the  scale,  and  render  the  consideration  sufficient  to  support  the 
agreement.  It  was  held  in  Le  Page  v.  McCrea,  1  Wend.  164,  19  Am. 
Dec.  469,  and  in  Boyd  v.  Hitchcock,  20  Johns.  76,  11  Am.  Dec.  247, 
that,  "giving  further  security  for  part  of  a  debt,  or  other  security, 
though  for  a  less  sum  than  the  debt,  and  acceptance  of  it  in  full  of 
all  demands,  make  a  valid  accord  and  satisfaction ;"  that,  "if  a  debtor 
gives  his  creditor  a  note  indorsed  by  a  third  party  for  a  less  sum 
than  the  debt  (no  matter  how  much  less),  but  in  full  satisfaction  of 
the  debt,  and  it  is  received  as  such,  the  transaction  constitutes  a  good 
afcord  and  satisfaction."  Yarney  v.  Conery,  77  Me.  527,  1  Atl.  683. 
And  so  it  has  been  held,  "where,  by  mode  or  time  of  part  payment 
different  than  that  provided  for  in  the  contract,  a  new  benefit  is  or 
may  be  conferred,  or  a  burden  imposed,  a  new  consideration  arises 
out  of  the  transaction,  and  gives  validity  to  the  agreement  of  the  cred- 
itor." Rose  V.  Hall,  26  Conn.  392,  68  Am.  Dec.  402.  And  so  "pay- 
ment of  less  than  the  whole  debt,  if  made  before  it  is  due,  or  at  a 
different  place  from  that  stipulated,  if  received  in  full,  is  a  good  satis- 


102  CONTRACTS  (Part  1 

faction."  Jones  v.  Bullitt,  2  Litt.  (Ky.)  49.  *  *  *  In  Watson  v. 
Elliott,  57  N.  H.  511-513,  it  was  held:  "It  is  enough  that  somethnig 
substantial  which  one  party  is  not  bound  by  law  to  do  is  done  by  him, 
or  something  which  he  has  a  right  to  do  he  abstains  from  doing,  at  the 
request  of  the  other  party,  is  held  a  good  satisfaction." 

It  has  been  held  in  a  number  of  cases,  that,  if  a  note  be  surrendered 
bv  the  payee  to  the  maker,  the  whole  claim  is  discharged  and  no  action 
can  afterwards  be  maintained  on  such  instrument  for  the  unpaid  bal- 
ance.    *     *     *     It  has  been  held  that  a  partial  payment  made  to  an- 
other though  at  the  creditor's  instance  and  request,  is  a  good  discharge 
of  the  whole  debt.     Harper  v.  Graham,  20  Ohio,  106.    "The  reason  of 
the  rule  is  that  the  debtor  in  such  case  has  done  something  more  than 
he  was  originally  bound  to  do,  or,  at  least,  something  different.    It  may 
be  more,  or  it  may  be  less,  as  a  matter  of  fact."    It  was  held  by  the  su- 
preme court  of  Pennsylvania  in  Bank  v.  Houston,  11  Wkly.  Notes  Cas. 
389  (February  13,  1882)  :    The  decided  advantage  which  a  creditor  ac- 
quires bv  the  receipt  of  a  negotiable  note  for  a  part  of  his  debt,  as  by 
the  increased  facilities  of  recovering  upon  it,  the  presumption  of  a  con- 
sideration for  it.  the  ease  of  disposing  of  it  in  market,  etc.,  was  held 
to  furnish  ample  reason  why  it  should  be  a  valid  discharge  of  a  larger 
account  or  open  claim  unnegotiable.     It  has  been  held  that  a  payment 
in  advance  of  the  time,  if  agreed  to,  is  a  full  satisfaction  for  a  larger 
claim  not  vet  due.     Brooks  v.  White.  2  Mete.  (Mass.)  283,  V7  Am. 
Dec.  95.     in  softie  states,  notably  Maine  and  Georgia,  the  legislature, 
in  order  to  avoid  the  harshness  of  the  rule  under  consideration,  have, 
by  statute,  changed  the  law  upon  that  subject,  by  providing:     "No 
action  can  be  maintained  upon  a  demand  which  has  been  canceled  by 
the  receipt  of  any  sum  of  money  less  than  the  amount  legally  due  there- 
on,  or   for  any  good  and  valuable   consideration,  however   smair'— 
citing  Weymouth  v.  Babcock,  42  Me.  42.    And  so  in  Gray  v.  Barton,  55 
N.  Y.  68,  14  Am.  Rep.  181,  where  a  debt  of  $820  upon  book  account 
was  satisfied  bv  the  payment  of  one  dollar  by  calling  the  balance  a 
"gift,"  though  the  balance  was  not  delivered,  except  by  fiction,  and  the 
receipt  was  in  the  usual  form,  and  was  silent  upon  the  subject  of  a 
gift,  and  this  case  was  followed  and  referred  to  in  Ferry  v.  Stephens. 
66  N.  Y.  321.     So  it  was  held  in  Mitchell  v.  Wheaton,  46  Conn.  315, 
33  Am.  Rep.  24,  that  the  debtor's  agreement  to  pay,  and  the  payment 
of  $150,  with  the  costs  of  this  suit,  upon  a  liquidated  debt  of  $299. 
satisfied  the  principal  debt.     These  cases  show  in  a  striking  manner 
the  extreme  ingenuity  and  assiduity  which  the  courts  have  exercised 
to   avoid   the  operation   of    the   "rigid  and   rather  unreasonable   rule 
of  the  'old  law,'  "   as  it  is  characterized  in  Johnson  v.   Brannan,   o 
Johns.  26S-272;    or  as  it  is  called  in  Kellogg  v.  Richards.  14  Wend. 
116.  "technical  and  not  very  well  supported  by  reason" ;  or,  as  may  be 
more  practicallv  stated,  a  rule  that  "a  bar  of  gold  worth  $100  will  dis- 
charge a  debt  of  $500,  while  400  gold  dollars  in  current  coin  will  not." 
See  note  to  Goddard  v.  O'Brien,  supra,  in  21  Amer.  Law  Reg.  640.  641. 
The  state  of  the  law  upon  this  subject,  under  the  modification  of  lat- 
er decisions,  both  in  England  and  in  this  country,  would  seem  to  be 
as  expressed  in  Goddard  v.  O'Brien,  supra :    "The  doctrine  in  Cumber 
V.  Wane,  is  no  doubt  very  much  qualified  by  Sibree  v.  Tripp,  and  1 
cannot  find  it  better  stated  than  in  1  Smith,  Lead.  Cas.  (7th  Ed.)  595  : 
'The  general  doctrine  in  Cumber  v.  Wane,  and  the  reason  of  all  the 
exceptions  and  distinctions  which  have  been  ingrafted  on  it,  may  per- 


Ch.  2)  CON.SIOEItATION  103 

haps  be  summed  up  as  follows,  viz. :  That  a  creditor  cannot  bind  him- 
self by  a  simple  agreement  to  accept  a  smaller  sum  in  lieu  of  an  ascer- 
tained' debt  of  larger  amount,  such  an  agreement  being  nudum  pactum. 
But,  if  there  be  any  benefit,  or  even  any  legal  possibility  of  benefit,  to 
the  creditor  thrown  in,  that  additional  weight  will  turn  the  scale,  and 
render  the  consideration  sufficient  to  support  the  agreement.'  " 

In  the  case  at  bar,  the  defendants  gave  their  promissory  notes  upon 
time  for  one-half  the  debt  they  owed  plaintiff,  and  also  gave  plaintiff  a 
chattel  mortgage  on  the  stock,  fixtures,  and  other  personal  property  of 
the  defendants,  under  an  agreement  with  plaintiff  to  accept  the  same 
in  full  satisfaction  and  discharge  of  said  indebtedness.  Defendants 
paid  the  notes  as  they  became  due,  and  plaintiff  then  discharged  the 
mortgage.  Under  the  cases  above  cited,  and  uix)n  principle,  this  new 
agreement  was  supported  b}^  a  sufficient  consideration  to  make  it  a 
valid  agreement,  and  this  agreement  was,  by  the  parties,  substituted  in 
place  of  the  former.  The  consideration  of  the  new  agreement  was 
that  the  plaintifi'.  in  place  of  an  open  book  account  for  goods  sold,  got 
the  defendants'  promissory  notes,  probably  negotiable  in  form,  signed 
by  defendants,  thus  saving  the  plaintiff  perhaps  trouble  or  expense  of 
proving  their  account,  and  got  security  upon  all  the  defendants'  per- 
sonal property  for  the  payment  of  the  sum  specified  in  the  notes,  where 
before  they  had  no  security.  It  was  some  trouble  at  least,  and  per- 
haps some  expense,  to  the  defendants  to  execute  and  deliver  the  se- 
curity, and  they  deprived  themselves  of  the  legal  ownership,  or  of  any 
exemptions,  or  the  power  of  disposing  of  this  property,  and  gave  the 
plaintiff  such  ownership,  as  against  the  defendants,  and  the  claims 
thereto  of  defendants'  creditors,  if  there  were  any.  It  seems  to  me, 
uppn  principle,  and  the  decisions  of  this  state,  *  *  *  and  of  quite 
all  of  the  other  states,  the  transactions  between  the  plaintiff  and  the 
defendants  constitute  a  bar  to  this  action.  All  that  is  necessary  to  pro- 
duce satisfaction  of  the  former  agreement  is  a  sufficient  consideration 
to  support  the  substituted  agreement. 

The  doctrine  is  fully  sustained  in  the  opinion  of  Jndge  Andrews,  in 
Allison  V.  Abendroth,  108  N.  Y.  470,  15  N.  E.  606,  from  which  I 
quote:  "Rut  it  is  held  that,  where  there  is  an  independent  considera- 
tion, or  the  creditor  receives  any  benefit,  or  is  put  in  a  better  position, 
or  one  from  which  there  may  be  legal  possibility  of  benefit  to  which  he 
was  not  entitled,  except  for  the  agreement,  then  the  agreement  is  not 
nudum  pactum,  and  the  doctrine  of  the  common  law,  to  which  we  have 
adverted,  has  no  application."  Upon  this  distinction  the  cases  rest, 
which  hold  that  the  acceptance  by  the  creditor  in  discharge  of  the  debt 
of  a  different  thing  from  that  contracted  to  be  paid,  although  of  much 
less  pecuniary  value  or  amount,  is  a  good  satisfaction,  as,  for  example, 
a  negotiable  instrument  binding  the  debtor  and  a  third  person  for  a 
smaller  sum.  Curlewis  v.  Clark,  3  Exch.  375.  Following  the  same 
principle,  it  is  held  that,  when  the  debtor  enters  into  a  new  contract 
with  the  creditor  to  do  something  which  he  was  not  bound  to  do  by 
the  original  contract,  the  new  contract  is  a  good  accord  and  satisfaction, 
if  so  agreed.  The  case  of  accepting  the  sole  liability  of  one  of  two 
joint  debtors  or  copartners,  in  satisfaction  of  the  joint  or  copartnership 
debt,  is  an  illustration.  This  is  held  to  be  a  good  satisfaction,  because 
the  sole  liabilit)^  of  one  of  two  debtors  "may  be  more  beneficial  than 
the  joint  hability  of  both,  either  in  respect  of  the  solvency  of  the  par- 


104  CONTRACTS  (Part  1 

ties,   or  the  convenience  of  the   remedy."     Thompson  v.   Percival,   5 
Barn.  &.  Adol.  925.     The  judgment  must  be  reversed. 


MELROY  V.  KEMMERER. 

(Supreme  Court  of  Pennsylvania,  1907.    21S  Pa.  381,  67  Atl.  690,  11  L.  R.  A. 
[N.  S.]  lOlS,  120  Am.  St.  Rep.  88S.) 

MiTCHEivL,  C.  J.  *  *  *  In  the  present  case  the  debtor,  being  in 
faiUng  circumstances  and  contemplating  bankruptcy,  offered  the  plain- 
tiffs 30  per  cent,  of  his  debt  as  a  settlement  in  full.  The  plaintiffs  dis- 
suaded him  from  going  into  bankruptcy,  accepted  his  alternative  offer, 
received  the  money,  and  closed  the  account.  They  have  now  brought 
this  suit  for  the  balance.  In  the  absence  of  any  express  decision  in 
this  state  on  this  point,  the  learned  judge  below  did  not  feel  at  liberty 
to  depart  from  the  general  rule.  We  have  no  such  hesitation.  The 
exact  point  is  whether  the  debtor's  relinquishment  of  his  intention  to 
seek  a  discharge  in  bankruptcy,  and  his  payment  of  30  per  cent,  in- 
stead, constitute  a  sufficient  consideration  to  bind  the  creditor  to  the 
agreement.  On  that  point  we  have  no  doubt.  A  valuable  .considera- 
tion may  consist  in  some  right,  interest,  or  benefit  to  one  party,  or 
some  loss,  detriment,  or  responsibility  resulting  actually  or  potentially 
to  the  other.  "If  there  is  any  advantage  to  the  creditor,  the  law  will 
not  weigh  the  adecjuacy  of  the  consideration."  Fowler  v.  Smith,  153 
Pa.  659,  25  Atl.  744.  The  accord  in  this  case  was  good  on  both  branch- 
es. By  it  the  creditors  got  a  sum  certain,  instead  of  the  chances  of 
an  uncertain  dividend  in  bankruptcy.  On  the  other  hand,  the  debtor 
accepted  the  responsibility  of  paying  a  sum  certain,  whether  his  assets 
were  sufficient  or  not,  and  gave  up  his  right  to  a  release  of  his  fu- 
ture assets,  and  to  a  discharge  from  his  whole  debt,  without  regard 
to  the  sufficiency  of  his  present  assets. 

The  decisions  on  this  exact  point  in  other  states  are  not  numerous, 
but  the  general  trend  is  uniform  to  the  result  we  have  reached.  *  *  * 
On  principle  and  on  authority,  therefore,  the  agreement  in  the  present 
case  was  binding,  and,  there  being  no  dispute  on  the  material  facts, 
the  defendant's  sixth  point,  asking  for  binding  instructions,  should 
have  been  affirmed.     Judgment  for  plaintiff'  reversed. 


TANNER  V.  MERRILL. 

(Supreme  Court  of  IMiehisan,  1895.     108  aiich.  58.  65  N.  W.  664,  .SI  L.  R.  A. 
171.  G2  x\m.  St.  Rep.  687.) 

HooKKR,  J.  The  defendants  appeal  from  a  judgment  recovered 
against  them  at  circuit.  They  are  lumbermen,  and  the  plaintiff  worked 
for  them  at  Georgian  Bay.  his  transportation  from  Saginaw  to  that 
place  having  been  paid  by  them.  When  he  quit  work,  a  question  arose 
as  to  who  should  pay  this,  under  the  contract  of  employment,  and  de- 
fendants' superintendent  decHned  to  pay  any  transportation.  The 
plaintiff  needed  the  money  due  him  to  get  home,  and  showed  a  tele- 
gram announcing  the  illness  or  death  of  his  mother,  and  said  that  he 
must  go  home,  to  which  the  superintendent  replied  that  "he  did  noi 
pay  any  man's  fare''  ;  whereupon  a  receipt  in  full  was  signed,  and  the 
money  due,  after  deducting  transportation,  was  paid.     The  plaintiff 


Ch.  2)  CONSIDERATION  105 

testified  that  they  had  no  dispute,  only  he  claimed  the  fare  and  the 
superintendent  refused  to  allow  it.     *     *     * 

It  is  urged  upon  behalf  of  the  plaintiff  that  receipts  are  always  open 
to  explanation,  and  that  there  is  no  consideration  to  support  the  ac- 
ceptance of  a  portion  of  a  valid  claim  as  full  payment.  The_  cases 
which  counsel  cite  do  not  support  the  broad  contention  of  plaintiff's 
counsel,  which  would  seriously  derange  business  affairs  if  it  should 
be  sustained.  The  doctrine  that  the  receipt  of  part  payment  must 
rest  upon  a  valid  consideration  to  be  effective  in  discharge  of  the  entire 
debt  is  carefully  limited  to  cases  where  the  debt  is  liquidated,  by  agree- 
ment of  the  parties  or  otherwise,  which  was  not  the  case  here.  It  was 
in  dispute.  *  ^'^  *  In  Marion  v.  Heimbach,  62  Minn.  215,  64  N.  W. 
386,  the  court  say:  "But  where  the  claim  is  unliquidated,  it  would 
seem  to  be  true  that  if  the  creditor  is  tendered  a  sum  less  than  his 
claim,  upon  the  condition  that,  if  it  is  accepted,  it  must  be  in  full  sat- 
isfaction of  his  whole  claim,  his  acceptance  is  an  accord  and  satisfac- 
tion." *  *  *  The  important  fact  to  ascertain  is  whether  the  plain- 
tiff's claim  was  a  liquidated  claim  or  not.  If  it  was,  there  was  no  con- 
sideration for  the  discharge.  If  not.  the  authorities  are  in  substantial 
accord  that  part  payment  of  the  claim  may  discharge  the  debt,  if  it  is 
so  received. 

Upon  the  undisputed  facts,  the  claim  of  the  plaintiff',  as  made,  was 
not  liquidated.  It  was  not  even  admitted,  but,  on  the  contrary,  was 
denied,  because  the  defendants  claimed  that  it  had  been  partially  paid 
by  a  valid  offset.  While  the  controversy  was  over  the  offset,  it  is 
plain  that  the  amount  due  the  plaintiff  was  in  dispute.  If  so,  it  is 
difficult  to  understand  how  it  could  be  treated  as  a  liquidated  claim, 
unless  it  is  to  be  said  that  a  claim  may  be  liquidated  piecemeal,  and  that, 
so  far  as  the  items  are  agreed  upon,  it  is  liquidated,  and  to  that  extent 
is  not  subject  to  adjustment  on  a  basis  of  part  payment.  Cases  are 
not  numerous  in  which  just  this  phase  of  the  question  appears.  This 
would  seem  remarkable,  unless  we  are  to  assume  that,  in  calling  a 
claim  unliquidated,  the  courts  have  alluded  to  the  whole  claim,  and 
have  considered  that,  where  the  amount  is  not  agreed  upon,  the  claim 
as  a  whole  is  unliquidated,  and  therefore  subject  to  adjustment.  If 
this  is  not  true,  no  man  can  pay  an  amount  that  he  admits  to  be  due 
without  being  subject  to  action  whenever  and  so  often  as  his  creditor 
may  choose  to  claim  that  he  was  not  fully  paid,  no  matter  how  solemn 
rhay  have  been  his  acknowledgment  of  satisfaction,  so  long  as  it  is  not 
a  release  vmder  seal. 

The  judgment  must  be  reversed.     No  new  trial  should  be  ordered. 


HOGAN  V.  STOPHLET. 

(Supreme  Court  of  Illinois,  1899.     179  III.  150,  53  N.  E.  604,  44  L.  R.  A.  809.) 

Appellant  Hogan  sued  appellee  Stophlet  to  recover  a  reward  of 
$50  offered  by  the  latter  for  the  apprehension  and  conviction  of  an  in- 
cendiary. Appellant,  sheriff  of  Pulaski  county,  arrested  the  incendiary 
in  the  county.  The  incendiary  was  convicted  of  arson.  Appellant 
recovered  in  the  justice  of  the  peace  court.  The  circuit  court,  on  ap- 
peal, found  for  the  appellant.  The  Appellate  Court,  upon  appeal  to  it, 
found  for  the  appellee,  reversing  the  case  without  remanding  it.  Ho- 
gan now  appeals  to  the  Supreme  Court. 


106  CONTKACTS  (Parti 

Magruder,  J.  *  *  *  The  Appellate  Court  has  found  in  its  find- 
ing of  facts,  as  embodied  in  its  judgment,  that  the  Harry  Howard  who 
was  arrested  was  so  arrested  for  the  offense  of  setting  on  fire  and 
burnnig  the  store  building  of  appellee,  and  for  the  apprehension  and 
conviction  of  the  party  committing  this  offense  the  reward  was  offer- 

The  appellant  was  tlie  sheriff  of  Pulaski  county.  The  arrest  of 
Howard  was  made  in  Pulaski  county,  and  for  a  felony  committed  by 
Howard  in  that  county ;  Howard  also  being  a  resident  of  that  county. 
It  was.  therefore,  appellant's  duty  to  make  the  arrest.  *  *  *  jt  be- 
ing true  that  it  was  the  official  duty  of  the  appellant,  as  sheriff,  to  make 
the  arrest  of  the  guilty  party,  and  that  the  fees  which  he  is  entitled  to 
charge  for  the  performance  of  his  official  duties  are  fixed  by  law,  it 
follov^s  upon  well-established  principles,  that  the  appellant  was  not 
entitled  to  the  reward  sued  for  in  this  case.  It  is  against  public  policy 
to  allow  a  man  to  recover  a  reward  for  doing  his  duty  as  a  public  offi- 
cer. It  is  also  against  public  policy,  and  illegal,  for  a  sheriff  to  re- 
ceive, for  services  for  which  fixed  compensation  is  prescribed  by  law, 
any  other  or  further  fees,  although  extraordinary  diligence  may  have 
been  exercised  by  him  in  the  discharge  of  his  duty.  *  *  *  A  prom- 
ise to  pay  an  officer  a  reward  for  doing  what  it  is  his  duty  to  do  under 
the  law  is  a  promise  without  any  consideration  to  support  it. 

There  are  some  decisions  which  hold  to  the  contraiy  of  the  views 
herein  expressed,  but  these  decisions  will  be  found  upon  examination 
to  be  cases  where  the  officer  arrested  the  offender  beyond  his  terri- 
torial jurisdiction,  or  cases  arising  under  particular  statutes  which 
did  not  make  it  the  duty  of  the  officer  to  make  the  arrest.  Many  of 
these  decisions  are  reviewed  in  the  very  able  opinion  delivered  by  the 
Supreme  Court  of  Connecticut  in  Re  Russell,  51  Conn.  577,  50  Am. 
Rep.  55,  and  are  there  distinguished  from  such  cases  as  that  which  is 
presented  by  the  present  record. 

For  the  reasons  above  stated,  the  judgment  of  the  appellate  court  is 
affirmed. 


KING  V.  DULUTH.  M.  &  N.  RY.  GO. 
(Supreme  Court  of  Minnesota,  1895.     61  Minn.  482,  6.3  N.  W.  1105.) 

Action  by  George  R.  King,  as  surviving  partner  of  the  late  firm  of 
Wolf  &  King,  against  the  Duluth,  Missabe  &  Northern  Railway  Com- 
pany, on  contract.  From  an  order  overruling  a  demurrer  to  the  com- 
plaint, defendant  appeals. 

Start,  C.  J.  This  is  an  action  brought  by  the  plaintiff,  as  surviving 
partner  of  the  firm  of  Wolf  &  King,  to  recover  a  balance  claimed  to  be 
due  for  the  construction  of  a  portion  of  the  defendant's  line  of  rail- 
way. The  complaint  alleges  two  supposed  causes  of  action,  to  each 
of  which  the  defendant  demurred  on  the  ground  that  neither  states 
facts  constituting  a  cause  of  action.  From  an  order  overruling  the  de- 
murrer the  defendant  appealed. 

The  complaint  for  a  first  cause  of  action  alleges,  among  other  things, 
substantially,  that  in  January,  1893,  the  firm  of  Wolf  &  King  entered 
into  three  written  contracts  with  the  president  and  representative  of 
the  defendant  for  the  grading,  clearing,  grubbing,  and  construction 
of  the  roadbed  of  its  railway  for  a  certain  stipulated  price  for  each  of 


Ch.  2)  CONSIDERATION 


107 


the  general  items  of  work  and  labor  to  be  performed;  that  the  firm 
entered  upon  the  performance  of  such  contracts,. but  in  the  latter  part 
of  Febrnary,  1893,  in  the  course  of  such  performance,  unforeseen  dif- 
ficulties of'  construction  involving  unexpected  expenses,  and  such  as 
were  not  anticipated  bv  the  parties  to  the  contracts,  were  encountered. 
That  the  firm  of  Wolf'&  King  found  that  by  reason  of  such  difficulties 
it  would  be  impossible  to  complete  the  contracts  within  the  time  agreed 
upon  without  employing  an  additional  and  an  unusual  force  of  men 
and  means,  and  at  a  loss  of  not  less  than  $40,000  to  them,  and  conse- 
quently they  notified  the  representative  of  the  defendant  that  they 
woulcf  be  unable  to  go  forward  with  the  contracts,  and  unable  to  com- 
plete or  prosecute  the  work.  Thereupon  such  representative  entered 
into  an  agreement  with  them  modifying  the  written  contracts,  whereby 
he  agreed  that  if  they  would  "go  forward  and  prosecute  the  said  work 
of  construction,  and  complete  said  contract,"  he  would  pay  or  cause 
to  be  paid  to  them  an  additional  consideration  therefor,  up  to  the  fuH 
extent  of  the  cost  of  the  work,  so  that  they  should  not  be  compelled  to 
do  the  work  at  a  loss  to  themselves;  that  in  consideration  of  such 
promise  they  agreed  to  forward  the  work  rapidly,  and  force  the  same 
to  completion,  "in  the  manner  provided  in  the  specifications  for  such 
work,  and  referred  to  in  such  contracts;  that  in  reliance  upon  the 
agreement  modifying  the  former  contracts,  and  in  reliance  iipon  such 
former  contracts,  they  did  prosecute  and  complete  the  \vork  in  accord- 
ance with  the  contracts  as  so  modified  by  the  oral  agreement,  to  the 
satisfaction  of  all  parties  in  interest ;  that  such  contracts  and  the 
oral  contract  modifying  them  Avere  duly  ratified  by  the  defendant,  and 
that  die  actual  cost  of  such  construction  was  not  less  than  $30,000 
in  excess  of  the  stipulated  amount  provided  for  in  the  original  written 
contracts. 

It  is  claimed  by  appellant  that  the  complainant  shows  no  considera- 
tion for  the  alleged  promise  to  pay  extra  compensation  for  the  work ; 
that  it  is  at  best  simply  a  promise  to  pay  the  contractors  an  additional 
compensation  if  they  would  do  that  which  they  were  already  legally 
bound  to  do.  The  general  rule  is  that  a  promise  of  a  party  to  a  con- 
tract to  do,  or  the  doing  of,  that  which  he  is  already  under  a  legal  ob- 
ligation to  do  by  the  terms  of  the  contract  is  not  a  valid  consideration 
to  support  the  promise  of  the  other  party  to  pay  an  additional  compen- 
sation for  such  performance.  *  *  *  '  In  other  words,  a  promise  by 
one  party  to  a  subsisting  contract  to  the  opposite  party  to  prevent  a 
breach  of  the  contract  on  his  part  is  without  consideration.  *  *  * 
If  the  allegations  of  the  complaint,  when  taken  together,  are  in  legal 
effect  simply  that  the  contractors,  finding  by  the  test  of  experience  in 
the  prosecution  of  the  work  that  they  had  agreed  to  do  that  which 
involved  a  greater  expenditure  of  money  than  they  calculated  upon, 
that  they  had  made  a  losing  contract,  and  thereupon  notified  the  oppo- 
site party  that  they  were  unable  to  proceed  with  the  work,  and  he 
promised  them  extra  compensation  if  they  would  perform  their  con- 
tract, the  case  is  within  the  rule  stated,  and  the  demurrer  ought  to  have 
been  sustained  as  to  the  first  cause  of  action. 

It  in  claimed,  however,  by  the  respondent,  that  such  is  not  the  proper 
construction  of.  the  complaint,  and  that  its  allegations  bring  the  case 
Avithin  the  rule  adopted  in  se^'eral  states,  and  at  least  approved  in  our 
own,  to  the  effect  that  if  one  party  to  a  contract  refuses  to  perform  his 
part  of  it  unless  promised  some  further  pay  or  benefit  than  the  contract 


108  CONTRACTS  (Part  1 

provides,  and  such  promise  is  made  by  the  other  party,  it  is  supported 
by  a  vaUd  consifleration,  for  the  making  of  the  new  promise  shows  a 
rescission  of  the  original  contract  and  the  substitution  of  another.  In 
other  words,  that  the  party,  by  refusing  to  perform  his  contract,  there- 
by subjects  himself  to  an  action  for  damages,  and  the  opposite  party 
has  his  election  to  bring  an  action  for  the  recovery  of  such  damages 
or  to  accede  to  the  demands  of  his  adversary  and  make  the  promise ; 
and  if  he  does  so  it  is  a  relinquishment  of  the  original  contract  and 
the  substitution  of  a  new  one.  Munroe  v.  Perkins,  9  Pick.  (Mass.) 
305,  20  Am.  Dec.  475;  Bryant  v.  Lord,  19  Minn.  396  (Gil.  342); 
Moore  v.  Locomotive  Works,  14  Mich.  266;  Goebel  v.  Linn.  47  Mich. 
489,  11  N.  W.  284,  41  Am.  Rep.  723;  Rogers  v.  Rogers,  139  Mass. 
440,  ]  N.  E.  122. 

The  doctrine  of  these  cases  as  it  is  frequently  applied  does  not  com- 
mend itself  either  to  our  judgment  or  our  sense  of  justice,  for  where 
the  refusal  to  perform  and  the  promise  to  pay  extra  compensation  for 
performance  of  the  contract  are  one  transaction,  and  there  are  no  ex- 
ceptional circumstances  making  it  equitable  that  an  increased  com- 
pensation should  be  demanded  and  paid,  no  amount  of  astute  reasoning 
can  change  the  plain  fact  that  the  party  who  refuses  to  perform,  and 
thereby  coerces  a  promise  from  the  other  party  to  the  contract  to  pay 
him  an  increased  compensation  for  doing  that  which  he  is  legally 
bound  to  do,  takes  an  unjustifiable  advantage  of  the  necessities  of  the 
other  party.  To  hold,  under  such  circumstances,  that  the  party  mak- 
ing the  promise  for  extra  compensation  is  presumed  to  have  voluntari- 
ly elected  to  relinquish  and  abandon  all  of  his  rights  under  the  orig- 
inal contract,  and  to  substitute  therefor  the  new  or  modified  agreement, 
is  to  wholly  disregard  the  natural  inference  to  be  drawn  from  the 
transaction,  and  invite  parties  to  repudiate  their  contract  obligations 
whenever  they  can  gain  thereby.  There  can  be  no  legal  presumption 
that  such  a  transaction  is  a  voluntary  rescission  or  modification  of  the 
original  contract,  for  the  natural  inference  to  be  drawn  from  it  is  oth- 
erwise in  the  absence,  of  any  equitable  considerations  justifying  the 
demand  for  extra  pay.  In  such  a  case  the  obvious  inference  is  that 
the  party  so  refusing  to  perform  his  contract  is  seeking  to  take  ad- 
vantage of  the  necessities  of  the  other  party  to  force  from  him  a 
promise  to  pay  a  further  sum  for  that  which  he  is  already  legally  en- 
titled to  receive.     *     *    * 

It  is  entirely  competent  for  the  parties  to  a  contract  to  modify  or  to 
waive  their  rights  under  it,  and  ingraft  new  terms  upon  it,  and  in  such 
a  case  the  promise  of  one  party  is  the  consideration  for  that  of  the 
other;  but  where  the  promise  to  the  one  is  simply  a  repetition  of  a 
subsisting  legal  promise  there  can  be  no  consideration  for  the  promise 
of  the  other  party,  and  there  is  no  warrant  for  inferring  that  the 
parties  have  voluntarily  rescinded  or  modified  their  contract.  But 
where  the  party  refusing  to  complete  his  contract  does  so  by  reason 
of  some  unforeseen  and  substantial  difficulties  in  the  performance  of 
the  contract,  which  w^ere  not  known  or  anticipated  by  the  parties  when 
the  contract  was  entered  into,  and  which  cast  upon  him  an  additional 
burden  not  contemplated  by  the  parties,  and  the  opposite  party  prom- 
ises him  extra  pay  or  benefits  if  he  will  complete  his  contract,  and  he 
so  promises,  the  promise  to  pay  is  supported  by  a  valid  consideration. 
In  such  a  case  the  natural  inference  arising  from  the  transaction,  if 
ttnmodified  by  any  equitable  considerations,  is  rebutted,  and  the  pre- 


Ch.  2)  CONSIDERATION  109 

sumption  arises  that  by  the  voluntary  and  mutual  promises  of  the  par- 
ties their  respective  rights  and  obligations  under  the  original  contract 
are  waived,  and  those  of  the  new  or  modified  contract  substituted  for 
them.  Cases  of  this  character  form  an  exception  to  the  general  rule 
that  a  promise  to  do  that  which  a  party  is  already  legally  bound  to  do 
IS  not  a  sufficient  consideration  to  support  a  promise  by  the  other  par- 
ty to  the  contract  to  give  the  former  an  additional  compensation  or 
benefit.     *     *     * 

What  unforeseen  difficulties  and  burdens  will  make  a  party's  refusal 
to  go  forward  with  his  contract  equitable,  so  as  to  take  the  case  out  of 
the  general  rule  and  bring  it  within  the  exception,  must  depend  upon 
the  facts  of  each  particular  case.  They  must  be  substantial,  unfore- 
seen, and  not  within  the  contemplation  of  the  parties  when  the  contract 
was  made.     ''^     *     * 

The  cases  of  Meech  v.  City  of  Buffalo.  29  N.  Y.  198,  where  the  un- 
foreseen difficulty  in  the  execution  of  the  contract  was  quicksand,  in 
place  of  expected  ordinary  earth  excavation,  and  Michaud  v.  Mc- 
Gregor (decided  at  the  present  term)  61  Minn.  198,  63  N.  W.  479, 
where  the  unforeseen  obstacles  were  rocks  below  the  surface  of  the 
lots  to  be  excavated,  which  did  not  naturally  belong  there,  but  were 
placed  there,  by  a  third  party,  and  of  the  existence  of  which  both  par- 
ties to  the  contract  were  ignorant  when  the  contract  was  made,  are  il- 
lustrations of  what  unforeseen  difficulties  will  take  a  case  out  of  the 
general  rule.  Do  the  allegations  of  fact  contained  in  plaintifif's  first 
alleged  cause  of  action  bring  his  case  within  the  exception?  Clearly 
not ;  for  eliminating  all  conclusions,  and  considering  only  the  facts  al- 
leged, there  is  nothing  to  make  the  case  exceptional,  other  than  the 
general  statement  that  the  season  was  so  extraordinary  that  in  order 
to  do  the  stipulated  work  it  would  require  great  and  unusual  expense, 
involving  a  large  use  of  powder  and  extra  time  and  labor  for  the  pur- 
pose of  blasting  out  the  frozen  earth  and  other  material  which  was  en- 
countered. What  the  character  of  this  material  was  we  are  not  told, 
or  what  the  other  extraordinary  conditions  of  the  ground  were. 

The  court  will  take  judicial  knowledge  of  the  fact  that  frozen 
ground  on  the  Missabe  Range,  where  the  work  was  to  be  performed, 
in  the  month  of  February,  is  not  unusual  or  extraordinary.  It  was  a 
matter  which  must  have  been  anticipated  by  the  parties,  and  taken  in- 
to consideration  by  them  when  this  contract  was  made.  The  most  that 
can  be  claimed  from  the  allegations  of  the  complaint  is  that  the  con- 
tractors had  made  a  losing  bargain,  and  refused  to  complete  their  con- 
tract, and  the  defendant,  by  its  representative,  promised  them  that  if 
they  would  go  forward  and  complete  their  contract  it  would  pay  them 
an  additional  compensation,  so  that  the  total  compensation  should  be 
equal  to  the  actual  cost  of  the  work.     "■'•     *     * 

So  much  of  the  order  appealed  from  as  overruled  the  defendant's 
demurrer  to  the  supposed  first  cause  of  action  in  the  plaintiff's  com- 
plaint must  be  reversed.    *    *    * 


110  CONTRACTS  (Part  1 


MAKER   V.  TAFT. 

(Siipronio  Court  of  Oklahoma.  ini4.     41  Okl.  GOo.  139  Pac.  970, 
52  L.  R.  A.  [N.  S.]  328.) 

Galbraith,  C.  This  was  an  action  in  replevin  commenced  April  3, 
1911,  for  the  purpose  of  obtaining  the  possession  of  certain  horses  and 
cattle  described  in  a  chattel  mortgage  given  for  the  purpose  of  securing 
a  promissory  note  for  S582.  The  note  being  past  due,  the  mortgagee 
sought  the  possession  of  the  property  in  order  that  he  might  foreclose 
the  same.  The  order  of  replevin  was  issued,  and  the  property  seized 
and  sold  after  posting  notice  the  required  time,  and  the  proceeds  of 
the  sale  applied  in  payment  of  the  amount  of  the  note  and  interest  and 
cost,  and  a  small  balance  of  $36  remaining  in  the  hands  of  the  mort- 
gagee was  offered  to  the  defendants,  and  by  them  refused.  The  de- 
fendants filed  a  joint  answer  to  the  petition  in  replevin,  in  which  they 
admitted  the  execution  of  the  note  and  mortgage,  but  denied  that  they 
were  unlawfully  in  the  possession  of  the  property  at  the  time  of  the 
commencement  of  the  suit,  for  the  reason  that  the  maturity  of  the  note 
and  mortgage  had  been  extended  for  six  months  a  short  time  prior  to 

filing  the  suit,  and  specially  pleaded  that  "on  or  about  the day 

of  April,  1911,  and  before  the  beginning  of  this  action,  said  defendants 
paid  to  the  plaintiff  the  sum  of  $50  on  said  debt,  and,  as  consideration 
therefor,  the  plaintiff'  has  promised  and  agreed  with  the  defendants 
that  said  note  and  mortgage  was  extended  for  a  period  of  six  months 

from  said day  of  April,  1911."     To  this  answer  the  plaintiff 

demurred,  on  the  ground  that  the  same  did  not  state  facts  sufficient 
to  constitute  a  defense  to  the  action.     *     *     * 

It  is  contended  that,  in  paying  the  $50  interest  already  due,  the  de- 
fendant was  doing  no  more  than  she  was  already  legally  bound  to  do, 
and  that,  therefore,  there  was  no  consideration  for  the  agreement  to 
extend  the  payment  of  the  note.  *  *  *  The  authorities  upon  this 
proposition  are  in  irreconcilable  conflict,  and  it  is  for  this  court  to  de- 
cide which  line  of  authorities  to  follow  upon  this  proposition.     *     *     * 

In  Dare  v.  ?lall,  70  Ind.  545,  it  was  held  that,  to  release  a  surety  on 
account  of  the  extension  of  time  to  the  principal,  the  extension  must 
have  been  upon  a  new  consideration,  and  that  the  payment  of  interest 
already  due  upon  the  note  did  not  constitute  such  new  consideration. 
It  was  also  held  that  an  agreement  to  continue  the  payment  of  interest 
at  the  same  rate  as  specified  in  the  note,  or  an  agreement  to  provide 
paying  interest  at  a  reduced  rate,  created  no  new  consideration  for  the 
extension  of  the  note.  To  the  same  eft'ect  is  the  case  of  Wilson  v. 
Powers,  130  Mass.  127;  Olmstead  v.  Latimer,  158  N.  Y.  313,  53  N. 
E.  5.  43  L.  R.  A.  685.    *     -     •■' 

There  are  authorities  equally  as  strong  upon  the  other  side  of  this 
]n-oposition.  =■=  '■-'  *  In  McComb  v.  Kittridge,  14  Ohio  348,  the 
court  in  language  referred  to  by  Mr.  Justice  Brewer  in  Royal  v.  Lind- 
say, 15  Kan.  591,  said :  "It  is  just  as  competent  for  the  principals  to  a 
note  to  extend  the  time  of  payment  for  a  specified  period  as  it  was  to 
fix  the  time  of  payment  originally.  If  the  lender  of  money  secured  by 
a  note,  after  the  same  becomes  due.  contracts  with  the  borrower  that 
the  time  of  paying  the  same  shall  be  extended  for  one  year,  or  for  any 
other  period,  upon  consideration  that  the  borrower  shall  pay  the  legal  or 
less  rate  of  interest,  why  is  not  that  a  binding  contract?  The  lender, 
bv  this  contract,  secures  to  himself  the  interest  on  his  money  for  the 


Ch.  2)  CONSIDERATION  111 

year;  and  the  borrower  precludes  himself  from  gctthig  rid  of  the 
payment  of  the  interest  by  discharging  the  principal.  It  is  a  valuable 
right  to  have  money  placed  at  interest,  and  it  is  a  valuable  right  to 
have  the  privilege,  at  any  time,  of  getting  rid  of  the  payment  of  inter- 
est by  discharging  the  principal.  By  this  contract,  the  right  to  interest 
is  secured  for  a  given  period,  and  the  right  to  pay  off  the  principal, 
and  get  rid  of  paying  the  interest,  is  also  relinquished  for  such  period. 
Here,  then,  are  all  the  elements  of  a  binding  contract.  But  it  is  said 
there  is  no  consideration  for  the  extension  of  time,  because  the  law 
gives  6  per  cent  after  the  note  is  due.  But  the  law  does  not  secure  the 
payment  of  this  interest  for  any  given  period,  or  prevent  the  discharge 
of  the  principal  at  any  moment.  There  is  precisely  the  same  consider- 
ation for  the  extension  of  the  time  as  there  was  for  the  original  loan 
The  consideration  of  the  loan,  on  the  part  of  the  borrower,  is  the  pay- 
ment of  interest.  If  there  was  no  law  limiting  the  amount  of  interest, 
the  parties  might  contract  for  any  rate  they  pleased.  A  contract  to 
forbear  the  collection  of  a  debt  for  a  specified  period,  in  consideration 
of  the  payment  of  a  rate  of  interest  beyond  what  the  law  allows,  is 
founded  upon  a  valid  consideration.  This  would  never  have  been 
doubted  at  all,  if  the  law  had  not  fixed  the  rate  for  which  collection 
could  be  had.  But  by  limiting  the  rate  of  interest  the  law  does  not 
declare  that  such  rate  is  not  a  valuable  consideration  but,  on  the  con- 
trary, declares  that  such  rate  is  so  fully  valuable  that  it  will  not  permit 
a  higher  rate  for  the  use  of  money  or  forbearance."     *     *     * 

We  are  constrained  to  follow  the  line  of  decisions  holding  that  the 
promised  extension,  if  made  as  set  out  in  the  defendants'  answer,  was 
without  consideration  and  void.  The  entire  debt  at  the  time  of  this 
payment  being  past  due,  and  the  interest  then  accrued  amounting  to 
more  than  the  amount  paid,  and  not  having  paid  or  agreed  to  pay  any 
more  than  she  was  under  obligation  to  pay  at  that  time,  and  not  having 
paid  any  greater  rate  of  interest  than  was  provided  by  the  terms  of  the 
note  and  mortgage,  there  was  not,  in  any  aspect  of  the  case,  a  con- 
sideration passing  from  the  maker  of  the  note  to  the  payee  s-ufiicient 
to  support  the  alleged  promised  extension,  and  for  that  reason  the  an- 
swer did  not  set  out  facts  sufticient  to  constitute  a  defense,  and  the 
demurrer  thereto  should  have  been  sustained.  The  same  objection, 
as  raised  at  the  subsequent  stages  of  the  trial,  was  well  taken,  and  the 
denial  thereof  was  prejudicial  error. 

On  account  of  these  errors,  the  judgment  appealed  from  should  be 
reversed,  and  said  cause  remanded  to  the  superior  court  of  Custer 
county  for  further  proceedings  not  inconsistent  with  the  foregoing 
opinion. 


DE  CICCO  V.  SCHWEIZEiR  et  al. 

(Court  of  Appeals  of  New  York,  1917.     221  N.  Y.  431,  117  N.  E.  807,  L.  R.  A. 
lOlSE,  1004,  Ann.  Gas.  191SC,  816.) 

Cardozo,  J.  On  January  16,  1902,  "articles  of  agreement"  were  ex- 
ecuted by  the  defendant  Joseph  'Schweizer,  his  wife,  Ernestine,  and 
Count  Oberto  Gulinelli.  The  agreement  is  in  Italian.  We  quote  from 
a  translation  the  part  essential  to  the  decision  of  this  controversy: 
"Whereas,  Miss  Blanche  Josephine  Schweizer,  daughter  of  said  Mr. 
Joseph  Schweizer  and  of  said  Mrs.  Ernestine  Teresa  Schweizer,  is  now 
affianced  to  and  is  to  be  married  to  the  above  said  Count  Oberto  Gia- 


112  CONTRACTS  (Parti 

como  Giovanni  Francesco  Maria  Gulinelli :  Now  in  consideration  of 
all  that  is  herein  set  forth  the  said  Mr.  Joseph  Schweizer  promises  and 
expressly  agrees  bv  the  present  contract  to  pay  annually  to  his  said 
daughter  Blanche,  during  his  own  life  and  to  send  her,  during  her  life- 
time, the  sum  of  two  thousand  five  hundred  dollars,  or  the  equivalent  of 
said  sum  in  francs,  the  first  payment  of  said  amount  to  be  made  on  the 
20th  day  of  January,  1902."  Later  articles  provided  that,  "for  the  same 
reason  heretofore  set  forth,"  Mr.  Schweizer  will  not  change  the  provi- 
sion made  in  his  will  for  the  benefit  of  his  daughter  and  her  issue,  if 
any.  The  yearly  payments  in  the  event  of  his  death  are  to  be  continued 
by  his  wife. 

On  January  20,  1902,  the  marriage  occurred.  On  the  same  day,  the 
defendant  made  the  first  payment  to  his  daughter.  He  continued  the 
payments  annually  till  1912.  This  action  is  brought  to  recover  the  in- 
stallment of  that  year.  The  plaintiff  holds  an  assignment  executed  by 
the  daughter,  in  which  her  husband  joined.  The  question  is  whether 
there  is  any  consideration  of  the  promised  annuity.  That  marriage 
may  be  a  sufficient  consideration  is  not  disputed.  The  argument  for 
the  defendant  is.  however,  that  Count  Gulinelli  was  already  affianced 
to  Miss  Schweizer,  and  that  the  marriage  was  merely  the  fulfillment 
of  an  existing  legal  duty.  For  this  reason,  it  is  insisted,  consideration 
was  lacking.  The  argument  leads  us  to  the  discussion  of  a  vexed  prob- 
lem of  the  law  which  has  been  debated  by  courts  and  writers  with  much 
subtlety  of  reasoning  and  little  harmony  of  results.  There  is  general 
acceptance  of  the  proposition  that  where  A.  is  under  a  contract  with  B., 
a  promise  made  by  one  to  the  other  to  induce  performance  is  void.  The 
trouble  comes  when  the  promise  to  induce  performance  is  made  by 
C,  a  stranger.  Distinctions  are  then  drawn  between  bilateral  and 
unilateral  contracts;  between  a  promise  by  C.  in  return  for  a  new 
promise  by  A.,  and  a  promise  by  C.  in  return  for  performance  by  A. 
Some  jurists  hold  that  there  is  consideration  in  both  classes  of  cases. 
Ames,  Two  Theories  of  Consideration,  12  Harvard  Law  Review,  515, 
and  13  Harvard  Law  Review,  29,  35  ;  Langdell.  Mutual  Promises  as 
a  Consideration,  14  Harvard  Law  Review,  496;  Leake.  Contracts,  p. 
622.  Others  hold  that  there  is  consideration  where  the  promise  is 
made  for  a  new  promise,  but  not  where  it  is  made  for  performance. 
Beale.  Notes  on  Consideration.  17  Harvard  Law  Review,  71 ;  2  Street, 
Foundations  of  Legal  Liabilities,  pp.  114,  116;  Pollock,  Contracts 
(8th  Ed.)  199;  Pollock,  Afterthoughts  on  Consideration,  17  Law 
Ouarterly  Review,  415;  7  Halsbury,  Laws  of  England,  Contracts,  p. 
385 ;  Abbott  v.  Doane,  163  Mass.  433.  40  N.  E.  197,  34  L.  R.  A.  33, 
47  Am.  St.  Rep.  465.  Others  hold  that  there  is  no  consideration  in 
either  class  of  cases.  Williston,  Successive  Promises  of  the  Same  Per- 
formance, 8  Harvard  Law  Review,  27,  34;  Consideration  in  Bilateral 
Contracts,  27  Harvard  Law  Review,  503,  521 ;  Anson  on  Contracts 
(11th  Ed.)  p.  92. 

The  storm  center  about  which  this  controversy  has  raged  is  the  case 
of  Shadwell  v.  Shadwell,  9  C.  B.  (N.  S.)  159,  99  E.  C.  L.  158.  which 
arose  out  of  a  situation  similar  in  many  features  to  the  one  before  us. 
Nearly  everything  that  has  been  written  on  the  subject  has  been  a  com- 
mentary on  that  decision.  There  an  uncle  promised  to  pay  his  nephew 
after  marriage  an  annuity  of  il50.  At  the  time  of  the  promise  the 
nephew  was  already  engaged.  The  case  was  heard  before  Erie,  C.  J., 
arid  Keating  and  Byles,  JJ.     The  first  two  judges  held  the  promise  to 


Ch.  2)  CONSIDERATION  113 

be  enforceable.  Byles,  J.,  dissented.  His  view  was  that  the  nephew, 
being  already  affianced,  had  incurred  no  detriment  upon  the  faith  of 
the  promise,  and  hence  that  consideration  was  lacking.  Neither  of  the 
two  opinions  in  Shadwell  v.  Shadwell  can  rule  the  case  at  bar.  There 
are  elements  of  difference  in  the  two  cases  which  raise  new  problems. 
But  the  earlier  case,  with  the  literature  which  it  has  engendered,  gives 
us  a  point  of  departure  and  a  method  of  approach. 

The  courts  of  this  state  are  committed  to  the  view  that  a  promise  by 
A.  to  B.  to  induce  him   not  to   break  his  contract  with   C.   is  void. 

*  *  *  If  that  is  the  true  nature  of  this  promise,  there  was  no  con- 
sideration. We  have  never  held,  however,  that  a  like  infirmity  attaches 
to  a  promise  by  A.,  not  merely  to  B.,  but  to  B.  and  C.  jointly,  to  induce 
them  not  to  rescind  or  modify  a  contract  which  they  are  free  to 
abandon.  To  determine  whether  that  is  in  substance  the  promise  be- 
fore us,  there  is  need  of  closer  analysis. 

The  defendant's  contract,  if  it  be  one,  is  not  bilateral.  It  is  uni- 
lateral. *  *  ''^  The  consideration  exacted  is  not  a  promise,  btit  an 
act.  The  count  did  not  promise  anything.  In  effect  the  defendant 
said  to  him :  If  you  and  my  daughter  marry,  I  will  pay  her  an  annuity 
for  life.  Until  marriage  occurred,  the  defendant  was  not  bound.  It 
would  not  have  been  enough  that  the  count  remained  willing  to  marry. 
The  plain  import  of  the  contract  is  that  his  bride  also  should  be  will- 
ing, and  that  marriage  should  follow.  The  promise  was  intended  to 
affect  the  conduct,  not  of  one  only,  but  of  both.  This  becomes  tb.e 
more  evident  when  we  recall  that  though  the  promise  ran  to  the  count, 
■it  was  intended  for  the  benefit  of  the  daughter.  *  *  *  When  it 
came  to  her  knowledge,  she  had  the  right  to  adopt  and  enforce  it. 
'•■     *     *     In    doing    so,    she   made   herself   a   party   to   the    contract. 

*  *  *  If  the  contract  had  been  bilateral,  her  position  might  have 
been  different.  Since,  however,  it  was  unilateral,  the  consideration  be- 
ing performance,  action  on  the  faith  of  it  put  her  in  the  same  position 
as  if  she  had  been  in  form  the  promisee.  That  she  learned  of  the  prom- 
ise before  marriage  is  a  legitimate  inference  from  the  relation  of  the 
parties  and  from  other  attendant  circumstances.  The  writing  was 
signed  by  her  parents ;  it  was  delivered  to  her  intended  husband ;  it 
was  made  four  days  before  the  marriage ;  it  called  for  a  payment  on 
the  day  of  the  marriage ;  and  on  that  day  payment  was  made,  and  made 
to  her.  From  all  these  circumstances,  we  may  infer  that  at  the  time 
of  the  marriage  the  promise  was  known  to  the  bride  as  well  as  the 
husband,  and  that  both  acted  upon  the  faith  of  it. 

The  situation,  therefore,  is  the  same  in  substance  as  if  the  promise 
had  run  to  husband  and  wife  alike,  and  had  been  intended  to  induce 
performance  by  both.  They  were  free  by  common  consent  to  terminate 
their  engagement  or  to  postpone  the  marriage.  If  they  forbore  from 
exercising  that  right  and  assumed  the  responsibilities  of  marriage  in 
reliance  on  the  defendant's  promise,  he  may  not  now  retract  it.  The 
distinction  between  a  promise  by  A.  to  B.  to  induce  him  not  to  break 
his  contract  with  C,  and  a  like  promise  to  induce  him  not  to  join  with 
C.  in  a  voluntary  rescission,  is  not  a  new  one.  It  has  been  suggested 
in  cases  where  the  new  promise  ran  to  B.  solelv,  and  not  to  B.  and  C. 
jointly.  Pollock,  Contracts  (8th  Ed.)  p.  199;' Williston,  8  Harv.  L. 
Rev.  36.  The  criticism  has  been  made  that  in  such  circumstances 
there  ought  to  be  some  evidence  that  C.  was  ready  to  withdraw.  Will- 
B.&  B.Bus.Law— 8 


114  CONTUACTS  (Part  1 

iston,  supra,  pp.  36,  2)7.  Whether  that  is  true  of  contracts  to  marry  is 
not  certain.  Many  elements  foreign  to  the  ordinary  business  contract 
enter  into  such  engagements.  It  does  not  seem  a  far-fetched  assum])- 
tion  in  such  cases  that  one  will  release  where  the  other  has  repented. 
We  shall  assume,  however,  that  the  criticism  is  valid  where  the  prom- 
ise is  intended  as  an  inducement  to  only  one  of  the  two  parties  to  the 
contract.  It  may  then  be  sheer  speculation  to  say  that  the  other  party 
could  have  been  persuaded  to  rescind.  But  where  the  promise  is  held 
out  as  an  inducement  to  both  parties  alike,  there  are  new  and  differ- 
ent implications.  One  does  not  commonly  apply  pressure  to  coerce 
the  will  and  action  of  those  who  are  anxious  to  proceed.  The  attempt 
to  sway  their  conduct  by  new  inducements  is  an  implied  admission 
that  both  may  waiver ;  that  one  equally  with  the  other  must  be  strength- 
ened and  persuaded ;  and  that  rescission  or  at  least  delay  is  something 
to  be  averted,  and  something,  therefore,  within  the  range  of  not  un- 
reasonable expectation.  If  pressure,  applied  to  both,  and  holding  both 
to  their  course,  is  not  the  purpose  of  the  promise,  it  is  at  least  the  nat- 
ural tendency  and  the  probable  result. 

The  defendant  knew  that  a  man  and  a  woman  were  assuming  the 
responsibilities  of  wedlock  in  the  belief  that  adequate  provision  had 
been  made  for  the  woman  and  for  future  offspring.  He  offered  this 
inducement  to  both  while  they  were  free  to  retract  or  to  delay.  That 
they  neither  retracted  nor  delayed  is  certain.  It  is  not  to  be  expected 
that  they  should  lay  bare  all  the  motives  and  promptings,  some  avowed 
and  conscious,  others  perhaps  half-conscious  and  inarticulate,  which 
swayed  their  conduct.  It  is  enough  that  the  natural  consequence  of 
the  defendant's  promise  was  to  induce  them  to  put  the  thought  of  re- 
scission or  delay  aside.  From  that  moment,  there  was  no  longer  a  real 
alternative.  There  was  no  longer  what  philosophers  call  a  "living' 
option.  This  in  itself  permits  the  inference  of  detriment.  *  *  '' 
The  same  inference  follows,  not 'so  inevitably,  but  still  legitimately 
where  the  statement  is  made  to  mduce  the  preservation  of  a  contract 
It  will  not  do  to  divert  the  minds  of  others  from  a  given  line  of  conduct 
and  then  to  urge  that  because  of  the  diversion  the  opportunity  has  gone 
by  to  say  how  their  minds  would  otherwise  have  acted.  If  the  tend- 
ency of  the  promise  is  to  induce  them  to  persevere,  reliance  and  detri- 
ment may  be  inferred  from  the  mere  fact  of  performance.  The 
springs  of  conduct  are  subtle  and  varied.  One  who  meddles  with  them 
must  not  insist  upon  too  nice  a  measure  of  proof  that  the  spring  which 
he  released  was  effective  to  the  exclusion  of  all  others. 

One  other  line  of  argument  must  be  considered.  The  suggestion  is 
inade  that  the  defendant's  promise  was  not  made  animo  contrahendi. 
It  was  not  designed,  we  are  told,  to  sway  the  conduct  of  any  one ;  it 
Avas  merely  the  offer  of  a  gift  which  found  its  motive  in  the  engage- 
ment of  the  daughter  to  the  count.  Undoubtedly,  the  prospective  mar- 
riage is  not  to  be  deemed  a  consideration  for  the  promise  "unless  the 
parties  have  dealt  with  it  on  that  footing."  Holmes,  Common  Law,  p. 
292.  *  *  *  "Nothing  is  consideration  that  is  not  regarded  as  such 
by  both  parties."  Philpot  v.  Gruninger,  14  Wall.  570,  577,  20  L.  Ed. 
743.  *  *  *  But  here  the  very  formality  of  the  agreement  suggests 
a  purpose  to  affect  the  legal  relations  of  the  signers.  One  does  not 
commonly  pledge  one's  self  to  generosity  in  the  language  of  a  cove- 
nant. That  the  parties  believed  there  was  a  consideration  is  certain. 
The  document  recites  the  engagement  and  the  coming  marriage.     It 


Ch.  2)  CONSIDEHATION  115 

States  that  these  are  the  "consideration"  for  the  promise.  The  faiUire 
to  marry  would  have  made  the  promise  ineffective.  In  these  circum- 
stances we  cannot  say  that  the  promise  was  not  intended  to  control  the 
conduct  of  those  whom  it  was  designed  to  benetit.  Certainly  we  cannot 
draw  that  inference  as  one  of  law.  Both  sides  moved  for  the  direc- 
tion of  a  verdict,  and  the  trial  judge  became  by  consent  the  trier  of 
the  facts.  If  conthcting  inferences  were  possible,  he  chose  those  fa- 
vorable to  the  plaintiff. 

The  conclusion  to  which  we  are  thus  led  is  reinforced  by  those  con- 
siderations of  public  policy  which  cluster  about  contracts  that  touch 
the  marriage  relation.  The  law  favors  marriage  settlements,  and  seeks 
to  uphold  them.  It  puts  them  for  many  purposes  in  a  class  by  them- 
selves. *  *  *  It  has  enforced  them  at  times  where  consideration,  it 
present  at  all,  has  been  dependent  upon  doubtful  inference.  *  *  * 
It  strains,  if  need  be,  to  the  uttermost  the  interpretation  of  equivocal 
words  and  conduct  in  the  effort  to  hold  men  to  the  honorable  fulfill- 
ment of  engagements  designed  to  influence  in  their  deepest  relations 
the  lives  of  others. 

The  judgment  should  be  affirmed  with  costs. 


SECTION  4.— PROMISES  IN  THE  NATURE  OF 
GRATUITIES 


INITLLEK    et   a\.   v.   M'ESTEKX   COLI.EGI?  OF   TOEEDO. 

(Supreme  Court  of  Illinois,  J'^OS.     177  111.  280,  52  N.  E.  4:32.     42  L.  R.  A.  797. 

69  Am.  St.  Rep.  242.) 

In  the  matter  of  the  estate  of  Mary  Beatty,  deceased,  the  Western 
College  of  Toledo  obtained  a  judgment  against  Jacob  Miller  and  an- 
other, executors,  and  they  appealed  to  the  Appellate  Court,  which  af- 
firmed the  judgment,  and  they  again  appeal.    *     *    * 

The  note,  filed  as  a  claim  against  the  estate  of  the  deceased,  is  as 
follows : 

"$7,000.00.  Dover.  111.,  Dec.  9,  1887.  In  consideration  of  a  desire 
to  aid  the  cause  of  Christian  education,  and  the  privilege  of  sending 
one  student  four  years  free  of  tuition,  I  promise  to  pay  to  the  order  of 
the  treasurer  of  Western  College,  of  Toledo,  Iowa,  for  the  erection 
of  the  Ladies'  Boarding  Hall  of  said  college,  on  or  before  the  first 
day  of  December,  1910,  the  sum  of  seven  thousand  dollars,  without  in- 
terest :  provided,  that  in  the  event  of  my  death  before  the  maturitv  of 
this  note  it  shall  become  then  due.  Mary  Beatty.  P.  O.:  Dover. 
County:  Bureau.  State:  111.  Witness:  '  H.  H.' Maynard.  \V.  \L 
Beard  shear."     *     *     * 

The  appellee  is  a  college  located  at  Toledo,  in  the  state  of  Iowa,  and 
is  under  the  management  of  the  denomination  known  as  the  United 
Brethren  in  Christ.  Prior  to  December,  1887,  the  college  had  com- 
menced the  erection  of  a  building  to  be  known  as  the  "Ladies'  Boarding 
Hall"  of  the  college  and  had  expended  upon  the  stone  foundation  there- 
of the  sum  of  $2,000,  donated  to  it  by  a  man  in  Ohio,  named  Dodds. 
In  December,  1887,  representatives  of  the  college  appealed  to  the  de- 
':eased,  ]\Iary  Beatty,  at  her  home  in  Dover,  111.,  for  a  donation  of  $10,- 


116  CONTRACTS  (Part  1 

000,  to  complete  the  erection  of  said  hall,  she  being  a  member  of  the 
denomination  to  which  the  college  belonged.  On  December  9,  1887, 
she  was  visited  by  H.  H.  Maynard,  a  soliciting  agent  of  the  college, 
and  W.  M.  Beardshear,  president  of  the  college.  On  December  3, 
1887,  she  had  given  to  Maynard  $500  in  cash,  a  note  for  $1,500.  pay- 
able on  or  before  December  3,  1890,  and  a  note  for  $5,000  of  like 
tenor  with  the  note  for  $7,000  above  set  forth.  On  December  9, 
1887,  she  destroyed  the  $5,000  note,  and  gave  to  Maynard  and  Beard- 
shear  the  $7,000  note  above  described,  and  also  a  short-time  note  for 
$1,000.    *    *    •* 

Magruder,  J.  It  is  contended,  however,  that  the  note  for  $7,000, 
filed  as  a  claim  in  this  case  was  executed  and  delivered  without  any 
valid  consideration  to  support  it.  The  note  recites  upon  its  face  that 
the  maker  thereof  promises  to  pay  "in  consideration  of  a  desire  to  aid 
the  cause  of  Christian  education,  and  the  privilege  of  sending  one 
student  four  years  free  of  tuition."  *  *  *  Whether  this  note,  upon 
its  face,  imports  a  consideration  or  not,  it  is  well  settled  that  proof  may 
be  introduced  to  show  the  facts  in  regard  to  the  consideration  of  the 
note.  The  evidence  tends  to  show  that  the  deceased  availed  herself  of 
the  privilege,  specified  in  the  note,  of  sending  one  student  four  years 
free  of  tuition.  The  certificate  embodying  such  privilege  was  issued  to 
Mrs.  Beatty,  and  was  made  use  of  by  a  female  student  upon  the  order 
of  Mrs.  Beatty.  We  do  not  deem  it  necessary,  however,  to  decide 
whether  or  not  the  privilege  specified  upon  the  face  of  the  note,  and 
the  use  of  it  made  by  the  deceased,  constituted  a  valid  consideration. 
The  proof  tends  to  show  that  the  note  for  $7,000  was  a  gift  or  dona- 
tion to  the  college.  Sych  a  note  partakes  of  the  nature  of  a  volun- 
tary subscription  to  raise  a  fund  or  promote  an  object.  It  is  well  set- 
tled that  a  promissory  note  without  consideration,  and  intended  as  a 
gift  to  the  payee  by  the  maker  thereof,  is  but  a  promise  to  make  a  gift 
in  the  future,  and  is  not  enforceable.  As  a  gift  it  is  always  revocable 
until  it  is  executed,  and  is  not  executed  until  it  is  paid.  "The  promise 
stands  as  a  mere  ofifer,  and  may,  by  necessary  consequence,  be  revok- 
ed at  any  time  before  it  is  acted  upon."  Pratt  v.  Trustees,  93  111.  475, 
34  Am.  Rep.  187.  In  Blanchard  v.  Williamson,  70  111.  647,  we  said 
(page  652):  "If  a  party  delivers  his  own  promissory  note  as  a  gift,  it 
is  but  a  promise  to  pay  a  sum  certain  at  a  future  day,  and  we  are  not 
aware  such  a  promise  can  be  enforced,  either  at  law  or  in  equity.  It 
could  not  be  enforced  against  the  maker  in  his  lifetime,  and  his  rep- 
resentatives could  defend  against  it  on  the  ground  there  was  no  con- 
sideration." *  *  *  But,  while  such  a  note,  amounting  to  a  mere 
gift,  is  open  to  the  defense  of  a  want  of  consideration,  yet  that  defense 
cannot  be  made  to  it  if  money  has  been  expended,  or  liabilities  have 
been  incurred,  in  reliance  upon  the  note.  If  money  has  been  expended, 
or  liabilities  have  been  incurred,  which,  by  legal  necessitv,  must  cause 
loss  or  injury  to  the  person  so  expending  money  or  incurring  liability, 
if  the  note  is  not  paid,  the  donor  or  maker  thereof  is,  in  good  con- 
science, bound  to  pay;  and  the  gift  will  be  upheld  upon  the  ground  of 
estoppel,  and  not  by  reason  of  any  valid  consideration  in  the  original 
undertaking.  We  have  said :  "It  is  the  expending  of  money,  etc.,  or 
incurring  a  legal  liability  on  the  faith  of  the  promise,  which  gives  the 
right  of  action ;  and  without  this  there  is  no  right  of  action."  Pratt 
V.  Trustees,  93  111.  475,  34  Am.  Rep.  187. 

There  was  evidence  in  the  case  at  bar  tending  to  show  that  the  ap- 


Ch.  2)  CONSIDERATION  117 

pellee  expended  money  in  the  construction  of  the  building  known  as 
"Ladies'  Boarding  Hall"  upon  the  faith  of  the  promise  made  by  the 
deceased  as  embodied  in  the  note  for  $7,000.  It  makes  no  difference 
that  she  did  not  advance  any  money  upon  that  note,  but  preferred  to 
donate  $6,700,  and  take  back  certificates,  which  secured  to  her  the 
payment  of  annuities  thereon  during  her  life.  The  instructions  given 
by  the  court  to  the  jury  required  them  to  find  whether  or  not  the  col- 
lege, during  the  lifetime  of  Mary  Beatty,  entered  into  a  contract  to 
build  and  erect,  and  did  build  and  erect,  and  expend  moneys  and  incur 
liabilities  in  building  and  erecting,  the  Ladies'  Boarding  Hall  on  the 
faith  and  strength  of  the  note  for  $7,000.  The  question  as  to  the  ex- 
penditure of  such  moneys  and  the  incurring  of  such  liabilities  upon 
the  faith  and  strength  of  the  note  was  a  question  of  fact,  which  was 
submitted  to  the  jury  by  the  instructions.  In  the  present  state  of  the 
record,  we  are  obliged  to  assume  that  the  jury  found  in  favor  of  such 
expenditures  of  money  and  the  incurring  of  such  liabilities  on  the  part 
of  the  appellee.  This  being  so,  the  appellee  is  entitled  to  its  right  of 
action,  even  if  the  note  for  $7,000  was  without  consideration  before  it 
was  thus  acted  upon.  Upon  this  branch  of  the  case,  therefore,  we  are 
of  the  opinion  that  the  courts  below^ committed  no  error  in  holding  the 
claim  of  appellee  to  be  a  valid  claim.  *  *  * 
Judgment  affirmed. 


PRESBYTERIAN   CHURCH   OF    AT^BANY   v.    COOPER. 

(Court  of  Appeals  of  New  York,  1880.    112  N.  Y.  517.  20  N.  E.  352,  3  L.  R.  A. 
46.S,  8  Am.  St.  Rep.  767. 

Appeal  from  order  of  the  General  Term  of  the  Supreme  Court  in 
the  third  judicial  department,  made  the  first  Tuesday  of  May,  1887. 
which  reversed  a  judgment  in  favor  of  plaintiff,  entered  upon  the  re- 
port of  a  referee,  and  ordered  a  new  trial. 

This  was  a  reference  under  the  statute  of  a  disputed  claim  against 
the  estate  of  Thomas  P.  Crook,  defendants'  intestate.  The  claim 
arose  under  a  subscription  paper,  of  which  the  following  is  a  copy : 

"We.  the  undersigned,  hereby  severally  promise  and  agree  to  and, 
with  the  trustees  of  the  First  Presbyterian  Church  in  this  city  of  Al- 
bany, in  consideration  of  one  dollar  to  each  of  us  in  hand  paid  and 
the  agreements  of  each  other  in  this  contract  contained,  to  pay  on  or 
before  three  years  from  the  date  hereof  to  said  trustees  the  sum  set 
opposite  to  our  respective  names,  but  upon  the  express  condition,  and 
not  otherwise,  that  the  sum  of  $45,000  in  the  aggregate  shall  be  sub- 
scribed and  paid  in  for  the  purpose  hereinafter  stated ;  and  if  within 
one  year  from  this  date  said  sum  shall  not  be  subscribed  or  paid  in  for 
such  purpose,  then  this  agreement  to  be  null  and  of  no  effect.  The 
purpose  of  this  subscription  is  to  pay  oft'  the  mortgage  debt  of  $45,000. 
now  a  lien  upon  the  church  edifice  of  said  church,  and  the  subscrip- 
tion or  contribution  for  that  purpose  must  equal  that  sum  in  the  aggre- 
gate to  make  this  agreement  binding. 

"Dated  Mav  18,  1884." 

The  defendants'  intestate  made  two  subscriptions  to  this  paper — 
one  of  $5,000  and  the  other  of  $500.  He  paid  upon  the  subscription 
$2,000.    The  claim  w^as  for  the  balance. 

Andrews.  J-  It  is.  we  think,  an  insuperable  objection  to  the  main- 
tenance of  this  action  that  there  was  no  valid  consideration  to  uphold 


118  CONTRACTS  (Part  1 

the  subscription  of  the  defendants'  intestate.  It  is,  of  course,  unciucs- 
tionable  that  no  action  can  be  maintained  to  enforce  a  gratuitous  prom- 
ise, however  worthy  the  object  intended  to  be  prornoted.  The  per- 
formance of  such  a  promise  rests  wholly  on  the  will  of  the  person 
making  it.  He  can  refuse  to  perform,  and  his  legal  right  to  do  so 
cannot  be  disputed,  although  his  refusal  may  disappoint  reasonable 
expectations,  or  may  not  be  justified  in  the  forum  of  conscience.  By 
the  terms. of  the  subscription  paper  the  subscribers  promise  and  agree 
to  and  with  the  trustees  of  the  First  Presbyterian  Church  of  Albany, 
to  pay  to  said  trustees,  within  three  years  from  its  date,  the  sums 
severally  subscribed  by  them,  for  the  purpose  of  paying  off  "the  mort- 
gage-debt of  $45,000  on  the  church  edifice,"  upon  the  condition  that 
the  whole  sum  shall  be  subscribed  or  paid  in  within  one  year.  It  re- 
cites a  consideration,  viz.,  "in  consideration  of  one  dollar  to  each  of 
us  (subscribers)  in  hand  paid  and  the  agreement  of  each  other  in  this 
contract  contained.''  It  was  shown  that  the  one  dollar  recited  to  have 
been  paid  was  not  in  fact  paid,  and  the  fact. that  the  promise  of  each 
subscriber  was  made  by  reason  of  and  in  reliance  upon  similar-  prom- 
ises by  the  others  constitutes  no  consideration  as  between  the  corpora- 
tion for  whose  benefit  the  promise  was  made  and  the  promisors.  The 
recital  of  a  consideration  paid  does  not  preclude  the  promisor  from 
disputing  the  fact  in  a  case  like  this,  nor  does  the  statement  of  a  par- 
ticular consideration  which,  on  its  face,  is  insufficient  to  support  a 
promise,  give  it  any  validity,  although  the  fact  recited  may  be  true. 

It  has  sometimes  been  supposed  that  when  several  persons  promise 
to  contribute  to  a  common  object,  desired  by  all,  the  promise  of  each 
may  be  a  good  consideration  for  the  promise  of  others,  and  this  al- 
though the  object  in  view  is  one  in  which  the  promisors  have  no  pe- 
cuniary or  legal  interest,  and  the  performance  of  the  promise  by  one 
of  the  promisors  would  not  in  a  legal  sense  be  beneficial  to  the  others. 
This  seems  to  have  been  the  view  of  the  chancellor  as  expressed  in 
Stewart  v.  Hamilton  College,  when  it  was  tried  before  the  Court  of 
Errors,  2  Denio,  417,  and  dicta  of  judges  will  be  found  to  the  same  ef- 
fect in  other  cases.  *  *  *  But  the  doctrine  of  the  chancellor,  as  we 
understand,  was  overruled  when  the  Hamilton  College  Case  came  be- 
fore this  court  (1  N.  Y.  581),  as  have  been  also  the  dicta  in  the  Massa- 
chusetts cases,  by  the  court  in  that  state,  in  the  recent  case  of  Cottage 
Street  Methodist  Episcopal  Church  v.  Kendall,  121  ]\Iass.  528.  23  Am. 
Rep.  286.  The  doctrine  seems  to  us  unsound  in  principle.  It  proceeds 
on  the  assumption  that  a  stranger  both  to  the  consideration  and  the 
promise,  and  whose  only  relation  to  the  transaction  is  that  of  donee  of 
an  executory  gift,  may  sue  to  enforce  the  payment  of  the  gratuity  for 
the  reason  that  there  has  been  a  breach  of  contract  between  the  several 
promisors  and  a  failure  to  carry  out  as  between  themselves  their  mu- 
tual engagement.  It  is  in  no  proper  sense  a  case  of  mutual  promises, 
as  between  the  plaintiff  and  defendant.     *     *     * 

In  the  disposition  of  this  case  we  must,  therefore,  reject  the  con- 
sideration recited  in  the  subscription  paper  as  ground  for  supporting 
the  promise  of  the  defendant's  intestate,  the  money  consideration,  be- 
cause it  had  no  basis  in  fact,  and  the  mutual  promise  between  the  sub- 
scribers, because,  there  is  no  privity  of  contract  between  the  plaintiff" 
and  the  promisors.  Some  consideration  must,  therefore,  l3e  found  oth- 
er than  that  expressly  stated  in  the  subscription  paper,  in  order  to 
sustain  the  action.     It  is  urged  that  a  consideration  may  be  found  in 


Ch.  2)  CONSIDERATION  119 

the  efforts  of  the  trustees  of  the  plaintiff  during  the  year,  and  the  time 
and  labor  expended  by  them  durintj  that  time,  to  secure  subscriptions 
in  order  to  fulfill  the  condition  upon  which  the  liability  of  the  subscrib- 
ers depended.  There  is  no  doubt  that  labor  and  services,  rendered  by 
one  party  at  the  request  of  another,  constitute  a  good  consideration  for. 
a  promise  made  by  the  latter  to  the  former,  based  on  the  rendition  of 
the  service.  But  the  plaintiff  encounters  the  difficulty  that  there  is  no 
evidence,  express  or  implied,  on  the  face  of  the  subscription  paper,  nor 
any  evidence  outside  of  it,  that  the  corporation  or  its  trustee  did,  or 
undertook  to  do,  anything  upon  the  invitation  or  request  of  the  sub- 
scribers. Nor  is  there  any  evidence  that  the  trustees  of  the  plaintiff, 
as  representatives  of  the  corporation,  in  fact  did  anything  in  their  cor- 
porate capacity,  or  otherwise  than  as  individuals,  interested  in  pro- 
moting the  general  object  in  view. 

Leaving  out  of  the  subscription  paper  the  affirmative  statement  of 
the  consideration  (which,  for  reasons  stated,  may  be  rejected),  it 
stands  as  a  naked  promise  of  the  subscribers  to  pay  the  several 
amounts  subscribed  by  them  for  the  purpose  of  paying  the  mortgage 
on  the  church  property  upon  a  condition  precedent  limiting  their  lia- 
bility. Neither  the  church  nor  the  trustees  promise  to  do  anything, 
nor  are  they  requested  to  do  anything,  nor  can  such  a  request  be  im- 
plied. It  was  held  in  Hamilton  College  v.  Stewart,  1  N.  Y.  581,  that 
no  such  request  could  be  implied  from  the  terms  of  the  subscription 
in  that  case,  in  which  the  p-rou»^d  for  such  an  implication  was,  to  say 
the  least,  as  strong  as  in  this  case.  It  may  be  assumed  from  the  fact 
that  the  subscriptions  were  to  be  paid  to  the  trustees  of  the  church 
for  the  purpose  of  paying  the  mortgage,  that  it  was  understood  that 
the  trustees  were  to  make  the  payment  out  of  the  moneys  received. 
But  the  duty  to  make  such  payment,  in  case  they  accepted  the  money, 
would  arise  out  of  their  duty  as  trustees.  This  duty  would  arise  upon 
receipt  of  the  money,  although  they  had  no  antecedent  knowledge  of 
the  subscription.  They  did  not  assume  even  this  obligation  by  the 
terms  of  the  subscription,  and  the  fact  that  the  trustees  applied  money, 
paid  on  subscriptions,  upon  the  mortgage  debt,  did  not  constitute  a 
consideration  for  the  promise  of  the  defendant's  intestate.  We  are 
unable  to  distinguish  this  case  in  principle  from  Hamilton  College  v. 
Stewart,  1  N.  Y.  581.  There  is  nothing  that  can  be  urged  to  sustain 
this  subscription  that  could  not,  with  equal  force,  have  been  urged  to 
sustain  the  subscription  in  that  case.  In  both,  the  promise  was  to  the 
trustees  of  the  respective  corporations.  In  each  case  the  defendant 
had  paid  part  of  his  subscription  and  resisted  the  balance.  In  both, 
part  of  the  subscription  had  been  collected  and  applied  by  the  trustees 
to  the  purpose  specified.  In  the  Hamilton  College  Case  (which  in. 
that  respect  is  unlike  the  present  one)  it  appeared  that  the  trustees  had 
incurred  expense  in  employing  agents  to  procure  subscriptions  to  make 
up  the  required  amount,  and  it  was  shown,  also,  that  professors  had 
been  employed  upon  the  strength  of  the  fund  subscribed.  That  case 
has  not  been  overruled,  and  has  been  frequently  cited  with  approval  in 
the  courts  of  this  and  other  states.  The  cases  of  Barnes  v.  Ferine,  12 
N.  Y.  18,  and  Roberts  v.  Cobb,  103  N.  Y.  600,  9  N.  E.  500,  are  not  in 
conflict  with  that  decision.  There  is,  we  suppose,  no  doubt  that  a 
subscription  invalid  at  the  time  for  want  of  consideration,  may  be 
made  valid  and  binding  by  a  consideration  arising  subsequently  be- 
tween the  subscribers  and  the  church  or  corporation  for  whose  benefit 


120  CONTRACTS  (Part  1 

it  is  made.  Both  of  the  cases  cited,  as  we  understand  them,  were 
supported  on  this  principle.  There  was,  as  was  held  by  the  court  in 
each  of  these  cases,  a  subsequent  request  by  the  subscriber  to  the  prom- 
isee to  go  on  and  render  service  or  incur  liabilities  on  the  faith  of  the 
subscription,  which  request  was  complied  with,  and  services  were  ren- 
dered or  liabilities  incurred  pursuant  thereto.  It  was  as  if  the  request 
was  made  at  the  very  time  of  the  subscription,  followed  by  perform- 
ance of  the  request  by  the  promisor.  Judge  Allen,  in  his  opinion  in 
Barnes  v.  Ferine,  said,  "the  request  and  promise  were-,  to  every  legal 
effect,  simultaneous.*'  and  he  expressly  disclaims  any  intention  to  in- 
terfere with  the  decision  in  the  Hamilton  College  Case.  In  the  present 
case  it  was  shown  that  individual  trustees  were  active  in  procuring 
subscriptions.  But,  as  we  have  said,  they  acted  as  individuals,  and 
not  in  their  individual  capacity.  They  were  deeply  interested,  as  was 
Mr.  Crook,  in  the  success  of  the  effort  to  pay  the  debt  on  the  church, 
and  they  acted  in  unison.  But  what  the  trustees  did  was  not  prompted 
by  any  request  of  Mr.  Crook.  They  were  co-laborers  in  promoting  a 
common  object.  We  can  but  regret  that  the  intention  of  the  intestate 
in  respect  to  a  matter  in  which  he  was  deeply  interested,  and  whose  in- 
terest was  manifested  up  to  the  very  time  of  his  death,  is  thwarted  by 
the  conclusion  we  have  reached.  But  we  think  there  is  no  alternative, 
and  that  the  order  should  be  affirmed.  All  concur. 
Order  affirmed  and  judgment  accordingly. 


SECTION   5.— ILLUSORY   PROMISES 


WICKHAM  &  BURTON  COAL  CO.  v.  FARMERS'  LUMBER  CO. 
(Supreme  Court  of  Iowa,  1920.     170  X.  W.  417,  14  A.  L.  R.  129.3.) 

Counterclaim  asserting  that  damages  were  due  from  plaintiff'  be- 
cause of  a  contract  made  between  plaintiff  and  defendant.  A  demur- 
rer to  the  counterclaim  was  overruled ;    hence  this  appeal. 

Salinger.  J.  The  counterclaim  alleges  that  about  August  18.  1916, 
defendant,  through  an  agent,  entered  into  an  oral  agreement  "whereby 
plaintiff  agreed  to  furnish  and  to  deliver  to  defendant  orders  given 
them''  for  carload  shipments  of  coal  from  defendant  f.  o.  b.  mines,  "to 
be  shipped  to  defendant  at  such  railroad  yard  stations  as  defendant 
might  direct,  at  the  price  of  $1.50  a  ton  on  all  orders  up  to  Septem- 
ber 1,  1916,  and  $1.65  a  ton  on  all  orders  from  then  to  April  1,  1917." 
It  is  further  alleged  that  "said  coal  ordered  would  be  and  consist''  of 
what  v/as  known  as  plaintiff's  Paradise  6"  lump.  6x3"  egg,  or  3x2" 
nut  coal.  *  *  =^  Then  comes  an  allegation  that  the  agent  made  oral 
agreement  "that  plaintiff  would  furnish  unto  defendant  coal  in  car- 
load lots,  that  defendant  would  want  to  purchase  from  plaintiff"  on 
stated  terms,  with  character  of  the  coal  described,  and  that  the  oral 
contract  was  confirmed  by  the  letter  Exhibit  1.  It  is  of  date  August 
21,  1916,  and  recites  that  plaintiff  is  in  receipt  of  a  letter  from  their 
agent — "asking  us  to  name  you  a  price  [repeating  the  price  and  coal 
description  found  in  the  counterclaim],  x^lthough  this  is  a  very  low 
price,  our  agent,  Mr.  Spalding,  has  recommended  that  we  quote  you 
this  price,  and  we  hereby  confirm  it.  Any  orders  received  between 
now  and  September  1st  are  to  be  shipped  at  $1.50.     We  would  like  to 


Ch.  2)  CONSIDERATION  121 

have  a  letter  from  you  accepting  these  prices,  and  if  this  is  satisfactory 
will  consider  same  as  a  contract." 

On  August  26,  1916,  the  defendant  responded:  "We  have  your 
favor  of  the  21st  accepting  our  order  for  coal  for  shipment  to  March 
31,  1917."  ^    . 

The  basis  of  the  counterclaim,  so  far  as  damages  are  concerned,  is 
the  allegation  that  a  stated  amount  of  coal  had  to  be  purchased  by 
defendant  in  the  open  market  at  a  greater  than  the  contract  price,  and 
that  therefore  there  is  due  the  defendant  from  the  plaintiff  the  sum  of 
$3,090.  ^  .,  , 

The  demurrer  asserts  that  the  alleged  contract  is  "void  for  failure  of 
mutuality  and  certainty,"  is  void  because  there  is  no  consideration 
between  the  parties,  because  it  appears  affirmatively  that  the  offer  was 
simply  an  offer  on  part  of  plaintiff,  which  might  be  accepted  by  giving 
an  order  until  such  time  as  it  was  actually  withdrawn  or  expired  by 
limitation,  each  order  and  acceptance  of  a  carload  lot  constituting  a 
separate  and  distinct  contract,  and  void  because  the  agreement  could 
not  be  enforced  by  the  plaintiff  on  any  certain  or  specified  ^amount  of 
tonnage,  or  for  the  payment  of  any  specified  tonnage.     *     *     * 

The  authorities  that  deal  with  uncertainty  and  indefiniteness  hold, 
in  effect,  that  whatsoever  is  ascertainable  with  reasonable  effort  is  suf- 
ficiently certain  to  be  enforced,  if  there  be  no  objection  to  enforce- 
ment other  than  uncertainty.  Now,  grant  that  it  was  not  difiicult  to 
ascertain  how  much  coal  defendant  would  sell  in  the  time  stated  in 
the  negotiations,  how  does  that  help  if  there  was  no  obligation  on  one 
side  to  sell,  or  on  part  of  the  other  to  buy?  If  the  defendant  was 
under  no  binding  obligation  to  buy  of  plaintiff,  it  does  not  matter  how 
much  defendant  could  sell.  In  fewer  words,  though  an  offer  to  sell  a 
specified  number  of  tons  of  coal  is  not  uncertain  or  lacking  in  definite- 
ness,  such  offer  is  no  contract,  unless  the  other  party  agrees  to  receive 
what  is  offered.  In  still  fewer  words,  while  a  writing  may  be  so  un- 
certain as  not  to  be  enforceable,  a  perfectly  definite  writing  may  still 
be  unenforceable  because  there  is  no  mutuality  of  obligation. 

And  the  asserted  lack  of  consideration  is  bottomed  on  the  claim  that 
mutuality  is  lacking.  Appellant  does  not  deny  that  a  promise  may 
be  a  consideration  for  a  promise.  Its  position  is  that  this  is  so  only 
of  an  enforceable  promise.  That  is  the  law.  If,  from  lack  of  mu- 
tuality, the  promise  is  not  binding,  it  cannot  form  a  consideration. 
*     *     *    There  is  no  consideration  by  promises  which  lack  mutuality. 

The  question  of  first  importance  then,  is,  whether  there  is  a  lack  of 
mutuality.  In  the  last  analysis  the  counterclaim  is  based  on  the  alle- 
gation that  plaintiff"  undertook  to  furnish  defendant  such  described 
coal  "as  defendant  would  want  to  purchase  from  plaintiff."  The  de- 
fendant never  "accepted."  Indeed,  it  is  its  position  that  it  gave  orders, 
and  that  plaintiff  did  the  accepting.  But  concede,  for  argument's  sake, 
that  defendant  did  accept.  What  was  the  acceptance?  At  the  utmost, 
it  was  a  consent  that  plaintiff  might  ship  it  such  coal  as  defendant 
"would  want  to  purchase  from  plaintiff'."  What  obligation  did  this 
fasten  upon  defendant?  It  did  not  bind  itself  to  buy  all  it  could  sell. 
It  did  not  bind  itself  to  buy  of  plaintiff  only.  It  merely  agreed  to 
buy  what  it  pleased.  It  may  have  been  ascertainable  how  much  it 
would  need  to  buy  of  some  one.  But  there  was  no  undertaking  to  buy 
that  much,  or,  indeed,  any  specified  amount  of  coal  of  plaintiff.    *    *    * 


122  CONTRACTS  (Part  1 

The  "contract"  on  part  of  appellee  is  to  buy  if  it  pleased,  when  it 
pleased,  to  buy  if  it  thought  it  advantageous,  to  buy  much,  little,  or 
not  at  all,  as  it  thought  best. 

A  contract  of  sale  is  mutual  where  it  contains  an  agreement  to  sell 
on  the  one  side,  and  an  agreement  to  purchase  on  the  other.  But  it  is 
not  mutual  where  there  is  an  obligation  to  sell,  but  no  obligation  to 
purchase,  or  an  obligation  to  purchase,  but  no  obligation  to  sell.     '•'   *  * 

Where  one  party  agrees  to  cut  for  the  other  hay  "not  to  exceed  200 
tons,"  there  is  lack  of  mutuality,  because  the  offerant  was  not  bound 
to  deliver  any  particular  quantity  of  hay,  and  could  cut  as  little  as  he 
pleased.    *    *    * 

And  so  of  an  offer  to  receive  and  transport  railroad  iron,  not  to  ex- 
ceed a  stated  number  of  tons,  during  specified  periods,  and  at  a  speci- 
fied rate  per  ton.  As  to  this  it  was  held  that,  though  plaintiff  answ^er- 
ed,  assenting  to  the  proposal,  there  was  still  no  contract,  because 
there  was  no  agreement  on  his  part  that  he  would  deliver  any  iron  for 
transportation.  *  *  *  An  agreement  to  purchase  all  that  the  man- 
ufacturer desires  to  sell  at  a  specified  price  is  void.  *  *  *  A  written 
Ijroposition  to  buy  a  stated  quantity  of  coal  at  a  stated  price  is  not 
enforceable,  because  there  is  no  corresponding  obligation  on  the  other 
to  sell  the  coal  at  said  price.     *     *     * 

No  contract  is  created  by  a  willingness  to  ship  such  gauge  glasses 
as  the  other  "might  order,"  *  *  *  nor  by  an  engagement  to  deliver 
at  a  stated  price  "as  many  grapes  as  he  (the  other  party)  should  wish." 
*    *    * 

A  contract  to  sell  personal  property  is  void  for  want  of  mutuality 
if  the  quantity  to  be  delivered  is  conditioned  entirely  on  the  will,  wish, 
or  want  of  the  buyer.  *  *  *  An  agreement  to  receive  and  pay  for 
such  beer  as  the  plaintiff  might  from  time  to  time  want  from  the  de- 
fendant lacks  binding  force  for  want  of  mutuality,  though  plaintiff 
agreed  to  sell  all  the  beer  of  specified  brands  which  plaintiff  should 
order  at  prices  to  be  agreed  on.    *    *    * 

If  there  never  was  a  contract  to  ship  anything,  that  is  still  the  situa- 
tion when  a  contract  to  ship  what  has  not  vet  been  shipped  is  asserted 
as  the  basis  of  an  action.  As  said  in  Cold  Blast  Co.  v.  Bolt  Co.,  114 
Fed.  80,  52  C.  C.  A.  25,  57  L.  R.  A.  696,  even  though  there  had  been 
some  shipments,  there  was  still  no  consideration  and  no  mutuality  in 
the  contract  as  to  any  articles  which  defendant  had  not  ordered,  or 
which  plaintiff  had  not  delivered,  and  therefore  the  refusal  of  plain- 
tiff' to  honor  the  orders  of  defendants  was  no  breach  of  any  valid 
contract,  and  formed  no  legal  cause  of  action  whereon  to  base  a  coun- 
terclaim.    *     *     * 

It  is  thus  stated  in  13  Corpus  Juris,  341 :  "Accepted  orders  for 
goods  under  contracts  void  within  these  rules  constitute  sales  of  the 
goods  thus  ordered  at  the  price  named  in  the  contracts,  but  do  not  vali- 
date the  agreements  as  to  articles  which  the  one  refuses  to  purchase 
or  the  other  refuses  to  deliver,  or  to  deliver  under  the  void  contract. 
This  is  so  because  neither  party  is  bound  to  take  or  deliver  any  amount 
or  quantity  of  these  articles  thereunder." 

Defendant  alleges  further  that,  by  reason  of  the  conduct  of  plaintiff 
in  furnishing  defendant  two  carloads  at  $1.50  per  ton  under  the  con- 
tract terms,  plaintiff  is  now  estopped  from  claiming  there  was  no  bind- 
ing between  the  parties  for  furnishing  coal  to  defendant  under  the 


Ch.  2)  CONSIDERATION  123 

contract  contended  for  by  defendant.     But  the  claimed  estoppel  is  no 
broader  than  the  claimed  breach  of  a  contract  which  is  no  contract. 

Cases  relied  on  by  appellee  do  not,  on  careful  consideration,  militate 
with  what  we  have  declared.  All  that  Keller  v.  Ybarru,  3  Cal.  147, 
holds  is  that,  when  one  party  offers  to  sell  as  much  as  the  other  wishes, 
there  is  a  contract  after  the  other  declares  what  quantity  he  will  take. 

*  *     * 

The  demurrer  should  have  been  sustained. 
Re^ersed.  

OSCAR   SCIILEGEL    j\IFG.    CO.    v.    PETEIl    COOrER'S    GLUE   FACTORY. 
(Court  of  Appeals  of  New  York,  1921.     2.31 'N.   Y.  4.59,  132  N.  E.  14S.) 

Action  by  the  Oscar  Schlegel  Manufacturing  Company  against  Pe- 
ter Cooper's  Glue  Factory  to  recover  damages  for  an  alleged  breach 
of  contract.  A  judgment  for  the  plaintiff  for  a  substantial  amount 
was  affirmed  by  the  Appellate  Division,  two  Justices  dissenting  ( 189 
App.  Div.  843,  179  N.  Y.  Supp.  271),  and  defendant  appeals. 

McLaughlin,  J.  Action  to  recover  damages  for  alleged  breach  of 
contract.  The  complaint  alleged  that  on  or  about  December  9,  1915, 
the  parties  entered  into  a  written  agreement  by  which  the  defendant 
agreed  to  sell  and  deliver  to  the  plaintiff,  and  the  plaintiff  agreed  to 
purchase  from  the  defendant,  all  its  "requirements"  of  special  BB 
glue  for  the  year  1916,  at  the  price  of  nine  cents  per  pound.  It  also 
alleged  the  terms  of  payment,  the  manner  in  which  the  glue  was  to 
be  packed,  the  place  of  delivery,  the  neglect  and  refusal  of  defendant 
to  make  certain  deliveries,  and  the  damages  siistained,  for  which  judg- 
ment was  demanded.  The  answer  put  in  issue  the  material  allega- 
tions of  the  complaint.  At  the  trial  a  jury  was  waived,  and  the  trial 
proceeded  before  the  trial  justice.  At  its  conclusion  he  rendered  a 
decision  awarding  the  plaintiff  a  substantial  amount.  Judgment  was 
entered  upon  the  decision,  from  which  an  appeal  was  taken  to  the 
Appellate  Division,  First  Department,  where  the  same  was  affirmed, 
two  of  the  justices   dissenting.     The  appeal  to  this   court   followed. 

I  am  of  the  opinion  the  judgment  appealed  from  should  be  reversed, 
upon  the  ground  that  the  alleged  contract,  for  the  breach  of  which  a 
recovery  was  had,  was  invalid  since  it  lacked  mutuality.  It  consisted 
solely  of  a  letter  written  by  defendant  to  plaintiff',  the  material  part 
•of  which  is  as  follows : 

"Gentlemen :  We  are  instructed  by  our  Mr.  Von  Schuckmann  to 
enter  your  contract  for  your  requirements  of  'special  BB'  glue  for  the 
year  1916,  price  to  be  9c  per  lb.,  terms  2%  20th  to  30th  of  month  fol- 
lowing purchase.  Deliveries  to  be  made  to  you  as  per  your  orders 
during  the  year  and  quality  same  as  heretofore.  Glue  to  be  packed  in 
500-lb.  or  350-lb.  barrels  and  100-lb.  kegs,  and  your  special  label  to 
be  carefully  pasted  on  top,  bottom  and  side  of  each  barrel  or  keg. 

*  *     *  Peter  Cooper's  Glue  Factory, 

"W.  D.  Donaldson,  Sales  Manager." 
At  the  bottom  of  the  letter  the  president  of  the  plaintiff  wrote,  "Ac- 
cepted. Oscar  Schlegel  Manufacturing  Company,"  and  returned  it  to 
the  defendant. 

The  plaintiff  at  the  time  was  engaged  in  no  manufacturing  business 
in  which  glue  was  used  or  required,  nor  was  it  then  under  contract 
to  deliver  glue  to  any  third  parties  at  a  fixed  price  or  otherwise.  It 
was  simply  a  jobber,  selling  among  other  things,  glue  to  such  custom- 


124  CONTRACTS  (Part  1 

ers  as  might  be  obtained  by  sending  out  salesmen  to  solicit  orders 
therefor.  The  contract  was  invalid  since  a  consideration  was  lacking. 
Mutual  promises  or  obligations  of  parties  to  a  contract,  either  ex- 
press or  necessarily  implied,  may  furnish  the  requisite  consideration. 
The  defect  in  the  alleged  contract  here  under  consideration  is  that 
it  contains  no  express  consideration,  nor  are  there  any  mutual  promises 
of  the  parties  to  it  from  which  such  consideration  can  be  fairly  in- 
ferred. The  plaintiff,  it  will  be  observed,  did  not  agree  to  do  or  re- 
frain from  doing  anything.  It  was  not  obligated  to  sell  a  pound  of 
defendant's  glue  or  to  make  any  effort  in  that  direction.  It  did  not 
agree  not  to  sell  other  glue  in  competition  with  defendant's.  The 
only  obligation  assumed  by  it  was  to  pay  nine  cents  a  pound  for  such 
glue  as  it  might  order.  Whether  it  should  order  any  at  all  rested  en- 
tirely with  it.  If  it  did  not  order  any  glue,  then  nothing  was  to  be 
paid.  The  agreement  was  not  under  seal,  and  therefore  fell  within 
the  rule  that  a  promise  not  under  seal  made  by  one  party,  with  none 
by  other,  is  void.  Unless  both  parties  to  a  contract  are  bound,  so  that 
either  can  sue  the  other  for  a  breach,  neither  is  bound.  *  *  *  Had 
the  plaintiff"  neglected  or  refused  to  order  any  glue  during  the  year 
1916,  defendant  could  not  have  maintained  an  action  to  recover  dam- 
ages against  it,  because  there  would  have  been  no  breach  of  the  con- 
tract. In  order  to  recover  damages,  a  breach  had  to  be  shown,  and 
this  could  not  have  been  established  by  a  mere  failure  on  the  part  of 
the  plaintiff  to  order  glue,  since  it  had  not  promised  to  give  such  orders. 

There  are  certain  contracts  in  which  mutual  promises  are  implied: 
Thus  w^here  the  purchaser,  to  the  knowledge  of  the  seller,  has  en- 
tered into  a  contract  for  the  resale  of  the  article  purchased ;  *  *  * 
where  the  purchaser  contracts  for  his  requirements  of  an  article  neces- 
sary to  be  used  in  the  business  carried  on  by  him  ;  *  *  *  or  for  all 
the  cans  needed  in  a  canning  factory ;  *  *  *  all  the  lubricating  oil 
for  party's  owm  use ;  *  *  *  all  the  coal  needed  for  a  found- 
r}-  during  a  specified  time ;  *  *  *  all  the  iron  required  during 
a  certain  period  in  a  turnace ;  *  *  *  ^i^id  all  the  ice  required 
in  a  hotel  during  a  certain  season.  *  *  *  jj-^  cases  of  this  char- 
acter, while  the  quantity  of  the  article  contracted  to  be  sold  is  indefi- 
nite, nevertheless  there  is  a  certain  standard  mentioned  in  the  agree- 
ment by  which  such  quantity  can  be  determined  by  an  approximately 
accurate  forecast.  In  the  contract  here  under  consideration  there  is 
no  standard  mentioned  by  which  the  quantity  of  glue  to  be  furnished 
can  he  determined  with  any  approximate  degree  of  accuracy. 

The  view  above  expressed  is  not  in  conflict  with  the  authorities  cited 
by  the  respondent.  Thus,  in  N.  Y.  C.  Iron  Works  Co.  v.  U.  S.  Radi- 
ator Co.,  174  N.  Y.  331,  66  N.  E.  967,  principally  relied  upon  and  cited 
in  the  prevailing  opinion  at  the  Appellate  Division,  "the  defendant 
bound  the  plaintiff'  to  deal  exclusively  in  goods  to  be  ordered  from  it 
under  the  contract  and  to  enlarge  and  develop  the  market  for  the  de- 
fendant's wares  so  far  as  possible." 

In  Fuller  &  Co.  v.  Schrenk,  58  App.  Div.  222,  68  N.  Y.  Supp.  781, 
affirmed  171  N.  Y.  671,  64  N.  E.  1126,  the  contract  provided:  "It 
is  hereby  agreed  that,  in  consideration  of  W.  P.  Fuller  &  Co.  buying 
all  their  supply  of  German  mirror  plates  from  the  United  Bavarian 
Looking  Glass  Works  for  a  period  of  six  months  from  this  date,  the 
said  United  Bavarian  Looking  Glass  Works"  agrees  to  sell  certain  mir- 
rors at  specified  prices. 


Ch.  2)  CONSIDEUATION  125 

In  Wood  V.  Lucy,  Lady  Dufif-Gordon,  222  N.  Y.  88,  118  N.  E.  214, 
the  plaintiff  was  to  have,  for  the  term  of  one  year,  the  excktsive  right 
to  place  defendant's  indorsement  on  certain  designs,  in  return  for 
which  she  was  to  have  one-half  of  all  the  profits  and  revenue  derived 
from  any  contracts  he  might  make.  The  point  was  there  made,  as 
here,  that  plaintiff  did  not  promise  that  he  would  use  reasonable  efforts 
to  place  defendant's  indorsement  and  market  her  designs,  but  this 
court  held  that  such  a  promise  was  fairly  to  be  implied ;  that  when  de- 
fendant gave  to  the  plaintiff  an  exclusive  privilege  for  a  period  of 
one  year,  during  which  time  she  could  not  place  her  own  indorsements, 
or  market  her  own  designs,  except  through  the  agency  of  the  plain- 
tiff, that  the  acceptance  of  such  an  exclusive  agency  carried  with  it  an 
assumption  of  its  duties. 

In  Ehrenworth  v.  George  F.  Stuhmer  &  Co..  229  N.  Y.  210,  128  N. 
E.  108.  defendant  and  its  predecessor  were  desirous  of  obtaining  a 
market  for  a  particular  kind  of  bread  which  it  manufactured.  In 
order  to  accomplish  this  purpose,  it  was  agreed  that  plaintiff  should 
purchase  and  defendant  sell  all  the  bread  of  the  kind  specified  which 
plaintiff'  required  in  a  certain  locality  and  pay  therefor  a  price  specified 
in  the  agreement.  The  plaintiff  also  agreed  he  would  not  sell  any 
other  bread  of  that  kind  on  that  route  during  the  life  of  the  contract, 
which  was  .to  continue  so  long  as  the  parties  remained  in  business. 
This  contract,  it  will  be  noticed,  specified  the  articles  to  be  sold,  the 
price  to  be  paid,  the  quantity  to  be  furnished,  and  the  term  of  the 
contract,  during  which  time  plaintiff  agreed  not  to  sell  any  other  bread 
of  the  kind  named  in  that  territory. 

In  the  instant  case,  as  we  have  already  seen,  there  was  no  obligation 
on  the  part  of  the  plaintiff'  to  sell  any  of  the  defendant's  glue,  to  make 
any  effort  towards  bringing  about  such  sale,  or  not  to  sell  other  glues 
in  competition  with  it.  There  is  not  in  the  letter  a  single  obligation 
from  which  it  can  fairly  be  inferred  that  the  plaintiff  was  to  do  or  re- 
frain from  doing  anything  whatever. 

The  price  of  glue  having  risen  during  the  year  1916  from  9  to  24 
cents  per  pound,  it  is  quite  obvious  why  orders  for  glue  increased 
correspondingly.  Had  the  price  dropped  below  9  cents,  it  may  fairly 
be  inferred  such  orders  would  not  have  been  given.  In  that  case,  if 
the  interpretation  put  upon  the  agreement  be  the  correct  one,  plaintiff' 
would  not  have  been  liable  to  the  defendant  for  damages  for  a  breach, 
since  he  had  not  agreed  to  sell  any  glue. 

The  judgments  of  the  Appellate  Division  and  trial  court  should  be 
reversed,  and  the  complaint  dismissed,  with  costs  in  all  courts.    *    *    * 


RAMEY   LUMBER   CO.   v.   .70HN   SCHROEDER   LUMBER   CO. 

(United  States  Circuit  Court  of  Appeals.  Seventh  Circuit,  1916.     237  Fed.  39, 

150  C.  C.  A.  241.) 

Plaintiff',  the  Ramey  Lumber  Company,  Limited,  agreed  to  sell  to 
defendant,  the  John  Schroeder  Lumber  Company,  at  stated  prices,  all 
the  lumber  of  certain  grades  that  p»laintiff  should  manufacture  or  own 
during  the  year  1911,  in  consideration  of  which  defendant  agreed  to 
buy  all  such  lumber.  Plaintiff  sues  for  breach  of  contract.  Defenses: 
Uncertainty  and  want  of  mutuality  of  consideration.  Complaint  dis- 
missed below.     Plaintiff  brings  writ  of  error. 


126  CONTRACTS  (Part  1 

Ai<SCiirLER,  J.  *  *  *  As  to  the  defenses  of  uncertainty  and  want 
of  mutuality,  we  are  unable  to  concur  in  the  decision  of  the  trial  court. 
The  contract  did  not  lack  mutuality  of  obligation.  While  defendant 
promised  to  buy  of  plaintiff  all  the  lumber  of  a  certain  quality  that 
plaintiff  might  own  during  the  season,  plaintiff  bound  itself,  if  it  did 
manufacture  or  acquire  any  such  lumber,  to  sell  all  of  it  to  defendant 
and  to  no  one  else.  Thus  plaintiff  deprived  itself  of  the  right  to  sell 
lumber  to  whom  it  pleased.  The  promise  to  restrict  its  freedom  by 
giving  up  its  right  to  sell  to  others  was  real  and  definite.  It  was  the 
substantial  and  contemplated  consideration  for  defendant's  promise 
to  buv  all  that  plainriff  might  own  during  the  season.  There  was 
the  mutuality  of  obligation  essential  to  a  bilateral  contract ;  there  was 
the  consideration  essential  to  the  validity  of  any  contract.  *  =>-  * 
That  the  plaintiff'  did  not  bind  itself  to  acquire  or  manufacture  any 
such  lumber  is  immaterial.  Its  promise  to  deal  with  defendant  was 
the  valid  consideration  for  the  obligation  by  defendant,  a  consideration 
that  made  the  undertaking  of  the  other  party  binding  and  enforceable. 

With  regard  to  the  question  of  uncertainty,  a  contract  is  void  (save 
for  the  possibility  of  reformation  in  equity)  because  of  uncertainty, 
only  w^ien  it  is  so  worded  that  the  intention  of  the  parties  cannot  be 
deduced  therefrom.  If  the  intention  be  clear,  the  mere  uncertainty 
of  the  amount  involved  does  not  invalidate  the  obligation,  however 
it  may  affect  the  possibility  of  proving  damages  for  a  breach.  In  the 
present  case  the  preliminary  negotiations  demonstrate  that  defendant 
wanted  to  secure  all  such  lumber  that  it  could  possibly  obtain,  without 
limit,  and  without  binding  plaintiff'  absolutely  and  under  all  circum- 
stances to  deliver  any  lumber.  The  parties  had  a  right  to  make  such 
a  contract,  even  though  the  amount  that  would  be  dehverable  there- 
under was  not  specified,  and  was  in  a  sense  optional  with  the  vendor ; 
and  this  they  did.  in  terms  which  are  clear  and  certain.     *     *     * 

Moreover,  there  were  definite  limitations  on  the  amount  that  could 
and  must  be  tendered.  While  plaintiff  had  the  option  either  to  manu- 
facture and  to  buy  from  others,  or  to  refrain  therefrom,  it  was  abso- 
lutely obligated  to  sell  all  that  it  manufactured  or  owned  during  the 
season.  When  the  contract  was  executed,  the  maximum  amount  that 
would  be  deliverable  thereunder,  while  unknown  to  the  parties,  and  in 
that  sense  uncertain,  was,  under  the  finding  of  facts,  the  amount  of 
specified  grades  of  a  definite  kind  of  lumber  that  could  be  manufac- 
tured between  March  and  July  of  the  year  1911  either  by  plaintiff  or 
others.  So  much  thereof  as  plaintiff  might  own  within  a  definitely 
limited  time,  the  season  of  1911,  was  the  amount  that  it  had  obligated 
itself  to  sell.  This  would  necessarily  have  become  certain  during  the 
season,  even  if  the  time  limit  for  plaintift"s  owniership  included,  not 
merely  the  manufacturing  season,  but  also  the  short  period  thereafter 
within  which  delivery  must  be  made.     *     *    * 

We  therefore  conclude  that  the  plaintiff  is  entitled  to  recover  as  its 
damages  the  loss  it  incurred  from  defendant's  nonacceptance  of  the 
20  carloads,  and  on  account  of  the  1,455,919  feet  on  hand  at  time  of  re- 
pudiation of  the  contract.     *     *     * 

The  judgment  is  therefore  reversed,  and  the  cause  remanded,  with 
directions  to  the  District  Court  to  enter  a  judgment  in  favor  of  plain- 
tiff for  $4,899.82,  together  with  interest,  as  above  stated,  to  date  of 
entry  of  judgment,  and  costs. 


Ch.  2)  CONSIDERATION  127 


RICH   V.   DONEGHEY. 

(Snprenip  Court  of  Oklahoma,  1918.    177  Pac.  fr,.  P,  A.  L.  U.  r,'t2.) 

The  owners  of  a  tract  of  60  acres  of  land  executed  an  instrument, 
denominated  an  oil  and  gas  lease,  by  the  terms  of  which  they  granted, 
demised,  leased,  and  let  the  same  to  another,  his  heirs,  executors,  ad- 
ministrators, and  assigns,  for  the  sole  and  only  purpose  of  mining 
and  operating  for  oil  and  gas,  and  of  laying  pipe  lines,  and  of  building 
tanks,  power  stations,  and  structures  thereon,  to  procure  and  take  care 
of  said  products.  The  grant  was  for  a  term  of  five  years  from  date 
and  as  long  thereafter  as  oil  or  gas,  or  either  of  them,  was  produced 
by  said  party.  The  instrument  recited  a  consideration  of  $1  paid  by 
the  lessee  to  the  lessors.  The  lessee  agreed  to  deliver  to  lessors  one-  , 
eighth  of  the  oil  produced  and  saved  from  the  premises;  to  pay  cer- 
tain stipulated  sum  per  annum  for  each  gas  well,  and  for  gas  utilized 
from  each  oil  well.  The  lessee  further  agreed  to  complete  a  well  on 
said  premises  within  six  months,  or  pay  at  the  rate  of  $15  for  each 
additional  month  such  completion  was  delayed.  The  instrument  con- 
tained the  further  provision  that  the  lessee  should  have  the  right  at 
any  time,  on  payment  of  $1  to  the  lessors,  to  surrender  the  lease  for 
cancellation,  after  which  all  payments  and  liabilities  thereafter  to  ac- 
crue under  and  by  virtue  of  its  terms  should  cease  and  determine. 

The  owners  of  the  land  bring  action  to  cancel  the  instrument  and 
remove  same  as  a  cloud  on  their  title.  It  appeared  that  no  well  had 
been  commenced,  but  that  the  lessee  had  made  timely  payments  or 
tender  of  all  sums  stipulated  to  be  paid  for  delay  in  completing  a  well. 

MiLEY,  j_  *  *  *  Among  the  considerations  expressed  in  this  in- 
strument are  the  covenants  and  agreements  of  the  lessee  to  pay  certain 
stipulated  royalties  for  oil,  and  for  each  gas  well,  and  to  complete  a 
well  within  six  months,  or  pay  at  the  rate  of  $15  for  eacH  additional 
month  such  completion  is  delayed.  It  will  be  conceded  that  this  agree- 
ment to  develop,  and  the  prospective  royalties,  or  the  monthly  pay- 
ments in  lieu  of  development,  standing  alone,  would  constitute  a  suf- 
ficient consideration.  But  it  is  contended  that  under  the  clause  in 
the  instrument  conferring  on  the  defendant  the  option  to  surrender 
the  lease  for  cancellation,  after  which  all  payments  and  liabilities  there- 
after to  accrue  under  and  by  virtue  of  its  terms  shall  cease  and  deter- 
mine, the  lessee  was  not  bound  to  perform  these  promises,  or,  as  it  is 
said,  not  bound  to  do  anything.  This  statement  would  appear  to  be 
too  sweeping.  Instead  of  not  being  bound  to  do  anything,  the  lessee 
is  obligated  thereunder  to  do  one  of  three  things:  (1)  Drill  and  com- 
plete a  well  in  a  fixed  time,  or  (2)  surrender  all  his  rights  and  pay  in 
addition  the  sum  of  $1,  or  (3)  pay  during  the  term  of  five  years,  or 
until  surrender,  $15  per  month  for  each  additional  month  the  comple- 
tion of  a  well  is  delayed. 

■  The  lessee  cannot  escape  from  all  these  obligations.  He  may  es- 
cape two  of  them,  but  he  is  absolutely  bound  to  do  one  of  the  tliree. 
If  he  does  the  first,  and  fails  to  find  oil  or  gas,  he  will  suffer  a  det- 
riment, and,  if  oil  or  gas  is  discovered,  will  confer  a  benefit  on  the 
lessor  by  way  of  royalties  on  the  oil  and  gas  produced.  If  he  does 
the  second,  he  will  suffer  a  detriment  and  confer  a  corresponding  bene- 
fit on  the  lessor.  If  he  does  neither  of  these,  he  is  absolutely  ob- 
ligated to  the  other,  and  the  amounts  agreed  to  be  paid  for  the  de- 
lay may  be  recovered  in  an  action  therefor.     *     *     '•'     If  the  lessee 


128  CONTRACTS  (Part  1 

should  choose  to  perform  what  may  seem  to  be  the  least  onerous  obli- 
gation, and  surrender,  the  lessor  will  obtain  some  benefit  and  the  lessee 
suffer  some  detriment,  at  least  to  the  extent  of  $1.  It  would  seem, 
therefore,  that  under  these  alternative  obligations  to  develop,  or  sur- 
render, or  pay  for  delay,  a  consideration  is  not  wanting.  The  fact  that 
the  lessee  must  pay  $1  at  the  time  he  exercises  the  right  of  surrender 
should,  it  would  seem,  afford  ground  for  distinguishing  decisions  hold- 
ing that  the  lessee  was  not  obligated  to  anything  where,  under  the 
leases  there  under  consideration,  the  lessee  was  not  obligated  to  pay 
anything  at  the  time  of  surrender,  or  in  which  it  was  provided  that 
the  lease  should  terminate  and  become  void  as  to  both  parties  unless 
a  stipulated  sum  was  paid  for  delay. 

But,  putting  that  aside,  if  we  give  the  surrender  clause  the  sweeping 
effect  claimed,  and  assume  that  by  virtue  thereof  the  lessee  has  given 
no  binding  promise  to  drill  or  pay,  or  do  anything,  and  treat  the  instru- 
ment as  though  it  recited  no  promise  whatever,  or  imposed  no  obliga- 
tions to  pay  royalties,  and  to  develop,  or  pay  a  fixed  sum  at  stated  times 
in  lieu  thereof,  it  does  not  follow  that  the  instrument  is  without  suffi- 
cient consideration.  Grants  of  this  character  are  not  dependent  for 
their  validity  on  an  agreement  to  pay  royalties  and  the  consequent  ex- 
pressed or  implied  covenant  to  develop.  They  may  be  for  any  other 
consideration  agreeable  to  the  parties  and  valuable  in  law.  The  con- 
sideration may  be  wholly  executed.  It  may  be  in  money  only  paid  at 
the  time  of  the  execution  and  delivery  of  the  instrument.  Such  money- 
ed consideration,  in  addition  to  the  covenants  before  referred  to.  is  re- 
cited to  have  been  paid  and  its  receipt  acknowledged  in  the  face  of  the 
instrument.  It  is  true  that  the  amount  recited  is  small,  being  only  $1, 
but  a  dollar  is  the  unit  of  value,  and  is  a  thing  of  value  in  fact  and  in 
the  eye  of  the  law ;  many  sales  and  transactions  are  had  daily  in  which 
that  sum  is  the  sole  consideration.     "•'     *     * 

The  $1  is  not  the  sole  consideration,  however.  It  may  be  urged 
that  it  is  not  the  real  consideration,  but  that  development  and  pro- 
spective royalties,  as  has  been  said  in  some  decisions,  were  the  real  or 
moving  consideration.  That  statement  would  hardly  be  accurate  here, 
since  the  parties  agreed  that  development  might  be  deferred  through- 
out the  five-year  term,  and  provided  stipulated  monthly  payments  in 
lieu  thereof.  It  would  be  more  accurate  to  say  that  one  of  the  con- 
siderations, perhaps  the  principal  one,  for  the  grant  was  the  covenant 
to  develop  and  yield  prospective  royalties  or  pay  in  lieu  thereof.  In 
this  connection,  it  is  argued  that,  by  virtue  of  the  surrender  clause, 
the  lessee  has  the  option  of  terminating  the  lease,  and  thereby  to  escape 
the  obligation  to  develop  or  pay  in  lieu  thereof,  and  thus  defeat  the 
main  purpose  or  object  of  the  lessor  in  making  the  grant,  and  therefore 
that  it  is  likewise  optional  with  the  lessor  to  refuse  payments  for  delay 
and  to  compel  a  surrender.  To  support  this  argument,  the  somewhat 
misleading,  though  euphonious,  epigram,  "that  contracts  unperformed, 
optional  as  to  one  of  the  parties,  are  optional  as  to  both,"  is  invoked. 
That  rule  can  have  no  application  here.  It  applies  to  contracts  con- 
sisting entirely  of  mutual  promises  wholly  executory  and  unperformed, 
the  promises  on  one  side  being  the  sole  consideration  for  the  promises 
on  the  other,  and  in  which,  if  it  is  optional  with  one  of  the  parties 
whether  he  will  perform  his  promises,  it  is  said  that  prior  to  perform- 
ance of  such  promises  by  him  it  is  optional  with  the  other  whether  he 
will  perform  his  promises.    It  is  but  another  way  of  stating  the  rule  of 


Ch.  2)  CONSIDERATION  129 

mutuality  before  referred  to.  *  *  '''  So  far  as  the  lessors  are  con- 
cerned, the  lease  was  fully  executed,  and  by  its  terms  there  was  granted 
to  the  lessee  an  interest  in  the  land  to  explore  the  same  for  oil  and  gas, 
and  to  produce  such  as  might  be  found,  which  interest  vested  imme- 
diately upon  execution  and  delivery  of  the  instrument.  Nor  was  the 
lease  wholly  unperformed  on  the  part  of  the  lessee  with  respect  to  the 
covenant  now  under  consideration.  He  had  made  two  of  the  monthly 
payments  for  delay,  which  had  been  accepted,  and  had  tendered  the 
payment  for  the  third  month  before  demand  was  made  for  cancellation, 
and  has  since  performed  the  promise  to  pay  for  delay  by  depositing 
the  amounts  due  in  the  designated  bank,  in  strict  conformity  with  the 
terms  of  the  agreement.  However,  if  it  be  assumed  that  the  agree- 
ment, being  fully  executed  on  one  side  and  partly  performed  on  the 
other,  does  not  make  the  rule  inapplicable,  yet  the  fact  that  the  agree- 
ment is  founded  on  an  independent  consideration,  namely,  the  $1  paid 
by  the  lessee  at  the  execution  and  delivery  of  the  instrument,  does  have 
that  etTect. 

In  13  C.  J.  336.  it  is  said :  ''When  there  is  an  agreement  founded  on 
a  consideration,  it  is  not  invalid  for  the  want  of  mutuality  because  one 
party  has  an  option  while  the  other  has  not,  or,  in  other  words,  because 
it  is  obligatory  on  one  and  optional  with  the  other.  *  *  *  And  the 
option  to  relinquish  a  right  acquired  under  a  contract  will  not  render 
it  unilateral." 

In  6  R.  C.  L.  687,  it  is  said :  "An  option,  supported  by  a  consider- 
ation, furnishes  another  illustration  of  a  contract  which  is  valid  not- 
withstanding the  lack  of  mutuality.  It  is  no  objection  to  the  validity 
of  the  contract  that  the  holder  of  the  option  is  under  no  obligation 
to  exercise  it."     *     *     * 

The   cases   cannot    be   distinguished   in   principle    on    that   ground. 

*  K  ;i; 

The  judgment  is  accordingly  reversed,  and  the  cause  remanded  for 
further  proceedings  in  accordance  with  the  views  herein  expressed. 

All  the  Justices  concur  except  Turner  and  Brett,  JJ.,  not  partici- 
pating, and  Owen,  J.,  dissenting. 


SECTION  6.— PROMISES  TO  PAY  FOR  A  BENEFIT 
PREVIOUSLY  RECEIVED 


ALLEN  V.  BRYSOX. 

(Supreme  Court  of  Iowa,  1S85.    67  Iowa,  591,  25  N.  W.  S20.  56  Am.  Rep.  358.) 

Both  parties  are  attorneys  at  law,  and  this  action  was  brought  to 
recover  for  professional  services  performed  by  the  plaintiff  for  the 
defendant,  and  for  personal  property  sold.  Several  defenses  were 
pleaded,  which  are  sufficiently  referred  to  in  the  opinion.  Trial  by 
jury.     Verdict  and  judgment  for  the  plaintiff",  and  defendant  appeals. 

Seevers,  J.  '^  *  ■■'•  The  defendant  pleaded  that  he  and  the  plain- 
tiff were  brothers-in-law,  and,  in  substance,  that  each  of  them  was  en- 
gaged in  the  practice  of  the  law,  and  had  been  in  the  habit  of  assisting 
each  other  as  a  matter  of  mutual  accommodation,  and  that  '"all  and  each 
of  the  professional  services  for  which  plaintiff"  seeks  to  recover  in  this 
B.&  B.Bus.Law— 9 


130  CONTRACTS  (Part  1 

action  were  rendered  by  him  as  matters  of  mutual  accommodation 
and  interchange  of  courtesies,  and  without  charge  or  expectation  of 
payment  or  reward  by  one  as  against  the  other."  The  court  instructed 
the  jury:  "If,  however,  such  services  were  rendered  by  the  plaintiff 
without  expectation  of  reward,  or  intention  on  his  part  to  charge  there- 
for, or  by  any  agreement  or  understanding  that  the  services  were  to  be 
gratuitous,  the  plaintiff  cannot  recover  unless,  after  such  services  were 
rendered,  and  in  consideration  thereof,  defendant  agreed  with  or  prom- 
ised plaintiff  to  pay  for  the  same.  In  the  latter  case,  the  valuable  char- 
acter of  the  service,  and  the  moral  obligation  to  pay  for  the  same, 
would  be  a  sufficient  consideration  to  support  the  promise,  and  enable 
the  plaintiff  to  recover  the  reasonable  value  of  such  service." 

We  understand  this  instruction  to  mean  that  where  one  person  ren- 
ders services  for  another  gratuitously,  and  with  no  expectation  of  being 
paid  therefor,  that  a  moral  obligation  is  incurred  by  the  latter  which 
will  support  a  subsequent  promise  to  pay.  In  our  opinion,  this  is  not 
the  law.  If  the  services  are  gratuitous,  no  obligation,  either  moral  or 
legal  is  incurred  by  the  recipient.  No  one  is  bound  to  pay  for  that 
which  is  a  gratuity.  No  moral  obligation  is  assumed  by  a  person  who 
receives  a  gift.  Suppose  the  plaintiff'  had  given  the  defendant  a  horse, 
was  he  morally  botmd  to  pay  what  the  horse  was  reasonably  worth? 
We  think  not.  In  such  case  there  never  was  any  liabihty  to  pay,  and 
therefore  a  subsequent  promise  would  be  without  any  consideration  to 
support  it.  That  there  are  cases  which  hold  that  where  d.  liability  to 
pay  at  one  time  existed,  which,  because  of  the  lapse  of  time,  or  for 
other  reasons,  cannot  be  enforced,  the  moral  obligation  is  sufficient  to 
support  a  subsequent  promise,  will  be  conceded. 

These  cases  are  distinguishable,  because  the  instructions  contemplate 
a  case  where  an  obligation  to  pay  never  existed  until  the  promise  was 
made.  We  do  not  believe  a  case  can  be  found  where  a  moral  obliga- 
tion alone  has  been  held  to  be  a  sufficient  consideration  for  a  subse- 
quent promise.  To  our  minds,  however,  it  is  difficult  to  find  a  moral 
obligation  to  pay  anything,  in  the  case  contemplated  in  the  instructions, 
prior  to  the  promise.     *     *     * 

Reversed. 

SILVERTHORN  v.   WYLIE.  * 

(Supreme  Court  of  Wisconsin,  1897.    96  Wis.  69,  71  N.  W.  107.) 

Action  by  George  Silverthorn  against  Winfred  Wylie,  administrator, 
etc.    Judgment  for  plaintiff,  and  defendant  appeals. 

Cassoday,  C.  J.  It  appears  from  the  record  and  the  findings  of  the 
trial  court,  in  effect,  that  during  1888,  and  a  long  time  prior  thereto, 
one  Alexander  R.  McDonald,  of  Wausau,  was  a  practical  woodsman, 
and  proficient  in  estimating  the  quantity  and  quality  of  standing  tim- 
ber ;  that  immediately  prior  to  September  10,  1888,  he  rendered  valu- 
able services  for  Daniel  B.  Wylie,  then  living  at  said  city,  in  selecting 
certain  vacant  lands  and  government  lands  desirable  for  private  cash 
entry ;  that  said  services  consisted  in  obtaining  a  correct  plat  of  all 
vacant  state  and  government  lands  in  a  town  named,  and  going  out 
over  said  vacant  lands,  and  running  out  the  boundary  lines  of  the  vari- 
ous subdivisions  thereof,  and  estimating  the  quantity  and  quality  of 
standing  timber  thereon,  and  making  minutes  of  the  same,  and  thereby 
selecting  four  40-acre  tracts,  deemed  the  most  valuable  and  desirable 


Ch.  2)  COXSIDIORATION  131 

for  casli  entry,  one  being  a  state  40,  and  the  other  three  being  govern- 
ment 40's ;  that  said  services  occupied  one  week,  at  an  expense  of  $12 
for  an  assistant,  besides  the  ordinary  expenses  of  the  trip  from  Wau- 
sau;  that,  upon  McDonald's  report  and  selection  so  made,  the  said 
Daniel  B.  Wylie,  September  10,  1888,  entered  or  purchased  the  said 
three  government  40's  from  the  United  States  and  the  40  from  the 
state,  paying  therefor  $200.50,  and  taking  the  title  in  his  own  name; 
that  said  services  were  so  rendered  with  the  understanding,  which  was 
afterwards  reduced  to  writing,  and  embodied  in  the  written  contract 
signed  and  delivered  by  the  said  Daniel  B.  Wylie  to  said  McDonald, 
November  26,  1888,  in  consideration  of  said  services,  and  as  compen- 
sation therefor,  which  contract  was  to  the  efifect  that  Daniel  B.  Wylie 
had  purchased  or  entered  the  lands  which  were  therein  described,  and 
which  had  been  selected  by  Alexander  R.  McDonald,  and  that  when 
said  lands  should  be  sold  he  thereby  agreed  to  pay  McDonald,  after  de- 
ducting the  amount  of  the  purchase  money,  with  5  per  cent,  per  annum 
interest  thereon,  also  any  and  all  taxes  that  might  be  levied  on  said 
land,  with  interest  at  the  rate  of  10  per  cent,  per  annum,  he  would  di- 
vide the  balance  of  said  proceeds  equally  between  himself  and  the 
said  McDonald ;  that  said  contract  was  duly  assigned  by  McDonald  to 
the  plaintiff,  October  12,  1891. 

The  assignments  of  McDonald  to  the  plaintiff  are  both  in  writing, 
and  purport  to  be  upon  a  good  and  adequate  consideration.  But, 
even  if  the  assignments  were  without  such  consideration,  yet  it  would 
be  no  reason  for  withholding  payment  of  the  share  of  the  proceeds 
which,  by  the  terms  of  the  contract,  were  to  go  to  McDonald.  The 
contention  that  the  contract  to  pay  McDonald  such  share  of  the  pro- 
ceeds Avas  without  consideration  is  without  foundation.  "A  promise 
to  pay  for  past  services  implies  that  they  were  rendered  upon  pre- 
vious request,  and  such  services  are  a  good  consideration  for  the 
promise."  Jilson  v.  Gilbert,  26  Wis.  637,  7  Am.  Rep.  100.  *  '  *  * 
The  facts  found  bring  the  case  within  the  principle  of  law  stated. 
Certainly  we  are  not  to  presume  that  McDonald  expended  his  time 
and  money  and  made  the  selections  mentioned,  and  then  voluntarily 
bestowed  the  entire  beneficial  results  upon  Daniel  B.  Wylie  gratui- 
tously, and  without  any  consideration  whatever.  Daniel  B.  Wylie  was 
clearly  liable  for  the  services  which  McDonald  had  rendered  for  him, 
and  of  which  he  received  the  benefit.  We  find  no  error  in  the  record. 
The  judgment  of  the  circuit  court  is  affirmed. 


MOOEE  V.  ELMER. 

(Supreme  Jurlicial  Court  of  IMassachusetts,  1901.    ISO  Mass.  15,  61  N.  E.  259.) 

Bill  by  Josephine  L.  Moore  against  Nelson  L.  Elmer  and  others,  as 
administrators,  etc. 

The  following  is  a  copy  of  the  contract  sued  on :  "Springfield, 
Mass.,  Jan.  11th,  1898.  In  Consideration  of  Business  and  Test  Sit- 
tings Reseived  from  Mme  Sesemore,  the  Clairvoyant,  otherwise  known 
as  Mrs.  Josephene  I^.  Moore  on  Numerous  occasions  I  the  undersighned 
do  hearby  agree  to  give  the  above  named  Josephene  or  her  heirs,  if 
she  is  not  alive,  the  Balance  of  her  Mortgage  note  whitch  is  the  Her- 
man E.  Bogardus  Mortgage  note  of  Jan.  5,  1893,  and  the  Interest  on 
sane  on  or  after  the  last  day  of  Jan.  1900,  if  my  Death  occurs  before 


132  CONTRACTS  (Part  1 

then  whitch  she  has  this  day  Predicted  and  Claims  to  be  the  truth,  and 
whitch  I  the  undersighned  Strongly  doubt.  Wherein  if  she  is  right 
I  am  willing  to  make  a  Recompense  to  her  as  above  stated,  but  not 
payable  unless  death  Occurs  before  1900.     Willard  Elmer." 

Holmes,  C.  J.  It  is  hard  to  take  any  view  of  the  supposed  contract 
in  which,  if  it  were  made  upon  consideration  it  would  not  be  a  wager. 
But  there  was  no  consideration.  The  bill  alleges  no  debt  of  Elmer 
to  the  plaintiff  prior  to  the  making  of  the  writing.  It  alleges  only  that 
the  plaintiff  gave  him  sittings  at  his  request.  This  may  or  may  not 
have  been  upon  an  understanding  or  implication  that  he  was  to  pay 
for  them.  If  there  was  such  an  under^anding  it  should  have  been 
alleged  or  the  liability  of  Elmer  in  some  way  shown.  If,  as  we  must 
assume  and  as  the  writing  seems  to  imply,  there  was  no  such  under- 
standing, the  consideration  was  executed  and  would  not  support  a 
promise  made  at  a  later  time.  The  modern  authorities  which  speak 
of  services  rendered  upon  request  as  supporting  a  promise  must  be 
confined  to  cases  where  the  request  implies  an  undertaking  to  pay,  and 
do  not  mean  that  what  was  done  as  a  mere  favor  can  be  turned  into 
a  consideration   at   a   later  time  by  the   fact  that  it  was   asked   for. 

>!-        *        * 

It  may  be  added  that  even  if  Elmer  was  under  a  previous  liability 
to  the  plaintiff'  it  is  not  alleged  that  the  agreement  sued  upon  was  re- 
ceived in  satisfaction  of  it,  either  absolutely  or  conditionally,  and  this 
again  cannot  be  implied  in  favor  of  the  plaintiff's  bill,     *     *     * 

Bill  dismissed. 


HERRINGTON  v.  DAVITT. 

(Court  of  Appeals  of  New  York,  1917.     220  X.  Y.  162,  11.5  X.  E.  476, 
1   A.   L.   R.   1700.) 

Action  by  Etta  F.  Herrington  against  Ida  K.  Davitt  and  others. 
From  a  judgment  for  plaintiff  at  the  Trial  Term,  affirmed  bv  the  Ap- 
pellate Division  (165  App.  Div.  942,  149  N.  Y.  Supp.  1087),  defend- 
ants appeal. 

CoLLix,  J.  The  action  is  upon  a  promissory  note  made  by  the  de- 
fendants' testator.  After  the  note  was  delivered  the  maker  was  ad- 
judicated a  bankrupt,  under  the  federal  act  of  1898,  and  thereunder 
received  his  discharge.  A  composition  was  effected,  under  the  provi- 
sions of  the  act,  between  the  bankrupt  and  his  creditors.  The  plaintiff 
duly  accepted  the  offer  of  the  composition  and  the  20  per  centum  of 
the  face  value  of  the  note  payable  under  it.  The  defendants'  testa- 
tor thereafter  wrote  to  the  plaintiff  a  letter  as  follows : 

"Troy,  N.  Y.,  Dec.  6,  1904. 

"My  Dear  Sister:  Your  letter  received.  Was  somewhat  surprised 
at  its  contents.  In  regard  to  your  claim  against  me  you  will  be  paid 
every  dollar  of  it  with  inst  as  soon  as  I  sell  the  mill.  If  anything  hap- 
pens to  me  the  farm  is  in  my  name  and  you  will  be  paid.  I  have  left 
orders  to  that  effect.  Tell  Lester  to  see  what  balance  there  is  due  me 
on  the  books  for  wood  and  to  pay  it  to  you  for  inst  money. 

"Yours  truly,  A.  W.  Davitt." 

The  claim  mentioned  in  the  letter  was  the  note.  The  mill  referred 
to  in  the  letter  was  sold  and  conveyed  by  the  testator  in  January,  1907. 
This  action  upon  the  note  was  commenced  June  8,  19i2.  Upon  the 
trial  judgment  in  favor  of  the  plaintiff  for  the  unpaid  balance  pay- 


Ch.  2)  CONSIDKnATION  13?> 

able  by  the  terms  of  the  note  was  ordered.  The  Appellate  Division 
unanimously  affirmed  the  consequent  judgment. 

The  appellants  assert  and  argue  that  the  letter  of  December  6,  1904, 
does  not  contain  or  constitute  a  promise  or  agreement  to  pay  the  sum 
unpaid.    At  its  writing,  a  statute  pro\ided : 

"Every  agreement,  promise,  or  imdertaking  is  void,  unless  it  or  some 
note  or  memorandum  thereof  be  in  writing,  and  subscribed  by  the  party 
to  be  charged  therewith,  or  by  his  lawful  agent,  if  such  agreement, 
promise  or  undertaking ;  "^  *  *  5.  Is  a  subsequent  or  new  promise 
to  pay  a  debt  discharged  in  bankruptcy.  *  *  *  "  Personal  Proper- 
ty Law  (Laws  1897,  c.  417)  §  21. 

The  statute  has  remained  in  force.  *  *  *  The  debtor  does  not 
promise  to  pay  the  debt  discharged  in  bankruptcy,  unless  there  is  a 
distinct  and  unequivocal  expression  by  him,  by  a  writing  of  the  pre- 
scribed form,  of  a  clear  intention  to  bind  himself  to  its  payment.  The 
acknowledgment  of  the  existence  of  the  debt  by  the  payment  of  a  part 
of  it  or  of  interest  upon  it  or  by  express  written  words  is  not  sufficient. 
For  the  purpose  of  creating  anew  the  liability,  the  law  does  not  imply  a 
promise.  The  promise  need  not  be  made  to  the  creditor,  but  it  must 
with  certainty  refer  to  the  debt.  No  particular  form  of  words  need  be 
used.  The  promise  is  censtituted  by  words  which,  in  their  natural  im- 
port, express  the  present  intention  to  obligate  or  undertake  to  pay.  The 
payment  may,  however,  depend  upon  a  contingency  or  condition.  If 
so  dependent,  it  must  be  proved  that  the  contingency  has  happened  or 
the  condition  has  been  performed.     *     *     * 

The  letter  of  the  defendant's  testator  constituted  a  distinct  and  un- 
qualified promise  to  pa}"  the  debt.  In  effect  and  in  truth  it  said  to  the 
plaintiff,  I  will  pay  you  every  dollar  remaining  unpaid  upon  the  note, 
with  interest,  and  will  so  pay  you  as  soon  as  I  sell  the  mill.  He  stated 
positively  that  he  then  undertook  and  obligated  himself  to  pay.  The 
construction  of  the  words  used  by  the  debtors  and  the  conclusions 
stated  in  the  judicial  decisions  above  cited,  adequately  support  such 
decision. 

The  rule  of  law  is  well-nigh  universal  that  such  a  promise  made  has 
an  obligating  and  validating  consideration  in  the  moral  obligation  of 
the  debtor  to  pay.  The  debt  is  not  paid  by  the  discharge  in  bank- 
ruptcy. It  is  due  in  conscience,  although  discharged  in  law,  and  this 
moral  obligation,  uniting  with  the  subsequent  promise  to  pay,  creates 
a  right  of  action.  *  *  *  The  appellant  asserts  that  the  rule  does 
not  obtain  or  have  applicability  where,  as  in  the  present  case,  there  was 
a  composition  between  the  bankrupt  and  his  creditors,  assented  to 
and  accepted  by  the  creditors  seeking  to  enforce  the  unpaid  debt.  The 
clear  weight  of  judicial  opinion  and  correct  reasoning  declare  such  as- 
sertion erroneous.  In  Cohen  v.  Lachenmaier,  147  Wis.  649,  133  N.  W. 
1099,  the  facts,  in  the  particular  under  consideration,  wxre  as  are  the 
facts  here.  The  trial  court  awarded  judgment  for  the  balance  unpaid 
on  the  note.  The  Supreme  Court  of  Wisconsin  in  affirming  the  judg- 
ment said : 

"It  is  further  contended  that  each  promise,  if  made,  is  nudum  pac- 
tum, because  the  plaintiff",  as  one  of  the  creditors,  joined  with  the  ma- 
jority of  the  creditors  in  number  and  amount  in  accepting  the  defend- 
ant's offer  of  a  composition  with  the  creditors  in  settlement  of  their 
claims.  This  claim  is  based  upon  the  ground  that  a  discharge  in  bank- 
ruptcy in  a  composition  is  not  a  discharge  by  operation  of  law  but  is 


134  CONTRACTS  (Part  1 

one  effected  by  the  voluntary  assent  of  the  creditors.  The  adjudica- 
tions are  to  the  effect  that  a  debt  which  has  been  extinguished  by  a 
voluntary  agreement  of  the  debtor  and  creditor  will  not  support  a  new 
promise  and  that  one  discharged  by  operation  of  law  will  support  one. 
The  proceeding  resulting  in  the  discharge  of  a  debtor  from  liability, 
based  on  a  composition  after  bankruptcy  proceedings  are  instituted,  is 
not  in  its  nature  such  a  voluntary  act  of  the  creditor  as  is  considered 
in  law  as  being  a  voluntary  assent  of  the  creditor  to  the  satisfaction  of 
the  debt. 

In  Matter  of  Merrimam's  Estate,  44  Conn.  587,  Fed.  Cas.  No.  9,479, 
the  court  stated  the  principal  question  as  being  "whether  an  express 
l)romise  made  by  a  bankrupt  to  a  creditor  to  pay  the  amount  of  his 
debt  is  valid,  such  creditor  having  theretofore  expressly  assented  to 
a  composition  made  and  confirmed  under  the  seventeenth  section  of  the 
amended  Bankruptcy  Act  of  June  22,  1874,"  and  carried  into  effect  and 
held  that  the  promise  was  valid.  It  enunciated  that  an  express  prom- 
ise to  pay  a  debt,  which  had  been  theretofore  discharged  by  operation 
of  law,  was  valid.  The  adequate  consideration  was  the  moral  obliga- 
ton  to  keep  the  original  promise;  this  rule  does  not  apply  to  a  com- 
position inter  partes  which  derives  its  validity  merely  from  the  will  of 
the  parties;  and  if  a  debt  is  legally  discharged  .by  the  voluntary  act  of 
the  party,  there  remains  no  obligation  which  can  be  deemed  a  consider- 
ation for  a  promise;  a  discharge  by  performance  of  the  terms  of  a 
bankruptcy  composition  is  a  discliarge  by  operation  of  law ;  the  com- 
jxjsition  is  as  to  the  assenting  creditor  both  a  voluntary  act  and  an 
act  of  the  law,  but  its  efficiency  is  derived  from  the  compulsory  power 
of  the  law.     *     *     * 

The  case  of  Taylor  v.  Skiles,  113  Tenn.  288,  81  S.  W.  1258,  conflicts 
with  the  decisions  cited  and  others  of  like  import.  Therein  it  is  stated : 
"It  is  very  generally  held  that,  in  the  case  of  a  discharge  of  a  debt 
under  insolvent  or  bankrupt  laws,  a  subsequent  promise  to  pay  by  the 
insolvent  or  bankrupt  will  revive  the  original  debt  and  make  it  en- 
forceable at  law.  But  it  is  otherwise  where  the  creditor  comes  to 
terms  with  his  debtor  under  a  valid  composition,  and  agrees  to,  and 
does,  accept  a  part  of  his  debt  for  the  whole.  When  this  is  done,  the 
debt  is  extinguished.  The  parties  having  met  on  common  ground,  and 
agreed  on  terms  of  settlement  which  have  been  carried  out,  there  is 
no  longer  even  a  moral  obligation  resting  upon  the  debtor  as  to  the 
balance  of  the  original  liability.  So  that  a  new  promise  after  compo- 
sition is  without  consideration,  and  will  not  aft'ord  a  cause  of  action. 

•i;  *  ;;:    >' 

It  is  to  be  noted  that  the  decisions  thus  cited  sustain  the  proposition 
that  a  promise  to  pay  a  debt  voluntarily  discharged  is  not  binding  for 
want  of  a  legal  consideration,  but  do  not  hold  that  a  discharge  in  bank- 
ruptcy through  a  composition  is  a  voluntary  release  or  extinguishment 
of  the  debt.     *     *     *     The  judgment  should  be  affirmed. 


KEENER  V.  CRULL. 

(Supreme  Court  of  Illinois,  IS.jT.     10  111.  ISO.) 
This  is  an  agreed  case,  taken  by  appeal  from  Scott,  from  a  judg- 
ment  rendered   in  the  circuit  court  of  said  county,   at  the  October 
term,  A.  D.  1857,  which  judgment  was  rendered  upon  the  following 
state  of  facts : 


Ch.  2)  CONSIDERATION  135 

Sarah  Crull,  wife  of  George  Crull,  while  a  feme  sole,  in  the  lifetime 
of  said  John  Peniger,  deceased,  rendered  services  for  said  Penigcr, 
which  claim  for  services  became  barred  by  lapse  of  time,  and  it  was 
insisted  by  the  appellees  in  the  court  below,  that  the  case  was  taken 
out  of  the  statute  of  limitations  by  a  subsequent  promise,  and  they 
relied  upon  the  testimony  of  George  Longwith,  which  testimony  is  as 
follows :  That  in  the  month  of  November,  1850,  he  (the  witness)  had 
a  conversation  with  the  said  Peniger ;  had  been  old  neighbors,  and 
they  had  a  long  conversation  together,  at  Peniger's ;  Peniger  then 
told  witness  that  he  had  agreed  to  give  his  daughter,  the  said  Sarah, 
two  hundred  dollars  a  year  for  her  work,  and  he  had  not  paid  her  yet, 
and  that  she  had  gone  to  Ohio.  Appellant  insists  that  said  testimony 
of  George  Longwith  is  not  sufficient  to  take  the  case  out  of  the  statute 
of  limitations. 

It  is  stipulated,  in  this  case,  that  said  Sarah  Crull  commenced  serv- 
ices in  A.  D.  1833,  she  being  then  of  age,  and  continued  in  service 
until  December,  A.  D.  1838. 

Skinner,  J.  This  was  an  agreed  case.  The  plaintiffs  sue,  as  hus- 
band and  wife,  for  a  debt  due  the  wife  when  sole.  The  case  shows 
that  the  wife,  while  sole  and  of  full  age,  remained  with  her  father, 
and  worked  in  the  family  from  1833  to  1838;  that,  in  1850,  the  father, 
who  is  the  defendant's  testator,  in  a  conversation  with  one  Longwith, 
said  "that  he  had  agreed  to  give  his  daughter  (the  now  feme  covert 
plaintiff  with  her  husband),  two  hundred  dollars  per  year  for  her 
work,  and  he  had  not  paid  her  yet,  and  she  had  gone  to  Ohio."  The 
debt,  if  one  existed,  was  barred  by  the  statute,  and  the  question  is, 
whether,  by  reason  of  the  admissions  of  her  father  in  1850,  the  plain- 
tiffs are  entitled  to  recover  against  his  executor? 

The  great  diversity  of  construction  of  Hke  statutes,  both  in  the 
courts  of  this  country  and  of  England,  demands  in  this  case  the  appli- 
cation of  such  rule  as  is  consistent  with  our  ow'n  decisions,  and  the 
current  of  modern  adjudications. 

The  statute  bars  the  action,  and  all  remedy  for  recovery  of  the  debt ; 
and,  when  the  bar  is  complete,  the  statute  being  interposed  in  defense, 
no  action  for  the  recovery  of  the  debt  can  be  maintained. 

The  debt,  however,  is  not  annihilated,  and  remains  the  same  as  be- 
fore, excepting  that  all  remedy  for  enforcement  of  the  obligation  is 
gone.  The  debt  constituting  an  unquestioned  moral  obligation,  is, 
however,  a  good  consideration  to  support  a  promise  to  perform  that 
obligation;  and  a  new  promise,  based  upon  this, moral  obligation,  is 
binding  upon  the  debtor  in  avoidance  of  the  bar  of  the  statute. 

The  new  promise  may  arise  out  of  such  facts  as  identify  the  debt, 
the  subject  of  the  promise,  with  such  certainty  as  will  clearly  deter- 
mine its  character,  fix  the  amount  due,  and  show  a  present  unqualified 
willingness  and  intention  to  pay  it,  at  the  time  acted  vipon  and  acceded 
to  by  the  creditor,  the  promisee.     *     *     * 

Like  any  other  promise,  having  legal  force  and  sanction,  it  must 
be  made  to  the  party  seeking  its  benefits,  or  to  some  one  authorized  to 
act  for  him.  A  promise  to  a  stranger  is  insufficient  to  establish  a 
promise  to  the  plaintiff  or  the  party  whom  he  represents,     *     *     * 

Were  this  a  new  question,  we  should  hold  that  the  action  could 
alone  be  brought  upon  the  new  promise.  But  the  current  of  author- 
ity and  long  usage  sanction  the  practice  of  declaring  upon  the  original 
cause  of  action,  and  of  replying  the  new  promise  in  avoidance  of  the 


136  CONTRACTS  (Part  1 

statute  of  limitation;  and  we  do  not  feel  at  liberty  to  disturb  a  rule 
so  well  settled. 

Tested  by  the  rules  stated,  the  plaintiffs  cannot  recover.  The  lan- 
guage of  the  defendant's  testator  was  used  to  a  stranger  having  no 
concern  in  the  matter,  or  right  to  act  for  the  party  in  interest,  the 
amount  of  the  debt  was  not  named  or  in  any  manner  indicated,  nor 
was  there  any  language  unequivocally  importing  a  present  intention 
or  undertaking  to  pay. 

Judgment  [for  plaintiff']  reversed. 


BANK  OF  CARROLLTON,  MISS.,  v.  LATTING. 

(Supreme  Court  of  Okhvhonia.  1013.     37  Old.  8,  130  Pac.  144, 
44   L.   R.  A.   [N.   S.]  481.) 

Action  by   Bank  of   Carrollton.  Miss.,   against  R.   G.   Latting,   Jr. 
Judgment  for  defendant,  and  plaintiff  brings  error. 

Sharp,  C.  On  May  17,  1906,  the  Carrollton  Cotton  Oil  Company,  a 
corporation,  engaged  in  the  manufacture  of  cotton  seed  products  at 
Carrollton,  Miss.,  was  overdrawn  in  its  account  with  the  plaintiff,  the 
Bank  of  Carrollton.  On  said  day  said  milling  company  executed  to 
said  bank  its  demand  note  for  $948.86;  that  being  the  amount  of  its 
overdraft.  This  note  was  signed,  "The  Carrollton  Cotton  Oil  Co.,  R. 
G.  Latting,  Jr.,  Sec.  &  Mgr.,"  by  Mr.  Latting,  and  on  the  day  of  its 
execution  was  delivered  to  the  bank.  Latting  was  at  the  time  a  stock- 
holder in  the  mill  company,  and  was  also  its  secretary  and  manager. 
vSome  10  days  after  the  note  was  executed  and  delivered  to  the  bank's 
cashier,  at  the  cashier's  request,  Mr.  Latting  signed  the  note  individu- 
ally. At  the  same  time  it  appears  that  Latting  told  the  cashier  of  cer- 
tain collaterals  owned  by  the  mill  company  that  he  would  put  up  as 
collateral  security  for  the  company's  note.  This,  however,  was  not 
requested  by  the  bank,  but  was  volunteered  by  Latting  acting  for  the 
mill  company.  These  collaterals  consisted  of  some  accounts,  and  two 
bills  of  lading  for  two  car  loads  of  cotton  seed,  issued  to  the  mill  com- 
pany by  the  Southern  Railway  Company.  The  giving  of  the  note  took  up 
the  mill  company's  overdraft.  This,  it  appears,  was  all  the  bank  at 
the  time  required  in  the  way  of  a  settlement  of  the  mill  company's  in- 
debtedness. As  testified  to  by  Mr.  Latting:  "The  cashier  of  the  bank 
called  my  attention  to  the  fact  that  the  mill  had  overdrawn  some  $900 
or  more,  and  asked  me  to  close  it  up  with  a  note,  wdiich  I  did." 

The  transaction  between  the  principal,  the  mill  company,  and  the 
creditor,  the  bank,  upon  the  execution  and  delivery  of  the  note,  there- 
upon became  an  executed  one,  and  apparently  the  bank  was  satisfied 
with  the  manner  in  which  the  transaction  was  closed.  It  had  extended 
credit  to  the  mill  company  by  permitting  it  to  overdraw  its  account, 
and  accepted  its  demand  note  in  settlement  of  the  overdraft.  It  does 
not  appear  that,  at  the  time  of  the  execution  and  delivery  of  the  note, 
any  request  for  security  in  any  form  was  made.  The  subsequent  un- 
dertaking of  the  defendant,  Latting,  was  therefore  a  collateral  one. 
The  indebtedness  was  that  of  the  mill  company.  There  must,  of  legal 
necessity,  be  a  sufficient  consideration  in  order  to  render  valid  the  con- 
tract of  suretyship  or  guaranty.  This  consideration  is  usually  either 
of  benefit  to  the  principal  or  surety,  or  of  detriment  to  the  creditor. 
But  where  the  consideration  between  the  principal  and  the  creditor  has 


Ch.  2)  CONSIDERATION  137 

]jassed  and  become  executed  before  the  contract  of  the  surety  or  guar- 
anty is  made,  and  such  contract  was  no  part  of  the  inducement  to  the 
creation  of  the  original  debt,  such  consideration  is  not  sufficient  to 
sustain  such  contract.  The  rule  is  a  very  general  one,  and  authorities 
in  support  thereof  are  manifold.     *     *     * 

It  is  insisted,  however,  1)y  counsel  that  the  transaction  of  May  17th, 
together  with  that  which  subsequently  took  place  when  the  note  was 
signed  by  Latting,  constituted  a  single  transaction,  and  was  therefore 
not  complete  until  the  date  of  the  latter  occurrence.  This  contention 
finds  no  support  in  the  evidence.  That  the  mill  company  complied 
fully  with  the  bank's  demand  on  the  day  that  the  note  was  given  is 
unchallenged.  There  was  no  request  or  agreement  on  that  date  that 
Latting  should  personally  indorse  the  note,  or  that  the  mill  company 
should  deposit  collateral.  It  is  therefore  unnecessary  for  us  to  give 
further  consideration  to  this  contention.     *     *     * 

It  not  appearing  that  there  was  any  consideration  for  the  defendant's 
contract  of  suretyship  or  guaranty,  the  judgment  of  the  trial  court 
should  be  affirmed.     *     *     * 

Per  Curiam.    Adopted  in  whole. 


SECTION  7.— SEALED  INSTRUMENTS 

As  we  have  seen,  promises  are  enforced  if  they  are  supported  by 
consideration.  It  is  possible  for  the  law  to  select  some  other  test 
for  the  enforceability  of  a  promise;  that  is,  the  requisite  of  consid- 
eration could  be  entirely  dispensed  with.  But,  unless  the  law 
adopts  the  policy  of  enforcing  all  promises,  which  it  has  never 
done,  something  must  take  its  place.  An  intention  to  make  a  gift 
coupled  with  delivery  will  transfer  rights  in  property  to  the  donee. 
Also  a  gratuitous  declaration  of  trust,  unaccompanied  by  delivery, 
imposes  obligations  upon  the  trustee  and  confers  rights  upon  the 
beneficiary.  The  law  imposes  duties  even  in  the  absence  of  a  prom- 
ise to  assvime  them,  as  in  the  case  where  one  would  be  unjustly 
enriched  if  he  were  allowed  to  keep  what  he  received,  without  pay- 
ing for  it.  Moreover,  we  are  under  legal  duties,  not  depending  upon 
a  voluntary  assumption  of  them,  not  to  commit  a  trespass  or  wrong 
to  another's  person,  to  his  property,  to  his  reputation,  or  to  his 
freedom  to  engage  in  all  lawful  social  or  business  activities.  Legal 
obligations  arise  in  various  ways.  Moreover,  legal  obligations  may' 
arise  out  of  promises  for  more  than  one  reason.  The  law  could  say 
that  all  promises  in  writing  shall  be  enforceable,  merely  because 
they  are  in  writing,  but  it  does  not  say  so.  The  law  could  say 
that  all  promises,  either  oral  or  in  waiting,  made  in  the  presence  of 
two  witnesses,  shall  be  enforceable.  A  rule  very  similar  to  this 
exists  in  the  law  of  wills.  A  promise  to  make  a  gift,  when  made 
in  conformity  with  the  statute  relating  to  wills,  creates  rights  in  the 
devisee  or  legatee  upon  the  death  of  the  testator.  The  usual  re- 
quirement is  that  the  will  must  be  in  writing  and  signed  by  the 
testator  and  by  two  or  more  witnesses  who  signed  in  his  pres- 


138  coxTRAOTS  (Part  1 

ence.    Wills  of  personal  property  are,  in  some  states,  valid  although 
oral,  if  made  in  the  presence  of  the  requisite  number  of  witnesses. 

The  law  could  provide  that  promises  made  in  open  court,  or  be- 
fore some  public  officer,  or  filed  in  some  public  office  should  there- 
by be  enforceable,  and  there  are  situations  where  this  is  so.  Sup- 
pose that  one  makes  a  promise  to  a  judge  in  the  course  of  a  trial, 
and  deliberately  breaks  it;  the  breach,  under  some  circumstances, 
may  constitute  contempt  of  court,  punishable  by  fine  or  impris- 
onment,'  although  the  promise  was  made  w^ithout  consideration. 
The  sworn  statements  of  witnesses  on  the  witness  stand,  are  not 
promises,  in  the  generally  recognized  sense ;  j-et  if  they  are  not  true, 
the  person  making  them  is  guilty  of  the  crime  of  perjury.  vState- 
ments  sworn  to  before  notaries  public  and  other  officers  are  of  like 
nature.  In  the  case  of  deeds  and  mortgages,  there  must  be  an  act 
of  delivery  before  the  rights  and  duties  therein  created  become  op- 
erative. Moreover,  the  law  prescribes,  generally,  that,  unless  these 
instruments  are  recorded  in  the  office  of  some  public  official,  third 
parties  have  the  right  to  deal  with  the  parties  to  the  deed  or  mort- 
gage just  as  if  the  deed  or  mortgage  had  never  existed,  provided 
such  third  parties  have  no  actual  knowledge  of  the  existence  of 
such  instrument. 

The  above  statement  was  made  largely  for  the  purpose  of  intro- 
ducing a  comment  concerning  sealed  instruments.  The  point  is, 
that  legal  rights  and  duties  may  come  into  existence,  either  (1) 
because  the  lawmaking  authority  has  provided  that  they  should 
exist,  or  (2)  because  the  parties  have  voluntarily  created  them. 
But,  realizing  that  people  will  appear  to  assume  duties  and  to  create 
rights  under  many  circumstances  where,  in  the  long  run,  it  would 
be  more  just  to  condone  the  non-performance  of  the  promise,  the 
lavvA,  of  necessity,  has  had  to  select  some  requisite,  in  addition  to  the 
promise,  to  render  it  enforceable.  Consideration  is  one  test.  Man- 
kind, at  all  times,  has  attached  more  importance  to  an  act  attended 
by  some  formality  than  to  informal  acts.  The  above  illustrations 
show  how  various  these  formalities  may  be,  and  those  stated,  by 
no  means,  exhaust  the  possibilities. 

At  a  very  early  day,  it  became  the  law  that,  if  a  person  made  a 
promise  in  writing,  and  in  addition  affixed  his  seal,  the  promise  was 
enforceable,  no  consideration  being  necessary.  In  fact,  for  a 
long  time,  the  sealed  contract  was  the  only  kind  of  executory  con- 
tract. The  law  of  simple  contracts,  based  upon  consideration  had 
not  yet  developed.  The  seal  originally  was  an  impression  made  in 
wax,  adhering  to  the  instrument.  Modern  statutes  have,  for  the 
most  part,  done  away  with  this  form  of  seal.  To-day,  in  most  states, 
a  seal  may  consist  of  the  word  "seal"  or  some  scroll  or  marks  which 
sufficiently  indicate  that  the  party  signing  intended  to  execute  a 
formal  contract.  The  statutes  of  most  states  have  changed  the 
legal  effect  of  sealed  instruments  from  what  it  was  at  the  common 
law.  In  some  states,  it  is  provided  that  the  presence  of  a  seal  on  a 
contract  shall  have  no  effect ;  that  is,  the  rules  of  law  applicable  to 


Ch.  2)  CONSIDKKATION  139 

simple  contracts  shall  apply  to  and  control  instruments  which  in 
fact  have  a  seal.  In  some  states,  it  is  provided  tliat  the  presence 
of  a  seal  raises  a  presumption  of  consideration.  At  common  law,  no 
consideration  was  necessary.  There  is  a  good  deal  of  variation  in 
the  phraseology  of  the  various  statutes.  Sometimes  the  statutes 
which  change  the  law  with  respect  to  sealed  instruments  do  so 
only  with  respect  to  certain  kinds  of  contracts,  leaving  the  rules  of 
the  common  law  to  apply  to  all  other  kinds. 

Seals  are  important,  not  only  in  the  law  of  contract,  but  also  in 
the  law  relating  to  conveyances  of  property.  It  is  commonly  pro- 
vided that  deeds  and  mortgages  must  be  sealed,  that  is,  unless  they 
are  sealed,  they  will  not  operate  as  deeds.  Likewise,  in  the  case  of 
wills,  statutes  sometimes  provide  that  the  instrument  must  be 
sealed,  as  well  as  signed,  by  the  testator. 


140 


CONTUACTS  (Part  1 


CHAPTER  III 
PERFORMANCE  OF  CONTRACTS 

Section 

1.  Introflnrtiou. 

2.  Interpi'etation. 

3.  Conditions   in   Contracts— General    Statement. 

4.  Performance  on  Time  as  a  Condition. 

5.  Performance  to  tlie  Satisfaction  of  Another  as  a  Condition. 
6*  Procuring  Certificate  of  an  Architect  as  a  Condition. 

T.  Substantial  Performance  in  Various  Other  Types  of  Contracts  as  Con- 
ditions. 

S.  Tender  of  Performance  as  a  Condition. 

9.  Divisible  Contracts. 

10.  Conditions  Subsequent. 

11.  Prevention  as  an  Excuse  for  Non-Performance. 

12.  Waiver  as  an  Excuse  for  Non-Performance. 

13.  Anticipatory  Breach  of  Contract. 

14.  Right  of  a  Party  :Materially  in  Default  to  Recover  for  His  Incomplete 

Performance. 

15.  Impossibility  of  Performance  as  a  Condition. 


SECTION  1.— INTRODUCTION 

In  this  chapter  we  are  concerned  with  two  general  questions: 
(1)  The  question  of  interpretation  of  contracts;  and  (2)  the  ques- 
tion of  the  legal  effect  of  acts  which  occur  after  the  contract  has 
been  entered  into. 

With  respect  to  the  first,  it  is  obvious  that  in  many  cases  the 
problem  of  interpretation  is  either  not  raised  or,  if  raised,  is  easily 
settled.  When  there  is  no  misunderstanding  as  to  the  meaning  of 
words  employed  in  the  contract,  there  is  virtually  no  occasion  for 
interpreting  the  words.  Where  the  terms  of  the  contract  are  to  be 
found  in  the  conduct  of  the  parties,  or  when  their  meaning  is  affect- 
ed by  custom  and  usage,  the  question,  "What  did  each  party  prom- 
ise to  do?"  becomes  more  difhcult  to  answer.  Even  where  the 
language  forming  the  agreement  is  definitely  fixed,  there  are  many 
cases  where  it  is  not  always  easy  to  decide  whether  a  particular  act 
falls  within  the  meaning  of  the  words  used.  The  discussion  and 
cases  in  Section  2  present  some  aspects  of  the  problem  of  inter- 
pretation. 

The  larger  portion  of  the  chapter  is  devoted  to  various  detailed 
problems  which  concern  the  legal  eff'ect  of  acts  done  or  omitted 
after  the  contract  was  entered  into.  These  problems  grow  out  of 
performance  and  of  failure  to  perform  contracts.  Did  the.  parties 
promise  to  do  certain  things,  absolutely  and  at  all  events,  or,  did 
they,  or  either  of  them,  promise  to  perform  certain  acts  condition- 
ally upon  the  happening  of  some  event,  or  conditionally  upon  the 
prior  performance  of  some  act  by  the  other  party?  What  is  a 
breach  of  contract?  What  is  the  legal  effect  of  a  breach  upon  the 
party's  own  rights  and  duties,  and  what  is  the  legal  effect  of  the 


Ch.  3)  PERFORMANCE   OF   CONTRACTS  141 

breach  upon  the  other  party's  rights  and  duties?  In  the  main, 
these  are  the  broad  outlines  of  the  problem.  A  brief,  but  some- 
what more  detailed  statement  concerning  the  problems  growing 
out  of  performance  is  made  in  Section  3  following. 


SECTION  2.— INTERPRETATION 

Before  taking  up  the  question  of  interpretation,  it  may  be  well 
to  advert  again  to  the  problem  which  immediately  precedes  that 
of  interpretation.  In  the  chapter  on  Offer  and  Acceptance,  we 
noted  that  there  are  many  situations  where  considerable  difficulty 
is  met  in  determining  what  promises  were  actually  made  by  the 
parties.  Whether  we  are  dealing  with  an  express  or  an  implied 
contract,  we  are  required  to  ascertain  what  words,  or  symbols  or 
conduct  are  to  be  deemed  parts  of  the  contract.  This  problem  is 
relatively  more  difficult  with  respect  to  contracts  which,  in  whole 
or  in  large  part,  arise  by  implication  from  conduct ;  but  in  all  cases, 
this  aspect  of  the  negotiations — i.  e.,  the  fixing  of  the  subject-mat- 
ter to  be  interpreted — must  be  settled  before  we  may  concern  our- 
selves with  the  question  of  interpretation. 

To  present  the  problem  involved  in  the  interpretation  of  lan- 
guages and  conduct,  it  may  be  profitable  to  resort  to  a  more  or  less 
extended  illustration.  If  the  idea  which  lies  behind  the  illustration 
is  grasped,  it  will  contribute  something  toward  an  appreciation  of 
the  nature  of  one  of  the  problems  of  the  law.  Suppose  A.  enters 
into  a  contract  to  sell  to  B.,  at  a  specified  price,  all  of  his  ripe  to- 
matoes then  growing  on  vines  in  A.'s  tomato  patch.  Let  us  assume, 
further,  that  the  contract  does  not  define  what  constitutes  a  ripe 
tomato,  and  does  not  provide  that  either  A.  or  B.  shall  have  the 
power,  exclusive  of  the  other,  to  select  the  tomatoes,  or  to  de- 
termine what  shall  constitute  a  ripe  tomato.  The  parties  have 
simply  contracted  to  buy  and  sell  ripe  tomatoes,  when,  at  the  time, 
they  had  no  thought  that  there  might  be  any  dift'erences  of  opinion 
on  this  question.  Of  course,  in  the  great  majority  of  cases,  people 
would  agree  as  to  whether  a  particular  tomato  was  ripe  or  not  ripe. 
A  very  small  boy,  sent  into  the  garden  to  bring  in  a  half  dozen 
ripe  tomatoes  for  dinner,  would  know  enough  to  execute  the  order 
without  running  any  great  risk  of  incurring  maternal  censure  for 
bringing  in  green  tomatoes.  But  we  are  dealing,  supposedly,  with 
a  contract  for  the  sale  of  several  hundred  bushels  of  tomatoes, 
where  it  may  become  of  great  importance  to  know  what  constitute 
ripe  tomatoes  for  the  purposes  of  this  contract.  If,  for  example, 
the  price  of  tomatoes  suddenly  rose  20  or  30  cents  on  the  market, 
the  probabilities  are  that  the  buyer's  judgment  now  as  to  what  con- 
stituted ripe  tomatoes  would  include  a  good  many  tomatoes  which 
he  would  call  green  if  the  market  price  of  tomatoes,  instead  of 
rising,  had  dropped  20  or  30  cents  below  the  contract  price.  Ob- 
viously there  should  be  some  way  of  determining  what  constitutes 


142  coxTRACTS  '  (Parti 

ripe  tomatoes  by  some  standard  of  interpretation  which  will  be  rea- 
sonably workable,  certain,  and  fair  to  both  parties.  We  are  more 
interested  here  in  discovering  the  various  possible  standards  of  in- 
terpreting the  expression  "ripe  tomatoes"  than  we  are  in  determin- 
ing which  standard  ought  to  be  adopted.  Enough  has  been  said  to 
show  that  there  may  be  disagreement  between  the  parties  on  this 
question.  From  a  business  standpoint  we  are  vitally  interested  in 
locating  the  source  of  controversy,  to  the  end  that  the  possibilities 
for  dispute  and  litigation  over  contracts  may  be  reduced  as  much 
as  possible. 

In  how  many  ways,  therefore,  may  we  interpret  the  words  "ripe 
tomatoes"?  (1)  The  words  "ripe  tomatoes"  might  mean  all  those 
tomatoes  which  in  the  buyer's  judgment  were  ripe.  (2)  These 
words  might  mean  all  those  tomatoes  which  in  the  seller's  judgment 
were  ripe.  (3)  The  words  might  include  only  those  tomatoes 
which  were  regarded  as  ripe  by  both  buyer  and  seller.  (4)  The 
expression  "ripe  tomatoes"  might  include  only  those  tomatoes 
whi^li  would  be  regarded  as  ripe  by  the  general  consensus  of  opin- 
ion, (b)  The  words  might  be  given  that  meaning  which  they  had 
acquired  in  that  particular  community,  or  which  had  been  given  to 
them  by  those  persons  who  were  engaged  in  the  raising  and  market- 
ing of  tomatoes.  (6)  The  words  might  be  given  that  meaning 
which  the  party  using  them  had  reason  to  believe  that  the  other 
party  would  attach  to  the  words.  No  doubt  there  are  other  stand- 
ards of  interpretation. 

It  is  reasonably  certain  that,  if  the  contract  contemplated  the 
sale  of  several  hundred  bushels  of  ripe  tomatoes,  there  would  be 
considerable  variation  in  the  quantity  of  tomatoes  delivered,  ac- 
cording as  one  or  the  other  of  the  above  standards  for  interpreting 
the  expression  "ripe  tomatoes"  was  employed.  Between  some  of 
them  there  might  be  great  variation ;  between  others,  the  variation 
would  be  less.  The  problem  with  which  the  law  has  to  deal  is, 
therefore,  to  select  the  standard  of  interpretation  to  which  contracts 
must  be  subjected.  The  adoption  of  a  particular  standard  of  inter- 
preting language,  does  not,  of  course,  solve  the  problem  ;  it  merely 
turns  the  investigation  in  a  particular  direction.  The  courts  have 
adopted  a  great  many  rules,  which  aid  in  arriving  at  an  actual  re- 
sult, but  we  shall  not  here  undertake  to  consider  them. 

The  problem  of  interpretation  also  has  another  setting,  and,  for 
the  sake  of  completeness,  we  may  turn  our  attention  to  this  phase 
of  the  subject  although  it  does  not  concern  the  interpretation  of 
contracts.  To  continue  the  illustration,  suppose  that  we  have  a 
state  statute  which  imposes  a  tax  upon  all  sales  of  fruit.  Assuming 
that  we  have  finally  determined  the  number  of  bushels  of  tomatoes 
to  which  the  buyer  is  entitled,  and  the  question  now  is  whether 
or  not  this  particular  sale  should  be  taxed  under  a  statute  impos- 
ing a  tax  on  sales  of  fruit.  The  character  of  the  question  is  sub- 
stantially the  same  as  that  presented  above  ;  that  is :  What  kinds 
of  physical  objects  may  properly  be  regarded  under  the  concept 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  143 

"''fruit"?  There  is  this  probable  difference:  It  may  be  proper  to 
interpret  a  particular  word,  when  employed  in  a  contract,  accord- 
ing to  some  standard  which  would  not  be  a  fitting-  standard  for  the 
interpretation  of  the  same  word  when  found  in  a  statute.  We 
use  the  same  words  ofttimes  to  express  different  ideas,  and  the 
particular  meaning  is  to  be  sought  in  the  circumstances  surround- 
ing the  use  of  the  word.  Certainly  the  circumstances  surrounding 
the  use  of  a  word  in  a  statute  are  different  from  those  surrounding 
the  use  of  the  same  word  in  a  contract,  although  this  fact  in  itself 
may  not  necessarily  point  to  a  different  meaning.  On  the  other 
hand,  it  is  a  circumstance  which  must  be  considered,  because  the 
fact  of  its  use  in  a  statute  may  indicate  a  meaning  in  some  respects 
different  from  some  other  accepted  meaning  of  the  word. 

Let  us  explore  some  of  the  possibilities  in  the  subject.  Where 
shall  we  search  for  the  meaning  of  the  word  "fruit"?  We  frequent- 
ly meet  the  expression  that  the  interpretation  of  a  statute  involves 
an  inquiry  as  to  what  the  Legislature  meant.  It  is  altogether  im- 
probable that  all  of  the  members  of  the  Legislature  who  voted  for 
this  particular  measure  had  precisely  the  same  meaning  attached 
to  the  word  "fruit."  Even  if  they  had,  it  would  be  impossible, 
years  after  the  measure  was  passed,  to  find  out  what  that  meaning 
was.  It  is  altogether  possible  that  many  of  the  members  did  not 
read  the  bill.  It  is  just  as  probable  that  many  of  them  voted  for 
the  bill  because  they  had  the  assurance  of  some  other  members, 
in  whom  they  had  confidence,  that  the  measure  ought  to  be  adopt- 
ed. If  we  were  in  search  of  actual  intention,  we  might  accord- 
ingly be  sent  out  on  a  search  for  the  individual  who  drafted  the 
bill.  This  individual  might  or  might  not  be  a  member  of  the  Legis- 
lature. Frequently  he  is  not.  If  it  be  said,  therefore,  that  ^a  stat- 
ute is  to  be  taken  as  meaning  that  which  the  draftsman  thought 
it  meant,  in  many  cases  we  should  find  that  some  persons  who  were 
not  members  of  the  law-making,  body  were  actually  making  laws 
for  the  community.  Obviously,  the  proper  method  of  interpreting 
statutes  must  be  sought  elsewhere. 

Might  it  be  that  we  should  be  justified  in  ascertaining  the  mean- 
ing of  the  word  "fruit"  from  the  standard  treatises  on  botany?" 
If  there  should  happen  to  be  a  conflict  of  opinion,  whose  opinion 
should  control?  Suppose  that,  at  the  time  the  statute  was  passed, 
all  the  botanists  were  agreed  as  to  the  meaning  of  the  word,  but 
that  now  there  was  considerable  disagreement,  or  it  might  be  that 
they  all  now  agreed,  but  that  the  present  meaning  was  different 
from  what  it  was  at  the  time  the  statute  was  enacted.  Which  mean- 
ing is  the  proper  one?  Perhaps  scientific  opinion  has  nothing  to  do 
with  the  legal  meaning  of  the  word,  but  that,  on  the  contrary,  the 
meaning  is  that  which  is  commonly  accepted  by  the  people.  If  so, 
,how  is  that  meaning  to  be  found  out? 

It  is  hoped  that  enough  has  been  said  to  show  that  it  is  impossible 
to  be  so  specific  and  so  definite  as  to  put  an  end  to  the  possibility  of 
controversy  over  the  meaning  of  words.     For  some  purposes,  at 


144  CONTRACTS  (Part  1 

least,  words  are  poor  vehicles  for  the  transference  of  thought  from 
one  mind  to  another.  The  problem  of  interpretation  is  one  of  the 
necessary  and  continuing  problems  in  all  legal  systems. 

The  following  cases  are  not  inserted  with  a  view  of  developing 
the  subject.  They  are  included  merely  for  the  purpose  of  further 
illustrating  the  existence  of  the  problem  and  of  showing  some  of 
the  difficulties  attendant  upon  its  solution.  It  may  be  said  that 
every  decision  of  a  court  involves,  in  one  way  or  another,  some 
aspect  of  this  problem. 


DAVISON  CHEMICAL  CO.  OF  BALTIMORE  COUNTY  v.  BAUGII 

CHEMICAL  CO.  OF  BALTIMORE  COUNTY. 

(Court  of  Appeals  of  Maryland.  1918.    133  Md.  203,  104  Atl.  404,  3  A.  L.  R.  1.) 

Suit  by  the  Baugh  Chemical  Company  of  Baltimore  County  against 
the  Davison  Chemical  Company  of  Baltimore  County.  From  a  decree 
for  plaintiff,  defendant  appeals. 

Thomas,  J.  The  appellee,  the  Baugh  Chemical  Company  of  Balti- 
more County,  plaintiff  below,  is  a  corporation  engaged  in  the  manufac- 
ture of  acid  phosphate,  and  its  plant  is  located  in  Baltimore  county, 
Md.,  and  the  appellant,  the  Davison  Chemical  Company  of  Baltimore 
County,  is  a  corporation  engaged  in  the  manufacture  of  sulphuric  acid, 
and  its  plant  is  also  located  in  Baltimore  county.  The  chief  materials 
used  in  the  manufacture  of  acid  phosphate,  the  product  of  plaintiff's 
plant,  are  sulphuric  acid  and  phosphate  rock,  and  for  a  number  of 
years  prior  to  the  year  1913,  the  plaintiff  had  purchased  the  sulphuric 
acid  recjuired  in  the  manufacture  of  its  acid  phosphate  from  the  de- 
fendant. Sulphuric  acid  is  made  from  sulphur,  and  originally,  or  in 
the  early  days,  the  raw  material  employed  in  the  manufacture  of  that 
acid  was  native  sulphur  or  brimstone.  After  the  discovery  of  the  sul- 
phur tearing  ore  called  pyrites,  containing  about  50  per  cent,  of  sul- 
phur, it  became  the  raw  material  generally  used  in  the  manufacture 
of  sulphuric  acid,  particularly  the  low  grade  of  acid  used  in  the  mak- 
ing of  acid  phosphate.  Just  when  this  change  from  brimstone  to 
pyrites  took  place  is  not  definitely  fixed  by  the  evidence  in  the  case, 
but  the  lower  court  in  its  opinion  stated  that  it  was  between  1880  and 
1890.  The  chief  supply  of  pyrites  was  imported  from  Spain,  the  sup- 
,|)ly  from  the  Canadian  mines  and  mines  in  this  country  being  very 
"small,  and  those  mines  were  generally  owned  or  controlled  and  their 
product  consumed  by  companies  engaged  in  the  manufacture  of  acid 
or  acid  phosphate. 

In  the  early  part  of  1913,  the  plaintiff  and  defendant  began  negotia- 
tions for  the  purchase  and  sale  of  sulphuric  acid,  which  resulted  in  a 
contract  executed  by  them  the  28th  day  of  April,  1913,  by  which  the 
plaintiff'  purchased  from  the  defendant  from  30,000  to  50,000  tons, 
of  2,000  pounds  each,  of  sulphuric  acid  per  year,  of  the  quality  desig- 
nated "chamber  acid  ranging  from  50  degrees  to  54  degrees  Beaume,"' 
to  be  delivered  at  the  p]aintift''s  works  at  Canton,  or  to  Baugh  &  Sons 
Company,  Norfolk,  Va.,  for  a  period  of  five  years  beginning  January 
1,  1913,  and  ending  December  31.  1917,  for  the  sum  of  $5.75  per  ton. 
The  contract  provided  that  the  plaintiff  should  declare  on  the  2d  of 
January  of  each  year  what  amount  in  excess  of  the  minimum  amount 
cf  30,000  tons  it  would  take  that  year,  and  that  the  deliveries  of  sul- 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  145 

phnric  acid  should  be  made  as  nearly  as  possible  in  equal  weekly  in- 
stallments, and  also  contained  the  following  provisions : 

"Fire,  accident  or  strike,  in  the  work  of  any  of  the  parties  herein 
mentioned ;  obstruction  to  navigation,  accident  to  acid,  barges,  war, 
insurrections  or  other  uncontrollable  causes  rendering  buyers  unable 
to  receive  or  sellers  unable  to  deliver,  shall  be  good  and  sufficient  rea- 
sons to  make  this  contract  inoperative  during  the  period  of  necessary 
repairs,  reconstructions,  or  continuance  of  the  difficulties." 

Immediately  following  the  execution  of  the  contract,  the  price  fixed 
thereby  was  by  agreement  reduced  to  $5  per  ton.  In  pursuance  of 
the  provisions  of  the  contract,  the  plaintiff  elected  to  take  50  tons  of 
acid  per  year,  and  it  appears  that  the  deliveries  of  the  acid  were  ac- 
cordingly and  regularly  made  by  the  defendant  during  the  years  1913 
and  1914  and  until  some  time  early  in  the  year  1915.  During  the 
year  1915,  the  defendant  failed  to  make  full  deliveries  to  the  plaintiff, 
t.  =!:  *  ^„(j  Qi-i  the  10th  of  November,  1916,  the  plaintiff  brought  suit 
at  law  against  the  defendant  to  recover  damages  for  the  non-delivery 
of  acid  in  accordance  with  its  contract  up  to  and  including  June,  1916. 

Interference  with  the  importation  of  pyrites  caused  by  the  war,  and 
which  had  diminished  the  normal  supply  during  the  year  1915,  had 
largely  abated  during  the  fall  of  1916  and  the  early  part  of  1917,  and 
by  reason  thereof,  and  the  extra  efforts  made  by  the  defendant  in  an- 
ticipation of  difficulty  in  obtaining  the  ore,  it  had.  in  March,  1917,  ac- 
cumulated at  its  plant  about  forty-eight  thousand  tons.  About  that 
time,  however,  just  preceding  the  entrance  of  this  country  into  the 
war,  the  interference  with  navigation  occasioned  by  the  German  U-boat 
campaign  became  very  serious.  The  companies  with  which  the  de- 
fendant had  contracted  for  delivery  of  the  ore,  and  whose  contracts 
contained  a  clause  similar  to  the  clause  in  the  contract  between  the 
plaintiff  and  the  defendant  which  we  have  quoted,  notified  the  defend- 
ant that  they  would  be  compelled  to  suspend  deliveries.  After  receiv- 
ing this  notice,  and  after  making  efforts  to  secure  further  deliveries 
of  ore  from  the  parties  with  whom  it  had  contracted  and  from  other 
sources,  the  defendant  notified  the  plaintiff  and  all  others  with  whom 
it  had  contracts  for  delivery  of  sulphuric  acid  that  after  the  exhaus- 
tion of  its  accumulated  stock  of  pyrites  it  would  not  be  able  to  make 
deliveries  of  the  acid  contracted  for,  and  would  have  to  take  advan- 
tage of  the  clause  in  its  contract  with  the  plaintiff  authorizing  a  sus- 
pension of  deliveries.  At  the  same  time  the  defendant  stated  that  it 
would  continue  its  efforts  to  secure  pyrites,  and  continue  to  deliver  to 
them  their  proportion  of  acid  from  any  pyrites  that  it  might  be  able 
to  obtain.,  and  offered  to  install  in  its  plant  brimstone  burners,  and  to 
furnish  the  plaintiff  and  other  parties  to  whom  it  had  contracted  to 
furnish  acid,  with  brimstone  acid,  provided  they  would  agree  to  pav 
the  increased  cost  of  the  brimstone  acid  delivered  in  lieu  of  acid  made 
from  pyrites.  All  of  the  parties  with  whom  the  defendant  contracted 
accepted  the  offer  of  the  defendant  and  entered  into  agreements  ac- 
cordingly except  the  plaintiff,  and  on  the  25th  of  September,  1917,  the 
plaintiff  filed  in  the  court  below  a  bill  of  complaint  against  the  de- 
fendant.    *     *     * 

On  the  same  day  the  court  passed  an  order,  directing  a  preliminary 
injunction  to  be  issued,  requiring  the  defendant  to  "proceed  forthwith 

to    fulfill   the   contract   between  the   complainant  and  the   defendant. 

*     *     *" 

B.&  B.Bus.Law— 10 


146  CONTRACTS  (Part  1 

The  defense  relied  on  by  the  appellant  is  that  under  its  contract  with 
the  plaintiff  of  April  28,  1913,  it  was  not  required  to  deliver  acid  made 
from  brimstone,  and  that  it  was  unable  by  reason  of  the  war  to  obtain 
the  necessary  amount  of  pyrites  to  fulfill  its  contract  with  the  plaintiff 
and  other  parties  with  whom  it  had  contracted  to  deliver  acid  or  acid 
phosphate,  it  was  entitled,  under  the  provision  we  have  quoted,  to  sus- 
pend the  deliveries  of  acid  to  the  plaintiff  to  the  extent  of  its  inability 
to  secure  pyrites.  *  *  *  The  learned  court  below  took  the  view  that 
by  reason  of  the  conflict  in  the  testimony  as  to  the  meaning  of  the 
words  "chamber  acid"  the  evidence  produced  by  the  defendant  was  not 
sufficient  to  establish  a  usage  and  to  show  that  the  trade  meaning  of  the 
words  "chamber  acid"  was  acid  produced  from  pyrites.    *     *    * 

It  is  apparent  that  the  first  and  important  question  in  the  case  in- 
volves the  construction  of  the  contract  between  the  plaintiff  and  de- 
fendant of  April  28,  1913.  A  large  part  of  the  evidence  was  offered 
for  the  purpose  of  showing  the  meaning  of  the  words  "chamber  acid." 
The  witnesses  produced  by  the  plaintiff  testified  that  they  mean  acid 
manufactured  by  the  chamber  process  from  either  pyrites  or  brimstone, 
while  the  evidence  offered  by  the  defendant  tends  to  show  that  at  the 
time  the  contract  of  1913  was  executed  they  were  generally  understood 
by  those  engaged  in  the  manufacture  or  sale  of  acid  and  acid  phosphate 
to  mean  the  low  grade  of  acid  manufactured  from  pyrites  by  the  cham- 
ber process.  The  precise  question,  however,  to  be  determined  is.  What 
is  the  meaning  of  the  words  "chamber  acid"  as  used  in  the  contract 
between  the  plaintiff'  and  defendant? 

In  the  case  of  Saunders  Co.  v.  Ducker,  116  Md.  474,  82  Atl.  154. 
Ann.  Cas.  1913C,  817,  this  court  said:  "It  is  an  established  canon  of 
-construction  that:  'In  order  to  arrive  at  the  intention  of  the  parties, 
the  contract  itself  must  be  read  in  the  light  of  the  circumstances  under 
which  it  was  entered  into.  General  or  indefinite  terms  employed  in 
the  contract  may  be  thus  explained  or  restricted  as  to  their  meaning 
and  application ;  and  the  contract  must  be  so  constructed  as  to  give  it 
such  effect  and  none  other,  as  the  parties  intended  at  the  time  it  was 
made.'  " 

Contracts  "must  receive  a  reasonable  construction  so  as  to  give  effect 
to  the  intention  of  the  parties  thereto,  and  so  as  to  carry  out  rather 
than  defeat  the  purposes  for  which  they  were  executed.  They  should 
neither,  on  the  one  hand,  be  so  narrowly  or  technically  interpreted  as 
to  frustrate  their  obvious  design;  nor,  on  the  other  hand,  so  loosely 
or  inartificially  as  to  relieve  the  obligor  from  a  liability  fairly  within 
the  scope  or  spirit  of  their  term."  And  in  the  case  of  Schlens  v.  Poe. 
128  Md.  352,  97  Atl.  649,  the  court  said: 

"It  is  therefore  the  duty  of  the  court  to  construe  them  (resolutions) 
— to  ascertain  the  intention  of  the  parties — and  that  intention  must  be 
'gathered  from  the  language  of  the  resolution  read  in  the  light  of  the 
circumstances  existing  at  the  time.  The  rule  of  construction,  as  stated 
in  Nash  v.  Towne,  5  Wall.  699,  18  L.  Ed.  527,  is  this:  'Courts. 
in  the  construction  of  contracts,  look  to  the  language  employed,  the 
subject-matter,  and  the  surrounding  circumstances.  They  are  never 
shut  out  from  the  sa- ~"  light  which  the  parties  enjoyed  when  the  con- 
tract was  executed,  ai.d.  in  that  view,  they  are  entitled  to  place  them- 
selves in  the  same  situation  as  the  parties  who  made  the  contract,  so 
as  to  view  the  circumstances  as  they  viewed  them,  and  so  as  to  judge 
•of  the  meaning  of  the  words  and  the  correct  application  of  the  language 
to  the  things  described.'  " 


Ch.  3)  PERFORMANCE  OF  CONTRAPTS  147 

The  evidence  in  the  case  shows  that  in  1913  the  defendant  had  been 
furnishing  the  plaintiff  the  acid  used  in  the  manufacture  of  its  acid 
phosphate  for  a  great  many  years ;  that  with  one  or  two  minor  excep- 
tions sulphuric  acid  of  the  quality  used  in  the  manufacture  of  acid 
phosphate,  and  sold  for  that  purpose,  was  made  from  pyrites  ore. 
which  contains  about  50  per  cent,  of  sulphur,  by  the  process  known  as 
the  chamber  process,  and  that  only  about  5  per  cent,  of  the  brimstone 
or  sulphur  sold  in  this  country  was  used  for  acid  making,  and  that  that 
per  cent,  of  brimstone  employed  in  making  acid  was  vised  in  the  pro- 
duction of  what  was  known  as  a  high  grade  acid  or  brimstone  acid, 
which  was  used  for  purposes  other  than  the  manufacture  of  acid  phos- 
phate. Dr.  Grosvenor,  one  of  the  plaintiff's  witnesses,  testified  that  in 
1913  the  amount  of  brimstone  or  sulphur  used  in  the  manufacture  of 
sulphuric  acid  was  only  about  5  per  cent,  of  the  raw  material  used  for 
that  purpose.  The  evidence  further  shows  that  the  cost  of  the  brim- 
stone or  sulphur  in  1913  was  about  $22.50  per  ton,  while  the  cost  of 
pyrites  containing  an  equal  amount  of  sulphur  was  about  $11  a  ton. 
and  that  the  cost  of  the  brimstone  required  to  make  one  ton  of  acid 
was  $5.15,  while  the  cost  of  the  pyrites  necessary  to  make  one  ton  of 
acid  was  $2.60  a  ton.  The  undisputed  evidence  also  shows  that  the 
officers  of  the  plaintiff  were  at  the  time  considering  the  advisabihty  of 
manufacturing  the  sulphuric  acid  necessary  for  its  own  plant,  and 
knew  what  it  would  cost  to  produce  it,  and  that  they  were  familiar  with 
the  construction  of  the  defendant's  plant,  and  knew  that  it  was  at  that 
time  only  adapted  to  the  production  of  sulphuric  acid  from  pyrites. 

In  view  of  this  evidence  it  is  impossible  to  escape  the  conclusion  that 
when  the  plaintifit  and  defendant  used  the  words  "Chamber  acid"  to  de- 
scribe the  subject-matter  of  their  contract,  they  did  not  refer  to  acid 
made  from  brimstone,  v.-hich  they  both  knew  the  defendant  could  not 
produce  in  its  plant  as  then  constructed,  and  could  not  furnish  at  the 
contract  price  of  $5  per  ton.  Whether,  therefore,  strictly  and  techni- 
cally speaking,  chamber  acid  may  be  said  to  include  acid  made  by  the 
chamber  process  from  either  pyrites  or  brimstone,  if  we  are  to  give  ef- 
fect to  the  w-ell-established  canon  of  construction  to  which  we  have 
referred,  arriving  at  the  intention  of  the  parties,  it  would  seem  reason- 
ably clear  that  the  contract  referred  to  the  kind  of  sulphuric  acid  that 
was  almost  universally  employed  in  the  manufacture  of  acid  phosphate, 
and  to  the  production  of  which  the  defendant's  plant  was  adapted, 
and  which  alone  the  defendant  could  have  furnished  at  the  price  agreed 
upon. 

It  would  be  giving  the  contract  a  strained  and  unreasonable  con- 
struction to  assume  that  the  defendant  obligated  itself  to  deliver  50" 
tons  of  brimstone  acid  per  year,  through  a  period  of  five  years  and 
commencing  at  a  date  anterior  to  the  date  of  the  contract  when  it  knew 
and  the  plaintifit  knew  it  could  not  do  so  except  at  a  loss  per  ton  equal 
to  about  one-half  of  the  price  agreed  upon.    '^     '■'     * 

It  follows  from  what  we  have  said  that  the  preliminary  injunction 
should  have  been  dissolved,  and  we  must  therefore  reverse  the  decree 
from  which  this  appeal  was  taken. 


If  the  Legislature  had  enacted  a  statute  imposing  a  tax  on  all 
sales  of  sulphuric  acid,  would  acid  manufactured  from  pyrites  and 
from  brimstone  each  be  taxed,  or  would  acid  manufactured  from, 
pyrites  alone  be  taxed? 


148  CONTRACTS  (Part  1 


INGERSOLl>RAXL)  CO.  v.   I'NITED   STATES  FIDELITY  & 
GUARANTY   CO. 

(Court  of  Errors  and  Appeals  of  New  Jersey,  191S.     92  N.  J.  Law,  403, 

105  Atl.  236.) 

Suit  by  the  Ingersoll-Rand  Company,  a  corporation,  against  the 
United  States  Fidehty  &  Guaranty  Company.  Judgment  for  defend- 
ant, and  plaintiff  appeals. 

TrEnchard,  J.  The  Ingersoll-Rand  Company,  the  plaintiff  below, 
sued  to  recover  the  value  of  certain  machinery  which  it  claimed  was 
its  property  and  was  wrongly  converted  by  the  defendant  to  its  use. 

The  record  disclosed  the  following  situation :  Prendergast  &  Clark- 
son  had  a  contract  with  the  United  States  government  for  the  building 
of  the  Shoshone  dam  at  Cody,  Wyo.  They  needed  certain  machinery 
for  use  in  this  work.  The  plaintiff,  in  writing,  proposed  to  furnish 
them  an  Ingersoll-Rand  air  compressor  "of  the  size  and  dimensions 
as  set  forth  in  the  attached  specifications,"  together  with  various  other 
machines  and  appliances  in  the  proposal  described,  at  a  price  of  $13,- 
001,  upon  "terms  one-third  cash  on  shipment,  one-third  60  days  there- 
after, and  the  balance  120  days  after  shipment."  This  proposal  was 
signed,  by  the  plaintiff,  and  following  the  signature  is  :  "Accepted  Feb- 
ruary 24.  1906.  Prendergast  &  Clarkson,  by  T.  J.  Prendergast,  Presi- 
dent." To  this  contract  was  attached  certain  unsigned  specifications 
which  concluded  with  a  statement  that  the  title  and  right  of  possession 
to  the  compressor  "remains  in  the  Rand  Drill  Company  until  the  com- 
pressor has  been  fully  paid  for  in  cash."  A  part  of  the  machinery 
thus  sold  (including  the  compressor), was  delivered  to  Prendergast  & 
Clarkson  at  Cody,  and  was  used  by  them  in  their  work  on  the  dam. 
Later,  by  reason  of  a  washout  at  the  dam,  they  defaulted  on  their  con- 
tract, and  the  United  States  government,  pursuant  to  its  contract  rights, 
took  possession  of  all  the  machinery  and  appliances  on  the  ground, 
among  others,  those  which  are  the  basis  of  this  suit,  being  a  part  of 
that  furnished  by  the  plaintiff,  and  then  called  on  the  defendant  com- 
pany (which  was  surety  for  the  performance  of  the  dam  contract)  to 
do  the  work  of  construction.  At  the  same  time  the  government,  in 
supposed  compliance  with  the  defendant  surety  company's  contract 
rights,  turned  over  to  the  defendant  the  machinery  and  appliances  thus 
taken  into  possession.  Inasmuch  as  the  plaintiff  had  not  been  paid  in 
full  for  this  property,  it  brought  this  suit,  which  is  based  upon  the 
claim  that  title  to  the  property  did  not  pass  until  the  whole  purchase 
money  was  paid. 

The  trial  judge,  sitting  at  the  Hudson  circuit  without  a  jury,  found 
for  the  defendant,  and  the  plaintiff  appeals. 

We  are  of  the  opinion  that  the  judgment  must  be  affirmed.  Of 
course,  if  we  look  only  at  the  contract  for  the  sale  of  this  machin- 
ery (without  regard  to  the  specifications),  there  can  be  no  doubt 
that  the  title  passed  to  the  purchaser  upon  delivery.  The  question 
which  the  case  presents  is,  however,  whether  the  unsigned  annexed 
specifications,  taken  in  connection  with  the  contract  itself,  were  oper- 
ative to  retain  the  title  in  the  plaintiff',  for  the  rule  is  that  unsigned 
specifications,  not  contained  in  the  contract  nor  in  terms  made  a  part 
thereof  by  the  contract  itself,  but  referred  to  therein  and  annexed 
thereto,  must  be  construed  therewith.    =•■'    *    * 

But  it  is  also  the  rule  that,  where  the  specifications  are  referred  to 


Ch.  3)  PERFORMANCE   OP   CONTRACTS  149 

for  a  specific  purpose  only,  they  become  a  part  of  the  contract  for  such 
purpose  only,  and  should  be  treated  as  irrelevant  for  all  other  pur- 
poses. *  *  *  Tested  by  this  rule,  we  think  the  reservation  of  title 
found  in  the  "attached  specifications"  was  no  part  of  the  contract. 

The  word  "specifications,"  when  used  in  such  a  contract,  ordinarily 
means  a  specific  and  detailed  description  of  the  thing  to  be  furnished 
or  the  work  to  be  done.  The  specifications  in  question  were  of  that 
character.  True,  they  concluded  with  the  statement  that  the  title  and 
right  of  possession  to  the  compressor  "remain  in  the  Rand  Drill  Com- 
pany until  the  compressor  has  been  fully  paid  for  in  cash."  But  that 
is  not  a  "specification"  within  the  meaning  of  the  term. 

It  is  to  be  noted  that  the  "attached  specifications"  were  not  in  terms 
made  a  part  of  the  contract,  and  the  only  reference'  therein  to  them 
is  in  the  clause  describing  the  compressor  as  "of  the  size  and  dimen- 
sions as  set  forth  in  the  attached  specifications."  No  doubt  they  were 
thus  referred  to  for  the  purpose  only  of  fixing  the  size  and  dimensions 
of  the  compressor,  and  not  for  the  purpose  of  adding  new  terms  to 
the  contract  by  making  it  a  conditional  sale.  This  view  is  strengthened 
by  the  fact  that  the  specifications  used  were  evidently  prepared  for  use 
by  the  Rand  Drill  Company  (plaintiff's  predecessor  in  business),  and, 
while  quite  appropriate  for  fixing  the  size  and  dimensions  of  the  com- 
pressor, were  inappropriate  to  reserve  title  in  the  plaintiff'.     *     *     * 

The  judgment  below  will  be  affirmed. 


PENNSYLVANIA    SUGAR    CO.    v.    CZARNIKOW-RIONDA    CO. 

(United  States  Circuit  Court  of  Appeals,  Third  Circuit,  1917.     245  Fed.  913, 

158  C.  C.  A.  201.) 

McPhKRSON,  Circuit  Judge.  In  this  action  the  plaintiff,  a  purchas- 
er of  raw  sugar  from  the  defendant,  was  nonsuited  in  the  eff'ort  to 
recover  damages  for  failure  to  make  a  full  delivery.  The  defendant 
shipped  32,000  bags  from  Cuba  to  Philadelphia,  and  the  plaintiff  re- 
ceived 25,000  bags ;  the  remaining  7,000  being  the  quantity  in  dispute. 
The  plaintiff'  sets  up  a  right  to  the  whole  32.000,  while  the  defendant 
contends  that  25,000  bags  completely  fulfilled  the  contract.  The  facts 
are  as  follows : 

The  Pennsylvania  Company  is  a  Philadelphia  refiner,  and  the  Rionda 
Company  is  a  dealer  in  Cuban  sugar,  having  an  office  in  New  York 
City,  and  transacting  part  of  its  business  through  John  F.  Craig  &  Co., 
a  firm  of  brokers  in  IMiiladelphia.  So  far  as  appears,  Craig  &  Co. 
were  not  authorized  to  make  final  contracts  of  sale.  Shortly  before^ 
June  16,  1914,  the  Peimsylvania  Company  and  Craig  &  Co.  negotiated 
concerning  the  sale  of  sugar,  and  agreed  upon  certain  terms  provi- 
sionally. The  brokers  sent  these  on  to  New  York  for  approval,  and 
in  due  course  the  following  written  form  of  agreement,  dated  June 
16,  signed  by  the  Rionda  Company,  and  identified  as  "Contract  V 
329,"  was  returned  to  the  brokers  to  be  accepted  by  the  Pennsylvania 
Company : 

"New  York,  June  16th,  1914. 
"To  Messrs.  Pennsylvania  Sugar  Company,  Philadelphia,  Pa. : 

"We  have  this  day  sold  to  you  for  account  of  Czarnikow-Rionda 
Company,  New  York : 

"Quantity:  Twenty-five  thousand  to  thirty  thousand  (25/30,000) 
l^gg-g    *    *    *    q£  c^ba  centrifugal  sugar. 


150  CONTRACTS  (Parti 

"Sliipment  or  clearance :  To  be  shipped  cleared  during  August, 
1914,  first  half,  not  before  5th. 

"Destination :  Per  steamer,  or  steamers,  to  be  named  as  soon  as 
possible,  for  Philadelphia.     *     *     * 

"Price:  At  two  and  seven-sixteenth  (2  7/16c)  cents  per  pound. 
Cost  and  freight,  basis  ninety-six  (96"),  average  outturn  polarization, 
net  landed  weights. 

"Payment :  To  be  made  to  Czarnikow-Rionda  Company  by  cash 
in  New  York  in  six  (6)  days  from  date  of  delivery  of  .shipping  docu- 
ments to  buyers,  for  the  net  amoimt  of  the  invoice,  or  by  sellers  or 
Czarnikow-Rionda  Company  drawing  on  buyers  at  six  (6)  days'  sight 
for  the  net  amount  of  the  invoice  w'ith  shipping  documents  attached. 

"Delivery :  Sugar  to  be  delivered  at  a  customary  safe  wharf  or  re- 
finery, as  directed  by  buyers.     *    *     * 

"Marine  insurance:  To  be  covered  by  buyers  from  shore  to  shore, 
including  risk  of  lighters  at  ports  of  loading  and  discharge. 

"Czarnikow-Rionda  Company, 

"[Signed]  Manuel  E.  Rionda,  Vice  President.     Brokers." 

Craig  &  Co.  presented  this  writing  to  the  Pennsylvania  Company  for 
acceptance,  but  were  informed  that  it  did  not  contain  all  the  terms 
that  had  been  agreed  upon.  Thereupon  the  brokers  communicated 
with  the  Rionda  Company  and  were  authorized  to  write  the  following 
letter : 

"Philadelphia.  June  17th,  1914. 

Messrs.  Pennsylvania  Sugar  Co.,  Philadelphia — Dear  Sirs:  Refer- 
ring to  contract  V  329,  dated  June  16th,  1914,  the  understanding  at 
the  time  of  sale  of  this  cargo  was  that  the  drafts  to  be  drawn  against 
this  cargo  were  to  be  made  payable  in  Philadelphia;  also  that,  should 
there  be  any  demurrage,  the  same  was  to  be  settled  for  on  the  basis 
of  net  registered  tonnage.  The  sellers,  Messrs.  Czarnikow-Rionda 
Company,  authorize  us  to  herewith  confirm  these  conditions  and  same 
become  part  of  contract  above  named. 

"Yours  truly,  [Signed]   Jno.  F.  Craig  &  Co., 

"Brokers  for  Messrs.  Czarnikow-Rionda  Co.,  New  York." 

*  *  *  The  two  writings  of  the  16th  and  17th  are  therefore  to  be 
taken  together  as  the  contract,  and  upon  their  construction  the  deci- 
sion of  the  controversy  depends.     *     *     * 

The  question  may  perhaps  be  stated  thus:  Was  the  express  and 
definite  provision  of  the  contract  that  calls  for  a  specified  quantity  of 
sugar  within  the  limits  named  so  modified  by  the  word  "cargo"  as  to 
lose  its  apparent  meaning,  and  to  take  on  the  new  meaning  of  a  whole 
.'shipload,  a  load  that  exceeds  the  maximum  limit?  It  is  true  that  a 
"cargo"  is  primarily  the  load  of  a  ship;  but  the  word,  like  many 
another,  may  carry  a  varying  content,  and  the  question  of  its  scope  in 
a  given  contract  under  given  circumstances  cannot  be  decided  by  con- 
fining the  court's  inquiry  to  its  abstract  meaning.  We  must  determine 
wdiat  scope  the  parties  gave  it  in  this  contract,  and  our  opinion  is 
that  the  meaning  here  is  the  same  as  the  meaning  of  the  definite 
phrase,  "25.000  to  30,000  bags  of  Cuba  centrifugal  sugar."  There  can 
be  no  doubt  that  the  writing  of  June  16.  unaffected  by  the  letter  of 
June  17,  would  have  been  satisfied  by  the  delivery  of  25,000  bags,  and 
we  find  little  in  the  letter  that  indicates  a  different  conclusion.  The 
letter  is  dealing  directly  with  two  subjects  only — payment  in  Philadel- 
phia, instead  of  in  New  York,  and  the  settlement  of  possible  demur- 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  151 

rage — and  the  reference  to  the  quantity  of  sugar  is  indirect  and  inci- 
dental. No  doubt  the  sugar  is  spoken  of  as  "this  cargo;  "  but  we  think 
this  is  no  more  than  the  writer's  allusion  to  the  large  quantity  (cor- 
rectly described  as  a  cargo)  that  had  already  been  distinctly  specified, 
and  therefore  did  not  need  to  be  specified  again.    *     *     * 

And  this  leads  to  the  question,  how  much  sugar  did  the  Pennsylvania 
Company  buy?  If  the  word  "cargo"  were  not  in  the  contract,  the  an- 
swer would  be  plain,  namely,  from  25,000  to  30,000  bags,  at  the  seller's 
option.  But,  as  the  letter  of  June  17  put  "cargo"  into  the  contract, 
the  effect  of  introducing  it  must  have  been  one  of  two  things — either 
to  strike  out  the  figures  and  substitute  "cargo,"  or  to  let  the  figures 
stand  and  add  "cargo."  *  *  *  Without  prolonging  the  discussion, 
we  conclude  that  the  word  "cargo,"  as  used  in  this  contract,  does  not 
mean  a  whole  shipload,  but  does  mean  the  quantity  specified,  and  for 
this  reason  we  see  no  occasion  to  consider  in  this  opinion  the  cases 
where  the  word  in  other  contracts  has  been  held  to  bear  a  different 
meaning — e.  g.,  Kreuger  v.  Blanck,  5  L.  R.  Exch.  179;  Borrowmen 
V.  Drayton,  2  L.  R.  Exch.  15. 

The  judgment  is  affirmed. 


The  case  following  is  inserted  by  way  of  a  digression  from  the 
general  subject  of  contracts,  but  it  does  concern  the  problem  of 
interpretation.  The  larger  question  raised  may  be  stated  roughly 
as  follows :  Are  constitutional  provisions  to  be  interpreted  ex- 
clusively in  accordance  with  the  meaning  which  the  words  pos- 
sessed at  the  time  of  the  adoption  of  the  constitution,  or,  may  those 
same  words  be  given  a  meaning  to-day  different  from  that  which 
they  had  at  the  time  when  they  were  used  in  the  fundamental  law? 

There  has  been  much  able  thought  directed  toward  the  solution  of 
this  broader  problem  of  the  law.  It  is  one  which,  while  involved  in 
innumerable  decisions  of  the  courts,  is  not  commonly  dealt  with  as 
a  problem  in  judicial  decisions.  This  problem  is,  however,-  ex- 
pressly presented  in  the  next  case,  distinctly  so  because  of  the 
presentation  therein  of  two  views  with  respect  to  its  solution. 

The  extracts  are  taken  from  a  decision  sustaining  the  constitu- 
tionality of  an  employers'  liability  and  workmen's  compensation 
law. 


BORGNIS  et   al.  v.   FALK  CO. 

(Supreme  Court  of  Wisfonsiii,  1011.     147  Wis.  327,  18.S  N.  W.  209,  .37  L.  R.  A. 
[N.  S.]  489,  2  N.  C.  C.  A.  834.) 

WiNSLOW,  C.  J.  *  *  *  For  all  the  essential  purposes  of  this  dis- 
cussion, it  may  truly  be  said  that  this  is  the  law  which  is  before  us, 
and  the  question  is  simply  whether  there  is  any  vital  part  of  it  which 
the  Legislature  may  not  enact  because  the  Constitution  forbids  it.  It 
is  matter  of  common  knowledge  that  this  law  forms  the  legislative  re- 
sponse to  an  emphatic,  if  not  a  peremptory,  public  demand.  It  was 
admitted  by  lawyers,  as  well  as  laymen,  that  the  personal  injury  action 
brought  by  the  employe  against  his  employer  to  recover  damages,  for 
injuries  sustained  by  reason  of  the  negligence  of  the  employer  had 


152  CONTRACTS  (Parti 

wholly  failed  to  meet  or  remedy  a  great  economic  and  social  problem 
which  modern  industrialism  has  forced  upon  us,  namely,  the  problem 
of  who  shall  make  pecuniary  recompense  for  the  toll  of  suffering  and 
death  which  that  industrialism  levies  and  must  continue  to  levy  upon 
the  civilized  world.  This  problem  is  distinctly  a  modern  problem.  In 
the  days  of  manual  labor,  the  small  shop,  with  few  employes,  and  the 
stagecoach,  there  was  no  such  problem,  or,  if  there  was,  it  was  almost 
negligible.  Accidents  there  were  in  those  days,  and  distressing  ones ; 
but  they  were  relatively  few,  and  the  employe  who  exercised  any  rea- 
sonable degree  of  care  was  comparatively  secure  from  injury.  There 
was  no  army  of  injured  and  dying,  with  constantly  swelling  ranks 
marching  with  halting  step  and  dimming  eyes  to  the  great  hereafter. 
This  is  what  we  have  with  us  now,  thanks  to  the  wonderful  material 
progress  of  our  age,  and  this  is  what  we  shall  have  with  us  for  many  a 
day  to  come.  Legislate  as  we  may  in  the  line  of  stringent  reciuirements 
for  safety  devices  or  the  abolition  of  employers'  common-law  defenses, 
the  army  of  the  injured  will  still  increase,  and  the  price  of  our  manu- 
facturing greatness  will  still  have  to  be  paid  in  human  blood  and  tears. 
To  speak  of  the  common-law  personal  injury  action  as  a  remedy  for 
this  problem  is  to  jest  with  serious  subjects,  to  give  a  stone  to  one  who 
asks  for  bread.  The  terrible  economic  waste,  the  overwhelming  temp- 
tation to  the  commission  of  perjury,  and  the  relatively  small  propor- 
tion of  the  stuns  recovered  which  comes  to  the  injured  parties  in  such 
actions,  condemn  them  as  wholly  inadequate  to  meet  the  difficulty. 

In  approaching  the  consideration  of  the  present  law,  we  must  bear 
in  mind  the  well-established  principle  that  it  must  be  sustained  unless 
it  be  clear  beyond  reasonable  question  that  it  violates  some  constitu- 
tional limitations  or  prohibition.  That  governments  founded  on  writ- 
ten constitutions  which  are  made  difficult  of  amendment  or  change  lose 
much  in  flexibility  and  adaptability  to  changed  conditions  there  can  be 
no  doubt.  Indeed  that  may  be  said  to  be  one  purpose  of  the  written 
constitution.  Doubtless  they  gain  enough  in  stability  and  freedom 
from  mere  whimsical  and  sudden  changes  to  more  than  make  up  for 
the  loss  in  flexibility ;  but  the  loss  still  remains,  whether  for  good  or 
ill.  A  constitution  is  a  very  human  document,  and  must  embody  with 
greater  or  less  fidelity  the  spirit  of  the  time  of  its  adoption.  It  will  be 
framed  to  meet  the  problems  and  difficulties  which  face  the  men  who 
make  it,  and  it  will  generally  crystallize  with  more  or  less  fidelity  the 
political,  social,  and  economic  propositions  which  are  considered  irre- 
futable, if  not  actually  inspired,  by  the  philosophers  and  legislators  of 
the  time ;  but  the  difficulty  is  that,  while  the  Constitution  is  fixed  or 
very  hard  to  change,  the  conditions  and  problems  surroimding  the  peo- 
ple, as  well  as  their  ideals,  are  constantly  changing.  The  political  or 
philosophical  aphorism  of  one  generation  is  doubted  by  the  next,  and 
entirely  discarded  by  the  third.  The  race  moves  forward  constantly, 
and  no  Canute  can  stay  its  progress. 

Constitutional  commands  and  prohibitions,  either  distinctly  laid 
down  in  express  words  or  necessarily  implied  from  general  words, 
must  be  obeyed,  and  implicitly  obeyed,  so  long  as  they  remain  unamend- 
ed or  unrepealed.  Any  other  course  on  the  part  of  either  legis- 
lator or  judge  constitutes  violation  of  his  oath  of  office ;  but  when  there 
is  no  such  express  command  or  prohibition,  but  only  general  language, 
or  a  general  policy  drawn  from  the  four  corners  of  the  instrument, 
what  shall  be  said  about  this?    By  what  standards  is  this  general  Ian- 


Ch.  8)  pinu'ouMANCE  of  contuacts  153 

guage  or  general  policy  to  be  interpreted  and  applied  to  present  day 
people  and  conditions?  When,  an  eighteenth  century  constitution 
forms  the  charter  of  liberty  of  a  twentieth  century  government,  must 
its  general  provisions  be  construed  and  interpreted  by  an  eighteenth 
century  mind  in  the  light  of  eighteenth  century  conditions  and  ideals? 
Clearly  not.  This  were  to  command  the  race  to  halt  in  its  progress, 
to  stretch  the  state  upon  a  veritable  bed  of  Procrustes. 

Where  there  is  no  express  command  or  prohibition,  but  only  general 
language  or  policy  to  be  considered,  the  conditions  prevailmg  at  the 
time  of  its  adoption  must  have  their  due  weight ;  but  the  changed 
socialyi  economic^  and  governmental  conditions  and  ideals  of  the  time, 
as  well  as  the  problems  which  the  changes  have  produced,  must  also 
logically  enter  into  the  consideration,  and  become  influential  factors  in 
the  settlement  of  problems  of  construction  and  interpretation.  These 
general  propositions  are  here  laid  down,  not  because  they  are  consid- 
ered either  new  or  in  serious  controversy,  but  because  they  are  believed 
to  be  peculiarly  applicable  to  a  case  like  the  present,  wbere  a  law  which 
is  framed  to  meet  new  economic  conditions  and  difficulties  resulting 
therefrom  is  attacked  principally  because  it  is  believed  to  offend 
against  constitutional  guaranties  or  prohibitions  couched  in  general 
terms,  or  supposed  general  policies  drawn  from  the  whole  body  of  the 
mstrument.     *     *     '•'  .    _ 

Marshall,  J.  (concurring).  The  result,  itself,  meets  with  my  un- 
qualified approval.  Some  language  in  the  court's  opinion,  however, 
respecting  the  Constitution,  I  fear  will  be  construed  in  a  different  way 
than  the  writer  thereof,  or  any  member  of  the  court,  intended  or  would 
sanction,  tending  to  impair  the  lofty  character  of  the  fundamental  law 
as  significantly  maintained  by  this  court.     *     *     * 

As  to  the  subject  of  the  enactment,  advanced  thinkers  in  econom- 
ics, law  and  legislation  have  been  at  the  front  and  the  public  has  been 
slow  to  follow.  It  took  the  industrious,  able,  patient,  tactful  legis- 
lative committee  over  two  years  of  activity,  to  educate  the  people  up 
to  willingness  to  accept  on  trial  the  mild  law  before  us.  Opposition 
had  to  be  overcome  by  education  on  all  sides.  The  Legislature  re- 
sponded, not  so  much  to  a  general  demand,  as  to  a  constitutional  com-' 
mand.  to  conserve,  in  the  light  of  the  present,  the  public  welfare. 

The  remarks  in  the  court's  opinion  which  may  suggest  to  some  that 
a  different  meaning  is  to  be  read  out  of  the  Constitution  now  than 
formerly;  that  it  may  have  meant  one  thing  when  framed  and  later 
another,  and  now  be  held  differently,  according  to  judicial  interpre- 
tation to  meet  social  necessities  as  recognized  by  human  instrumentali- 
ties in  the  particular  environment — probably  was  not  so  intended,  but 
I  sense  danger  of  a  contrary  impression  going  out.  Such  ability  to 
bend  the  fundamental  law  in  the  name  of  judicial  interpretation — the 
idea  ihat  an  eighteenth  century  construction  for  an  eighteenth  century 
condition  may  not,  and  at  the  hands  of  the  court  does  not  have  to.  fit 
a  twentieth  century  condition — has  been  advanced  by  some,  but  not. 
significantly  at  least,  by  any  court.  On  the  contrary,  it  has  met  with 
universal  condemnation.  That  it  is  wrong,  every  man  of  eminence 
that  has  ever  written  upon  the  subject  in  the  past,  as  well  as  the  very 
nature  of  the  case  and  the  very  logic  and  limitations  of  jvtdicial  inter- 
pretation, bear  witness.  The  fertile  method  of  dealing  with  the  Con- 
stitution has  been  characterized  as  one  which  has  "furnished  a  mode 
of   argument  which  would   on  the  one   hand   leave  the   Constitution 


154  CONTRACTS  (Part  1 

crippled  and  inanimate,  or  on  the  other  give  it  an  extent  of  elasticity 
subversive  of  all  rational  boundaries*"     Story,  Constitution,  389. 

Manifestly,  there  can  be  but  one  right  interpretation  or  construction 
of  the  Constitution.  It  is  said  to  have  been  constructed  of  general 
declarations,  so  that,  in  letter  and  spirit,  it  might  abide  indefinitely 
and  would  have  to  so  abide,  dealing  w^ith  all  conditions  and  all  ages, 
except  as  amended  in  the  manner  therein  specified.  Considerately 
with  that,  there  can  be  but  one  viewpoint  for  interpretation,  and  that 
is  the  one  from  which  the  framers  of  the  system  builded.     *     *     * 

The  foregoing  I  can  but  regard  out  of  harmony  with  this,  in  its 
letter:  "Changed  social,  economic  and  governmental  conditions  and 
ideals  of  the  time,  as  well  as  the  problems  the  changes  have  produced, 
must  largely  enter  into  the  consideration  and  become  influential  fac- 
tors in  the  settlement  of  problems  of  construction  and  interpretation" 
— so  far  as  it  is  pregnant  with  the  thought  that  the  fundamental  law  is 
judicially  changeable.  The  words  "problems"  of  "construction"  and 
"interpretation"  I  think  were  unfortunately  used,  if  the  thought  was 
merely  of  problems  of  whether  new  enactments  to  cope  with  new  con- 
ditions are  within  or  without  the  legitimate  field  of  legislative  activity, 
having  regard  to  appropriateness  of  means  to  effect  a  constitutional 
end.  The  latter  might  be,  as  I  have  suggested,  at  one  time  and  not  a 
half  century  theretofore,  because  changed  conditions  may  render  an 
end  legitimate,  within  the  unchangeable  scope  of  the  fundamental  law, 
which  earlier  was  not,  or  the  selected  means  to  efifect  that  end  might 
be  reasonably  appropriate  at  one  time,  though  not  so  a  century,  more 
or  \e^s,  theretofore. 

Why  treat  judicial  interpretation  of  law  as  a  process  of  following 
changing  ideals,  social  problems  and  ideas,  since  its  sole  office  is  to 
solve  uncertainties  as  to  the  intent  at  the  time  of  the  enactment?  In- 
terpretation commences  where  begins  uncertainty — obscurity  as  to  the 
meaning  the  lawgivers  purposed  putting  into  the  enactment  and  suc- 
ceeded, discoverably,  in  expressing,  literally  or  inferentially.  In  short, 
the  gist  of  the  matter  is  the  intent  when  the  law  was  made,  not  what 
one  can  make  the  language  say  in  a  dififerent  environment  from  that 
'of  its  origin  to  accomplish  a  desired  purpose.     *     *     * 

It  is  needless  to  add  that  I  heartily  endorse  all  said  in  the  court's 
opinion  regarding  the  importance  of  the  legislation  which  has  received 
approval.  May  it  be  the  beginning  of  a  well  rounded  out  constitu- 
tional system  making  every  one  who  consumes  any  product  of  labor 
for  hire  pay  his  proportionate  amount  of  the  cost  of  the  creation  rep- 
resenting the  personal  injury  misfortunes  of  those  whose  hands  have 
enabled  him  to  secure  the  objects  of  human  desire,  thus  minimizing 
the  sufiferings  which  are  the  natural  incidents  of  industry  and  should 
be  borne,  so  far  as  they  represent  pecuniary  sacrifice,  by  the  mass  of 
mankind  whose  desires  are  administered  to  by  such  industry. 


SECTION   3.— CONDITIONS   IN   CONTRACTS— GENERAL 

STATEMENT 

In  the  remaining  portion  of  this  chapter  we  are  concerned  with 
the  problems  which  arise  after  the  contract  has  been  entered  into. 
We  are  assuming  the  existence  of  a  binding  contract  between  the 
parties.     Questions  pertaining  to  ofifer,  acceptance  and  considera- 


Ch.  .j)  PERFORMAXCE    OF   rONTUArTS  15") 

tion  have  all  been  settled.  The  questions  which  are  presented  in 
the  following  cases  grow  out  of  the  conduct  of  the  parties  to  the 
contract  and  other  events  which  occur  subsequent  to  its  formation.^ 

It  is  obvious  that  if  each  party  to  a  contract  performs  his  promise 
or  promises  exactly — that  is,  if  each  performs  the  promised  act  or 
acts  at  the  proper  time  and  at  the  proper  place — no  controversy  will 
arise.  The  contract  will  then  be  fully  performed  on  both  sides 
and  will  accordingly  be  discharged  by  performance ;  that  is,  having 
lived  its  allotted  life  the  contract  will  cease  to  exist.  Perhaps, 
"having  regard  for  the  countless  number  of  contracts  which  are 
daily  entered  into,  the  great  majority  are  fully  performed  without 
controversy  between  the  parties.  But  we  are  dealing  with  the  legal 
situations  which  are  presented  when  contracts  are  not  performed 
"by  both  parties  in  accordance  with  their  respective  promises.  We 
are  to  be  concerned  with  the  questions  which  arise  when  one  party 
to  a  contract  sues  the  other  party  to  the  contract.  We  w^ant  to 
"know  whether  the  plaintiff  or  the  defendant  is  to  win,  and  we  want 
to  discover  the  reasons  which  will  impel  the  courts  to  terminate  the 
litigation  in  favor  of  the  one  or  of  the  other. 

It  would  be  possible  to  discuss  these  questions  by  employing  the 
terms  "legal  rights"  and  "legal  duties,"  etc.,  wholly  apart  from 
any  actual  law  suit,  but  it  may,  perhaps,  add  to  clearness  if  we  have 
visualized  a  proceeding  in  court  wherein  one  of  the  parties  to  a 
•contract  is  suing  the  other  party.  The  plaintiff  is  asking  for  some 
relief  from  the  defendant,  usually  money  damages.  It  is  perfectly 
■clear  of  course,  that  if  the  defendant  has  fully  performed  all  the 
acts  which  he  promised  to  perform,  and  that  such  performance 
was  effected  at  the  proper  time  and  place,  the  defendant  cannot  be 
"held  liable.  In  such  a  case  the  plaintiff's  charge  that  defendant 
broke  his  contract  is  not  made  out.  The  defendant  wins  because  he 
was  not  guilty  of  a  breach  of  contract. 

It  is  apparent,  therefore,  that  in  one  view  of  the  situation  with 
which  we  are  dealing — a  lawsuit  between  the  parties  to  a  contract — 
the  first  question  to  arise  is:  Did  the  defendant  break  his  contract; 
that  is,  did  the  defendant  fail  in  any  respect  to  perform  the  prom- 
ised act,  either  with  respect  to  the  quality  of  the  act  itself,  or  with 
respect  to  the  time  or  place  of  its  performance?  If  the  defendant 
did  so  fail  to  perform,  he  will  be  held  liable  to  the  plaintiff,  irre- 
spective of  the  extent  of  such  breach.  The  breach,  from  a  business 
point  of  view,  may  be  very  trifling.  Nevertheless  he  will  be  held 
liable.  Perhaps  the  amount  of  damages  may  be  but  nominal,  but  he 
will  be  liable  to  this  extent.  Substantial  performance  is  never  a 
defense.  Proof  of  substantial  performance  by  the  plaintiff  will 
often  enable  him  successfully  to  maintain  his  suit  against  the  de- 
fendant to  recover   damages  for  the  defendant's  breach,   but  the 

1  Two  of  the  very  best  treatments  of  the  difficult  subject  of  Conditions 
are  found  in  the  article  by  Professor  Arthur  L.  Corbin,  "Conditions  in  the 
Law  of  Contracts."  28  Yale  Law  .Tournal.  739;  also  chapter  XIII  of  Cor- 
bin's  Anson  on  Contract;  and  "The  Summary  of  Conditions  in  Contracts 
and  Impossibility  of  Performance,"  by  Professor  George  P.  Costigan. 


156  CONTRACTS  (Part  1 

defendant  cannot  defend  by  proving  substantial  performance.  This 
point  should  not  be  lost  sight  of,  for  in  the  cases  following  there  is 
a  good  deal  of  discussion  of  the  doctrine  of  substantial  performance, 
but  in  such  cases  it  will  be  found  that  it  is  the  plaintifif  who  is  in- 
sisting that  all  he  need  prove  is  substantial  performance,  in  order 
to  hold  the  defendant.  The  defendant  is  not  urging  that  he  is  not 
liable  because  he  has  substantially  performed.  This  matter  will 
appear  more  clearly  in  the  light  of  later  discussion. 

We  are  now  at  the  point  where  the  problems  with  which  this 
chapter  is  concerned  may  be  indicated.  The  bulk  of  the  problems 
arises  in  cases  where  the  defendant  is  admitting  that  he  is  guilty 
of  a  breach  of  contract,  but  he  is  insisting  that  he  cannot  be  held 
liable  for  such  breach  because  of  the  legal  effect  of  certain  conduct 
of  the  plaintiff.  The  defendant,  therefore,  is  urging  that  his  non- 
performance is  excused.  Looking  at  the  law  suit  from  the  stand- 
point of  the  defendant,  the  question  is:  What  conduct  by  the 
plaintiff  or  what  outside  events  will  operate  as  an  excuse  for  the 
defendant's  breach?  Looking  at  the  same  situation  from  the  stand- 
point of  the  plaintiff  the  question  is:  What  facts  must  the  plain- 
tiff prove  in  order  to  hold  the  defendant  liable  for  the  letter's 
breach?  This  statement  of  the  question  at  once  suggests  the  possi- 
bility of  legal  rights  being  conditioned  upon  the  occurrence  of  cer- 
tain events  or  the  performance  of  certain  acts  by  the  holder  of  the 
right. 

The  idea  of  "excuses  for  non-performance"  could  be  used  as  a 
basis  for  the  classification  of  the  cases  following,  or,  the  notion 
of  "conditions"  could  be  similarly  employed  as  a  basis  for  classify- 
ing the  subject-matter.  It  is  the  latter  idea,  that  of  conditions, 
which  has  here  been  used  as  a  basis  for  arranging  the  cases,  which, 
in  their  broader  aspect,  concern  problems  in  the  performance  of 
contracts. 

A  'condition  may  be  defined  as  follows :  A  condition  in  a  con- 
tract is  some  act  or  event,  either  affirmative  or  negative,  expressly 
or  impliedly  agreed  upon  by  the  parties  or  interpolated  into  the 
contract  by  the  Islw  which  creates,  qualifies  or  extinguishes  some 
right  or  duty  or  other  legal  relation  arising  out  of  the  contract. 
The  act  constituting  the  condition  may  be  one  to  be  performed  by 
either  of  the  parties  to  the  contract  or  it  may  be  an  act  to  be  per- 
formed bv  a  third  party  or  it  may  be  some  event  of  nature.  The 
act  may  or  may  not  be  an  act,  the  performance  of  which  has  been 
promised  by  either  of  the  parties.  The  act,  thus  operating  as  a 
creation,  qualification,  or  extinguishment  of  some  legal  relation  may 
be  so  referred  to  in  the  contract  that  it  must  be  performed  or  occur 
before  the  relation  which  it  concerns  arises.  In  such  a  case  we 
would  refer  to  the  act  as  a  condition  precedent,  to  the  existence  of 
the  right  or  duty  or  other  relation.  If  we  were  thinking  of  the 
circumstances  under  which  A.'s  duty  to  perform  a  certain  promise 
in  a  contract  with  B.,  would  arise  and  we  discovered  that  his  duty 
of  performance  was  not  to  arise  until  some  act  X  was  to  be  per- 


Ch.  3)         .      PERFORMANOE  OF  CONTRArTS  157 

formed  either  by  A.,  or  by  B.,  or  by  some  third  party,  we  would 
refer  to  act  X  as  a  condition  precedent  to  A.'s  duty  to  perform  his 
promise.  Such  a  promise  by  A.,  namely,  one,  the  duty  to  perform 
which  is  thus  qualified,  \»  sometimes  referred  to  as  a  dependent 
promise,  or  dependent  covenant,  because  the  duty  of  performance 
arising  thereunder  depends  upon,  and  is  conditioned  upon  the  hap- 
pening of  some  act.  This  act  may  be  one  of  actual  performance  or 
of  tender  of  performance.  If  instead  of  thinking  of  A.'s  duty  to 
perform  a  particular  promise,  we  were  to  inquire  into  the  cir- 
cumstances under  which  some  right  of  A.  were  to  arise,  such  as  a 
right  to  demand  immediate  performance  of  some  promise  by  B., 
or  a  right  to  sue  B.  for  damages  because  of  B.'s  failure  to  perform 
this  particular  promise,  we  might  also  discover  that  this  right  of  A. 
against  B.  would  not  arise  until  some  act  Y  was  performed.  It 
might  be  that  act  Y  was  an  act,  which  A.  was  to  perform,  or  which 
B.  was  to  perform  or  which  was  to  be  performed  by  some  third 
partv.  In  this  case,  we  are  dealing  with  the  same  kind  of  situation 
as  that  wherein  act  X  was  involved,  except  that  in  this  case,  since 
Ave  are  looking  at  the  transaction  from  A.'s  standpoint,  act  Y  is  a 
conditiori  precedent,  not  to  a  duty  but  to  a  right  of  A.  Quite  often 
courts  refer  to  certain  acts  as  conditions  precedent  without  stat- 
ing whether  the  particular  act  so  referred  to  is  precedent  to  a  duty 
or  precedent  to  a  right.  The  context  will  usually  make  it  clear 
which  is  meant.  It  is  obviously  quite  important  to  find  out  wheth- 
er a  particular  act  is  regarded  as  precedent  to  a  duty  or  precedent 
to  a  right  and  to  determine  whose  duty  or  whose  right  is  referred  to. 

We  have  thus  far,  for  the  most  part,  apparently  assumed  that  the 
act  which  we  have  here  been  calling  a  condition,  can  be  precedent 
only  to  duties  or  to  rights.  As  a  matter  of  fact  there  are  other  legal 
relations  to  which  an  act  may  be  precedent.  The  occurrence  of  an 
act  or  event  may  be  made  to  operate  as  a  condition  precedent  to  the 
existence  of  a  legal  power  or  privilege.  A  power  is  not  the  same  as 
a  right,  though  the  term  "right"  is  often  used  to  include  the  con- 
cept "power."  Usually  the  term  "right"  implies  a  correlative  duty 
in  some  other  person.  A  power  does  riot  imply  a  duty  in  some 
other  person,  the  term  power  merely  means  that  the  person  so  pos- 
sessing it,  may  by  some  act  of  his  alone,  change  some  person's  re- 
lations Vvith  respect  to  the  subject  of  the  power.  Such  person  is 
under  a  liability  An  agent  sometimes  has  power  to  bind  his  princi- 
pal to  a  contract  Avhich  his  principal  did  not  authorize  him  to  make 
but  in  doing  so  the  agent  ma}^  break  his  contract,  that  is,  violate  a 
duty  owed  to  his  principal.  A  thief  of  a  negotiable  instrument  pay- 
able to  bearer  has  power  to  transfer  title  to  an  innocent  purchaser. 
We  shall  not  pursue  these  distinctions  further,  but  they  are  men- 
tioned merely  for  the  purpose  of  showing  that  acts  may  operate  as 
conditions  precedent  to  legal  relations  other  than  legal  rights  and 
legal  duties. 

There  are  acts,  which  affect  rights  and  duties  under  contracts, 
properly  called  conditions  which  have  a  dififerent  legal   effect  in 


158  CONTRACTS  .  (Parti 

their  operation.  A  right  or  duty  may  be  presently  owed,  except  in 
so  far  as  the  passage  of  time  is  necessary  to  render  them  active, 
which  rights  or  duties  may  be  destroyed  or  otherwise  affected  by 
the  happening  of  the  act.  In  this  case,  the  act  would  not  be  re- 
ferred to  as  a  condition  precedent  to  the  right  or  duty,  but  would  be 
subsequent  to  the  particular  right  or  duty  which  is  being  referred 
to.  For  example,  if  A.  sells  goods  to  B.  and  if  by  the  terms  of  the 
contract  and  by  the  performance  thereunder  all  of  the  incidents  of 
legal  title  or  of  ownership  pass  to  B.,  but  the  contract  provides  that 
if  within  a  specified  time  B.  chooses  to  return  the  goods,  this  act  of 
B.  may  be  referred  to  as  a  condition  subsequent  to  the  passing  of 
title  to  B.  Of  course  this  same  act  will  operate  as  a  condition  pre- 
cedent to  A.'s  regaining  title.  Whether  the  act  should  be  referred 
to  as  a  condition  precedent  or  as  a  condition  subsequent  will  thus 
depend  upon  whether  attention  is  focused  upon  what  happened  be- 
fore the  act  occurred  or  upon  what  is  to  take  place  after  the  act  oc- 
curred. 

There  is  another  class  of  acts  which,  while  they  operate  as  con- 
ditions, have  a  somewhat  different  legal  effect  from  conditions  pre- 
cedent to  rights  or  duties  or  conditions  subsequent  to  rights  or 
duties.  It  is  possible,  in  fact  very  common,  for  a  contract  to  refer, 
not  to  one  future  act  alone,  but  to  two  future  acts,  in  such  a  way 
as  to  lead  to  the  inference  that  these  two  acts  are  to  be  performed 
at  the  same  moment  of  time.  Commonly  one  of  the  acts  is  to  be 
performed  by  one  of  the  parties  to  the  contract  and  the  other  is  to 
be  performed  by  the  other  party  to  the  contract.  These  acts  may  be 
called  concurrent  conditions.  When  we  were  sketching  the  nature 
and  effects  of  conditions  precedent  to  rights  or  duties,  we  noted 
that  the  act  which  operated  as  the  condition  precedent  must  have 
been  performed  before  the  particular  right  or  duty  which  was  in- 
volved was  deemed  to  have  come  into  existence.  The  distinction 
between  conditions  precedent  and  conditions  concurrent  is  not  so 
much  with  respect  to  the  character  of  the  act,  nor  even  with  respect 
to  the  legal  effects  which  follow  a  non-performance  of  the  act,  but 
more  properly  the  distinction  is  with  respect  to  what  constitutes  a 
non-performance  of  the  condition.  If  act  X  is  a  condition  preced- 
ent to  the  existence  of  right  A  or  duty  A,  act  X  must  be  performed 
before  right  A  or  duty  A  comes  into  existence.  But  if  act  X  is  a 
condition  concurrent  with  act  Y,  and  if  right  A  or  duty  A  is  to 
follow  the  performance  of  act  X  and  act  Y,  the  party  who  owes 
the  performance  of  act  X,  or  the  party  who  owes  the  performance  of 
act  Y  need  not  actually  perform  his  act  in  order  to  bring,  let  us  say 
his  right  A,  into  existence,  he  needs  merely  to  tender  the  perform- 
ance of  his  act  and  if  the  other  party  signifies  his  unwillingness  or 
inability  to  make  a  tender  of  performance  of  his  act,  then  the  right 
or  duty  which  is  to  follow  a  performance  of  the  act  is  deemed  to 
have  arisen.  Even  here  it  is  possible  to  regard  concurrent  condi- 
tions as  a  special  class  of  conditions  precedent,  by  regarding  the 
act  of  tender  as  the  real  condition  precedent. 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  159 

Thus  far  conditions  have  been  classified  as  precedent,  subsequent 
and  concurrent.  Looking  at  conditions  from  a  different  point  of 
view,  they  may  be  classified  as  express,  implied  in  fact  and  implied 
in  law.  A  condition  is  said  to  be  express  when  it  is  created  by  lan- 
guage definitely  set  out  in  the  oral  or  written  agreement.  When  a 
condition  is  implied  in  fact  it  is  based  upon  actual,  but  unexpressed, 
intention  of  the  parties.  When  a  condition  is  implied  in  law,  it  is 
not  based  upon  an  actual  and  unexpressed  intention  of  the  parties, 
but  it  is  based  upon  a  conviction  of  the  court  that  in  order  to  do 
justice  between  the  parties  the  contract  must  be  dealt  with  just 
as  though  it  did  provide  for  such  a  condition.  The  two  kinds  of 
conditions,  those  implied  in  fact  and  those  implied  in  law,  shade 
gradually  into  one  another  so  that  it  is  difficult  to  determine  in 
some  cases  upon  which  theory  the  court  proceeded  in  dealing  with 
them.  There  is  a  tendency  recognizable  in  the  decisions  to  call  a 
condition  one  implied  in  fact  when  it  would  be  more  proper  to  re- 
fer to  it  as  a  condition  implied  in  law.  Conditions  implied  in  law 
are  sometimes  called  constructive  conditions.  The  distinctions  be- 
tween the  two  kinds  of  implied  conditions  are  not  in  most  cases  of 
great  importance,  because  their  legal  effects  will  be  substantially 
the  same.  There  is  this  difference:  where  a  condition  is  implied 
in  law,  the  courts  are  more  likely  not  to  insist  upon  its  literal  per- 
formance to  the  same  extent  as  in  the  case  where  it  is  implied  in 
fact.  When  a  condition  is  implied  in  fact  it  is  to  be  given  the  same 
legal  effect  as  an  express  condition,  because  parties  are  left  free, 
within  very  broad  limits,  to  enter  into  such  contracts  as  they 
choose,  and  when  they  have  expressed  their  intention,  whether  ex- 
pressly or  impliedly,  this  intention  is  to  be  given  effect. 

It  will  be  noticed  that  in  the  above  very  brief  discussion  of  con- 
ditions we  have  not  attempted  to  consider  what  words  or  conduct 
descriptive  of  acts  will  be  regarded  as  creating  conditions.  We 
-have  but  briefly  touched  upon  their  legal  effect.  We  have  merely 
attempted  to  create  a  few  concepts,  mental  receptacles  so  to  speak, 
into  which  we  may  put  these  ideas  as  we  find  them  developed  in 
the  cases. 


SECTION  4.— PERFORMANCE  ON  TIME  AS  A  CONDITION 


ADAMS  et  al.  v.  GUYANDOTTE  VALLEY  RY.  CO.  et  aL 

(Supreme  Court  of  Appeals  of  West  Virginia,  190S.     64  W.  Va.  ISl, 
61    S.    E.    341.) 

Bill  to  cancel  a  contract  by  P.  C.  Adams  and  others  against  the 
Guyandotte  Valley  Railway  Company  and  another.  Decree  for  de- 
fendants, and  complainants  appeal. 

PoFFENBARGER,  P.  The  [plaintiff]  landowners  agreed  to  *  *  * 
lease  *  *  *  for  coal  mining  or  coal  coking  purposes  any  part  of  the 
land"  that  lies  upon  or  is  drained  by  the  stream  emptying  into  the  Guy- 
andotte river  to  any  party  or  parties  presented  by  the  railway  company 


160  CONTRACTS  (Part  1 

or  its  assigns,  with  all  such  privileges  as  are  necessary  and  proper  for 
the -conduct  of  mining  operations.  *  *  *  The  covenants  and  condi- 
tions imposed  upon  the  railway  company  were  two  in  number,  only  the 
first  of  which  is  important,  which  reads  as  follows:  "It  will  cause 
the  said  railway  to  be  commenced  within  one  year  and  completed  and 
in  operation  opposite  the  said  lands  of  the  parties  of  the  first  part  by 
the  1st  of  January,  1903 ;  and  it  is  understood  that,  if  the  said  railway 
is  not  completed  and  in  operation  by  the  said  date,  this  agreement  shall 
no  longer  be  binding  upon  the  parties  hereto."    *    *    * 

Failure  of  the  railway  company  to  comply  with  the  condition  having 
been  shown,  the  propriety  of  the  remedy  invoked  by  the  plaintiffs  is 
dependent  upon  the  character  of  that  condition.  If  it  is  a  condition 
subsequent,  noncompliance  with  which  works  ^  forfeiture  of  a  vested 
right  or  estate  a  court  of  equity  will  not  enforce  the  forfeiture.  It  \yill 
leave  the  parties  to  their  legal  remedies.  *  *  *  If  it  is  a  condition 
precedent,  one  which  it  was  incumbent  upon  the  railway  company  to 
perform  before  any  interest,  right,  title  or  estate  vested  or  could  vest, 
or,  in  other  words, "the  performance  of  which  operated  to  vest  the  title, 
or'  was  the  means  by  which  the  title  was  to  be  acquired,  not  defeated, 
after  acquisition  in  some  other  way,  equity  has  jurisdiction  to  cancel 
the  contract  by  way  of  removing  a  cloud  from  the  title  to  the  land,  if 
it  constitutes  a  cloud  thereon,  for  this  can  be  done  without  destroying 
any  right  under  it.  *  *  *  That  failure  to  perform  a  condition  pre- 
cedent prevents  the  vesting  of  title  or  right  is  elementary  law.    *    *    * 

No  authority  need  be  cited  for  the  proposition  that  the  completion 
and  operation  of  the  railroad  opposite  the  land  is  a  condition  precedent. 

*  *  *  That  was  the  substance  of  the  thing  which  it  was  stipulated  the 
railway  company  should  do.  It  constituted  the  whole  consideration 
for  all  the  covenants  and  agreements  made  by  the  other  parties.  This 
would  necessarily  be  the  conclusion  if  the  terms  of  the  contract  did 
not  indicate  it,  but  they  do.  All  the  stipulations  in  favor  of  the  rail- 
way company  are  clothed  in  prospective  terms.  *  '''  *  There  is  no 
language  in  the  contract  importing  a  grant  of  any  right  in  prsesenti. 

*  *  *  The  only  matter  about  which  there  could  be  a  doubt  is  whether 
time  is  made  an  essential  part  of  the  condition.  In  the  construction  of 
contracts  this  is  often  a  perplexing  inquiry,  but  the  doubt  generally 
arises  in  those  instances  in  which  the  parties  have  not,  by  any  express 

■  terms  of  the  contract,  indicated  the  .essentiality  of  the  time  specified. 
Then  resort  must  be  had  to  the  nature  of  the  instrument,  its  subject- 
matter,  the  evident  purpose  had  in  view,  the  prior  and  subsequent 
conduct  of  the  parties,  and  the  immediate  context  of  the  phrase  or 
clause  specifying  time.  The  form  and  legal  effect  of  the  stipulation 
also  have  important  bearing  upon  the  question.  In  such  cases,  the 
inquiry  is  for  the  intention  of  the  parties,  and  it  must  be  gathered  from 
the  whole  instrument  and  the  surrounding  circumstances.     *     *     * 

Under  the  practically  unlimited  right  and  power  of  parties  to  make 
such  contracts  as  they  see  fit  to  make,  and  bind  themselves  to  such  ex- 
tent and  in  such  manner  as  they  please,  they  may  make  performance 
of  any  covenant  or  condition,  however  unimportant  or  trivial  in  char- 
acter, a  condition  precedent.  Though  time  of  performance  may  be 
comparatively  or  really  unimportant  in  a  practical  sense,  they  have 
the  power  to  stipulate  with  one  another  that  failure  to  observe  it  shall 
be  fatal  and  put  an  end  to  the  contract.    *     *     * 

The  stipulation  under  consideration  here  relates  to  a  condition,  the 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  161 

nonperformance  of  which  may  inflict  injury  not  easily  or  readily  sus- 
ceptible of  ascertainment  or  compensation.  It  is  not  like  failure  to 
pay  money  on  a  specified  day.  *  *  *  In  the  event  of  failure  to  per- 
form within  the  time  stipulated,  the  gravity  of  the  injury  would  de- 
pend upon  the  period  of  delay.  Delay  of  one  month  or  six  months 
might  not  be  serious ;  but,  if  such  delay  is  permissible,  why  not  a  de- 
lay of  one  year,  five  years,  or  ten  years?  How  could  the  court  fix  a 
time  within  which  the  delay  would  be  deemed  innocuous,  and  beyond, 
fatal?  *  *  *  How  can  we  say  that  this  did  not  signify  intention  to 
make  the  time  specified  an  essential  element  of  the  condition?  They 
have  solemnly  said  in  their  written  agreement,  not  only  that  the  road 
should  be  completed  and  operated  opposite  the  land,  but  also  that  it 
should  be  completed  and  operated  by  the  1st  day  of  January,  1903, 
and  that  failure  to  comply  within  that  time  should  put  an  end  to  the 
contract.  In  this  final  clause  the  date  of  completion  is  referred  to  as 
well  as  the  requirement  of  completion.  *  *  *  Our  conclusion  is 
that,  by  the  express  terms  of  the  contract,  time  is  made  of  the  essence 
thereof.  As  the  road  was  not  built  within  that  time,  no  title  vested,  nor 
can  it  ever  vest  under  this  contract.  Wherefore  the  agreement  now 
amounts  to  nothing  more  than  a  cloud  upon  the  title  of  the  plaintiffs, 
and  the  court  should  have  canceled  it  as  such.    *    *    * 


BECK  &  PAULI  LITHOOrtAPHING  CO.  v.  COLORADO  MILLING 
&  ELEVATOR  CO. 

(United  States  Circuit  Coxu-t  of  Appeals,  Eisrhtli  Circuit,  1S92.     52  Fed. 
700,  3  C.  C.  A.  248.) 

Sanborn,  Circuit  Judge.  The  ground  on  which  it  is  sought  to  sus- 
tain the  instruction  of  the  court  below  to  return  a  verdict  for  the  de- 
fendant in  this  case  is  that  the  plaintiff  failed  to  tender  or  deliver  the 
articles  contracted  for  to  the  defendant,  at  Denver,  until  six  or  eight 
days  after  the  expiration  of  the  year,  that  the  plaintiff"  did  not  there- 
fore furnish  them  "in  the  course  of  the  year,"  and  that  this  failure 
justified  the  defejidant  in  repudiating  the  contract,  and  refusing  to  pay 
any  part  of  the  contract  price. 

It  is  a  general  principle  governing  the  construction  of  contracts  that 
stipulations  as  to  the  time  of  their  performance  are  not  necessarily  of 
their  essence,  unless  it  clearly  appears  in  the  given  case  from  the  ex- 
press stipulations  of  the  contract  or  the  nature  of  its  subject-matter 
that  the  parties  intended  performance  within  the  time  fixed  in  tli^ 
contract  to  be  a  condition  precedent  to  its  enforcement,  and,  where 
the  intention  of  the  parties  does  not  so  appear,  performance  shortlv 
after  the  time  limited  on  the  part  of  either  party  will  not  justify  a  re- 
fusal to  perform  by  the  party  aggrieved,  but  his  only  remedy  will  be 
an  action  or  counterclaim  for  the  damages  he  has  sustained  from  the 
breach  of  the  stipulations.  In  the  application  of  this  principle  to  the 
cases  as  they  have  arisen,  in  the  promulgation  of  the  rules  naturally 
deduced  from  it,  and  in  the  assignment  of  the  various  caseS  to  the  re- 
spective classes  in  which  the  stipulation  as  to  time  of  performance  is. 
or  is  not,  deemed  of  the  essence  of  the  contract,  the  controlling  con- 
sideration has  been,  and  ought  to  be,  to  so  decide  and  classify  the  cases 
that  unjust  penalties  may  not  be  inflicted,  nor  unreasonable  damages 
recovered.  Thus,  in  the  ordinary  contract  of  merchants  for  the  sale 
B.&  B.Bus.Law— 11 


1G2  CONTRACTS  (Part  1 

and  delivery,  or  the  manufacture  and  sale,  of  marketable  commodities 
within  a  time  certain,  it  has  been  held  that  performance  within  the 
time  is  a  condition  precedent  to  the  enforcement  of  the  contract,  and 
that  a  failure  in  this  regard  would  justify  the  aggrieved  party  in  re- 
fusing performance  at  a  later  day.    *    *     * 

This  application  of  the  general  principle  commends  itself  as  just  and 
reasonable,  on  account  of  the  frequent  and  rapid  interchange  and  use 
of  such  commodities  made  necessarf  by  the  demands  of  commerce, 
and  because  such  goods,  if  not  received  in  time  by  the  vendee,  may 
usually  be  sold  to  others  by  the  vendor  at  small  loss,  and  thus  he  may 
himself  measure  the  damages  he  ought  to  suffer  from  his  delay  by 
the  difference  in  the  market  value  of  his  goods.  On  the  other  hand, 
it  has  been  held  that  an  express  stipulation  in  a  contract  for  the  con- 
struction of  a  house,  that  it  should  be  completed  on  a  day  certain,  and 
that,  in  case  of  failure  to  complete  it  within  the  time  limited,  the 
builder  would  forfeit  $1,000,  would  not  justify  the  owner  of  the  land 
on  which  the  house  was  constructed  in  refusing  to  accept  it  for  a 
breach  of  this  stipulation  when  the  house  was  completed  shortly  after 
the  time  fixed,  nor  even  in  retaining  the  penalty  stipulated  in  the  con- 
tract, but  that  he  must  perform  his  part  of  the  contract,  and  that  he 
could  retain  from  or  recover  of  the  builder  the  damages  he  sustained 
by  the  delay  and  those  only.  *  *  *  This  application  of  the  gen- 
eral rule  is  equally  just  and  reasonable.  The  lumber  and  material 
bestowed  on  a  house  by  a  builder  become  of  little  comparative  value  to 
him,  while  they  are  ordinarily  of  much  greater  value  to  the  owner  of 
the  land  on  which  it  stands,  and  to  permit  the  latter  to  escape  pay- 
ment because  his  house  is  completed  a  few  days  later  than  the  con- 
tract requires  would  result  in  great  injustice  to  the  contractor,  while  the 
rule  adopted  fully  protects  the  owner,  and  does  no  injustice  to  any  one. 
The  cases  just  referred  to  illustrate  two  well-settled  rules  of  law  which 
have  been  deduced  from  this  general  principle,  and  in  accordance 
with  which  this  case  must  be  determined.    They  are : 

In  contracts  of  merchants  for  the  sale  and  delivery  or  for  the  manu- 
facture and  sale  of  marketable  commodities  a  statement  descriptive  of 
the  subject-matter,  or  some  material  incident,  such  as  the  time  of  ship- 
ment, is  a  condition  precedent,  upon  the  failure  or  nonperformance  of 
which  the  party  aggrieved  may  repudiate  the  whole  contract.  *  *  * 
But  in  contracts  for  work  or  skill,  and  the  materials  upon  which  it  is 
to  be  bestowed,  a  statement  fixing  the  time  of  performance  of  the 

r tract  is  not  ordinarily  of  its  essence,  and  a  failure  to  perform  within 
time  stipulated,  followed  by  substantial  performance  after  a  short 
delay,  will  not  justify  the  aggrieved  party  in  repudiating  the  entire 
contract,  but  will  simply  give  him  his  action  for  damages  for  the 
breach  of  the  stipulation.    *     *     * 

It  only  remains  to  determine  whether  the  contracts  in  the  case  at 
bar  are  the  ordinary  contracts  of  merchants  for  the  manufacture  and 
sale  of  marketable  commodities  or  contracts  for  labor,  skill,  and  mate- 
rials, and  this  is  not  a  difficult  task.  A  contract  to  manufacture  and 
furnish  articles  for  the  especial,  exclusive,  and  peculiar  use  of  another, 
with  special  features  which  he  requires,  and  which  render  them  of 
value  to  him,  but  useless  and  unsalable  to  others — articles  whose  chief 
cost  and  value  are  derived  from  the  labor  and  skill  bestowed  upon 
them,  and  not  from  the  materials  of  which  they  are  made — is  a  con- 
tract for  work  and  labor,  and  not  a  contract  of  sale.    *    *     *     Thus 


Ch.  3)  PKKKORMANX'E  OF  CONTRACTS  1G3 

in  Engraving  Co.  v.  Moore,  75  Wis.  170,  172,  43  N.  W.  1124,  6  L.  R. 
A.  788,  17  Am.  St.  Rep.  186,  where  the  lithographing  company  had 
contracted  to  manufacture  a  large  cjuantity  of  engravings  and  litho- 
graphs for  a  theatrical  manager,  with  special  features,  useful  to  him 
only  during  a  certain  season,  and  they  were  completed  and  set  aside 
in  the  rooms  of  the  lithographer,  and  there  burned  before  delivery  to 
the  manager,  the  court  held  that  the  contract  was  not  one  for  the 
sale  of  personal  property,  but  one  for  work,  skill,  and  materials,  be- 
cause it  was  not  the  materials,  but  the  lithographer's  work  of  skill, 
that  gave  the  value  to  the  finished  advertisements,  and  was  the  actual 
subject-matter  of  the  contract,  and  because  that  work  and  skill,  while 
it  added  the  chief  value  to  the  finished  articles  for  the  especial  use  of 
the  defendant,  made  both  the  articles  and  the  materials  worthless  for 
all  otlier  purposes. 

The  contracts  in  the  case  we  are  considering  were  not  for  the  blank 
paper  on  which  they  were  finally  impressed ;  that  was  of  small  value 
in  proportion  to  the  value  of  the  finished  articles;  they  were  not  for 
the  sale  of  anything  then  in  existence ;  they  were  for  the  artistic  skill 
and  labor  of  the  employes  of  the  defendant  in  preparing  the  sketches 
and  designs,  transferring  them  upon  stone,  and  finally  impressing  them 
upon  the  paper  the  defendant  was  to  furnish ;  and  they  authorized  the 
plaintiff,  without  other  orders  than  the  contracts  themselves,  and  the 
approvals  of  the  designs  and  proofs  there  called  for,  to  prepare  and 
furnish  all  the  articles  named  in  the  contracts  and  to  collect  the  con- 
tract price  therefor.  These  contracts  required  the  names  of  defendant's 
mills  and  its  trade-marks  to  be  so  impressed  upon  all  these  articles  that 
when  they  were  completed  they  were  not  only  unsalable  to  all  others, 
but  worthless  to  plaintiff  for  all  purposes  but  waste  paper.  The  con- 
tracts are  evidence  that  on  December  31,  1889,  the  articles  contracted 
for  would  have  been  worth  about  $6,000  to  the  defendant,  and  if  a  few 
days  later,  when  they  were  tendered,  they  were  not  worth  so  much, 
the  defendant  may  recover  the  damages  it  suffered  from  the  delay 
from  December  31,  1889,  to  the  date  of  the  tender,  in  a  proper  action 
therefor,  or  may  have  the  same  allowed  in  this  action  under  proper 
pleadings  and  proofs,  and  no  injustice  will  result;  while,  if  the  de- 
fendant was  permitted  on  account  of  this  delay  to  utterly  repudiate 
the  contract,  the  plaintiff  must  practically  lose  the  entire  $6,000. 

The  contracts  contain  no  stipulation  from  which  it  can  be  fairly  in- 
ferred that  the  parties  intended  the  time  of  performance  to  be  even 
material;  indeed,  they  strongly  indicate  the  contrary.  They  provide 
that  a  certain  portion  of  the  articles  shall  be  furnished  in  two  months, 
that  the  remainder  of  the  stationery  and  5,000  hangers  shall  be  furnish- 
ed in  the  course  of  the  year,  and  the  5,000  hangers  more  and  the  vi- 
gnette shall  be  furnished  within  a  reasonable  time  after  the  proofs  are 
approved  by  the  defendant ;  there  is  no  stipulation  for  the  payment  of 
any  damages  or  the  avoidance  of  the  contracts  on  account  of  a  failure 
to  perform  within  any  of  the  times  stipulated  in  the  contracts,  and  the 
parties  themselves  proceeded  so  leisurely  thereunder  that  the  'first  and 
only  admitted  request  by  the  defendant  for  the  delivery  of  any  of  the 
articles  not  delivered  in  August  was  on  December  16,  1889.  *  *  * 
In  the  absence  of  any  such  stipulation,  or  any  clearly  expressed  intent 
that  time  should  be  material  even,  it  would  be  clearly  unjustified  by 
the  law  and  inequitable  to  hold  that  the  plaintiff  is  compelled  to  for- 
feit his  entire  contract  price  on  account  of  this  trifling  delay  that  may 


104  CONTRACTS  (Part  1 

have  been  immaterial  to  the  defendant,  and,  if  not,  may  be  fully  com- 
pensated in  damages. 

The  result  is  that  these  contracts  were  not  for  the  sale  and  deliv- 
ery, or  the  manufacture  and  delivery,  of  marketable  commodities. 
They  were  contracts  for  artistic  skill  and  labor,  and  the  materials  on 
which  they  were  to  be  bestowed  in  the  manufacture  of  articles  which 
were  not  salable  to  any  one  but  the  defendant  when  completed  because 
impressed  with  special  features  useful  only  to  it.  There  was  nothing 
in  the  contracts  or  their  subject-matter  indicating  any  intention  of  the 
parties  that  the  stipulations  as  to  time  should  be  deemed  of  their  es- 
sence; and  the  defendant  was  not  justified  on  account  of  the  slight 
delay  disclosed  by  the  record  in  refusing  to  accept  the  goods,  or  in 
repudiating  the  entire  contract.  This  conclusion  disposes  of  the  case, 
and  it  is  unnecessary  to  notice  other  errors  assigned.  The  judgment 
below  is  reversed,  and  the  cause  remanded  for  further  proceedings  not 
inconsistent  with  this  opinion. 


SECTION  5.— PERFORMANCE  TO  THE  SATISFACTION  OF 
ANOTHER  AS  A  CONDITION 


PEN^■I^'GTOX  V.  HOA^XAND. 

(Supreme  Court  of  Rhode  Island.  1S9S.    21  R.  I.  65,  41  Atl.  891, 
79  Am.  St.  Rep.  774.) 

Action  by  Harper  Pennington  against  Samuel  S.  Howland.  There 
was  a  verdict  and  judgment  for  plaintiff. 

Stiness,  J.  The  plaintiff  was  employed  to  paint  a  pastel  portrait 
of  the  defendant's  wife  for  the  sum  of  $500,  under  a  contract  by  cor- 
respondence, which  only  provided  for  the  price.  The  plaintiff  went 
to  the  defendant's  house,  in  Washington,  D.  C,  and  began  his  work. 
The  defendant  testified  that  he  at  once  objected  to  the  proposed  por- 
trait, in  street  dress  and  hat ;  but  the  plaintiff  said  it  was  an  artistic 
idea,  which  he  wished  to  carry  out,  and  that,  if  it  was  not  satisfac- 
tory, he  would  paint  the  defendant  one  "until  satisfied."  He  also  tes- 
tified that  the  plaintiff  undertook  the  commission  with  the  understand- 
ing that  he  would  paint  a  satisfactory  portrait.  The  plaintiff  denies 
this,  and  says  that,  upon  the  completion  of  his  work,  Mrs.  Howland 
said  that  she  wanted  another  portrait,  taken  in  a  different  style  of 
dress,  to  show  a  pearl  necklace  which  had  belonged  to  her  mother.  He 
then  painted  a  second  portrait,  and  went  away,  leaving  his  implements, 
as  he  says,  to  be  sent  to  him,  or,  as  the  defendant  says,  because  the 
portrait  was  not  finished,  and  because  he  was  to  return  to  complete  it. 
The  defendant  says  that  he  received  a  letter  from  the  plaintiff  stating 
that  the  pictures  should  be  framed  to  keep  the  pastel  from  brushing 
off,  and  that  he  would  give  instructions  to  a  man,  whom  he  usually 
employed,  to  do  it.  The  frames  came,  the  pictures  were  put  into  them, 
and,  after  some  correspondence,  the  defendant  paid  for  them,  and  the 
pictures  are  still  in  his  possession. 

Upon  this  general  statement  of  testimony,  the  plaintiff's  claim  was 
that  he  painted  one  portrait  at  an  agreed  price,  and  then  another  upon 
request,  for  which  he  had  charged  the  same  price,  and  that  both  were 
not  only  v.'ithout  conditions,  but  were  said  to  be  satisfactory.    The  de- 


Ch.  3)  PERFORMANCE   OF   CONTRACTS  165 

fendant  claims  that  the  plaintiff  agreed  upon  starting  his  work  that, 
if  the  picture  was  not  satisfactory,  he  would  paint  another;  that,  after 
expressing  his  dissatisfaction,  the  plaintiff  immediately  started  another, 
which  he  did  not  finish ;  that  the  pictures  w^ere  framed  simply  to  pre- 
serve them  until  the  last  one  should  be  finished ;  and  that  they  have 
since  remained  with  him  in  that  way.  These  conflicting  claims  pre- 
sent obvious  questions  of  fact  for  a  jury.  Numerous  exceptions  were 
taken  at  the  trial,  which  can  be  better  considered  generally  than  in 
detail. 

According  to  the  defendant's  statement  that  the  work  was  to  be  sat- 
isfactory to  him,  he  asked  the  court  to  instruct  the  jury  that  he  had 
the  right  Xo  reject  the  first  portrait,  if  he  was  not  satisfied  with  it.  The 
judge  instructed  the  jury  that  "satisfactoiy"  means  "reasonably  satis- 
factory," but,  in  response  to  another  request,  he  also  instructed  the 
jury  that  "an  artist,  if  he  agreed  to  paint  a  picture  to  one's  satisfac- 
tion, has  no  cause  of  action  for  the  price  unless  the  buyer  is  satisfied, 
however  good  the  picture  is" — adding:  "But,  unless  the  man  returns 
the  picture,  he  is  conclusively  held  to  be  satisfied."  This  last  instruc- 
tion, without  the  added  sentence,  states  the  law  correctly,  according 
to  the  current  of  authority ;  and,  in  giving  the  preceding  instruction 
that  a  portrait  must  be  "reasonably  satisfactory,"  the  judge  doubtless 
had  in  mind  another  class  of  cases  to  which  that  limitation  may  apply. 
When  the  subject  of  the  contract  is  one  which  involves  personal  taste 
or  feeling,  an  agreement  that  it  shall  be  satisfactory  to  the  buyer  nec- 
essarily makes  him  the  sole  judge  whether  it  answers  that  condition. 
He  cannot  be  required  to  take  it  because  other  people  might  be  satis- 
fied with  it.  for  that  is  not  what  he  agreed  to  do.  Personal  tastes  dif- 
fer widely,  and,  if  one  has  agreed  to  submit  his  work  to  such  a  test, 
he  must  abide  by  the  result.  A  large  number  of  witnesses  might  be 
brought  to  testify  that  the  work  was  satisfactory  to  them,  that  they 
considered  it  perfect,  and  that  they  could  see  no  reasonable  ground 
for  objecting  to  it.  But  that  would  not  be  the  test  of  the  contract, 
nor  should  a  jury  be  allowed  to  say  in  sudi  a  case  that  a  defendant 
must  pay  because,  by  the  preponderance  of  evidence,  he  ought  to  have 
been  satisfied  with  the  work,  or,  in  other  words,  that  it  was  "reasonably 
satisfactory." 

Upon  this  principle  numerous  cases  have  been  decided.  In  McCar- 
ren  v.  McNulty,  7  Gray  (Mass.)  139  (an  action  to  recover  the  price 
of  a  bookcase),  the  court  said:  "It  may  be  that  the  plaintiff  was  in- 
judicious or  indiscreet  in  undertaking  to  labor  and  furnish  material 
for  a  compensation  the  payment  of  which  was  made  dependent  upon 
a  contingency  so  hazardous  or  doubtful  as  the  approval  or  satisfaction 
of  a  party  particularly  in  interest.  But  of  that  he  was  the  sole  judge. 
Against  the  consequences  resulting  from  his  own  bargain,  the  law  can 
afford  him  no  relief.  Having  voluntarily  assumed  the  obligations 
and  risk  of  the  contract,  his  legal  rights  are  to  be  ascertained  and  de- 
termined solely  according  to  its  provisions."  Gibson  v.  Cranage,  39 
Mich.  49.  33>  Am..  Rep.  351.  was  to  the  same  eft'ect.  where  the  subject 
of  the  action  was  a  portrait.  In  Zaleski  v.  Clark.  44  Conn.  218,  26 
Am.  Rep.  446,  the  plaintiff  was  to  make  a  bust  of  the  defendant's  de- 
ceased husband  satisfactory  to  her.  The  court  held  that  it  was  for 
her  alone  to  determine  whether  it  was  so,  and  that  it  was  not  enough 
to  show  that  her  dissatisfaction  was  unreasonable.  Brown  v.  Foster, 
113  Mass.  136,  18  Am.  Rep.  463,  was  for  a  suit  of  clothes.     Devens, 


166  CONTRACTS  (Part  1 

J.,  said:  "It  is  not  for  any  one  else  to  decide  whether  a  refusal  to 
accept  is  or  is  not  reasonable,  when  the  contract  permits  the  defendant 
to  decide  himself  wdiether  the  articles  furnished  are  to  his  satisfaction." 
The  doctrine  was  carried  to  very  great  length  in  Singerly  v.  Thayer, 
108  Pa.  291,  2  Atl.  230,  56  Am.  Rep.  207,  where  an  elevator  had  been 
erected  in  a  building,  and  "warranted  satisfactory  in  every  respect." 
It  was  held  that,  if  it  had  been  substantially  completed  so  that  the 
owner  of  the  building  could  understand  how  it  would  operate,  it  could 
be  rejected  if  it  was  not  satisfactorv. 

In  Boiler  Co.  v.  Garden,  101  X.  Y.  387,  4  N.  E.  749,  54  Am.  Rep. 
709,  the  opinion  sets  out  the  two  classes  of  cases  with  reference  to 
which  a  distinction  has  been  made.  One  class  is  that  which  involves 
personal  taste  and  judgment,  examples  of  which  we  have  shown;  and 
the  other  class  is  that  where  the  subject-matter  of  the  contract  is  such 
that  the  satisfaction  stipulated  for  must  be  held  to  apply  to  quality, 
workmanship,  salability,  and  other  like  considerations,  rather  than  to 
personal  satisfaction.  For  example,  if  one  agrees  to  sell  land  with  a 
satis  fa  ctoiy  title,  and  shows  a  title  valid  and  complete,  the  parties 
must  have  intended  such  a  title  to  be  satisfactory,  rather  than  to  leave 
an  absolute  right  in  the  purchaser  to  say  "I  am  not  satisfied,"  when 
no  reason  could  be  shown  why  he  should  not  be  satisfied.  So,  if  one 
agrees  to  do  work  in  a  satisfactory  manner,  it  must  mean  a  workman- 
like manner — as  well  as  it  would  be  expected  to  be  done — rather  than 
a  merely  personal  or  whimsical  rejection.  It  is  this  class  of  cases  to 
which  the  term  "reasonably  satisfactory"  applies.  Hence  in  the  boiler 
case,  last  cited,  it  was  held  that  a  simple  allegation  of  dissatisfaction, 
without  some  good  reason  assigned  for  it,  might  be  a  mere  pretext, 
and  would  not  be  regarded. 

In  Machine  Co.  v.  Smith,  50  ^lich.  565,  15  N.  W.  906,  45  Am.  Rep. 
57,  the  court  says:  "In  the  one  class  the  right  of  decision  is  complete- 
ly reserved  to  the  promisor,  without  being  liable  to  disclose  reasons  or 
account  for  his  course ;  and  a  right  to  inquire  into  the  grounds  of  his 
action  and  overhaul  his  determination  is  absolutely  excluded  from  the 
promisee  and  from  all  other  tribunals.  In  the  other  class  the  promisor 
is  supposed  to  undertake  that  he  will  act  reasonably  and  fairly,  and 
found  his  determination  upon  grounds  which  are  just  and  sensible ; 
and  from  thence  springs  a  necessary  implication  that  his  decision,  in 
point  of  correctness  and  the  adequacy  of  the  grounds  of  it,  is  open  to 
consideration,  and  subject  to  the  judgment  of  judicial  triors."  *  *  * 
Even  in  cases  of  the  latter  class,  where  a  rejection  is  made  in  good 
faith,  the  dissatisfaction  of  the  purchaser  is  held  in  many  decisions  to 
be  sufficient. 

The  instruction  to  the  jury  in  the  present  case  that  "satisfactory" 
means  "reasonably  satisfactory"  was  erroneous  as  applied  to  the  sub- 
ject-matter of  the  alleged  contract.    *    *    *    New  trial  granted. 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  167 

SECTION  6.— PROCURING  CERTIFICATE  OF  AN 
ARCHITECT  AS  A  CONDITION 


NOLuVN  et  al.  v.  WHITNEiY. 
(Court  of  Appeals  of  New  York,  1882.    88  N.  Y.  648.) 

One  Michael  Nolan,  entered  into  an  agreement  with  the  defendant 
to  do  some  mason  work  in  the  erection  of  two  buildings  for  the  sum 
of  $11,700  to  be  paid  in  installments  as  the  work  progressed.  The  last 
installment  of  $2,700  was  to  be  paid  thirty  days  after  completion  of 
the  work  which  was  to  be  performed  to  the  satisfaction  and  under  the 
direction  of  the  architect,  to  be  attested  by  his  certificate,  before  any 
payment  could  be  required  to  be  made.  All  the  installments  were  paid 
except  the  last,  and  Nolan,  claiming  that  he  had  fully  performed  his 
agreement,  commenced  this  action  to  recover  that  installment.  The 
defendant  alleged  that  Nolan  had  not  fully  performed  his  agreement 
according  to  its  terms  and  requirements,  and  also  that  he  had  not  ob- 
tained the  architect's  certificate,  as  required  by  the  agreement. 

Upon  the  trial  the  defendant  gave  evidence  tending  to  show  that 
much  of  the  work  was  imperfectly  done,  and  that  the  agreement  had 
not  been  fully  performed  on  the  part  of  Nolan;  the  latter  gave  evi- 
dence tending  to  show  that  the  work  was  properly  done,  that  he  had 
fairly  and  substantially  performed  his  agreement,  and  that  the  archi- 
tect had  refused  to  give  him  the  certificate  which  would  entitle  him  to 
the  final  payment.  The  referee  found  that  Nolan  completed  the  mason 
work  required  by  the  agreement  according  to  its  terms ;  that  he  sub- 
stantially complied  with  and  performed  the  requirements  of  his  agree- 
ment ;  but  that  there  were  trivial  defects  in  the  plastering  for  which  a 
deduction  of  $200  should  be  made  and  he  ordered  judgment  in  favor 
of  Nolan  for  the  last  installment,  less  $200.      • 

The  Court  in  their  opinion  say :  "It  is  a  general  rule  of  law  that  a 
party  must  perform  his  contract  before  he  can  claim  the  consideration 
due  him  upon  performance;  but  the  performance  need  not  in  all  cas- 
es be  literal  and  exact.  It  is  sufticient  if  the  party  bound  to  perform, 
acting  in  good  faith,  and  intending  and  attempting  to  perform  his  con- 
tract, does  so  substantially,  and  then  he  may  recover  for  his  work, 
notwithstanding  slight  or  trivial  defects  in  performance,  for  which 
compensation  may  be  made  by  an  allowance  to  the  other  party. 
Whether  a  contract  has  been  substantially  performed  is  a  question  of 
fact  depending  upon  all  the  circumstances  of  the  case  to  be  determin- 
ed by  the  trial  court.  *  *  *  According  to  the  authorities  cited  un- 
der an  allegation  of  substantial  performance  upon  the  facts  found  by 
the  referee,  Nolan  was  entitled  to  recover  unless  he  is  barred  because 
he  failed  to  get  the  architect's  certificate  which  the  referee  found  was 
unreasonably  and  improperly  refused.  But  when  he  had  substantially 
performed  his  contract,  the  architect  was  bound  to  give  him  the  cer- 
tificate, and  his  refusal  to  give  it  was  unreasonable,  and  it  is  held  that 
an  unreasonable  refusal  on  the  part  of  an  architect  in  such  a  case  to 
give  the  certificate  dispenses  with  its  necessity." 


1G8  CONTRACTS  (Part  1 


HP:BERT  v.  DEWEY. 
(Supreme  Judicial  Court  of  Massacliusetts,  1906.    191  Mass.  403,  77  X.  E.  822.) 

KNOWI.TON,  C.  J.  The  first  of  these  actions  was  brought  by  the 
plaintiff's  intestate  to  recover  upon  a  contract  in  writing  for  building 
a  house  for  the  defendant.     *     *     * 

The  defendant  contended  that  the  plaintiff'  could  not  recover  under 
the  contract,  because  her  intestate  failed  to  obtain  from  the  architect 
a  certificate  that  the  final  payment  was  due.  The  question  is  whether 
a  sufficient  justification  was  shown  for  this  failure.  The  instruction 
to  the  jury  on  this  point  was  as  follows:  "If  the  defendant's  archi- 
tect capriciously  withheld  the  final  certificate,  and  capriciously  allow- 
ed the  contractor  to  believe  that  nothing  more  remained  to  be  done  to 
entitle  him  to  such  certificate,  the  contractor  is  thereby  relieved  from 
his  obligation  to  secure  the  certificate."  This  was  in  accordance  with 
the  plaintiff's  request,  except  that  the  judge  left  out  the  word  ''fraudu- 
lently" which  was  used  in  the  request  with  "capriciously."  The  law 
bearing  upon  this  part  of  the  case  has  not  been  definitely  settled  in 
this  commonwealth.  There  is  a  class  of  cases  arising  under  poHcies 
of  insurance  and  other  similar  contracts,  in  which  it  is  held  that  the 
procurement  of  the  certificate,  called  for  by  the  contract,  is  a  condition 
precedent  to  the  plaintiff's  recovery.  *  *  *  The  reason  why  it  is 
not  open  to  the  plaintiff  in  these  cases  to  show  that  he  could  not  ob- 
tain the  certificate,  is  because  the  nature  of  the  contract  and  the  pur- 
pose of  the  requirement  of  a  certificate  are  such  as  to  make  the  re- 
covery conditional  upon  the  presentation  of  the  paper.  *  *  *  In 
such  contracts  the  plaintiff"  takes  upon  himself  the  obligation  to  furnish 
the  required  proof,  and  assumes  the  risk  of  whatever  difficulty  there 
may  be  in  procuring  it. 

Whether  a  contract  is  of  this  kind  is  a  question  of  construction, 
dependent  upon  the  meaning  of  the  parties,  as  ascertained  from  the 
writing.  A  provision  for  a  certificate  by  an  architect,  in  a  building 
contract,  stands  differently.  The  architect  is  the  agent  of  the  owner, 
to  perform  an  act  for  the  convenience  of  both  parties,  in  regard  to  a 
matter  with  which  he  is  directly  connected  as  an  employe.  It  is  as- 
sumed by  the  contracting  parties  and  implied  in  the  contract  that  he 
will  do  his  duty,  and  will  act  in  good  faith  in  determining  whether 
a  certificate  should  be  granted.  In  cases  under  provisions  like  the  one 
before  us,  it  is  everywhere  held  that  the  contractor  may  recover  with- 
out a  certificate,  if  the  circumstances  relieve  him  from  the  obligation 
to  obtain  one.  What  circumstances  are  sufficient  for  this  purpose  is 
the  only  question.  If  the  owner  wrongfully  interferes  to  prevent  the 
giving  of  a  certificate,  it  is  universally  held  that  this  will  entitle  the 
contractor  to  recover  without  it.  *  *  *  Many  of  the  authorities  are 
to  the  effect  that  any  wrongful  refusal  Of  the  architect  to  give  a  cer- 
tificate will  entitle  the  contractor  to  proceed  without  one.  In  some 
of  the  cases  it  is  said  that  if  the  architect  unreasonably  refuses  to  give 
a  certificate  it  is  enough.  *  *  *  jj^  others  it  appeared  that  he  refused 
"dishonestly  and  arbitrarily,"  or  "willfully  and  fraudulently,"  or  "ca- 
priciously."   'i'    *    * 

In  the  present  case  there  was  evidence  from  which  the  jury  might 
have  found  that  after  a  complete  performance  of  the  contract  the 
plaintiff's  intestate  applied  to  the  architect  for  the  final  certificate,  and 
he  willfully  and  fraudulently  refused  to  give  it.     It  is  plain  that  in 


Ch.  3)  PERFORMANCE  OF  COXTRACTS  169 

making  the  contract  it  was  understood  between  the  parties  that  the 
architect  would  act  in  good  faith  in  the  performance  of  this  part  of 
his  duty.  In  legal  effect,  the  contract  is  as  if  their  understanding  in 
this  particular  had  been  written  into  it,  as  one  of  its  terms.  If,  under 
such  an  agreement,  after  the  full  performance  of  the  contract,  the  ar- 
chitect willfully  and  fraudulently  refuses  to  act,  or  dies,  or  becomes 
disqualified,  and  there  is  no  provision  for  such  a  case,  the  question 
arises  whether  the  contractor  is  entitled  to  receive  the  contract  price, 
the  fact  of  performance  being  shown  in  some  other  way,  or  whether 
the  entire  contract  falls  to  the  ground,  and  the  parties  are  left  to  en- 
force their  rights  under  a  quantum  meruit.  It  is  a  general  rule  that 
if  an  implied  condition  that  fails  is  of  the  essence  of  the  contract,  and 
enters  largely  into  the  consideration,  in  such  a  way  that  there  can  be 
no  substantial  performance  under  the  changed  conditions,  the  whole 
contract  will  fail,  and  the  parties  may  ha\'e  reasonable  compensation 
for  what  they  have  done  in  reliance  upon  it.  *  *  *  But  the  provi- 
sion in  this  case  for  the  ascertainment  of  their  rights,  in  reference  to 
the  construction  of  the  building  called  for  by  the  contract  is  of  a  differ- 
ent kind.  It  is  a  part  of  the  machinery  provided  for  the  ascertain- 
ment and  adjustment  of  their  rights  in  reference  to  the  matters_  to 
which  the  contract  relates.  It  is  provided  to  be  used  only  upon  an  im- 
plied condition  that  it  will  be  available  for  use.  If,  through  the  death 
or  incapacity  of  the  architect,  or  his  willful  refusal  to  act,  it  becomes 
impossible  to  adopt  this  method  of  determining  the  rights  of  the  par- 
ties, other  means  may  be  adopted,  on  the  ground  that  this  no  longer  re- 
mains as  an  essential  term  of  the  agreement.  In  all  substantial  par- 
ticulars the  contract  is  complete  without  the  provision  for  obtaining 
a  final  certificate,,  and,  in  the  case  supposed,  it  should  be  treated  as  if 
the  provision  were  stricken  from  the  contract.     *     *     * 

In  all  the  cases  that  we  have  cited  under  building  contracts,  it  is 
held  that  there  may  be  a  recovery  upon  the  contract,  where  the  con- 
tractor's failure  to  obtain  the  architect's  certificate  showing  perform- 
ance of  it  is  caused  by  the  fraud  or  intentional  misconduct  of  the  ar- 
chitect. '^-  *  *  We  have  found  no  case  of  this  kind  in  which  it  is 
held,  on  a  failure  to  obtain  an  architect's  certificate  after  performance 
of  a  contract,  that  the  contract  lost  its  force,  and  that  the  parties  were 
left  to  their  rights  upon  a  quantum  meruit.  In  a  case  like  the  present, 
we  are  of  opinion  that  if  an  architect  after  the  completion  of  a  con- 
tract willfully,  and  without  excuse,  refuses  to  act  at  all,  or  if  he  acts 
dishonestly  and  in  bad  faith,  and  the  contractor  is  thereby  prevented 
from  obtaining  a  certificate,  the  contractor  may  proceed  with  his  suit 
without  i'l.     *     *     * 

After  telling  the  jury  that  certain  conduct  of  Dewey  would  not  be 
fraudulent  in  reference  to  the  certificate,  he  added:  "It  would  still 
have  to  be  shown  by  the  plaintiff  that  the  certificate  ought  to  have 
been  given,  and  if  it  was  shown  that  the  work  was  done  and  the  con- 
tract substantially  performed,  then  the  fact  that  the  certificate  was  not 
given  was  not  of  any  account."  This  last  proposition  was  not  correct 
in  law.  If  the  architect,  acting  in  good  faith,  thought  that  the  work 
w^as  not  properly  done  and  the  contract  was  not  substantially  per- 
formed, and  refused  the  certificate  for  that  reason,  the  mere  fact  that 
the  certificate  ought  to  have  been  given,  and  that  the  work  was  done, 
and  the  contract  was  performed,  would  not  entitle  the  plaintiff  to  re- 


170  CONTRACTS  (Part  1 

cover  without  the  certificate.     The  parties  were  bound  by  the  decision 
of  the  architect  made  in  good  faith.     *    *     * 

Because  the  instructions  give  too  httle  effect  to  the  requirement  that 
the  contractor  shall  procure  a  certificate  from  the  architect  before  he 
is  entitled  to  payment,  there  must  be  a  new  trial. 


SECTION  7.— SUBSTANTIAL  PERFORMANCE  IN  VARIOUS 
OTHER  TYPES  OF  CONTRACTS  AS  CONDITIONS 


BUFFALO  &  L.  LAND  CO.  v.  BELLEVUE  LAND  &  IMPROVEMENT  CO. 

(Court  of  Appeals  of  "New  York,  1901.    165  N.  Y.  247,  59  N.  E.  5, 
51   L.  R.  A.  951.) 

A  vendor  in  selling  land  contracted  to  construct  a  street  car  line 
over  such  land,  and  operate  cars  thereon  at  certain  specified  hours  "as 
such  street  railroads  are  usually  run,"  until  the  land  was  sold  by  the 
vendee,  and  agreed,  in  case  of  default,  to  release  its  mortgage  on  the 
land,  and  repay  the  purchase  money  and  certain  liquidated  damages. 
The  road  was  constructed  by  the  vendor,  and  operated  according  to 
contract,  except  during  a  certain  winter,  when  its  service  was  inter- 
rupted by  heavy  snow  blockades,  but  it  used  all  the  usual  means  to 
keep  its  tracks  clear,  and  operated  its  road  as  well  as  similar  roads  in 
the  vicinity. 

O'Brien,  J.  This  is  an  action  to  rescind  a  contract  for  a  breach  by 
the  defendant,  and  to  compel  the  latter  to  specifically  perform  certain 
alternative  provisions  thereof.  *  *  *  The  trial  court  rendered  judg- 
ment for  the  plaintiff  for  the  relief  demanded,  which  was  the  restora- 
tion of  the  purchase  money  of  the  land,  so  far  as  paid,  and  all  money 
paid  on  the  mortgage  by  the  plaintiff;  but  on  appeal  to  the  appellate 
division  the  judgment  was  reversed,  and  a  new  trial  granted.     *     *     * 

The  agreement  to  run  passenger  cars  on  the  road  as  often  as  once 
every  half  hour  was  not  literally  or  absolutely  performed,  and  the 
question  is  whether  the  omission  in  that  respect  constitutes  such  a 
breach  of  the  defendant's  contract  as  to  give  to  the  plaintiff  the  right 
to  rescind,  and  to  demand  from  the  defendant  the  restoration  of  the 
benefits  received  under  it.  We  do  not  think  that  it  would  be  a  fair 
construction  of  the  contract  to  hold  that  the  defendant  was  absolutely 
bound  to  run  a  car  every  half  hour  each  day  under  all  circumstances 
and  conditions,  whether  possible  or  not,  or  that  an  omission  in  that 
regard,  under  the  circumstances  and  conditions  found,  was  a  breach 
of  the  contract  to  operate  the  railroad  in  the  manner  specified.  The 
whole  contract,  and  its  purpose  and  object,  must  be  bi-bught  into  view, 
and  the  language  employed  by  the  parties  understood  in  a  reasonable 
way.  Neither  party  intended  to  be  bound  ,to  do  things  that  were  im- 
possible. The  construction  for  which  the  learned  counsel  for  the  plain- 
tiff contends  would  be  unreasonable,  and  would  place  the  defendant  at 
the  mercy  of  the  elements,  since  it  is  well  known  that  the  operation  of 
railroads  is  frequently  interrupted  by  storms  such  as  are  mentioned  in 
the  findings  in  this  case.     *     *     * 

It  is  a  well-settled  rule  of  law  that  where  a  party,  by  his  own  con- 
tract, absolutely  engages  to  do  an  act,  it  is  his  own  fault  and  folly 
that  he  did  not  thereby  provide  against  contingencies,  and  exempt  him- 


Ch.  3)  rKUKOK.MAXCE  OF  COXTRACTS  ITl 

self  from  responsibility  in  certain  events.  In  such  cases  performance 
is  not  excused  by  inevitable  accident  or  other  contingency,  although 
not  foreseen  or  under  the  control  of  the  party.  When  the  contract  is 
absolute,  the  vis  major  is  not  an  excuse  for  nonperformance.  *  *  * 
But  there  are  many  contracts  from  which  by  their  very  natufe  a  con- 
dition may  be  implied  that  a  party  will  be  relieved  from  the  conse- 
quences of  nonperformance,  in  some  slight  particular,  where  the  obli- 
gation is  qualified,  or  when  performance  is  rendered  impossible  with- 
out his  fault,  and  we  think  the  contract  in  question  belonged  to  that 
class.     *     *     * 

In  this  case  the  covenant  to  run  the  cars  every  half  hour  was  quali- 
fied, not  only  by  the  nature  of  the  contract  and  the  act  to  be  per- 
formed, but  by  'the  use  of  the  words,  "as  such  street  railroads  are 
usually  run."  We  are  of  opinion  that  there  was  no  substantial  breach 
of  the  agreement  upon  the  facts  found  at  the  trial,  when  they  are  all 
taken  together,  since  the  railroad  was  constructed,  maintained,  and 
operated  "in  conformity  with  the  agreement,  when  reasonably  and  fair- 
ly construed.     *     *     *  .  ,   .    , 

The  order  and  judgment  of  reversal  should  be  affirmed,  and  judg- 
ment absolute  ordered  for  the  defendant. 


MOHA  V.  HUDSON  BOXING  CDUB. 

(Suprome  Court  of  Wisconsin.  1910.     164  Wis.  425,  160  N.  W.  266, 
L.  R.  A.  1917B,  12.38.) 

Plaintiff  is  a  professional  boxer,  and  sues  the  defendant  to  recover 
22i/>  per  cent,  of  the  gross  receipts  of  a  boxing  contest  held  under  the 
management  of  the  club  December  4,  1914,  at  Hudson,  Wis.  The 
contract  was  in  writing,  and  provided  in  substance  that  the  plaintiff 
would  box  Mike  Gibbons  of  St.  Paul  ten  rounds  "to  a  no  decision"  at 
the  defendant's  boxing  arena,  receiyng  as  consideration  therefor  221/2 
per  cent,  of  the  gross  receipts,  together  with  certain  transportation  and 
hotel  expenses,  he  to  deposit  with  a  named  stakeholder  $100  to  guar- 
antee that  he  would  make  the  weight  specified  in  the  contract,  which 
sum  in  case  Of  his  failure  to  appear  or  enter  the  contest  was  to  belong 
to  the  defendant;  that  the  revised  Queensbury  rules,  as  interpreted 
by  the  referee  and  in  compliance  with  the  laws  of  this  state  and  the 
rules  of  the  State  Athletic  Commission  should  govern  the  contest. 

The  contest  began,  and  during  the  second  round  the  referee  decided 
that  the  plaintiff'  had  struck  a  foul  blow,  i.  e.,  a  blow  below  the  belt, 
and  stopped  the  contest.  Neither  side  introduced  in  evidence  the  re- 
vised Queensbury  rules,  ngr  the  rules  of  the  State  Athletic  Commis- 
sion, but  the  referee  testified  that  the  rules  prohibit  the  striking  of  a 
foul  blow,  and  that  he  stopped  the  contest,  because  the  other  man  was 
disabled  by  the  foul  blow. 

The  trial  court  held  that  the  plaintiff  had  failed  to  perform  his  con- 
tract, and  hence  could  not  recover.  From  this  judgment,  plaintiff 
appealed. 

WiNSLOW,  C,  J.  Plaintiff"  sues  to  recover  the  contract  price  of  his 
professional  services.  In  order  to  succeed  he  must  show  at  least  sub- 
stantial performance  of  his  contract.  It  is  certain  that  there  has  been 
none  here.  He  contracted  to  box  ten  rounds  under  certain  rules.  At 
the  outset  of  the  contest,  in  the  middle  of  the  second  round,  he  vio- 
lated one  of  the  rules,  and  as  a  result  thereof  disabled  his  opponent. 


1 72  CONTRACTS  (Part  1 

and  thus  by  his  own  act  made  substantial  performance  impossible. 
Wherher  this  act  was  deliberate  or  not  cuts  no  figure.  It  was  an  act 
which  he  had  contracted  not  to  do,  and  it  prevented  performance. 
*  *  *  It  does  not  seem  necessary  to  consider  other  questions;  the 
considerations  suggested  are  decisive. 
Judgment  affirmed. 

SEWELL  V.    UNDEKIIILL. 

(Court  of  Appeals  of  New  York,  1910.    197  N.  Y.  168,  90  X.  E.  4-30,  27  L.  R.  A. 
[N.  S.I    23.3,  1.34  Am.  St.  Rep.  863,  18  Ann.  Cas.  795.) 

Gray,  J.  The  plaintiff  and  defendant  had  entered  into  an  agree- 
ment for  the  sale  by  the  latter  and  the  purchase  by  the  former,  of  a 
parcel  of  land  at  the  price  of  $25,000.    *    *    * 

This  action  was  brought  by  the  plaintiff  to  recover  the  damage  suf- 
fered by  him  through  the  destruction  of  the  dwelling  house,  upon  the 
theory  that  there  had  been  a  breach  of  the  agreement,  in  the  failure 
of  the  defendant  to  convey  the  house.  *  *  *  The  one  question  which 
is  presented  by  the  plaintiff's  appeal  is:  Should  the  loss,  occasioned 
by  the  accidental  destruction  of  the  building  upon  the  premises,  be 
borne  by  the  vendor,  or  the  vendee?  The  appellant  argues  that,  upon 
principle,  the  loss  should  fall  upon  the  vendor,  and  insists  that  the 
contrary  view  rests  upon  a  rule  of  the  English  courts,  which  is  not 
only  unjust,  but  which  is  not  to  be  regarded  as  conclusive  upon  us. 

I  think  that  it  is  too  late  to  dispute  the  English  rule,  and  that  we 
must  consider  it  as  established  by  decisions  of  the  courts  of  this  state. 
It  was  authoritatively  stated  by  Lord  Eldon.  in  Paine  v.  Meller,  6  Ves. 
Jr.  349,  31  Eng.  Repr.  10S8,  departing  from  the  rule  asserted  in  the 
earlier  case  of  Stent  v.  Bailis,  2  P.  Wms.  220,  24  Eng.  Repr.  705.  In 
Paine  v.  Meller  the  buildings  were  destroyed  by  fire  before  the  con- 
veyance was  ready.  Somewhat  like  the  present  case,  there,  after  the 
acceptance  of  the  title,  a  delay  occurred  in  the  preparation  and  execu- 
tion of  the  deeds.  With  respect  to  that  objection  of  the  vendee, 
which  was  grounded  upon  the  fire.  Lord  Eldon  said :  "As  to  the  mere 
effect  of  the  accident  itself,  no  valid  objection  can  be  founded  upon 
that  simply,  for,  if  the  party  by  the  contract  has  become  in  equity  the 
owner  of  the  premises,  they  are  his  to  all  intents  and  purposes.  Thev 
are  vendible  as  his ;  chargeable  as  his ;  capable  of  being  incumbered  as 
his ;  they  may  be  devised  as  his ;  they  may  be  assets  and  they  would 
descend  to  his  heir."  This  case  has  been,  repeatedly,  recognized  as 
an  authority  for  the  rule  by  the  courts  of  this  state.  *  *  *  A  con- 
trary view  has  been  taken  by  courts  in  other  states ;  but  the  great 
weight  of  authority  is  in  favor  of  the  English  doctrine.    *    *    * 


IIAWKES  V.  KEHOE  et  al. 

(Supreme  Judicial  Court  of  Massaehu.setts,  1907.    193  Mass.  419,  79  N.  E.  766, 
10  L.  R.  A.  [N.  S.]  125,  9  Ann.  Cas.  1053.) 

ShKLDON,  J.  *  *  *  We  need  spend  no  time  upon  the  numerous 
cases  in  England  and  in  this  country  which  the  industry  of  counsel 
has  brought  to  our  notice  as  to  the  rights  of  parties  to  such  agreements 
upon  a  total  or  partial  destruction  of  the  buildings  by  fire.  *  *  *  We 
are  of  opinion  that  in  this  commonwealth,  when  as  in  this  case,  the 
conveyance  is  to  be  made  of  the  whole  estate,  including  both  lands 


Ch.  3)  PERFORMANCE   OF   CONTRACTS  173 

and  buildings,  for  an  entire  price,  and  the  value  of  the  buildings  con- 
stitutes a  large  part  of  the  total  value  of  the  estate,  and  the  terms  of 
the  agreement  show  that  they  constituted  an  important  part  of  the 
subject-matter  of  the  contract,  it  is  now  settled  by  the  decisions  in 
Wells  V.  Calnan,  107  Mass.  514,  9  Am.  Rep.  65,  that  the  contract  is  to 
be  construed  as  subject  to  the  implied  condition  that  it  no  longer  shall 
be  binding  if,  before  the  time  for  the  conveyance  to  be  made,  the  build- 
ings are  destroyed  by  fire.  The  loss  by  the  fire  falls  upon  the  vendor, 
the  owner;  and  if  he  has  not  protected  himself  by  insurance,  he  can 
have  no  reimbursement  of  this  loss  ;  but  the  contract  is  no  longer  bind- 
ing upon  either  party.  If  the  purchaser  has  advanced  any  part  of  the 
price,  he  can  recover  it  back.  *  *  *  If  the  change  in  the  value  of  the 
estate  is  not  so  great,  or  if  it  appears  that  the  buildings  did  not  con- 
stitute so  material  a  part  of  the  estate  to  be  conveyed  as  to  result  in 
an  annulling  of  the  contract,  specific  performance  may  be  decreed,  with 
compensation  for  any  breach  of  agreement,  or  relief  may  be  given  in 
damages.    *    *    *  

TEBEAU  V.  RIDGE. 

(Supreme  Court  of  Missouri.  1914.     261  Mo.  517,  170  S.  W.  871, 
L.  R.  A.  1915C,  367.) 

Suit  for  specific  performance  by  George  Tebeau  against  Thomas  S. 
Ridge  and  another.  From  a  decree  for  complainant  for  less  than  the 
relief  demanded,  defendant  appeals,  and  complainant  prosecutes  a 
cross-appeal. 

Faris.  J.  *  *  *  Which  brings  us  to  a  discussion  of  the  plaintiff's 
cross-appeal  and  requires  us  to  ascertain,  if  we  can,  what  sort  of  decree 
should  be  entered.  Should  we  affirm  the  case  without  diminution  of 
price  for  the  outstanding  inchoate  dower  of  Mrs.  Ridge,  leaving  plain- 
tift"  to  his  action  at  law  for  relief,  if  any  he  has.  or  will  ever  have  upon 
the  facts  here,  or  should  we  decree  or  order  a  decree  for  plaintifi:'  after 
diminishing  the  purchase  price  to  be  paid  by  the  value  of  Mrs.  Ridge's 
inchoate  dower,  figured  as  one-third  of  such  actual  purchase  price? 

*      sK      * 

There  is  no  unanimity  of  decision  on  this  question  of  diminution  of 
purchase  price.  The  cases  are  in  much  confusion  and  irreconcilable 
contrariety.  Three  views  prevail:  (1)  The  purchaser  is  entitled,  as 
against  inchoate  dower,  to  have  the  purchase  price  diminished  by  such 
sum  as  represents  the  present  value  of  the  wife's  contingent  interest, 
estimated  by  the  tables  of  mortality  and  by  the  statute  of  present  values 
of  estates  less  than  a  fee  (in  Alabama,  Indiana,  Iowa,  New  York. 
Massachusetts,  Michigan,  Minnesota,  South  CaroHna,  and  Wisconsin), 
and  in  New  Jersey,  when  refusal  of  the  wife  to  convey  is  fraudulently 
brought  about;  (2)  the  view  that  the  decree  of  the  court  may  permit 
the  vendee  to  retain  one-third  of  the  purchase  price  as  an  indemnity 
until  the  wife  die  or  convey  (in  Alabama  and  Iowa)  ;  and  (3)  the 
view  that  the  vendee  shall  have  no  abatement  of  the  agreed  purchase 
price  on  account  of  the  wife's  refusal  to  relinquish  her  inchoate  dower, 
on  the  ground  usually  that  such  abatement  would  serve  to  put  upon  the 
wife  unfair  coercion  to  rehnquish  a  right  given  to  her  by  law  (District 
of  Columbia,  Illinois,  and  New  Jersey),  unless  wife's  refusal  was 
fraudulently  collusive  with  husband,  in  which  case  rule  in  New  Jersey 
is  contra  (New  York,  Pennsylvania,  Virginia,  Missouri).    *     *    * 

The  last  holding  in  this  state  was  in  Aiple-Hemmelmann  Real  Es- 


174  CONTRACTS  (Part  1 

tate  Co.  V.  Spelbrink.  211  Mo.  671,  111  S.  W.  480,  14  Ann.  Cas.  652, 
where,  by  a  divided  court  of  three  to  four,  it  wa.s  held  by  the  majority 
opinion  that  the  vendee  might,  if  he  so  wishes,  take  the  title  of  the 
husband  at  the  original  agreed  purchase  price,  undiminished  by  the  in- 
choate dower  of  the  wife,  but  that  nothing  was  to  be  ruled,  so  as  to  for- 
bid the  vendee  from  suing  for  his  damages  by  reason  of  the  outstand- 
ing inchoate  dower  of  the  wife.     *     '"     * 

In  my  humble  view  the  great  weight  of  authority,  both  of  the  ad- 
judged cases  and  the  text-writers,  adhere  to  the  view  that  in  a  proper 
case — "a  purchaser  of  real  estate  under  a  contract  such  as  here 
-  *  *  is  entitled  as  of  right  to  performance.  The  contracting  parties 
write  their  own  law  in  their  contract.  Courts  sit  to  enforce  the  law. 
Hence  they  sit  to  enforce  contracts,  not  abrogate  them."  Dissenting 
opinion  by  Lamm,  J.,  Aiple-Hemmelmann  Real  Estate  Co.  v.  Spelbrink, 
supra. 

Should  any  or  all  of  the  facts  that  plaintiff,  as  here,  did  or  did  not 
know  there  was  a  wife  in  the  case,  or  did  not  know  that  such  wife 
would  not  sign,  or  that  the  defendant  did  not  request  and  would  not 
request  his  wife  to  sign,  because  the  agreed  sale  price  was  inadequate, 
or  had  become  so  from  an  undreamed  of  increase  in  values,  serve  to 
prevent  a  court  of  equity,  in  an  otherwise  just  case,  from  decreeing 
specific  performance?  Nevertheless  one  or  more  of  these  reasons  is 
to  be  found  present  and  controlling  in  every  case  where  diminution  of 
the  purchase  price  is  refused,  and  consequently  specific  performance 
denied,  excepf  upon  condition  that  the  plaintiff  take  such  title  only  as 
the  soie  deed  of  the  husband  will  convey.  I  say  that  the  authorities 
ought  not  to  say  so ;  neither  do  the  great  weight  of  them  say  so,  as  I 
read  them.  Performance  in  a  proper  case  will,  it  seems,  almost  al- 
ways be  decreed,  but  upon  terms  differing  and  utterly  irreconcilable. 
'■'■'  *  *  If,  then,  such  contracts  are  to  be  enforced — and  the  rule  is 
that,  while  the  enforcement  thereof  is  in  the  discretion  of  the  chancel- 
lor, the  discretion  to  be  used  is  a  sound,  judicial,  and  not  a  capricious, 
discretion,  and  also  the  rule  is  that,  other  things  being  equal,  they  are  to 
be  enforced— then,  in  my  opinion,  both  the  weight  of  authority  and 
the  reason  of  the  thing  lie  with  the  view  that  there  should  be  a  diminu- 
tion of  the  purchase  price  by  the  present  value  of  the  wife's  inchoate 
dower.  The  defaulting  option  giver  should  not  get  the  whole  purciiase 
price  and  then  as  a  reward  for  his  breach  of  contract,  keep  one-third 
of  the  title  in  a  life  estate  in  the  family.  Therefore  I  am  forced  by 
the  authorities  and  the  text- writers,  as  well  as  by  the  logic  and  reason 
of  the  case,  to  follow  the  dissenting  opinion  in  the  Spelbrink  Case. 
This  is  a  stronger  case  than  the  Spelbrink  Case ;  not  so  much  stronger, 
it  may  be,  as  the  dift'erence  in  the  rule  connotes,  but  stronger  neverthe- 
less in  that  plaintiff  was  in  ignorance  of  the  marital  status  of  defend- 
ant, and  also  in  that  defendant  defiantly— approaching  the  twilight 
zone  of  fraudulently,  in  a  constructive  sense— refused  to  even  request 
his  wife  to  convey  her  inchoate  dower;  moreover,  the  estate  covered 
by  the  letter  of  the  option,  while  impliedly  a  fee,  was  not  agreed  to  be 
warranted. 

As  forecast  above,  the  cases  which  refuse  to  require  specific  per- 
formance, except  the  plaintiff  take  that  title  and  estate  only  which  the 
sole  deed  of  the  husband  will  convey,  usually  put  refusal  largely  upon 
the  ground  that  to  do  so  would  be  to  coerce  the  wife,  but  we  have  seen 
that  the  rule  that  specific  performance  will  be  decreed  upon  some  terms 


.Cll.  3)  PERFORMANCE  OF  CONTRACTS  175 

is  almost  universal,  and  that  some  of  these  terms  are  exceedingly 
harsh;  e.  g.,  the  retention  as  indemnity  of  one-third  of  the  purchase 
price  till  the  wife  dies  or  conveys. 

Back  of  all  of  the  few  cases  which  neither  decree  diminution  of 
purchase  price  nor  provide  for  an  indemnity  to  cover  inchoate  but 
contingent  dower  lies  the  idea  that  specific  performance  is  a  matter 
resting  in  the  judicial  discretion  of  the  chancellor,  which  discretion 
will  not  be  exercised,  if  the  exercise  thereof  shall  be  beset  with  dif- 
ficulties or  shall  afford  opportunity  of  injustice  such  as  may  happen  in 
dealing  with  the  wholly  contingent  dower  of  a  wife  in  the  lands  of  a 
living  husband.  When  these  few  cases,  which  neither  indemnify  the 
purchaser  nor  diminish  the  purchase  price  by  reason  of  the  inchoate 
dower  of  the  wife,  decree  specific  performance,  it  is  done  in  a  sense 
ex  gratia  (that  is,  the  plaintiff  is  told  in  effect  that  he  may  not  have 
that  for  which  he  sues),  but,  if  he  be  willing  to  take  less  than  he  sued 
for  and  less  than  the  option  giver  contracted  to  sell,  he  may  have  a 
partial  specific  performance.  If  he  will  not  accept  the  half  loaf  of 
justice,  he  must  then  take  nothing  by  his  solemn  contract.     *     *     * 

It  would  be  bad  policy  to  announce  a  rule  of  law  which  would  result 
in  rewarding  those  who  wantonly  break  their  solemn  obligations.  By 
compelling  the  husband  to  convey  at  a  price  diminished  by  the  pres- 
ent value  of  the  wife's  inchoate  dower,  she  personally  and  presently 
loses  nothing;  her  husband  suffers  a  loss  which,  somewhat  like  bread 
upon  the  waters,  may  come  back  to  the  wife.  If  it  be  conceded  that 
she  is  coerced  by  her  husband's  present  loss  to  an  extent  greater  than 
she  is  buoyed  up  by  the  future  hope  of  widowhood  and  dower  in  the 
land,  there  is  no  sufficient  basis  or  reason  in  the  view  to  account  log- 
ically for  the  rule.  For  if  she  sign  rather  than  refuseto  do  so,  the 
full  purchase  price  is  paid  to  her  spouse;  and  if — and  this  contingency 
must  occur  to  aid  her  in  either  case  supposed — her  husband  be  gathered 
to  his  fathers  before  her,  she  takes  her  statutory  interest  in  the  money, 
to-wit,  personal  property,  of  her  husband  rather  than  in  the  land,  sub- 
ject only  to  her  husband's  debts.  So  that  upon  such  view  the  case 
largely  falls  into  the  category  of  those  things  "which  are  six  of  one 
and  half  a  dozen  of  the  other."    *    *    * 

I  am  led  by  the  authorities  to  conclude  that  the  case  of  Aiple-Hem- 
melmann  Real  Estate  Co.  v.  Spelbrink,  211  Mo.  671,  111  S.  W.  480, 
14  Ann.  Cas.  652.  should  no  longer  be  followed,  but  that  the  views 
expressed  in  the  dissenting  opinion  should  be  followed  as  being  more 
in  consonance  with  the  reason  of  things  and  more  in  accord  with  the 
great  weight  of  authority.    *    *    * 

It  results,  therefore,  that  this  case  should  be  reversed  and  remanded, 
with  directions  to  the  trial  court  to  order  specific  performance  in  fa- 
vor of  plaintiff,  and  that  if,  within  a  reasonable  time  to  be  fixed  by  the 
court,  defendant  and  his  wife  do  not  make,  execute,  acknowledge,  and 
deliver  to  plaintiff  a  good  and  sufficient  deed  of  conveyance  covering 
the  premises  in  controversy  to  plaintiff,  the  circuit  court  shall  enter 
a  decree  divesting  out  of  defendant  Thomas  S.  Ridge  all  and  singular 
the  right,  title,  interest,  and  estate  of  him  (said  Ridge)  in  the  land  in 
controversy,  and  vesting  the  same  in  the  plaintiff,  upon  the  payment 
to  defendant  by  plaintiff  of  the  sum  of  $68,200,  diminished  by  the 
value,  as  of  the  time  of  the  trial,  of  the  inchoate  contingent  dower  of 
Mrs.  Effie  S.  Ridge  in  the  one-third  part  thereof,  calculated  at  6  per 
cent,  upon  the  basis  of  a  life  in  the  contingent  dowress  of  two  years, 


176  CONTRACTS  (Part  1 

nine  months,  and  six  days  more  than  that  of  defendant,  and  being 
therefore  the  sum  of  $2,863,  and  leaving  to  be  paid  to  defendant  the 
sum  of  $65,337.  Glauque  and  McClure's  Tables,  pp.  18,  20,  and  158. 
Taxes  and  special  assessments,  if  any,  since  suit  was  begun  to  be  paid 
by  plaintiff ;  all  costs  to  follow  decree. 
It  is  so  ordered.    *     *    *       

BUCHANAN  v.  ORANGE. 

(Supreme  Court  of  Appeals  of  Virginia.  1916.     118  Va.  511,  88  S.  E.  52, 
L.  R.  A.  1916E,  739,  Ann.  Cas.  1918D,  391.) 

Harrison,  T.  This  is  an  attachment  proceeding,  brought  by  the 
plaintiff  in  error  to  recover  of  the  defendant  in  error  rent  to  become 
due  under  a  certain  contract  of  lease. 

The  evidence  shows  that  Mrs.  G.  T.  Orange  entered  into  a  deed  of 
lease  in  writing,  dated  May  13,  1911,  with  D.  Buchanan  &  Son,  where- 
by she  leased,  for  the  term  of  five  years  from  August  1,  1911,  the  sec- 
ond floor  of  a  brick  storehouse  on  Broad  street,  in  the  city  of  Rich- 
mond, to  be  used  as  a  millinery  establishment;  the  monthly  rent  of 
$60  being  payable  on  the  first  day  of  each  month.  The  lessor  cove- 
nanted with  her  for  quiet  enjoyment,  and  further  stipulated  to  fur- 
nish her,  free  from  cost,  with  water,  light,  and  furnace  heat.  Mrs. 
Orange  continued  in  possession  of  the  demised  premises  until  Octo- 
ber 31,  1914,  when  she  removed  to  other  quarters.     *     *     * 

Testimonv  of  the  defendant  in  error  with  respect  to  the  discomfort 
of  the  prernises  from  the  lack  of  heat  and  lightsis  abundantly  sun- 
ported  by  numerous  other  witnesses  who  were  familiar  with  the  prem- 
ises. 

The  question  to  be  determhied  is  whether  the  facts  stated  consti- 
tute a  constructive  eviction  of  the  defeadanr  in  err 
premises,  thereby  relieving  her  from  the  payment  of  the  rent  not  due. 

It  is  to  be  observed  in  the  outset  that  the  subject  of  the  lease  in- 
volved in  this  case  was  not  land,  out  of  which  the  rigid  principles  of 
the  common  law  governing  the  relation  of  landlord  and  tenant  grew, 
owing  to  the  sanctity  with  which  land  was  invested  in  the  eyes  of  the 
common  law,  but  the  subiect  of  the  lease  was  only  a  floor  in  the  build- 
ing; the  landlord  controlling  his  own  land  and  all  of  the  rest  of  the 
building.     *     *     * 

In  Taylor  on  Landlord  and  Tenant  (9th  Ed.)  §  3q9a,  it  is_  said : 
"The  rule  is  that,  while  an  eviction  was  originally  a  dispossession  of 
the  tenant  by  some  act  of  his  landlord,  or  by  failure  of  the  latter's  title, 
it  has  now  come  to  include  any  wrongful  act  of  the  landlord,  either  of 
commission  or  omission,  which  may  result  in  a  substantial  interfer- 
ence with  the  tenant's  possession  or  enjoyment,  in  whole  or  in  part. 
Actual  force  is  not  essential  to  constitute  a  wrongful  eviction." 

We  are  of  opinion  that  the  great  weight  of  modern  authority  sus- 
tains the  view  that  the  facts  of  the  instant  case  constitute  a  constructive 
eviction,  and  entitle  the  defendant  to  a  release  from  the  payment  of 
rent  not  due  v^•hen  the  premises  are  vacated.    *    *    * 

The  plaintiff  in  error  contends  that  in  order  for  the  acts  or  defaults 
of  the  landlord  to  amount  to  constructive  eviction,  they  must  be  of  a 
grave  and  permanent  character,  and  they  must  clearly  indicate  an  in- 
tention on  the  part  of  the  landlord  that  the  tenant  shall  no  longer  con- 
tinue to  hold  the  premises,  or  some  material  part  thereof.  Our  view 
of  this  proposition  is  so  clearly  expressed  by  the  learned  judge  of  the 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  177 

lower  court,  in  his  opinion  filed  with  the  record,  that  we  cannot  do 
better  than  quote  what  is  there  said : 

"It  is  certainly  difficult  for  the  modern  jurist  to  apply  the  stringent 
common-law  principles  concerning  eviction,  as  between  landlord  and 
tenant,  to  the  conditions  of  the  present  day.  By  eviction  at  common 
law  originally  was  manifestly  meant  an  actual  dispossession  of  the 
tenant  by  the  landlord,  in  order  that  the  landlord  might  take  posses- 
sion of  the  premises,  and  with  an  intention  on  his  part  so  to  do,  or  the 
eviction  may  occur  under  the  paramount  title  of  a  stranger.  Whether 
the  eviction  be  called  actual  or  constructive,  at  common  law,  there 
must  be,  in  the  mind  of  the  landlord,  the  intention  of  driving  the  ten- 
ant ofif  of  the  land  leased,  so  that  he  may  take  possession  of  it.  To 
apply  this  idea  to  the  modern  custom  of  leasing  a  floor  in  a  building, 
for  business  or  living  purposes,  under  a  contract  with  varying  stipu- 
lations as  to  the  duties  of  the  landlord  towards  the  tenant,  incompatible 
with  the  common-law  lease,  is  a  task  impossible  of  exact  accomplish- 
ment. *  *  *  j^  seems  to  me  that  the  law  would  be  stultifying  itself 
to  lay  down,  as  a  maxim  in  these  cases,  that  there  can  be  no  abandon- 
ment unless  it  be  shown  that  the  landlord  intended  to  dispossess  the 
tenant.  I  am  satisfied  that  under  the  more  modern  doctrine  in  cases 
of  this  character,  the  intention  of  the  landlord  should  be  held  to  be  a 
matter  of  law  or  of  fact,  to  be  inferred  from  the  acts,  so  that  if  the 
acts  of  the  landlord  as  a  matter  of  fact  resulted  in  dispossessing  the 
tenant  by  giving  him  justifiable  cause  to  vacate  the  premises,  then  the. 
law  imputes  the  intention  to  the  landlord,  on  the  general  principle  that 
every  man  must  be  held  to  intend  the  proximate  consequences  of  the 
act.    *    *    * " 

[Judgment  for  defendant   (tenant)   affirmed.] 


BETTINI   V.   GYE. 

(High  Court  of  Justice,  1876.     1  Q.  B.  Div.  183.) 

Defendant  was  the  director  of  the  Royal  Italian  Opera  in  London, 
and  the  plaintiff  was  a  dramatic  artist  and  professional  singer.  Plain- 
tiff contracted  to  sing  for  defendant  from  March  30,  1875,  to  July  13, 
1875,  and  agreed  to  be  in  London  "without  fail"  at  least  six  days  be- 
fore the  commencement  of  his  engagement,  for  the  purpose  of  rehears- 
als. The  defendant  refused  to  receive  the  plaintifif  into  his  service  un- 
der the  contract.  The  defendant  pleaded,  in  this  action  on  the  con- 
tract, that  the  plaintift"  was  not  in  London  six  days  before  the  com- 
mencement of  the  engagement  for  the  purpose  of  rehearsals. 

Blackburn,  j.  *  *  =i^  The  question  *  *  *  is,  not  whether  the 
plaintiff  has  any  excuse  for  failing  to  fulfill  this  part  of  the  contract, 
which  may  prevent  his  being  liable  in  damages  for  not  doing  so,  but 
whether  his  failure  to  do  so  justified  the  defendant  in  refusing  to  pro- 
ceed with  the  engagement,  and  fulfill  his,  the'  defendant's  part.  And 
the  answer  to  that  question  depends  on  whether  this  part  of  the  con- 
tract is  a  condition  precedent  to  the  defendant's  liability,  or  only  an  in- 
dependent agreement,  a  breach  of  which  will  not  justify  a  repudiation 
of  the  contract,  but  will  only  be  a  catise  of  action  for  a  compensation 
in  damages.    *    *    * 

We  think  the  answer  to  this  question  depends  on  the  true  construc- 
tion of  the  contract  taken  as  a  whole.  Parties  may  think  some  matter, 
■B.&  B.Bus.Law— 12 


178  CONTRACTS  (Parti 

apparently  of  very  little  importance,  essential ;  and  if  they  sufficiently 
express  an  intention  to  make  the  literal  fulfillment  of  such  a  thing  a 
condition  precedent,  it  will  be  one;  or  they  may  think  that  the  per- 
formance of  some  matter,  apparently  of  essential  importance  and 
prima  facie  a  condition  precedent,  is  not  really  vital,  and  may  be  com- 
pensated for  in  damages,  and  if  they  sufficiently  expressed  such  an  in- 
tention, it  will  not  be  a  condition  precedent. 

In  this  case,  if  to  the  seventh  paragraph  of  the  agreement  there  had 
been  added  words  to  this  effect :  "And  if  Mr.  Bettini  is  not  there  at  the 
stipulated  time,  Mr.  Gye  may  refuse  to  proceed  further  with  the  agree- 
ment;" or  if,  on  the  other  hand,  it  had  been  said,  "And  if  not  there, 
Mr.  Gye  may  postpone  the  commencement  of  Mr.  Bettini's  engage- 
ment for  as  many  days  as  Mr.  Bettini  makes  default,  and  be  shall 
forfeit  twice  his  salary  for  that  time,"  there  could  have  been  no  ques- 
tion raised  in  the  case.  But  there  is  no  such  declaration  of  the  inten- 
tion of  the  parties  either  way.  And  in  the  absence  of  such  an  express 
declaration,  we  think  that  we  are  to  look  to  the  whole  contract,  and 
applying  the  rule  stated  by  Parke,  B.,  to  be  acknowledged,  see  whether 
the  particular  stipulation  goes  to  the  root  of  the  matter,  so  that  a  fail- 
ure to  perform  it  would  render  the  performance  of  the  rest  of  the 
contract  by  the  plaintiff  a  thing  different  in  substance  from  what  the 
defendant  has  stipulated  for;  or  whether  it  merely  partially  affects 
it  and  may  be  compensated  for  in  damages.  Accordingly,  as  it  is  one 
or  the  other,  we  think  it  must  be  taken  to  be  or  not  to  be  intended  to 
be  a  condition  precedent. 

If  the  plaintiff's  engagement  had  been  only  to  sing  in  operas  at  the 
theatre,  it  might  very  well  be  that  previous  attendance  at  rehearsals 
with  the  actors  in  company  with  whom  he  was  to  perform  was  essen- 
tial. And  if  the  engagement  had  been  only  for  a  few  performances,  or 
for  a  short  time,  it  would  afford  a  strong  argument  that  attendance 
for  the  purpose  of  rehearsals  during  the  six  days  immediately  before 
the  commencement  of  the  engagement  was  a  vital  part  of  the  agree- 
ment. But  we  find,  on  looking  to  the  agreement,  that  tlie  plaintiff  was 
to  sing  in  theatres,  halls,  and  drawing  rooms,  both  public  and  private, 
from  the  30th  of  March  to  the  13th  of  July,  1875,  and  that  he  was  to 
sing  in  concerts  as  well  as  in  operas,  and  was  not  to  sing  anywhere 
out  of  the  theatre  in  Great  Britain  or  Ireland  from  the  1st  of  January 
to  the  31st  of  December,  1875,  without  the  written  permission  of  the 
defendant,  except  at  a  distance  of  more  than  fifty  miles  from  London. 

The  plaintiff,  therefore,  has,  in  consequence  of  this  agreement,  been 
deprived  of  the  power  of  earning  anything  in  London  from  the  1st  of 
January  to  the  30th  of  March ;  and  though  the  defendant  has,  per- 
haps, not  received  any  benefit  from  this,  so  as  to  preclude  him  from 
any  longer  treating  as  a  condition  precedent  what  had  originally  been 
one,  we  think  this  at  least  aft'ords  a  strong  argument  for  saying  that 
subsequent  stipulations  are  not  intended  to  be  conditions  precederft, 
unless  the  nature  of  the  thing  strongly  shows  they  must  be  so. 

And,  as  far  as  we  can  see,  the  failure  to  attend  at  rehearsals  dur- 
ing the  six  days  immediately  before  the  30th  of  March  could  only  af- 
fect the  theatrical  performances  and,  perhaps,  the  singing  of  duets  or 
concerted  pieces  dtu-ing  the  first  week  or  fortnight  of  this  engagement, 
which  is  to  sing  in  theatres,  halls,  and  drawing-rooms,  and  concerts, 
for  fifteen  weeks. 

We  think,  therefore,  that  it  does  not  go  to  the  root  of  the  matter 
so  as  to  require  us  to  consider  it  a  condition  precedent.    The  defendant 


Ch.  3)  PERFORMANCE   OF  CONTRACTS  179^ 

must,  therefore,  we  think,  seek  redress  by  a  cross-clauTi  for  damages. 
Judgment  for  the  plaintiff. 


NATIO^N^AL  CABLE  &  MFG.  CO.  v.  FILBERT. 

(Supreme  Court  of  South  Dakota.  19L3.     31  S.  D.  244,  140  N.   W.  741, 
45  L.  R.  A.  [N.  S.]  258.) 

Action  by  the  National  Cable  &  Manufacturing  Company,  a  corpora- 
tion against  W,  F.  Filbert.  From  judgment  for  plaintiff,  defendant 
appeals. 

PoLLEY,  J.  This  action  grew  out  of  a  contract  entered  into  between 
the  plaintiff,  and  the  defendant,  a  hardware  and  implement  dealer  at 
Twin  Brooks,  S.  D.  The  contract  was  entered  into  on  the  18th  day 
of  December,  1907,  and  provided  for  the  sale,  by  the  plaintiff  to  the 
defendant,  of  a  quantity  of  copper  cable  and  other  material  and  equip- 
ment of  lightning  rods.  The  contract  provided  for  the  delivery,  by  the 
plaintiff,  of  the  goods  at  the  railway  station  at  Niles,  Mich,  The  con- 
tract gave  the  defendant  the  exclusive  right  to  sell  the  merchandise 
described  in  the  contract,  and  other  merchandise  of  a  similar  character 
to  be  purchased  from  the  plaintiff,  but  restricted  the  territory  within 
which  he  might  sell  to  Twin  Brooks,  Milbank.  Corona,  and  Marvin, 
and  limited  the  time  within  vs^hich  he  might  sell  to  the  period  between 
the  acceptance  of  the  contract  by  the  plaintiff  and  the  last  day  of  De- 
cember, 1908.  The  defendant  was  also  bound  by  the  contract,  during 
the  above  period,  not  to  purchase  any  similar  goods  from  any  other 
manufacturer.  It  contained  a  covenant  fixing  the  minimum  price  for 
which  he  should  sell  said  copper  cable,  and  also  contained  the  following 
covenant,  to  wit:  "That  said  first  party  (plaintiff)  agrees  to  furnish  a 
salesman  to  assist  in  starting  the  business  as  soon  as  possible  after  re- 
quested by  said  second  party,  and  that  said  second  party  in  case  a 
salesman  is  furnished  at  his  request,  agrees  that  on  arrival  of  said 
salesman,  he,  said  second  party,  will  furnish  a  man  and  team  and  at 
once  proceed  to  canvass  jointly  with  said  salesman,  exclusively  for  the. 
sale  of  lightning  rods,  and  that,  as  soon  as  said  canvass  is  terminated, 
he,  said  second  party,  hereby  agrees  to  pay  said  salesman,  as  compen- 
sation for  his  services,  an  amount  equal  to  one-half  of  the  profits 
arising  from  the  sale  of  the  goods  during  said  canvass."  Plaintiff's 
agent,  also,  in  addition  to  the  nvimerous  restrictions  contained  in  the 
written  contract,  gave  defendant  positive  instructions  not  to  attempt  to- 
put  up  any  rods  until  they  (meaning  some  of  the  plaintiff's  agents) 
were  there  to  .show  him  how  to  put  them  up.    *     *    * 

The  goods  were  shipped  by  the  plaintiff  and  received  by  defendant 
at  his  place  of  business  in  Twin  Brooks,  S.  D.  No  question  was  ever 
raised  as  to  the  value  of  the  goods,  or  that  they  were  not  shipped  ac- 
cording to  contract ;  but  the  defendant  claims  that  the  plaintiff  never 
furnished  him  with  a  saleman  to  assist  in  starting  the  business,  as  pro- 
vided for  in  said  contract,  and  justifies  his  refusal  to  pay  the  bill  solely 
upon  that  ground.    *    *    * 

The  case  was  tried  to  a  jury.  The  plaintiff,  on  the  trial,  treated  the 
agreement  to  furnish  the  expert  as  one  of  the  "conditions  precedent" 
to  be  performed  by  it,  and  directed  the  greater  part  of  its  somewhat 
voluminous  testimony  to  an  attempt  to  prove  that  it  had  complied  with 
this  requirement  of  the  agreement.    At  the  close  of  all  the  testimony,. 


180  CONTRACTS  (Part  1 

the  plaintiff  moved  the  court  to  direct  a  verdict  for  it.  *  *  *  This 
nwtion  was  granted,  and  the  defendant  took  exceptions. 

As  the  case  appears  on  appeal,  the  question  involved  depends  wholly 
upon  the  construction  to  be  put  upon  the  above-quoted  clause  of  the 
contract.  It  is  strenuously  contended  by  the  respondent  that  this 
clause  in  the  contract  is  an  independent  covenant  to  be  performed  by 
the  plaintiff  at  some  subsequent  time,  and  without  reference  to  de- 
fendant's liability,  and  that  therefore  the  court  was  justified  in  taking 
the  case  from  the  jury.  On  the  other  hand,  it  is  just  as  strenuously 
contended  by  the  appellant  that  this  covenant  is  one  of  the  material  ele- 
ments of  the  contract,  or  was  a  "mutual  and  dependent  condition," 
to  be  performed  by  it  to  entitle  it  to  the  purchase  price.  If  this  conten- 
tion is  correct,  then  the  question  should  have  been  submitted  to  the 
jury. 

We  may  state,  at  the  outset  that  the  fact  that  the  defendant  under- 
took to  rescind  by  returning  the  goods  to  the  plaintiff  would  ordinarily 
be  wholly  immaterial  to  a  determination  of  the  issues  in  the  case.  If  it 
were  necessary,  as  contended  by  defendant,  that  the  plaintiff'  must  com- 
ply with  the  disputed  condition  in  the  contract  before  it  became  en- 
titled to  the  purchase  price,  it  was  unnecessary  for  him  to  rescind  in 
order  to  avoid  liability.  He  would  have  a  perfect  right  to  wait  until 
the  plaintiff  had  performed  all  of  its  obligations  before  he  became 
liable  for  the  purchase  price.  On  the  other  hand,  if  the  disputed  clause 
in  the  contract  was  an  independent  covenant  or  "condition  subsequent." 
then  the  defendant  became  fully  liable  upon  plaintiff's  delivery  of  the 
goods,  and  his  attempted  rescission  would  have  been  of  no  avail. 
*     *    * 

The  contract  does  not  specifically  state  upon  its  face  that  this  pro- 
vision is  a  condition  precedent,  and  therefore,  whether  it  is  such  or 
not  is  a  matter  of  construction  for  the  court,  and  depends  upon  a  con- 
sideration of  the  entire  contract  and  the  intent  and  understanding  of 
the  parties  themselves,  as  disclosed  by  their  conduct  relative  hereto. 

The  court  having  directed  a  verdict  for  the  plaintiff,  all  the  evidence 
of  the  defendant  must  be  taken  as  true,  and  he  must  be  given  the  bene- 
fit of  all  legitimate  inferences  therefrom.     *     *     * 

Provisions  in  contracts  like  the  one  in  dispute  in  this  case  have  been 
much  litigated  in  the  courts ;  but,  owing  to  the  peculiar  nature  of  the 
question,  each  case  must  be  determined  in  accordance  with  the  fact 
involved.  No  definite  rule,  other  than  to  determine  the  real  intent  of 
the  parties,  where  the  same  is  not  clearly  expressed  by  the  terms  of 
the  contract,  can  be  laid  down ;  and  it  is  rarely  that  the  conclusions 
reached  in  one  case  can  be  decisive  of  another.  As  was  said  by  Foot, 
J.,  in  Grant  v.  Johnson,  5  N.  Y.  255 :  "So  many  decisions  have  been 
made  on  the  vexed  question  of  what  are,  and  what  are  not  dependent 
covenants,  and  so  many  of  them  are  irreconcilable  that  they  rather  per- 
plex than  aid  the  judgment  in  determining  a  given  case.  One  rule  is 
universal,  and  that  is  that  the  intent  of  the  parties  is  to  control." 
While  this  is  true,  the  principles  and  reasoning  that  have  been  applied 
in  the  adjudicated  cases  are  helpful  in  determining  this  vexed  ques- 
tion.    *     *     * 

In  Ink  et  al.  v.  Rohrig,  23  S.  D.  548,  122  N.  W.  594,  this  court  an- 
nounced the  rule  as  follows :  "The  universal  rule  laid  down  under 
the  authorities  concerning  the  construction  of  covenants  in  contracts, 
as  to  whether  they  are  dependent  or  independent,  is  that  the  relation 


Ch.  3)  PERFOUMAN'CE  OF  CONTRACTS  181 

of  covenants  is  to  be  determined  according  to  the  intention  and  mean- 
ing of  the  parties  as  the  same  appears  in  the  instrument,  and  by  the 
appHcation  of  common  sense  to  each  particular  case,  to  which  inten- 
tion, when  once  discovered,  all  technical  forms  of  expression  must  give 
way.  It  is  further  held  under  the  authorities  that,  in  case  of  doubt, 
the  courts  will  construe  such  covenants  as  dependent,  rather  than  inde- 
pendent." And,  quoting  from  Bank  v.  Hagner,  1  Pet.  464,  7  L.  Ed. 
219,  the  court  said :  "In  contracts  of  this  description  the  undertakings 
of  the  respective  parties  are  always  considered  dependent,  unless  a  con- 
trary intention  clearly  appears.  A  dilferent  construction  would,  in 
many  cases,  lead  to  the  greatest  injustice,  and  a  purchaser  might  have 
payment  of  the  consideration  money  forced  upon  him,  yet  be  disabled 
from  procuring  the  property  for  which  he  paid  it.  Although  many 
nice  distinctions  are  to  be  found  in  the  books  upon  the  question  as  to 
whether  the  covenants  are  promises  of  the  respective  parties  to  the 
contract  or  to  be  considered  independent  or  dependent,  yet  it  is  evi- 
dent the  inclination  of  the  courts  strongly  favored  the  most  just.  The 
seller  ought  not  to  be  compelled  to  part  with  his  property  without  re- 
ceiving an  equivalent  in  return." 

In  the  case  of  Davis  et  al.  v.  Jefifris,  5  S.  D.  352,  58  N.  W.  815,  this 
court  used  the  following  language:  "Whether  or  not  a  covenant  is 
dependent  or  independent  must  be  ascertained  from  the  contract  and 
attending  circumstances  ;  the  rule  being  that  such  covenants  will  be  con- 
strued as  dependent,  unless  a  contrary  intention  appears  from  the  terms 
of  the  contract."  This  was  an  action  to  recover  on  a  contract  for  the 
construction  of  a  creamery  and  cold  storage  plant,  according  to  plans 
and  specifications  contained  in  the  contract.  The  contract  provided 
that  the  cold  storage  department  should  be  constructed  under  the 
McCray  Cold  Storage  and  Refrigerator  patents,  and  contained  the  fol- 
lowing covenant:  "We  agree  to  furnish  with  said  contract  a  patent 
deed  from  the  McCray  Refrigerator  Company,  conveying  all  the  rights 
under  said  patents."  The  provisions  of  the  contract,  so  far  as  the  erec- 
tion and  equipment  of  the  plant  is  concerned,  were  carried  out  by  the 
plaintiff,  but  the  patent  deed  for  the  McCray  Cold  Storage  and  Re- 
frigerator patents  was  not  furnished ;  plaintiff  contending  that  the 
stipulation  to  furnish  the  said  patent  deed  was  an  independent  stipula- 
tion or  covenant,  and  that  the  plaintiffs  were  not  required  to  prove  that 
they  had  furnished  or  tendered  such  deed  to  entitle  them  to  recover 
on  the  contract.  The  contract  provided  that  the  defendants  should 
pay  for  the  creamery  and  cold  storage  when  "Completed."  The  court 
held  that  the  completion  of  the  -plant  without  the  patent  deed  was  not 
a  "completion  of  the  contract,"  and  that  proof  that  the  patent  deed 
had  been  furnished  was  essential  to  plaintiff's  right  of  recovery,  holding 
that,  although  the  contract,  so  far  as  the  completion  of  the  plant  is 
concerned,  had  been  fully  complied  with  by  the  plaintiff',  still  it  would 
be  of  no  value,  and  could  be  made  of  no  use  to  the  defendants,  unless 
the  patent  deed  conferring  upon  defendants,  the  right  to  use  the  Mc- 
Cray Cold  Storage  and  Refrigerator  process  was  furnished;  that  they 
contracted  for  something  that  they  knew  would  be  valueless  to  them 
when  they  got  it,  or  else  the  covenant  to  furnish  the  patent  deed  was 
one  of  the  essential  elements  of  the  contract. 

This  case  is  directly  in  point  with  the  case  at  bar.  When  all  the  sur- 
roundings and  attending  circumstances  are  taken  into  consideration, 
it  cannot  but  appear  that,  when  the  defendant  entered  into  the  contract 


182  CONTRACTS  (Part  1 

sued  ttpon,  the  furnishing  of  a  salesman  to  help  defendant  dispose 
of  the  goods  contracted  for  was  as  important  an  element  in  the 
transaction  as  the  goods  themselves.  The  goods  sued  for  were  not 
staple  goods;  they  could  not  be  placed  upon  the  shelves  in  defend- 
ant's store  and  sold  in  the  ordinary  course  of  business.  In  order  to 
dispose  of  them,  it  was  necessary  to  canvass  the  territory  over  which 
they  were  to  be  sold,  and  to  attach  them  to  the  buildings  of  purchasers 
as  they  went  along.     *     '•'     * 

Again  a  careful  examination  of  the  disputed  clause  in  this  contract, 
in  view  of  the  attending  circumstances,  will  be  instructive.  It  will 
show  that  the  covenant  contained  in  this  provision  was  as  much  in 
contemplation  of  the  parties  hereto,  at  the  time  of  entering  into  the 
contract,  as  the  shipment  of  the  merchandise  itself.  It  was  the  induce- 
ment that  led  defendant  to  enter  into  the  transaction;  it  was  not  an 
afterthought  nor  a  mere  gratuitous  act  on  the  part  of  the  plaintiff,  to 
be  performed  only  at  the  option  of  defendant.  Plaintiff  agrees  abso- 
lutely to  do  it.  True,  it  is  to  be  done  so  soon  as  possible  after  re- 
(luested,  but  it  is  to  be  done  whether  requested  or  not ;  and  the  only 
option  the  defendant  had  in  the  matter  was  by  making  the  request  to 
hx  the  time,  or  rather  to  hasten  the  time,  of  his  coming.  Neither  is 
the  condition  requiring  the  defendant  to  furnish  a  man  and  to  assist 
such  agent  and  to  pay  his  compensation  out  of  the  profits  from  sales 
they  jointly  made  an  absolute  condition  to  be  performed  at  all  events. 
He  is  to  do  this  only  in  case  he  has  made  the  request  to  have  the  agent 
sent.  If  plaintiff  sent  him  in  compliance  with  the  terms  of  his  agree- 
ment, it  would  be  without  cost  to  the  defendant. 

It  was  to  the  pecuniary  interest  of  the  plaintiff'  to  have  the  goods 
shipped  to  defendant  disposed  of  at  as  early  a  date  as  possible ;  and 
it  was  also  to  its  pecuniary  interest  to  have  the  lightning  rods,  when 
sold,  properly  attached  to  the  buildings  for  the  purchasers,  in  order 
that  a  market  for  other  similar  goods  might  be  created  as  contemplated 
by  the  terms  of  the  agreement.  It  was  for  this  reason  that  plaintiff', 
through  its  agents,  instructed  the  defendant  not  to  try  to  put  up  any 
of  the  lightning  rods  until  they  were  there  to  show  him  how  to  do  it, 
and  for  this  reason  defendant  could  not  dispose  of  the  goods  nor  de- 
rive any  benefit  whatever  from  the  purchase  until  this  assistance  was 
furnished.  Thus,  it  will  appear  that  the  furnishing  of  the  assistance 
provided  for  in  the  disputed  clause  of  this  contract  is  one  of  the  most 
important  and  essential  elements  of  the  entire  agreement.  And  this 
is  the  view  taken  by  both  plaintiff'  and  defendant.  Ample  time  for 
its  performance  was  allowed  between  the  sale  of  the  goods  and  the 
time  the  purchase  price  was  to  become  due.  During  this  time,  one 
or  two  of  plaintiff"'s  agents  visited  the  defendant,  and  plaintiff'  claimed 
they  had  complied  with  the  agreement.  Defendant  claimed  they  did 
not,  and  refused  payment  on  that  account.  Later  on  plaintiff'  sent 
other  of  its  agents  to  defendant,  who  they  claimed  rendered  defendant 
the  assistance  provided  for  in  the  contract,  but  this  was  disputed  by 
defendant;  and  whether  they  did  or  not  was  the  principal  and  practi- 
cally the  only  issue  raised  at  the  trial.  That  plaintiff  so  regarded  this 
condition  is  apparent  from  the  fact  that  it  assumed  the  burden  on  its 
main  case  of  showing  that  this  clause  in  the  contract  had  been  fully 
complied  with. 

If  the  intent  of  the  parties,  when  entering  into  the  contract,  is  to  be 
gathered   from  their  understanding  of  and  conduct  relative   thereto, 


Ch.  3)  PERFORMANCE   OP   CONTRACTS  183 

then  certainly  the  agreement  to  furnish  the  defendant  this  assistance 
in  starting  the  business  was  one  of  the  essential  elements  of  the  con- 
tract ;  and  the  question  whether  it  had  been  complied  with  or  not  should 
have  been  submitted  to  the  jury. 

The  judgment  and  order  appealed  from  should  be  reversed,  and  a 
new  trial  awarded. 


MAYO   V.  AMERICAN  MALTING   CO. 

(United   States  Circuit  Court  of  Appeals,  Fourth  Circuit,  1914. 
211  Fed.  045,  128   C.  C.  A.  443.) 

Action  by  the  American  Malting  Company  against  George  D.  Mayo, 
trading  as  the  Mayo  Milling  Company.  Judgment  for  plaintiff,  and  de- 
fendant brings  error. 

Rose,  District  Judge.  The  parties  will  be  designated  as  they  were 
below.  The  malting  company  was  there  the  plaintiff',  Mr.  Mayo  the 
defendant.  On  October  26,  1911,  the  defendant  agreed  to  buy  6,250 
bushels  of  malt  from  the  plaintiff.  He  was  to  pay  $1.32  a  bushel  for 
it.  The  terms  were  sight  draft,  bill  of  lading  attached.  He  was  to 
order  the  malt  shipped  in  approximately  equal  monthly  installments 
prior  to  June  1,  1912.     *     *     * 

The  defendant  never  ordered  any  of  this  malt.  *  *  *  The  rela- 
tions between  the  parties  began  in  September,  1911.  Defendant  then 
wrote  to  plaintiff"  for  its  prices  for  distillers'  malt.  An  agent  of  the 
plaintiff  thereupon  called  upon  the  defendant.  At  the  interview  an  un- 
derstanding was  reached  that  defendant  would  buy  malt  from  the  plain- 
tiff, and  that  the  latter  would  not  quote  prices  on  distillers'  malt  to  other 
persons  in  Virginia.  *  "  *  For  some  reason  during  the  season  of 
1912,  the  Richmond  distillers  bought  much  less  than  the  usual  quantity 
of  malt.  The  barley  crop  of  1912  was  large  and  of  high  average  quality. 
The  prices  of  malt  fell  rapidly.  *  *  *  While  things  were  thus 
drifting  along  a  car  of  distillers'  malt  sold  by  the  plaintiff  to  the  Adams 
'Grain  &  Provision  Company  of  Richmond  arrived  in  that  city.  The  de- 
fendant learned  of  the  incident  almost  immediately.  He  at  once,  on  the 
23d  of  October,  wrote  to  the  plahitiff'  that  he  regarded  this  sale  to  one 
whom  he  described  as  a  competitor  as  a  breach  of  the  contract  with 
Tiim,  and  told  it  that  he  would  not  take  any  of  the  malt.   , 

In  the  court  below  and  here  he  contends  that  he  had  the  right  to  take 
this  position,  and  that  it  is  a  complete  answer  to  plaintiff's  demand.  It 
is  to  the  refusal  to  tell  the  jury  that  the  shipment  in  question  in  itself  en- 
titled the  defendant  to  rescind,  that  he  makes  his  most  serious  objection. 
It  is  not  every  breach  of  a  term  or  provision  of  a  contract  which  will 
justify  its  rescission  by  the  other  party.  If  the  breach  did  him  no 
hurt,  it  was  immaterial.  If  the  shipment  in  question  forced  down  the 
price  of  defendant's  malt,  or  kept  him  from  selling  it,  he  was  injured 
hy  it.  It  could  not  have  harmed  him  in  any  other  way.  Whether  it 
did  him  that  harm  was  squarely  submitted  to  the  jury.  They  decided 
against  him.  *  *  *  \Ve  do  not  see  that  the  defendant  has  any  rea- 
son to  complain  of  the  action  of  either  court  or  jury. 

Affirmed. 


184  CONTRACTS  (Part  1 


PELTCAX  V.  MUTUAL  LIFE  INS.  CO.  OF  NEW  YORK. 

(Supreme  Court  of  Montana,  1931.    44  Mont.  277,  119  Pac.  778.) 

Action  by  Jennie  Pelican  against  the  Alutual  Life  Insurance  Com- 
pany of  New  York.     Judgment  for  plaintiff,  and  defendant  appeals. 

Brantlv,  C.  J.  Plaintiff,  being  sworn,  testified  that  she  was  the 
surviving  wife  of  Henry  Pelican,  the  beneficiary  named  in  the  policy 
and  that  no  part  of  the  sum  stipulated  for  therein  had  been  paid.  Her 
counsel  then  introduced  the  policy  and  rested.  Thereupon  counsel  for 
defendant  moved  for  a  nonsuit  on  the  grovmd  that  plaintiff  had  failed 
to  show  that  Pelican  w^as  in  good  health  at  the  time  the  policy  was  de- 
livered. The  motion  was  overruled.  Defendant  assigns  error.  Coun- 
sel argue  that,  since  in  the  application  Pelican  agreed  that  the  contract 
should  not  become  effective  unless  the  first  premium  was  paid  and 
the  policy  was  issued  during  his  "continuance  in  good  health,"  it  had 
not  become  a  binding  contract  in  the  absence  of  evidence  showing  that 
he  was  in  good  health  at  the  date  of  its  issuance.  The  ruling  was 
proper.     *     *     * 

The  general  rule  is  that  a  warranty  must  be  a  part  and  parcel  of 
the  contract — made  so  by  express  agreement  of  the  parties  upon  the 
face  of  the  policy.  It  is  in  the  nature  of  a  condition  precedent  and 
must  be  strictly  complied  with  or  literally  fulfilled,  to  entitle  the  as- 
sured to  recover  on  the  policy.  It  need  not  be  actually  material  to  the 
risk;    its  falsity  will  bar  recovery  because  by  the  express  stipulation 

the   statement  is  warranted  to  be  true,  and  thus   is  made   material. 

*  *     -jf. 

"A  representation  is  not,  strictly  speaking,  a  part  of  the  contract  of 
insurance,  or  of  the  essence  of  it,  but  rather  something  collateral  or 
preliminary,  and  in  the  nature  of  an  inducement  to  it.  A  false  repre- 
sentation, unlike  a  false  warranty,  will  not  operate  to  vitiate  the  con- 
tract, or  avoid  the  policy,  unless  it  relates  to  a  fact  actually  material, 
or  clearly  intended  to  be  made  material  by  the  agreement  of  the  par- 
ties. It  is  sufficient  if  representations  be  substantially  true.  They 
need  not  be  strictly,  or  literally,  so.  A  misrepresentation  renders  the 
policy  void  on  the  ground  of  fraud,  while  a  noncompliance  with  a  war- 
ranty operates  as  an  express  breach  of  the  contract."  Alabama  Gold 
Life  Ins.  Co.  v.  Johnston,  80  Ala.  467,  2  South.  125,  59  Am.  Rep. 
816.    *    *    * 

It  is  true  that  in  the  application  there  is  found  the  statement  that 
the  answers  made  to  the  medical  examiner  were  true  and  were  made 
to  the  company  "as  an  inducement  to  issue  the  proposed  policy."  Yet 
it  appears,  from  the  condition  quoted  above  from  the  policy  itself,  that 
in  the  absence  of  fraud  these  statements  were  to  be  "deemed  as  repre- 
sentations and  not  warranties."    *     *     * 

The  evidence  tends  to  show  that  Pelican  died  of  pulmonary  tuber- 
culosis,  attended   by  chronic  pleurisy   and   chronic   pleuropercarditis. 

*  *    * 

The  evidence  left  in  doubt  the  truth  of  the  answers  of  Pelican  to  the 
several  ciuestions,  as  well  as  his  good  faith  in  making  them.  If  he 
was  suffering  from  tuberculosis  on  September  12,  1908,  and  died  in 
an  advanced  stage  of  the  disease  in  July,  1909,  the  ordinary  layman 
might  suspect  that  he  was  afflicted  with  it  at  the  date  of  his  applica- 
tion [August  26,  1908].  Yet  the  testimony  of  Dr.  Hammond  tends  to 
show  that  he  was  entirely  free  from  it  at  that  time,  and  the  fact  that 


Ch.  3)  PERFORMANCE   OF   CONTRACTS  185 

the  doctor  found  him  insurable  indicates  that  he  was  then  in  good 
heahh.  Therefore  the  truth  or  falsity  of  his  answers  to  questions, 
which  all  reflected  upon  the  condition  of  his  health,  depended  upon 
the  proper  inferences  to  be  drawn  from  the  evidence.  There  was  evi- 
dence tending  to  show  that,  when  Dr.  IMatthews  visited  him,  he  in- 
formed him  that  he  was  suffering  from  influenza.  Even  though  he  was 
then  suffering  from  pleuritic  tuberculosis,  nevertheless,  being  a  lay- 
man, he  could  not  himself  be  expected  to  have  a  better  knowledge  of 
diseases  or  of  the  condition  of  his  health,  than  had  Dr.  Hammond,  who 
about  a  month  later  made  a  careful  examination  to  ascertain  if  the 
disease  was  present.  Hence,  also,  the  inference  of  his  good  or  bad 
faith  in  making  these  several  answers  was  to  be  drawn  from  conflict- 
ing evidence.  ***!(■  ■y;^as  peculiarly  within  the  province  of  the 
jury  to  determine  whether,  upon  the  whole  of  the  evidence  as  to  any  of 
his  answers,  Pelican  was  guilty  of  fraud  within  the  rule  stated  above. 
The  apparent  haste  with  which  he  proceeded  to  have  his  life  insured, 
after  his  illness  in  1908,  the  short  time  that  he  was  at  work  thereafter, 
and  the  condition  of  his  body  as  described  by  the  physicians  who  per- 
formed the  autopsv,  some  nine  months  later,  might  well  be  regarded  as 
sufficient  to  create  a  suspicion  that  his  statements  were  intentionally 
untrue.  Nevertheless,  the  court  properly  refused  to  take  the  case  from 
the  jury.    *    *     * 

The  judgment  and  order  are  affirmed. 


KAUFFJNIAN   v.    RAEDER    et   al. 

(United  States  Circuit  Court  of  Appeals,  Eiglith  Circuit.  1901.     lOS  Fed.  171, 
47  C.  C.  A.  278,  54  L.  R.  A.  247.) 

Sanborn,  Circuit  Judge.  May  one  party  to  a  contract,  who  has 
accepted  and  retained  the  benefits  of  its  substantial  performance  by  the 
other  party,  retain  and  enjoy  these  benefits,  and  still  rescind  the  agree- 
ment, and  escape  all  the  burdens  and  liabilities  of  the  contract,  because 
the  first  party  has  failed  to  perform  at  the  exact  time  stipulated  there- 
in a  subordinate  covenant,  incidental  to  the  main  purpose  of  the  agree- 
ment, which  goes  only  to  a  part  of  the  consideration,  and  whose  breach 
may  be  compensated  by  damages?  This  is  the  most  important  question 
which  this  case  presents.  It  Avill  be  conducive  to  brevity  and  perspicu- 
ity to  obtain  a  clear  idea  of  the  relations  of  the  parties  to  the  agree- 
ment to  be  considered,  their  respective  covenants  therein,  and  the  mov- 
ing considerations  which  induced  them  to  make  their  stipulations  be- 
fore entering  upon  the  discussion  of  this  issue.  This  conception  must 
be  secured  by  the  light  of  the  fundamental  rule  that  the  situation  of  the 
parties  when  the  contract  was  made,  its  subject-matter,  and  the  pur- 
pose of  its  execution  are  material  to  determine  the  intention  of  the 
parties  and  the  meaning  of  the  terms  they  used,  and  that  when  these 
are  ascertained  they  must  prevail  over  the  dry  words  of  the  stipula- 
tions.   *     *     * 

On  June  19,  1895,  when  this  agreement  was  made,  the  plaintiff, 
John  W.  Kauffman,  had  made  a  lease  of  the  valuable  premises  in  the 
heart  of  the  city  of  St.  Louis,  involved  in  the  negotiation,  to  the  Cen- 
tral Realty  &  Improvement  Company  for  a  term  of  years,  whereby  he 
was  secured — First,  by  his  legal  right  to  eject  the  lessee  and  to  take 
back  the  premises  upon  default  in  the  payment  of  any  installment  of 


186  CONTRACTS  (Parti 

the  rent;  and,  second,  by  the  covenant  of  the  lessee  in  the  receipt 
during  the  year  then  ensuing  of  a  rent  of  $35,000  in  quarterly  pay- 
ments. The  defendants  had  formed  the  project  of  organizing  a  cor- 
poration, the  Century  Building  Company,  of  purchasing  this  lease 
from  the  lessee,  of  assuming  its  covenants,  and  of  constructing  a  build- 
ing on  the  leased  premises  in  the  name  of  this  prospective  corporation. 
They  could  derive  no  rents  or  income  from  the  premises  during  the 
year  then  ensuing,  while  the  building  was  in  course  of  construction,  and 
they  desired  to  carry  the  time  of  payment  of  this  $35,000  forward  to  a 
period  when  the  building  would  be  completed  and  the  property  would 
be  yielding  an  income.  For  this  purpose  they  induced  the  plaintiff  to 
make  the  contract  under  consideration.  In  this  agreement  the  plaintiff 
and  the  defendants  made  certain  covenants  with  each  other.  By  the 
dry  words  of  the  contract  the  plaintiff  covenanted  to  accept  preferred 
stock  of  the  Century  Company  at  its  par  value  for  the  $35,000  rent 
Vv^hich  was  coming  due  in  the  then  ensuing  year,  and  to  assign  and 
transfer  this  stock  to  the  defendants  and  their  associates  for  $35,000 
and  interest  thereon  at  6  per  cent,  per  annum  from  the  time  that  the 
rent  fell  due  by  the  terms  of  the  lease. 

On  the  other  hand,  the  defendants  covenanted  to  pay  this  $35,000 
and  interest  to  the  plaintiff  on  or  before  July  1,  1898.  The  legal  ef- 
fect, the  real  meaning,  of  the  agreement  was  that  Kauffman  covenant- 
ed to  release  (1)  the  security  of  his  right  to  eject  the  lessee  and  its  as- 
signee, and  to  recover  back  the  premises,  for  a  failure  to  pay  any  in- 
stallment of  this  rent,  and  (2)  the  security  of  his  lessee's  agreement  to 
pay  it,  and  to  accept  in  lieu  of  this  security  the  personal  covenant  of 
the  defendants  that  they  would  pay  the  rent,  with  interest,  on  or  before 
July  1,  1898,  and  the  preferred  stock  of  the  prospective  corporation, 
which  he  agreed  to  hold  and  to  deliver  to  the  defendants  upon  their  per- 
formance of  their  covenant  to  pay  the  rent.  The  considerations  which 
Kauffman  agreed  to  give  to  the  defendants  for  their  covenant  to  pay 
the  rent  and  interest  were  (1)  the  use  by  the  prospective  corporation  of 
the  leased  premises  for  a  year  without  the  payment  of  any  rent ;  (2) 
the  release  of  the  premises  from  Kauft'man's  right  to  retake  them  for 
the  failure  to  pay  any  installment  of  this  rent;  (3)  the  release  of  the 
realty  company  and  of  its  proposed  assignee,  the  Century  Company, 
from  liability  to  pay  this  rent;  and  (4)  the  assignment  and  transfer  of 
the  3^0  shares  of  stock.  The  single  consideration  which  the  defendant 
agreed  to  give  to  the  plaintiff  for  all  these  covenants  was  the  payment 
of  the  $35,000  and  interest  on  or  before  July  1,  1898.  Thus  it  will  be 
seen  that  the  main  purpose  of  the  contract  was  the  novation,  the  re- 
lease by  the  plaintiff  of  the  leased  premises,  of  the  lessee  and  of  its 
proposed  assignee  from  liability  for  the  rent,  and  the  covenant  of  the 
defendants  to  pay  it  with  interest.  The  desideratum  which  induced 
the  agreement  and  which  went  to  the  whole  consideration  of  both  sides 
was  this  novation.  Without  that  the  contract  would  never  have  been 
made.  The  covenant  of  Kauffman  to  take,  to  hold,  and  to  assign 
and  transfer  the  stock  to  the  defendants  was  subordinate  and  inci- 
dental to  the  main  purjDose  of  the  agreement,  never  induced  its  mak- 
ing, and  went  only  to  a  part  of  the  consideration.    *     *     - 

The  plaintiff'  has  released  his  property,  his  lessee,  and  its  assignee, 
the  Century  Company,  from  liability  for  the  $35,000  rent,  has  fur- 
nished the  use  of  his  property  to  the  defendants'  corporation  for  a  year 
without  the  payment  of  any  rent,  has  accepted  and  held  the  preferred 


Ch.  3)  PERFOUMAXCE  OF  CONTRACTS  187 

Stock  from  1896  until  the  present  time,  and  has  offered  and  still  oft'ers 
to  assign  and  deliver  it  to  the  defendants,  as  he  agreed  to  do.  The  de- 
fendants have  accepted,  enjoyed,  and  still  retain  the  use  of  the  leased 
premises  by  their  corporation  during  that  year  without  the  payment 
of  rent,  and  the  release  of  the  property,  of  the  lessee,  and  of  its  as- 
signee from  liability  for  the  $35,000.  They  have  received  and  retained 
the  great  desiderata  which  induced  them  to  make  their  promise,  and 
yet  thev  refuse  to  pay  a  dollar  for  these  benefits  and  insist  that  they 
are  absolved  from  all  liability  because  the  plaintiff  did  not  oft'er  to 
assign  and  deliver  the  stock  to  them  in  accordance  with  every  legal 
technicality  on  the  very  day  when  their  obligation  matured,  although 
he  was  always  ready  and  willing,  and  within  four  months  thereafter 
}je  offered  to  do  so  in  compliance  with  every  requirement  of  the  law 
which  the  defendants  did  not  waive.  Can  a  party  to  a  contract  retain 
all  the  benefits  of  a  substantial  performance  of  it  by  the  other  party, 
and  then  escape  all  its  burdens  and  repudiate  all  his  obligations  by 
means  of  such  a  technicality  as  this?  This  issue  will  be  considered 
and  discussed  on  the  assumption  that  the  defendant's  theory  of  this 
case  is  sustained  by  the  facts — on  the  assumption  that  the  plaintiff 
made  no  sufficient  oft'er  to  assign  or  deliver  the  stock  until  after  July 
1,  1898,  and  that  his  failure  to  make  this  oft'er  was  never  waived  by  the 
defendants.  The  evidence,  however,  is  conclusive  that  within  four 
months  after  that  date  an  adequate  offer  on  the  part  of  the  plaintiff 
to  complete  his  performance  of  the  agreement  was  made  and  still  the 
defendants    refused  to  pay    any  part    of  the    $35,000,  and    interest. 

There  is  another  principle  of  law  which  equally  prohibits  the  main- 
tenance of  the  theory  of  the  defendants  in  this  case.  It  is  stated  by 
Lord  ^lansfield  in  Boone  v.  Eyre,  1  H.  Bl.  273,  in  these  words: 
"Where  mutual  covenants  go  to  the- whole  of  the  consideration  on 
both  sides,  they  are  mutual  conditions,  the  one  precedent  to  the  other; 
but  where  they  only  go  to  a  part,  where  a  breach  may  be  paid  for  in 
damages,  there  the  defendant  has  a  remedy  on  his  covenant,  and  shall 
not  plead  it  as  a  condition  precedent."     *     *     * 

The  breach  of  a  covenant  of  the  first  class — a  dependent  covenant, 
one  which  goes  to  the  whole  consideration  of  the  contract — gives  to 
the  injured  party  the  right  to  treat  the  entire  contract  as  broken  and 
to  recover  damages  for  a  total  breach.  *  ^'  *  But  a  breach  of  a  cov- 
enant of  the  second  class,  an  independent  covenant,  a  covenant  which 
does  not  go  to  the  whole  consideration  of  the  contract  and  is  subordi- 
nate and  incidental  to  its  main  purpose,  does  not  constitute  a  breach 
of  the  entire  contract,  does  not  authorize  the  injured  party  to  rescind 
the  agreement,  but  he  is  still  bound  to  perform  his  part  of  it,  and  his 
only  remedy  is  a  recovery  of  damages  for  the  breach.  *  *  *  Now, 
the  covenant  of  the  plaintiff'  to  assign  and  transfer  the  stock  to  the  de- 
fendants did  not  go  to  the  whole  consideration  of  the  contract,  but 
was  subordinate  and  incidental  to  its  main  purpose,  as  has  already 
been  shown.  Its  breach  was  susceptible  of  compensation  in  damages. 
Therefore,  even  though  the  plaintiff*  committed  a  technical  breach  of 
it,  the  defendants,  who  had  accomplished  the  main  purpose  of  their 
contract,  and  had  accepted  the  benefits  of  the  plaintiff's  performance 
of  that  part  of  his  covenants  which  went  to  the  whole  consideration 
of  the  agreement,  the  use  of  the  leased  premises  by  their  corporation 
for  a  year  without  payment  of  the  rent,  and  the  release  of  the  prem- 


1S8  CONTRACTS  (Parti 

ises,  of  the  lessee,  and  of  its  assignee  from  liability  therefor,  were  still 
bound  by  their  agreement  to  pay  this  rent  and  interest,  and  their  only 
remedy  for  the  plaintiff's  breach  was  compensation  in  damages. 
^     ^     ^ 

A  large  number  of  cases  have  been  discussed  which  simply  hold 
that,  before  a  party  to  mutual  dependent  covenants  which  are  to  be 
performed  at  the  same  time  can  maintain  an  action  for  the  breach,  he 
must  perform  or  offer  to  perform  his  part  of  them,  unless  the  offer  is 
waived  by  the  other  party  to  the  contract.  *  *  *  But  none  of  these 
decisions  hold  that  a  failure  of  one  party  to  perform  or  to  offer  to  per- 
form on  the  day  fixed  releases  the  other  party  from  his  obligation  to 
fulfill  his  covenants.     *     *     * 

The  facts  of  this  case  bring  it  squarely  under  the  salutary  rules 
that  (1)  when  a  covenant  goes  only  to  a  part  of  the  consideration  pf 
a  contract,  is  incidental  and  subordinate  to  its  main  purpose,  and  its 
breach  may  be  compensated  in  damages,  such  a  breach  does  not  war- 
rant a  rescission  of  the  contract,  but  the  injured  party  is  still  bound 
to  perform  his  part  of  the  agreement,  and  his  only  remedy  for  the 
breach  consists  of  the  damages  he  has  suffered  therefrom,  and  (2) 
where  one  party  to  a  contract  has  received  and  retained  the  benefits 
of  a  substantial  partial  performance  of  the  agreement  by  the  other 
party,  who  has  failed  to  completely  fulfill  all  his  covenants,  the  first 
party  cannot  retain  the  benefits  and  repudiate  the  burdens  of  the  con- 
tract, but  he  is  bound  to  perform  his  part  of  the  agreement,  and  his 
remedy  for  the  breach  is  limited  to  compensation  in  damages.  The 
first  party  upon  plea  and  proof  of  his  substantial  partial  performance, 
and  without  plea  or  proof  of  his  complete  performance,  may  maintain 
an  action  either  for  specific  performance  or  for  damages  on  account 
of  the  failure  of  the  second  party  to  perform,  and  the  latter  may  se- 
cure- his  damages  for  the  plaintiff's  breach  either  by  counterclaim  or 
by  an  independent  action. 

The  failure  of  the  court  below  to  try  this  case  in  accordance  with 
Miese  established  principles  of  the  law  necessitates  a  reversal  of  the 
judgment  in  favor  of  the  defendants  and  another  trial  of  this  case. 


SECTION  8.— TENDER  OF  PERFORMANCE  AS  A 
CONDITION 


DELAWARE  TRl'ST  CO.  V.  CALM  et  al. 

(Court  of  Appeals  of  New  York,  1909.     195  N.  Y.  231,  88  N.  E.  53.) 

Vann,  J.  When  the  assignors  of  the  plaintiff  exercised  the  option 
given  by  the  sixth  clause  of  the  agreement  in  question,  the  arrangement 
became  a  contract,  whereby  one  party  agreed  to  purchase,  and,  by  nec- 
essary implication,  the  other  party  agreed  to  sell  "for  cash,  all  the 
right  and  interest  of"  the  latter  "in  said  business"  and  said  "agree- 
ment." The  buyers  were  to  pay  for  the  actual  amount  of  cash  "paid 
out  or  expended"  by  the  sellers  "in  and  about  said  business."  *  *  * 
The  evidence  warrants  the  inference  that  both  real  and  personal  prop- 
erty had  been  acquired  in  the  business,  and  that  the  evidence  of  title 
stood  in  the  names  of  various  individuals,  some  of  whom,  and  among 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  189 

them  certain  ''nominees"  of  the  sellers,  were  parties  neither  to  the 
agreement  nor  the  action.  Thus  an  executor}-  contract  came  into  ex- 
istence as  of  the  date  when  the  option  was  exercised  for  the  ptirchase 
and  sale  of  both  kinds  of  property.  *  *  *  The  contract  was  thus 
made,  but  neither  party  performed  it  by  simply  making  it,  and  no  time 
or  place  for  performance  was  specified.     *     *     * 

Under  these  circumstances,  it  was  the  duty  of  the  plaintiff  or  its  as- 
signors to  tender  performance  on  their  part  and  to  demand  perform- 
ance on  the  part  of  the  defendants  before  subjecting  them  to  the  ex- 
pense and  annoyance  of  an  action  to  recover  the  amotint  of  the  pur- 
chase price.  Otherwise  the  sellers  would  have  both  money  and  prop- 
erty and  the  buyers  nothing.     *     *     * 

The  action  was  brought  on  the  theory^  that  it  was  for  the  recovery 
of  a  debt,  and  that  the  commencement  of  the  suit  was  a  sufficient  de- 
mand, but  there  was  no  debt.  The  express  promise  of  the  buyers  was 
to  purchase  and  pay  for  various  rights  and  interests  in  a  certain  busi- 
ness and  agreement,  and  the  implied  promise  of  the  sellers  was  to 
transfer  or  assign  those  rights  and  interests  to  the  purchasers,  for 
there  can  be  no  purchase  without  a  sale.  Some  of  the  rights  were  in 
the  nature  of  an  interest  in  realty,  and  the  written  evidence  of  title 
stood  in  the  names  of  outsiders  who  had  been  nominated  by  the  sellers. 
Concurrent  action  was  required,  and  no  debt  could  come  into  exist- 
ence until  the  sellers  had  assigned  or  offered  to  assign  that  which  they 
had  agreed  to  sell.  The  obligations  of  the  parties  were  mutual  and 
dependent,  for  both' were  to  be  performed  at  the  same  time.  *  *  * 
"The  general  rule  is  to  consider  all  covenants  dependent,  in  absence  of 
a  contrary  intention,  for  this  is  the  way  most  men  make  their  bargains, 
neither  party  intending  to  perform  unless  the  other  at  the  same  time 
performs  on  his  part."    29  Am.  &  Eng.  Encyc.  of  Law  (2d  Ed.)  689. 

One  party  had  something  to  sell  and  agreed  to  sell  it,  but  it  was  a 
kind  of  property  that  required  a  written  transfer  not  only  from  them- 
selves, but  from  their  nominees  or  representatives,  before  the  sale 
could  be  completed  and  a  debt  created.  As  was  said  by  this  court  in 
an  early  case :  "The  purchaser  is  not  bound  to  pay  the  purchase  mon- 
ey unless  he  receives  the  thing  purchased ;  and  how  can  it  be  said 
that  he  has  refused  to  receive  the  thing  purchased,  and  to  pay  the  mon- 
ey for  it,  when  he  has  never  had  the  opportunity  of  receiving  it?" 
Lester  v.  Jewett,  11  N.  Y.  453,  454.  "In  contracts  of  this  description, 
the  undertakings  of  the  respective  parties  are  always  considered  de- 
pendent, unless  a  contrary  intention  clearly  appears.  A  different  con- 
struction would  in  many  cases  lead  to  the  greatest  injustice,  and  a 
purchaser  might  have  payment  of  the  consideration  money  forced  up- 
on him,  and  yet  be  disabled  from  procuring  the  property  for  which  he 
paid  it."  President,  etc..  Bank  of  Columbia  v.  Hagner,  1  Pet.  455.  7 
L.  Ed.  219.  '^'  *  *  The  agreement  itself  was  not  a  transfer,  but 
merely  an  implied  promise  to  transfer  upon  performance  by  the  other 
party.  \Miere  a  contract  requires  contemporaneous  performance, 
neither  party  can  sue  at  law  until  he  has  put  the  other  in  default.  An 
oft'er  to  perform  made  in  the  pleadings  or  during  the  trial  is  not 
enough,  and  even  that  kind  of  an  offer  was  not  made  in  this  case. 

5k        ^        ^ 

Complaint  dismissed. 


190  CONTRACTS  (Part  1 


GLENN  V.   ROSSLER  et  al. 

(Court  of  Appeals  of  New  York,  1898.    156  N.  Y.  161,  50  N.  E.  785.) 

Action  by  James  S.  Glenn  against  Charles  Rossler  and  Richard  R. 
Ditzell.  From  a  judgment  affirming  a  judgment  on  a  verdict  for  plain- 
tiff, defendants  appeal. 

While  the  action  as  originally  commenced  included  other  purposes, 
it  was  finally  treated  simply  as  an  action  at  law  by  the  vendee  of  real 
property  to  recover  the  payments  of  purchase  money  made  to  the 
vendor.  The  property  which  was  the  subject  of  the  sale  consisted  of 
about  125  acres  of  land  located  in  the  town  of  Tonawanda,  Erie  coun- 
ty, N.  Y.  On  March  11,  1S93,  a  contract  was  entered  into  between 
the  defendants  and  the  plaintiff  by  which  the  former  agreed  to  sell  the 
latter  the  premises  mentioned  for  the  price  of  $138,347,  to  be  paid  as 
follows:  $1,000  seven  days  from  the  date  of  the  contract ;  $5,000 
April  15,  1893;  $10,000  October  1,  1893— with  interest  at  the  rate  of 
6  per  cent,  on  all  sums  from  time  to  time  remaining  unpaid,  payable 
at  the  time  of  each  payment.  Then  followed  this  provision:  "The 
party  of  the  first  part  shall,  after  the  payments  mentioned  herein  are 
fully  made  on  this  contract,  at  their  own  proper  cost  and  expense, 
execute  and  deliver  to  the  said  party  of  the  second  part  a  good  and 
sufficient  warranty  deed  of  said  premises,  and  at  the  time  deliver  to 
the  second  party  a  tax  and  title  search  made  by  one  of  the  guaranty 
seaixh  companies  of  the  city  of  Buffalo,  showing  good  and  perfect 
title ;  and,  at  the  time  deed  to  said  premises  is  executed  and  delivered 
by  the  first  parties  to  the  second  party,  the  party  of  the  second  part 
agrees  to  execute  and  deliver  to  first  parties  a  bond  and  mortgage  for 
the  sum  of  one  hundred  and  twelve  thousand  two  hundred  and  thirty- 
seven  ($112,237)  dollars,  due  and  payable  six  years  from  October  1, 
1892,  with  interest  at  the  rate  of  6  per  cent,  per  annum,  payable  semi- 
annually." 

The  plaintiff  paid  on  his  contract  $1,000  March  17,  1893;  $5,000 
April  15,  1893;  and  $7,000  July  3,  1893.  There  was  a  subsequent 
agreement  between  the  parties  by  which  the  payment  of  the  remaining 
$3,000  due  July  1st  was.  postponed  until  October  1st  of  that  year.  Oc- 
tober 1st  was  Sunday.  On  the  preceding  day  the  parties  met  and 
agreed  that  the  contract  should  be  performed  on  Monday.  Upon  that 
day  they  again  met,  and  the  plaintiff  tendered  to  the  defendants  the 
sum  of  $17,330,  which  was  the  balance  required  to  make  up  the  sum 
of  the  payments  due  when  a  deed  was  to  be  delivered  and  a  mortgage 
executed.  When  that  tender  was  made,  the  defendants  were  unable 
to  give  the  plaintiff  title,  and  asked  him  to  extend  the  time  for  the 
delivery  of  the  deed.  The  plaintiff  declined,  and  demanded  a  deed 
upon  that  day,  which  was  not  given.  On  the  next  day  he  demanded 
a  return  of  the  purchase  price  paid.  The  defendants  refused  to  repay 
it,  and  several  days  after  this  action  was  commenced. 

Martin,  J.  That  the  defendants  had  no  title  to  the  premises,  and 
were  unable  to  convey  them  to  the  plaintiff'  when  a  deed  was  demanded, 
are  undisputed.  Whether  the  covenants  in  the  agreement  in  suit  on 
one  hand  to  pay,  and  on  the  other  to  give  a  deed,  were  concurrent  and 
dependent  so  far  as  the  payments  to  be  made  on  the  1st  of  October 
were  concerned,  or  whether  they  were  independent,  and  the  payment 
of  the  entire  amount  then  due  was  a  condition  precedent  to  the  right 
of  the  plaintiff  to  a  conveyance  of  the  property,  or  upon  default  to 


Ch.  3)  PERI-'ORMANCE   OF   CONTRACTS  191 

rescind  the  contract,  is  practically  the  only  question  in  this  case.  The 
contention  of  the  appellants  is  that  all  the  provisions  of  the  contract 
relating  to  the  payment  of  that  portion  of  the  consideration  constituted 
independent  covenants  which  the  plaintifif  was 'required  to  fully  per- 
form by  paying  the  entire  amount  before  he  became  entitled  to  a  deed, 
and  it  was  only  within  a  reasonable  time  after  such  payments  were 
made  that  the  defendants  were  required  to  give  him  a  conveyance  of 
the  property.  As  sustaining  that  contention,  the  plaintiff  relies  chiefly 
upon  the  language  of  the  contract.  It  is  to  be  observed  that  it,  in 
terms,  provides  that,  after  the  payments  mentioned  are  fully  made, 
the  defendants  shall  execute  and  deliver  a  sufficient  deed  of  the  prem- 
ises, and  "at  the  time"  deliver  a  tax  and  title  search,  and  that  "at  the 
time"  the  plaintift  should  execute  and  deliver  a  mortgage  to  the  defend- 
ants. The  appellants  claim  that  this  language  should  be  construed  as 
not  requiring  the  delivery  of  the  deed  until  a  reasonable  time  after  the 
payments  were  made.     *     *     * 

While  an  examination  displays  a  want  of  harmony  in  the  authorities 
upon  this  question  when  particular  cases  are  examined  and  compared, 
yet  it  is  quite  obvious  that  they  all  recognize  the  principle  that  the  in- 
tention of  the  parties  is  to  control  in  determining  the  question  of  the- 
dependence  or  independence  of  the  covenants  in  such  contracts.  In 
the  language  of  Lord  Mansfield  in  Kingston  v.  Preston,  2  Doug.  690: 
"The  dependence  or  independence  of  covenants  w^as  to  be  collected 
from  the  evident  sense  and  meaning  of  the  parties,  and  that,  how- 
ever transposed  they  might  be  in  the  deed,  their  precedency  must  de- 
pend on  the  order  of  time  in  which  the  intent  of  the  transaction  re- 
quires their  performance."  Hence  the  real  question  to  be  determined 
in  this  case,  upca  a  reading  of  the  entire  contract  between  the  parties, 
is  whether  it  was  their  intention  that  the  payments  which  were  due 
October  1st  and  the  delivery  of  the  deed  w^ere  to  be  simultaneous  and 
concurrent  acts.  The  rule,  as  stated  by  Thompson,  J.,  in  Bank  v. 
Hagner,  1  Pet.  455,  464,  7  L.  Ed.  219,  is  that,  "in  contracts  of  this  de- 
scription, the  undertakings  of  the  respective  parties  are  always  Consid- 
ered dependent,  unless  a  contrary  intention  clearly  appears.  A  different 
construction  would,  in  many  cases,  lead  to  the  greatest  injustice,  and  a 
purchaser  might  have  payment  of  the  consideration  money  enforced  up- 
onhim,  and  yet  be  disabled  from  procuring  the  property  for  which  he- 
paid  it."  An  application  of  these  principles  renders  it  quite  evident 
that  although  a  literal  reading  of  a  portion  of  the  agreement  may  tend 
to  sustain  the  contention  of  the  appellants,  still,  when  the  whole  agree- 
ment is  read  and  properly  construed,  the  payments  due  October  1st 
and  the  giving  of  the  deed  were  intended  to  be  dependent  and  concur- 
rent acts.  The  plain  inference  to  be  drawn  from  all  its  provisions  is 
that  the  deed  was  to  be  executed  and  delivered  at  the  time  of  the  pay- 
ment of  the  account  due  October  1st.  No  fair  reading  of  it  would 
justify  the  conclusion  that  the  payment  of  the  entire  consideration  then 
due,  amounting  to  many  thousands  of  dollars,  was  to  precede  the  trans- 
fer of  the  title.  We  think  the  trial  court  properly  decided  tliis  case,, 
and  that  the  judgment  should  be  affirmed,  with  costs. 


192  CONTRACTS  (Part  1 


MOORE    V.    NORMAN. 

(Supreme  Court  of  IMinnesota.  1S92.     52  Minn.  S3,  53  N.  W.  809,  18  L.  R.  A. 
359,  38  Am.  St.  Rep.  526.) 

Action  by  Ella  M.  Moore  against  H.  G.  Norman  to  recover  posses- 
sion of  personal  property.  Verdict  for  defendant.  From  an  order 
refusing  a  new  trial,  plaintiff  appeals. 

Dickinson,  J.  The  defendant,  to  secure  two  promissory  notes  exe- 
cuted by  him  to  the  plaintiff",  mortgaged  certain  personal  property  to 
her.  She  prosecutes  this  action  to  recover  possession  of  a  part  of  the 
mortgaged  property  by  virtue  of  her  rights  as  such  mortgagee. 
^     ^     ^ 

The  only  issue  to  which  reference  is  now  necessary  is  as  to  whether 
certain  payments  and  a  tender  of  payment  made  by  the  defendant 
were  sufficient  and  effectual  to  discharge  the  mortgages.  The  whole 
transaction  oil  the  part  of  the  plaintiff  was  conducted  by  one  George 
R.  Moore,  who  was  her  general  agent.  Long  after  the  maturity  of 
the  notes  the  defendant  made  a  tender  of  payment  to  the  plaintiff, 
which  on  his  part  is  claimed  to  have  been  sufficient  in  amount,  with 
payments  which  had  been  previously  made,  to  complete  the  payment 
of  the  debt,  and  hence  to  discharge  the -mortgages.     *     *     * 

The  plaintiff,  however,  then  claimed  that  the  amount  tendered  was 
not  sufficient  to  pay  the  debt;  and  whether  it  was  so  or  not  was  one 
of  the  issues  in  this  case,  in  respect  to  which  the  plaintiff's  contention, 
that  the  amount  was  insufficient,  was  supported  by  evidence  which 
would  have  sustained  a  verdict  in  her  favor.  The  evidence  tended 
to  show  that  the  tender  was  accompanied  by  a  demand  that  the  notes 
be  surrendered;  that  such  surrender  was  refused,  a  larger  sum  being 
claimed  to  be  due;  but  that  the  plaintiff'  (by  her  agent,  who  held  the 
notes)  offered  to  receive  the  money  tendered,  and  indorse  it  on  the 
notes,  which  offer  the  defendant  refused  to  accept.  The  court,  at  the 
request  of  the  defendant,  charged  the  jury  to  the  effect  that  if  the 
amount  tendered  was  sufficient  the  defendant  had  a  right  to  demand 
the  surrender  of  his  notes.  This  constitutes  one  of  the  errors  as- 
signed. 

We  think,  as  applied  to  the  circumstances  of  this  case,  this  instruc- 
tion was  erroneous.  It  may  be  stated  as  a  general  proposition,  applica- 
ble at  least  where  it  appears  that  a  larger  sum  than  that  tendered  is  in 
good  faith  claimed  to  be  due,  that  the  tender  is  not  effectual  as  such 
if  it  be  coupled  with  such  conditions  that  the  acceptance  of  it,  as  ten- 
dered, will  involve  an  admission  by  the  party  accepting  it  that  no  more 
is  due.     *     *     * 

The  most  common  and  familiar  illustrations  of  the  proposition  above 
stated  are  cases  where  the  tender  is  made  as  being  all  that  is  due,  or 
as  payment  in  full.  It  is  everywhere  held  that  such  a  tender  is  not 
good.  The  debtor  has  no  right  to  the  benefit  of  a  tender,  as  having  the 
effect  of  a  payment,  when  it  is  burdened  with  such  a  condition  that 
the  creditor  cannot  accept  the  money  without  compromising  his  legal 
right  to  recover  the  further  sum  which  he  claims  to  be  due.  This 
case  falls  within  the  same  principle.  By  offering  to  pay  the  money  only 
upon  the  condition  that  the  plaintiff  deliver  up  the  notes  (if  such  was 
the  fact),  the  defendant  insisted  upon  a  condition  the  acceptance  of 
which  would  at  least  seriously  compromise  the  right  of  the  plaintiff  to 
recover  any  more,  even  though  it  should  be  true  that  the  amount  un- 


Cll.  3)  PERFORMANCE   OF   CONTRACTS  193 

paid  exceeded  the  sum  tendered.  The  acceptance  of  the  money  and 
the  surrender  of  the  notes  would  be  at  least  strong  evidence  against 
her,  in  the  nature  of  an  admission,  that  the  notes  were  thereby  fully 
paid. 

The  defendant  should  not  be  heard  to  assert  that  a  mere  offer  to 
pay  a  specified  sum,  less  than  was  supposed  by  the  other  party  to  be 
due,  has  the  effect  of  a  payment,  so  as  to  discharge  the  mortgage, 
when  the  offer  was  burdened  with  such  a  condition.  It  was  enough 
for  his  protection  that  the  plaintiff'  would  have  received  the  money  of- 
fered and  have  indorsed  its  payment  on  the  notes,  which  were  already 
overdue  and  still  in  the  hands  of  the  plaintiff.  If  the  defendant  re- 
jected this  offer,  and  insisted  upon  the  surrender  of  the  notes,  the  nat- 
ural and  only  reasonable  construction  to  be  put  upon  his  conduct  was 
that  he  insisted  that  the  tender,  if  accepted,  should  be  accepted  as  pay- 
ment of  the  notes  in  full.  If  that  was  the  eft'ect  of  the  tender,  it  was 
bad,  under  all  the  authorities.  A  mere  tender  should  not  be  eff'ectual 
to  discharge  the  lien  of  a  mortgage  unless  it  be  certainly  sufficient  in 
amount,  and  unburdened  with  any  conditions  which  the  debtor  has 
not  a  clear  right  to  impose.     *     *     * 

A  new  trial  must  be  granted  for  the  reason  above  stated.  *  *  * 
'Order  reversed  

SECTION  9.— DIVISIBLE  CONTRACTS 


PRODUCEItS"   COKE   CO.  v.   HILLMAX  et  al. 
(Supreme  Court  of  Pennsylvania.  1014.     24.3  Pa.  313,  90  Atl.  144.) 

Stewart,  J.  The  action  was  for  recovery  of  a  definite  quantity  of 
coke  sold  and  delivered  by  the  plaintiff  company  to  the  defendants 
between  3d  July,  1912.  and  the  29th  of  the  same  mopth,  at  specified 
rates  per  ton,  on  an  implied  promise  that  the  defendants  would  pay 
for  the  coke  furnished.  In  the  afiidavit  of  defense  filed  defendants 
aver  that  on  or  about  10th  May,  1912,  the  plaintiff  company  and  the 
defendants  entered  into  a  contract,  evidenced  by  writings,  by  which 
the  plaintiff  agreed  to  place  in  the  hands  of  the  defendants  for  sale 
substantially  all  the  coke  it  produced  during  the  six  months  from  1st 
July  to  December  31,  1912;  that,  under  this  contract,  the  defendants 
made  sales  of  large  quantities  of  coke  in  their  own  names  for  delivery 
between  1st  July  and  31st  December;  that  about  20th  July,  the  same 
year,  the  plaintiff  desiring  to  be  relieved  of  its  obligations  to  furnish 
defendants  all  the  coke  it  produced  within  the  period  named,  by  mutual 
agreement  the  original  contract  was  rescinded,  and,  as  a  consideration 
for  defendants'  consent  to  the  rescission,  the  plaintiff  promised  and 
agreed  that  defendant  should  be  protected  as  to  the  coke  which  up 
to  that  time  they  had  sold  ;  and  that,  to  this  end,  it  would  deliver  during 
the  balance  of  the  year  the  coke  which  had  been  sold  by  the  defend- 
ants on  certain  terms  then  and  there  specified,  as  follows :  "During 
the  month  of  July  3,680  tons  at  the  price  of  $2,379  per  net  ton,  and 
2,124  tons  per  month  for  the  months  of  August,  September,  October, 
November,  and  December  at  the  price  of  $2,345  per  net  ton."  The 
plaintiff  delivered  to  the  defendants  during  July  about  844i-'2  tons 
less  than  the  amount  called  for^  and  failed  to  deliver  any  coke  what- 
B.&  B. Bus. Law— 13 


194  CONTRACTS  (Part  1 

ever  during  the  month  of  September.  The  suit  was  brought  19th 
September,  1912,  to  recover  for  coke  delivered  during  July.  The 
contention  on  part  of  defendants  was  that  the  contract  set  up  in  the  af- 
fidavit of  defense  was  entire,  and  that  there  could  be  no  recovery  by 
plaintiff  for  any  partial  performance.  A  rule  for  a  judgment  for 
want  of  a  sufificient  affidavit  of  defense  was  made  absolute,  and  judg- 
ment followed.     *     *     ''' 

Where  a  question  of  this  kind  arises,  it  is  the  intention  of  the  parties 
that  controls,  and  not  the  divisibility  of  the  subject,  *  *  *  and  this 
intention  is  to  be  collected  from  the  words  employed,  where  the  inten- 
tion can  be  clearly  derived  therefrom.  When,  as  understood  in  their 
ordinary  sense,  the  words  do  not  disclose  the  manner  and  intent  to 
which  the  parties  intended  to  be  bound,  resort  must  be  had  to  rules  of 
construction  as  aids.  Having  regard  simply  to  the  words  employed 
in  this  contract,  the  inference  that  the  contract  was  intended  to  be 
entire  would  be  quite  as  reasonable  as  that  it  was  intended  to  be  divisi- 
ble. If  there  are  provisions  which  indicate  that  a  divisible  contract 
was  intended,  there  are  others  which  quite  as  clearly  indicate  the  op- 
posite. 

The  distinguishing  mark  of  a  divisible  contract  is  that  it  admits  of 
apportionment  of  the  consideration  on  either  side  so  as  to  correspond 
to  the  unascertained  consideration  on  the  other  side.  Where  such  a 
purpose  appears  in  the  contract,  or  is  clearly  deducible  therefrom,  it 
is  allowed  great  significance  when  ascertaining  the  intention  of  the 
parties.  It  is  a  mistake,  however,  to  suppose  that  in  every  case  it  is 
conclusive  in  itself.  It  is  determining  only  when  there  are  no  oppos- 
ing signs  or  marks.  Where  these  latter  are  present  it  becomes  a  ques- 
tion of  preponderance.     *     *     * 

While  it  is  not  averred  in  the  affidavit  that  failure  to  complete  the 
contract  of  plaintiffs  would  have  affected  the  sale  in  this  case,  it  is  a 
reasonable  inference,  in  view  of  the  situation  of  the  parties  and  the 
object  contemplated,  that  it  would  have  done  so.  It  was  not  required 
that  it  should  have  been  averred  in  the  affidavit.  The  courts  always 
seek  to  avoid,  as  far  as  they  consistently  can,  a  construction  that  would 
render  a  contract  ineffectual.  The  present  is  a  case  in  which  the  mani- 
fest purpose  of  the  agreement  would  be  defeated  were  it  held  to  be  a 
divisible  contract,  thereby  allowing  the  plaintiff  not  simply  to  disap- 
point the  defendants  in  what  it  was  intended  they  should  receive  for 
a  specific  and  express  purpose,  but  requiring  from  the  defendants  pay- 
ment for  so  much  performance  as  met  the  pleasure,  convenience,  and 
advantage  of  the  plaintiff".  As  against  such  construction,  the  defend- 
ants might  well  reply,  in  haec  foedera  non  venimus.  We  have  dis- 
cussed the  case  as  though  the  contract  were  as  averred  in  the  affidavit. 
The  defendants  should  be  allowed  an  opportunity  to  prove  the  aver- 
ment.    *     *     *     The  judgment  is  reversed.     *     *     * 


STEWART  V.  NEWBURY  et  al. 

(Court  of  Appeals  of  New  York,  1»17.     220  X.  Y.  379,  115  N.  E.  984, 
2  A.  L.  R.  519.) 

Action  by  Alexander  Stewart  against  Herbert  A.  Newbury  and 
others,  doing  business  under  the  firm  name  and  style  of  the  Newbury 
Manufacturing"  Company.  From  a  judgment  for  plaintiff,  defendants 
appeal. 


Ch.  3)  PKIIFOnMANfE   OF   CONTRACTS  195 

Crank,  J.  The  defendants  are  partners  in  the  pipe  fitting  business 
under  the  name  of  Newbury  Manufacturing  Company.  The  plaintilf 
is  a  contractor  and  builder  residing  at  Tuxedo,  N.  Y.  Plaintiff  agreed 
to  do  all  excavation  and  concrete  work  upon  a  foundry  building  for 
defendants.  The  parties  agreed  as  to  amounts  to  be  paid  for  the  work. 
Nothing  was  said  in  writing  about  the  time  or  manner  of  payment. 

-;:       *       * 

In  July  the  plaintiff  commenced  work  and  continued  until  September 
29th,  at  which  time  he  had  progressed  with  the  construction  as  far  as 
the  first  floor.  He  then  sent  a  bill  for  the  work  done  up  to  that  date 
for  $896.35.  The  defendants  refused  to  pay  the  bill  and  work  was 
discontinued.     *     *     * 

In  this  action,  which  is  brought  to  recover  the  amount  of  the  bill 
presented,  as  the  agreed  price  and  $95.68  damages  for  breach  of  con- 
tract, the  plaintiff  had  a  verdict  for  the  amount  stated  in  the  bill,  but 
not  for  the  other  damages  claimed,  and  the  judgment  entered  thereon 
has  been  affirmed  by  the  Appellate  Division.  The  appeal  to  us  is  upon 
exceptions  to  the  judge's  charge.     *     *     "^^ 

The  jury  was  plainly  told  that  if  there  were  no  agreement  as  to  pay- 
ments, yet  the  plaintiff'  would  be  entitled  to  part  payment  at  reasonable 
times  as  the  work  progressed,  and  if  such  payments  were  refused  he 
could  abandon  the  work  and  recover  the  amount  due  for  the  work 
performed. 

This  is  not  the  law.  Counsel  for  the  plaintiff'  omits  to  call  our  at- 
tention to  any  authority  sustaining  such  a  proposition  and  our  search 
reveals  none.  In  fact,  the  law  is  very  well  settled  to  the  contrary.  This 
was  an  entire  contract.  *  *  *  Where  a  contract  is  made  to  perform 
work  and  no  agreement  is  made  as  to  payment,  the  work  must  be  sub- 
stantially performed  before  payment  can  be  demanded.     *     *     * 

The  judgment  should  be  reversed,  and  a  new  trial  ordered. 


NORRINGTOX  v.  WRIGHT  et  al. 

<Supreme  Court  of  the  United  States,   1SS5.     115  U.  S.  188.  6   Sup.  Ct.  12, 

29  L.  Ed.  366.) 

Gray,  J.  This  was  an  action  of  assumpsit,  brought  by  Arthur  Nor- 
rington,  a  citizen  of  Great  Britain,  against  James  A.  Wright  and  others, 
citizens  of  Pennsylvania,  trading  under  the  name  of  Peter  Wright  & 
Sons,  upon  the  following  contract : 

"Philadelphia,  January  19,  1880. 

"Sold  to  Messrs.  Peter  Wright  &  Sons,  for  account  of  _A.  Norring- 
ton  &  Co.,  London:  Five  thousand  (5,000)  tons  old  T  iron  rails,  for 
shipment  from  a  European  port  or  ports,  at  the  rate  of  about  one  thou- 
sand (1,000)  tons  per  month,  beginning  February,  1880,  but  whole 
contract  to  be  shipped  before  August  1,  1880,  at  forty-five  dollars 
($45.00)  per  ton  of  2240  lbs.  customhouse  weight,  ex  ship  Philadelphia. 
Settlement,  cash,  on  presentation  of  bills  accompanied  bv  custom- 
house certificate  of  weight.  'Edward  J.  Etting,  Metail  Broker." 

The  plaintiff  shipped  from  various  European  ports  400  tons  by  one 
vessel  in  the  last  part  of  February.  885  tons  by  two  vessels  in  March, 
1,571  tons  by  five  vessels  in  April,  850  tons  by  three  vessels  in  May, 
1,000  tons  by  two  vessels  in  June,  and  300  tons  by  one  vessel  in  July, 
and  notified  to  the  defendants  each  shipment.  The  defendants  receiv- 
•ed  and  paid  for  the  February  shipment  upon  its  arrival  in  March,  and 


3  96  coxTRACTS  (Parti 

in  April  gave  directions  at  what  wharves  the  ^March  shipments  should 
be  discharged  on  their  arrival ;  but  on  Alay  14th,  about  the  time  of  the 
arrival  of  the  March  shipments,  and  having  been  then  for  the  first  time 
informed  of  the  amounts  shipped  in  February,  [March,  and  April,  they 
gave  Etting  written  notice  that  they  should  decline  to  accept  the  ship- 
ments made  in  Alarch  and  April,  because  none  of  them  were  in  ac- 
cordance with  the  contract ;  and  in  answer  to  a  letter  from  him  of 
May  16th,  wrote  him  on  May  17th.  as  follows:  "We  are  advised  that 
what  has  occurred  does  not  amount  to  an  acceptance  of  the  iron  under 
the  circumstances,  and  the  terms  of  the  contract.  You  had  a  right  to 
deliver  in  parcels,  and  we  had  a  right  to  expect  the  stipulated  quantity 
would  be  delivered  until  the  time  was  up  in  which  that  was  possible. 
*  *  *  If  we  are  mistaken  as  to  our  obligation  for  the  Februaiy  and 
March  shipments,  of  course  we  must  abide  the  consequences;  but  if 
we  are  right,  you  have  not  performed  your  contract,  as  you  certainly 
have  not  for  the  April  shipments.  There  is  then  the  very  serious  and 
much  debated  question,  as  we  are  advised,  whether  the  failure  to  make 
the  stipulated  shipments  in  February  or  ]\Iarch  has  absolved  us  from 
the  contract.  If  it  does,  we  of  course  will  avail  ourselves  of  this  ad- 
vantage." 

On  May  18th  Etting  wrote  to  the  defendants,  insisting  on  their  lia- 
bility for  both  past  and  future  shipments:  "  *  *  *  You  say  in  your 
last  paragraph  that  you  shall  avail  yourselves  of  the  advantage,  if  you 
are  absolved  from  the  contract ;  but,  as  you  seem  to  be  in  doubt  wheth- 
er you  can  set  up  that  claim  or  not,  I  should  like  to  know  definitely 
what  is  your  intention." 

On  May  19th  the  defendants  replied :  "We  do  not  read  the  con- 
tract as  you  do.  We  read  it  as  stipulating  for  monthly  shipments  of 
about  one  thousand  tons,  beginning  in  February,  and  that  the  six 
months'  clause  is  to  secure  the  completion  of  whatever  had  fallen 
short  in  the  five  months.  As  to  the  meaning  of  'about.'  it  is  settled 
as  well  as  such  a  thing  can  be;  and  certainly  neither  the  February, 
March,  nor  April  shipments  are  within  the  limits.  *  *  *  You  ask 
us  to  determine  whether  we  will  or  will  not  object  to  receive  further 
shipments  because  of  past  defaults.  We  tell  you  we  will  if  we  are  en- 
titled to  do  so,  and  will  not  if  we  are  not  entitled  to  do  so.  We  do  not 
think  you  have  the  right  to  compel  us  to  decide  a  disputed  question  of 
law  to  relieve  you  from  the  risk  of  deciding  it  yourself.  You  know 
quite  as  well  as  we  do  what  is  the  rule  and  its  uncertainty  of  applica- 
tion." *  *  *  From  the  date  of  the  contract  to  the  time  of  its  re- 
scission by  the  defendants,  the  market  price  of  such  iron  was  lower 
than  that  stipulated  in  the  contract,  and  was  constantly  falling.  Aft- 
er the  arrival  of  the  cargoes,  and  their  tender  and  refusal,  they  were 
sold  by  Etting.  with  the  consent  of  the  defendants,  for  the  benefit  of 
whom  it  might  concern. 

At  the  trial  the  plaintiiT  contended:  ( 1)  That  under  the  contract  he 
had  six  months  in  which  to  ship  the  5,000  tons,  and  any  deficiency  in 
the  earlier  months  could  be  made  up  subsequently,  provided  that  the 
defendants  could  not  be  required  to  take  more  tlian  1,000  tons  in  any 
one  month ;  (2)  that,  if  this  was  not  so  the  contract  was  a  divisible  con- 
tract, and  the  remedy  of  the  defendants  for  a  default  in  any  month 
was  not  by  rescission  of  the  whole  contract,  but  only  by  deduction  of 
the  damages  caused  by  the  delays  in  the  shipments  on  the  part  of  the 
plaintift'.     But  the  court  instructed  the  jury  that  if  the  defendants,  at 


Ch.  3)  PERFORMAXCE  OF  CONTRACTS  197 

the  time  accepting  the  deHvery  of  the  cargo  paid  for,  had  no  notice 
of  the  faihire  of  the  plaintiff  to  ship  about  1,000  tons  in  the  month  of 
February,  and  immediately  upon  learning  that  fact  gave  notice  of  their 
intention  to  rescind,  the  verdict  should  be  for  them.  The  plaintiff  ex- 
cepted to  this  instruction,  and,  after  verdict  and  judgment  for  the  de- 
fendants, sued  out  this  writ  of  error. 

In  the  contracts  of  merchants,  time  is  of  the  essence.  The  time  of 
shipment  is  the  usual  and  convenient  means  of  fixing  the  probable  time 
of  arrival,  with  a  view  of  providing  funds  to  pay  for  the  goods,  or  of 
fulfilling  contracts  with  third  persons. 

The  contract  sued  on  is  a  single  contract  for  the  sale  and  purchase 
of  5.000  tons  of  iron  rails,  shipped  from  a  European  port  or  ports 
for  Philadelphia.  The  subsidiary  provisions  as  to  shipping  in  different 
months,  and  as  to  paying  for  each  shipment  upon  its  delivery,  do  not 
split  up  the  contract  into  as  many  contracts  as  there  shall  be  shipments, 
or  deliveries  of  so  many  distinct  quantities  of  iron.  *  *  *  The 
times  of  shipment,  as  designated  in  the  contract,  are  "at  the  rate  of 
about  1,000  tons  per  month,  beginning  February,  1880,  but  whole  con- 
tract to  be  shipped  before  August  1,  1880."  These  words  are  not  sat- 
isfied by  shipping  one-sixth  part  of  the  5,000  tons,  or  about  833  tons, 
in  each  of  the  six  months  which  begin  with  February  and  end  with 
July.  But  they  require  about  1,000  tons  to  be  shipped  in  each  of  the 
five  months  from  February  to  ]\me  inclusive,  and  allow  no  more  than 
slight  and  unimportant  deficiencies  in  the  shipments  during  those 
months  to  be  made  up  in  the  month  of  July.  The  contract  is  not  one 
for  the  sale  of  a  specific  lot  of  goods,  identified  by  independent  cir- 
cumstances— such  as  all  those  deposited  in  a  certain  warehouse,  or  to 
be  shipped  in  a  particular  vessel,  or  that  may  be  manufactured  by  the 
seller,  or  may  be  required  for  use  by  the  buyer,  in  a  certain  mill — in 
which  case  the  mention  of  the  quantity,  accompanied  by  the  qualifica- 
tion of  "about,"  or  "more  or  less,"  is  regarded  as  a  mere  estimate  of 
the  probable  amount,  as  to  which  good  faith  is  all  that  is  required  of 
the  party  making  it.  But  the  contract  before  us  comes  within  the  gen- 
eral rule :  "When  no  such  independent  circumstances  are  referred  to, 
and  the  engagement  is  to  furnish  goods  of  a  certain  quality  or  charac- 
ter to  a  certain  amount,  the  quantity  specified  is  material,  and  governs 
the  contract.  The  addition  of  the  qualifying  words  'about,'  'more  or 
less,'  and  the  like,  in  such  cases,  is  only  for  the  purpose  of  providing 
against  accidental  variations  arising  from  slight  and  unimportant  ex- 
cesses or  deficiencies  in  number,  measure,  or  weight."  The  seller  is 
bound  to  deliver  the  quantity  stipulated,  and  has  no  right  either  to 
compel  the  buyer  to  accept  a  less  quantity,  or  to  require  him  to  select 
part  out  of  a  greater  quantity ;  and  when  the  goods  are  to  be  shipped 
in  certain  proportions  monthly,  the  seller's  failure  to  ship  the  required 
quantity  in  the  first  month  gives  the  buyer  the  same  right  to  rescind 
the  whole  contract  that  he  would  have  had  if  it  had  been  agreed  that 
all  the  goods  should  be  delivered  at  once. 

The  plaintiff,  instead  of  shipping  about  1,000  tons  in  February  and 
about  1,000  tons  in  March,  as  stipulated  in  the  contract,  shipped  only 
400  tons  in  February,  and  885  tons  in  March.  His  failure  to  fulfill 
the  contract  on  his  part  in  respect  to  these  first  two  installments  justi- 
fied the  defendants  in  rescinding  the  whole  contract,  provided  they  dis- 
tinctly and  seasonably  asserted  the  right  of  rescission.  The  defend- 
ants, immediately  after  the  arrival  of  the  March   shipments,  and  as 


198  CONTRACTS  (Part  1 

soon  as  they  knew  that  the  quantities  which  had  been  shipi;ccl  in  Feb- 
ruary and  in  March  were  less  than  the  contract  called  for,  clearly 
and  positively  asserted  the  right  to  rescind,  if  the  law  entitled  them  to 
do  so.  Their  previous  acceptance  of  the  single  cargo  of  400  tons 
shipped  in  February  was  no  waiver  of  this  right,  because  it  took  place 
without  notice  or  means  of  knowledge  that  the  stipulated  quantity  had 
not  been  shipped  in  February.  The  price  paid  by  them  for  that  cargo 
being  above  the  market  value,  the  plaintiff  suffered  no  injury  by  the 
omission  of  the  defendants  to  return  the  iron ;  and  no  reliance  was 
placed  on  that  omission  m  the  correspondence  between  the  parties. 
*     *     * 

For  these  reasons  we  are  of  opinion  that  the  judgment  below  should 
be  affirmed.  

HELGAR  CORP.  v.   WARNER'S  FEATURES,   Inc. 
(Court  of  Appeals  of  New  York,  191S.    222  N.  Y.  449,  119  X.  E.  11.3.) 

Action  by  the  Helgar  Corporation  against  Warner's  Features,  In- 
corporated. 

Cardozo,  J.  The  plaintiff's  assignor  made  a  contract  with  the  de- 
fendant for  the  sale  of  films  for  moving  pictures.  At  least  one  film 
was  to  be  delivered  every  month.  Deliveries  were  to  begin  in  Novem- 
ber, 1913,  and  to  end  in  October,  1914.  The  price  was  fixed  at  eight 
cents  per  foot,  and  payment  for  each  film  was  to  be  made  within  30 
days  after  exhibition  to  the  public.  By  way  of  additional  compensa- 
tion, the  defendant  was  also  to  pay  one-half  of  the  net  profits  realized 
by  it  as  the  result  of  foreign  sales. 

The  plaintiff',  having  received  an  assignment  of  the  contract,  deliv- 
ered pictures  of  the  value  at  the  contract  rate  of  nearly  $10,000.  The 
price  was  payable  on  December  24,  1913.  The  finding  is  that  pay- 
ment was  then  demanded,  and  that  ''the  defendant  refused  and  neg- 
lected to  pay  the  same  or  any  part  thereof,  nor  did  the  defendant  offer 
or  tender  a  part  payment  of  said  amount  or  oft'cr  to  pay  the  same  in 
installments."  Two  days  later  this  action  was  begun.  The  plaintiff' 
alleged  its  election  to  terminate  the  contract  by  reason  of  the  breach. 
Judgment  was  demanded  for  the  price  of  the  films  delivered,  and  also 
for  the  profits  that  would  have  been  gained  through  the  completion  of 
the  contract.  The  referee  gave  judgment  for  the  price,  but  refused 
to  award  the  profits.  In  his  opinion,  he  put  his  refusal  upon  the 
ground  that  the  failure  to  make  punctual  payment  was  not  accom- 
panied by  acts  or  words  evincing  repudiation  or  abandonment.  The 
Appellate  Division  added  $2,000  to  the  judgment.  This  was  the  es- 
timated value  of  foreign  rights  which  attached  to  the  sales  already 
made.  That  value  was  thought  to  be  recoverable  as  an  incident  to  the 
price.  With  this  modification,  the  judgment  was  unanimously  affirm- 
ed.    There  are  cross-appeals  in  this  court. 

The  rights  of  vendor  and  vendee  upon  the  breach  of  an  installment 
contract  are  now  regulated  by  statute.  The  rule  is  to  be  found  in  sec- 
tion 4.S,  subdivision  2,  of  the  statute  governing  sales  of  goods  :  "Where 
there  is  a  contract  to  sell  goods  to  be  delivered  by  stated  install- 
ments, which  are  to  be  separately  paid  for,  and  the  seller  makes  de- 
fective deliveries  in  respect  of  one  or  more  installm.ents,  or  the  buyer 
neglects  or  refuses  to  take  delivery  of  or  pay  for  one  or  more  install- 
ments, it  depends  in  each  case  on  the  terms  of  the  contract  and  the 
circumstances  of  the  case  whether  the  breach  of  contract  is  so  ma- 


Ch.  3)  PERFORIMANCE  OF  CONTRACTS  199 

terial  as  to  justify  the  injured  party  in  refusing  to  proceed  further 
and  suing  for  damages  for  breach  of  the  entire  contract,  or  whether 
the  breach  is  severable,  giving  rise  to  a  claim  for  compensation,  but 
not  to  a  right  to  treat  the  whole  contract  as  broken."  Uniform  Sales 
Act,  §  45,  subd.  2. 

The  statute  thus  establishes  a  like  test  for  vendor  and  for  vendee. 
The  earlier  cases  may  not  be  wholly  uniform.  *  *  *  We  do  not 
need  to  reconcile  them.  We  have  departed  from  the  rule  of  the  Eng- 
lish statute  (St.  56  &  57  Vict.  c.  71,  §  31,  subd.  2),  which  keeps  the 
contract  alive  unless  the  breach  is  equivalent  to  repudiation.  We  have 
established  a  new  test  which  weighs  the  effect  of  the  default,  and  ad- 
justs the  rigor  of  the  remedy  to  the  gravity  of  the  wrong.  "It  depends 
in  each  case  on  the  terms  of  the  contract  and  the  circumstances  of  the 
case"  whether  the  breach  is  "so  material"  as  to  affect  the  contract  as  a 
whole. 

The  answer  to  that  question  must  vary  with  the  facts.  Williston  on 
Sales,  p.  810.  Default  in  respect  of  one  installment,  though  falling 
short  of  repudiation,  may  under  some  conditions,  be  so  material  that 
there  should  be  an  end  to  the  obligation  to  keep  the  contract  alive. 
Under  other  conditions,  the  default  may  be  nothing  but  a  technical 
omission  to  observe  the  letter  of  a  promise.  *  *  *  General  state- 
ments abound  that,  at  law,  time  is  alwavs  of  the  essence.  Williston, 
supra;  Norrington  v.  Wright,  115  U.  S.^188,  6  Sup.  Ct.  12,  29  L.  Ed. 
366.  For  some  purposes  this  is  still  true.  The  vendor  who  fails  to 
receive  payment  of  an  installment  the  vei"y  day  that  it  is  due  may  sue  at 
once  for  the  price.  But  it  does  not  follow  that  he  may  be  equally  pre- 
cipitate in  his  election  to  declare  the  contract  at  an  end.  *  *  *  That 
depends  upon  the  question  whether  the  default  is  so  substantial  and 
important  as  in  truth  and  in  fairness  to  defeat  the  essential  purposes 
of  the  partie^.  Whatever  the  rule  may  once  have  been,  this  is  the 
test  that  is  now  prescribed  by  statute.  The  failure  to  make  punctual 
payment  may  be  material  or  trivial  according  to  the  circumstances. 
We  must  know  the  cause  of  the  default,  the  length  of  the  delay,  the 
needs  of  the  vendor,  and  the  expectations  of  the  vendee.  If  the  default 
is  the  result  of  accident  or  misfortune,  if  there  is  a  reasonable  assur- 
ance that  it  will  be  promptly  repaired,  and  if  immediate  payment  is 
not  necessary  to  enable  the  vendor  to  proceed  with  performance,  there 
may  be  one  conclusion.  If  the  breach  is  willful,  if  there  is  no  just 
ground  to  look  for  prompt  reparation,  if  the  delay  has  been  substan- 
tial, or  if  the  needs  of  the  vendor  are  urgent  so  that  continued  per- 
formance is  imperiled,  in  these  and  in  other  circumstances,  there  may 
be  another  conclusion.  Sometimes  the  conclusion  will  follow  from  all 
the  circumstances  as  an  inference  of  law  to  be  drawn  by  the  judge ; 
sometimes,  as  an  inference  of  fact  to  be  drawn  by  the  jury. 

The  findings  in  this  case  do  not  enable  us  to  say  that  the  plaintiff 
was  jvistified  in  its  precipitate, election  to  declare  the  contract  at  an 
end.  There  is  a  finding  that  payment  was  refused.  That  is  inconclu- 
sive by  itself.  The  refusal  may  have  been  nothing  more  than  a  dec- 
laration of  inability  to  make  payment  on  the  instant.  There  is  a  find- 
ing that  the  defendant  did  not  offer  part  payment  or  payment  in  in- 
stallments. That  again  is  inconclusive.  It  is  not  an  ultimate,  but  at 
most  an  evidentiary,  fact.  The  circumstances  may  none  the  less  have 
indicated  a  temporar}'  default  to  be  followed  promptly  by  full  payment. 
The  referee  must  have  interpreted  the  situation  in  that  way,  for  he 


200  CONTRACTS  (Part  1 

states  in  his  opinion  that  the  defauU  was  not  accompanied  by  any  act 
or  declaration  that  would  indicate  abandonment.  If  we  were  at  lib- 
erty to  look  into  the  evidence  and  draw  our  own  inferences,  we  might 
reach  a  contrary  conclusion.  But  the  evidence  is  not  open  to  our  scru- 
tiny. The  plaintiff  has  not  requested  the  referee  to  find  the  ultimate 
fact  on  which  the  right  to  the  recovery  of  profits  depends.  It  has  not 
requested  a  finding  that  the  breach  was  so  material  as  to  justify  its 
hasty  election  to  declare  the  contract  at  an  end.  It  has  not  requested  a 
finding  of  the  circumstances  preceding  or  accompanying  the  default. 
There  is  not  even  a  request  whiA  brings  before  us  in  due  form  the 
ruling  that  all  profits  must  be  excluded.  The  only  request  made  speci- 
fies the  extent  of  the  loss,  and  includes  elements  of  damage  which  the 
referee,  in  any  view  of  the  breach,  was  at  liberty  to  reject.  In  these 
circumstances,  we  must  hold  the  plaintiff  to  the  rule  which  requires 
a  request  to  find  and  an  exception.  *  *  *  The  findings  as  made 
leave  the  character  of  the  default  equivocal.  In  the  absence  of  an 
appropriate  request  for  other  findings,  the  evidence  is  not  before  us. 
The  rule  would  be  different  if  we  vv^ere  asked  to  go  behind  the  find- 
ings for  the  purpose  of  affirmance.  *  *  *  The  plaintiff  asks  us 
to  go  behind  them  for  the  purpose  of  reversal.  Its  appeal  must  there- 
fore fail. 

The  defendant  complains  of  the  increase  of  the  judgment  directed 
at  the  Appellate  Division.  We  think  the  increase  was  erroneous.  We 
have  seen  that  the  plaintiff"  was  not  at  liberty  to  treat  the  entire  con- 
tract as  broken.  Its  cause  of  action  was  limited  to  the  recovery  of 
payments  in  default.  But  there  has  thus  far  been  no  default  in  re- 
spect of  foreign  sales.  No  foreign  sales  have  yet  been  made.  The 
award  in  that  respect  is  an  estimate  of  sales  to  be  made  hereafter. 
Until  the  conditions  prescribed  by  the  contract  have  been  satisfied,  the 
extra  compensation  is  not  payable.  The  plaintiff's  recovery  must  be 
limited  to  payments  already  due. 

The  judgment  of  the  Appellate  Division  to  the  extent  that  it  modifies 
the  judgment  entered  on  the  report  of  the  referee  should  be  reversed, 
and  the  judgment  entered  upon  such  report  affirmed,  with  costs  in 
this  court  to  the  defendant.    Judgment  accordingly. 


SECTION   10.— CONDITIONS  SUBSEQUENT 


MOODY   V.   AMAZON   INS.   CO. 

(Supreme  Court  of  Ohio.  1894.     52  Ohio  St.  12.  P,S  X.  E.  1011,  26  L.  R.  A. 
■MP,,  49  Am.  St.  Rep.  699.) 

Action  by  one  Moody  against  insurance  company.  From  a  judg- 
ment of  the  circuit  court  affirming  a  judgment  rendered  on  a  verdict 
directed  in  favor  of  defendant,  plaintiff  brings  error. 

The  original  action  was  upon  a  policy  of  insurance,  by  the  terms  of 
which  the  defendant  insured  the  plaintiff,  to  the  amount  of  $500, 
against  loss  or  damage  by  fire,  on  his  dwelling  house  in  Ashtabula 
county,  for  the  period  of  three  years  from  the  1st  day  of  January, 
1887.  The  building  was  totally  destroyed  by  fire  on  the  28th  day  of 
September,  1888. 

Williams,  J.  The  policy  of  insurance  upon  which  the  plaintiff 
sought  to  recover  in  the  action  below  provides,  among  its  many  con- 


Ch.  8)  PERFORMANCE  OF  CONTRACTS  201 

ditions,  that  "no  liability  shall  exist  under  this  policy  for  loss  or  dam- 
age in  or  on  vacant  or  unoccupied  buildings,  unless  consent  for  such 
vacancy  or  inoccupancy  be  indorsed  hereon.  The  answer  alleges  that 
the  house  insured  by  the  policy  was  burned  while  it  was  unoccupied; 
and,  though  that  allegation  was  denied,  the  court  required  the  plaintiff 
to  take  the  burden  of  proving  that  the  building  was  occupied.  That 
action  of  the  court  is  assigned  for  error,  and  presents  the  first  question 
for  consideration.  The  court  went  upon  the  theory  that  the  provision 
of  the  policy  above  quoted  constitutes  a  condition  precedent,  the  per- 
formance of  which  was  put  in  issue  by  the  denial  of  the  averments 
of  the  petition.  In  an  action  on  a  policy  of  fire  insurance,  the  plaintiff 
may  plead  generally,  as  was  done  in  this  case,  the  due  performance  of 
all  the  conditions  precedent  on  his  part,  and  when  the  allegation  is 
controverted  the  burden  is  undoubtedly  upon  him  to  show  such  per- 
formance. But  we  do  not  understand  the  clause  of  the  policy  in  ques- 
tion to  be  a  condition  of  that  kind.  An  unexpired  policy  of  fire  insur- 
ance, which  has  been  regularly  issued,  and  remains  uncanceled,  must, 
in  the  absence  of  a  showing  to  the  contrary,  be  regarded  as  a  valid 
and  effective  policy,  upon  which  the  assured  is  prima  facie  entitled 
to  recover  when  the  loss  occurs,  and  the  steps  necessary  to  establish 
it  have  been  taken ;  and,  hence,  the  conditions  precedent  in  such  a 
policy  included  only  those  affirmative  acts  on  the  part  of  the  assured  the 
performance  of  which  is  necessary  in  order  to  perfect  his  right  of  ac- 
tion on  the  policy,  such  as  giving  notice  and  making  proof  of  the  loss, 
furnishing  the  certificate  of  a  magistrate  when  required  by  the  terms 
of  the  policy,  and,  it  may  be,  in  some  cases,  other  steps  of  a  like  nature. 
Those  clauses  usually  contained  in  policies  of  insurance,  which  pro- 
vide that  the  policy  shall  become  void,  or  its  operation  defeated  or  sus- 
l>ended,  or  the  insurer  relieved  wholly  or  partially  from  liability,  upon 
the  happening  of  some  event,  or  the  doing  or  omission  to  do  some  act, 
are  not  in  any  proper  sense  conditions  precedent.  If  they  may  be 
properly  called  conditions,  they  are  conditions  subsequent,  and  matters 
of  defense,  which,  together  with  their  breach,  must  be  pleaded  by  the 
insurer,  to  be  available  as  a  means  of  defeating  a  recovery  on  the 
policy  ;  and  the  burden  of  establishing  the  defense,  if  controverted,  is, 
of  course,  upon  the  party  pleading  it.  This  precise  question  has  not 
heretofore  received  the  consideration  of  this  court,  but  it  has  been 
raised  in  other  states  under  various  clauses  of  insurance  policies.  In 
the  case  of  Lounsbury  v.  Insurance  Co.,  8  Conn.  459,  21  Am.  Dec.  686, 
the  question  was  presented  in  an  action  on  a  policy  of  fire  insurance 
which  provided  "that  the  insurers  would  not  be  liable  for  loss  or  dam- 
age happening  by  means  of  any  invasion,  insurrection,  riot,  or  civil 
commotion,  or  of  any  military  or  usurped  power;  also  that  if  the 
building  insured  should  be  used  during  the  term  of  insurance  for  any 
occupation,  or  for  the  purpose  of  storing  therein  any  goods,  denomi- 
nated 'hazardous'  or  'extra  hazardous'  in  the  conditions  annexed  to  the 
policy  (unless  otherwise  specially  provided  for),  the  policy  should 
cease  and  have  no  effect."  It  was  held  these  were  not  conditions  pre- 
cedent to  the  plaintiff's  right  of  recovery,  but  were  matters  of  defense,, 
to  be  taken  advantage  of  by  pleading.  The  court  in  that  case  sayr 
"All  these  conditions,  if  such  they  may  be  called,  are  inserted  in  the 
policy  by  way  of  proviso,  and  not  at  all  as  conditions  precedent.  They 
are  introduced  for  the  benefit  of  the  defendants ;  and  they  must  be 
taken  advantage  of,  if  at  all,  by  pleading.''    In  Newman  v.  Insurance 


202  CONTRACTS  (Part  1 

Co.,  17  Minn.  123  (Gil.  98),  it  is  held  that  "under  a  stipulation  in  a 
policy  that  if  the  risk  be  increased  by  any  means  whatever,  within  the 
control  of  the  insured,  the  insurance  shall  be  void,  the  assured  is  not 
to  plead  and  prove  afifinpatively  that  it  has  not  been  thus  increased ; 
but,  if  it  has,  it  is  a  matter  of  defense,  to  be  alleged  and  proved  by 
the  defendant."  *  *  *  The  vacancy,  or  want  of  occupancy,  of  a 
building,  is  as  much  an  affirmative  fact  as  its  occupancy,  and  as  capable 
of  proof ;  and  the  burden  upon  that  subject,  under  the  issues  in  this 
case  was,  we  think,  upon  the  defendant. 

The  court  also  erred  in  its  direction  to  the  jury,  because,  as  we  have 
seen,  it  was  not  incumbent  upon  the  plaintiff  to  show  the  house  was 
occupied ;  the  burden  being  upon  the  defendant  to  prove  that  it  was 
vacant  and  unoccupied.  h=  *  *  -^q  j-^jg  jg  better  settled  than  that 
such  conditions  in  policies  should  receive  a  strict  construction,  and, 
when  ambiguous,  be  construed  most  strongly  against  the  insurer,  for 
the  reason  that  they  are  prepared  by,  and  inserted  for  the  benefit  of, 
the  insurer.  The  condition  of  the  policy  in  the  present  case  is  not 
more  specific  or  comprehensive  in  its  requirements  concerning  the  oc- 
cupancy of  the  building  insured  than  the  one  involved  in  the  Ken- 
tucky case.  Insurance  Co.  v.  Kiernan,  83  Ky.  468.  It  declares  that 
no  liability  shall  exist  under  the  policy  for  loss  or  damage  to  an  un- 
occupied building,  but  does  not  stipulate  that  the  insured  bu'Hing  shall 
be  used  as  a  dwelling,  or  require  any  particular  mode  of  occupancy. 
Strictly  construed,  occupancy  for  any  lawful  purpose  would  satisfy 
the  condition,  and  preserve  the  obligation  of  the  policy.  At  all  events, 
it  was  not  essential  that  the  building  should  be  put  to  all  the  uses  or- 
dinarily made  of  a  dwelling,  or  to  some  of  those  uses  all  of  the  time ; 
nor  that  the  whole  house  should  be  subjf^cted  to  that  use.  Nor  does  it 
follow,  as  a  matter  of  law,  that  a  dwelling  house  is  to  be  considered 
as  unoccupied  merely  because  it  has  ceased  to  be  used  as  a  family 
residence,  where  the  household  goods  remain  ready  for  use,  and  it 
continues  to  be  occupied  by  one  or  more  members  of  the  family  who 
have  access  to  the  entire  building  for  the  purpose  of  caring  for  it,  and 

who  do  care  for  it,  and  make  some  use  of  it  as  a  place  of  abode. 
*    *    * 

For  each  of  the  errors  pointed  out,  the  judgment  of  the  common 
pleas  and  of  the  circuit  court  will  be  reversed,  and  the  cause  remand- 
ed.   Judgment  accordingly. 


SECTION  11.— PREVENTION  AS  AN  EXCUSE  FOR  NON- 
PERFORMANCE 

If  A.  has  contracted  to  perform  services  for  B.,  for  example,  to 
cut  timber  on  B.'s  land,  and  B.,  by  force  or  otherwise,  keeps  A.  from 
entering  the  premises,  it  is  clear  that  A.  is  excused  from  perform- 
ing, and  so  A.  will  not  be  liable  for  breach  of  .contract.  The  con- 
duct of  B.  may  also  amount  to  a  breach  of  an  implied  promise  on 
his  part  which  will  render  him  liable  to  A.  Similarly,  with  respect 
to  the  prevention  of  the  fulfillment  of  a  condition,  if,  for  example, 
A.  has  contracted  to  build  a  house  for  B.,  and  B.  has  agreed  to 
pay  the  contract  price  upon  the  express  condition  that  A.  procure 
the  certificate  of  Architect  X.  that  the  building  was  completed  in 


Ch.  3)  PERFORMAXCK  OF  CONTRACTS  203 

accordance  with  the  ijhms  and  specifications,  and  E.  by  fraud,  in- 
duces X.  not  to  give  the  certificate  to  A.,  A.  will  be  excused  from 
the  duty  to  obtain  the  certificate  as  a  condition  precedent  to  A.'s 
right  to  recover  the  contract  price.  In  a  great  variety  of  ways,  one 
party  to  a  contract  may  prevent  the  other  party's  performance. 
The  performance  of  many  contracts  is  dependent  upon  a  certain 
amount  of  cooperation  by  the  parties.  If  one  of  them  withdraws 
his  sup]K)rt,  the  other  party  will  not  have  the  means  of  perform- 
ance. The  effect  of  prevention  is,  therefore,  to  excuse  perform- 
ance by  the  party  thus  restrained,  and  such  act  may  justify  rescis- 
sion of  the  contract  by  him,  and  the  party  guilty  of  the  wrongful 
conduct  may  be  liable  for  breach. 


PATTEIISON  V.  .AIEYErMIOFER. 
(Court  of  Appeals  of  New  York,  1912.     204  N.  Y.  9G,  97  N.  E.  472.) 

Action  by  Benjamin  Patterson  against  Anna  Meyerhofer.  From  a 
judgment  for  defendant,  plaintiff  appeals. 

WiLLAUD  BARTLF/fT,  J.  The  parties  to  this  action  entered  into  a 
written  contract  whereby  the  plaintiff  agreed  to  sell,  and  the  defendant 
agreed  to  buy,  four  several  parcels  of  land  with  the  houses  thereon 
for  the  sum  of  $23,000,  to  be  partly  in  cash  and  partly  by  taking  title 
subject  to  certain  mortgages  upon  the  property.  When  she  executed 
this  contract,  the  defendant  knew  that  the  plaintiff  was  not  then  the 
owner  of  the  premises  which  he  agreed  to  sell  to  her,  but  that  he  ex- 
pected and  intended  to  acquire  title  thereto  by  purchasing  the  same  at  a 
foreclosure  sale.  Before  this  foreclosure  sale  took  place,  the  defend- 
ant stated  to  the  plaintiff  that  she  would  not  perform  the  contract  on 
her  part,  but  intended  to  buy  the  premises  for  her  own  account  with- 
out in  any  way  recognizing  the  said  contract  as  binding  upon  her,  and 
this  she.  did,  buying  the  four  parcels  for  $5,595  each.  The  plaintiff'  at- 
tended the  foreclosure  sale,  able,  ready,  and  willing  to  purchase  the 
premises,  and  he  bid  for  the  same,  but  in  every  instance  of  a  bid  made 
by  him  the  defendant  bid  a  higher  sum.  The  result  was  that  she  ac- 
quired each  lot  for  $155  less  than  she  had  obligated  herself  to  pay  the 
plaintiff'  therefor  under  the  contract  or  $620  less  in  all.    *    *     ''' 

The  complaint  also  prays  that  the  plaintiff'  be  awarded  the  sum  of 
$620  damages,  being  the  difference  between  the  price  which  the  de- 
fendant paid  at  the  foreclosure  sale  for  the  four  houses  mentioned 
in  the  ocntract  and  the  price  which  she  would  have  had  to  pay  the 
plaintiff  thereunder.     *     *     -''' 

In  the  case  of  every  contract  there  is  an  implied  undertaking  on  the 
part  of  each  party  that  he  will  not  intentionally  and  purposely  do  any- 
thing to  prevent  the  other  party  from  carrying  out  the  agreement  on 
his  part.  This  proposition  necessarily  follows  from  the  general  rule 
that  a  party  who  causes  or  sanctions  the  breach  of  an  agreement  is 
thereby  precluded  from  recovering  damages  for  its  nonperformance 
or  from  interposing  it  as  a  defense  to  an  action  upon  the  contract. 

*         ;|<         :!; 

By  entering  into  the  contract  to  purchase  from  the  plaintiff  property 
which  she  knew  he  would  have  to  buy  at  a  foreclosure  sale  in  order 
to  convey  it  to  her.  the  defendant  impliedly  agreed  that  she  would  do 


204  CONTRACTS  (Part  1 

nothing  to  prevent  him  from  acquiring  the  property  at  such  sale.  The 
defendant  violated  the  agreement  thus  implied  on  her  part  by  bidding 
for  and  buying  the  premises  herself.  Although  the  plaintifit  bid  there- 
for, she  uniformly  outbid  him.  Presumably,  if  she  had  not  interfered, 
he  could  have  bought  the  property  for  the  same*  price  which  she  paid 
for  it.  He  would  then  have  been  able  to  sell  it  to  her  for  the  price 
specified  in  the  contract  (assuming  that  she  fulfilled  the  contract), 
which  was  $620  more.  This  sum,  therefore,  represents  the  loss  which 
he  has  suiTered.  It  is  the  measure  of  the  plaintiff's  damages  for  the 
defendant's  breach  of  contract.     *     *     * 

For  these  reasons,  the  judgments  of  the  Appellate  Division  and  the 
Special  Term  should  be  reversed  and  a  new  trial  granted,  with  costs 
to  abide  the  event.  

DEWEY   V.  UNION  SCHOOL  DIST.   OF   THE  CITY   OF  ALPENA. 

(Supreme  Court  of  ]Miehiiian,  ISSO.     4.3  Mich.  480,  5  N.  W.  646, 
38  Am.  Rep.  206.) 

Graves,  J.  The  plaintiff  was  regulady  hired  by  the  district  to  serve 
as  teacher  in  its  public  schools  for  10  months,  for  $130  per  month.  He 
entered  on  his  duties  on  the  second  of  September,  and  continued  up  to 
the  tenth  of  December,  at  which  time  the  district  officers  closed  the 
schools,  on  account  of  the  prevalence  of  small-pox  in  the  city,  and 
kept  them  closed  thereafter,  for  the  same  reason,  until  the  seventeenth 
of  March.  They  were  then  reopened;, ,  and  the  plaintift'  resumed  his 
duties.  *  *  *  The  district  refused  to  pay  him  for  the  period  of  sus- 
pension, and  he  brought  this  action  to  recover  it.    '^    *     * 

Beyond  controversy  the  closing  of  the  schools  was  a  wise  and  timely 
expedient ;  but  the  defense  interposed  cannot  rest  on  that.  *  *  '"  It 
is  not  enough  that  great  difficulties  were  encountered,  or  that  there 
existed  urgent  and  satisfactory  reasons  for  stopping  the  schools;  but 
this  is  all  the  evidence  tended  to  show.  The  contract  between  the  par- 
ties was  positive  and  for  lawful  objects.  On  one  side  school  buildings 
and  pupils  were  to  be  provided,  and  on  the  other  personal  service  as 
teacher.  The  plaintift"  continued  ready  to  perform,  but  the  district  re- 
fused to  open  its  houses  and  allow  the  attendance  of  pupils,  and  it 
thereby  prevented  performance  by  the  plaintiff.  Admitting  that  the 
circumstances  justified  the  officers,  and  yet  there  is  no  rule  of  justice 
which  will  entitle  the  district  to  visit  its  own  misfortune  upon  the  plain- 
tiff'. He  was  not  at  fault.  He  had  no  agency  in  bringing  about  the 
state  of  things  which  rendered  it  eminently  prudent  to  dismiss  the 
schools.  It  was  the  misfortune  of  the  district,  and  the  district,  and  not 
the  plaintiff,  ought  to  bear  it. 

The  occasion  which  was  presented  to  the  district  was  not  within  the 
principle  contended  for.  It  was  not  one  of  absolute  necessity  but  of 
strong  expediency.  To  let  in  the  defense  that  the  suspension  pre- 
cluded recovery  the  agreement  must  have  provided  for  it.  But  the 
district  did  not  stipulate  for  the  right  to  discontinue  the  plaintiff's  pay 
on  the  judgment  of  its  officers,  however  discreet  and  fair,  that  a  stop- 
page of  the  schools  is  found  a  needful  measure  to  prevent  their  invasion 
by  disease,  or  to  stay  or  oppose  its  spread  or  progress  in  the  community, 
and  the  contract  cannot  be  regarded  as  tacitly  subject  to  such  a  con- 
dition. 

The  judgment  for  defendant  must  be  reversed,  with  costs,  and  a 
new  trial  srranted. 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  205 

SECTION  12.— WAIV^ER  AS  AN  EXCUSE  FOR 
NON-PERFORMANCE 


RICHARD  DEEVES  &  SON  v.   MANHATTAN   LIFE   INS.  CO. 

(Court  of  Appeals  of  New  York,  1909.  195  N.  T.  324,  88  N.  E.  395.) 

Chase,  J.  *  *  *  Where  a  building  contract  provides  that  the  ma- 
terials shall  be  furnished  and  the  labor  performed  for  a  gross  sum  and 
by  a  day  fixed  in  the  contract  for  the  full  completion  thereof,  and  the 
contractor  fails  to  perform  by  the  day  so  fixed,  the  owner  may  insist 
on  his  strict  legal  right,  and  put  an  end  to  the  contract.  *  ""  '•'  If  the 
owner  voluntarily  permits  the  contractor  to  proceed  with  such  a  con- 
tract and  accepts  the  materials  and  labor  thereafter  furnished  and 
performed,  and  the  contractor  fully  performs  his  contract,  except  as 
to  the  time  provided  for  the  completion  thereof,  he  is  estopped  from 
interposing  the  delay  as  a  defense  to  the  action  for  the  agreed  price. 
One  cannot  receive  and  enjoy  the  benefit  of  the  labor  and  materials  so 
furnished  under  the  contract  and  refuse  to  pay  for  them  simply  be- 
cause the  contract  was  not  completed  within  the  time  specified.  *  *  * 
This  does  not  mean  that  an  owner  is  without  remedy.  He  may  re- 
cover his  damages  by  an  independent  action  or  by  counterclaim  in  an 
action  brought  by  the  contractor  for  the  contract  price.     *     *     * 


PABST  BREWING  CO.  v.  CITY  OF  MILWAUKEE. 

(Supreme  Court  of  Wisconsin,  1905.     126  WMs.  110,  105  N.  W.  563.) 

Marshall,  J.  *  *  *  The  distinguishing  features  between  the  dif- 
ferent phases  of  waiver,  as  viewed  in  its  general  sense,  are  so  slight  as 
to  hardly  be  appreciable.  Generally  speaking,  in  neither  is  any  con- 
sideration in  a  pecuniary  sense  nor  any  element  of  estoppel  required. 
The  contrary  of  this  may  be  found  asserted,  but  the  soundness  of  the 
foregoing  is  easily  demonstrable  by  reference  to  the  different  situations 
to  which  it  has  been  frequently  applied.  In  case  of  payment  of  a  tax 
without  protest,  or  other  claim  voluntarily  and  with  knowledge  of  the 
facts,  an  action  cannot  be  maintained  to  recover  back  the  money,  re- 
gardless of  whether  the  payee  so  changed  his  position  on  the  faith  of 
such  payment  that  the  previous  status  cannot  be  fully  restored  by  a 
return  of  the  money.  It  is  manifest  that  the  disability  to  enforce  such 
return  cannot  be  based  on  any  other  reason  than  that  of  unqualified 
submission  to  the  attitude  of  the  payee — the  doctrine  that  one  cannot 
blow  hot  and  then  blow  cold  and  have  the  aid  of  judicial  remedies 
in  the  matter.  That  is  not  of  such  universal  application  as  the  doc- 
trine of  estoppel. 

The  efforts  of  courts  and  text-writers  to  harmonize' the  situations 
to  which  the  principle  of  waiver  has  been  applied  with  the  idea  that 
some  element  of  estoppel  or  some  consideration  is  necessary  to  sup- 
port the  defense  has  led  to  many  interesting  discussions  and  the  as- 
signment of  reasons  much  too  shadowy  to  be  appreciated  by  minds 
general,  if  at  all.  It  must  be  conceded  that  in  many  cases  where  the 
defense  of  waiver  has  prevailed  no  element  of  estoppel  can  be  pointed 
to.  If  it  were  otherwise,  many  instances  of  supposed  waiver  would 
be  misnamed,  the  proper  designation  of  the  defense  being  estoppel. 


206  CONTRACTS  (Part  1 

It  mav  be  that  the  theory  advanced  by  a  learned  writer  that  in  every 
case  where  the  law  of  waiver  is  apphcable  and  there  is  no  element  of 
estoppel,  there  is  one  of  consideration,  in  the  broad  sense  of  the  term 
as  applicable  to  contracts.  A  consideration  essential  to  a  contract 
is  satisfied  by  a  disadvantage  to  the  promisee  as  well  as  by  a  benefit 
to  him.  Parsons  on  Contracts  (9th  Ed.)  vol.  1,  §  431.  So  waiver 
may  perhaps  be  viewed  as  involving  a  consideration  and  supported  on 
that  theory.  In  every  case  where  the  waivee  asserts  as  a  defense 
submission  by  the  waivor,  the  former  would  be  prejudiced  if  the  lat- 
ter were  allowed  to  successfully  change  his  position.     58  Cent.  Law 

T.  264.  ,     ^ 

It  would  seem  that  the  more  satisfactory  ground  to  support  the  doc- 
trine of  waiver  on  is  that  it  is  a  rule  of  judicial  policy — the  legal  out- 
growth of  judicial  abhorrence,  so  to  speak,  of  a  person's  taking  incon- 
sistent positions  and  gaining  advantages  thereby  through  the  aid  of 
courts.  A  rule  by  which  regardless  of  any  element  of  estoppel  or 
consideration,  as  those  terms  are  popularly  understood,  the  saying  that 
one  should  not  be  permitted  to  blow  hot  and  with  advantage  to  himself 
turn  and  blow  cold,  within  limits  sanctioned  by  long  experience  as  re- 
quired for  the  due  administration  of  justice,  has  been  prohibitively 
applied.  It  is  applied  where  one  with  knowledge  of  the  facts  volun- 
tarily pays  a  demand  upon  him.  It  is  applied  when  one  \yith  knowl- 
edge, or  reasonable  means  of  knowledge,  of  the  facts  .having  two  in- 
consistent remedies  chooses  one  of  them.  It  is  applied  where  one 
without  objection  and  with  such  knowledge,  or  means  of  knowledge, 
receives  property  in  consummation  of  an  executory  contract.  The 
tendency  of  courts  is  to  consider  as  within  one  of  the  exceptional 
classes  any  situation  which  is  within  the  principle  of  it,  both  as  regards 
the  mere  fact  of  waiver  and  the  importance  in  the  administration  of 
justice  of  holding  the  waivor  to  the  position  he  voluntarily  and  with 
kiiowledge  of  the  facts  has  elected  to  take.     '''■     '■'     * 

It  is  suggested  that  there  can  be  no  waiver  without  intent  to  waive 
based  on  knowledge  of  the  facts.  True,  but  one  is  presumed  to  know 
that  which  in  contemplation  of  law  he  ought  to  know,  and  one  is  pre- 
sumed to  waive  that  which  is  necessarily  implied  from  his  conduct. 
Constructive  as  well  as  actual  knowledge  of  the  facts,  and  implied  as 
well  as  express  intent,  satisfies  the  prime  essential  of  a  conclusive 
waiver.     *     *    '''•'    A  standard  reference  work  puts  the  matter  thus : 

"The  intent  to  waive  may  appear  as  a  legal  result  of  conduct.  The 
actuating  motive,  or  the  intention  to  abandon  a  right,  is  generally  a 
matter  of  inference  to  be  deduced  with  more  or  less  certainty  from 
the  external  and  visible  acts  of  the  party,  and  all  the  accompanying 
circumstances  of  the  transaction,  regardless  of  whether  there  was  an 
actual  but  undisclosed  intention  to  the  contrary."  Am.  &  Eng.  Enc. 
of  Law  (2d  Ed.)  vol.  29,  p.  1095. 

Waiver,  acquiescence  or  election  by  one  often  precludes  him  from 
insisting  successfully  upon  advantages  which  he  has  concluded  with 
knowledge  of  the  facts  to  forego,  but  that  forms  but  an  element  pro- 
ducing the  legal  consequences  denominated  estoppel  in  pais.  The 
crowning  element  of  such  legal  consequences  is  the  change  of  position, 
in  reliance  upon  the  prior  element  mentioned,  to  one  from  which  there 
can  be  no  retreat  without  loss.     *     *     * 


Ch.  3)  PERFORMANCE   OF   CONTRACTS  207 


ALSENS  AMERICAN  PORTLAND  CEMENT  WORKS  V.  DEGNON 
CONTRACTING  CO. 

(Court  of  Appeals  of  New  York,  1917.     222  N.  Y.  34,  118  N.  E.  210.) 

Action  by  the  Alsens  American  Portland  Cement  Works  against 
the  Degnon  Contracting  Company.  Judgment  in  favor  of  plaintiff, 
and  it  appealed. 

Collin,  J.  The  action  is  to  recover  the  purchase  price,  at  the  rate 
of  $1.62  per  barrel,  of  cement  sold  by  the  plaintiff  to  the  defendant. 
The  trial  justice  directed  a  verdict  based  upon  the  purchase  price  of 
$1.41  per  barrel.  A  question  to  be  determined,  under  proper  excep- 
tions, is  whether  or  not  there  was  any  evidence  creating  a  question 
of  fact  to  be  submitted  to  and  determined  by  the  jury. 

The  evidence  is  free  of  contradiction.  The  undisputed  facts, 
briefly  and  adequately  stated  are :  In  May,  1909,  the  parties  entered 
into  a  contract  which  provided  for  the  sale  by  the  plaintiff  to  the  de- 
fendant of  175,000  barrels  of  cement,  to  be  totally  ordered  for  ship- 
ment by  the  defendant  before  March  1,  19l3,  at  the  price  of  $1.41 
per  barrel.  On  March  1,  1913,  there  remained  unordered  for  ship- 
ment 36.0C0  barrels.  Petween  March  1,  1913,  and  May  8,  1913,  the 
defendant  ordered  of  and  received  from  the  plaintiff  1.90O  barrels. 
Throup-hout  that  period  the  market  value  was  $1.62  per  barrel.  The 
plaintiff"  by  this  action  claims  that  the  1,900  barrels  were  not  sold  under 
the  contract,  and  should  be  paid  for  (except  the  first  two  shipments) 
at  the  market  value.  The  defendant  claims  that  the  sale  was  within 
the  contract,  and  the  plaintiff  should  be  paid  $1.41  per  barrel. 

The  defendant  rightly  concedes  that  the  defendant  was  bound  by 
the  contract  to  order  for  shipment  before  March  1,  1913.  the  total 
amount  of  175,000  barrels,  and  after  that  date  the  plaintiff  was  free 
to  refu^  e  to  make  any  delivery  under  the  contract.  It  asserted  at  the 
trial  and  asserts  here  that  the  stipulation  of  the  contract  thus  binding 
it  was,  as  a  matter  of  law,  waived  by  the  acts  of  the  plaintiff.  Therein 
it  errs.  Under  the  evidence,  whether  or  not  there  was  a  waiver  on 
the  part  of  the  plaintiff'  was  a  question  of  fact  determinable  by  the 
jury. 

In  reversing  the  judgment  and  granting  a  new  trial,  we  may  not  with 
propriety  attempt  to  define  the  effect  due,  in  our  opinion  to  any  part 
of  the  evidence.  A  waiver,  not  express,  found  in  the  acts,  conduct,  or 
language  of  a  party,  is  rarely  established  as  a  matter  of  law  rather 
than  as  a  matter  of  fact.  This  conclusion  inheres  in  its  nature  and 
character.  A  waiver  is  an  intentional  abandonment  or  relinquishment 
of  a  known  right  or  advantage  which,  but  for  such  waiver,  the  party 
would  have  enjoyed.  It  is  the  voluntary  act  of  the  party,  and  does 
not  require  or  depend  upon  a  new  contract,  new  consideration,  or  an 
estoppel.  It  cannot  be  recalled  or  expunged.  *  *  *  It  is  essentially 
a  matter  of  intention.  Negligence,  oversight,  or  thoughtlessness  does 
not  create  it.  The  intention  to  relinquish  the  right  or  advantage  must 
be  proved.  Occasionally  it  is  proved  by  the  express  declaration  of  the 
party,  or  by  his  undisputed  acts  or  language  so  inconsistent  with  his 
purpose  to  stand  upon  his  rights  as  to  leave  no  opportunity  for  a  rea- 
sonable inference  to  the  contrary.  Then  the  waiver  is  established  as 
a  matter  of  law.  Commonly  it  is  sought-  to  be  proved  by  various 
species  of  proofs  and  evidence,  by  declarations,  by  acts,  and  by  non- 
feasance, permitting  differing  inferences,  and  which  do  not  directly, 


208  CONTRACTS  (Part  1 

unmistakably,  or  unequivocally  establish  it.  Then  it  is  for  the  jury 
to  determine  from  the  facts  as  proved  or  found  by  them  whether  or 
not  the  intention  existed.     *    *    * 

In  the  present  case  whether  or  not  the  plaintiff  waived  the  default 
of  the  defendant  was  a  question  of  fact.  There  was  no  express  waiver. 
In  the  shipments  by  the  plaintiff  under  defendant's  orders  of  March 
14th  and  28th  and  the  plaintiff's  invoices  of  them,  there  was  evidence 
that  the  plaintiff  through  and  by  means  of  them  waived  the  default. 
The  effect  of  the  testimony  of  Air.  Corbett  and  the  other  evidence  re- 
lating to  those  orders  and  invoices  must  be  measured  by  the  jury.  In 
the  acts,  letters,  and  invoices  of  the  plaintiff  subsequent  to  April  3d 
and  in  certain  letters  prior  to  March  first  is  evidence  that  there  was 
not  the  waiver.  The  evidence  throughout  was  of  an  inconclusive  or 
equivocal  nature,  and  furnished  only  grounds  of  inference  and  deduc- 
tion, which  it  is  the  appropriate  province  of  a  jury  only  to  consider. 

The  judgment  should  be  reversed,  and  a  new  trial  granted. 


STEAKNS  SALT  &  LUMBER  CO.  v.  DENNIS  LUMBER  (X). 

(Supreme  Court  of  IMiohisan.  1915.     18S  Mich.  700,  154  N.  W.  91, 
2   A.  L.   R.   G3S.) 

Action  by  the  Stearns  Salt  &  Lumber  Company  against  the  Dennis 
Lumber  Company.  Judgment  for  defendant,  and  plaintiff  brings 
error. 

KuHN,  J.  On  December  29,  1911,  the  defendant  company  placed 
an  order  with  the  plaintiff  company  by  telephone  for  two  car  loads 
of  a  certain  grade  of  lumber,  and  followed  this  by  letter  confirming 
the  same.  *  '''  *  To  this  communication  the  plaintiff  company  re- 
plied under  date  of  December  30.  1911,  advising  that  the  lumber  would 
be  shipped  at  once. 

On  January  6,  1912,  the  plaintiff  mailed  to  the  defendant  an  invoice 
of  the  first  car  of  lumber  shipped,  and  on  January  11,  1912,  sent  an 
invoice  of  the  second  car  load  shipped.  The  first  car  of  lumber  was 
placed  for  unloading  February  19,  1912.  and  was  unloaded  on  the 
following  day.  The  other  car  was  placed  for  unloading  on  February 
21,  1912.  and  the  unloading  of  that  car  was  completed  within  two 
days,  on  February  23d.  On  the  next  day,  February  24,  1912,  defend- 
ant notified  plaintiff  of  the  rejection  of  part  of  the  lumber  received. 

The  plaintiff  company  immediately  replied  that  it  would  not  con- 
sent to  any  loss  on  the  car.  and  must  have  settlement  in  full.  Further 
correspondence  was  had  between  the  parties,  and  finally  suit  was 
brought  to  recover  the  sum  of  $50.75.  the  claimed  balance  due  on 
the  two  cars  in  question,  the  value  of  the  lumber  rejected.  Suit  was 
started  in  the  justice  court,  which  resulted  in  a  judgment  in  favor  of 
the  defendant,  and  on  appeal  taken  to  the  circuit  court  the  trial  judge 
directed  a  verdict  of  no  cause  of  action. 

It  is  contended  here  that  the  circuit  judge  erred  in  holding  and  in- 
structing the  jury  that  the  contract  in  question  was  severable,  and  that 
the  defendant  had  a  right  to  reject  part  of  the  lumber  in  question  and 
accept  the  remainder.  It  is  the  contention  of  the  plaintiff  that  the  de- 
fendant had  purchased  these  two  cars  of  lumber,  of  one  quality  and 
grade,  and  as  soon  as  the  cars  arrived  the  defendant  had  a  reasonable 
time  in  which  to  inspect  the  same  and  ascertain  if  they  comolied  with 


Ch. 8)  PERFORMANCE  OF  CONTRACTS  209 

the  requirements  of  the  contract  as  to  quahty  and  grade,  and  after 
such  examination  defendant  was  obliged  to  either  accept  or  reject  all 
of  the  lumber;  and  if  he  accepted  a  part  of  the  lumber,  and  then 
used  the  same,  he  was  obliged  to  pay  the  contract  price  of  all  of  the 
lumber.     *    *    * 

It  is  true  that  it  is  the  rule  of  law  in  this  state  that  in  an  executory 
contract  for  the  sale  of  personal  property,  where  there  is  an  implied 
warranty,  the  warranty  does  not  survive  the  acceptance  of  the  goods, 
and  it  becomes  the  duty  of  the  purchaser  to  make  an  inspection  and 
reject  or  pay  the  contract  price.  *  *  *  But  the  question  here  is 
rather  whether  or  not  the  contract  in  question  is  a  severable  one,  and 
whether  or  not  the  defendant  could  after  inspection,  in  view  of  the  rule 
of  law  here  established,  reject  that  part  of  the  lumber  which  did  not 
meet  the  specifications.     *     *     * 

In  the  instant  case,  if  the  defendant  had  taken  into  possession  the 
rejected  lumber  and  assumed  to  dispose  of  it  at  a  less  price,  *  *  * 
there  could  be  no  question  that  under  the  law  in  this  state  the  damages 
thus  sustained  could  not  have  been  recouped  in  an  action  to  recover  for 
the  rejected  lumber.  But  here  the  defendant  moved  promptly  by  noti- 
fying the  plaintiff  the  very  next  day  after  the  inspection,  of  the  rejec- 
tion of  the  lumber  in  question. 

In  a  similar  case  in  Maryland,  Canton  Lumber  Co.  v.  Liller,  107  Md. 
146,  68  Atl.  500,  the  court  held  that  the  plaintiff  had  a  right  to  accept 
lumber  which  was  up  to  the  grade  contracted  for,  and  that  by  so  doing 
it  did  not  accept  the  part  which  was  below  grade.  In  its  opinion  the 
court  said : 

"  -^-  *  *  Can  it  be  supposed  then  that  it  was  the  intention  of  either 
of  the  parties  that  if  one-half  or  one-quarter  of  the  lumber  passed 
the  inspection,  and  the  remainder  was  rejected,  that  the  plaintiff  could 
not  vise  the  former  for  the  specific  purpose  for  which  it  was  bought, 
without  being  required  to  take  also  the  rejected  portion  which  he 
could  not  use?  Such  a  conclusion  is  as  irrational  when  attributed  to 
the  defendant  as  when  attributed  to  the  plaintiff,  under  all  the  circum- 
stances of  this  case.  *  *  *  As  illustrative  of  this  view,  it  was  said  in 
Richards  v.  Shaw,  67  111.  222,  that  the  modern  rule  is  that  the  entirety 
of  a  contract  of  sale  is  severed  by  the  buyers  receiving  and  retaining 
a  part  after  the  seller  has  refused  or  failed  to  deliver  the  residue  of 
the  specific  quantitv  of  goods  bargained  for. 

"The  case  of  Holmes  v.  Gregg,  66  N.  H.  621,  28  Atl.  17,  relied 
on  by  the  plaintiff,  is  directly  in  point,  and  meets  with  our  full  concur- 
rence. That  was  a  sale  of  lumber  shipped  on  cars  in  five  lots,  three 
of  which  were  accepted  and  used  by  the  defendants,  and  the  others, 
not  conforming  to  the  order  in  quality,  were  rejected  and  piled  in  their 
yard,  where  they  remained,  subject  to  the  plaintiff's  order.  The  de- 
fendants seasonably  informed  the  plaintiffs  of  their  action,  and  ten- 
dered the  price  of  the  accepted  lumber,  and  the  court  said :  'Without 
an  express  stipulation  that  the  contract  was  or  was  not  entire,  the  par- 
ties might  have  understood  that  it  was  severable  in  such  a  sense  that 
the  defendants  could  accept  the  lumber  that  conformed  to  the  contract 
and  reject  the  rest.'  " 

We  are  of  the  opinion  that  the  trial  court  was  correct  in  holding 
that  the  contract  was  a  severable  one,  and  no  error  was  committed  in 
charging  the  jury.    Judgment  afiirmed. 
B.&  B.Bus.Law— 14 


210  CONTRACTS  (Part  1 


CHICAGO  WASHED  COAL  CO.  v.  WHITSBTT  et  al. 
(Supreme  Court  of  Illiuois,  1917.     278  111.  623,  IIG  N.  E.  115.) 

Action  by  the  Chicago  Washed  Coal  Company  against  R.  C.  Whit- 
sett  and  others.    From  a  judgment  for  defendant,  plaintiff  appeals. 

Craig,  C.  J-  Appellant,  the  Chicago  Washed  Coal  Company,  on  De- 
cember 3,  1910,  brought  suit  in  the  municipal  court  of  Chicago  against 
ihe  appellees,  R.  C.  and  A.  H.  Whitsett,  co-partners  doing  business  as 
the  R.  C.  Whitsett  Coal  &  Mining  Company,  to  recover  damages  for  an 
alleged  breach  of  contract  to  furnish  it  certain  grades  of  coal  at  the 
rate  of  150  tons  per  day  from  December  28,  1909,  to  March  30, 
1910.     *     *     * 

The  contract  was  entered  into  December  24,  1909,  and  provides  that 
appellees  were  to  furnish  appellant  with  coal  from  the  mine  at  Ward, 
111.,  from  December  28,  1909,  to  March  30,  1910,  at  the  rate  of  50  tons 
per  day  of  No.  3  screenings  at  72V2  cents  per  ton,  and  100  tons  per 
day  of  6  X  3  egg  at  $1.45  per  ton,  f.  o.  b.  the  mines.  The  freight  rate 
from  the  mines  to  Chicago  was  90  cents  a  ton  by  way  of  the  Illinois 
Central  Railroad.  The  coal  was  to  be  shipped  from  the  Chicago-Car- 
bondale  Coal  Company's  mines,  appellant  to  have  preference  over  all 
other  shipments,  and  all  deliveries  to  be  made  subject  to  the  usual  con- 
tingencies occasioned  by  strikes,  lockouts,  delays  in  transportation, 
changes  in  freight  rates,  or  other  causes  beyond  the  control  of  appellees. 
All  payments  were  to  be  made  on  or  before  the  10th  day  of  each  month 
for  all  shipments  made  during  the  preceding  month.  Appellees  were 
unable  to  secure  the  kind  of  coal  contracted  for  the  December  delivery, 
and  a  verbal  agreement  was  made  whereby  a  different  kind  of  coal  was 
received  on  the  contract  during  that  month.  The  total  deliveries  for 
December  amounted  to  $101.83.  Appellees  rendered  appellant  a  state- 
ment for  the  coal  so  delivered  on  December  31,  1909.  Appellant  failed 
to  make  payment  of  this  account  on  or  before  January  10th,  as  pro- 
vided by  the  contract,  and  appellees  ceased  to  make  deliveries  on  the 
contract  after  that  date.  The  last  coal  delivered  by  them  was  January 
9,  1910. 

On  January  15th  appellant  paid  its  account  for  coal  delivered  in 
December  in  full,  and  on  January  17th  wrote  appellees  as  follows: 
"We  beg  to  call  your  attention  to  the  fact  that  we  have  received 
no  shipments  on  our  contract  made  with  you  for  coal  from  Ward,  111., 
since  January  8th,  and  have  had  the  matter  up  with  your  Mr.  Stinson, 
and  was  assured  by  him  that  he  was  watching  the  same  and  was  doing 
all  he  could  to  get  same  forwarded  to  us.  We  must  insist  that  we  re- 
ceive shipment  on  this  contract  to  the  extent  of  150  tons  per  day,  as 
stipulated.  Trusting  we  may  hear  favorably  from  you  by  return  mail, 
we  remain." 

To  which  appellees  replied  on  January  18th  as  follows:  "We  are 
in  receipt  of  your  favor  of  the  17th  inst.,  and  are  surprised  to  note 
that  you  still  expect  to  receive  shipments  under  this  contract.  If  you 
refer  to  your  contract,  you  will  note  that  it  calls  for  payment  on  or 
before  the  10th  of  each  month  for  all  shipments  made  during  the 
preceding  month.  Therefore,  inasmuch  as  we  did  not  receive  your 
lemittance  on  the  10th  inst.,  we  canceled  your  contract  on  the  11th 
inst." 

The  total  shipments  of  coal  made  during  the  month  of  January,  until 
the  contract  was  canceled  on  January  11th,  amounted  to  $281.76.    Ap- 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  21  1 

pellant  also  failed  and  refused  to  pay  this  account  on  or  before  Feb- 
ruary 10th,  as  provided  in  the  contract,  or  at  any  time  thereafter,  until 
suit  was  brought  and  a  judgment  recovered  against  it  for  such  amount. 

Appellees  rely  upon  the  failure  of  appellant  to  pay  its  December 
account  on  or  before  January  lOlh  and  their  letter  of  January  17tn 
notifying  appellant  of  the  cancellation  of  the  contract  as  constituting 
a  rescission  of  the  contract;  also  the  failure  of  appellant  to  pay  the 
January  account  on  or  before  February  10th  as  such  an  abandonment 
of  the  contract  as  to  preclude  a  recovery  thereon  by  appellant  at  this 
time,  even  if  the  prior  rescission  was  wrongful,  which  they  do  not  con- 
cede. Appellant  insists  that  the  acceptance  of  the  payment  for  the 
December  delivery  on  January  15th  was  a  waiver  of  its  failure  to  pay 
on  or  before  the  10th  of  the  month,  and  the  letter  notifying  it  of  the 
cancellation  of  the  contract  was  such  a  repudiation  of  the  contract  by 
appellees  as  to  excuse  appellant  from  a  further  performance  of  the 
contract  on  its  part.  Both  the  trial  and  Appellate  Courts  adopted  the 
view  of  appellees,  and  we  concur  in  their  views.  When  appellees 
ceased  to  make  deliveries  on  the  contract  after  January  8,  1910,  and 
thereafter  notified  appellant  the  contract  had  been  canceled,  the  con- 
tract was  terminated  for  all  purposes  so  far  as  appellees  were  con- 
cerned. Their  repudiation  of  the  agreement  could  not  have  been  made 
more  emphatic  or  complete.  The  acceptance  of  the  payment  for  the 
]>ast-due  account  did  not  estop  them  from  insisting  upon  a  rescission 
of  the  contract,  when  they  were,  at  the  time  of  accepting  such  pay- 
ment, refusing  to  further  comply  with  such  contract. 

They  had  the  right  to  receive  or  accept  payment  for  coal  already 
delivered  in  any  event,  whether  the  contract  was  canceled  or  not.  If 
appellant  deemed  the  contract  still  valid  and  binding,  it  then  had  the 
right  to  treat  the  contract  as  terminated  for  all  purposes  and  bring 
an  action  for  its  breach,  and  for  all  the  damages  which  it  had  sus- 
tained by  reason  of  nonperformance,  or  being  prevented  from  perform- 
ing the  contract,  or  it  had  a  right  to  treat  the  contract  as  subsisting 
and  to  keep  it  alive  for  the  benefit  of  both  parties,  keeping  itself  at  all 
limes  ready,  able,  and  willing  to  perform  its  part  of  the  contract,  and 
at  the  expiration  of  the  term  of  the  contract  sue  for  its  damages  sus- 
tained by  reason  of  the  wrongful  nonperformance  by  appellees :  but  it 
could  not  do  both.  '■'  "  *  If  it  elected  to  keep  the  contract  alive 
and  in  force  for  the  purpose  of  recovering  damages  for  future  profits,  it 
must  do  so  for  the  benefit  of  both  parties,  and  must  both  allege  and 
prove  performance  of  the  contract  upon  its  part,  or  a  legal  excuse  for 
•its  nonperformance,  before  there  could  be  a  recovery  on  the  contract. 
:!c  *  :ic  jj^  ^j-jg  present  instance  appellant  did  neither,  although  it  evi- 
dently tried  to  do  both.  It  treated  the  contract  as  subsisting  in  so  far 
as  its  right  to  demand  delivery  of  coal  thereunder  was  concerned,  and 
broken  in  so  far  as  appellees'  right  to  demand  payment  of  the  coal 
previously  delivered  was  concerned.  This  -was  fatal  to  appellant's  right 
of  action  on  the  contract.     *     "^^     * 

If  it  elected  to  keep  the  contract  alive,  it  must  show  performance  on 
its  part,  or  legal  excuse  for  its  nonperformance.  In  order  to  do  this, 
it  was  incumbent  upon  appellant  to  show  payment  for  the  coal  previ- 
ously delivered,  or  an  offer  to  do  so.  or  set  the  same  off  against  its 
damages  on  the  contract  and  at  the  time  and  in  the  manner  provided 
by  such  instrument.     *     *     * 

Judgment  affirmed. 


212  CONTRACTS  (Part  1 

SECTION  13.— ANTICIPATORY  BREACH  OF  CONTRACT 
Our  particular  proljlem  here  is  to  determine  whether  or  not  a 
declaration,  by  one  of  the  parties  to  a  contract  that  he  intends  not 
to  perform  his  future  obligations,  under  the  contract,  will  have 
the  same  or  any  of  the  legal  effects  brought  about  by  a  nonperform- 
ance of  existing  obligations.  If  A.  has  contracted  to  build  a  house 
for  B.  according  to  certain  specifications  and  to  have  the  same  com- 
pleted by  January  1  next,  and  this  date  arrives  and  the  house  is  not 
so  built,  we  know  from  previous  cases  what  effect  is. thereby 
brought  about  in  the  relations  of  A.  and  B.  Suppose,  however, 
that,  a  few  days  after  the  contract  was  entered  into,  and  before  per- 
formance has  started,  A.,  the  builder,  informs  B.  that  he  will  not 
build  the  house — does  this  act  of  A.  constitute  a  breach  of  con- 
tract? The  situation  should  be  looked  upon  from  the  following 
standpoints:  (1)  Does  A.'s  act  justify  B.  in  not  performing  his 
duties  which  were  to  arise  before  January  1  ?  (2)  May  B.  then 
sue  A.  for  damages,  or  must  A.  wait  until  after  January  1  before 
bringing  suit?  (3)  If  B.  chooses  to  wait  until  after  January  1  to 
sue  A.,  may  B.  recover  damages  based  upon  the  state  of  affairs 
existing  on  January  1,  or  will  he  be  limited  to  the  recovery  of 
damages  calculated  as  of  the  date  of  the  repudiation?  This  in- 
volves also  the  further  question:  May  B.  perform  all  of  his  duties 
under  the  contract  and,  after  January  1,  hold  A.  liable  for  the  pay- 
ment for  such  performance?  (4)  In  the  event  that  B.  does  not  sue 
A.  immediately  upon  A.'s  repudiation,  may  A.,  by  recalling  his  re- 
pudiation, restore  the  relations  which  existed  before  he  declared 
that  he  would  not  perform? 


O'NEILL  V.  SrPRi:ME  COUNCIL  A.  L.  OF  H. 

(Supreme  Court  of  New  Jersey,  1904.    70  N.  J.  Law,  410,  57  Atl.  463, 
1  Ann.  Cas.   422.) 

Action  by  Thomas  O'Neill  against  the  Supreme  Council  American 
Legion  of  Honor. 

PiTNJiY,  J.  The  declaration  avers  that  in  the  year  1891  the  defend- 
ant was  a  corporation  of  the  state  of  Massachusetts,  engaged  in  busi- 
ness in  the  state  of  New  Jersey,  and  made  a  contract  under  seal  with 
the  plaintiff,  known  as  a  benefit  certificate,  *  *  *  whereby  it  was 
certified  that  the  plaintiff  was  a  companion  of  the  American  Legion  of 
Honor,  and  thereupon,  in  consideration  of  full  compliance  by  him  with 
all  by-laws  of  the  supreme  council  of  that  order,  then  existing  or 
thereafter  adopted,  and  the  conditions  in  the  benefit  certificate  con- 
tained, the  supreme  council  agreed  to  pay  to  the  plaintiff's  sister,  in 
trust  for  his  six  children,  the  sum  of  $5,000,  upon  satisfactory  proof 
of  the  plaintift''s  death  while  in  good  standing  upon  the  books  of  the 
supreme  council.  It  alleges  that  the  contract  was  made  in  considera- 
tion of  the  payment  by  the  plaintiff  of  the  assessments  or  premiums 
which  might  from  time  to  time  be  called  by  the  defendant.  It  avers 
payment  by  the  plaintiff  of  all  assessments  called,  and  performance  by 
him  of  all  conditions,  until  the  defendant  broke  the  contract  and  de- 


Ch.  3)  PERFORMANCE   OP   CONTRACTS  213 

clared  the  same  void.  It  sets  up  that  the  defendant  has  failed,  neg- 
lected, and  refused  to  carry  out  the  conditions  of  the  contract,  in  that 
on  August  22,  1900,  on  December  10,  1901,  and  on  divers  other  days 
between  those  dates,  the  defendant  declared  to  the  plaintiff  that  it 
would  not  perform  the  contract  or  pay  the  insurance  money  thereby 
agreed  to  be  paid,  and  that  upon  the  plaintiff's  death  the  beneficiaries 
should  receive  only  $2,000.  The  declaration  further  avers  that  upon 
the  breach  of  the  contract  by  the  defendant  as  aforesaid,  and  upon 
the  several  dates  mentioned  above,  the  plaintiff  tendered  to  the  de- 
fendant the  same  monthly  assessments  and  payments  as  had  been  there- 
tofore called  or  required  by  the  defendant  upon  the  contract,  and  the 
plaintiff  offered  and  agreed  to  continue  making  such  payments,  and  in 
all  respects  offered  to  comply  with  the  terms  and  conditions  of  the 
contract ;  yet  the  defendant  refused  to  accept  from  the  plaintiff  the 
assessments  so  tendered,  and  refused  to  recognize  the  contract  or  con- 
tinue it  in  force ;  whereby  the  plaintiff'  has  sustained  damages,  to  re- 
cover which  the  action  is  brought.  The  defendant  has  pleaded  the 
general  issue  and  five  special  pleas.  To  each  of  the  latter  the  plaintiff 
demurs. 

The  first  question  for  consideration  is  whether  the  declaration  sets 
forth  a  good  cause  of  action.  The  cause  of  action  asserted  is  not  the 
right  to  recover  the  sum  named  in  the  benefit  certificate  according  to 
its  terms,  but  to  recover  damages  for  a  renunciation  of  the  agreement, 
by  the  party  bound,  in  advance  of  the  time  set  for  performance.  Nu- 
merous reported  decisions  have  laid  down  the  doctrine  that  where  a 
contract  embodies  mutual  and  interdependent  conditions  and  obliga- 
tions, and  one  party  either  disables  himself  from  performing,  or  pre- 
vents the  other  from  performing,  or  repudiates  in  advance  his  obliga- 
tions under  the  contract,  and  refuses  to  be  longer  bound  thereby,  com- 
municating such  repudiation  to  the  other  party,  the  latter  party  is 
not  only  excused  from  further  performance  on  his  part,  but  may  at  his 
option  treat  the  contract  as  terminated  for  all  purposes  of  performance, 
and  maintain  an  action  at  once  for  damages  occasioned  by  such  re- 
pudiation, without  awaiting  the  time  fixed  by  the  contract  for  perform- 
ance by  the  defendant.  This  doctrine  has  been  followed  in  the  Eng- 
Hsh  courts  for  more  than  half  a  century.     *     *     * 

In  the  leading  case  of  Hochster  v.  De  La  Tour  (1853)  2  El.  & 
Black.  678,  22  E.  J.  Q.  B.  455,  17  Jur.  972.  6  Eng.  Rul.  Cas.  576, 
Crompton,  J.,  said,  during  the  argument :  "When  a  party  announces 
his  intention  not  to  fulfill  the  contract,  the  other  side  may  take  him  at 
his  word  and  rescind  the  contract.  That  word  'rescind'  implies  that 
both  parties  have  agreed  that  the  contract  shall  be  at  an  end  as  if  it 
had  never  been.  But  I  am  inclined  to  think  that  the  party  may  also 
say:  'Since  you  have  announced  that  you  will  not  go  on  with  the  con- 
tract, I  will  consent  that  it  shall  be  at  an  end  from  this  time  (aieaning, 
of  course,  for  purposes  of  further  performance)  ;  but  I  will  hold  you 
liable  for  the  damage  I  have  sustained,  and  I  will  proceed  to  make 
that  damage  as  little  as  possible  by  making  the  best  use  I  can  of  my 
liberty.'  This  is  the  principle  of  those  cases  in  which  there  has  been 
a  discussion  as  to  the  measure  of  damages  to  which  a  servant  is  entitled 
on  a  wrongful  dismissal."  And  Lord  Campbell,  C.  J.,  in  delivering 
judgment,  said:  "It  seems  strange  that  the  defendant,  after  renounc- 
ing the  contract  and  absolutely  declaring  that  he  will  never  act  under 
it,  should  be  permitted  to  object  that  faith  is  given  to  his  assertion, 


214  CONTRACTS  (Part  1 

and  that  an  opportunity  is  not  left  to  him  of  changing  his  mind. 
t.  *  *  'j'j-jg  j-,-,gj-^  ^^YiQ  wrongfully  renounces  a  contract  into  which  he 
has  deliberately  entered  cannot  justly  complain  if  he  is  immediately  sued 
for  a  compensation  in  damages  by  the  man  whom  he  has  injured;  and 
it  seems  reasonable  to  allow  an  option  to  the  injured  party  either  to  sue 
immediately  or  to  wait  till  the  time  when  the  act  was  to  be  done,  still 
holding  it  as  prospectively  binding  for  tlie  exercise  of  this  option, 
which  may  be  advantageous  to  the  innocent  party,  and  cannot  be  preju- 
dicial to  the  wrongdoer." 

The  same  rule  prevails  in  the  Supreme  Court  of  the  United  States. 
Roehm  v.  Horst  (1899)  178  U.  S.  1,  20  Sup.  Ct.  780,  44  L.  Ed.  953, 
where  numerous  previous  decisions  of  the  same  court  are  cited.  And 
the  great  weight  of  authority  in  the  state  courts  is  to  the  same  effect. 

:;:  *         * 

The  doctrine  of  Hochster  v.  De  La  Tour  is  generally  recognized  by 
the  text-writers  as  established  law.  *  '^  *  So  far  as  observed, 
the  only  states  dissenting  from  the  doctrine  are  Massachusetts,  Ne- 
braska, and  North  Dakota.  Daniels  v.  Newton,  114  Mass.  530.  19 
Am.  Rep.  384;  Carstens  v.  AlcDonald,  38  Neb.  858.  57  N.  W.  757; 
King  v.  Waterman,  55  Neb.  324,  75  N.  W.  830;  Stanford  v.  Mc- 
Gill,  6  N.  D.  536,  72  N.  W.  938,  38  L.  R.  A.  760.  The  latter  deci- 
sion is  based  partly,  and  the  Nebraska  decisions  principally,  upon 
the  authority  of  Daniels  v.  Newton,  which  is  the  leading  case  upon 
this  side  of  the  question.  It  is  there  held  that  a  mere  refusal  of  per- 
formance by  ,the  promisor,  before  the  time  for  performance  arrives, 
cannot  form  a  ground  for  damages.  But  in  Parker  v.  Russell,  133 
Mass.  74,  it  was  held  a  refusal  of  performance  of  a  substantial  part 
of  the  contract,  after  the  time  of  entering  upon  performance  has  begun, 
entitles  the  injured  party  to  treat  the  entire  contract  as  absolutely 
broken,  and  to  recover  immediately  his  damages,  based  upon  the  whole 
value  of  the  contract,  including  compensation  for  nonperformance  in 
the  future  as  well  as  in  the  past.  In  Ballon  v.  Billings,  136  Mass.  307. 
it  was  held  that,  for  purposes  of  rescission  by  the  promisee,  notice  that 
the  promisor  will  not  perform  has  the  same  effect  as  an  actual  breach. 
These  and  other  cases  show  that,  even  in  Massachusetts,  the  reasoning 
on  which  the  decision  in  Daniels  v.  Newton  was  based  is  hardly  carried 
to  its  logical  conclusion.  *  '•'  "'  Upon  the  precise  point  now  pre- 
sented, however,  the  authority  of  Daniels  v.  Newton  is  still  recognized 
in  iSIassachusetts,  as  appears  from  a  recent  decision  in  a  case  that  is  "on 
all  fours"  with  the  one  now  before  us.  Porter  v.  American  Legion  of 
Honor  (1903),  183  Mass.  326,  67  N.  E.  238. 

The  general  question  of  repudiation  of  contracts  is  ably  discussed 
by  Prof.  Williston  in  14  Harv.  Law  Rev.  317,  421,  with  an  ample 
citation  of  cases.  He  combats  the  doctrine  of  Hochster  v.  De  La 
Tour,  while  conceding  that  it  is  sustained  by  the  great  weight  of  au- 
thority. 

There  seems  to  be  no  controlling  decision  in  our  own  state ;  at  least. 
no  reported  case  that  is  precisely  in  point.  In  Parker  v.  Pettit,  43  N. 
J.  Law  512,  which  was  an  action  brought  by  the  purchaser  to  recover 
damages  for  refusal  to  deliver  goods  purchased,  the  vendor,  prior  to 
the  time  of  performance,  had  declared  his  intention  not  to  perform, 
and  had  Hkewise  disabled  himself  from  performing  by  selling  tlie  goods 
to  another.  The  court  held  that  thereby  the  vendor  had  dispensed  ' 
with  the  performance  of  conditions  precedent  by  the  purchaser,  and 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  215 

that  neither  a  demand  of  performance  nor  a  tender  of  the  consideration 
money  was  necessary.  It  was  intimated  by  Air.  Justice  Depue,  in  the 
opinion,  that  the  defendant's  refusal  of  performance,  before  the  time 
for  performance  arrived,  did  not  of  itself  amount  to  a  breach  of  the 
contract  so  as  to  authorize  a  suit  before  the  time  for  performance ;  but 
this  was  obiter  dictum,  for  the  suit  was  in  fact  brought  afte"  <^hat  f'me. 
In  Vickers  v.  Electrozone  Commercial  Co.,  67  N.  J.  Law  665.  671,  52 
Atl.  467.  469.  Judge  Vredenburgh,  speakine  for  the  Court  of  Errors 
and  Appeals,  declared  that  "a  party  injured  by  the  repudi-tion  of  a 
contract  by  the  other  party,  also  bound  by  it,  has  an  election  of  reme- 
dies he  may  pursue,  one  of  which  is  that  he  may  treat  the  repudiation 
as  putting  an  end  to  the  contract  for  all  purposes  of  performance,  and 
sue  for  the' profits  he  would  have  realized  if  he  had  not  been  prevented 
from  performing,  and  the  contract  would  be  continued  in  force  for 
that  purpose." 

It  must  be  conceded  that  the  adoption  of  this  rule  was  not  necessary 
for  the  decision  of  the  case,  which  was  an  action  to  recover  damages 
for  the  past  breach  of  a  single  covenant,  and  was  not  based  upon  a 
repudiation  of  the  entire  agreement.  But  as  a  pronouncement  by  our 
court  of  last  resort,  agreeing,  as  it  dees,  with  the  English  and  most 
of  the  American  decisions,  the  expression  quoted  is  entitled  to  great 
weip'ht  in  this  court.  Upon  the  whole,  we  are  satisfied  that  the  doc- 
trine of  Hochster  v.  De  La  Tour  is  well  founded  in  principle  as  well 
as  supported  by  authority.  We  are  also  clear  that  it  applies  to  such 
a  contract  as  the  one  in  suit,  and  that  the  declaration  sets  forth  a  re- 
nunciation so  clear  and  unequivocal  as  to  give  ground  for  an  action,  it 
being  averred  that  the  defendant  has  declared  to  the  plaintiff  that  it 
will  not  perform  the  contract,  and  has  refused  to  accept  the  monthly 
assessments  tendered  by  the  plaintiff'  in  performance  of  conditions 
precedent  on  his  part.     *     *     * 

The  plaintiff  is  entitled  to  judgment. 


GREEXWAY  v.  GAITHER. 

(United  States  Circuit  Court,  D.  Maryland,  1853.     Taney.  227.  Fed.  Cas.  No. 

5.7SS.) 

Tanev,  Circuit  Justice.  *  *  *  j  h^ve  been  referred  to  an  opin- 
ion delivered  in  the  queen's  bench,  in  the  case  of  Hochster  v,  De  La 
Tour,  20  Eng.  Law  &  Eq.  157,  2  Ellis  &  Blackburn,  678.  *  *  * 
The  principle  upon  which  that  case  was  decided  is  loosely  stated  by 
Lord  Campbell  in  the  opinion  delivered.  In  the  first  portion  of  it, 
the  decision  would  seem  to  be  placed  upon  the  character  of  the  con- 
tract, and  the  necessity  the  plaintiff"  was  under  of  preparing  himself 
for  the  service,  before  the  day  when  he  was  to  enter  upon  its  actual 
performance.  *  *  *  But  in  the  latter  part  of  the  opinion,  Lord 
Campbell  says,  that  a  man  who  wrongfully  renounces  a  contract,  when 
is  to  do  an  act  at  a  future  day,  may  be  sued  immediately  for  a  breach' 
of  it,  without  waiting  for  the  time  stipulated  for  its  performance.  His 
language,  in  tliis  part  of  his  opinion  is  general  enough  to  apply  to  all 
cases  where  an  act  is  to  be  done  by  the  party  on  a  future  day,  whether 
that  act  be  to  render  service,  or  deliver  goods,  or  pay  money;  and  it  is 
upon  this  part  of  the  opinion  that  the  plaintiff  in  this  case  relies  to 
support  his  present  application.     *     *     * 

The  language  of  Lord  Campbell,  in  this  part  of  his  opinion,  is  per- 


216  CONTRACTS  (Part  1 

haps  broad  enough  to  bear  the  construction  which  the  plaintiff  has  put 
upon  it.  It  is,  however,  but  justice  to  him  to  restrict  it  to  contracts 
of  the  character  of  which  he  was  speaking;  and  so,  I  suppose,  he  in- 
tended it.  For  if  he  meant  to  say  that  a  contract  hke  this,  by  which 
the  defendant  engaged  to  pay  a  certain  sum  of  money  on  certain  days, 
would  be  broken,  and  might  be  sued  on  immediately,  if  the  party  gave 
notice  that  he  would  not  comply  with  it.  and  intended  to  dispute  it ;  if 
such  was  the  doctrine  he  meant  to  announce  in  that  opinion,  it  cannot 
be  maintained  either  upon  principle  or  the  authority  of  adjudged  cases. 
It  has  never  been  supposed  that  notice  to  the  holder  of  a  bond,  or  a 
promissory  note,  or  bill  of  exchange,  that  the  party  would  not  (from 
any  cause)  comply  with  the  contract,  would  give  to  the  holder  an  im- 
mediate cause  of  action,  upon  which  he  might  sue  before  the  time  of 
payment  arrived.     *     *     * 

WIGENT  V.  MARKS. 
(Supreme  Court  of  Micliisan,  1902.     130  Mich.  000.  90  N.  W.  423.) 

Action  by  Gardner  A.  Wigent  against  Thomas  Marrs,  administra- 
tor of  the  estate  of  Chloe  R.  AlcClung,  deceased.  There  was  a  judg- 
ment in  favor  of  defendant,  and  plaintiff  brings  error. 

Hooker,  C.  J.  Plamtiff  recovered  a  verdict  and  judgment  in  an 
action  of  assumpsit  before  a  justice  of  the  peace,  which  was  reversed 
m  the  circuit  court  on  appeal.  The  declaration  was  upon  the  common 
counts.  The  facts  were  undisputed,  and  in  substance  are  as  follows : 
In  May,  1901,  defendant's  intestate  gave  a  written  order  to  plaintiff's 
agents  for  a  monument  to  be  erected  upon  her  lot  in  the  cemetery  at  the 
agreed  price  of  $100,  the  same  to  be  completed  between  that  date  and 
June  30,  1901,  imless  unforeseen  causes  should  prevent,  and  in  that 
event  as  soon  thereafter  as  practicable.  It  was  to  be  set  upon  a  foun- 
dation to  be  erected  by  her.  The  contract  was  approved  by  the  plain- 
tiff on  May  14th,  of  which  Mrs.  McClung  was  notified,  and  at  the  same 
time  the  monument  was  ordered  to  be  made  at  the  quarry.  The  latter 
part  of  June  the  plaintiff  notified  her  to  get  the  foundation  ready,  in 
response  to  which  she  wrote  him  that  he  need  not  bring  that  monu- 
ment, as  it  did  not  come  according  to  agreement.  On  July  5th  plaintiff 
replied,  stating  that  the  monument  was  well  under  way,  and  he  could 
uot  allow  her  to  countermand  her  order ;  that  it  would  be  delivered  as 
soon  as  completed,  and  would  be  strictly  according  to  contract,  and 
she  was  requested  to  have  her  foundation  built  as  soon  as  possible.  In 
response  to  this  she  wrote :  "You  have  not  done  according  to  agree- 
ment at  all.  You  was  to  have  it  up  by  the  30th  of  June  at  the  farth- 
est. We  are  not  obliged  to  wait  your  motion,  so,  if  you  bring  it,  you 
may  take  it  back."  The  plaintiff  had  the  monument  completed  and 
set  up  upon  a  foundation  erected  by  himself.  This  action  was  brought 
to  recover  the  contract  price  and  $1.50  for  the  foundation,  with  inter- 
est from  August  23,  1900. 

It  was  shown  that  the  delay  was  caused  by  unforeseen  circumstanc- 
es. No  complaint  was  made  of  the  workmanship,  which  was  such  that 
the  monument  could  not  be  used  for  any  other  purpose.  The  defend- 
ant claims  that  the  plaintiff,  upon  receipt  of  Mrs.  McClung's  letter, 
had  no  legal  right  to  complete  the  contract,  and  recover  the  price; 
that  his  only  remedy  was  to  recover  in  dajmages  for  a  breach  of  the 
contract.     Plaintiff,  on  the  other  hand,  claims  that  it  was  competent 


Ch. 3)  PERFORMANCE  OF  CONTRACTS  217 

to  treat  the  contract  as  performed,  and  that  he  is  entitled  to  recover 
the  contract  price  upon  the  common  counts.  It  is  undisputed  that  de- 
fendant unquahfiedly  renounced  this  contract  before  the  monument 
was  completed,  and  forbade  its  completion  and  erection  upon  her 
premises.  Many  authorities  hold  that  she  had  the  right  to  do  this,  and 
diereafter  plaintiff's  right  of  recovery  would  be  limited  to  damages 
for  the  breach  of  the  contract  involved  in  the  renunciation.  In  Me- 
chem.  Sales,  §  1091,  the  author  says:  "The  law  is  well  settled  that  a 
party  to  an  executory  contract  may  always  stop  performance  on  the 
other  side  by  an  explicit  direction  to  that  effect,  though  he  thereby 
subjects  himself  to  the  payment  of  such  damages  as  will  compensate 
the  other  for  the  loss  he  has  sustained  by  reason  of  having  his  per- 
formance checked  at  that  stage  in  its  progress."  "The  contract  is 
not  rescinded,  but  broken;  and  immediately  the  other  party  has  the 
right  to  deem  it  in  force  for  the  purpose  of  the  recovery  of  his  dam- 
ages, he  is  under  no  obligation  for  that  purpose  to  tender  complete 
performance,  nor  has  he  the  right  to  unnecessarily  enhance  the  dam- 
ages bv  proceeding  after  the  countermand  to  finish  his  undertaking." 
Id.  §  1092. 

This  subject  is  discussed  in  the  case  of  Hosmer  v.  Wilson,  7  Mich, 
at  page  305,  74  Am.  Dec.  716,  where  Mr.  Justice  Christiancy  says: 
"And'it  is  certainly  very  questionable  whether  the  party  thus  notified 
has  a  right  to  go  on  after  such  notice  to  increase  the  amount  of  hjs 
own  damages.  In  Clark  v.  Marsiglia,  1  Denio  (N.  Y.)  317,  43  Am. 
Dec.  670.  it  was  held  he  had  no  such  right,  and  that  the  employer  has 
a  right  (in  a  contract  for  work  and  labor)  to  stop  the  work,  if  he 
choose,  subjecting  himself  to  the  consequences  of  a  breach  of  his 
contract ;  and  that  the  workman,  after  notice  to  quit  work,  has  no 
right  to  continue  his  labor,  and  recover  pay  for  it.  This  doctrine  is 
fully  approved  in  Derby  v.  Johnson,  21  Vt.  21."  Mr.  Justice  Chris- 
tiancy adds  that :  ''This  would  seem  to  be  good  sense,  and  therefore 
sound  law  ;  and  it  would  seem  that  any  other  rule  must  tend  to  the 
injury,  and  in  many  cases  to  the  ruin,  of  all  parties."  In  the  case 
of  Danforth  v.  Walker,  37  Vt.  244,  the  court  said  of  a  similar  case:' 
"While  a  contract  is  executory,  a  party  has  the  power  to  stop  the 
performance  on  the  other  side  by  an  explicit  direction  to  that  effect 
by  subjecting  himself  to  such  damages  as  will  compensate  the  other 
party  for  being  stopped  in  the  performance  on  his  part  at  that  point 
or  stage  in  the  execution  of  the  contract.  The  party  thus  forbidden 
cannot  afterwards  go  on  and  thereby  increase  the  damages,  and  then 
recover  such  increased  damages  of  the  other  party."    *    *     * 

We  are  cited  by  plaintiff's  counsel  to  the  case  of  Black  v.  Herbert, 
111  Mich.  638,  70  N.  W.  138,  as  a  case  on  all  fours  with  the  present 
case,  but  we  think  it  is  readily  distinguishable.  In  that  case,  after  re- 
nunciation the  parties  met  by  appointment,  and  the  plaintiff  was  per- 
mitted to  alter  and  set  up  the  monument.  It  became,  therefore,  a 
question  for  the  jury  whether  or  not  the  contract  had  been  performed. 
Renunciation  must  be  more  than  mere  idle  talk  flf  nonperformance; 
it  must  be  a  distinct,  unequivocal,  and  absolute  refusal  to  receive 
performance  or  to  perform  on  his  own  part.  Mechem,  Sales,  §  1087. 
The  party  attempting  to  renounce  may  withdraw  his  renunciation  and 
have  the  contract  performed  (Id.  §  1090),  and  it  would  seem  that  the 
defendant  in  that  case  did  so.  There  are  only  two  theories  upon  which 
the  common  counts  could  be  relied  upon  in  this  case :     First,  upon  the 


218  CONTRACTS  (Part  1 

theory  that  the  contract  had  been  performed,  and  that  the  contract 
price  was  therefore  recoverable ;  and,  second,  for  the  work  and  ma- 
terial used  in  the  foundation  built  by  the  plaintiff.  The  undisputed 
facts  show  that  the  contract  was  not  performed  on  receipt  of  the  re- 
nunciation, and  there  could  be  no  recovery  for  the  erection  of  the 
foundation,  because  the  plaintiff  was  never  requested  to  build  it,  but, 
on  the  contrary,  was  prohibited  from  doing  anything  further  in  per- 
formance of  the  contract.  The  only  redress  that  the  plaintiff  would 
be  entitled  to  recover  would  be  damages  for  the  breach  of  the  contract 
if  renunciation  should  be  found  to  be  unwarranted,  which  does  not 
appear. 

It  follows  that  the  judgment  must  be  affirmed. 


SECTION  14.— RIGHT  OF  A  PARTY  MATERIALLY  IN" 
DEFAULT  TO  RECOVER  FOR  HIS  INCOM- 
PLETE PERFORMANCE 

Suppose  that  A.  has  contracted  to  perform  certain  personal  serv- 
ices for  B.,  to  extend  over  a  prescribed  period  of  time,  and,  before 
the  work  is  completed.  A.,  without  justification  quits  work,  may 
A.  recover  anything  for -the  work  he  has  performed?  Or,  to  raise 
the  same  legal  problem  in  other  kinds  of  contracts,  suppose  that 
A.  has  contracted  to  erect  a  building  for  B.,  and,  when  the  build- 
ing is  but  partially  constructed,  or  fully  consti^ucted  but  grossly 
defective  in  workmanship  and  materials  used.  A.,  without  just 
cause,  abandons  the  contract ;  is  A.  entitled  to  any  proportionate 
payment  of  the  contract  price?  Or,  it  may  be  that  A.  has  contract- 
ed to  sell  goods  of  a  certain  kind  and  quality  to  B.  and  has  delivered 
goods  of  an  inferior  quality  to  B.,  who  has  retained  them.  What, 
if  anything,  may  A.  recover  from  B.?  In  other  words,  our  problem 
is  to  determine  whether  or  not  a  party  who  has  materially  broken 
his  contract,  of  whatever  nature  it  may  be,  either  by  reason  of  his- 
failure  to  perform  within  the  time  specified  or  at  the  proper  place, 
or  because  the  acts  performed  were  not  the  acts  promised,  may 
recover  anything  for  his  defective  performance.  This  question  is 
essentially  different  from  the  series  of  problems  discussed  in  the 
preceding  sections.  We  have  already  noted  several  of  the  effects 
which  a  breach  of  contract  by  A.  has  upon  B.  We  have  seen  that,  in 
all  cases,  B.  may  sue  A.  for  damages.  Moreover,  if  A.'s  breach  w^as 
material,  B.  may  not  only  sue  A.  for  damages  thus  sustained  by 
him,  but  also  B.  is  justified  in  not  performing  his  remaining  duties 
under  the  contract,  that  is,  the  prior  breach  by  A.  is  an  excuse  for 
the  nonperformance  by  B.  Also,  we  have  seen  that,  in  many  in- 
stances, B.  may  reecind  the  contract.  We  are  here  not  concerned 
with  any  of  these  rights  and  privileges  of  B.  The  new  point  is, 
does  A.,  the  party  in  default,  have  any  rights  against  B.? 

Assuming  that  there  is  such  a  right  in  A.  against  B.,  it  may  very 
well  happen  that  the  damages  sustained  by  B.  will  more  than  equal 
the  money  value  of  the  right  of  A.  against  B.,  so  that  the  action 
brought  either  by  A.  against  B.  or  by  B.  against  A.  would  result 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  219 

in  a  judgment  in  B.'s  favor.  But  the  amount  of  this  judgment  ob- 
viously will  be  cut  down  by  allowing  A.  a  right  of  recovery.  As  a 
practical  matter,  is  it  good  public  policy  for  the  law  to  declare  that, 
if  parties  break  their  contracts,  they  will  be  held  liable  in  damages, 
but  to  permit  such  party  in  default  to  recover  something  from 
the  other  party ;  or,  on  the  other  hand,  is  it  better  policy  for  the 
law  to  provide  for  a  double  penalt}'  upon  defaulting  contractors  by 
making  them  liable  to  pay  for  all  damages  occasioned  to  the  other 
party  and  by  denying  them  the  right  of  paying  some  portion  of 
these  damages  by  some  valuation  placed  upon  their  defective  work? 

There  is  a  good  deal  of  conflict  in  the  decisions  on  this  question. 
In  labor  and  construction  contracts,  the  general  rule  is  that  the 
laborer  or  builder  who  has  willfully  broken  his  contract  can  recover 
nothing,  but  that,  if  his  breach  is  not  willful,  he  may  recover.^ 
Likewise  where  a  buyer  accepts  a  defective  performance,  the  weight 
of  authority  is  that  the  seller  may  recover  the  reasonable  value  of 
the  goods.  In  the  last  case,  it  will  be  noticed  that  there  is  less 
occasion  for  resorting  to  the  distinction  between  willful  and  non- 
willful breach.  In  the  ordinary  case,  the  breach  by  the  seller  would 
not  be  willful. 

The  following  cases  discuss  some  phases  of  the  general  question 
and  also  the  question  as  to  the  proper  basis  for  ascertaining  the 
amount  of  the  recovery  to  be  allowed  the  party  in  default: 


BKITTON  V.  TURNER. 
(Supreme  Court  of  New  Hampshire,  1S34.     6  N.  H.  481,  26  Am.  Dec.  713.j 

,  Parker,  J.  It  may  be  assumed  that  the  labor  performed  by  the 
plaintiff,  and  for  which  he  seeks  to  recover  a  compensation  in  this 
action,  was  commenced  under  a  special  contract  to  labor  for  the  de- 
fendant the  term  of  one  year,  for  the  sum  of  one  hundred  and  twenty 
dollars,  and  that  the  plaintiff  has  labored  but  a  portion  of  that  time, 
and  has  voluntarily  failed  to  complete  the  entire  contract. 

It  is  clear,  then  that  he  is  not  entitled  to  recover  upon  the  contract 
itself,  because  the  service,  which  was  to  entitle  him  to  the  sum  agreed 
upon,  has  never  been  performed. 

But  the  question  arises,  can  the  plaintiff,  under  these  circumstanc- 
es, recover  a  reasonable  sum  for  the  service  he  has  actually  perform- 
ed, under  the  count  of  quantum  meruit.  Upon  this,  and  questions  of 
a  similar  nature,  the  decisions  to  be  found  in  the  books  are  not  easily 
reconciled. 

It  has  been  held,  upon  contracts  of  this  kind  for  labor  to  be  per- 
formed at  a  specified  price,  that  the  party  who  voluntarily  fails  to 
fulfill  the  contract,  by  performing  the  whole  labor  contracted  for,  is 
not  entitled  to  recover  anything  for  the  labor  actually  performed, 
however  much  this  has  been  considered  the  settled  rule  of  law  upon 
this  subject.     *     *     * 

That  such  rule  in  its  operation  may  be  very  unequal,  not  to  say 
unjust,  is  apparent.  A  party  who  contracts  to  perform  certain  speci- 
fied labor,  and  who  breaks  his  contract  in  the  first  instance,  without 

2  Williston  on  Contracts.  §§  1474,  1475,  1477. 


220  CONTRACTS  (Part  1 

any  attempt  to  perform  it,  can  only  be  made  liable  to  pay  the  damages 
which  the  other  party  has  sustained  by  reason  of  such  nonperform- 
ance, which  in  many  instances  may  be  trifling ;  whereas,  a  party  who, 
in  good  faith,  has  entered  upon  the  performance  of  his  contract,  and 
nearly  completed  it,  and  then  abandoned  the  further  performance, 
although  the  other  party  has  had  the  full  benefit  of  all  that  has  been 
done,  and  has  perhaps  sustained  no  actual  damage,  is  in  fact  sub- 
jected to  a  loss  of  all  which  has  been  performed,  in  the  nature  of 
damages  for  the  nonfulfillment  of  the  remainder,  upon  the  technical 
rule,  that  the  contract  must  be  fully  performed,  in  order  to  a  recov- 
ery of  any  part  of  the  compensation.  By  the  operation  of  this  rule, 
then,  the  party  who  attempts  performance  may  be  placed  in  a  much 
worse  situation  than  he  who  wholly  disregards  his  contract,  and  the 
other  party  may  receive  much  more,  by  the  breach  of  the  contract, 
than  the  injury  which  he  has  sustained  by  such  breach,  and  more  than 
he  could  be  entitled  to  were  he  seeking  to  recover  damages  by  an  ac- 
tion. 

The  case  before  us  presents  an  illustration.  Had  the  plaintiff  in  this 
case  never  entered  upon  the  performance  of  his  contract,  the  damage 
could  not  probably  have  been  greater  than  some  small  expense  and 
trouble  incurred  in  procuring  another  to  do  the  labor  which  he  had 
contracted  to  perform.  But  having  entered  upon  the  performance, 
and  labored  nine  and  a  half  months,  the  value  of  which  labor  to  the 
defendant,  as  found  by  the  jury,  is  ninety-five  dollars,  if  the  defend- 
ant can  succeed  in  this  defense,  he  in  fact  receives  nearly  five-sixths 
of  the  value  of  a  whole  year's  labor,  by  reason  of  the  breach  of  con- 
tract by  the  plaintiff,  a  sum  not  utterly  disproportionate  to  any  prob- 
able, not  to  say  possible  damage,  which  could  have  resulted  from  the 
neglect  of  the  plaintiff  to  continue  the  remaining  two  and  a  half 
months,  but  altogether  beyond  any  damage  which  could  have  been  re- 
covered by  the  defendant,  had  the  plaintiff  done  nothing  towards  the 
fulfillment  of  his  contract.  *  *  *  fhe  party  who  contracts  for  la- 
bor merely,  for  a  certain  period,  does  so  with  full  knowledge  that  he 
must,  from  the  nature  of  the  case,  be  accepting  part  performance  from 
day  to  day,  if  the  other  party  commences  the  performance,  and  with 
knowledge  also  that  the  other  may  eventually  fail  of  completing  the 
entire  term. 

If,  under  such  circumstances,  he  actually  receives  a  benefit  from  the 
labor  performed,  over  and  above  the  damage  occasioned  by  the  failure 
to  complete,  there  is  as  much  reason  why  he  should  pay  the  reasonable 
worth  of  what  has  thus  been  done  for  his  benefit,  as  there  is  when 
he  enters  and  occupies  the  house  which  has  been  built  for  him,  but  not 
according  to  the  stipulations  of  the  contract,  and  which  he  perhaps 
enters,  not  because  he  is  satisfied  with  what  has  been  done,  but  because 
circvmistances  compel  him  to  accept  it  such  as  it  is,  that  he  should 
pay  for  the  value  of  the  house.     *     *     * 

We  hold,  then,  that  where  a  party  undertakes  to  pay  upon  a  special 
contract  for  the  performance  of  labor,  or  the  furnishing  of  materials, 
he  is  not  to  be  charged  upon  such  special  agreement,  until  the  money  is 
earned  according  to  the  terms  of  it;  and  where  the  parties  have  made 
an  express  contract,  the  law  will  not  imply  and  raise  a  contract  dif- 
ferent from  that  which  the  parties  have  entered  into,  except  upon 
some  further  transaction  between  the  parties. 

In  case  of  a  failure  to  perform  such  special  contract  by  the  default 


Ch.  3)  PEnFORMANCE  OF  CONTRACTS  221 

of  the  party  contracting  to  do  the  service,  if  the  money  is  not  due  by 
the  terms  of  the  special  agreement,  he  is  not  entitled  to  recover  for  his 
labor,  or  for  the  materials  furnished,  unless  the  other  party  receives 
what  has  been  done  or  furnished,  and  upon  the  whole  case  derives  a 
benefit  from  it.     *     =i=     * 

But  if,  where  a' contract  is  made  of  such  a  character,  a  party  actual- 
ly receives  labor  or  materials,  and  thereby  derives  a  benefit  and  advan- 
tage, over  and  above  the  damage  which  has  resulted  from  the  breach 
of  the  contract  by  the  other  party,  the  labor  actually  done  and  the 
value  received  furnish  a  new  consideration,  and  the  law  thereupon 
raises  a  promise  to  pay  to  the  extent  of  the  reasonable  worth  of  such 
excess.  This  may  be  considered  as  making  a  new  case,  one  not  within 
the  original  agreement,  and  the  party  is  entitled  to  "recover  on  his 
new  case,  for  the  work  done,  not  as  agreed,  but  yet  accepted  by  the 
defendant."     1  Dane  Abr.  224. 

If,  on  such  failure  to  perform  the  whole,  the  nature  of  the  contract 
be  such  that  the  employer  can  reject  what  has  been  done,  and  refuse 
to  receive  any  benefit  from  the  part  performance,  he  is  entitled  so  to 
do,  and  in  such  case  is  not  liable  to  be  charged,  unless  he  has  before 
assented  to  and  accepted  of  what  has  been  done,  however  much  the 
other  party  may  have  done  towards  the  performance.  He  has  in 
such  case  received  nothing,  and  having  contracted  to  receive  nothing 
but  the  entire  matter  contracted  for,  he  is  not  bound  to  pay,  because 
his  express  promise  was  only  to  pay  on  receiving  the  whole,  and  hav- 
mg  actually  received 'nothing,  the  law  cannot  and  ought  not  to  raise 
an  implied  promise  to  pay.  But  where  the  party  receives  value,  takes 
and  uses  the  materials,  or  has  advantage  from  the  labor,  he  is  liable 
to  pay  the  reasonable  worth  of  what  he  has  received.  *  *  *  And 
the  rule  is  the  same,  whether  it  was  received  and  accepted  by  the  as- 
sent of  the  party  prior  to  the  breach,  under  a  contract  by  which,  from 
its  nature,  he  was  to  receive  labor,  from  time  to  time,  until  the  com- 
pletion of  the  whole  contract ;  or  whether  it  was  received  and  accepted 
by  an  assent  subsequent  to  the  performance  of  all  which  was  in  fact 
done.  If  he  received  it  under  such  circumstances  as  precluded  him 
from  rejecting  it  afterwards,  that  does  not  alter  the  case ;  it  has  still 
been  received  by  his  assent. 

In  fact,  we  think  the  technical  reasoning  that  the  performance  of 
the  whole  labor  is  a  condition  precedent,  and  the  right  to  recover  any- 
thing dependent  upon  it;  that  the  contract  being  entire,  there  can  be 
no  apportionment ;  and  that  there  being  an  express  contract  no  other 
can  be  implied,  even  upon  the  subsequent  performance  of  service,  is 
not  properly  applicable  to  this  species  of  contract,  where  a  beneficial 
service  has  been  actually  performed;  for  we  have  abundant  reason 
to  believe,  that  the  general  understanding  of  the  community  is,  that 
the  hired  laborer  shall  be  entitled  to  compensation  for  the  service  ac- 
tually .performed,  though  he  do  not  continue  the  entire  term  contract- 
ed for,  and  such  contracts  must  be  presumed  to  be  made  with  refer- 
ence to  that  understanding,  unless  an  express  stipulation  shows  the 
contrary. 

Where  a  beneficial  service  has  been  performed  and  received,  there- 
fore, under  contracts  of  this  kind,  the  mutual  agreement  cannot  be 
considered  as  going  to  the  whole  of  the  consideration,  so  as  to  make 
them  mutual  conditions,  the  one  precedent  to  the  other,  without  a  spe- 
cific proviso  to  that  efifect.    *    *    *    It  is  easy,  if  the  parties  so  choose, 


222  CONTRACTS  (Part  1 

to  provide  by  an  express  agreement  that  nothing  shall  be  earned,  if 
the  laborer  leaves  his  employer  without  having  performed  the  whole 
service  contemplated,  and  then  there  can  be  no  pretense  for  a  recovery 
if  he  voluntarily  deserts  the  service  before  the  expiration  of  the  time. 

The  amount,  however,  for  which  the  employer  ought  to  be  charged, 
where  the  laborer  abandons  his  contract,  is  only  the  reasonable  worth, 
or  the  amount  of  advantage  he  receives  upon  the  whole  transaction; 
*  *  *  and  in  estimating  the  value  of  the  labor,  the  contract  price 
cannot  be  exceeded.  '■'  *  *  If  a  person  makes  a  contract  fairly,  he 
is  entitled  to  have  it  fully  performed,  and  if  this  is  not  done,  he  is 
entitled  to  damages.  He  may  maintain  a  suit  to  recover  the  amount 
of  damages  sustained  by  the  nonperformance. 

The  benefit  and  advantage  which  the  party  takes  by  the  labor,  there- 
fore, is  the  amount  of  value  which  he  receives,  if  any,  after  deducting 
the  amount  of  damage;  and  if  he  elects  to  put  this  in  defense  he  is  en- 
titled so  to  do,  and  the  implied  promise  which  the  law  will  raise,  in 
such  case,  is  to  pay  such  amount  of  the  stipulated  price  for  the  whole 
labor,  as  remains  after  deducting  what  it  would  cost  to  procure  a  com- 
pletion of  the  residue  of  the  service,  and  also  any  damage  which  has 
been  sustained  by  reason  of  the  nonfulfillment  of  the  contract.  If. 
in  such  case,  it  be  found  that  the  damages  are  equal  to,  or  greater  than 
the  amount  of  the  labor  performed,  so  that  the  employer,  having  a 
right  to  the  full  performance  of  the  contract,  has  not  upon  the  whole 
case  received  a  beneficial  service,  the  plaintifif  cannot  recover.    *    *    * 

Judgment  on  the  verdict    [for  plaintiff]. 


GILLIS  et  al.  v.  COBE  et  al. 

(Supreme   Judicial    Court    of  Massachnsetts.    1901.      177    Mass.    584, 
59  X.  E.  455.) 

Action  by  Daniel  B.  Gillis  and  others  against  Mark  H.  Cobe  and 
others.     From  a  judgment  in  favor  of  defendants,  plaintiffs  appeal. 

LoRiNG,  J.  The  first  question  submitted  to  the  court  by  the  ref- 
eree is  whether  the  defendants'  act  of  putting  in  the  tanks  constituted 
an  act  of  acceptance  which  dispensed  with  the  necessity  of  the  plain- 
tiffs furnishing  the  architect's  certificate.  The  plaintiffs  contend  that 
this  question  does  not  arise  in  this  case,  because  it  is  nowhere  provided 
in  the  contract  that  their  right  to  recover  the  contract  price  depends 
upon  their  securing  a  certificate  from  the  architect.  Though  the  pro- 
visions of  this  contract  are  not  as  explicit  as  building  contracts  usual- 
ly are  in  this  respect,  yet,  on  a  fair  construction  of  its  terms,  we  think 
that  the  plaintiffs'  right  to  recover  does  depend  upon  their  pro- 
ducing a  certificate  from  the  architect.  In  the  specifications,  which 
are  made  part  of  the  contract,  there  is  this  provision:  "Payments 
only  to  be  made  upon  a  written  order  from  the  architect  as  the  work 
progresses.  No  order  will  be  considered  an  acceptance  of  the  work  on 
which  it  is  given.  Only  an  order  for  the  final  payment  shall  be  con- 
sidered as  an  acceptance  of  the  work."  This  clause,  taken  in  connec- 
tion with  the  two  following  clauses  of  the  contract,  must  be  taken  to 
make  the  payment  of  the  contract  price  dependent  upon  the  architect's 
giving  his  certificate :  "Any  disagreement  between  the  owners  and 
the  contractor  upon  any  matter  arising  from  these  specifications  or 
drawings  of  the  work  required  shall  be  decided  by  the  engineers  and 
architects,  whose  decision  shall  be  final  and  binding  on  both  parties." 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  223 

"All  payments  shall  be  made  upon  written  certificate  of  the  engineers 
and  architects." 

We  are  therefore  of  opinion  that  this  question  does  arise.  Further, 
we  are  of  opinion  that  the  acts  of  the  defendants  in  using  the  building 
when  the  plaintiffs  stopped  working  on  it  were  not  an  acceptance  of 
it.  By  the  express  terms  of  the  contract,  "only  an  order  for  the  final 
payment  shall  be  considered  as  an  acceptance  of  the  work."  The 
building  became  the  defendants'  property  as  it  was  affixed  to  their 
land.  When  the  plaintiff's  stopped  working  on  it,  and  the  architect 
refused  to  give  a  certificate  that  it  was  constructed  in  accordance  with 
the  requirements  of  the  contract,  the  defendants  were  not  bound  to 
remove  the  building;  nor  were  they  boUnd,  so  long  as  the  building 
stood  on  their  land,  to  abstain  from  usifig  what  was  their  own.  The 
use  of  the  building,  therefore,  was  not  an  acceptance  of  it,  under  the 
contract.     *     *     * 

The  second  question  is  whether  a  recovery  can  be  had  in  this  case 
on  the  common  counts,  without  furnishing  the  architect's  certificate. 

The  plaintiffs  further  contend  that  they  are  entitled  to  the  fair  value 
of  the  structure,  viewed  with  reference  to  the  labor  and  materials 
which  produced  jt.  *  *  *  But  one  who  has  done  work  under  a 
special  contract,  and  resorts  to  a  recovery  under  the  principle  of  Hay- 
ward  V.  Leonard.  7  Pick.  181,  19  Am.  Dec.  268,  recovers  on  the 
ground,  and  only  on  the  ground  that  the  result  of  his  work  is  of  some 
benefit  to  the  defendant.  He  comes  into  court  admitting  that  he  has 
not  done  what  he  agreed  to  do.  and  that  he  cannot  hold  the  defend- 
ant on  his  promise  to  pay  him  the  contract  price.  More  than  that,  he 
admits  that  the  part  which  he  has  failed  to  perform  is  one  that  so 
far  goes  to  the  essence  of  the  contract  that  it  is  a  condition  precedent 
to  a  recovery  by  him  on  the  contract;  for,  if  the  part  which  he  agreed 
to  perform  and  did  not  perform  was  of  slight  importance,  it  is  not  a 
condition  precedent.  He  can  recover  the  contract  price  without  per- 
forming it,  and  the  only  advantage  which  the  defendant  can  take  of  jt 
is  by  way  of  recoupment,  or  by  a  cross  action,  in  which  the  burden  is 
on  him  (the  defendant)  to  prove  the  damage  he  has  suffered  from  its 
nonperformance.  The  only  ground  on  which  a  plaintiff  who  resorts 
to  a  recovery  under  the  principle  of  Hayward  v.  Leonard  is  entitled 
to  recover  anything  is  that,  though  so  far  as  his  contract  rights  are 
concerned,  he  is  entirely  out  of  court;  yet  it  is  not  fair  that  the  de- 
fendant should  go  out  of  the  transaction  as  a  whole  with  a  profit  at 
his  (the  plaintiff's)  expense;  and  therefore  if  the  structure,  which,  for 
the  purpose  of  a  recovery  on  this  ground,  he  necessarily  admits  does 
not  come  up  to  the  contract  requirements  in  essential  particulars,  is 
nevertheless  a  thing  of  some  value,  the  defendant  ought  to  make  him 
compensation  therefor.  That  such  is  the  ground  on  which  a  recover}^ 
can  be  had  in  such  a  case  was  laid  dow^n  in  the  original  case  of  Hay- 
ward  V.  Leonard,  7  Pick.  181,  19  Am.  Dec.  268,  and  has  been  repeated 
in  the  subsequent  decisions.    *    *     * 

It  had  been  held  by  this  court  12  years  before  Hayward  v.  Leonard 
was  decided  that  there  could  be  no  recovery  on  the  doctrine  after- 
wards stated  at  length  in  that  case,  if  the  result  of  the  plaintiff's  mis- 
directed work  was  not  a  thing  of  value.     *     *     * 

The  contention  of  the  plaintiffs  in  this  connection  comes  to  this: 
While  a  plaintiff  who  has  done  work  under  a  special  contract,  when 
suing  on  the  contract,  has  the  burden  of  proving  that  he  has  com- 


224  CONTRACTS  (Part  1 

plied  with  its  requirements,  yet  on  his  faihng  to  sustain  that  burden 
he  can,  by  resorting  to  a  count  of  quantum  meruit,  and  by  proving  the 
vakie  of  the  work  done  by  him  (which  he  failed  to  prove  was  a  per- 
formance of  what  he  agreed  to  perform),  shift  thC' burden  of  proof, 
and  throw  on  the  defendant  the  burden  of  proving  that  he  committed 
a  breach  of  the  contract,  and  that  in  this  way  he  can  entitle  himself 
to  the  value  of  that  work  to  the  same  extent  as  he  would  have  been 
entitled  had  that  work  been  done  in  the  manner  in  which  the  defend- 
ant requested  to  have  it  done,  and  to  recover  that  value,  unless  the  de- 
fendant goes  forward  and,  by  way  of  recoupment,  cuts  that  amount 
down  by  proving  that  he  (the  plaintiff)  committed  a  breach  of  the 
contract  under  which  the  work  was  done,  and  that  he  (the  defendant) 
has  suffered  damages  from. .that  breach,  and  proves  the  amount  of 
those  damages. 

There  are  no  cases  in  which  the  amount  of  the  compensation  to 
which  a  plaintiff  who  resorts  to  a  recovery  under  the  principle  of 
Hayward  v.  Leonard  is  entitled  has  received  deliberate  consideration. 
But  if  the  sole  ground  of  his  being  entitled  to  anything  is  that,  were 
he  not  paid  something,  the  defendant  would  profit  at  his  expense,  al- 
though his  claim  is  without  merit  so  far  as  rights  under  the  contract 
are  concerned,  it  is  clear  that  the  amount  which  should  be  paid  the 
plaintiff  is  the  amount  by  which,  were  no  payment  made,  the  defend- 
ant would  profit  at  his  expense ;  that  is  to  say,  the  amount  which  rep- 
lesents  the  fair  market  value  of  the  structure  which,  against  the  wish- 
es of  the  defendant,  has  been  put  upon  his  land.     *     *     * 

The  case  at  bar,  then,  is  a  case  where  the  plaintiff's  have  not  satis- 
fied the  architect  that  they  did  their  work  as  required  by  the  contract, 
as  by  the  terms  of  the  contract  they  had  to  do  before  they  were  enti- 
tled to  be  paid  for  it,  and  where  it  is  expressly  found  by  the  referee 
that  "there  was  no  fraud  or  collusion  between  architect  and  defend- 
ants which  caused  him  to  withhold  the  certificate,  and  the  retention 
by  architect  of  certificate  was,  if  wrong,  from  error  of  judgment." 
And  it  is  a  case  where  the  plaintiffs  have  failed  to  prove  that  they  have 
performed  their  contract  in  constructing  the  filling  on  which  the  floor 
lests  which  has  given  way,  and  where,  by  the  finding  of  the  referee, 
"the  damages  to  defendants  by  reason  of  the  sinking  of  the  floor  is  in 
excess  of  the  amount  of  plaintiff's  claim."     *     *     * 

The  finding  of  the  referee  that  the  work  and  materials  furnished 
by  the  plaintiffs  in  the  construction  of  the  building  "are  of  value 
$1,266,"  is  not  a  finding  to  the  effect  that  the  building,  as  it  is,  is  worth 
$1,266.     *     *     * 

The  appeal  from  the  judgment  entered  by  the  superior  court  for  the 
defendant  must  be  sustained. 


SANDERS   V.   BROCK. 

(Supreme  Court  of  Pennsylvania,  1901.    2.30  Pa.  609,  79  Atl.  772, 
35  L.  R.  A.  [N.   S.]   532.) 

Action  by  Albert  J.  Sanders  against  Seldon  J.  M.  Brock.  From  an 
order  discharging  rule  for  judgment  for  want  of  a  sufficient  affidavit 
of  defense,  plaintiff  appeals. 

MkstrezaT,  J.  *  *  *  By  an  agreement  in  writing  dated  January 
14,  1910,  the  defendant  agreed  to  sell  and  convey  to  the  plaintiff 
the  premises  at  1507  Walnut  street,  Philadelphia,  for  the  consideration 


Ch.  3)  PERFORMANCE   OP   CONTRACTS  225 

of  $104,000,  of  which  $1,000  were  to  be  paid  at  the  signing  of  the 
agreement  and  the  balance  at  the  time  of  settlement  on  or  before  Feb- 
ruary 1,  1910.  The  premises  were  to  be  conveyed  clear  of  all  incum- 
brances and  easements,  and  the  title  was  to  be  good  and  marketable 
and  subject  to'  no  restrictions.  It  was  agreed  that,  if  the  purchaser 
made  an  additional  payment  of  $1,000  on  the  purchase  money,  the 
time  of  settlement  should  be  extended  for  a  further  period  of  30  days 
from  February  1st.  The  agreement  was  executed  by  the  parties  as 
agents  for  undisclosed  principals.  The  purchaser  paid  $1,000  at  the 
signing  of  the  agreement,  and  the  additional  sum  of  $1,000  on  or  about 
February  1st  when  the  time  of  settlement  was  extended  to  March  2, 
1910. 

The  statement,  after  setting  forth  the  above  facts,  avers  that  on 
March  2,  1910,  the  plaintiff  was  ready  and  willing  and  offered  to  settle 
for  the  property  according  to  the  terms  of  the  agreement,  but  the  de- 
fendant was  unable  to  convey  the  premises  clear  of  incumbrances  and 
easements  and  with  no  restrictions.    *     =i^    * 

The  defendant  filed  an  affidavit  of  defense  in  which  he  admits  the 
execution  of  the  contract  and  the  payment  of  the  $2,000  as  averred  in 
the  statement.  *  *  *  The  affidavit  denies  that  plaintiff'  was  ready  to 
settle  on  March  2,  1910,  as  alleged  in  the  statement,  and  avers  that 
on  said  date  the  defendant  "was  prepared  to  give  a  good  and  market- 
able title  to  the  said  property  and  estate  called  for  in  the  said  agree- 
ment and  in  good  faith  tendered  a  proper  conveyance  thereof  to  the 
said  plaintiff,  who,  without  good  reason  or  legal  excuse,  positively  de- 
clined and  refused  to  take  the  said  title  or  to  pay  the  balance  of  the 
purchase  money  reserved  and  stipulated  in  the  said  agreement." 

The  defendant  admits  that  prior  to  the  bringing  of  the  suit  he  sold 
the  property  for  a  price  in  excess  of  $104,000,  but  avers  that  he  did 
not  sell  "until  after  the  plaintiff'  had  without  good  cause  or  lawful 
excuse,  himself  violated  his  said  agreement,  and  had  positively  re- 
fused to  take  title  to  the  said  propertv  or  to  pay  the  purchase  price 
therefor." 

The  plaintiff'  bases  his  right  to  recover  back  the  $2,000  on  the  fact 
that,  the  defendant  having  resold  the  property  for  a  sum  in  excess 
of  the  price  agreed  to  be  paid  by  the  plaintiff',  the  defendant  was  not 
injured  by  the  plaintiff''s  breach  of  the  contract  and  must  therefore 
return  the  sum  paid  on  the  purchase  money. 

We  must  deal  with  the  case  on  the  averments  of  fact  in  the  state- 
ment and  affidavit  of  defense.  The  defendant  tendered  the  plaintiff' 
a  deed  which  conveyed  a  good  and  marketable  title  to  the  premises, 
and  in  every  other  respect  he  complied  with  the  terms  of  the  agree- 
ment. Without  any  just  or  legal  excuse  or  cause,  the  plaintiff  refused 
to  accept  the  deed  and  declined  to  pay  the  unpaid  purchase  money. 
In  other  words,  the  plaintiff"  refused  to  complete  the  purchase,  violated 
his  contract,  and  compelled  the  defendant  to  retain  the  property.  This 
action  is  assumpsit  on  an  implied  contract  to  compel  the  repayment  of 
money  had  and  received  by  the  defendant  for  the  plaintiff''s  use. 

When  a  purchaser  of  real  estate  declines  to  comply  with  his  agree- 
ment by  pa5dng  the  purchase  money,  the  vendor  may^  in  affirmance  of 
the  contract,  bring  an  action  to  compel  payment  of  the  money,  or  he 
may  treat  the  contract  as  rescinded  and  sue  for  damages  for  its  breach. 
The  vendor,  however,  is  not  required,  on  the  breach  of  the  contract 
B.&B.Bus.Law— 15 


226  CONTRACTS  (Part  1 

by  the  purchaser,  to  pursue  him  to  enforce  his  rights  by  an  action  at 
law.  What  the  vendor  is  required  to  do,  under  such  circumstances, 
is  to  be  ready  and  wilHng  at  the  stipulated  time  to  perform  his  part 
of  the  contract  and  convey  the  real  estate  to  the  purchaser  in  compli- 
ance with  its  provisions.  So  long  as  he  occupies  such  a  position,  he  is 
not  in  default  and  has  not  infringed  or  rescinded  the  agreement. 

He,  therefore,  is  not  liable  to  a  defaulting  purchaser  who  has  vio- 
lated the  contract  by  declining  to  fulfill  its  stipulations.  "No  rule  in 
respect  to  the  contract  (for  the  sale  of  real  estate)  is  better  settled," 
says  Nelson,  J.,  in  Hansbrough  v.  Peck,  72  U.  S.  (5  Wall.)  497,  506,  18 
h.  Ed.  520,  "than  this,  That  the  party  who  has  advanced  money,  or 
done  an  act  in  part  performance  of  the  agreement,  and  then  stopped 
short  and  refuses  to  proceed  to  its  ultimate  conclusion,  the  other  party 
being  ready  and  willing  to  proceed  and  fulfill  all  his  stipulations  accord- 
ing to  the  contract,  will  not  be  permitted  to  recover  back  what  has 
thus  been  advanced  or  done."     *     *     * 

The  plaintiff  contends  that  the  defendant,  the  vendor,  by  reselling 
the  property  rescinded  the  contract,  and  that  ex  ccqvio  et  bono  he  is 
entitled  to  have  refunded  the  part  of  the  purchase  money  which  was 
paid  on  the  agreement.  It  is  upon  this  ground  that  he  claims  that  an 
action  for  money  had  and  received  will  lie.    *    *     '" 

Could  the  defendant  under  the  circumstances  at  any  time  sell  the 
property  without  being  liable  to  the  plaintiff  for  the  purchase  money 
paid  by  him  ?  Must  he  forever  continue  to  hold  the  property  to  await 
the  offer  and  convenience  of  the  purchaser,  giving  the  latter  an  oppor- 
tunity to  complete  the  purchase  if  the  property  advanced  in  price  or 
refuse  it  if  its  value  diminished,  and  in  the  meantime  subject  the  ven- 
dor to  the  risk  of  a  loss  possibly  imperiling  his  financial  standing? 
The  law  imposes  no  such  unreasonable  requirement  on  a  party  who 
has  in  good  faith  kept  and  offered  to  perform  the  stipulations  of  his 
contract.  He  has  done  his  duty,  and  the  defaulting  party  is  not  in  a 
position  to  make  demands  of  him  which  might  subject  him  to  financial 
losses.  Under  such  circumstances,  the  vendor  has  the  right  to  accept 
as  final  the  positive  refusal  of  the  purchaser  to  complete  the  sale  and 
take  the  property.     *    *  * 

If  the  vendor  still  had  the  property,  the  purchaser  could  not  demand 
a  conveyance  to  him  without  first  tendering  the  balance  of  the  money 
due  by  the  contract.  *  *  *  jg  j^-  reasonable  or  just  that  without  such 
tender,  after  a  positive  refusal  to  pay  and  accept  a  deed  at  the  datp 
provided  in  the  agreement,  the  vendor  should  be  compelled  to  hold 
the  property  or  be  penalized  for  selling  it  at  the  demand  of  the  other 
party  who  himself  has  violated  the  contract?  This  action  is  based  on 
an  implied  contract  to  refund  the  money.  The  implication  must  arise 
from  equitable  considerations.  Such  action  can  be  maintained  if  the 
vendor  rescinds  the  agreement.  He  has  no  right  in  equity  to  refuse 
to  carry  out  his  part  of  the  contract  and  at  the  same  time  require  per- 
formance by  the  other  party  or  retain  what  has  been  paid  him  under 
the  terms  of  the  contract.  If  he  has  received  the  purchase  money, 
equity  will  compel  him  to  refund  if  he  declines  to  convey  the  premises. 
Here,  however,  the  vendor  did  not  rescind  the  agreement  or  refuse  to 
convey  the  property,  but  tendered  a  deed  and  insisted  upon  the  pur- 
chaser accepting  the  title  which  he  has  positively  and  at  all  times  de- 
clined. The  facts  here,  therefore,  do  not  raise  an  equity  in  favor  of 
the  purchaser  which  will  support  an  action. 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  227 

The  cases  decided  by  this  court  and  cited  by  the  appellant  do  not 
conflict  with  the  rule  here  announced.  The  action  in  those  cases  was 
sustained  on  the  ground  that  there  had  been  a  rescission  of  the  con- 
tract by  the  vendor  or  a  mutual  rescission  by  both  parties,  and  that 
under  the  facts  the  purchaser  was  entitled  ex  aequo  et  bono  to  recover, 
back  the  purchase  money.  In  other  jurisdictions,  a  recovery  has  not 
been  permitted  under  facts  similar  to  those  in  this  case.  *  *  *  The 
language  used  in  the  opinion  in  the  last  case  is  especially  applicable 
to  the  facts  of  the  present  case.  It  is  there  said,  inter  alia :  "It  would 
be  an  alarming  doctrine  to  hold  that  the  plaintiffs  might  violate  the 
contract ;  and,  because  they  chose  to  do  so,  make  their  own  infraction 
of  the  agreement  the  basis  of  an  action  for  money  had  and  received. 
Every  man  who  makes  a  bad  bargain,  and  has  advanced  money  upon 
it,  would  have  the  same  right  to  recover  it  back  that  the  plaintiffs  have. 
The  defendant's  subsequent  sale  of  the  land  does  not  alter  the  case; 
the  plaintiffs  had  not  only  abandoned  the  possession,  but  expressly 
refused  to  proceed,  and  renounced  the  contract.  To  say  that  the  sub- 
sequent sale  of  the  land  gives  a  right  to  the  plaintiffs  to  recover  back 
the  money  paid  on  the  contract  would,  in  effect,  be  saying  that  the 
defendant  could  never  sell  it  without  subjecting  himself  to  an  action 
by  the  plaintiffs.  Why  should  he  not  sell  ?  The  plaintiffs  renounced 
the  contract,  and  peremptorily  refused  to  fulfill  it;  it  was  in  vain, 
therefore,  to  keep  the  land  for  them.  The  plaintiff's  cannot,  by  their 
own  wrongful  act,  impose  upon  the  defendant  the  necessity  of  retain- 
ing property  which  his  exigencies  may  require  him  to  sell.  This  would 
be  most  unreasonable  and  unjust,  and  is  not  sanctioned  by  any  prin- 
ciple of  law." 

The  order  discharging  the  rule  for  judgment  is  affirmed. 


SECTION  15.— IMPOSSIBILITY  OF  PERFORMANCE 
AS   A   CONDITION 

A.  agrees  to  work  for  B.  for  a  year,  but  his  work  is  interrupted  by 
a  six  months'  jail  sentence.  Is  A.  liable?  A.  contracts  with  B.  to 
run  one  hundred  yards  in  eight  seconds.  A.  fails ;  is  he  liable  to 
B.?  A.  purchases  a  ticket  for  a  baseball  game.  The  game  is 
called  on  account  of  rain  in  the  first  inning.  IMay  A.  recover  the 
price  of  his  ticket?  May  A.  hold  the  owners  of  the  baseball  clubs 
liable  for  breach  of  contract?  A  singer  is  taken  seriously  ill  and 
cancels  his  engagements.  Is  he  liable?  A.  contracts  to  manu- 
facture an  artillery  piece  that  will  fire  a  distance  of  two  hundred 
miles.  May  he  be  held  liable  for  nonperformance?  A.  has  been 
out  of  work  for  many  weeks  on  account  of  illness.  He  fails  to 
pay  his  grocer,  because  he  has  no  money.    Is  he  liable? 

Some  of  these  questions  are  not  altogether  easy  of  solution.  It 
will  be  noticed  that  the  element  of  impossibility  may  be  injected 
into  the  situation  from  various  angles.  The  act  or  event  which 
renders  the  fulfillment  of  the  Gondition  impossible  or  which  makes 
the  performance  of  the  promise  impossible  is  not  always  of  the 
same  kind.  They  have  dift'erent  origins.  All  of  the  cases  mentioned 
may  have  substantially  the  same  physical  and  economic  effects,  but 


228  coxTRACTS  (Part  1 

should  the  legal  effect  always  be  the  same?  Would  it  be  a  just 
rule  of  law  to  excuse  every  breach  of  contract  if  the  party  in 
default  proves  that,  for  any  reason  whatsoever,  physical,  economic 
or  otherwise,  he  could  not  perform?  Obviously  not,  because  this 
would  include  the  unreasonable  proposition  that  supervening  in- 
solvency would  always  discharge  a  debt.  On  the  other  hand,  if  a 
person  who  has  contracted  to  perform  personal  services,  by  reason 
of  impossibility  brought  about  by  physical  incapacity,  fails  to 
perform  his  contract,  justice  would  seem  to  require  tliat  the  em- 
ployee should  be  relieved  of  liability. 

It  is  clear,  therefore,  that  impossibility  of  performance  sometimes 
will  be  a  defense,  and  also  that  the  impossibility  of  the  fulfillment 
of  certain  conditions  will  destroy  a  duty  to  perform  a  possible  act, 
or  will  create  a  new  right  to  recover  what  was  parted  with.  The 
difficulty  arises  in  the  attempt  to  discover  the  real  reasons  for  dis- 
charging a  contract  on  account  of  impossibility — for  impossibility 
alone  will  not  have  this  effect.  Only  that  kind  of  impossibility 
which  arises  in  certain  ways  will  so  operate.  The  following  cases 
concern  themselves  with  this  problem. 

Before  going  to  the  cases,  it  may  be  well  to  examine  the  general 
situation  under  discussion,  with  a  view  to  relating  it  to  the  sub- 
ject-matter of  the  preceding  sections.  That  is,  may  we  make  use 
of  the  terminology  relating  to  conditions?  It  may  be  said  that  the 
continued  absence  of  the  physical  facts  constituting  the  impossi- 
bility is  a  condition  precedent  to  the  duty  of  performance,  or,  to  em- 
ploy an  affirmative,  instead  of  a  negative  statement,  the  occurrence 
of  the  physical  facts  which  introduce  the  element  of  impossibility 
operate  as  a  condition  subsequent  to  an  existing  duty  and  thereby 
destroy  it.  The  condition,  whether  regarded  as  precedent  or  sub- 
sequent, perhaps  should  be  regarded  as  implied  in  law  rather  than 
as  a  condition  implied  in  fact.  It  is  possible,  of  course,  to  say  that 
the  condition  is  implied  in  fact,  that  is,  based  upon  the  intention 
of  the  parties.  But,  inasmuch  as,  in  a  great  many  cases,  perhaps 
a  majority  of  them,  the  situation  which  did  develop,  rendering  per- 
formance impossible,  never  entered  the  minds  of  the  parties,  it 
would  seem  more  logical  to  say  that  the  law  deems  the  condition 
present  as  a  means  of  eft'ecting  justice  between  the  parties. 

There  is  this  important  distinction  between  the  operation  of  this 
kind  of  condition  and  the  effect  of  the  conditions  discussed  in  the 
preceding  sections :  When  material  promises  are  rendered  impos- 
sible of  performance,  or  wdien  material  conditions  are  rendered  im- 
possible of  occurrence,  there  is  not  only  an  excuse  for  nonperform- 
ance ;  but  the  contract  will  be  entirely  discharged,  leaving  no 
causes  of  action  upon  the  contract.  If  the  impossibility  affected 
only  the  performance  of  independent  covenants  the  contract  of 
which  it  was  a  part  would  not  be  discharged.  Even  where  the  en- 
tire contract  is  discharged  there  may  be,  of  course,  a  recovery  for 
that  which  has  been  parted  with  in  reliance  upon  a  performance 
which  becomes  impossible ;    but  such  recovery  is  upon  the  quasi 


Ch.  P>)         ■  PERFORMANCE  OF  CONTRACTS  229 

contractual  obligation  to  prevent  the  defendant's  unjust  enrich- 
ment. The  weight  of  authority  permits  such  a  recovery  for  money 
or  property  or  services  so  rendered;  but  some  courts,  in  certain' 
kinds  of  cases,  deny  the  right  to  recover.  The  problem  is  closely 
analogous  to  that  heretofore  discussed  dealing  with  the  right  of 
a  plaintiff  in  material  default  under  an  express  contract,  to  recover 
for  work  done  or  materials  furnished.  Little,  if  any,  distinction 
need  be  drawn  between  cases  where  the  impossibility  existed  at 
the  time*  the  contract  was  made — so  long  as  both  parties  did  not 
know  of  it — and  where  the  impossibility  arose  subsequent  to  the 
making  of  the  contract.  Where  the  parties,  at  the  time  they  en- 
tered into  the  contract,  were  aware  of  the  facts  constituting  the 
existing  impossibility,  the  courts  will  sometimes  be  justified  in 
holding  that  the  agreement  was  so  obviously  impossible  that  the 
parties  had  no  contractual  intent.  This  would  doubtless  be  true  of 
an  agreement  whereby  one  of  the  parties  undertook  to  shoot  a  can- 
non ball  to  the  moon  or  to  run  one  hundred  yards  in  eight  seconds. 
In  other  cases,  even  with  knowledge  of  the  facts  constituting  the 
impossibility,  the  count  may  find  such  a  degree  of  uncertainty  re- 
lating to  the  consequences  of  the  facts  which  would  call  for  the 
application  of  the  same  rules  which  govern  subsequent  impossi- 
bility.   

ANDETcSON  v.  MAY  et  al. 

(Supreme  Court  of  Minnesota,  1892.     50  Minn.  2S0.  52  N.  W.  530.  17  L.  R.  A. 
555,  36  Am.  St.  Rep.  642.) 

Action  by  G.  W.  Anderson  against  L.  L.  May  &  Co.  on  a  certain 
contract.     Fron  a  judgment  for  plaintiff,  defendant  appeals. 

GiLFiLLAN,  C.  J.  The  defendant  having  alleged  as  a  counterclaim 
a  contract  in  June,  1890,  between  him  and  plaintiff,  whereby  the  lat- 
ter agreed  to  sell  and  deliver  to  the  former,  on  or  before  November 
15th,  certain  quantities  of  specified  kinds  of  beans,  and  that  he  failed 
so  to  do  except  as  to  a  part  thereof,  the  plaintiff,  in  his  reply,  alleged 
in  substance  that  the  contract  was  to  deliver  the  beans  from  the  crop 
that  he  should  raise  that  year  from  his  market  gardening  farm  near 
Red  Wing.  Upon  the  trial  the  contract  was  proved  by  letters  passing 
between  the.  parties.  From  thes?  it  fairly  appears  that  the  beans  to  be 
delivered  were  to  be  grown  by  plaintiff',  though  it  cannot  be  gathered 
from  them  that  he  was  to  grow  the  beans  on  any  particular  land.  They 
contain  no  restriction  in  that  respect.  There  can  be  no  question  that, 
if  grown  by  him,  and  of  the  kinds  and  quality  specified,  defendant 
would  have  been  obliged  to  accept  the  beans,  though  not  grown  on  any 
land  previously  cutivated  by  plaintiff.  The  contract,  therefore,  was, 
in  effect,  to  raise  and  sell  and  deliver  the  quantities,  kinds,  and  quality 
of  beans  specified — a  contract  in  its  nature  possible  of  performance. 
As  an  excuse  for  not  delivering  the  entire  quantity  contracted  for,  the 
plaintiff  relies  on  proof  of  the  fact  that  an  early  unexpected  frost  de- 
stroyed or  injured  his  crop  to  such  extent  that  he  was  unable  to  de- 
liver the  entire  quantity.  What,  in  the  way  of  subsequently  arising 
impossibility  for  the  party  to  perform,  will  stiffice  as  excuse  for  non- 
performance of  a  contract,  is  well  settled  in  the  decisions;    the  only 


230  CONTRACTS  (Part  1 

apparent  difference  in  them  arising  from  the  apphcation  of  the  rules  to 
particular  circumstances.  The  general  rule  is  as  well  stated  as  any- 
where in  2  Chit.  Cont.  1074,  thus :  "Where  the  contract  is  to  do  a  thing 
which  is  possible  in  itself,  or  where  it  is  conditioned  on  any  event  which 
happens,  the  promisor  will  be  liable  for  a  breach  thereof,  notwithstand- 
ing it  was  beyond  his  power  to  perform  it ;  for  it  was  his  own  fault  to 
run  the  risk  of  undertaking  to  perform  an  impossibility,  when  he  might 
have  provided  against  it  by  his  contract.  And  therefore,  in  such  cases, 
the  performance  is  not  excused  by  the  occurrence  of  an  inevitable  ac- 
cident, or  other  contingency,  although  it  was  not  foreseen  by,  or  within 
the  control  of,  the  party." 

An  application  of  this  rule  is  furnished  by  Cowley  v.  Davidson,  13 
Minn.  92  (Gil.  86).  What  is  sometimes  called  an  "exception  to  the 
rule"  is  where  the  contract  is  implied  to  be  made  on  the  assumed  con- 
tinued existence  of  a  particular  person  or  thing,  and  the  person  or 
thing  ceases  to  exist,  as,  where  it  is  for  personal  service,  and  the  per- 
son dies,  or  it  is  for  repairs  upon  a  particular  ship  or  building,  and  the 
ship  or  building  is  destroyed.  An  agreement  to  sell  and  deliver  at  a  fu- 
ture time  a  specific  chattel  existing  when  the  agreement  is  made  would 
come  under  this  exception.  The  exception  was  extended  further  than 
in  any  other  case  we  have  found  in  Howell  v,  Coupland,  L.  R.  9  O. 
B.  462.  That  was  a  contract  to  sell  and  deliver  a  certain  quantity  from 
a  crop  to  be  raised  on  a  particular  piece  of  land,  and  the  entire  crop  was 
destroyed  by  blight.  The  court  held  the  contract  to  be  to  deliver  part 
of  a  specific  thing,  to-wit,  of  the  crop  to  be  grown  on  a  given  piece  of 
land,  and  held  it  to  come  within  the  rule  that,  where  the  obligation  de- 
pends on  the  assumed  existence  of  a  specific  thing,  performance  is  ex- 
cused by  the  destruction  of  the  thing  without  the  parties'  fault  With- 
out intimating  whether  we  would  follow  that  decision  in  a  similar  case, 
we  will  say  that  the  case  is  unlike  this,  in  that  in  this  case  the  plaintiff 
was  not  limited  or  restricted  to  any  particular  land.  It  was  not  an 
undertaking  to  sell  and  deliver  part  of  a  specific  crop,  but  a  general 
undertaking  to  raise,  sell,  and  deliver  the  specified  quantity  of  beans. 
We  have  been  cited  to  and  found  no  case  holding  that,  where  one 
agrees  generally  to  produce,  by  manufacture  or  otherwise,  a  particu- 
lar thing,  performance  being  possible  in  the  nature  of  things,  he 
may  be  excused  from  performance  by  the  destruction,  before  com- 
pletion or  delivery,  of  the  thing,  from  whatever  cause,  except  the  act 
of  the  other  party.  *  "^^  ^'^  Where  such  causes  may  intervene  to 
prevent  a  party  performing,  he  should  guard  against  them  in  his  con- 
tract. 

Order  reversed. 


PIAGGTO  V.  SOMERVILLE. 
("Supreme  Court  of  Mississippi,  1919.     119  Miss.  6,  80  South.  .'?42.) 

Action  by  J.  W.  Somerville  against  Henry  Piaggio.  Judgment  for 
plaintiff,  and  defendant  appeals. 

Smith,  C.  J.  This  is  an  action  in  assumpsit  in  which  the  appellee 
was  the  plaintiff  and  the  appellant  was  the  defendant  in  the  court 
below,  and  they  will  be  hereinafter  so  designated. 

The  declaration  in  substance  alleges  that  a  charter  party  was  en- 
tered into  between  the  owners  of  the  American  schooner  Henry  S. 
Little  and  the  W.  A.   Powell  Transport  Company,  by  the  terms  of 


Ch.  3)  PERFORMANCE    OP   CONTRACTS  231 

which  the  vessel  was  to  transport  a  cargo  of  lumber  from  the  Gulf 
of  Mexico  to  a  port  on  the  west  coast  of  the  United  Kingdom,  London, 
Lisbon,  or  the  west  coast  of  Italy ;  the  W.  A.  Powell  Transport  Com- 
pany, or  its  assigns,  having  the  right  to  designate  the  port  of  loading 
and  of  destination;  that  this  charter  party  was  assigned  by  the  W. 
A.  Powell  Transport  Company  to  Hunter  Benn  &  Co.,  who  assigned  it 
to  the  plaintiff;  that  on  the  27th  day  of  February,  1917,  the  plaintiff 
assigned  this  charter  party  to  the  defendant.    *     *     * 

The  declaration  further  alleges  that  the  owners  of  the  vessel  de- 
clined to  permit  it  to  sail  to  any  of  the  ports  designated  in  the  charter 
party  because  of  the  increased  perils  of  the  sea  due  to  the  unrestricted 
submarine  warfare  then  being  conducted  by  Germany  in  disregard  of 
the  rights  of  neutrals,  and  in  lieu  thereof  paid  to  the  defendant  the 
sum  of  $7,500  in  full  settlement  of  all  claims  he  might  have  against 
them  under  the  charter  party,  and  prayed  for  a  judgment  against  the 

defendant  in  the  sum  of  $1,500,  together  with  interest  thereon,  etc. 
*    *    * 

The  contention  of  the  defendant  is  that  the  clearance  of  the 
schooner  Henry  S.  Little  at  Mobile  under  the  charter  party  is  a  con- 
dition precedent  to  any  obligation  on  his  part  to  pay  the  plaintiff  the 
money  sued  for,  to  which  the  plaintiff  replies  that  the  performance  of 
this  condition,  if  such  it  is,  was  waived  by  the  defendant  when  he  ac- 
cepted the  $7,500,  from  the  owners  of  the  vessel,  and  released  them 
from  further  liability  to  him  under  the  charter  party,  to  which  defend- 
ant rejoins  that  his  acceptance  of  the  money  and  release  of  the  owners 
of  the  vessel  from  further  liability  under  the  charter  party  cannot  be 
construed  to  be  a  waiver  of  the  condition  precedent  for  the  reason  that 
he  could  not  have  enforced  its  performance  had  he  tried  to  do  so;  the 
owners  of  the  vessel  having  been  released  from  the  obligation  of  the 
charter  party  because  of  the  danger  of  being  sunk  by  a  German  sub- 
marine to  which  the  vessel  would  have  been  subjected  had  it  attempted 
to  make  the  voyage. 

The  charter  party  contains  no  such  qualification  of  the  obligation. 
Consequently  the  owners  of  the  vessel  were  bound  to  transport  the 
cargo  of  lumber  as  provided  therein,  notwithstanding,  the  risk  to  the 
vessel  of  being  sunk  by  a  submarine,  or  pay  damages  for  their  failure 
so  to  do,  for  the  rule  is  that  when  a  party  by  his  own  coptract  creates 
a  duty  or  charge  upon  himself  he  is  bound  to  discharge  it,  although  so 
to  do  should  subsequently  become  unexpectedly  burdensome  or  even 
impossible;  the  answer  to  the  objection  of  hardship  in  all  such  cases 
being  that  it  might  have  been  guarded  against  by  a  proper  stipulation. 

There  are,  however,  certain  classes  of  events  the  occurring  of  which 
are  said  to  excuse  from  performance  because  "they  are  not  within  the 
contract,"  for  the  reason  that  it  cannot  reasonably  be  supposed  that 
either  party  would  have  so  intended  had  they  contemplated  their  oc- 
currence when  the  contract  was  entered  into,  so  that  the  promisor  can- 
not be  said  to  have  accepted  specifically  nor  promised  unconditionally 
in  respect  to  them.  *  *  *  These  three  classes  are :  First,  a  subse- 
quent change  in  the  law,  whereby  performance  becomes  unlawful. 
*  *  *  Second,  the  destruction,  from  no  default  of  either  party,  of 
the  specific  thing,  the  continued  existence  of  which  is  essential  to  the 
performance  of  the  contract.    *    *    *    And,  third,  the  death  or  inca- 


232  CONTRACTS  (Part  1 

pacitating  illness  of  the  promisor  in  a  contract  which  has  for  its  object 
the  rendering  by  him  of  personal  services.     *    *     * 

The  case  at  bar  cannot  be  referred  to  any  of  these  classes,  and,  in 
order  for  it  to  be  brought  within  the  exception  to  the  rule  of  absolute 
liability,  it  will  be  necessary  for  us  to  add  thereto  a  fourth  class,  to  wit, 
a  subsequent  foreign  war  or  a  subsequent  change  by  one  or  more  of 
the  belligerents  in  the  method  of  waging  such  a  war  which  renders  per- 
formance more  burdensome  to  the  promisor  than  when  the  contract 
was  entered  into,  but  so  to  do  would  be  without  the  reason  of  the  ex- 
ception and  contrary  to  the  authorities.     *     *    * 

There  are  a  few  cases  which  cannot  be  referred  to  any  of  the  three 
foregoing  classes,  such  as  Kinzer  Construction  Co.  v.  State  (N.  Y.  Ct. 
CI.)  125  N.  Y.  Supp.  46,  and  the  Kronprinzessin  Cecilie,  244  U.  S. 
12.  Z7  Sup.  Ct.  490,  61  L.  Ed.  960,  which  last-mentioned  case  is  errone- 
ously supposed  by  counsel  for  the  defendant  to  sustain  his  contention. 
In  that  case  a  German-owned  vessel  sailed  from  New  York  to  Bremer- 
haven  via  Plymouth,  England,  and  Cherbourg,  France,  on  the  eve  of 
the  outbreak  of  the  recent  war,  having  on  board,  among  other  articles, 
a  number  of  kegs  of  gold  consigned  to  Plymouth  and  Cherbourg.  In 
order  to  escape  capture  by  the  French  or  English,  it  turned  back  before 
reaching  either  of  the  last-named  ports  and  returned  the  gold  to  the 
shippers,  who  instituted  libels  against  it  to  recover  the  damages  alleged 
to  have  been  sustained  by  them  because  of  its  failure  to  deliver  the 
gold.  The  probabilities  of  the  vessel's  capture,  had  it  continued  its 
voyage  to  either  the  French  or  the  English  port,  were  so  great  that 
the  court  held  that  it  was  justified  in  turning  back,  and  that  its  owners 
were  thereby  excused  from  performing  their  contract  to  transport  and 
deliver  the  gold,  for  the  reason  that  the  capture  of  the  vessel  was  a 
risk  "which,  if  it  had  been  dealt  with  (when  the  contract  of  shipment 
was  made),  it  cannot  be  believed  that  the  contractee  would  have  de- 
manded or  the  contractor  would  have  assumed."  No  such  reason  can 
be  assigned  here  for  the  exclusion  from  the  contract  of  the  risk  which 
the  Henry  S.  Little  would  run  by  making  the  voyage  to  Italy  demanded 
by  the  defendant  when  we  remember  that  commerce  was  not  suspended 
because  of  Germany's  unrestricted  submarine  warfare ;  but,  on  the 
contrary,  vessels  owned  by  citizens  of  both  neutral  and  belligerent  coun- 
tries sailed  continuously  in  the  waters  in  which  that  warfare  was  being 
waged.    *    *    * 

It  follows  from  the  foregoing  views  that  the  judgment  rendered  in 
the  lower  court  is  correct,  even  should  it  be  conceded,  which  counsel 
for  the  plaintifif  do  not,  that  the  clearance  of  the  Henry  S.  Little  at 
the  port  of  Mobile  under  the  charter  party  is  a  condition  precedent  to 
liability  on  the  part  of  the  defendant,  that  condition,  if  such  it  is,  hav- 
ing been  waived  by  the  release  by  the  defendant  of  the  vessel's  obliga- 
tion to  make  the  voyage ;  but  we  are  of  the  opinion  that  the  clearance 
of  the  vessel  is  not  a  condition  precedent  to  liability,  but  is  simply  the 
time  fixed  for  the  payment  of  the  money  sued  for,  and  consequently 
that  the  failure  of  the  vessel  to  clear  at  the  port  under  the  charter  party, 
for  whatever  reason,  is  immaterial,  for  the  consideration  of  the  de- 
fendant's promise  to  pay  was  the  assignment  to  him  of  the  charter 
party  so  that  it  constituted  a  present  liability  on  his  part,  payment  sim- 
ply being  postponed  until  the  clearance  of  the  vessel  at  Mobile,  and, 
since  that  event  did  not  happen,  payment  became  due  within  a  rea- 
sonable time.    *    *    * 

Affirmed. 


Ch.  3)  PERFORMANCE    OF    CONTRACTS  233 


MOORE    &    TIERNEY,    INC.,    v.    ROXFORD    KNITTING    CO. 

(United  State.s  District  Court.  Northern  District  of  New  Yorlv,  1918. 

250  Fed.  278.) 

Ray,  District  Judge.  At  the  time  war  was  declared  between  the 
United  States  of  America  and  the  Imperial  Government  of  Germany 
the  plaintiff,  engaged  in  manufacturing 'knit  underwear,  had  a  valid 
contract  or  contracts  with  the  defendant,  by  the  terms  of  which  it  was 
obligated  to  make  and  deliver  to  defendant  certain  qualities  of  woolen 
knit  undershirts  and  drawers  at  agreed  prices  and  at  or  within  speci- 
fied times.  These  contracts  came  into  existence  by  way  of  accepted 
orders,  which  were  subject  to  delays  or  nondelivery  by  strikes,  acci- 
dents, or  for  any  reason  beyond  the  control  of  plaintiff.  It  was  then 
engaged  in  the  performance  of  such  contracts,  and  intended  in  good 
faith  to  perform,  but  was  prevented  by  the  performance  of  certain 
government  orders.  The  plaintiff  is  one  of  several  manufacturers  of 
such  goods  located  at  Cohoes,  N.  Y.  Deliveries  aggregating  $14,090.08 
were  made  and  not  paid  for,  and  considerable  quantities  were  not  de- 
livered. Defendant  alleges  $20,000  damages  for  nonperformance  or 
alleged  breach  of  contract. 

May  22,  1917,  one  A.  Fre3%  who  was  a  member  of  a  committee  of 
the  Advisory  Board  of  National  Defense,  wrote  each  of  these  manu- 
facturers at  Cohoes,  N.  Y.,  including  the  plaintiff,  informing  them  that 
the  United  States  government  was  in  need  of  and  desirous  of  obtaining 
knit  undershirts  and  drawers,  inquiring  as  to  the  capacity  of  the  mills 
of  the  manufacturers  and  the  Cjuantities  they  could  furnish.     *     *     =i= 

July  2,  1917,  Mr.  Cromwell,  signing  as  chairman,  etc.,  wrote  the 
plaintiff  and  the  other  manufacturers  of  knit  goods  mentioned  as  to  the 
urgent  wants  and  needs  of  the  United  States  ISTavy  Department  fof 
knit  undershirts  and  drawers,  and  amongst  other  things  wrote : 

"The  Knit  Goods  Committee  (of  the  Council  of  National  Defense) 
has  received  an  emergency  call  for  the  Navy  Department,"  etc. ;  and 
also,  "It  is  absolutely  necessary  that  this  underwear  should  be  ob- 
tained;" and  also,  "This  underwear  can  be  made  by  only  a  limited 
number  of  mills  in  the  country.  We  have  carefully  apportioned  it 
among  the  different  mills,  and  know  that  we  cannot  secure  the  quantity 
needed  unless  we  can  receive  from  you  25,000  shirts  and  25.000  drawers 

by  October  1st  and  the  same  quantity  additional  by  December  1st.'* 
*    *     * 

To  fill  this  order  or  contract  with  the  Navy  Department,  and  also 
the  orders  or  contracts  with  the  War  Department,  demanded  and  re- 
quired the  total  capacity  and  output  of  the  plaintiff's  mill  while  filling 
same,  and  plaintiff"  was  unable,  if  it  filled  the  government  orders  or 
contracts,  to  make  further  deliveries  to  defendant  under  its  contract 
with  it  at  the  times  agreed,  and  defendant  was  so  advised,  whereupon 
it  in  substance  and  effect  canceled  the  contract,  refused  to  pay  for  the 
goods  delivered,  and  claims  damages  for  nonperformance.  Two  other 
contracts  or  orders  were  placed  with  the  plaintiff  by  the  government, 
one  November  16,  and  one  December  12,  1917,  and  from  the  acts  of 
the  parties  and  the  correspondence  it  cannot  be  doubted  that  it  Was 
understood  the  plaintiff  in  accepting  the  work,  was  acting  under  the 
orders  and  demands  of  the  government.  The  plaintiff  does  not  con- 
tend that  these  government  requirements  released  it  from  the  contract 
with  defendant  and  obligation  to  perform  it,  except  in  so  far  as  it  post- 


234  CONTRACTS  (Part  1 

poned  performance  on  its  part  and  gave  preference  to  this  government 
work.  The  defendant  claims  these  were  not  orders  under  or  within 
the  meaning  of  the  acts  of  Congress  referred  to,  and  that  it  was  justi- 
fied in  acting  as  it  did,  and  may  counterclaim  its  damages. 

If  before  or  after  war  was  declared  a  party,  A.,  entered  into  a  con- 
tract with  another  party,  B.,  to  make  and  deliver  to  him  the  goods, 
wares,  and  merchandise,  stores  and  supplies  such  as  the  government 
requires  for  army  and  navy  use,  or  both,  and  after  the  passage  of  the 
acts  of  Congress — Public  No.  85,  64th  Congress,  approved  June  3, 
1916,  "An  act  for  making  further  and  more  effectual  provision  for  the 
national  defense,  and  for  other  purposes,"  and  Public  No.  391,  64th 
Congress,  approved  March  4,  1917,  "An  act  making  appropriation  for 
the  naval  service  for  the  fiscal  year  ending  June  30th,  1918,  and  other 
purposes" — the  United  States  government,  being  at  war,  came  in  and 
ordered  or  directed  such  party,  A.,  to  make  goods,  wares,  and  merchan- 
dise of  the  nature  and  kind  referred  to  for  it,  and  compliance  with  such 
order  and  requirement  of  the  government  demanded  or  required  the 
entire  output  of  the  factory  of  such  party  thereafter,  all  it  could  reason- 
ably produce,  it  was  the  duty  of  such  party  to  comply  with  such  gov- 
ernment order  or  requirement,  and  if  compliance  therewith  made  it  im- 
possible for  such  party  to  fill  or  comply  with  or  perform  its  contract 
with  such  other  party,  B.,  according  to  its  terms  and  within  the  time 
specified,  and  such  other  party,  on  being  notified  of  the  inability  to  so 
perform,  declared  the  contract  ended,  he  cannot  recover  damages  for 
nonperformance  by  A.  The  same  rule  applies  in  case  of  a  contract 
made  after  the  enactment  of  such  statutes ;   a  state  of  war  existing. 

In  such  case  or  cases  it  is  clear  that,  under  the  provision  of  the  acts 
of  Congress  referred  to,  performance  by  A.  within  the  time  required 
by  the  contract  was  made  impossible  by  the  act  and  requirement  of  the 
United  States  government.  But  if  party  A.,  thinking  it  more  profitable 
or  patriotic  to  work  for  the  government  than  in  the  performance  of  its 
existing  contract  with  B.,  voluntarily  sought  a  contract  with  the  gov- 
ernment and  ofl^ered  its  service  for  compensation  in  the  manufacture  of 
such  goods  as  the  government  required,  and  voluntarily  entered  into 
such  a  contract  sought  by  it  with  the  United  States,  the  performance 
of  which  demanded  and  required  its  entire  output,  all  it  reasonably 
could  produce,  and  party  A.  thereupon  voluntarily  declined  or  refused 
to  proceed  further  in  the  performance  of  hi^  contract  with  party  B., 
he  is  not  excused,  and  party  B.  may  recover  or  oflrset  and  counterclaim 
his  damages,  if  any.  In  such  case  performance  by  A.  is  not  prevented 
by  the  act  of  God,  or  vis  major.  Nonperformance  is  the  result  of  his 
voluntar)^  act  or  acts,  not  that  of  the  government,  and  he  acts  under  no 
compulsion  whatever. 

But  section  120  of  the  National  Defense  Act,  referred  to,  authorizes 
the  President,  through  the  head  of  any  department,  in  addition  to  the 
present  authorized  methods  of  purchase  or  procurement,  the  methods 
before  in  use,  to  "place  an  order"  with  any  individual,  firm,  associa- 
tion, company,  corporation,  or  organized  manufacturing  industry  for 
such  product  or  material  as  may  be  required,  and  which  is  of  the  nature 
or  kind  usually  produced  or  capable  of  being  produced  by  such  indi- 
vidual, firm,  or  corporation,  and  then  further  provides  that,  when  such 
an  order  is  placed,  "compliance  with  all  such  orders  for  products  or 
material  shall  be  obligatory,"  and  "shall  take  precedence  over  all  other 
orders  and  contracts  theretofore  placed  with  such  individual,  firm,  or 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  235 

corporation."  Refusal  to  comply  is  made  a  crime,  and  severe  punish- 
ments may  be  inflicted,  etc.    *    *    * 

The  correspondence  in  evidence  and  the  testimony  of  Paymaster 
Hancock  shows  that  the  plaintiff  and  the  other  manufacturers  referred 
to  were  acting  with  and  pursuant  to  the  direction  of  these  committees 
or  councils  appointed  by  the  United  States  authorities  and  those  of  Mr. 
Cromwell,  also  acting  for  the  Paymaster  of  the  Navy.    *    *    * 

I  do  not  doubt  that  Congress  had  power  to  place  these  burdens  on 
the  manufacturers,  and  on  those  with  whom  they  had  contracted  or 
with  whom  they  should  contract.  The  war  power  is  paramount,  arises 
from  necessity,  and  no  government  can  endure  without  its  exercise  on 


occasion. 


*     * 


The  parties  may  come  before  me  at  some  convenient  time  to  settle 
findings  of  fact,  and  at  such  time  the  defendant  can  offer  proof  of  its 
alleged  damages,  when  I  will  rule  on  the  question  whether  proof  there- 
of should  be  taken.  If  proof  thereof  is  now  taken,  and  a  finding  made 
as  to  the  amount  thereof  in  case  the  Circuit  Court  of  Appeals,  on  ap- 
peal, should  reverse,  and  hold  the  defendant  entitled  to  counterclaim 
and  offset  its  damages,  and  have  an  affirmative  judgment  in  case  such 
damages  exceed  the  sum  plaintiff  is  entitled  to  recover  for  goods  de-' 
livered  and  not  paid  for,  a  final  judgment  could  be  pronounced,  with- 
out the  expense  and  delay  of  a  retrial.  The  further  proceedings  in 
this  court  can  be  determined  on  a  settlement  of  findings.     *    *    * 


CARNEGIE   STEP:L  00.  v.  UNITED  STATES. 

(Supreme   Court   of   the   United    States,    1916.      240   U.    S.    156, 
3G   Sup.  Ct.  342,  60  L.   Ed.  576.) 

McKenna,  J.  Petition  in  the  Court  of  Claims  for  the  recovery  of 
$8,595.35,  alleged  to  be  due  claimant  as  a  balance  of  the  price  of  armor 
plate  furnished  the  government  under  a  contract  between  it  and  claim- 
ant. 

The  contract  is  an  elaborate  one  and  by  it  claimant  engaged  to  manu- 
facture for  the  Ordnance  Department  armor  plates  of  a  certain  desig- 
nated tliickness  in  conformity  with  instructions,  specifications  and 
drawings  attached  to  and  made  a  part  of  the  contract.  And  claimant 
agreed  to  provide  certain  of  the  18-inch  plates  for  the  purpose  of  the 
ballistic  test  prescribed  by  the  specifications,  and  that  such  plates  when 
subjected  to  the  ballistic  test  should  fulfill  certain  requirements  set 
forth  in  the  specifications.     *     *     * 

It  is  alleged  that  claimant  encountered  difficulties  which  were  un- 
foreseen by  both  parties  when  the  contract  was  made,  and  were  then 
unforeseeable,  and  in  consequence  thereof  the  delivery  of  the  armor 
and  pertaining  material  was  delayed  unavoidably. 

That  prior  to  the  manufacture  of  the  armor  no  face-hardened  armor 
18  inches  in  thickness  had  been  manufactured  in  this  or  any  foreign 
country  and  no  information  with  respect  to  the  process  or  processes 
to  be  employed  in  its  manufacture  was  obtainable. 

That  for  the  purpose  of  learning  what  manner  of  treatment  or  face- 
hardening  process  should  be  applied  to  the  18-inch  plate,  and  in  order 
that  they  might  attain  the  highest  degree  of  efiiciency  possible  and 
meet  all  the  requirements  of  the  specifications,  claimant  completed  one 
of  the  plates,  applying  to  it  a  treatment  or  face-hardening  process  de- 
duced from  the  formula  which  claimant  and  every  other  manufacturer 


236  CONTRACTS  (Part  1 

of  armor  plate  in  this  and  every  foreign  country  had  followed  in  the 
manufacture  of  armor  plate  and  which  was  recognized  by  authorities 
on  the  subject  as  the  one  which  would  give  the  best  results. 

That  upon  its  completion  the  plate  was,  on  April  19,  1911,  subjected 
to  the  ballistic  test  and  it  met  the  requirements  of  the  specifications. 
Thereupon  claimant  proceeded  to  complete  all  of  the  plates,  certain 
of  which  were  selected  for  the  purpose  of  the  ballistic  test  and  failed 
to  fulfill  the  requirements  of  the  specifications.  Other  plates  were  se- 
lected and  failed.  Thereupon  claimant,  with  all  due  diligence  and 
dispatch,  made  or  caused  to  be  made  by  metallurgical  experts  exhaus- 
tive tests  and  experiments  and  it  was  ascertained  that  in  order  to  pass 
the  test  required  by  the  Ordnance  Department  the  plates  must  possess 
certain  metallurgical  qualities  or  conditions  which,  up  to  that  time, 
were  unknown  to  any  one  and  the  necessity  for  which  was  not  foresee- 
able when  the  contract  was  made.  In  conducting  the  test  it  was  neces- 
sary to  use  plates  of  full  size  and  the  tests  were  conducted  with  all  due 
diligence  and  dispatch.  From  the  plates  thus  tested  the  Ordnance  De- 
partment selected  a  third  plate  which  was  tested  January  19  and  24, 
1912,  and  was  found  to  fulfill  the  requirements  of  the  specifications. 
Claimant  in  due  course  finished  all  of  the  plates  which  tlie  contract 
called  for  and  they  were  approved  and  delivered  as  in  the  manner 
prescribed. 

It  is  alleged  that  by  reason  of  the  circumstances  detailed  there  were 
delays  in  the  delivery  of  the  plates  and  that  the  delays  were  due  to 
causes  which  were  unavoidable  within  the  meaning  of  the  contract. 

On  account  of  the  delays,  however,  the  Ordnance  Department  pro- 
posed to  deduct  from  the  contract  price  of  the  armor  and  pertaining 
material  the  sum  of  $8,595.15  as  liquidated  damages  on  account  of  a 
portion  of  the  delay.  Claimant  made  protest,  asserting  that  the  de- 
lays were  due  to  causes  provided  for  in  articles  4  and  8  of  the  contract. 

By  article  4  it  was  provided  that  in  case  of  failure  of  claimant  to 
deliver  any  or  all  of  the  armor  contracted  for  there  would  be  deducted 
from  any  payment  to  be  made  to  claimant  1/30  of  1%  of  the  contract 
price  of  all  of  the  armor  remaining  undelivered  for  each  and  every  day 
of  delay  in  the  completion  of  the  contract,  not,  however,  by  way  of 
penalty  but  as  liquidated  damages. 

It  was,  however,  provided  in  article  8  of  the  contract  that  the  Chief 
of  Ordnance  in  case  of  delay  in  the  delivery  of  the  armor  as  provided 
in  article  1  of  the  contract,  instead  of  completing  the  manufacture  or 
delivery  of  the  material  at  the  expense  of  claimant,  might  waive  the 
time  limit  and  deduct  from  any  payment  due  or  to  become  due  the 
liquidated  damages,  if  any,  provided  for  in  article  4:  "Provided,  how- 
ever, that  in  making  final  settlement  based  upon  the  date  of  completion 
of  the  delivery,  the  party  of  the  first  part  [claimant]  shall  receive 
credit  for  such  delays  occurring  during  the  performance  of  the  contract 
as  the  Chief  of  Ordnance  may  determine  to  have  been  due  to  unavoid- 
able causes,  such  as  fires,  storms,  labor  strikes,  action  of  the  United 
States,  etc.,  and  the  date  of  completion  shall  be  considered  for  the 
purposes  of.  final  settlement  as  the  date  of  the  actual  completion  of 
the  delivery  less  the  delays  due  to  unavoidable  causes;  but  none  of  the 
above  causes  shall  constitute  a  basis  for  an  action  against  the  United 
States  for  damages." 

,  It  will  be  observed  that  the  point  in  the  case  is  a  short  one.  It  is 
whether  the  causes  of  delay  alleged  in  the  petition  were  unavoidable 


Ch.  3)  PERFOBMANCE    OF    CONTRACTS  237 

or  were  of  the  character  described  in  the  contract,  that  is,  "such  as 
fires,  storms,  labor  strikes,  action  of  the  United  States,"  etc.  The 
contention  that  the  alleged  causes  can  be  assigned  to  such  category 
creates  some  surprise.  It  would  seem  that  the  very  essence  of  the 
promise  of  a  contract  to  deliver  articles  is  ability  to  procure  or  make 
them.  But  claimant  says  its  ignorance  was  not  peculiar,  that  it  was 
shared  by  the  world  and  no  one  knew  that  the  process  adequate  to 
produce  14-inch  armor  plate  would  not  produce  18-inch  armor  plate. 
Yet  claimant  shows  that  its  own  experiments  demonstrated  the  inade- 
quacy of  the  accepted  formula.  A  successful  process  was  therefore 
foreseeable  and  discoverable.  And  it  would  seem  to  have  been  an  ob- 
vious prudence  to  have  preceded  manufacture,  if  not  engagement,  by 
experiment  rather  than  risk  failure  and  delay  and  their  consequent 
penalties  by  extending  an  old  formula  to  a  new  condition. 

But  even  if  this  cannot  be  asserted,  the  case  falls  within  The  Har- 
riman,  9  Wall.  161,  19  L.  Ed.  629,  where  it  is  said  that  "the  principle 
deducible  from  the  authorities  is  that  if  what  is  agreed  to  be  done  is 
possible  and  lawful,  it  must  be  done.  Difficulty  or  improbability  of 
accomplishing  the  undertaking  will  not  avail  defendant.  It  must  be 
shown  that  the  thing  cannot  by  any  means  be  effected.  Nothing  short 
of  this  will  excuse  performance."     *     *     * 

It  was  said,  however,  in  The  Harriman.  9  Wall.  161,  172,  19  L.  Ed. 
629,  633,  that  "the  answer  to  the  objection  of  hardship  in  all  such  cases 
is  that  it  might  have  been  guarded  against  by  a  proper  stipulation," 
and  such  a  stipulation  is  relied  on  in  the  case  at  bar.  Ignorance  of  the 
scientific  process  necessary  for  face-hardening  18-inch  armor  plate  is 
asserted  to  be  an  unavoidable  cause  of  the  character  of  the  enumeration 
of  article  8  of  the  contract,  that  is,  "such  as  fires,  storms,  labor  strikes, 
action  of  the  United  States,  etc."  The  contention  is  that  it  is  the  same 
"genus  or  kind,"  because  (1)  it  was  not  foreseeable  when  the  contract 
was  made ;  (2)  was  not  the  result  of  any  act  or  neglect  on  the  part  of 
claimant ;  (3)  was  not  a  cause  the  company  could  prevent.  What  we 
have  already  said  answers  these  contentions.  Ability  to  perform  a  con- 
tract is  of  its  very  essence.  It  would  have  no  sense  or  incentive,  no  as- 
surance of  fulfillment,  otherwise ;  and  a  delay  resulting  from  the  ab- 
sence of  such  ability  is  not  of  the  same  kind  enumerated  in  the  contract 
— is  not  a  cause  extraneous  to  it  and  independent  of  the  engagements 
and  exertions  of  the  parties. 

Judgment  affirmed. 


KINZER  CONST.  CO.  v.  STATE. 
(Court  of  Claims  of  New  York.  1910.     125  N.  Y.  Supp.  46.) 

RoDENBECK,  J.  The  claimant  made  a  contract  with  the  state  of  New 
York  to  construct  3.76  miles  of  the  improved  Champlain  Canal  which 
is  a  part  of  the  so-called  Barge  Canal  system  of  the  state  now  in  prog- 
ress of  construction ;  and  while  the  work  was  in  progress,  and  claim- 
ant was  excavating  for  one  of  the  locks,  an  extensive  cave-in  occurred, 
which  revealed  the  fact  that  for  the  balance  of  the  contract  the  earth 
was  of  a  "slippery,  greasy  clay,"  with  not  sufficient  resistency  to  per- 
mit of  the  construction  according  to  the  contract,  plans,  and  specifica- 
tions of  the  lock  and  substantially  the  remainder  of  the  work.  The 
state  issued  a  stop  order  while  it  was  investigating  and  determining 
what  to  do  under  these  unexpected  conditions,  and  this  order  remained 


238  CONTRACTS  (Part  1 

in  force  for  six  months,  when  an  alteration  order  which  involved  ex- 
tensive changes  in  the  construction  of  the  remainder  of  the  contract, 
was  submitted  by  the  state  to  the  claimant  for  the  completion  of  the  con- 
tract. The  claimant  refused  to  accept  these  alterations,  insisting  that 
they  constituted  a  fundamental  change  in  the  contract  and  amounted  to 
a  breach  of  the  contract  by  the  state,  and  thereupon  the  state  proceeded 
to  advertise  for  bids  for  the  completion  of  the  work,  and  let  it  to  other 
contractors,  and  the  claimant  filed  this  claim -for  the  work  done  and 
not  paid  for,  and  for  damages  including  loss  of  profits  on  the  portion 
of  the  work  uncompleted,  amounting,  in  all,  to  $370,525.41.  The  total 
amount  of  the  contract,  including  previous  alteration  orders,  was 
$968,296.11,  and  there  was  uncompleted  at  the  time  that  the  stop  order 
was  issued  $521,954.42,  and  of  this  amount  $398,612  was  eliminated 
and  new  work  was  added,  aggregating  $153,584.50,  so  that  the  work 
to  be  done  there  was  a  reduction  of  $245,027.50  or  a  decrease  of 
about  25  per  cent,  of  the  contract  price,  and  upon  these  facts,  and  upon 
the  terms  of  its  contract,  the  claimant  insists  that  the  state  violated  its 
contract  and  justified  its  course  in  refusing  to  complete  the  contract; 
while  the  state  claims  that  the  construction  of  the  work  when  the  cave- 
in  occurred  revealed  the  fact  that  the  subsoil  was  so  treacherous  that 
the  lock  could  not  be  constructed  in  that  section  of  claimant's  contract 
at  all,  and  made  necessary  the  other  changes  in  the  plans  and  specifi- 
cations, and  also  that  the  alterations  were  authorized  by  the  contract, 
and  that  claimant  was  guilty  of  a  breach  of  its  contract  in  refusing  to 
complete  it  as  directed  by  the  alteration  order.     *     *     * 

When  the  excavation  for  the  foundation  of  the  lock  had  been  carried 
to  a  depth  of  10  or  12  feet,  it  was  found  that  the  underlying  stratum 
was  a  greasy,  slippery  clay  with  no  grit  in  it — ''just  like  axle  grease" — 
as  one  witness  put  it.  Claimant's  expert  said  that  he  had  never  seen 
any  soil  like  it,  and  that  it  would  not  be  good  engineering  to  build  a 
lock  in  such  material  at  all.  Under  this  condition  of  things,  the  case 
falls  within  that  line  of  decisions  where  the  contract  is  regarded  as 
at  an  end  and  performance  is  excused  because  of  the  failure  of  con- 
ditions the  existence  of  which  are  necessary  to  the  performance  of 
the  contract.  The  early  rule  upon  impossibility  as  an  excuse  for  the 
performance  of  a  contract  was  that  inability  to  execute  an  absolute 
executory  contract  due  to  subsequent  unforeseen  accident  or  misfor- 
tune without  the  fault  of  either  party  will  not  excuse  performance. 
Paradine  v.  Jane,  Aleyn,  26.  This  rule  which  was  promulgated  in 
English  Jurisprudence  as  early  as  the  year  1178  was  based  upon  the 
ground  as  stated  in  this  case  that :  "Where  the  party  by  his  own  con- 
tract creates  a  duty  or  charge  upon  himself,  he  is  bound  to  make  it 
good,  if  he  may,  notwithstanding  any  accident  by  inevitable  necessity, 
because  he  might  have  provided  against  it  by  his  contract."     *     *     * 

In  England  the  rule  prevailed  in  all  its  severity  down  to  the  middle 
of  the  last  century  (Hall  v.  Wright,  E.  B.  &  E.  [1857]),  but  since 
then  the  courts  both  here  and  in  England  have  modified  it  to  a  large 
extent  upon  the  theory  that  the  event  which  rendered  the  performance 
impossible  should  be  implied  as  a  matter  of  law  as  one  of  the  condi- 
tions of  the  contract  (Taylor  v.  Caldwell,  3  B.  &  S.  826  [1863]  ;  Bailey 
V.  De  Crespigny,  L.  R.  4  Q.  B.  185),  thus  carrying  out  the  supposed 
intention  of  the  parties.     *     *     * 

These  exceptions  have  been  growing  so  that  now  there  are  at  least 
four  well-recognized  modifications  of  the  early  rule,  while  the  courts 


Ch.  3)  PERFORMANCE  OF  CONTRACTS  239 

seem  to  be  groping  for  a  rule  broad  enough  to  include  all  of  the  excep- 
tions. Three  of  these  exceptions  have  long  since  been  firmly  estab- 
lished in  the  jurisprudence,  not  only  of  this  country,  but  of  England, 
and  the  fourth  has  been  adopted  in  many  cases  of  recent  date  in  this 
state  where  the  existing  rules  did  not  equitably  meet  the  peculiar  facts. 
The  rule  that  performance  is  excused  where  legal  impossibility  arises 
from  a  change  in  the  law  or  where  the  specific  thing  which  is  essential 
to  performance  is  destroyed,  or  where  there  is  an  incapacity  by  sick- 
ness or  death  in  the  case  of  a  contract  for  personal  services,  are  of 
long  standing,  but  quite  recently  a  fourth  and  broader  rule  has  grown 
up  which  is  applicable  to  the  case  at  bar. 

One  writer  in  the  Columbia  Law  Review,  in  discussing  the  tendency 
toward  a  broader  rule  to  meet  cases  of  impossibility  in  the  perform- 
ance of  contracts,  says:  "If  the  contingency  which  makes  the  con- 
tract impossible  of  performance  is  such  that  the  parties  to  the  contract, 
had  they  actually  contemplated  it,  would  probably  have  regarded  it 
as  so  obviously  terminating  the  obligation  as  not  to  require  expression, 
failure  of  performance  should  be  excused."     Volume  1,  p.  533. 

Another  writer  in  the  Harvard  Law  Review,  criticising  the  proposed 
rule,  suggests  another :  "A  proper  rule,  it  is  suggested,  is  that  impos-^ 
sibility  should  be  recognized  as  a  defense  wherever  it  seems  reasonable 
that,  had  the  contingency  which  renders  performance  impossible  been 
contemplated  by  the  parties,  they  would  have  both  agreed  that  its  intro- 
duction into  the  contract  as  a  condition  terminating  the  obligation 
would  be  just."    Volume  15,  p.  419. 

A  third  writer  in  the  same  Review,  after  referring  to  the  general 
rule  and  its  exceptions,  says:  "The  New  York  court,  however,  has 
of  late  been  more  liberal  and  in  a  somewhat  indefinite  way  has  laid 
down  the  doctrine  that  impossibility  is  an  excuse  when  caused  by  the 
non-continuance  either  of  the  subject-matter  of  the  contract  or  of  the 
conditions  essential  to  its  performance."    Volume  15,  p.  63. 

There  is  abundant  warrant  in  the  decided  cases  in  this  state  for  these 
attempts  to  state  the  broad  rule  that  the  courts  are  now  following  in 
(relation  to  this  subject  and  to  justify  the  statement  that  the  "modern 
tendency  seems  to  be  toward  a  more  lenient  construction.  More  re- 
gard is  paid  to  what  must  have  been  the  intention  of  the  parties." 
American  Law  Register,  1909,  p.  570. 

In  Stewart  v.  Stone,  127  N.  Y.  500,  507,  28  N.  E.  595,  596,  14  L.  R. 
A.  215,  the  factory  at  which  milk  delivered  by  plaintifl:  and  his  assignor 
was  to  be  manufactured  into  cheese  and  butter  burned,  and  with  it  a 
quantity  of  butter  and  cheese  and  some  milk  which  had  not  been  con- 
verted into  cheese  and  butter.  Judge  Bradley  says  in  the  course  of  his 
opinion:  "It  is  true  that,  where  an  absolute  executory  contract  is 
made,  the  contractor  is  not  excused  by  inability  to  execute  it  caused 
by  unforeseen  accident  or  misfortune,  but  must  perform  or  pay  dam- 
ages unless  he  has  protected  himself  against  such  contingency  by  stipu- 
lation in  his  contract.  *  *  *  But  there  may  be  in  the  nature  of  a 
contract  an  implied  condition  by  which  he  will  be  relieved  from  such 
unqualified  obligation,  and  when,  in  such  case,  without  his  fault,  per- 
formance is  rendered  impossible  it  may  be  excused.  That  is  so  when 
it  inherently  appears  by  it  to  have  been  known  to  the  parties  to  the 
contract,  and  contemplated  by  them  when  it  was  made,  that  its  fulfill- 
ment would  be  dependent  upon  the  continuance  or  existence  at  the  time 
for  performance  of  certain  things  or  conditions  essential  to  its  execu- 


240  CONTRACTS  (Parti 

tion.  Then  in  the  event  they  cease,  before  default,  to  exist  or  continue, 
and  thereby  performance  becomes  impossible  without  his  _  fault,  the 
contractor  is.  by  force  of  the  implied  condition  to  which  his  contract 
is  subject  relieved  from  liability  for  the  consequences  of  his  failure 
to  perform.     *     '^     * " 

In  Lorillard  v.  Clyde,  142  N.  Y.  456,  462,  37  N.  E.  489,  491,  24  L.  R. 
A.  113,  the  defendant  was  relieved  from  paying  dividends,  which  he 
had  agreed  to  do,  because  the  corporation  out  of  whose  earnings  they 
were  to  come  had  been  involuntarily  dissolved.  Chief  Judge  An- 
drews says  in  his  opinion  :  '<  *  *  *  The  contract  in  question  was 
not  with  the  corporation  whose  life  was  extinguished  by  judgment  of 
dissolution.  But  the  guaranty  assumed  that  the  corporation  would  con- 
tinue in  existence  during  the  seven-year  period.  The  liability  which 
the  defendant  assumed  was  in  consideration  of  the  benefits  which 
might  accrue  to  them  from  the  management  of  the  transportation  busi- 
ness of  the  corporation  during  that  period.  Upon  the  assumption  that 
the  death  of  the  corporation  was  brought  about  without  their  fault, 
were  they  thereafter  bound?  Is  the  doctrine  of  implied  condition  less 
applicable  than  it  would  be  if  the  contract  had  been  between  the  de- 
fendants and  the  corporation?  If  in  the  one  case  the  contract,  so  far 
as  it  was  unexecuted,  would  be  terminated,  did  not  the  happening  of 
the  same  event  terminate  the  engagement  of  these  parties,  based  on 
the  assumed  continuance  of  the  corporation  in  life?"     *     *     * 

In  Herter  v.  Mullen,  159  N.  Y.  28,  40,  53  N.  E.  700,  704,  44  L.  R.  A. 
703.  70  Am.  St.  Rep.  517,  the  defendant  was  relieved  from  hability 
for  a  year's  rent  by  reason  of  holding  over  after  the  expiration  of  his 
term  on  account  of  the  sickness  of  a  member  of  his  family.  Judge 
O'Brien  says :  "Legal  rules  may  sometimes  be  pushed  to  a  point 
where  they  accomplish  the  grossest  injustice,  and  it  then  becomes 
the  duty  of  the  courts  to  limit  their  application  to  cases  that  are  within 
their  true  scope  and  fair  meaning." 

In  Buffalo  &  Lancaster  Land  Co.  v.  Bellevue  L.  &  I.  Co.,  165  N.  Y. 
247,  254,  59  N.  E.  5,  7,  51  L.  R.  A.  951,  the  plaintiff  failed  to  secure 
relief  for  an  alleged  breach  of  a  contract  for  the  construction  of  an 
electric  road  under  which  the  defendant  had  agreed  to  operate  cars 
certain  hours  each  day,  and  was  prevented  from  doing  so  on  certain 
days  in  the  winter  by  storms  of  unusual  severity.     *     *     * 

In  Labaree  Co.  v.  Crossman,  100  App.  Div.  499,  504,  92  N.  Y.  Supp. 
565,  567,  the  impossibility  of  performance  arose  from  an  order  of  the 
board  of  health  of  the  city  of  New  York  prohibiting  the  landing  of 
a  cargo  of  coffee.  The  court,  adopting  the  opinion  of  the  referee 
who  tried  the  case,  says :  "In  my  opinion  the  doctrine  of  implied  con- 
dition is  applicable  to  the  case,  and  the  parties  must  be  deemed  to 
have  contracted  upon  the  condition  that  there  would  be  no  legal  inter- 
ference with  the  admission  of  the  coffee  to  the  storehouses  of  the  city, 
or  rather  that,  if  performance  was  rendered  impossible  by  the  act  of 
the  law,  the  contract  would  be  dissolved." 

In  Whipple  v.  Lyons  Beet  Sugar  Refining  Co.,  64  Misc.  Rep.  363, 
365,  118  N.  Y.  Supp.  338,  340,  the  impossibility  of  performance  arose 
from  drought  and  other  climatic  conditions  which  prevented  the  defend- 
ant from  carrying  out  a  contract  to  grow  a  certain  number  of  acres 
of  beets  for  a  sugar  company  according  to  certain  printed  instruc- 


tions. 


Ch.  3)  PERFORMANCE    OF    CONTRACTS  241 

From  these  cases  it  will  be  seen  that  a  fourth  exception  must  be 
made  to  the  general  rule  that  accident  or  an  unforeseen  contingency- 
arising  without  the  fault  of  either  party  will  not  excuse  performance 
of  an  absolute  executory  contract,  and  for  the  four  exceptions  may 
now  be  stated  broadly  as  follows :  First,  where  the  legal  impossibility 
arises  from  a  change  in  the  law ;  *  *  *  second,  where  the  specific 
thing  which  is  essential  to  the  performance  of  the  contract  is  destroy- 
ed; *  *  *  third,  where  by  sickness  or  death  personal  services 
become  impossible;  *  *  *  and  fourth,  where  conditions  essential 
to  performance  do  not  exist.  *  *  *  From  these  considerations  the 
rule  may  be  deduced  fairly  in  the  present  case  that  where  in  the  course 
of  the  construction  of  a  canal  natural  conditions  of  soil  unexpectedly 
appear  which  contingency  the  contract  does  not  in  express  terms  cover, 
and  which  render  the  performance  of  the  contract  as  planned  impos- 
sible, and  make  necessary  substantial  changes  in  the  nature  and  cost 
of  the  contract  and  substantially  affect  the  work  remaining  under  the 
contract,  the  law  will  read  into  the  contract  an  implied  condition  when 
it  was  made  that  such  a  contingency  will  terminate  the  entire  contract. 

These  terms  are  implied  in  the  contract  by  force  of  the  law  itself, 
and  not  because  the  parties  had  them  in  mind.  Whether  we  approve 
of  their  insertion  upon  the  theory  that  had  the  attention  of  the  parties 
been  called  to  the  conditions  giving  rise  to  the  application  of  the  rule, 
they  would  have  omitted  any  reference  to  them  because  obviously 
covered  by  the  law  (1  Columbia  Law  Review,  p.  533),  or  upon  the 
theory  that  they  would  have  regarded  them  as  just  provisions  to  have 
inserted  (15  Harvard  Law  Review,  p.  419). 

In  the  eyes  of  the  law  being  a  part  of  the  terms  of  the  contract,  the 
conditions  that  rendered  performance  impossible  do  not  terminate  the 
contract  ab  initio,  and  vitiate  what  has  been  done  and  what  remains 
to  be  done  that  is  capable  of  execution.  The,  conditions  may  be  of 
such  an  extent  as  to  amount  to  a  substantial  abrogation  of  the  entire 
contract,  or  they  may  relate  to  an  insignificant  part  of  the  contract, 
but  they  excuse  performance  only  to  the  extent  to  which  performance 
is  impossible,  and  leave  what  has  been  done  valid,  permitting  a  recov- 
ery therefor,  and  may  not  excuse  performance  of  the  remaining  work. 
No  general  rule  can  be  laid  down  which  will  apply  to  all  cases,  but 
each  case  must  be  decided  upon  its  own  facts,  and  that  this  course  can 
be  taken  and  justice  done  according  to  the  facts  in  each  case  unham- 
pered by  written  rules  is  due  to  the  great  flexibility  of  the  common 
law,  which  is  its  chief  merit. 

Applying  this  rule  to  the  case  at  bar,  it  will  be  seen  to  work  out 
an  equitable  result.  The  state  was  not  in  a  position  to  compel  per- 
formance of  an  impossibility,  and  likewise  the  claimant  could  not 
ask  the  state  to  proceed  with  the  contract.  It  would  not  have  been 
fair  of  the  state  to  insist  upon  the  literal  performance  of  its  contract, 
and  place  the  loss  upon  the  claimant  for  the  failure  to  perform,  nor 
would  it  have  been  just  for  the  claimant  to  insist  that  the  state  must 
carry  out  its  contract  as  planned  or  suffer  the  penalty  of  paying  dam- 
ages, including  prospective  profits  for  the  breach  of  the  contract. 
It  is  better  to  regard  the  contract  as  at  an  end,  and  treat  both  parties 
as  having  been  excused  from  further  performance,  allowing  the  claim- 
ant to  recover  for  work  done  and  for  benefits  received  by  the  state 
under  the  contract  down  to  the  time  of  the  discovery  of  the  condi- 
'B.&  E.Brs.LAW— 16 


242  CONTRACTS  (Part  1 

tions  which  rendered  performance  impossible,  and  for  such  dam- 
ages as  may  have  resulted  to  it  from  the  stop  order  issued  by  the 
state.  Both  of  the  parties  were  in  the  same  situation  at  the  time  that 
the  conditions  were  discovered,  and  the  rule  applied  leaves  both  of 
them  to  share  the  responsibilities  for  these  conditions  which  were  not 
anticipated  when  the  contract  was  made,  thus  carrying  out  the  spirit 
of  the  state  Constitution,  which  provides  that,  if  for  any  unforeseen 
cause  the  terms  of  any  contract  prove  to  be  unjust  and  oppressive,  the 
canal  board  may,  upon  the  apphcation  of  the  contractor,  cancel  the 
contract.  State  Const,  art.  7,  §  9.  The  state,  therefore,  had  the  right 
to  relet  the  completion  of  the  work,  but  must  bear  the  increased  ex- 
pense resulting  therefrom,  while  the  claimant  is  not  entitled  to  recover 
for  any  prospective  profits  on  the  work  remaining  to  be  done.     *     *     * 

The  claimant  should  have  judgment  for  $70,679.25,  with  interest  on 
$61,144.16  from  December  15,  1908. 

Judgment  entered  accordingly. 


CARROLL  V.  BOWER  SOCK. 

(Supreme  Court  of  Kansas,  3917.     100  Kan.  270,  164  Pac.  143, 
L.   R.  A.  1917D,  1006.) 

BuRCH,  J.  The  action  was  one  to  recover  for  part  performance  of 
a  contract  to  construct  a  reinforced  concrete  floor  in  a  warehouse, 
which  was  destroyed  by  fire  before  the  floor  was  completed.  The 
plaintiff  recovered,  and  the  defendant  appeals.     *    *     * 

The  court  permitted  recovery  for  substantially  what  the  plaintiff  had 
done  by  way  of  perfonnance  of  the  contract  before  the  fire. 

The  contract  was  to  place  the  floor  in  a  specific  warehouse.  De- 
struction of  the  warehouse  without  fault  of  either  party  put  an  end 
to  construction  of  a  floor  in  that  warehouse.  No  warehouse  except 
the  one  destroyed  having  been  contemplated  or  contracted  about,  the 
defendant  could  not  be  charged  with  delinquency  for  not  building  an- 
other. To  do  so  would  be  to  charge  him  with  breach  of  an  obligation 
which  he  did  not  assume.  If  continued  existence  of  the  particular 
warehouse  to  which  the  contract  related  were  not  taken  for  granted  by 
both  parties,  the  plaintiff  would  be  bound  by  his  contract  and  could 
not  recover  at  all ;  no  concrete  floor  having  been  constructed.    *    *    * 

If  a  contractor  should  engage  to  furnish  all  labor  and  material  and 
build  a  house,  and  the  house  should  burn  before  completion,  the  loss 
falls  on  him.  If  a  contractor  should  engage  to  refloor  two  rooms  of 
a  house  already  in  existence,  and  should  complete  one  room  before 
the  house  burned,  he  ought  to  be  paid  something.  So  far  the  authori- 
ties are  in  substantial  agreement. 

The  principle  upon  which  the  contractor  may  recover  in  a  case  of 
the  character  last  instanced  has  been  variously  stated.  Sometimes  it 
is  said  that  it  was  a  material  and  substantive  part  of  the  contract  on 
the  owner's  side  that  he  would  have  the  house  in  existence  as  long  as' 
might  be  necessaiy  for  the  contractor  to  do  the  work.  This  statement 
of  the  principle  arbitrarily  attaches  to  the  contract  a  warranty  which 
the  parties  did  not  put  there,  and  places  the  owner  in  default  when 
he  has  been  guilty  of  no  wrong.  Impossibility  of  performance  be- 
cause of  destruction  of  the  building  was  not  contemplated  by  either 
party.      Performance   was   prevented   without    fault    of   either  party. 


Ch.  3)  PERFORMANCE    OF   CONTRACTS  243^ 

and  the  true  rule  is  that  neither  part}^  can  be  charged  with  delinquen- 
cy because  the  contract  cannot  be  fulfilled.    *     *     * 

The  contractor  cannot  give  and  the  owner  cannot  obtain  that  which 
they  contracted  about.  Neither  one  can  complain  of  the  other  on  that 
account,  and  the  law  must  deal  with  the  new  situation  of  the  parties 
created  by  the  fire.  The  owner  cannot  be  called  on  to  reimbvirse  the 
contractor  merely  because  the  contractor  has  been  to  expense  in  taking 
steps  tending  to  performance.  A  contractor  may  have  purchased  spe- 
cial material  to  be  used  in  repairing  a  house,  and  may  have  had  much 
millwork  done  upon  it.  If  the  material  remain  in  the  rnill,  and  the 
house  burn,  there  can  be  no  recovery.  If  the  milled  material  be  de- 
livered at  the  house  ready  for  use.  and  the  house  burn,  there  can  be 
no  recovery.  It  takes  something  more  to  make  the  owner  liable  for 
what  the  contractor  has  done  toward  performance.  The  owner  must 
be  benefited.  He  should  not  be  enriched  at  the  expense  of  the  con- 
tractor. That  w^ould  be  unjust,  and  to  the  extent  that  the  owner  has 
been  benefited,  the  law  may  properly  consider  him  as  resting  under  a 
duty  to  pay.  The  benefit  which  the  owner  has  received  may  or  may 
not  be  equivalent  to  the  detriment  which  the  contractor  has  suffered. 
The  only  basis  on  which  the  law  can  raise  an  obligation  on  the  part  of 
the  owner  is  the  consideration  he  has  received  by  way  of  benefit,  ad- 
vantage, or  value  to  him. 

The  question  whether  or  not  the  owner  has  l^een  benefited  fre- 
quently presents  difficulties.  Sometimes  the  question  is  answered  by 
the  owner's  own  conduct,  as  when  by  taking  possession,  or  by  insur- 
ing as  his  own  property,  or  by  other  act,  he  evinces  a  purpose  to  ap- 
propriate the  contractor's  material  and  labor.  Sometimes  the  circum- 
stances are  such  that  the  owner  is  precluded  from  rejecting  the  fruits 
of  the  contractor's  efforts  if  he  would,  as  when  one  room  is  finished 
under  a  contract  to  refloor  two.     *     *     * 

The  test  of  benefit  received  has  been  variously  stated.  Sometimes 
it  is  said  that  benefit  accrues  whenever  the  contractor's  material  and 
labor,  furnished  and  perfonned  according  to  the  contract,  have  be- 
come attached  to  the  owner's  realty.  The  facts  of  particular  cases 
suggest  different,  forms  of  expression.  After  considering  all  the  au- 
thorities cited  in  the  briefs,  the  court  is  inclined  to  approve,  for  the 
purposes  of  this  case,  the  form  adopted  by  the  Supreme  Court  of 
Massachusetts,  in  the  case  of  Young  v.  Chicopee,  186  Mass.  518,  72 
N.  E.  63,  cited  by  the  plaintiff.  The  action  was  one  for  labor  and  ma- 
terial furnished  to  repair  a  bridge  destroyed  by  fire  while  the  work 
was  proceeding.  The  contract  required  at  least  half  of  the  material 
to  be  "upon  the  job"  before  work  commenced.  The  contractor 
complied  with  this  condition,  and  distributed  material  "all  along  the 
bridge"  and  on  the  river  bank  A  portion  of  the  material  thus  distrib- 
uted but  not  wrought  into  the  structure  was  destroyed  by  fire.  Lia- 
bility for  work  done  upon  the  material  wrought  into  the  structure  was 
not  disputed,  but  the  contractor  sought  to  make  good  his  entire  loss. 
The  court  said : 

"In  whatever  way  the  principle  may  be  stated,  it  would  seem  that 
the  liability  of  the  owner  in  a  case  like  this  should  be  measured  by  the 
amount  of  the  contract  work  done  which,  at  the  time  of  the  destruc- 
tion of  the  structure,  had  become  so  far  identified  with  it  as  that  but 
for  the  destruction  it  would  have  inured  to  him  as  contemplated  by 
the  contract."     186  Mass.  520,  72  N.  E.  64. 


244  CONTRACTS  (Part  1 

Applying  the  test  stated  to  the  facts  of  the  present  controversy,  it 
is  clear  that  the  plaintiff  should  recover  for  the  work  done  in  cutting 
the  old  floor  away  from  the  wall  and  in  removing  such  part  of  the 
old  floor  as  was  necessary.  The  warehouse  was  improved  to  that 
extent  by  labor,  the  benefit  of  which  had  inured  to  the  defendant 
when  the  fire  occurred.  If  the  fire  had  not  occurred,  the  undesirable 
floor  would  have  been  out  of  the  way.  precisely  as  the  contract  con- 
templated. Likewise,  the  contractor  should  recover  for  the  completed 
concrete  footings. 

The  contractor  should  not  recover  for  material  furnished  or  labor 
performed  in  the  construction  of  either  column  or  floor  forms.  They 
were  temporary  devices,  employed  to  give  form  to  the  structure  which 
was  to  be  produced.  They  were  not  themselves  wrought  into  the 
warehouse,  were  to  be  removed  when  the  work  was  completed,  and 
inured  to  nobody's  benefit  but  that  of  the  contractor. 

The  contractor  should  not  recover  for  either  upright  or  floor  rods, 
or  for  the  labor  of  putting  them  in  place.  While  the  rods  were  wired 
together,  they  were  not  attached  to  the  building  and  would  not  have 
been  wrought  into  the  structure  until  the  concrete  was  poured.  If 
the  fire  had  not  occurred,  the  contractor  could  have  removed  the  rods 
without  dismembering  or  defacing  the  warehouse,  and  the  defendant 
could  not  have  held  the  rods  as  amalgamated  into  the  fabric  of  his 
structure. 

There  could  be  no  recovery  for  superintendence  and  use  of  tools, 
except  as  regards  that  part  of  the  work  done  which  had  become  iden- 
tified with  the  warehouse  itself.  Other  items  sued  for  should  be  al- 
lowed or  disallowed  by  application  of  the  principle  indicated. 

The  defendant  says  he  had  a  right  to  a  specific  kind  of  completed 
floor  which  he  could  test  and  which  would  comply  with  a  prescribed 
test,  and  that  cutting  away  the  old  floor  from  the  walls  of  the  building, 
and  concrete  footings  for  a  floor  which  was  never  laid,  were  of  no 
value  to  him.  The  test  is  whether  or  not  the  work  would  have  inured 
to  his  benefit  as  contemplated  by  the  contract  if  the  fire  had  not  oc- 
curred. The  cutting  away  of  the  old  floor  was  done  according  to  the 
contract,  and  the  defendant  had  the  benefit  of  that  work  as  soon  as 
it  was  finished.  The  evidence  was  that  putting  in  the  concrete  foot- 
ings was  the  next  step  in  the  construction  of  the  concrete  floor.  Those 
footings  would  have  inured  to  his  benefit,  in  accordance  with  the  con- 
tract, if  the  fire  had  not  occurred.  They  became  a  part  of  his  ware- 
house. Unless  he  could  reject  them  for  want  of  substantial  compli- 
ance with  the  contract  so  far  as  they  were  concerned,  he  was  benefited 
by  them  at  the  time  of  their  incorporation  into  his  structure.  Test  of 
a  completed  concrete  floor  was  one  of  the  things  rendered  impossible 
by  the  fire.     *     *     * 

The  judgment  of  the  district  court  is  reversed,  and  the  caUse  is  re- 
manded, with  direction  t(  'ike  such  additional  evidence  as  may  be  nec- 
essary and  determine  the  rights  of  the  parties  according  to  the  view> 
which  have  been  expressed.     *     *     * 

Johnston,  C.  J.  (dissenting  in  part).  I  am  of  opinion  that  the  up- 
right rods  set  up  and  tied  together  were  a  part  of  the  building,  and 
a  recovery  for  them  should  be  allowed.     *    *     * 


Ch.  4)  RIGHTS   OF   THIRD    PARTIES   IN   CONTRACTS  245 

CHAPTER  IV 
RIGHTS  OF  THIRD  PARTIES  IN  CONTRACTS 

Section 

1.  Introduction. 

2.  Contracts  for  the  Benefit  of  a  Donee  of  the  Promisee. 

3.  Contracts  for  the  Benefit  of  a  Creditor  of  the  Promisee. 

4.  Nature  and  Requisites  of  an  Assignment. 

5.  Interests  Capalile  of  Assignment. 

6.  Nature  and   Extent  of    the  Interest   Acquired   by   the   A.ssignee. 


SECTION  1.— INTRODUCTION 

Is  it  possible  for  a  contract  between  A.  and  B.  to  create  rights  in 
C,  C.  not  being  otherwise  a  party  to  the  contract,  which  may  be 
enforced  by  C.  ?  After  a  contract  has  been  entered  into  by  A. 
and  B.,  is  it  then  possible  for  either  of  them  to  transfer  to  C.  rights 
or  duties  which  arise  out  of  the  contract?  Stated  generally,  these 
are  the  two  questions  with  which  this  chapter  deals.  It  will  be  no- 
ticed that  these  two  questions  have  to  do  with  situations  which  are 
alike  in  this  respect ;  that  a  person  is  interested  in  a  contract  to 
which  he  is  not  a  party.  The  two  situations  referred  to  dififer  in 
this  respect :  in  the  first  case,  the  third  party's  rights,  if  he  has  any. 
arise  by  force  of  the  terms  of  the  contract  itself ;  in  the  second 
case,  the  third  party's  rights,  if  they  are  to  arise,  come  into  exist- 
ence, not  by  virtue  of  the  terms  of  the  original  contract,  but  as  the 
result  of  some  independent  transaction  entered  into  by  him  with 
one  of  the  parties  to  the  contract  subsequent  to  its  execution. 


SECTION  2.— CONTRACTS  FOR  THE  BENEFIT  OF  A 
DONEE  OF  THE  PROMISEE 

Turning  our  attention  to  the  first  of  these  questions :  Suppose 
that  A.  and  B.  enter  into  a  contract  by  the  terms  of  which  A.  is*  to 
transfer  property  to  B.  and  B.  is  to  pay  the  purchase  price.  A. 
desires  to  make  a  gift  to  C,  and  as  a  part  of  the  contract  B.  prom- 
ises to  pay  the  amount  of  the  purchase  price  to  C?  If  B.  rails  to 
perform,  may  C.  sue  B.?  What  difficulties  are  in  the  way?  In  or- 
der to  make  an  irrevocable  gift,  the  law  usually  requires  delivery. 
If  C,  the  beneficiary,  were  allowed  to  sue  B.,  the  promisor,  would 
such  result  infringe  upon  the  rule  relating  to  the  formalities  for 
making  a  gift?  Is  it  possible  to  regard  B.  as  a  trustee  of  any 
property  for  the  use  of  the  beneficia,ry,  C?  Clearly  A.,  the  party  to 
whom  B.  made  the  promise  to  pay  C,  being  a  party  to  the  contract, 
may  sue  B.  if  B.  fails  to  perform.  How  much  may  A.  recover? 
Has  A.  sustained  any  damage?  If  A.  recovered  from  B.  the  full 
amount,  could  C.  recover  this  sum  from  A.? 


246  CONTRACTS  (Part  1 

These  are  some  of  the  difficulties  presented  in  attempting  to  give 
a  person  rights  in  a  contract  in  which  he  is  to  be  the  sole  party  to 
be  benefited.  And  yet  it  will  readily  be  recognized  that  the  situ- 
ation described  above  is  illustrated  by  the  very  common  case  of 
a  life  insurance  policy  taken  out  by  A.  upon  his  own  life  in  favor 
of  C.  Is  the  life  insurance  case  a  special  case  and  to  be  treated 
differently  from  similar  cases?  In  other  words,  the  question  is: 
"What  is  the  real  basis  for  allowing  C,  a  beneficiary  in  a  contract 
between  A.  and  B.,  to  sue  the  promisor  in  the  contract?  May  all 
beneficiaries  sue,  whatever  their  relations  to  B,  and  C,  or  may  only 
some  of  them  sue,  depending  upon  the  existence  of  certain  circum- 
stances.   If  the  latter  be  true,  what  are  these  special  circumstances? 


KNIGHTS  OF  THE  MODERN  MACCABEES  v.  SHARP. 

(Supreme  Court  of  Michigan.  1910.     163   Mich.  449,   128  N.  W.  786, 
33  L.  R.  A.  [N.  S.]  780.) 

Bill  of  Interpleader  by  Knights  of  the  Modern  Maccabees  against 
Malinda  Sharp  and  John  L.  Clink,  guardian  for  Lena  Sharp  and  oth- 
ers.    Defendant  Melinda  Sharp  appeals. 

OsTRANDER,  J.  The  issues  raised  by  the  answers  to  complainant's 
bill  of  interpleader  are  sufficiently  indicated  in  the  opinion  of  the 
learned  trial  judge,  as  follows: 

"On  July  23,  1896,  Asa  B.  Sharp  and  his  first  wife,  Minnie  D. 
Sharp,  lived  in  the  village  of  Yale,  St.  Clair  county,  Mich.  At  that 
time  he  was  30  years  of  age  and  his  wife  28.  They  had  five  small 
children.  He  was  a  laboring  man,  and  his  family  was  dependent  on 
his  earnings  for  support.  Some  time  prior  to  the  above-named  date, 
the  husband  and  wife  entered  into  a  contract  by  the  terms  of  which  he 
agreed  he  would  take  out  a  policy  of  insurance  in  complainant  order 
in  which  his  wife  should  be  named  as  beneficiary  and  so  remain  dur- 
ing her  life  and  his,  and,  in  case  his  wife  should  die  before  he  did,  • 
that  their  children  should  always  remain  the  beneficiaries ;  the  wife 
agreed  she  would  take  out  a  policy  of  insurance  in  the  Ladies  of  the 
Maccabees,  a  woman's  fraternal  benefit  association,  in  which  her  hus- 
band should  be  named  as  beneficiary,  and  so  remain  during  his  life 
and  hers,  and,  in  case  her  husband  should  die  before  she  did,  that  their 
children  should  always  remain  the  beneficiaries.  The  consideration 
for  this  agreement  on  the  part  of  each  was  the  promise  made  by  the 
other.  The  object  of  this  mutual  agreement  was  the  protection  of 
the  children.  *  *  *  Qn  July  23,  1896,  a  policy  for  $1,000  was  is- 
sued by  complainant  association  to  Asa  B.  Sharp,  in  which  his  wife 
was  named  as  beneficiary,  and  on  the  same  date  a  polic}^  of  like  amount 
was  issued  by  the  Ladies  of  the  Maccabees  to  Minnie  D.  Sharp  in 
which  her  husband  was  named  as  beneficiary.  *  *  *  Qn  January 
1,  1902,  Minnie  D.  Sharp  deceased,  and  the  proceeds  of  her  policy  in 
the  Ladies  of  the  Maccabees  was  paid  to  her  husband,  Asa  B.  Sharp, 
who  had  remained  the  beneficiary  in  her  certificate  since  the  time  it 
was  issued.  On  August  17,  1904,  Asa  B.  Sharp  married  Melinda 
Sharp,  now  his  widow.  *  *  *  Qn  April  19,  1906,  Asa  B.  Sharp 
signed  a  paper  revoking  his  former  designation  of  beneficiary  in  his 
policy,  and  designated  Melinda  Sharp,  his  wife,  as  the  new  beneficiary. 


Ch.  4)  RIGHTS   OF  THIRD   PARTIES   IN   CONTRACTS  247 

*  *  *  Asa  B.  Sharp  surrendered  his  first  certificate,  and  on  May  8, 
1906,  a  new  one  was  issued  to  him  by  complainant  association  in  which 
claimant,  MeHnda  Sharp,  was  named  as  beneficiary,  and  she  remain- 
ed as  such  designated  beneficiary  up  to  the  time  of  her  husband's 
death."    *    *     * 

Assuming  the  mutual  promises  never  to  change  beneficiaries  to  have 
been  made  as  is  claimed,  upon  what  theory  may  the  children  enforce 
the  contract?  No  promise  was  made  to  them  or  any  of  them,  no  con- 
sideration for  the  promise  moved  from  them.  The  agreement  related 
to  no  fund  in  existence.  No  trust  was  created.  I  find  no  reason  for 
thinking  that  the  parties  were  not  at  liberty,  at  any  time,  to  revoke 
their  promises.  It  is  true  that  after  the  death  of  the  mother  there 
could  be  no  mutual  revocation,  but,  unless  some  legal  interest  in  the 
performance  of  the  promise  vested  in  the  children  when  the  promise 
of  the  father  was  made,  such  interest  never  vested. 

It  is  the  general  rule  in  England  that  a  third  person  cannot  become 
entitled  by  the  contract  itself  to  demand  the  performance  of  any  duty 
under  the  contract.  Pollock,  Prin.  of  Contracts  (7th  Ed.)  199.  The 
rule,  contracts  creating  trusts  aside,  is  the  same  whether  such  enforce- 
ment is  attempted  at  law  or  in  equity.  In  this  state  the  English  rule 
has  been  followed  when  the  attempted  enforcement  of  the  contract  by 
a  third  person  was  at  law.  *  *  *  There  is  a  well-recognized  excep- 
tion to  the  rule  in  England  as  to  the  provisions  contained  in  a  settle- 
ment made  upon  and  in  consideration  of  marriage,  for  the  benefit  of 
children  to  be  born  of  the  marriage.  *  *  *  The  contention  of  ap- 
pellees is  that  the  principle  underlying  the  English  exception  to  the 
rule  should  be  extended,  at  least  in  equity,  so  as  to  support  the  en- 
forcement by  children  of  contracts  made  by  their  father  or  mother, 
with  each  other  or  with  strangers,  for  their  benefit,  and  Buchanan  v. 
Tilden.  158  N.  Y.  109,  52  N.  E.  724,  44  L.  R.  A.  170,  70  Am.  St. 
Rep.  454.  is  cited  and  relied  upon.  The  courts  of  New  York  do  not 
follow  the  English  rule.     *     *     * 

The  general  rule  in  this  state  is  regarded  as  settled.  I  see  no  rea- 
son ^  for  saying  that  it  is  not  the  same  in  proceedings  at  law  and  in 
equity.  To  what  extent  and  under  what  circumstances  an  exception  to 
the  rule  should  be  recognized  in  favor  of  the  enforcement  by  children 
of  contracts  (other  than  those  creating  trusts),  made  for  their  direct 
or  indirect  benefit,  by  persons  nearly  related  to  them  or  by  those  sus- 
taining the  duty  to  provide  for  them,  is  a  subject  which  needs  to  be 
considered  no  further  than  this,  that  the  mutual  promises  of  a  father 
and  rnother,  who  each  hold  the  certificate  of  a  beneficial  association 
in  which  the  other  is  named  as  beneficiary,  never  to  change  the  bene- 
ficiaries so  named,  create  no  legal  or  equitable  interest  of  the  children 
in  the  fund  derived  on  the  death  of  the  surviving  parent,  although,  if 
no_  such  change  had  been  made,  they  would  have  been  the  legal  bene- 
ficiaries, and  although  the  mutual  promises  of  the  parents  contemplat- 
ed that  in  such  case  they  should  be  the  legal  beneficiaries.     ■ 

The  case  presented  is  ruled  precisely  as  it  would  be  ruled  if  the 
children,  in  the  lifetime  of  the  father,  were  seeking  specific  perform- 
ance of  the  alleged  contract  or  an  injunction  to  restrain  a  threatened 
change  of  beneficiaries.  It  may  be  added,  although  the  suggestion  re- 
lates rather  to  the  facts  than  to  the  law,  that  the  children,  appellees, 
appear  to  have  no  particular  claim,  as  against  the  appellant,  to  equita- 
ble consideration.     It  is  not  claimed  that  appellant  knew  of  any  ar- 


248  CONTRACTS  (Part  1 

rangement  between  her  husband  and  his  former  wife  about  Hfe  in- 
surance. His  relation  to  her  is  a  sufficient  reason  for  insuring  his  Hfe 
for  her  benefit.  If,  instead  of  pursuing  the  method  of  substituting  one 
beneficiary  for  another,  he  had  refused  to  pay  assessments,  thus  per- 
mitting the  original  certificate  to  lapse,  and  procured  one  in  which  ap- 
pellant was  named  as  beneficiary,  it  is  clear  that  her  right  to  any  fund 
derived  therefrom  and  from  his  death,  would  be  unassailable. 

The  decree  below,  except  as  to  the  provision  for  costs  to  complain- 
ant, is  reversed,  and  a  decree  will  be  entered  in  this  court  for  the  pay- 
ment of  the  fund  to  the  appellant,  who  will  recover  of  the  appellees  the 
costs  of  both  courts.  

SEAVER  V.  RANSOM  et  al. 

(Court  of  Appeals  of  New  York.  1918.     224  N.  Y.  233,  120  N.  E.  639, 
2  A.  L.  R.   1187.) 

Action  by  Seaver  against  Ransom  and  another,  as  executors,  etc.,  of 
Samuel  A.  Beman,  deceased.  From  a  judgment  for  plaintiff,  defend- 
ants appeal. 

Pound,  J.  Judge  Beman  and  his  wife  were  advanced  in  years. 
Mrs.  Beman  was  about  to  die.  She  had  a  small  estate,  consisting  of 
a  house  and  lot  in  Malone  and  little  else.  Judge  Beman  drew  his 
wife's  will  according  to  her  instructions.  It  gave  $1,000  to  plaintiff, 
$500  to  one  sister,  plaintiff's  mother,  and  $100  each  to  another  sister 
and  her  son,  the  use  of  the  house  to  her  husband  for  life,  and  re- 
mainder to  the  American  Society  for  the  Prevention  of  Cruelty  to 
Animals.  She  named  her  husband  as  residuai-y  legatee  and  executor. 
Plaintiff  was  her  niece,  34  years  old,  in  ill  health,  sometimes  a  mem- 
ber of  the  Beman  household.  When  the  will  was  read  to  Mrs.  Be- 
man, she  said  that  it  was  not  as  she  wanted  it.  She  wanted  to  leave 
the  house  to  plaintiff.  She  had  no  other  objection  to  ihe  will,  but  her 
strength  was  waning,  and  although  the  judge  offered  to  write  another 
will  for  her,  she  said  she  was  afraid  she  would  not  hold  out  long 
enough  to  enable  her  to  sign  it.  So  the  judge  said,  if  she  would  sign 
the  will,  he  would  leave  plaintiff  enough  in  his  will  to  make  up  the 
difference.  He  avouched  the  promise  by  his  uplifted  hand  with  all 
solemnity  and  his  wife  then  executed  the  will.  When  lie  came  to  die, 
it  was  found  that  his  will  made  no  provision  for  the  plaintiff". 

This  action  was  brought,  and  plaintiff  recovered  judgment  in  the 
trial  court,  on  the  theory  that  Beman  had  obtained  property  from  his 
wife  and  induced  her  to  execute  the  will  in  the  form  prepared  by  him 
by  his  promise  to  give  plaintiff  $6,000,  the  value  of  the  house,  and  that 
thereby  equity  impressed  his  property  with  a  trust  in  favor  of  plain- 
tiff. Where  a  legatee  promises  the  testator  that  he  will  use  property 
given  him  by  the  will  for  a  particular  purpose,  a  trust  arises.  *  *  * 
Beman  received  nothing  under  his  wife's  will  but  the  use  of  the  house 
in  Malone  for  life.  Equity  compels  the  application  of  property  thus 
obtained  to  the  purpose  of  the  testator,  but  equity  cannot  so  impress  a 
trust,  except  on  property  obtained  by  the  promise.  Beinan  was  bound 
by  his  promise,  but  no  property  was  bound  by  it;  no  trust  in  plain- 
tiff's favor  can  be  spelled  out. 

An  action  on  the  contract  for  damages,  or  to  make  the  executors 
trustees  for  performance  stands  on  different  ground.  *  *  *  The 
Appellate  Division  properly  passed  to  the  consideration  of  the  question 
whether  the  judgment  could  stand  upon  the  promise  made  to  the  wife. 


Ch.  4)  RIGHTS   OF   THIRD    PARTIES   IN   CONTRACTS  249 

Upon  a  valid  consideration,  for  the  sole  benefit  of  plaintiff.  The  judg- 
ment of  the  trial  court  was  affirmed  by  a  return  to  the  general  doc- 
trine laid  down  in  the  great  case  of  Lawrence  v.  Fox.  20  N.  Y.  268, 
which  has  since  been  limited  as  herein  indicated. 

Contracts  for  the  benefit  of  third  persons  have  been  the  prolific 
source  of  judicial  and  academic  discussion.  Williston.  Contracts  for 
the  Benefit  of  a  Third  Person,  15  Harvard  Law  Review,  767;  Corbin, 
Contracts  for  the  Benefit  of  Third  Persons.  27  Yale  Law  Journal, 
1008.  The  general  rule,  both  in  law  and  equitv  (Phalen  v.  United 
States  Trust  Co.,  186  N.  Y.  178,  186,  78  N.  E.  943,  7  L.  R.  A.  [N. 
S.]  734,  9  Ann.  Cas.  595),  was  that  privity  between  a  plaintiff  and  a 
defendant  is  necessary  to  the  maintenance  of  an  action  on  the  contract. 
The  consideration  must  be  furnished  by  the  party  to  whom  the  prom- 
ise was  made.  The  contract  cannot  be  enforced  against  the  third 
party,  and  therefore  it  cannot  be  enforced  by  him.  On  the  other  hand, 
the  right  of  the  beneficiary  to  sue  on  a  contract  made  expressly  for 
his  benefit  has  been  fully  recognized  in  many  American  jurisdictions, 
either  by  judicial  decision  or  by  legislation,  and  is  said  to  be  "the  pre- 
\'ailing  rule  in  this  country."  Hendrick  v.  Lindsay,  93  U.  S.  143.  23 
L.  Ed.  855 ;  Lehow  v.  Simonton,  3  Colo.  346.  It  has  been  said  that 
"the  establishment  of  this  doctrine  has  been  gradual,  and  is  a  victory 
of  practical  utility  over  theory,  of  equity  over  technical  subtlety." 
Brantly  on  Contracts  (2d  Ed.)  p.  253.  The  reasons  for  this  view  are 
that  it  is  just  and  practical  to  permit  the  person  for  whose  benefit  the 
contract  is  made  to  enforce  it  against  one  whose  duty  it  is  to  pay. 
Other  jurisdictions  still  adhere  to  the  present  English  rule  (7  Hals- 
bury's  Laws  of  England,  342,  343;  Jenks'  Digest  of  English  Civil 
Law,  §  229)  that  a  contract  cannot  be  enforced  by  or  against  a  per- 
son who  is  not  a  party.      [Citing  Massachusetts  cases.] 

In  New  York  the  right  of  the  beneficiary  to  sue  on  contracts  made 
for  his  benefit  is  not  clearly  or  simply  defined.  It  is  at  present  con- 
fined: First,  to  cases  where  there  is  a  pecuniary  obligation  running 
from  the  promisee  to  the  beneficiary,  "a  legal  right  founded  upon  some 
obligation  of  the  promisee  in  the  third  party  to  adopt  and  claim  the 
promise  as  made  for  his  benefit."  [Citing 'New  York  cases.]  The 
natural  and  moral  duty  of  the  husband  or  parent  to  provide  for  the 
future  of  wife  or  child  sustains  the  action  on  the  contract  made  for 
their  benefit.  "This  is  the  farthest  the  cases  in  this  state  have  gone." 
says  Cullen,  T-.  in  the  marriage  settlement  case  of  Borland  v.  Welch. 
162  N.  Y.  104.  110,  56  N.  E.  556. 

The  right  of  the  third  party  is  also  upheld  in.  thirdly,  the  public 
contract  cases.  [Citing  New  York  cases.]  Cf.  German  Alhance  Ins. 
Co.  V.  Hom.e  Water  Supply  Co..  226  U.  S.  220,  33  Sup.  Ct.  32,  57  L. 
Ed.  195,  42  L.  R.  A.  [N.  S.]  1000,  where  the  municipality  seeks  to 
protect  its  inhabitants  by  covenants  for  their  benefit ;  and,  fourthly,  the 
cases  where,  at  the  request  of  a  party  to  the  contract,  the  promise"  runs 
directly  to  the  beneficiary  although  he  does  not  furnish  the  considera- 
tion. [Citing  New  York  cases.]  It  may  be  safely  said  that  a  general 
rule  sustaining  recovery  at  the  suit  of  the  third  party  would  include 
but  few  classes  of  cases  not  included  in  these  groups,  either  categori- 
cally or  in  principle. 

The  desire  of  the  childless  aunt  to  make  provision  for  a  beloved 
and  favorite  niece  differs  imperceptibly  in  law  or  in  equity  from  the 
moral  duty  of  the  parent  to  make  testamentary  provision  for  a  child. 


250  CONTRACTS  (Part  1 

The  contract  was  made  for  the  plaintiff's  benefit.  She  alone  is  sub- 
stantially damaged  by  its  breach.  The  representatives  of  the  wife's 
estate  have  no  interest  in  enforcing  it  specifically.  It  is  said  in  Bu- 
chanan v.  Tilden,  158  N.  Y.  109,  52  N.E.  724,  44  L.  R.  A.  170,  70 
Am.  St.  Rep.  454,  that  the  common  law  imposes  moral  and  legal  obli- 
gations upon  the  husband  and  the  parent  not  measured  by  the  neces- 
saries of  life.  It  was,  however,  the  love  and  affection  or  the  moral 
sense  of  the  husband  and  the  parent  that  imposed  such  obligations  in 
the  cases  cited,  rather  than  any  common-law  duty  of  husband  and 
parent  to  wife  and  child.  If  plaintiff  had  been  a  child  of  Mrs.  Be- 
man,  legal  obligation  would  have  required  no  testamentary  provision 
for  her,  yet  the  child  could  have  enforced  a  covenant  in  her  favor 
identical  with  the  covenant  of  Judge  Beman  in  this  case.  *  *  * 
The  constraining  power  of  conscience  is  not  regulated  by  the  degree 
of  relationship  alone.  The  dependent  or  faithful  niece  may  have  a 
stronger  claim  than  the  affluent  or  unworthy  son.  No  sensible  theory 
of  moral  obligation  denies  arbitrarily  to  the  former  what  would  be 
conceded  to  the  latter.  We  might  consistently  either  refuse  or  allow 
the  claim  of  both,  but  I  cannot  reconcile  a  decision  in  favor  of  the 
wife  m  Buchanan  v.  Tilden,  based  on  the  moral  obligations  arising  out 
of  near  relationship,  with  a  decision  against  the  niece  here  on  the 
ground  that  the  relationship  is  too  remote  for  equity's  ken.  No  con- 
trolling authority  depends  upon  so  absolute  a  rule.  In  Sullivan  v. 
Sullivan,  161  N.  Y.  554,  56  N.  E.  116,  the  grandniece  lost  in  a  liti- 
gation with  the  aunt's  estate,  founded  on  a  certificate  of  deposit  pay- 
able to  the  aunt  "or  in  case  of  her  death  to  her  niece"  ;  but  what  was 
said  in  that  case  of  the  relations  of  plaintiff's  intestate  and  defendant 
does  not  control  here,  any  more  than  what  was  said  in  Dumherr  v. 
Rau,  135  N.  Y.  219,  32  N.  E.  49,  on  the  relation  of  husband  and  wife, 
and  the  inadequacy  of  mere  moral  duty,  as  distinguished  from  legal  or 
equitable  obligation,  controlled  the  decision  in  Buchanan  v.  Tilden. 
Bouton  V.  Welch,  170  N.  Y.  554,  63  N.  E.  539,  deals  only  with  the 
rights  of  vofunteers  under  a  marriage  settlement  not  made  for  the 
benefit  of  collaterals.  Kellogg,  P.  J.,  writing  for  the  court  below  well 
said:  "The  doctrine  of  Lawrence  v.  Fox  is  progressive,  not  retro- 
grade. The  course  of  the  late  decisions  is  to  enlarge,  not  to  limit, 
the  effect  of  that  case." 

The  court  in  that  leading  case  attempted  to  adopt  the  general  doc- 
trine that  any  third  person,  for  whose  direct  benefit  a  contract  was 
intended,  could  sue  on  it.  The  headnote  thus  states  the  rule.  Finch, 
J.,  in  Gifford  V.  Corrigan,  117  N.  Y.  257,  262,  22  N.  E.  756,  6  L.  R. 
A.  610,  15  Am.  St.  Rep.  508,  says  that  the  case  rests  upon  that  broad 
proposition ;  Edward  T.  Bartlett,  J.,  in  Pond  v.  New  Rochelle  Wa- 
ter Co.,  183  N.  Y.  330,  337,  76  N.  E.  211,  213,  1  L.  R.  A.  (N.  S.)  958, 
5  Ann.  Cas.  504,  calls  it  "the  general  principle"  ;  but  Vrooman  v. 
Turner,  confined  its  application  to  the  facts  on  which  it  was  decid- 
ed. "In  every  case  in  which  an  action  has  been  sustained,"  says  Al- 
len, J.,  "there  has  been  a  debt  or  duty  owing  by  the  promisee  to  the 
party  claiming  to  sue  upon  the  promise."  69  N.  Y.  285,  25 -Am.  Rep. 
195.  As  late  as  Townsend  v.  Rackham,  143  N.  Y.  516.  523,  38  N. 
E.  731,  733,  we  find  Peckham,"  J.,  saying  that,  "to  maintain  the  action 
by  the  third  person,  there  must  be  this  liability  to  him  on  the  part  of 
the  promisee."  Buchanan  v.  Tilden  went  further  than  any  case  since 
Lawrence  v.  Fox  in  a  desire  to  do  justice  rather  than  to  apply  with 


Ch.  4)  RIGHTS   OF   THIRD   PARTIES   IN   CONTRACTS  25l 

technical  accuracy  strict  rules  calling  for  a  legal  or  equitable  obliga- 
tion. In  Embler  v.  Hartford  Steam  Boiler  Inspection  &  Ins.  Co.,  158 
N.  Y.  431,  53  N.  E.  212,  44  L.  R.  A.  512,  it  may  at  least  be  said  that 
a  majority  of  the  court  did  not  avail  themselves  of  the  opportunity 
to  concur  with  the  views  expressed  by  Gray,  J.,  who  wrote  the  dis- 
senting opinion  in  Buchanan  v.  Tilden,  to  the  efifect  that  an  employe 
could  not  maintain  an  action  on  an  insurance  policy  issued  to  the  em- 
ployer, which  covered  injuries  to  employes. 

In  Wright  V.  Glen  Telephone  Co.,  48  Misc.  Rep.  192,  195,  95  N.  Y. 
Supp.  101,  the  learned  presiding  justice  who  wrote  the  opinion  in  this 
case  said  at  Trial  Term :  "The  right  of  a  third  person  to  recover  up- 
on a  contract  made  by  other  parties  for  his  benefit  must  rest  upon  the 
peculiar  circumstances  of  each  case  rather  than  upon  the  law  of  some 
other  case."  "The  case  at  bar  is  decided  upon  its  peculiar  facts." 
Edward  T.  Bartlett,  J.,  in  Buchanan  v.  Tilden. 

But,  on  principle,  a  sound  conclusion  may  be  reached.  If  Mrs.  Be- 
man  had  left  her  husband  the  house  on  condition  that  he  pay  the  plain- 
tifif  $6,000,  and  he  had  accepted  the  devise,  he  would  have  become 
personally  liable  to  pay  the  legacy,  and  plaintiff  could  have  whatever 
the  value  of  the  house.  *  *  *  That  would  be  because  the  testatrix 
had  in  substance  bequeathed  the  promise  to  plaintiff,  and  not  because 
close  relationship  or  moral  obligation  sustained  the  contract.  The  dis- 
tiriction  between  an  implied  promise  to  a  testator  for  the  benefit  of  a 
third  party  to  pay  a  legacy  and  an  unqualified  promise  on  a  valuable 
consideration  to  make  provision  for  the  third  party  by  will  is  discerni- 
ble. The  tendency  of  American  authority  is  to  sustain  the  gift  in  all 
such  cases  and  to  permit  the  donee  beneficiary  to  recover  on  the  con- 
fract.  Matter  of  Edmundson's  Estate  (1918,  Pa.)  259  Pa.  429,  103 
Atl.  277,  2  A.  L.  R.  1150.  The  equities  are  with  the  plaintiff,  and  they 
may  be  enforced  in  this  action,  whether  it  be  regarded  as  an  action 
for  damages  or  an  action  for  specific  performance  to  convert  the  de- 
fendants into  trustees  for  plaintiff's  benefit  under  the  agreement. 

The  judgment  should  be  affirmed,  with  costs.     *     *     * 


SECTION  3.— CONTRACTS  FOR  THE  BENEFIT  OF  A 

CREDITOR  OF  THE  PROMISEE 
The  second  situation  with  which  we  have  to  deal  in  considering 
the  rights  of  third  party  beneficiaries,  may  be  stated  as  follows: 
Suppose  that  A.,  instead  of  desiring  to  make  a  gift  to  C,  is  in- 
debted to  C,  and  that,  in  a  contract  between  A.  and  B.,  B.  prom- 
ises to  pay  C.  the  sum  Avhich  otherwise  he  would  have  promised 
to  pay  A.  A.'s  object,  here,  is  not  to  make  a  gift  to  C,  but  to  pay 
his,  A.'s,  debt  to  C.  C.  is  still  called  a  beneficiary,  but  obviously  he 
is  a  different  kind  of  beneficiary  from  the  beneficiary  occupying  the 
position  of  a  donee.  May  C,  under  these  circumstances,  sue  B.? 
May  A.  sue  B.  ?  A.,  being  a  party  to  the  contract,  it  would  certainly 
seem  that  he  could  sue.  How  much  could  A.  recover  from  B.?  Is 
A.  damaged  to  the  full  amou,nt?  If  C.  is  deemed  to  have  the  right 
to  sue  B.,  is  there  anything  to  prevent  A.  also  from  suing  B.? 
■Could  it  be  said  that  there  is  but  one  right  to  sue,  and  that  that 
right  belongs  to  the  beneficiary  C,  and  that  C.  has  in  some  way 


252  CONTRACTS  (Part  1 

obtained  the  right  to  sue  B.  which  A.  formerly  had.  If  the  law 
gave  C.  the  right  of  A.  to  sue  B.,  would  this  not  involve  a  discharge 
of  liability  of  A.  to  C,  and  is  there  anything  in  the  situation  tend- 
ing to  show  that  C.  has  given  up  his  right  to  sue  A.,  or  that  it  is 
just  to  deprive  him  of  such  right?  If  we  are  able  to  say  that,  in 
some  way,  not  yet  explained,  C.  may  sue  B.,  when  does  C.  obtain 
his  right,  at  the  time  the  contract  is  entered  into,  or  upon  notice  to 
C,  or  upon  C.'s  giving  his  assent. 

Finally,  it  may  be  asked :  Are  the  rights  of  a  beneficiary,  C,  a 
donee  of  A.,  the  same  in  origin  and  extent  as  the  rights  of  a  bene- 
ficiarv,  C,  a  creditor  of  A.,  with  respect  to  a  contract  between  A. 
and  B.? 


MEEOH  V.  ENSIGN. 

(Supreme  Court  of  Errors  of  Connecticut,   ISSl.     49  Conn.  191, 
44  Am.  Rep.  225.) 

Carpenter,  J.  The  plaintififs  held  a  mortgage  on  real  estate.  The 
defendant  purchased  the  equity  of  redemption,  agreeing  with  the  mort- 
gagor to  pay  the  mortgage  debt.  Subsequently  the  mortgage  was  fore- 
closed— the  property  then  being  worth  less  than  the  mortgage  debt — 
leaving  a  balance  unpaid.  This  action  is  brought  to  recover  the  bal- 
ance.    *>!--* 

We  now  have  the  naked  question  whether  the  owner  of  a  debt  se- 
cured by  a  mortgage  may  maintain  an  action  on  the  promise  made  by 
the  purchaser  of  the  equity  of  redemption  to  the  mortgagor  to  pay 
the  debt  without  an  assignment  of  the  right  of  action  which  that  prom- 
ise gives. 

As  a  rule  actions  on  contracts  can  be  brought  only  by  him  with 
whom  the  contract  was  made  and  from  whom  the  consideration  moved. 
The  legal  title  is  deemed  to  be  in  him  alone  and  strangers  to  the  con- 
tract cannot  sue.  The  rule  is  a  salutary  one  and  should  not  be  de- 
parted from  except  for  good  reasons.  There  are,  however,  some  ex- 
ceptions to  it.  Actions  of  assumpsit  may  be  maintained  in  some  in- 
stances where  there  is  no  express  contract  with  the  plaintiff  and  where 
the  consideration  does  not  move  from  him.  If  A.  receives  money  from 
B.  to  be  paid  to  C,  C.  may  maintain  an  action  against  A.  These  cases, 
however,  are  exceptions  only  in  appearance.  They  in  fact  recognize 
the  general  rule  and  are  really  within  it ;  for  the  action  is  not  brought 
on  the  express  promise  by  A.  to  B.,  but  on  an  implied  promise  by  A.  to 
pay  the  money  to  C. 

Another  class  of  exceptions  is  where  the  contract  has  for  its  object 
a  benefit  to  a  third  party  and  is  made  with  that  intent.  Some  early 
English  cases  in  which  promises  were  made  to  a  father  or  uncle  for 
the  benefit  of  a  child  or  nephew  are  instances  of  this  class.  There 
may  also  be  cases  in  which  a  third  party  may  have  some  peculiar  equity 
in  the  subject-matter  of  a  contract  which  will  enable  him  to  maintain 
a  bill  in  equity  to  enforce  it. 

Does  this  case  fall  within  any  exception  recognized  by  authority  and 
supported  by  principle  ?  Before  alluding  to  decided  cases  let  us  examine 
the  case  with  some  care  in  the  light  of  the  circumstances,  for  the  pur- 
pose of  discovering  just  what  the  intention  of  the  parties  was  and  pre- 
cisely what  the  defendant  promised  to  do. 


Ch.  4)  RIGHTS   OF   THIRD    PARTIES   IN   CONTRACTS  253 

^^'hat  was  the  transaction?  It  was  not  a  sale  of  a  piece  of  land 
for  a  fixed  price,  equal  to  the  value  of  the  land,  so  as  to  create  a  debt 
for  that  sum ;  but  was  simply  a  sale  of  the  equity  of  redemption.  The 
distinction  between  the  land,  unincumbered,  and  an  equity  of  redemp- 
tion, is  obvious  enough,  and  is  an  important  one,  as  on  it  depend  in  a 
great  degree  the  rights  and  obligations  of  the  parties.  The  defendant 
purchased  the  equity  of  redemption.  The  finding  is  that  the  mort- 
gagor "conveyed  to  the  defendant  said  real  estate  subject  to  said  mort- 
gage." So  that  the  only  debt  brought  into  existence  by  the  transaction 
was  the  price  agreed  to  be  paid  for  the  equity  of  redemption.  The 
mere  purchase  raised  no  debt  to  the  mortgagor  which  the  defendant 
was  to  discharge  by  paying  the  incumbrance.  By  the  contract  of  as- 
sumption he  obliged  himself  to  the  mortgagor  to  pay  the  mortgage  debt. 
Whether  that  raised  any  personal  obligation  to  the  mortgagee  is  the 
question  in  the  case.  If  the  probable  intention  of  the  parties  is  to 
govern  it  is  difficult  to  find  any  such  liability  in  the  transaction.  The 
mortgagee  was  not  a  party  to  it,  no  part  of  the  consideration  moved 
from  him,  and  he  was  in  no  worse  condition  because  of  it.  He  still 
had  the  security  of  the  land  and  the  personal  responsibility  of  the 
mortgagor,  and  that  is  all  he  contracted  for  or  required.  The  parties 
contracted  with  reference  to  their  own  interests,  not  his;  to  benefit 
themselves,  not  him.  He  had  no  legal  or  equitable  interest  in  the 
contract  and  there  is  no  room  for  the  presumption  that  it  was  intended 
for  his  benefit. 

There  was  no  agency,  express  or  implied.  The  mortgagor  would 
doubtless  be  surprised  at  the  suggestion,  should  it  be  made,  that  he  was 
acting  as  the  agent  of  the  mortgagee.  There  was  no  substitution  or 
novation,  for  that  requires  three  parties,  and  here  were  only  two ; 
besides  the  original  debtor  was  not  discharged. 

It  was  not  the  object  of  the  parties  to  give  the  mortgagee  additional 
security ;  and  to  interpret  it  in  that  sense  is  to  give  it  a  force  and 
meaning  never  contemplated  by  the  parties,  and  is  in  efifect  making  a 
contract  for  them.  The  only  contract  which  they  made  was  simply 
this,  the  defendant  agreed  that  he  would  pay  the  mortgagor's  debt.  The 
promisee  alone  had  the  legal  and  equitable  interest.  It  follows  that 
he  alone  can  enforce  it  unless  he  imparts  that  right  to  others.  That 
he  may  sue  will  not  be  disputed.  If  the  mortgagee  has  that  right  by 
force  of  the  contract,  then  two  persons  wholly  independent  of  each 
other  have  an  equal  right.  If  either  may  sue  both  may,  and  a  suit  by 
one  will  not  abate  or  bar  a  suit  by  the  other ;  and  a  discharge  by  one 
for  any  cause  short  of  a  fulfillment  will  not  discharge  the  contract. 
Thus  the  promisor  may  be  harassed  with  two  suits  at  the  same  time 
on  the  same  contract,  and  if  he  would  compromise  with  the.  promisee 
he  must  obtain  the  consent  of  a  stranger.  If  this  is  the  law  it  is  an 
anomaly,  for  another  instance  of  this  kind  is  hardly  to  be  found  in 
the  whole  range  of  jurisprudence. 

We  are  aware  that  there  are  decisions  from  courts  of  the  highest 
authority,  and  whose  opinions  are  entitled  to  the  highest  respect,  which 
hold  that  the  creditor  may  sue  on  such  contracts ;  perhaps  it  is  not  too 
much  to  say  that  the  prevailing  current  of  authority  in  this  country  is 
in  that  direction;  but  believing  as  we  do  that  they  are  not  founded 
in  good  reason  or  sound  policy  we  cannot  accept  them  as  law.  The 
question  is  an  open  one  in  this  State,  and  principle,  rather  than  prece- 
dents not  founded  in  principle,  should  determine  it. 


254  CONTRACTS  (Part  1 

We  cannot  undertake  to  examine  in  detail  the  cases  alluded  to ;  we 
can  only  refer  in  a  general  way  to  the  reasoning  by  which  they  are 
supported.  It  is  interesting  to  note  the  various  grounds  on  which 
they  stand,  some  of  which  are  not  only  weak  in  themselves,  but  fail 
to  strengthen  the  others.  It  is  an  argument  of  no  little  weight  against 
the  correctness  of  decisions  that  they  seem  to  require  disconnected 
and  inharmonious  reasons  to  sustain  them. 

Some  of  the  cases  seem  to  proceed  "upon  the  broad  principle  that 
if  one  person  makes  a  promise  to  another,  for  the  benefit  of  a  third 
person,  that  third  person  may  maintain  an  action  on  the  promise ;"  and 
that  without  regard  to  the  question  whether  the  benefit  of  a  third  per- 
son was  the  principal  thing  intended  or  was  a  mere  incident.  Law- 
rence V.  Fox,  20  N.  Y.  268.     *     *     * 

In  cases  of  this  class  the  reasoning  is  not  uniform.  In  snrne  i^  i*^ 
suggested  that  from  the  express  promise  to  the  promisee  the  law  im- 
plies a  promise  to  the  third  person.  In  others  the  principle  of  agency 
is  invoked,  and  the  mortgagor  in  making  the  contract  is  treated  as  the 
agent  of  the  mortgagee.  The  difficulty  with  this  last  position  is  that 
it  is  contrary  to  the  facts. 

In  Urquhart  v.  Brayton,  12  R.  I.  169.  D'urfee,  C.  J.,  holds  the  de- 
fendant liable  to  a  third  person  on  the  ground  of  a  novation,  while 
Potter,  J.,  in  the  same  case  places  the  liability  on  the  ground  of  money 
had  and  received.  There  seem  to  be  several  difficulties  in  treating  it 
as  a  novation ;  first,  it  changes  the  nature  of  the  contract ;  second,  it 
requires  a  third  party,  and  here  are  but  two ;  and  third,  an  essential 
element  of  a  novation  is  wanting,  the  discharge  of  the  original  debtor. 

In  other  cases  the  transaction  is  treated  as  a  sale  of  the  land  irre- 
spective of  the  mortgage  and  a  retention  by  the  purchaser  of  a  portion 
of  the  purchase-money,  to  be  paid  to  tlie  mortgagee.  *  *  *  \A/hen 
the  circumstances  will  warrant  that  view  of  the  lacts  there  is  no  diincul- 
ty.  In  such  cases  the  debtor  actually  places  or  leaves  the  money  in  the 
hands  of  the  promisor  to  be  paid  to  the  creditor,  and  the  notion  for 
money  had  and  received  may  be  maintained,  not  on  a  promise  to  the 
debtor  but  on  an  implied  promise  to  the  creditor. 

Other  cases,  and  this  class  includes  a  large  number,  resort  to  the 
doctrine  of  suretyship.  *  *  *  Wg  agree  that  that  ground  would  be 
tenable,  in  equity  at  least,  if  that  was  the  real  contract  between  the 
parties ;  that  is,  if  the  parties  really  intended  by  the  transaction  to 
furnish  additional  security  to  the  creditor.  If  not,  it  seems  to  us  dif- 
ficult to  support  the  decisions  upon  that  ground.  In  order  to  do  so 
the  court  must  assume  without  reason  and  contrary  to  the  fact  that 
such  was  the  object  and  purpose  of  the  contract.  We  have  already 
endeavored  to  show  that  it  was  not.  Let  us  examine  the  subject  a 
little  further.  There  is  no  express  contract  of  suretyship.  Whatever 
element  of  suretyship  there  is  results  by  operation  of  law  from  the 
position  in  which  the  parties  place  themselves.  The  defendant  agreed 
with  the  debtor  that  he  would  pay  the  debt.  As  between  themselves 
he  thereby  became  the  principal  debtor.  The  original  debtor  not  being 
discharged  he  was  also  liable  to  the  creditor.  If  compelled  to  pay 
he  was  a  surety  only  in  this,  that  he  had  a  right  to  call  on  the  defend- 
ant to  indemnify  him.  But  all  this  did  not  afifect  the  creditor  and  he 
is  not  a  party  to  it.  What  interest  has  he  in  the  transaction?  And  in 
what  consists  his  equity?  To  make  that  relationship  available  to  him, 
it  is  necessary  not  only  to  bring  him  into  contract  relations  with  the 


Ch.  4)  RIGHTS   OF  THIRD   PARTIES   IN   CONTRACTS  255 

Other  parties,  but  also  to  reverse  the  positions  of  the  principal  and 
surety  and  make  the  purchaser  the  surety  instead  of  the  principal. 
Upon  what  principle  can  that  be  done?  By  what  process  of  reasoning 
can  it  be  vindicated?  Again,  there  is  no  implication  of  suretyship  as 
between  the  creditor  and  the  other  parties,  as  no  such  implication  is 
necessary  in  order  to  give  full  effect  to  the  intention  of  the  parties. 

We  come  now  to  a  class  of  cases  which  constitutes  an  important  ex- 
ception to  the  rule  we  are  considering,  that  suits  must  be  brought  by 
the  party  making  the  contract  and  from  whom  the  consideration  mov- 
ed. We  refer  to  those  cases  in  which  the  parties  confessedly  con- 
tracted for  the  benefit  of  third  persons,  not  incidentally  but  as  the 
principal  object.  Some  of  the  cases  cited  by  the  plaintiffs  are  cases 
of  this  description  and  are  not  applicable  to  the  case  at  bar.  There 
may  be  cases,  however,  in  which  this  principle  is  invoked  to  sustain 
actions  by  the  mortgagee  against  the  purcha-ser  of  tlie  equity  of  redemp- 
tion. 

The  principle  itself  is  best  illustrated  by  a  brief  reference  to  a  few 
of  the  leading  cases.  In  Button  v.  Pool,  1  Vent.  318.  the  defendant 
promised  the  father  to  pay  the  daughter  a  sum  of  money  as  a  mar- 
riage portion.  It  was  held  that  the  daughter  might  sue  on  the  prom- 
ise. The  relation  of  the  father  to  the  daughter  and  his  obligation  to 
give  her  a  marriage  portion  seem  to  be  adopted  as  a  substitute  for 
privity  of  contract.  Some  of  the  decisions  in  the  state  of  New  York 
have  taken  a  similar  view  and  treat  the  obligation  of  the  mortgagor  to 
the  mortgagee  as  a  "substitute  for  privity,"  or  "privity  by  substitu- 
tion," to  connect  the  mortgagee  with  the  contract.  Vrooman  v.  Tur- 
ner, 69  N.  Y.  280,  25  Am.  Rep.  195.  *  *  *  Button  v.  Pool,  in 
modem  times  in  this  country,  would  be  upheld  on  the  ground  that  the 
promise  was  intended  for  the  benefit  of  the  daughter  as  its  object. 

In  Felton  v.  Bickinson,  10  Mass.  287,  the  defendant  promised  the 
father  of  a  minor  son  to  pay  the  son  a  sum  of  money  for  his  services. 
After  performing  the  service  it  was  held  that  the  son  might  maintain 
an  action  in  his  own  name.     *     *     * 

And  yet  this  exception  seems  not  now  to  be  recognized  in  England. 
Tweddle  v.  Atkinson,  1  B.  &  S.  393.  Even  in  Massachusetts  the 
tendency  is  to  narrow  the  exception  and  adhere  more  rigidly  to  the 
rule.  Exchange  Bank  v.  Rice,  107  Mass.  39,  9  Am.  Rep.  1.  It  seems 
to  us  that  the  exception  to  the  rule  is  a  reasonable  one  and  should  pre- 
vail. 

The  question  then  recurs,  is  the  case  at  bar  within  the  exception? 
We  have  already  expressed  our  views  as  to  the  nature  of  the  contract 
and  the  real  intent  of  the  parties.  If  we  are  right  it  is  clear  that  the 
question  must  be  answered  in  the  negative. 

That  the  incidental  advantage  to  the  creditor  (if  it  is  an  advantage 
to  have  his  debt  paid  by  one  man  rather  than  another)  is  not  such  a 
benefit  as  the  exception  contemplates,  is  apparent  from  a  consideration 
of  the  possible  and  even  probable  consequences  of  holding  it  to  be  so. 
The  case  before  us  affords  a  good  illustration.  The  debtor  is  insol- 
vent, and  the  property  mortgaged  has  largely  depreciated,  so  that  it 
fails  to  pay  the  debt.  Now  if  the  plaintiffs  may  recover  the  balance 
of  the  defendant,  they  have  a  security  for  their  debt  which  they  did 
not  originally  have,  which  they  never  contracted  for,  and  which  the 
contracting  parties  did  not  intend  they  should  have.  It  in  eff'ect  makes 
him  the  absolute  guarantor  of  the  debt. 


256  CONTRACTS  (Parti 

Whatever  doubt  may  have  existed  as  to  the  state  of  the  law  in  New 
York  on  this  subject,  it  seems  to  be  set  at  rest,  for  the  present  at  least, 
by  recent  decisions.  In  Garnsey  v.  Rogers,  47  N.  Y.  233,  7  Am.  Rep. 
440,  which  was  an  action  hke  this,  the  court  says,  by  Rapallo,  J. :  "I 
do  not  understand  that  the  case  of  Lawrence  v.  Fox,  20  N.  Y.  268,  has 
gone  so  far  as  to  hold  that  every  promise  made  by  one  person  to  an- 
other, from  the  performance  of  which  a  third  would  derive  a  benefit, 
gives  a  right  of  action  to  such  third  party,  he  being  neither  privy  to 
the  contract  nor  to  the  consideration.  To  entitle  him  to  an  action  the 
contract  must  have  been  made  for  his  benefit.  He  must  be  the  person 
intended  to  be  benefited.  *  *  *  jf  g^^^j-j  ^  contract  could  be  enforc- 
ed by  the  creditor  who  would  be  incidentally  benefited  by  its  perform- 
ance, every  agreement  by  which  one  party  should  agree  with  another, 
for  a  consideration  moving  from  him,  to  become  security  for  him  to  his 
creditors,  or  to  advance  money  to  pay  his  debts,  could  be  enforced  by 
the  parties  whose  claims  are  thus  to  be  secured  or  paid.  I  do  not 
understand  any  case  to  have  gone  this  length.''     *     *     * 

We  advise  the  Superior  Court  to  render  judgment  for  the  defend- 
ant. 

Judgment  accordingly. 

THE  HOilE  V.   SELLING  et  al. 
(Supreme  Court  of  Oregon,  1919.     91  Or.  428,   179  Pac.  261.) 

Action  by  The  Home,  a  corporation,  against  Ben  Selling  and  another, 
executors,  and  others.  Judgment  for  plaintiff,  and  defendants  ap- 
peal. 

The  plaintiff  and  the  defendant  Emanuel  May  Investment  Company 
are  corporations.  Emanuel  May,  the  individual,  died  during  the  prog- 
ress of  this  litigation,  and  his  personal  representatives  were  substi- 
tuted. 

On  November  21,  1910,  George  E.  Jacobs  and  his  wife  gave  their 
note  to  the  plaintiff  for  $40,000,  due  ten  years  from  date,  with  "inter- 
est thereon  quarter  yearly  at  the  rate  of  six  per  cent,  per  annum  from 
date  until  paid."  They  stipulated  therein  that,  "in  case  suit  is  insti- 
tuted to  collect  this  note  or  any  part  thereof,"  they  would  pay  a  rea- 
sonable attorney's  fee  to  be  determined  in  the  suit.  At  the  same  time 
they  gave  their  mortgage  to  the  plaintiff'  on  certain  real  property  in 
Portland,  Ore.,  and  "covenanted  and  agreed  to  pay  all  sums  of  money, 
the  principal  and  interest,  specified  in  said  promissory  note  at  the  time 
therein  designated."  On  February  25,  1913,  they  conveyed  the  prem- 
ises to  Emanuel  Alay  by  deed  duly  executed,  containing  a  statement  to 
the  effect  that  the  property  was  subject  to  the  mortgage  mentioned, 
and  that  "the  grantee  herein  in  part  consideration  for  this  conveyance 
assumes  payment  of  the  $40,000  unpaid  balance  of  the  first  of  said 
mortgages  and  the  interest  accrued  and  to  accrue  thereon."  After- 
wards May  conveyed  to  the  investment  company  by  deed  which  re- 
ferred to  the  premises  and  the  mortgage  and.  contained  the  following 
words : 

"And  Emanuel  May  *  *  *  ^qq^  covenant  to  and  with  Emanuel 
May  Investment  Company,  *  *  *  that  the  above-named  premises 
are  free  from  all  incumbrances  except  the  following  mortgages,  which 
are  as  a  part  of  the  purchase  price,  assumed  by  Emanuel  ]May  Invest- 
ment Company.  *  *  *  Mortgage  of  $40,000  in  favor  of  The 
-Home,  a  corporation.     *     *     * " 


Ch.  4)  RIGHTS   OF   THIRD   PARTIES   IN   CONTRACTS  257 

This  action  was  brought  against  Emanuel  May,  the  grantee  of  Ja- 
cobs and  his  wife  and  against  the  investment  company,  May's  grantee, 
to  recover  the  interest  on  the  note  from  November  21,  1915,  to  Febru- 
ary 21,  1917,  amounting  to  $3,000.  and  the  plaintitT  claims  $300  as  a 
reasonable  attorney's  fee. 

BuRNr^TT,  J.  One  of  the  principal  questions  to  be  determined  is 
whether  or  not  the  defendants  contracted  to  pay  the  mortgage,  and 
whether  the  mortgagee  can  maintain  an  action  directly  against  them. 

According  to  the  decisions  in  this  state,  where  one  accepts  a  deed 
which  not  only  recites  the  mortgage,  but  adds  that  the  grantee  assumes 
it  he  becomes  personally  liable  to  pay  the  mortgage.  *  *  *  It  is 
plain,  therefore,  that  the  acceptance  of  the  deeds  mentioned,  containing 
the  clauses  already  quoted,  made  May  and  the  investment  company 
personally  liable  to  pay  the  mortgage  debt. 

The  original  general  rule  was  that  one  who  is  not  a  party  to  a  con- 
tract cannot  bring  an  action  on  it  in  a  court  of  law,  although  he  might 
be  benefited  by  its  fulfillment.  *  *  *  Oregon  precedents  are  nu- 
merous to  the  effect  that,  on  a  contract  properly  made  for  the  benefit 
of  a  third  person,  he  can  bring  an  action  directly  against  the  promi- 

cr\t*  ^         n^         ^ 

It  is  said  in  13  C.  J.  705,  §  815:  "In  most  of  the  states  the  Eng- 
lish doctrine  that  where  a  person  makes  a  promise  to  another  for  the 
benefit  of  a  third  person  the  latter  cannot  maintain  an  action  on  it  is 
not  recognized  to  the  full  extent,  but  it  is  held,  subject  to  the  qualifica- 
tions hereafter  stated,  that  the  action  may  be  maintained.  This  is  now 
the  prevailing  doctrine  in  the  United  States" — citing  a  wealth  of  au- 
thorities. 

But  it  is  not  every  agreement  to  discharge  an  obligation  to  a  third 
party  that  will  support  an  action  at  law  by  the  latter.  The  principle 
is  thus  stated  by  Mr.  Chief  lustice  Bean  in  Washburn  v.  Interstate 
Investment  Co.,  26  Or.  436.  441,  38  Pac.  620,  621:  "The  prevailing 
doctrine  in  this  country  undoubtedly  is  that,  where  one  person,  as  a 
consideration  or  part  consideration  for  an  executed  contract,  prom- 
ises another,  for  a  consideration  moving  from  him,  to  pay  or  discharge 
some  legal  obligation  or  debt  due  from  such  other  to  a  third  person,  the 
latter,  although  a  stranger  to  the  consideration,  and  not  an  immediate 
party  to  the  contract,  may  maintain  an  action  thereon,  if  it  was  made 
directly  and  primarilv  for  his  benefit." 

In  Vrooman  v.  Turner,  69  N.  Y.  280,  25  Am.  Rep.  195,  the  follow- 
ing language  was  used,  and  approved  in  Kansas  City  Sewer  Pipe  Co.  v. 
Thompson,  120  Mo.  218,  25  S.  W.  522:  "To  give  a  third  party  who 
may  derive  a  benefit  from  the  performance  of  the  promise  an  ac- 
tion, there  must  be :  First,  an  intent  by  the  promisee  to  secure  some 
benefit  to  the  third  party;  and,  second,  some  privity  between  the 
two,  the  promisee  and  the  party  to  be  benefited,  and  some  obligation 
or  duty  owing  from  the  former  to  the  latter  which  would  give  him 
a  legal  or  equitable  claim  to  the  benefit  of  the  promise,  or  an  equiva- 
lent from  him  personally." 

The  present  case  comes  within  the  doctrine  thus  announced,  which, 
we  think,  is  well  settled  by  the  authorities.  The  stipulation  to  pay 
the  mortgage  was  for  the  benefit  of  the  holder  thereof,  directly.  There 
was  a  privity  between  the  mortgagor,  who  is  the  promisee,  and  the 
holder  of  the  mortgage,  resulting  from  that  instrument.  There  was 
B.&B.Bus.Law— 17 


258  CONTRACTS  (Part  1 

an  obligation  from  the  original  mortgagor  to  the  mortgagee  to  pay ; 
hence,  when  the  mortgagor  conveyed  his  property  to  May,  who  as- 
sumed the  mortgage,  at  once  an  obligation  arose  which,  under  our 
precedents,  considering  tlie  lex  fori,  could  be  enforced  by  an  action  at 
law.     *     *     * 

One  reason  given  by  the  courts  which  refuse  to  enforce  such  an  obli- 
gation except  in  equity,  is  that  the  immediate  parties  to  the  agreement 
could  annul  the  same,  but  that  matter  is  controlled  by  this  doctrine, 
that  such  a  contract  cannot  be  rescinded  by  the  parties  thereto  after 
it  has  been  acted  upon  or  accepted  by  the  third  party.     *     *     * 

Bringing  an  action  by  the  mortgagee  on  the  contract  for  his  benefit 
is  an  acceptance  thereof  by  him.  *  *  *  jf  ^i^q  rescission  of  the  con- 
tract by  Jacobs  had  been  mooted  here,  it  is  foreclosed  by  the  institu- 
tion of  this  action,  which  makes  it  impossible  now  to  abrogate  it  with- 
out the  consent  of  the  plaintiff.     *     *     * 

The  second  defense,  to  the  effect  that  neither  May  nor  the  invest- 
ment company  ever  entered  into  any  contract  or  agreement  with  the 
plaintiff  to  pay  it  any  sum  of  money  whatever,  is  sham,  in  the  legal 
sense,  because,  as  the  record  discloses,  the  acceptance  of  the  deed 
drawn  in  the  form  stated  amounts  to  a  contract  to  pay  the  mortgage 
to  the  holder  thereof.     *     *     * 

In  assuming  the  payment  of  the  mortgage  the  covenant  therein  as 
distinguished  from  the  separate  personal  note  w^as  the  measure  of  the 
grantee's  duty.  The  obligation  assumed  by  him  must  be  construed 
according  to  its  terms,  and  is  not  to  be  enlarged  beyond  them.  The 
present  grantees  did  not  agree  to  respond  directly  to  the  conditions 
of  the  note,  but  only  to  the  mortgage,  which  latter  instrument  does 
not  directly  bind  them  to  pay  more  than  the  principal  and  interest  on 
the  note ;  hence  the  attorney's  fee  must  be  laid  out  of  the  case,  al- 
though the  note  itself  is  quoted  in  the  complaint.     *     *     * 

On  the  authority  of  Hicks  v.  Hamilton,  144  AIo.  495,  46  S.  W.  432, 
66  Am.  St.  Rep.  431,  the  contention  is  made  that  the  investment  com- 
pany is  a  remote  grantee,  and  as  such  is  not  liable  here.  In  that  case 
the  mortgagor  conveyed  his  land  merely  "subject  to  the  mortgage," 
without  requiring  his  grantee  to  assume  or  pay  the  incumbrance.  The 
latter  in  turn  deeded  the  tract  to  another  by  an  indenture  w'hich  re- 
quired the  grantee  to  "assume  and  pay  the  mortgage."  Thus  the  con- 
tinuity of  personal  liability  was  interrupted  so  that  its  chain  did  not 
unite  the  original  mortgagee  with  the  ultimate  grantee,  and  for  this 
reason  it  was  held  that  the  latter  was  directly  liable  to  the  former. 
The  case  at  bar  is  different  because  the  clause  assuming  and  agreeing 
to  pay  the  mortgage  is  common  to  both  successive  conveyances,  which 
constitutes  an  unbroken  sequence  of  personal  liability  from  the  original 
mortgagors  down  to  the  last  grantee.  Of  course  there  can  be  but  one 
satisfaction  of  the  demand,  although  both  grantees  are  liable. 

The  result  is  that  the  judgment  is  modified  by  allowing  the  plaintiff" 
to  recover  from  the  defendants  the  sum  of  $3,000,  without  any  attor- 
ney's fees. 


Ch.  4)  RIGHTS  OF  TiiruD  parties  in  contracts  259 

SECTION  4.— NATURE  AND  REQUISITES  OF  AN 
ASSIGNMENT 

From  the  preceding  cases,  it  appears  that,  in  many  jurisdictions, 
it  is  possible  for  a  third  party  to  acquire  rights  in  a  contract  between 
other  persons  and  that  such  rights  arise  out  of  the  express  provi- 
sions of  the  contract.  It  is  also  possible  for  one  to  acquire  inter- 
ests in  a  contract  between  other  persons  by  virtue  of  an  act  per- 
formed by  one  of  the  parties  to  the  contract  subsequent  to  its  for- 
mation. Such  an  act  is  called  an  assignment.  The  party  who 
executes  it  is  called  the  assignor,  and  the  party  to  whom  the  right 
is  transferred  is  called  the  assignee.  An  assignment,  therefore,  is 
the  manifestation,  in  some  form  prescribed  by  law,  of  the  intention 
of  the  assignor  to  substitute  the  assignee  in  his  place  with  respect 
to  the  right  or  other  relation  assigned.  When  tangible  personal 
property  is  the  subject  of  a  transfer  by  an  owner  who  is  parting 
with  his  entire  interest,  we  speak  of  such  transaction  as  a  sale.  The 
parties  are  referred  to  as  vendor  and  vendee,  or,  more  commonly, 
as  buyer  and  seller.  When  the  subject  of  the  transfer  is  land,  the 
transferor  is  called  the  grantor,  and  the  transferee,  the  grantee. 
When  the  subject  of  transfer  is  some  right  other  than  the  rights 
and  other  relations  constituting  ownership  of  tangible  property,  it 
is  common  to  speak  of  such  an  interest  as  a  chose  in  action  and  to 
speak  of  its  transfer  as  an  assignment.  Sales  of  tangible  personal 
property,  grants  of  land,  and  assignments  of  choses  in  action  have 
many  points  in  common.  The  sale  of  a  horse,  a  grant  of  a  farm, 
and  the  assignment  of  the  right  to  demand  payment  of  $100  from 
the  assignor's  debtor,  all  have  this  in  common:  Each  transaction 
is  for  the  purpose  of  placing  the  transferee  in  the  same  position  with 
respect  to  the  subject-matter  of  the  transfer  as  the  transferor  occu- 
pied. But  there  are  a  great  many  differences  in  these  transac- 
tions. A  special  body  of  rules  has  been  developed  which  relate  to 
the  transfer  of  land.  This  branch  of  the  law  is  not  taken  up  in 
this  volume.  There  is  also  a  special  body  of  rules  pertaining  to 
sales  of  personal  property.  This  branch  of  law  furnishes  the  sub- 
ject-matter of  Part  IV  of  this  volume.  The  cases  following  indi- 
cate some  of  the  general  problems  which  grow  out  of  assignments 
of  choses  in  action.  In  Part  III  of  this  volume,  we  take  up,  in  some 
detail,  the  study  of  the  methods  of  transfer,  the  rights  and  liabilities 
of  parties  with  respect  to  that  special  type  of  chose  in  action  known 
as  a  negotiable  instrument.  The  expression  "chose  in  action"  in- 
cludes claims  which  arise  other  than  from  contracts,  but  in  the  cases 
following  we  are  chiefly  concerned  with  questions  relating  to  the 
assignment  of  rights  arising  out  of  contracts. 

What  are  some  of  the  more  important  problems  pertaining  to 
assignments?  In  the  first  place,  it  is  necessary  to  ascertain  what 
methods  have  been  prescribed  to  effectuate  a  transfer  of  a  chose 
in  action.  If  A.  owes  B.  $100,  may  B.  give  to  C.  the  right  to  de- 
mand payment  from  A.,  or  is  consideration  necessary  for  the  trans- 


2G0  CONTRACTS  (Part  1 

fer?  Are  there  any  requirements  as  regards  form?  The  next  ques- 
tion to  arise  is:  Are  all  kinds  of  rights  assignable?  A.  may  owe 
B.  the  duty  of  paying  B.  $100,  or  of  refraining  from  doing  certain 
things,  or  of  transferring  to  B.  certain  interests  in  property.  Are 
any  or  all  of  these  rights  of  B.  capable  of  assignment  by  B.?  Again, 
the  question  may  arise:  Are  duties  assignable?  This  question 
has  a  double  aspect.  B.  owes  a  certain  duty  to  A.  May  B.  assign  or 
delegate  this  duty  to  C.  in  such  a  way  as  to  relieve  himself  from 
all  further  duty  to  A.,  so  that,  even  in  the  event  that  C.  failed  to 
perform,  B.  would  not  be  liable  to  A.  for  non-performance?  If 
this  cannot  be  done,  may  B.  at  least  delegate  the  duty  to  C,  so  that, 
if  C.  does  perform,  A.  will  be  obliged  to  accept  C.'s  performance  or 
tender  of  performance,  just  as  if  it  were  made  by  B.  Finally,  the 
question  arises  as  to  the  nature  of  the  interest  acquired  by  the 
assignee.  Does  the  assignee  take  the  right,  subject  to  all  the  de- 
fenses and  claims  of  other  parties,  including  prior  assignees,  to 
which  it  was  subject  in  the  hands  of  the  assignor;  or,  will  the 
assignee,  if  he  is  ignorant  of  these  outstanding  claims  and  defenses 
possessed  by  the  assignor's  obligor,  take  free  from  such  claims  of 
ownership  and  defenses? 

AXNING  V.  ANNING  et  al. 
(High  Courl  of  Australia,  1907.    4  C.  L.  R.  10J9.) 

Griffith,  C.  J.  The  question  for  determination  in  this  case  is  as  to 
the  effect  to  be  given  to  an  instrument  under  seal  executed  by  William 
Anning  a  few  days  before  his  death,  and  alleged  to  have  been  made 
with  a  view  to  avoid  payment  of  succession  duty.  The  instrument, 
which  was  in  form  a  deed  poll,  witnessed  that  Anning  freely  and  vol- 
untarily conveyed  to  his  wife  (the  appellant)  and  his  five  infant  chil- 
dren (the  respondents)  all  his  personal  estate  of  whatsoever  nature 
and  wheresoever  situate,  including  a  station  called  Chudleigh  Park,  his 
share  in  another  pastoral  property  called  Mount  Sturgeon,  all  cattle 
and  horses  thereon,  and  all  moneys  lying  to  his  credit  in  three  banks, 
to  be  equally  divided  between  the  donees.    *    *     * 

Cooper,  C.  J.,  *  *  *  held  that  the  deed  was  intended  to  operate 
as  an  immediate  irrevocable  gift.    '■■'    *    * 

The  whole  law  on  the  subject  is  contained  in  the  judgment  of  Turner, 
L.  J.,  in  Alilroy  v.  Lord,  4  De.  G.,  F.  &  J.  264,  274 :  '1  take  the  law  of 
this  court  to  be  well  settled,  that,  in  order  to  render  a  voluntary  set- 
tlement valid  and  effectual,  the  settlor  must  have  done  everything 
which,  according  to  the  nature  of  the  property  comprised  in  the  settle- 
ment, was  necessary  to  be  done  in  order  to  transfer  the  property  and 
render  the  settlement  binding  upon  him.  He  may  of  course  do  this  by 
actually  transferring  the  property  to  the  persons  for  whom  he  intends 
to  provide,  and  the  provision  will  then  be  effectual,  and  it  will  be  equal- 
ly eft'ectual  if  he  transfers  the  property  to  a  trustee  for  the  purposes 
of  the  settlement,  or  declares  that  he  himself  holds  it  in  trust  for  those 
purposes;  and  if  the  property  be  personal,  the  trust  may,  as  I  appre- 
hend, be  declared  either  in  writing  or  by  parol :  but,  in  order  to  render 
the  settlement  binding,  one  or  other  of  these  modes  must,  as  I  under- 
stand the  law  of  this  court,  bp  resorted  to,  for  there  is  no  equity  in 
this  court  to  perfect  an  imperfect  gift."    *    *    * 


Ch.  4)  RIGHtS   OP   THIRD   PARTIES   IN   CONTRACTS  261 

It  seems  clear  to  nic  that  the  testator  intended  to  divest  himself  of  his 
legal  ownership.  The  question  therefore  arises,  and  must  be  answered 
with  respect  to  each  class  of  property  described  in  the  deed,  whether 
the  donor  did  everything  which,  according  to  the  nature  of  the  prop- 
erty, was  necessary  to  be  done  in  order  to  transfer  the  property  and 
make  the  gift  binding  upon  himself.     *     *     * 

With  regard  to  some  of  the  property  no  difficulty  arises.  The  Chud- 
leigh  Park  Station  was  held  under  lease  from  the  Crown,  which  by 
law  was  transferable  by  an  instrument  duly  executed  and  registered  in 
the  Lands  Department.  Anning  did  not  execute  any  such  instrument. 
The  attempted  gift  of  this  leasehold  was  therefore  inettectual.  The 
same  consequences  follow  as  to  certain  promissory  notes  payable  to 
order,  w^hich  the  donor  failed  to  endorse.  With  regard  to  the  donor's 
share  in  the  Mount  Sturgeon  property  and  the  stock  upon  it,  his  inter- 
est, being  equitable  only,  was  effectually  assigned  by  the  deed. 

W^ith  regard  to  his  money  in  the  banks,  some  of  which  w^as  on  fixed 
deposit  and  some  at  current  account,  a  more  difficult  question  arises. 
The  donor's  interests  in  all  these  funds  were  choses  in  action.  In 
Fortescue  v.  Barnett,  3  Myl.  &  K.  36,  Sir  John  Leach,  M.  R.,  held  that 
a  voluntary  assignment  by  deed  of  a  policy  of  life  assurance  was  valid 
and  complete  without  notice  to  the  assurance  company.  He  put  the 
case  on  the  same  footing  as  an  assignment  of  a  bond,  and~^ seems  to 
have  thought  that  as  all  property  is  assignable  in  equity  by  some  means 
or  other,  and  as  no  other  way  of  assigning  a  chose  in  action  than  by 
some  writing  can  be  suggested,  an  assignment  by  deed  is  sufficient. 
In  Edwards  v.  Jones,  1  My.  &  C.  226,  however,  Lord  Cottenham,  C, 
said  that  the  decision  in  Fortescue  v.  Barnett,  supra,  depended  upon 
the  relationship  of  trustee  and  cestui  que  trust  having  been  completely 
created  between  the  assignor  and  assignee.  He  did  not  elaborate  his 
reasons  for  taking  this  view,  but  on  consideration  they  will,  I  think, 
be  found  to  be  these :  Although  a  legal  chose  in  action  was  not  as- 
signable at  law,  a  court  of  equity  would  give  effect  to  it  by  allowing 
the  assignee  to  sue  the  debtor  in  his  own  name.  As  between  the  as- 
signee and  the  debtor  the  absence  of  consideration  for  the  assignment 
was  immaterial.  But  in  such  a  suit  the  assignee  was  bound  to  join 
the  assignor  as  a  defendant.  The  foundation  of  the  jurisdiction  of 
the  court  of  equity  in  such  a  case  was  that  the  assignor  would  not 
take  the  necessary  action  at  law  to  enable  the  assignee  to  get  the  benefit 
of  the  assignment.  But  this  assumes  some  breach  of  duty  on  the  part 
of  the  assignor,  against  the  consequences  of  which  the  court  wiy  re- 
lieve the  assignee.  In  the  absence  of  consideration  for  the  assignment 
it  is  clear  that  there  is  no  such  breach  of  duty,  unless  the  assignor  has 
become  a  trustee  for  the  assignee.  Another  way  of  arriving  at  the 
same  result  is  to  say  that  a  suit  by  the  assignee  of  a  legal  chose  in 
action  against  the  debtor  was  only  an  instance  of  the  class  of  suits 
by  a  cestui  que  trust  in  respect  of  trust  property  when  the  trustee  re- 
fuses to  take  the  necessary  steps  for  its  protection. 
_  Unless,  therefore,  this  relation  existed  between  the  assignor  and  as- 
signee the  court  would  not  interfere  in  the  absence  of  valuable  con- 
sideration for  the  assignment.     *     *     * 

In  my  opinion,  *  *  *  the  donees  are  entitled  to  the  benefit  of  the 
fund  in  question.  Assuming  that  the  gift,  qua  gift,  fails,  the  deed, 
nevertheless,  *  *  *  operated  as  a  covenant.  The  implied  cove- 
nant is  not  to  do  anything  which  will  have  the  effect  of  preventing  the 


^62  CONTRACTS  (Part  1 

donee  from  obtaining  the  benefit  of  this  donation.  A  receipt  of  the 
debt  by  the  donor  or  his  executor  before  notice  given  by  the  donee  tO' 
the  debtor  would  be  a  breach  of  this  obHgation,  for  which  an  action  at 
law  would  lie  by  the  donee  against  the  donor  or  his  executor,  in  which 
action  the  amount  of  the  debt,  or  so  much  of  it  as  was  received  by  the 
donor  or  his  executor,  could  be  recovered.    *    *    * 

For  these  reasons  I  am  of  opinion  that  the  assignment  was  effectual 
as  to  the  bank  deposits.  These  considerations  do  not  apply  to  the 
promissory  notes,  as  to  which  the  donees  could  not  by  any  act  on  their 
part  perfect  their  title  without  endorsement  by  the  donor.    *    *    * 

With  respect  to  the  horses  and  cattle  and  other  chattel  property,  ca- 
pable of  manual  delivery  comprised  in  the  deed,  the  gift  would  be  valid 
according  to  the  law  of  England,  which  allows  such  property  to  be 
transferred  either  by  delivery  or  by  instrument  under  seal.  But  the 
law  of  Queensland  is  different.  By  the  Bills  of  Sale  Acts  1891  a  deed 
purporting  to  transfer  chattels  is  absolutely  void,  even  as  between  the 
assignor    and    assignee,    until   registered    as   prescribed   by   that   Act. 

=!;       ^       * 

[Dissenting  opinion  of  Hicgins,  J.,  omitted.] 


In  re  SMITH'S  ESTATE. 

Appeal  of  PMNNSYLVAJMA  CO. 

(Supreme  Court  of   Pennsylvania.   1S91.     144  Pa.  428,   22   Atl.  016, 
27  Am.  St.  Rep.  641.) 

Accounting  of  the  Pennsylvania  Company  for  Insurance  on  Lives 
and  Granting  of  Annuities,  as  executor  of  the  estate  of  Thomas  Smith, 
deceased.  Henry  S.  Parmalee.  as  guardian  of  Thomas  Smith  Kelly, 
claimed  and  was  awarded  certain  bonds  left  by  testator,  on  the  ground 
that  testator  held  them  in  trust  for  said  ward.     The  executor  appeals. 

Clark,  J.  The  appellant  is  the  Pennsylvania  Company  for  Insur- 
ance on  Lives  and  Granting  Annuities,  trustee  under  the  will  of  Thom- 
as Smith,  deceased;  the  appellee,  Henry  S.  Parmalee,  guardian  of 
Thomas  Smith  Kelly,  a  minor.  The  proceeding  was  the  adjudica- 
tion of  an  account,  filed  by  the  trustee  under  the  will  of  Thomas  Smith, 
of  the  principal  and  income  of  $13,000  of  Pensacola  &  Atlantic  Rail- 
road Company's  coupon  bonds,  which  the  said  trustees  claimed  were 
part  of  the  estate  of  decedent,  and  passed  to  them  under  his  will.  The 
guardian  of  Thomas  Smith  Kelly,  a  minor,  appeared  before  the  audit- 
ing judge,  and  claimed  that  the  bonds  had  been  held  by  the  testator 
in  trust  for  said  minor,  and  should  be  awarded  to  the  latter's  guard- 
ian. The  auditing  judge  and  the  judges  of  the  orphans'  court  sus- 
tained the  guardian's  claim,  and  awarded  him  the  fund. 

The  owner  of  personal  property,  in  order  to  make  a  voluntary  dis- 
position of  it,  may,  by  a  proper  transfer  of  the  title,  make  a  gift  of 
it  direct  to  the  donee,  or  he  may  impress  upon  it  a  trust  for  the  benefit 
of  the  donee.  It  is  well  settled,  however,  that  whether  a  gift  or  a  trust 
is  intended,  if  the  transaction  still  remains  imperfect  and  executory, 
equity  will  not  aid  in  its  enforcement.  The  expression  of  a  mere  in- 
tention to  create  a  trust,  therefore,  without  more,  is  insufficient.  Like 
a  promise  to  give,  it  will  not  be  enforced  in  equity.  *  *  *  Almost  all 
trusts  are  in  a  certain  sense  executory.     Ordinarily,  a  trust  cannot  be 


Ch.  4)  RIGHTS   OF  THIRD   PARTIES   IN   CONTRACTS  263 

executed  except  by  conveyance.  There  is,  in  most  cases,  something 
to  be  done.  But  this  is  not  the  sense  in  which  a  trust  is  said  to  be 
executory.  An  executory  trust,  properly  so-called,  is  one  in  which 
the  limitations  are  imperfectly  declared,  and  the  donor's  intention  is 
expressed  in  such  general  terms  that  something  not  fully  declared  is 
required  to  be  done  in  order  to  complete  and  perfect  the  trust,  and 
to  give  it  effect.  \\'hen  the  limitations  of  a  trust  are  fully  and  per- 
fectly declared,  the  trust  is  regarded  as  an  executed  trust.  *  *  * 
Nor  in  such  case,  if  it  appear  that  the  intention  of  the  donor  was  to 
adopt  either  one  of  these  methods  of  disposition,  will  a  court  resort  to 
the  other  for  the  purpose  of  carrying  it  into  effect.  What  is  clearly  in- 
tended as  a  voluntary  assignment  or  a  gift,  but  is  imperfect  as  such, 
cannot  be  treated  as  a  declaration  of  trust.  If  this  were  not  so,  an 
expression  of  present  gift  would  in  all  cases  amount  to  a  declaration 
of  trust,  and  any  imperfect  gift  might  be  made  eft'ectual  simply  by 
converting  it  into  a  trust. 

There  is  no  principle  of  equity  which  wdll  perfect  an  imperfect  gift, 
and  a  court  of  equity  will  not  impute  a  trust  where  a  trust  was  in  con- 
templation. *  *  *  Upon  the  same  ground  it  has  been  held  that  a 
paper  of  a  testamentary  character,  but  invalid  for  want  of  proper  exe- 
cution, cannot  be  enlarged  or  converted  into  a  declaration  of  trust. 

*  *     *     In  Richards  v.  Delbridge,  L.  R.  18  Eq.  11-13,  it  was  held 

*  *  *  that  to  create  a  trust  there  must  be  the  expression  of  an  in- 
tention not  to  create  a  present  gift,  but  to  become  a  trustee.  *  *  * 
Although  the  cases  may  not  be  altogether  consistent,  the  rule  is  now, 
we  think,  well  settled  in  accordance  with  the  doctrine  declared  in  Rich- 
ards V.  Delbridge,  supra,  that,  if  the  transaction  is  intended  to  be  ef- 
fected by  gift,  the  court  will  not  give  it  effect  by  construing  it  as  a 
trust.  It  is  well  settled  that  nothing  can  take  effect  as  an  assignment 
or  gift  which  does  not  manifest  an  intention  to  relinquish  the  right  of 
dominion  on  one  hand  and  to  create  it  on  the  other.  If  the  donor  has 
perfected  his  gift  as  he  intended,  and  has  placed  the  subject  beyond  his 
power  or  dominion,  the  want  of  consideration  is  immaterial ;  the  donee's 
right  will  be  enforced.  A  gift  can  only  be  eft'ectual  after  the  intention 
to  make  it  has  been  accompanied  by  delivery  of  possession  or  some 
equivalent  act.  If  it  is  not,  the  transaction  is  not  a  gift,  but  a  contract 
merely.  If  a  trust  is  intended,  it  will  be  equally  effectual  whether  the 
donor  transfer  the  title  to  the  trustee  or  declare  that  he  himself  holds 
the  property  for  the  purposes  of  the  trust.  "It  is  well  settled  that  the 
owner  of  personal  property  may  impress  upon  it  a  valid  present  trust, 
either  by  a  declaration  that  he  holds  the  property  in  trust,  or  by  a  trans- 
fer of  the  legal  title  to  a  third  party  upon  certain  specified  trusts;  in 
other  words,  he  may  constitute  either  himself  or  another  person  trustee. 
If  he  makes  himself  trustee,  no  transfer  of  the  subject-matter  is  nec- 
essary;  but  if  he  selects  a  third  party,  the  subject  of  the  trust  must  be 
transferred  to  him  in  such  mode  as  will  be  effectual  to  pass  the  legal 
title."  *  *  *  In  Richards  v.  Delbridge,  L.  R.  18  Eq.  11-13.  Sir 
George  Jessel  said :  "A  man  may  transfer  his  property  without  valu- 
able consideration  in  one  of  two  ways :  He  may  either  do  such  acts  as 
amount  in  law  to  a  conveyance  or  assignment  of  the  property,  and  thus 
completely  divest  himself  of  the  legal  ownership,  in  which  case  the  per- 
son who  by  those  acts  acquires  the  property  takes  it  beneficially  or  on 
trust  as  the  case  may  be ;  or  the  legal  owner  of  the  property  may,  by 
one  or  other  of  the  methods  recognized  as  amounting  to  a  valid  declara- 


264  CONTRACTS  (Part  1 

tion  of  trust,  constitute  himself  a  trustee,  and,  without  an  actual  trans- 
fer of  the  title,  may  so  deal  with  the  property  as  to  deprive  himself 
of  its  beneficial  ownership,  and  declare  that  he  will  hold  it  from  that 
time  forward  in  trust  for  the  other  person."    *    *    * 

If  the  donor  makes  a  third  party  a  trustee,  he  must  transfer  to  him 
the  subject  of  the  trust  in  such  mode  as  will  be  effectual  to  pass  the 
title.  The  transaction,  as  in  the  case  of  a  gift,  to  be  effectual,  must  be 
accompanied  by  delivery  of  the  subject  of  the  trust,  or  by  some  act  so 
strongly  indicative  of  the  donor's  intention  as  to  be  tantamount  to  such 
a  delivery;  but  where  the  donor  makes  himself  the  trustee,  no  transfer 
of  the  subject-matter  is  necessary.  *  *  *  In  such  cases  no  assign- 
ment of  the  legal  title  is  required,  for  the  nature  and  effect  of  the  trans- 
action is  that  the  legal  title  remains  in  the  donor  for  the  benefit  of  the 
donee.  It  is  conceded  that,  as  the  bonds  of  the  Pensacola  &  Atlantic 
Railroad  Company — the  bonds  in  question — were  not  delivered  to 
Thomas  Smith  Kelly  by  Thomas  Smith,  the  transaction  cannot  be  sus- 
tained as  a  gift.  It  is  clear  that  a  gift  was  not  in  contemplation,  and 
the  only  question  for  our  determination  is  whether  or  not  a  complete 
and  valid  trust  was  created,  for  a  trust  would  seem  to  have  been  con- 
templated. 

There  is  no  certain  form  required  in  the  creation  of  a  trust.  In 
the  case  of  personal  property  or  choses  in  action,  trusts  may  be  proved 
by  parol.  If  the  declaration  be  in  writing,  it  is  not  essential,  as  a 
general  rule,  that  it  should  be  in  any  particular  form.  It  may  be 
couched  in  any  language  which  is  sufficiently  expressive  of  the  inten- 
tion to  create  a  trust.  "Three  things,  it  has  been  said,  must  concur 
to  raise  a  trust — sufficient  words  to  create,  a  definite  subject,  and  a 
certain  or  ascertained  object;  and  to  these  requisites  may  be  added 
another,  viz.,  that  the  terms  of  the  trust  should  be  sufficiently  de- 
clared." Bisp.  Eq.  65,  citing  Cruwys  v.  Colman,  9  Ves.  323.  *  *  * 
The  intention  must  be  a  complete  one,  and  this  requisite  is  especially 
applicable  to  trusts  created  by  voluntaty  dispositions.  "A  mere  in- 
choate and  executory  design  is  not  enough,  and,  unless  there  is  some 
distinct  equity — as  fraud,  for  example — it  cannot  be  enforced."  Bisp. 
Eq.  65.  The  intention  must  be  plainly  manifest,  and  not  derived  from 
loose  and  equivocal  expressions  of  parties,  made  at  different  times, 
and  upon  different  occasions;  but  any  words  which  indicate  with  suf- 
ficient certainty  a  purpose  to  create  a  trust  will  be  effective  in  so  doing. 
It  is  not  necessary  that  the  terms  "trust"  or  "trustee"  should  be  used. 
The  donor  need  not  say  in  so  many  words,  "I  declare  myself  a  trus- 
tee," but  he  must  do  something  which  is  equivalent  to  it,  and  use  ex- 
pressions which  have  that  meaning,  for,  however  anxious  the  court 
may  be  to  carry  out  a  man's  intention,  it  is  not  at  liberty  to  construe 
words  otherwise  than  according  to  their  proper  meaning.  *  ^=  *  jn 
Heartley  v.  Nicholson,  E.  R.  19  Eq.  233,  Vice  Chancellor  Bacon  says : 
"It  is  not  necessary  that  the  declaration  of  a  trust  should  be  in  terms 
explicit,  but  what  I  take  the  law  to  require  is  that  the  donor  should 
have  evinced  by  his  acts,  which  admit  of  no  other  interpretation,  that 
he  himself  had  ceased  to  be,  and  that  some  other  person  had  become, 
the  beneficial  owner  of  the  subject  of  the  gift  or  transfer,  and  that 
such  legal  right  of  it,  if  any,  as  he  retained,  was  held  in  trust  for  the 
donee."    *     *     * 

In  the  case  at  bar  the  subject  of  the  alleged  trust  is  certain,  the 
cestui  que  trust  is  particularly  designated  by  name  and  identified,  while 


Ch.  4)  RIGHTS   OF   THIRD   PARTIES   IN    CONTRACTS  265 

the  terms  are  specific,  and  sufficiently  shown.  The  contention  is.  how- 
ever, that  a  trust  upon  these  terms  was  not  sufficiently  declared ;  that 
the  whole  matter  rested  in  the  undeclared  and  unexecuted  intention 
of  the  donor,  and  was,  therefore,  wholly  without  effect.  Thomas 
Smith,  although  a  married  man,  had  no  children.  He  was  the  owner 
of  a  large  estate,  the  personalty  alone  aggregating  about  $1,000,000. 
Thomas  Smith  Kelly  was  his  nephew,  his  godson  and  namesake,  and, 
although  his  father  and  mother  were  both  living,  he  lived  with  and 
was  maintained  and  educated  by  his  uncle  from  the  age  of  3  years 
until  the  time  of  the  decedent's  death,  on  the  20th  of  May,  1883,  when 
he  was  about  13  years  of  age.  His  uncle  admittedly  stood  in  loco  pa- 
rentis, which  would  seem  to  furnish  a  sufficient  motive  for  making 
this  disposition  of  the  bonds,  and  would  have  the  like  efifect  generally 
to  that  which  attends  the  relation  of  parent  and  child.  *  *  *  The 
bonds  M^ere  purchased  28th  of  January,  1882,  and  the  death  of  the 
decedent  occurred  on  the  20th  of  May,  1883.  A  year  or  more  before  his 
decease — which  was  presumably  near  the  time  when  the  bonds  were 
purchased — Thomas  Smith,  in  a  conversation  with  John  H.  Kelly, 
the  father  of  Thomas  Smith  Kelly,  stated  "he  had  laid  by  or  appro- 
priated some  bonds  for  Tom."  After  his  death,  when  his  box  in  the 
trust  cornpany's  vaults  was  opened,  the  bonds  in  question  were  found 
among  his  assets.  The  envelope  in  which  they  were  contained  w-as 
indorsed:  "13  bonds,  $1,000  each,  held  for  Tom  Smith  Kelly.  [Sign- 
ed] T.  S.  Pensacoia  &  Atlantic  R.  R.  mortgage  bonds."  The  envelope 
contained  bonds  of  that  description  and  amount.  In  the  decedent's 
account-book  was  an  entry  in  his  own  handwriting,  as  follows  :  "*  *  * 
$13,000  of  these  bonds  I  bought  for,  and  are  the  property  of,  my 
nephew  and  godson,  Thomas  Smith  Kelly,  and  belong  to  him.  Thom- 
as Smith.     *     *     * " 

In  the  absence  of  the  precise  terms  "in  trust,"  it  is  difficult  to  suggest 
words  more  expressive  of  a  trust  than  the  words  thus  employed.  We 
are  of  opinion  that  the  trust  is  fully  established,  and  the  decree  of  the 
orphans'  court  is  affirmed,  and  the  appeal  dismissed,  at  the  costs  of  the 
appellant. 


SECTION  5.— INTERESTS  CAPABLE  OF  ASSIGNMENT 


R0DI.7KEIT  V.  ANDREWS. 

(Supreme  Court  of  Ohio,   1906.     74  Ohio   St.   104,  77  N.  E.   747,  5  L    R     \ 
IN.  S.]  564,  6  Ann.  Cas.  761.) 

Summers,  j.  *  *  *  f}^g  question  presented  is  the  right  of  a 
person  in  the  employ  of  another,  in  the  absence  of  a  contract  for  a  defi- 
nite time  of  employment,  to  assign  future  earnings  from  such  employ- 
ment. It  is  well  settled  that  a  mere  expectancy  or  possibility  is  not 
assignable  at  law,  consequently  Avages  to  be  earned  in  the  future,  not 
under  an  existing  engagement,  but  under  engagements  subsequently  to 
be  made,  are  not  assignable.  If  there  is  an  existing  employment,  under 
which  it  may  reasonably  be  expected  that  the  wages  assigned  will  be 
earned,  then  the  possibility  is  coupled  with  an  interest,  and  the  wages 
mav  be  assigned.     *     *     * 


266  CONTRACTS  (Part  1 

Some  of  the  early  cases  were  to  the  effect  that  the  engagement  must 
be  for  a  time  covering  the  wages  assigned.  *  *  *  And  later  cases 
held  that  the  assignment  was  valid  although  the  engagement  was  sub- 
ject to  be  terminated  at  any  time.  But  in  Kane  v.  Clough,  36  Mich. 
436,  24  Am.  Rep.  599,  Cooley,  C.  J.,  states  that  he  is  unable  to  dis- 
tinguish a  case  of  existing  employment  merely,  where  there  is  no' con- 
tract for  a  definite  time,  but  only  an  employment,  and  an  expectation 
of  continuous  work,  from  a  case  of  an  existing  contract  for  a  fixed 
time,  but  subject  to  the  right  to  discharge  at  will,  and,  accordingly,  it 
is  there  ruled  that  an  assignment  of  wages  to  be  earned  in  the  future 
under  an  existing  employment  is  valid.  *  *  *  "When  a  party  has 
entered  into  a  contract  or  arrangement,  by  the  ordinary  and  legitimate 
and  natural  operation  of  which  he  will  acquire  property,  his  existing 
right  thereunder  is  certainly  not  a  mere  naked  hope;  it  is  a  possibil- 
ity of  acquiring  property  coupled  with  a  legal  interest  in  the  contract. 
The  cargo  to  be  obtained  or  the  freight  to  be  earned  by  a  ship  on  a 
voyage  already  contracted  for,  the  wages  to  be  earned  under  an  exist- 
ing employment,  the  payment  to  become  due  under  an  existing  build- 
ing contract,  are  familiar  examples,"  Pom.  Eq.  Jur.  §  1286.  "An  as- 
signment of  his  wages  by  a  laborer,  executed  when  he  is  not  engaged 
in,  and  not  under  contract  for,  the  employment  in  which  the  wages  are 
to  be  earned,  is  too  vague  and  uncertain  to  be  sustained  as  a  valid 
assignment  and  transfer  of  property."  Lehigh  Valley  R.  Co.  v. 
Woodring,  116  Pa.  513,  9  Atl.  58.  But  "an  assignment  of  wages  ex- 
pected to  be  earned  in  the  future  in  a  specified  employment,  though 
not  under  an  existing  employment  or  contract,  is  valid  in  equity." 
Edwards  v.  Peterson,  80  Me.  367,  14  Atl.  936,  6  Am.  St.  Rep.  207. 
The  reason  such  an  assignment  is  not  good  at  law,  but  may  be  in  eq- 
uity, is  tersely  stated  thus :  "To  make  a  grant  or  assignment  valid  at 
law,  the  thing  which  is  the  subject  of  it  must  have  an  existence,  actual 
or  potential,  at  the  time  of  such  grant  or  assignment.  But  courts  of 
equity  support  assignments  not  only  of  choses  in  action,  but  of  con- 
tingent interests  and  expectations,  and  also  of  things  which  have  no 
present  actual  or  potential  existence,  but  rest  in  mere  possibility  only." 
4:      *     ♦ 


BRITISH  WAGGON  CO.  et  al.  v.  LEA  &  CO. 
(Queen's  Bench  Division,  1880.    5  Q.  B.  Div.  149.) 

The  Parkgate  Waggon  Company,  one  of  the  plaintiffs,  let  to  de- 
fendants fifty  railway  waggons,  for  a  term  of  seven  years,  lessor  con- 
tracting to  keep  them  in  repair.  Four  years  after  the  making  of  the 
contract,  the  Parkgate  Waggon  Company  assigned  the  contract 
to  the  British  Waggon  Company,  which  agreed  to  do  plaintift''s 
duties  under  the  contract.  Defendants  assert  that  this  assign- 
ment is  a  breach  of  the  contract,  and  that  they  may  treat  the  contract 
as  being  at  an  end.     Plaintiffs  bring  suit  for  rental  of  the  waggons. 

CocKBURN,  C.  J.  *  *  *  The  main  contention  on  the  part  of  the 
defendants  =i^  *  *  was  that,  as  the  Parkgate  Company  had,  by  as- 
signing the  contracts,  and  by  making  over  their  repairing  stations  to 
the  British  Company,  incapacitated  themselves  to  fulfill  their  obliga- 
tion to  keep  the  waggons  in  repair,  that  company  had  no  right,  as  be- 
tween themselves  and  the  defendants,  to  substitute  a  third  party  to  do 


Ck  4)  RIGHTS   OF    THIRD   PARTIES    IN    CONTRACTS         ,  267 

the  work  they  had  engaged  to  perform,  nor  were  the  defendants 
bound  to  accept  the  party  so  substituted  as  the  one  to  whom  they  were 
to  look  for  performance  of  the  contract ;  the  contract  was  therefore 
at  an  erid. 

The  authority  principally  relied  on  in  support  of  this  contention  was 
the  case  of  Robson  v.  Drummond,  2  B.  &  Ad.  303,  approved  of  by 
this  court  in  Humble  v.  Hunter,  12  Q.  B.  310.  In  Robson  v.  Drum- 
mond, supra,  a  carriage  having  been  hired  of  one  Sharp,  a  coachmaker, 
for  five  years,  at  a  yearly  rent,  payable  in  advance  each  year,  the  car- 
riage was  to  be  kept  in  repair  and  painted  once  a  year  by  the  maker — 
Robson  being  then  a  partner  in  the  business,  but  unknown  to  the  de- 
fendant— on  Sharp  retirmg  from  the  business  after  three  years  had 
expired,  and  making  over  all  interest  in  the  business  and  property  in 
the  goods  to  Robson,  it  was  held  that  the  defendant  could  not  be  sued 
on  the  contract — by  Lord  Tenterden.  on  the  ground  that  "the  defend- 
ant might  have  been  induced  to  enter  into  the  contract  by  reason  of 
the  personal  confidence  which  he  reposed  in  Sharp,  and  therefore 
might  have  agreed  to  pay  money  in  advance,  for  which  reason  the 
defendant  had  a  right  to  object  to  its  being  performed  by  any  other 
person"  ;  and  by  Littledale  and  Pai-ke,  JJ.,  on  the  additional  ground 
that  the  defendant  had  a  right  to  the  personal  services  of  Sharp,  and 
to  the  benefit  of  his  judgment  and  taste,  to  the  end  of  the  contract. 

In  like  manner,  where  goods  are  ordered  of  a  particular  manufac- 
turer, another,  who  has  succeeded  to  his  business,  cannot  execute  the 
order,  so  as  to  bind  the  customer,  who  has  not  been  made  aware  of 
the  transfer  of  the  business,  to  accept  the  goods.  The  latter  is  entitled 
to  refuse  to  deal  with  any  other  than  the  manufacturer  whose  goods 
he  intended  to  buy.  For  this  Boulton  v.  Jones,  2  H.  &  N.  564,  is  a 
sufficient  authority.  The  case  of  Robson  v.  Drummond,  2  B.  &  Ad. 
303.  comes  nearer  to  the  present  case,  but  is,  we  think,  distinguisha- 
ble from  it.  We  entirely  concur  in  the  principle  on  which  the  decision 
in  Robson  v.  Drummond,  supra,  rests,  namely,  that  where  a  person 
contracts  with  another  to  do  work  or  perform  service,  and  it  can  be 
inferred  that  the  person  employed  has  been  selected  with  reference  to 
his  individual  skill,  competency,  or  other  personal  qualification,  the 
inability  or  unwillingness  of  the  party  so  employed  to  execute  the  work 
or  perform  the  service  is  a  sufficient  answer  to  any  demand  by  a 
stranger  to  the  original  contract  of  the  performance  of  it  by  the  other 
party,  and  entitles  the  latter  to  treat  the  contract  as  at  an  end,  not- 
withstanding that  the  person  tendered  to  take  the  place  of  the  con- 
tracting party  may  be  equally  well  qualified  to  do  the  service.  Per- 
sonal perfomiance  is  in  such  a  case  of  the  essence  of  the  contract, 
which,  consequently,  cannot  in  its  absence  be  enforced  against  an  un- 
willing party.  But  this  principle  appears  to  us  inapplicable  in  the 
present  instance,  inasmuch  as  we  cannot  suppose  that  in  stipulating 
for  the  repair  of  these  waggons  by  the  company — a  rough  description 
of  work  which  ordinary  workmen  conversant  with  the  business  would 
be  perfectly  able  to  execute — the  defendants  attached  any  importance 
to  whether  the  repairs  were  done  by  the  company,  or  by  any  one  with 
whom  the  company  might  enter  into  a  subsidiary  contract  to  do  the 
work.  All  that  the  hirers,  the  defendants,  cared  for  in  this  stipulation 
was  that  the  waggons  should  be  kept  in  repair;  it  was  indift'erent  to 
them  by  whom  the  repairs  should  be  done.  Thus  if,  without  going 
into   liquidation,   or  assigning  these  contracts,   the  coirpany  had  en- 


2(J8  coxTitACTS  (Part  1 

tered  into  a  contract  with  any  competent  party  to  do  the  repairs,  and 
so  had  procured  them  to  be  done,  we  cannot  think  that  this  would 
have  been  a  departure  from  the  terms  of  the  conti^act  to  keep  the  wag- 
gons in  repair.  While  fully  acquiescing  in  the  general  principle  just 
referred  to,  we  must  take  care  not  to  push  it  beyond  reasonable  hm- 
its.  And  we  cannot  but  think  that,  in  applying  the  principle,  the  Court 
of  Queen's  Bench  in  Robson  v.  Drummond,  supra,  went  to  the  utmost 
length  to  which  it  can  be  carried,  as  it  is  difficult  to  see  how  in  re- 
pairing a  carriage  when  necessary,  or  painting  it  once  a  year,  pref- 
erence would  be  given  to  one  coachmaker  over  another.  Much  work 
is  contracted  for,  which  it  is  known  can  only  be  executed  by  means 
of  subcontracts ;  much  is  contracted  for  as  to  which  it  is  indifferent 
to  the  party  for  whom  it  is  to  be  done,  whether  it  is  to  be  done  by 
the  immediate  party  to  the  contract,  or  by  some  one  on  his  behalf. 

We  are  therefore  of   opinion  that  our  judgment  must  be  for  the 
plaintiffs  for  the  amount  claimed. 


PAIGE  V.  I'AURE. 

(Court  of  Appeals  of  New  York,  1920.     2liO  X.  T.  114.  127  N.  E.  S98, 
10  A.  Lr.  R.   649.) 

Action  by  Paige  against  Faure.  From  judgment  for  plaintiff,  de- 
fendant appeals, 

AIcLaughlin,  J.  On  the  12th  of  December.  1914,  the  appellant,  a 
dealer  in  automobile  tires  bearing  his  name,  entered  into  a  contract 
with  the  respondent  and  one  Lindner,  the  material  terms  of  which,  so 
far  as  the  question  presented  on  the  appeal  is  concerned,  are  as  fol- 
lows :  Faure,  for  a  period  of  one  year,  gave  to  Paige  and  Lindner  the 
exclusive  agency  in  the  United  States,  except  the  cities  of  Boston  and 
New  York  and  certain  territory  adjacent  thereto,  to  sell  automobile 
tires  manufactured  by  and  for  him  and  bearing  his  name.  He  agreed 
to  sell  the  tires  and  make  prompt  delivery  to  Paige  and  Lindner  at 
the  prices  charged  him  for  their  manufacture  by  the  B.  F.  Goodrich 
Company,  or  any  other  manufacturer,  plus  $2  profit  on  each.  He  also 
agreed  to  immediately  consign  to  them  a  maximum  of  30  tires,  title 
to  which  was  to  remain  in  him  until  sold ;  they  agreeing  to  promptly 
inform  him  of  sales  made  therefrom  and  to  pay  for  all  goods  sold, 
whether  from  consigned  stock  or  those  purchased  outright,  on  the 
20th  of  the  month  following  the  date  of  sale.  They  also  agreed,  upon 
the  execution  of  the  contract,  to  purchase  $1,000  worth  of  plaintiff's 
goods,  and  to  thereafter,  during  the  life  of  the  contract  or  any  renew- 
als thereof,  carry  and  sell  his  stock ;  he  agreeing  to  renew  the  contract 
from  year  to  year  at  their  option,  provided  they  sold,  during  the  year 
immediately  preceding  the  renewal,  $10,000  worth  of  his  goods  and 
gave  him  30  days'  written  notice  before  the  expiration  of  the  contract 
of  an  intention  to  renew.  They  purchased  $1,000  worth  of  tires  and 
entered  upon  and  continued  to  carry  out  the  provisions  of  the  contract 
until  some  time  in  July  following,  when  Lindner  sold  his  interest  in 
the  contract  to  Paige.  Paige  thereafter  continued  to  perform  until 
some  time  in  November  ($10,000  worth  of  plaintift''s  goods  having  in 
the  meantime  been  sold),  when  he  gave  notice  of  his  intention  and  re- 
quested a  renewal  of  the  contract  for  another  year.     Faure  refused 


Ch.  4)  RIGHTS    OF    THIRD   PARTIES    IN    CONTRACTS  269 

to  renew,  and  thereupon  this  action  vvas  brought  to  recover  the  dam- 
ages alleged  to  have  been  sustained.  Plaintiff  had  a  verdict  for  $5,- 
000,  upon  which  judgment  was  entered,  from  which  defendant  appeal- 
ed to  the  Appellate  Division,  where  the  same  (one  of  the  justices  dis- 
senting) was  affirmed.     He  now  appeals  to  this  court. 

There  was  no  provision  in  the  contract  to  the  effect  that  Paige  and 
Lindner  were  to  devote  their  time  and  use  their  best  endeavors  to 
further  the  interest  of  Faure,  or  in  fact  to  do  anything  except  to 
purchase  $1,000  worth  of  tires  and  pay  him  for  goods  sold  by  them 
whether  from  consigned  stock  or  that  purchased  outright,  on  or  before 
the  20th  of  the  month  following  the  date  of  sale.  In  view,  however, 
of  the  credit  and  the  exclusive  agency  given  to  them  it  is  fairly  to 
be  implied  that  they  were  to  devote  their  time  and  do  whatever  was 
reasonable  and  necessary  to  selling  the  plaintiff's  product.  The  con- 
tract meant  something.  It  was  not  a  mere  scrap  of  paper.  The  owner 
of  a  product  would  not  give  to  another  the  exclusive  agency,  cover- 
ing a  wide  territory,  to  sell  the  same  unless  he  believed  an  effort  would 
be  made  by  the  one  to  whom  such  right  was  given  to  sell;  and  one 
would  not  take,  if  acting  in  good  faith,  an  exclusive  agency  to  sell 
another's  goods  unless  he  expected  and  intended  to  use  reasonable 
efforts  to  sell.     *     *     * 

This  naturally  leads  to  the  only  other  question  presented  by  the  ap- 
peal and  that  is  whether  the  contract  was  assignable  without  Faure's 
consent ;  in  other  words,  did  Lindner's  assignment  to  Paige  of  all  his 
interest  in  the  contract  justify  Faure  in  refusing,  at  the  request  of 
Paige,  to  renew  the  contract  for  another  year?  I  am  of  the  opinion 
that  it  did.  Faure  entered  into  a  contract,  not  with  Paige,  but  with 
Paige  and  Lindner.  He  was  to  have  the  benefit  of  the  services  of 
both,  not  one,  in  the  sale  of  his  product.  He  agreed  to  give  credit  to 
both,  not  one,  and  it  may  very  well  be,  except  for  Lindner,  he  would 
not  have  executed  the  contract  at  all. 

The  general  rule  is  that  rights  arising  out  of  a  contract  cannot  be 
transferred  if  they  are  coupled  with  liabilities  or  if  they  involve  a  re- 
lationship of  personal  credit  and  confidence.  Nassau  Hotel  Co.  v. 
Barnett  &  Barse  Corp.,  162  App.  Div.  381,  147  N.  Y.  Supp.  283,  af- 
firmed, on  opinion  below,  212  N.  Y.  568,  106  N.  E.  1036;  *  *  * 
Hardy  Implement  Co.  v.  South  Bend  Iron  Works,  129  Mo.  222,  31  S. 
W.  599.     *    *    * 

No  bilateral  contract  for  personal  services  can  be  assigned  by  either 
party  to  it,  without  the  consent  of  the  other.  Williston  on  Contracts. 
§  421.  But  it  is  urged  that  this  case  does  not  fall  within  the  general 
rule,  because  there  is  a  provision  in  the  contract  that  "This  agreement 
sliall  bind  and  benefit  the  respective  successors  and  assigns  of  the  par- 
ties hereto."  When  the  whole  contract  is  considered,  I  am  of  the  opin- 
ion this  did  not  give  Lindner  the  right,  without  Faure's  consent,  to  as- 
sign his  interest  to  Paige.  The  intention  of  parties  to  a  contract  must 
be  ascertained,  not  from  one  provision,  but  from  the  entire  instrument. 
*  *  *  When  this  contract  is  thus  considered,  it  is  apparent  that  both 
Paige  and  Lindner  were  personally  to  devote  their  time  to  carrying 
out  its  terms.  This  necessarily  follows  from  the  language  used,  which 
shows  that  a  personal  trust  and  confidence  were  reposed  in  both  of 
them.     *     *     * 

In  Nassau  Hotel  Co.  v.  Barnett  &  Barse  Corp.,  supra,  the  plaintiff 
owned  a  hotel  and  entered  into  an  agreement  with  two  men  by  the 


270  CONTRACTS  '  (Part  1 

names  of  Barnett  and  Barse  to  conduct  it  for  a  period  of  years. 
Thereafter  they  formed  a  corporation  and  assigned  the  contract  to  it. 
The  court  held  that  as  the  contract  involved  a  relation  of  trust  and 
confidence,  and  as  a  party  has  the  right  to  the  benefit  contemplated 
from  the  character,  credit,  and  substance  of  him  with  whom  he  con- 
tracts, the  contract  was  not  assignable,  notwithstanding  there  was  a 
provision  in  it  that  "this  agreement  shall  inure  to  the  benefit  of  and 
bind  the  respective  parties  hereto,  their  personal  representatives,  suc- 
cessors, and  assigns." 

An  authority  very  much  in  point  is  Hardy  Implement  Co.  v.  South 
Bend  Iron  Works,  supra.  There  defendant  entered  into  a  contract 
with  a  firm  composed  of  two  persons,  Hardy  and  Mason,  for  the  sale 
of  plows  manufactured  by  it,  to  which  a  credit  was  to  be  given  and 
certain  discount  advantages  offered.  Mason  withdrew  from  the  firm 
and  transferred  his  interest  in  the  contract  to  the  plaintiff.  Defend- 
ant refused  to  ship  to  the  plaintiff  the  goods  called  for  by  the  con- 
tract. Action  was  brought  to  recover  damages  alleged  to  have  been 
sustained.  A  demurrer  was  interposed  to  the  complaint,  which  was 
sustained,  the  court  stating  that  where  an  executory  contract  is  made 
between  two  parties  and  one  of  them  consists  of  two  persons,  compos- 
ing a  partnership,  and  one  of  those  persons  withdraws  from  the  firm,, 
which  is  thereby  dissolved,  it  is  for  the  party  who  contracted  with  the 
firm  to  say  whether  the  contract  shall  proceed  or  not.  The  principle 
upon  which  the  rule  stated  is  predicated  is  that  a  party  cannot  be 
forced  to  accept  a  contract  which  he  did  not,  in  tlie  first  instance, 
make,  and  to  which  he  did  not  subsequently  assent.     *     *     * 

The  judgments  appealed  from  should  therefore  be  reversed  and 
the  complaint  dismissed,  with  costs  in  all  courts. 


SECTION  6.— NATURE  AND  EXTENT  OF  THE  INTEREST 
ACQUIRED   BY  THE  ASSIGNEE 


In  re  PHILLIPS'  ESTATE. 

Appeal  of  MOSES. 

(Supreme  Court  of  Peiinsvlvania.  1903.     205  Pa.  515,  55  AtL  213.  66  L.  R.  A. 
760,  97  Am.  St.  Rep.  746.) 

Appeal  by  one  of  the  claimants  of  a  fund  in  the  hands  of  the  ex- 
ecutors of  Henry  M.  Phillips,  deceased,  for  the  benefit  of  H.  C. 
Moses  under  an  alleged  assignment  of  such  fund  from  a  decree  of  the 
orphans'  court  for  Philadelphia  county  awarding  the  fund  to  another- 
claimant. 

Brow^n,  T.  On  July  2,  1895,  H.  Cleremont  Moses,  a  nephew  of 
Henry  M.  Phillips,  assigned  to  his  wife,  Andrena  Moses.  $15,000  of 
his  interest  in  his  uncle's  estate.  On  February  28,  18^)9,  he  and  his 
brother,  Altamont,  executed  a  joint  assignment  of  their  interests  in 
the  estate  to  the  United  Security  Life  Insurance  &  Trust  Company  of 
Pennsylvania  for  $60,000.  Notice  of  this  second  assignment  was  at 
once  given  to  the  accountants  by  the  assignee,  and  to  it  the  court  be- 
low awarded  the  share  of  H.  Cleremont  Moses  in  decedent's  estate, 
on  the  ground  that,  though  the  assignment  to  Mrs.  Andrena  Moses. 


Ch.  4)  RIGHTS    OF    THIRD    PARTIES   IN    CONTRACTS  271 

was  first  in  time,  as  she  had  not  given  the  accountants  any  notice  of  it 
until  July  23,  1901,  it  was  postponed  to  that  held  by  the  appellee. 

Whether,  as  between  successive  assignees  of  a  fund  in  the  hands 
of  a  third  person,  that  assignee,  without  regard  to  the  date  of  his  as- 
signment, who  first  gives  the  debtor  notice  of  it,  is  entitled  to  be  first 
paid,  is  a  question  upon  which  the  American  decisions  cannot  be  rec- 
onciled. In  England  it  is  well  settled  that  the  claims  of  competing 
assignees  of  a  fund  rank,  as  between  themselves,  not  in  the  order  of 
the  dates  of  assignments  to  them,  but  according  to  the  dates  when  they 
respectively  give  notice  to  the  debtor  of  their  assignments.  The 
Supreme  Court  of  the  United  States  seems  to  have  adopted  the  same 
view.  *  *  *  To  review  the  conflicting  views  entertained  by  the 
courts  of  our  different  states  would  needlessly  consume  pages.  With 
us  the  question  does  not  seem  ever  to  have  been  definitely  settled.  The 
learned  auditing  judge,  sustained  by  the  court  in  banc,  adopted  the 
rule  that  the  assignee  who  first  gives  notice  has  the  first  right  to  par- 
ticipate in  the  assigned  fund.  In  adopting  this  as  the  better  rule,  he 
reasoned  by  analogy,  saying,  what  all  of  us  now  approve:  "The 
analogies  with  regard  to  sales  of  personal  property  in  possession  are 
certainly  in  favor  of  the  view  taken  in  the  decisions  last  referred  to, 
the  vendee  in  such  case  being  required,  for  the  protection  of  subse- 
quent purchasers,  to  take  possession,  to  the  exclusion  of  the  vendor, 
where  the  property  is  capable  of  actual  possession,  or  by  assuming 
such  open  ownership  as  the  case  admits  of.  where  it  is  not.  Why 
should  a  different  rule  apply  to  purchasers  of  choses  in  action?  Why 
should  the  purchaser  not  be  required  to  do  all  that  lies  in  his  power  to 
make  it  impossible  for  the  assignor  to  commit  a  fraud,  or  to  do  an 
injury  to  subsequent  purchasers,  relying  on  his  integrity,  and  having 
no  means  of  knowing  that  he  has  ceased  to  be  the  owner,  except  by  in- 
quiry of  the  person  in  whose  hands  the  fund  is?  The  failure  to  give 
notice  to  such  person  puts  it  in  the  power  of  the  assignor  to  do  this 
wrong,  and  the  consequences  of  the  failure  ought,  therefore,  to  be  up- 
on him  who  commits  it."     *     *     * 

"The  maxiln,  'Prior  in  tempore,  potior  in  jure,'  holds,  it  is  true, 
wherever  it  has  not  been  invented  by  enactment,  as  it  has  been  by  the 
recording  laws,  so  far  as  it  regards  conveyances  of  land,  or  where  the 
benefit  of  it  has  not  been  lost  by  misconduct  or  imprudence;  but  it 
must  not  be  allowed  to  protect  a  party  who  has  neglected  a  requisite 
precaution  to  protect  from  imposition  those  who  may  come  after  him. 
*  *  *  "  [Gibson,  C.  J.,  in  Fisher  v.  Knox,  13  Pa.  622,  53  Am.  Dec. 
503.] 

Business  transactions  constantly  require  the  assignments  of  choses 
in  action.  In  many  instances  personal  credit  cannot  be  maintained  in 
any  other  way,  and  for  assignees  who  purchase  in  good  faith  there 
ought  to  be  protection.  None  is  found  in  the  recording  act,  but  a 
measure  of  it  ought  not  on  that  account  to  be  withheld,  if  it  can  be 
extended  by  courts  of  equity  on  equitable  principles.  The  protection 
invoked  by  the  appellee  is  against  the  latent  equity  of  the  appellant. 
If  it  had  been  informed  of  this  prior  assignment,  it  is  not  likely  it 
would  have  taken  the  second  one  from  the  assignor,  who  failed  to  say 
anything  about  the  first  when  he  made  the  second.  Protection  can 
hardly  be  expected  from  an  assignor  who  will  sell  twice  what-  he 
knows  he  has  a  right  to  sell  but  once,  for,  if  conscienceless  enough  to 
make  a  second  sale,  he  will  conceal  the  first  in  his  scheme  to  cheat  one 


272  CONTRACTS  (Part  1 

or  the  other  of  his  assignees.  Protection  can  only  come  from  him  who 
owes  the  money,  and  who.  by  notice  to  him,  may  be  able  to  give  pro- 
tection. He  is  a  mere  stakeholder,  and  it  is  immaterial  to  him  whom 
he  pays.  There  is  no  reason  why  he  should  not  be  frank  with  a  pros- 
pective purchaser  of  the  whole  or  a  portion  of  what  he  owes,  or  that, 
upon  inquiry  from  such  a  one,  he  should  conceal  notice  of  any  other 
prior  purchase  or  assignment,  if  notice  of  it  was  given  him.  If  it  be 
understood  that  each  assignee  of  a  fund,  or  a  portion  of  it,  can  pro- 
tect himself  against  subsequent  assignees  only  by  giving  immediate 
notice  to  the  debtor,  such  notice  will  be  given,  and,  when  given,  the 
instances  will  be  very  rare  when  subsequent  assignees  are  imposed 
upon. 

With  the  question  now  fairly  before  us.  we  adopt  and  announce,  as 
the  only  safe  rule,  that,  if  an  assignee  fails  to  give  notice  to  the  per- 
son holding  the  fund  assigned  to  him,  a  subsequent  assignee,  without 
notice  of  the  former  assignment,  will,  upon  giving  notice  of  his  as- 
signment, acquire  priority.  "By  such  notice  the  legal  holders  are  con- 
verted into  trustees  for  the  new  purchaser,  and  are  charged  with 
responsibility  towards  him ;  and  the  cestui  que  trust  is  deprived  of 
the  power  of  carrying  the  same  security  repeatedly  into  the  market, 
and  of  inducing  third  persons  to  advance  money  upon  it  under  the 
eri-oneous  belief  that  it  continues  to  belong  to  him  absolutely,  free 
from  encumbrances,  and  that  the  trustees  are  still  trustees  for  him 
and  for  no  one  else.  That  precaution  is  always  taken  by  diligent  pur- 
chasers and  incumbrancers ;  if  it  is  not  taken,  there  is  neglect." 
Dearie  v.  Hall,  3  Russ.  Ch.  13.  This  rule  is  recognized  and  approved 
by  the  best  text  writers.  Story,  Eq.  Jur.  §§  1035a.  1047 ;  Beach,  Mod- 
ern Law  of  Eq.  Jur.  344 ;  Pom.  Eq.  Jur.  §  965 ;  Bispham,  Eq.  §§  168, 
169.  In  the  last,  the  learned  text  writer  says:  "The  decisions,  in 
favor  of  the  English  rule,  however,  appear  to  be  based  upon  the  more 
correct  view  of  the  law."  As  the  appellee  is  claiming  under  the  as- 
signment to  it,  and  not  under  the  attachment  issued  by  it,  the  second 
question  raised  on  the  appeal  need  not  be  considered. 

Appeal  dismissed  at  appellant's  costs,  and  as  to  her  the  decree  is 
affirmed. 


CrOIER   V.   AMKUICAN   GROCERY    CO. 

(Supreme  Court  of  Now   York.  Appellate  Division,  1S97.     21  App.  Div.  5rj(j. 

4S  N.  Y.  Supp.  431.) 

O'Brien,  J.  *  *  *  In  15  Am.  &  Eng.  Enc.  Law,  p.  861,  the  rule 
prevailing  in  this  state  is  given  as  follows:  "The  rule  is  not  simply 
that  the  assignee  takes  subject  to  the  equities  between  the  original  par- 
ties, but  that  the  purchaser  of  a  chose  in  action  must  always  abide  the 
case  of  the  person  from  whom  he  buys.  The  true  test  is  to  inquire, 
what  can  the  mortgagee  do  by  way  of  enforcement  of  it  against  the 
property  mortgaged?  What  he  can  do,  the  assignee  can  do,  and  no 
more.  The  reason  of  the  rule  is  that  the  holder  of  a  chose  in  action 
cannot  alienate  anything  but  the  beneficial  interest  which  he  possess- 
es. It  is  a  question  of  power  or  capacity  to  transfer  to  another,  and 
th^t  capacity  is  to  be  exactly  measured  by  the  rights  of  the  assignor. 
In  that  state  (New  York),  therefore,  it  is  well  settled  that  the  as- 
signee of  a  mortgage  is  no  less  bound  by  equities  existing  between  the 


Ch.  4)  RIGHTS   OP    THIRD   PARTIES    IN    CONTRACTS  273 

mortgagee  and  third  persons  than  by  those  existing  against  the  mort- 
gagee in  favor  of  the  mortgagor." 

The  general  rule  is  that  the  assignee  of  a  chose  in  action  takes  only^ 
the  interest  of  his  assignor,  and  while  many  of  the  cases  from  which 
the  rule  as  stated  above  has  been  deduced  relate  to  mortgages,  the 
principle  applicable  to  a  policy  of  insurance  would  be  in  no  respect 
different.  In  Owen  v.  Evans,  134  N.  Y.  514.  31  N.  E.  1000,  that  rule 
is  thus  stated:  "Our  courts  recognize  no  distinction  between  equities 
existing  in  favor  of  the  mortgagor  and  those  in  favor  of  a  third  per- 
son, but  hold  that,  in  the  absence  of  an  estoppel,  an  assignee  of  a  mort- 
gage takes  only  the  interest  of  his  assignor,  and  subject  to  any  latent 
equity  in  favor  of  any  person." 

This  is  a  reaffirmation  of  what  was  said  in  Schafer  v.  Reilly,  50  N. 
Y.  61,  that:  "One  who  takes  an  assignment  of  a  mortgage  takes  it 
subject  not  only  to  any  latent  equities  that  exist  in  favor  of  the  mort- 
gagor, but  also  subject  to  the  like  equities  in  favor  of  third  persons." 

Ind?e  Allen,  in  this  case,  says:     "It  is  well  settled  that  a  seller  or 
assignor  of  a  chattel  or  chose  in  action  can  give  not  other  or  better 
title  than  he  himself  has.  and  that  the  purchaser  or  assignee  must  be 
content  to  stand  in  his  place  and  to  accept  his  title."     *    *    * 
B.&  B.Bus.Law— IS 


274  CONTRACTS  (Part  1 

CHAPTER  V 
,    .  DISCHARGE  OF  CONTPvACTS 

Section 

1.  Introduction. 

2.  Discharire  by  Agreement,  Accord  and  Satisfaction,  Account  Stated,  and 

Merger. 
.3.     Discliarge  by  Novation. 

4.  Discharge  by  Release.  Cancellation,  and  Alteration. 

5.  Discharge  in  Bankruptcy  Proceedings. 

6.  Effect  of  Statutes  of  Limitations. 


SECTION  1.— INTRODUCTION 

An  offer  and  an  acceptance  upon  consideration  create,  between 
the  parties  to  the  contractual  agreement  thus  formed,  certain  legal 
relations  which  theretofore  have  not  existed.  The  effect  of  such 
agreement,  m-ore  specifically,  is  to  confer  certain  rights,  powers, 
and  privileges,  and  to  impose  certain  duties  and  liabilities  upon  the 
parties  thereto.  Each  has  a  right  that  the  other  party  shall  per- 
form his  promise.  Each  may  have  the  power  and  privilege  of  as- 
signing some  right  arising  out  of  the  contract  or  of  delegating  the 
performance  of  some  duty.  The  relations  which  bind  the  parties  to- 
gether will  remain  until  there  has  been  some  act  or  series  of  acts 
constituting  a  discharge.  The  life  history  of  a  contract  dates  from 
the  acceptance  of  an  oft'er,  there  being  consideration  therefor;  and 
it  ceases  upon  the  happening  of  an  act  constituting  a  discharge. 

What  acts  will  constitute  a  discharge?  We  have  already  con- 
sidered certain  matters  pertaining  to  discharge.  Obviously,  com- 
plete performance  on  both  sides  will  discharge  a  contract.  Even 
tender  of  performance  may  work  a  discharge.  Generally,  of  course, 
a  tender  of  performance  is  not  the  equivalent  of  performance — a 
debt  cannot  be  paid  by  a  tender,  though  the  running  of  interest  on 
the  debt  will  be  stopped.  But  where  the  tendered  act  is  of  such  a 
nature  that  it  cannot  be  performed  at  a  later  time,  a  tender  will 
result  in  a  discharge  of  the  duty  to  perform  the  tendered  act. 
There  remain  to  be  considered  several  methods,  other  than  those 
just  enumerated,  which  bring  about  a  discharge  of  contractual  obli- 
gations. 


SECTION  2.— DISCHARGE  BY  AGREEMENT,  ACCORD 

AND  Sx\TISFACTION,  ACCOUNT  STATED, 

AND  MERGER 

A  contract  may  be  discharged  by  mutual  agreement ;  that  is,  the 
parties  enter  into  a  second  contract  which  has  the  effect  of  rescind- 
ing the  first.  The  discharging  agreement  must  be  supported  bv 
consideration.  In  the  case  of  bilateral  contracts,  for  example,  where 
neither  party  has  performed,  the  consideration  for  the  agreement  to 


Ch.  5)  DISCHARGE   OF   CONTRACTS  275 

rescind  is  found  in  the  surrender  of  the  rights  created  by  the  re- 
scinded contract.  If  the  first  contract  has  been  performed  on  one 
side,  then  some  independent  consideration  is  necessary  to  dis- 
charge the  party  who  has  not  performed.  Where  this  independent 
consideration  is  a  promise,  we  have  Avhat  is  called  an  accord. 

The  term  "accord"  is  employed  to  describe  an  executory  bilateral 
contract,  whereby  one  of  the  parties  to  a  previously  existing  con- 
tract agrees  to  give  and  the  other  party  to  the  same  prior  contract 
agrees  to  accept  something  different  from  that  called  for  by  the 
original  contract.  Such  an  executory  contract  generally  does  not 
discharge  the  pre-existing  contract,  for  such  former  contract  may 
still  be  sued  upon,  although  such  suit  may  involve  the  breach  of  the 
second  contract  called  the  accord.  The  defendant,  when  thus  sued 
on  the  first  contract,  cannot  successfully  defend  by  proving  the  sec- 
ond contract,  nor  even  by  proving  a  tender  of  performance  or  of 
part  performance.  His  only  remedy  is  to  sue  for  breach  of  the 
second  contract  called  the  accord. 

The  term  "satisfaction"  is  used  to  describe  the  situation  after 
full  performance  of  the  accord.  Here  we  meet  the  question  of 
consideration,  which  was  treated  in  Chapter  H.  The  satisfaction, 
to  operate  as  a  discharge  of  the  former  contract,  must  be  on  good 
consideration  as  that  requisite  has  been  interpreted  in  this  class  of 
cases. 

There  is  one  exception  to  this  rule  in  the  law  of  negotiable  instru- 
ments, where  it  is  held,  and  now  codified  in  the  Negotiable  Instru- 
ments Law,  that  the  holder  of  a  negotiable  instrument,  may,  by 
written  renunciation,  without  consideration,  discharge  the  instru- 
ment. 


HATIKTSOX    V.    HENDERSON. 

(Supreme  Court  of  Kansas.  100;j.  07  Kan.  194.  72  Pac.  87.',  62  L.  R.  A.  760', 

100  Am.  St.  Rep.  3S6.) 

Cunningham,  j,  *  *  *  ^j^  accord  is  an  agreement,  an  adjust- 
ment, a  settlement  of  former  difficulty,  and  presupposes  a  difference, 
a  disagreement,  as  to  what  is  right.  A  satisfaction,  in  its  legal  signifi- 
cance in  this  connection,  is  a  performance  of  the  terms  of  the  accord. 
If  such  terms  required  a  payment  of  a  sum  of  money,  then  that  such 
payment  has  been  made. 

In  this  case  there  is  no  evidence  of  any  disagreement  between  the 
parties  prior  to  the  sending  of  the  account  and  remittance  accompany- 
ing it.  Plaintiff  in  error  contends,  however,  that,  because  such  remit- 
tance was  denominated  "a  balance,"  its  acceptance  constituted  an  ac- 
cord and  satisfaction,  and  cites  a  number  of  authorities  where  courts 
have  held  that  a  remittance  made  as  a  balance,  and  the  acceptance  of 
the  same,  amounted  to  an  accord  and  satisfaction.  These  cases  have  all 
been  carefully  examined,  and  in  every  one  there  appears  to  have  been 
a  prior  disagreement,  a  contention  as  to  what  amount  was  due,  so  that 
a  remittance,  being  denominated  a  balance,  carried  with  it  to  the  cred- 
itor, as  a  fair  conclusion,  that  it  was  intended  by  the  debtor  to  be  in 
full  of   all  demands.     Without   the   requirement   being  made  by   the 


276  CONTRACTS  (Part  1 

debtor  that  if  the  creditor  accepts  and  retains  the  proffered  amount  he 
must  do  so  in  full  satisfaction  of  his  demand,  or  without  accompanying 
and  surrounding  circumstances  fairly  indicating  that  such  was  the 
purpose  and  object  of  the  debtor  in  making  the  remittance,  a  creditor 
cannot  be  said  to  have  so  accepted  a  payment.     *     *     * 

An  accord  and  satisfaction  is  the  result  of  an  agreement  between  the 
parties,  and,  like  all  other  agreements,  must  be  consummated  by  a  meet- 
ing of  the  minds  of  the  parties,  accompanied  by  a  sufficient  considera- 
tion. If  the  creditor  is  to  be  held  to  abate  his  claim  against  the  debtor, 
it  must  be  shown  that  he  understood  that  he  was  doing  so  when  he 
received  the  claimed  consideration  therefor.  A  simple  tender  of  a 
balance,  as  shown  by  an  account  tendered  by  the  debtor,  does  not  carry 
with  it  an  implication  or  conclusion  that  by  such  tender  the  debtor 
paid,  or  that  the  creditor  agreed  to  receive,  the  same  in  full  of  the 
amount  due,  where  there  had  been  no  prior  disagreement  or  discussion 
as  to  what  was  actually  due.  Surely  it  cannot  be  claimed  that  such 
was  the  condition  in  the  case  at  bar.  It  was  shown  in  the  evidence 
that  the  administrator  had  no  knowledge  of  fees  properly  chargeable 
by  attorneys  in  this  state  for  services  rendered,  or  that  he  even  knew 
of  the  character  and  extent  of  the  services  which  had  been  rendered. 
The  sender  of  the  check  did  not  require  its  acceptance  in  full  of  all 
demands  upon  him  as  a  condition  precedent  to  its  acceptance.  The  cir- 
cumstances better  warrant  the  conclusion  that  the  sender  was  saying, 
"In  my  judgment  these  fees  charged  are  correct,  and  a  proper  remuner- 
ation for  the  services  which  I  have  rendered,  and,  in  accordance  with 
this  view,  the  amount  sent  you  is  the  balance  that  is  due.  If,  however, 
after  you  have  investigated,  you  do  not  so  conclude,  we  will  hereafter 
have  an  adjustment  of  any  difference  that  may  then  arise,"  rather 
than,  'T  will  give  you  no  opportunity  whatever  to  inquire  as  to  the  cor- 
rectness of  the  charges  I  have  made,  and,  if  you  accept  the  draft,  it 
must  foreclose  all  question."  The  former  view  is  most  just  to  the 
plaintiff'  in  error,  and  it  is  the  position  that  an  honorable  and  fair- 
minded  attorney  would  take.  *  *  *  W^e  are  fully  persuaded  in  this 
case  there  was  no  accord  and  satisfaction,  and  that  the  defendant  in 
error  is  entitled  to  recover  the  amount  found  due  by  the  referee. 

The  judgment  of  the  district  court  will  be  affirmed. 


An  account  stated  is  similar  to  an  accord,  but  the  transaction 
called  to  mind  by  the  expression  "account  stated"  is  dift'erent  from 
the  transaction  referred  to  by  the  word  "accord."  The  w^ord  "ac- 
cord" carries  with  it  the  notion  that  the  parties  who  entered  into 
such  transaction  thereby  agreed  to  give  and  accept  some  perform- 
ance in  substitution  for  the  performance  due  under  an  existing  con- 
tract. An  account  stated  does  not  suggest  a  substitution  of  the 
performance  of  one  kind  of  an  act  for  the  performance  of  another 
kind  of  act,  but,  on  the  contrary,  the  account  stated  restates  the  very 
act  of  which  the  performance  is  called  for  by  the  existing  contract. 
The  meaning  of  the  term  "account  stated"  is  further  restricted  and 
confined  to  a;i  agreement  to  pay  a  certain  specified  sum  of  monev. 

The  legal  effect  of  an  accord  is  also  different  from  that  of  an 
account  stated.    An  accord,  while  a  binding  contract,  does  not  dis- 


CIl.  5)  DISCHARGE   OF   CONTRACTS  277 

charge  the  former  agreement;  an  account  stated  does  discharge  the 
former  contract. 

The  transaction  is  a  very  common  one.  The  submission  of  a 
monthly  statement  by  a  merchant  to  his  customer,  assented  to  by 
the  latter,  either  expressly  or  impliedly,  is  an  account  stated. 
The  balancing  of  a  depositor's  book  by  his  bank,  when  agreed  to 
by  the  depositor,  is  an  account  stated.  In  the  event  of  a  suit  by  the 
creditor,  action  would  be  brought  upon  the  account  stated,  and  not 
upon  the  series  of  contracts  which  makes  up  the  account.  The  rule 
thus  materially  tends  to  simplify  the  situation  by  precluding  in- 
quiry, as  a  general  rule,  into  the  former  transactions  between  the 
parties.  There  is  some  danger  in  it  from  the  standpoint  of  the 
debtor  who,  sometimes,  will  be  held  to  have  assented  to  the  ac- 
count stated  by  his  failure  to  protest  against  its  incorrectness,  or 
by  other  conduct,  when  perhaps,  in  fact,  he  held  mental  reserva- 
tions on  the  subject  and  intended  at  some  time  to  take  the  mat- 
ter up  with  his  creditor. 


GARD^'ER  V.  WATSON. 
(Supreme  Court  of  Crtlifonua,   1915.     170  Cal.  570,  1-50  Pac.  994.) 

Henshaw,  J.  *  *  *  Over  what  in  law  constitutes  an  account 
there  was  never  any  question  in  this  state,  and  very  little  uncertainty 
exists  in  other  states. 

"It  must  appear  [says  this  court  in  Baird  v.  Crank,  98  Cal.  297,  33 
Pac.  65]  that  at  the  time  of  the  accounting  certain  claims  existed,  of 
and  concerning  which  an  account  was  stated,  that  a  balance  was  then 
struck  and  agreed  upon,  and  that  defendant  expressly  admitted  that 
a  certain  sum  was  then  due  from  him  as  a  debt.'' 

To  like  effect  is  Coffee  v.  Williams,  103  Cal.  556,  37  Pac.  506,  where 
it  is  said :  "An  account  stated  is  a  document — a  writing — which  exhib- 
its the  state  of  account  between  parties  and  the  balance  owing  from 
one  to  the  other ;  and  when  assented  to,  either  expressly  or  impliedly, 
it  becomes  a  new  contract.  An  action  upon  it  is  not  founded  upon 
the  original  items,  but  upon  the  balance  agreed  to  by  the  parties.  And 
the  general  rule  is  that  when  the  stated  account  is  admitted,  it  can  be 
avoided  only  by  averment  and  proof  of  fraud,  mistake,"  etc. 

The  action  upon  an  account  stated  is  not  upon  the  original  dealings 
and  transactions  of  the  parties.  Inquiry  may  not  be  had  into  those  mat- 
ters at  all.  It  is  upon  the  new  contract  by  and  under  which  the  parties 
have  adjusted  their  dift'erences  and  reached  an  agreement. 

It  is  not  at  all  necessary  that  there  should  be  mutual  or  cross-accounts 
or  demands  between  the  parties.  The  acknowledgment  of  a  debt, 
though  it  consists  of  but  a  single  item,  may  form  the  basis  of  such  a 
stated  account.  As  has  been  said,  the  original  transactions  between 
the  parties  are  not  the  subject  of  inquiry  and  may  not  be  made  the  sub- 
ject of  inquiry  except  upon  such  equitable  consideration  as  fraud, 
duress,  or  mistake.  And  if  it  be  sought  to  avoid  the  legal  effect  of 
the  account  stated  upon  any  of  these  grounds,  they  must  be  pleaded. 
Moreover,  the  writing  constituting  an  account  stated  need  not  aver, 
or  at  all  contain,  the  grounds  and  reasons  for  the  conclusion  and  dec- 


278  CONTRACTS  ,  (Part  1 

laration  expressed.  It  is  a  complete  account  stated  if  it  contains  a 
signed  and  written  acknowledgment  of  a  present,  unqualified  indebted- 
ness or  liability  with  a  promise  to  pay  a  named  sum. 

Reading  the  contract  between  these  parties  in  the  light  of  these  prin- 
ciples, which  are  so  well  established  that  they  may  be  said  to  be  truisms 
of  the  law,  we  are  unable  to  understand  how  the  court  reached  the 
conclusion  that  the  contract  in  question  did  not  constitute  an  account 
stated  between  these  parties  litigant.  "The  said  Watson  hereby  ac- 
knowledges himself  indebted  to  the  said  Gardner  in  the  sum  of  $3,000 
in  the  manner  above  mentioned."  The  agreement,  it  is  declared,  was 
reduced  to  writing  "to  the  end  that  in  the  event  that  he  has  not  been 
able  to  meet  the  said  obligation  prior  to  the  time  of  his  death,  the  said 
Gardner  shall  then  and  at  that  time  have  a  valid  and  subsisting  claim 
against  his  estate  for  the  payment  of  the  said  obligation,"  Indeed,  we 
think  it  would  be  difficult  to  draw  a  paper  which  would  more  com- 
pletely conform  to  the  legal  requirements  of  an  account  stated. 

It  is  the  general  rule  that  the  true  consideration  for  a  written  instru- 
ment may  always  be  shown.  Among  the  cases  constituting  an  apparent 
exception  to  this  rule  are  those  upon  an  account  stated.  It  is  open  to 
a  defendant,  as  has  been  pointed  out,  to  repel  the  legal  effect  of  the 
account  stated  by  pleading  and  proof  of  its  procurement  through  fraud, 
duress,  mistake,  or  other  grounds  cognizable  in  ecjuity  for  the  avoid- 
ance of  an  instrument.  But  it  is  not  open  to  a  defendant  to  attempt 
to  defeat  the  legal  eft'ect  of  such  a  contract  by  showing  a  lack  of  con- 
sideration in  any  other  way.  Thus,  it  is  not  open  to  a  defendant  in 
such  a  case  merely  to  show  that  the  account  stated  was  based  upon  a 
disputed  clai;ii  of  the  plaintift''s,  which  claim  subsequently  proved  to 
be  invalid.  Nor  would  it  be  open  to  a  defendant  to  show  that  the 
amount  justly  due  was  very  much  less  than  the  amount  named  in  the 
account  stated.  All  such  evidence  going  to  total  or  partial  lack  of 
consideration  is  forever  debarred  by  the  convention  and  agreement  of 
the  parties,  for  this  is  of  the  very  essence  of  an  account  stated. 


A  result  similar  to  that  of  an  account  stated  arises  from  an  arbi- 
tration and  award.  If  the  parties  have  agreed  upon  an  arbitration 
and  the  arbitrators  have  fixed  the  amount  due,  this  determination 
will  be  conclusive  between  the  parties.  Usuall}-,  any  suit  brought 
thereafter  would  be  upon  the  award  and  not  upon  the  original  debt. 

A  contract  may  also  be  discharged  by  merging  it  in  some  other 
form  of  contract,  as,  for  example,  wdien  a  simple  contract  debt  is 
converted  into  a  negotiable  instrument.  The  mere  fact  that  a  nego- 
tiable instrument  has  been  given  will  not  be  conclusive  that  the 
original  debt  is  discharged,  for  the  instrument  may  have  been  giv- 
en and  received  only  in  conditional  payment.  The  presumption 
usually  is  that  an  instrument  is  given  and  received  only  in  con- 
ditional and  not  in  absolute  payment  of  the  debt. 

Similarly  a  contract  will  be  discharged  by  judgment  obtained  in 
an  action  upon  the  contract,  the  original  cause  of  action  thus  being 
regarded  as  merged  in  the  judgment. 


Ch    5)  DISCHARGE   OP   CONTRACTS  279 


SECTION  3.— DISCHARGE  BY  NOVATION 
In  a  sense,  discharges  of  contracts  by  mutual  rescirsion,  by  ac- 
cord and  satisfaction,  and  by  account  stated,  are  forms  of  nova- 
tion, but  it  is  more  common  to  employ  the  term  novation  to  de- 
scribe a  transaction  w^hereby  a  new  party  is,  by  agreement,  sub- 
stituted as  an  obligor  in  the  place  of  the  one  upon  whom  the  duty 
rested  by  the  terms  of  the  original  contract.  This  aspect  of  a  no- 
vation is  presented  in  the  following  cases: 


MARriN    V.    LEEPEli   BEOS.    LUMBER    CO. 
(Supreme  Court  of  Oklahoma,  1915.    48  Old.  219,  149  Pac.  1140.) 

Action  by  the  Leeper  Bros.  Lumber  Company,  a  corporation,  against 
Swan  Martin.     Judgment  for  plaintiff,  and  defendant  brings  error. 

DuDLKY,  C.  In  May,  1912,  Leeper  Bros.  Lumber  Company,  a  cor- 
poration, defendant  in  error,  hereinafter  referred  to  as  the  lumber 
company,  commenced  this  action  in  the  county  court  of  Oklahoma 
county  against  Swan  Martin,  plaintiff  in  error,  hereinafter  referred  to 
as  owner,  to  recover  judgment  for  the  balance  due  on  account  for  lum- 
ber and  building  material  used  in  making  certain  repairs  upon  his 
property.  The  lumber  company  recovered  judgment  for  the  amount 
sued  for,  and  from  this  the  owner  has  appealed,  and  the  only  question 
presented  is  whether  or  not  the  petition  states  a  cause  of  action. 
,     The  petition,  omitting  the  caption  and  the  prayer,  is  as  follows : 

"  *     *     *     That  on  or  about  the  —  day  of  ,  1910,  the 

above-named  defendant  entered  into  a  contract  with  one  Oscar  White, 
in  and  by  the  terms  of  which  contract  said  Oscar  White  agreed  to  fur- 
nish material  and  do  certain  repair  and  construction  work  upon  a 
building  owned  by  defendant  on  East  Eighth  street,  Oklahoma  City, 
Okl,  for  which  repair  and  construction  work  defendant  agreed  to  pay 
said  Oscar  White  the  sura  of  $ .     *     *     * 

"That  on  or  about  the  day  of  May,  1910,  plaintiff  entered 

into  an  oral  contract  with  said  Oscar  White  in  and  by  the  terms  of 
which  contract  plaintiff  promised  and  agreed  to  furnish  the  material  to 
be  used  by  said  Oscar  White  in  making  the  repairs  and  construction 
work  above  mentioned;  that  in  pursuance  of  said  contract  with  said 
Oscar  White  plaintiff'  furnished  and  delivered  to  said  Oscar  White  upon 
the  p^-emises  where  the  above-mentioned  repair  and  construction  was 
being  done  material  as  shown  by  Exhibit  A  hereto  attached  and  made 
a  part  hereof,  for  which  said  material  said  Oscar  White  agreed  and 
promised  to  pay  plaintiff'  $750.62. 

"That  after  plaintiff  had  completed  the  delivery  of  the  material  as 
shown  by  Exhibit  A  upon  the  premises  where  the  repair  work  and 
construction  was  being  done,  it  was  orally  agreed  by  and  between  de- 
fendant and  said  Oscar  White  that  defendant  should  take  over  the  re- 
pair and  construction  work  on  the  building,  which  said  Oscar  White 
had  agreed  and  contracted  to  do  for  said  defendant,  as  above  set  forth, 
and  it  was  then  expressly  agreed  and  understood  by  and  between  said 
Oscar  White  and  defendant  herein  that  this  defendant  should  assume 
and  pay  all  bills  for  material  on  said  job,  including  the  amount  due 
plaintiff^  for  material  furnished  as  hereinbefore  set  forth  ;  that  said  Os- 
car White  advised  defendant  the  amount  which  was  then  due  and  owinef 


280  CONTRACTS  (Part  1 

this  plaintiff,  and  defendant  fully  understood  the  amount  of  indebt- 
edness to  this  plaintiff  which  he,  the  defendant  herein,  was  assuming. 

"That  the  agreement  and  arrangement  by  and  between  said  Oscar 
White  and  this  defendant  whereby  defendant  assumed  and  agreed  to 
pay  this  plaintiff  for  the  material  furnished  as  above  set  forth  was 
communicated  to  this  plaintiff,  and  that  this  plaintiff  accepted  the  offer 
and  promise  made  by  defendant  to  make  payment  of  the  said  indebted- 
ness for  material,  and  then  and  there  released  said  Oscar  \\'hite  from 
all  further  liability  to  make  payment  of  said  indebtedness. 

"The  defendant,  on  or  about  the  1st  day  of  August,  1910,  paid  this 
plaintiff  $450  on  said  indebtedness,  and  plaintiff'  allowed  defendant 
a  credit  for  material  returned  of  $55.74,  but  that  defendant  always 
has  neglected  and  now  refuses  to  make  payments  of  the  balance  of  said 
indebtedness,  the  balance  being  $244.88."     *     *     * 

In  29  Cyc.  1134,  in  discussing  the  manner  in  which  a  novation  may 
be  effected  it  is  said:  "Novation  may  be  effected  in  three  ways.'  (1) 
By  the  substitution  of  a  new  obligation  between  the  same  parties, 
with  intent  to  extinguish  the  old  obligations ;  (2)  by  the  substitution 
of  a  new  debtor  in  the  place  of  the  old  one,  with  intent  to  release  the 
latter;  (3)  by  the  substitution  of  a  new  creditor  in  the  place  of  the 
old  one,  with  intent  to  transfer  the  rights  of  the  latter  to  the  former." 
The  foregoing  rule  seems  to  be  the  general  one.     *     *     * 

Measured  by  these  rules,  we  think  the  petition  sufficient  on  the  the- 
ory of  a  novation.  It  pleads:  (1)  A  contract  between  the  owner  and 
the  contractor ;  and  (2)  a  contract  between  the  lumber  company  and 
the  contractor.  Under  the  contract  between  the  lumber  company  and 
the  contractor,  the  contractor  is  its  debtor.  The  petition  then  pleads  a 
release  and  extinction  of  the  contract  between  the  owner  and  the  con- 
tractor, and  the  creation  of  a  new  contract  by  which  the  owner  is  to 
make  the  repairs,  and  pay  for  the  labor  and  material,  including  the 
debt  of  the  lumber  company.  The  terms  of  this  contract  were  made 
known  to  and  accepted  by  the  lumber  company,  and  its  debt  against  the 
contractor  was  released,  and  the  owner  accepted  as  its  new  debtor  in 
discharge  of  the  original  debtor. 

The  petition  fairly  pleads  a  novation  by  the  substitution  of  a  new 
debtor,  and  comes  squarely  within  the  rule  announced  in  29  Cyc.  1136, 
which  is  as  follows:  "The  most  frequent  novation  is  the  substitution 
of  a  new  debtor.  To  constitute  this  kind  of  a  novation,  there  must  be 
a  mutual  agreement  among  three  parties,  the  creditor,  his  immediate 
debtor,  and  the  intended  new  debtor,  by  which  the  liability  of  the  last 
named  is  accepted  in  the  place  of  the  original  debtor  in  discharge  of 
the  original  debt."     *     *     * 

The  petition  sufficiently  pleads  a  consideration  under  section  926,  R. 
L,.   1910,  and  is  sufficient  upon  the  theory  of  a  novation.     *     *     * 

The  judgment  of  the  trial  court  should  be  affirmed. 

KLINKOOSTEN    v.    MUNDT. 

(Supreme  Coin-t  of  South  Dakota,  1910.     36  S.  D.  59.5,  156  N.  W.  85, 
L.  R.  A.   1918B,  111.) 

McCoy,  J.  Plaintiff,  as  assignee  of  the  original  payee,  brought 
this  suit  against  defendant  to  recover  upon  a  negotiable  promissory 
note  for  $25  executed  and  delivered  by  defendant  to  the  Unitype 
Company.     *     *     *     In  circuit  court  there  was  a  verdict  and  judg- 


Ch.  5)  DISCHARGE   OF   CONTRACTS  281 

ment  in  favor  of  defendant.  'At  the  close  of  all  the  evidence  plaintiff 
moved  the  court  for  a  directed  verdict  in  favor  of  plaintitf.  The 
motion  was  denied,  to  which  ruling  plaintiff  excepted.     *     *     * 

Defendant  admitted  the  execution  of  the  note.  The  defendant  plead- 
ed as  a  defense  that  prior  to  the  transfer  of  said  note  to  plaintiff  the 
(Jnitype  Company  released  defendant  from  the  payment  of  said  note 
and  agreed  in  writing  to  accept  as  payor  in  lieu  of  defendant  the  Mes- 
senger Publishing  Company.  It  appears  from  the  evidence  that  at 
the  time  of  the  execution  of  said  note  defendant  was  the  proprietor 
of  a  printing  and  publishing  business,  and  purchased  certain  printing 
machinery  from  the  Unitype  Company,  and  gave  46  notes,  amounting 
to  $1,450  in  consideration  of  the  purchase  price  of  said  machinery,  the 
note  in  question  being  one  of  such  notes.  Under  the  contract  for  the 
purchase  of  said  machinery  it  was  provided  that  the  title  to  such  ma- 
chinery should  remain  in  the  Unitype  Company  until  the  full  payment 
of  said  notes.  After  the  making  of  this  contract,  and  before  the  ma- 
turity of  said  note,  defendant  sold  and  transferred  his  printing  and 
publishing  business  and  said  machinery  to  the  Messenger  Publishing 
Company.  About  the  time  this  sale  and  transfer  were  made  to  the 
]\Iessenger  Company,  defendant  wrote  the  Unitype  Company  that  he 
had  made  such  sale ;  that  the  Messenger  Company  had  agreed  to  make 
new  notes  for  those  remaining  unpaid  for  such  machinery,  and  would 
assume  the  entire  obligation  of  defendant,  provided  the  Unitype  Com- 
pany would  consent  to  take  their  notes.  The  Messenger  Company  also 
wrote  the  Unitype  Company  in  substance  as  follows :  We  have  pur- 
chased the  interest  of  Mundt  in  his  contract  under  which  the  Unitype 
typesetting  machine  was  installed.  We,  therefore,  assume  the  rights 
and  obligations  of  Mundt  in  the  contract,  and  agree  to  pay  the  unpaid 
notes  given  by  him,  and  carry  out  all  his  obligations  under  the  terms  of 
the  agreement.  It  is  agreed  between  Mundt  and  the  Messenger  Com- 
pany that  on  completion  of  the  payment  of  the  balance  of  these  notes 
and  the  carrying  out  in  full  of  the  terms  of  the  agreement,  you  are 
to  issue  a  bill  of  sale  for  said  machinery  to  the  Messenger  Publishing 
Company.  This  letter  was  signed  by  the  Messenger  Publishing  Com- 
pany by  its  president,  and  at  the  bottom  thereof,  over  the  signature 
of  defendant,  appeared  the  following : 

"The  Unitype  Company  is  hereby  authorized  to  issue  a  bill  of  sale 
to  the  Messenger  Publishing  Co.  for  the  above-described  machine  when 
all  the  terms  of  the  contract  have  been  fully  met  and  all  the  notes 
given  under  the  same  duly  paid." 

Also  on  the  bottorn  of  this  letter  appears  the  following :  "Accepted. 
The  Unitype  Co.,  by  E.  J.  Andrews,  Treas." 

The  note  in  question  was  never  paid.  The  Messenger  Publishing 
Company  never  executed  and  delivered  to  the  Unitype  Company  its 
notes  in  place  of  the  notes  given  by  defendant.  In  order  to  constitute 
novation,  there  must  be  either  an  express  or  implied  agreement  on  the 
part  of  the  creditor  to  substitute  the  new  debtor  in  place  of  the  original 
debtor,  and  also  an  express  or  implied  agreement  to  release  and  dis- 
charge the  original  debtor.  *  *  *  All  that  the  Unitype  Company 
ever  assented  to  as  shown  by  the  correspondence,  was  that  the  Mes- 
senger Publishing  Company  might  assume  the  rights  and  obligations  of 
defendant  under  the  contract  and  make  payment  of  the  notes  given  by 
defendant,  and  when  said  notes  had  all  been  fully  paid  and  satisfied, 
it  would  transfer  title  to  the  machinery  to  the  Messenger  Publishing 


282  CONTRACTS  (Part  1 

Company.  There  was  no  assent  or  agreement,  either  express  or  im- 
pHed,  to  discharge  or  release  defendant.  In  most  of  the  adjudicated 
cases  where  it  has  been  held  that  implied  novation  had  occurred  there 
were  circumstances  such  as  the  delivery  to  the  original  debtor  of  his 
notes  and  new  notes  taken  in  place  thereof,  or  other  circumstances, 
indicating  an  intention  on  the  part  of  the  creditor  to  accept  the  new 
debtor  in  place  of  the  old,  and  to  release  and  discharge  the  obligation 
as  against  the  original  debtor.  No  circumstances  of  that  character  ap- 
pear in  this  case.  We  are  of  the  view  that  the  court  erred  in  overruling 
the  motion  to  direct  a  verdict  for  plaintiff;  no  defense  of  release  by 
novation  having  been  shown. 

The  judgment  and  order  appealed  from  are  reversed,  and  the  cause 
remanded.  

SECTION  4.— DISCHARGE   BY   RELEASE,   CANCEL- 
LATION, AND  ALTERATION 

A  release  is  a  declaration  in  writing  by  the  releasor  which  mani- 
fests his  intention  to  regard  as  extinguished  an  existing  right  which 
he  had  against  the  releasee.  To  constitute  a  release,  the  instrument 
must  be  under  seal.  In  states  where  the  common-law  rules  relat- 
ing to  sealed  instruments  obtain,  such  an  instrument  is  effective 
without  consideration;  but,  in  many  states,  these  rules  have  been 
altered  by  statute.  Statutory  changes  must  therefore  be  taken  into 
consideration  in  determining,  in  a  particular  state,  the  requisites 
and  legal  effect  of  such  instruments.  In  the  absence  of  such 
changes,  the  legal  effect  of  a  release  is  to  discharge  the  duty  of  the 
releasee  referred  to  in  the  instrument.  In  one  respect,  the  effect 
of  a  release  may  be  regarded  as  somewhat  extraordinary.  Where 
A.  and.B.  have  assumed  a  joint  duty,  or  a  joint  and  several  duty 
to  C,  a  release  of  either  A.  or  B.  will  have  the  effect  of  discharg- 
ing the  other,  although  there  be  in  the  instrument  no  language  that 
manifests  A.'s  intention  to  release  the  other  party.  The  theory 
apparently  is  that  there  is  but  one  set  of  legal  relations  between 
the  two  or  more  parties  on  one  side  of  the  contract  and  that  party 
or  parties  on  the  other,  and,  that,  in  order  to  release  one  of  the 
parties,  it  is  necessary  to  destroy  these  relations.  Figures  of 
speech  in  the  law  are  dangerous,  but  perhaps  the  situation  bears 
some  figurative  resemblance  to  a  case  where  A.  is  raising  B.  and 
C.  up  a  steep  cliff  by  the  aid  of  a  single  rope.  A.  decides  to  "re- 
lease" C.  and  let  him  drop,  but  he  wants  to  save  B.  A.  cuts  the 
rope  and  C.  plunges  to  the  bottom,  and,  despite  A.'s  prayers,  B.  does 
likewise.  If  the  situation  were  regarded  as  a  double  set  of  rela- 
tions, a  release  of  one  obligor  would  not  have  this  effect;  but  the 
law  does  not  so  regard  it.  But  parties  to  a  contract,  no  matter  how 
numerous  on  each  side,  are  regarded  as  tied  together  by  one  rope, 
and  not  several.  But,  as  usual,  a  harsh  result  is  mitigated  by  the 
introduction  of  a  fiction.  A  legal  fiction,  and  fictions  are  legion,  is 
much  like  a  crutch;  it  assists  one  in  reaching  one's  destination, 
but  it  is  a  poor  method  of  transportation,  when  it  is  not  needed. 
Bv  a  legal  fiction  there  has  been  formulated  the  rule  that,  where  a 


Ch.  5)  DISCHARGE   OF   COXTUACTS  283 

party  to  a  contract  enters  into  a  covenant  not  to  sue  one  of  several 
obligors,  or  where  one  of  such  obligors  is  released,  the  releasor  re- 
serving his  rights  against  the  other  obligors,  such  other  obligors 
will  not  be  discharged. 

Since,  at  common  law,  an  instrument  under  seal  gave  rise  to  an 
obligation  without  colisideration,  one  method  of  discharging  a 
sealed  instrument  was  to  cancel  it.  An  act  of  cancellation  is  ac- 
complished by  surrendering  the  instrument  to  the  obligor  thereon 
or  by  mutilating  it,  marking  upon  it,  or  destroying  it,  with  the  in- 
tent to  put  an  end  to  the  legal  obligations  which  it  has  evidenced. 
Negotiable  instruments,  and  perhaps  some  other  types  of  written 
contracts  may  be  discharged  by  cancellation. 

Material  alteration  of  the  written  evidence  of  a  contract  also  has 
the  effect  of  avoiding  the  contract.  Where  such  alterations  are 
innocently  made,  there  may  still  be  a  recovery  upon  the  original 
claim;  but,  where  they  are  fraudulently  made,  the  entire  right  of 
action  is  destroyed.  Material  alteration  by  a  stranger  does  not 
avoid  the  instrument,  though  the  contrary  is  the  law  in  England, 
and,  it  seems  that,  in  this  country,  under  the  Negotiable  Instru- 
ments Law,  a  material  alteration  by  a  stranger  will  avoid  the  in- 
strument, though  there  may  be  a  recovery  upon  the  original  con- 
tract, if  the  holder  was  not  a  party  to  the  alteration.  The  nature 
and  effect  of  material  alteration  of  negotiable  instruments  will  be 
treated  in  more  detail  in  Part  III. 


SECTION  5.— DISCHARGE  IN  BANKRUPTCY 
PROCEEDINGS 

While  it  would  be  decidedly  detrimental  to  the  best  interests  of 
society  and  to  the  individuals  directly  concerned  for  the  law  to 
provide  that  insolvency  should,  of  itself,  under  the  doctrine  of  im- 
possibility of  performance,  operate  as  a  discharge  of  contractual 
obligations,  nevertheless,  experience  shows,  that  within  relatively 
narrow  limits  and  under  certain  restrictions,  the  policy  of  granting 
a  discharge  of  debts  on  account  of  insolvency  may  with  propriety 
be  adopted.  This  is  one  of  the  features  of  the  Bankruptcy  Act  (U. 
S.  Comp.  St.  §§  9585-9656),  but  it  is  not  its  primary  purpose. 
The  principal  aspect  of  a  bankruptcy  law  is  to  provide  the  judicial 
and  administrative  machineiy  requisite  for  an  economical  and 
expeditious  collection  of  the  assess  of  a  failing  debtor  and  the  equi- 
table distribution  thereof  among  his  creditors.  This  feature  of  the 
bankruptcy  act  will  be  taken  up  in  a  later  chapter.  We  are  here 
interested  only  in  those  provisions  of  the  act  which  authorize  the 
court  to  grant  a  discharge  cf  the  debts  of  the  bankrupt. 

The  present  National  Bankruptcy  Act  does  not  authorize  the 
granting'  of  a  discharge  from  all  kinds  of  obligations,  nor  does  it 
provide  that,  under  all  circumstances,  a  bankrupt  will  be  entitled  to 


284  CONTRACTS  (Part  1 

a  discharge.  Sometimes  a  bankrupt  is  not  entitled  to  a  discharge 
of  any  obligation. 

With  respect  to  the  kinds  of  debts  for  which  a  discharge  may- 
be granted  section  17  of  the  National  Bankruptcy  Act  provides: 
A  discharge  in  bankruptcy  shall  release  a  bankrupt  from  all  of 
his  provable  debts.  The  act  then  proceeds  to  declare  certain  ex- 
ceptions to  the  rule  that  all  provable  debts  may  be  discharged. 
These  exceptions  are  as  follows:  (1)  A  tax  levied  by  the  United 
States,  the  state,  county,  district,  or  municipality  in  which  he  (the 
bankrupt)  resides ;  (2)  liabilities  for  obtaining  property  by  false 
pretenses  or  false  representations,  or  for  maintenance  or  support 
of  wife  or  child  or  for  seduction  of  an  unmarried  female,  or  for 
criminal  conversation.  Some  of  these  exceptions  under  clause  2 
are  inserted  out  of  an  abundance  of  legislative  caution,  because 
there  is  little  likelihood  that  the  courts  would  hold  that  some  of 
the  obligations  therein  mentioned  would  be  provable  debts.  Un- 
less the  obligation  is  a  provable  debt,  there  is  no  necessity  for  pro- 
viding for  it  in  these  express  exceptions.  Liabilities  for  obtaining 
property  by  false  pretenses  or  false  representations  and  liabilities 
for  malicious  injuries  to  property  are  provable  debts.  Were  it 
not  for  this  express  exception,  they  would  be  subject  to  discharge. 
But  liabilities  for  malicious  injury  to  a  person,  for  alimony,  for 
maintenance  of  a  wife  or  child,  for  seduction  and  for  criminal  con- 
versation are  probably  not  provable  debts,  and  therefore  could  not 
be  discharged  even  if  this  express  exception  were  eliminated. 

The  third  exception  consists  of  debts  which  have  not  been  duly 
scheduled  in  time  for  proof  and  allowance,  with  the  name  of  the 
creditor  if  known  to  the  bankrupt,  unless  such  creditor  had  notice 
or  actual  knowledge  of  the  proceedings  in  bankruptcy.  With  ref- 
erence to  the  scheduling  of  debts,  it  may  be  remarked  in  passing 
that  this  act  consists  in  the  preparation  and  filing  by  the  bankrupt, 
in  the  bankruptcy  court,  of  a  detailed  statement  of  his  assets  and 
liabilities.  With  reference  to  the  schedules,  section  7,  clause  8,  pro- 
vides that,  the  bankrupt  shall  prepare,  make  oath  to  and  file  in  court 
within  ten  days,  unless  further  time  is  granted,  after  the  adjudi- 
cation, of  an  involuntary  bankrupt,  and  with  the  petition  if  a  vol- 
untary bankrupt,  a  schedule  of  his  property,  showing  the  amxount 
and  kind  of  property,  the  location  thereof,  its  money  value  in  de- 
tail and  a  list  of  his  creditors,  showing  their  residences,  if  known, 
if  unknown,  that  fact  to  be  stated,  the  amounts  due  each  of  them, 
the  consideration  thereof,  the  security  held  by  them,  if  any,  and 
a  claim  for  such  exemption  as  he  may  be  entitled  to,  all  in  tripli- 
cate, one  copy  of  each  for  the  clerk,  one  for  the  referee  and  one  for 
the  trustee.  The  time  within  which  claims  against  a  bankrupt 
may  be  proved  is  fixed  in  section  57n  as  follows :  Claims  shall  not 
be  proved  against  a  bankrupt  subsequent  to  one  year  after  the 
adjudication.  There  are  a  few  minor  exceptions  not  necessary  to  be 
noted  here,  allowing  proof  of  claims  more  than  a  year  after  the  date 
of  adjudication.    The  fourth  and  last  exception  to  the  rule  that  all 


Ch.  5)  DISCHARGE   OP   CONTRACTS  285 

provable  debts  may  be  discharged,  consists  of  debts  created  by 
fraud,  embezzlement,  misappropriation,  or  defalcation  while  acting 
as  an  officer  or  in  any  fiduciary  capacity. 

Returning  to  the  principal  matter  involved  in  this  section,  the 
question  is:  Wi)at  kinds  of  debts  are  subject  to  discharge?  Sec- 
tion 17,  above  quoted,  provides,  in  legal  effect,  that,  unless  a  debt 
is  a  provable  debt,  it  will  not  be  discharged.  AVhat  is  a  provable 
debt?  The  following  section  of  the  act  defines  what  shall  constitute 
a  provable  debt,  although  it  should  here  be  stated  that,  in  some 
respects,  the  section  is  not  clear.  There  has  been  a  great  deal  of 
litigation  over  this  section  and  the  resulting  decisions  of  the  courts 
have  gone  a  long  way  toward  removing  the  uncertainties,  though, 
even  yet,  there  remains  some  doubt  as  to  certain  types  of  claims. 
It  may  also  be  pointed  out  here,  that  while  we  are  chiefly  interest- 
ed in  the  following  section  for  the  purpose  of  ascertaining  what 
debts  will  be  discharged  in  bankruptc)%  the  section  and  the  discus- 
sion following  may  be  looked  upon  purely  from  the  standpoint  of 
a  creditor  of  a  bankrupt  who  faces  the  question:  "Do  I  have  the 
privilege  of  filing  this  particular  claim  against  my  debtor,  or  not?" 
The  creditor  is  affected  in  this  way:  If  he  holds  a  provable  claim, 
he  must  prove  if  he  expects  to  get  anything  at  all  from  his  bank- 
rupt debtor,  because  the  debt  will  be  discharged.  If  his  claim  is 
not  provable,  the  creditor  can  get  nothing  from  the  estate,  but,  since 
his  claim  will  not  be  discharged,  the  creditor  will  be  entitled  to  the 
full  amount  and  may  recover  it  in  an  ordinary  action  at  law.  Of 
course,  the  judgment  will  not  be  paid  until  the  judgment  debtor 
acquires  property.  Even  so,  that  may  be  much  better  than  par- 
ticipating with  the  other  creditors  in  the  bankruptcy  proceedings, 
where  the  proportion  of  the  debt  paid  by  the  estate  through  the 
trustee  may  be  very  small.  Section  63  provides:  (a)  Debts  of  the 
bankrupt  which  may  be  proved  and  allowed  against  his  estate 
which  are  (1)  a  fixed  liability  as  evidenced  by  a  judgment  or  an 
instrument  in  writing,  absolutely  owing  at  the  time  of  the  filing  of 
the  petition  against  him,  whether  then  payable  or  not,  with  any 
interest  thereon  which  would  have  been  recoverable  at  that  date 
or  with  a  rebate  of  interest  upon  such  as  were  not  then  payable  and 
did  not  bear  interest ;  (2)  due  as  costs  taxable  against  an  involun- 
tary bankrupt  who  was  at  the  time  of  the  filing  of  the  petition 
against  him  plaintiff  in  a  cause  of  action  which  would  pass  to  the 
trustee  and  which  the  trustee  declines  to  prosecute  after  notice; 
(3)  founded  upon  a  claim  for  taxable  costs  incurred  in  good  faith 
by  a  creditor  before  the  filing  of  the  petition  in  an  action  to  re- 
cover a  provable  debt;  (4)  founded  upon  an  open  account,  or  upon 
a  contract  express  or  implied;  and  (5)  founded  upon  provable 
debts  reduced  to  judgments  after  the  filing  of  the  petition  and  be- 
fore the  consideration  of  the  bankrupt's  application  for  a  discharge, 
less  costs  incurred  and  interests  accrued  after  the  filing  of  the  pe- 
tition and  up  to  the  time  of  the  entry  of  such  judgments. 

(b)   Unliquidated  claims  against  the  bankrupt  may,  pursuant  to 


286  CONTRACTS  (Part  1 

application  to  the  court,  be  liquidated  in  such  manner  as  it  shall  di- 
rect, and  may  thereafter  be  proved  and  allowed  against  his  estate. 

It  will  not  be  necessary  to  go  into  a  detailed  discussion  of  the 
interpretation  of  this  section,  but  merely  to  point  out  some  of  the 
more  important  features.  It  will  be  noted  that  only  those  debts 
due  at  the  time  of  the  filing  of  the  petition  against  the  bankrupt 
will  be  provable.  As  will  be  seen  later  in  some  cases  these  debts 
need  be  but  contingently  due.  If  the  bankrupt  buys  goods  subse- 
quent to  date  of  the  filing  of  the  petition,  the  claim  is  not  provable 
nor  dischargeable.  The  bankrupt  remains  liable  therefor.  The 
phrase  "absolutely  owing,  whether  then  payable  or  not"  has  refer- 
ence to  transactions  which  may  be  illustrated  by  the  ordinary  case 
of  a  claim  founded  upon  a  note  given  for  money  loaned  or  prop- 
erty sold  to  the  maker  which  is  not  by  its  terms  payable  until  a  date 
subsequent  to  the  date  of  the  filing  of  the  petition.  Clause  4  is  the 
most  inclusive,  since  it  deals  with  contracts  express  or  implied  and 
is  not  limited  to  contracts  in  writing,  as  is  clause  1.  While  clause 
5  contemplates  the  possibility  of  claims  reduced  to  judgment  after 
the  filing  of  the  petition,  it  is  to  be  noticed  that  this  clause  does  not 
provide  for  the  proving  of  any  kind  of  a  claim  not  provable  under 
the  preceding  clauses,  because  the  application  of  clause  5  is  ex- 
pressly limited  to  judgments  founded  upon  provable  debts.  Clause 
5  is  relied  upon  as  the  basis  for  proving  a  claim  which,  at  the  date 
of  the  filing  of  the  petition,  was  unliquidated,  that  is,  where  the 
amount  of  the  claim  had  not  then  been  determined.  The  procedure 
for  reducing  unliquidated  claims  to  judgment  is  provided  for  in 
clause  (b).  This  clause,  like  clause  5,  does  not  enlarge  the  class  of 
claims  which  are  provable.  Clause  (b)  makes  provision  for  the 
liquidation  only  of  those  claims  which  are  provable  under  the  first 
four  clauses. 

The  difficult  questions  arising  out  of  the  above  section  concern 
the  interpretation  of  the  term  "fixed  liability  *  *  *  absolutely 
owing,"  and  the  term  "contract  express  or  implied."  Or,  to  ap- 
proach the  question  through  a  dififerent  terminology:  What  is  the 
status  of  contingent  claims?  To  illustrate:  It  is  held  that  a  claim 
for  future  rent  against  a  bankrupt  tenant  is  not  a  provable  debt. 
On  the  other  hand,  it  has  been  held  that  the  claim  of  the  holder  of 
commercial  paper  against  a  bankrupt  indorser  is  provable,  although, 
at  the  time  of  the  filing  of  the  petition,  the  party  primarily  liable  on 
the  instrument  has  not  defaulted.  It  has  also  been  held  that  the 
claim  of  a  surety  against  a  bankrupt  principal  debtor  for  reim- 
bursement is  a  provable  debt,  although  the  surety  did  not  pay  the 
debt  to  the  creditor  until  after  the  petition  was  filed  against  the 
principal  debtor.  This  somewhat  strained  interpretation  is  proba- 
bly brought  about  by  the  feeling  that  the  bankrupt  should  be  dis- 
charged from  contingent  claims  as  well  as  non-contingent  claims. 
It  is  conceivable  that  a  bankrupt  might  owe  relatively  few  debts 
absolutely  owing  and  many  contingent  debts.    This  would  be  true 


Ch.  5)  DISCHARGE   OF   CONTRACTS  287 

where  the  bankrupt's  business  involves  the  discounting  and  sale  of 
large  quantities  of  commercial  paper. 

The  question  of  the  provability  of  contingent  claims  also  arises 
over  bilateral  contracts.  It  has  been  held  that  where  a  bankrupt 
is  under  a  contract  to  perform  services,  which  contract  has  not  yet 
been  broken  at  the  date  of  the  filing  of  the  petition,  the  fact  of 
bankruptcy  operates  as  an  anticipatory  breach  of  the  contract,  and 
the  claim  arising  thereon  is  provable.^  This  will  not  always  be  the 
case.  Bankruptcy  will  operate  as  an  anticipatory  breach  only  if 
there  is  a  reasonable  probability  that  the  bankruptcy  will  in  fact 
render  performance  by  the  bankrupt  unlikely.  If  the  bankrupt  had 
contracted  to  perform  future  personal  services  for  A.,  with  all  tools 
and  materials  to  be  furnished  by  A.,  bankruptcy  would  not  be  a 
breach  of  such  a  contract.  Accordingly,  this  claim  would  not  be 
provable  nor  dischargeable. 

Tort  claims,  such  as  for  assault,  trespass  to  land,  libel,  slander, 
malicious  prosecution,  etc.,  are  not  provable  claims.  An  apparent 
exception  exists  in  the  case  of  conversion  of  personal  property. 
While  this  act  is  a  tort,  the  obligation  of  the  converter  to  make 
restitution  is  also  treated  as  a  contract  obligation  implied  in  law. 
The  claim  is  therefore  provable  under  clause  4. 

It  was  stated  above  that  a  bankrupt  would  not  always  be  en- 
titled to  a  discharge.  Section  14  of  the  act  provides :  Any  person 
may,  after  the  expiration  of  one  month  and  within  the  next  twelve 
m.onths  subsequent  to  being  adjudged  a  bankrupt,  file  an  applica- 
tion for  a  discharge  in  the  court  of  bankruptcy  in  which  the  pro- 
ceedings are  pending.  *  *  *  The  judge  shall  hear  the  applica- 
tion for  discharge  and  such  proofs  and  pleas  as  may  be  made  in 
opposition  thereto  *  *  *  and  discharge  the  applicant  unless  he 
has  (1)  committed  an  offense  punishable  by  imprisonment  as  herein 
provided ;  or  (2)  with  intent  to  conceal  his  financial  condition,  de- 
stroyed, concealed  or  failed  to  keep  books  of  account  or  records 
from  which  such  condition  might  be  ascertained;  or  (3)  obtained 
money  or  property  on  credit  upon  a  materially  false  statement 
in  writing  made  by  him  to  any  person  or  his  representative  for  the 
purpose  of  obtaining  credit  from  such  person;  or  (4)  at  any  time 
subsequent  to  the  first  day  of  the  four  months  immediately  pre- 
ceding the  filing  of  the  petition  transferred,  removed,  destroyed,  or 
concealed  or  permitted  to  be  removed,  destroyed,  or  concealed,  any 
of  his  property,  with  intent  to  hinder,  delay  or  defraud  his  credi- 
tors; or  (5)  in  voluntary  proceedings  been  granted  a  discharge  in 
bankruptcy  within  six  years ;  or  (6)  in  the  course  of  the  proceed- 
ings in  bankruptcy  refused  to  obey  any  lawful  order  of,  or  to  an- 
swer any  material  question  approved  by  the  court:  Provided, 
That  a  trustee  shall  not  interpose  objections  to  a  bankrupt's  dis- 

1  Central  Trust  Co.  of  Illinois  v.  Chicago  Auditorium  Association,  240  U. 
S.  581,  36  Sup.  Ct.  412,  60  L.  Ed.  811,  L.  R.  A.  1917B,  580  (1916). 


288  CONTRACTS  (Part  1 

charge  until  he  shall  be  authorized  so  to  do  at  a  meeting  of  credi- 
tors called  for  that  purpose. 

Section  15.  The  judge  may,  upon  the  application  of  parties  in 
interest  who  have  not  been  guilty  of  undue  laches,  filed  at  any 
time  within  one  year  after  a  discharge  shall  have  been  granted,  re- 
voke it  upon  a  trial  if  it  shall  be  made  to  appear  that  it  was  obtained 
through  the  fraud  of  the  bankrupt,  and  that  the  knowledge  of  the 
fraud  has  come  to  the  petitioners  since  the  granting  of  the  dis- 
charge, and  that  the  actual  facts  did  not  warrant  the  discharge. 


SECTION  6.— EFFECT  OF  STATUTES  OF  LIMITATIONS 

Statutes  of  the  states  provide  definite  periods  of  time  within 
which  various  actions  must  be  brought.  With  respect  to  contracts, 
a  period  may  vary  from  a  year  up  to  ten  years ;  or  even  more  is 
allowed,  depending  on  the  nature  of  the  claim,  whether  a  claim 
against  an  estate,  upon  an  oral  or  written  contract,  negotiable  or 
sealed  instrument,  etc.  The  statute  begins  to  run  from  the  date 
of  breach,  if  the  breach  is  material  and  the  plaintiff  elects  to  treat 
the  contract  as  abandoned.  Where  the  contract  is  to  pay  a  sum  of 
money,  this  rule  would  be  expressed  by  saying  that  the  period  be- 
gins to  run  from  the  day  payment  is  due.  In  the  case  of  demand 
notes  and  bills  of  exchange,  this  would  mean  that  the  statute  began 
to  run  from  date  of  issue.  But  with  respect  to  bank  notes  and 
certificates  of  deposit  payable  on  demand,  the  statute  does  not  be- 
gin to  run  until  demand.  In  case  of  mutual  accounts,  the  period 
begins  to  run  from  the  date  of  the  last  entry.  Where  the  plaintiff"  is 
under  disability  at  the  time  the  cause  of  action  arises,  it  is  common- 
ly provided  that  the  statute  does  not  begin  to  run  until  the  disa- 
bility is  removed.  The  general  rule  also  is  that  the  departure  of  the 
defendant  from  the  jurisdiction  stops  the  running  of  the  statute  and 
the  term  during  which  he  resides  outside  the  state  will  not  be  count- 
ed in  determining  whether  the  period  has  elapsed.  The  legal  effect 
of  the  running  of  the  statute  is  not,  however,  to  discharge  the 
debt.  The  debt  in  contemplation  of  law  still  exists,  but  no  action 
can  be  maintained  to  recover  it.  This  is  shown  by  the  fact  that 
a  right  to  sue  may  be  barred  in  one  state  but  not  in  another.  If 
the  claim  is  barred  in  state  A.  and  the  creditor  obtains  service  of 
process  upon  his  debtor  in  state  B.  on  an  action  brought  there,  the 
statute  of  limitations  of  state  B.  will  generally  control,  and  not  the 
statute  of  state  A.  The  effect  of  the  running  of  the  statute  as  not 
constituting  a  discharge  of  the  obligation  is  also  shown  by  the  rules 
that,  although  the  debt  is  barred,  the  creditor  may  still  resort  to 
securities  such  as  pledges,  mortgages,  and  other  liens  to  enforce 
payment.  The  circumstances  may  be  such  that  the  claim  of  a 
creditor  against  his  debtor  is  barred  when  the  claim  against  the 
surety  is  not  barred.  The  surety,  in  such  circumstances,  remains 
liable. 


Ch.  G)  EFFECT   OF   MISTAKE,  FRAUD,  DURESS,  ETC.  289 


'fsi       CHAPTER  VI 

EFFECT  OF  MISTAKE.   FRAUD,  DURESS  AND  UNDUE 

INFLUENCE 


Section 

1. 

Introduction. 

2. 

Mistake. 

3. 

Fraud. 

4. 

Duress. 

5. 

I'ndue    Influence. 

SECTION  1.— INTRODUCTION 

The  preceding  chapters  have  presented  the  problems  which  arise 
out  of  the  formation,  performance,  and  discharge  of  contracts. 
Every  agreement  worthy  of  the  dignity  of  a  contract  will  ultimate- 
ly be  discharged,  either  by  performance  or  by  some  one  of  the 
other  methods  of  discharge  to  which  reference  has  been  made.  We 
have  surveyed,  therefore,  the  normal  life  history  of  a  contract.  In 
the  four  chapters  following,  we  are  to  be  concerned  with  a  group 
of  circumstances  of  a  special  nature.  Specifically,  we  deal,  in  these 
chapters,  with  such  questions  as  the  following:  What  effect  is 
brought  about  in  the  relations  of  the  parties  to  a  contract  by  the 
existence  of  mistake,  fraud,  duress,  undue  influence,  or  illegality? 
What  is  the  status  of  the  contracts  of  minors  or  of  insane  persons? 
Finally,  what  kinds  of  contracts  must  be  in  writing,  and  what  is  the 
legal  effect  of  a  failure  to  comply  with  such  requirements? 

It  would  be  possible  to  classify  these  portions  of  the  law  of  con- 
tracts under  the  topics  heretofore  treated.  For  example,  a  mistake 
may  be  of  such  a  nature  as  to  prevent  the  formation  of  a  contract. 
This  involves  the  application  of  the  principles  of  law  which  fix  the 
requisites  of  a  contract.  A  mistake  may  not  prevent  the  formation 
of  a  contract,  but  it  may  constitute  such  an  important  aspect  of  the 
transaction  that  justice  would  require  that  it  be  taken  into  account 
in  fixing  the  rights  and  duties  of  the  parties.  In  a  sense,  therefore. 
the  mistake  could  be  regarded  as  a  condition,  either  implied  in  fact 
or  in  law,  which  would  operate  substantially  like  any  other  condi- 
tion. This  phase  of  the  subject  of  mistake  could  therefore  be  treat- 
ed under  the  head  of  conditions.  So,  also,  the  subject  of  fraud,  du- 
ress, and  undue  influence  may  be  examined,  sometimes  with  a  view 
of  .determining  whether  there  was  a  contract,  and  sometimes  from 
the  standpoint  of  conditions.  With  respect  to  illegality,  it  is  pos- 
sible to  say  that  one  of  the  requisites  to  the  existence  of  a  contract 
is  that  it  shall  have  a  legal  object.  But,  inasmuch  as  illegal  con- 
tracts do  produce  some  of  the  eft"ects  of  a  normal  contract,  it  would 
seem  desirable  to  regard  an  illegal  contract  as  a  real  contract,  and 
B.&B.Bus.Law— 19 


290  CONTRACTS  (Part  1 

then  to  treat  the  element  of  illegality  as  an  independent  matter, 
which  affects  materially  the  relations  of  the  parties  to  the  contract. 

It  is  sometimes  said  that  one  of  the  requisites  of  a  contract  is 
that  the  parties  must  be  competent,  but  this  is  hardly  correct. 
Minors  and  other  persons  entitled  to  a  larger  measure  of  protec- 
tion than  normal  persons  do  make  contracts,  but  the  law  gives  to 
them  certain  rights  and  privileges  which  are  not  possessed  by 
other  persons.  The  rules  of  law  prescribing  that  certain  kinds  of 
contracts  shall  be  in  writing  are  founded  upon  considerations  of 
public  policy.  Sometimes  these  rules  prescribe  an  actual  requisite 
to  the  existence  of  a  contract,  as  in  the  case  of  negotiable  contracts ; 
but  the  rules  discussed  in  Chapter  IX,  for  instance,  are  not  of  this 
character.  Failure  to  reduce  such  contracts  to  writing  will  have 
some  effect,  but  this  effect  is  not  to  prevent  the  formation  of  the 
contract. 

In  other  words,  the  matters  treated  in  the  next  four  chapters  are 
new  chiefly  in  the  sense  that  the  operative  facts  themselves  are  new. 
After  it  has  been  determined  what  constitutes  mistake,  fraud,  du- 
ress, illegality,  etc.,  the  legal  effect  follows  more  or  less  naturally 
as  a  result  of  the  application  of  principles  previously  developed. 


SECTION  2.— MISTAKE 

The  inquiry  into  the  nature  and  effect  of  mistake  opens  up  a 
broad  field  of  study.  Mistake  may  project  itself  into  any  of  the 
varied  phases  of  individual,  social,  business,  or  political  life..  One 
may  do  a  great  many  things  which  one  would  not,  if  one  were 
aware  of  all  the  facts  relating,  in  one  way  and  another,  to  his 
conduct.  We  are  interested  here  in  three  aspects  of  mistake:  (1) 
What  is  a  mistake?  (2)  What  kinds  of  mistake  are  taken  cogni- 
zance of  by  the  law ;  that  is,  what  kinds  of  mistake  will  so  operate 
as  to  create,  alter,  extinguish,  or  prevent  the  formation  of  legal 
relations — principally  contractual  relations?  (3)  What  are  the 
legal  effects  of  the  various  kinds  of  mistake  with  which  the  law 
is  concerned? 

A  mistake  is  a  mental  state,  consisting  in  the  erroneous  assump- 
tion that  a  specified  fact  is  presently  existing  or  non-existing,  or 
that,  in  the  future,  it  will  or  will  not  exist.  The  mental  state  thus 
called  mistake,  instead  of  being  an  affirmative  state  of  mind,  may 
be  a  negative  state  of  mind ;  that  is,  instead  of  erroneously  as- 
suming that  fact  X  exists,  one  may  simply  fail  to  think  about  the 
existence  or  non-existence  of  fact  X.  Causes  of  mistake  may -be 
various.  A  mistake  may  arise  as  the  result  of  careless  mental  hab- 
its, from  the  failure  to  follow  a  line  of  inquiry  which  would  lead  to 
a  discovery  of  the  truth,  or  from  a  belief  induced  by  fraudulent  rep- 
resentations of  a  third  party.  It  is  usual  to  treat  that  kind  of  mis- 
take caused  by  the  fraud  of  a  third  party  under  the  general  head 
of  fraud,  and  it  will  be  so  treated  here.    With  respect  to  the  kinds  of 


Ch.  6)  EFFECT   OF   MISTAKE,  FRAUD,  DURESS,  ETC.  291 

mistake,  it  is  possible  for  the  mistake  to  concern  the  transaction  be- 
tween the  parties  in  such  a  way  as  to  prevent  the  formation  of  any 
contract.  Some  reference  to  this  phase  of  the  law  relating  to  mis- 
take was  made  in  the  chapter  on  Offer  and  Acceptance.  Again,  the 
mistake  may  not  prevent  the  formation  of  a  contract,  but  it  may 
be  nevertheless  of  so  material  a  nature  that  the  law  will  permit 
the  rescission  of  the  contract  on  the  ground  of  mistake.  Finally, 
there  may  be  no  misunderstanding  in  the  making  of  the  real  con- 
tract, but,  in  the  same  case,  some  mistake  may  arise  in  giving  the 
contract  formal  expression.  In  such  a  case,  it  may  not  be  just  to 
rescind  the  contract,  but  it  may  be  reformed ;  that  is,  the  formal 
expression  may  be  made  to  conform  to  the  contract  actually  en- 
tered into. 


EIEGEL  V.  AMEIIICAN  LIFE  INS.  CO. 

.    (Supreme  Court  of  Peunsylvania.  1893.     153  Pa.  134,   25   Atl.  1070, 

19  L.  R.  A.  166.) 

Plaintiff's  intestate,  a  creditor  carrying  a  $6,000  pohcy  of  insurance 
upon  the  life  of  one  Leisenring,  her  debtor,  in  order  to  be  relieved  of 
the  burden  of  further  premiums,  surrendered  the  same  for  a  paid-up 
policy  for  $2,500,  under  the  rules  of  the  company,  subsequent  to  the 
death  of  the  insured,  both  parties  being  ignorant  of  said  death.  Plain- 
tiff brings  a  bill  against  the  insurance  company,  asking  the  reinstate- 
ment of  the  surrendered  policy.  In  the  court  below,  a  decree  was  ren- 
dered, sustaining  a  demurrer  to  the  bill  and  dismissing  it.  Plaintiff 
appeals  from  the  decree. 

Sterrett,  J,  *  *  *  [Quoting  from  a  previous  opinion  in  the 
same  case:] 

"The  case  presented  on  these  facts  was  that  of  a  contract  entered  into 
under  the  influence  of  a  mutual  mistake,  and  a  claim  for  relief  from 
such  contract.  The  mistake  was  in  relation  to  the  fact  of  Leisenring's 
death.  Both  parties  evidently  supposed  and  acted  on  the  supposition 
that  he  was  alive,  and  that  the  annual  premiums  upon  his  life,  which 
had  become  burdensome  to  J\Irs.  Riegel,  must  be  continued  indefinitely 
until  his  death  should  take  place.  As  it  had  become  difficult  for  her  to 
pay  these  premiums,  the  only  way  in  which  she  could  be  relieved  from 
them  was  to  surrender  her  policy,  and  accept  a  paid-up  policy  for  such 
smaller  sum  as  the  premiums  already  paid  would  purchase.  Rather 
than  take  the  risk  of  losing  the  entire  amount  of  the  policy,  by  her 
inability  to  keep  up  the  annual  payments,  she  surrendered  her  policy 
for  $6,000,  and  accepted  in  lieu  of  it  a  paid-up  policy  for  $2,500.  This 
was  the  contract  she  made  while  in  ignorance  of  Leisenring's  death. 
At  the  time  she  made  it  she  was  already  relieved  from  the  burden- 
some premiums,  and  the  entire  amount  of  the  policy  was  honestly  due 
her  from  the  company.  What  was  the  effect  of  the  mistake  upon 
her?  Simply  to  take  from  her  the  difference  between  the  two  policies, 
and  give  her  absolutely  nothing  for  it.  She  surrendered  a  policy  for 
$6,000,  on  which  the  liability  of  the  company  was  already  fixed,  and 
received  one  for  $2,500,  to  secure  relief  from  a  burden  already  remov- 
ed. The  company  parted  with  nothing.  She  secured  nothing.  The 
whole  transaction  was  a  mistake,  and,  if  the  decree  of  the  court  stands. 


292         '  CONTRACTS  (Part  1 

the  result  will  be  to  take  $3,500  from  Mrs.  Riegel  and  give  it  to  the 
insurance  company.  These  facts  seem  to  us  to  present  a  clear  and  a 
strong  case  for  equitable  relief,  so  strong,  indeed,  that  a  mere  state- 
ment of  them  is  the  only  argument  necessary  for  its  support.  The 
duty  of  a  chancellor  to  relieve  in  cases  of  mutual  mistake  is  so  well 
settled  that  no  citation  of  authorities  can  be  needed.  *  *  *  The 
learned  judge  who  heard  this  case  in  the  court  below,  and  who  is  thor- 
oughly familiar  with  the  principle  to  which  we  have  referred,  seems  to 
have  been  misled  in  regard  to  the  facts  set  up  in  the  bill.     *     *     *  " 

The  general  rule  is  that  an  act  done  or  a  contract  made  under  a 
mistake  of  a  material  fact  is  voidable  and  relievable  in  equity.  The 
fact  must  of  course  be  material  to  the  act  or  contract;  for,  though 
there  may  be  an  accidental  mistake  or  ignorance  of  the  fact,  yet,  if  the 
act  or  contract  is  not  materially  affected  by  it,  relief  will  not  be  granted. 
Thus,  A.  buys  from  B.  an  estate  to  which  the  latter  is  supposed  to  have 
an  tmquestionable  title.  It  turns  out,  upon  due  investigation  of  the 
facts  unknown  at  the  time  to  both  parties,  that  B.  has  no  title;  as,  if 
there  be  a  nearer  heir  than  B.,  who  was  supposed  to  be  dead,  but  is  in 
fact  living.  In  such  a  case  equity  would  relieve  the  purchaser  and 
rescind  the  contract.  But  suppose  A.  buys  from  B.  an  estate  the  loca- 
tion of  which  was  well  known  to  'each  of  them,  and  they  mutually 
believed  it  contained  20  acres,  when  in  fact  it  contained  only  19% 
acres,  and  the  difference  would  not  have  varied  the  purchase  in  the  view 
of  either  party ;  m  such  a  case  the  mistake  would  not  be  ground  for 
rescission  of  the  contract.  *  *  *  It  makes  no  difference  in  applica- 
tion of  the  principle  that  the  subject-matter  of  the  contract  be  known 
to  both  parties  to  be  liable  to  a  contingency  which  may  destroy  it  im- 
mediately ;  for,  if  the  contingency  has,  unknown  to  the  parties,  already 
happened,  the  contract  will  be  avoided,  as  founded  on  a  mutual  mistake 
of  a  matter  constituting  the  basis  of  the  contract.     *     *     * 

The  principle  is  illustrated  by  familiar  examples,  employed  by  text 
writers,  thus :  A.  agrees  to  buy  a  certain  horse  from  B.  It  turns  out 
that  the  horse  is  dead  at  the  time  of  the  bargain,  though  neither  party 
was  then  aware  of  the  fact.  The  agreement  is  void.  A.  agrees  to  buy 
a  house  belonging  to  B.  The  house  was  previously  destroyed  by  fire, 
but  the  parties  dealt  in  ignorance  of  that  fact.  The  contract  not  being 
for  sale  of  the  land  on  which  the  house  stood,  was  not  enforceable. 
So,  too,  A.,  being  entitled  to  an  estate  for  the  life  of  B.,  agreed  to  sell 
it  to  C.  B,  was  dead  but  both  parties  were  ignorant  of  the  fact.  The 
agreement  was  avoided.  For  similar  reasons,  a  life  insurance  cannot 
be  revived  by  payment  of  a  premium  within  the  time  allowed  for  that 
purpose  by  the  original  contract,  bvit  after  the  life  had  dropped,  un- 
known to  both  insurer  and  assured,  although  it  was  in  existence  when 
the  premium  became  due,  and  although  the  insurer  has  waived  proof 
of  the  party's  health,  which,  by  the  terms  of  the  renewal,  it  might  have 
required.  The  waiver  applies  to  the  proof  of  health,  not  to  the  fact  of 
his  being  alive.  *  *  *  Mr.  Pollock,  in  his  excellent  treatise  on  the 
Principles  of  Contract  (page  *441),  states  the  general  principle  thus: 
"An  agreement  is  void  if  it  relates  to  a  subject-matter  (whether  a 
material  subject  of  ownership,  or  a  particular  title  or  right)  contem- 
plated by  the  parties  as  existing,  but  which  in  fact  did  not  ex- 
ist."    *     *     * 

It  cannot  be  doubted  that  in  exchanging  the  old  for  the  new  policy 
both  parties  acted  on  the  basis  that  Leisenring  was  then  alive.     *     *     * 


Ch.  G)  EFFECT   OF   MISTAKE,  FRAUD,  DURESS,  ETC.  293 

In  view  of  the  undisputed  facts  as  to  the  acts  of  both  parties,  and 
everything  connected  with  the  transaction,  it  would  be  wholly  unrea- 
sonable and  unwarranted  to  hold  that  the  parties  treated  upon  the 
basis  that  the  fact  which  was  the  subject  of  their  agreement  was 
doubtful,  or  that  the  contract  was  made  "in  view  of  doubtful  facts,  and 
because  of  the  doubtful  facts."     *     *     * 

It  is  therefore  adjudged  that  the  decree  of  the  court  of  common  pleas 
be  reversed  and  set  aside,  and  exceptions  to  master's  report  dismissed ; 
and  it  is  now  adjudged  and  decreed  that  the  contract  under  which  said 
exchange  of  insurance  policies  was  made  be  rescinded;  that  the  paid- 
up  policy  for  $2,500  he  surrendered  and  canceled ;  and  that  the  original 
policy  of  insurance  be  reinstated,  as  of  date  of  its  surrender;  and  it  is 
further  adjudged  and  decreed  that  the  defendant  company  pay  to  the 
plaintiff  the  sum  of  $6,000,  with  interest  from  October  4,  1889,  and 
also  all  the  costs  of  this  proceeding. 

Paxson,  C.  J.  I  dissent,  and  would  affirm  the  decree,  upon  the 
clear  and  able  opinion  of  the  learned  judge  below. 

Mitchell,  J.    I  concur  with  the  chief  justice  in  his  dissent. 


WOOD  V.  BOYNTON  et  al. 

(Supreme  Court  of  Wisconsin.  18S5.     64  Wis.  265,  25  N.  W.  42, 
54  Am.  Rep.  610.) 

Taylor,  J.  This  action  was  brought  in  the  circuit  court  for  Mil- 
waukee county  to  recover  the  possession  of  an  uncut  diamond  of  the 
alleged  value  of  $1,000.  The  case  was  tried  in  the  circuit  court,  and 
after  hearing  all  the  evidence  in  the  case,  the  learned  circuit  judge  di- 
rected the  jury  to  find  a  verdict  for  the  defendants.  The  plaintiff 
excepted  to  such  instruction,  and,  after  a  verdict  was  rendered  for  the 
defendants,  moved  for  a  new  trial  upon  the  minutes  of  the  judge.  The 
motion  was  denied,  and  the  plaintiff  duly  excepted,  and  after  judgment 
was  entered  in  favor  of  the  defendants,  appealed  to  this  court.  The  de- 
fendants are  partners  in  the  jewelry  business.  On  the  trial  it  appeared 
that  on  and  before  the  twenty-eighth  of  December,  1883,  the  plaintiff 
was  the  owner  of  and  in  the  possession  of  a  small  stone  of  the  nature 
and  value  of  which  she  was  ignorant;  that  on  that  day  she  sold  it  to 
one  of  the  defendants  for  the  sum  of  one  dollar.  Afterwards  it  was 
ascertained  that  the  stone  was  a  rough  diamond,  and  of  the  value  of 
about  $700.  After  hearing  this  fact  the  plaintiff  tendered  the  de- 
fendants the  one  dollar,  and  ten  cents  as  interest,  and  demanded  a  re- 
turn of  the  stone  to  her.  The  defendants  refused  to  deliver  it,  and 
therefore  she  commenced  this  action. 

The  plaintiff  testified  *  *  *  as  follows ;  *  *  *  "Before  I 
sold  the  stone  I  had  no  knowledge  whatever  that  it  was  a  diamond.  I 
told  him  that  I  had  been  advised  that  it  was  probably  a  topaz,  and  he 
said  probably  it  was.  *  *  *"  She  also  testified  that  before  this 
action  was  commenced  she  tendered  the  defendants  $1.10,  and  de- 
manded the  return  of  the  stone,  which  they  refused.  *  *  *  l^he 
evidence  on  the  part  of  the  defendant  is  not  very  different  from  the 
version  given  by  the  plaintiff,  and  certainly  is  not  more  favorable  to 
the  plaintiff".     *     *     * 

The  only  question  in  the  case  is  whether  there  was  anything  in 
the  sale  which  entitled  the  vendor  (the  appellant)  to  rescind  the  sale 
and  so  revest  the  title  in  her.     The  only  reasons  we  know  of  for  re- 


294  CONTRACTS  (Part  1 

scinding  a  sale  and  revesting  the  title  in  the  vendor  so  that  he  may 
maintain  an  action  at  law  for  the  recovery  o£  the  possession  against 
his  vendee  are  (1)  that  the  vendee  was  guilty  of  some  fraud  in  pro- 
curing a  sale  to  be  made  to  him ;  (2)  that  there  was  a  mistake  made  by 
the  vendor  in  delivering  an  article  which  was  not  the  article  sold, — a 
mistake  in  fact  as  to  the  identity  of  the  thing  sold  with  the  thing  de- 
livered upon  the  sale.  This  last  is  not  in  realit}^  a  rescission  of  the 
sale  made,  as  the  thing  delivered  was  not  the  thing  sold,  and  no  title 
ever  passed  to  the  vendee  by  such  delivery. 

In  this  case,  upon  the  plaintiff's  own  evidence,  there  can  be  no  just 
grouiid  for  alleging  that  she  was  induced  to  make  the  sale  she  did  by 
any  fraud  or  unfair  dealings  on  the  part  of  Mr.  Boynton.  Both  were 
entirely  ignorant  at  the  time  of  the  character  of  the  stone  and  of  its 
intrinsic  value.  Mr.  Boynton  was  not  an  expert  in  uncut  diamonds, 
and  had  made  no  examination  of  the  stone,  except  to  take  it  in  his 
hand  and  look  at  it  before  he  made  the  oft'er  of  one  dollar,  which  was 
refused  at  the  time,  and  afterwards  accepted  without  any  comment 
or  further  examination  made  by  Mr.  Boynton.  The  appellant  had 
the  stone  in  her  possession  for  a  long  time,  and  it  appears  from  her 
own  statement  that  she  had  made  some  inquiry  as  to  its  nature  and 
qualities.  If  she  chose  to  sell  it  without  further  investigation  as.  to 
its  intrinsic  value  to  a  person  who  was  guilty  of  no  fraud  or  unfair- 
ness which  induced  her  to  sell  it  for  a  small  sum,  she  cannot  repudiate 
the  sale  because  it  is  afterwards  ascertained  that  she  made  a  bad 
bargain.  '"  *  "'  There  is  no  pretense  of  any  mistake  as  to  the  iden- 
tity of  the  thing  sold.  *  "^^  *  When  this  sale  was  made  the  value 
of  the  thing  sold  was  open  to  the  investigation  of  both  parties,  neither 
knowing  its  intrinsic  value,  and,  so  far  as  the  evidence  in  this  case 
shows,  both  supposed  that  the  price  paid  was  adequate.  *  *  * 
However  unfortunate  the  plaintiff  may  have  been  in  selling  this  val- 
uable stone  for  a  mere  nominal  sum,  she  has  failed  entirely  to  make 
out  a  case  either  of  fraud  or  mistake  in  the  sale  such  as  will  entitle 
her  to  a  rescission  of  such  sale  so  as  to  recover  the  property  sold  in 
an  action  at  law. 

The  judgment  of  the  circuit  court  is  affirmed. 


NEWTON  V.  TOLLES. 

(Supreme  Court  of  New  Hauipshire,  1S90.    66  N.  H.  136,  19  Atl.  1092, 
9  L.  E.  A.  50,  49  Am.  St.  Rep.  593.) 

Plaintiff  made  a  contract  with  defendant  to  purchase  a  farm, 
which  defendant  represented,  and  which  both  supposed,  contained  200 
acres,  but  which  in  fact  contained  only  135  acres.  Plaintiff  made  par- 
tial payments,  and  took  possession,  but,  discovering  the  mistake,  re- 
fused to  accept  the  deed,  and  immediately  after  its  tender  brought 
suit  to  rescind  the  contract,  offering  to  account  for  rent  and  profits, 
and  make  allowance  for  such  personal  property  sold  with  the  farm 
as  had  been  consumed  in  its  management. 

Carpenter,  J.  There  was  a  mutual  mistake  in  the  quantity  of  land. 
The  defendant  understood'  she  was  selling,  ajid  the  plaintiff  that  he 
was  buying,  a  farm  of  200  acres.  It  in  fact  contains  only  135  acres. 
The  defendant,  believing  that  the  farm  contained  200  acres,  informed 
the  plaintiff  that  it  did  contain  that  number.  The  plaintiff  relied  on 
her  statement.    Under  the  influence  of  the  error  common  to  both  par- 


Ch.  G)  EFFECT   OF   MISTAKE,  FRAUD,  DURESS,  ETC.  295 

ties,  the  transaction  was  consummated.  The  mistake  was  one  of  fact 
in  a  material  point  affecting  the  value  of  the  property.  *  *  *  A 
material  mistake  in  the  quantity  does  not,  in  its  effect  upon  the  equita- 
ble rights  of  the  parties,  differ  from  a  like  mistake  in  the  character, 
situation,  or  title  of  the  bargained  property.  It  is  equivalent  to  a  mis- 
take in  the  existence  of  a  material  part  of  the  subject  of  the  contract. 
The  case  is  as  if  before  the  contract  was  executed,  and  without  the 
knowledge  of  either  party,  a  parcel  containing  65  acres  of  the  200  con- 
tracted for  had  sunk  in  the  sea.  *  *  *  It  is  inequitable,  in  the  high- 
est degree,  that  the  defendant,  by  reason  of  her  negligent  and  erro- 
neous, though  not  fraudulent,  representation,  should  make  a  profit  of 
the  sum  at  which  the  parties  valued  65  acres  of  land,  and  that  the 
plaintiff,  without  fault  on  his  part,  should  lose  that  sum.  Equity  will 
prevent  such  a  result  by  rescinding  the  contract,  or  decreeing  a  .spe- 
cific performance  with  compensation  in  behalf  of  the  injured  party, 
at  his  election,  or  by  refusing  specific  performance  on  the  application 
of  the  other  party.     *     *     * 

The  details  of  the  decree  will  be  settled  at  the  trial  term.  Decree 
for  the  plaintiff.     .  

STEINMEYER  et  al.  v.   SCHROEPPEL. 

(Supreme  Court  of  Illinois.  1007.     226  111.  9,  80  N.  E.  .564,  10  L.  Pv.  A. 
[N.  S.]  114,  117  Am.  St.  Rep.  224.) 

Action  by  Henry  Steinmeyer  and  others  against  John  Schroeppel, 
which  was  consolidated  with  a  suit  by  Schroeppel  against  Henry 
Steinmeyer  and  others.  From  a  decree  of  the  Appellate  Court,  re- 
versing a  decree,  canceling  a  contract  between  the  parties,  Henry 
Steinmeyer  and  others  appeal. 

Cartwright,  J.  *  *  *  The  jurisdiction  of  equity  to  grant  the 
remedy  of  cancellation  because  of  a  mistake  of  fact  by  one  party  to 
a  contract  is  well  recognized.  Mutual  consent  is  requisite  to  the  cre- 
ation of  a  contract,  and  if  there  is  a  mistake  of  fact  by  one  of  the  par- 
ties going  to  the  essence  of  the  contract,  no  agreement  is,  in  fact, 
made.  *  *  *  If  there  is  apparently  a  valid  contract  in  writing,  but 
by  reason  of  a  mistake  of  fact  by  one  of  the  parties,  not  due  to  his 
negligence,  the  contract  is  different  with  respect  to  the  subject-matter 
or  terms  from  what  was  intended,  equity  will  give  to  such  party  a 
remedy  by  cancellation  where  the  parties  can  be  placed  in  statu  quo. 
The  ground  for  relief  is,  that  by  reason  of  the  mistake  there  was  no 
mutual  assent  to  the  terms  of  the  contract.  ''"  *  *  The  fact  con- 
cerning which  the  mistake  was  made  must  be  material  to  the  trans- 
action and  aff'ect  its  substance,  and  the  mistake  must  not  result  from 
want  of  the  care  and  diligence  exercised  by  persons  of  reasonable 
prudence  under  the  same  circumstances.  *  *  *  j^  this  case  the 
mistake  was  in  the  addition  of  the  figures  set  down  by  the  bookkeep- 
er. The  price  of  each  item  was  written  correctly,  but  appellants  claim- 
ed that  one  item  of  about  $400  was  placed  somewhat  to  the  right,  and 
in  adding  the  column  the  4  was  counted  in  the  10-column  instead  of 
the  100-column.  If  that  was  done,  it  does  not  account  for  the  differ- 
ence of  $421.  But  if  it  did,  it  would  only  show  a  want  of  ordinary 
cg.re  and  attention.  If  the  figures  were  not  exactly  in  line,  the  fact 
could  hardly  escape  notice  by  a  competent  business  man  giving  rea- 
sonable attention  to  what  he  was  doing.  There  was  no  evidence  tend- 
ing to  prove  any  special  circumstances  excusing  the  blunder. 


296  CONTRACTS  (Part  1 

The  case  of  Board  of  School  Com'rs  v.  Bender.  36  Ind.  App.  164, 
72  N.  E.  154  (decided  by  the  Appellate  Court  of  Indiana,  Division 
No.  2),  relied  on  by  appellants,  differs  from  this  in  various  respects, 
one  of  which  is  that  Bender  was  excusable  for  the  mistake.  His  com- 
plaint alleged  that  he  was  misinformed  by  the  architect  that  his  bid 
must  be  in  at  or  before  4  o'clock,  when,  in  fact,  he  was  allowed  until 
8  o'clock ;  that  in  ignorance  of  the  fact  and  for  want  of  time  he  was 
hurried  in  submitting  his  bid,  and  had  no  opportunity  for  verification 
of  his  estimate,  and  that  under  those  circumstances  he  turned  two 
leaves  of  his  estimate  book  by  mistake  and  omitted  an  estimate  on  a 
large  part  of  the  work.  The  case  involved  the  question  whether  the 
bidder  had  forfeited  a  sum  deposited  as  a  guaranty  that  he  would  en- 
ter into  a  contract,  and  when  notified  that  his  bid  was  accepted,  having 
discovered  his  mistake,  he  informed  the  architect  and  immediately 
gave  notice  that  he  would  not  enter  into  the  contract.  By  the  terms  of 
the  bid  it  was  intended  that  if  the  bid  was  accepted  a  contract  would 
be  made,  but  the  bid  was  not  the  contract  contemplated  by  the  parties 
and  the  bidder  never  did  enter  into  the  contract.  The  court  conclud- 
ed that  the  minds  of  the  parties  never,  in  fact,  met,  because  the  bidder 
fell  into  the  error  without  his  fault.  In  the  case  of  Harran  v.  Foley. 
62  Wis.  584,  22  N.  W.  837,  there  was  no  agreement,  for  the  reason 
that  the  minds  of  the  parties  never  met.  The  plaintiff'  claimed  to  have 
purchased  of  the  defendant  some  cattle  for  $161.50,  but  the  defendant 
intended  to  state  the  price  at  $261.50.  When  the  defendant  was  in- 
formed that  the  plaintiff  understood  the  price  to  be  $161.50  he  re- 
fused to  deliver  the  cattle  and  tendered  back  $20  received  on  the  pur- 
chase price.  No  agreement  was,  in  fact,  made,  since  the  statement  of 
the  price  by  the  seller  was  clearly  a  mistake. 

A  mistake  which  will  justify  relief  in  equity  must  affect  the  sub- 
stance of  the  contract,  and  not  a  mere  incident  or  the  inducement  for 
entering  into  it.  The  mistake  of  the  appellants  did  not  relate  to  the 
subject-matter  of  the  contract,  its  location,  identity,  or  amount,  and 
there  was  neither  belief  in  the  existence  of  a  fact  which  did  not  ex- 
ist or  ignorance  of  any  fact  material  to  the  contract  which  did  exist. 
The  contract  was  exactly  what  each  party  understood  it  to  be  and  it 
expressed  what  was  intended  by  each.  If  it  can  be  set  aside  on  ac- 
count of  the  error  in  adding  up  the  amounts  representing  the  selling 
price,  it  could  be  set  aside  for  a  mistake  in  computing  the  percentage 
of  profits  which  appellants  intended  to  make,  or  on  account  of  a  mis- 
take in  the  cost  of  the  lumber  to  them,  or  any  other  miscalculation  on 
their  part.  If  equity  would  relieve  on  account  of  such  a  mistake 
there  would  be  no  stability  in  contracts,  and  we  think  the  Appellate 
Court  was  right  in  concluding  that  the  mistake  was  not  of  such  a 
character  as  to  entitle  the  appellants  to  the  relief  prayed  for. 

The  judgment  of  the  Appellate  Court  is  affirmed. 


BERRY,  DEMOVILLE  &  CO.   v.  SOWELL. 
(Supreme  Court  of  Alabama,  1882.     72  Ala.  14.) 

Some^rviIvL:^,  J.  It  is  a  settled  principle  of  equity  jurisprudence 
that  where,  by  mistake  or  fraud,  a  deed  or  other  written  contract 
fails  to  express  any  material  term  of  the  real  agreement  which  the 
parties  mutually  intended  to  make,  a  court  of  equity  will,  on  clear  and 
satisfactory  proof  of  such  mistake  or  fraud,  reform  the  instrument. 


Ch.  6)  EFFECT   OF   MISTAKE,  FRAUD,  DURESS,  ETC.  297 

SO  as  to  make  it  conform  to  the  intention  of  the  parties,  and  embody 
the  actual  or  true  agreement.  *  *  *  'j^fjg  ^jj^  of  the  court,  in 
such  cases,  is  to  place  the  parties,  as  nearly  as  possible,  in  the  sit- 
uation they  would  have  occupied  but  for  the  mistake.  *  *  *  And 
this  jurisdiction  to  reform  or  rectify  written  instruments  may  be  ex- 
ercised as  well  against  creditors,  and  purchasers  having  actual  or 
constructive  notice  of  the  mistake,  as  between  the  immediate  parties 
themselves.  *  *  *  jf^  however,  the  parties  cannot  be  placed  in 
statu  quo,  or  if  the  mistake  cannot  be  rectified  without  impairing  the 
vested  rights  of  innocent  third  parties,  having  no  notice  of  the  mis- 
take, the  aid  of  equity  will  be  withheld.    *     *     * 


TILLIS   V.   SMITH. 
(Supreme  Court  of  Alabama,  1S9.5.    108  Ala.  264,  19  South.  374.) 

Head,  J.  It  is  not  denied  that  the  instrument  whose  reformation 
is  sought  by  the  bill  misdescribes  the  lands  which  the  appellees  agreed 
to  convey  to  the  appellant,  and  for  the  purpose  of  conveying  which 
they  went  to  his  place  of  business,  in  the  town  of  Geneva.  It  is  ad- 
mitted that  *  *  *  he  was  possessed  of  the  corresponding  subdivi- 
sions in  section  25.  but  that  he  was  possessed  of  the  corresponding 
subdivisions  in  section  28,  constituting  his  homestead,  and  upon  which 
the  appellant  had  a  first  mortgage.  In  his  testimony.  Smith  says  that 
he  had  previously  mortgaged  these  lands  to  appellant,  and  that  he 
intended  to  deed  the  same  lands  lying  in  section  28,  instead  of  sec- 
tion 25.  There  is  therefore  no  room  for  doubt  or  controversy  that 
a  mistake  was  made  by  the  scrivener  in  respect  of  the  description  of. 
the  lands,  and  that,  in  its  present  form,  the  instrument  does  not  ex- 
press the  true  intention  and  meaning  of  the  parties.  The  jurisdiction 
of  a  court  of  equity  to  correct  such  mistakes,  when  admitted  or  estab^ 
lished  by  the  necessar}^  measure  of  proof,  is  too  well  settled,  and  has 
been  too  often  successfully  invoked  in  this  state,  to  require  a  citation 
of  the  cases  to  be  found  in  our  reports  upon  this  subject.  And  at 
this  time  it  is  no  longer  open  to  debate  that  reformation  may  be  had 
of  a  conveyance  designed  to  pass  the  husband's  exempt  homestead,  but 
which,  by  mistake,  fails  to  correctly  describe  it,  provided  the  deed  or 
mortgage  is  executed  and  acknowledged  by  him  and  wife,  in  con- 
formity with  the  statute  governing  such  cases.     *     *    * 


HEALY  V.  HEALY. 
(Supreme  Court  of  New  Hampshire,  1912.     76  N.  H.  .504,  So  Atl.  156.) 

Bill  for  specific  performance  by  John  F.  Healy  and  others  against 
Michael  Healy  and  others.  The  bill  was  dismissed,  and  plaintiffs 
bring  exceptions.  The  plaintiffs  are  sons  and  daughters  of  deceased 
uncles  and  aunts,  and  the  defendants  are  two  of  the  surviving  uncles 
and  aimts  of  John  M.  Harrington,  who  died  in  February,  1908,  intes- 
tate. On  the  petition  of  the  plaintiffs,  one  of  the  cousins  was  appoint- 
ed administrator  of  Harrington's  estate,  notwithstanding  the  defend- 
ants objected  and  petitioned  for  the  appointment  of  another  qualified 
person.     The  appointment  was  made  upon  the  erroneous  assumption 


298  CONTRACTS  (Part  1 

that  the  cousins  of  the  decedent,  as  well  as  the  uncle  and  aunt,  partic- 
ipated in  the  distribution  of  the  estate.  Acting  on  the  same  erro- 
neous assumption,  all  the  parties  and  another  uncle  subsequently  join- 
ed in  a  power  of  attorney  to  the  administrator,  but  in  his  individual 
capacity,  authorizing  him  to  sell  the  real  estate,  and  erroneously  de- 
scribing the  parties  to  the  power  as  heirs  of  Harrington.  This  power 
was  revoked  April  6,  1909,  by  the  defendants.  At  the  date  of  revo- 
cation nothing  had  been  done  under  the  power  except  the  employment 
of  an  auctioneer  whose  bill  for  services,  amounting  to  $10,  has  been 
paid  by  one  of  the  plaintiffs. 

The  plaintiffs  claim  that  all  the  parties  to  the  power  of  attorney 
assented  to  the  mistaken  view  of  the  law  upon  which  the  administra- 
tor was  appointed,  and  that  his  power  was  given  to  facilitate  distri- 
bution of  the  estate  among  the  parties.  This  the  defendants  deny, 
claiming  that  such  was  not  the  purpose  of  the  power.  This  issue  has 
not  been  tried,  the  court  having  ruled  that,  even  if  the  defendants  signed 
the  power  of  attorney  for  that  purpose,  they  are  not  concluded  there- 
by since  they  acted  under  a  mistaken  apprehension  of  the  law,  and 
that  they  may  now  controvert  it;  that  the  signing  of  such  power  of 
attorney,  under  such  misapprehension  of  their  legal  rights,  does  not 
conclude  the  real  owners  of  the  property  from  now  insisting  upon  a 
distribution  in  accordance  with  the  law.  The  court  ordered  that  the 
bill  be  dismissed,  and  that  the  nieces  and  nephews  who  became  par- 
ties to  the  power  of  attorney  should  be  relieved  of  any  obligation  in- 
cident thereto.     To  the  order  of  dismissal  the  plaintiffs  excepted. 

PeasleE,  J.  The  only  exception  taken  is  to  the  order  that  the  bill 
be  dismissed.  This  order  was  apparently  based  upon  the  ruling  that 
the  defendants  were  entitled  to  rescind  their  agreement,  and  the  ques- 
tion relating  to  rescission  is  thus  presented.     *     *     * 

That  a  rescission  may  be  had  for  a  mutual  mistake  as  to  the  legal 
rights  of  the  parties  seems  to  be  well  settled.  In  some  cases  this  has 
been  put  upon  the  ground  that  there  was  no  consideration  for  the 
promise,  in  others  that  there  was  a  mistake  as  to  the  subject-matter, 
but  usually  upon  the  broad  principle  that  justice  and  equity  require 
such  a  rule.  The  dividing  line  between  cases  where  these  considera- 
tions should  control  and  those  which  should  be  governed  by  the  maxim 
that  ignorance  of  the  law  excuses  no  one  has  not  always  been  clearly 
defined.  Pomeroy  describes  it  thus:  ''Whenever  a  person  is  igno- 
rant or  mistaken  with  respect  to  his  own  antecedent  and  existing  pri- 
vate legal  rights,  interests,  estates,  duties,  liabilities,  or  other  relation, 
either  of  property,  or  contract,  or  personal  status,  and  enters  into  some 
transaction  the  legal  scope  and  operation  of  which  he  correctly  appre- 
hends and  understands,  for  the  purpose  of  affecting  such  assumed 
rights,  interests,  or  relations,  or  of  carrying  out  such  assumed  du- 
ties or  liabilities,  equity  will  grant  its  relief,  defensive  or  affirmative, 
treating  the  mistake  as  analogous,  if  not  identical  with,  a  mistake  of 
fact."  Of  this  rule  he  says:  "The  number  of  decisions  which  sup- 
port it,  and  which  it  explains,  is  very  great."  Pom.  Eq.  Jur.  §  849. 
"Whenever  the  mistake  of  law  is  mutual,  and  the  party  jeopardized 
thereby  can  be  relieved  without  substantial  injustice  to  the  other  side, 
then  equity  will  aft'ord  redress,  especially  if  the  party  to  be  benefited 
by  the  mistake  invokes  the  aid  of  equity  to  put  him  in  a  position  where 
the  mistake  will  become  advantageous  to  him."  Freichnecht  v.  Meyer, 
39  N.  J.  Eq.  551,  561.    *    *    *    And  in  this  jurisdiction  the  fact  that 


Ch.  G)  EFFECT   OF   MISTAKE,  FRAUD,  DURESS,  ETC.  299 

/ 

a  mistake  was  one  of  law  has  not  been  considered  as  necessarily  a  bar 
to  treating-  it  as  a  ground  for  granting  relief.     **--!= 

Judged  by  any  of  the  tests  above  suggested,  these  defendants  were 
entitled  to  withdraw  from  their  agreement.  Assuming,  as  the  plain- 
tiffs claim,  that  the  agreement  covers  a  division  of  the  estate  with 
them,  there  was  no  consideration  for  the  promise.  The  subject-mat- 
ter— their  interest  in  the  estate — had  no  existence.  And  they  are  here 
seeking  relief  from  a  court  of  equity  to  the  end  that  they  may  enforce 
an  "equitable  bargain.  It  may  be  conceded,  as  the  plaintiffs  argue,  that 
the  rule  as  to  rescission  does  not  apply  where  the  agreement  was  en- 
tered into  to  settle  disputed  or  doubtful  claims.  The  arrangement 
here  made  was  not  in  any  sense  a  settlement  of  a  controversy.  It  was 
made  because  all  the  parties  then  supposed  that  the  nephews  and 
nieces  were  entitled  to  share  in  the  distribution.  There  was  no  differ- 
ence of  opinion  which  was  compromised,  but  simpty  a  mutual  mistake 
as  to  their  rights  in  the  premises.  Believing  that  all  w^ere  entitled  to 
share  in  the  estate,  the  parties  made  this  agreement  for  the  convenient 
disposal  of  the  property.  No  action  has  been  taken  under  the  agree- 
ment, save  the  payment  of  $10  by  one  of  the  plaintiff's. 

By  the  decree  which  was  entered  this  is  to  be  returned  to  him. 
The  contract,  if  one  was  made,  is  still  executor}'.  Upon  these  facts, 
equity  plainly  requires  the  order  which  was  made  in  the  superior 
court.     Exception  overruled. 


SECTION  3.— FRAUD 

There  are  few  topics  of  the  law  which  more  frequently  engage 
the  attention  of  the  courts  than  that  of  fraud.  Fraudulent  practices 
protrude  themselves  into  every  kind  of  human  relationships.  The 
courts  are  called  upon  to  define  what  constitutes  fraud  and  to  pre- 
scribe its  legal  eft"ects. 

Fraudulent  practices  are  so  infinitely  varied  that  the  framing  of 
a  definition  is  next  to  impossible.  Under  some  circumstances  a 
particular  group  of  acts  may  constitute  fraud,  while  under  different 
circumstances  the  same  acts  would  not  be  regarded  as  frauclulent. 
What  constitutes  fraud  depends  to  a  considerable  extent  upon  the 
nature  of  the  suit  and  the  character  of  the  relief  sought.  The  sub- 
ject of  fraud  may  become  involved  in  one  of  three  ways:  (1)  As  a 
defense  to  an  action  for  breach  of  contract;  (2)  as  a  ground  for 
affirmative  relief  by  way  of  rescission  of  a  contract  or  of  a  transfer 
of  property ;  and  (3)  as  the  ground  for  affirmative  relief  for  dam- 
ages in  a  tort  action  of  deceit.  We  are  interested,  primarily,  in  the 
subject  of  fraud  as  a  defense  to  a  contract  or  as  ground  for  rescind- 
ing a  contract. 

Where  fraud  is  relied  upon  as  a  defense  to  an  action  for  breach  of 
contract,  we  are  concerned  with  a  real  contract;  but  the  breach  of 
the  defendant  is  justified  by  proof  that  the  defendant  entered  into 
the  contract  because  of  the  fraud.  Sometimes  fraud  is  of  such  a 
character  that  the  courts  may  fairly  say  that  no  contract  resulted  ; 
but  in  the  majority  of  instances  the  party  knowingly  entered  into 


300  CO  NTH  ACTS  (Part  1 

the  contract,  but  would  not  have  done  so,  if  the  fraud  had  not 
been  practiced  upon  him. 

Where  fraud  is  reHed  upon  as  a  ground  for  seeking  affirmative 
relief  against  the  fraudulent  party,  the  defrauded  party  is  seeking 
one  of  two  types  of  relief,  and  sometimes  he  seeks  both:  (1)  The 
defrauded  party  may  desire  to  have  a  decree  of  a  court  which  de- 
clares that  the  particular  contract  is  void ;  (2)  or  he  may  ask  that 
the  court  grant  him  a  decree  which  orders  the  fraudulent  party,  to 
restore  to  the  defrauded  party  what  he  has  parted  with.  Where 
the  defrauded  party  is  asking  for  a  decree  that  the  contract  be  de- 
clared null  and  void  because  of  fraud,  the  circumstances  will  be 
such  that  the  mere  fact  that  the  defrauded  party  will  have  a  good 
defense  if  the  fraudulent  party  should  sue  him  will  not  be  an  ade- 
quate remedy.  Such  situations  frequently  arise  in  connection  with 
contracts  for  the  sale  of  land  or  of  deeds  to  land.  Again,  the  de- 
frauded party  may  have  already  parted  with  the  consideration,  in 
which  case  it  is  to  his  interest  to  rescind  the  contract;  that  is,  to 
treat  the  contract  as  if  it  had  never  existed  and  ask  for  a  return  cf 
the  consideration. 

Where  the  defrauded  party  brings  a  tort  action  against  the  fraud- 
ulent party,  the  contract  is  only  indirectly  involved.  The  gist  of  the 
action  is  the  wrong  done  to  the  plaintifif,  and  for  this  wrong  the 
plaintiff  is  asking  for  damages.  Generally  speaking,  a  stronger 
case  of  fraud  must  be  made  out  in  the  tort  action  of  fraud  and 
deceit  than  is  necessary  where  fraud  is  relied  upon  as  a  defense, 
or  as  a  ground  for  a  decree  declaring  the  contract  void  or  for  a 
return  of  the  consideration. 

Fr^ud  has  five  elements:  (1)  There  must  be  a  false  representa- 
tion of  material  facts.  (2)  There  must  be  knowledge,  by  the  party 
making  the  assertion,  that  the  facts  stated  were  untrue.  (3)  The 
party  making  the  false  statement  must  have  had  the  intention  to 
defraud;  that  is,  he  must  have  intended  that  the  party  to  whom  the 
untrue  statements  were  made  should  act  upon  them  as  true.  (4) 
The  party  to  whom  the  false  statements  were  made  must  have  been 
ignorant  of  their  falsity ;  that  is,  he  must  have  relied  upon  them 
as  true.  (5)  The  party  to  whom  the  statements  were  made  must 
hav;e  sustained  damage  by  reason  of  his  reliance  upon  the  untrue 
statements. 

At  least  these  five  elements  are  necessary  in  order  to  maintain 
the  tort  action  for  fraud  and  deceit.  Where  fraud  is  relied  upon  as 
a  defense  to  a  contract  or  as  a  ground  for  rescission,  it  is  not  nec- 
essary to  prove  that  the  defrauding  party  intended  to  defraud. 
The  contract  may  be  rescinded,  or  the  defense  of  fraud  will  be  suc- 
cessful, if  it  be  proved  that  there  were  misrepresentations  of  ma- 
terial facts,  although  such  misrepresentations  were  made  inno- 
cently. 

It  is  apparent  that  there  may  be  every  manner  of  controversy  on 
the  question  whether  a  particular  group  of  circumstances  fulfills 
all  of  the  requisites  of  fraud. 


Ch.  G)  EFFECT   OF   MISTAKE,  FRAUD,  DURESS,  ETC.  301 


WILSON  V.  HUNDLEY. 

(Supreme  Court  of  Appeals  of  Vir-inia.  l.«98.     06  Va.  96.  nO  S.  E.  492. 
70  Am.  St.  Rep.  837.) 

Action  by  William  Wilson,  trustee  of  the  Rivermont  Company,  for 
the  benefit  of  creditors,  against  George  J.  Hundley,  to  recover  unpaid 
stock  subscriptions.  Defendant  was  induced  to  subscribe  for  stock  in. 
the  corporation  on  the  fraudulent  representation  that  a  certain  syndi- 
cate had  subscribed  for  a  large  amount  of  the  stock,  and,  when  inform- 
ed that  the  greater  part  of  such  subscription  was  merely  optional, 
he  affirmed  the  contract. 

RiELY,  J.  *  *  *  A  contract  induced  by  fraud  is  not  void,  but 
voidable  at  the  option  of  the  party  injured  by  the  fraud.  Upon  the 
discovery  of  the  fraud,  he  has,  as  a  general  rule,  the  choice  of  two 
remedies :  He  may  elect  to  rescind  the  contract,  if  he  can  restore  what 
he  has  received  in  the  same  state  or  condition  in  which  he  received  it, 
and  sue  for  and  recover  back  the  consideration  he  has  paid  or  given, 
or,  if  he  has  not  paid  or  given  anything,  repudiate  the  contract,  and 
rely,  when  sued,  upon  the  fraud  as  a  complete  defense;  or  he  may 
elect  to  retain  what  he  has  received  under  the  contract,  and  bring  an 
action  to  recover  damages  for  the  injury  he  has  sustained  from  the 
deceit.  By  adopting  the  latter  course,  he.  in  effect,  affirms  the  contract, 
but  not  as  made  in  good  faith.  He  consents  to  be  bound  by  its  provi- 
sions, but  does  not  thereby  release  or  waive  his  claim  for  damages  aris- 
ing from  the  fraud  collateral  to  the  agreement.     *     *     * 

If,  however,  the  party  who  has  been  defrauded  elect,  on  the  discovery 
of  the  fraud,  to  affirm  the  contract,  his  election  is  final  and  conclusive. 
He  has  but  one  election  to  rescind,  and,  having  once  elected  to  affirm 
the  contract,  he  cannot  thereafter  disaffirm  it,  but  must  abide  by  the 
decision  he  has  made.     *     *     * 

In  Ormes  v.  Beadel  (1861)  30  Law  J.  Eq.  1,  Lord  Campbell  said: 
"No  case  can  be  found  to  establish  the  doctrine  that  if  a  voidable  con- 
tract is  voluntarily  acted  upon,  with  a  knowledge  of  all  the  facts,  in  the 
hope  that  it  may  turn  out  to  the  advantage  of  a  party  who  might  have 
avoided  it,  he  may  still  avoid  it,  when,  after  abiding  the  event,  it  has 
turned  out  to  his  disadvantage.'"     =^     *     * 

[Judgment  for  defendant  reversed.] 


DAVIS  V.  BUTLER. 

(Supreme  Court  of  California,  1908.     154  Cal.  623,  98  Pac.  1047.) 

Action  by  H,  E.  Davis  against  T.  C.  Butler.  From  an  order  deny- 
ing a  motion  for  a  new  trial,  defendant  appeals. 

Sloss,  J.  On  November  7,  1905,  the  defendant  sold  to  the  plaintiff' 
250  shares  of  the  capital  stock  of  the  Salinas  Valley  Bottling  Company, 
a  corporation.  In  January,  1906,  the  plaintiff",  claiming  that  he  had 
been  induced  to  buy  the  stock  by  means  of  fraudulent  misrepresenta- 
tions made  to  him  by  the  defendant,  undertook  to  rescind  the  agreement 
of  purchase  and  sale.  The  defendant  refusing  to  restore  the  money 
and  property  received  as  the  purchase  price,  the  plaintiff  brought  this 
action,  praying  a  decree  that  the  agreement  be  rescinded,  and  that  de- 
fendant be  required  to  transfer  to  plaintiff"  the  property  received  as  the 


o02  coxTKACTS  (Parti 

purchase  price  of  the  stock  upon  plaintiff  retransferring  the  250  shai'es 
of  stock.  The  plaintiff  had  judgment  in  the  court  below.  The  defend- 
ant now  appeals  from  an  order  denying  his  motion  for  a  new  trial. 

The  Salinas  Valley  Bottling  Company  was  engaged  in  the  business  of 
bottling  and  selling  beer  which  it  purchased  in  bulk.  Four  hundred  and 
thirty  shares  of  its  stock,  of  the  par  value  of  $10  each,  had  been  issued. 
The  misrepresentations  alleged  by  plaintiff'  to  have  been  made  by  de- 
fendant had  reference  to  three  matters.  The  complaint  averred  that 
the  defendant  had  stated  that  the  indebtedness  of  the  corporation,  over 
and  above  the  money  it  then  had  in  bank  and  solvent  credits  due  to  it 
by  its  patrons,  amounted  to  the  sum  of  $1,530,  and  no  more,  whereas 
in  fact  such  indebtedness  amounted  to  the  sum  of  $2,963.64.  He  had 
represented  that  the  corporation  was  and  had  been  marketing  and 
selling  two  car  loads  of  beer  per  month,  whereas  in  fact  it  had  not  been 
and  was  not  selling  more  than  one  car  load  per  month.  The  third 
representation  relied  upon  was  that  the  corporation  received  a  net  profit 
of  $6.15  per  barrel  on  the  beer  bottled  and  marketed  by  it,  when  as  a 
matter  of  fact  said  net  profit  did  not  exceed  $3.35  per  barrel.     *     *     * 

A  single  material  misstatement,  knowingly  made,  with  intent  to  in- 
fluence another  into  entering  into  a  contract,  will,  if  believed  and  relied 
on  by  that  other,  aff'ord  as  complete  ground  for  rescission  as  if  it  had 
been  accompanied  by  a  multitude  of  other  false  representations.  It  will 
hardly  be  contended  that  a  representation  that  the  indebtedness  of  the 
corporation  was  only  $1,530,  when  in  fact  it  was  $2,800,  was  not  ma- 
terial. There  are  many  corporations  having  assets  and  conducting  a 
business  of  such  magnitude  that  a  difference,  one  way  or  the  other, 
of  a  few  thousand  dollars  of  indebtedness  would  not  appreciably  affect 
the  value  of  their  stock.  But  the  Salinas  Valley  Bottling  Company 
had  a  total  outstanding  issue  of  only  430  shares,  of  the  par  value  of  $10 
each.  The  sale  to  plaintiff  embraced  250  shares  at  par.  The  difference 
between  $1,530  and  $2,800,  if  apportioned  among  the  outstanding 
shares  of  stock,  amounts  to  almost  $3  for  each  of  the  430  shares.  Such 
a  discrepancy,  having  a  close  relation  to  the  value  of  the  stock,  would 
certainly  be  material  in  a  transaction  based  on  a  selling  price  of  $10 
per  share.     *     *     * 

The  rule  that  a  party  may  not  complain  of  misrepresentations  regard- 
ing matters  which  he  has  investigated,  or,  having  the  opportunity  so 
to  do,  has  begun  to  investigate  for  himself  *  *  *  has  no  applica- 
tion here.  While  the  plaintiff,  before  purchasing,  looked  over  the 
books  of  the  corporation,  the  court  finds  *  *  *  that  defendant 
stated  to  plaintiff  that  neither  he  nor  the  corporation  kept  any  books  of 
account  showing  the  corporate  indebtedness.  The  plaintiff'  was  fully 
justified  in  relying  upon  defendant's  statements  as  to  such  indebted- 
ness. *  *  *  jt  jg  j-^Qt  essential  to  the  right  to  rescind  a  contract  for 
the  purchase  of  property  that  the  purchaser  should  be  able  to  show  that 
the  property  purchased  was  worth  less  than  he  paid  for  it.  It  is 
enough  that  he  was  induced,  by  false  representations,  to  buy  property 
which  would,  if  the  representations  had  been  true,  have  been  worth 
more  than  it  actually  was  worth.     *     *     * 

The  sale  to  plaintiff  v/as  made  on  November  7,  1905.  The  notice  of 
rescission  was  given  on  January  11,  1906,  and  the  complaint  filed  on 
January  18,  1906.  The  court  found  that  plaintiff  did  not  delay  an  un- 
reasonable time  in  electing  to  rescind  the  contract  after  discovery  of 


Ch.  6)^  EFFECT   OF   MISTAKE,  FRAUD,  DURESS,  ETC.  303 

the  falsity  of  the  defendant's  representations.     This  finding  cannot  be 
said  to  be  contrary  to  the  evidence.     *     *     * 
The  order  is  affirmed. 


MILLER  V.  SUTLIFF  et  al. 

(Supreme  Court  of  Illinois,  1909.     241  111.  521,  89  N.  E.  G51, 
24  L.  R.  A.  [N.  S.]  735.) 

Suit  by  James  B.  Miller  against  Milton  Sutliff  and  others.  From  a 
decree  dismissing  the  bill  for  want  of  equity,  on  sustaining  a  demurrer 
thereto,  complainant  appeals. 

Cartwright,  J.  James  B.  Miller  filed  his  bill  of  complaint  in  the 
circuit  court  of  Peoria  county  against  Milton  Sutliff,  Dwight  R.  Chap- 
man, Moses  J.  Richards  and  their  unknown  heirs,  and  Augustus  E. 
Scott,  praying  the  court  to  set  aside  a  deed  made  by  the  complainant 
to  Sutliff,  Chapman,  and  Richards  of  the  undivided  one-half  of  the 
coal  and  mineral  underlying  the  lands  of  the  complainant,  and  a  deed 
of  the  same  made  to  said  Augustus  E.  Scott,  and  to  declare  the  same 
void  and  a  cloud  upon  complainant's  title.  *  *  *  The  material 
facts  alleged  in  the  bill  and  admitted  by  the  demurrer  to  be  true  are  as 
follows : 

On  October  1,  1869,  the  complainant  was  the  owner  and  in  posses- 
sion of  900  acres  of  land  in  Peoria  county,  under  which  there  were 
deposits  of  coal.  *  *  *  Qn  that  day  the  complainant,  with  his 
wife,  executed  a  deed  to  Milton  Sutliff',  Dwight  R.  Chapman,  and 
Moses  J.  Richards,  three  of  the  defendants,  conveying  the  undivided 
one-half  of  all  the  coal  and  other  minerals  under  said  lands.  The 
deed  recited  a  consideration  of  $400,  and  that  it  was  made  in  pursuance 
of  a  contract  subsisting  by  and  between  the  complainant  and  Chapman 
and  Phillips  and  by  them  performed.  There  was,  in  fact  no  consider- 
ation paid,  but  the  complainant  was  induced  to  make  the  deed  by  rep- 
resentations and  promises  of  said  defendants  made  first  at  a  meeting 
at  the  farm  of  one  of  his  neighbors,  and  afterward  at  a  meeting  held 
at  a  public  school  house,  and  finally  when  the  conveyance  was  made. 
The  representations  were  that  said  defendants  were  the  owners  of 
large  foundries,  smelters,  coke  ovens,  and  iron  mills  near  Youngstown, 
Ohio ;  that  they  were  men  of  large  means  and  resources ;  that  the  sup- 
ply of  coal  such  as  was  used  in  their  industries  had  practically  become 
exhausted  at  their  present  location,  necessitating  a  removal  of  the  in- 
dustries ;  and  that  they  would  remove  the  industries  to  complainant's 
locaHty  if  they  could  find  and  obtain  in  sufficient  quantities  a  suitable 
kind  of  coal.  These  representations  were  first  made  to  secure  the 
privilege  of  boring  and  prospecting  for  coal,  and,  after  prospecting  and 
making  borings,  said  defendants  stated  that  they  had  found  suitable 
coal  in  sufficient  quantities,  and,  if  the  complainant  and  his  neighbors 
would  convey  to  them  the  undivided  one-half  of  the  coal  and  other  min- 
erals underlying  their  lands,  they  would  immediately  remove  their 
plants  and  industries  to  the  locality,  and  would  employ  a  great  num- 
ber of  men  and  build  a  railroad  giving  facilities  for  transportation. 
They  represented  to  the  complainant  that,  if  he  would  make  the  con- 
veyance, they  would  locate  one  of  their  plants  upon  his  premises  and 
the  remainder  in  the  vicinity,  and  would  proceed  at  once  toward  open- 
ing up  mines  on  his  land.  *  *  *  'pj-jg  complainant  relied  upon  the 
representations  and  executed  the  deed,     *     *     *     but  said  defendants 


304  CONTRACTS  (Part  1 

did  not  perform  any  of  their  agreements.  *  *  *  f}-,g  complainant 
has  been  in  possession  of  the  premises  ever  since,  and  neither  said 
defendants,  nor  any  one  claiming  under  them,  has  ever  been  in  posses- 
sion of  the  subject-matter  of  the  conveyance.     *     *     * 

In  order  to  constitute  fraud  in  law,  a  representation  must  be  on 
affirmance  of  a  fact,  and  not  a"  mere  promise  or  matter  of  intention. 
While  a  statement  of  a  matter  in  the  future,  if  affirmed  as  a  fact,  may 
amount  to  a  fraudulent  misrepresentation,  it  must  amount  to  an  asser- 
tion of  a  fact,  and  not  an  agreement  to  do  something  in  the  future. 
*  *  *  If  a  promise  is  made  to  do  something  in  the  future  and 
at  the  time  it  is  not  intended  to  perform  the  promise,  that  fact  does 
not  constitute  a  fraud  in  the  law.  *  *  *  If  an  intention  not  to 
perform  constituted  fraud,  every  transaction  might  be  avoided  where 
the  facts  justified  an  inference  that  a  party  did  not  intend  to  pay  the 
consideration  or  keep  his  agreement.  A  mere  breach  of  a  contract 
does  not  amount  to  a  fraud,  and  neither  a  knowledge  of  inability  to 
perform,  nor  an  intention  not  to  do  so,  would  make  the  transaction 
fraudulent.  The  bill  in  this  case  states  no  representation  as  to  any  past 
or  existing  fact  except  that  the  kind  of  coal  used  in  the  plant  near 
Youngstown,  Ohio,  had  become  exhausted,  necessitating  a  removal  of 
the  plant  to  a  locality  where  such  coal  could  be  found,  and  that  the 
defendants  had  a  steamer  in  the  Ohio  river  loaded  with  iron  and  ma- 
chinery for  removal,  and  there  is  no  averment  that  either  of  these 
representations  was  false.  The  other  averments  of  the  bill  amount 
simply  to  charges  that  the  defendants  to  whom  the  deed  was  made 
failed  to  perform  their  promises,  which  constituted  the  sole  considera- 
tion for  the  deed.  The  averments  of  the  bill  are  not  sufficient  to 
charge  fraud  in  obtaining  the  deed.     *     *     * 

It  is  not  to  be  inferred  that  the  representations  of  the  three  defend- 
ants as  to  what  they  would  do,  and  which  constituted  the  sole  consider- 
ation for  the  conveyance,  gave  rise  to  no  right  in  the  complainant  or 
that  the  right  would  not  be  enforced  or  relief  granted  by  a  court  of 
equity.  *  *  *  But  the  remedy  that  might  be  given  is  not  the  one 
sought  by  this  bill.  The  court  correctly  decided  that  the  facts  al- 
leged were  not  sufficient  to  establish  the  charge  of  fraud  in  obtaining 
the  conveyance  or  to  justify  declaring  the  deed  void  and  removing  it 
as  a  cloud  upon  complainant's  title.    The  decree  is  affirmed. 


GLOBE  MUTUAL  LIFE   INS.   ASS'N   v.   WAGNER. 

(Supreme  Court  of  Illinois,  1900.     188  111.  1.33.  58  N.  E.  970,  52  L.  K.  A.  649, 

SO  Am.  St.  Itep.  169.) 

Appellee,  Dora  Wagner,  recovered  a  judgment  of  $250  in  a  suit 
in  assumpsit  in  the  superior  court  of  Cook  county  against  appellant, 
the  Globe  Mutual  Life  Insurance  Association  of  Chicago,  on  a  policy 
of  insurance  issued  to  her  on  the  life  of  her  son  Richard  Wagner. 
The  association  appealed  to  the  appellate  court,  where  the  judgment  of 
the  superior  court  was  affirmed,  and  now  prosecutes  this  further  ap- 
peal. 

Wilkin,  J.  The  chief  ground  urged  by  appellant  for  a  reversal 
of  the  judgment  of  the  appellate  court  is  the  falsity  of  the  answer  to 
one  of  the  questions  appearing  in  the  medical  examination  of  the  in- 
sured. On  the  back  of  the  application  made  by  appellee,  in  what  pur- 
ports to  be  the  medical  examination  of  the  insured,  this  question  and 


Ch.  6)  EFFECT   OF   MISTAKE,  FRAUD,  DURESS,  ETC.  305 

answer    appear:      "O.  How    many    brothers    dead?      Ans.  None." 

*  *  *  It  appears  from  the  evidence  that  a  brother  of  the  insured 
died  in  London,  England,  more  than  four  years  prior  to  the  date  of 
the  application  for  insurance  in  this  case,  but  there  is  no  evidence 
tending  to  show  that  the  insured  ever  knew  of  his  brother's  death. 
Appellant  asserts,  however,  that,  whether  he  knew  of  it  or  not,  the 
statement  that  none  of  his  brothers  was  dead  is  a  warranty,  and,  be- 
ing untrue,  avoids  the  policy.  Appellee  contends  that  the  statement, 
though  false,  is  not  a  warranty,  but  a  mere  representation,  which, 
unless  material,  would  not  avoid  the  policy. 

In  the  absence  of  explicit,  unequivocal  stipulations  requiring  such 
an  interpretation,  it  should  not  be  inferred  that  the  insured  or  the 
appellee  took  a  life  policy  with  the  distinct  understanding  that  it  should 
be  void  if  any  statements  made  in  the  medical  examination  should 
be  false,  whether  the  insured  was  conscious  of  the  falsity  thereof  or  not. 

*  *  *  Whether  or  not  the  deceased  knew  of  the  death  of  his  brother 
at  the  time  of  the  application  for  insurance  was  a  question  for  the 
jury,  and  no  evidence  of  such  knowledge  appears  in  the  record. 
* ,  *  *  We  are  satisfied  the  court  below  committed  no  reversible  er- 
ror, and  the  judgment  of  that  court  will  be  affirmed. 


CROMPTON   V.    EEEDLE. 

(Supreme  Court  of  Vermont.  1910.     8.3  Vt.  287,  ir^  Atl.  331,  30  L.  R.  A. 
[N.  S.]  748,  Ann.  Cas.  1912A,  399.) 

Bill  by  Cora  E.  Crompton  against  Albert  H.  Beedle  and  another, 
praying  for  a  reconveyance  of  land  deeded  to  defendants.  Complain- 
ant tendered  defendants  the  purchase  price. 

HasELTOX,  J.  The  oratrix  in  this  cause,  a  resident  of  Worcester, 
Mass.,  sets  out  in  her  bill  as  amended  that,  at  a  time  named  she  was  the 
owner  in  fee  simple  of  a  farm  in  Randolph  in  this  state;  that  she 
purchased  the  farm  for  the  use  of  a  relative,  and  had  herself  never  been 
in  Randolph,  and  had  never  seen  the  farm  and  was  ignorant  of  its  true 
value;  that  there  was  and  is  an  undeveloped  and  valuable  granite 
quarry  in  and  under  the  pasture  of  the  farm,  but  that  at  the  time  named 
she  had  nO'  knowledge  of  such  quarry.  She  further  sets  out  that  at 
the  time  in  question,  which  was  October  22,  1908,  the  defendant  Beedle, 
called  upon  her  in  Worcester,  and  stated  that  he  desired  to  buy  the 
pasture  mentioned,  and  that  she  told  him  that  she  did  not  know  the 
value  of  the  pasture  apart  from  the  farm ;  that  thereupon  the  defendant 
Beedle  told  her  that  the  pasture  was  poor  and  of  comparatively  little 
value;  that  it  adjoined  some  land  that  belonged  to  him,  and  that  the 
only  way  of  access  to  the  pasture  was  over  his  land,  and  that  it  annoy- 
ed him  and  his  family  to  have  his  land  gone  over  for  such  access,  and 
that  that  was  the  only  reason  why  he  desired  to  purchase  the  pasture. 
*  *  *  The  oratrix  further  alleges  that  the  defendants  knew  of  the 
existence  of  the  granite  quarry,  and  knew  that  she  was  ignorant  of  its 
existence,  that  the  representations  made  as  above  stated  were  false,  and 
were  known  to  the  defendants  to  be  false,  and  were  fraudulently  made 
for  the  purpose  of  inducing  her  to  sell  the  farm  to  the  defendants  at  a 
price  much  less  than  its  true  value,  and  for  the  purpose  of  inducing  her 
to  forbear  inquiry  as  to  the  existence  and  value  of  the  granite  quarry, 
B.&  B.Bvs.Law— 20 


306  CONTRACTS  (Part  1 

and  as  to  the  value  of  the  farm  as  affected  thereby;   that  the  pasture 
was  not,  as  represented,  of  Httle  value,  $400,  but  $15,000.    *    *    * 

In  an  early  Pennsylvania  case  cited  by  the  defendantsit  is  said  that 
"concealment  on  the  part  of  the  vendee  is  a  novel  objection."  But 
the  question  presented  has,  in  its  various  aspects,  been  discussed  for 
many  centuries.  Cicero  puts  the  case  of  one  who  buys  for  a  trifle  gold, 
which  the  seller,  in  his  ignorance,  supposed  to  be  brass,  and  he  moots 
similar  questions  regarding  sales  of  personal  property  and  of  real  estate 
as  well.  But  we  pass  over  the  discussions  of  the  ethical  writers  and  the 
civilians,  discussions  which  are  in  some  cases  luminous  and  in  others 
obscure.  It  has  long  been  settled  in  common-law  jurisdictions  that,  in 
general,  the  mere  failure  of  a  buyer  to  disclose  something  extrinsic  or 
intrinsic  to  the  thing  bought,  known  to  him  and  not  known  to  the  seller, 
is  not  in  legal  sense  fraud.  *  *  *  in  Laidlaw  v.  Organ,  2  Wheat. 
178,  4  L.  Ed.  214,  it  appeared  that  in  February,  1815,  the  defendant 
got,  through  private  sources,  news  of  our  Treaty  of  Peace  with  Eng- 
land, of  which  the  plaintiffs  were  ignorant,  and  that,  without  disclos- 
ing the  news,  the  defendant  bought  of  the  plaintiffs  111  hogsheads  of 
tobacco,  the  price  of  which  was  greatly  enhanced  by  news  of  tjie 
peace.  It  appeared  that  the  plaintiffs  inquired,  in  the  course  of  the 
transaction,  if  there  was  any  news  calculated  to  enhance  the  value  of 
tobacco,  and  that  no  reply  was  made  to  their  inquiry.  In  the  district 
court  it  was  held,  as  matter  of  law,  that  there  could  be  no  recovery. 
Chief  Justice  Marshall  in  delivering  the  opinion  of  the  Supreme  Court 
said :  "The  question  in  this  case  is  whether  the  intelligence  of  extrin- 
sic circumstances  which  might  influence  the  price  of  the  commodity, 
and  which  was  exclusively  within  the  knowledge  of  the  vendee,  ought 
to  have  been  communicated  by  him  to  the  vendor.  The  court  is  of 
opin'on  that  he  was  not  bound  to  communicate  it.  It  would  be  difficult 
to  circumscribe  the  contrary  doctrine  within  proper  limits  where  the 
means  of  intelligence  are  equally  accessible  to  both  parties.  But  at 
the  same  time  each  party  must  take  care  not  to  say  or  do  anything 
tending  to  impose  upon  the  other."  In  accordance  with  these  views  the 
court  held  that  in  the  circumstances  disclosed  it  was  a  question  of  fact 
whether  any  imposition  was  practiced  by  the  vendee  upon  the  vendor, 
and  so  the  judgment  was  reversed  and  the  cause  remanded.     *     *     * 

In  a  case  decided  a  few  years  later  than  Laidlaw  v.  Organ,  Lord 
Eldon,  in  a  carefully  considered  case,  gave  expression  to  the  law  here 
applicable.  He  said :  "If  an  estate  is  offered  for  sale,  and  I  treat  for 
it  knowing  that  there  is  a  mine  under  it,  and  the  other  party  makes  no 
inquiry,  I  am  not  bound  to  give  him  any  information  of  it;  he  acts  for 
himself,  and  exercises  his  own  sense  and  knowledge.  But  a  very  little 
is  sufficient  to  affect  the  application  of  that  principle.  If  a  word,  if  a 
single  word,  be  dropped  which  tends  to  mislead  the  vendor,  that  princi- 
ple will  not  be  allowed  to  operate."  Turner  v.  Harvey,  Jacob,  169,  178. 
In  Walters  v.  Morgan,  3  De  G.  F.  &  J.  718,  Lord  Chancellor  Campbell 
expressed  his  full  concurrence  in  the  doctrine  of  Turner  v.  Harvey, 
and  said  that,  not  only  a  single  word,  but  "a  nod  or  a  wink  or  a  shake 
of  the  head,  or  a  smile  from  the  purchaser,  might  defeat  the  application 
of  the  principle  that  mere  reticence  on  the  part  of  a  purchaser  does  not 
in  law  amount  to  fraud."  *  *  *  In  Mountain  v.  Day,  91  Minn. 
249,  97  NL  W.  883,  the  syllabus,  by  the  court,  is  this :  "An  action  will 
lie  for  fraudulent  representations  made  by  the  prospective  purchaser 
of  land  as  to  its  value  and  condition ;  the  land  being  at  a  distance  from 


Ch.  6)  EFFECT   OF   MISTAKE,  FRAUD,  DURESS,  ETC.  307" 

the  place  of  purchase,  and  the  vendor  being  ignorant  as  to  its  condition 

and  value,  and  relying  upon  the  truthfulness  of  such  representations." 

*     *     * 

Unfairness  and  fraud  may  be  collected  from  a  variety  of  circum- 
stances, and  it  is  ordinarily  enough  to  establish  fraud  that  a  vendee  has 
actively  attempted  to  ensnare,  and  has  in  fact  ensnared,  the  vendor  into- 
the  making  of  an  unconscionable  contract.  Where  concealment  of  an 
essential  thing  is  effected  by  an  industrious  course  of  misleading  and 
deceptive  talk  or  conduct,  there  is  fraud  against  which  equity  will  re- 
lieve. The  law  distinguishes  between  passive  concealment  and  active 
concealment.  Where  one  has  full  information,  and  represents  that  he 
has.  if  he  discloses  a  part  of  his  information  only,  and  by  words  or  con- 
duct leads  the  one  with  whom  he  contracts  to  believe  that  he  has  made 
a  full  disclosure,  and  does  this  with  intent  to  deceive  and  overreach 
and  to  prevent  investigation,  he  is  guilty  of  fraud  against  which  equity 
will  relieve,  if  his  words  and  conduct  in  consequence  of  reliance  upon 
them  bring  about  the  result  which  he  desires.  The  jurisdiction  of 
courts  of  equity  to  relieve  against  active  and  effective  fraud  is  so  es- 
sential to  the  administration  of  justice  therein  that  such  courts,  often 
indeed,  to  use  the  language  of  Chief  Justice  Crew,  as  reported  by  Sir 
William  Jones,  will  "take  hold  of  a  twig  or  twine  thread  to  uphold  it." 
We  have  in  this  state  several  cases  to  the  effect  that,  even  where  there 
is  no  confidential  relation,  one  party  to  a  sale  may,  without  direct  mis- 
representation, be  guilty  of  fraud  by  means  of  words  or  acts  calculated 
and  intended  to  produce  a  false  impression,  and  which  do  in  fact  de- 
ceive and  induce  the  sale.     *     *     * 

The  result  is  that  the  decree  sustaining  the  demurrer  and  adjudging, 
the  bill  insufficient  is  reversed,  and  the  case  is  remanded. 


SECTION  4.— DURESS 
Duress  consists  in  compelling  action  through  fear,  as,  for  exam- 
ple, where  A.  says  to  B..  "Sign  this  note,  or  I  will  shoot  you." 
Duress  implies  coercion,  the  will  of  the  actor  being  overcome  or  di- 
rected, not  because  of  mistake  or  fraud  or  persuasion,  but  through 
fear  of  consequences  of  not  acting  as  directed.  Commonly  the 
threats  constituting  duress  are  of  physical  injury  to  the  person 
threatened,  or  of  physical  injury  to  some  other  person,  or  of  injury 
to  or  deprivation  of  the  property  of  the  person  threatened,  or  of  in- 
stituting a  criminal  prosecution  against  the  person  threatened,  or 
some  other  person.  The  nature  and  legal  consequences  of  duress 
are  illustrated  in  the  following  cases. 


WILLIAMSON-HALSELI^FKAZIER  CO.   V.   ACKERMAN  et   al. 

(Supreme  Court  of  Kansas,   190S.     77  Kan.  502.  94  Pac.   807,  ' 

20  L.  R.  A.  [N.  S.]  484.) 

Action  on  three  notes  and  mortgage  given  by  defendant  J.  J.  Acker-^ 
man  and  other  defendants  to  secure  the  payment  of  a  defalcation  of 
Ackerman's  son.  Halsell,  a  representative  of  the  plaintiff  company, 
came  to  defendant  J.  J.  Ackerman  and  informed  him  that  his  son 
John  had  embezzled  about  $4,000  of  the  company's  money,  that  he 


308  CONTRACTS  (Part  1 

(Halsell)  had  in  his  pocket  a  warrant  for  John's  arrest  for  embezzle- 
ment, and  that  there  was  a  deputy  sheriff  waiting  in  an  adjoining  room 
to  serve  the  warrant,  and  unless  the  notes  and  mortgages  were  signed 
the  warrant  would  be  served,  and  John  would  be  convicted  and  sent 
to  the  penitentiary.  Judgment  below  for  defendants,  and  plaintiff 
brings  error. 

Johnston,  C.  J.  *  *  *  The  action  was  not  one  to  determine 
the  guilt  or  innocence  of  John ;  nor  was  the  matter  of  his  actual  guilt 
an  essential  feature  of  the  defense  of  duress.  The  point  for  decision 
was  whether  the  threats  of  arrest  and  prosecution  of  John  put  the 
father  in  fear,  and  thus  overcame  his  will,  and  rendered  him  incom- 
petent to  contract.  If  there  was  no  free  will  in  the  execution  of  the 
notes  and  mortgage,  there  is  no  contract,  nor  any  binding  obligation. 
Under  the  modern  theory,  duress  is  to  be  tested,  not  by  the  nature  of 
the  acts  or  threats,  but  rather  by  the  state  of  mind  of  the  victim  in- 
duced by  such  acts  and  threats.  In  Galusha  v.  Sherman,  105  Wis. 
263,  81  N.  W.  495,  47  L.  R.  A.  417,  there  is  a  full  discussion  of  the 
subject  and  of  the  development  of  the  law  from  the  ancient  doctrine 
that  duress  should  be  tested  by  the  means  used  to  overcome  the  per- 
son threatened  to  the  later  and  better  one  of  the  condition  of  the  mind 
induced  by  the  threats.  It  was  there  said  that :  "The  making  of  a 
contract  requires  the  free  exercise  of  the  will  power  of  the  contracting 
parties,  and  the  free  meeting  and  blending  of  their  minds.  In  the  ab- 
sence of  that,  the  essential  of  a  contract  is  wanting ;  and,  if  such  ab- 
sence-be produced  by  the  wrongful  conduct  of  one  party  to  the  trans- 
action, or  conduct  for  which  he  is  responsible,  whereby  the  other  party, 
for  the  time  being,  through  fear,  is  bereft  of  his  free  will  power,  for 
the  purpose  of  obtaining  the  contract,  and  it  is  thereby  obtained,  such 
contract  may  be  avoided  on  the  ground  of  duress.  There  is  no  legal 
standard  of  resistance  which  a  party  so  circumstanced  must  exercise 
at  his  peril  to  protect  himself.  The  question  in  each  case  is :  Was  the 
alleged  injured  person,  by  being  put  in  fear  by  the  other  party  to  the 
transaction  for  the  purpose  of  obtaining  an  advantage  over  him,  de- 
prived of  the  free  exercise  of  his  will  power,  and  was  such  advantage 
thereby  obtained?  If  the  proposition  be  determined  in  the  affirmative, 
no  matter  what  the  nature  of  the  threatened  injury  to  such  person, 
or  his  property,  or  the  person  or  liberty  of  his  wife  or  child,  the  ad- 
vantage thereby  obtained  cannot  be  retained." 

Following  the  same  theory,  neither  the  legality  of  the  threatened  ar- 
rest and  prosecution,  nor  the  guilt  or  innocence  of  John,  w'as  material 
to  the  determination  of  whether  there  was  duress.  The  conduct  of 
lohn,  whatever  it  may  have  been,  was  no  excuse  or  justification  for 
intimidating  and  coercing  the  father  to  pay  John's  debt,  or  to  give 
a  mortgage  on  his  home  to  secure  the  payment  of  such  debt,  or  to 
relieve  him  from  any  liability.  If  it  is  assumed  that  John  misappro- 
priated the  money  of  the  plaintiff,  and  was  therefore  indebted  to  it' for 
a  large  sum  of  money,  it  nevertheless  gave  its  representatives  no  right 
'to  use,  or  threaten  the  use  of,  the  criminal  law  to  make  the  father 
pay  or  secure  the  debt.  It  is  not  an  appropriate  method  for  enforcing 
the  payment  of  the  debt  by  the  debtor  himself,  much  less  to  compel  the 
securing  of  it  by  one  who  was  in  no  sense  liable  for  its  payment. 
*     *     * 

In  Thompson  v.  Niggley,  53  Kan.  664,  35  Pac.  290,  26  L.  R.  A. 
803,  the  court  repudiated  the  doctrine  that  duress  could  not  be  pred- 


Ch.  6)  EFFECT   OF   MISTAKE,  FRAUD,  DURESS,  ETC.  309 

icated  upon  a  threatened  arrest  and  prosecution  for  an  offense  of 
which  the  party  was  in  fact  guilty,  saying:  "We  are  not  incHned  to 
encourage  a  resort  to  such  pressure  as  was  used  in  this  instance  to  com- 
pel the  settlement  of  private  demands."     *     *     * 

In  a  very  early  case  the  Supreme  Court  of  New  Hampshire,  in  con- 
sidering what  amounted  to  duress,  said :  "Where  there  is  an  arrest 
for  improper  purposes,  without  just  cause,  or  an  arrest  for  a  just  cause, 
but  without  lawful  authority,  or  an  arrest  for  a  just  cause,  and  under 
lawful  authority,  for  an  improper  purpose,  and  the  person  arrested 
pays  money  for  his  enlargement,  he  may  be  considered  as  having  paid 
the  money  by  duress  of  imprisonment,  and  may  recover  it  back  in  an 
action  for  money  had  and  received."  Richardson  v.  Duncan,  3  N.  H. 
508.  The  Supreme  Court  of  Alabama  in  a  recent  case  ruled  that  threats 
of  unlawful  imprisonment  were  not  necessary  to  constitute  duress, 
and  that,  if  there  was  a  liability  for  arrest  and  imprisonment,  and  such 
liability  was  used  to  overcome  the  will  and  compel  the  making  of  a 
contract,  which  would  otherwise  not  have  been  made,  it  would  amount 
to  duress.     *     *     * 

The  important  consideration  in  cases  like  this  one  is  not  whether  there 
was  ground  for  the  arrest  or  imprisonment  threatened,  but  it  is  rather 
whether  the  free  will  of  the  party  making  the  contract  was  constrained 
by  the  threats  of  the  other.  *  *  *  There  is  no  lack  of  testimony 
to  show  threats  of  the  arrest  and  prosecution  of  John,  nor  that  the 
notes  and  mortgage  were  procured  through  the  fear  excited  by  the 
threats.  Joseph  J.  Ackerman  was  subject  to  duress  because  of  the 
threats  directed  against  a  member  of  his  family  as  much  as  if  they 
had  been  directed  against  himself.     *     *     * 

Finding  no  error  in  the  record,  the  judgment  will  be  affirmed. 


FOUNTAIN   V.   BIGHAM. 

(Supreme  Court  of  rennsylvaiiin.-1912.     235  Pa.  .35,  84  Atl.  131, 
Ann.  Cas.  1913D,  1185.) 

Action  of  assumpsit  on  a  bond  by  Fountain  against  Mrs,  Bigham. 
From  a  judgment  for  plaintiff,  defendant  appeals. 

Dunn,  son-in-law  of  Mrs.  Bigham,  defendant,  forged  the  indorse- 
ment of  Fountain,  plaintiff,  on  a  check,  indorsed  his  own  name,  and 
deposited  the  check  and  received  credit  for  the  amount  in  his  bank 
account.  Dunn  was  arrested  on  two  informations  by  Fountain,  charg- 
ing him  with  obtaining  money  under  false  pretenses.  Mrs.  Bigham, 
after  the  arrest  of  Dunn,  signed  as  surety  a  bond  with  warrant  of 
attorney  to  confess  judgment,  conditioned  for  the  payment  of  $2,500 
in  one  day  after  date.  Dunn  was  later  acquitted.  Judgment  was  en- 
tered on  the  bond  next  day.  After  two  installments  of  interest  had 
been  paid  on  the  judgment  and  default  as  to  the  third  installment,  ex- 
ecution was  issued.  Mrs.  Bigham  presented  her  petition  to  the  court 
below  and  obtained  a  rule  to  stay  the  writ  and  opened  up  the  judg- 
ment. Among  the  defenses  set  up  was  the  defense  that  the  bond 
was  executed  under  the  influence  of  threats  and  coercion. 

Mestrkzat,  j,  *  *  *  That  a  contract  obtained  by  duress  or 
acts  of  coercion  or  intimidation  may  be  invalidated  is  well  settled:. 
*     *     *     But,  where  one  has  a  just  claim  against  another  for  money 


310  CONTRACTS  (Part  1 

obtained  by  the  commission  of  a  crime,  it  is  not  unlawful  for  the 
creditor  to  threaten  to  prosecute  if  the  claim  is  not  paid ;  and  a  con- 
tract cannot  be  avoided  which  the  debtor  enters  into  to  secure  payment 
of  the  claim,  unless  the  creditor  attempts  by  such  threat  to  accomplish 
an  unlawful  purpose.  In  other  words,  a  threat  of  lawful  imprison- 
ment is  not  duress,  unless  it  is  made  for  an  unlawful  purpose,  such, 
for  instance,  as  compelling  the  satisfaction  of  a  debt  by  payment  in 
money,  or  by  the  execution  of  an  obligation  to  secure  it.  If,  in  con- 
nection with  the  threat,  it  appears  that  the  creditor  declared  he  would 
prosecute  if  the  claim  was  not  paid,  with  other  evidence  showing  that 
his  intention  was  to  use  the  criminal  process  to  collect  the  debt,  or 
to  accomplish  any  unlawful  purpose,  a  jury  might  well  lind  that  such 
was  the  purpose  of  the  creditor  in  making  the  threat ;  and  that  there- 
fore it  was  duress.     *     *     * 

It  is,  therefore,  immaterial  whether  Fountain,  when  he  made  the 
alleged  threat,  knew  or  did  not  know  that  he  had  a  criminal  case  against 
Dunn,  as  he  could  not  lawfully  compel  the  execution  of  the  bond  by 
threats  to  prosecute,  made  for  such  a  purpose.  In  this  case,  however, 
Dunn  is  not  contesting  the  validity  of  the  bond ;  but  the  present  ap- 
peal was  taken  by  Mrs.  Bigham,  his  mother-in-law,  the  surety  on  the 
iDond.  Can  she  avoid  the  obligation  on  the  ground  of  duress  exer- 
cised on  Dunn?  The  general  rule  undoubtedly  is  that  the  defense  of 
duress  is  open  only  to  the  party  upon  whom  it  is  imposed,  and  that  a 
third  party,  who  has  become  surety  for  the  payment  of  the  claim, 
cannot  avail  himself  of  the  plea,  unless  he  signed  the  obligation  with- 
out knowledge  of  the  duress. 

There  are  certain  exceptions  to  the  rule  as  well  established  as  the 
rule  itself.  These  exceptions  include  husband  and  wife  and  parent  and 
child,  and  either  may  avoid  his  contract  made  to  relieve  the  other  from 
duress.  The  exceptions  have  been  extended  to  grandmother  and 
grandson,  *  *  *  aunt  and  nephew,  *  *  *  sister  and  brother, 
*  *  *  father-in-law  and  son-in-law,  *  ^=  *  and  brother  and  broth- 
er. *  *  *  The  reason  for  avoiding  a  contract  on  the  ground  of  duress, 
as  appears  above,  is  that  the  condition  of  mind  of  the  party  upon 
whom  the  duress  is  imposed  is  such  as  to  deprive  him  of  the  exercise 
of  his  free  will.  Whatever  influence  produces  such  a  condition  of  mind 
will  invalidate  a  contract  executed  while  the  influence  prevails.  The 
relations  between  parent  and  child  and  husband  and  wife  are  so  close 
and  tender  that  the  law  recognizes  that  threats  to  imprison  one  will 
have  substantially  the  same  effect  on  the  mind  of  the  other ;  and  what 
will  deprive  the  one  of  the  free  exercise  of  his  will  or  judgment  will 
have  a  like  elTect  on  the  other.  The  reason  of  the  rule  will  extend  it 
to  the  case  of  a  mother-in-law  and  son-in-law,  where  the  latter  is  liv- 
ing amicably  with  his  wife,  and  the  two  families  are  on  the  usual 
terms  of  intimacy  and  friendship.     *     *     * 

We  think  the  learned  court  below  should  have  submitted  to  the 
jury,  with  proper  instructions,  whether,  owing  to  the  relationship  of 
the  parties  and  the  circumstances  disclosed  by  the  testimony,  the  bond 
was  Mrs.  Bigham's  voluntary  act,  or  was  executed  under  threats  of 
prosecution  of  her  son-in-law,  which  deprived  her  of  the  exercise  of 
her  free  will.  *  *  *  f^g  judgment  is  reversed,  with  a  venire  de 
novo. 


Ch.  6)         EFFECT  OF  MISTAKE,  FRAUD,  DURESS,  ETC.  311 

SECTION  5.— UNDUE  INFLUENCE 


DU  BOSE  V.  KELL. 
(Snprpme  Court  of  South  Carolina,  1911.     90  S.  C.  196,  71  S.  E.  371.) 

Action  to  set  aside  a  deed. 

Moore,  Special  Judge  (trial  court).  *  *  *  The  principles  of 
law  applicable  to  the  question  of  undue  influence  are  well  settled,  and 
may  be  thus  stated  in  general  terms :  Where  a  deed  is  procured  by 
undue  influence  exerted  upon  the  grantor,  it  will  be  set  aside  by  a  court 
of  equity  upon  a  proper  and  timely  application  on  the  part  of  the  per- 
son injured  or  aggrieved  thereby ;  but,  in  order  to  avoid  the  deed  upon 
this  ground,  there  must  be  shown  such  an  influence  exerted  upon 
the  grantor  as  to  overbear  her  will  and  to  make  the  act  of  execution 
not  the  carrying  out  of  a  real  purpose  or  intention  of  the  grantor,  but 
the  mere  mechanical  performance  by  her  of  the  wish  and  design  of 
some  other  person.  Neither  fair  argument,  nor  mere  suggestion,  nor 
even  persuasion,  unaccompanied  by  other  circumstances  to  show  a 
substitution  of  the  will  or  purpose  of  some  other  person  for  that  of 
the  grantor,  will  amount  to  undue  influence.  In  order  to  make  it  un- 
due, it  must  appear  that  the  influence  exerted  was  such  as  to  overcome 
or  destroy  the  free  will  of  the  grantor  and  to  make  the  deed  as  executed 
the  expression  not  of  his  purpose,  but  that  of  some  other  person. 
*  *  *  Put  "the  line  between  due  and  undue  influence,  when  drawn, 
must  be  with  full  recognition  of  the  liberty  due  every  true  owner  to 
obey  the  voice  of  justice,  the  dictates  of  friendship,  of  gratitude  and 
of  benevolence,  as  well  as  the  claims  of  kindred,  and  when  not  hindered 
by  personal  incapacity,  or  particular  regulations,  to  dispose  of  his  own 
property  according  to  his  own  free  choice."  Wallace  v.  Harris,  32 
Mich.  380. 

It  is  further  an  established  principle  of  equity,  well  founded  in  right 
reason,  that  the  acts  and  contracts  of  persons  who  are  of  weak  un- 
derstanding and  who  are  thereby  liable  to  imposition,  and  also  all  con- 
tracts or  gifts  between  persons  standing  in  confidential  relations  to- 
wards each  other,  will  be  closely  scrutinized  by  the  courts  to  discover 
whether  or  not  any  undue  influence  was  exerted,  or  any  confidence  was 
betrayed  to  the  prejudice  of  the  weaker  party  or  of  the  one  reposing 
such  trust  and  confidence.     *     *     * 

Undue  influence  may  be  said  to  consist  in  any  influence  which  is  so 
far  operative  as  to  destroy  free  agency,  so  as  to  compel  the  person 
doing  the  act  in  question  to  do  the  same  against  his  will.  It  is  not 
material  how  such  control  was  exerted,  whether  by  physical  force, 
threats,  importunities,  or  any  other  species  of  mental  or  physical  coer- 
cion, provided  only  it  was  so  exerted  as  to  destroy  free  agency  and  to 
make  the  act  done  not  a  true  expression  of  the  will  of  the  person  do- 
ing it,  but  in  truth  a  carrying  out  of  the  purposes  of  some  other  per- 
son against  that  will.  But  the  undue  influence  is  to  be  proved  and 
not  to  be  presumed,  unless  the  relation  in  which  the  parties  stood  with 
reference  to  each  other  is  such  as  to  raise  a  presumption  of  its  exis- 
tence. Yet,  even  where  such  a  presumption  arises,  it  is  rebutted  by  evi- 
dence showing  that  everything  between  the  parties  was  fair,  open, 
voluntarv,  and  well  understood.     *     *     * 


312  CONTRACTS  (Part  1 

Applying  the  principles  stated  to  the  evidence  in  the  case  at  bar, 
we  find  that  the  grantor  in  the  deed  here  under  consideration  was 
a  feeble  old  lady,  past  her  four-score  years  of  life,  her  mind  and  mem- 
ory to  some  extent  weakened  and  impaired  by  the  troubles  and  afflic- 
tions of  her  previous  life,  and  by  the  burdens  of  the  years  resting  upon 
her,  entertaining  at  times  delusive  momentary  beliefs  as  to  the  continu- 
ing existence  in  her  life  of  her  long-dead  parents  and  temporary  be- 
liefs at  variance  with  facts  as  to  then  existing  weather  conditions  and 
as  to  locality  of  places.  It  appears  that  she  had  none  then  standing 
towards  her  in  the  relation  of  her  kindred  or  dear  friends,  excepting 
only  the  grantee  in  this  deed,  who  was  not  her  blood,  but  had  long 
been  holding  the  place  of  a  devoted  son,  having  laid  aside  a  promising 
career  in  life  in  order  to  bestow  upon  her  the  skilled  attention  which 
his  knowledge  as  a  physician  enabled  him  to  give.  It  is  shown  by 
the  evidence  that  the  grantor  was  weak  in  body  and  doubtless  to  some 
extent  enfeebled  in  her  general  mental  powers,  but  that  at  the  very 
moment  of  the  execution  of  the  deed  she  was  not  laboring  under  any 
delusion  of  mind,  and  was  in  fact  engaged  in  the  carrying  out  of  a 
long-cherished  purpose  to  dispose  of  her  property  as  to  insure  its 
devolution  upon  her  grantee.  It  is  true  that  at  or  about  the  time  of  the 
signing  of  the  paper  in  question  she  expressed  sentiments  of  confidence 
m  the  belief  that  the  grantee  would  continue  to  care  for  her  during 
the  remainder  of  her  life,  and  it  cannot  be  doubted  that  she  executed 
the  deed  in  the  faith  that  he  would  not  permit  her  to  suffer  by  rea- 
son of  her  act.  If  he  had  failed  to  give  her  support,  aid,  and  main- 
tenance, the  circumstances  and  relations  of  the  parties  were  such  as 
would  well  have  warranted  a  court  of  equity  in  imposing  upon  the 
grantee  the  duty  of  providing  for  her  support  and  comfort  during 
the  remainder  of  her  life,  at  her  instance  and  upon  her  application. 
But  it  does  not  appear  that  there  was  any  abuse  of  that  trust  and 
confidence  nor  is  there  any  evidence  of  a  failure  by  him  to  discharge 
any  duty  in  that  particular. 

The  testimony  of  the  subscribmg  witnesses  and  of  those  present  at 
the  time  of  the  signing  by  the  donor  is  unanimous  to  the  effect'  that 
she  was  then  compos  mentis ;  that  she  appreciated  and  understood  the 
force  and  effect  of  her  act ;  that  she  was  not  hoodwinked  or  deceived 
as  to  the  nature  of  the  instrument ;  and  that  she  acted  entirely  of 
her  own  volition,  although  upon  the  suggestion  of  the  grantee  in  the 
execution  of  the  instrument.  The  voluminous  mass  of  the  evidence  in 
this  case  has  been  searched  in  vain  to  discover  any  testimony  of  undue 
influence  exerted  by  the  grantee  or  by  any  other  person,  either  before 
or  at  the  time  of  the  execution  of  this  deed,  in  order  to  induce  the  mak- 
ing thereof.  There  is  not  the  slightest  evidence  of  even  argument  or 
persuasion  employed  to  that  end,  and  the  testimony  tends  to  show,  and 
in  my  opinion  does  establish,  the  fact  that  the  grantor  therein  had 
long  entertained  a  fixed  purpose  to  bestow  the  lands  in  question  upon 
the  grantee  as  ultimate  owner. 

If  it  be  the  fact,  as  I  think  it  is,  that  the  relation  of  the  parties  to 
this  transaction  and  the  mental  weakness  and  dependence  of  the  grant- 
<Dr  upon  the  grantee  were  such  as  to  impose  upon  those  claiming  under 
the  latter  the  burden  of  showing  that  no  fraud  was  practiced  nor  un- 
due influence  exerted  by  or  on  behalf  of  the  beneficiary  under  this 
gift,  that  there  was  no  suppressio  veri  nor  suggestio  falsi  operating  as 
an  inducement  thereto,  it  is  my  opinion,  after  a  careful  examination 


Ch.  6)  EFFECT   OF   MISTAKE,  FRAUD,  DURESS,  ETC.  313 

of  the  entire  record,  that  this  has  been  affirmatively  shown,  and  that 
it  appears  from  the  evidence  that  the  conveyance  was  the  vohmtary  act 
and  deed  of  Susan  C.  Kell,  was  wilHngly  executed  by  her  in  pursuance 
of  a  long-cherished  intention,  was  not  induced  by  any  suppression  or 
misrepresentation  of  facts,  and  that  there  was  no  fraud  upon  the  part  of 
the  grantee  thereof  nor  abuse  of  the  confidential  relations  existing  be- 
tween the  said  grantor  and  grantee. 

The  evidence  shows  that  the  act  of  signing  was  performed  not  only 
understandingly  and  without  reluctance,  but  also  with  a  desire  and 
purpose  on  the  part  of  the  donor  to  dispose  of  her  property  to  the 
donee  named  in  the  deed  and  for  his  own  ultimate  benefit.  When  the 
effect  of  her  act  was  mentioned  to  her  subsequently  to  such  execution 
of  the  deed,  she  expressed  satisfaction  with  her  act  in  so  disposing  of 
her  property  and  a  continued  understanding  of  the  purpose  and  ef- 
fect of  what  she  had  done.  She  lived  for  nearly  two  months  thereafter^ 
and  so  far  as  the  evidence  discloses,  although  the  fact  of  her  having  so 
disposed  of  practically  her  entire  property  was  mentioned  in  her  pres- 
ence and  in  the  absence  of  the  donee,  she  never  at  any  time,  so  far 
as  appears,  gave  expression  to  any  other  feeling  than  that  of  satis- 
faction with  the  deed  as  efi^ectuating  her  voluntary  purpose  and  inten- 
tion. '  If  the  transaction  had  been  regarded  at  the  time  by'  tlie  grantor 
as  a  business  transaction,  whereby  she  was  conveying  the  property  to 
the  grantee  in  consideration  of  past  services  alone,  or  if  there  were 
evidence  going  to  show  that  she  viewed  it  in  the  light  of  a  commer- 
cial transaction,  then  the  question  sought  to  be  made  as  to  the  ade- 
,quacy  of  the  consideration  mentioned  in  the  deed  would  be  a  mat- 
ter of  serious  importance.  But  as  it  was  evidently  understood  by  her 
as  being  a  deed  of  gift,  with  but  slight,  if  any,  reference  to  pecuniary 
obligations  existing  between  the  parties,  the  transaction  is  to  be  con- 
sidered as  purely  a  matter  of  gift,  and  not  of  bargain  and  sale.  So 
considering  it,  I  am  of  the  opinion  that  the  validity  of  this  deed  must 
be  sustained,  and  it  is  accordingly  so  adjudged.     *     *     * 

Gary,  j.  *  *  *  We  are  satisfied  with  the  circuit  judge's  find- 
ings of  fact,  and  the  reasons  assigned  by  him  for  his  conclusions  of 
law.    Affirmed. 


314  CONTRACTS  (Part  1 

CHAPTER  VII 
ILLEGALITY 

Section 

1.  Introduction. 

2.  Contracts  in  Restraint  of  Trade. 

3.  Contracts  Limiting  the  Liability  of  Bailees  and  Other  Persons. 

4.  Gambling  Contracts. 

5.  Other  Illustrations  of  Illegal  Contracts. 

6.  Effect  of  Illegality. 

7.  Sunday  Contracts. 


SECTION  1.— INTRODUCTION 

Society,  through  its  legislative  and  judicial  organization,  adopts 
various  methods  in  its  endeavor  to  repress  wrong  and  in  its  at- 
tempt to  compel  the  observance  of  high  principles  of  personal  and 
business  ethics.  Sometimes  an  act  may  be  such  an  atrocious  in- 
vasion of  personal  or  property  rights  that  it  calls  for  the  imposition 
of  the  most  severe  penalties.  In  such  a  case,  the  law  regards  the  act 
as  criminal,  and,  in  addition  to  the  liability  to  respond  in  dam- 
ages to  the  person  primarily  injured  thereby,  the  law  prescribes 
the  punishment  of  the  offender  by  fine  or  imprisonment.  The  com- 
mission of  a  tort  imposes  upon  the  wrongdoer  the  duty  of  making 
restitution  and  of  paying  damages  to  the  person  wronged.  A  breach 
of  contract  creates  a  duty  to  respond  in  damages  to  the  injured 
party  and  also  operates  as  an  excuse  to  the  injured  party  for  his 
non-performance.  The  wrong  attempted  by  two  or  more  persons 
in  entering  into  an  illegal  contract  is  sufficiently  different  from  a 
tort  or  breach  of  contract  as  to  call  for  a  somewhat  special  treat- 
ment. Generally  it  cannot  be  treated  as  a  tort,  for  there  may 
have  been  no  invasion  of  the  personal  or  property  rights  of  an- 
other. Performance  of  the  illegal  contract  may,  of  course,  result  in 
the  commission  of  a  tort,  or  of  a  crime,  or  both,  but  the  execution 
of  the  contract  itself  will  not  usually  constitute  a  tort  or  a  crime. 

The  problem  that  is  most  frequently  presented  concerns  the  right 
of  one  of  the  parties  to  the  illegal  contract  to  hold  the  other  liable 
for  his  breach,  or  to  recover  what  he  has  parted  with  in  perform- 
ance of  the  illegal  contract ;  that  is,  generally  speaking,  there  can 
be  no  recovery  for  breach  of  an  illegal  contract,  nor  may  one  of  the 
parties  thereto,  who  has  performed,  compel  restitution  of  the  con- 
sideration with  which  he  has  parted.  However  the  action  may  arise, 
the  defendant  usually  wins,  not  because  of  any  superior  virtue  in 
himself,  but  because  of  the  general  policy  of  the  law  not  to  enforce 
illegal  contracts,  nor  to  attempt  to  undo  what  has  been  done  under 
them.  The  loss,  if  any,  falls  where  the  acts  of  the  parties  them- 
selves place  it.  Of  course,  this  policy  does  not  prevent  the  making 
of  illegal  contracts.  Still  the  knowledge  that  the  aid  of  the  court 
cannot  be  invoked  to  aid  a  party  who  has  sustained  a  loss  arising 


Ch.  7)  ILLEGALITY  315 

out  of  the  breach  of  an  illegal  contract  has  some  tendency  to  pre- 
vent the  formation  of  such  contracts.  For  the  more  serious  kinds 
of  illegal  contracts,  the  law,  in  addition  to  its  withdrawal  of  all 
legal  remedies,  makes  the  act  of  entering  into  the  contract  or  the 
performance  of  it,  a  criminal  offense  punishable  by  fine  or  imprison- 
ment. 

The  above  comment  concerns  the  legal  effect  of  illegal  contracts. 
The  question  remains:  What  kinds  of  contracts  are  illegal? 
Transactions  of  this  character  are  of  so  varied  a  nature  that  a  defi- 
nition is  scarcely  possible.  In  the  last  analysis,  the  question  de- 
pends upon  the  probable  effect  of  the  contract  upon  society.  If  it 
be  one  which  is  directed  against  the  maintenance  of  public  author- 
ity, against  public  morals,  or  against  the  economic  welfare  of  so- 
ciety, the  contract  may  be  treated  as  illegal  because  of  its  harmful 
effects.  The  circumstances  under  which  a  contract  will  be  regarded 
as  illegal,  and  the  legal  eft'ects  thereof,  are  illustrated  in  the  follow- 
ing cases. 

SECTION  2.— CONTRACTS  IN  RESTRAINT  OF  TRADE 


UNITED  STATES  v.  ADDYSTONE  PIPE  &  STEEL  CO.  et  al. 

(United   States   Circuit   Court   of   Appeals,    Sixth   Circuit,   1S9S. 
S5  Fed.  271,  29  C.  C.  A.  141,  46  L.  R.  A.  122.) 

This  was  a  proceeding  in  equity,  begun  by  petition  filed  by  the  At- 
torney General,  on  behalf  of  the  United  States,  against  six  corpora- 
tions engaged  in  the  manufacture  of  cast-iron  pipe,  charging  them 
with  a  cornbination  and  conspiracy  in  tmlawful  restraint  of  interstate 
commerce  in  such  pipe,  in  violation  of  the  so-called  "Anti-Trust  Law," 
passed  by  Congress  July  2,  1890.  The  petition  prayed  that  all  pipe 
sold  and  transported  from  one  state  to  another,  under  the  combination 
and  conspiracy  described  therein,  be  forfeited  to  the  petitioner,  and 
be  seized  and  confiscated  in  the  manner  provided  by  law,  and  that  a 
decree  be  entered  dissolving  the  unlawful  conspiracy  of  defendants, 
and  perpetually  enjoining  them  from  operating  under  the  same,  and 
from  selling  said  cast-iron  pipe  in  accordance  therewith  to  be  trans- 
ported from  one  state  into  another.  Judge  Clark,  who  presided  in  the 
Circuit  Court,  dismissed  the  petition  on  the  merits, 

Taft,  Circuit  Judge.  The  first  section  of  the  act  of  congress  enti- 
tled "An  act  to  protect  trade  and  commerce  against  unlawful  restraints 
and  monopolies,"  passed  July  2,  1890,  26  Stat.  209  (U.  S.  Comp.  St. 
§§  8820-8823,  8827-8830),  declares  illegal  "every  contract,  combina- 
tion in  the  form  of  trust  or  otherwise  or  conspiracy  in  restraint  of  trade 
or  commerce  among  the  several  states  or  with  foreign  nations."  The 
second  section  makes  it  a  misdemeanor  for  any  person  to  monopolize, 
or  attempt  to  monopolize,  or  combine  or  conspire  with  others  to 
monopolize,  any  part  of  the  trade  or  commerce  among  the  several 
states.     *     *    * 

It  is  certain  that,  if  the  contract  of  association  which  bound  the 
defendants  was  void  and  unenforceable  at  the  common  law  because 
in  restraint  of  trade,  it  is  within  the  inhibition  of  the  statute  if  the 
trade  it  restrains  was  interstate.     Contracts  that  were  in  unreasonable 


316  CONTRACTS  (Part  1 

restraint  of  trade  at  common  law  were  not  unlawful  in  the  sense  of 
being  criminal,  or  giving  rise  to  a  civil  action  for  damages  in  favor 
of  one  prejudicially  affected  thereby,  but  were  simply  void,  and  were 
not  enforced  by  the  courts.  *  *  *  The  effect  of  tlie  act  of  1890  is 
to  render  such  contracts  unlawful  in  an  affirmative  or  positive  sense, 
and  punishable  as  a  misdemeanor,  and  to  create  a  right  of  civil  action 
for  damages  in  favor  of  those  injured  thereby,  and  a  civil  remedy  by 
injunction  in  favor  of  both  private  persons  and  the  public  against  the 
execution  of  such  contracts  and  the  maintenance  of  such  trade  re- 
straints.    *     *     * 

From  early  times  it  was  the  policy  of  Englishmen  to  encourage 
trade  in  England,  and  to  discourage  those  voluntary  restraints  which 
tradesmen  were  often  induced  to  impose  on  themselves  by  contract. 
Courts  recognized  this  public  policy  by  refusing  to  enforce  stipula- 
tions of  this  character.     *     *     * 

The  reasons  were  stated  *  *  *  j^  Alger  v.  Thacher,  19  Pick. 
(Mass.)  51,  54,  31  Am.  Dec.  119,  in  which  the  Supreme  Judicial  Court 
of  Massachusetts  said:  "The  unreasonableness  of  contracts  in  re- 
straint of  trade  and  business  is  very  apparent  from  several  obvious 
considerations:  (1)  Such  contracts  injure  the  parties  making  them, 
because  they  diminish  their  means  of  procuring  livelihoods  and  a 
competency  for  their  families.  They  tempt  improvident  persons,  for 
the  sake  of  present  gain,  to  deprive  themselves  of  the  power  to  make 
future  acquisitions,  and  they  expose  such  persons  to  imposition  and 
oppression.  (2)  They  tend  to  deprive  the  public  of  the  services  of  men 
in  the  employments  and  capacities  in  which  they  may  be  most  useful 
to  the  community  as  well  as  themselves.  (3)  They  discourage  indus- 
try and  enterprise,  and  diminish  the  products  of  ingenuity  and  skill. 
(4)  They  prevent  competition  and  enhance  prices.  (5)  They  expose 
the  public  to  all  the  evils  of  monopoly ;  and  this  especially  is  applica- 
ble to  wealthy  companies  and  large  corporations,  who  have  the  means, 
unless  restrained  by  the  law,  to  exclude  rivalry,  monopolize  business, 
and  engross  the  market.  Against  evils  like  these,  wise  laws  protect 
individuals  and  the  public  by  declaring  all  such  contracts  void." 

The  changed  conditions  under  which  men  have  ceased  to  be  so 
entirely  dependent  for  a  livelihood  on  pursuing  one  trade,  have  ren- 
dered the  first  and  second  considerations  stated  above  less  important 
to  the  community  than  they  were  in  the  seventeenth  and  eighteenth 
centuries,  but  the  disposition  to  use  every  means  to  reduce  competi- 
tion and  create  monopolies  has  grown  so  much  of  late  that  the  fourth 
and  fifth  considerations  mentioned  in  Alger  v.  Thacher  have  certain- 
ly lost  nothing  in  weight  in  the  present  day,  if  we  may  judge  from  the 

statute  here  under  consideration  and  similar  legislation  by  the  states. 
*     *     * 

For  the  reasons  given,  then,  covenants  in  partial  restraint  of  trade 
are  generally  upheld  as  valid  when  they  are  agreements  (1)  by  the  sell- 
er of  property  or  business  not  to  compete  with  the  buyer  in  such  a 
way  as  to  derogate  from  the  value  of  the  property  or  business  sold; 
(2)  by  a  retiring  partner  not  to  compete  with  the  firm ;  (3)  by  a  part- 
ner pending  the  partnership  not  to  do  anything  to  interfere,  by  com- 
petition or  otherwise,  with  the  business  of  the  firm ;  (4)  by  the  buy- 
er of  property  not  to  use  the  same  in  competition  with  the  business 
retained  by  the  seller;  and  (5)  by  an  assistant,  servant,  or  agent  not 
to  compete  with  his  master  or  employer  after  the  expiration  of  his 


Ch.7)  ILLKGALITY  317 

time  of  service.  Before  such  agreements  are  upheld,  however,  the 
court  must  find  that  the  restraints  attempted  thereby  are  reasonably 
necessary  (1,  2,  and  3)  to  the  enjoyment  by  the  buyer  of  the  property, 
good  will,  or  interest  in  the  partnership  bought;  or  (4)  to  the  legiti- 
mate ends  of  the  existing  partnership;  or  (5)  to  the  prevention  of 
possible  injury  to  the  business  of  the  seller  from  use  by  the  buyer  of 
the  thing  sold;  or  (6)  to  protection  from  the  danger  of  loss  to  the 
employer's  business  caused  by  the  unjust  use  on  the  part  of  the  em- 
ploye of  the  confidential  knowledge  acquired  in  such  business.  *  *  * 
It  would  be  stating  it  too  strongly  to  say  that  these  five  classes  of 
covenants  in  restraint  of  trade  include  all  of  those  upheld  as  valid 
at  the  common  law ;  but  it  would  certainly  seem  to  follow  from  the 
tests  laid  down  for  determining  the  validity  of  such  an  agreement  that 
no  conventional  restraint  of  trade  can  be  enforced  unless  the  covenant 
embodying  it  is  merely  ancillary  to  the  main  purpose  of  a  lawful  con- 
tract, and  necessary  to  protect  the  covenantee  in  the  enjoyment  of  the 
legitimate  fruits  of  the  contract,  or  to  protect  him  from  the  dangers 
of  an  unjust  use  of  those  fruits  of  the  contract,  or  to  protect  him 

from  the  dangers  of  an  unjust  use  of  those  fruits  by  the  other  party. 
^     ^     ^ 

Much  has  been  said  in  regard  to  the  relaxing  of  the  original  strict- 
ness of  the  common  law  in  declaring  contracts  in  restraint  of  trade 
void  as  conditions  of  civilization  and  public  policy  have  changed,  and 
the  argument  drawn  therefrom  is  that  the  law  now  recognizes  that 
competition  may  be  so  ruinous  as  to  injure  the  public,  and,  therefore, 
that  contracts  made  with  a  view  to  check  such  ruinous  competition 
and  regulate  prices,  though  in  restraint  of  trade,  and  having  no  other 
purpose,  will  be  upheld.  We  think  this  conclusion  is  unwarranted  by 
the  authorities  when  all  of  them  are  considered.  It  is  true  that  cer- 
tain rules  for  determining  whether  a  covenant  in  restraint  of  trade 
ancillary  to  the  main  purpose  of  a  contract  was  reasonably  adapted 
and  limited  to  the  necessary  protection  of  a  party  in  the  cari*ying  out 
of  such  purpose  have  been  somewhat  modified  by  modern  authori- 
ties. *  *  *  Recently  the  limitation  that  the  restraint  could  not  be 
general  or  unlimited  as  to  space  has  been  modified  in  some  cases  by 
holding  that,  if  the  protection  necessary  to  the  covenantee  reasonably 
requires  a  covenant  unrestricted  as  to  space,  it  will  be  upheld  as 
valid.     *     *     * 

We  have  no  doubt  that  the  association  of  the  defendants,  however 
reasonable  the  prices  they  fixed,  however  great  the  competition  they 
had  to  encounter,  and  however  great  the  necessity  for  curbing  them- 
selves by  joint  agreement  from  committing  financial  suicide  by  ill- 
advised  competition,  was  void  at  common  law,  because  in  restraint  of 
trade,  and  tending  to  a  monopoly.  But  the  facts  of  the  case  do  not 
require  us  to  go  as  far  as  this,  for  they  show  that  the  attempted  justi- 
fication of  this  association  on  the  grounds  stated  is  without  foundation. 

The  defendants,  being  manufacturers  and  vendors  of  cast-iron  pipe, 
entered  into  a  combination  to  raise  the  prices  for  pipe  for  all  the 
states  west  and  south  of  New  York,  Pennsylvania,  and  Virginia,  con- 
stituting considerably  more  than  three-quarters  of  the  territory  of 
the  United  States,  and  significantly  called  by  the  associates  "pay 
territory."  Their  joint  annual  output  was  220,000  tons.  The  total 
capacity  of  all  the  other  cast-iron  pipe  manufacturers  in  the  pay  ter- 
ritory was   170,500  tons.     Of  this,  45,000  tons  was  the  capacity  of 


318  CONTRACTS  (Part  1 

mills  in  Texas,  Colorado,  and  Oregon,  so  far  removed  from  that  part 
of  the  pay  territory  where  the  demand  was  considerable  that  neces- 
sary freight  rates  excluded  them  from  the  possibility  of  competing, 
and  12,000  tons  was  the  possible  annual  capacity  of  a  mill  at  St.  Louis, 
which  was  practically  under  the  same  management  as  that  of  one  of 
the  defendants'  mills.  Of  the  remainder  of  the  mills  in  pay  territory 
and  outside  of  the  combination,  one  was  at  Columbus,  Ohio,  two  in 
Northern  Ohio,  and  one  in  Michigan.  Their  aggregate  possible  annual 
capacity  was  about  one-half  the  usual  annual  output  of  the  defend- 
ants' mills.  They  were,  it  will  be.obsei-ved,  at  the  extreme  northern 
end  of  the  pay  territory,  while  the  defendants'  mills  at  Cincinnati, 
Louisville,  Chattanooga,  and  South  Pittsburgh,  and  Anniston,  and 
Bessemer,  were  grouped  much  nearer  to  the  center  of  the  pay  terri- 
tory. The  freight  upon  cast-iron  pipe  amounts  to  a  considerable  per- 
centage of  the  price  at  which  manufacturers  can  deliver  it  at  any 
great  distance  from  the  place  of  manufacture.  Within  the  margin  of 
the  freight  per  ton  which  Eastern  manufacturers  would  have  to  pay 
to  deliver  pipe  in  pay  territory,  the  defendants,  by  controlling  two- 
thirds  of  the  output  in  pay  territory,  were  practically  able  to  fix 
prices.  The  competition  of  the  Ohio  and  Michigan  mills,  of  course, ' 
somewhat  affected  their  power  in  this  respect  in  the  northern  part  of 
the  pay  territory;  but,  the  further  south  the  place  of  delivery  was 
to  be,  the  more  complete  the  monopoly  over  the  trade  which  the  de- 
fendants were  able  to.  exercise,  within  the  limit  already  described. 
Much  evidence  is  adduced  upon  affidavit  to  prove  that  defendants  had 
no  power  arbitrarily  to  fix  prices,  and  that  they  were  always  obliged - 
to  meet  competition.  To  the  extent  that  they  could  not  impose  prices 
on  the  public  in  excess  of  the  cost  price  of  pipe  with  freight  from  the 
Atlantic  seaboard  added,  this  is  true ;  but,  within  that  limit,  they  could 
fix  prices  as  they  chose.  The  most  cogent  evidence  that  they  had  this 
power  is  the  fact,  everywhere  apparent  in  the  record,  that  they  exer- 
cised it.  *  *  *  The  defendants  were,  by  their  combination,  there- 
fore able  to  deprive  the  public  in  a  large  territory  of  the  advantages 
otherwise  accruing  to  them  from  the  proximity  of  defendants'  pipe 
factories,  and,  by  keeping  prices  just  low  enough  to  prevent  compe- 
tition by  Eastern  manufacturers,  to  compel  the  public  to  pay  an  in- 
crease over  what  the  price  would  hav^e  been,  if  fixed  by  competition  be- 
tween defendants,  nearly  equal  to  the  advantage  in  freight  rates  en- 
joyed by  their  committee,  and  by  allowing  the  highest  bidder  at  the 
secret  "auction  pool"  to  become  the  lowest  bidder  of  them  at  the  public 
letting.  ■  Now,  the  restraint  thus  imposed  on  themselves  was  only  par- 
tial. It  did  not  cover  the  United  States.  There  was  not  a  complete 
monopoly.  It  was  tempered  by  the  fear  of  competition,  and  it  affected 
only  a  part  of  the  price.  But  this  certainly  does  not  take  the  contract 
of  association  out  of  the  annulling  eft'ect  of  the  rule  against  monopo- 
lies. .  *     *    * 

It  has  been  earnestly  pressed  upon  us  that  the  prices  at  which  the 
cast-iron  pipe  was  sold  in  pay  territory  were  reasonable.  A  great 
many  affidavits  of  purchasers  of  pipe  in  pay  territory,  all  drawn  by 
the  same  hand  or  from  the  same  model,  are  produced,  in  which  the 
affiants  say  that,  in  their  opinion,  the  prices  at  which  pipe  has  been 
sold  by  defendants  have  been  reasonable.  We  do  not  think  the  issue 
an  important  one,  because,  as  already  stated,  we  do  not  think  that  at 
common  law  tliere  is  any  question  of  reasonableness  open  to  the  courts 


Ch.  7)  ILLEGALITY  319 

with  reference  to  such  a  contract.  Its  tendency  was  certanily  to  give 
defendants  the  power  to  charge  unreasonable  prices,  had  they  chosen 
to  do  so.  But,  if  it  were  important,  we  should  unhesitatingly  find  that 
the  prices  charged  in  the  instances  which  were  in  evidence  were  un- 
reasonable. The  letters  from  the  manager  of  the  Chattanooga  foun- 
dry written  to  the  other  defendants,  and  discussing  the  prices  fixed 
by  the  association,  do  not  leave  the  slightest  doubt  upon  this  point, 
and  outweigh  the  perfunctory  affidavits  produced  by  the  defendants. 
The  cost  of  producing  pipe  at  Chattanooga,  together  with  a  reason- 
able profit,  did  not  exceed  $15  a  ton.  It  could  have  been  delivered 
at  Atlanta  at  $17  to  $18  a  ton,  and  yet  the  lowest  price  which  that 
foundry  was  permitted  by  the  rules  of  the  association  to  bid  was 
$24.25.  The  same  thing  was  true  all  through  pay  territory  to  a 
greater  or  less  degree,  and  especially  at  "reserved  cities." 

Another  aspect  of  this  contract  of  association  brings  it  within  the 
term  used  in  the  statute,  "a  conspiracy  in  restraint  of  trade."  A 
conspiracy  is  a  combination  of  two  or  more  persons  to  accomplish 
an  unlawful  end  by  lawful  means  or  a  lawful  end  by  unlawful  means. 
In  the  answer  of  the  defendants,  it  is  averred  that  the  chief  way  in 
which  cast-iron  pipe  is  sold  is  by  contracts  let  after  competitive  bid- 
ding invited  by  the,  intending  purchaser.  It  would  have  much  inter- 
fered with  the  smooth  working  of  defendants'  association  had  its  ex- 
istence and  purposes  become  known  to  the  public.  A  part  of  the  plan 
was  a  deliberate  attempt  to  create  in  the  minds  of  the  members  of  the 
public  inviting  bids  the  belief  that  competition  existed  between  the 
defendants.  Several  of  the  defendants  were  required  to  bid  at  every 
letting,  and  to  make  their  bids  at  such  prices  that  the  one  already  se- 
lected to  obtain  the  contract  should  have  the  lowest  bid.  It  is  well 
settled  that  an  agreement  between  intending  bidders  at  a  public  auc- 
tion or  a  public  letting  not  to  bid  against  each  other,  and  thus  to  pre- 
vent competition,  is  a  fraud  upon  the  intending  vendor  or  contractor, 
and  the  ensuing  sale  or  contract  will  be  set  aside.     *     *     * 

For  the  reasons  given,  the  decree  of  the  circuit  court  dismissing 
the  bill  must  be  reversed,  with  instructions  to  enter  a  decree  for  the 
United  States  perpetually  enjoining  the  defendants  from  maintaining 
the  combination  in  cast-iron  pipe  described  in  the  bill,  and  substan- 
tially admitted  in  the  answer,  and  from  doing  any  business  there- 
under.^ 


STRAUS  et  al.  v.  VICTOR  TALKING  MACHINE  CO. 

(Supreme  Court  of  the  United   States,  1917.     243  U.  S.  490,  37  Sup.  Ct.  412, 
61  L.  Ed.  866,  L.  R.  A.  1917E,  1196,  Ann.  Cas.  1918A,  955.) 

On  writ  of  certiorari  to  the  United  States  Circuit  Court  of  Appeals 
for  the  Second  Circuit  to  review  a  decree  which,  on  a  second  appeal, 
reversed  a  decree  of  the  District  Court  of  the  United  States  for  the 
Southern  District  of  New  York,  dismissing  the  bill  in  a  suit  charging 
the  violation  of  a  license  restriction  made  by  the  owner  of  a  patent, 

Clarke;,  j,  *  *  *  I'he  plaintiff  in  its  bill  alleges:  That  it  is  a 
corporation  of  New  Jersey;  that  for  many  years  it  has  been  manu- 
facturing   sound-reproducing    machines    embodying   various    features 

1  Modified:  Addystone  Pipe  &  Steel  Co.  v.  United  States,  175  U.  S.  211,  20 
Sup.  Ct.  96,  44  L.  Ed.  136  (1S99). 


320  CONTRACTS  (Part  1 

covered  by  patents  of  which  it  is  the  owner,  and  that,  for  the  purpose 
of  marketing  these  machines  to  the  best  advantage,  about  August  1, 
1913,  it  adopted  a  form  of  contract  which  it  calls  a  "license  contract" 
and  a  form  of  notice  called  a  "license  notice,"  under  which  it  alleges 
all  of  its  machines  have,  since  that  date,  been  furnished  to  dealers  and 
to  the  public. 

This  "license  notice,"  which  is  attached  to  each  machine  and  is  set 
out  in  full  in  the  bill,  declares  that  the  machine  to  which  it  is  attached 
is  manufactured  under  patents,  is  licensed  for  the  term  of  the  patent 
under  which  it  is  licensed  having  the  longest  time  to  run,  and  may  be 
used  only  with  sound  records,  sound  boxes,  and  needles  manufactured 
by  the  plaintiff ;  that  only  the  right  to  use  the  machine  "for  demonstrat- 
ing purposes  is  granted  to  "distributors"  (wholesale  dealers),  but  that 
these  "distributors"  may  assign  a  like  right  "to  the  public"  or  to  "regu- 
larly licensed  Victor  dealers"  (retailers)  "at  the  dealer's  regular  dis- 
count royalty" ;  that  the  "dealers"  may  convey  the  "license  to  use  the 
machine"  only  when  a  "royalty"  of  not  less  than  $200  shall  have  been 
paid,  and  upon  the  "consideration"  that  all  of  the  conditions  of  the 
"license"  shall  have  been  observed;  that  the  title  to  the  machine  shall 
remain  in  the  plaintilt,  which  shall  have  the  right  to  repossess  it  upon 
breach  of  any  of  the  conditions  of  the  notice,  by  paying  to  the  user 
the  amount  paid  by  him,  less  5  per  cent,  for  each  year  that  the  machine 
has  been  used.  The  notice  in  terms  reserves  the  right  to  the  plaintiff  to 
inspect,  test,  and  repair  the  machine  at  all  times  and  to  instruct  the 
user  in  its  use,  "but  it  assumes  no  obligation  to  do  so" ;  it  provides  that 
"any  excessive  use 'or  violation  of  the  conditions  shall  be  an  infringe- 
ment of  plaintift''s  patent,''  and  that  any  erasure  or  removal  of  the  no- 
tice will  be  considered  a  violation  of  the  license.  Finally,  it  provides 
that  at  the  expiration  of  the  patent  "under  which  it  is  licensed"  having 
the  longest  time  to  run  the  machine  shall  become  the  property  of  the 
licensee  provided  all  the  conditions  recited  in  the  notice  shall  have  been 
complied  with,  and  the  acceptance  of  the  machine  is  declared  to  be  "an 
acceptance  of  these  conditions." 

The  contract  between  the  plaintiff  and  its  dealers  is  not  set  out  in 
full  in  the  bill,  but  it  is  alleged  that  since  August  1st,  1913,  the  plaintiff 
has  had  with  each  of  its  7,000  licensed  dealers  a  written  contract  in 
which  all  the  terms  of  the  "license  notice"  are  in  substance  repeated, 
and  in  addition  it  is  alleged  that  each  dealer,  "if  he  has  signed  the  as- 
sent thereto,"  is  authorized  to  dispose  of  any  machines  received  from 
"the  plaintiff  directly  or  through  a  paramount  distributing  dealer,"  but 
subject  to  all  of  the  conditions  expressed  in  the  "license  notice."  It  is 
alleged  that  this  contract  contains  the  provision  that  "a  breach  of  any 
of  the  conditions  on  the  part  of  a  distributor  will  render  him  liable,  not 
only  for  an  infringement  of  the  patent,  but  to  an  action  on  the  contract 
or  other  proper  remedy." 

As  to  the  defendants,  the  bill  alleges  that  they  conduct  a  large  mer- 
cantile business  in  New  York  city;  that  with  full  knowledge  of  the 
terms  of  the  contract,  as  described,  between  the  plaintiff  and  its  distribT 
utors,  and  of  the  "license  notice"  attached  to  each  machine,  the  de- 
fendants, "being  members  of  the  general  unlicensed  public,"  and  having 
no  contract  relation  with  the  plaintiff"  or  with  any  of  its  licensed  dis- 
tributors or  licensed  dealers,  induced  "covertly  and  on  various  pre- 
tenses," one  or  more  of  plaintiff's  licensed  distributors  or  dealers  to 
violate  his  or  their  contracts  with  the  plaintiff,  providing  that  no  ma- 


Ch.  7)  ILLEGALITY  321 

chines  should  be  delivered  to  any  unlicensed  member  of  the  general 
public  until  "the  full  license  price"  stated  in  the  "license  notice"  affixed 
to  each  machine  was  paid,  and  thereby  obtained  possession  of  a  large 
number  of  such  machines  at  much  less  than  the  prices  stated  in  the 
"license  notice"  ;  that  under  the  terms  of  the  said  license  agreement  and 
notice,  they  have  no  title  to  the  same,  and  that  they  have  sold  large 
numbers  thereof  to  the  public,  and  are  proposing  and  threatening  to 
dispose  of  the  remainder  of  those  which  they  have  acquired  to  "the 
unlicensed  general  public,"  at  much  less  than  the  price  stated  in  the 
notice  affixed  to  each  machine. 

The  prayer  is  for  an  injunction  restraining  the  defendants  from  sell- 
ing any  of  the  machines,  possession  of  which  they  have  acquired,  from 
other  and  further  violation  of  plaintiff's  rights  under  its  letters  patent, 
and  for  the  usual  accounting  and  for  damages. 

The  District  Court  regarded  the  transaction  described  in  the  "license 
notice"  as  in  substance  a  sale  which  exhausted  the  interest  of  the  plain- 
tiff in  the  machine,  except  as  to  the  right  to  have  it  used  with  records 
and  needles  as  provided  for  therein,  and  this  right  not  being  involved 
in  this  case,  dismissed  the  bill.     *     *     * 

On  appeal,  the  Circuit  Court  of  Appeals  affirmed  this  judgment  and 
remanded  the  case,  but  with  instructions  to  allow  the  plaintiff"  to  amend 
its  bill  "if  it  be  so  advised."     *     *     * 

The  bill  was  thereafter  so  amended  as  to  allege  that  the  defendants 
had  in  their  possession  a  large  number  of  machines  which  they  had  ob- 
tained from  plaintiff's  distributors  and  dealers  at  much  less  in  each 
case  than  the  price  stated  in  the  "license  notice,"  and  that  they  were 
proposing  to  dispose  of  these  machines  to  the  "unlicensed  general  pub- 
he"  at  less  than  the  prices  stated  in  the  "license  notice,"  in  disregard  of 
plaintiff's  rights. 

Again,  the  District  Court,  on  the  same  ground  as  before,  sustained  a 
motion  to  dismiss  the  bill,  but  the  Circuit  Court  of  Appeals  reversed 
this  holding,  and  the  case  is  here  for  review  on  certiorari. 

The  abstract  of  the  bill  which  we  have  given  makes  it  plain :  That 
whatever  rights  the  plaintiff  has  against  the  defendants  must  be  derived 
from  the  "license  notice"  attached  to  each  machine,  for  no  contract 
rights  existed  between  them,  the  defendants  being  only  "members  of 
the  unlicensed  general  public" ;  and  that  the  sole  act  of  infringement 
charged  against  the  defendants  is  that  they  exceeded  the  terms  of  the 
license  notice  by  obtaining  machines  from  the  plaintiff's  wholesale  or 
retail  agents,  and  by  selling  them  at  less  than  the  price  fixed  by  the 
plaintiff. 

It  is  apparent  from  the  foregoing  statement  that  we  are  called  upon 
to  determine  whether  the  system  adopted  by  the  plaintiff  was  selected 
as  a  means  of  securing  to  the  owner  of  the  patent  that  exclusive  right 
to  use  its  invention  which  is  granted  through  the  patent  law,  or  wheth- 
er, under  color  of  such  a  purpose,  it  is  a  device  unlawfully  resorted  to 
in  an  eff'ort  to  profitably  extend  the  scope  of  its  patent  at  the  expense 
of  the  general  public.  Is  it  the  fact,  as  is  claimed,  that  this  "license 
notice"  of  the  plaintiff  is  a  means  or  agency  designed  in  candor  and 
good  faith  to  enable  the  plaintiff  .to  make  only  that  full,  reasonable, 
and  exclusive  use  of  its  invention  which  is  contemplated  by  the  patent 
law,  or  is  it  a  disguised  attempt  to  control  the  prices  of  its  machines 
after  they  have  been  sold  and  paid  for? 
B.&B.Bus.Law— 21 


322  coxTRACTS     '  (Parti 

First  of  all,  it  is  plainly  apparent  that  this  plan  of  marketing,  adopted 
by  the  plaintiff,  is,  in  substance,  the  one  dealt  with  by  this  court  in  Dr. 
Miles  Medical  Co.  v.  John  D.  Park  &  Sons  Co.,  220  U.  S.  373,  31  Sup. 
Ct.  376,  55  L.  Ed.  502,  and  in  Bauer  v.  O'Donnell,  229  U.  S.  1,  33 
Sup.  Ct.  616,  57  h.  Ed.  1041,  50  L.  R.  A.  (N.  S.)  1185.  Ann.  Cas. 
191 5 A,  150,  adroitly  modified  on  the  one  hand  to  take  advantage,  if 
possible,  of  distinctions  suggested  by  these  decisions,  and,  on  the  other 
hand,  to  evade  certain  supposed  effects  of  them. 

If  we  look  through  the  words  and  forms  with  which  the  plaintiff  has 
most  elaborately  enveloped  its  purpose,  to  the  substance  and  realities 
of  the  transaction  contemplated,  we  shall  discover  several  notable  and 
significant  features.  First,  while,  as  if  looking  to  the  future,  the 
notice,  in  terms,  imposes  various  restrictions  as  to  the  "use''  of  the 
machines  by  plaintiff's  agents,  wholesale  and  retail,  and  by  the  "un- 
licensed members  of  the  public,"  for  itself,  the  plaintiff  makes  sure  that 
the  future  shall  have  no  risks,  for  it  requires  that  all  that  it  asks  or 
expects  at  any  time  to  receive  for  each  machine  must  be  paid  in  full 
before  it  parts  with  the  possession  of  it. 

Second,  while  in  terms  the  "use"  of  each  machine  is  restricted,  and 
forfeiture  for  failure  to  strictly  comply  with  the  many  conditions  and 
requirements  of  the  notice  is  provided  for,  this  system,  elaborate  to 
the  extent  of  confusion,  fails  utterly  to  provide  for  entering  any  evi- 
dence of  a  qualified  title  in  any  public  office  or  in  any  public  record, 
and  no  requirement  is  found  in  it  for  reporting  by  users  or  licensees, 
who  may  remove  from  one  place  to  another,  taking  the  machine  with 
them,  as  would  very  certainly  be  required  if  the  plaintiff"  intended  to 
enforce  the  rights  so  elaborately  asserted  in  this  notice — if  the  system 
were  really  a  genuine  provision  designed  to  protect  through  many  years 
to  come  the  restricted  right  to  "use"  and  the  seemingly  qualified  title 
which  it  purports  to  grant  to  dealers  and  to  the  public,  from  being  ex- 
ceeded or  departed  from. 

Third.  The  fact  that  under  this  system  "at  different  times"  "large 
numbers"  of  machines,  as  is  alleged  in  the  plaintiff's  bill,  have  been 
"covertly"  sold  to  the  defendants  by  the  plaintiff's  wholesale  and  retail 
agents  at  less  than  the  price  fixed  for  them,  is  persuasive  evidence  that 
the  transaction  is  not  what  it  purports  on  its  face  to  be.  If  it  were  a 
reasonably  guarded  plan,  really  intended  to  keep  the  plaintiff  in  touch 
with  each  of  its  machines  until  the  expiration  of  the  patent  of  latest 
date,  for  the  purpose  of  insisting  upon  its  being  used  in  the  manner 
provided  for  in  the  "license  notice,"  the  plaintiff's  prompt  and  sufficient 
remedy  for  such  an  invasion  of  its  right  as  is  claimed  in  this  case  would 
be  found  in  its  sales  department,  or  rather  in  its  "license"  department, 
and  not  in  the  courts.  That  the  plaintiff  comes  into  court  with  a  bill  to 
enjoin  the  defendants  from  reselling  machines  secretly  sold  to  them  in 
large  numbers  by  the  plaintiff's  agents  indicates  very  clearly  that  at 
least  until  the  exigency  out  of  which  this  case  grew  arose,  the  scheme 
was  regarded  b)^  the  plaintiff  itself  and  by  its  agents  simply  as  one  for 
maintaining  prices  by  holding  a  patent  infringement  suit  in  terrorem 
over  the  ignorant  and  the  timid. 

And  finally,  while  the  notice  permits  the  use  of  the  machines,  which 
have  been  fully  paid  for,  by  the  "unlicensed  members  of  the  general 
public,"  significantly  called  in  the  bill  "the  ultimate  users,"  until  "the 
expiration  of  the  patent  having  the  longest  term  to  run"  (which,  under 
the  copy  of  the  notice  set  out  in  the  bill,  would  be  July  22,  1930),  it 


Ch.  7)  ILLEGALITY  323 

provides  that  if  the  licensee  shall  not  have  failed  to  observe  the  condi- 
tions of  the  license,  and  the  Victor  Company  shall  not  have  previously 
taken  possession  of  the  machine,  as  in  the  notice  provided,  then,  per- 
haps sixteen  years  or  more  after  he  has  paid  for  it,  and  in  all  probabil- 
ity long  after  it  has  been  worn  out  or  become  obsolete  and  worthless, 
"it  shall  become  the  property  of  the  licensee." 

It  thus  becomes  clear  that  this  "license  notice"  is  not  intended  as  a 
security  for  any  further  payment  upon  the  machine,  for  the  full  price, 
called  a  "royalty,"  was  paid  before  the  plaintiff  parted  with  the  posses- 
sion of  it ;  that  it  is  not  to  be  used  as  a  basis  for  tracing  and  keeping 
the  plaintiff  informed  as  to  the  condition  or  use  of  the  machine,  for  no 
report  of  any  character  is  required  from  the  "ultimate  user"  after  he 
has  paid  the  stipulated  price  ;  that,  notwithstanding  its  apparently  stud- 
ied avoidance  of  the  use  of  the  word  "sale,"  and  its  frequent  refer- 
ence to  the  word  "use,"  the  mose  obvious  requirements  for  securing  a 
bona  fide  enforcement  of  the  restrictions  of  the  notice  as  to  "use"  are 
omitted ;  and  that,  even  by  its  own  terms,  the  title  to  the  machines  ulti- 
mately vests  in  the  "ultimate  users,"  without  further  payment  or  action 
on  their  part,  except  patiently  waiting  for  patents  to  expire  on  inven- 
tions which,  so  far  as  this  notice  shows,  may  or  may  not  be  incorporat- 
ed in  the  machine.  There  remains  for  this  "license  notice,"  so  far  as 
we  can  discover,  the  function  only  of  fixing  and  maintaining  the  price 
of  plaintiff's  machines  to  its  agents  and  to  the  public,  and  this,  we  can- 
not doubt,  is  the  purpose  for  which  it  really  was  designed. 

Courts  would  be  perv^ersely  blind  if  they  failed  to  look  through  such 
an  attempt  as  this  "license  notice"  thus  plainly  is  to  sell  property  for 
a  full  price,  and  yet  to  place  restraints  upon  its  further  alienation,  such" 
as  have  been  hateful  to  the  law  from  Lord  Coke's  day  to  ours,  because 
obnoxious  to  the  public  interest.  The  scheme  of  distribution  is  not  a 
system  designed  to  secure  to  the  plaintiff  and  to  the  public  a  reasonable 
use  of  its  machines,  within  the  grant  of  the  patent  laws,  but  is  in  sub- 
stance and  in  fact  a  mere  price-fixing  enterprise,  which,  if  given  eft'ect, 
would  work  great  and  widespread  injustice  to  innocent  purchasers,  for 
it  must  be  recognized  that  not  one  purchaser  in  many  would  read  such 
a  notice,  and  that  not  one  in  a  greater  number,  if  he  did  read  it,  could 
understand  its  involved  and  intricate  phraseology,  which  bears  many 
evidences  of  being  framed  to  conceal  rather  than  to  make  clear  its  real 
meaning  and  purpose.  It  would  be  a  perversion  of  terms  to  call  the 
transaction  intended  to  be  embodied  in  this  system  of  marketing  plain- 
tiff's machines  a  "license  to  use  the  invention."  Bauer  v.  O'Donnell, 
supra. 

Convinced,  as  we  are,  that  the  purpose  and  effect  of  this  "license 
notice"  of  plaintiff,  considered  as  a  part  of  its  scheme  for  marketing  its 
product,  is  not  to  secure  to  the  plaintiff  any  use  of  its  machines,  and  as 
is  contemplated  by  the  patent  statutes,  but  that  its  real  and  poorly- 
concealed  purpose  is  to  restrict  the  price  of  them,  after  the  plaintiff 
had  been  paid  for  them  and  after  they  have  passed  into  the  possession 
of  dealers  and  of  the  public,  we  conclude  that  it  falls  within  the  princi- 
ples of  Adams  v.  Burks,  17  Wall.  453,  456,  21  L.  Ed.  700,  703;  and  of 
Bauer  v.  O'Donnell,  supra;  that  it  is,  therefore,  invalid,  and  that  the 
District  Court  properly  held  that  the  bill  must  fail  for  want  of  equity. 


324  CONTRACTS  (Part  1 


SECTION  3.— CONTRACTS  LIMITING  THE  LIABILITY  OF 
BAILEES  AND  OTHER  PERSONS 


INLAND   COMPRESS   00.  v.    SIMMONS. 
(Siipreme  Court  of  Oklahoma.  1916.    59  Okl.  287,  159  Pac.  262.) 

HooKDR,  c_  *  *  *  About  the  only  question  presented  by  this 
appeal  is  whether  the  cotton  tickets  executed  by  the  company  and  de- 
livered to  the  plaintiff  at  the  time  the  cotton  was  delivered  by  him  to 
the  company  *  *  *  is  a  legal  contract  and  enforceable  in  the 
courts  of  this  state,  it  being  contended  by  the  plaintiff  in  error  that 
the  cotton  tickets  did  constitute  a  contract,  and  that  under  the  terms 
of  the  contract  it  is  not  liable  for  loss  by  damage,  fire,  flood,  or  other 
agencies  unless  by  the  willful  act  or  gross  negligence.  The  facts  in 
the  instant  case  show  that  the  plaintiff  in  error  received  this  cotton 
for  the  purpose  of  compressing  the  same,  for  which  it  received  com- 
pensation, and  that  the  storage  of  the  cotton  was  an  incident  of  the 
business  in  which  it  was  engaged  of  compressing  the  same.     *     *     * 

In  the  case  of  Union  Compress  Co.  v.  Nunnally,'  67  Ark.  284,  54  S. 
W.  872,  the  Supreme  Court  of  that  state  said:  *  *  *  "When  a 
bailment  is  reciprocally  beneficial  to  each  party,  the  bailee  is  answer- 
able for  want  of  ordinary  care." 

Applying  the  rule  to  the  evidence  in  the  instant  case,  we  are  of 
the  opinion  that  the  plaintiff  in  error  was  a  bailee  for  hire  of  the 
cotton  in  question,  and,  as  such,  was  subject  to  the  same  responsi- 
bility and  duties;  and,  for  the  failure  to  exercise  that  degree  of  care 
of  the  property  in  its  possession  that  the  law  requires  of  a  bailee  for 
hire,  it  is  responsible  for  whatever  damages  that  said  property  suf- 
fers as  the  proximate  result  caused  by  the  failure  of  the  company  to 
exercise  such  care.  That  being  true,  it  must  have  been  the  duty  of  the 
compress  company  in  this  case  to  have  exercised  reasonable  care  in 
the  storing  of  the  property  of  the  defendant  in  error,  and  for  its  failure 
so  to  do  it  must  be  held  liable,  unless  the  provision  of  the  cotton  tickets, 
which  sought  to  limit  it?  liability  to  injuries  caused  by  the  willful  act 
or  gross  negligence  of  the  company,  should  prevail. 

Section  1109  of  the  Revised  Laws  of  1910  provides:  "A  bailee  for 
hire  must  use  at  least  ordinary  care  for  the  preservation  of  the  thing 
bailed."  The  writers  on  bailments  seem  to  agree  that  the  parties  to  a 
bailment  contract  may  regulate  the  responsibilities  of  the  bailee  by  spe- 
cial contract,  but  it  is  also  universally  agreed  that  the  terms  which 
public  policy  and  legislation  of  the  state  impose  are  not  to  be  overleap- 
ed by  contractual  relations  and,  if  so,  the  contract  will  be  disregarded 
and  declared  void,  and  the  bailee  held  in  the  same  manner  and  to  the 
same  extent  as  if  such  contract  never  existed. 

The  public  policy  of  a  state  must  be  determined  by  reference  to  its 
Constitution,  the  acts  of  its  Legislature,  and  the  judicial  decisions 
of  its  courts.  It  is  universally  agreed  and  acceded  to  in  this  state  that 
common  carriers,  on  account  of  the  relation  that  they  occupy  towards 
the  public  and  the  duty  that  they  owe  to  the  public  generally,  are  pro- 
hibited by  law  from  contracting  against  their  own  negligence.  The 
reason  for  this  requirement  is  apparent,  and  it  would  seem  that  the 
same  cause  which  prohibits  contracts  of  this  character  from  being 


Ch.  7)  ILLEGALITY  325 

made  by  a  common  carrier  would  likewise  prohibit  contracts  of  like 
nature  from  being  made  by  other  enterprises  which  serve  the  public, 
and  which  conduct  and  carry  on  such  a  large  and  important  part  of 
the  public  business,  which  business  is  so  essential  to  the  commercial 
life  of  the  people  of  the  state.  The  Legislature  of  this  state,  by  the 
provision  of  our  statute  above  quoted,  has  provided  that  a  bailee  for 
hire  must  use  at  least  ordinary  care  for  the  preservation  of  the  thing 
bailed,  and  while  this  provision  of  the  statute  may  be  considered  as  a 
declaration  of  the  general  law  on  the  subject  of  bailment,  yet  it  also 
indicates  the  fixed,  definite,  and  declared  policy  of  the  state  with  "refer- 
ence to  the  degree  of  care  that  all  bailees  for  hire  must  use  towards 
property  intrusted  to  its  care. 

In  this  state  cotton  occupies  such  an  important  relation  to  the  busi- 
ness life  of  the  people  of  the  state,  and  cotton  compresses  perform  such 
an  important  duty  to  the  general  public,  that  it  may  be  said  that  courts 
take  judicial  knowledge  of  the  fact  that  compresses  are  in  their  nature, 
or  rather  in  a  sense,  quasi  public  institutions.  In  fact  the  business  of 
compressing  cotton,  by  reason  of  its  nature,  the  extent  and  the  neces- 
sity therefor,  is  such  that  the"  public  must  use  it,  and  it  is  of  such  pub- 
lic consequence,  and  affects  the  community  at  large  to  such  an  extent, 
that  it  is  a  public  business,  and  as  such  should  not  be  permitted  to  re- 
lieve itself  from  liability  by  contracts  of  the  kind  involved  here.  It 
will  not  suffice  to  say  that  this  contract  was  a  voluntary  contract,  and 
that  the  defendant  in  error  was  compelled  to  have  his  cotton  com- 
pressed, for  the  same  objection  could  be  urged  with  the  relation  of 
the  public  to  the  railroads,  the  express  companies  and  to  other  pub- 
lic utilities.  It  is  said  in  volume  6,  Corpus  Juris,  p.  1112,  §  44:  "The 
parties  to  a  bailment  may  diminish  the  liability  of  the  bailee  by  spe- 
cial contract,  the  principle  being  that  the  bailee  may  impose  whatever 
terms  he  chooses  if  he  gives  the  bailor  notice  that  there  are  special  terms 
and  the  means  of  knowing  what  they  are ;  and,  if  the  bailor  chooses 
to  make  the  bailment,  he  is  bound  by  them,  provided  the  contract  is 
not  in  violation  of  law  or  of  public  policy,  and  that  it  stops  short  of 
protection  in  case  of  fraud  or  negligence  of  the  bailee." 

While  it  cannot  be  contended  that  the  plaintiff  in  error  is  a  pub- 
lic warehouseman  within  the  provisions  of  our  statute,  yet,  as  a  circum- 
stance indicating  the  public  policy  of  this  state,  it  might  not  be  amiss 
to  notice  section  8302  of  the  Revised  Laws  of  1909,  which  prohibits 
public  warehousemen  from  inserting  in  the  receipt  any  language  limit- 
ing or  modifying  the  liability  or  responsibility  as  imposed  by  the  law  of 
the  state.  Third  volume,  Enc.  of  Law  (2d  Ed.)  p.  750,  states  the  rule 
as  follows :  "To  what  extent  a  bailee  may  limit  his  liability  by  special 
contract  is  not  clear.  It  has  been  said  by  good  authority  that  the  bailee 
might  contract  not  to  be  liable  for  any  degree  of  negligence  not  amount- 
ing to  gross  neglect,  for,  the  latter  being  regarded  as  equivalent  of 
fraud,  the  law  will  not  tolerate  such  an  indecency,  as  that  a  man  may 
contract  to  be  safely  dishonest.  But  negligence  in  any  degree  being  a 
wrong,  the  distinction  is  not  apparent,  and  the  better  doctrine  supported 
by  authority  would  seem  to  be  that  a  bailee  cannot  stipulate  against 
liability  for  his  own  negligence."  Lancaster  Countv  Nat.  Bank  v. 
Smith,  62  Pa.  47.     *     *     =i< 

We  conclude  that  it  would  be  against  public  policy  in  tliis  state  to 
permit  the  defendant  in  this  case  as  a  bailee  for  hire  to  contract  in 
such  manner  as  to  relieve  it  of  any  responsibility  for  its  own  negligence, 


326  CONTRACTS  (Part  1 

and  that,  the  provision  of  the  receipt  issued  to  the  plaintiff  in  error 
attempting  to  reHeve  the  company  from  any  habihty  on  account  of  dam- 
age, the  result  of  its  negligence  is  void  as  against  public  policy.  There- 
fore the  court  did  not  err  in  instructing  the  jury  to  the  effect  that  such 
provision  of  the  contract  would  not  protect  the  defendant  against  its 
own  negligence. 

The  judgment  of  the  lower  court  is  affirmed. 


WELD  et  al.  v.  POsSTAL  TELEGRAPH  CABLE  CO. 

(Court  of  Appeals  of  New  York,  1910.     199  N.  Y.  SS,  92  N.  E.  41-5.) 

Action  by  Stephen  M.  Weld  and  others  against  the  Postal  Tele- 
graph Cable  Company,  for  damages  for  loss  occasioned  by  error  in 
the  transmission  of  a  telegraph  message. 

In  submitting  the  case  to  the  jury  the  learned  trial  court  held  as 
matter  of  law  that  the  conditions  printed  upon  the  defendant's  blank 
used  in  sending  the  message  were  reasonable,  and  created  a  contract 
which  bound  the  plaintiffs  and  exempted  the  defendant  from  liability 
for  loss  occasioned  by  its  slight  or  ordinary  negligence,  but  that  it  did 
not  exempt  the  defendant  from  the  consequences  of  its  gross  negli- 
gence. The  court  then  defined  to  the  jury  the  legal  meaning  of  gross 
negligence  as  distinguished  from  ordinarv  negligence,  and  left  it  to 
the  jury  to  say,  as  a  matter  of  fact,  whether,  under  the  evidence  ad- 
duced, the  defendant  was  guilty  of  gross  negligence.  The  jury  ren- 
dered a  verdict  in  favor  of  the  plaintiffs  for  $10,000,  and  the  judg- 
ment entered  thereon  having  been  unanimously  affirmed  by  the  Appel- 
late Division,  the  defendant  has  appealed  to  this  court. 

Werner,  J.  *  *  *  The  action  is  brought  *  *  *  to  charge 
the  defendant  with  the  damages  sustained  by  the  plaintiffs  through 
the  alleged  negligence  of  the  former  in  transmitting  a  telegraphic 
message  sent  by  the  latter  from  New  York  to  New  Orleans.  The 
message  as  written  by  the  plaintiffs  was :  "Ellis  N.  O.  ^h\\  20  thou- 
sand Mch.  12.70.  Weld" — and  as  received  by  the  New  Orleans  rep- 
resentative of  the  plaintiffs  it  had  been  so  changed  and  transposed  as 
to  read :  "Sell*  twenty  thousand  March  1207.  Well."  The  import 
of  the  message  as  sent  was  well  understood  by  the  plaintiffs,  their 
correspondents,  and  the  operators  of  the  defendant.  It  contained  a 
direction  to  sell  tvv^enty  thousand  bales  of  cotton  for  March  delivery 
at  12.70  cents  per  pound,  which  was  understood  by  all  concerned  to 
mean  a  sale  at  12.70  cents  or  more.  The  message  as  received  was 
quite  as  clearly  understood  to  mean  a  sale  of  twenty  thousand  bales 
of  cotton  for  March  delivery  at  12.07  cents  or  more.  The  New  Or- 
leans representative  of  the  plaintiffs  followed  the  instructions  set 
forth  in  the  message  as  received,  sold  the  designated  number  of  bales 
at  various  prices  below  12.70  cents  and  when  the  error  was  discov- 
ered by  the  plaintiffs  they  directed  their  representatives  to  purchase 
at  once  20,000  bales  of  cotton  for  I\Iarch  dclivei-y  at  the  best  price 
obtainable.  This  was  done  in  the  New  Orleans  market  at  prices  be- 
low 12.70  but  above  the  prices  at  which  the  plaintiffs'  representatives 
had  previously  sold,  and  the  net  result  was  a  loss  to  the  plaintiffs  of 
$27,565. 

As  the  original  message  was  not  "repeated"  the  learned  trial  court 
charged  the  jury  that  the  conditions  printed  on  the  blank  or   form 


Ch.  7)  ILLEGALITY  327 

upon  which  it  was  sent  were  bin(Hng  upon  the  plauitiffs,  and  absolved 
the  defendant  from  Hability  for  damages  unless  they  were  occasioned 
by  the  defendant's  gross  neghgence.  Under  the  unanimous  afhrmance 
of  the  Appellate  Division  of  the  judgment  recovered  by  the  plaintiffs, 
the  defendant's  gross  negligence  must  be-  deemed  to  have  been  con- 
clusively established,  and  the  only  question  in  that  behalf  which  we 
have  power  to  consider  is  whether  the  rule  of  liabiUty  given  to  the 
jury  by  the  trial  judge  correctly  states  the  law. 

The  liability  of  telegraph  companies  in  respect  of  the  business  which 
they  carry  on  is  regulated  by  two  things:  (1)  By  contract.  (2)  By  the 
nature  of  their  quasi  public  employment.  In  the  absence  of  any  spe- 
cial contract  limiting  or  regulating  their  liability,  they  do  not  insure 
the  safe  and  accurate  transmission  of  messages,  but  they  are  bound 
to  transmit  them  with  a  degree  of  care  and  diligence  adequate  to  the 
business  which  they  undertake.  The  liability  which  a  telegraph  com- 
pany assumes  under  this  general  rule,  may,  however,  be  limited  by 
special  contract,  and  that  is  today  the  universal  practice.  As  it  is  a 
business  requiring  employes  of  peculiar  skill,  so  it  is  also  subject  to 
atmospheric  and  physical  disturbances  which  may  set  at  naught  the 
greatest  care  and  skill.  It  is,  therefore,  but  right  that  telegraph  com- 
panies should  have  the  power  to  limit  their  liability  in  cases  where  mis- 
takes occur  through  no  fault  on  their  part,  or  for  such  mistakes  of 
their  employes  as  will  occur  through  ordinary  negligence  in  spite  of 
the  most  stringent  regulations  or  the  most  vigilant  general  oversight. 
But  manifestly  this  power  cannot  be  extended  further  without  placing 
the  public  absolutely  at  the  mercy  of  those  engaged  in  transmitting 
telegraphic  messages.  This  is  the  reason  of  the  rule,  long  since  es- 
tablished in  this  state,  that  individuals  and  corporations  engaged  in 
this  quasi  pubHc  business  cannot  contract  to  absolve  themselves  from 
liability  for  their  own  willful  misconduct  or  gross  negligence.  They 
may  protect  themselves  by  contractual  limitations  that  are  reasonable, 
but  beyond  that  they  may  not  go.  That  is  the  law  as  laid  down  by 
this  court  in  a  number  of  cases.  *  *  *  The  cases  '•'  *  *  hold 
that  a  regulation  limiting  the  liability  of  a  telegraph  company  for  a 
mistake  in  an  "unrepeated"'  message  to  the  price  paid  for  sending  it  is 
reasonable,  but  that  it  does  not  relieve  such  a  company  against  the 
consequences  of  its  gross  negligence.  The  charge  of  the  trial  court 
in  this   respect  was,  therefore,   clearly  correct.     *     *     * 

We  now  turn  to  a  series  of  requests  made  by  defendant's  counsel 
which  we  think  should  have  been  charged.  Defendant's  counsel  asked 
the  court  to  charge:  "That,  if  the  jury  find  as  a  fact  that  when  plain- 
tiffs sent  the  message  to  Ellis  &  Co.  to  sell  20,000  bales,  March  cot- 
ton, the  plaintiffs  did  not  intend  to  deliver  cotton,  and  that  it  was  the 
plaintiffs'  intention  that  one  party  to  the  sale  was  to  pay  to  the  other 
only  the  difference  between  the  prices  named  and  the  market  price  of 
the  cotton  at  the  date  fixed  for  executing  the  contract,  then  the  whole 
contract  constituted  nothing  more  than  a  wager,  and  the  plaintiffs 
are  entitled  to  a  verdict  for  only  sixty  cents."  *  *  * 
_  As  bearing  upon  the  nature  of  the  transactions  between  the  plain- 
tiffs and  those  who  dealt  with  them  through  Henican,  one  of  the 
plaintiffs'  New  Orleans  correspondents,  Henican  testified  that  there 
was  no  delivery  of  cotton,  and  that  the  transactions  consisted  entirely 
of  a  "settlement  of  differences."  This  testimony  was  supplemented 
by  an  account  of  sales,  from  which  the  jury  might  have  drawn  the 


328  CONTRACTS  (Part  1 

inference  that  it  was  not  the  intention  of  the  parties  to  these  contracts 
to  sell  and  deliver  actual  cotton,  but  simply  to  record  the  market 
fluctuations  upon  the  basis  of  which  settlements  were  to  be  made  be- 
tween the  parties.  This  testimony,  although  meager  and  perhaps 
inconclusive,  was  hostile  to  the  legal  presumption  that  the  transactions 
were  lawful,  and  was  sufficient  to  create  an  issue  of  fact  upon  which 
the  defendant  had  the  right  to  a  charge  embodying  the  substance  of 
the  requests  above  quoted.  If  the  transactions  between  the  plaintiffs 
and  their  clients  or  customers  were  mere  wagering  contracts,  they  are 
void  under  the  statutes  of  this  state  and  the  general  law  of  the  land. 
The  generally  accepted  rule  upon  this  subject  can  be  very  simply 
stated.  A  man  may  lawfully  sell  goods  or  stocks  for  future  deliv- 
ery, even  though  he  has  none  in  his  possession,  if  he  really  intends 
and  agrees  to  deliver  them  at  the  appointed  time.  Such  a  transaction 
constitutes  a  valid  contract,  which  is  enforceable  in  the  courts.  But 
a  man  may  not,  under  the  guise  of  such  a  contract,  enter  into  a  naked 
speculation  upon  the  rise  or  fall  of  prices,  in  which  there  is  to  be  no 
delivery  of  property,  and  no  payment  except  such  as  may  be  neces- 
sary to  provide  for  differences  arising  purely  from  market  fluctua- 
tions. Such  a  transaction  is  a  mere  wager,  which  is  condemned  alike 
by  statute  and  public  policy.     *     *     * 

For  the  failure  of  the  learned  trial  court  to  charge  in  substance  as 
requested  upon  this  branch  of  the  case,  the  judgment  herein  must  be 
reversed   and  a   new   trial   granted,   with  costs   to   abide  the   event. 


SECTION   4.— GAMBLING   CONTRACTS 


WELD  et  al.  v.  POSTAL  TELEGRAPH  CABLE  CO. 
(Court  of  Appeals  of  New  York,  1910.     199  N.  Y.  SS,  92  N.  E.  415.) 
See  ante,  p.  326,  for  a  report  of  the  case. 


OLSO'N  V.  SAWYER-GOODMAN  CO. 

(Supreme  Court  of  Wisconsin,   190L     110   Wis.  149,   85  N.   W.   640, 
53  L.   R.   A.   648.) 

Bardekn,  J.  It  is  admitted  that  the  plaintiff  worked  166  days  for 
the  defendant  at  $1  per  day.  It  is  also  admitted  by  plaintiff  that  dur- 
ing that  time  he  personally  received  goods  and  supplies  from  the  com- 
pany amounting  to  $12.53,  and  that  the  defendant  paid  his  railroad 
fare  home,  and  for  other  expenses  amounting  to  $3.35.  The  defend- 
ant claims  to  be  entitled  to  an  additional  credit  of  $65.40,  arising  out 
of  the  following  circumstances :  The  defendant  kept  a  supply  depart- 
ment in  its  camp,  under  the  charge  of  one  Riley,  who  was  also  de- 
fendant's timekeeper  and  bookkeeper.  A  number  of  the  men  amused 
themselves  playing  poker.  A  banker  kept  account  of  the  game,  and  at 
the  end  of  each  game  he  would  report  who  had  lost  and  won,  and  the 
amount.  There  was  no  money  in  the  camp  with  which  these  balances 
could  be  liquidated,  so  it  was  agreed  between  the  players  that  the  debts 
should  be  paid  from  the  camp  store;    that  is,  the  winner  could  go  to 


Ch.  7)  ILLEGALITY  329 

the  store  and  get  goods  to  the  amount  he  had  won,  and  have  it  charged 
to  the  loser.  Instead  of  drawing  goods  al;  the  end  of  each  game  and 
squaring  accounts,  the  banker,  in  the  presence  of  each  player',  would 
report  the  debts  and  credits  to  Riley,  who  kept  a  private  memorandum 
thereof.  If  at  any  time  a  party  who  had  credit  on  this  account  wanted 
anything,  Riley  would  give  it  to  him  from  the  company's  goods,  and 
charge  it  to  some  person  against  whom  there  was  a  debt ;  and,  if  the 
amount  drawn  was  greater  than  the  debit  against  any  one  loser,  it 
would  be  distributed  among  several,  and  would  then  be  entered  on  the 
company's  books  as  goods  obtained  by  the  several  losers.  This  ar^ 
rangement  was  made  between  the  men  and  Riley  before  the  games 
commenced  in  the  fall,  and  was  also  known  to  the  foreman  of  the  camp. 
During  the  winter  there  was  charged  against  plaintiff  on  store  ac- 
count $81.38.  Of  this  amount,  $12.53  was  taken  by  plaintiff  for  his 
personal  use,  and  $7.40  was  delivered  to  winners  on  the  personal  or- 
der of  plaintiff.  The  remainder  was  for  goods  turned  over  to  the  vari- 
ous winners  pursuant  to  the  original  agreement  at  various  times  dur- 
ing the  winter,  and  without  any  express  direction  from  plaintiff.  Riley 
was  one  of  the  gamblers,  and,  as  agent  for  the  defendant,  assented  to 
the  arrangements  before  stated.  The  eff'ect  of  this  agreement  was  that 
defendant,  by  Riley,  stood  as  banker  for  each  man  to  the  amount  of 
wages  earned,  and  agreed  to  turn  the  same  over,  or  such  portion  as 
was  lost,  to  the  winners  at  the  games.  This  was  to  be  done  pursuant 
to  the  arrangement  made  between  the  men  and  Riley  before  the  games 
were  commenced. 

The  trial  court  held  that  this  agreement  was  illegal  and  void,  as  be- 
ing promotive  of  gambling,  and  gave  no  authority  to  Riley  to  deliver 
goods  to  winners  and  charge  them  to  the  loser;  that,  when  the  men 
were  present  and  got  the  goods  themselves,  they  were  properly  charge- 
able to  them,  regardless  of  what  they  did  with  them.  Upon  this  theor}' 
the  plaintiff  was  held  chargeable  with  the  goods  to  the  amount  of  $7.40, 
which  were  turned  over  to  winners  in  his  presence  and  under  his  di- 
rection. The  decision  of  the  trial  court  seems  to  have  been  founded 
upon  a  correct  appreciation  of  our  statutes  condemning  gambling,  and 
all  agreements  and  transactions  based  thereon  or  growing  out  of  the 
same.  *  *  *  f\^Q  whole  scheme  was  illegal,  void,  and  contrary 
to  the  statutes  and  to  public  policy  as  well.  The  plan  of  operations 
was  known  to  defendant's  foreman,  and  carried  on  with  his  knowledge 
and  acquiescence.  Except  for  the  agreem'ent  as  to  delivery  of  goods 
and  the  plan  of  shifting  credits,  it  is  not  at  all  likely  that  the  games 
would  have  been  continued.  We  are  entirely  satisfied  with  the  con- 
clusion of  the  trial  court,  and  must  therefore  affirm  the  judgment.  The 
court  found  that  plaintiff"'s  wages  amounted  to  $166,  and  that  his  to- 
tal debts  were  $23.33,  and  directed  judgment  for  $136.67,- — a  mistake 
of  $6  against  plaintiff.  Judgment  was  entered  as  directed,  and  the 
mistake,  not  being  prejudicial  to  defendant,  affords  no  ground  for 
complaint  on  its  part.    The  judgment  is  affirmed. 


330  coNTUArTS  (Part  1 

SECTION  5.— OTHER  ILLUSTRATIONS  OF  ILLEGAL 
CONTRACTS 


DUNTON  V.  WESTCHESTER  FIRE  INS.   CO. 

(Supreme  Jndidal  Court  of  Maine,  1008.     104  Me.  372,  71  Atl.  1037, 
20  L.  R.  A.  fN.  S.]  1058.) 

Action  by  Dunton  against  an  insurance  company  on  a  fire  insur- 
ance policy,  which  provided  for  arbitration  as  to  amount  due,  as  a 
condition  precedent  to  the  right  to  maintain  an  action  on  the  poHcy. 
Verdict  for  plaintiff.    Defendant  excepts. 

WhitehousU,  J.  *  *  *  It  has  been  long  established  by  author- 
ity both  in  this  country  and  in  Englana  iiat  if  parties  stipulate  in  con- 
tracts of  insurance  and  other  similar  CL.ntracts  to  submit  to  arbitration 
the  question  of  the  amount  of  damage  or  any  similar  matters  that  do 
not  go  to  the  root  of  the  action,  it  is  entirely  competent  for  them  to 
make  such  an  agreement  a  condition  precedent  to  the  right  of  action; 
and  if  it  appears  from  the  express  terms  of  the  contract,'  or  from  nec- 
essary implication,  that  such  was  the  intention,  it  will  be  upheld  by 
the  courts,  and  no  action  can  be  maintained  upon  the  contract  without 
proof  on  the  part  of  the  plaintiff  that  he  has  fulfilled  the  stipulation  in 
the  contract  or  made  all  reasonable  effort  to  fulfill  it.  The  effect  of 
such  an  agreement  is  not  to  refer  a  cause  of  action,  but  to  provide  that 
a  cause  of  action  shall  arise  as  soon  as  the  amount  to  be  paid  has  been 
determined,  and  not  before.  It  does  not  deprive  the  courts  of  their 
jurisdiction,  but  simply  provides  a  reasonable  method  of  estimating 
and  ascertaining  the  amount  of  the  loss,  and  leaves  the  general  ques- 
tion of  liability  to  be  determined  by  the  judicial  courts.  *  *  *  ^~^_ 
captions  overruled. 


LIVINGSTON  V.   PAGE. 

(Supreme  Court  of  Vermont,  1902.     74  Vt.  356,  52  Atl.  965,  59  L.  R.  A.  836, 

93  Am.  St.  Rep.  901.) 

Action  of  assumpsit  by  James  H.  Livingston  against  Carrol  S.  Page. 
From  a  judgment  for  the  defendant,  the  plaintiff  brings  exceptions. 

MuNSON,  J.  At  the  close  of  the  plaintiff's  evidence  the  defendant 
moved  that  a  verdict  be  directed  in  his  favor,  on  the  ground  that  the 
contract  claimed  by  the  plaintiff  was  void,  as  against  public  policy. 
The  court  held  the  contract  void  for  the  reason  assigned,  and  directed 
a  verdict  accordingly.  The  case  is  here  upon  the  plaintiff's  exception 
to  this  holding. 

The  plaintiff-  called  the  defendant  as  a  witness.  The  evidence  con- 
sisted of  certain  correspondence  had  by  the  parties ;  and  the  testimony 
of  the  parties  as  to  the  circumstances  in  which  the  letters  were  written, 
the  meaning  that  was  attached  to  the  language  used,  the  matters  in- 
closed for  publication  by  one  party  and  the  services  rendered  by  the 
other,  and  subsequent  transactions  bearing  upon  their  understanding 
of  the  relations  they  had  sustained.  The  defendant  claimed  that  no 
contract  with  the  plaintiff  was  in  fact  consummated,  and  that  the  only 
contract  ever  contemplated  was  one  for  the  publication  of  extracts 
from  other  papers  at  a  legitimate  charge  for  the  space  actually  taken. 


Ch.  7)  ILLEGALITY  331 

The  plaintiff  did  not  claim  to  recover  on  this  ground,  but  claimed 
to  recover  a  reasonable  compensation  for  the  support  and  influence 
of  his  paper  and  his  services  as  its  editor.  The  plaintiff  was  a  Demo- 
crat, publishing  a  Democratic  paper  of  independent  proclivities.  The 
defendant  was  a  Republican,  seeking  a  nomination  to  congress  from  a 
Repubhcan  convention.  It  appeared  from  the  plaintiff's  testimony  that 
he  considered  defendant's  proposal  an  application  for  the  use  and  in- 
fluence of  his  paper  in  the  nature  of  a  retainer;  that  he  accepted  it 
with  the  understanding  that  his  paper  and  his  services  as  editor  would 
be  at  the  command  of  the  defendant  during  the  campaign,  to  be  set- 
tled for  at  its  close;  that  he  was  to  do  all  he  could  to  influence  the 
choice  of  delegates  and  secure  the  defendant's  nomination ;  that  orig- 
inal matter  was  within  the  scope  of  his  contract,  and  that  his  editorials 
were  written  in  that  view ;  that  he  supported  defendant  because  of  this 
contract  and  the  money  he  was  to  get  out  of  it;  that  he  expected  to 
receive  a  larger  compensation  if  defendant  v/as  nominated  than  he  oth- 
erwise would ;  that  he  tried  to  conceal  his  relations  with  the  defend- 
ant from  the  public,  and  understood  that  the  defendant  was  trying 
to  do  the  same ;  that  he  took  this  course  because  it  v/ould  make  his 
efforts   in   influencing  voters   in   defendant's  behalf   more   successful. 

5):         H<         ^ 

In  Strasburger  v.  Burk,  13  x\m.  Law  Reg.  (N.  S.)  607,  decided  by 
the  city  court  of  Baltimore,  the  defendant  was  the  keeper  of  a  lager 
beer  saloon,  and  agreed  to  give  his  political  influence  and  furnish  beer 
and  cigars  to  secure  a  caucus  nomination  for  the  plaintift"'s  father. 
The  gratuitous  furnishing  of  food  or  liquor  to  secure  votes  at  an 
election  was  prohibited  by  the  Code,  but  the  only  statutory  recogni- 
tion of  primary  elections  was  a  provision  for  the  preservation  of  or- 
der. The  court  considered  that  in  applying  the  principles  of  public 
policy  no  distinction  could  be  made  between  voluntary  m.eetings  of 
this  character  and  elections  ordained  by  law.  Mr.  McCrary  adopts 
the  conclusions  of  this  opinion  in  his  work  on  Elections,  and  applies 
the  doctrine  to  the  sale  of  influence,  as  well  as  the  sale  of  votes.  Mr. 
Redfield,  in  commenting  upon  the  same  opinion  in  13  Am.  Law  Reg. 
(N.  S.)  at  page  610,  says  that  the  invalidity  of  contracts  designed  to 
control  the  freedom  of  elections  results  from  the  principles  of  common 
law,  and  that  those  relating  to  caucuses  cannot  be  made  an  exception 
on  the  ground  that  such  meetings  are  not  recognized  by  the  statute. 
We  cannot  doubt  the  correctness  of  this  conclusion.  The  rule  would 
largely  fail  of  its  purpose  if  not  so  applied.  When  the  voters  are  un- 
evenly divided  into  two  parties,  the  nomination  of  the  stronger  organi- 
zation is  usually  equivalent  to  an  election.  And  when  party  action  is 
less  decisive  the  subsequent  efforts  of  the  voters  are  ordinarily  confined 
to  a  selection  from  the  candidates  regularly  presented.  The  individual 
voter  of  a  large  electorate  can  seldom  give  an  effective  expression  to 
a  choice  that  is  not  in  line  with  the  action  of  some  party  convention. 
To  secure  a  free  and  exact  expression  of  the  sovereign  will,  there  must 
be  a  proper  selection  of  candidates,  as  well  as  an  honest  election.  If 
the  choice  of  delegates  and  the  action  of  the  nominating  convention 
are  improperly  determined,  the  election  ballots  will  fail  to  express  the 
real  judgment  of  the  voters. 

It  is  not  claimed  in  argument,  and  no  ground  occurs  to  us  upon 
which  it  could  be  claimed,  that  this  contract  was  any  the  less  obnoxious 
to  the  law  because  the  purchased  influence  was  to  be  exerted  through  the 


332  CONTRACTS  (Part  1 

columns  of  the  plaintiff's  paper.  A  newspaper  is  understood  to  pre- 
sent the  views  of  some  one  connected  with  its  management  or  views 
deemed  consistent  with  some  settled  policy,  and  has  a  patronage  and 
influence  which  are  due  to  that  understanding.  As  long  as  the  editorial 
column  is  relied  upon  as  a  public  teacher  and  adviser,  there  can  be  no 
more  dangerous  deception  than  that  resulting  from  the  secret  pur- 
chase of  its  favor.  We  hold  that  the  contract  testified  to  and  relied 
upon  by  the  plaintiff  is  contrary  to  public  policy,  and  therefore  void. 
Judgment  affirmed. 


HARBISON  V.   SHIRLEY  et  al. 

(Supreme  Court  of  Iowa,  1908.     139  Iowa,  605,  117  N.  W.  96.3, 
19  L.  R.  A.  [N.  S.]  662.) 

Evans,  j.  *  *  *  The  authorities  are  not  altogether  in  hairmony 
as  to  the  rule  which  renders  a  contract  void  when  it  is  entered  into 
by  one  of  the  parties  with  the  intent  to  violate  the  law,  and  where 
such  intent  is  known  or  suspected  by  the  other  party.  The  great  w^eight 
of  authority,  however,  in  our  opinion  is  that  mere  knowledge  or  sus- 
picion on  the  part  of  the  lessor  that  the  lessee  intends  to  violate  the 
law  upon  the  property  will  not  of  itself  render  a  contract  void.  In 
order  to  defeat  a  recovery  for  rent  by  the  lessor,  it  must  be  shown 
that  he  participated  in  some  degree,  however  slight,  in  the  wrongful 
purpose  and  intent  that  the  property  should  be  so  used.  Mere  indiffer- 
ence on  his  part  as  to  the  intended  use  of  the  property  is  not  suffi- 
cient. If  the  lessor  in  any  way  aids  the  lessee  in  his  unlawful  design, 
such  participation  will  render  the  contract  void.  His  relation  to  the 
unlawful  purpose  must  be  in  some  degree  active,  rather  than  merely 
passive  or  indifferent.  If  he  does  any  act  in  aid  of  the  unlawful  pur- 
pose, however  slight,  it  is  sufficient  participation  on  his  part  to  defeat 
recovery.  But,  until  there  be  some  degree  of  connivance  shown,  a  con- 
tract will  not  be  avoided.  *  *  *  The  law  finds  itself  in  close  quar- 
ters at  this  point,  and  is  confronted  with  danger  at  either  side.  On 
the  one  hand,  it  must  needs  withhold  its  sanction  from  contracts  en- 
tered into  for  criminal  purposes ;  and,  on  the  other  hand,  it  ought  not 
to  go  so  far  as  to  oft"er  undue  inducement  to  beneficiaries  of  con- 
tracts to  taint  them  with  criminality  for  the  very  purpose  of  avoiding 
liability  thereon  after  receiving  the  benefits  of  performance  by  the 
other  party,  lest  the  latter  evil  become  greater  than  the  first.  While, 
therefore,  it  is  true  that  the  line  of  distinction  drawn  in  the  authorities 
above  cited  is  somewhat  fine,  it  is  also  true  that  it  requires  a  thin  blade 
to  divide  the  "joints  and  marrow"  of  one  evil  to  be  checked  and  another 
to  be  avoided.  This  court  has  not  heretofore  passed  directly  upon 
this  question.     *     *     * 

Under  the  evidence  in  this  case,  the  most  that  can  be  said  is  that 
the  plaintiff  feared  or  suspected  that  intoxicating  liquors  might  be 
sold  upon  the  premises.  There  is  no  testimony  indicating  any  con- 
nivance on  his  part.  The  lease  expressly  forbade  the  use  of  the  prem- 
ises for  any  unlawful  purpose.  It  is  urged  in  argument  that  this  was 
a  mere  pretense  to  cover  up  the  real  purpose  ;  but  the  evidence  does  not 
warrant  such  contention.  The  defendant  Shirley  testified  to  his  con- 
versation with  the  plaintiff  as  follows:  "Mr.  Harbison  said  that  he 
did  not  want  anything  sold  in  there  that  would  cause  a  nuisance.     He 


Ch,  7)  ILLEGALITY  333 

said  'You  want  it  for  restaurant  purpose.  All  right,  take  for  restau- 
rant purposes.'  "  This  oral  statement  is  in  harmony  with  the  prohibi- 
tion of  the  lease,  and  indicates  no  ulterior  purpose  on  the  part  of  the 
plaintiff.  There  was  no  other  evidence  on  the  question.  The  burden 
was  upon  the  defendants  to  prove  their  affirmative  defense.  They 
have  wholly  failed  to  do  so.  The  trial  court  directed  a  verdict  for 
the  plaintiff  and  entered  judgment  for  the  amount  claimed. 
The  judgment  is  right,  and  is  affirmed. 


ROGERS  V.  BLUENSTEIN. 

(Supreme  Court  of  Georgia,  1905.     124  Ga.  501,  52  S.  E.  G17 
3  L.  R.  A.  [N.  S.]  213.) 

Action  by  Laura  B.  Rogers  against  S.  Bluenstein.  Judgment  for 
defendant  and  plaintiff  brings  error. 

Laura  B.  Rogers  brought  an  action  against  S.  Bluenstein  to  recover 
a  diamond  ring  and  setting  and  a  diamond  pendant  and  setting.  The 
evidence  showed  that  on  June  18,  1902,  the  plaintiff  executed  an  in- 
strument in  writing  by  which  she  conveyed  the  diamonds  to  one  Carroll 
D.  Judson  for  the  sum  of  $400.  He  executed  to  her  on  the  same  day 
a  paper  whereby  he  agreed  to  sell  the  diamonds  to  her  on  or  before 
October  15th  for  the  sum  of  $408. 

Lumpkin,  J.  It  is  legally  possible  for  one  person  to  buy  property 
from  another  and  agree  to  resell  it  to  the  vendor  at  a  higher  price  pay- 
able in  future.  If  such  be  the  actual  transaction,  the  law  will  enforce 
it.  The  difficulty  frequently  arising  is  to  determine  whether  in  a  given 
instance  the  parties  intended  a  sale  or  a  mortgage.  *  *  *  jf 
Bluenstein  in  fact  bought  the  diamonds  from  Judson  with  the  assent 
of  Mrs.  Rogers,  and  agreed  to  sell  them  to  her  at  an  advanced  price 
payable  in  the  future,  there  would  be  nothing  unlawful  about  it.  If  in 
fact  the  transaction  was  one  by  which  Bluenstein  loaned  Mrs.  Rogers  a 
sum  of  money  at  a  usurious  rate  of  interest,  it  was  illegal,  and  the 
title  so  obtained  was  tainted  with  usury.  The  transaction,  being  on  its 
face  apparently  lawful,  might,  nevertheless,  be  shown  to  be  a  device  for 
concealing  usury.  But  the  burden  of  proving  this  rested  on  the  party 
asserting  it.     *    *    * 

There  was  a  considerable  amount  of  evidence  tending  to  show  that 
in  fact  the  title  of  the  defendant  was  tainted  with  usury,  but  it  was  not 
free  from  conflict.  In  addition  to  what  appeared  on  the  face  of  the 
papers,  when  asked  in  regard  to  a  loan  to  the  plaintiff,  defendant  testi- 
fied :  "There  was  no  loan  with  her.  *  *  *  As  to  how  much  money 
I  let  Mrs.  Rogers  have,  I  never  had  a  contract  with  Mrs.  Rogers,  The 
bill  of  sale  shows  what  I  paid  Judson.  I  don't  remember  exactly — 
$413,  or  something.  *  *  *  And  I  gave  an  option  to  purchase  back 
on  the  14th  of  February,  1903."  If  the  jury  based  their  verdict  on  the 
belief  that  this  was  in  fact  a  sale  with  an  agreement  to  resell,  we  can- 
not say  that  they  were  without  evidence  authorizing  them  to  do  so. 

The  plaintiff  in  error  alleges  that  the  court  erred  in  charging  that  if 
the  diamonds  were  conveyed  to  the  defendant  as  a  security  for  a  debt 
Avhich  was  tainted  with  usur}',  and  not  in  fact  as  a  sale  with  the  right 
to  repurchase,  and  if  she  tendered  the  defendant  the  amount  of  money 
due  upon  her  contract  with  him.  and  it  was  refused,  she  would  be  en- 
titled to  recover  the  difference  between  the  amount  of  her  debt  at  the 


334  CONTRACTS  (Part  1 

time  of  the  tender  and  the  highest  proved  vahie  of  the  property  since 
the  date  of  such  payment.  It  is  contended  that,  if  the  diamonds  were 
pledged  as  a  security  for  a  loan,  the  pledgor  would  be  entitled  to  redeem 
the  property  pledged,  regardless  of  the  question  of  usury.  If  this  be 
conceded,  there  was,  nevertheless,  no  harmful  error  in  the  charge.  If 
what  transpired  between  the  parties  amounted  to  a  pledging  of  the  dia- 
monds to  secure  a  debt,  the  amount  fixed  for  their  return  or  reconvey- 
ance was,  without  any  controversy,  greater  than  the  amount  advanced 
with  legal  interest.  The  plaintiff  contended  that  there  was  usury,  and 
in  making  the  tender  her  attorney  calculated  the  rate  which  he  alleged 
had  been  previously  charged.  We  think  the  charge  of  the  court,  if 
erroneous,  could  not  have  injured  the  plaintiff. 
Judgment  affirmed.     All  tiie  Justices  coucuring. 


GPvIGSBY   V.   RrSSELIi. 

(Supreme  Court  of  the  United  States,  1911.     222  U.   S.  140.  32  Sup.  Ct.  58, 
56  L.  Ed.  133,  36  L.  R.  A.  [N.  S.]  642,  Ann.  Cas.  1913B,  8G3.) 

Holmes,  J.  This  is  a  bill  of  interpleader  brought  by  an  insurance 
company  to  determine  whether  a  policy  of  insurance  issued  to  John  C. 
Burchard,  now  deceased,  upon  his  life,  shall  be  paid  to  his  administra- 
tors or  to  an  assignee,  the  company  having  turned  the  amount  into 
court.  The  material  facts  are  that  after  he  had  paid  two  premiums  and 
a  third  was  overdue,  Burchard,  being  in  want  and  needing  money  for 
a  surgical  operation,  asked  Dr.  Grigsby  to  buy  the  policy  and  sold  it  to 
him  in  consideration  of  one  hundred  dollars  and  Grigsby's  undertaking 
to  pay  the  premiums  due  or  to  become  due ;  and  that  Grigsby  had  no 
interest  in  the  life  of  the  assured.  The  Circuit  Court  of  Appeals  in 
deference  to  some  intimations  of  this  court  held  the  assignment  valid 
only  to  the  extent  of  the  money  actually  given  for  it  and  the  premiums 
subsequently  paid.     *     *     * 

Of  course  the  ground  suggested  for  denying  the  validity  of  an  as- 
signment to  a  person  having  no  interest  in  the  life  insured  is  the  public 
policy  that  refuses  to  allow  insurance  to  be  taken  out  by  such  persons 
in  the  first  place.  A  contract  of  insurance  upon  a  life  in  which  the  in- 
sured has  no  interest  is  a  pure  wager  that  gives  the  insured  a  sinister 
counter  interest  in  having  the  life  come  to  an  end.  And  although  that 
counter  interest  always  exists,  as  early  was  emphasized  for  England  in 
the  famous  case  of  Wainewright  (Janus  Weathercock),  the  chance 
that  in  some  cases  it  may  prove  a  sufficient  motive  for  crime  is  greatly 
enhanced  if  the  whole  world  of  the  unscrupulous  are  free  to  bet  on 
what  life  they  choose.  The  very  meaning  of  an  insurable  interest  is 
an  interest  in  having  the  life  continue  and  so  one  that  is  opposed  to 
crime. .  And,  what  perhaps  is  more  important,  the  existence  of  such  an 
interest  makes  a  roughly  selected  class  of  persons  who  by  their  general 
relations  with  the  person  whose  life  is  insured  are  less  likely  than 
criminals  at  large  to  attempt  to  compass  his  death. 

But  when  the  question  arises  upon  an  assignment  it  is  assumed  that 
the  objection  to  the  insurance  as  a  wager  is  out  of  the  case.  In  the 
present  instance  the  policy  was  perfectly  good.  There  was  a  faint  sug- 
gestion in  argument  that  it  had  become  void  by  the  failure  of  Burchard 
to  pay  the  third  premium  ad  diem,  and  that  when  Grigsby  paid  he  was 
making  a  new  contract.     But  a  condition  in  a  policy  that  it  shall  be- 


Ch.  7)  ILLEGALITY  335 

void  if  premiums  are  not  paid  when  due,  means  only  that  it  shall  be 
voidable  at  the  option  of  the  company.  *  *  *  'phe  company  waiv- 
ed the  breach,  if  there  was  one,  and  the  original  contract  with  Burchard 
remained  on  foot.  No  question  as  to  the  character  of  that  contract  is 
before  us.  It  has  been  performed  and  the  money  is  in  court.  But  this 
being  so,  not  only  does  the  objection  to  wagers  disappear,  but  also 
the  principle  of  public  policy  referred  to,  at  least  in  its  most  convinc- 
ing form.  The  danger  that  might  arise  from  a  general  license  to  all 
to  insure  whom  they  like  does  not  exist.  Obviously  it  is  a  very  dif- 
ferent thing  from  granting  such  a  general  license,  to  allow  the  holder 
of  a  valid  insurance  upon  his  own  life  to  transfer  it  to  one  whom  he, 
the  party  most  concerned,  is  not  afraid  to  trust.  The  law  has  no 
universal  cynic  fear  of  the  temptation  opened  by  a  pecimiary  benefit 
accruing  upon  a  death.  It  shows  no  prejudice  against  remainders 
after  life  estates,  even  by  the  rule  in  Shelley's  Case,  1  Coke,  104.  In- 
deed, the  ground  of  the  objection  to  life  insurance  without  interest  in 
the  earlier  English  cases  was  not  the  temptation  to  murder  but  the  fact 
that  such  wagers  came  to  be  regarded  as  a  mischievous  kind  of  gam- 
insr.     ♦     *     * 

On  the  other  hand,  life  insurance  has  become  in  our  days  one  of 
the  best  recognized  forms  of  investments  and  self-compelled  saving. 
So  far  as  reasonable  safety  permits,  it  is  desirable  to  give  to  life  poli- 
cies the  ordinary  characteristics  of  property.  This  is  recognized  by  the 
Bankruptcy  Law,  §  70  (U.  S.  Comp.  St.  §  9654),  which  provides  that 
unless  the  cash  surrender  value  of  a  policy  like  the  one  before  us  is 
secured  to  the  trustee  within  thirty  days  after  it  has  been  stated  the 
policy  shall  pass  to  the  trustee  as  assets.  Of  course  the  trustee  may 
have  no  interest  in  the  bankrupt's  life.  To  deny  the  right  to  sell  ex- 
cept to  persons  having  such  an  interest  is  to  diminish  appreciably  the 
value  of  the  contract  in  the  owner's  hands.  The  collateral  difficulty 
that  arose  from  regarding  life  insurance  as  a  contract  of  indemnity 
only,  *  *  *  long  has  disappeared.  *  *  *  /^j^(j  cases  in  which 
a  person  having  an  interest  lends  himself  to  one  without  any  as  a  cloak 
to  what  is  in  its  inception  a  wager  have  no  similarity  to  those  where  an 
honest  contract  is  sold  in  good  faith. 

Coming  to  the  authorities  in  this  court,  it  is  true  that  there  are  inti- 
mations in  favor  of  the  result  come  to  by  the  Circuit  Court  of  Appeals. 
But  the  case  in  which  the  strongest  of  them  occur  was  one  of  the  type 
just  referred  to,  the  policy  having  been  taken  out  for  the  purpose  of 
allowing  a  stranger  association  to  pay  the  premiums  and  receive  the 
greater  part  of  the  benefit,  and  having  been  assigned  to  it  at  once. 
*  *  *  On  the  other  hand,  it  has  been  decided  that  a  valid  policy  is 
not  avoided  by  the  cessation  of  the  insurable  interest,  even  as  against 
the  insurer,  unless  so  provided  by  the  policy  itself.  *  *  *  It  is  at 
least  satisfactory  to  learn  from  the  decision  below  that  in  Tennessee, 
where  this  assignment  was  made,  although  there  has  been  much  divi- 
sion of  opinion,  the  Supreme  Court  of  that  State  came  to  the  conclu- 
sion that  we  adopt,  in  an  unreported  case,  Lewis  v.  Edwards,  Decem- 
ber 14,  1903.  The  law  in  England  and  the  preponderance  of  decisions 
in  our  state  courts  are  on  the  same  side.     *     *     * 

Decree  reversed. 


336  CONTRACTS  (Part  1 

ROHRBACn  V.   GERMANIA   FIRE  INS.   CO. 

(Court  of  Appeals  of  New  York,  1875.    62  N.  Y.  47,  20  Am.  Rep.  451.) 

FoLGER,  J.  *  *  *  The  general  definitions  of  the  phrase  "in- 
surable interest,"  as  given  in  the  text-books,  are  quite  vague  and 
not  always  concordant.  See  *  *  *  May,  Ins.  §  76.  The  last  cited 
author  says  that  an  insurable  interest  sometimes  exists  where  there  is 
not  any  present  property,  any  jus  in  re,  or  jus  ad  rem,  and  such  a 
connection  must  be  established  between  the  subject-matter  insured, 
and  the  party  in  whose  behalf  the  insurance  has  been  effected,  as  may 
be  sufficient  for  deducing  the  existence  of  a  loss  to  him,  from  the 
occurrence  of  an  injury  to  it,  and  that  the  tendency  of  modern  deci- 
sions is  to  admit  to  the  protection  of  the  contract,  whatever  act,  event 
or  property,  bears  such  relation  to  the  person  seeking  insurance,  as 
that  it  can  be  said  with  a  reasonable  degree  of  probability,  to  have  a 
bearing  upon  his  prospective  pecuniary  condition.  While  on  the 
other  hand,  the  statement  is,  that  the  interest  must  be  founded  on 
some  legal  or  equitable  title;  and  if  it  be  inconsistent  with  the  only 
title  which  the  law  can  recognize,  it  will  not  be  deemed  an  insurable 
interest.    Marsh,  Ins.,  115. 

But  the  result  of  a  comparison  of  the  text-writers  above  cited 
[eleven  writers  on  insurance]  is,  that  there  need  not  be  a  legal  or 
equitable  title  to  the  property  insured.  If  there  be  a  right  in  or  against 
the  property,  which  some  court  will  enforce  upon  the  property,  a 
right  so  closely  connected  with  it,  and  so  much  dependent  for  value 
upon  the  continued  existence  of  it  alone,  as  that  a  loss  of  the  prop- 
erty will  cause  pecuniary  damage  to  the  holder  of  the  right  against 
it,  he  has  an  insurable  interest.  Thus  a  mortgagee  of  real  estate, 
though  he  hold  also  tlie  bond  of  the  mortgagor,  has  an  insurable  in- 
terest in  the  buildings ;  while  a  judgment  creditor  of  the  same  mort- 
gagor, his  judgment  being  a  lien  upon  the  same  real  estate  and  the 
same  buildings,  is  said  not  to  have  an  insurable  interest  in  them. 
The  interest  of  the  first  is  said  to  be  specific,  the  interest  of  the  latter 
general.  As  a  general  rule  the  distinction  may  be  sound.  But  I  think 
it  would  be  difficult  to  show  an  appreciable  practical  difference  in  the 
pecuniary  result  to  the  two.  If  the  mortgagor  and  judgment  debtor 
should  die,  leaving  no  personal  property,  and  no  real  estate  save  that 
mortgaged,  it  principally  valuable  for  the  buildings  upon  it,  and  they 
should  be  burned,  each  must  then  look  to  the  real  estate,  the  lands 
alone,  for  a  security  for  his  debt;  and  if  that  be  insufficient,  each 
must  with  equal  certainty  suffer  a  pecuniary  disaster,  resulting  di- 
rectly from  the  fire.    What  legal  reason  is  there  why  the  one  may  not, 

as   well   as   the  other,  protect  himself  by   a   contract   of   insurance? 

*     *     * 

It  is  not  the  name  of  the  right  which  gives  or  refuses  an  insurable 
interest ;  it  is  the  character  of  the  right.  A  specific  lien  gives  an 
insurable  interest,  because  a  loss  of  the  particular  property  is  at  once 
seen  to  affect  disastrously  the  specific  lienor.  But  when  a  right  to 
payment  of  debt  exists,  which  can  be  satisfied  only  from  a  particular 
piece  of  property,  is  there  not  the  same  result  from  the  same  cause? 
If  I  have  a  debt  against  another,  and  he  have  but  one  piece  of  prop- 
erty from  which  my  debt  may  be  made,  and  he  die  leaving  no  per- 
sonal estate,  though  in  technical  language  my  lien  may  not  be  spe- 


Ch.  7)  ILLEGALITY  337 

cific  upon  that  real  estate,  it  is  true  in  fact  that  there  is  a  specific  piece 
of  property  from  which  alone  I  may  hope  to  satisfy  my  lien,  and 
which  is  alone  legally  bound  to  satisfy  it,  and  I  am  practically  just 
like  one  to  whom  that  piece  of  real  property  has  been  specifically 
pledged  for  a  specific  debt.  If  the  latter,  for  that  he  may  suffer 
pecuniary  loss  by  the  burning  of  that  real  property,  has  such  an  in- 
terest as  that  he  may  insure  against  that  burning,  I  have  such  an 
interest  also,  and  I,  too,  may  insure.  The  probability — nay,  the  pos- 
sibility of  the  payment  of  the  plaintiff's  debt  out  of  the  property  of 
the  deceased  debtor — rested  entirely  upon  the  contingency  of  this  real 
estate  remaining  without  serious  impairment  in  value.     *     *     * 

In  Insurance  Co.  v.  Allen,  43  N.  Y.  389-395,  396,  3  Am.  Rep.  711, 
it  is  said  by  Allen,  J. :  "An  insurable  interest  may  exist  without  any 
estate  or  interest  in  the  corpus  of  the  thing  insured ;  "  "it  was  enough 
that"  there  be  a  pecuniary  interest  in  the  preservation  and  protection 
of  the  property,  and  that  one  "might  sustain  a  loss  by  its  destruc- 
tion."   *    *    * 


SECTION  6.— EFFECT  OF  ILLEGALITY 


BASKET  et  al.  v.  MOSS. 

(Supreme  Court  of  North  Carolina,  1894.    115  N.  C.  448,  20  S.  E.  733, 
48  L.  R.  A.  842,  44  Am.  St.  Rep.  46.3.) 

Action  to  restrain  the  defendant,  W.  E.  Moss,  trustee,  from  selling 
certain  real  estate  described  in  the  affidavits. 

The  affidavit  on  which  the  application  was  founded,  after  setting 
forth  that  the  defendant  John  R.  Moss  was  postmaster  at  Henderson 
on  September  1,  1893,  and  that  the  full  term  to  which  he  had  been 
appointed  expired  March  1,  1894,  stated : 

That  on  or  about  September  1,  1893,  defendant  John  R.  Moss, 
represented  to  the  plaintiff.  Basket,  an  old  man,  easily  influenced, 
that  he.  Moss,  could  procure  for  Basket  the  appointment  of  postmaster 
at  Henderson  as  his  successor,  and  represented  further  to  said  Basket 
that  if  he  would  secure  to  him,  said  John  R.  Moss,  the  sum  of  $952. .SO 
(which  sum  was  to  be  evidenced  by  the  bond  of  said  A.  M.  Basket)  by  a 
deed  of  trust  on  his  (Basket's)  real  estate,  that  he,  said  John  R.  Moss, 
would  go  to  Washington  City,  see  President  Cleveland  and  other  au- 
thorities, resign  said  office  in  favor  of  Basket  and  surrender  the  of- 
fice to  him,  and  secure  the  appointment  of  Basket  as  postmaster  in 
his  stead,  stating  as  a  further  inducement  for  the  execution  of  said 
bond  and  trust  deed,  that  if  said  Basket  should  be  appointed  and  hold 
the  office  at  the  expiration  of  the  term  of  said  Moss,  Mr.  Cleveland 
would  no  doubt  reappoint  him. 

That  the  said  Basket,  relying  on  John  R.  Moss's  representations, 
executed  his  bond  to  J.  R.  Moss  for  $972.50,  and  at  the  same  time 
executed  to  W.  E.  Moss,  the  other  defendant,  a  trust  deed  on  a  tract 
of  125  acres. 

That  said  bond  and  trust  deed  were  executed  without  consideration, 
or  upon  a  consideration  which  was  illegal,  and  that  said  bond  and 
trust  deed  are  invalid, 
B.&  B.Bus.Law— 22 


338  CONTRACTS  (Part  1 

That  affiant  is  informed  and  believes  that  it  was  a  part  of  the  agree-  • 
ment  when  said  bond  and  trust  deed  were  executed,  that  if,  upon  the 
visit  of  John  R.  Moss  to  his  Excellency,  Grover  Cleveland,  at  Wash- 
ington, he  should  fail  to  have  said  Basket  appointed  postmaster  as 
aforesaid,  the  said  bond  and  trust  deed  should  be  cancelled  and  sur- 
rendered,' the  said  Basket  to  pay  the  actual  expenses  of  Moss.^ 

That  no  part  of  the  agreement  (which  affiant  claims  was  invalid 
so  far  as  the  promising  the  office  of  postmaster  for  A.  M.  Basket  is 
concerned)  has  been  complied  with  by  said  Moss. 

That  defendant  has  indorsed  the  trust  deed  as  being  paid  ofif  and 
satisfied  down  to  $199. 

That,  notwithstanding  these  facts,  defendant  John  R.  Moss  has 
caused  his  codefendant  W.  E.  Moss  to  advertise  the  said  real  proper- 
ty for  sale  under  said  invalid  deed,  to  pay  the  alleged  balance  of  $199 
claimed  as  due  on  said  invalid  bond. 

The  defendant  prays  for  a  restraining  order,  etc. 

Clark,  J.  The  public  has  a  right  to  some  better  test  of  the  capacity 
of  their  servants  than  the  fact  that  they  possess  the  means  of  pur- 
chasing their  offices.  The  Code  (section  1871)  provides,  "All  bargains, 
bonds  and  assurances  made  or  given  for  the  purchase  or  sale  of  any 
office  whatsoever,  the  sale  of  which  is  contrary  to  law,  shall  be  void." 
Notwithstanding  the  office  is  an  office  under  <the  United  States  govern- 
ment, if  an  action  were  brought  in  our  courts  to  recover  upon  a  bond 
or  mortgage  given  for  such  consideration,  our  courts  would  hold  it 
void.  Such  agreements  are  void  at  common  law,  as  well  as  by  stat- 
ute. So  also  contracts  to  procure  appointment  to  office  are  void, 
*  *  *  or  to  resign  in  another's  favor.  *  *  *  Public  offices  are 
public  trusts,  and  should  be  conferred  solely  upon  considerations  of 
ability,  integrity,  fidelity  and  fitness  for  the  position.  Agreements  for 
compensation  to  procure  these  tend  directly  and  necessarily  to  low- 
er the  character  of  the  appointments  to  the  great  detriment  of  the 
public.  Hence  such  agreements,  of  whatever  nature,  have  always  been 
held  void  as  being  against  public  policy.  *  *  *  Says  Ames,  C.  J., 
in  Eddy  v.  Capron.  4  R.  I.  394,  67  Am.  Dec.  541,  "By  the  theory  of  our 
government,  appointments  to  office  are  presumed  to  be  made  solely 
upon  the  principle  detur  digniori,  and  any  practice  whereby  the  bare 
consideration  of  money  is  brought  to  bear  in  any  form  upon  such  ap- 
pointments to  or  resignation  of  office,  conflicts  with  and  degrades  this 
great  principle.  The  services  performed  under  such  appointments 
are  paid  for  by  salary  or  fees,  presumed  to  be  adjusted  at  the  point 
of  adequate  remuneration  only.  Any  premium  paid  to  obtain  office 
interferes  with  this  adjustment  and  tempts  to  peculation,  overcharges 
and  frauds  in  the  effort  to  restore  the  balance  thus  disturbed."  Be- 
sides, the  moral  sense  revolts  at  traffic  to  any  extent  in  the  bestowal 
of  public  office.  It  is  against  good  morals  as  well  as  against  the 
soundest  principles  of  public  policy.  If  public  offices  can  be  sold  or 
procured  for  money,  the  purchasers  will  be  sure  to  reimburse  them- 
selves by  dispensing  the  functions  of  their  offices  for  pecuniary  con- 
sideration. The  law  wisely  guards  against  the  first  step  in  that  di- 
rection. For  that  reason,  not  only  the  sum  agreed  to  be  paid  di- 
rectly to  the  holder  of  this  office  to  resign,  but  the  amounts  advanced 
for  expenses  and  compensation  of  persons  to  go  to  Washington  to 
procure  the  authorities  there  to  accept  the  resignation  of  one  party 
and  the  appointment  of  the  other,  are  not  recoverable.     For  the  same 


Ch.  7)  ILLEGALITY  339 

reason  that  agreements  to  pay  for  lobbying  the  passage  of  bills  before 
a  legislative  body  are  void,  "  '''  '•'  all  agreements  for  expenses  and 
compensation  of  persons  seeking  to  influence  or  procure  appointments 
to  office  are  void.  *  *  *  L,awson  on  Contracts,  §§  309,  310. 
"The  courts  condemn  the  very  appearance  of  evil,  and  it  matters 
not  that  in  a  particular  case  nothing  improper  was  done  or  expected 
to  be  done.  It  is  enough  that  the  employment  tends  directly  to  such  • 
results."  Clippinger  v.  Hepbaugh,  5  Watts  &  S.  (Pa.)  315,  40  Am. 
Dec.  519.     *     *     * 

If  an  action  had  been  brought  to  recover  these  sums,  or  to  foreclose 
a  mortgage  given  to  secure  payment  thereof,  the  court  v^^ould  dismiss 
the  action.  The  defendant  contends,  however,  that  as  he  was  care- 
ful to  take  a  mortgage  with  a  power  of  sale,  the  courts  will  not  in- 
terfere by  injunction,  but  will  let  him  proceed  to  collect  his  ill-gotten 
gains.  This  would  simply  legalize  the  practice  which  is  denounced 
both  by  statute  and  common  law.  Reasons  of  public  policy  forbid- 
ding this  species  of  corruption  are  too  profound  and  too  important 
to  the  public  welfare  to  be  evaded  and  nullified  by  so  simple  a  device. 
A  mortgage  given  to  secure  a  sum  of  money  upon  an  agreement 
against  public  policy  is  void.     *     *     * 

Pomeroy,  Equity  Jurisprudence,  §§  939-942,  calls  attention  to  the 
fact  that  the  nile  in  pari  delicto  is  often  misunderstood,  and  its  ap- 
plication is  properly  and  correctly  that  in  such  cases  "potior  est  con- 
ditio possidentis"— that  is,  that  the  court  will  permit  nothing  to  be 
done  which  will  enable  a  party  to  collect  from  the  other  the  fruits  of 
his  wrong.  When  he  sues  to  recover,  the  law  will  not  give  him 
judgment.  When  he  has  shrewdly  attempted  to  evade  this  by  tak- 
ing a  mortgage  with  a  power  of  sale,  the  court  will  by  injunction  pre- 
vent his  collecting  on  a  mortgage  denounced  as  void  by  reasons  of 
public  policy..  In  section  941  he  says :  "Whenever  public  policy  is 
considered  as  advanced  by  allowing  either  party  to  sue  for  relief 
against  the  transaction,  then  relief  is  given  to  him.  In  pursuance  of 
this  high  principle,  and  in  compliance  with  the  demands  of  a  high 
public  policy,  equity  may  aid  a  party  equally  guilty  with  his  oppo- 
nent, not  only  by  cancelling  and  ordering  the  surrender  of  an  execu- 
tory agreement,  but  even  by  setting  aside  an  executed  contract,  con- 
veyance or  transfer,  and  decree  the  recovery  back  of  nioney  paid  or 
property  delivered  in  performance  of  the  agreement."  Also,  in  sec- 
tion 940,  he  says  that  whenever  the  defensive  remedy  at  law  will  not 
be  equally  certain,  perfect  and  adequate,  the  equitable  remedy  will  be 
granted  by  injunction  and  the  like.  "The  equitable  relief  so  conferred 
does  not  violate  the  general  maxim  concerning  parties  in  pari  delicto ; 
on  the  contrary,  it  carries  that  maxim  into  etitect."  So  in  the  present 
case  the  injunction  against  sale,  under  the  void  mortgage  taken  against 
public  policy,  enforces  tha,t  maxim  by  prosecuting  either  party  re- 
covering anything  from  the  other.  This  is  also  the  well-settled  rule  in 
England.  In  Lloyd  v.  Gurdon,  2  Swan.  181,  Lord  Eldon  granted  an 
injunction  to  restrain  the  negotiation  of  bills  of  exchange  which 
were  made  void  by  Statute  9  Anne,  c.  14,  which  is  in  the  very  tenor 
of  section  1871  of  the  Code,  applicable  to  the  present  transaction.  Lord 
Hardwicke  granted  the  injunctive  relief  in  a  similar  case.     *     *     * 

In  such  case,  before  the  Master  of  the  Rolls,  Sir  John  Romilly, 
where  part  of  the  consideration  was  for  money  loaned,  and  part  was  for 
an  immoral  consideration,  the  whole  mortgage  was  ordered  to  be  can- 


340  CONTRACTS  (Part  1 

celled,  the  court  declining  to  pass  upon  the  question  whether  the  mort- 
gagee could  recover  at  law  for  the  valid  part  of  the  consideration — i.  e., 
the  money  loaned.  Willyams  v.  Bullmore,  33  L.  J.  R.  (Eq.)  N.  S.  461. 
In  the  present  case,  upon  the  defendant's  own  showing  $37.50  is  the 
only  valid  part  of  the  sum  attempted  to  be  secured.  Whether  the  mort- 
gage can  be  upheld  to  that  extent  is  not  before  us,  as  the  plaintiff  in  his 
reply  expresses  his  willingness  to  pay  said  sum.  The  plaintiff  recover- 
ing judgment  for  the  cancellation  of  the  mortgage,  the  defendant  should 
be  taxed  with  the  costs.  The  injunction  was  properly  continued  to  the 
hearing.    Affirmed. 

Shepherd,  C.  J.  (concurring).  I  concur  in  the  conclusion  of  the 
court  that  the  agreement  which  the  mortgage  is  given  to  secure  is  con- 
trary to' public  policy,  and  therefore  illegal,  and  I  am  also  of  the 
opinion  that  the  injunction  should  be  continued  until  the  final  hear- 
ing. It  is  alleged  that  the  plaintiff  Joseph  Basket  has  a  resulting 
trust  in  the  land  included  in  the  mortgage,  and  as  it  does  not  appear 
that  he  had  any  connection  with  the  illegal  transaction  between  A.  M. 
Basket,  the  mortgagor  (the  holder  of  the  legal  title),  and  the  mortgagee, 
I  see  no  reason  why  the  equitable  aid  of  the  court  should  not  be  ex- 
tended to  him. 

I  cannot  agree,  however,  in  that  part  of  the  opinion  which  declares 
that  A.  M.  Basket  is  entitled  to  equitable  relief.  "Whenever  a  con- 
tract or  other  transaction  is  illegal,  and  the  parties  thereto  are,  in 
contemplation  of  law,  in  pari  delicto,  it  is  a  well-settled  rule,  subject 
only  to  a  few  exceptions  depending  upon  other  considerations  of 
policy,  that  a  court  of  equity  will  not  aid  a  particeps  criminis.  either 
by  enforcing  the  contract  while  it  is  yet  executory,  or  by  relieving  him 
against  it  by  setting  it  aside,  or  by  enabling  him  to  recover  the  title 
to  property  which  he  has  parted  with  by  its  means.  The  principle  is 
thus  applied  in  the  same  manner  when  the  illegality  is  merely  malum 
prohibitum,  being  in  contravention  of  some  positive  statute,  and  when 
it  is  malum  in  se,  as  being  contrary  to  public  policy  or  to  good  morals. 
Among  the  latter  class  are  agreements  and  transfers,  the  consideration 
for  which  was  violative  of  chastity,  compounding  of  a  felony,  gam- 
bling, false  swearing,  the  commission  of  any  crime  or  breach  of  good 
morals."     1   Pom.  Eq.  402. 

"Where  the  party  seeking  relief  is  the  sole  guilty  party,  or  where 
he  has  participated  equally  and  deliberately  in  the  fraud,  or  where  the 
agreement  which  he  seeks  to  set  aside  is  founded  in  illegality,  immoral- 
ity, or  is  base  and  unconscionable  on  his  part — in  such  cases  courts 
of  equity  will  leave  him  to  the  consequences  of  his  own  iniquity,  and 
will  decline  to  assist  him  to  escape  from  the  toils  which  he  has  studi- 
ously prepared  to  entangle  others,  or  whereby  he  has  sought  to  vio- 
late with  impunity  the  best  interests  and  morals  of  social  life.  *  *  * 
Courts  of  equity  could  not,  without  staining  the  administration  of  jus- 
tice, interfere  to  save  the  party  from  the  just  results  of  his  own  mis- 
conduct, when  the  failure  of  success  in  the  scheme  would  manifestly 
be  the  sole  cause  of  his  praying  relief."  2  Story,  Eq.  696.  *  *  * 
These  principles  are  so  well  established  that  it  is  hardly  necessary 
to  produce  authority  to  their  support.     *     *     * 

There  are,  it  is  true,  limitations  to  the  rule,  as  where  parties  are 
not  equally  in  fault,  or  as  in  the  case  of  usury,  where  the  borrower 
is  considered  as  in  vinculo  or  where  the  security  is  for  past  cohabi- 
tation ;   and  there  are  cases  where,  under  peculiar  circumstances,  con- 


Ch.  7)  ILLEGALITY  341 

siderations  of  public  policy  will  be  best  subserved  by  granting  relief. 
These  and  other  instances  will  be  found  in  the  text-books  and  notes  to 
which  I  have  referred,  and  there  seems  to  be  some  confusion  in  the 
decided  cases  upon  the  subject.  No  satisfactory  authority,  however, 
can,  in  my  opinion,  be  found  to  take  the  present  case  out  of  the  general 
rule.  If,  as  we  have  seen,  the  court  will  not  interfere  where  the 
consideration  is  the  compounding  of  a  felony  for  the  commission  of 
a  crime,  it  is  difficult  to  understand  why  it  should  extend  its  relief 
where  the  consideration  is  for  the  commission  of  the  offence  alleged 
in  the  complaint.  Certainly,  considerations  of  public  policy  are  as 
grave  in  the  former  cases  as  in  the  latter.  Again,  it  will  hardly  be 
contended  that  the  plaintiff  A.  M.  Basket  is  not  equally  in  fault. 
Indeed,  it  appears  from  the  written  agreement  executed  contempor-a- 
neously  with  the  mortgage,  that  he  was  the  moving  party  in  the  trans- 
action. The  proposition  was  made  by  him,  and  it  is  perfectly  clear 
that  his  guilt  is  equal  if  not  greater  than  that  of  the  defendant.  Again, 
if  it  be  conceded  that  he  is  entitled  to  the  relief  on  the  ground  that 
part  of  the  contract,  the  note,  is  executory,  the  court  would  only  grant 
it  upon  terms,  and  as  the  mortgagee  has,  under  the  agreement,  so  cred- 
ited the  note  that  everything  is  eliminated  except  certain  expenses 
and  counsel  fees,  and  a  pre-existing  debt  (leaving  only  a  balance  of 
about  $200),  it  would  seem  very  clear  that  the  court,  even  if  it  in- 
terfered, would  not  place  him  in  any  better  condition.  The  expenses 
and  counsel  fees  were  actually  expended  in  furtherance  of  his  own 
proposition,  and  it  would  seem  a  complete  reversal  of  the  maxim  "In 
pari  delicto  melior  est  conditio  defendentis,"  to  so  use  the  equitable 
power  of  the  court  as  to  extricate  the  plaintiff  from  the  position  in 
which  he  has  placed  himself,  and  put  the  entire  expense  of  carrying  out 
his  own  proposition  upon  the  shoulders  of  the  defendant.  No  clearer 
case  can,  in  my  opinion,  be  conceived  for  the  application  of  the  rule 
than  the  present. 

Furthermore,  it  is  a  fundamental  principle  that  a  court  of  equity 
never  interferes  where  there  is  a  complete  defence  at  law.  High  on 
Injunction,  473.  In  the  present  case  it  is  said  that  the  mortgage  is 
utterly  void.  If  this  be  so.  there  is  no  occasion  for  equitable  relief, 
not  even  on  the  ground  that  it  is  necessary  to  discover  and  preserve  the 
evidence  of  its  illegality,  as  the  contemporaneous  agreement  executed 
by  all  of  the  parties  is  plenary  proof  of  the  vitiating  element.  2 
Story,  Eq.  700. 

This  consideration,  as  well  as  the  firmly  established  rule  in  pari 
delicto,  etc.,  is  also  a  complete  bar  to  the  prayer  that  the  deed  be  can- 
celled on  the  ground  that  it  is  a  cloud  upon  plaintiff's  title.  2  Story, 
Eq.  700.  Public  policy  will  be  far  better  subserved  by  leaving  the  plain- 
tiif  where  his  illegal  conduct  has  placed  him,  than  by  encouraging  him 
in  another  attempt  to  violate  the  law  by  the  assurance  that  a  court  of 
equity  will  always  stand  ready  to  relieve  him  against  the  consequences 
of  his  unsuccessful  experiments.  "The  suppression  of  illegal  contracts 
is  far  more  likely  in  general  to  be  accomplished  by  leaving  the  parties 
without  remedy  against  each  other,  and  by  thus  introducing  a  pre- 
ventive check  naturally  connected  with  a  want  of  confidence,  and  a 
sole  reliance  upon  personal  honor.  And  so  accordingly  the  modern 
practice  is  established."    1  Story,  Eq.  298. 

The  case  of  Patterson  v.  Donner,  48  Cal.  369,  cited  in  the  opinion 
to  the  effect  that  a  mortgage  given  to  secure  money  upon  an  agreement 


342  CONTRACTS  (Parti 

against  public  policy  does  not  divest  the  title,  does  not  aid  the  plain- 
tiff, for,  if  the  title  is  not  divested,  there  is  certainly  no  occasion  for 
resorting  to  a  court  of  equity  where  the  illegality  is  evidenced,  as 
in  this  case,  by  the  contemporaneous  agreement  referred  to.  The  case, 
however,  decides  the  other  way.  It  holds  that  the  title  passes,  but  that 
the  performance  of  the  illegal  condition  will  not  divest  the  title  of 
the  grantee.  The  case  cited  from  Indiana  is  equally  inapplicable,  as 
it  was  an  action  at  law  to  enforce  an  illegal  executory  agreement,  and 
it  was  of  course  held  that  tlie  defendant  could  plead  the  illegality  of 
the  consideration.  The  case  from  Maryland  is  also  inapplicable,  as 
it  was  an  action  to  foreclose  a  mortgage  given  upon  an  illegal  consider- 
ation, and  the  court  refused  relief.  It  is  no  authority  that  the  court 
would  have  aided  the  mortgagor  had  he  been  seeking  a  decree  for 
cancellation.  The  case  of  Willyams  v.  Bullmore,  33  L.  J.  R.  (Eq.) 
N.  S.  461,  cites  no  authority.  It  seems,  however,  that  the  mortgagee 
was  seeking  foreclosure,  and  that  this  action  was  consolidated  with  one 
brought  by  the  mortgagor  for  cancellation.  Under  these  circumstances 
there  was  a  decree  for  cancellation.  It  is  doubtful  whether  the  court 
would  have  made  such  a  decree,  had  not  the  mortgagee  been  seeking 
foreclosure.  However  this  may  be,  it  cannot  be  regarded  as  sufficient 
authority  to  overturn  the  well-established  rule  embodied  in  the  maxim 
which  I  have  quoted.  There  is  nothing  in  the  reference  to  Pomeroy's 
Equity  Jurisprudence  which  at  all  countenances  relief  under  the  cir- 
cumstances of  this  case.  The  defendant  has  already  agreed  to  terms 
as  favorable  as  would  be  imposed  by  a  court  of  equity. 

I  think  that  A.  M.  Basket  has  no  standing  in  a  court  of  equity, 
and  that,  under  the  circumstances,  he  is  entitled  to  no  relief.  To  in- 
terfere in  his  behalf  would  be  giving  aid  and  comfort  to  the  moving 
party  in  this  illegal  transaction. 


SECTION  7.— SUNDAY  CONTRACTS 


RICHMOND  V.  MOORE. 

(Supreme  Court   of   I]lmoi.s,   188-3.     107   111.   429,   47  Am.   Rep.   44.5.) 

Walker,  J,  *  *  *  On  the  trial  in  the  superior  court  the  evi- 
dence tended  to  prove  the  agreement  was  entered  into  on  Sunday. 
Defendant,  on  this  evidence,  asked  the  court  to  hold  that  the  con- 
tract was  prohibited  by  our  statute,  and  was  void,  but  the  superior 
court  refused  to  so  hold,  and  the  principal  question  discussed  by 
counsel  is,  whether,  under  our  statute,  such  a  contract  is  void,  or 
binding  on  the  parties. 

The  provision  of  our  statute  which  it  is  claimed  renders  this  con- 
tract void,  is  the  261st  section  of  our  Criminal  Code.  The  portion  of 
that  section  claimed  to  render  the  contract  void,  is  this :  "Whoever 
disturbs  the  peace  and  good  order  of  society  by  labor  (works  of  ne- 
cessity and  charity  excepted)  or  by  amusements  or  diversion  on  Sun- 
day, shall  be  fined  not  exceeding  $25."  It  contains  other  exceptions,  of 
which  is  this:  "Nor  to  prevent  the  due  exercise  of  the  rights  of 
conscience  by  whomsoever  thinks  proper  to  keep  any  other  day  as  a 
Sabbath."  The  common  law  did  not  prohibit  the  making  of  such 
contracts.     In  Drury  v.  Defontaine,  1  Taunt.  136,  Lord  Mansfield,  in 


Ch.  7)  ILLEGALITY  343 

delivering  the  opinion,  s^id:  "It  does  not  appear  that  the  common 
law  ever  considered  those  contracts  as  void  which  were  made  on 
Sunday."  Judgment  was  accordingly  given  for  the  price  of  a  horse 
sold  on  that  day.  *  *  *  This  is  the  doctrine  of  all  the  cases,  Eng- 
lish or  American,  with  perhaps  no  more  than  one  or  two  exceptions 
that  announce  a  different  doctrine.  The  doctrine  that  contracts  made 
on  Sunday  are  void,  depends,  therefore,  alone  on  statutory  enact- 
ments, and  in  the  various  states  of  the  Union  the  statutes  vary,  in 
language  or  substance,  and  the  decisions  of  the  different  courts  have 
been  based  on  the  phraseology  of  their  several  statutes.  The  com- 
mon law,  on  the  other  hand,  seems  always  to  have  prohibited  all  ju- 
dicial proceedings  on  Sunday.     *     *     * 

St.  29  Car.  II,  c.  257,  seems  to  be  the  basis  of  the  enactments  of 
the  various  states  of  the  Union.  It  is  this :  "That  no  tradesman,  ar- 
tificer, workman,  laborer,  or  other  person  whatsoever,  shall  do  or 
exercise  any  worldly  labor,  business  or  work,  on  the  Lord's  day." 
It  contains  exceptions,  of  which  are  works  of  necessity..  A  mere 
glance  at  that  and  our  statute  will  show  that  they  are  materially  dif- 
ferent. That  prohibits  labor  and  business ;  ours  only  prohibits  labor 
or  amusement  that  disturbs  the  peace  and  good  order  of  society.  The 
offense  by  that  statute  is  the  performance  of  labor  or  business,  and 
by  ours  it  is  the  disturbance  of  the  peace  and  good  order  of  society. 
The  British  statute  is  much  more  comprehensive  in  its  purposes  and 
language  than  ours.  Ours  only  prohibits  labor  that  disturbs  the 
peace  and  good  order  of  society,  not  naming  business,  whilst  the 
British  statute  renders  the  mere  act  of  labor  or  business  penal.    *    *    * 

But  even  under  St.  29  Car.  II  the  British  courts  have  held  that  the 
sale  of  a  horse  on  Sunday,  out  of  the  usual  course  of  trade,  by  the 
vendor,  was  not  void.  *  *  *  So  the  hiring  of  a  laborer  on  Sunday 
by  a  farmer  for  a  year,  was  held  legal  and  binding,  and  conferred  a 
settlement  of  the  laborer  in  the  parish.  *  *  *  That  a  baker  might 
prepare  dinners  for  his  customers  on  Sunday.  *  *  *  Thus  it  is 
seen  that  the  statute  was  rigidly  construed,  and  the  same  is  true  of 
most  of  the  statutes  of  the  various  states  of  the  Union.  Here  there 
was  nothing  done  to  disturb  the  peace  and  good  order  of  society, 
which  it  is  the  primary  purpose  of  the  statute  to  prevent.  Had  this 
contract  been  made  in  such  a  manner  as  to  disturb  the  peace  and 
good  order  of  society,  or  any  portion  of  it,  then  a  very  different  ques- 
tion would  have  been  presented,  but  one  which  need  not  be  discussed 
here.  But  there  is  no  evidence  that  in  the  slightest  degree  tends  to 
prove  any  one  was  disturbed.    *    *    * 

Judgment  [for  the  plaintiff]  affirmed. 


344  CONTRACTS  (Part  1 

CHAPTER  VIII 
CAPACITY 

Section 

1.  Introduction. 

2.  Disaffirmance. 

3.  Ratification. 

4.  Contracts    for   Necessaries. 


SECTION  1.— INTRODUCTION 

There  are  certain  classes  of  persons  who,  for  one  reason  or  an- 
other, sustain  a  different  relation  to  contracts  entered  into  by 
them  from  that  which  usually  exists.  The  problem  in  this  chapter 
is  to  ascertain  what  rights  are  possessed  by  such  persons. 

There  are  five  classes  of  persons  who  do  not  have  full  con- 
tractual capacity;  that  is,  there  are  five  classes  of  persons  whose 
rights  growing  out  of  contracts  are  somewhat  different  from  the 
rights  which  grow  out  of  contracts  generally.  These  are:  (1) 
Infants ;  (2)  insane  persons ;  (3)  intoxicated  persons ;  (4)  mar- 
ried women ;    and  (5)  corporations. 

In  the  case  of  infants  and  insane  persons,  it  has  been  thought  that 
these  classes  are  deserving  of  a  higher  degree  of  protection  against 
the  consequences  of  their  acts  than  is  necessary  in  the  case  of 
adults.  Statutes  usually  prescribe  the  age  under  which  all  per- 
sons are  to  be  deemed  infants.  The  age  of  twenty-one  is  commonly 
provided.  In  some  states  girls  become  of  age  at  eighteen.  These 
age  limits  are  more  or  less  arbitrary.  Minors  under  the  age  of 
twenty-one  are,  no  doubt,  in  many  cases,  just  as  capable  of  looking 
after  their  own  affairs  as  an  adult;  but  a  limit  must  be  fixed  some- 
where, and  the  age  of  twenty-one  is  generally  agreed  upon  as  that 
limit. 

Intoxicated  persons  are  accorded  some  additional  protection,  for 
substantially  the  same  reason  that  minors  are  protected.  Married 
women,  at  common  law,  were  under  a  disability,  not  because  it 
was  thought  that  they  were  entitled  to  additional  protection,  but 
largely  because  of  the  notion  of  legal  identity  of  husband  and 
wife.  The  incapacity  of  married  women  has  quite  generally  been 
removed  by  statute  so  that,  as  a  general  proposition,  it  may  to- 
day be  said  that  married  women  in  all  states  have  full  capacity  to 
contract.  But  in  some  states  there  yet  remain  traces  of  their  for- 
mer incapacity. 

Corporations  do  not  have  full  capacity,  not  because  they  are  en- 
titled to  special  protection,  but  because  a  corporation  has  no  power 
to  contract,  except  the  power  given  it  by  the  state  creating  it. 
The  probabilities  are  that  no  corporation  has  been  given  freedom 
to  contract  to  the  same  extent  as  that  possessed  by  individuals. 
Generally  we  speak  of  contracts  which  a  particular  corporation 


Ch.  8)  CAPACITY  345 

does  not  have  the  power  to  make  as  ultra  vires  contracts ;  that  is, 
contracts  which  are  beyond  or  outside  the  power  given  it  by  the 
act  creating  the  corporation.  The  subject  of  ultra  vires  contracts 
will  be  taken  up  in  the  chapters  dealing  with  corporations. 

To  return  to  the  inquiry  as  to  the  nature  of  the  special  rights  ac- 
corded to  persons  who  do  not  have  full  contractual  capacity,  it  is 
more  correct  to  think  of  these  contracts,  in  the  first  instance,  just 
as  we  look  upon  the  contracts  of  all  other  persons ;  that  is,  an 
agreement  between  a  minor  and  an  adult,  founded  upon  considera- 
tion is  a  contract,  just  as  other  like  agreements  are  contracts.  Be- 
ing an  adult  is  not  a  requisite  to  the  existence  of  a  contract,  A 
minor  may  sue  an  adult  for  breach  of  contract  with  the  same  ef- 
fect as  if  he  were  an  adult,  and  in  the  same  manner,  except  that 
the  infant  must  bring  his  action  "by  his  next  friend." 

Incapacity,  therefore,  is  not  a  circumstance  which  makes  it  im- 
possible for  one  who  is  said  to  be  incapacitated  from  making  a  con- 
tract. Incapacity  merely  confers  upon  such  persons  certain  weap- 
ons of  defense  and  of  attack  that  cannot  be  used  in  a  legal  battle 
between  adults.  But  these  weapons  of  defense  and  of  attack  are 
not  acquired  until  some  act  has  been  done.  This  act  is  called  dis- 
afhrmance.  Our  first  question,  therefore,  is  to  ascertain  what  con- 
stitutes a  disaffirmance  and  what  are  its  consequences. 

It  should  also  be  apparent  that  when  a  minor  becomes  of  age 
that  he  should  have  the  power  of  making  contracts  entered  into 
by  him  while  a  minor,  in  all  respects  the  same  as  if  they  had  been 
made  after  he  attained  his  majority.  Such  an  act  is  called  ratifi- 
cation. Our  second  question  is :  What  circumstances  amount  to 
a  ratification? 

Finally,  it  will  be  found  that  there  are  certain  kinds  of  contracts 
made  by  infants  that  are,  in  a  sense,  binding  upon  the  infant; 
that  is,  the  courts  will  entertain  a  suit  against  an  infant  and  enter 
a  judgment  against  him  for  the  reasonable  value  of  what  he  re- 
ceived. These  contracts  are  for  necessaries.  The  following  cases 
present  various  problems  relating  to  disaffirmance,  ratification,  and 
to  contracts  for  necessaries. 


SECTION  2.— DISAFFIRMANCE 


LEMMOlN  v.  beeman. 
(Supreme  Court  of  Ohio,  18S8.     45  Ohio  St.  505,  15  N.  E.  476.)i 

William  J,  Beeman,  the  plaintiff  below,  sued  the  defendant,  James 
F.  Lemmon,  as  administrator,  for  money  paid  by  him  upon  the  pur- 
chase of  a  certain  stock  of  drugs  of  James  Lemmon,  the  defendant's 
decedent ;  the  plaintiff  being  a  minor  at  the  time  of  the  purchase,  and 
having  elected,  on  becoming  of  age,  to  rescind  the  contract.  On  the 
trial  of  the  case,  in  the  common  pleas,  the  defendant  excepted  to  a 
part  of  the  charge  of  the  court,  and  took  a  bill  of  exceptions,  setting 


346  CONTRACTS  (Part  1 

forth  the  evidence  and  the  char.s^e  to  which  exception  was  taken. 
The  judgment  was  for  the  plaintiff,  and  was  affirmed  in  the  district 
court.  The  part  of  the  charge  to  which  exception  was  taken  is  to  the 
effect  that,  upon  the  facts  of  the  case,  the  plaintiff  could  recover  with- 
out returning  the  property. 

MiNSHALL,  J.  In  1881,  Beeman,  then  a  minor,  purchased  of  James 
Lemmon,  then  in  life,  but  since  deceased,  a  certain  stock  of  drugs,  for 
which  he  paid  at  the  time  $400,  the  price  agreed  on  between  them. 
The  stock  was  in  a  store  in  the  state  of  Illinois;  and  the  sale  was 
made  by  Lemmon,  through  his  agent,  Dr.  Everett,  who  some  time 
before  had  sold  the  stock  to  Lemmon,  and,  as  his  agent,  had  con- 
tinued in  possession  of  the  property,  and  conducted  the  business  for 
him.  In  a  short  time  after  the  sale  had  been  made  to  Beeman,  the 
goods  were  taken  from  him  under  an  execution  issued  upon  a  judg- 
ment against  Everett,  upon  the  claim  of  the  creditor  of  the  latter  that 
they  belonged  to  him,  and  not  to  Lemmon.  Beeman  made  an  effort 
to  recover  the  property ;  and  in  a  short  time  after  he  became  of  age 
(which  was  in  1882)  disaffirmed  the  contract,  presented  a  claim  to 
the  administrator  of  Lemmon's  estate  for  the  money  he  had  paid  on 
the  purchase,  and  demanded  its  return ;  which  was  refused  and  the 
claim  rejected. 

;No  point  is  made  as  to  the  ownership  of  the  goods ;  it  is  averred 
in  the  petition,  and  must  be  taken  as  the  fact,  that  they  belonged  to 
the  deceased  at  the  time  of  the  sale  to  Beeman.  Again,  there  is  no 
room  for  a  claim,  nor  is  it  made,  that  the  property  purchased  was  in 
the  nature  of  necessaries,  and  the  contract,  for  such  reason,  incapa- 
ble of  being  disaffirmed;  nor  is  it  claimed  that  the  decedent  or  his 
agent  was  in  any  way  deceived  as  to  the  age  of  Beeman  at  the  time  the 
sale  was  made.  The  only  question  presented  upon  the  record  is 
whether,  upon  the  facts  as  stated,  the  minor  had  the  right,  on  becom- 
ing of  age,  to  rescind  the  contract,  and  recover  the  consideration  he 
had  paid,  without  returning  the  property  that  had  been  sold  and  de- 
livered to  him.  The  true  doctrine  now  seems  to  be  that  the  contract 
of  an  infant  is  in  no  case  absolutely  void.     *     *     =!■ 

An  infant  may,  as  a  general  rule,  disaffirm  any  contract  into  which 
he  has  entered;  but,  until  he  does  so,  the  contract  may  be  said  to 
subsist,  capable  of  being  made  absolute  by  affirmance,  or  void  by 
disaffirmance  of  a  contract  by  an  infant,  in  the  exercise  of  a  right 
similar  to  that  of  rescission  in  the  case  of  an  adult,  the  ground  being 
minority,  independent  of  questions  of  fraud  or  mistake.  But,  in  all 
else,  the  general  doctrine  of  rescission  is  departed  from  no  further 
than  is  necessary  to  preserve  the  grounds  upon  which  the  privilege 
is  allowed;  and  is  governed  by  the  maxim  that  infancy  is  a  shield, 
and  not  a  sword.  He  is  not  in  all  cases,  as  is  an  adult,  required  to 
restore  the  opposite  party  to  his  former  condition;  for  if  he  has  lost 
or  squandered  the  property  received  by  him  in  the  transaction  that  he 
rescinds,  and  so  is  unable  to  restore  it,  he  may  still  disaffirm  the  con- 
tract and  recover  back  the  consideration  paid  by  him  without  making 
restitution;  for,  if  it  were  otherwise,  his  privilege  would  be  of  little 
avail  as  shield  against  the  inexperience  and  improvidence  of  youth. 
But  when  the  property  received  by  him  from  the  adult  is  in  his  pos- 
session, or  under  his  control,  to  permit  him  to  rescind,  witliout  re- 
turning it,  or  offering  to  do  so,  would  be  to  permit  him  to  use  his  priv- 
ilege as  a  sword,  rather  than  as  a  shield. 


Ch.  8)  CAPACITY  347 

This  view  is  supported,  not  only  by  reason,  but  by  the  greater 
weight  of  authority.  It  was  recognized  and  appHed  by  this  court  in 
Cresinger  v.  Welch's  Lessee,  15  Ohio,  156,  45  Am.  Dec.  565,  decided 
in  1846.  The  following  is  the  language  used  by  Mr.  Tyler  on  the 
subject :  "If  the  contract  has  been  executed  by  the  adult,  and  the  in- 
fant has  the  property  or  consideration  received  at  the  time  he  attains 
full  age,  and  he  then  repudiates  the  transaction,  he  must  return  such 
property  or  consideration,  or  its  equivalent,  to  the  adult  party.  If, 
however,  the  infant  has  wasted  or  squandered  the  property  or  con- 
sideration received  during  infancy,  and  on  coming  of  age  repudiates 
the  transaction,  the  adult  party  is  remediless."  He  then  adds  that 
"there  are  expressions  of  judges  and  text  writers  against  this  latter 
proposition,  but,"  he  says,  "the  weight  of  authority  is  in  harmony  with 
it,  and  is  decidedly  in  accord  with  the  general  principles  of  law  for 
the  protection  of  infants."    Tyler,  Inf.  (2d  Ed.)  80.    *    *    * 

See,  also,  the  case  of  Price  v.  Furman,  27  Vt.  268,  65  Am.  Dec.  194, 
and  the  notes  thereto  of  Mr.  Ewell,  in  his  Leading  Cases  on  Infancy 
and  Coverture,  119.  After  an  exhaustive  review  of  the  cases,  this 
author  says :  "The  true  doctrine,  and  the  one  supported  by  the  weight 
of  authority  (at  least  in  the  United  States),  would  seem  to  be  that 
when  an  infant  disaffirms  his  executed  contract,  after  arriving  at 
age,  and  seeks  a  recovery  of  the  consideration  moving  from  him,  and 
where  the  specific  consideration  received  by  him  remains  in  his  hands, 
in  specie,  at  the  time  of  disaffirmance,  and  is  capable  of  return,  it 
must  be  returned  by  him;  but  if  he  has,  during  infancy,  wasted,  sold, 
or  otherwise  disposed  of,  or  ceased  to  possess  the  consideration,  and 
has  none  of  it  in  his  hands  in  kind  on  arriving  at  majority,  he  is  not 
liable  therefor,  and  may  disaffirm  without  tendering  or  accounting 
for  such  consideration." 

This  statement  of  the  law,  supported,  as  it  is,  not  only  by  the  great- 
er weight  of  authority,  but  also  of  reason,  meets  with  our  full  ap- 
proval. There  is,  however,  much  conflict  in  the  decisions  of  the  dif- 
ferent states;  greater  perhaps  than  upon  any  other  question  connect- 
ed with  the  law  of  infancy ;  *  *  *  \j^^^  ^g  deem  it  unnecessary  to 
attempt  to  review  or  discuss  them,  for  the  very  good  reason,  that  it 
has  been  done  with  thoroughness  and  ability  by  the  authors  just  re- 
ferred to.     *     *     * 

By  his  disaffirmance,  the  title  has  been  restored  to  the  estate  of 
the  vendor,  and  the  property,  or  its  value,  may  be  recovered  by  the 
administrator,  if  it  was  wrongfully  taken  by  the  sheriff  under  the 
execution  against  Everett.     Judgment  affirmed. 


JOHNSON   y.    NORTHWESTERN   MUTUAL  LIFE    INS.    CO. 

(Supreme  Court  of  Minuesota,  1894.    56  Minn.  365,  57  N.  W.  934,  59  N.  W.  992, 
26  L.  R.  A.  187,  45  Am.  St.  Rep.  473.) 

Buck,  J-  On  the  25th  day  of  October,  1888,  the  plaintiff,  Johnson, 
who  was  then  a  minor,  seventeen  years  old,  obtained  a  policy  of  in- 
surance on  his  own  life  in  the  Northwestern  Mutual  Life  Insurance 
Company,  this  defendant,  for  the  sum  of  $1,000,  in  consideration  of 
the  payment  by  him  of  the  premium  of  $23.29,  and  the  semiannual 
payment  of  a  like  sum  to  defendant  on  or  before  noon  of  the  25th 
days  of  October  and  April  thereafter  in  each  and  every  year  during 


348  CONTRACTS  '  (Part  1 

the  continuance  of  the  policy,  viz.  for  20  years.  He  made  eight  semi- 
annual payments  amounting  to  the  total  sum  of  $186.32,  and  im- 
mediately thereafter  plaintiff  attained  his  majority,  or  full  age  of  twen- 
ty-one years;  and  thereupon,  on  December  21,  1892,  he  duly  served 
upon  said  defendant  his  notice  in  writing  that  he  had  arrived  at  his 
majority,  and  that  he  elected  to  avoid  the  contract  of  insurance  be- 
tween the  defendant  and  himself,  and  offered  to  return  said  policy  to 
the  defendant,  and  demanded  of  the  defendant  that  it  return  to  him 
the  moneys  which  he  had  paid  to  the  said  company,  amounting  to  the 
sum  above  named,  which  the  defendant  refused  to  do,  whereupon  he 
brought  this  action  to  recover  of  the  defendant  the  amount  so  paid, 
upon  the  ground  that  he  was  an  infant  at  the  time  of  the  execution 
of  the  said  contract  and  during  the  times  when  he  made  the  semi- 
annual payments  as  herein  stated. 

The  defendant  interposed  a  demurrer  to  the  plaintiff's  complaint  upon 
the  ground  that  the  complaint  did  not  state  facts  sufficient  to  consti- 
tute a  cause  of  action.  The  court  below  overruled  the  demurrer,  and 
the  defendant  appealed  to  this  court. 

In  its  memorandum  the  court  below  gave  as  its  reason  for  overrul- 
ing the  demurrer  that  "this  contract  of  insurance  was  not  beneficial 
to  the  insured ;  it  was  for  the  benefit  of  third  persons."  We  do  not 
see  how  the  court  fell  into  such  an  error,  for  the  plain  provisions  of 
the  policy  show  clearly  that  it  was  for  the  benefit  of  the  plaintiff,  for 
it  expressly  provides  that  at  the  end  of  twenty  years  the  policy  is  pay- 
able to  himself  if  living,  and  after  ten  years  he  could  share_  the  com- 
pany's surplus,  according  to  usage,  at  each  distribution,  until_  all  con- 
tributions to  the  surplus  funds,  found  in  the  course  of  making  such 
contributions  to  have  arisen  from  the  policy,  should  have  been  returned. 
After  three  or  more  annual  premiums  were  paid  in  cash,  if  he  made 
default  in  the  payment  of  any  premium  on  the  day  it  became  due,  he 
was  entitled  to  a  paid-up  nonparticipating  policy  for  as  many  twentieth 
parts  of  the  original  sum  insured  as  there  were  complete  annual  premi- 
ums so  paid.  There  were  also  other  benefits  which  he  would  receive, 
which  we  need  not  further  specify  particularly.  But,  notwithstanding 
the  wrong  reason  given  by  the  trial  court  for  its  decision,  if  the  decision 
was  correct,  it  must  stand. 

The  question  of  the  proper  construction  of  contracts  between  an 
infant  and  an  adult  is  frequently  one  of  great  difficulty.  The  power 
which  exists  upon  the  part  of  an  infant  to  insist  upon  the  performance 
of  a  contract  which  is  for  his  benefit  and  to  repudiate  one  which  is 
against  his  interest  necessarily  results  in  this  condition  of  affairs,  and 
the  only  method  for  courts  to  deal  with  such  questions  is  to  apply  so 
far  as  possible  the  legal  or  equitable  rules  to  each  case  as  it  may  pre- 
sent itself  for  judicial  determination.  The  infirmities  which  are  al- 
ways attendant  upon  infancy  are  so  many,  and  present  themselves  in 
so  many  different  phases,  tliat  the  law  must  necessarilv  throw  its  pro- 
tection around  them,  and  allow  them  to  avoid  acts  which  are  obvi- 
ously injurious,  and  which  are  brought  about  by  their  own  imprudent 
conduct,  or  by  the  evil  designs  of  others.  But  there  are  contracts  made 
by  infants  which  are  valid  and  binding  upon  them,  such  as  contracts 
for  necessaries.  It  is  conceded,  however,  that  this  contract  is  not 
one  coming  within  the  term  "necessaries,"  and  it  must  also  be  conceded 
that  there  was  no  fraud  on  the  part  of  the  defendant  whereby  the 
plaintiff  was  induced  to  enter  into  this  contract  of  insurance.    Nor  does 


Ch,  8)  CAPACITY  349 

the  question  of  delay  on  the  part  of  plaintiff  in  disaffirming  this  con- 
tract enter  into  the  case  for  discussion  or  for  determination.  If  he 
had  a  right  to  disaffirm  the  contract  at  all,  it  was  done  promptly,  and 
without  delay,  after  he  attained  his  majority.  Was  this  contract  void 
or  voidable?  We  are  of  the  opinion  that  it  was  not  void.  It  was  for 
the  benefit  of  the  infant.  That  is  to  say,  construing  it  in  accordance 
with  the  well-understood  business  principles  and  practical  experience 
of  the  age,  it  should  be  deemed  one  beneficial  to  him.  Like  all  busi- 
ness ventures,  even  among  adults,  it  might  prove  disastrous  or  it 
might  be  of  benefit  to  the  plaintiff.  It  was  the  ordinary  policy  of  in- 
surance upon  the  usual  terms,  and  in  a  solvent  company.  At  least  no 
suggestion  is  made  to  the  contrary. 

It  did  not  obtain  the  money  of  the  plaintiff",  it  is  true,  through  de- 
ceit, fraud,  or  concealment  of  any  fact,  nor  in  any  way  impose  upon 
the  infant,  but  it  did  obtain  and  receive  a  fund  belonging  to  him  which 
it  was  not  necessary  for  him  to  part  with.  This  was  done  at  a  time 
when  the  law  adjudges  him  incapable  of  determining  whether  it  was 
for  his  benefit  or  not.  To  leave  this  question  of  making  contracts  to 
the  immature  judgment  of  infants  who  are  easily  influenced  or  misled, 
and  frequently  to  their  great  injury,  and  then  have  the  courts  con- 
tinually called  upon  to  decide  whether  the  contract  was  of  such  a  ben- 
eficial nature  to  the  infant  that  it  might  be  enforced  against  him,  would 
lead  to  an  endless  variety  of  decisions.  The  interest  of  the  infant 
will  be  best  subserved  by  holding  such  contracts  voidable.  It  is  a  rule 
which  can  be  appropriately  applied  in  this  case,  for  the  plaintiff  has 
performed  all  that  can  be  reasonably  asked  of  him  to  do.  We  have 
examined  many  of  the  authorities  cited  by  the  counsel  for  the  appel- 
lant in  their  brief,  but  we  are  of  the  opinion  that  the  rule  heretofore 
laid  down  in  this  court  is  the  correct  one  to  follow,  and  is  applicable 
to  this  case.    (Citing  cases.) 

The  order  appealed  from  is  affirmed. 

On  Reargument. 

Mitchell,  J.  This  case  was  argued  and  decided  at  the  last  term 
of  this  court.  A  reargument  was  granted  for  the  reasons  that  al- 
though the  amount  was  small  the  legal  principles  involved  were  im- 
portant ;  the  time  permitted  for  argument  under  our  rules  was  brief ; 
the  case  was  decided  near  the  end  of  the  term,  without,  perhaps,  the 
degree  of  consideration  that  its  importance  demanded ;  and,  on  further 
reflection,  we  are  not  satisfied  that  our  decision  was  correct. 

The  former  opinion  laid  down  the  following  propositions,  to  which 
we  still  adhere:  (1)  That  the  contract  of  insurance  was  of  benefit  to 
the  infant  himself,  and  was  not  a  contract  for  the  benefit  of  third 
parties.  (2)  The  contract,  so  far  as  appears  on  its  face,  was  the  usual 
and  ordinary  one  for  life  insurance,  on  the  customary  terms,  and  was  a 
fair  and  reasonable  one,  and  free  from  any  fraud,  unfairness,  or  undue 
influence  on  part  of  the  defendant,  unless  the  contrary  is  to  be  pre- 
sumed from  the  fact  that  it  was  made  with  the  infant. 

It  is  not  correct,  however,  to  say  that  the  plaintiff  has  received  no 
benefit  from  the  contract,  or  that  the  defendant  has  parted  with  noth- 
ing of  value  under  it.  True,  the  plaintiff  has  received  no  money,  and 
the  defendant  has  paid  none  to  the  plaintiff ;  but  the  life  of  the  former 
was  insured  for  four  years,  and  if  he  had  died  during  that  time  the 
defendant  would  have  had  to  pay  the  amount  of  the  policy  to  his  es- 


"350  CONTRACTS  (Part  1 

tate.  The  defendant  carried  the  risk  all  that  time,  and  this  is  the 
essence  of  the  contract  of  insurance.  Neither  does  it  follow  that  the 
risk  has  cost  the  defendant  nothing  in  money  because  plaintiff  himself 
was  not  one  of  those  insured  who  died.  The  case  is  therefore  one  of 
a  voidable  or  rescindable  contract  of  an  infant,  partly  performed  on 
both  sides,  the  benefits  of  which  the  infant  has  enjoyed,  but  which  he 
cannot  return,  and  where  there  is  no  charge  of  fraud,  unfairness,  or 
undue  influence  on  the  part  of  the  other  party,  unless,  as  already  sug- 
gested, it  is  to  be  presumed  from  the  fact  that  the  contract  was  made 
with  an  infant. 

The  question  is :  Can  the  plaintiff  recover  back  what  he  has  paid, 
assuming  that  the  contract  was  in  all  respects  fair  and  reasonable? 
The  opinion  heretofore  filed  held  that  he  can.  Without  taking  time  to 
cite  or  discuss  any  of  our  former  decisions,  it  is  sufficient  to  say  that 
none*  of  them  commit  this  court  to  stich  a  doctrine.  That  such  a  rule 
goes  further  than  is  necessary  for  the  protection  of  the  infant,  and 
v/ould  often  work  gross  injustice  to  those  dealing  with  him,  is,  to  our 
minds,  clear.  Suppose  a  minor  engaged  in  agriculture  should  hire  a 
man  to  work  on  his  farm,  and  pay  him  reasonable  wages  for  his 
services.  According  to  this  rule  the  minor  might  recover  back  what  he 
paid,  although  retaining  and  enjoying  the  fruits  of  the  other  man's 
labor.  Or,  again,  suppose  a  man  engaged  in  mercantile  business,  with 
a  capital  of  $5,000,  should,  from  time  to  time,  buy  and  pay  for  $100,000 
worth  of  goods,  in  the  aggregate,  which  he  had  sold,  and  had  got  his 
pay.  According  to  this  doctrine  he  could  recover  back  the  $100,000 
which  he  had  paid  to  the  various  parties  from  whom  he  had  bought  the 
goods.  Not  only  would  such  a  rule  work  great  injustice  to  others,  but 
it  would  be  positively  injurious  to  the  infant  himself.  The  policy  of 
the  law  is  to  shield  or  protect  the  infant,  and  not  to  debar  him  from  the 
privilege  of  contracting. 

But,  if  the  rule  suggested  is  to  obtain,  there  is  no  footing  on  Avhich 
an  adult  can  deal  with  him,  except  for  necessaries.  Nobody  could  or 
would  do  any  business  with  him.  He  could  not  get  his  life  insured. 
He  could  not  insure  his  property  against  fire.  He  could  not  hire  serv- 
ants to  till  his  farm.  He  could  not  improve  or  keep  up  the  land  or 
buildings.  In  short,  however  advantageous  other  contracts  might  be  to 
him,  or  however  much  capital  he  might  have,  he  could  do  absolutely 
nothing,  except  to  buy  necessaries,  because  nobody  would  dare  to  con- 
tract with  him  for  anything  else. 

The  following  propositions  are  well  settled,  everywhere,  as  to  the  re- 
scindable contracts  of  an  infant,  and  in  that  category  we  include  all 
contracts  except  for  necessaries  : 

First.  That,  in  so  far  as  the  contract  is  executory  on  part  of  an 
infant,,  he  may  always  interpose  his  infancy  as  a  defense  to  an  action 
for  its  enforcement.    He  can  always  use  his  infancy  as  a  shield. 

Second.  If  the  contract  has  been  wholly  or  partly  performed  on  his 
part,  but  is  wholly  executory  on  part  of  the  other  party,  the  minor 
having  received  no  benefits  from  it,  he  may  recover  back  what  he  has 
paid  or  parted  with. 

Third.  Where  the  contract  has  been  wholly  or  partly  performed  on 
both  sides,  the  infant  may  always  rescind,  and  recover  back  what  he 
has  paid,  upon  restoring  what  he  has  received. 

Fourth.  A  minor,  on  arriving  at  full  age,  may  avoid  a  conveyance  of 
his  real  estate  without  being  required  to  place  the  grantee  in  siatu  quo, 


Ch.  8)  CAPACITY  351 

although  a  different  rule  has  sometimes  been  adopted  by  courts  of 
equity  when  the  former  infant  lias  applied  to  them  for  aid  in  avoiding 
his  deeds.  Whether  this  distinction  between  conveyances  of  real  prop- 
erty and  personal  contracts  is  founded  on  a  technical  rule,  or  upon  con- 
siderations of  policy  growing  out  of  the  difference  between  real  and 
personal  property,  it  is  not  necessary  here  to  consider. 

Fifth.  Where  the  contract  has  been  wholly  or  partly  performed  on 
both  sides,  the  infant,  if  he  sues  to  recover  back  what  he  has  paid,  must 
always  restore  what  he  has  received,  in  so  far  as  he  still  retains  it  in 
specie. 

Sixth.  The  courts  will  always  grant  an  infant  relief  where  the  other 
party  has  been  guilty  of  fraud  or  undue  influence.  As  to  what  would 
constitute  a  sufficient  ground  for  relief  under  this  head,  and  what  relief 
the  courts  would  grant  in  such  cases,  we  will  refer  to  hereafter. 

But  suppose  that  the  contract  is  free  from  all  elements  of  fraud,  un- 
fairness, or  overreaching,  and  the  infant  has  enjoyed  the  benefits  of  it, 
but  has  spent  or  disposed  of  what  he  has  received,  or  the  benefits  re- 
ceived are,  as  in  this  case,  of  such  a  nature  that  they  cannot  be  restored. 
Can  he  recover  back  what  he  has  paid  ?  It  is  well  settled  in  England 
that  he  cannot.  This  was  held  in  the  leading  case  of  Holmes  v.  Blogg, 
8  Taunt.  508,  approved  as  late  as  1890  in  Valentini  v.  Canali,  24  Q.  B. 
Div.  166.  Some  obiter  remarks  of  the  Chief  Justice  in  Holmes  v.  Blogg, 
to  the  effect  that  an  infant  could  never  recover  back  money  voluntarily 
paid,  were  too  broad,  and  have  often  been  disapproved — a  fact  which 
has  sometimes  led  to  the  erroneous  impression  that  the  case  itself  has 
been  overruled.  Corpe  v.  Overton,  10  Bing.  252  (decided  by  the  same 
court),  held  that  the  infant  might  recover  back  what  he  had  voluntarily 
paid,  but  on  the  ground  that  the  contract  in  that  case  remained  wholly 
executory  on  part  of  the  other  party,  and  hence  the  infant  had  never 
enjoyed  its  benefits. 

In  Chitty  on  Contracts  (volume  1,  p.  222),  the  law  is  stated  in  ac- 
cordance with  the  decision  in  Holmes  v.  Blogg.  Leake,  a  most  accu- 
rate writer,  in  his  work  on  Contracts  (page  553),  sums  up  the  law  to  the 
same  effect.  In  this  country.  Chancellor  Kent  (2  Kent,  Comm.  240), 
and  Reeves  in  his  work  on  Domestic  Relations  (chapters  2  and  3,  tit. 
"Parent  and  Child"),  state  the  law  in  exact  accordance  with  the 
"English  rule."  Parsons  in  his  work  on  Contracts  (volume  1,  p.  322),, 
undoubtedly  states  the  law  too  broadly,  in  omitting  the  qualification, 
"and  enjoys  the  benefit  of  it." 

At  least  a  respectable  minority  of  the  American  decisions  are  in 
full  accord  with  what  we  have  termed  the  "English  rule."  See,  among 
others,  Riley  v.  Mallory,  33  Conn.  206 ;  Adams  v.  Beall,  67  Md.  53,  8 
Atl.  664,  1  Am.  St.  Rep.  379;  Breed  v.  Judd,  1  Gray  (Mass.)  455.  But 
many — perhaps  a  majority — of  the  American  decisions,  apparently 
thinking  that  the  English  rule  does  not  sufficiently  protect  the  infant 
have  modified  it ;  and  some  of  them  seem  to  have  wholly  repudiated  it, 
and  to  hold  that  although  the  contract  was  in  all  respects  fair  and  rea- 
sonable, and  the  infant  had  enjoyed  the  benefits  of  it,  yet  if  the  infant 
had  spent  or  parted  with  what  he  had  received,  or  if  the  benefits  of  it 
were  of  such  a  nature  that  they  could  not  be  restored,  still  he  might 
recover  back  what  he  had  paid.  The  problem  with  the  courts  seems  to 
have  been,  on  the  one  hand,  to  protect  the  infant  from  the  improvidence 
incident  to  his  youth  and  inexperience,  and  how,  on  the  other  hand,  to 
compel  him  to  conform  to  the  principles  of  common  honesty.     The 


352  CONTRACTS  (Part  1 

result  is  that  the  American  authorities — at  least  the  later  ones — have 
fallen  into  such  a  condition  of  conflict  and  confusion  that  it  is  difficult 
to  draw  from  them  any  definite  or  uniform  rule. 

The  dissatisfaction  with  what  we  have  termed  the  ''English  rule" 
seems  to  be  generally  based  upon  the  idea  that  the  courts  would  not 
grant  an  infant  relief,  on  the  ground  of  fraud  or  undue  influence,  except 
where  they  would  grant  it  to  an  adult  on  the  same  grounds,  and  then 
only  on  the  same  conditions.  Many  of  the  cases,  we  admit,  would  seem 
to  support  this  idea.  If  such  were  the  law,  it  is  obvious  that  there 
would  be  many  cases  where  it  would  furnish  no  adequate  protection  to 
the  infant.  Cases  may  be  readily  imagined  where  an  infant  may  have 
paid  for  an  article  several  times  more  than  it  was  worth,  or  where  the 
contract  was  of  an  improvident  character,  calculated  to  result  in  the 
squandering  of  his  estate,  and  that  fact  was  known  to  the  other  party ; 
and  yet  if  he  was  an  adult  the  court  would  grant  him  no  relief,  but 
leave  him  to  stand  the  consequences  of  his  own  foolish  bargain.  But  to 
measure  the  right  of  an  infant  in  such  cases  by  the  same  rule  that 
would  be  applied  in  the  case  of  an  adult  would  be  to  fail  to  give  due 
weight  to  the  disparity  between  the  adult  and  the  infant,  or  to  apply 
the  proper  standard  of  fair  dealing  due  from  the  former  to  the  latter. 
Even  as  between  adults,  when  a  transaction  is  assailed  on  the  ground 
of  fraud,  undue  influence,  etc.,  their  disparity  in  intelligence  and  ex- 
perience, or  in  any  other  respect  which  gives  one  an  ascendency  over 
the  other,  or  tends  to  prevent  the  latter  from  exercising  an  intelligent 
and  unbiased  judgment,  is  always  a  most  vital  consideration  with  the 
courts.  Where  a  contract  is  improvident  and  unfair,  courts  of  equity 
have  frequently  inferred  fraud  from  the  mere  disparity  of  the  parties. 

If  this  is  true  as  to  adults,  the  rule  ought  certainly  to  be  applied  with 
still  greater  liberality  in  favor  of  infants,  whom  the  law  deems  so  in- 
competent to  care  for  themselves  that  it  holds  them  incapable  of  bind- 
ing themselves  by  contract,  except  for  necessaries.  In  view  of  this 
disparity  of  the  parties,  thus  recognized  by  law,  every  one  who  assumes 
to  contract  with  an  infant  should  be  held  to  the  utmost  good  faith  and 
fair  dealing.  We  further  think  that  this  disparity  is  such  as  to  raise 
a  presumption  against  the  fairness  of  the  contract,  and  to  cast  upon 
the  other  party  the  burden  of  proving  that  it  was  a  fair  and  reasonable 
one,  and  free  from  any  fraud,  undue  influence  or  overreaching. 

A  similar  principle  applies  to  all  the  relations,  where,  from  disparity 
of  years,  intellect,  or  knowledge,  one  of  the  parties  to  the  contract  has 
an  ascendency  which  prevents  the  other  from  exercising  an  unbiased 
judgment — as,  for  example,  parent  and  child,  husband  and  wife, 
guardian  and  ward.  It  is  true  that  the  mere  fact  that  a  person  is 
dealing  with  an  infant  creates  no  "fiduciary  relation"  between  them,  in 
the  proper  sense  of  the  term,  such  as  exists  between  guardian  and 
ward ;  but  we  think  that  he  who  deals  with  an  infant  should  be  held  to 
substantially  the  same  standard  of  fair  dealing,  and  be  charged  with  the 
burden  of  proving  that  the  contract  was  in  all  respects  fair  and  rea- 
sonable, and  not  tainted  with  any  fraud,  undue  influence,  or  over- 
reaching on  his  part.  Of  course,  in  this  as  in  all  other  cases,  the  degree 
of  disparity  between  the  parties,  in  age  and  mental  capacity,  would  be 
an  important  consideration.  Moreover,  if  the  contract  was  not  in  all 
respects  fair  and  reasonable,  the  extent  to  which  the  infant  should 
recover  would  depend  on  the  nature  and  extent  of  the  element  of  un- 
fairness which  characterized  the  transaction. 


Ch.  8)  CAPACITY  353 

If  the  party  dealing  with  the  infant  was  guilty  of  actual  fraud  or 
bad  faith,  we  think  the  infant  should  be  allowed  to  recover  back  all  he 
had  paid,  without  making  restitution,  except,  of  course,  to  the  extent 
to  which  he  still  retained  in  specie  what  he  had  received.  Such  a  case 
would  be  a  contract  essentially  improvident,  calculated  to  facilitate  the 
squandering  the  mfant's  estate,  and  which  the  other  party  knew  or 
ought  to  have  known  to  be  such,  for  to  make  such  a  contract  at  all 
with  an  infant  would  be  fraud.  But  if  the  contract  was  free  from  any 
fraud  or  bad  faith,  and  otherwise  reasonable,  except  that  the  price  paid 
by  the  infant  was  in  excess  of  the  value  of  what  he  received,  his  re- 
covery should  be  limited  to  the  difference  between  what  he  paid  and 
what  he  received.  Such  cases  as  Medbury  v.  Watrous.  7  Hill  (N.  Y.) 
110.  16  N.  Y.  Com.  Law,  529,  Medbury  v.  Watson,  6  Mete.  (Mass.) 
246,  39  Am.  Dec.  726,  Sparm.an  v.  Keim,  83  N.  Y.  245,  and  Heath  v. 
Stevens,. 48  N.  H.  251,  really  proceed  upon  this  principle,  although  they 
may  not  distinctly  announce  it.  The  objections  to  this  rule  are,  in  our 
opinion,  largely  imaginary,  for  we  are  confident  that  in  practice  it  can 
and  will  be  applied  by  courts  and  juries  so  as  to  work  out  substantial 
justice. 

Our  conclusion  is  that  where  the  personal  contract  of  an  infant, 
beneficial  to  himself,  has  been  wholly  or  partly  executed  on  both 
sides,  but  the  infant  has  disposed  of  what  he  has  received,  or  the 
benefits  recovered  [received]  by  him  are  such  that  they  cannot  be  re- 
stored, he  cannot  recover  back  what  he  has  paid,  if  the  contract  was 
a  fair  and  reasonable  one,  and  free  from  any  fraud  or  bad  faith  on 
part  of  the  other  party,  but  that  the  burden  is  on  the  other  party  to 
prove  that  such  was  the  character  of  the  contract;  that,  if  the  con- 
tract involved  the  element  of  actual  fraud  or  bad  faith,  the  infant 
may  recover  all  he  paid  or  parted  with,  but  if  the  contract  involved 
no  such  elements,  and  was  othenvise  reasonable  and  fair,  except  that 
what  the  infant  paid  was  in  excess  of  the  value  of  what  he  received, 
his  recovery  should  be  limited  to  such  excess.  It  seems  to  us  that  this 
will  sufficiently  protect  the  infant,  and  at  the  same  time  do  justice  to 
the  other  party.  Of  course,  in  speaking  of  contracts  beneficial  to 
the  infant,  we  refer  to  those  that  are  deemed  such  in  contemplation 
of  law. 

Applying  these  rules  to  the  case  in  hand,  we  add  that  life  insurance 
in  a  solvent  company,  at  the  ordinarv'  and  usual  rates,  for  an  amount 
reasonably  commensurate  with  the  infant's  estate,  or  his  financial  abil- 
ity to  carry  it,  is  a  provident,  fair,  and  reasonable  contract,  and  one 
which  it  is  entirely  proper  for  an  insurance  company  to  make  with 
him,  assuming  that  it  practices  no  fraud  or  other  unlawful  means  to 
secure  it;  and  if  such  should  appear  to  be  the  character  of  this  con- 
tract the  plaintiff  could  not  recover  the  premiums  which  he  has  paid 
in,  so  far  as  they  were  intended  to  cover  the  current  annual  risk  as- 
sumed by  the  company  under  its  policy. 

But  it  appears  from  the  face  of  the  policy  that  these  premiums 
covered  something  more  than  this.  The  policy  provides  that  after 
payment  of  three  or  more  annual  premiums  the  insured  will  be  en- 
titled to  a  paid-up,  nonparticipating  policy  for  as  many  twentieths 
of  the  original  sum  insured  ($1,000)  as  there  have  been  annual  pre- 
miums so  paid.  The  complaint  alleges  the  payment  of  four  annual 
premiiuns.  Hence,  the  plaintiff  was  entitled,  upon  surrender  of  the 
B.&B.Bus.Law— 23 


354  CONTRACTS  (Part  1 

original  policy,  to  a  paid-up,  nonparticipating  policy  for  $200;  and 
it  therefore  seems  to  us  that,  having  elected  to  rescind,  he  was  entitled 
to  recover  back,  in  any  event,  the  present  cash  "surrender"  value  of 
such  a  policy.  For  this  reason,  as  well  as  that  the  burden  was  on  the 
defendant  to  prove  the  fair  and  honest  character  of  the  contract,  the 
demurrer  to  the  complaint  was  properly  overruled.  The  result  ar- 
rived at  in  the  former  opinion  was  therefore  correct,  and  is  ajjhered 
to,  although  on  somewhat  different  grounds. 
Order  affirmed. 


RICE  V.  BOYER. 
(Supreme  Court  of  Indiana,  18S6.     108  Ind.  472,  9  X.  E.  420,  58  Am.  Rep.  53.) 

ElL-ioTT,  C.  J.  It  is  alleged  in  the  complaint  of  the  appellant  that 
the  appellee,  with  intent  to  defraud  the  appellant,  falsely  and  fraud- 
ulently represented  that  he  was  21  years  of  age;  that,  relying  on  this 
representation,  the  appellant  was  induced  to  sell  and  deliver  to  the 
appellee,  on  one  year's  credit,  a  buggy  and  a  set  of  harness ;  that  the 
appellee,  in  payment  for  the  property,  delivered  to  appellant,  a  bug- 
gy, and  executed  to  him  a  promissory  note,  payable  one  year  after 
date,  and  also  executed  a  chattel  mortgage  to  secure  the  payment  of 
the  note;  that^the  appellee's  representation  was  untrue;  that  he  had 
not  yet  attained  the  age  of  21  years;  that,  on  account  of  appellee's 
nonage,  the  note  cannot  be  enforced ;  that  the  appellee  avoided  his 
note  and  mortgage  by  a  sale  of  the  mortgaged  property,  and  repudi- 
ates and  refuses  to  be  bound  by  his  contract  in  reference  thereto ;  that 
the  appellant  brings  into  court  the  note  and  mortgage  executed  to  him. 
and  tenders  them  to  the  appellee.  Prayer  for  judgment  for  the  value 
of  the  property  delivered  to  appellee.  To  this  complaint  a  demurrer 
was  sustained,  and  error  is  assigned  on  that  ruling. 

The  appellee's  counsel  defend  the  ruling  principally  upon  the 
ground  that  the  action  was  prematurely  brought,  inasmuch  as  it  can- 
not be  determined  that  any  injury  w^ill  be  done  the  appellant  until  the 
expiration  of  the  year  fixed  for  the  payment  of  the  property  pur- 
chased of  the  appellant.  We  agree  with  counsel  that  the  contract  is 
voidable,  not  void,  and  that  the  appellee  might  have  performed  it 
notwithstanding  his  nonage,  if  he  had  so  elected.     *     *    * 

Butxthis  principle  is  not  broad  enough  to  meet  the  averment  of  the 
complaint  that  the  appellee  has  repudiated  his  contract,  and  refuses 
to  be  bound  by  it.  As  the  authorities  relied  on  by  counsel  do  not  fully 
cover  the  case,  further  investigation  is  necessary,  and  the  first  step 
in  this  investigation  is  to  ascertain  and  declare  the  eft"ect  of  the  in- 
fant's repudiation  of  his  contract. 

In  Shrock  v.  Crowl,  83  Ind.  243,  the  holding  in  Mustard  v.  Wohl- 
ford,  15  Grat.  (Va.)  329,  76  Am.  Dec.  209,  that,  where  a  voidable  act 
of  an  infant  is  disaffirmed,  it  avoids  the  contract  ab  initio,  is  fully  ap- 
proved. If  this  is  the  law,  then,  when  the  appellee  repudiated  his  con- 
tract, he  destroyed  it  for  all  purposes.  It  no  longer  bound  him,  nor 
could  he  take  any  benefit  from  it.  If  the  contract  was  destroyed 
back  to  the  beginning,  it  ceased  to  be  operative  for  anybody's  benefit. 
We  think  the  principle  of  law  is  correctly  stated  in  the  cases  to  which 
we  have  referred,  and  that  the  conclusion  we  have  stated  is  the  log- 
ical, and,  indeed,  inevitable,  sequence  of  that  principle.     *     *     * 

An  infant  may  repudiate  a  contract  respecting  personal  property. 


Ch.  8)  CAPACITY  355 

during  nonage.  *  *  *  I'j^g  repudiation  by  the  appellee  was  there- 
fore a  complete  avoidance  of  the  contract,  effectually  putting  an  end 
to  its  existence,  both  as  to  him,  and  as  to  the  adult  with  whom  he 
contracted. 

It  is  evident,  from  what  we  have  said,  that  the  ground  taken  by 
the  appellee's  counsel  is  not  tenable;  for,  when  their  client  repudiated 
the  contract,  as  it  is  alleged  he  did  do,  it  ceased  to  be  effective  for  any 
purpose.     *     *    * 

Infants  are,  in  many  cases,  liable  for  torts  committed  by  them,  but 
they  are  not  liable  where  the  wrong  is  connected  with  a  contract,  and 
the  result  of  the  judgment  is  to  indirectly  enforce  the  contract.  Judge 
Cooley  says :  "If  the  wrong  grows  out  of  contract  relations,  and  the 
real  injury  consists  in  the  non-performance  of  the  contract  into  which 
the  party  wronged  has  entered  with  an  infant,  the  law  will  not  permit 
the  former  to  enforce  the  contract  indirectly  by  counting  on  the  in- 
fant's neglect  to  perform  it,  or  omission  of  duty  under  it,  as  a  tort." 
Cooley,  Torts,  116.  In  another  place  the  same  author  says:  "So,  if  an 
infant  effects  a  sale  by  means  of  deception  and  fraud,  his  infancy  pro- 
tects him."  Id.,  107.  Addison,  following  the  English  cases,  says  an 
infant  is  not  liable  "if  the  cause  of  action  is  grounded  on  a  matter  of 
contract  with  the  infant,  and  constitutes  a  breach  of  contract  as  well 
as  a  tort."    Addison,  Torts,  par.  1314. 

Upon  this  principle  it  has  been  held  in  some  of  the  cases  that  an 
infant  is  not  liable  for  the  value  of  property  obtained  by  means  of 
false  representations.  *  *  *  It  is  also  generally  held  that  an  infant 
is  not  estopped  by  a  false  representation  as  to  his  age ;  but  this  doctrine 
rests  upon  the  principle  that  one  under  the  disability  of  coverture  or 

infancy  has  no  power  to  remove  the  disability  by  a  representation. 

*  *     * 

It  is  evident,  from  this  brief  reference  to  the  authorities,  that  it  is 
not  easy  to  extract  a  principle  that  will  supply  satisfactory  reasons  for 
the  solution  of  the  difficulty  here  presented.  It  is  to  be  expected  that 
we  should  find,  as  we  do,  stubborn  conflict  in  the  authorities  as  to  the 
question  here  directly  presented,  namely,  whether  an  action  will  lie 

against  an  infant  for  falsely  representing  himself  to  be  of  full  age. 

*  *     * 

Our  judgment,  however,  is  that,  where  the  infant  does  fraudulently 
and  falsely  represent  that  he  is  of  full  age,  he  is  liable  in  an  action  ex 
-delicto  for  the  injury  resulting  from  his  tort.  This  result  does  not 
involve  a  violation  of  the  principle  that  an  infant  is  not  liable  where  the 
consecjuence  would  be  an  indirect  enforcement  of  his  contract;  for 
the  recovery  is  not  upon  the  contract,  as  that  is  treated  as  of  no  ef- 
fect, nor  is  he  made  to  pay  the  contract  price  of  the  article  purchased 
by  him,  as  he  is  only  held  to  answer  for  the  actual  loss  caused  by  his 
fraud.  In  holding  him  responsible  for  the  consequences  of  his  wrong, 
an  equitable  conclusion  is  reached,  and  one  which  strictly  harmonizes 
with  the  general  doctrine  that  an  infant  is  liable  for  his  torts.  Nor  does 
our  conclusion  invalidate  the  doctrine  that  an  infant  has  no  power  to 
deny  his  disability ;  for  it  concedes  this,  but  affirms  that  he  must  an- 
swer for  his  positive  fraud. 

Our  conclusion  that  an  infant  is  liable  in  tort  for  the  actual  loss 
resulting  from  a  false  and  fraudulent  representation  of  his  age  is  well 
sustained  by  authority,  although,  as  we  have  said,  there  is  a  fierce  con- 
flict, and  it  is  strongly  entrenched  in  principle.     *     *     * 


356  CONTRACTS  (Part  1 

Aside  from  mere  personal  torts,  it  is  scarcely  possible  to  conceive  a 
tort  not  in  some  way  connected  with  a  contract,  and  yet  all  the  au- 
thorities agree  that  the  liability  of  infants  is  not  confined  to  mere  per- 
sonal torts.  *  *  *  q^j^g  cases  certainly  do  agree — it  is,  indeed, 
difficult,  if  not  impossible,  to  perceive  how  it  could  be  otherwise — that, 
although  there  may  be  some  connection  between  the  contract  and  the 
wrong,  the  infant  may  be  liable  for  his  tort.  It  seems  to  us  that  the 
only  logical  and  defensible  conclusion  is  that  he  is  liable,  to  the  extent 
of  the  loss  actually  sustained,  for  his  tort,  where  a  recovery  can  be 
had  without  giving  effect  to  his  contract.  The  test,  and  the  only 
satisfactory  test,  is  supplied  by  the  answer  to  the  question :  Can  the  in- 
fant be  held  liable  without  directly  or  indirectly  enforcing  his  promise? 

There  is  no  enforcement  of  a  promise  where  an  infant,  who  has  been 
guilty  of  a  positive  fraud,  is  made  to  answer  for  the  actual  loss  his 
wrong  has  caused  to  one  who  has  dealt  with  him  in  good  faith,  and  has 
exercised  due  diligence ;  nor  does  such  a  rule  open  the  way  for  design- 
ing men  to  take  advantage  of  an  infant,  for  it  holds  one  who  con- 
tracts with  an  infant  to  the  exercise  of  good  faith  and  reasonable  dil- 
igence, and  does  not  enable  him  to  make  any  profit  out  of  the  trans- 
action with  the  infant,  for  it  allows  him  only  compensation  for  the 
actual  loss  sustained.  It  does  not  permit  him  to  make  any  profit  out 
of  an  executory  contract,  but  it  simply  makes  good  his  actual  loss. 

It  is  worthy  of  observation  that,  in  the  cases  which  hold  that  an  in- 
fant's representation  will  not  estop  him  to  deny  his  disability,  it  is 
generally  declared  that  he  may,  nevertheless,  be  held  liable  for  his 
tort.  It  may  often  happen  that  the  age  and  appearance  of  the  infant 
will  be  such  as  to  preclude  a  recovery  for  a  fraud,  because  reasonable 
diligence,  which  is  exacted  in  all  cases,  would  warn  the  plaintiff  of  the 
nonage  of  the  defendant.  On  the  other  hand,  the  infant  may  be  in  years 
almost  of  full  age,  and  in  appearance  entirely  so,  and  thus  deceive  the 
most  diligent  by  his  representations.  Suppose  a  minor  who  is  really 
20  years  and  10  months  old,  but  in  appearance  a  man  of  full  age,  should 
obtain  goods  by  falsely  and  fraudulently  representing  that  he  is  21 
years  of  age,  ought  he  not,  on  the  plainest  principles  of  natural  jus- 
tice, to  be  held  liable,  not  on  his  contract,  but  for  the  loss  occasioned 
by  his  fraud?     *     *     * 

Judgment  reversed,  with  instructions  to  overrule  the  demurrer  to 
the  complaint. 


SECTION  3.— RATIFICATION 


HOBBS   et  al  V.   HINTOX  FOUNDRY,  MACHINE  &  PLUMBING  CO. 

(Supreme  Court  of  Appeals  of  West  Virginia,  1914.     74  W.  Va.  443, 
82  S.  E.  267,  Ann.  Cas.  1917D,  410.) 

Suit  by  T.  E.  Hobbs  and  others  against  the  Hinton  Foundry,  Ma- 
chine &  Plumbing  Company  and  others.  From  a  decree  for  plain- 
tiffs, defendants  appeal. 

Lynch,  J.  Does  one  who,  while  a  minor,  purchases  personal  prop- 
erty, and  thereafter  and  for  three  months  next  ensuing  his  majority 
uses  and  operates  it  in  the  conduct  of  a  foundry  and  plumbing  busi- 
ness, taking  unto  himself  the  profits,  if  any,  arising  therefrom,  ad- 


Ch.  8)  CAPACITY  357 

vertises  it  for  sale,  but  sells  no  part  of  it,  pays  part  of  the  considera- 
tion therefor  and  a  rental  on  a  building  leased  to  him  by  the  seller, 
thereby  ratify  his  contract,  and  bind  himself  to  pay  the  residue  of  the 
consideration?  Or  may  he,  notwithstanding  these  acts  on  his  part, 
subsequently  disaffirm  the  contract,  and  thereby  exonerate  himself  from 
further  liability  thereon?  If  so,  does  his  disaffirmance  operate  to  dis- 
.  charge  the  lien  of  a  deed  of  trust  by  himself  and  wife  and  a  brother 
to  secure  the  payment  of  the  consideration  and  rental  payable  under 
the  contract  and  leasehold?  A  proper  answer  to  each  of  these  in- 
quiries determines  the  issues  involved  in  this  cause. 

On  April  17,  1911,  T.  E.  Hobbs,  then  a  minor,  purchased  of  the 
Hinton  Foundry,  Machine  &  Plumbing  Company  its  machinery  and 
plumbing  outfit.  The  consideration  therefor  and  the  rental  on  the 
building  in  which  the  property  was  then  located  and  used,  was  secured 
by  a  deed  of  trust  by  plaintiff,  his  wife  (also  then  a  minor),  and  his 
brother  on  the  machinery  and  appliances  and  on  undivided  interests  in 
a  lot  in  the  town  of  Hinton;  plaintiff  alone  signing  the  note  thus  se- 
cured. 

From  the  date  of  the  purchase  until  September  1,  1911,  plaintiff  used 
the  property  in  the  operation  of  a  general  foundry  and  plumbing  busi- 
ness, contracting  for  work  appertaining  to  such  business,  and  taking 
to  himself  the  profits,  if  any,  arising  from  the  conduct  thereof ;  he 
also  paid  part  of  the  original  purchase  price,  and  the  rental  as  it  be- 
came due,  advertised  part  of  the  property  for  sale,  but  did  not  sell  any 
of  it,  and  in  addition  purchased  and  operated  with  it  other  like  ma- 
chinery and  appliances.  But  on  September  1,  1911,  by  notice  in  writ- 
ing duly  served,  he  notified  defendant  of  his  disaffirmance  of  the  con- 
tract, offered  to  return  the  property  purchased  of  it,  and  demanded 
a  cancellation  of  the  note  and  trust  deed. 

With  few  exceptions  not  necessary  to  be  noted  here,  the  contracts 
of  infants  are  voidable,  and  not  void.  *  *  *  But  whether  an  in- 
fant should,  within  a  reasonable  time  after  arriving  at  full  age,  do  some 
affirmative  act  indicative  of  an  intention  on  his  part  to  repudiate,  we 
are  not  now  called  upon  to  decide,  because  of  plaintiff's  notice  and 
offer,  though  whether  he  acted  within  a  reasonable  time  does  become  an 
important  inquiry  in  connection  with  the  facts  recited,  which,  accord- 
ing to  defendant's  contention,  operated  as  a  ratification  prior  to  the 
service  of  such  notice. 

While  ratification  is,  generally  speaking,  a  question  of  intention,  it 
is  not  essential  that  the  purpose  to  ratify  shall  be  expressly  declared. 
It  may  be,  and  ordinarily  is,  inferred  from  the  free  and  voluntary  acts 
and  conduct  of  the  party  sought  to  be  charged,  although  at  the  time 
he  may  not  have  had  in  mind  any  definite  idea  or  purpose  of  ratifica- 
tion. 

But,  to  effectuate  a  ratification,  his  acts,  words,  or  conduct  must  be 
inconsistent  with  any  other  purpose,  as  where,  after  arriving  at  age 
he  retains  for  an  unreasonable  length  of  time  the  property  purchased 
by  him  while  in  infancy,  or  uses  it  as  his  own,  or  exercises  such  acts 
of  ownership  over  it  as  clearly  evinces  a  purpose  to  ratify.  *  *  * 
Whether  he  acts  within  a  reasonable  time  after  full  age,  and,  if  he  does, 
what  acts  constitute  a  confirmation  of  contracts  made  in  infancy,  are 
questions  of  fact,  to  be  determined  in  the  usual  manner  either  by  a 
jury  under  proper  instruction  or  by  the  chancellor  when  properly 
submitted  to  him.     *     *     * 


358  CONTRACTS  (Part  1 

While  much  depends  upon  the  prom])titude  with  which  acts  are  per- 
formed by  way  of  ratification  or  disaffirmance  after  attaining  his  ma- 
jority no  period  of  time  generally  applicable  in  all  cases  has  been, 
or  in  the  nature  of  things  can  ever  be,  definitely  fixed.  The  acts  and 
conduct  relied  on  for  confirmation,  and  the  reasonableness  of  the  time, 
must  be  determined  from  the  facts  and  circumstances  of  each  particu- 
lar case,  for  what  may  be  a  reasonable  time,  and  what  a  ratification, 
under  some  conditions,  may  be  unreasonable  and  insufficient  under 
other  conditions. 

An  infant  s  contract  wholly  consummated  by  him  either  before  or 
after  full  legal  age  requires  more  prompt  action  and  a  less  degree  of 
confirmatory  conduct  than  one  not  fully  performed  by  him,  as  in  this 
case,  for  as  to  plaintifl:'  the  contract  remains  executory,  though  executed 
by  defendant.  A  like  distinction  is  noted  and  upheld  between  sales 
to  infants  and  sales  by  them,  and  between  conveyances  of  their  lands 
and  purchases  of  land  by  them.  For  if,  after  full  age,  one,  who  while 
a  minor  sells  lands  belonging  to  him,  stands  by  an  unreasonable  length 
of  time,  and,  without  notice  or  warning  of  an  intention  to  repudiate 
his  contract  or  deed,  sees  his  vendee  make  valuable  improvements 
on  the  land  he  will  thereby  estop  himself  from  the  assertion  of  a 
right  to  annul  the  contract  or  deed  and  to  demand  a  rescission  and 
reconveyance.     *     *     * 

Did  plaintiff  act,  or  fail  to  act,  within  a  reasonable  time  after  June 
3,  1911?  Or  did  he,  by  his  acts  and  conduct  thereafter  and  before 
notice  to  the  defendant,  preclude  right  to  disaffirm?  These  are  ques- 
tions so  inseparable  that  both  may  to  some  extent  be  properly  treated 
and  answered  together.  In  Hook  v.  Donaldson,  9  Lea  (Tenn.)  56,  a 
delay  of  four  years  was  held  unreasonable,  while  in  Gaskins  v.  Allen, 
137  N.  C.  426,  49  S.  E.  919,  a  delav  of  three  years  was  deemed  rea- 
sonable. In  Green  v.  Wilding,  59  Iowa,  679,  13  N.  W.  761,  44  Am. 
Rep.  696,  and  Kline  v.  Beebe,  6  Conn.  494,  a  delay  of  four  years  was 
held  unreasonable.  But  payment,  four  months  after  full  age,  of  part 
of  the  consideration  for  land  purchased  while  an  infant  does  not  alone 
imply  a  ratification.  Land  Co.  v.  Sandford  (Tex.  Civ.  App.)  24  S. 
W.  587.  Acknowledgment  of  the  validity  of  the  debt  and  oral  promise 
to  pay  it  are  insufficient.  Whitney  v.  Dutch,  14  Mass.  457,  7  Am.  Dec. 
229 ;  Hinely  v.  Margaritz,  3  Pa.  428 ;  Hatch  v.  Hatch,  60  Vt.  160,  13 
Atl.  791.  Nor  does  part  payment  of  the  debt  alone  constitute  a  legal 
affirmance.  Kendrick  v.  Neisz,  17  Colo.  508,  30  Pac.  245.  See,  also, 
Barnaby  v.  Barnaby,  1  Pick.  (Mass.)  221,  where,  after  majority,  he 
paid  rent  arrearages  previouslv  due.  Mere  inactivity  is  insufficient. 
Thomas  v.  Pullis,  56  Mo.  211.  ' 

These  cases  sustain  ratification  of  contracts  made  in  infancy,  where, 
after  majority,  he  continued  in  the  possession,  use,  and  enjoyment  and 
exercising  acts  of  ownership  inconsistent  with  an  intention  to  disaffirm : 
Boody  V.  McKenney,  23  ^le.  517,  where  it  seems  the  property  was 
personalty,  only  a  small  part  of  which  came  into  his  possession  after 
majority,  but  which  he  retained  for  three  years  and  then  sold,  the  res- 
idue having  been  consumed  or  otherwise  disposed  of  during  his  minor- 
ity; Ellis  V.  Alford,  64  Miss.  8,  1  South.  155,  where  an  infant  ex- 
changed his  for  other  lands  which  he  occupied  and  used  for  nine  years 
after  full  age;  Luce  v.  Jestrab,  12  N.  D.  548,  97  N.  W.  848,  where 
an  infant  purchased  and  for  nine  months  after  majority  retained  pos- 
session of  a  team  of  horses,  using  them,  and  twice  promised  to  pay 


Ch.  8)  CAPACITY  359 

the  note  executed  by  him  therefor;  Lawson  v.  Lovejoy,  8  Me.  (8 
Greenl.)  405,  23  Am.  Dec.  526,  where  the  facts  were  similar  to  those 
in  the  Luce  Case;  Robinson  v.  Hoskins,  77  Ky.  (14  Bush)  393,  where 
infant  purchased  a  horse,  which,  after  majority,  he  sold  and  appropri- 
ated to  use  the  proceeds  thereof ;  Boyden  v.  Boyden,  50  Mass.  (9 
Mete.)  519,  where  the  infant  purchased  goods  (not  necessaries)  on 
credit,  and  retained  and  used  them  an  unreasonable  time  (duration  not 
noted),  without  offer  to  restore  or  notice  of  disaffirmance;  Chesire  v. 
Barrett,  4  McCord  (S.  C.)  241,  17  Am.  Dec.  735,  where  infant  pur- 
chased a  horse,  and  sold  it  after  his  majority.  A  suit  for  specific  per- 
formance is  a  ratification.    Carrell  v.  Potter,  23  Mich.  377. 

But  while,  in  case  under  consideration,  the  acts  on  which  defendant 
relies  for  confirmation  consist  only  in  the  retention  by  plaintiff  for 
three  months  after  full  age  of  the  property  sold  to  him,  and  the  benefi- 
cial use  and  profits  derived  from  it  during  that  period,  payment  of  part 
of  the  consideration  therefor  and  of  rent  accruing  under  the  lease,  and 
offering  the  property  for  sale  but  not  selling  or  otherwise  disposing 
of  it,  cannot  so  far  operate  to  defendant's  prejudice  as  to  warrant  the 
conclusion  either  that  plaintift"  delayed  his  disaffirmance  an  unreason- 
able length  of  time,  or  that  his  acts  authorized  the  inference  of  an 
intention  to  ratify  or  amounted  to  a  ratification  of  the  contract,  es- 
pecially since  it  appears,  at  least  it  is  not  denied  or  alleged,  that  plain- 
tiff offered  to  restore  to  defendant  the  property,  which,  so  far  as  dis- 
closed, virtually  remains  in  the  same  condition  as  at  the  date  of  the 
contract.  And,  while  by  the  decree  complained  of  the  defendant  was 
required  to  refund  part  of  the  consideration  paid  to  it,  plaintiff  was  vir- 
tually required  to  pay  defendant  the  rent  due  under  the  leasehold  to 
September  1,  1911,  the  date  of  plaintift''s  notice  of  disaffirmance. 

That  a  contract  made  by  an  infant  may  be  repudiated  by  him  after 
he  attains  his  majority  is,  of  course,  elementary.  It  is  not  questioned 
here.  Nor  is  his  right  to  disaffirm  within  a  reasonable  time  after  his 
majority.  Having  that  right,  and  exercising  it,  as  he  did,  within  three 
months  from  the  time  he  could  legally  act  by  way  of  confirmation  or 
repudiation,  we  cannot  say  the  time  was  unreasonably  prolonged,  or 
that  plaintiff's  acts  indicated  an  intention  on  his  part  to  ratify  his  pur- 
chase. This  conclusion  is  reached  without  any  intention  to  assert  or 
deny  the  application  to  the  facts  of  this  case  of  clause  2,  §  1,  c.  98, 
Code,  cited  but  not  argued.     *     *     * 

Finding  no  error,  we  affirm  the  decree  from  which  defendant  has 
appealed. 


SECTION  4.— CONTRACTS   FOR   NECESSARIES 


MAULDIN  V.  SOUTHERN  SHORTHAND  &  BUSINESS  UNIVERSITY. 
(Court  of  Appeals  of  Georgia,  1908.     3  Ga.  App.  SOO,  60  S.  B.  358.) 

PowElivl,,  J.  Dora  Mauldin,  of  Tunnell  Hill,  Ga.,  a  17  year  old  girl, 
an  orphan,  whose  whole  estate  consisted  of  about  $75,  came  to  At- 
lanta, and  over  the  objection  of  her  guardian  made  a  contract  with  the 
defendant  to  take  a  five-months'  course  in  stenography  for  $35,  which 
at  her  request  her  guardian  paid  out  of  her  mone3's  in  his  hands.  Being 
disappointed  in   her  expectations  of  being  lodged  and  cared   for  by 


360  CONTRACTS  (Part  1 

relatives  while  in  Atlanta,  she  within  about  five  days,  notified  the 
president  of  the  business  school  of  her  inability  to  take  the  course,  and 
requested  a  return  of  her  tuition;  and  this  he  refused.  She  brought 
suit.  The  defendant  set  up  that  her  contract  provided  that  the  tui- 
tion should  not  be  refunded  except  in  certain  providential  contingen- 
cies ;  and  that  this  contract  was  for  necessaries  and  therefore  bind- 
ing on  her.  A  jury  on  the  first  trial  having  found  in  favor  of  the  de- 
fendant, the  Supreme  Court  granted  a  new  trial  because  it  did  not 
affirmatively  appear  that  the  tuition  in  stenography  was  a  necessary 
thing  for  her  station  in  life.  *  *  *  On  the  second  trial  there  was 
a  verdict  for  the  plaintiff,  but,  on  a  certiorari  containing  substantial- 
ly the  general  grounds,  the  judge  of  the  superior  court  ordered  a  new 
trial ;    and  to  this  the  plaintiff  brings  error. 

In  our  judgment  the  determination  whether  the  course  in  shorthand 
would  have  been  such  a  necessary  thing  as  to  charge  the  plaintiff' 
with  a  liability  therefor  if  she  had  taken  it  is  not  in  the  case.  The 
right  to  recover  from  an  infant  for  necessaries  does  not  arise  out  of 
the  contract  between  the  parties,  but  from  a  quasi  contractual  relation 
arising  by  operation  of  law.  Keener  on  Quasi  Contracts,  20.  The 
quality  of  justice  in  the  law,  not  the  quality  of  efficacy  in  the  infant's 
agreement,  is  the  basis  of  the  right  of  the  person  who  has  furnished 
the  necessaries  to  hold  the  infant  bound  therefor.  A  corollary  to  the 
foregoing  principle  is  the  well-recognized  rule  that  an  infant  may  re- 
pudiate an  executory  contract  for  necessaries.  The  case  of  Jones  v. 
Valentines'  School  of  Telegraphy,  122  Wis.  318,  99  N.  W.  1043,  is  ab- 
solutely identical  in  every  essential  fact  and  feature  with  the  case  at 
bar.  The  plaintiff  there,  an  infant,  paid  for  a  scholarship  in  a  busi- 
ness school,  but  afterward,  concluding  not  to  enjoy  the  privilege,  de- 
manded a  return  of  the  money,  which  was  refused,  whereupon  he  sued 
for  it.  The  court  says :  "It  is  elementary  law  that  an  infant  is 
bound  by  implied  contract  to  pay  reasonably  for  necessaries  furnish- 
ed him.  The  limitations  of  the  rule  are  plainly  indicated  by  the  state- 
ment of  it.  In  order  that  the  infant  may  be  bound,  all  the  circum- 
stances must  exist  essential  to  raise  a  promise  by  implication  of  law. 
There  must  have  been  furnished  him  property  or  something  of  value, 
being  such  as  to  administer  to  his  necessities.  That  obviously  ex- 
cludes the  idea  of  an  infant's  being  liable  upon  an  executory  contract 
to  furnish  him  necessaries,  as  has  been  uniformly  held.  Gregory  v. 
Lee,  64  Conn.  407,  30  Atl.  53,  25  L.  R.  A.  618.  No  liability  can  be 
created  by  an  infant  for  necessaries  by  express  contract.  His  liability 
therefor  is  wholly  a  creation  of  law.     *     *     * 

In  view  of  the  foregoing,  we  need  not  stop  to  inquire  whether  an  in- 
fant may  bind  himself  by  implied  contract  to  pay  for  educational 
training  of  the  kind  promised  by  appellant,  under  the  rule  above  stated 
since  there  is  no  claim  that  such  training  was  bestowed  upon  re- 
spondent." In  Gregory  v.  Lee,  64  Conn.  407,  30  Atl.  53,  25  L.  R.  A. 
618,  the  infant,  being  a  student  of  Yale  College,  made  an  engage- 
ment to  take  lodging  from  the  plaintiff  for  a  year.  After  holding 
that  the  infant's  liability  for  necessaries  arises  by  operation  of  law 
and  not  from  any  contract  he  may  have  attempted  to  make,  and  that, 
therefore,  no  executory  contract  is  enforceable  against  him,  the  court 
applied  the  law  to  the  case,  deciding  that  "an  infant  may  disaffirm  his 
contract  for  the  lease  of  a  room  suitable  to  his  needs  and  situation  in 
life,  and  is  not  liable  for  the  rent  of  the  room  alleged  to  have  accrued 


Ch.  8)  CAPACITY  361 

after  such  disaffirmance  and  after  he  has  ceased  to  occupy  it,  although 
such  period  was  within  the  period  covered  by  his  contract."  *  *  * 
The  case  at  bar  has  therefore  been  contested  over  the  immaterial  ques- 
tion whether  tuition  in  shorthand  would  have  been  necessary  for  the 
girl  in  her  station  of  life;  for  the  principle  of  law  above  stated  con- 
cludes the  proposition  that  she  should  not  be  held  bound  on  the  con- 
tract in  either  event. 

There  is  a  suggestion  in  the  argument  that  the  plaintiff's  right  to 
recover  back  the  money  may  be  defeated  on  the  theory  that  she  did 
not  pay  the  defendant  the  money,  but  that  her  guardian  paid  it,  mak- 
ing the  contract  his  contract.  This  position  is  likewise  untenable. 
It  is  a  well-recognized  rule  that  a  minor  may  recover  from  whomso- 
ever knowingly  received  any  of  his  money  paid  out  by  his  guardian 
without  lawful  authority.  *  *  *  j^  requires  the  approval  of  the 
ordinary  to  legalize  any  encroachment  upon  the  corpus  of  the  ward's 
estate  by  a  guardian  for  education  or  maintenance.  *  *  *  No  such 
approval  is  shown.  The  verdict  in  the  plaintiff's  favor  was  demand- 
ed, and  the  court  erred  in  sustaining  the  certiorari. 

Judgment  reversed. 


The  rule  relating  to  necessaries,  in  so  far  as  it  concerns  contracts 
for  the  sale  of  personal  property,  has  been  codified  in  the  Uniform 
Sales  Act,  as  follows : 

Section  2.  Where  necessaries  are  sold  and  delivered  to  an  in- 
fant, or  to  a  person  who  by  reason  of  mental  incapacity  or  drunk- 
enness is  incompetent  to  contract,  he  must  pay  a  reasonable  price 
therefor.  Necessaries  in  this  section  means  goods  suitable  to  the 
condition  in  life  of  such  infant  or  other  person,  and  to  his  actual 
requirements  at  the  time  of  delivery. 


362  COMPACTS  (Parti 

CHAPTER  IX 
CONTRACTS  REQUIRED  TO  BE  IN  WRITING 

Section 

1.  Introduction. 

2.  Contracts  of  Guaranty. 

3.  Contracts  of  Executors  and  Administrators. 

4.  Contracts  Made  in  Consideration  of  Marriage. 

5.  Contracts  for  the  Sale  of  Lands. 

6.  Contracts  Not  to  be  Performed  Witliin  the  Space  of  One  Year. 

7.  Contracts  for  the  Sale  of  Personal  Property. 

8.  Compliance  with  the  Statute. 

9.  Effect  of  Non-Compliance  with  the  Statute. 


SECTION  1.— INTRODUCTION 
The  Statute  of  Frauds,  originally  enacted  by  the  British  Parlia- 
ment in  the  twenty-ninth  year  of  the  reign  of  Charles  II  (1677), 
and  subsequently   enacted  in  the  American  states,  provides  that 
certain  kinds  of  contracts  must  be  in  writing  in  order  to  be  enforce- 
able.    There  is  no  general  requirement  that  all  contracts  must  be 
in  writing.    In  fact,  a  great  many  kinds  of  contracts,  perhaps  a  ma- 
jority of  them,  need  not  be  in  writing.    This  statute,  which  makes 
the   enforceability   of   certain   kinds   of   contracts   depend   upon   a 
writing,  is  called  a  statute  relating  to  fraud,  for  the  reason  that 
originally  it  was  designed  to  render  ineffective  the  apparently  com^ 
mon  practice  of  testifying  falsely  to  the  existence  of  certain  kinds 
of  contracts.    Of  course,  it  should  be  impossible  to  prove  a  contract 
which  has  no  existence.     Theoretically,  it  is  impossible.     Practi- 
cally, it  is  possible,  just  as  it  is  possible  for  a  person  guilty  of  a 
crime  to  be  acquitted,  or  for  a  person  not  guilty  to  be  convicted. 
Courts  and  juries  act  upon  sworn  testimony.     Presumably   it  is 
true,  but  it  may  be  untrue.    Doubtless,  at  the  time  the  statute  was 
originally  enacted  in  England,  there  was  a  great  deal  of  perjury  in 
actions  upon  oral  contracts.    Possibly  there  was  greater  likelihood 
of  false  testimony  in  trials  involving  certain  contracts  than  in  those 
involving  others.     Presumably  the  kinds  of  contracts  which,  after 
the  passage  of  the  statute,  were  required  to  be  in  writing,  com- 
prised those  contracts  concerning  whose  existence  and  nature  per- 
jury was  considered  most  likely.     The  statute  has  come  down  to 
the  present  time  practically  unchanged.     It  is  possible,  of  course, 
so  to  use  the  statute  as  to  defeat  honest  obligations,  in  which  case 
it  becomes  an  instrument  of  fraud,  rather  than  an  agency  to  prevent 
fraud.     In  spite  of  the  possibility  that  the  Statute  of  Frauds  may 
be  used  to  defeat  honest  obligations,  it  is  true  that  a  rule  which 
requires  persons  to  put  into  indisputable  form  the  terms  of  certain 
kinds  of  contracts  tends,  in  the  long  run,  to  diminish  the  amount 
of  litigation.    The  probabilities  are  that  these  general  benefits  from 
the  Statute  of  Frauds  outweigh  the  wrongs  sometimes  resulting. 


Ch.  9)  CONTRACTS   REQUIRED   TO   RE   IX   WUITIXG  363 

The  injustice  that  would  result  from  the  repeal  of  the  statute,  we 
can  probably  safely  say,  would  be  more  general  and  widespread 
than  the  injustice  now  resulting  from  the  operation  of  the  statute 
in  occasional  cases. 

There  are  two  distinct  kinds  of  problems  arising  out  of  the 
Statute  of  Frauds:  (1)  The  problem  of  interpreting  the  statute 
with  a  view  to  ascertaining  what  contracts  fall  within  the  classes 
named  in  the  statute  and  what  contracts  fall  outside  the  scope  of 
the  terms ;  (2)  the  problem  of  determining  the  legal  effect  of  non- 
compliance with  the  statute. 

With  respect  to  the  first  problem,  it  is  apparent  that,  where  a 
statute  attempts  to  designate  certain  kinds  of  contracts  and  to  pre- 
scribe a  certain  rule  with  respect  to  the  classes  thus  marked  off, 
the  language  used  to  describe  the  classes  cannot  be  so  clear  as  to 
prevent  controvei*sy  over  the  question  whether  a  particular  trans- 
action falls  within  the  statute.  This  general  type  of  problem  per- 
vades the  whole  field  of  the  law — the  problem  of  interpretation. 
If  a  statute  makes  the  felonious  taking  and  carrying  away  of  the 
personal  property  of  another  larceny,  and  A.,  with  intent  to  steal, 
takes  hold  of  B.'s  dog  and  starts  to  run  away  with  him,  when  he 
finds  that  the  dog  is  securely  chained  to  a  post,  we  have  before  us 
the  question  of  interpreting  the  words  ''taking  and  carrying  away." 
Likewise,  with  respect  to  the  Statute  of  Frauds,  if  the  statute  ap- 
plies to  all  special  promises  to  answer  for  the  debts  of  others,  the 
question  will  arise,  in  a  particular  case,  whether  the  promisor  un- 
dertook to  pay  the  debt  of  another  or  to  pay  his  own  debt. 

As  to  the  second  problem,  we  are  to  determine  whether  an  agree- 
ment not  complying  with  the  requirement  of  the  statute  is  no  con- 
tract, or  is  to  be  treated  as  an  illegal  contract,  or  is  to  be  con- 
sidered, in  some  respects,  like  any  other  contract,  and,  in  other 
respects,  different  from  the  ordinary  contract. 


SECTION    2.— CONTRACTS    OF    GUARANTY 


NUGENT  V.  WOLFE. 

(Supreme  Court  of  Pennsylvania.  1S86.     Ill  Pa.  471.  4  Atl.  ir>, 
5G  Am.  Rep.  291.) 

SterreTT,  J.  If  the  verbal  agreement  which  plaintiff  offered  to 
prove  is  within  the  supplement  of  1855  to  the  statute  of  frauds  and 
perjuries,  there  was  no  error  in  rejecting  the  testimony,  nor  in  en- 
tering judgment  of  nonsuit.     The  supplement  declares: 

"No  action  shall  be  brought  whereby  *  *  *  to  charge  the  de- 
fendant upon  any  special  promise  to  answer  for  the  debt  or  default 
of  another  unless  the  agreement  upon  which  such  action  shall  be 
brought,  or  some  memorandum  or  note  thereof,  shall  be  in  writing, 
and  signed  by  the  party  to  be  charged  therewith,  or  some  other  per- 
son by  him  authorized."    P.  L,.  308. 

Plaintiff'  gave  in  evidence  the  record  of  two  judgments  in  favor  of 
the  First  National  Bank  of  Ravenna,  one  dated  January,  1876,  against 


364  CONTRACTS  (Part  1 

Powers  &  Co.,  and  the  other  March,  1877,  against  himself  as  bail  for 
stay  of  execution  on  the  first-mentioned  judgment.  He  then  offered  to 
prove,  in  substance,  that  in  February,  1876,  defendant  Wolfe  request- 
ed him  to  become  bail  for  stay  of  execution,  and,  in  consideration  of 
his  agreeing  to  do  so.  promised  and  undertook  to  indemnify  and  save 
him  "harmless  from  any  loss  or  liability,  and  from  paying  anything 
by  reason  of  his  so  going  security" ;  that,  relying  on  said  promise  and 
undertaking  of  defendant,  he  did  become  bail  for  stay  of  execution 
on  the  judgment  against  Powers  &  Co.  This  offer  was  objected  to  on 
the  ground  that  the  agreement  was  not  in  writing  as  required  by 
the  statute,  and  the  proposed  testimony  was  excluded  by  the  court. 
In  the  same  connection  it  was  admitted  that  Powers  &  Co.  became 
insolvent;  that  plaintiff  was  compelled  to  pay  the  judgment,  then 
amounting  to  $1,499.74,  and  that  defendant,  though  often  requested, 
had  not  paid  any  portion  thereof.  The  question  thus  presented  is 
whether  the  alleged  agreement  which  plaintiff  was  not  permitted  to 
prove  is  within  the  clause  of  the  supplement  above  quoted. 

The  clause  in  question  is  copied  substantially  from  the  fourth  sec- 
tion of  the  English  statute,  29  Car.  II,  c.  3,  which,_  with  slight  changes 
in  phraseology,  has  been  generally  adopted  in  this  country.  During 
the  more  than  two  centuries  since  its  original  enactment  the  construc- 
tion of  this  section,  and  its  application  to  various  forms  of  contract, 
have  been  constantly  the  subject  of  contention;  and  on  no  question, 
perhaps,  has  there  been  greater  diversity  and  contrariety  of  judicial 
decision  in  this  as  well  as  in  the  parent  country.  Cases  of  real  or 
apparent  hardship  have  repeatedly  led  courts  to  put  a  strained  and 
unnatural  construction  on  what  appears  to  be  a  plain  and  easily  com- 
prehended act,  passed  for  the  purpose  of  preventing  the  commission 
of  fraud  and  perjury.  If  time  would  permit,  a  review  of  the  many 
conflicting  and  irreconcilable  decisions  that  from  time  to  time  have 
been  rendered,  and  the  refined  distinctions  upon  which  they  have  been 
based,  would  be  interesting ;  but  the  undertaking  would  be  too  great, 
and  withal  not  specially  profitable.  It  is  very  evident  the  statute  was 
not  intended  to  apply  except  in  cases  where,  in  addition  to  the  prom- 
,  isor  and  promisee,  there  is  also  a  third  party  to  whose  debt  or  under- 
taking the  "agreement  of  the  promisor  relates,  and  not  even  then  un- 
less the  liability  of  the  third  party  continues.  In  other  words,  the 
agreement,  to  be  within  the  pur\aew  of  the  statute,  must  in  a  certain 
sense  be  a  collateral  and  not*  an  original  undertaking.  Independently 
of  the  debt  or  liability  of  the  third  party,  there  must,  of  course,  be  a 
good  consideration  for  the  collateral  or  subordinate  agreement ;_  such, 
for  example,  as  a  benefit  or  advantage  to  the  promisor,  or  an  injury 
to  the  promisee.  It  is  difficult,  if  not  impossible,  to  formulate  a  rule 
by  which  to  determine  whether  a  promise  relating  to  the  debt  or  lia- 
bility of  a  third  person  is  or  is  not  within  the  statute ;  but,  as  a  general 
rule,  when  the  leading  object  of  the  promise  or  agreement  is  to  be- 
come guarantor  or  surety  to  the  promisee,  for  a  debt  for  which  a  third 
party  is  and  continues  to  be  primarily  liable,  the  agreement,  whether 
made  before  or  after,  or  at  the  time  with  the  promise  of  the  principal, 
is  within  the  statute,  and  not  binding  unless  evidenced  by  writing. 
On  the  other  hand,  when  the  leading  object  of  the  promisor  is  to  sub- 
serve some  interest  or  purpose  of  his  own,  notwithstanding  the  effect 
is  to  pay  or  discharge  the  debt  of  another,  his  promise  is  not  within 
the  statute.    *    *    * 


Ch.  9)  CONTRACTS   REQUIRED  TO  BE   IN   WRITING  365 

If  one  says  to  another,  "Deliver  goods  to  A.,  and  I  will  pay  you." 
the  verbal  promise  is  binding,  because  A.,  though  he  receives  the  goods, 
is  not  responsible  to  the  party  who  furnishes  them.  But  if,  instead  of 
saying,  "I  will  pay  you,"  he  says,  "I  will  see  you  paid,"  or  "I  will  pay 
you  if  he  does  not,"  or  uses  words  equivalent  thereto,  showing  that  the 
debt  is  in  the  first  instance  the  debt  of  A.,  the  undertaking  is  collateral, 
and  not  valid  unless  in  writing..  In  these  latter  cases,  the  same  con- 
sideration, viz.,  the  consideration  of  the  promise  of  the  principal,  is  a 
good  consideration  for  the  promise  of  the  surety  or  collateral  prom- 
isor. The  credit  is  given  as  well  upon  the  original  consideration  of  the 
principal  as  the  collateral  promise  of  the  surety,  and  is  a  good  con- 
sideration for  both.     *     *     * 

[Judgment  granting  nonsuit  affirmed.] 


WHITE  V.  RINTOUL. 

(Court  of  Appeals  of  New  York,  1SS8.     108  N.  T.  222.  15  N.  E.  ,318.) 

This  action  was  brought  upon  an  alleged  verbal  promise  of  defend- 
ant to  pay  the  amount  of  two  notes  owned  by  plaintiff  and  made  by 
the  firm  of  Wheatcroft  &  Rintoul. 

Finch,  J.  The  doctrine  prevailing  in  this  state  which  serves  to 
distinguish  between  original  and  collateral  promises  in  cases  arising 
under  the  statute  of  frauds  has  been  reached  in  three  stages.  Each 
was  a  definite  and  deliberate  advance  toward  a  more  faithful  obser- 
vance of  the  statute,  and  an  abandonment  of  efiforts  to  narrow  the  just 
and  natural  range  of  its  application.  When,  by  some  authorities,  it  was 
said  that  a  verbal  promise  to  pay  the  debt  of  another  was  always  col- 
lateral, and  invalid  if  the  primary  debt  continued  to  exist  concurrently 
with  the  promise,  a  simple  and  easy  test  was  furnished  to  determine 
whether  the  statute  did  or  did  not  apply.  But  when  that  test  was  dis- 
carded, and  it  became  the  law  that  a  promise  to  pay  another's  debt 
might  be  original,  although  that  debt  subsisted  and  was  in  no  manner 
extinguished,  the  presence  of  such  continued  liability  raised  a  cloud 
of  doubt  and  ambiguity,  which  perhaps  will  never  be  entirely  dissi- 
pated.    *     *     * 

[The  cases  have]  ended  in  establishing  a  doctrine  in  the  courts  of 
this  state  which  may  be  stated  with  approximate  accuracy  thus :  That 
where  the  primary  debt  subsists  and  was  antecedently  contracted,  the 
promise  to  pay  it  is  original  when  it  is  founded  on  a  new  consideration 
moving  to  the  promisor  and  beneficial  to  him,  and  such  that  the  prom- 
isor thereby  comes  under  an  independent  duty  of  payment  irrespective 
of  the  liability  of  the  principal  debtor.     *     *     * 

We  are,  therefore,  to  bring  the  facts  of  the  case  to  the  test  of  the 
rule  above  stated,  and  in  doing  so,  we  are  to  take  them  from  defend- 
ant's own  lips,  to  treat  as  true  his  representations  as  detailed  by  his 
adversary,  and  to  draw  from  the  evidence  every  possible  inference 
which  is  favorable  to  the  plaintift''s  case. 

The  firm  of  Wheatcroft  &  Rintoul,  of  which  defendant  was  not  a 
member,  became  indebted  to  the  plaintiff'  in  the  amount  of  two  notes, 
one  dated  June  1,  1880,  and  maturing  September  4,  1880,  and  the  other 
dated  July  1,  1880,  and  to  become  due  October  4,  1880.  On  the  16th 
of  August,  1880,  and  so  before  the  maturity  of  either  note,  the  defend- 
ant requested  the  plaintiff  to  forbear  any  effort  at  their  collection  un- 
til June  or  July,  1881,  promising,  if  the  plaintiff  would  do  so,  to  pay 


366  CONTRACTS  (Part  1 

the  amount  of  the  notes.  The  plaintiff  did  forbear,  and  now  sues  upon 
the  promise.  The  courts  have  held  many  times  that  a  promise  upon 
consideration  of  forbeajance  to  sue  the  debtor  is  not  original,  and,  to 
be  valid,  must  be  in  writing.     *     *     * 

One  member  of  the  debtor  firm  was  the  defendant's  son,  and  that 
firm  was  somewhat  in  debt  and  not  managing  the  business  successfully 
or  satisfactorily.  The  defendant  was  a  creditor  of  the  firm.  He  had 
loaned  to  them  something  over  $5,000,  for  which  he  held  as  security  a 
chattel  mortgage  on  the  fixtures  and  machinery  of  the  firm.  He  was, 
therefore,  to  some  extent  at  least,  a  secured  creditor.  He  represented 
to  plaintiff  that  he  had  advanced  all  the  money  for  the  business  of  the 
firm ;  that  he  was  determined  to  get  rid  of  his  son's  partner,  who  was 
drawing  money  that  was  his  money ;  that  the  business  was  not  paying, 
and  he  wanted  to  give  it  up,  or  he  was  going  to  conduct  it  alone  or 
through  his  son ;  that  if  plaintiff  tried  to  collect  his  debt  he  would 
not  be  able  to  get  anything ;  that  there  was  a  chattel  mortgage  against 
the  property ;  that  he  had  furnished  money  himself  for  which  he  had  a 
mortgage,  or  would  get  one,  and  plaintiff"  could  not  get  anything ; 
that  the  only  way  and  the  best  way  would  be  to  give  the  firm  time ; 
that  it  was  late  in  the  season,  and  by  waiting  until  the  next  summer 
they  could  sell  their  beer,  and  that  he  would  pay  plaintiff  for  the 
two  notes.  That  is  plaintiff's  account  of  the  conversation  given  on 
his  direct  examination.  On  his  cross-examination  he  added  that  de- 
fendant said  he  had  a  claim  or  a  confession  or'a  mortgage  or  some  se- 
curity for  the  amount  of  money  due  him,  and  that  plaintiff'  could  not 
get  anything  anyway,  and  that  the  money  that  was  due  defendant  was 
the  first  to  be  paid  out  of  the  firm.  Upon  the  btisis  of  this  evidence, 
the  plaintiff  contends  that  the  defendant  had  a  direct  personal  interest 
in  procuring  a  forbearance  to  sue  the  firm,  which  he  explains  in  his 
brief  by  saying  "that  if  the  plaintiff  pressed  the  collection  of  the 
notes,  and  did  not  wait  till  the  then  next  summer,  defendant  would 
lose  his  money,"  which  had  been  loaned  to  the  firm.  But  I  do  not 
discover  a  single  fact  in  the  case  which  tends  to  any  such  conclu- 
sion.    *     •*     * 

The  motive  disclosed  was  regard  for  his  son,  and  desire  that  his 
business  credit  should  not  be  damaged  by  a  failure.  The  purpose  for 
which  he  sought  delay  was  wholly  in  the  interest  of  that  son,  and  to 
enable  him  to  market  his  beer  the  next  summer,  and  so  procure  the 
means  to  pay  the  plaintiff  without  sacrifice  or  discredit.  The  debt  of 
the  firm  was  in  no  sense  defendant's  debt.  No  consideration  of  benefit 
moved  to  him  from  either  party,  and  least  of  all  had  there  been  any 
new  dealing  with  either  which  put  upon  him  a  duty  of  payment.  Be- 
fore the  promise  was  made  he  owed  no  such  duty  and  came  under  no 
such  obligation.  The  doctrine  of  the  court  clearly  stamps  the  promise 
as  collateral  and  void  for  want  of  a  writing.     *     *     * 

Judgment  reversed. 

LAMKIN  V.  PALMER. 
(Court  of  Api>eals  of  New  York,  1900.     104  N.  T.  201.  r^H  N.  E.  12.3.) 

Haight,  J.  This  action  was  brought  to  recover  the  sum  of  $2,150 
upon  an  oral  promise  of  the  defendant  to  pay  the  plaintiff  that  sum  out 
of  the  proceeds  of  the  sale  of  the  property  of  the  M.  S.  Robinson 
Musee  Company.     The  facts  are  somewhat  complicated,  but,  for  the 


Ch.  9)  CONTHACTS   REQUIRED  TO  BE   IN  WRITING  367 

purpose  of  raising  the  questions  presented  upon  this  appeal,  they  may 
be  briefly  stated  as  follows  : 

The  plaintiff  was  an  employe  and  stockholder  in  the  M.  S.  Robinson 
Musee  Company,  a  corporation  operating  theaters  in  the  city  of  Buf- 
falo and  in  the  city  of  Rochester.  He  had  loaned  to  the  president  of 
the  company,  M.  S.  Robinson,  to  be  used  by  the  company  in  the  op- 
eration of  its  theaters,  the  money  in  question.  The  Buffalo  theater 
had  been  destroyed  by  fire,  and  the  defendant  had  become  obligated  to 
pay  certain  indebtedness  incurred  by  the  Rochester  theater.  He  had 
procured  from  a  person  in  Detroit  an  offer  to  purchase  from  him  the 
Rochester  property,  and  was  endeavoring  to  procure  the  consent  of 
the  stockholders  for  the  sale  to  him  of  such  theater,  to  the  end  that 
he  might  accept  the  offer  of  the  Detroit  gentleman  and  effect  a  sale 
to  him,  and  then  appropriate  the  proceeds  to  the  payment  of  the  debts 
of  the  Rochester  theater  which  he  had  become  obligated  to  pay.  The 
defendant,  in  order  to  induce  the  plaintiff  to  sign  the  consent,  made 
the  agreement  upon  which  this  action  is  founded.  The  defendant,  by 
his  answer,  denied  many  of  the  allegations  of  the  complaint,  and  then 
alleged:  "That  the  agreement  referred  to  in  the  complaint,  if  made 
at  all,  was  made  without  consideration,  and  the  same,  not  being  in 
writing,  was  void  by  the  statute  of  frauds  of  the  state  of  New 
York."     *     *     * 

The  plaintiff  had  furnished  money  to  be  used  in  carrying  on  the 
business  of  the  corporation.  He  was  a  creditor  and  had  the  right  to 
seek  indemnity  from  the  assets  of  the  company.  The  defendant  Was 
seeking  a  transfer  of  the  assets  of  the  company,  so  that  he  could  con- 
vert the  same  into  money  and  pay  off  the  debts  that  he  had  become 
obligated  to  pay.  The  plaintiff,  by  his  consent,  released  his  right  to 
follow  the  assets  for  the  satisfaction  of  his  claim,  and  accepted  the 
promise  of  the  defendant  to  pay  him  out  of  the  proceeds  of  the  sale. 
The  contemplated  purchaser  refused  to  complete  the  purchase  unless  the 
claim  of  the  plaintiff  was  settled  or  his  consent  to  the  transfer  obtained. 
The  sale  was  for  $12,000.  The  transaction  was,  therefore,  beneficial 
to  the  defendant,  for  it  enabled  him  to  relieve  himself  of  a  greater 
portion  of  the  obligations  assumed  by  him  to  the  other  creditors.  The 
question  of  consideration  to  support  the  agreement  was  not,  there- 
fore dependent  solely  upon  the  consent  of  the  plaintiff"  as  stockhold- 
er.    *     *    * 

Judgment  [for  plaintiff]  affirmed. 


SECTION  3.— CONTRACTS  OF  EXECUTORS  AND 
ADMINISTRATORS 

The  Statute  of  Frauds  provides : 

No  action  shall  be  brought  whereby  to  charge  any  executor  or 
administrator  upon  any  special  promise  to  answer  damages  out  of 
his  own  estate,  unless  the  agreement  upon  which  such  action  shall 
be  brought,  or  some  memorandum  or  note  thereof  shall  be  in  writ- 
ing, and  signed  by  the  party  to  be  charged  therewith  or  some  other 
person  thereunto  by  him  lawfully  authorized. 

An  executor  is  nominated  by  a  testator  in  his  will,  qualifies  as 


368  CONTRACTS  (Part  1 

executor  in  the  probate  court,  receives  "letters  testamentary"  from 
the  court,  and  is  then  charged  with  the  duty  of  paying  the  testa- 
tor's debts  out  of  the  testator's  estate  and  of  distributing  the  re- 
maining property  among  the  beneficiaries  designated  in  the  will,  ac- 
cording to  the  terms  thereof.  An  administrator  occupies  the  same 
position  with  respect  to  the  estate  of  a  deceased  person,  except  as 
regards  the  source  of  his  authority.  The  administrator  is  appoint- 
ed by  a  probate  court  to  administer  the  estate  of  a  decedent  leaving 
no  will.  An  administrator  with  the  will  annexed  is  appointed  by  a 
probate  court  to  act  practically  as  executor,  where  no  executor  is 
nominated  in  the  will,  or  where  the  person  nominated  by  the  testa- 
tor fails  or  refuses  to  qualify  as  executor. 

The  above  section  of  the  Statute  of  Frauds  carries  out  the  general 
rule  that  guaranty  contracts  must  be  in  writing.  If,  for  any  rea- 
son, an  executor  or  an  administrator,  in  the  absence  of  some  in- 
dependent consideration  to  himself,  contracts  individually  to  pay 
the  debt  of  the  decedent  whom  he  represents,  such  contract  must 
be  in  writing  in  order  to  be  enforceable. 


SECTION   4.— CONTRACTS    MADE    IN    CONSIDERATION 

OF  MARRIAGE 

The  Statute  of  Frauds  provides : 

No  action  shall  be  brought  to  charge  any  person  upon  any  agree- 
ment made  upon  consideration  of  marriage,  unless  the  agreement 
upon  which  such  action  shall  be  brought,  or  some  memorandum  or 
note  thereof  shall  be  in  writing  and  signed  by  the  party  to  be  charg- 
ed therewith  or  some  other  person  thereunto  by  him  lawfully 
authorized. 

This  section  has  been  construed  not  to  require  mutual  promises 
to  marry  to  be  in  writing  in  order  to  be  enforceable.  It  is  possible 
to  construe  this  section  to  apply  to  mutual  promises  to  marry,  but 
doubtless  the  courts,  in  recognition  of  the  fact  that  people  gen- 
erally find  it  more  desirable  to  conduct  such  negotiations  orally, 
have  wisely  excluded  such  contracts  from  the  operation  of  the 
statute.  The  above  section  of  the  statute  applies  to  what  are  some- 
times called  marriage  settlement  contracts.  One  of  the  parties  to 
the  contract,  or  a  third  party,  may,  in  consideration  that  two  desig- 
nated persons  shall  marry,  promise  to  transfer  certain  property  to 
one  of  the  contracting  parties.  The  fact  of  marriage  may  be  suffi- 
cient consideration  for  this  promise,  but,  in  a  sense,  it  is  a  promise 
to  make  a  gift  upon  the  happening  of  a  certain  contingency.  It  is 
the  kind  of  contract,  therefore,  where  false  testimony  as  to  the 
making  of  such  a  promise  might  frequently  be  made,  and  it  is  prob- 
ably for  this  reason  that  it  was  included  among  those  contracts  not 
enforceable  unless  in  writing. 


Ch.  9)  CONTRACTS   REQUIRED   TO   BE   IN   WRITING  369 

SECTION   5.— CONTRACTS   FOR  THE   SALE   OF  LANDS 

With  reference  to  contracts  for  the  sale  of  interests  in  land,  the 
Statute  of  Frauds  provides : 

No  action  shall  be  brought  upon  any  contract  or  sale  of  lands, 
tenements,  or  hereditaments,  or  any  interest  in  or  concerning  them, 
unless  the  agreement  upon  which  such  action  shall  be  brought,  or 
some  memorandum  or  note  thereof  shall  be  in  writing,  and  signed 
by  the  party  to  be  charged  therewith  or  some  other  person  there- 
unto by  him  lawfully  authorized. 

A  discussion  of  the  various  interests  in  land  is  beyond  the  scope 
of  this  book.  It  should  be  apparent,  however,  that  there  are  many 
possibilities  for  dividing  the  sum  total  of  rights  of  ownership  in 
land.  The  highest  interest  in  land  is  usually  called  a  fee-simple  in- 
terest. It  is  this  interest  which  is  commonly  meant  when  we  speak 
of  a  person  as  owning  land.  It  is  possible  for  one  to  have  less  than 
a  fee-simple  title.  He  may  have  but  a  life  estate,  or  a  lease  for 
years.  The  deed,  or  will,  or  other  instrument  which  created  the 
interest,  may  provide  that,  upon  the  termination  of  the  life  estate, 
the  fee-simple  title  or  some  lesser  interest  shall  pass  to  a  third 
party.  This  future  interest  is  sometimes  called  a  remainder.  The 
interest  which  the  grantor  retains  after  creating  an  estate  in  an- 
other is  called  a  reversion.  There  are  various  other  kinds  of  future 
interests  in  land.  The  point  here  is  not,  however,  to  discuss  the  na- 
ture of  these  interests,  but  simply  to  note  the  fact  that  ownership 
in  land  is  capable  of  division  into  numerous  -interests  of  this  char- 
acter. 

There  are  other  types  of  interests  in  land.  A  person  may  have 
acquired  the  right  to  use  another's  land  in  a  particular  way,  as,  for 
example,  A.  may  have  the  right  to  drive  across  B.'s  land  and  to  use 
B.'s  private  roadway,  or  A.  may  have  acquired  the  right  to  con- 
struct a  drain  pipe  through  B.'s  land.  These  interests  are  called 
easements  or  licenses,  depending  upon  the  manner  in  which  they 
are  created.  A.  may  have  the  right  to  take  gravel  from  B.'s  gravel 
bed.  This  is  something  more  than  an  easement,  because  it  involves 
the  taking  of  something  of  value  from  B.'s  land.  Such  a  right  is 
called  a  profit. 

There  are  several  interests  in  land  which  owe  their  origin  to  the 
doctrines  of  that  branch  of  the  law  which  we  call  equity,  as,  for 
example,  the  interest  of  the  beneficiary  of  a  trust  in  land,  or  that 
of  a  mortgagee. 

Again  it  is  customary,  for  some  purposes,  to  regard  as  part  of 
the  land  all  fixtures  attached  to  the  realty,  growing  trees,  and 
growing  crops.  The  expression  "interests  in  land"  is  very  broad, 
for  it  includes  a  great  many  groups  of  rights  capable  of  segregation 
from  the  total  interest  of  ownership  and  of  sale  to  different  persons. 

In  discussing  the  transfer  of  interests  in  land,  there  are  two 
things  which  should  be  kept  quite  distinct:  (1)  The  contract 
B.&  B.Bus.Law— 24 


370  CONTRACTS  (Part  1 

which  creates  the  duty  to  transfer  the  interest;  and,  (2)  the  instru- 
ment which  actually  transfers  the  interest.  The  Statute  of- Frauds 
has  nothing  to  do  with  prescribing  the  manner  in  which  an  interest 
in  land  shall  be  transferred.  While  we  are  not  directly  interested 
in  this  subject  here,  it  may  be  remarked  in  passing  that  interests  in 
land  are  commonly  transferred  either  by  deed  or  by  will.  Inde- 
pendent rules  of  law  prescribe  that  deeds  and  wills  must  be  in  writ- 
ing, and  moreover  that  they  shall  conform  to  certain  other  formal 
requisites.  Statutes  of  the  various  states  prescribe,  generally  with 
considerable  detail,  the  form  by  which  interests  in  land  are  to  be 
conveyed,  whether  by  deed  or  by  will. 

We  are  here  interested,  however,  in  the  contract  which  ante- 
dates the  execution  and  delivery  of  the  deed,  and  we  find  that  such 
contracts  must  be  in  writing  in  order  to  be  enforceable.  Short 
term  leases  are,  in  most  states,  expressly  exempted  from  the  opera- 
tion of  the  statute,  which  makes  it  possible  to  make  a  valid  oral 
lease  in  many  states  for  a  period  of  one  year,  and  in  some  states 
for  a  period  as  long  as  three  years.  The  following  cases  will  give 
some  idea  of  a  few  of  the  questions  that  have  arisen  involving  the 
interpretation  of  this  section. 


MOORE  V.  SxMALL. 
(Supreme  Court  of  Pennsylvania,  1852.     19  Pa.  461.) 

Woodward,  J.  The  statute  of  frauds  and  perjuries,  regarded  as 
a  rule  of  property,  is  simple  and  intelligible.  Every  mind  is  capable 
of  understanding  that  contracts  about  land,  if  more  is  meant  than  a 
three  years'  lease,  must  be  in  writing.  This  rule  is  as  apprehensible 
and  appreciable  by  the  common  mind  as  those  other  statutory  rules 
which  make  twenty-one  years'  adverse  possession  of  land,  title  thereto ; 
bar  actions  on  simple  contracts  after  six  years'  delay;  require  judg- 
ments to  be  revived  once  in  five  years;  and  liens  of  mechanics  and 
material  men  to  be  entered  within  six  months  after  the  contract  ex- 
ecuted. 

And  what  rule  is  more  reasonable?  Land  is  the  most  important  and 
valuable  kind  of  property.  Or  if  it  be  not,  there  is  no  other  stake  for 
which  men  will  play  so  desperately.  In  men  and  nations  there  is  an 
insatiable  appetite  for  lands,  for  the  defence  or  acquisition  of  which 
money  and  even  blood  sometimes  are  poured  out  like  water.  The  evi- 
dence of  land  title  ought  to  be  as  sure  as  human  ingenuity  can  make 
it.  But  if  left  in  parol,  nothing  is  more  uncertain,  whilst  the  tempta- 
tions to  perjury  are  proportioned  to  the  magnitude  of  the  inter- 
est.   *    *    *  

WETOPSKY  V.  NEW  HAVEN  GAS  LIGHT  CO. 

(Supreme  Court  of  Errors  of  Connecticut,  1914.     88  Conn.  1,  90  Atl.  30, 
Aim.  Cas.  1916D,  968.) 

Action  by  Sylvester  Wetopsky  against  the  New  Haven  Gaslight 
Company.     From  a  judgment  as  of  nonsuit,  plaintiff  appeals. 

The  complaint  alleges  that  the  defendant  sold  a  dwelling  house  to 
the  plaintiff  (who  then  owned  a  lot  on  the  opposite  side  of  the  street 


Ch.  9)  COXTRACTS   REQUIRED   TO   BE   IX   AVRITIXG  371 

to  which  he  intended  to  remove  it),  for  a  good  and  valuable  consid- 
eration then  paid ;  that  the  defendant  had  knowledge  of  the  purpose 
for  which  the  plaintiff  purchased  the  house;  and  that  the  defendant 
afterwards  refused  to  permit  the  plaintifif  to  remove  or  take  posses- 
sion of  the  house  or  to  deliver  the  same  to  him.     *     *     * 

Thayer,  j,  *  *  *  The  plaintiff  claims  that  the  sale  of  a  house 
to  be  immediately  removed  from  the  land  on  which  it  stands,  and  to 
which  it  is  affixed,  is  a  sale  of  personal  property,  and  not  of  an  in- 
terest in  real  estate,  and  so  is  not  within  the  section  of  the  statute  of 
frauds  which  prevents  the  maintenance  of  an  action  upon  agreements 
for  the  sale  of  real  estate,  unless  the  same  shall  be  in  writing.     *    *     * 

Williston  says:  "If  the  contract  is  to  sell  and  deliver  a  house,  even 
though  the  house  is,  at  the  time,  affixed  to  the  realty,  it  is  a  contract 
for  the  sale  of  goods,  for  the  parties  contract  to  buy  and  sell  a  house 
separated  from  the  realty  and  moved  from  its  foundations.  On  the 
other  hand,  if  the  parties  attempt  to  make  a  present  transfer  of  a 
building  or  materials  fixed  in  a  building,  it  is  evident  that  they  are 
attempting  to  make  a  sale  of  realty,  even  though  it  is  also  agreed  that 
the  subject-matter  of  the  sale  shall  be  severed  in  a  short  time."  Wil- 
liston on  Sales,  §  66.  The  Supreme  Court  of  Massachusetts,  speaking 
in  a  case  where  the  contract  related  to  growing  trees,  said :  "It  may 
be  difficult  in  many  cases  to  determine,  from  the  terms  of  the  con- 
tract, whether  the  parties  intend  to  grant  a  present  estate  in  the  trees 
while  growing  or  only  a  right,  either  definite  or  unlimited  as  to  time, 
to  enter  and  cut  wdth  title  to  the  property  when  it  becomes  a  chattel. 
If  the  former  be  the  true  construction,  then  it  comes  within  the  stat- 
ute, and  must  be  in  waiting;  if  the  latter,  then,  though  wholly  oral, 
it  may  be  enforced."  White  v.  Foster,  102  Mass.  375,  378.  There  is 
great  conflict  in  the  decisions,  but  this  is  the  rule  in  England  and  in 
many  of  our  sister  states.  *  '•'  *  We  think,  notwithstanding  the 
numerous  opposing  authorities,  that  this  is  the  better  rule. 

Counsel  for  the  defendant  attempted  to  distinguish  cases  of  contract 
to  sell  millstones  or  other  fixtures  attached  to  the  realty  and  belonging 
to  the  owner  thereof,  *  *  *  or  a  case  of  contract  to  sell  the  boards 
and  brick  of  which  a  building  is  composed,  where  the  vendee  is  to  re- 
move the  millstones  in  the  one  case  and  to  tear  down  the  building  and 
remove  the  materials  of  which  it  is  constructed  in  the  other,  from  a 
contract  to  sell  an  entire  building  to  be  severed  and  removed  by  the 
vendee.    We  see  no  difference  in  principle  between  the  cases.     *    *     * 

Where  the  intent  to  sell  a  building  as  a  chattel  is  thus  apparent  from 
the  contract  and  circumstances  attending  it,  the  severance  may  be 
made  by  the  vendee.  *  *  *  The  fact  that  the  vendee  is  to  remove 
the  building  is  important  only  as  bearing  upon  the  intent  of  the  par- 
ties in  detemiining  whether  the  title  to  the  building  is  to  pass  at  once 
or  only  after  severance  from  the  realty.  When  the  parties  to  the 
contract  have  in  contemplation  the  sale  of  a  building  or  a  tree  as  a 
chattel,  when  it  shall  be  detached  from  the  land,  there  is  no  good  rea- 
son why  a  court  should  not  give  eft'ect  to  the  contract  as  the  parties 
understood  and  intended  it.  In  such  a  case  neither  party  intends  that 
any  interest  in  the  real  estate  shall  pass.  The  very  purpose  of  the 
contract  may  be  to  rid  the  land  of  such  tree  or  building.  Until  de- 
tached from  the  land,  the  thing  contracted  to  be  sold  would  remain  a 
part  of  the  realty,  and  a  conveyance  of  the  realty  to  a  third  party 
would  carry  it  to  the  purchaser. 


372  CONTRACTS  (Part  1 

The  implied  license  to  enter  and  sever  the  chattel,  if  this  was  to  be 
done  by  the  vendee,  would  be  revoked  by  such  conveyance  of  the  land, 
and  the  vendee's  remedy  must  be  against  the  vendor  for  breach  of 
the  contract. 

Growing  crops,  fructus  industriales,  are  an  exception  to  the  rule, 
and  may  be  sold  and  the  title  pass  to  the  purchaser  before  severance 
from  the  soil.    *    *    * 

The  plaintiff  was  entitled  to  show  that  the  contract  was  as  he  claim- 
ed for  the  sale  of  the  house  as  a  chattel  after  severance  from  the  soil, 
and  there  was  error  in  excluding  the  evidence  offered  for  this  purpose. 

There  is  error;  the  judgment  is  set  aside;  and  a  new  trial  ordered. 


MILLER  V.  BALL. 
(Court  of  Appeals  of  New  York,  1876.     64   N.  Y.  287.) 

Appeal  from  judgment  of  the  General  Term  of  the  Supreme  Court 
in  the  Third  Judicial  Department,  affirming  a  judgment  in  favor  of 
plaintiff.  This  action  was  brought  to  compel  a  specific  performance 
of  an  alleged  parol  contract  for  the  sale  of  land. 

The  referee  found  in  substance  the  following  facts :    That  in  the  fall 
of  1863,  Robert  Miller,  agent  of  plaintiff,  without  disclosing  his  agency, 
made  a  verbal  contract  with  Philip  Potter,  defendant's  agent,  for  the 
purchase  of  fifty  acres  of  land  at  three  dollars  per  acre,  which  he 
agreed  to  pay  on  delivery  of  a  v/arranty  deed,  Potter  agreeing  to  have 
a  survey  made  and  to  procure  the  deed.    This  land  was  subsequently 
surveyed  and  its  metes  and  bounds  fixed.    Defendant,  upon  receipt  of 
the  survey  bill,  executed  a  warranty  deed  of  the  premises  to  Robert 
Miller.    The  consideration  was  stated  therein  to  be  $100,  and  there  was 
a  reservation  of  mines  and  minerals,  and  the  right  to  use  and  occupy 
all  streams  for  logging  and  milling  purposes.    The  deed  was  delivered 
by  Potter  to  Robert  Miller,  who  delivered  it  to  plaintiff,  who  objected 
to  the  statement  of  consideration  and  to  the  reservations  and  returned 
it  to  Robert,  who  returned  it  to  Potter,  who  agreed  to  have  it  corrected 
and  returned.    The  deed  was  sent  back  to  defendant,  who,  after  prom- 
ising several  times  to  fix  the  matter  satisfactorily,  in  April,  1867,  re- 
fused to  execute  a  deed  unless  paid  two  dollars  more  per  acre.    Plain- 
tiff tendered  a  deed  and  demanded  that  defendant  execute  the  same, 
which  he  refused.    The  referee  also  found  as  follows:    "The  land  in 
question  is  situated  about  two  and  a-half  miles  from  a  highway  in  one 
direction,  and  about  five  miles  in  another,  and  was  a  wild,  uncultivat- 
ed lot,  and  of  no  practical  value  for  cultivation  until  cleared,  nor  for 
any  purpose  without  means  of  access  to  it  by  teams.     In  November, 
1864,  the  plaintiff  entered  upon  the  lot,  cut  and  constructed  a  road 
thereto  across  the  adjoining  lands  of  other  parties,  under  a  parol  license 
from  the  owners,  to  construct,  occupy  and  use  the  same,  said  road  con- 
necting with  roads  which  the  plaintiff  also  made  upon  the  lot  in  ques- 
tion.   He  underbrushed  and  cut  up  fallen  trees,  preparatory  to  clearing 
about  a  quarter  of  an  acre  of  land ;  built  a  bough  shanty,  and  since  that 
time  and  down  to  the  commencement  of  this  action,  on  the  12tli  day  of 
April,  1867,  he  continued  in  the  occupancy  of  the  said  lot,  cutting  trees 
and  timber  upon  it,  and  paying  the  taxes  thereon,  and  also  continued  to 
labor  upon  and  improve  the  roads  upon  the  lot  and  those  connecting 
the  same  with  the  public  highway. 


Ch.  9)  CONTRACTS  REQUIRED  TO   BE   IN   WRITING  373 

Earl,  J.  We  will  assume,  for  the  present  purpose,  that  there  was 
not  a  sufficient  note  or  memorandum  of  the  agreement  between  the 
parties  to  satisfy  the  requirement  of  the  statute  of  frauds,  and  we 
still  reach  a  conclusion  adverse  to  the  appellant.     *     *     * 

It  is  not  always  easy  to  determine  whether  there  has  been  sufficient 
part  performance  of  a  parol  agreement  for  the  sale  of  land,  in  the  sense 
of  courts  of  equity,  to  free  it  from  the  operation  of  the  statute  of 
frauds.  The  general  rule  is  that  nothing  is  to  be  considered  as  a  part 
performance  which  does  not  put  the  party  into  a  situation  which  is  a 
fraud  upon  him,  unless  the  agreement  is  fully  performed.  *  *  * 
The  principle  upon  which  courts  of  equity  hold  that  part  performance 
is  sufficient  is  that  a  party  who  has  permitted  another  to  perform  acts 
on  the  faith  of  an  agreement  shall  not  be  allowed  to  insist  that  the 
agreement  is  invalid  because  it  was  not  in  writing,  and  that  he  is  en- 
titled to  treat  those  acts  as  if  the  agreement  in  compliance  with  which 
they  were  performed  had  not  been  made;  in  other  words,  upon  the 
ground  of  fraud,  in  refusing  to  execute  the  parol  agreement  after  a 
part  performance  thereof  by  the  other  party,  and  when  he  cannot  be 
placed  in  the  same  situation  that  he  was  in  before  such  part  perform- 
ance by  him.  Taking  possession  under  a  parol  agreement,  with  the 
consent  of  the  vendor,  accompanied  with  other  acts  which  cannot  be 
recalled  so  as  to  place  the  party  taking  possession  in  the  same  situa- 
tion that  he  was  in  before,  has  always  been  held  to  take  such  agreement 
out  of  the  operation  of  the  statute.     *    *    * 

The  payment  of  the  consideration  alone,  in  a  case  where  its  recovery 
in  an  action  at  law  would  fully  indemnify  the  party  paying,  would  not 
be  a  sufficient  part  performance  within  the  rule  under  consideration, 
and  neither  wotild  mere  possession  be,  without  any  other  circumstance 
of  hardship  or  fraud.  But  payment  of  the  consideration  and  posses- 
sion under  the  agreement,  or  by  the  consent  of  the  vendor,  are  facts 
which  may  be  considered  with  other  facts  upon  the  question  of  part 
performance.  Here  the  whole  consideration-money  was  paid,  and  the 
plaintiff  took  all  the  possession  of  such  a  lot  which  is  ordinarily  practi- 
cable. He  built  roads  to  it  and  upon  it ;  built  a  shanty  and  made  some 
clearing.  His  improvements  thus  made  were  probably  equal  in  cost  to 
the  consideration  paid  for  the  lot,  and  that  cost  would  be  lost  to  him 
unless  the  defendant  be  compelled  to  perform  his  agreement.  He  paid 
the  taxes,  and  the  money  thus  paid  he  cannot  recover  back.  I  am 
therefore  of  opinion  that  enough  was  done  by  the  plaintiff  to  bring  his 
case  within  the  equitable  rule  as  to  part  performance. 

But  before  acts,  otherwise  sufficient  for  part  performance,  can  have 
the  effect  within  the  rule,  they  must  have  been  done  in  pursuance  or 
fulfillment  of  the  parol  agreement,  or  in  just  reliance  thereon.  They 
must  have  been  done  with  a  view  to  the  agreement,  and  be  referable 
exclusively  thereto.  *  *  *  In  the  respects  here  mentioned,  plaintiff's 
acts  were  sufficient.  The  plaintiff  paid  the  entire  consideration  under 
the  agreement.     *     *     * 

Judgment  affirmed 


374  CONTRACTS  (Part  1 


SECTION  6.— CONTRACTS  NOT  TO  BE  PERFORMED 
WITHIN  THE  SPACE  OF  ONE  YEAR 

The  section  of  the  Statute  of  Frauds  here  involved  provides  as 
follows : 

No  action  shall  be  brought  upon  any  agreement  that  is  not  to 
be  performed  within  the  space  of  one  year  from  the  making  there- 
of, unless  the  agreement  upon  which  such  action  shall  be  brought, 
or  some  memorandum  or  note  thereof  shall  be  in  writing,  and 
signed  by  the  party  to  be  charged  therewith  or  some  other  per- 
son thereunto  by  him  lawfully  authorized. 


DOYLE  V.  DIXON. 

(Supreme  Judicial  Court  of  Massachusetts,  18G7.     97  Mass.  208, 
93  Am.  Dec.   SO.) 

Defendant  sold  his  grocery  business  to  plaintiff,  and  agreed  not  to  go 
into  the  grocery  business  in  the  same  village  within  the  next  five  years. 
Defendant  contends  that  this  agreement  is  within  the  statute  of  frauds. 
The  trial  judge  ruled  that  the  agreement  was  not  within  the  statute. 
Defendant  excepts  to  this  ruling. 

Gray,  J.  It  is  well  settled  that  an  oral  agreement  which  accord- 
ing to  the  expression  and  contemplation  of  the  parties  may  or  may  not 
be  fully  performed  within  a  year  is  not  within  that  clause  of  the 
statute  of  frauds,  which  requires  any  "agreement  not  to  be  performed 
within  one  year  from  the  making  thereof"  to  be  in  writing  in  order 
to  maintain  an  action.  An  agreement  therefore  which  will  be  com- 
pletely performed  according  to  its  terms  and  intention  if  either  party 
should  die  within  the  year  is  not  within  the  statute.  Thus  in  Peters  v, 
Westborough,  19  Pick.  364,  31  Am.  Dec.  142,  it  was  held  that  an 
agreement  to  support  a  child  until  a  certain  age  at  which  the  child 
would  not  arrive  for  several  years  was  not  within  the  statute,  because 
it  depended  upon  the  contingency  of  the  child's  life,  and,  if  the  child 
should  die  within  one  year  would  be  wholly  performed.  On  the 
other  hand,  if  the  agreement  cannot  be  completely  performed  within 
a  year,  the  fact  that  it  may  be  terminated,  or  further  performance  ex- 
cused or  rendered  impossible,  by  the  death  of  the  promisor  or  of  anoth- 
er person  within  a  year,  is  not  sufficient  to  take  it  out  of  the  statute. 
It  was  therefore  held  in  Hill  v.  Hooper,  1  Gray,  131,  that  an  agree- 
ment to  employ  a  boy  for  five  Years  and  to  pay  his  father  certain  sums 
at  stated  periods  during  that  time  was  within  the  statute ;  for  although 
by  the  death  of  the  boy  the  services  which  were  the  consideration  of 
the  promise  would  cease,  and  the  promise  therefore  be  determined, 
it  would  certainly  not  be  completely  performed.  So  if  the  death  of 
the  promisor  within  the  year  would  merely  prevent  full  performance 
of  the  agreement,  it  is  within  the  statute ;  but  if  his  death  would  leave 
the  agreement  completely  performed  and  its  purpose  fully  carried  out, 
it  is  not.  It  has  accordingly  been  repeatedly  held  by  this  court  that 
an  agreement  not  hereafter  to  carry  on  a  certain  business  at  a  particu- 
lar place  was  not  within  the  statute,  because,  being  only  a  personal 
engagement  to    forbear   doing  certain  acts,   not   stipulating   for   any- 


Ch.  9)  CONTRACTS   REQUIRED   TO   BE   IN   WRITING  375 

thing  beyond  the  promisor's  life,  and  imposing  no  duties  upon  his 
legal  representatives,  it  would  be  fully  performed  within  the  year. 
*  *  *  An  agreement  not  to  engage  in  a  certain  kind  of  business 
at  a  particular  place  for  a  specified  number  of  years  is  within  the  same 
principle ;  for  whether  a  man  agrees  not  to  do  a  thing  for  his  life, 
or  never  to  do  it,  or  only  not  to  do  it  for  a  certain  number  of  years, 
it  is  in  either  form  an  agreement  by  which  he  does  not  promise  that 
anything  shall  be  done  after  his  death,  and  the  performance  of  which 
is  therefore  completed  with  his  life.  An  agreement  to  do  a  thing  for 
a  certain  time  may  perhaps  bind  the  promisor's  representatives,  and  at 
any  rate  is  not  performed  if  he  dies  within  that  time.  But  a  mere 
agreement  that  he  will  himself  refrain  from  doing  a  certain  thing  is 
fully  performed  if  he  keeps  it  so  long  as  he  is  capable  of  doing  or 
refraining.  The  agreement  of  the  defendant  not  to  go  into  business 
again  in  Chicopee  for  five  years  was  therefore  not  within  the  statute 
of  frauds.  *  *  * 
Exceptions  overruled. 


O'DONNELL  v.   DAILY  NEWS  CO.   OF  MINNEAPOLIS. 
(Supreme  Court  of  Minnesota,  1912.     119  Minn.  378,  138  N.  W.  677.) 

Philip  E.  Brown,  J.  This  is  an  action  for  damages  for  breach  of 
an  alleged  contract  for  the  plaintifif's  employment  as  advertising  man- 
ager for  the  defendant,  the  Minneapolis  Daily  News.     *     *     * 

Was  the  contract  within  the  statute  of  frauds,  as  being  a  contract 
not  to  be  performed  within  one  year  from  the  making  thereof?  In 
its  ultimate  analysis,  however,  the  question  here  is :  What  must  be 
deemed  to  be  the  date  contemplated  by  the  contract  for  the  commence- 
ment of  its  performance?  For  it  is  settled  that  a  contract  for  services, 
which  by  its  terms  shows  that  it  is  not  to  be  performed  or  is  inca- 
pable of  performance  within  one  year  from  the  making  thereof,  is 
within  the  statute,     *     *     *     while  a  contract  for  one  year's  services 

commencing  on   the  date  of  the  contract  is  not   within  the  statute. 

*     *     * 

Does,  then,  the  contract  here  involved  show  that  it  was  not  to  be 
performed  or  was  incapable  of  performance  within  one  year  from  the 
date  on  which  it  was  made,  January  31,  1910?  The  plaintiff  contends 
that  it  does  not  so  appear,  insisting  that  it  must  be  deemed  to  be  for 
'one  year's  services,  beginning  January  31st,  and  ending  on  the  same 
date  in  the  following  year.  The  defendant,  on  the  other  hand,  contends 
that  the  contract  was  for  services  beginning  February  7th.  As  be- 
tween these  two  contentions,  we  hold  with  the  defendant.  *  *  * 
February  7th  was  the  date  in  the  minds  of  the  parties  throughout  the 
negotiations,  and  such  date  was  expressly  incorporated  in  the  con- 
tract by  the  telegrams  and  the  letter  above  quoted.  It  was  the  date 
fixed  as  giving  the  plaintiff  a  reasonable  time  in  which  to  reach  Minne- 
apolis from  his  home  in  another  state,  and  the  distance  he  would  have 
to  travel  in  order  to  reach  Minneapolis  precluded  the  possibility  of 
his  actually  beginning  work  in  that  city  on  the  date  of  his  telegram 
of  acceptance. 

Undoubtedly  the  parties  could  have  contracted  that  the  plaintiff's 
services,  and  his  pay,  should  be  deemed  to  begin  January  31st;  but  they 
did  not  do  this.    Nor  did  they  leave  the  date  undetermined.    They  fix- 


376  CONTRACTS  (Part  1 

ed  February  7th  as  the  date  when  the  plaintiff  should  come  and  take 
the  position  contracted  for.  *  *  *  jf  nothing  whatever  had  been 
said  about  when  the  plaintiff  was  to  report  for  work,  there  might  be 
room  for  the  plaintiff's  contention  that  a  contract  is,  if  possible,  to  be 
construed  so  as  to  keep  it  out  of  the  operation  of  the  statute  of  frauds, 
and  that  where  no  other  date  is  specified  the  date  of  the  contract  will 
be  presumed  to  be  the  date  for  the  commencement  of  its  performance ; 
but  where,  as  in  this  case,  the  contract  indicates  the  date  when  the 
services  are  to  begin  such  contentions  are  irrelevant.  *  *  *  ^nd 
it  makes  no  difference  that  the  year  is  exceeded  by  only  a  week.  "An 
hour  more  than  the  time  specified  is  in  law  as  fatal  to  the  contract  as 
though  it  were  two,  five,  or  a  hundred  years."     *     *     * 

The  contract  in  this  case  being,  as  we  have  held  above,  one  which 
contemplated  that  its  performance  should  commence  in  future,  and 
that  the  services  contracted  for  should  continue  for  one  year  from  the 
commencement  thereof,  it  follows  that,  in  the  absence  of  writing  suffi- 
cient to  satisfy  the  statute  of  frauds,  the  plaintiff  was  not  entitled  in 
any  event  to  a  more  favorable  judgment  than  he  obtained. 

Judgment  affirmed. 


SECTION  /.—CONTRACTS  FOR  THE  SALE  OF  PERSONAL 

PROPERTY 

The  English  Statute  of  Frauds  prescribed  that  all  contracts  for 
the  sale  of  goods  of  the  value  of  £10,  in  order  to  be  enforceable, 
must  be  in  writing,  unless  the  buyer  has  made  a  partial  payment  or 
accepted  and  received  the  goods.  This  section  has  been  re-enacted 
in  most,  but  not  all,  of  the  states  in  this  country.  The  section  was 
commonly  made  to  apply  to  contracts  where  the  value  of  the  prop- 
erty was  $50  or  over.  There  is  some  variation  as  to  the  amount 
in  the  various  states.  The  Uniform  Sales  Act,  which  has  codified 
most  of  the  common  law  relating  to  contracts  for  the  sale  of 
goods,  contains  a  section  which  is  a  restatement  of  that  section 
of  the  statute  of  frauds  dealing  with  sales  of  personal  property. 

This  section  reads  as  follows : 

Section  4.  (1)  A  contract  to  sell  or  a  sale  of  any  goods  or 
choses  in  action  of  the  value  of  five  hundred  dollars  or  upwards 
shall  not  be  enforceable  by  action  unless  the  buyer  shall  accept 
part  of  the  goods  or  choses  in  action  so  contracted  to  be  sold,  or 
sold,  and  actually  received  the  same,  or  give  something  in  earnest 
to  bind  the  contract,  or  in  part  payment,  or  unless  some  note  or 
memorandum  in  writing  of  the  contract  or  sale  be  signed  by  the 
party  to  be  charged  or  his  agent  in  that  behalf. 

(2)  The  provisions  of  this  section  apply  to  every  such  contract 
or  sale  notwithstanding  that  the  goods  may  be  intended  to  be  de- 
livered at  some  future  time  or  may  not,  at  the  time  of  such  con- 
tract or  sale,  be  actually  made,  procured  or  provided  or  fit  or  ready 
for  delivery,  or  some  act  may  be  requisite  for  the  making  or  com- 
pleting thereof,  or  rendering  the  same  fit  for  delivery;  but  if  the 
goods  are  to  be  manufactured  by  the  seller  especially  for  the  buyer 


Ch.  9)  CONTRACTS   REQUIRED  TO  BE   IN  WRITING  377 

and  are  not  suitable  for  sale  to  others  in  the  ordinary  course  of  the 
seller's  business,  the  provisions  of  this  section  shall  not  apply. 

(3)  There  is  an  acceptance  of  goods  within  the  meaning  of  this 
section,  when  the  buyer,  either  before  or  after  delivery  of  the  goods, 
expresses,  by  words  or  conduct,  his  assent  to  becoming  the  owner 
of  those  specific  goods. 


GODDARD  V.  BINNBY. 

(Suprerae  Judicial  Court  of  Massachusetts,  1S74.     115  Mass.  450, 
15  Am.  Rep.  112.) 

The  plaintiff,  a  carriage  manufacturer  in  Boston,  testified  that  the 
defendant  came  to  his  place  of  business  in  April,  1872,  and  directed  the 
plaintiff  to  make  for  him  a  buggy,  and  the  plaintiff  entered  the  order 
in  his  order  book;  the  defendant  gave  directions  that  the  color  of  the 
lining  should  be  drab,  and  the  outside  seat  of  cane,  and  as  to  the 
painting,  and  also  that  the  buggy  was  to  have  on  it  his  monogram  and 
initials.  The  sum  of  $675  was  agreed  as  the  price.  It  was  to  be  done 
in  or  about  four  months.  The  plaintiff  immediately  began  work  upon 
the  buggy  and  made  every  part,  it  being  painted,  lined,  and  with  the 
initials,  as  ordered.  By  the  fire  of  November  9,  1872,  this  buggy  and 
all  the  property  on  the  plaintiff's  premises  were  destroyed.  Plaintiff 
sues  defendant  for  the  price.  Upon  the  evidence,  the  presiding  judge 
directed  a  verdict  for  the  defendant. 

Ames,  J.  Whether  an  agreement  like  that  described  in  this  report 
should  be  considered  as  a  contract  for  the  sale  of  goods,  within  the 
meaning  of  the  statute  of  frauds,  or  a  contract  for  labor,  services  and 
materials,  and  therefore  not  within  that  statute,  is  a  question  upon 
which  there  is  a  conflict  of  authority.  According  to  a  long  course  of 
decisions  in  New  York,  and  in  some  other  states  of  the  Union,  an 
agreement  for  the  sale  of  any  commodity  not  in  existence  at  the  time, 
but  which  the  vendor  is  to  manufacture  or  put  in  a  condition  to  be 
delivered  (such  as  flour  from  wheat  not  yet  ground,  or  nails  to  be  made 
from  iron  in  the  vendor's  hands),  is  not  a  contract  of  sale  within  the 
meaning  of  the  statute.  *  *  *  j^  England,  on  the  other  hand,  the 
tendency  of  the  recent  decisions  is  to  treat  all  contracts  of  such  a  kind 
intended  to  result  in  a  sale,  as  substantially  contracts  for  the  sale  of 
chattels ;  and  the  decision  in  Lee  v.  Griffin,  1  B.  &  S.  272,  goes  so  far 
as  to  hold  that  a  contract  to  make  and  fit  a  set  of  artificial  teeth  for  a 
patient  is  essentially  a  contract  for  the  sale  of  goods,  and  therefore  is 
subject  to  the  provisions  of  the  statute.     *     *     * 

In  this  commonwealth,  a  rule  avoiding  both  of  these  extremes  was 
established  in  Mixer  v.  Howarth,  21  Pick.  205,  32  Am.  Dec.  256,  and 
has  been  recognized  and  affirmed  in  repeated  decisions  of  more  recent 
date.  The  effect  of  these  decisions  we  understand  to  be  this,  namely, 
that  a  contract  for  the  sale  of  articles  then  existing,  or  such  as  the 
vendor  in  the  ordinary  course  of  his  business  manufactures  or  pro- 
cures for  the  general  market,  whether  on  hand  at  the  time  or  not,  is  a 
contract  for  the  sale  of  goods,  to  which  the  statute  applies.  But  on  the 
other  hand,  if  the  goods  are  to  be  manufactured  especially  for  the  pur- 
chaser, and  upon  his  special  order,  and  not  for  the  general  market,  the 
case  is  not  within  the  statute.  *  *  *  "The  distinction,"  says  Chief 
Justice  Shaw,  in  Lamb  v.  Crafts,  12  ]\Ietc.  353,  "we  believe  is  now  well 


378  CONTRACTS  (Part  1 

understood.  When  a  person  stipulates  for  the  future  sale  of  articles, 
which  he  is  habitually  making,  and  which,  at  the  time,  are  not  made  or 
finished,  it  is  essentially  a  contract  of  sale,  and  not  a  contract  for 
labor ;  otherwise,  when  the  article  is  made  pursuant  to  the  agreement." 
In  Gardner  v.  Joy,  9  Aletc.  177,  a  contract  to  buy  a  certain  number  of 
boxes  of  candles  at  a  fixed  rate  per  pound,  which  the  vendor  said  he 
would  manufacture  and  deliver  in  about  three  months,  was  held  to  be 
a  contract  of  sale  and  within  the  statute.  *  *  *  jj-i  this  case,  the 
carriage  was  not  only  built  for  the  defendant,  but  in  conformity  in  some 
respects  with  his  directions,  and  at  his  request  was  marked  with  his 
initials.  It  was  neither  intended  nor  adapted  for  the  general  market. 
*  *  *  We  must  therefore  hold  that  the  statute  of  frauds  does  not 
apply  to  the  contract  which  the  plaintifi:  is  seeking  to  enforce  in  this 
action.     *     *     *     Judgment  entered  for  the  plaintiff. 


WEEKS  V.  CRIE  et  al. 

(Supreme  Judicial  Court  of  Maine.  190O.     94  Me.  458,  48  Atl.  107, 
80  Am.  St.  Eep.  410.) 

Assumpsit  to  recover  damages  for  nondelivery  of  a  quantity  of  fish, 
M^hich  the  plaintiff  alleged  he  purchased  of  the  defendants  under  an 
oral  contract.  The  defendants  denied  the  contract,  and  invoked  the 
statute  of  frauds.  The  verdict  was  for  plaintiff,  and  damages  assessed 
at  $128.70.     *     *     * 

■Savage,  J.  At  the  trial  of  this  case  the  plaintiff  claimed,  and  in- 
troduced evidence  tending  to  show,  that  the  defendants  in  November, 
1898,  orally  agreed  to  sell  him  from  three  to  five  hundred  drums  of 
hake  at  $1.65  per  kentle,  to  be  delivered  at  Rockland  when  called  for  by 
him,  and  at  the  same  interview  agreed  to  sell  him  ten  barrels  of  split 
herring  at  $4.25  per  barrel,  to  be  delivered  in  Rockland  by  next  boat 
from  Criehaven,  which  would  be  within  one  week;  that  he  (the  plain- 
tiff") orally  agreed  with  the  defendants  to  purchase  the  hake  and  the 
herring  upon  these  terms.  It  was  admitted  by  the  defendants  that  they 
sold  the  herring  to  the  plaintiff  as  claimed,  and  that  they  were  delivered 
according  to  the  agreement,  and  paid  for  by  the  plaintiff.  The  plaintiff 
in  January,  1899,  demanded  300  drums  of  hake  to  be  delivered  in  ac- 
cordance with  the  alleged  agreement,  but  the  defendants  refused  to 
deliver  them;  and  to  recover  damages  for  that  alleged  breach  of  con- 
tract this  action  was  brought. 

The  defendants  denied  that  they  agreed  to  sell  any  hake  to  the  plain- 
tiff. But  the  jury,  under  instructions  to  which  no  exceptions  were 
taken,  have  found  they  did  make  such  a  contract.  In  this  contingency 
the  defendants  claim  that,  if  any  such  contract  of  sale  was  made,  it 
was  oral  merely,  and,  being  for  more  than  $30,  it  was  invalid  under 
the  statute  of  frauds.  The  case  shows  that  no  memorandum  was 
made,  and  nothing  was  given  in  earnest  to  bind  the  bargain ;  and  the 
defendants  claim  that  no  part  of  the  goods  sold  were  accepted  and  re- 
ceived by  the  purchaser,  so  as  to  bind  the  defendants  to  deliver  the 
hake.  This  last  proposition  is  controverted  by  the  plaintiff,  and  here- 
on, as  will  be  seen,  the  case  hinges.     *     *     * 

The  plaintiff,  however,  contends  that  the  contracts  for  the  hake  and 
the  herring  constituted  in  fact  but  one  entire  contract  for  hake  and 
herring,  and  that  his  acceptance  and  receipt  of  the  herring,  a  part  of  the 


Ch.  9)  CONTRACTS   REQUIRED   TO   BE   IN   WRITING  379 

merchandise  contracted  for,  took  the  sale  out  of  the  statute  as  to  the 
whole.     *     *     * 

Now,  if  there  were  two  separate  contracts  of  sale,  one  for  the  herring 
and  one  for  the  hake,  it  is  clear  that  the  acceptance  and  receipt  of  the 
herring  did  not  take  the  contract  for  the  hake  out  of  the  statute,  for  an 
acceptance  under  one  contract  cannot  make  another  contract  valid. 
But  if  there  was  in  fact  only  one  contract,  for  both  herring  and  hake, 
negotiated  for,  it  may  be,  successively,  a  delivery  followed  by  an  ac- 
ceptance and  receipt  of  the  herring  did  take  the  hake  out  of  the  stat- 
ute.    *     *     * 

The  application  of  the  statute  of  frauds  in  case  of  the  purchase  of  a 
number  of  articles  at  the  same  transaction  may  depend  upon  whether 
there  is  one  contract  or  more.  The  mere  fact  that  a  separate  price  is 
agreed  upon  for  each  article,  or  even  that  each  article  is  laid  aside  as 
purchased,  makes  no  difference,  so  long  as  the  different  purchases  are 
so  connected  in  time  or  place,  or  in  the  conduct  of  the  parties,  that  the 
whole  may  be  fairly  considered  as  one  transaction.  *  *  *  Such  is 
the  common  case  of  a  number  of  articles  purchased  at  private  sale  of 
a  shopman,  for  instance,  at  the  same  time,  though  at  separate  prices. 
*  *  *  The  same  doctrine  was  applied  in  a  case  where  the  parties 
made  bargains  for  the  purchase  and  sale  of  several  lots  of  timber  at 
different  places,  some  miles  apart ;  the  bargains  being  made  at  the  dif- 
ferent places  and  at  separate  prices,  but  all  on  the  same  day.  *  *  * 
Such  purchases  may  be  regarded  as  entire,  though  composed  of  sep- 
arate parts.  But  whether  such  negotiations  for  separate  articles  result 
in  one  entire  contract  for  the  whole,  or  whether  the  contract  for  each 
remains  separate  and  distinct,  may  depend  upon  many  circumstances. 
It  raises  a  question  of  fact  properly  to  be  passed  upon  by  a  jury.  Were 
the  transactions  near  in  time  or  place  or  similar  in  circumstances? 
What  was  the  conduct  of  the  parties?  Was  the  seller  a  merchant  en- 
gaged in  the  regular  course  of  his  business  in  his  shop  or  store?  What 
was  the  language  used  ?  What  are  the  proper  inferences  to  be  drawn  as 
to  the  intention  of  the  parties?  The  answers  to  these  and  other  like 
questions  solve  the  problem.  If  the  circumstances  are  such  as  to  lead 
to  a  reasonable  supposition  that  the  parties  intended  that  the  whole 
series  of  transactions  should  constitute  one  trade,  they  may  be  regard- 
ed as  one  entire  contract ;   otherwise,  not. 

Now,  in  the  case  at  bar,  the  jury  were  instructed,  in  effect,  that,  if 
the  two  contracts  for  sale  were  made  at  the  same  interview,  that  would 
be  sufficient.  We  think  this  ruling  was  erroneous.  Even  if  there  were 
no  other  facts  or  circumstances  to  be  considered,  which  is  hardly  sup- 
posable,  it  cannot  be  said,  as  a  matter  of  law,  that  the  mere  fact  that 
the  negotiations  for  the  herring  and  the  hake  were  made  at  the  same  in- 
terview resulted  in  a  single  contract.  They  may  have  constituted  one 
contract  only,  and  they  may  not.  If  not,  then  the  hake  were  not  taken 
out  of  the  statute  by  the  acceptance  of  the  herring.  Whether  the  nego- 
tiations constituted  one  contract  or  niore~was  a  question  of  fact,  and 
should  have  been  submitted  to  the  jury. 

Exceptions  sustained. 


380  CONTRACTS  (Part  1 

SECTION  8.— COMPLIANCE  WITH  THE  STATUTE 


CASTLE  V.   SWIFT  &  CO. 
(Court  of  Appeals  of  Maryland,  1918.     132  Md.  631,  KM  Atl.  187.) 

Pattison,  J.  The  action  in  this  case  was  brought  by  the  appellee, 
Swift  &  Co.,  to  recover  the  loss  sustained  by  it  in  the  resale  of  eggs 
claimed  to  have  been  sold  by  it  to  the  appellant,  Frederick  C.  Castle, 
and  which  he  refused  to  take  under  such  alleged  sale.  This  appeal 
presents  the  question  whether,  under  the  statute  known  as  the  "Sales 
Act,"  there  was  a  sale  of  the  eggs  by  the  appellee  to  the  appellant  that 
can  be  legally  enforced. 

J.  Frederick  Conrad,  salesman  for  Swift  &  Co.,  testified  that  on 
Friday  night,  November  24,  1916,  the  defendant,  a  dealer  in  butter  and 
eggs  in  the  city  of  Baltimore,  called  the  plaintiff  over  the  phone  at  its 
Eutaw  Market,  Baltimore,  Md.,  and  asked  the  price-  of  eggs.  Wit- 
ness quoted  them  to  him  at  Z7  cents  per  dozen,  whereupon  the  defend- 
ant first  offered  36  cents,  but  finally  offered  to  purchase  200  cases  and 
to  pay  therefor  361^  cents  per  dozen,  if,  as  stated  by  the  witness,  "I 
would  put  them  in  our  upstairs  butter  cooler,  and  he  would  order 
them  out  as  he  needed  them."  The  eggs  were  to  be  placed  in  the  but- 
ter cooler  to  save  him  the  cost  of  storage.  This  offer  was  accepted, 
but,  as  Saturday  was  "a  half  holiday,"  the  eggs  were  not  put  aside  for 
the  defendant  until  Monday,  when,  as  requested  by  him,  they  were 
put  in  the  butter  cooler  and  designated  as  his  eggs.  On  Tuesday 
morning  the  eggs  were  billed  to  him.  On  Wednesday  morning  the 
defendant  again  called  the  plaintiff  over  the  phone,  and  Conrad,  who 
answered  the  phone,  was  told  by  him  that  "the  ^.gg  deal  was  off." 
Castle  assigned  as  a  reason  therefor  that  the  plaintiff's  Pratt  Street 
Market,  as  well  as  another  dealer,  had  offered  eggs  to  him  at  a  lower 
price.  The  plaintiff  refused  to  treat  the  deal  as  off,  and  upon  the 
defendant's  refusal  to  take  the  eggs  and  to  comply  with  the  terms  of 
said  agreement,  they  were  resold  by  the  plaintiff ;  the  sum  received 
therefor  being  less  than  the  amount  at  which  they  had  been  sold  to  the 
defendant  at  such  alleged  sale.     *     *     * 

It  is  conceded  that  there  was  nothing  given  in  earnest  to  bind  the 
contract,  or  in  part  payment  of  the  purchase  money  for  the  eggs  said 
to  have  been  bought  by  the  defendant,  and  that  there  was  no  note  or 
memorandum  in  writing  of  the  contract  or  sale  signed  as  required  by 
the  statute;  consequently,  in  order  to  hold  the  contract  or  sale  bind- 
ing and  enforceable  against  the  defendant,  the  alleged  buyer,  it  must 
be  shown  that  he  accepted  at  least  a  part  of  the  eggs  contracted  to  be 
sold  or  sold,  and  that  he  actually  received  the  same.  Therefore  in  this 
case  we  are  concerned  only  in  the  meaning  of  the  statute  in  respect  to 
the  provisions  requiring  acceptance  and  receipt  by  the  buyer  of  the 
goods  sold. 

It  is  clear  that  the  terms  of  the  statute  require  two  distinct  acts  on 
the  part  of  the  vendee ;  he  must  accept,  and  he  must  actually  receive, 
a  part  of  the  goods,  in  order  to  render  the  contract  binding  on  him. 
There  may  be  an  actual  receipt  without  any  acceptance,  and  there  may 
be  an  acceptance  without  any  receipt.  An  acceptance  may  precede 
or  follow  the  receipt,  or  it  may  be  contemporaneous  therewith;    and 


Ch.  9)  CONTRACTS   REQUIRED  TO  BE   IN   WRITING  381 

at  times  even  a  receipt  may  be  evidence  of  acceptance,  but  it  is  not 
the  same  thing.  *  *  *  As  defined  by  the  statute  (section  25)  there 
is  an  acceptance  of  the  goods  "when  the  buyer,  either  before  or  after 
delivery  of  the  goods,  expresses  by  words  or  conduct  his  assent  to 
become  the  owner  of  those  specific  goods."  By  section  69  of  the  same 
article  he  "is  deemed  to  have  accepted  the  goods  when  he  intimates  to 
the  seller  that  he  has  accepted  them." 

In  Williston  on  Sales,  §  483,  it  is  said :  "The  ways  of  manifesting 
acceptance  may  be  reduced  to  the  three  enumerated  in  the  section  of 
the  Sales  Act  under  consideration,  namely:  (1)  Intimation  of  accept- 
ance. (2)  Exercising  acts  of  ownership.  (3)  Retaining  the  goods. 
Under  the  first  head  will  be  included  both  cases  where  the  buyer  re- 
ceives goods  and  expresses  his  acceptance  of  them,  and  also  cases 
where  by  the  terms  of  the  bargain  the  buyer  agreed  to  accept  goods, 
whether  specified  at  the  time  of  the  bargain  or  to  be  afterwards  se- 
lected by  the  seller,  without  inspection." 

All  cases  admit  that  the  term  "actually  receive,"  found  in  the  stat- 
ute, means  the  acquisition  of  possession  by  the  buyer,  and  whatever 
difficulties  exist  in  regard  to  its  meaning  are  largely  due  to  the  inher- 
ent difficulty  of  determining  what  is,  in  fact,  possession.  This  court, 
however,  has  said,  speaking  through  Judge  Alvey,  that :  "The  receipt 
of  part  of  the  goods  is  the  taking  possession  of  them.  When  the  sell- 
er gives  to  the  buyer  the  actual  control  of  the  goods,  and  the  buyer 
accepts  such  control,  he  has  actually  received  them."  Hewes  &  Co 
v.  Jordan,  39  Md.  472,  17  Am.  Rep.  578. 

It  is  said.  hov\-ever.  upon  good  authority,  that  goods  mav  be  received 
by  the  buyer  within  the  meaning  of  the  statute,  and  yet  allowed  to  re- 
main in  the  hands  of  the  vendor,  if  it  be  shown  that  the  seller  has 
ceased  to  hold  in  the  character  of  unpaid  vendor  and  holds  wholly  as 
bailee  for  the  buyer.  Williston  on  Sales,  §  91,  and  the  numerous 
cases  cited  in  note  thereto. 

In  this  case  we  think  there  is  evidence  of  both  acceptance  and"  ac- 
tual receipt  pi  the  goods,  which  should  be  submitted  as  a  question  of 
fact  to  the  jury  under  proper  instructions  of  the  court ;  thus  we  find 
no  error  in  the  ruling  of  the  court  in  its  rejection  of  the  defendant's 
first  prayer,  asking  that  the  case  be  taken  from  the  jury. 

But  the  court  in  our  opinion  erred  in  granting  the  plaintiff's  prayer, 
in  which  it  is  said  that,  if  it  be  disclosed  by  the  evidence  that  the  defend- 
ant purchased  the  eggs  at  the  price  named,  and  the  same  were  to  be 
placed  in  the  butter  cooler  to  save  him  storage,  and  that  upon  the  eggs, 
being  placed  therein  and  an  invoice  sent  to  him  he  was  to  pay  for  the 
eggs,  then  the  placing  of  the  eggs  in  the  butter  cooler  under  such 
circumstances  vested  the  title  to  said  eggs  in  the  defendant.  This 
prayer  fails  to  recognize,  or  at  least  within  sufficient  clearness,  the 
essential  requirements  of  the  actual  receipt  of  the  goods  by  the  buy- 
er and  the  intention  of  the  parties  as  to  the  same.  It  was  not  only 
necessary  to  find  that  the  eggs  were  placed  in  the  butter  cooler,  but 
it  was  also  to  be  found  that  by  so  doing  the  unrestricted  control  of 
the  eggs  passed  to  the  buyer,  and  that  such  was  the  intention  of  the 
parties.     *     *     * 

Because  of  the  error  of  the  court  in  granting  the  plaintiff's  prayer, 
the  judgment  of  the  court  below  will  be  reversed.    *    *    * 


J82  CONTRACTS  (Part  1 


DRIGGS  V.  BUSH  et  al. 

(Supreme  Court  of  Michican,  190S.     152  Midi.  53,   115  N.  W.   9S6, 
15  L,  R.  A.  [N.  S.]  654,  125  Am.  St.  Rep.  389,  15  Ann.  Cas.  30.) 

Action  by  Hue  H.  Driggs  against  Levi  Bush  and  another.  Judgment 
for  plaintiff,  and  defendants  bring  error, 

Montgome;ry,  J.  The  plaintiff"  is  a  buyer  of  hay,  and  through  his 
agents,  Homer  B.  McWilliams  and  John  Van  Horn,  made  a  contract 
with  the  defendants,  who  own  and  operate  two  farms  in  Van  Buren 
county,  and  who  were  the  joint  owners  of  the  hay  crop  thereon,  for 
the  purchase  of  24  tons  of  hay  or  more  at  the  option  of  the  defend- 
ants. The  contract  was  by  parol,  and,  as  appears  by  the  testimony 
offered  on  behalf  of  the  plaintiff,  was  as  follows:  "Mr.  Dean  said: 
T  want  $10  a  ton  and  you  bale  the  hay.'  We  finally  bought  all  of 
the  hay  for  $10  a  ton,  and  we  to  do  the  baling,  and  we  were  to  take 
the  hay  the  first  cars  we  could  get  at  Gobleville  after  the  hay  was 
baled."  *  *  =i=  After  the  contract  was  made,  the  plaintiff'  sent  bal- 
ers to  the  premises  of  the  defendants  who  baled  the  hay,  the  defend- 
ants being  present  and  assisting  in  the  work.  The  price  paid  for  bal- 
ing the  hay  was  $1.10  per  ton,  or  $33.55,  that  being  the  regular  price 
for  such  services.  The  defendants  subsequently  refused  performance 
of  the  contract,  and  this  action  was  brought  to  recover  damages  for 
the  breach.  Plaintiff  was  permitted  to  recover  below  the  difference  be- 
tween the  purchase  price  of  the  hay  and  its  actual  market  price  at 
the  date  when  delivery  was  contemplated.  Defendants  bring  error,  and 
contend  that  the  contract  was  void  under  the  statute  of  frauds,  and 
has  never  been  validated  and  this  presents  the  principal  question  for 
our  consideration.     *     *     * 

It  is  strenuously  insisted  that  there  was  no  such  delivery  or  accept- 
ance, and  plaintiff's  counsel  do  not  seek  to  maintain  that  there  was. 
Without  passing  directly  upon  the  question,  therefore,  in  this  case, 
we  may  assume  that  there  was  no  such  completed  delivery  as  the 
statute  requires,  and  that  the  defendants  still  retained  the  title  to 
the  property  after  the  same  was  baled.  *  *  *  The  question  oc- 
curs, therefore,  whether  the  expenditure  of  $1.10  per  ton  upon  this 
hay,  which  remained  the  property  of  the  defendants,  which  expenditure 
was  received  and  accepted  by  them,  and  was  made  in  pursuance  of  the 
contract  between  the  parties,  was  such  a  part  payment  as  answered  the 
requirements  of  the  statute.  It  is  contended  that  the  thing  in  earnest 
must  be  actually  paid,  and  received  by  the  seller.  This  we  fully  ac- 
cept. But  there  can  be  no  doubt  in  this  case  that  the  service  of  bal- 
ing this  hay  was  received  and  accepted  by  these  defendants,  and  if 
this  was  done  at  a  time  while  the  hay  remained  their  property,  and 
such  service  was  received  in  pursuance  of  the  contract  made  between 
the  parties,  we  can  conceive  of  no  valid  objection  to  treating  this  as 
a  part  payment  of  the  consideration  which  was  to  pass  from  the  plain- 
tiff to  the  defendants  at  a  time  prior  to  the  passing  of  the  title  of  the 
hay  to  plaintiff'.  *  *  *  It  is  not  necessary  that  the  payment  made 
upon  the  contract  be  in  money.     *     *     * 

In  the  present  case,  any  work  done  upon  the  hay  in  baling  the  same, 
passed  a  present  benefit  from  the  purchaser  to  the  seller,  and  as  it 
was  done  in  pursuance  of  the  contract,  it  could  be  nothing  else  than 
payment  upon  the  contract.     None  of  these  cases,  therefore,  militate 


CIl.  9)  CONTRACTS  REQUIRED  TO   BE   IN  WRITING  Z83 

against  the  conclusion  which  we  announce,  that  this  contract  was  vali- 
dated by  the  receipt  of  the  benefit  of  baling  the  hay  in  pursuance  of 
the  contract.     *     *     * 
Judgment  affirmed. 


TLLSPERGER  v.   MEYER. 

(Supreme  Court  of  Illinois,  lOO.j.    217  111.  2G2,  7.5  N.  E.  4S2,  2  L.  R.  A. 
[N.  S.]  221,  3  Ann.  Cas.  10.32.) 

RiCKS,  J.  *  *  *  From  the  reading  of  the  sections  of  the  stat- 
ute it  will  be  seen  that  it  is  only  necessary  that  some  memorandum  or 
note  be  made  of  the  contract  and  signed  by  the  party  to  be  charged 
therewith.  "The  statute  does  not  require  that  the  contract  itself  shall 
be  reduced  to  writing.  It  is  sufficient  if  there  be  a  memorandum  of 
the  contract  in  writing  signed  by  the  party  to  be  charged  or  by  some 
one  by  him  duly  authorized.  *  *  *  No  particular  form  of  lan- 
guage is  necessary  to  constitute  the  memorandum  requisite  to  satisfy 
the  requirements  of  the  statute.  An  admission  in  writing  of  the  bar- 
gain having  been  made,  although  it  may  not  furnish  exclusive  evi- 
dence of  the  contract,  as  a  final  agreement  would  do,  or  an  offer  in 
writing  so  stating  the  proposal  that  its  mere  acceptance  would  fix 
the  terms  of  the  bargain,  will,  if  accepted,  satisfy  the  statute,  and  the 
acceptance  of  the  offer  in  writing  may  be  shown  by  parol.     *     *     * 

The  authorities  are  agreed  that  if  the  memorandum  shall  contain 
on  its  face  the  names  of  the  parties  vendor  and  vendee,  a  sufficiently 
clear  and  explicit  description  of  the  thing,  interest,  or  property  as  will 
be  capable  of  identification,  together  with  the  terms  and  conditions 
of  the  contract,  and  signed  by  the  party  to  be  charged,  it  will  be 
sufficient  upon  which  to  predicate  a  decree  for  specific  performance. 
*  *  *  The  contract  or  memorandum  set  up  in  the  bill  while  in  the 
•nature  of  a  receipt,  clearly  evidences  a  sale  of  the  property  therein  de- 
scribed as  having  taken  place  from  appellee  to  appellant,  and  ac- 
knowledges that  $100  has  been  paid  upon  the  purchase  price  of  $14,000 
by  appellant.  Appellant  is  named  as  the  purchaser,  and  the  text  of  the 
writing  clearly  designates  appellee  as  the  vendor  by  whom  the  writing- 
is  signed;  so  that  it  will  be  seen  that  the  contract  or  writing  relied 
upon  contains  all  that  is  required  by  the  statute,  and  more,  as  the  stat- 
ute does  not  require  that  the  consideration  shall  be  stated  in  the  writ- 
ing but  authorizes  it  to  be  established  by  parol. 

It  is  insisted  that  there  is  no  time  specified  for  the  completion  of 
the  contract,  and  that  therefore  the  contract  is  not  complete.  Un- 
der such  a  contract  the  law  would  imply  that  it  was  to  be  performed 
within  a  reasonable  time  after  entering  into  the  same,  and  what  would 
be  a  reasonable  time  would  be  a  matter  of  proof  under  all  the  condi- 
tions and  circumstances  that  might  surround  the  case.     *     *     * 

It  is  urged  that  this  contract  lacks  in  the  material  element  of  mutu- 
ality. The  particular  ground  upon  which  this  contention  is  based  is 
that  the  contract  is  signed  by  appellee  only.  *  *  *  We  are  unable 
to  understand  why  the  mere  written  option  signed  by  the  vendor  shall 
bind  him  by  the  verbal  acceptance  of  the  vendee  and  his  offer  to  per- 
form be  held  to  be  a  mutual  and  binding  contract  within  the  statute 
of  frauds,  and  the  contract  of  sale  acknowledging  the  receipt  of  part 
payment,  signed  by  the  vendor,  shall  be  held  void  for  w^ant  of  mutual- 


384  CONTRACTS  (Part  1 

ity  upon  the  alleged  ground  that  the  vendee  has  not  bound  himself  to 
perform  by  some  writing.  We  are  aware  that  there  is  a  diversity  of 
opinion  and  a  contrariety  of  holdings  by  the  courts  of  last  resort  in 
the  various  states  upon  this  subject;  but  a  careful  review  of  the 
authorities  leads  us  to  conclude  that  a  contract  otherwise  clear  and  ex- 
phcit  is  sufficient  to  meet  the  requirements  of  the  statute  of  frauds, 
if  signed  by  the  vendor.  In  29  Am.  &  Eng.  Enc.  Law  (2d  Ed.)  the 
subject  under  consideration  is  extensively  discussed  and  the  authori- 
ties touching  it  reviewed,  and  the  conclusion  there  announced  is  (page 
858) :  "The  weight  of  authority  is  that  the  statute  is  satisfied  if  the 
memorandum  be  signed  by  the  parties  sought  to  be  charged  alone,  or, 
in  other  words,  by  the  party  defendant  in  an  action  brought  to  en- 
force the  contract,  whether  he  be  vendor  or  vendee.  In  the  case  of  a 
contract  for  the  sale  of  lands,  the  vendor  is  usually  the  person  to  be 
charged,  and  a  memorandum  signed  by  him  alone  is  valid.  The  party 
not  signing  the  memorandum  is  not  bound  unless,  as  held  by  some  au- 
thorities, he  has  accepted  the  same  as  a  valid,  subsisting  contract. 
Want  of  mutuality  arising  from  the  failure  of  both  parties  to  sign 
cannot  be  successfully  pleaded  as  a  defense  by  the  party  who  did  sign, 
as  the  act  of  filing  a  bill  for  specific  performance  binds  the  plaintiff  and 
renders  the  contract  mutual."  A  reference  to  the  authorities  there  cit- 
ed shows  that  the  rule  thus  obtains  in  England  and  in  the  majority  of 
the  United  States.  Speaking  of  this  rule,  Mr,  Pomeroy,  in  his  work 
on  Specific  Performance  (section  75),  in  part  says:  "It  may,  perhaps, 
be  sustained  upon  the  following  grounds :  The  statute  of  frauds  does 
not  reach  the  substance  of  contracts  and  render  them  valid  or  invalid. 
It  simply  furnishes  a  rule  of  evidence.  Whenever,  therefore,  any 
agreement  is  enforced  against  a  defendant  w^ho  has  signed  it  by  a 
piaintifif  who  has  not,  it  cannot  be  said  that  the  agreement,  so  far  as 
it  purports  to  bind  the  piaintifif,  is  a  nullity.  In  the  suit  against  him 
the  statute  does  no  more  than  require  a  certain  kind  of  proof  in  case  he 
avails  himself  of  it  as  a  defense.  The  defense,  however,  is  wholly  a 
personal  one,  and  if  he  neglects  to  set  it  up  the  agreement  would  be 
established  against  him,  notwithstanding  the  statute.  For  these  rea- 
sons it  cannot  be  said  that  a  memorandum  signed  by  one  party  alone 
is  so  completely  wanting  in  mutuality  that  no  action  upon  it  can  be 
sustained."     *     *     * 


SECTION  9.— EFFECT  OF  NON-COMPLIANCE  W^TH 
TIIE  STATUTE 


BIRD  et  al.  v.  MUNROE. 
(Supreme  Judicial  Court  of  Maine,  1877.     66  Me.  .337,  22  Am.  Rep.  571.) 

Peters,  J.  On  March  2,  1874,  at  Rockland,  in  this  state,  the  de- 
fendant contracted  verbally  with  the  plaintiffs  for  the  purchase  of 
a  quantity  of  ice,  to  be  delivered  (by  immediate  shipments)  to  the  de- 
fendant in  New  York.  On  March  10,  1874,  or  thereabouts,  the  de- 
fendant, by  his  want  of  readiness  to  receive  a  portion  of  the  ice  as 
he  had  agreed  to,  temporarily  prevented  the  plaintiffs  from  perform- 
ing the  contract  on  their  part  according  to  the  preparations  made  by 
them  for  the  purpose.    On  ]\Iarch  24,  1874,  the  parties,  then  in  New 


Ch.  9)  CONTRACTS   REQUIRED   TO   BE   IN   WRITING  385 

York,  put  their  previous  verbal  contract  into  writing,  antedating  it  as 
an  original  contract  made  at  Rockland  on  March  2,  1874.  On  the 
same  day  (March  24),  by  consent  of  the  defendant,  the  plaintiffs  sold 
the  same  ice  to  another  party,  reserving  their  claim  against  the  de- 
fendant for  the  damages  sustained  by  them  by  the  breach  of  the  con- 
tract by  the  defendant  on  March  'lOth  or  about  that  time.  This 
action  was  commenced  on  April  11,  1874,  counting  on  the  contract 
as  made  on  March  2,  and  declaring  for  damages  sustained  by  the 
breach  of  contract  on  March  10,  or  thereabouts  and  prior  to  March 
24.  1874.  Several  objections  are  set  up  against  the  plaintiffs'  right  to 
recover.     *     *     * 

Then,  the  defendant  next  contends  that,  even  if  the  writing  signed 
by  the  parties  was  intended  by  them  to  operate  retroactively  as  of 
the  first  named  date,  as  a  matter  of  law,  it  cannot  be  permitted  to 
have  that  effect  and  meet  the  requirements  of  the  statute  of  frauds. 
The  position  of  the  defendant  is,  that  all  which  took  place  between 
the  parties  before  the  24th  of  March  was  of  the  nature  of  negotiation 
and  proposition  only;  and  that  there  was  no  valid  contract,  such  as 
is  called  for  by  the  statute  of  frauds,  before  that  day;  and  that  the 
action  is  not  maintainable,  because  the  breach  of  contract  is  alleged  to 
have  occurred  before  that  time.  The  plaintiffs,  on  the  other  hand, 
contend  that  the  real  contract  was  made  verbally  on  the  2d  of  March, 
and  that  the  written  instrument  is  sufficient  proof  to  make  the  verbal 
contract  a  valid  one  as  of  that  date  (March  2),  although  the  written 
proof  was  not  made  out  until  twenty-two  days  after  that  time.  Was 
the  valid  contract,  therefore,  made  ^  on  March  2d  or  March  24th? 
The_  point  raised  is,  whether,  in  view  of  the  statute  of  frauds,  the 
writing  in  this  case  shall  be  considered  as  constituting  the  contract 
itself  or  at  any  rate  any  substantial  portion  of  it,  or  whether  it  may 
be  regarded  as  merely  the  necessary  legal  evidence  by  means  of  which 
the  prior  unwritten  contract  may  be  proved.  In  other  words,  is  the 
writing  the  contract,  or  only  evidence  of  it;  we  incline  to  the  latter 
view.  *  *  *  Such  a  construction  of  the  statute  upholds  contracts 
according  to  the  intention  of  parties  thereto,  while  it,  at  the  same 
time,  fully  subserves  all  the  purposes  for  which  the  statute  was  cre- 
ated. It  must  be  borne  in  mind  that  verbal  bargains  for  the  sale  of 
personal  property  are  good  at  common  law.  Nor  are  they  made  ille- 
gal by  the  statute.  Parties  can  execute  them  if  they  mutually  please 
to  do  so.  The  object  of  the  statute  is  to  prevent  perjury  and  fraud. 
Of  course,  perjury  and  fraud  cannot  be  wholly  prevented;  but  as 
said  by  Bigelow,  J.,  in  Marsh  et  al.  v.  Hyde,  3  Gray  (Mass.)  331,  "a 
memorandum  in  writing  will  be  as  effectual  against  perjury,  although 
signed  subsequently  to  the  making  of  a  verbal  contract,  as  if  it  had 
been  executed  at  the  moment  when  the  parties  consummated  their 
agreement  by  word  of  mouth."  We  think  it  would  be  more  so.  A 
person  vvould  be  likely  to  commit  himself  in  writing  with  more  care 
and  caution  after  time  to  take  a  second  thought.  The  locus  poeniten- 
tise  remains  to  him. 

By  no  means  are  we  to  be  understood  as  saying  that  all  written  in- 
struments will  satisfy  the  statute,  by  having  the  eft"ect  to  make  the 
contracts  described  in  them  valid  from  the  first  verbal  inception. 
That  must  depend  upon  circumstances.  In  many,  and  perhaps,  most 
instances,  such  a  version  of  the  transaction  would  not  agree  with  the 
B.&  B.Bus.Law— 25 


386  CONTRACTS  (Part  1 

actual  understanding  of  the  parties.  In  many  cases,  undoubtedly,  the 
written  instrument  is  per  se  the  contract  of  the  parties.    *     *    - 

There  are  few  decisions  that  bear  directly  upon  the  precise  point 
which  this  case  presents  to  us.  From  the  nature  of  things,  a  state  of 
facts  involving  the  question  would  seldom  exist.  But  we  regard  the 
case  of  Townsend  v.  Hargraves,  118  Mass.  325,  as  representing  the 
principle  very  pointedly.  It  was  there  held  that  the  statute  of  frauds 
affects  the  remedy  only  and  not  the  validity  of  tlie  contract;  and  that 
where  there  has  been  a  completed  oral  contract  of  sale  of  goods,  the 
acceptance  and  receipt  of  part  of  the  goods  by  the  purchaser  takes  the 
case  out  of  the  statute,  although  such  acceptance  and  receipt  are  after 
the  rest  of  the  goods  are  destroyed  by  fire  while  in  the  hands  of  the 
seller  or  his  agent.  The  date  of  the  agreement  rather  than  the  date 
of  the  part  acceptance  was  treated  as  the  time  when  the  contract 
was  made;  and  the  risk  of  the  loss  of  the  goods  was  cast  upon  the 
buyer.  We  are  not  aware  of  any  case  where  the  question  has  been 
directly  adjudicated  adversely  to  these  cases.     *     *     * 

But  there  are  a  great  many  cases  where,  in  construing  the  statute  of 
frauds,  the  force  and  effect  of  the  decisions  go  to  sustain  the  view  we 
take  of  this  question,  by  the  very  strongest  implication:  Such  as: 
that  the  statute  does  not  apply  where  the  contract  has  been  executed 
on  both  sides ;  *  *  *  that  no  person  can  take  advantage  of  the 
statute  but  the  parties  to  the  contract,  and  their  privies;  *  *  * 
that  the  memorandum  may  be  made  by  a  broker,  or  by  an  auctioneer; 
that  a  sale  of  personal  property  is  valid  when  there  has  been  a  de- 
livery and  acceptance  of  part,  although  the  part  be  accepted  several 
hours  after  the  sale,  *  *  *  qj.  several  days  after,  *  *  *  or 
ever  so  long  after ;  that  a  creditor,  receiving  payments  from  his  debt- 
or without  any  direction  as  to  their  application,  may  apply  them  to  a 
debt  on  which  the  statute  of  frauds  does  not  allow  an  action  to  be 
maintained ;  *  *  *  that  a  contract  made  in  France,  and  valid  there 
without  a  writing,  could  not  be  enforced  in  England  without  one, 
upon  the  ground  that  the  statute  related  to  the  mode  of  procedure  and 
not  to  the  validity  of  the  contract,  Leroux  v.  Brown,  12  C.  B.  801,  but 
this  case  has  been  questioned  somewhat ;  that  a  witness  may  be  guilty 
of  perjury  who  swore  falsely  to  a  fact  which  may  not  be  competent  ev- 
idence by  the  statute  of  frauds,  but  which  becomes  material  because 
not  objected  to  by  the  party  against  whom  it  was  offered  and  receiv- 
ed; *  *  *  that  an  agent  who  signs  a  memorandum  need  not  have 
his  authority  at  the  time  the  contract  is  entered  into,  if  his  act  is  oral- 
ly ratified  afterwards;  *  *  *  that  the  identical  agreement  need 
not  be  signed,  and  that  it  is  sufficient  if  it  is  acknowledged  by  any 
other  instrument  duly  signed;  *  *  *  that  the  recognition  of  the 
contract  may  be  contained  in  a  letter,  or  in  several  letters,  if  so  con- 
nected by  "written  links"  as  to  form  sufficient  evidence  of  the  con- 
tract ;  that  the  letters  may  be  addressed  to  a  third  person ;  that  an 
agent  may  write  his  own  name  instead  of  that  of  the  principal  if  in- 
tending to  bind  his  principal  by  it;  *  *  *  that  a  proposal  in  writ- 
ing, if  accepted  by  the  other  party  by  parol,  is  a  sufficient  memoran- 
dum; *  *  *  that  where  one  party  is  bound  by  a  note  or  memo- 
randum the  other  party  may  be  bound  if  he  admits  the  writing  by  an- 
other writing  by  him  subsequently  signed ;  that  the  written  contract 
may  be  rescinded  by  parol,  although  many  decisions  are  opposed  to 
this  proposition;      *     *     *     ^i^^^^  equity  will  interfere  to  prevent  a 


Ch.  0)  CONTRACTS   REQUIRED   TO   BE   IN   WRITING  387 

party  making  the  statute  an  instrument  of  fraud;  *  *  *  that  a 
contract  verbally  made  may  be  maintained  for  certain  purposes,  not- 
withstanding the  statute ;  that  a  person  who  pays  his  money  under  it 
cannot  recover  it  back  if  the  other  side  is  willing  to  perform,  and  he 
can  recover  if  performance  is  refused  ;  *  *  *  that  a  respondent  in 
equity  waives  the  statute  as  a  defense  unless  set  up  in  plea  or  an- 
swer ;  *  *  *  that  it  must  be  specially  pleaded  in  an  action  at  law ; 
*  *  *  _  that  the  defendant  may  waive  the  protection  of  the  statute 
and  admit  verbal  evidence  and  become  bound  by  it.    *     *     * 

It  is  clear  from  the  foregoing  cases,  as  well  as  from  many  more 
that  might  be  cited,  that  the  statute  does  not  forbid  paid  contracts,  but 
only  precludes  the  bringing  of  actions  to  enforce  them.  As  said  in 
Thornton  v.  Kempster,  5  Taunt.  786,  788,  "the  statute  of  frauds 
throws  a  difficulty  in  the  way  of  the  evidence."  *  *  *  Jervis,  C. 
J.,  said.  "The  effect  of  the  section  is  not  to  avoid  the  contract,  but 
to  bar  the  remedy  upon  it,  unless  there  be  writing."    *    *    * 

But  the  defendant  contends  that  this  course  of  reasoning  would 
make  a  memorandum  sufficient  if  made  after  action  brought,  and 
that  the  authorities  do  not  agree  to  that  proposition.  There  has 
been  some  judicial  inclination  to  favor  the  doctrine  to  that  extent 
even,  and  there  may  be  some  logic  in  it.  Still  the  current  of  decision 
requires  that  the  writing  must  exist  before  action  brought.  And  the 
reason  for  the  requirement  does  not  militate  against  the  idea  that  a 
memorandum  is  only  evidence  of  the  contract.  There  is  no  actionable 
contract  before  memorandum  obtained.  The  contract  cannot  be  sued 
until  it  has  been  legally  verified  by  writing;  until  then  there  is  no 
cause  of  action,  although  there  is  a  contract.  The  writing  is  a  con- 
dition precedent  to  the  right  to  sue.  Willes,  J.,  perhaps  correctly  de- 
scribes it  in  Gibson  v.  Holland,  L.  R.  1  C.  P.  1,  when  he  says,  "the 
memorandum  is  in  some  way  to  stand  in  the  place  of  a  contract." 
He  adds :  "The  courts  have  considered  the  intention  of  the  legislature 
to  be  of  a  mixed  character;  to  prevent  persons  from  having  actions 
brought  against  them  so  long  as  no  written  evidence  was  existing  when 
the  action  was  instituted."  *  *  *  jj,  ^j^^  j^g^  ^^^^  ^^  -g  g^j^. 
"Strictly  speaking,  the  statute  does  not  make  the  contract  void,  ex- 
cept for  the  purpose  of  sustaining  an  action  upon  it,  to  enforce  it." 
Action  to  stand  for  trial. 


388  CONTRACTS  (Part  1 

CHAPTER  X 
REMEDIES 

Section 

1.  Introduction. 

2.  Measnre  of  Damages. 

3.  Rescission. 

4.  Judgments    and    Executions. 

5.  Garuisliment. 

6.  Attachment  of  Property. 

7.  Specific  Performance. 

8.  Injunction.  ^  \ 

9.  Enforcement  of  Decrees  by  Attachment  for  Contempt 

10.  Bankruptcy. 

11.  Receiversliips. 


SECTION  1.— INTRODUCTION 

In  the  preceding-  chapters  we  have  dealt  at  some  length  with 
contractual  legal  relations.  We  have  noted  the  origin,  nature  and 
scope  of  legal  rights  and  legal  duties.  In  the  chapter  on  Perform- 
ance we  had  occasion  to  observe,  in  detail,  the  circumstances  under 
which  the  law  regards  a  contractual  duty  as  violated.  Our  inquiry, 
then,  primarily,  was  to  determine  what  constitutes  a  breach  of  con- 
tract and  to  ascertain  the  circumstances  under  which  the  other 
party  might  successfully  sue  the  party  in  default.  Our  inquiry 
stopped  upon  the  discovery  of  the  existence  or  non-existence  of  this 
right  to  succeed  in  such  an  action  and  of  the  reasons  which  im- 
pelled the  court  so  to  decide.  Our  primary  question  was :  "May 
this  plaintifif  recover  anything?"  not,  "How  much  or  what  may  he 
recover." 

In  this  chapter  our  attention  is  directed  more  pointedly  toward 
the  nature  and  operation  of  the  remedy,  rather  than  to  the  ques- 
tion :  "Is  the  plaintiff  entitled  to  any  relief  at  all?"  In  the  follow- 
ing cases  and  discussion  we  are  assuming,  usually,  that  the  plaintiff 
is  entitled  to  some  relief  under  the  rules  of  the  substantive  law  of 
contracts.  It  is  our  purpose  to  find  out  what  the  court  actually 
will  do  to  help  the  plaintiff  out  of  his  difficulty.  Our  problem  di- 
vides itself  into  two  parts:  (1)  What  is  it  that  the  court  may 
decide  that  the  plaintiff"  is  entitled  to  receive?  Will  the  court  or- 
der the  defendant  actually  to  perform  certain  personal  services  for 
the  plaintiff,  or  to  refrain  from  doing  certain  acts  which  cause 
damage  to  the  plaintiff?  In  its  broad  aspect,  therefore,  the  ques- 
tion is:  What  will  the  court  order  the  defendant  to  do?  (2)  The 
second  question  arises  after  the  court  has  decided  what  the  defend- 
ant should  do  and  has  ordered  him  to  comply  with  its  mandate. 
Suppose  the  defendant  is  no  more  inclined  to  obey  the  positive  di- 
rection of  the  court  than  he  was  to  do  his  duty  before  the  action 
was  brought  against  him.  What  will  the  court  then  do?  There 
exists  quite  a  range  of  possibilities.     It  is  possible  to  put  the  de- 


Ch.  10)  REMEDIES  389 

fendant  in  jail  until  he  decides  to  obey.  The  court  may  order 
some  of  his  property  sold  and  the  proceeds  turned  over  to  the  plain- 
tiff. The  court  might  even^  in  some  cases,  permit  the  plaintiff  to 
do  something"  which  in  the  absence  of  the  court's  order  would  be 
a  wrongful  act.  In  the  last  analysis  most  legal  remedies  resolve 
themselves  finally  into  one  of  two  kinds  of  acts ;  either  the  doing 
of  something  to  one's  person,  such  as  imprisoning  him,  or  in  the 
doing  of  something  to  his  property,  such  as  selling  it  or  destroying 
it.  The  following  sections,  therefore,  seek  to  call  attention  to  the 
nature  of  the  weapons  which  the  courts  may  employ  to  compel 
obedience  to  their  mandates  and  to  the  circumstances  under  which 
each  may  properly  and  effectively  be  used. 


SECTION   2.— MEASURE    OF   DAMAGES 

The  principles  which  fix'  the  amount  of  money  recoverable  for 
breach  of  contract  are  of  equal  importance  with  the  principles  which 
determine  the  existence  of  liability.  If  a  person  has  in  fact  been 
caused  a  loss  of  $2,000  by  reason  of  a  breach  of  contract,  from  his 
standpoint  there  should  be  a  recovery  of  $2,000.  Many  times, 
perhaps  in  a  majority  of  cases,  a  successful  plaintiff"  does  obtain  a 
judgment  for  an  amount  sufficient  to  reimburse  him  for  his  actual 
loss.  But  often  this  will  not  be  true.  There  are  cases  where  the 
loss  to  the  plaintiff  is  definitely  determined ;  but  the  circumstances 
may  be  such  that  it  would  not  be  just  to  compel  the  defendant  to 
pay  the  full  amount  of  plaintiff's  loss.  The  law  attempts,  therefore, 
to  fix  the  amount  of  recoverable  damages,  after  a  careful  consid- 
eration of  the  interests  of  both  plaintiff  and  defendant.  The  fol- 
lowing cases  do  very  little  toward  developing  the  rules  of  dam- 
ages, but  they  may  serve  to  indicate  the  point  of  view  from  which 
the  situation  is  approached. 


HADLEY  et  al.  v.  BAXENDALE  et  al. 

(Coint  of  Exchequer,  1S.54.     9  Exch.  .341,  5  Eng.  Rul.  Cas.  502.) 

The  plaintiff's  carried  on  an  extensive  business  as  millers  at  Glouces- 
ter, and  on  the  11th  of  May,  their  mill  was  stopped  by  a  breakage  of 
the  crank  shaft,  by  which  the  mill  was  worked.  The  steam  engine 
was  manufactured  by  Messrs.  Joyce  &  Co.,  the  engineers,  at  Greenwich, 
and  it  became  necessary  to  send  the  shaft  as  a  pattern  for  a  new  one 
to  Greenwich.  The  fracture  was  discovered  on  the  12th,  and  on  the 
13th  the  plaintiff's  sent  one  of  their  servants  to  the  office  of  the  de- 
fendants, who  are  the  well-known  carriers  trading  under  the  name  of 
Pickford  &  Co.,  for  the  purpose  of  having  the  shaft  carried  to  Green- 
wich. The  plaintiffs'  servant  told  the  clerk  that  the  mill  was  stopped, 
and  that  the  shaft  must  be  sent  immediately ;  and  in  answer  to  the 
incjuiry  when  the  shaft  would  be  taken  the  answer  was  that  if  it  was 
sent  up  by  twelve  o'clock  any  day  it  would  be  delivered  at  Greenwich 
on  the  following  day.  On  the  following  day  the  shaft  was  taken  by 
the  defendants,  before  noon,   for  the  purpose  of  being  conveyed  to 


390  CONTRACTS  (Part  1 

Greenwich,  and  the  sum  of  £2.  4s.  was  paid  for  its  carriage  for  the 
whole  distance.  At  the  same  time  the  defendants'  clerk  was  told  that 
a  special  entry,  if  required,  should  be  made,  to  hasten  its  delivery. 
The  delivery  of  the  shaft  at  Greenwich  was  delayed  by  some  neglect, 
and  the  consequence  was  that  the  plaintiffs  did  not  receive  the  new 
shaft  for  several  days  after  they  would  otherwise  have  done,  and  the 
working  of  their  mill  was  thereby  delayed,  and  they  thereby  lost  the 
profits  they  would  otherwise  have  received. 

On  the  part  of  the  defendants  it  was  objected  that  these  damages 
were  too  remote,  and  that  the  defendants  were  not  liable  with  respect 
to  them.  The  learned  judge  left  the  case  generally  to  the  jury,  who 
found  a  verdict  with  £25  damages  beyond  the  amount  paid  into  court 
by  defendant,  which  was  £25. 

Aldkrson,  B.  We  think  that  there  ought  to  be  a  new  trial  in  this 
case;  but  in  so  doing  we  deem  it  to  be  expedient  and  necessary  to 
state  explicitly  the  rule  which  the  judge,  at  the  next  trial,  ought,  in 
our  opinion,  to  direct  the  jury  to  be  governed  by  when  they  estimate 
the  damages. 

It  is,  indeed,  of  the  last  importance  that  we  should  do  this ;  for,  if 
the  jury  are  left  without  any  definite  rule  to  guide  them,  it  will,  in 
such  cases  as  these,  manifestly  lead  to  the  greatest  injustice.  "^^  ''^  * 
"There  are  certain  established  rules,"  this  court  says,  in  Alder  v. 
Keighley,  15  M.  &  W.  117,  "according  to  which  the  jury  ought  to  find." 
And  the  court  in  that  case  adds :  "And  here  there  is  a  clear  rule  that 
the  amount  which  would  have  been  received  if  the  contract  had  been 
kept  is  the  measure  of  damages  if  the  contract  is  broken."  Now,  we 
think  the  proper  rule  in  such  a  case  as  the  present  is  this :  Where  two 
parties  have  made  a  contract  which  one  of  them  has  broken,  the  dam- 
ages which  the  other  party  ought  to  receive  in  respect  of  such  breach 
of  contract  should  be  such  as  may  fairly  and  reasonably  be  considered 
either  arising  naturally — i.  e.,  according  to  the  usual  course  of  things, 
from  such  breach  of  contract  itself — or  such  as  may  reasonably  be 
supposed  to  have  been  in  the  contemplation  of  both  parties  at  the 
time  they  made  the  contract,  as  the  probable  result  of  the  breach  of 
it.  Now,  if  the  special  circumstances  under  which  the  contract  was 
actually  made  were  communicated  by  the  plaintiff's  to  the  defendants, 
and  thus  known  to  both  parties,  the  damages  resulting  from  the  breach 
of  such  a  contract,  which  they  would  reasonably  contemplate,  would 
be  the  amount  of  injury  which  would  ordinarily  follow  from  a  breach 
of  contract  under  these  special  circumstances  so  known  and  communi- 
cated. But,  on  the  other  hand,  if  these  special  circumstances  were 
wholly  unknown  to  the  party  breaking  the  contract,  he,  at  the  most, 
could  only  be  supposed  to  have  had  in  his  contemplation  the  amount 
of  injury  which  would  arise  generally,  and  in  the  great  multitude  of 
cases  not  affected  by  any  special  circumstances,  from  such  a  breach 
of  contract.  For,  had  the  special  circumstances  been  known,  the  par- 
ties might  have  specially  provided  for  the  breach  of  contract  by  spe- 
cial terms  as  to  the  damages  in  that  case;  and  of  this  advantage  it 
would  be  very  unjust  to  deprive  them. 

Now,  the  above  principles  are  those  by  which  we  think  the  jury 
ought  to  be  guided  in  estimating  the  damages  arising  out  of  any 
breach  of  contract.  It  is  said  that  other  cases,  such  as  breaches  of 
contract  in  the  nonpayment  of  money,  or  in  the  not  making  a  good 


Ch.  10)  REMEDIES  391 

title  to  land,  are  to  be  treated  as  exceptions  from  this,  and  as  governed 
by  a  conventional  rule.  But  as,  in  such  cases,  both  parties  must  be 
supposed  to  be  cognizant  of  that  well-known  rule,  these  cases  may, 
we  think,  be  more  properly  classed  under  the  rule  above  enunciated  as 
to  cases  under  known  special  circumstances,  because  there  both  parties 
may  reasonably  be  presumed  to  contemplate  the  estimation  of  the 
amount  of  damages  according  to  the  conventional  rule.  Now,  in  the 
present  case,  if  we  are  to  apply  the  principles  above  laid  down,  we  find 
that  the  only  circumstances  here  communicated  by  the  plaintiffs  to  the 
defendants  at  the  time  the  contract  was  made  were  that  the  article  to 
be  carried  was  the  broken  shaft  of  a  mill,  and  that  the  plaintiffs  were 
millers  of  that  mill. 

But  how  do  these  circumstances  show  reasonably  that  the  profits  of 
the  mill  must  be  stopped  by  an  unreasonable  delay  in  the  delivery  of 
the  broken  shaft  by  the  carrier  to  the  third  person?  Suppose  the 
plaintiffs  had  another  shaft  in  their  possession,  put  up  or  putting  up 
at  the  time,  and  that  they  only  wished  to  send  back  the  broken  shaft 
to  the  engineer  who  made  it,  it  is  clear  that  this  would  be  quite  con- 
sistent with  the  above  circumstances,  and  yet  the  unreasonable  delay 
in  the  delivery  would  have  no  effect  upon  the  intermediate  profits  of 
the  mill.  Or,  again,  suppose  that,  at  the  time  of  the  delivery  to  the 
carrier,  the  machinery  of  the  mill  had  been  in  other  respects  defective, 
then,  also,  the  same  results  would  follow.  Here  it  is  true  that  the 
shaft  was  actually  sent  back  to  serve  as  a  model  for  a  new  one,  and  that 
the  want  of  a  new  one  was  the  only  cause  of  the  stoppage  of  the  mill, 
and  that  the  loss  of  profits  really  arose  from  not  sending  down  the  new 
shaft  in  proper  time,  and  that  this  arose  from  the  delay  in  delivering 
the  broken  one  to  serve  as  a  model.  But  it  is  obvious  that  in  the  great 
multitude  of  cases  of  millers  sending  off  broken  shafts  to  third  per- 
sons by  a  carrier  under  ordinary  circumstances,  such  consequences 
would  not,  in  all  probability,  have  occurred ;  and  these  special  circum- 
stances were  here  never  communicated  by  the  plaintiffs  to  the  defend- 
ants. 

It  follows,  therefore,  that  the  loss  of  profits  here  cannot  reasonably 
be  considered  such  a  consequence  of  the  breach  of  contract  as  could 
have  been  fairly  and  reasonably  contemplated  by  both  the  parties  when 
they  made  this  contract.  For  such  loss  would  neither  have  flowed 
naturally  from  the  breach  of  this  contract  in  the  great  multitude  of 
such  cases  occurring  under  ordinary  circumstances,  nor  were  the 
special  circumstances,  which,  perhaps,  would  have  made  it  a  reasonable 
and  natural  consequence  of  such  breach  of  contract,  communicated 
to  or  known  by  the  defendants.  The  judge  ought,  therefore,  to  have 
told  the  jury  that  upon  the  facts  then  before  them  they  ought  not  to 
take  the  loss  of  profits  into  consideration  at  all  in  estimating  the  dam- 
ages.   There  must  therefore  be  a  new  trial  in  this  case. 


MILLER  V.  TRUSTEES  OF  MARINERS'  CHURCH. 
(Supreme  Judicial  Court  of  Maine,  1830.    7  Greenl.  51,  20  Am.  Dec.  341.) 

Assumpsit  for  the  contract  price  of  a  quantity  of  stone,  which  plain- 
tiffs contracted  to  supply  to  defendants  at  Portland  by  a  certain  date. 
The  stones  were  not  finished  until  about  four  months  after  the  date 
specified.     Defendants   claim  the  right  to  offset  damage  occasioned 


392  CONTRACTS  (Part  1 

by  the  delay.  The  lower  court  instructed  the  jury  that  defendants 
would  be  entitled  to  no  more  damages  than  they  had  or  would  have 
sustained  if,  when  the  time  of  delivery  had  expired,  they  had  stopped 
the  receiving  of  any  more  from  the  plaintiffs,  and  had  proceeded,  with 
due  diligence,  to  furnish  themselves  elsewhere. 

Weston,  J.  *  *  *  If  the  party  injured  has  it  in  his  power  to 
take  measures  by  which  his  loss  may  be  less  aggravated,  this  will  be 
expected  of  him.  Thus  in  a  contract  of  assurance,  where  the  assured 
may  be  entitled  to  recover  for  a  total  loss,  he,  or  the  master  employed 
by  him,  becomes  the  agent  of  the  assurer  to  save  and  turn  to  the  best 
account  such  of  the  property  assured  as  can  be  preserved. 

The  purchaser  of  perishable  goods  at  auction  fails  to  complete  his 
contract.  What  shall  be  done?  Shall  the  auctioneer  leave  the  goods 
to  perish,  and  throw  the  entire  loss  upon  the  purchaser?  That  would 
be  to  aggravate  it  unreasonably  and  unnecessarily.  It  is  his  duty  to 
sell  them  a  second  time,  and,  if  they  bring  less,  he  may  recover  the 
difference,  with  commissions  and  other  expenses  of  resale,  from  the 
first  purchaser. 

If  the  party  entitled  to  the  benetit  of  a  contract  can  protect  himself 
from  a  loss  arising  from  a  breach  at  a  trifling  expense,  or  with  rea- 
sonable exertions,  he  fails  in  social  duty  if  he  omits  to  do  so,  regardless 
of  the  increased  amount  of  damages  for  which  he  may  intend  to  hold 
the  other  contracting  party  liable.  "Qui  non  prohibet,  cum  prohibere 
possit,  jubet."  And  he  who  has  it  in  his  power  to  prevent  an  injury 
to  his  neighbor,  and  does  not  exercise  it,  is  often  in  a  moral,  if  not  in 
a  legal  point  of  view,  accountable  for  it.  The  law  will  not  permit  him 
to  throw  a  loss,  resulting  from  a  damage  to  himself,  upon  another, 
arising  from  causes  for  which  the  latter  may  be  responsible,  which  the 
party  sustaining  the  damage  might,  by  common  prudence,  have  prevent- 
ed. For  example ;  a  party  contracts  for  a  quantity  of  bricks  to  build 
a  house,  to  be  delivered  at  a  given  time ;  and  engages  masons  and 
carpenters  to  go  on  with  the  work.  The  bricks  are  not  delivered.  If 
other  bricks  of  an  equal  quality,  and  for  the  stipulated  price,  can  be  at 
once  purchased  on  the  spot,  it  would  be  unreasonable,  by  neglecting  to 
make  the  purchase,  to  claim  and  receive  of  the  delinquent  party  dam- 
ages for  the  workmen,  and  the  amount  of  rent  which  might  be  obtained 
for  the  house  if  it  had  been  built.  The  party  who  is  not  chargeable 
with  a  violation  of  his  contract  should  do  the  best  he  can  in  such  cases, 
and,  for  any  avoidable  loss  occasioned  by  the  failure  of  the  other,  he 
is  justly  entitled  to  a  liberal  and  complete  indemnity.     *     *     *- 

Judgment  affirmed. 


GALLAGHER  v.  JONES. 

(Supreme  Court  of  the  Unitecl   States.  1889.     129  U.  S.  193,  9  Sup.  Ct.  335, 

32  L.   Ed.  658.) 

Bradley,  J.  This  is  a  suit  brought  by  Jones,  a  stock-broker,  against 
his  customer  for  the  balance  of  account  alleged  to  be  due  to  the  plain- 
tiff arising  out  of  advances  of  money,  and  purchases  and  sales  made, 
and  commissions.     '^     *     * 

The  defendant  set  up  the  following  counterclaims,  to  wit:  (1)  That 
on  the  13th  day  of  November,  1878,  being  at  Virginia  City,  he  ordered 
the  plaintiff,  (at  Salt  Lake  City,)  by  telegraphic  dispatch,  to  sell  certain 
mining  stocks  then  in  his  hands  as  defendant's  agent,  to  wit:     320 


Ch.  10)  REMEDIES  393 

shares  of  "Justice"  stock,  worth  $9  per  share ;  50  shares  of  "Alta"' 
stock,  worth  $8  per  share;  200  shares  of  "Tip  Top"  stock,  worth  $1.60 
per  share;  and  to  invest  the  proceeds  in  "North  Bonanza"  stock — ^ 
another  mining  stock  on  the  same  board,  which  the  defendant  had  been 
investigating.  That  the  plaintitT  received  this  dispatch  in  ample  time 
to  make  the  transaction,  as  directed,  on  that  day,  but  refused  and  neg- 
lected to  do  so ;  and  that  the  defendant  reHed  on  its  being  done,  and 
agreed  with  another  party  to  sell  the  stock  he  had  ordered  purchased. 
That  the  plaintiff  did  not  give  notice  to  the  defendant  of  his  refusal 
to  comply  with  said  order  until  several  days  afterwards,  and  then  by 
letter.  That  afterwards,  and  without  any  orders  so  to  do,  the  plaintiff 
sold  the  "Alta"  stock  at  $7.75  per  share;  the  "Justice"  at  $4.40  per 
share;  and  the  "Tip  Top"  at  $1.25  per  share;  making  a  net  loss  to  de- 
fendant of  $1,200;  and  that  the  "North  Bonanza"  stock  was  not  worth 
more  than  $2  per  share  on  that  day,  and  within  five  days  thereafter  it 
advanced  to  $5.60  per  share,  which  the  defendant  would  have  real- 
ized if  the  plaintiff  had  complied  with  his  order, — whereby  the  defend- 
ant lost  the  sum  of  $6,125.     *     *     * 

[The  trial  court  entered  judgment  for  the  plaintiff'  and  disallowed 
the  defendant's  counterclaim  upon  the  theory  that  the  dift'erence  be- 
tween the  values  of  the  stocks  at  the  time  the  order  was  made  and  at 
the   time   they   were   afterwards    sold   is   immaterial    in   this   action.] 

In  this,  we  think,  the  court  was  in  error.  A  broker  is  but  an  agent, 
and  is  bound  to  follow  the  directions  of  his  principal,  or  give  notice 
that  he  declines  to  continue  the  agency.  In  the  absence  of  a  special 
agreement  to  the  contrary,  it  is  the  principal's  judgment,  and  not  his, 
that  is  to  control  in  the  purchase  and  sale  of  stocks.  The  latter  did  not 
ask  for  any  further  advances  by  the  order  in  question ;  he  only  directed 
a  conversion  or  change  of  one  stock  into  another.  The  plaintiff  should 
have  given  prompt  notice  that  he  objected,  and  declined  to  make  the 
change.  Telegraphic  communication  was  used  by  the  defendant,  and 
no  reason  appears  why  the  plaintiff'  could  not  have  used  the  same.  The 
delay  caused  by  using  the  mail  alone  was  inexcusable  under  the  cir- 
cumstances. The  plaintiff  charged  ample  compensation  for  his  serv- 
ices, and  was  bound  to  act  faithfully,  fairly,  and  promptly.  We  think 
that  he  was  liable  for  all  the  damages  which  the  defendant  sustained 
by  his  refusal  to  change  the  stocks,  both  for  the  loss  on  the  sales  of  the 
"Justice,"  "Alta,"  and  "Tip  Top,"  and  the  loss  occasioned  by  not  pur- 
chasing the  "North  Bonanza."  The  report  of  the  referee,  being  made 
in  conformity  with  the  decision  of  the  supreme  court,  does  not  show 
sufficient  facts  to  determine  the  amount  of  loss  in  these  respects.  If 
the  answer  states  the  facts  truly,  the  loss  on  the  failure  to  sell  the  old 
stocks  was  over  $2,000;  and  it  appears  from  the  report  that  the  North 
Bonanza  could  have  been  purchased  at  $2  to  $2.50  per  share  on  the 
13th  of  November,  and  sold  for  $5  to  $5.50  within  a  few  days, — show- 
ing a  loss  of  $3  per  share;  and  as  the  proceeds  of  the  other  stocks, 
if  they  had  been  sold  as  directed,  would  have  been  sufficient  to  pur- 
chase 1,600  to  2,000  shares  of  North  Bonanza,  the  loss  on  this  ac- 
count must  have  been  more  than  $5,000.  But  the  want  of  a  sufficient 
finding  of  facts  necessitates  a  new  trial.     *     *     * 

It  has  been  assumed,  in  the  consideration  of  the  case,  that  the  meas- 
ure of  damages  in  stock  transactions  of  this  kind  is  the  highest  in- 
termediate value  reached  by  the  stock  between  the  time  of  the  wrongful 
act   complained  of  and  a   reasonable  time   thereafter,  to  be   allowed 


394  CONTRACTS  (Part  1 

to  the  party  injured  to  place  himself  in  the  position  he  would  have  been 
in  had  not  his  rights  been  violated.  This  rule  is  most  frequently  exem- 
plified in  the  wrongful  conversion  by  one  person  of  stocks  belonging  to 
another.  To  allow  merely  their  valiie  at  the  time  of  conversion  would, 
in  most  cases,  afford  a  very  inadequate  remedy,  and,  in  the  case  of  a 
broker,  holding  the  stocks  of  his  principal,  it  would  afford  no  remedy 
at  all.  The  effect  would  be  to  give  to  the  broker  the  control  of  the 
stock,  subject  only  to  nominal  damages.  The  real  injury  sustained  by 
the  principal  consists  not  merely  in  the  assumption  of  control  over  the 
stock,  but  in  the  sale  of  it  at  an  unfavorable  time,  and  for  an  unfavor- 
able price.  Other  goods  wrongfully  converted  are  generally  supposed 
to  have  a  fixed  market  value  at  which  they  can  be  replaced  at  any  time ; 
and  hence,  with  regard  to  them,  the  ordinary  measure  of  damages  is 
their  value  at  the  time  of  conversion,  or,  in  case  of  sale  and  purchase, 
at  the  time  fixed  for  their  delivery.  But  the  application  of  this  rule  to 
stocks  would,  as  before  said,  be  very  inadequate  and  unjust.  The  rule 
of  highest  intermediate  value,  as  applied  to  stock  transactions,  has  been 
adopted  in  England,  and  in  several  of  the  states  in  this  country ;  while 
in  some  others  it  has  not  obtained.  The  form  and  extent  of  the  rule 
have  been  the  subject  of  much  discussion  and  conflict  of  opinion. 
*  *  *  Perhaps  more  transactions  of  this  kind  arise  in  the  state 
of  New  York  than  in  all  other  parts  of  the  country.  The  rule  of  high- 
est intermediate  value  up  to  the  time  of  trial  formerly  prevailed  in 
that  state,  and  may  be  found  laid  down  in  Romaine  v.  Van  Allen,  26 
N.  Y.  309,  and  Markham  v.  Jaudon,  41  N.  Y.  235,  and  other  cases, 
although  the  rigid  application  of  the  rule  was  deprecated  by  the  New 
York  superior  court  in  an  able  opinion  by  Judge  Duer,  in  Suydam  v. 
Jenkins,  5  N.  Y.  Super.  Ct.  614.  The  hardship  which  arose  from  es- 
timating the  damages  by  the  highest  price  up  to  the  time  of  trial,  which 
might  be  years  after  the  transaction  occurred,  was  often  so  great  that 
the  court  of  appeals  of  New  York  was  constrained  to  introduce  a 
material  modification  in  the  form  of  the  rule,  and  to  hold  the  true 
and  just  measure  of  damages  in  these  cases  to  be  the  highest  interme- 
diate value  of  the  stock  between  the  time  of  its  conversion  and  a  rea- 
sonable time  after  the  owner  has  received  notice  of  it  to  enable  him 
to  replace  the  stock.  This  modification  of  the  rule  was  very  ably  en- 
forced in  an  opinion  of  the  court  of  appeals  delivered  by  Judge  Rapallo 
inthecaseof  Baker  V.Drake,  53  N.Y.  211,  13  Am.  Rep.  507.  *  *  * 
On  the  whole,  it  seems  to  us  that  the  New  York  rule,  as  finally  set- 
tled by  the  court  of  appeals,  has  the  most  reasons  in  its  favor,  and  we 
adopt  it  as  a  correct  view  of  the  law. 

The  judgment  is  reversed,  and  the  cause  remanded  to  the  Supreme 
Court  of  Utah,  with  instructions  to  enter  judgment  in  conformity 
with  this  opinion. 

We  have  seen  that  the  courts  have  certain  fairly  definite  rules  for 
determining  the  amount  of  damages  to  be  assessed  in  compensation 
for  the  loss  occasioned  by  the  breach  of  a  contract.  However,  in 
order  to  make  judicial  inquiry  as  to  the  amount  of  damages  unnec- 
essary, the  parties  sometimes  place  in  their  contract  a  stipulation 
that,  in  the  event  of  a  breach  of  the  contract  by  one  of  the  parties, 
he  shall  pay  a  certain  sum  as  liquidated  damages. 

"Where  a  sum  named  is  construed  by  a  court  as  being  liquidated 


Ch.  10)  RKMEDIES  395 

damages,  such  sum  is  the  amount  of  recovery  for  a  breach.  A  pen- 
alty, which  differs  in  its  nature  very  widely  from  liquidated  dam- 
ages, is  a  sum  named  in  a  contract,  to  be  paid  by  a  defaulting  party 
as  punishment  for  his  breach.  Unlike  liquidated  damages,  a  pen- 
alty is  not  regarded  as  constituting  an  agreed  measure  of  compen- 
sation; it  is  considered  as  a  punishment  agreed  upon  beforehand. 
The  practical  purpose  of  the  parties  in  naming  such  a  sum,  is  to 
make  the  agreement  for  the  penalty  a  kind  of  security  for  the  per- 
formance of  the  contract.  If  their  purpose  is  to  make  a  penal  sum 
absolutely  due  in  toto  in  case  of  breach,  their  purpose  will  not  be 
given  effect;  a  sum  which  would,  on  principles  to  be  stated  here- 
after, be  unreasonable  and  unconscionable,  will  not  be  in  any  way 
determinative  of  the  amount  to  be  assessed  for  a  breach.  A  court 
does  not  feel  itself  compelled  to  regard  a  penalty  as  being  either 
the  maximum  or  minimum  amount  to  be  assessed  for  a  breach, 
where  the  penalty  is  named  in  a  mere  contract,  although  it  is  re- 
garded as  the  maximum  of  liabiHty,  where  it  is  named  in  a  penal 
bond.  Where  a  sum  named  in  a  contract  is  construed  by  a  court 
as  being  a  penalty,  it  cannot  be  collected  in  full  as  a  stated  com- 
pensation;  only  damages  for  the  actual  loss  occasioned  by  the 
default  will  be  assessed,  whether  such  damages  be  greater  or  less 
than  the  penalty  riamed.  Where  a  penalty  is  named  in  either  a 
statutory  undertaking  or  a  penal  bond,  the  sum  so  named  is  the 
limit  of  recovery;  and,  while  a  lesser  amount  may  be  recovered  on 
the  bond,  a  greater  cannot  be."  * 

There  is  some  conflict  on  various  questions  connected  with  liqui- 
dated damages ;   but,  in  general,  the  following  rules  are  followed : 

"An  intention  to  liquidate  the  damages  is  controlling.  In  seeking 
to  ascertain  the  real  intent,  the  courts  lean  strongly  towards  a  con- 
struction that  the  sum  fixed  is  a  penalty,  rather  than  liquidated  dam- 
ages. The  language  of  the  parties  is  not  conclusive,  and  will  be 
strictly  construed. 

"Where  the  stipulated  sum  is  wholly  collateral  to  the  object  of 
the  contract,  and  is  evidently  inserted  in  terrorem  as  security  for 
performance,  it  will  be  construed  to  be  a  penalty. 

"Where  the  stipulated  sum  is  to  be  paid  on  the  non-payment  of 
a  less  amount,  or  on  failure  to  do  something  of  less  value,  it  will 
generally  be  construed  to  be  a  'pi5nalty. 

"Where  the  stipulated  sum  is  to  be  paid  on  breach  of  a  contract 
of  such  a  nature  that  the  damages  arising  from  a  breach  may  be 
either  much  greater  or  much  less  than  the  sum  fixed,  it  will  be 
construed  to  be  a  penalty. 

"Where  the  stipulated  sum  is  to  be  paid  on  the  breach  of  a  con- 
tract of  such  a  nature  that  the  damages  resulting  from  a  breach 
would  be  uncertain,  and  incapable  or  difficult  of  being  estimated 
by  any  definite  standard,  it  will  generally  be  construed  to  be  liqui- 
dated damages,  if  reasonable  in  amount. 

I  Bauor  on  Daniaires,  §  .33. 


396  CONTRACTS  (Part  1 

"Where  the  stipulated  sum  is  to  be  paid  on  the  breach  of  a  con- 
tract of  such  a  nature  that  the  damages  arising  from  a  breach  are 
capable  of  exact  measurement  by  a  definite  standard,  the  sum  fixed, 
if  materially  variant  from  the  actual  damages,  will  usually  be  re- 
garded as  a  penalty ;  but  where  such  sum  is  fixed  to  cover  contem- 
plated consequential  losses,  not  recoverable  under  legal  rules,  and 
is  not  more  than  a  reasonable  compensation  therefor,  it  may  be 
sustained  as  liquidated  damages. 

"Where  the  contract  provides  that  a  certain  sum,  deposited  to  se- 
cure performance,  shall  be  forfeited  for  nonperformance,  the  sum 
deposited,  if  reasonable  in  amount,  will  be  construed  to  be  liqui- 
dated damages. 

"Where  the  stipulated  sum  is  to  be  paid  on  any  breach  of  a  con- 
tract containing  several  stipulations  of  widely  different  degrees  of 
importance,  it  is  usually  held  to  be  a  penalty. 

"A  sum  stipulated  to  be  paid  upon  a  breach  of  contract  cannot  be 
recovered  as  liquidated  damages  upon  a  partial  breach,  where  the 
other  party  has  accepted  part  performance. 

"A  sum  stipulated  to  be  paid  in  evasion  of  the  usury  laws  will 
be  regarded  as  a  penalty."  ^ 


JAQTITII  V.   HUDSON. 
(Siipi'eiue  Court  of  Michigan,  3858.    5  Mich.  12.3.) 

Christiancy,  J.  *  *  *  The  real  question  in  this  class  of  cases 
will  be  found  to  be,  not  what  the  parties  intended,  but  whether  the 
sum  is,  in  fact,  in  the  nature  of  a  penalty ;  and  this  is  to  be  deter- 
mined by  the  magnitude  of  the  sum,  in  connection  with  the  subject- 
matter,  and  not  at  all  by  the  words  or  the  understanding  of  the  par- 
ties. The  intention  of  the  parties  cannot  alter  it.  While  courts  of 
law  gave  the  penalty  of  the  bond,  the  parties  intended  the  payment  of 
the  penalty  as  much  as  they  now  intend  the  payment  of  stipulated 
damages ;  it  must  therefore,  we  think,  be  very  obvious  that  the  ac- 
tual intention  of  the  parties,  in  this  class  of  cases,  and  relating  to  this 
point,  is  wholly  immaterial ;  and  though  the  courts  have  very  gen- 
erally professed  to  base  their  decisions  upon  the  intention  of  the 
parties,  that  intention  is  not,  and  can  not,  be  made  the  real  basis  of 
these  decisions.     *     *     * 

In  this  class  of  cases,  where  the  .law  permits  the  parties  to  ascer- 
tain and  fix  the  amount  of  damages  in  the  contract,  the  first  inquiry 
obviously  is.  Whether  they  have  done  so  in  fact?  And  here,  the  in- 
tention of  the  parties  is  the  governing  consideration ;  and  in  ascer- 
taining this  intention,  no  merely  technical  effect  will  be  given  to  the 
particular  words  relating  to  the  sum,  but  the  entire  contract,  the  sub- 
ject-matter and  often  the  situation  of  the  parties  with  respect  to  each 
other  and  to  the  subject-matter,  will  be  considered.    *     *     * 

2  Hale  on  Damages  (2cl  Ed.)  §§   51-60. 


Ch.  10)  REMEDIES  397 


UNITED  STATES  v.  BETHLEHEM  STEEL  CO. 

(Supreme  Court  of  the  United  States,  1907.     205  U.  S.  105,  27  Sup.  Ct.  450, 

51  L.  Ed.  731.) 

Peckham,  J,  *  *  *  f)^Q  courts  at  one  time  seemed  to  be  quite 
strong  in  their  views,  and  would  scarcely  admit  that  there  ever  was  a 
valid  contract  providing  for  liquidated  damages.  Their  tendency  was 
to  construe  the  language  as  a  penalty,  so  that  nothing  but  the  actual 
damages  sustained  by  the  party  aggrieved  could  be  recovered.  Sub- 
sequently the  courts  became  more  tolerant  of  such  provisions,  and 
have  now  become  strongly  inclined  to  allow  parties  to  make  their  own 
contracts  and  to  carry  out  their  intentions,  even  when  it  would  result 
in  the  recovery  of  liquidated  damages,  upon  proof  of  the  violation  of 
the  contract,  and  without  proof  of  the  damages  actually  sustained. 
*  *  *  The  question  always  is :  What  did  the  parties  intend  by  the 
language  used?  When  such  intention  is  ascertained,  it  is  ordinarily 
the  duty  of  the  court  to  carry  it  out.     *    *     * 


KEEBLE   V.   KEEBLE. 
(Supreme  Court  of  Alabama.  ISSS.     85  Ala.  552,  5  South.  149.) 

Plaintiff  and  defendant's  testator  had  been  in  partnership  in  the 
mercantile  business.  Plaintiff  sold  out  to  defendant's  testator,  but 
was  employed  by  the  latter  as  business  manager.  The  terms  of  the 
employment  imposed  on  plaintiff  the  obligation  wholly  to  abstain  from 
the  use  of  intoxicating  liquors,  and,  in  the  event  he  should  become  in- 
toxicated, that  he  should  pay,  "as  liquidated  damages,"  the  sum  of 
$1,000.  The  plea  alleged  that  plaintiff  violated  his  promise  to  keep 
sober,  and  thereby  became  bound  to  pay  to  defendant's  testator  said 
sum  of  $1,000,  which  sum  was  offered  as  a  set-off  to  plaintift"'s  de- 
mand. 

SoMiSRViLLE,  J.  *  *  *  'phe  appellant  violated  his  promise  by 
becoming  intoxicated,  and  remained  so  for  a  long  time,  and  acted 
rudely  and  insultingly  towards  the  customers  and  employes  of  the 
testator,  and  otherwise  deported  himself,  by  reason  of  intoxication, 
in  such  manner  as  to  do  injury  to  the  business.  It  is  not  denied  by 
appellant's  counsel  that  this  is  a  total  breach  of  the  promise  to  keep 
sober;  nor  is  it  argued  that  the  damage  resulting  from  the  violation 
of  such  a  promise  can  be  ascertained  with  any  degree  of  certainty; 
nor  even  that  the  amount  agreed  to  be  paid  as  liquidated  damages,  in 
the  event  of  a  breach,  is  disproportionate  to  the  damages  which  may 
have  been  actually  sustained  in  this  case.  But  the  contention  seems 
to  be  that,  inasmuch  as  it  was  possible  for  a  breach  to  occur  with  no 
actual  damages  other  than  nominal,  the  amount  agreed  to  be  paid 
should  be  construed  to  be  a  penalty.  *  ^  *  It  is  argued,  in  other 
words,  that  becoming  intoxicated  in  private,  while  off  duty,  would 
be  a  violation  of  the  contract,  but  would  be  attended  with  no  actual 
damage  to  the  business  of  R.  C.  Keeble  &  Co.  *  *  *  There  are  but 
few  agreements  of  this  kind  where  the  stipulation  is  to  do  or  not  do 
a  particular  act,  in  which  the  damages  may  not,  according  to  circum- 
stances, vary,  on  a  sliding  scale,  from  nominal  damages  to  a  consid- 
erable sum.  One  may  sell  out  the  goodwill  of  his  business  in  a  given 
locality,  and  agree  to  abstain  from  its  further  prosecution,  or,  in  the 


398  CONTRACTS  (Part  1 

event  of  his  breach  of  his  agreement,  to  pay  a  certain  sum  as  hcjuidat- 
ed  damages;  as,  for  example,  not  to  practice  one's  profession  as  a 
physician  or  la\Yyer,  not  to  run  a  steamboat  on  a  certain  river  or  to 
carry  on  the  hotel  business  in  a  particular  town,  not  to  re-establish  a 
newspaper  for  a  given  period,  or  to  carry  on  a  particular  branch  of 
business  within  a  certain  distance  from  a  named  city. 

In  all  such  cases,  as  often  decided,  it  is  competent  for  the  parties 
to  stipulate  for  the  payment  of  a  gross  sum  by  way  of  liquidated  dam- 
ages for  the  violation  of  the  agreement,  and  for  the  very  reason  that 
such  damages  are  uncertain,  fluctuating,  and  incapable  of  easy  ascer- 
tainment. *  *  *  It  is  clear  that  each  of  these  various  agreements 
may  be  violated  by  a  substantial  breach,  and  yet  no  damages  might 
accrue  except  such  as  are  nominal.  The  obligor  may  practice  med- 
icine, and  possibly  never  interfere  v>"ith  the  practice  of  the  other  con- 
tracting party,  or  law,  without  having  a  paying  client ;  or  he  may 
run  a  steam-boat  without  a  passenger ;  or  an  hotel  without  a  guest ; 
or  carry  on  a  newspaper  without  the  least  injury  to  any  competitor. 
But  the  law  will  not  enter  upon  an  investigation  as  to  the  quantum  of 
damages  in  such  cases.  This  is  the  very  matter  settled  by  the  agree- 
ment of  the  parties.  If  the  act  agreed  not  to  be  done  is  one  from 
which,  in  the  ordinary  course  of  events,  damages,  incapable  of  as- 
certainment save  by  conjecture,  are  liable  naturally  to  follow,  some- 
times more  and  sometimes  less,  according  to  the  aggravation  of  the 
act,  the  court  will  not  stop  to  investigate  the  extent  of  the  grievance 
complained  of  as  a  total  breach,  but  will  accept  the  sum  agreed  on  as 
a  proper  and  just  measurement,  by  way  of  liquidated  damages,  un- 
less the  real  intention  of  the  parties  *  *  *  designed  it  as  a  penalty. 
We  may  add,  moreover,  that  no  one  can  accurately  estimate  the 
physiological  relation  between  private  and  public  drunkenness,  nor 
the  causal  connection  between  intoxication  one  time  and  a  score  of 
times.  The  latter,  in  each  instance,  may  follow  from  the  former, 
and  the  one  may  naturally  lead  to  the  other.  There  would  seem  to  be 
nothing  harsh  or  unreasonable  in  stipulating  against  the  very  source 

and  beginning  of  the  more  aggravated  evil  sought  to  be  avoided. 
*     *    * 

[Judgment  allowing  defendant's  set-off  affirmed.] 


SECTION  3.— RESCISSION 

When  a  party  has  materially  broken  his  contract,  the  Injured 
party  may  sue  the  party  in  default  and  recover  damages  for  the 
breach  of  contract.  This  is  a  suit  upon  the  contract.  The  plaintiff 
will  obtain  a  judgment  for  money  damages,  presumably  sufficient  in 
amount  to  equal  what  the  plaintiff  would  have  gained  had  the  con-  , 
tract  been  performed.  Where  the  suit  is  for  specific  performance  • 
of  the  contract,  a  successful  complainant  obtains,  literally,  what  he 
was  entitled  to  under  the  contract.  In  contrast  Avith  these  reme- 
dies, which  seek  to  put  the  plaintiff'  in  the  same  position  he  would 
have  occupied  had  the  contract  been  performed  by  the  defendant, 
the  remedy  of  rescission,  on  the  other  hand,  seeks  to  put  the 
plaintiff  in  the  same  position  which  he  occupied  before  he  entered 
into  the  contract;   that  is,  the  remedy  of  rescission  enables  a  plain- 


Ch.  10)  REMEDIES  399 

tiff  to  recover  what  he  parted  with.  The  remedy  of  rescission  does 
not  entitle  the  plaintiff  to  damages  in  addition  to  the  remedy  of 
obtaining  restitution.  Sometimes  the  term  "rescission"  is  used  to 
describe  the  election  of  the  plaintiff  to  hold  the  party  in  default  for 
breach  of  contract,  but  its  narrower  meaning  is  confined  to  that 
stated  above. 

RAFTER Y  v.  WORLD  FIt/M  CORPORATION. 

(Supreme  Court  of  New  York,  Appellate  Division,  1917.     180  App.  Div.  475, 

167  N.  Y.  Supp.   1027.) 

Action  by  George  A.  Raftery  against  the  World  Film  Corporation. 
From  an  interlocutory  judgment,  directing  an  accounting,  and  direct- 
mg  a  return  to  plaintiff  of  26  films  of  a  motion  picture  known  as  "The 
Head  Hunters"  defendant  appeals. 

Smith,  J.  Upon  February  13,  1915,  the  Seattle  Film  Company,  In- 
corporated, the  plaintiff's  assignor,  entered  into  a  contract  with  the 
World  Film  Corporation,  the  defendant  in  this  action,  called  in  the 
contract  the  "distributor."  The  general  provisions  of  the  contract  were 
that  the  defendant,  the  distributor,  should  distribute  and  have  produced 
the  motion  pictures  representing  the  Head  Hunters  in  the  various 
theaters  controlled  by  the  defendant,  which  were  26  in  number.  The 
film  was  the  property  of  the  plaintiff's  assignor.  Under  the  contract 
26  positive  prints,  so  called,  were  delivered  to  the  defendant  for  the 
purpose  of  the  production,  upon  the  express  covenant  of  the  defend- 
ant to  return  these  prints  to  the  producer  at  the  expiration  of  the 
contract.  +  *  *  j^  ^^,^g  further  provided  that  the  distributor  should 
upon  Tuesday  of  each  week  pay  to  the  producer  the  said  50  per  cent, 
of  the  gross  cash  receipts  over  and  above  the  amount  so  provided  to 
be  retained  during  the  week  ending  nine  days  prior  to  the  date  of  pay- 
ment, and  at  the  time  of  each  payment  to  the  producer  the  distributor 
was  to  submit  to  the  producer  a  statement  showing  such  gross  receipts, 
and  the  producer  should  have  the  privilege  once  a  month  at  a  rea- 
sonable time  to  inspect  the  accounts  of  the  distributor  relative  to  such 
gross  cash  receipts. 

The  trial  court  has  found  that  the  distributor  did  not  turn  over  to 
the  producer  one-half  of  the  gross  receipts  as  required  by  the  contract, 
did  not  render  to  the  said  company  just,  true,  and  accurate  statements 
of  the  rentals  received,  but,  on  the  contrary,  it  rendered  the  said  Se- 
attle Company,  the  producer,  week  by  week,  false,  untrue,  and  fraud- 
ulent statements  of  the  rentals  received  by  it  and  of  the  leases  by  it, 
and  of  the  expenses  incurred  by  it.  *  *  *  The  trial  court  has  fur- 
ther found  that  the  defendant  has  retained  possession  of  and  still  has 
the  26  sets  of  films  of  positive  prints  of  said  production  known  as 
"The  Head  Hunters,"  although  the  defendant  by  the  eighth  clause  of 
the  aforesaid^  contract  of  February  13,  1915,  contracted  and  agreed  to 
return  the  said  prints  upon  the  termination  of  the  contract,  which  oc- 
curred on  the  15th  day  of  August,  1916.     *     *     * 

The  defendant  offered  no  evidence  on  its  own  behalf,  and  now  stands 
upon  the  specific  objection  that  the  plaintiff  at  no  time  had,  and  does 
not  now  have,  any  right  to  ask  the  interposition  of  a  court  of  equity, 
and  for  that  reason  insists  that  the  complaint  should  have  been  dis- 
missed in  accordance  with  its  motion  made  at  the  trial.  There  are,  I 
think,  two  questions  of  law^  involved:    First,  was  the  defendant's  of- 


400  CONTRACTS  (Part  1 

fense,  in  giving  false  statements  of  its  receipts  and  refusing  to  allow 
the  plaintiff  to  examine  its  books  to  verify  the  statements  given,  suffi- 
cientl}'  grave  to  authorize  the  plaintiff  at  the  time  the  action  v^^as 
brought,  to  rescind  the  contract ;  secondly,  assuming  that  the  fight  of 
rescission  then  existed,  had  the  plaintiff  an  adequate  remedy  at  law? 
-K      *      * 

First.  The  Seattle  Film  Company  was  at  the  time  this  action  was 
commenced  authorized  to  rescind  the  contract  by  the  defendant's  will- 
ful and  fraudulent  breach  of  the  contract  in  failing  to  make  true  re- 
ports of  the  proceeds  of  the  production  and  refusing  the  plaintiff  an 
opportunity  to  inspect  the  books  of  the  company.  The  authorities  in 
this  state  bearing  upon  the  right  of  a  party  to  a  contract  to  rescind 
for  breach  of  the  contract  ''"  *  *  are  not  plentiful,  as  it  does  not 
appear  that  the  question  has  many  times  arisen.  The  rule  in  England 
has  been  ultra  strict  in  holding  that  the  breach  of  the  contract  must 
amount  practically  to  a  repudiation  or  an  abandonment  of  the  contract 
in  order  to  authorize  a  rescission. 

Professor  Williston,  one  of  the  most  eminent  authorities  in  this 
country  upon  the  Law  of  Contracts,  has  an  article  in  14  Harvard  Law 
Revievv^,  p.  318  et  seq.,  in  which  this  question  is  discussed,  in  which  it 
is  shown  that  the  law  as  applied  in  the  United  States  is  materially 
different  from  that  as  applied  in  England.  In  speaking  of  the  English 
rule  as  stated.  Professor  Williston  says :  "This  doctrine,  though  per- 
haps  it  is  that  of  the  English  law  to-day,  must  be  regarded  as  errone- 
ous in  principle  and  unfortunate  in  practice.  It  seems  to  be  based 
in  large  part  on  the  notion  that,  in  order  to  justify  such  a  rescission 
of  the  contract,  mutual  assent  of  the  parties  must  be  established — an 
offer  by  the  party  in  default  accepted  by  the  other  party.  In  almost 
anv  case  this  can  be  established  only  by  resorting  to  the  baldest  fic- 
tion." 

Professor  Williston,  in  speaking  of  the  American  rule,  then  says: 
"In  truth  rescission  is  imposed  in  invitum  by  the  law  at  the  option  of 
the  injured  party,  and  it  should  be,  and  in  general  is,  allowed,  not 
only  for  repudiation  or  total  inability,  but  also  for  any  breach  of  con- 
tract of  so  material  and  substantial  a  nature  as  should  constitute  a  de- 
fense to  an  action  brought  by  the  party  in  default  for  a  refusal  to  pro- 
ceed with  the  contract.''     *     *     * 

To  this  proposition  manv  cases  are  cited  in  the  United  States  court 
and  in  many  states  of  the  Union.  The  leading  authority  in  New  York 
state  is  the  Case  of  Callanan  v.  K.,  A.  C.  &  L.  C.  R.  R.  Co.,  reported 
in  199  N.  Y.  269,  92  N.  E.  747.  That  was  a  case  brought  in  equity 
to  rescind  a  contract  for  breach  of  a  condition  subsequent.  Judge 
Vann,  waiting  for  the  court,  in  speaking  of  the  holding  of  the  referee, 
said:  " '■'  *  ''"  There  is  no  hard  and  fast  rule  on  the  subject  of 
rescission,  for  the  right  usually  depends  on  the  circumstances  of  the 
particular  case.  It  is  permitted  for  failure  of  consideration,  fraud  in 
making  the  contract,  for  inability  to  perform  it  after  it  is  made,  for 
repudiation  of  the  contract  or  an  essential  part  thereof,  and  for  such  a 
breach  as  substantially  defeats  its  purpose.  It  is  not  permitted  for  a 
slight,  casual,  or  technical  breach,  but,  as  a  general  rule,  only  for  such 
as  are  material  and  willful,  or,  if  not  willful,  so  substantial  and  funda- 
mental as  to  strongly  tend  to  defeat  the  object  of  the  parties  in  mak- 
ing the  contract.    Failure  to  perform  in  every  respect  is  not  essential, 


Ch.  10)  REMEDIES  401 

but  a  failure  which  leaves  the  subject  of  the  contract  substantially  dif- 
ferent from  what  was  contracted  for  is  sufficient." 

Within  the  strict  letter  of  the  rule  thus  laid  down  the  plaintiff  has, 
in  my  judgment,  shown  a  right  of  rescission.  The  consideration  of 
the  contract  was  the  payment  of  50  per  cent,  of  the  gross  proceeds 
after  certain  deductions.  Inasmuch  as  the  defendant  was  giving  the 
production  through  its  different  agencies,  the  amount  of  those  pro- 
ceeds was  known  only  to  the  defendant.  It  was  therefore  deemed  nec- 
essary to  stipulate  that  the  defendant  should  make  weekly  reports  of 
the  gross  receipts,  and  should  allow  the  plaintiff  access  to  its  books, 
that  their  accuracy  might  be  tested.  The  giving  of  false  and  untrue 
reports  of  the  proceeds,  and  the  refusal  of  the  defendant  to  allow  the 
plaintiff  access  to  its  books  as  stipulated,  were  clearly  "material  and 
willful"  breaches  and  "repudiation  of  the  contract  or  an  essential  part 
thereof,"  and  also  such  a  "breach  as  substantially  defeats  its  purpose." 
It  would  seem  from  this  authority  that  the  breach  must  be  funda- 
mental, if  it  be  not  willful;  but,  if  willful,  then  a  breach  in  any  ma- 
terial stipulation  constitutes  ground  for  rescission.  That  the  breach 
must  be  of  a  material  provision  is  undoubted,  but  that  false  reports 
upon  which  payments  are  made  under  the  contract  and  a  refusal  to 
allow  a  verification  of  those  reports  constitute  a  breach  of  a  material 
stipulation  in  the  contract,  is  too  plain  for  controversy.  *  *  * 
The  judgment  should  therefore  be  affirmed.     *     *     * 


SECTION   4.— JUDGMENTS    AND    EXECUTIONS 

In  the  broadest  sense  of  the  term,  a  judgment  is  the  formal  dec- 
laration by  a  court  that  the  plaintiff  either  is  or  is  not  entitled  to 
the  relief  sought  by  him.  The  evidence  of  the  judgment  will  be 
found  usually  in  a  book,  called  the  docket,  kept  by  the  judge  or 
by  a  clerk  of  the  court.  The  judgment  may  be  entered  either  with 
or  without  a  trial.  Judgment  may  be  entered  against  a  defendant 
because  of  his  failure  to  appear  in  court  either  in  person  or  by 
counsel.  Such  a  judgment  is  usually  called  a  judgment  bv  default. 
So,  also,  may  a  judgment  be  entered  against  the  plaintiff  and  in 
favor  of  the  defendant  because  of  a  like  failure  on  the  part  of  the 
plaintiff  to  appear  at  times  designated  in  court  orders  for  his  ap- 
pearance. Such  a  judgment  is  usually  called  a  dismissal  for  want 
of  prosecution.  The  judgment  may  be  entered  against  either  of  the 
litigants  as  the  result  of  argument  on  propositions  of  law,  as  for 
example  upon  a  demurrer.  A  judgment  may  be  entered  after  a 
trial,  either  before  the  judge  alone,  or  before  the  judge  with  a  jury. 
A  finding  of  facts  by  a  judge,  or  a  finding  of  facts  by  a  jury,  called 
a  verdict,  is  to  be  distinguished  sharply  from  a  judgment,  in  that 
the  finding  of  ultimate  facts  in  and  of  itself  does  not  produce  the 
legal  effect  which  is  produced  by  the  formal  entry  of  judgment. 

Judgments  may  be  classified  in  several  ways.  It  is  convenient 
to  group  them  according  to  the  legal  effect  upon  the  relations  of 
the  parties  to  the  litigation.  Looked  upon  in  this  way,  judgments 
B.&  B.Bus.Law— 26 


402  CONTRACTS  (Part  1 

may  be  classified  as  follows:  (1)  Judgments  for  money;  (2) 
judgments  for  the  restitution  of  specific  property  or  which  other- 
wise affect  specific  property;  (3)  judgments  ordering  the  perform- 
ance of  specific  acts  by  the  defendant ;  (4)  judgments  which  dis- 
solve certain  legal  relations  then  existing  between  the  parties. 
This  list  is  not  entirely  exhaustive,  but  they  include  and  describe 
the  distinctive  aspects  of  most  forms  of  judicial  relief. 

Perhaps  in  a  majority  of  actions  the  plaintiff  is  seeking  a  judg- 
ment for  money  damages.  This  is  illustrated  by  the  ordinary  ac- 
tions for  breach  of  contract  and  for  tort.  Judgments  for  the  restitu- 
tion of  property  are  entered  when  the  defendant  is  unlawfully  with- 
holding possession  thereof  from  the  plaintiff.  The  property  so 
held  may  be  personal  property  or  real  property.  In  suits  for  spe- 
cific performance  the  judgment,  or  decree  as  it  is  usually  called, 
takes  the  form  of  an  order  from  the  court,  directed  to  the  defend- 
ant, to  perform  the  act  specified,  such  as  that  a  deed  be  executed 
and  delivered  by  the  defendant  to  the  plaintiff.  The  decree  may 
order  the  defendant  to  refrain  from  acting,  as,  for  example,  that  the 
defendant,  who  has  contracted  not  to  engage  in  a  certain  business 
within  specified  territory,  should  cease  his  violation  of  this  promise. 
The  decree  may  order  the  defendant  to  cease  the  commission  of  a 
tort,  as,  for  example,  that  the  defendant  shall  take  steps  to  prevent 
the  continuance  of  a  nuisance  in  the  vicinity  of  plaintiff's  residence. 
Such  an  order  is  commonly  called  an  injunction. 

There  are  several  types  of  cases  where  the  judgment  of  the  court 
will  take  the  form  merely  of  putting  an  end  to  existing  legal  re- 
lations between  the  parties.  Such  a  judgment  is  more  commonly 
called  a  decree.  For  example,  a  decree  of  divorce  destroys  the 
rights,  duties,  powers,  and  privileges  incident  to  the  marriage  re- 
lation. A  decree  dissolving  a  partnership  has  a  similar  effect.  In 
suits  to  remove  a  cloud  from  title  to  land,  the  decree  will  declare 
certain  adverse  claims  to  be  non-existent.  A  court  may  in  certain 
cases  decree  the  dissolution  of  a  corporation.  An  injunction  may 
be  incorporated  in  the  decree,  in  order  to  make  it  effective. 

The  principal  legal  effect  of  a  judgment  for  money  is  that,  usu- 
ally, the  entry  of  the  judgment  operates  to  confer  upon  the  owner 
of  the  judgment  a  lien  upon  the  real  property  owned  by  the  judg- 
ment debtor  within  the  jurisdiction  of  the  court.  Such  a  lien  is 
similar  to  a  mortgage,  in  that  the  property  upon  which  the  lien  was 
impressed  by  the  judgment  may  be  sold  under  appropriate  process 
to  satisfy  the  claim  evidenced  by  the  judgment.  Sometimes  the 
judgment  does  not  operate  to  create  a  lien  upon  property,  the 
statute  providing  that  some  act  must  be  done  before  the  lien  at- 
taches, such  as  recording  the  judgment  in  a  designated  office  or  the 
taking  out  of  a  formal  execution.  This  aspect  of  the  legal  effect  of 
a  judgment  is,  therefore,  to  confer  upon  the  judgment  creditor  the 
power  to  have  the  judgment  debtor's  property  sold  to  satisfy  the 
debt. 


Ch.  10)  REMEDIES  403 

The  term  "execution"  is  used  to  describe  one  of  the  formal  docu- 
ments, which  is  issued  from  the  office  of  the  clerk  of  the  court,  and 
under  the  authority  and  direction  of  the  court,  directed  to  the 
sheriff  of  the  county,  the  bailiff  of  the  court,  or  constable,  command- 
ing him  to  serve  the  same  upon  the  judgment  debtor  and  to  de- 
mand payment  of  the  debt.  This  document  is  the  source  of  the 
power  of  the  sheriff  or  other  officer  to  sell  the  judgment  debtor's 
property.  Frequently  this  document  and  the  service  thereof  upon 
the  judgment  debtor  will  not,  in  and  of  itself,  bring  about  a  judicial 
sale.  Generally  another  document  will  be  issued,  usually  from  the 
sheriff's  office,  which  is  called  a  levy;  the  judgment  creditor  hav- 
ing specified  therein  certain  property  which  he  declares  to  be  owned 
by  the  judgment  debtor.  The  levy  directs  the  sheriff  to  proceed,  in 
accordance  with  the  statute,  to  sell  the  property  therein  designated. 
Usually  a  short  period  of  time  must  elapse  between  the  issuance  of 
the  levy  and  the  date  set  for  the  sale.  This  period  may  vary  from  a 
few  days  to  three  or  four  weeks  or  even  more.  Statutes  generally 
require,  as  a  condition  precedent  to  the  holding  of  a  valid  judicial 
sale,  that  the  time  and  place  of  such  sale  be  advertised  in  the  papers- 
and  notices  posted  up  in  certain  public  places  within  the  county  or 
district  wherein  the  sale  is  to  occur.  The  effect  of  the  sale  will  be  to 
pass  a  good  title  to  the  purchaser,  but  there  is  usually  a  period  al- 
lowed by  statute  within  which  time  the  judgment  debtor  may  de- 
mand a  re-transfer  of  the  property  from  the  purchaser  at  the  sale,, 
upon  payment  of  the  amount  for  which  the  property  sold  and  the 
court  costs.    This  period  is  called  a  period  of  redemption. 

The  nature  of  the  other  types  of  judgments  or  decrees,  and  the 
methods  of  their  enforcement,  are  illustrated  in  the  following  sec- 
tions. 


SECTION  5.— GARNISHMENT 

Oftentimes  a  judgment  debtor  has  no  real  or  personal  property 
which  may  be  seized  on  execution  and  sold  to  satisfy  the  judg- 
ment. Such  judgment  debtor,  however,  may  "have  claims  for  money 
against  other  persons.  A  claim  for  money  against  a  third  party  is 
a  right  possessing  value,  but  it  is  not  of  such  a  nature  as  to  be 
capable  of  seizure  under  ordinary  judicial  process,  such  as  an  execu- 
tion. To  meet  this  situation  statutes  prescribe  a  procedure,  gen- 
erally known  as  a  "garnishment  proceeding,"  under  which  it  is 
possible  for  the  judgment  creditor  to  obtain  another  judgment 
against  the  person  who  owes  money  to  the  judgment  debtor.  The 
person  who  owes  money  to  the  judgment  debtor  is  called  the 
"garnishee."  A  successful  garnishment  suit  will  therefore  result  in 
an  order  by  the  court  directed  to  the  garnishee,  commanding  him  to 
pay  the  sum  which  he  owes  to  his  creditor,  to  the  plaintiff  in  the 
garnishment  suit. 


404  ,  CONTRACTS  (Part  1 


HALL  V.  KANSAS  CITY  TERRA  COTTA  CO.  et  al. 

(Supreme  Court  of  Kansas,  1916.    97  Kan.  103,  154  Pac.  210,  L.  R.  A.  1916D, 
361,  Ann.  Cas.  1918D,  605.) 

Action  by  W.  C.  Hall  against  the  Kansas  City  Terra  Cotta  Com- 
pany, wherein  the  Southwest  National  Bank  of  Kansas  City,  Mo., 
was  impleaded.  From  a  judgment  for  plaintifif,  interpleader  ap- 
peals.    *     *     * 

Dawson,  J.  The  plaintiff,  W.  C.  Hall,  commenced  this  action  on 
October  12,  1912,  against  the  Kansas  City  Terra  Cotta  Company  to 
recover  on  the  defendant's  promissory  note,  and  on  the  same  day 
caused  garnishment  proceedmgs  to  be  servxd  on  Albert  Neville,  a 
Coffeyville  contractor.  Neville,  the  garnishee,  answered  and  alleged 
that  on  July  26,  1912,  he  had  entered  into  a  written  contract  with 
the  defendant,  the  Kansas  City  Terra  Cotta  Company,  for  certain 
materials  to  be  delivered  to  him  at  Coffeyville  on  or  before  Septem- 
ber 20,  1912.  Other  allegations  covered  failure  of  the  Terra  Cotta 
Company  to  comply  in  full  with  its  contract,  consequent  damages  to 
garnishee,  including  freight  bills  which  he  was  compelled  to  pay  for 
the  defendant,  etc.  He  also  pleaded  that  on  November  16,  1912.  he 
had  been  notified  by  the  Southwest  National  Bank  of  Kansas  City  that 
the  claim  of  the  Terra  Cotta  Company  had  been  assigned  to  it  on 
September  16,  1912,  and  advising  him  that  all  the  proceeds  of  his  con- 
tract should  be  paid  to  the  bank.  He  also  prayed  that  the  bank 
should  be  impleaded  and  required  to  set  up  its  rights,  and  that  he  be 
protected. 

By  leave  of  court,  the  bank  filed  its  answer  and  cross-petition,  and 
by  agreement  of  parties,  and  with  the  approval  of  the  court,  Neville, 
the  garnishee,  was  permitted  to  pay  into  court  a  sum  of  money  and 
was  discharged.  This  action  thereupon  proceeded  between  the  plain- 
tiff and  the  interpleading  bank.     *     *     * 

The  district  court  found  that  the  Terra  Cotta  Company  was  in- 
debted to  the  bank,  and  that  for  the  purpose  of  securing  the  same  and 
to  procure  a  further  loan,  which  was  then  made,  the  contract  be- 
tween Neville  and  the  Terra  Cotta  Company  was  assigned  and  de- 
livered to  the  bank  on  September  16,  1912 ;  that  the  bank  did  not 
notify  Neville  until  about  a  month  after  this  action  and  garnishment 
were  begun.    *    *    * 

The  general  rule  is  that  garnishment,  like  other  proceedings  in 
invitum,  only  affects  the  actual  property,  money,  credits,  and  eft'ects 
of  the  debtor  in  the  hands  of  the  garnishee,  and  the  rule  relating  to 
bona  fide   holders  or  purchasers   without   notice  has   no   application. 

*        H:        * 

In  20  Cyc.  1012,  it  is  said :  "Where  the  principal  defendant  has 
made  a  valid  assignment  of  the  garnishee's  indebtedness,  or  convey- 
ance of  the  property  in  his  possession  belonging  to  such  defendant, 
before  the  service  of  the  summons  upon  the  garnishee,  the  latter  can- 
not be  charged  on  account  of  such  debt  or  property." 

"The  above  rule  is  especially  applicable  to  bills  of  exchange,  prom- 
issory notes,  and  other  evidences  of  indebtedness,  and  where  such 
paper  is  assigned  or  transferred  in  good  faith  before  the  drawer, 
maker  or  indorser  thereof  is  served  in  garnishment  proceedings  by  a 
creditor  of  the  payee,  or  of  the  last  holder  thereof,  the  rights  of  the 


Ch.  10)  REMEDIES  405 

I       -  ' 

assig-nee  or  transferee  are  not  affected  by  such  proceedings."     Page 
1013. 

"In  the  absence  of  statutory  provision  prescribing  the  mode  of 
assignment,  no  particular  mode  or  form  is  necessary  to  effect  a  valid 
assignment  of  property,  claims,  or  debts  so  as  to  defeat  garnishment 
proceedings  by  a  creditor  of  the  assignor.  If  the  intent  of  the  parties 
to  effect  an  assignment  be  clearly  established,  that  is  sufficient,  and 
the  assignment  may  be  in  the  form  of  an  agreement  or  order  or  any 
other  instrument  which  the  parties  may  see  fit  to  use  for  that  pur- 
pose. *  ■■-  '^  The  rule  is  sometimes  broadly  stated  that  an  assign- 
ment is  not  complete  so  as  to  defeat  proceedings  in  garnishment  until 
the  garnishee  is  notified  thereof ;  however,  this  rule  seems  to  be  sub- 
ject to  limitations;  thus  as  between  assignor  and  assignee,  it  is  not 
necessary  to  the  validity  of  an  assignment  that  the  garnishee  be  noti- 
fied thereof ;  and  the  assignment  will  likewise  be  complete  as  against 
creditors  of  the  assignor  instituting  garnishment  proceedings  after 
assignment  and  before  notice  of  the  assignment  to  the  garnishee,  pro- 
vided that  notice  of  the  assignment  be  given  to  the  garnishee  in  time 
to  permit  him  to  disclose  the  assignment  in  his  answer  to  the  gar- 
nishee process."     Pages  1016,  1017. 

The  district  court  treated  the  assignment  of  the  contract  between 
the  Terra  Cotta  Company  and  Neville  as  a  chattel  mortgage.  If  it 
were  treated  as  a  mortgage  of  the  contract,  then  the  possession  of 
the  contract  by  the  bank  would  obviate  all  necessity  for  its  registra- 
tion. Nothing  is  more  common  than  the  advancement  of  funds  to 
contractors  and  manufacturers,  and  while  banks  with  proper  pru- 
dence usually  take  more  tangible  security  than  the  potential  and  possi- 
ble future  profits  of  the  pending  contracts  of  the  borrowers,  yet  there 
is  no  impropriety  in  taking  an  assignment  of  the  latter  also ;  nor  does 
the  statute  require  such  assignments  to  be  recorded. 

When  the  borrower  thus  assigns  his  contract  or  the  possible  prof- 
its of  his  contract  in  good  faith,  such  assignments  should  be  respected. 
Nor  can  a  later  garnishing  creditor  justly  complain.  The  garnishment 
process  only  reaches  the  property,  assets,  and  credits  of  the  debtor, 
and  not  that  of  which  the  debtor  was  formerly  the  owner,  nor  that 
which  he  has  lawfully  assigned  to  a  third  party.  This  view  seems  to 
be  amply  sustained  by  the  authorities.     *     *     * 

In  the  case  at  bar,  the  debt  due  from  Neville  to  the  Terra  Cotta 
Company  for  goods  sold  and  delivered  and  resting  for  evidence  on  a 
written  contract,  was  assigned  to  the  bank,  and  such  assignment  must 
likewise  be  valid  though  made  only  by  mere  delivery  of  the  contract. 

But  in  our  opinion  the  assignment  was  neither  a  chattel  mortgage 
nor  a  pledge.  It  was  simply  what  it  purported  to  be — an  assignment 
of  a  sum  of  sums  of  money  due  and  to  become  due.  There  was 
nothing  about  the  transaction  which  was  unusual  or  against  public 
policy.  This  general  subject  is  one  which  might  well  be  regulated  by 
statute,  but  so  far  it  has  been  left  free  to  develop  in  the  usual  course 
of  modern  business.     *     *     * 

We  do  not  think  the  fact  that  the  Terra  Cotta  Company  was  made 
the  agent  of  the  bank  to  collect  the  proceeds  of  the  contract  can 
affect  the  validity  of  the  assignment.  Neither  can  the  later  modi- 
fication of  the  contract  by  remitting  $330  of  the  contract  price.  That 
deduction  in  plain  terms  recognized  that  "this  money  is  subject  to  the 


406  coxTRACTS  (Part  1 

order  of  the  court."  Recurring  to  the  proposition  first  laid  down, 
that  the  garnishing  creditor  can  reach  only  the  property  of  the  de- 
fendant in  the  hands  of  its  debtor,  the  plaintiff  could  not  reach  or 
attach  that  which  had  already  passed  by  lawful  assignment,  and  this 
necessitates  a  reversal  of  the  judgment  with  instructions  to  render 
judgment   for  the   interpleader.     All  the  Justices   concurring. 


SECTION  6.— ATTACHMENT  OF  PROPERTY 

The  general  policy  of  the  law  is  not  to  permit  a  plaintiff  to  ob- 
tain any  hold  on  the  defendant's  property  until  a  judgment  has 
been  entered  against  him.  This  rule  is  obviously  just,  because  un- 
til final  judgment  it  is  not  known  whether  the  plaintiff's  claim 
against  the  defendant  is  true  in  law  and  fact.  It  would  not  be 
just  to  the  defendant,  therefore,  to  allow  the  plaintiff  to  seize  the 
defendant's  property  and  to  hold  it  during  the  time  the  action  w^as 
pending.  But  there  are  some  special  cases  where  the  plaintiff's  in- 
terests overbalance  the  interests  of  the  defendant  in  this  respect, 
and  accordingly  the  plaintiff  is  permitted  to  have  the  property  kept 
by  an  officer  of  the  court  from  the  time  the  action  is  commenced. 
Such  a  proceeding  is  knowm  as  an  "attachment  proceeding."  The 
circumstances  under  which  a  plaintiff  is  allowed  to  attach  the 
property  of  the  defendant  differ  somewhat  in  the  various  states. 
Generally,  however,  non-residence  of  the  defendant  or  some  kind 
of  fraudulent  conduct  by  him  will  be  ground  for  attachment.  The 
proceeding,  being  one  which  confers  upon  the  plaintiff  an  extraor- 
dinary privilege,  the  plaintiff'  must  give  some  counter  protection 
to  the  defendant.  This  is  secured  by  requiring  the  plaintiff'  to  give 
a  bond,  which  must  be  approved  by  the  court. 


wi:are  commission  CO.  v.  DRULEY  et  al. 
(Supreme  Court  of  Illinois,  1895.     156  111.  25.  41  N.  E.  48.  30  L.  R.  A.  465.) 

Attachment  by  the  Weare  Commission  Company  against  William  M. 
Druley  and  Albert  A.  Druley.  Plaintiff  obtained  judgment  for  its 
debt,  but  the  attachment  was  dissolved.  This  judgment  was  affirmed 
by  the  Appellate  Court,  and  the  plaintiff  appeals. 

Bailey,  J.  On  the  3d  day  of  September,  1890,  the  Weare  Commis- 
sion Company  commenced  its  suit  in  assumpsit,  by  attachment,  as 
against  William  M.  Druley  and  Albert  A.  Druley.  The  grounds  for 
the  attachment,  as  stated  in  the  affidavit,  were :  (1)  That  the  defend- 
ants had,  within  two  years  then  last  passed,  fraudulently  conveyed  or 
assigned  their  effects,  or  part  thereof,  so  as  to  hinder  and  delay  their 
creditors ;  (2)  that  they  had,  within  two  years  last  past,  fraudulently 
concealed  or  disposed  of  their  property  so  as  to  hinder  and  delay  their 
creditors ;  and  (3)  that  they  were  about  fraudulently  to  conceal  or  dis- 
pose of  their  property  or  effects  so  as  to  hinder  and  delay  their  credi- 
tors.    *     *     * 

The  principal  controversy,  as  presented  here,  turns  upon  the  pro- 
priety of  the  peremptory   instruction  to  the  jury  to   find   the  issues 


Ch.  10)  REMEDIES  407 

upon  the  attachment  afifidavit  for  the  defendant.  If  that  instruction, 
and  the  consequent  verdict  and  judgment,  are  sustained,  it  is  mani- 
festly immaterial  whether  the  court  erred  in  refusing  to  quash  the  at- 
tachment on  motion  of  Albert  A.  Druley,  or  on  the  subsequent  motion 
of  the  administratrix.     *     *     * 

Some  time  about  the  year  1885,  Jesse  Druley,  William  M.  Druley's 
father,  sold  a  farm  in  McLean  county,  and  of  the  proceeds  loaned 
to  William  M.  Druley,  or  put  into  his  business,  about  $18,000.  Wil- 
liam M.  Druley  afterwards  advanced  to  his  father  and  mother  various 
sums  of  money,  and  about  March  10,  1887,  a  settlement  was  had  be- 
tween them,  at  which  it  was  found  that  William  M.  Druley  was  in- 
debted to  his  father  in  the  sum  of  $10,000.  For  this  sum  William  M. 
Druley,  with  his  father's  consent,  executed  his  promissory  note,  dated 
March  10,  1887,  payable  to  Jane  Druley,  his  mother,  five  years  after 
date,  with  interest  at  the  rate  of  6  per  cent  per  annum,  payable  quar- 
terly. This  note  remaining  wholly  unpaid,  William  M.  Druley,  some 
weeks  prior  to  his  death,  but  whether  in  payment  of  or  as  security  for 
the  note  is  left  by  the  evidence  somewhat  in  doubt,  signed  and  acknowl- 
edged a  deed  conveying  the  two-acre  tract  of  land  upon  which  the 
attachment  writ  was  afterwards  levied  to  Jesse  Druley,  his  father,  in 
trust  for  Jane  Druley,  his  mother. 

This  deed  was  executed  as  the  result  of  considerable  negotiations 
between  William  M.  Druley  and  an  attorney  representing  Jesse  and 
Jane  Druley,  such  negotiation  resulting  in  an  agreement  that  the  deed 
should  be  executed,  but  that,  if  William  M.  Druley  recovered  from  his 
illness,  he  should  have  the  land  back,  or  that  the  deed  should  be  return- 
ed to  him.  The  deed,  after  it  was  signed  and  acknowledged,  remain- 
ed in  the  possession  of  the  grantor  about  two  weeks,  and  he  then 
handed  it  to  his  brother,  Edwin  P.  Druley,  who  was  attending  and 
taking  care  of  him  in  his  illness,  saying  to  him  that  he  should  take  it, 
and  carry  it  in  his  pocket,  and  that  if  he,  the  grantor,  got  well,  he 
should  return  it  to  him,  but  that,  if  he  did  not,  he  should  put  it  on 
record.  On  the  2d  day  of  September,  1890,  Edwin  P.  Druley,  having 
learned  that  the  firm  of  Druley  Bros,  was  about  to  fail,  or  supposing 
that  it  had  failed,  put  the  deed  on  record,  and  about  six  weeks  after- 
wards he  got  it  from  the  recorder's  office,  and  delivered  it  to  his  fa- 
ther and  mother.  This  deed,  and  the  circumstances  attending  its  exe- 
cution, constituted  the  only  evidence  given  by  the  plaintiff  in  support 
of  the  grounds  for  an  attachment  alleged  in  its  attachment  affidavit. 

It  is  urged,  and  with  some  show  of  reason,  that  the  deed  was  never 
delivered  so  as  to  become  effectual  as  a  conveyance.  The  contention 
is  that  Edwin  P.  Druley  took  and  held  the  deed  merely  as  agent  of  the 
grantor,  and  that  by  delivering  it  to  him  with  instructions  to  keep 
it  in  his  pocket,  and  return  it  to  the  grantor  in  case  of  his  recovery, 
and  to  record  it  only  in  case  of  his  death,  the  grantor  did  not,  and  did 
not  intend  to,  absolutely  yield  dominion  over  it,  but  that  it  remained, 
down  to  the  time  of  his  death,  subject  to  his  control,  and  liable  to  be 
recalled  by  him  at  any  time;  and  it  would  seem  that,  if  the  deed 
was  never  delivered,  it  has  no  tendency  to  prove  the  charge  of  fraud 
made  by  the  attachment  afifidavit.  But,  without  determining  the  ques- 
tion of  delivery,  we  prefer  to  place  our  decision  upon  another  ground. 

Even  if  the  deed  is  to  be  regarded  as  having  been  effectually  deliv- 
ered, it  must  be  conceded  that  there  is  no  evidence  of  express  fraud,  or 
what  is  usually  termed   "fraud  in   fact."     There  is  no   evidence   of 


408  CONTRACTS  (Part  1 

any  actual  intention  on  the  part  of  the  grantor  to  hinder  or  delay 
his  creditors.  But  the  evidence  tends  to  show  that  the  deed,  though 
absohite  on  its  face,  was  intended  by  the  parties  as  a  mortgage  to 
secure  the  $10,000  note  given  by  the  grantor  to  his  mother,  and  the 
rule  is  supported  by  many  authorities  that  a  conveyance  of  lands, 
absolute  on  its  face,  but  intended  as  a  mortgage  or  security  for  a 
debt,  is  fraudulent  and  void  as  against  existing  creditors,  although 
there  may  have  been  no  actual  intent  to  defraud.     *     *     * 

The  question  thus  arises  whether,  under  our  statute,  an  attach- 
ment will  issue  where  the  fraud  charged  is  a  legal  or  constructive 
fraud  only,  as  contradistinguished  from  express  or  intentional  fraud, 
usually  denominated  "fraud  in  fact."  This  question,  so  far  as  we 
are  advised,  has  never  been  decided  by  this  court,  but  it  has  received 
consideration  by  the  Appellate  Courts  in  several  cases,  and  in  each 
case  it  has  been  decided  in  the  negative.  It  first  arose  in  the  Sec- 
ond district,  in  Shove  v.  Farwell,  9  111.  App.  256,  and  there  the  court 
said:  "The  law  does  not  allow  a  creditor  to  ignore  the  process  of 
the  common  law  in  the  collection  of  his  debt,  and  resort  to  a  sum- 
mary seizure  of  the  debtor's  property  upon  mesne  process,  from  the 
fact,  alone,  that  the  debtor  has,  within  two  years,  sold  his  property, 
or  any  part  of  it,  or  has  secured  some  other  creditor  by  mortgaging  or 
pledging  it,  even  though  the  attaching  creditor  should  be  hindered 
or  delayed  in  the  collection  of  a  just  debt.  Another  element  must 
exist  in  the  transaction,  the  fraud  of  the  debtor,  and,  in  our  opin- 
ion, the  statute  contemplates  that  this  fraud  shall  be  one  of  fact,  as 
contradistinguished  from  a  legal  or  constructive  fraud.  If  a  man  has 
shown  himself  to  be  dishonest  by  making  a  conveyance  of  his  prop- 
erty, designing  thereby  to  delay  and  hinder  his  creditors,  and  such 
effect  is  produced,  then,  for  the  space  of  two  years,  the  statute  per- 
mits the  creditor  to  treat  him  as  one  who  may  repeat  the  fraud,  and 
authorizes  its  prevention  by  a  seizure  of  his  property  upon  mesne  pro- 
cess, and  hold  it  to  answer  any  judgment  that  may  be  rendered  in  the 
action." 

The  same  question  arose  in  the  same  district  in  First  National  Bank 
V.  Kurtz,  22  111.  App.  213,  where  the  same  conclusion  was  again  .an- 
nounced. *  *  *  In  Spencer  v.  Deagle,  34  Mo.  455,  an  attachment 
writ  was  issued  under  a  statute  apparently  identical  with  ours,  and 
it  was  held  to  be  error  for  the  court  to  refuse  to  instruct  the  jury  that, 
to  render  the  deed  of  trust  there  in  question  fraudulent  as  to  the  de- 
fendant's creditors,  it  must  appear  that  it  was  executed  for  that  pur- 
pose ;  that  it  was  not  enough  that  the  effect  of  the  deed  was  to  delay 
his  creditors,  but  it  must  have  been  executed  with  that  purpose  and 
intent. 

While  some  decisions,  perhaps,  may  be  found  in  other  states  sup- 
porting the  contrary  view,  we  are  disposed  to  think  that  the  interpre- 
tation put  upon  our  statute  by  the  Appellate  Court  is  the  correct  one. 
It  seems  to  be  the  policy  of  our  attachment  law  to  give  creditors  the 
right  to  seize  the  property  of  their  debtors  on  original  or  mesne  pro- 
cess, and  hold  it  for  the  satisfaction  of  such  judgments  as  may  be 
subsequently  recovered,  in  those  cases  where  the  situation  or  conduct 
of  the  debtors  is  or  has  been  such  as  to  raise  a  reasonable  apprehension 
that  the  ordinary  common-law  processes  of  the  court  will  be  thwarted, 
and  thus  rendered  unavailing. 


Ch.  10)  REMEDIES  409 

The  Revised  Statutes  of  1845  authorized  attachments  for  only  the 
first  five  of  the  nine  causes  for  attachment  specified  in  our  present 
attachment  act,  viz.:  (1)  Where  the  debtor  is  not  a  resident  of  the 
state ;  (2)  where  he  conceals  himself,  or  stands  in  defiance  of  an  officer, 
so  that  process  cannot  be  served  upon  him;  (3)  where  he  has  depart- 
ed from  the  state  with  the  intention  of  having  his  effects  removed 
from  the,  state;  (4)  where  he  is  about  to  remove  from  the  state  with 
the  intention  of  having  his  effects  removed  from  the  state ;  and  (S) 
where  he  is  about  to  remove  his  property  from  the  state,  to  the  injury 
of  the  creditor  suing.  Rev.  St.  1881,  p.  123.  Here  the  writ  was  given 
only  where  the  debtor  was  already  a  nonresident,  and  so  beyond  the 
reach  of  the  ordinary  processes  of  the  law,  or  where  there  was  an  af- 
firmative intention  and  design  on  his  part  to  place  his  person  and 
property,  or  his  property  alone,  beyond  the  reach  of  those  processes. 
The  writ  was  given  for  the  purpose  of  seizing  the  property  so  as  to 
forestall  its  threatened  removal,  and  to  hold  it  as  security  for  the  judg- 
ment to  be  recovered. 

It  cannot  be  doubted,  we  think,  that  when  the  statute  was  so  amend- 
ed as  to  add  the  three  causes  for  attachment  set  up  in  this  case,  the  leg- 
islature was  acting  in  furtherance  of  the  same  general  intention  ex- 
pressed in  the  original  act. 

The  writ  was  not  given  for  the  purpose  of  enabling  the  creditor  to 
attack  a  transaction  which  is  only  constructively  fraudulent,  but  to 
enable  him  to  seize  the  property  of  his  debtor  in  cases  where  fraud 
has  been  committed  or  contemplated  of  such  character  as  to  raise  a 
reasonable  apprehension  that  by  further  fraudulent  acts  the  debtor 
will  put  his  property  and  effects  beyond  the  reach  of  legal  process. 
But  such  apprehension  does  not  arise  from  the  commission  of  a  mere 
legal  or  constructive  fraud.  There  evil  intention,  moral  turpitu.de^ 
and  actual  dishonesty  are  wanting.  Equity,  it  is  true,  will  set  such 
transactions  aside,  in  a  proper  proceeding,  at  the  instance  of  creditors ; 
but  no  inference  arises  that  the  debtor  will  attempt,  by  any  dishonest 
disposition  of  his  property,  to  interfere  with  his  creditors  in  the  as- 
sertion of  their  just  rights.  We  are  of  the  opinion,  then,  that  grant- 
ing writs  of  attachment  in  cases  where  only  legal  or  constructive  fraud 
is  shown  is  outside  of  the  general  scheme  and  purpose  of  the  attach- 
ment law. 

It  is  apparent  that  any  other  construction  of  the  statute  would  of- 
ten lead  to  consequences  extremely  oppressive.  Thus  a  sale  of  goods 
where  possession  has  not  actually  been  delivered  to  the  purchaser, 
though  valid  as  between  the  parties,  is  constructively  fraudulent  as 
to  the  creditors  of  the  seller,  and  the  goods  may  be  seized  by  them  on 
execution  as  his  goods,  however  honest  he  may  have  been  in  the  trans- 
action. In  contemplation  of  law  he  has  made,  or  attempted  to  make, 
a  disposition  of  his  property  which  is  constructively  fraudulent,  and^ 
if  attachments  may  issue  for  constructive  frauds,  he  has  thereby  sub- 
jected himself,  however  innocent  he  may  have  been,  to  all  such  attach- 
ment writs  as  his  creditors  may  see  fit  to  sue  out  against  his  property 
for  the  period  of  two  years.  So,  if  a  debtor,  in  perfect  good  faith, 
executes  a  chattel  mortgage  to  secure  an  honest  debt,  but  fails  to 
have  it  executed,  acknowledged,  and  recorded  in  all  respects  as  re- 
quired by  the  statute,  the  transaction  is  constructively  fraudulent  and 
void,  as  against  his  creditors.  But  can  it  be  said  that  he  thereby 
subjects  himself,  for  a  period  of  two  years,  to  attachments  by  any  of 


410 


CONTRACTS  (Part  1 


his  creditors?  Other  similar  illustrations  without  number  will  suggest 
themselves. 

In  view  of  these  various  considerations,  it  seems  to  us  to  be  very 
clear  that  the  legislature,  in  authorizing  writs  of  attachment  in  cases 
where  the  debtor  has  fraudulently  assigned  his  property  so  as  to 
hinder  or  delay  his  creditors,  could  have  had  in  mind  only  such  convey- 
ances or  assignments  as  are  fraudulent  in  fact,  and  that  it  was  not 
their  intention  to  grant  this  writ  where  the  debtor  acts  honestly,  and' 
with  no  fraudulent  purpose  or  design.  It  follows  that  the  instruction 
to  the  jury  to  find  the  issues  upon  the  attachment  affidavit  for  the  de- 
fendant was  properly  given.     *     *     * 

Judgment  affirmed. 

SECTION  7.— SPECIFIC  PERFORMANCE 
In  the  ordinary  case,  where  the  defendant  has  broken  his  con- 
tract the  plaintiff  is  allowed  to  recover  a  judgment  for  money  dam- 
ages. This  remedy  may  be  described  as  one  of  substitutional  re- 
dress. The  law  does  not,  in  these  cases,  aid  the  plaintiff  by  com- 
pelling or  by  attempting  to  compel  the  defendant  to  do  what  he 
promised  to  do.  Of  course,  where  the  defendant  has  promised  to 
pay  money  to  the  plaintiff  a  judgment  in  plaintiff's  favor  does  give 
him  exactly  what  he  bargained  for.  But  where  the  defendant  has 
promised  to  sell  the  plaintiff  certain  described  property  or  to  per- 
form certain  services  for  the  plaintiff,  an  action  by  the  latter  will 
usually  be  for  the  purpose  of  obtaining  a  judgment  for  money. 
The  court  substitutes  money  for  that  which,  under  the  contract,  the 
plaintiff  was  entitled  to  receive. 

There  are  some  cases  when  a  judgment  for  money  damages  is  a 
poor  substitute  for  that  which  defendant  promised,  or,  as  the  law 
usually  puts  it,  a  judgment  for  money  damages  is  not  an  adequate 
remedy.  When  such  a  situation  is  presented  the  court  will  order 
the  defendant  specifically  to  perform  his  promise;  hence  the  rem- 
edy of  specific  redress,  or,  as  it  is  usually  called,  specific  perform- 
ance. Of  course,  the  above  fact  that  a  court  orders  a  defendant  to 
perform  his  contract,  in  itself  carries  no  great  assurance  that  the 
court's  mandate  will  be  obeyed.  So  the  inquiry  into  the  nature  of 
the  remedy  of  specific  performance  involves  the  further  inquiry 
as  to  the  judicial  methods  for  compelling  obedience.  There  are  two 
such  methods:  (1)  Where  the  act  to  be  done  is  of  such  a  nature 
that  it  may  be  performed  by  an  officer  of  the  court  a  direction  to 
such  officer  to  perform  such  act  will  be  given.  This  is  illustrated  in 
the  case  where  the  defendant  has  promised  to  execute  and  deliver 
a  deed  to  certain  land  to  the  plaintiff.  The  court,  by  having  the 
deed  executed  and  delivered  by  some  officer,  may  then  give  the 
same  legal  effect  to  such  execution  and  delivery  as  though  the  acts 
had  been  done  by  the  defendant  himself.  (2)  Where  the  promised 
acts  are  numerous,  or  difficult,  and  sometimes  even  where  the 
duty  is  merely  to  pay  money,  the  court  may  hold  that  the  refusal  of 
the  defendant  to  comply  with  its  decree  shall  result  in  imprison- 
ment.   The  important  question  to  decide,  therefore,  is :    What  are 


Cll.lO)  REMEDIES  411 

the  circumstances  under  which  a  court  will  decree  specific  perform- 
ance? The  remedy  is  a  severe  one,  and  obviously,  is  not  available, 
except  upon  a  definite  showing  that  the  remedy  of  money  dam- 
ages is  inadequate. 

In  the  cases  on  this  topic  it  appears  that  the  remedy  of  specific 
performance,  and  also  of  injunction  are  "equitable  remedies." 
There  is  a  great  deal  of  discussion  as  to  the  circumstances  under 
which  "equity  will  decree  specific  performance"  or  grant  an  "in- 
junction." This  is  because,  historically,  the  courts,  in  the  early 
days,  during  the  eleventh,  twelfth,  thirteenth,  and  fourteenth  cen- 
turies, in  England,  did  not  grant  such  remedies.  Not  only  at  this 
time  were  there  deficiencies  in  legal  remedies,  but  the  substantive 
law  itself  was  not  developing  to  meet  the  demands  of  the  people. 
Accordingly  a  change  took  place  as  the  result  of  special  petitions 
to  the  king.  The  king's  chancellor  occupied  a  position  which  logi- 
cally tended  to  make  of  him  a  special  judicial  officer.  In  time  the 
chancellor  became  the  head  of  an  established  court  where  the  de- 
cisions were  somewhat  at  variance  with  the  rules  of  the  courts  of 
the  older  judicial  system.  Remedies  were  granted  by  the  chancel- 
lor, or  by  the  Court  of  Chancery,  as  it  came  to  be  called,  which 
were  not  granted  by  the  other  courts,  the  courts  of  common  law. 
The  Court  of  Chancery  sought  to  "do  equity"  between  the  parties. 
This  development  involved  the  assumption  that  the  cases  which 
came  to  the  Court  of  Chancery  would  not  have  been  decided  equi- 
tably had  they  come  before  the  courts  of  common  law. 

In  a  great  many  cases,  no  doubt,  this  was  true.  The  natural 
tendency  of  a  judicial  system,  in  certain  periods  of  its  development, 
is  to  contract  rather  than  to  expand;  that  is,  a  change  in  legal 
doctrine,  to  meet  new  social,  economic,  and  political  conditions  in 
society,  is  difiicult  of  accomplishment.  There  is  an  attempt  made, 
by  the  enforcement  6i  settled  principles  of  law,  to  force  society  to 
conduct  its  afifairs  in  precisely  the  same  way  that  similar  affairs 
had  been  conducted  by  the  same  or  other  society  in  an  earlier  stage 
of  its  history.  Often,  of  course,  change  is  accomplished  gradually 
through  the  medium  of  existing  judicial  machinery;  but  some- 
times it  is  brought  about  by  the  introduction  of  some  entirely  new 
organization.  This  was  the  case  in  the  development  of  that  portion 
of  existing  law  which  is  called  "equity."  Historically,  these  doc- 
trines were  formulated  and  applied  by  the  English  Court  of  Chan- 
cery. 

Changes  of  somewhat  analogous  nature  are  of  present-day  oc- 
currence. In  recent  years  many  states  in  this  country  have  organiz- 
ed special  tribunals,  to  which  is  assigned  jurisdiction  over  certain 
special  types  of  controversies.  For  example,  most  states  have  pub- 
lic service  and  industrial  commissions.  These  commissions  fix 
rates  and  standards  of  service  and  adjudicate  the  rights  and  lia- 
bilities of  employers  with  respect  to  injuries  to  employees  under 
workmen's  compensation  acts.  Even  the  practice  of  persons  con- 
victed of  crime  in  appealing  to  the  governor  for  executive  clem- 


412  '  CONTRACTS  (Part  1 

ency  is  also  illustrative  of  the  broad  truth  that  judicial  doctrines 
do  not,  in  all  cases,  function  as  many  people  think  they  should 
function,  and  that  change  in,  or  relief  from,  the  strict  application  of 
the  formulated  rules  of  law  is  often  accomplished  by  creating  new 
machinery,  judicial,  administrative,  or  executive,  which  establishes 
new  principles  and  new  remedies  and  applies  them  by  a  procedure 
somewhat  at  variance  with  the  doctrines  and  methods  of  procedure 
of  existing  judicial  bodies. 

The  history  of  the  development  of  equitable  doctrines  is  a  long 
one.  For  a  long  time  separate  tribunals  applied  these  newer  prin- 
ciples of  equity.  Generally,  to-day,  a  court  which  possesses  com- 
mon-law jurisdiction  will  also  possess  jurisdiction  in  equity.  But 
in  many  states,  even  to-day,  procedure  in  a  cause  of  equitable 
cognizance  is  somewhat  different  from  the  procedure  in  common- 
law  causes,  and  everywhere  account  must  be  taken  of  the  peculiar 
origin  and  development  of  the  doctrines  of  equity. 


PADDOCK  V.  DAVENPORT. 
(Supreme  Court  of  North  Carolina.  1890.  107  N.  C.  710,  12  S.  E.  404.) 
Shepherd,  j.  *  *  *  The  true  principle  upon  which  specific  per- 
formance is  decreed  does  not  rest  simply  upon  a  mere  arbitrary  dis- 
tinction as  to  different  species  of  property,  but  it  is  founded  upon  the 
inadequacy  of  the  legal  remedy  by  way  of  pecuniary  damages.  This 
principle  is  acted  upon  (1)  where  there  is  a  peculiar  value  attached  to 
the  subject  of  the  contract  which  is  not  compensable  in  damages.  The 
law  assumes  land  to  be  of  this  character  "simply  because,"  says  Pear- 
son, J.,  in  Kitchen  v.  Herring,  42  N.  C.  191,  "it  is  land — a  favorite  and 
favored  subject  in  England,  and  every  country  of  Anglo-Saxon  origin." 
The  law  also  attaches  a  peculiar  value  to  ancient  family  pictures,  title 
deeds,  valuable  paintings,  articles  of  unusual  beauty,  rarity,  and  dis- 
tinction, such  as  objects  of  vertu.  A  horn  whi-ch,  time  out  of  mind, 
had  gone  along  with  an  estate,  and  an  old  silver  patera,  bearing  a 
Greek  inscription  and  dedicated  to  Hercules,  were  held  to  be  proper 
subjects  of  specific  performance.  These,  said  Lord  Eldon,  turned  upon 
the  pretium  affectionis,  which  could  not  be  estimated  in  damages.  So, 
for  a  faithful  family  slave,  endeared  by  a  long  course  of  service  or 
early  association.  Chief  Justice  Taylor  remarked  that  "no  damages 
can  compensate,  for  there  is  no  standard  by  which  the  price  of  affec- 
tion could  be  adjusted,  and  no  scale  to  graduate  the  feelings  of  the 
heart."    Williams  v.  Howard,  7  N.  C.  80. 

The  principle  is  also  applied  (2)  where  the  damages  at  law^  are  so 
uncertain  and  unascertainable,  owing  to  the  nature  of  the  property 
or  the  circumstances  of  the  case,  that  a  specific  performance  is  indis- 
pensable to  justice.  Such  was  formerly  held  as  to  the  shares  in  a 
railway  company,  which  dift'er,  says  the  court  in  Ashe  v.  Johnson's 
Adm'r,  55  N.  C.  149,  from  the  funded  debt  of  the  government,  in  not 
always  being  in  the  market  and  having  a  specific  value ;  also  a  patent 
(Corbin  v.  Tracy,  34  Conn.  325),  a  contract  to  insure  (Carpenter  v. 
Insurance  Co.,  4  Sandf.  Ch.  [N.  Y.]  408),  and  like  cases.  The  gen- 
eral principle  everywhere  recognized,  however,  is  that,  except  in  cases 
falling  within  the  foregoing  principles,  a  court  of  equity  will  not  de- 


Ch.  10)  REMEDIES  413 

cree  the  specific  performance  of  contracts  for  personal  property ;  "for," 
remarks,  Pearson,  ].,  in  Kitchen  v.  Plerring,  supra,  "if,  with  money, 
an  article  of  the  same  description  can  be  bought,  *  =i=  *  the  remedy 
at  law  is  adequate."     *     *     * 

Applying  these  principles  to  the  facts  alleged  in  the  complaint,  it 
must  follow,  we  think,  that  this  is  not  a  case  which  calls  for  the  exer- 
cise of  the  equitable  power  of  the  court.  The  trees  were  purchased 
with  a  view  to  their  severance  from  the  soil,  and  thus  being  con- 
verted into  personal  property.  It  is  not  shown  that  they  have  any 
peculiar  value  to  the  plaintiff,  nor  does  there  appear  any  circumstances 
from  which  it  may  be  inferred  that  the  breach  of  the  contract  may  not 
be  readily  compensated  for  in  damages.  Neither  is  it  shown  that 
other  trees  may  not  be  purchased,  but  it  is  simply  alleged  that  they 
are  scarce  at  the  contract  price.  The  simple  fact  that  they  are  near  a 
water-course  does  not  alter  the  case,  for  the  convenience  of  transporta- 
tion are  elements  which  may  be  considered  in  the  estimation  of  the 
damages.  Neither  is  the  circumstance  that  the  plaintiff  purchased  "a 
few  trees  of  like  kind''  in  the  vicinity  sufficient  to  warrant  the  eq- 
uitable intervention  of  the  court.  We  can  very  easily  conceive  of  cases 
in  which  contracts  of  this  nature  may  be  specifically  enforced,  but  we 
can  see  nothing  in  this  complaint  which  calls  for  such  extraordinary  re- 
lief. The  ruling  of  the  court  as  to  this  branch  of  the  case  is  sus- 
tained.    *     *     * 

FIRST  NAT.  BANK  OF  HASTINGS  v.  CORPORATION  SECURITIES  CO. 

(Supreme  Court  of  Minnesota,  1915.     12S  Minn.  341,  150  N.  W.  1084.) 

Philip  E.  Brown,  J.  Action  to  enforce  specific  performance  of 
an  agreement  to  buy  shares  of  stock.  *  *  *  The  cause  was  tried, 
and  findings  made  for  plaintiff.  Defendant  appealed  from  an  order 
denying  a  new  trial. 

Defendant  *  *  *  insists  it  was  error  to  grant  specific  perform- 
ance, because  plaintiff  had  an  adequate  remedy  at  law.  *  *  *  ^^e 
power  of  a  court  of  equity,  upon  a  proper  showing,  to  grant  relief 
in  such  cases  is  now  universally  conceded,  and  in  50  L.  R.  A.  501, 
note,  the  present  state  of  the  law  in  this  regard  is  well  stated,  as  fol- 
lows:  "The  general  rule  in  this  country  is  that  a  contract  for  the 
sale  of  corporate  stock  will  not  be  specifically  enforced,  where  the  stock 
can  be  purchased  on  the  market,  and  its  value  can  be  readily  ascer- 
tained, unless  there  is  some  special  reason  for  the  purchaser's  obtain- 
ing the  same,  but  where  the  shares  are  limited  and  not  easily  obtaina- 
ble, or  where  their  value  cannot  be  readily  ascertained,  "the  contract 
will  be  enforced.  The  tendency  seems  to  be  towards  a  more  liberal 
allowance  of  the  remedy.  In  England  it  seems  to  be  allow^ed  almost 
as  a  matter  of  course,  except  in  case  of  government  stocks,  in  which 
case  it  has  generally  been  refused."     *     *     * 

The  inquiry,  then,  is  whether  the  court's  determination  that  the  value 
o£_  the  stock  was  not  readily  ascertainable  was  unsupported  by  the 
evidence,  and  we  cannot  so  hold.  Crocker,  S.  D.,  where  the  bank  is- 
suing the  stock  was  located,  had  about  150  inhabitants.  Another  bank, 
having  twice  as  much  business,  was  also  located  there.  A  large  part 
of  the  surrounding  country  was  suitable  and  used  for  grazing  pur- 
poses^ only.  Part  of  the  tributary  population  consisted  of  a  "drifting 
class,"  thus  making  bank  loans  and  discounts  extra  hazardous.     The 


414  coxTRACTS  (Part  1 

bank  was  organized  in  1907,  its  capital  being  $10,000.  Defendant  and 
its  officers  held  a  majority  of  its  stock,  which  was  not  listed  in  com- 
mercial reports,  and  only  two  or  three  sales  thereof  were  ever  made ; 
these  being  between  officers  of  the  company  or  local  people.  The 
bank  never  paid  a  dividend.  Its  books  showed  a  surplus  of  $4,619 
on  April  27,  1911,  which  was  reduced  to  $3,473  on  August  1,  1911,  and 
the  profits  for  the  year  preceding  December,  1911,  were  $589.  While, 
therefore,  there  was  some  testimony  to  the  contrary,  it  is  patent  under 
all  the  circumstances  disclosed  that  the  establishment  of  the  value  of 
the  stock  would  involve,  not  only  the  obviously  difficult  task  of  prov- 
ing the  value  of  the  bank's  assets,  but  also  a  speculative  forecast  upon 
its  prospects;  so  that  it  is  doubtful  whether  any  basis  could  be  laid 
upon  which  to  found  a  reasonable  approximation  of  market  value.  At 
least,  such  could  not  be  done  without  imposing  an  unwarranted  bur- 
den on  plaintiff. 

We  discover  nothing  inequitable  in  the  relief  granted,  and  find  no 
reversible  error.  

M.  M.  &  D.   D.  BROWN  v.  WESTERN  MARYLAND  RY.  CO. 

(Supreme  Court  of  Appeals  of  West  Virginia.  1919.     84  W.  Va.  271, 
99  S.  E.  457,  4  A.  L.  R.  522.) 

Lynch,  J.  Judged  by  the  prayer  of  the  bill,  dismissed  on  demurrer, 
of  which  action  plaintiff's  complain,  the  chief  objects  of  this  suit  were 
to  obtain  a  mandatory  injunction  to  require  defendant,  by  way  of 
enforcement  of  an  oral  contract,  to  extend  one  of  its  yard  side  tracks 
about  800  feet,  the  cost  and  expense  of  which  plaintiff's  contracted  to 
pay  upon  the  conditions  hereafter  noted,  and  to  furnish  the  railroad 
ties  necessary  therefor;  to  enjoin  defendant  from  carrying  into  ex- 
ecution its  announced  purpose  to  cause  the  removal  of  lumber  stacked 
on  its  property  with  defendant's  consent  and  approval  pursuant  to 
such  contract;  and  for  general  relief.  The  court  justified  its  decree 
upon  tlie  ground  that  equity  will  not  entertain  jurisdiction  to  enforce 
the  specific  execution  of  a  contract  for  the  performance  of  work  the 
supervision  of  which  requires  the  exercise  of  professional  skill  and 
judgment.  Thus  there  is  presented  the  one  main  question  whether  a 
court  of  equity  can  and  should  require  defendant  to  extend  its  side 
track,  which  it  contracted  to  do,  where  plaintiff's,  acting  in  good  faith, 
with  the  consent  and  upon  the  direction  of  defendant's  agents,  have 
in  part  done  what  the  contract  authorized  them  to  do.     *     *     * 

It  is  further  contended  that  this  contract  is  not  one  which  equity 
will  enforce  specifically  owing  to  the  amount  of  court  supervision 
which  will  be  necessary,  and  for  the  further  reason  that  the  remedy 
at  law  is  adequate.  A  railroad  contract  stands  on  no  higher  plane 
than  the  contract  of  any  other  corporation  or  individual,  and  the 
same  principles  apply  to  and  govern  all  of  them  alike.  There  is  this 
qualification  to  be  made,  however,  where  the  specific  performance 
of  a  railroad  contract  is  sought:  Equity  may  decline  to  exercise  its 
coercive  power  in  that  respect  if  to  do  so  will  injuriously  aff'ect  the 
performance  by  the  railroad  of  its  full  public  duties.  *  *  *  But 
where  the  public  rights  will  not  be  injured,  a  railroad  company  is  sub- 
ject to  the  same  duty  respecting  its  contracts  as  any  other  company 
or  an  individual. 

Underlying  every  contract  is  the  fundamental  conception  of  ex- 
change, one  contracting  party  offering  to  exchange  services  or  com- 


Ch.  10)  REMEDIES  415- 

modities  which  he  possesses  or  can  control  in  return  for  services  or 
commodities  not  within  his  possession  or  control,  but  which  he  de- 
sires. At  the  time  of  entering  upon  the  agreement  each  expects  to 
receive  and  render  performance  according  to  its  express  terms,  and 
the  contract  can  never  be  fully  satisfied  unless  its  execution  is  of  that 
character.  Frequently,  however,  the  circumstances  are  such  that 
performance  in  kind  is  excused,  and  this  is  especially  true  when,  with 
an  award  of  damages,  the  disappointed  party  can  easily  obtain  on 
the  market  or  elsewhere  the  same  or  a  substantially  similar  commodi- 
ty or  service  that  he  contracted  for.  But  when  the  remedy  at  law  is 
not  thus  adequate,  equity  has  full  jurisdiction,  and  in  its  discretion 
may  exert  its  inherent  power  to  compel  performance  of  the  obligation 
on  the  part  of  the  delinquent  obligor.  The  normal  end  or  termination 
of  every  contract  is  performance  in  accordance  with  the  agreement, 
and  such  a  consummation  should  be  the  presumptive  one;  resort  to 
the  legal  remedy  being  had  only  when  the  circumstances  are  such 
that  it  is  better  to  compel  the  obligee  to  accept  damages  iii  lieu  of  what 
he  contracted  for  than  to  compel  specific  performance.  Lightly  to 
permit  a  contracting  party  to  disregard  his  obligation  and  compel  the 
obligee  to  accept,  not  the  thing  contracted  for,  but  money  damages, 
is  to  place  a  premium  upon  contractual  insincerity.  Especially  is  this 
true  where  one  party  has  fully  performed  his  part  of  the  agreement. 
Vice  Chancellor  Sir  James  Bacon,  in  Greene  v.  West  Cheshire  Ry. 
Co.,  L.  R.,  13  Eq.  44,  50,  well  expresses  a  reasonable  view  of  such  a 
situation  in  decreeing  specific  performance  of  a  contract  to  construct 
and  maintain  a  railroad  siding  of  specified  length,     *     *     * 

In  this  country  the  authorities  generally  have  reached  the  same  con- 
clusion with  respect  to  contracts  for  sidings  or  spur  tracks.  Taylor 
V.  Florida,  etc.,  Ry.  Co.,  54  Fla.  635,  45  South.  574,  16  L.  R.  A.  (N. 
S.)  307,  127  Am.  St.  Rep.  155,  14  Ann.  Cas.  472.  *  *  *  ^  similar 
result  has  been  reached  during  more  recent  years  in  contracts  for  the 
operation  of  trains.  The  editor  of  recent  editions  of  Pomeroy's  Eq- 
uity Jurisprudence,  and  of  the  treatise  on  Specific  Performance  in 
36  Cyc,  says  at  page  587  of  the  latter  work :  "Beginning  with  the 
year  1890,  contracts  involving  the  operation  of  railroads,  often  of  the 
utmost  complexity  and  extending  over  long  terms  of  years,  or  per- 
petually, have  been  enforced  specifically." 

The  authorities  in  this  state  relative  to  the  specific  performance 
of  railroad  contracts  are  indicative  of  the  trend  of  courts  of  equity 
toward  greater  latitude  in  enforcing  construction  contracts  where 
the  only  reason  urged  against  them  is  the  necessity  of  court  super- 
vision.    *     *     * 

It  is  true  many  of  the  cases  cited  involve  contracts  entered  into  by 
the  railroad  company  in  consideration  of  the  conveyance  by  the  plain- 
tifif  of_  a  right  of  way  through  his  land.  The  consideration  here  is 
of  a  dififerent  nature,  but  of  equal  dignity.  Besides,  the  extent  of  the 
duty  created  by  a  contract  is  not  determined  by  the  kind  of  consider- 
ation on  which  it  is  based.     It  is  sufficient  if  the  consideration  is  such 

as  the  law  deems  valuable  without  regard  to  its  nature  or  character. 
*    *    * 

Superfluous,  perhaps,  is  the  observation  that  we  are  now  only  test- 
ing the  sufficiency  of  the  bill  on  demurrer,  and  while  we  think  the  bill 
presents  on  its  face  a  cause  for  relief,  the  case  may,  when  fully  ma- 
tured for  final  hearing  upon  bill,  answer,  and  proof,  show  plaintiff 


416  CONTRACTS  (Part  1 

not  to  be  entitled  to  any  relief.  In  the  meantime,  however,  the  status 
quo  should  be  maintained,  and  to  this  end  we  reverse  the  decree,  over- 
rule the  demurrer,  reinstate  the  injunction,  and  remand  the  cause. 


SECTION  8.— INJUNCTION 

What  w^as  said  with  respect  to  the  origin  and  development  of  the 
equitable  remed}^  of  specific  performance  may  also  be  said  with 
respect  to  the  equitable  remedy  of  injunction.  The  remedy  of 
injunction  is  by  no  means  confined  to  actions  upon  contracts. 
Where  this  remedy  is  invoked  in  contract  actions,  the  plaintiff  is 
asking-  for  a  decree  that  the  defendant  shall  not  break  a  particular 
promise  or  promises  in  the  contract.  In  its  operation  an  injunction 
is,  therefore,  much  like  a  decree  of  specific  performance.  Still  there 
is  some  difference  between  a  decree  ordering  the  defendant  to 
perform  an  act  and  one  ordering  him  not  to  do  an  act.  The  remedy 
of  injunction  in  contract  actions  is  most  frequently  sought  where 
the  defendant  has  covenanted  not  to  do  a  certain  thing,  as,  for 
example,  a  vendor  of  a  business  may  agree  not  to  engage  in  busi- 
ness within  a  specified  district  for  a  specified  time.  In  many  cases  a 
breach  of  such  a  promise  as  this  will  be  enjoined.  Of  course,  the 
effect  of  ordering  a  person  to  cease  business  operations  will  nec- 
essarily result  in  his  doing  many  affirmative  acts,  still  such  a  decree 
does  not  burden  the  court  with  the  task  of  supervising  the  work 
to  such  an  extent  as  would  be  true  if  the  court  undertook  specifi- 
cally to  enforce  contracts  for  personal  service.  Just  as  in  consid- 
ering specific  performance,  the  larger  question  concerning  the 
remedy  of  injunction  is:  "What  are  the  circumstances  under 
which  the  courts  will  grant  the  remedy?"  They  will  not  do  so 
when  the  remedy  of  money  damages  is  deemed  adequate. 

The  equitable  remedy  of  injunction,  as  suggested  above,  is  avail- 
able in  many  suits  not  directly  involving  contracts.  In  fact,  this 
remedy  is  perhaps  more  often  sought  to  prevent  commission  of 
torts  than  to  restrain  breaches  of  contracts,  especially  to  prevent 
torts  that  would  work  an  irreparable  injury  to  property.  Mainte- 
nance of  nuisances,  for  example,  is  frequently  enjoined.  Of  very 
great  present-day  importance  is  the  use  of  injunction  in  labor  dis- 
putes. The  application  for  an  injunction  in  such  cases  is  predicated 
upon  the  contention  that  the  actual  or  threatened  conduct  of  the  de- 
fendants will  amount  to  a  tort  causing  irreparable  injury  to  the 
plaintiff,  either  with  respect  to  his  property,  to  his  privilege  of  en- 
tering freely  into  business  relations  with  other  persons,  or  to  his 
legal  right  to  the' performance  of  his  existing  contracts  with  other 
persons.  The  remedy  of  injunction  is  also  available  to  prevent  the 
violation  of  certain  statutes,  as,  for  example,  to  bring  about  ces- 
sation of  such  practices  of  large  industrial  combinations  as  are  un- 
lawful under  anti-trust  acts. 


Ch.  10)  REMEDIES  417 

The  case  following  illustrates  one  type  of  situation  where  an 
injunction  is  sought  to  restrain  the  breach  of  a  negative  covenant 
in  a  contract. 


PHII/ADELPHIA   BALL   CLUB,   Limited,   v.    LAJOIE  et  al. 

(Supreme  Court  of  I'ennsylvania,  1902.     202  Pa.  210,  51  Atl    973 
58  L.  R.  A.  227,  90  Am.  St.  Rep.  627.) 

Potter,  J,  The  defendant  in  this  case  contracted  to  serve  the 
plaintiff  as  a  baseball  player  for  a  stipulated  time.  During  that  pe- 
riod he  was  not  to  play  for  any  other  club.  He  violated  his  agree- 
ment, however,  during  the  term  of  his  engagement,  and,  in  disregard 
of  his  contract,  arranged  to  play  for  another  and  a  rival  organization. 
The  plaintiff',  by  means  of  this  bill,  sought  to  restrain  him  during 
the  period  covered  by  the  contract.  The  court  below  refused  an  in- 
junction, holding  that  to  warrant  the  interference  prayed  for  "the 
defendant's  services  must  be  unique,  extraordinary,  and  of  such  a 
character  as  to  render  it  impossible  to  replace  him ;  so  that  his  breach 
of  contract  would  result  in  irreparable  loss  to  the  plaintiff'."  In  the 
view  of  the  court,  the  defendant's  qualifications  did  not  measure  up 
to  this  high  standard.  The  trial  court  was  also  of  opinion  that  the 
contract  was  lacking  in  mutuality,  for  the  reason  that  it  gave  plaintiff 
an  option  to  discharge  defendant  on  10  days'  notice,  without  a  re- 
ciprocal right  on  the  part  of  the  defendant. 

The  learned  judge  who  filed  the  opinion  in  the  court  below,  with 
great  industry  and  painstaking  care,  collected  and  reviewed  the  Eng- 
lish and  American  decisions  bearing  upon  the  question  involved,  and 
■  makes  apparent  the  wide  divergence  of  opinion  which  has  prevailed. 
We  think,  however,  that  in  refusing  relief  unless  the  defendant's  serv- 
ices were  shown  to  be  of  such  a  character  as  to  render  it  impossible 
to  replace  him  he  has  taken  extreme  ground.  It  seems  to  us  that  a 
more  just  and  equitable  rule  is  laid  down  in  Pom.  Spec.  Perf.  p.  31, 
where  the  principle  is  thus  declared:  "Where  one  person  agrees  to 
render  personal  services  to  another,  which  require  and  presuppose  a 
special  knowledge,  skill,  and  ability  in  the  employe  so  that  in  case  of  a 
default  the  same  service  could  not  easily  be  obtained  from  others,  al- 
though the  affirmative  specific  performa'nce  of  the  contract  is  beyond 
the  power  of  the  court,  its  performance  will  be  negatively  enforced 
by  enjoining  its  breach.  *  *  *  The  damages  for  breach  of  such 
contract  cannot  be  estimated  with  any  certainty,  and  the  employer  can- 
not by  means  of  any  damages  purchase  the  same  service  in  the  labor 
market."     *     *     * 

The  court  below  finds  from  the  testimony  that  "the  defendant  is 
an  expert  baseball  player  in  any  position;  that  he  has  a  great  repu- 
tation as  a  second  baseman ;  that  his  place  would  be  hard  to  fill  with 
as  good  a  player;  that  his  withdrawal  from  the  team  would  weaken 
It,  as  would  the  withdrawal  of  any  good  player,  and  would  probably 
make  a  difference  in  the  size  of  the  audiences  attending  the  game." 
We  think  that,  in  thus  stating  it,  he  puts  it  very  mildly,  and  that  the 
evidence  would  warrant  a  stronger  finding  as  to  the  ability  of  the 
defendant  as  an  expert  ball  player.  *  *  *  Lajoie  is  well  known, 
and  has  great  reputation  among  the  patrons  of  the  sport,  for  ability 
m  the  position  which  he  filled,  and  was  thus  a  most  attractive  draw- 
B.&  B.Bus.Law— 27 


418  CONTRACTS  (Parti 

ing  card  for  the  public.  He  may  not  be  the  sun  in  the  baseball  firma- 
ment, but  he  is  certainly  a  bright  particular  star.  We  feel,  there- 
fore, that  the  evidence  in  this  case  justifies  the  conclusion  that  the 
services  of  the  defendant  are  of  such  a  unique  character,  and  display 
such  a  special  knowledge,  skill,  and  ability,  as  renders  them  of  pe- 
culiar value  to  the  plaintiff,  and  so  difficult  of  substitution  that  their 
loss  will  produce  "irreparable  injury,"  in  the  legal  significance  of 
that  term,  to  the  plaintiff".  The  action  of  the  defendant  in  violating 
his  contract  is  a  breach  of  good  faith,  for  which  there  would  be  no 
adequate  redress  at  law,  and  the  case,  therefore,  properly  calls  for 
the  aid  of  equity  in  negatively  enforcing  the  performance  of  the  con- 
tract by  enjoining  its  breach. 

But  the  court  below  was  also  of  the  opinion  that  the  contract  was 
lacking  in  mutuality  of  remedy,  and  considered  that  as  a  controlling 
reason  for  the  refusal  of  an  injunction.     *     *     * 

The  term  "mutuality"  or  "lack  of  mutuality"  does  not  always  con- 
vey a  clear  and  definite  meaning.  As  was  said  in  Grove  v,  Hodges,  55 
Pa.  516:  "The  legal  principle  that  contracts  must  be  mutual  does  not 
mean  that  in  every  case  each  party  must  have  the  same  remedy  for  a 
breach  by  the  other."  In  the  contract  now  before  us  the  defendant 
agreed  to  furnish  his  skilled  professional  services  to  the  plaintiff  for  a 
period  which  might  be  extended  over  three  years  by  proper  notice 
given  before  the  close  of  each  current  year.  Upon  the  other  hand,  the 
plaintiff  retained  the  right  to  terminate  the  contract  upon  10  days' 
notice  and  the  payment  of  salary  for  that  time  and  the  expenses 
of  defendant  in  getting  to  his  home.  But  the  fact  of  this  concession 
to  the  plaintiff  is  distinctly  pointed  out  as  part  of  the  consideration 
for  the  large  salary  paid  to  the  defendant,  and  is  emphasized  as  such ; 
and  owing  to  the  peculiar  nature  of  the  services  demanded  by  the 
business,  and  the  high  degree  of  efficiency  which  must  be  maintained, 
the  stipulation  is  not  unreasonable.  Particularly  is  this  true  when  it 
is  remembered  that  the  plaintiff  has  played  for  years  under  substan- 
tially the  same  regulations. 

We  are  not  persuaded  that  the  terms  of  this  contract  manifest  any 
lack  of  mutuality  in  remedy.  Each  party  has  the  possibility  of  en- 
forcing all  the  rights  stipulated  for  in  the  agreement.  It  is  true  that 
the  terms  make  it  possible  for  the  plaintiff  to  put  an  end  to  the  con- 
tract in  a  space  of  time  much  less  than  the  period  during  which  the 
defendant  has  agreed  to  supply  his  personal  services ;  but  mere  dif- 
ference in  the  rights  stipulated  for  does  not  destroy  mutuality  of 
remedy.    *    *    * 

The  defendant  sold  to  the  plaintiff,  for  a  valuable  consideration, 
the  exclusive  right  to  his  professional  services  for  a  stipulated  period, 
unless  sooner  surrendered  by  the  plaintiff,  which  could  only  be  after 
due  and  reasonable  notice  and  payment  of  salary  and  expenses  until 
the  expiration.  Why  should  not  a  court  of  equity  protect  such  an 
agreement  until  it  is  terminated?  The  court  cannot  compel  the  de- 
fendant to  play  for  the  plaintiff,  but  it  can  restrain  him  from  playing 
for  another  club  in  violation  of  his  agreement.  No  reason  is  given 
why  this  should  not  be  done,  except  that  presented  by  the  argument, 
that  the  right  given  to  the  plaintiff  to  terminate  the  contract  upon  10 
days'  notice  destroys  the  mutuality  of  the  remedy.  But  to  this  it  may 
be  answered  that,  as  already  stated,  the  defendant  has  the  possibility 


Ch.  10)  REMEDIES  419 

of  enforcing  all  the  rights  for  which  he  stipulated  in  the  agreement, 
which  is  all  that  he  can  reasonably  ask.     *     *     * 

The   specifications   of  error  are   sustained,   and  the  decree  of   the 
court  below  is  reversed,  and  the  bill  is  reinstated.     *     *     * 


SECTION  9.— ENFORCEMENT  OF  DECREES  BY  ATTACH- 
MENT FOR  CONTEMPT 


O'BIIIEN  V.  PEOPLE  ex  rel.  KELLOGG  SWITCHBOAPtD  &   SUPPLY  CO. 

(Supreme  Court  of  Illinois.  1905.     216  111.  354,  75  N.  E.  108, 
108  Am.  St.  Rep,  219,  3  Ann.  Cas.  966.) 

Proceedings  for  contempt  by  the  People,  on  the  relation  of  the 
Kellogg  Switchboard  &  Supply  Company,  against  John  O'Brien,  Thom- 
as Queenan,  Lee  S.  Fisher,  Jacob  Christensen,  and  Albert  Mashek. 
From  judgments  sentencing  defendants  to  various  penalties,  affirmed 
by  the  Appellate  Court,  they  bring  error. 

On  May  25,  1903,  the  Kellogg  Switchboard  &  Supply  Company,  a 
corporation  organized  under  the  laws  of  the  state  of  Illinois,  and  en- 
gaged in  the  business  of  manufacturing  and  selling  telephones,  switch- 
boards, and  electrical  supplies,  with  its  principal  office  in  Chicago,  filed 
its  bill  for  an  injunction  in  the  superior  court  of  Cook  county  against 
certain  parties  named  therein  as  defendants,  and  prayed  for  an  injunc- 
tion restraining  said  defendants  from  doing  certain  things  mentioned 
in  said  bill.  A  preliminary  injunction  was  issued,  which  restrained  the 
defendants  and  their  confederates  from  in  any  manner  interfering 
with  the  business  of  the  said  Kellogg  Switchboard  &  Supply  Com- 
pany. 

On  June  3,  1903,  the  complainant  filed  a  petition  in  the  superior 
court,  which  petition  stated  that  persons  named  therein,  since  the  is- 
suing of  said  injunction,  had  been  picketing  and  patrolling  complain- 
ant's place  of  business,  stopping  persons  on  their  way  to  take  employ- 
ment with  complainant,  and  had  been  endeavoring,  by  threats,  in- 
timidation, and  persuasion,  to  compel  complainant's  employes  to  leave 
its  service,  and  to  prevent  persons  from  seeking  employment  with 
complainant,  and  that  the  persons  named  therein  had  congregated  on 
the  streets  and  approaches  to  the  complainant's  factory  in  order  to  ac- 
complish these  purposes.  At  a  hearing  on  the  petition  and  affidavits, 
on  June  15,  1903,  the  court  found  that  Jacob  Christensen,  S.  E.  Doty, 
Charles  Heinig,  Andrew  Emerson,  Fred  Waggoner,  Albert  Marshek, 
and  others  were  guilty  of  violating  the  injunction  order,  and  they  were 
each  fined  the  sum  of  $10. 

On  July  14,  1903,  the  complainant  filed  still  another  petition.  The 
court  found  that  George  Christensen,  Albert  Mashek,  Lee  S.  Fisher, 
John  Brent,  Charles  Evans,  and  John  O'Brien  had  violated  said  writ 
of  injunction,  and  ordered  that  Lee  S.  Fisher  be  fined  $100,  that  George 
Christensen  be  committed  to  the  county  jail  for  30  days,  that  John 
O'Brien  be  committed  to  the  county  jail  for  10  days,  that  Albert  Mashek 
be  committed  to  the  county  jail  for  60  days,  that  Charles  Evans  be 
fined  $25,  that  John  Brent  be  fined  $25,  and  that  R.  S.  Schoenbacker 
be  discharged. 


420  CONTRACTS  (Part  1 

Wilkin,  j.  *  *  *  It  is  a  well-known  rule  of  law  that,  in  pro- 
ceedings for  contempt  in  failing  to  obey  an  order  of  court,  the  re- 
spondent may  question  the  order  which  he  is  charged  with  refusing 
to  obey  only  in  so  far  as  he  can  show  it  to  be  absolutely  void,  and  can- 
not be  heard  to  say  that  it  is  merely  erroneous,  however  flagrant  it  may 
appear  to  be.  The  judgments  of  courts  cannot  be  attacked  collaterally 
for  mere  irregularities.  Therefore  plaintiffs  in  error  cannot  question 
in  this  proceeding  the  sufficiency  of  the  bill  upon  w^hich  the  writ  of 
injunction  was  granted.  Courts  of  chancery  have  within  themselves 
full  power  and  authority  to  enforce  their  official  mandates  in  a  sum- 
mary and  effective  manner.  To  say  otherwise,  would  render  them 
powerless  and  inefficient. 

It  is  again  insisted  with  much  earnestness  that  this  proceeding  is 
criminal  in  its  nature,  and  therefore  the  defendants  below  w^ere  en- 
titled to  be  discharged  upon  their  sworn  answer,  and,  if  their  answer 
was  not  sufficient,  they  could  only  be  punished  after  they  had  been 
tried  and  convicted  by  jury.  Proceedings  for  contempt  of  court  are 
of  two  classes :  those  which  are  criminal  in  their  nature,  and  those 
which  are  designated  as  purely  civil  remedies.  When  the  contempt 
consists  of  something  done  or  omitted  in  the  presence  of  the  court 
tending  to  impede  or  interrupt  its  proceedings  or  lessen  its  dignity, 
or  out  of  its  presence  in  disregard  or  abuse  of  its  process,  the  proceed- 
ing is  punitive  or  criminal,  and  the  penalty  is  inflicted  by  way  of  punish- 
ment for  the  wrongful  act,  and  to  vindicate  the  authority  and  dignity 
of  the  people  as  represented  by  their  judicial  tribunals.  In  such  cases 
the  application  for  attachment  may  be  made  in  the  original  cause,  yet 
the  contempt  proceeding  will  be  a  distinct  case,  criminal  in  its  nature. 
Cases  of  this  kind  are  clearly  distinguished  from  cases  where  the 
parties  to  a  civil  suit,  having  the  right  to  demand  that  the  other  party 
do  some  act  for  their  benefit,  obtain  an  order  from  a  proper  court 
commanding  the  act  to  be  done,  and,  upon  refusal,  the  court,  by  way 
of  executing  its  orders,  proceeds  as  for  contempt,  for  the  purpose  of 
advancing  the  civil  remedy  of  the  other  party  to  the  suit.  In  this 
class  of  cases,  while  the  authority  of  the  court  will  be  incidentally  vin- 
dicated, its  power  has  been  called  into  exercise  for  the  benefit  of  a  pri- 
vate litigant,  and  not  in  .the  public  interest,  merely.  If  imprisonment 
is  ordered,  it  is  not  as  a  punishment,  but  to  the  end  that  the  other 
party  to  the  suit  may  obtain  a  remedy  for  the  advancement  of  his  own 

private  interest   and   rights   which  he   could  not  otherwise   maintain. 
*     *     * 

Upon  this  bill  being  filed,  a  writ  of  injunction  was  ordered  for  the 
purpose  of  protecting  the  company  against  the  unlawful  acts  of  cer- 
tain persons;  and  when  the  injunction  was  issued,  and  the  plaintiffs 
in  error  were  attached  for  contempt  of  court,  it  was  primarily  because 
they  were  injuring  the  business  of  the  Kellogg  Company,  and  the 
punishment  was  inflicted  to  prevent  such  injury.  While  it  is  true  that 
the  dignity  of  the  law  and  the  order  of  the  judicial  tribunal  have  been 
violated,  this  was  merely  incidental  to  the  rights  of  private  individ- 
vials.  The  proceeding  for  the  attachment  was  civil,  and  in  no  sense 
criminal.  The  rule  is  that,  when  the  defendant  is  attached  for  con- 
tempt of  court  for  a  criminal  offense  and  files  a  sworn  answer,  that 
answer,  if  sufficient  to  purge  y.im  of  the  alleged  contempt,  may  be 
taken  as  true  and  the  defendant  discharged.  But  this  rule  applies  only 
where  the  proceeding  is  brought  to  vindicate  the  law  or  the  dignity  of 


Ch.  10)  REMEDIES  421 

the  court,  and  does  not  apply  to  acts  treated  as  contempts,  for  the 
enforcement  of  orders  and  decrees  as  a  part  of  the  remedy  sought 
to  be  enforced,     *     *     * 

It  is,  however,  contended  that,  even  though  they  were  not  entitled 
to.be  discharged  upon  their  sworn  answers,  they  still  had  the  constitu- 
tional right  to  a  trial  by  jury,  and  could  not  be  legally  deprived  of 
their  liberty  or  property  without  such  a  trial.  Upon  the  filing  of  the 
petitions  for  contempt  and  the  appearance  of  the  defendants  thereto, 
the  court  proceeded  in  the  summary  to  hear  the  case  upon  the  petitions, 
answers,  and  affidavits  filed  by  the  respective  parties.  In  1893  the  Leg- 
islature of  this  state  passed  an  act  providing  for  a  trial  by  jury  in  all 
cases  where  a  judgment  was  to  be  satisfied  by  imprisonment.  Laws 
1893,  p.  96.  In  the  case  of  Barclay  v.  Barclay,  184  111.  471,  56  N.  E. 
821,  we  decided  that  this  act  did  not  apply  to  the  case  of  proceedings 
for  contempt  of  court,  where  it  was  sought  to  coerce  defendant  into 
the  performance  of  the  duty  which  the  court  had  ordered  him  to  per- 
form. *  *  *  These  authorities  are  decisive  of  the  question  here 
raised,  and  hold  that  the  defendants  in  such  a  proceeding  as  this  are  not 
entitled  to  a  trial  by  jury.     *     *     * 

We  have  endeavored  to  give  the  material  questions  raised  and  dis- 
cussed in  the  argument  due  consideration,  and  have  reached  the  con- 
clusion that  the  judgments  of  the  superior  court  were  properly  affirmed 
by  the  Appellate  Court.  The  judgment  of  the  latter  court  will  ac- 
cordingly be  affirmed. 


SECTION  10.— BANKRUPTCY 

Section  8  of  article  1  of  the  Constitution  of  the  United  States 
confers  upon  Congress  power  to  establish  uniform  laws  on  the 
subject  of  bankrupicies  throughout  the  United  States.  Under  this 
grant  of  power  Congress  enacted  the  first  National  Bankruptcy  Act 
in  1800,  but  this  act  was  repealed  in  1803.  The  second  National 
Bankruptcy  Act  was  passed  in  1841,  but,  like  its  predecessor,  it 
was  repealed  two  years  later.  Again,  in  1867,  a  National  Bank- 
ruptcy Act  was  passed,  which  act  remained  in  force  until  its  repeal 
in  1878.  The  present  National  Bankruptcy  Act  (U.  S.  Comp.  St. 
§§  9585-9656)  was  passed  in  1898.  Several  amendments  thereto 
have  been  adopted  since  its  original  enactment. 

The  primary  purpose  of  a  bankruptcy  act  is  to  provide  the  ma- 
chinery, administrative  as  well  as  judicial,  for  the  expeditious  and 
economical  collection  of  the  assets  of  an  insolvent  person  and  for 
the  equitable  distribution  thereof  among  his  creditors.  The  act 
is  passed  largely  in  the  interests  of  the  creditors,  although,  under 
the  present  act  the  bankrupt  usually  obtains  the  benefit  of  a  dis- 
charge from  most  of  his  legal  obligations.  In  the  absence  of  such 
a  system  as  that  provided  for  by  the  Bankruptcy  Act,  creditors 
must  prosecute  independent  suits  against  their  common  debtor. 
The  prosecution  of  such  actions  results  in  needless  expense.  More- 
over, the  property  of  the  judgment  debtor  will  not  be  distributed 
proportionately  among  the  creditors,  because  the  extent  of  their 
several  rights  generally  will  be  fixed  as  of  the  date  of  the  entry  of 


422  '     CONTRACTS  (Part  1 

their  respective  judgments.  Some  creditors  are,  therefore,  likely  to 
be  paid  in  full,  while  other  creditors  will  receive  nothing.  Under  a 
system  of  bankruptcy  legislation,  all  of  the  property  of  the  bank- 
rupt is  placed  beyond  the  reach  of  all  courts  except  the  bankruptcy 
tribunal,  the  title  thereto  vested  in  a  trustee,  upon  whom  is  im- 
posed the  general  duty  of  distributing  it,  or  the  proceeds  arising 
from  its  sale,  among  the  creditors  in  proportion  to  the  amount  of 
their  respective  claims.  After  the  filing  of  a  petition  in  bank- 
ruptcy, the  custody  of  the  property  of  the  bankrupt  vests  in  the 
federal  court  having  jurisdiction  of  the  cause. 

In  the  following  very  brief  resume  of  some  of  the  more  promi- 
nent features  of  the  operation  of  the  Bankruptcy  Act,  we  are  con- 
cerned with  three  general  questions:  (1)  What  persons  may  be 
adjudicated  bankrupts?  (2)  Under  what  circumstances  may  these 
persons  be  adjudicated  bankrupts?  (3)  What  is  the  nature  and 
extent  of  the  rights  of  the  trustee,  who  is  charged  with  the  duties 
of  administering  the  bankrupt  estate,  in  the  property  of  the  bank- 
rupt, and  what  are  his  duties  with  respect  to  its  distributon  among 

creditors? 

(1)   WHO  MAY  BE  BANKRUPTS? 

With  respect  to  the  persons  who  may  become  bankrupts,  the  act 
draws  some  distinctions  between  voluntary  bankrupts,  that  is, 
those  persons  who,  upon  their  own  petition,  ask  to  be  adjudicated 
bankrupts,  and  involuntary  bankrupts,  namely,  those  persons  who 
have  been  proceeded  against  by  creditors.  Section  4  provides, 
with  four  exceptions,  that  any  person  may  be  adjudicated  a  volun- 
tary bankrupt.  Section  1,  clause  19,  defines  the  word  "person"  to 
include  corporations  and  partnerships.  The  four  exceptions  to 
the  rule  that  any  person  may  be  adjudicated  a  voluntary  bankrupt 
are  municipal,  railroad,  insurance,  and  banking  corporations.  No- 
tice that  the  exception  concerns  corporations  engaged  in  these  en- 
terprises, and  does  not  include  partnerships  engaged  in  the  private 
enterprises  named.  There  is  no  provision  with  reference  to  the 
amount  of  debts  which  one  must  owe  before  one  may  file  a  peti- 
tion in  voluntary  bankruptcy,  and,  indeed,  there  is  no  requirement 
that  such  person  be  insolvent,  although  as  a  practical  matter  a  per- 
son would  rarely  seek  an  adjudication  in  voluntary  bankruptcy  un- 
less he  were  insolvent. 

Not  every  person  who  is  privileged  to  obtain  an  adjudication 
in  bankruptcy  upon  his  own  voluntary  petition  may  be  proceeded 
against  by  his  creditors  upon  their  petition  in  involuntary  bank- 
ruptcy. With  reference  to  the  persons  who  may  be  adjudicated 
involuntary  bankrupts  the  act  contains  provision  with  respect  to 
three  classes  of  persons:  (1)  Natural  persons;  (2)  unincorpo- 
rated companies ;  and  (3)  corporations.  Section  4  provides  that 
"any  natural  person  *  *  *  j^-^^y  j^g  adjudged  an  involuntary 
bankrupt."  To  this  rule,  then,  are  two  exceptions ;  the  same  sec- 
tion providing  that  wage-earners  and  persons  engaged  chiefly  in 


Ch.  10)  REMEDIES  423 

farming  or  the  tillage  of  the  soil  cannot  be  adjudicated  involuntary 
bankrupts.  Who  are  wage-earners?  Who  are  farmers?  When 
will  a  person  be  engaged  chiefly  in  farming  or  in  the  tillage  of  the 
soil?  Section  1,  clause  27,  defines  a  wage-earner  as  "an  individual 
who  works  for  wages,  salary,  or  hire,  at  a  rate  of  compensation 
not  exceeding  one  thousand  five  hundred  dollars  per  year."  This 
definition  is  but  a  partial  definition  of  the  term  "wage-earner,"  for 
there  are  many  persons  who  earn  less  than  $1,500  per  year  who 
could  not  properly  be  regarded  as  wage-earners.  Would  a  school- 
teacher earning  less  than  $1,500  per  year  be  a  wage-earner,  within 
the  meaning  of  this  section?  Is  a  lawyer,  physician,  broker,  or  a 
preacher  a  wage-earner,  within  the  meaning  of  this  section?  What 
should  the  test  be?^ 

With  respect  to  the  second  exception,  may  one  be  a  tiller  of  the 
soil  without  being  a  farmer?  Is  a  stock  raiser  a  farmer?  Would 
one  be  a  farmer  who  was  engaged  in  raising  fruit?  Where  land 
has  been  rented  to  a  tenant,  who  cultivates  it,  is  the  owner  a  farm- 
er by  reason  of  his  receiving  an  income  from  the  land?  A.  owns  a 
tract  of  land  and  keeps  a  large  herd  of  dairy  cows.  He  raises 
very  little  of  his  feed.  Is  he  a  farmer?  A.  owns  a  tract  of  land,  and 
employs  B.  to  cultivate  the  land,  to  raise  and  care  for  the  crops. 
A,  does  no  work  on  the  land.  B.  is  paid  by  the  month.  Is  A.  a 
farmer?  Is  B.  a  farmer?  Occasionally  questions  of  this  nature 
are  presented  to  the  courts.  The  questions  may  be  further  compli- 
cated by  the  requirement  that,  in  order  to  be  exempt  from  involun- 
tary bankruptcy,  one  must  be  chiefly,  but  not  entirely,  engaged  in 
farming  or  tillage  of  the  soil.* 

With  respect  to  unincorporated  associations,  section  4  provides 
that  "any  unincorporated  company"  may  be  adjudicated  an  involun- 
tary bankrupt.  Section  5  further  provides  that  "a  partnership, 
during  the  continuance  of  the  partnership  business,  or  after  its 
dissolution  and  before  the  -final  settlement  thereof,  may  be  ad- 
judged a  bankrupt."^  The  expression,  "any  unincorporated  com- 
pany," while  broad  enough  to  include  all  partnerships,  was  inserted 
probably  for  the  purpose  of  including  within  the  scope  of  involun- 
tary bankruptcy  associations  other  than  partnerships.  Apparent- 
ly, therefore,  the  expression  would  include  associations  although 
not  established  and  conducted  for  profit. 

Not  all  corporations  may  be  adjudged  involuntary  bankrupts. 
In  the  first  place,  section  4  provides  that  only  those  corporations 
which  are  "moneyed,  business,  or  commercial  corporations"  are 
subject  to  involuntary  bankruptcy.  These  three  words,  "moneyed," 
"business,"  and  "commercial,"  indicate  rather  clearly  that  Congress 

3  See  Ilrst  National  Bank  of  Wilkes-Barre  v.  Barnum  (D.  C.)  160  Fed. 
245  (190S). 

4  See  Bank  of  Dearborn  v.  Matney   (D.  C.)  132  Fed.  75  (1004). 

5  A  leading  case  on  the  subject  of  partnership  bankriiptcv  is  Francis  v. 
McNeal,  228  U.  S.  695,  33  Sup.  Ct.  701,  57  L.  Ed.  1029,  L.  R.  A.  1915E,  706 
(1913). 


424  CONTRACTS  (Part  1 

intended  to  subject  all  corporations  which  were  organized  and 
conducted  for  pecuniary  profit  to  the  liability  of  being  proceeded 
against  in  involuntary  bankruptcy,  and  that  all  corporations  or- 
ganized not  for  pecuniary  profit,  such  as  religious  organizations, 
social  clubs,  fraternities,  and  the  like,  should  be  exempt  from 
these  provisions.  Of  course,  these  organizations  may  avail  them- 
selves of  the  provisions  relating  to  voluntary  bankruptcy,  and  it 
would  seem  that,  if  they  are  not  incorporated,  they  could  be  pro- 
ceeded against  by  creditors.  In  the  second  place.  Congress  has 
provided,  in  section  4,  that  four  classes  of  corporations,  although 
organized  for  pecuniary  profit,  cannot  be  adjudicated  involuntary 
bankrupts — "municipal,  railroad,  insurance,  or  banking  corpora- 
tions." Special  statutory  procedures,  or  ordinary  receiverships  as 
worked  out  by  courts  of  equity,  are  better  suited  to  the  purposes  of 
liquidating  or  reorganizing  railroad,  insurance,  and  banking  cor- 
porations ;  hence  they  are  excluded  from  the  operation  of  the  Bank- 
ruptcy Act.  There  is  reason  to  believe  that,  in  addition  to  rail- 
roads, public  service  corporations  generally  should  not  be  subject 
to  the  provisions  of  the  Bankruptcy  Act. 

(2)    CIRCUMSTANCES  UNDER  WHICH  PERSONS   SUBJECT  TO  BANK- 
RUPTCY MAY  BE  AD.TUDICATED  BANKRUPT 

Any  person,  except  the  four  classes  of  corporations  mentioned 
above,  is  entitled  to  the  provisions  of  the  act  relating  to  volun- 
tary bankruptcy.  There  is  no  requirement  that  such  persons  be 
insolvent  or  possess  assets.® 

Persons  subject  to  involuntary  bankruptcy  may  be  adjudicated 
bankrupt  upon  proof  of  the  following  facts:  '  (1)  That  the  person 
proceeded  against  owes  debts  to  the  amount  of  $1,000  or  over;  (2) 
that  such  person  has  committed  an  act  of  bankruptcy  within  a  pe- 
riod of  time  specified  in  the  act.  There  is  the  further  requirement 
that  there  must  be  three  or  more  creditors  joining  in  the  petition 
who  have  provable  claims  against  the  bankrupt  which  amount  in 
the  aggregate,  in  excess  of  the  value  of  securities  held  by  them,  if 
any,  to  $500  or  over,  or,  if  all  of  the  creditors  of  such  person  are 
less  than  twelve  in  number,  then  one  of  such  creditors  whose  claim 
equals  such  amount  may  file  a  petition.* 

We  may  pass  over,  without  discussion,  the  requirement  that  the 
bankrupt  must  owe  debts  of  $1,000  or  over,  except  to  note  the  pos- 
sibility of  controversy  over  the  question  what  constitutes  a  debt. 
Does  the  term  "debt"  include  unliquidated  claims  arising  from 
breaches  of  contracts  or  from  the  commission  of  torts?  Are  con- 
tingent claims,  such  as  the  obligation  of  an  indorser  of  a  nego- 
tiable instrument,  to  be  regarded  as  debts?® 

The  requirement  that  the  bankrupt  must  have  committed  what  is 

6  In  re  Schwaninger  (D.  C.)  1-14  Fed.  555  (1906). 

7  Section  3. 

8  Section  .59(b). 

0  See  discussion  in  Chapter  Y,  Section  5,  as  to  tlie  meaning  of  the  term 
•'•debt,"  as  nsed  in  the  sections  relating  to  discharge. 


Ch.  10)  REMEDIES  425 

called  an  act  of  bankruptcy,  as  a  prerequisite  to  his  adjudication, 
is  the  provision  which  covers  the  greater  amount  of  litigation.  It 
is  generally  true  that  a  person  must  be  insolvent  before  his  credi- 
tors may  proceed  against  him  in  involuntary  bankruptcy.  Never- 
theless, the  Bankruptcy  Act  does  not  lay  down  the  rule  that  all 
persons  when  insolvent  may  be  adjudged  involuntary  bankrupts, 
nor  in  any  case  is  it  possible  to  obtain  an  adjudication  solely  upon 
proof  that  the  person  proceeded  against  was  insolvent.  A  scheme 
of  bankruptcy  legislation  which  permitted  creditors  to  proceed 
against  a  debtor  upon  proof  of  his  insolvency  alone  probably  v/ould 
work  very  well,  but  it  would  not  be  so  desirable  as  the  method 
which  has  been  worked  out  in  our  present  act.  Instead  of  pro- 
viding that  a  person  may  be  adjudged  an  involuntary  bankrupt 
upon  proof  of  his  insolvency,  the  act  provides  that  the  petitioning 
creditors  must  allege  and  prove  that  the  alleged  bankrupt  com- 
mitted some  specific  act,  called  an  act  of  bankruptcy,  which  act, 
in  one  way  or  another,  affords  a  rather  clear  proof  that  his  liabili- 
ties then  exceed  his  assets,  or  that  his  liabilities  are  very  likely  to 
exceed  his  assets  in  a  relatively  short  time.  From  a  practical  stand- 
point, in  the  great  majority  of  cases,  insolvency  is  the  real  basis  for 
the  proceeding. 

Section  3  defines  five  specific  acts  of  bankruptcy,  although  the 
fourth  clause,  as  numbered  in  the  act,  in  reality,  enumerates  three 
separate  acts  of  bankruptcy.  These  acts  of  bankruptcy  may  be 
referred  to  generally  as:  (1)  Fraudulent  conveyances;  (2)  pref- 
erential transfers ;  (3)  preferences  obtained  through  legal  proceed- 
ings; (4)  (a)  general  assignments;  (b)  application  for  a  receiv- 
er, while  insolvent;  (c)  appointment  of  a  receiver  because  of  in- 
solvency;   (5)   admission  in  writing  of  one's  inability  to  pay  debts. 

The  first  act  of  bankruptcy  is  defined  as  follows :  Acts  of  bank- 
ruptcy by  a  person  shall  consist  of  his  having  conveyed,  trans- 
ferred, concealed  or  removed,  or  permitted  to  be  concealed  or  re- 
moved, any  part  of  his  property  with  intent  to  hinder,  delay  or 
defraud  his  creditors,  or  any  of  them. 

This  section  is  based  upon  a  statute  which,  independent  of  our 
bankruptcy  legislation,  is  in  force  generally  throughout  the  United 
States  and  is  a  substantial  re-enactment  of  the  English  act  passed 
during  the  reign  of  Elizabeth.  The  statute  is  commonly  referred 
to  as  the  Statute  of  Elizabeth.  The  efifect,  in  general,  of  the  act  is 
to  make  void,  as  to  creditors  and  sometimes  as  to  subsequent  pur- 
chasers, conveyances  of  property  which  are  defined  by  the  act  as 
fraudulent.  Under  this  state  legislation  a  creditor  of  a  fraudulent 
grantor  may  treat  a  fraudulent  conveyance  by  his  debtor  as  if  such 
conveyance  had  not  been  made;  that  is,  the  creditor  may  have  the 
property  thus  fraudulently  conveyed  sold  under  judicial  process 
to  satisfy  his  judgment.  The  claims  of  the  grantee,  if  he  were  not 
a  bona  fide  purchaser  for  value,  would  be  treated  as  non-existent. 
Congress  has,  therefore,  simply  provided,  generally,  that  those 
conveyances  which  are  fraudulent  under  the  various  state  statutes 


426  CONTRACTS  (Part  1 

which  re-enact  the  Statute  of  Elizabeth,  shall  also  amount  to 
acts  of  bankruptcy.  The  principal  difficulty  which  arises  in  con- 
nection with  the  interpretation  of  a  fraudulent  conveyance  act  is  to 
determine  what  constitutes  an  intent  to  defraud.  A  discussion  of 
this  question  would  carry  us  beyond  the  scope  of  this  section,  but  a 
few  of  the  more  common  situations  may  here  be  noted  very 
briefly. 

It  is  possible  for  one  to  make  a  transfer  of  his  property  with  in- 
tent to  defraud  although  such  transfer  is  for  value,  even  for  full 
value.  A  transfer  of  property  in  consideration  of  a  covenant  by 
the  grantee  to  support  the  grantor  for  life  is  not  an  uncommon 
transaction  and  such  transfer,  when  accompanied  by  the  requisite 
intent  to  defraud,  has  been  held  void  under  the  statute.  The  more 
common  transaction  concerns  gifts  of  property.  If  A.  is  insolvent, 
or  threatened  with  insolvency,  he  may  decide  to  attempt  to  put  his 
property  beyond  the  reach  of  his  creditors.  Accordingly  he  may 
transfer  by  wa}'-  of  gift  the  bulk  of  his  estate  to  a  relative ;  or  he 
may  ostensibly  transfer  his  property  by  way  of  gift,  although  ac- 
tually there  may  be  a  secret  agreement  on  the  part  of  the  grantee 
to  re-transfer  the  property  just  as  soon  as  the  financial  storm  blows 
over;  or  it  is  possible  that,  while  the  transfer,  as  far  as  legal 
form  is  concerned,  has  been  made  (as,  for  example,  to  the  grantor's 
wife),  the  property  is  for  all  practical  purposes  owned  and  con- 
trolled by  the  grantor. 

The  problem  with  which  the  courts  are  concerned  in  applying  the 
statute  of  fraudulent  conveyances  to  transactions  of  this  character 
is  to  determine  the  circumstances  under  which  it  is  proper  to  de- 
cide that  the  transfer  was  made  with  an  intent  to  defraud.  With 
respect  to  gifts  of  property,  the  courts  hold  that,  if  the  donor, 
after  the  gift,  has  retained  an  amount  of  property  insufficient  to 
meet  his  debts,  the  transfer  is  void ;  that  is,  proof  that  the  gift  lel't 
the  donor  insolvent  will  be  taken  as  the  equivalent,  in  legal  efi^ect, 
of  affirmative  proof  of  an  intent  to  defraud.  Since  the  donee,  ob- 
viously, is  not  a  bona  fide  purchaser  for  value,  creditors  of  the  in- 
solvent donor  need  not  prove  that  the  transferee  had  knowledge 
of  the  fraudulent  character  of  the  transfer.  Retention  of  possession 
after  sale  is  likewise  held  by  some  courts  to  be  conclusive  proof 
of  intent  to  defraud,  but  by  other  courts  such  act  of  retention  of 
possession  is  but  prima  facie  evidence  of  intent  to  defraud. 

The  rights  of  subsequent  creditors  to  attack  a  fraudulent  con- 
veyance are  not  the  same  in  all  jurisdictions.  In  some  states,  sub- 
sequent creditors  may  set  asid^  a  conveyance  only  upon  proof  of 
fraud  by  the  grantor  to  defraud  subsequent  creditors.  In  other 
states,  the  rule  is  that,  if  a  conveyance  may  be  set  aside  by  a 
prior  creditor,  any  subsequent  creditor  may  set  it  aside,  provided 
there  still  exists  some  prior  creditor  who  has  not  been  paid.  Still 
other  states  hold  that  if  a  conveyance  is  fraudulent  in  fact — that  is, 
not  deemed  fraudulent  under  the  rules  that  a  gift  by  an  insolvent 
and  a  retention  of  possession  after  sale  are  fraudulent  as  a  matter 


Ch.  TO)  REMEDIES  427 

of  law — any   creditor,   prior   or   subsequent,   may   set  the  convey- 
ance aside. 

The  above  brief  comment  was  made  to  give  some  indication  of 
the  types  of  specific  acts  which  constitute  the  first  act  of  bank- 
ruptcy. Two  important  statements  remain  to  be  made  with  refer- 
ence to  fraudulent  conveyances  as  acts  of  bankruptcy:  (1)  It  is 
to  be  noticed  that  in  the  definition  of  a  fraudulent  conveyance  in 
section  3  (a),  as  above  quoted,  the  condition  of  insolvency  is  not 
made  an  element.  But  section  3  (c)  makes  the  absence  of  insol- 
vency a  defense  to  an  involuntary  proceeding  predicated  upon  the 
first  act  of  bankruptcy.  But  this  provision  does  not  apply  to  any 
other  act  of  bankruptcy.^"  (2)  It  is  to  be  emphasized  that  proof 
of  the  commission  of  the  first  act  of  bankruptcy  does  not  necessi- 
tate proof  that,  the  transferee  of  the  fraudulent  conveyance  is  not  a 
bona  fide  purchaser.  It  makes  no  difference  whether  such  trans- 
feree is  a  bona  fide  purchaser.  The  proof  is  made  out  by  the  credi- 
tors' showing  (a)  that  a  transfer  was  made ;  (b)  that  it  was  made 
with  intent  to  defraud ;  and  (c)  upon  the  failure  of  the  defendant 
to  establish  his  solvency  at  the  time  of  the  filing  of  the  petition 
against  him.  One  ma}^  commit  the  first  named  act  of  bankruptcy, 
although  it  may  be  impossible  for  the  trustee  in  bankruptcy  to 
recover  the  property  for  the  benefit  of  creditors.  This  will  always 
occur  when  the  transferee  was  a  bona  fide  purchaser  for  value. 

The  second  named  act  of  bankruptcy  is  a  preferential  transfer. 
It  is  defined  in  section  3  (a)  (2)  as  follows  :  Acts  of  bankruptcy  by 
a  person  shall  consist  of  his  having  transferred,  while  insolvent, 
any  portion  of  his  property  to  one  or  more  of  his  creditors  with 
intent  to  prefer  such  creditors  over  his  other  creditors.  It  is  to 
be  noticed  that  this  section  places  the  burden  of  proving  the  con- 
dition of  insolvency  of  the  bankrupt  upon  the  petitioning  creditors, 
while,  under  the  first  act  of  bankruptcy,  no  such  burdenrests  upon 
the  petitioning  creditors.  The  act  places  the  burden  upon  the 
bankrupt  to  prove  that  he  was  solvent  if  he  seeks  to  defeat  the 
proceeding  upon  this  ground.  Under  the  second  act  of  bankruptcy, 
failure  of  the  creditors  to  prove  insolvency  will  defeat  the  petition. 

The  second  act  of  bankruptcy  is  like  the  first  act  of  bankruptcy  in 
that  each  deals  with  transfers  of  property,  but  there  are  im- 
portant differences.  The  first  act  of  bankruptcy  does  not  deal  ex- 
clusively with  transfers,  but  also  with  concealments,  of  property. 
The  second  act  of  bankruptcy  concerns  transfers  only.  The  trans- 
fer or  concealment  which  is  an  element  of  the  first  act  of  bank- 
ruptcy must  be  made  with  intent  to  defraud.  The  transfer  which 
constitutes  the  second  act  of  bankruptcy  must  be  made,  not  with 
an  intent  to  defraud,  but  with  an  intent  to  prefer.  This  raises  the 
question:    What  is  a  preference? 

Section  60  (a)  defines  a  preference  as  follows:  A  person  shall 
be  deemed  to  have  given  a  preference  if,  being  insolvent,  he  has 

If  West  Co.  V.  Lea,  174  U.  S.  590,  19  Sup.  Ct.  8.%,  43  L.  Ed.  1098    (1899). 


428  CONTRACTS  (Part  1 

*  *  *  made  a  transfer  of  any  of  his  property,  and  the  effect  of 
the  enforcement  of  such  *  *  *  transfer  will  be  to  enable  any 
one  of  his  creditors  to  obtain  a  greater  percentage  of  his  debt  than 
any  other  of  such  creditors  of  the  same  class.  The  definition  of 
a  bare  preference  does  not  include  the  element  of  an  intent  to  bring 
about  the  result  described  in  the  definition,  but  the  second  act  of 
bankruptcy  consists  in  making  a  preference  with  intent  to  do  so. 
The  broad  distinction  between  a  fraudulent  conveyance  and  that 
kind  of  a  preference  which  constitutes  the  second  act  of  bankruptcy 
is  not  so  much  in  the  efifect  which  the  transfer  has  upon  creditors, 
because  in  many  cases  the  effect  will  be  the  same,  but  rather  hi  the 
nature  of  the  intent  which  accompanies  the  transfers.  An  intent 
to  defraud,  except  where  such  intent  is  found  in  the  act  of  reten- 
tion of  possession  after  sale  and  in  gifts  by  insolvent  persons,  is  an 
aftirmative,  a  positive  desire  to  prevent  creditors  from  obtaining 
payment  of  the  money  due  them  by  making  the  transfer.  An  in- 
tent to  prefer  consists  in  the  desire  to  treat  the  creditor  preferred 
better  than  the  transferor  can  treat  other  creditors.  He  may 
make  a  preference  and  still  remain  an  honest  man. 

An  insolvent  person  may  not  desire  to  prevent  a  single  creditor 
from  collecting  his  money.  He  may  even  desire  most  heartily  to 
pay  all  of  them  in  full.  He  may  have  some  money,  and  he  may 
really  feel  that  he  ought  to  pay  his  grocer  rather  than  to  divide  the 
amount  among  all  of  his  creditors.  Accordingly  he  may  prefer  his 
grocer.  A  preference,  therefore,  is  not  a  fraudulent  conveyance; 
but,  when  it  is  made  with  an  intent  to  bring  about  this  result,  it 
does  constitute  an  act  of  bankruptcy.  Notice,  further,  that  a  pref- 
erence consists  in  paying  a  debt.  A  purchase  of  property  for 
cash  by  an  insolvent  is  not  a  preference  given  to  the  seller.  If  A,, 
being  insolvent,  has  $100,  and  with  this  money  buys  property  of  this 
value,  no  preference  results,  because  his  estate  has  not  been  di- 
minished. A  preference  is  the  payment  of  an  antecedent  debt, 
usually  a  debt  which  came  into  existence  as  the  result  of  a  pur- 
chase of  goods  on  credit.  This  rule  that  payments  on  cash  sales 
do  not  operate  as  preferences  is  carried  farther,  and  made  to  in- 
clude payments  on  a  running  account,  where  new  sales  succeed 
payments  and  the  net  result  is  to  increase  the  value  of  the  es- 
tate.^'^  This  rule  is  of  considerable  importance  to  dealers  who 
have  had  frequent  dealings  with  the  bankrupt,  consisting  in  sales 
of  property  to  the  bankrupt  at  different  times  and  the  receipt  from 
him  of  numerous  payments  on  account,  for  the  trustee  in  bank- 
ruptcy v^rill  not  be  able  to  recover  the  payments  as  he  may  many 
preferences. 

The  third  act  of  bankruptcy  is  also  a  preference,  but  it  differs 
from  the  kind  of  preference  just  discussed,  in  that  it  does  not  nec- 
essarily arise  from  a  voluntary  act  of  the  person  who  made  it. 

11  Jaquith  v.  Alden,  189  U.  S.  78,  23  Sup.  Ct.  649,  47  L.  Ed.  717  (1903). 


Ch.  10)  REMEDIES  429 

Section  3  (a)  (3)  defines  this  act  of  bankruptcy  as  follows:  Acts 
of  bankruptcy  by  a  person  shall  consist  of  his  having  *  *  * 
suffered  or  permitted,  while  insolvent,  any  creditor  to  obtain  a 
preference  through  legal  proceedings,  and  not  having  at  least  five 
days  before  a  sale  or  final  disposition  of  any  property  affected  by 
such  preference  vacated  or  discharged  such  preference.  Section 
60  (a)  defines  what  shall  constitute  a  preference  in  this  situation  as 
follows :  A  person  shall  be  deemed  to  have  given  a  preference  if, 
being  insolvent,  he  has,  *  *  *  procured  or  suffered  a  judg- 
ment to  be  entered  against  himself  in  favor  of  any  person  *  *  * 
and  the  effect  of  the  enforcement  of  such  judgment  *  *  *  will 
be  to  enable  any  one  of  his  creditors  to  obtain  a  greater  percentage 
of  his  debt  than  any  other  creditor  of  the  same  class. 

This  act  of  bankruptcy  is  like  the  second  act  of  bankruptcy,  in 
that  the  effect  of  the  act  upon  creditors  is  the  same ;  and  they  are 
also  alike,  in  that,  in  each,  insolvency  is  an  element,  and  the  bur- 
den of  establishing  its  existence  is  upon  the  petitioning  creditors  in 
both  cases.  But  there  are  two  important  differences  with  respect  to 
the  nature  of  the  act  or  acts  which  bring  the  common  result  into 
existence:  (1)  The  second  act  of  bankruptcy  involves  a  volun- 
tary transfer  of  property.  The  third  act  of  bankruptcy  does  not 
necessitate  the  voluntary  action  of  the  bankrupt.  Creditors  may 
force  an  insolvent  person  to  commit  the  third  act  by  obtaining  a 
judgment  against  him,  levying  upon  his  property,  ordering  a  sale 
thereof,  and  waiting  for  the  time  specified  in  the  section  to  elapse. 
(2)  Intent  is  an  element  of  the  second  act  of  bankruptcy,  while  in- 
tent is  not  an  element  of  the  third  act. 

The  use  of  the  words  "suft'ered  or  permitted,"  etc.,  may  seem  to 
indicate  that  to  constitute  the  third  act  of  bankruptcy  the  alleged 
bankrupt  must  consent  to  the  entry  of  the  judgment;  but  this  is 
not  the  interpretation  which  has  been  placed  upon  these  words. 
Within  the  meaning  of  this  section,  one  may  suffer  or  permit  a 
judgment  to  be  entered  against  one,  although  one  may  have  done 
everything  within  one's  power  to  prevent  it.  This  interpretation 
leads  to  this  important  distinction  between  the  second  and  third 
acts  of  bankruptcy :  Proof  of  the  commission  of  the  second  act 
of  bankruptcy  must  include  proof  of  intent  to  prefer,  while  proof  of 
the  third  act  of  bankruptcy  does  not  require  proof  of  an  intent  to 
prefer.^^  In  a  great  many  cases,  therefore,  it  will  be  much  easier 
for  creditors  to  obtain  an  adjudication  in  bankruptcy  by  forcing 
their  debtor  to  commit  the  third  act  of  bankruptcy  than  for  them  to 
rely  upon  the  first  or  second  acts;  for  the  proof  will  be  more  easily 
made.    It  is  sometimes  very  difficult  to  prove  an  intent. 

It  should  be  noticed  that  the  third  act  of  bankruptcy  is  not  com- 
mitted at  the  moment  a  judgment  is  obtained  against  an  insolvent 
person.    If  creditors  proceeded  no  further  than  to  obtain  judgment, 

12  Wilson  Brothers  v.  Nelson,  18.3  U.  S.  191,  22  Sup.  Ct.  74,  46  L.  Ed.  147 
(1901)  ;  Citizens'  Banking  Co.  v.  Ravenna"  National  Bank  of  Ravenna,  Ohio, 
234  U.  S.  360,  34  Sup.  Ct.  806,  58  L.  Ed.  1352  (1914). 


430  CONTRACTS  (Part  1 

the  judgment  debtor  never  would  commit  the  third  act  of  bank-- 
ruptcy.  The  judgment  creditor  must  go  further  and  take  out  an  ex- 
ecution upon  the  judgment.  Following  that  he  must  levy  upon 
specific  property  of  the  judgment  debtor  and  then  obtain  an  order 
for  the  judicial  sale  of  such  property  on  a  day  certain.  Even  then 
the  third  act  of  bankruptcy  has  not  been  committed,  for  this  sec- 
tion provides  that  the  act  is  not  complete  until  "at  least  five  days 
before  a  sale  or  final  disposition  of  any  property  afifected  by  such 
preference."  The  judgment  creditor  is  not  required  to  wait  until 
the  sale  actually  occurs,  but  he  must  wait  until  five  days  before 
the  day  arrives  on  which  the  judicial  sale  is  to  take  place. 

The  fourth  class  of  acts  of  bankruptcy,  consisting  of  three  inde- 
pendent acts,  is  defined  in  section  3  (a)  (4),  as  follows:  Acts  of 
Isankruptcy  by  a  person  shall  consist  of  his  having  *  *  *  made 
a  general  assignment  for  the  benefit  of  his  creditors,  or,  being 
insolvent,  applied  for  a  receiver  or  trustee  for  his  property  or  be- 
cause of  insolvency  a  receiver  or  trustee  has  been  put  in  charge- 
of  his  property  under  the  laws  of  a  State,  of  a  Territory,  or  of  the 
United  States. 

A  general  assignment  for  the  benefit  of  creditors  is  a  transfer 
by  the  assignor,  usually  of  all  of  the  transferor's  property  to  a 
person  called  the  assignee,  who  accepts  the  same  and  agrees  to 
care  for  and  dispose  of  the  property  as  directed,  usually  in  a  formal 
document.  State  statutes  sometimes  regulate  general  assignments 
for  the  benefit  of  creditors.  A  general  assignment  is  usually  the 
result  of  insolvency,  the  debtor  adopting  this  procedure  for  set- 
tling with  his  creditors.  While,  as  a  matter  of  fact,  a  general' 
assignment  will  rarely  be  executed  by  a  person  unless  he  is  in- 
solvent, the  Bankruptcy  Act,  in  declaring  that  the  execution  of 
a  general  assignment  shall  constitute  an  act  of  bankruptcy,  does 
not  require  petitioning  creditors  to  prove  that  the  assignor  was 
insolvent,  nor  is  solvency  a  defense  to  a  petition  which  sets  out 
this  act  of  bankruptcy.^^ 

The  remaining  acts  of  bankruptcy  specified  in  section  3  (a)  (4),. 
on  the  other  hand,  do  involve  insolvency.  In  the  first,  if  a  person 
is  in  fact  insolvent  and  applies  for  a  receiver  on  any  ground,  such 
act  constitutes  an  act  of  bankruptcy.  Under  the  last  clause  of  this 
subsection,  the  condition  of  insolvency  is  involved  but  in  a  some- 
what dififerent  way.  If  the  appointment  of  a  receiver  was  because- 
of  insolvency,  then  and  only  then  is  this  act  of  bankruptcy  com- 
mitted. Receivers  may  be  appointed  for  many  reasons  other  than 
because  of  insolvency.  It  is  only  when  the  appointment  of  the  re- 
ceiver is  because  of  insolvency  that  the  court  having  jurisdiction 
of  the  property  may  be  ousted  and  the  administration  of  the  es- 
tate transferred  to  the  federal  courts.-^* 

The  fifth  and  last  act  of  bankruptc}'  is  committed  when  a  person- 
is  West  Co.  V.  Lea,  174  U.  S.  590,  19  Sup.  Ct.  836,  43  L.  Ed.  1098  (1899). 
^  4  In  re  Spalding,  139  Fed.  244,  71  C.  C,  A.  370  (1905). 


Ch.  10)  REMEDIES  431 

has  "admitted  in  writing  his  inability  to  pay  his  debts  and  his  will- 
ingness to  be  adjudged  a  bankrupt  on  that  ground."  This  is  really 
a  substitute  for  voluntary  bankruptcy.  There  may  be  situations 
where,  for  purely  sentimental  reasons,  one  may  prefer  to  be  adjudi- 
cated an  involuntary  bankrupt  rather  than  to  file  a  voluntary  pe- 
tition. In  such  a  case  it  would  likely  not  be  difficult  for  such  per- 
son to  induce  three  of  his  creditors  to  file  an  involuntary  petition, 
where  they  are  given,  as  in  this  instance,  all  the  proof  necessary 
to  an  adjudication.  The  fifth  act  of  bankruptcy  also  has  this 
practical  effect :  Where  one  obtains  a  discharge  from  his  provable 
debts  in  a  voluntary  proceeding,  section  14  (b)  (5)  provides  that  a 
person  will  not  be  entitled  to  a  discharge  if  "in  voluntary  proceed- 
ings [he  has]  been  granted  a  discharge  in  bankruptcy  within  six 
years."  There  is  no  provision  which  prevents  a  bankrupt  adjudi- 
cated in  an  involuntary  proceeding  from  obtaining  a  discharge  just 
as  often  as  he  is  adjudicated.  It  would  seem,  therefore,  that  if  one 
is  adjudicated  on  the  fifth  act  of  bankruptcy,  as  a  practical  mat- 
ter, he  may  avoid  the  provision  limiting  discharges  in  voluntary 
proceedings  to  once  in  six  years. 

A  good  deal  has  been  said  above  concerning  insolvency.  There 
are  at  least  two  conditions  of  affairs  with  which  the  law  is  con- 
cerned, each  of  which  is  called  insolvency ;  but  they  are  not  alike. 
For  example,  in  the  law  of  sales,  as  now  defined  in  the  Sales  Act, 
section  76 :  A.  person  is  insolvent  within  the  meaning  of  this  act 
who  either  has  ceased  to  pay  his  debts  in  the  ordinary  course  of 
business  or  cannot  pay  his  debts  as  they  fall  due,  whether  he  has 
committed  an  act  of  bankruptcy  or  not,  and  whether  he  is  insolvent 
within  the  meaning  of  the  federal  bankruptcy  law  or  not.  The 
Bankruptcy  Act  (section  1,  clause  15)  gives  this  definition:  A 
person  shall  be  deemed  insolvent  within  the  provisions  of  this  act 
whenever  the  aggregate  of  his  property,  exclusive  of  any  property 
which  he  may  have  conveyed,  transferred,  concealed  or  removed, 
or  permitted  to  be  concealed  or  removed,  with  intent  to  defraud, 
hinder  or  delay  his  creditors,  shall  not,  at  a  fair  valuation,  be  suffi- 
cient in  amount  to  pay  his  debts.^"  Insolvency  in  bankruptcy 
proceedings  means,  therefore,  an  excess  of  liabilities  over  assets, 
while  in  the  law  of  sales  and  in  some  other  branches  of  the  law  in- 
solvency, in  addition  to  this  condition,  includes  within  its  meaning 
any  actual  suspension  of  payments  in  the  ordinary  course  of  busi- 
ness. The  bankruptcy  definition  is  obviously  more  favorable  to 
the  debtor. 

In  the  preceding  discussion  of  the  several  acts  of  bankruptcy, 
our  attention  has  been  directed  to  the  nature  of  the-  act  and  to  the 
circumstances  surrounding  its  commission.  There  is  also  a  time 
element  to  be  considered.  Not  every  act  which  satisfies  the  re- 
quirements heretofore  outlined  will  be  sufficient  to  obtain  an  ad- 
judication in  bankruptcy,  but  only  those  acts  which  were  com- 

15  In  re  Hines,   (D.  C.)  144  Fed.  142  (1906). 


432  coxTRACTS  (Part  1 

mitted  within  a  certain  specified  time.  This  period  of  time  is 
four  months;  that  is,  an  act  which  falls  within  the  definitions 
above  stated  will  be  an  act  of  bankruptcy  for  a  period  of  four 
months  but  after  that  period  has  elapsed  the  act  loses  its  force  as 
an  act  of  bankruptcy.  With  respect  to  this  matter,  section  3  (b) 
provides  as  follows :  A  petition  may  be  filed  against  a  person 
who  is  insolvent  and  who  has  committed  an  act  of  bankruptcy 
within  four  months  after  the  commission  of  such  act.  If  this 
were  the  only  provision  on  this  matter,  however,  it  would  be  pos- 
sible for  a  person  to  render  ineffective  the  provisions  of  the  Bank- 
ruptcy Act  in  many  cases  where  it  is  not  now  possible.  To  illus- 
trate: Statutes  of  the  various  states  provide  generally  that  the 
rights  of  grantees  and  mortgagees  of  land  under  deeds  and  mort- 
gages will  not  be  complete  and  indefeasible  as  against  the  claims 
of  judgment  creditors  and  subsequent  bona  fide  purchasers  from 
the  grantor  unless  such  deed  or  mortgage  is  recorded.  If  a  person, 
desiring  to  make  a  fraudulent  conveyance  or  a  preference  of  his 
land,  and  also  desiring  to  avoid  a  bankruptcy  proceeding,  executed 
the  transfer  and  induced  the  grantee  not  to  record  the  deed  or 
mortgage  until  after  the  four  months'  period  from  the  date  of  the 
transfer  had  expired,  he  would  then  be  able  to  defeat  a  petition  in 
bankruptcy  filed  against  him. 

In  order  to  prevent  this  and  other  frauds  upon  the  Bankruptcy 
Act  itself,  the  act  provides  that  the  four  months'  period  will  not 
begin  to  run  from  the  date  of  the  delivery  of  the  deed  or  mortgage 
if  it  is  necessary  to  record  it,  and  that  such  period  will  not  begin 
to  run  until  the  date  of  actual  recording.  This  provision  thus  re- 
moves the  motive  for  withholding  instruments  from  record ;  and 
also  the  act  provides  that  where  required  in  any  sense,  that  the 
four  months'  period  will  not  begin  to  run  until  the  transferee  has 
obtained  actual  possession.  This  prevents  a  person  from  avoiding 
a  proceeding  in  bankruptcy  by  making  a  transfer  and  retaining 
possession  of  the  property  thus  transferred  until  after  the  four 
months'  period  has  expired.  The  language  of  the  act,  in  section 
3  (b),  is  as  follows :  A.  petition  may  be  filed  against  a  person  who 
is  insolvent  and  who  has  committed  an  act  of  bankruptcy  within 
four  months  after  the  commission  of  such  act.  Such  time  shall  not 
expire  until  four  months  after  the  date  of  the  recording  or  register- 
ing of  the  transfer  or  assignment  when  the  act  consists  in  having 
made  a  transfer  of  any  of  his  property  with  intent  to  hinder,  delay 
or  defraud  his  creditors  or  for  the  purpose  of  giving  a  preference 
as  hereinbefore  provided,  or  a  general  assignment  for  the  benefit 
of  his  creditors,  if  by  law  such  recording  or  registering  is  required 
or  permitted,  or,  if  it  is  not,  from  the  date  when  the  beneficiary 
takes  notorious,  exclusive,  or  continuous  possession  of  the  prop- 
erty unless  the  petitioning  creditors  have  received  actual  notice  of 
such  transfer  or  assignment. 

The  question  that  presents  difficulty  here  is  to  determine  when 
recording  is  required  or  permitted  within  the  meaning  of  the  act. 


Ch.  10)  REMEDIES  433 

The  lower  federal  courts  have  not  been  in  agreement  upon  their 
interpretation  of  these  words.  The  interpretation  has  been  settled 
by  the  Supreme  Court  of  the  United  States  to  this  extent:  That 
the  words  "required  or  permitted"  refer  to  a  statute  which  makes 
the  recording  of  an  instrument  a  condition  precedent  to  the  pro- 
tection of  the  grantee  or  mortgagee  against  the  claims  of  creditors 
and  not  subsequent  purchasers.  If  a  statute  merely  requires  or 
permits  recording  to  make  the  transfer  good  against  subsequent 
purchasers,  that  is  not  the  kind  of  a  statute  which  requires  or  per- 
mits recording  within  the  meaning  of  the  section  above  quoted.*® 
A  difficult  question  is  also  presented  when  the  recording  of  an 
instrument  conveying  or  mortgaging  the  property  occurred  be- 
fore the  four  months'  period  next  prior  to  the  filing  of  the  petition, 
but  the  act  of  taking  possession  occurred  within  the  four  months' 
period.  This  often  happens  where  there  has  been  a  mortgage  in 
terms  covering  after-acquired  property.  Whether  the  act  of  tak- 
ing possession  or  the  execution  of  the  instrument  is  the  act  of 
bankruptcy  depends  upon  the  view  of  the  state  courts  where  the 
instrument  was  executed  as  to  the  legal  effect  of  the  instrument; 
that  is,  a  state  court  is  privileged  to  hold  that  the  act  of  taking  pos- 
session under  a  prior  mortgage  is  not  a  transfer;  that  the  real 
legal  transfer  occurred  as  of  the  date  of  the  execution  and  delivery 
of  the  instrument.*' 

(3j  ADMINISTRATION  OF  THE  ESTATE 
The  steps  taken  in  a  bankruptcy  proceeding  under  the  pro- 
visions commented  upon  above  are  all  preliminary  to  that  which 
follows,  namely,  the  administration  of  the  bankrupt's  estate.  The 
procedure  which  has  been  outlined  terminated  in  the  entry  of  the 
order  of  adjudication.  Thereafter,  in  the  fullest  sense  of  the  term, 
the  person  proceeded  against  is  a  bankrupt.  The  adjudication 
works  a  revolution  in  the  relations  which  the  bankrupt  thereto- 
fore sustained  with  respect  to  his  property'  and  with  respect  to 
his  creditors.  The  rights  of  his  creditors  likewise  have  under- 
gone vital  changes.  The  powers  of  all  courts,  other  than  the 
court  possessing  jurisdiction  over  the  estate,  are,  for  most  pur- 
poses, destroyed.  After  the  first  meeting  of  creditors,  at  which  the 
trustee  is  usually  elected,  the  real  administration  of  the  estate  be- 
gins. By  the  expression  "the  administration  of  an  estate"  is 
meant  the  assumption,  performance,  and  discharge  of  all  the  duties 
pertaining  to  the  collection  of  the  bankrupt's  property,  to  its  sale, 
and  to  the  distribution  of  the  proceeds  arising  therefrom  among 
creditors.  Two  general  lines  of  work  are  involved :  (1)  The  trus- 
tee must  obtain  control  over  all  property  owned  by  the  bankrupt, 

ic  Carey  v.  Donohue,  240  U.  S.  430,  36  Sup.  Ct.  386,  60  L.  Ed.  726,  L.  R.  A. 
1917A,  295  (1916). 

17  Thompson  v.  Fairbanks,  196  U.  S.  516,  25  Sup.  Ct.  306,  49  L.  Ed.  577 
(1905). 

B.&  B.Bus.Law— 28 


434  CONTRACTS  (Part  1 

and  must  recover  all  sums  of  money  due  the  bankrupt.  (2)  The 
trustee  must  see  to  it  that  such  property  is  made  to  yield  the  high- 
est possible  return,  and  that  it  is  distributed  in  accordance  with 
the  provisions  of  the  bankrupt  act  among  the  various  classes  of 
creditors.  Of  course,  all  of  these  acts  must  be  done  under  the 
supervision  and  by  the  authority  of  the  federal  court,  or,  as  is 
commonly  the  case,  under  the  immediate  control  of  an  officer  of 
the  federal  court  called  the  referee  in  bankruptcy. 

A  casual  survey  of  the  work  which  must  be  accomplished  by  the 
trustee  might  indicate  that  the  legal  problems  connected  therewith 
would  be  relatively  simple  and  perhaps  few  in  number.  Such  is 
not  necessarily  the  case.  There  are  many  bankruptcy  proceedings 
which  are  rushed  through  with  but  little  difficulty,  but  there  are 
others  where  the  legal  aspects  become  numerous  and  very  involved. 
Note  the  situation  which  may  be  presented:  A  large  business 
enterprise  is  suddenly  stopped  in  the  administration  of  its  affairs. 
All  the  legal  ties  which  connected  the  owner  to  all  other  persons 
with  respect  to  the  properties  are  cut,  or,  if  not  completely  severed, 
they  are  materially  altered.  An  attempt  is  then  made  to  introduce 
another  person,  the  trustee,  not  only  into  the  position  which  the 
bankrupt  occupied,  but  also,  to  some  extent,  into  the  position  oc- 
cupied by  creditors.  All  of  the  elaborate  provisions  of  the  Bank- 
ruptcy Act  are  simply  devices  for  bringing  about  such  a  condition 
of  affairs  that  the  ultimate  ends  of  the  proceeding  may  be  realized. 
If  a  bankrupt  owed  only  simple  contract  debts,  and  his  property 
was  not  incumbered,  and  if  he  had  not  theretofore  made  fraudulent 
conveyances-  or  preferential  transfers,  and  if  he  had  no  incomplete 
business  transactions  outstanding,  settlement  of  the  estate  would 
be.  relatively  easy.  But  this  situation  is  not  always  present.  The 
bankrupt's  property  may  be  mortgaged.  He  may  have  borrowed 
money  and  pledged  property  as  security.  He  may  have  various 
kinds  of  sureties.  He  may  have  been  fighting  bankruptcy  for  some 
time,  and  accordingly  may  have  made  many  preferential  transfers 
and  even  fraudulent  conveyances.  Various  creditors  may  have  ob- 
tained judgments  against  him,  and  the  proceedings  thereunder 
may  be  in  various  stages  of  development.  Innumerable  incom- 
plete transactions,  of  purchases  and  of  sales  of  property,  may  be 
discovered  by  the  trustee.  The  properties,  the  creditors,  and  vari- 
ous business  transactions  still  pending,  may  be  scattered  over 
many  states.  There  can  be  little  doubt,  therefore,  but  that  the 
settlement  of  some  bankrupt  estates  may  not  only  call  for  a  high 
order  of  business  judgment,  but  also  for  a  knowledge  of  a  wide 
range  of  the  law  in  some  of  its  most  intricate  phases.  Very  little 
may  here  be  attempted  in  discussing  the  problems  that  may  arise 
during  the  administration  of  a  bankrupt  estate.  A  few  of  the  more 
prominent  points,  however,  will  be  treated. 

The  position  of  the  trustee  with  respect  to  the  administration  of 
the  bankrupt  estate  may  be  dealt  with  conveniently  under  three 
heads :      (a)    Methods   of   obtaining   control    over    the   bankrupt's 


Ch.  10)  REMEDIES  435 

property;  (b)  extent  of  the  right  of  the  trustee  to  recover  prop- 
erty which  may  be,  wholly  or  partial!}-,  under  the  control  of  other 
persons ;    (c)  payment  of  claims. 

(a)  TITLE  TO  BANKRUPT'S  PROrEKTY  VESTS  IN  THE  TRUSTEE 
In  order  to  confer  upon  the  trustee  the  power  to  control  and 
to  dispose  of  all  of  the  bankrupt's  property,  the  Bankruptcy  Act 
operates  to  take  the  ownership  of  the  property  from  the  bankrupt 
and  vests  it  in  the  trustee.  Section  70  provides  as  follows:  (a) 
The  trustee  of  the  estate  of  a  bankrupt,  upon  his  appointment  and 
qualification,  and  his  successor  or  successors,  if  he  shall  have  one 
or  more,  upon  his  or  their  appointment  and  qualification,  shall  in 
turn  be  vested  by  operation  of  law  with  the  title  of  the  bankrupt, 
as  of  the  date  he  was  adjudged  a  bankrupt,  except  in  so  far  as  it  is 
to  property  which  is  exempt,  to  all  (1)  documents  relating  to  his 
property;  (2)  interests  in  patents,  patent  rights,  copyrights,  and 
trade  marks;  (3)  powers  which  he  might  have  exercised  for  his 
own  benefit,  but  not  those  which  he  might  have  exercised  for  some 
other  person;  (4)  property  transferred  by  him  in  fraud  of  his 
creditors;  (5)  property  which  prior  to  the  filing  of  the  petition 
he  could  by  any  means  have  transferred  or  which  might  have  been 
levied  upon  and  sold  under  judicial  process  against  him:  Pro- 
vided, that  when  any  bankrupt  shall  have  any  insurance  policy 
which  has  a  cash  surrender  value  payable  to  himself,  his  estate,  or 
personal  representatives,  he  may,  within  thirty  days  after  the  cash 
surrender  value  has  been  ascertained  and  stated  to  the  trustee  by 
the  company  issuing  the  same,  pay  or  secure  to  the  trustee  the  sum 
so  ascertained  and  stated,  and  continue  to  hold,  own,  and  carry 
such  policy  free  from  the  claims  of  the  creditors  participating  in 
the  distribution  of  his  estate  under  the  bankruptcy  proceedings, 
otherwise  the  policy  shall  pass  to  the  trustee  as  assets;  and  (6) 
rights  of  action  arising  upon  contracts  or  from  the  unlawful  tak- 
ing or  detention  of,  or  injury  to,  his  property. 

It  is  necessary,  of  course,  that  the  statute  shall  fix  the  precise 
moment  at  which  title  to  the  bankrupt's  property  shall  vest  in  the 
trustee,  and  the  date  fixed  is  the  date  on  which  the  court  enters  the 
order  of  adjudication.  However,  at  that  moment  there  will  never 
be  a  trustee  in  bankruptcy  who  can  take  title,  because  the  trustee 
will  not  be  appointed  until  the  first  meeting  of  creditors,  which 
meeting  will  not  occur  until  several  days  later.  Accordingly,  it  is 
held  that,  after  adjudication  and  until  the  trustee  is  appointed  and 
qualified,  the  bankrupt  still  retains  the  title,  although  it  is  a  title 
held  in  trust  for  creditors.^* 

The  remaining  portion  of  the  section  specifies  in  detail  certain 
kinds  of  property  and  then  employs  clauses  of  sweeping  character 
for  the  purpose  of  including  all  other  kinds  of  valuable  things  and 
vesting  the  title  thereto  in  the  trustee.     Clause  5  is  the  principal 

18  Johnson  t.  Collier.  222  U.  S.  53S,  32  Sup.  Ct.  104.  m  L.  Ed.  306  (1911). 


436  CONTRACTS  (Part  1 

one.  Instead  of  attempting  to  enumerate  all  of  the  various  kinds  of 
property  and  of  interests  in  property,  Congress  selected  language 
here  which  already  had  a  definite  meaning  in  the  law.  It  is  per- 
fectly obvious  that  courts  frequently  have  been  called  upon  to 
decide  what  kinds  of  interests  in  property  could  be  transferred  and 
what  kinds  of  interests  could  be  sold  by  judicial  process.  Gen- 
erally, but  not  always,  any  interest  capable  of  transfer  was  like- 
wise capable  of  sale  under  execution  but  not  always  under  com- 
mon law  execution.  The  two  phrases  taken  together  are  probably 
as  all-inclusive  and  as  satisfactory  from  a  standpoint  of  policy  as 
could  well  be  devised.  The  use  of  these  clauses  makes  it  unneces- 
sary to  specify  the  numerous  kinds  of  divided  interests  in  property, 
as,  for  example,  the  respective  interests  of  mortgagor  and  mort- 
gagee, pledgor  and  pledgee,  bailor  and  bailee,  the  interests  of  ten- 
ants in  common,  future  interests  in  property,  etc.  There  are  some 
kinds  of  future  interests,  or  rather  possibilities,  that  are  so  con- 
tingent that  they  are  not  transferable,  nor  may  they  be  levied 
upon.  Such  interests,  of  course,  would  not  pass  to  the  trustee. 
The  clause,  however,  may  be  taken  as  including  practically  every 
interest  relating  to  property  which  one  deems  valuable  from  a 
business  standpoint.  It  is  not  to  be  supposed  that  the  clause  is  so 
definite  in  meaning  that  no  controversy  arises  in  regard  to  its  in- 
terpretation, for  frequently  such  questions  are  presented.  For 
example,  the  question  whether  a  seat  in  a  stock  exchange  was 
property  within  the  meaning  of  this  section  was  carried  to  the 
Supreme  Court  of  the  United  States  for  settlement,  and  it  was  de- 
cided that  such  a  right  was  property  and  that  such  right  passed  to 
the  trustee.^*  And  there  are  many  other  questions  of  like  dififi- 
culty  that  have  arisen.  It  follows,  also,  that  the  trustee  will  not 
take  title  to  property  held  by  the  bankrupt  as  trustee  for  other 
persons.^*' 

Where  the  bankrupt  does  not  have  complete  ownership  in  prop- 
erty, persons  who  possess  interests  in  it  are,  of  course,  protected 
to  the  extent  of  their  respective  rights.  Third  parties  who  hold 
liens  upon  the  bankrupt's  property  are  protected  under  some  cir- 
cumstances. Section  67  (d)  provides :  Liens  given  or  accepted  in 
good  faith  and  not  in  contemplation  of  or  in  fraud  upon  this  act, 
and  for  a  present  consideration,  which  have  been  recorded  accord- 
ing to  law,  if  record  thereof  was  necessary  in  order  to  import  no- 
tice, shall,  to  the  extent  of  such  present  consideration  only,  not  be 
affected  by  this  act. 

Section  70  (a),  clause  6,  includes  valuable  rights  that  are  not 
true  rights  with  respect  to  property.  For  the  most  part  they  are 
contract  rights.  It  is  under  this  clause  that  the  trustee  proceeds 
to  collect  debts  due  the  bankrupt.  Notice  that  the  clause  gives 
to  the  trustee  the  right  to  recover  for  some,  but  not  all,  kinds  of 

19  Page  V.  Edmunds,  1S7  U.  S.  596,  23  Sup.  Ct.  200.  47  L.  Ed.  318  (1903). 
2  0  In  re  Coffin,  152  Fed.  381,  81  C.  C.  A.  507  (1907). 


Ch.  10)  REMEDIES  437 

torts.  The  right  to  sue  for  damages  to  the  person  does  not  pass 
to  the  trustee. 

Clause  4  confers  upon  the  trustee  a  right  which  was  not  pos- 
sessed by  the  bankrupt.  While  a  fraudulent  conveyance  may  be 
treated  as  if  it  had  not  been  made  by  creditors  of  the  fraudulent 
grantor  as  against  all  persons  not  innocent  purchasers;  the  fraudu- 
lent grantor  cannot  recover  his  property.  Clause  4,  therefore, 
gives  to  the  trustee  rights  with  respect  to  fraudulent  conveyances 
which  creditors  possessed  under  state  statutes.  Section  70  (e) 
further  amplifies  this  provision  as  follows :  The  trustee  may  avoid 
any  transfer  by  the  bankrupt  of  his  property  which  any  creditor 
of  such  bankrupt  might  have  avoided,  and  may  recover  the  prop- 
erty so  transferred,  or  its  value,  from  the  person  to  whom  it  was 
transferred,  unless  he  was  a  bona  fide  holder  for  value  prior  to  the 
date  of  adjudication. 

The  title  acquired  by  the  trustee  is  not  only  the  title  possessed 
by  the  bankrupt,  but  his  rights  are  farther  extended  by  the  pro- 
visions of  section  47  (a)  (2)  as  follows :  *  *  *  And  such 
trustees,  as  to  all  property  in  the  custody  or  coming  into  the  cus- 
tody of  the  bankruptcy  court,  shall  be  deemed  vested  with  all  the 
rights,  remedies,  and  powers  of  a  creditor  holding  a  lien  by  legal 
or  equitable  proceedings  thereon;  and  also,  as  to  all  property  not 
in  the  custody  of  the  bankruptcy  court,  shall  be  deemed  vested 
with  all  the  rights,  remedies,  and  powers  of  a  judgment  creditor 
holding  an  execution  duly  returned  unsatisfied. 

(b)  RECOVERY  OF  PROPERTY  AND  DISSOLUTION  OF  LIENS 
There  are  three  general  situations  where  legal  proceedings  are 
likely  to  be  necessary  in  order  to  recover  possession  of  property 
or  to  remove  attaching  liens:  (1)  Fraudulent  conveyances;  (2) 
preferences ;  (3)  liens  other  than  those  which  operate  as  prefer- 
ences. The  trustee  is  not  empowered  to  recover  all  property  fraud- 
ulently conveyed  nor  all  preferences.  Nor  may  the  trustee  take 
property  of  the  bankrupt  free  from  all  liens.  The  general  principle 
is  that  all  bona  fide  purchasers  of  property  fraudulently  conveyed, 
and  of  property  transferred  as  preferences  and  bona  fide  holders 
of  liens  may  retain  their  interests  free  from  the  claims  of  the  trus- 
tee, even  when  such  interests  were  acquired  within  the  four 
months'  period,  and  all  such  transferees  who  were  not  bona  fide 
purchasers  will  lose  their  interests  if  acquired  within  the  four 
months'  period,  but  if  such  interests  arose  before  the  four  months' 
period  began  to  run  the  trustee  cannot  recover  such  interests  even 
though  the  holders  thereof  were  not  bona  fide  purchasers.  Inter- 
ests acquired  bona  fide  during  the  four  months'  period  are  pro- 
tected. Interests  acquired  not  bona  fide  during  the  four  months' 
period  may  be  dissolved  by  action  of  the  trustee.  Interests  ac- 
quired not  bona  fide  before  the  commencement  of  the  four  months' 
period  cannot  be  recovered  by  the  trustee.  These  results  are  ac- 
complished by  the  following  sections : 


438  CONTRACTS  (Parti 

Section  67  (e)  :  That  all  conveyances,  transfers,  assignments, 
or  incumbrances  of  his  property,  or  any  part  thereof,  made  or 
given  by  a  person  adjudged  a  bankrupt  under  the  provisions  of 
this  Act  subsequent  to  the  passage  of  this  Act  and  within  four 
months  prior  to  the  filing  of  the  petition,  with  the  intent  and  pur- 
pose on  his  part  to  hinder,  delay,  or  defraud  his  creditors,  or  any 
of  them,  shall  be  null  and  void  as  against  the  creditors  of  such 
debtor,  except  as  to  purchasers  in  good  faith  and  for  a  present 
fair  consideration ;  and  all  property  of  the  debtor  conveyed,  trans- 
ferred, assigned,  or  encumbered  as  aforesaid  shall,  if  he  be  adjudg- 
ed a  bankrupt,  and  the  same  is  not  exempt  from  execution  and  lia- 
bility for  debts  by  the  law  of  his  domicile,  be  and  remain  a  part  of 
the  assets  and  estate  of  the  bankrupt  and  shall  pass  to  his  said 
trustee,  whose  duty  it  shall  be  to  recover  and  reclaim  the  same  by 
legal  proceedings  or  otherwise  for  the  benefit  of  the  creditors. 
And  all  conveyances,  transfers,  or  incumbrances  of  his  property 
made  by  a  debtor  at  any  time  within  four  months  prior  to  the  fil- 
ing of  the  petition  against  him,  and  while  insolvent,  which  are 
held  null  and  void  as  against  the  creditors  of  such  debtor  by  the 
laws  of  the  State,  Territory,  or  District  in  which  such  property  is 
situate,  shall  be  deemed  null  and  void  under  this  Act  against  the 
creditors  of  such  debtor  if  he  be  adjudged  a  bankrupt,  and  such 
property  shall  pass  to  the  assignee  and  be  by  him  reclaim.ed  and 
recovered  for  the  benefit  of  the  creditors  of  the  bankrupt. 

Section  60  (b)  :  If  a  bankrupt  shall  have  procured  or  suffered 
a  judgment  to  be  entered  against  him  in  favor  of  any  person  or 
have  made  a  transfer  of  any  of  his  property,  and,  if  at  the  time  of 
the  transfer,  or  of  the  entry  of  the  judgment,  or  of  the  recording  or 
registering  of  the  transfer  if  by  law  recording  or  registering  thereof 
is  required,  and  being  within  four  months  before  the  filing  of  the 
petition  in  bankruptcy  or  after  the  filing  thereof  and  before  the 
adjudication,  the  bankrupt  be  insolvent  and  the  judgment  or  trans- 
fer then  operate  as  a  preference,  and  the  person  receiving  it  or 
to  be  benefited  thereby,  or  his  agent  acting  therein,  shall  then 
have  reasonable  cause  to  believe  that  the  enforcement  of  such 
judgment  or  transfer  would  effect  a  preference,  it  shall  be  voidable 
by  the  trustee  and  he  may  recover  the  property  or  its  value  from 
such  person." 

Section  67  (f)  :  That  all  levies,  judgments,  attachments,  or  oth- 
er liens,  obtained  through  legal  proceedings  against  a  person  who 
is  insolvent,  at  any  time  within  four  months  prior  to  the  filing  of 
a  petition  in  bankruptcy  against  him,  shall  be  deemed  null  and 
void  in  case  he  is  adjudged  a  bankrupt,  and  the  property  affected 
by  the  levy,  judgment,  attachment,  or  other  lien  shall  be  deemed 
wholly  discharged  and  released  from  the  same,  and  shall  pass  to 
the  trustee  as  a  part  of  the  estate  of  the  bankrupt,  unless  the  court 
shall,  on  due  notice,  order  that  the  right  under  such  levy,  judgment, 
attachment,  or  other  lien  shall  be  preserved  for  the  benefit  of  the 
estate;  and  thereupon  the  same  may  pass  to  and  shall  be  preserved 


Ch.  10)  REMEDIES  439 

by  the  trustee  for  the  benefit  of  the  estate  as  aforesaid.  And  the 
court  may  order  such  conveyance  as  shall  be  necessary  to  carry  the 
purposes  of  this  section  into  effect:  Provided,  that  nothing  herein 
contained  shall  have  the  effect  to  destroy  or  impair  the  title  ob- 
tained by  such  levy,  judgment,  attachment,  or  other  lien,  of  a  bona 
fide  purchaser  for  value  who  shall  have  acquired  the  same  without 
notice  or  reasonable  cause  for  inquiry. 

(c)     FAYIMENT  OF  CLAIilS 

The  nature  and  extent  of  the  rights  and  powers  of  the  trustee 
with  respect  to  the  bankrupt's  property  have  been  outlined  in  the 
above  paragraphs.  When  these  rights  have  been  exercised  to  their 
fullest  extent,  the  trustee  then  has  in  his  possession  all  of  the  prop- 
erty to  which  creditors  may  look  as  a  source  of  payment.  By  rea- 
son of  the  title  to  such  property  which  the  law  vests  in  him,  the 
trustee  has  a  complete  power  of  disposition  of  the  property,  sub- 
ject only  to  the  approval  of  the  court.  We  have  yet  remaining 
for  consideration  the  question  of  the  duty  of  the  trustee  with  re- 
spect to  the  payment  of  claims. 

Provable  claims  are  divided  into  three  classes:  (1)  Claims  hav- 
ing a  priority ;  (2)  secured  claims ;  (3)  unsecured  claims.  Claims 
entitled  to  priority  of  payment  are  specified  in  section  64  as  fol- 
lows: 

(a)  The  court  shall  order  the  trustee  to  pay  all  taxes  legally 
due  and  owing  by  the  bankrupt  to  the  United  States,  state,  county, 
district,  or  municipality  in  advance  of  the  payment  of  dividends  to 
creditors,  and  upon  filing  the  receipts  of  the  proper  public  officers 
for  such  payment  he  shall  be  credited  with  the  am.ount  thereof,  and 
in  case  any  question  arises  as  to  the  amount  or  legality  of  any 
such  tax  the  same  shall  be  heard  and  determined  by  the  court. 

(b)  The  debts  to  have  priority,  except  as  herein  provided,  and 
to  be  paid  in  full  out  of  the  bankrupt  estates,  and  the  order  of 
payment  shall  be  (1)  the  actual  and  necessary  cost  of  preserving 
the  estate  subsequent  to  filing  the  petition ;  (2)  the  filing  fees 
paid  by  creditors  in  involuntary  cases,  and,  where  property  of  the 
bankrupt,  transferred  or  concealed  by  him  either  before  or  after 
the  filing  of  the  petition,  shall  have  been  recovered  for  the  benefit 
of  the  estate  of  the  bankrupt  by  the  efforts  and  at  the  expense  of 
one  or  more  creditors,  the  reasonable  expenses  of  such  recovery; 
(3)  the  cost  of  administration,  including  the  fees  and  mileage  pay- 
able to  witnesses  as  now  or  hereafter  provided  by  the  laws  of  the 
United  States,  and  one  reasonable  attorney's  fee,  for  the  profes- 
sional services  actually  rendered,  irrespective  of  the  number  of 
attorneys  employed,  to  the  petitioning  creditors  in  involuntary 
cases  to  the  bankrupt  in  involuntary  cases  while  performing  the 
duties  herein  prescribed,  and  to  the  bankrupt  in  voluntary 
cases,  as  the  court  may  allow;  (4)  wages  due  workmen,  clerks, 
traveling  or  city  salesmen,  or  servants  which  have  been  earned 


440  CONTRACTS  (Part  1 

within  three  months  before  the  date  of  the  commencement  of 
proceedings,  not  to  exceed  three  hundred  dollars  to  each  claimant ; 
and  (5)  debts  owing  to  any  person  who  by  the  laws  of  the  states 
or  the  United  States  is  entitled  to  priority. 

A  secured  creditor  is  one  who,  either  directly  or  indirectly,  has  a 
right  with  respect  to  specific  property  belonging  to  the  bankrupt, 
either  by  way  of  mortgage,  pledge  or  other  lien.  If  such  right  was 
acquired  by  the  secured  creditor  bona  fide  or  if  in  any  event  it 
was  acquired  before  the  four  months'  period  commenced  to  run, 
such  creditor  will  be  paid  the  value  of  this  right  and  as  to  the  bal- 
ance of  his  claim,  he  will  share  pro  rata  with  unsecured  credi- 
tors. Section  57  (h)  provides:  The  value  of  securities  held  by 
secured  creditors  shall  be  determined  by  converting  the  same  into 
money  according  to  the  terms  of  the  agreement  pursuant  to  which 
such  securities  were  delivered  to  such  creditors  or  by  such  credi- 
tors and  the  trustee,  by  agreement,  arbitration,  compromise,  or  liti- 
gation, as  the  court  may  direct,  and  the  amount  of  such  value  shall 
be  credited  upon  such  claims,  and  a  dividend  shall  be  paid  only 
on  the  unpaid  balance. 

After  secured  creditors  have  been  paid,  the  value  of  their  se- 
curities they  and  all  general  creditors  are  paid  pro  rata  out  of  the 
remaining  assets  of  the  estate.  Creditors  are  allowed  one  year 
subsequent  to  the  date  of  the  adjudication  within  which  claims 
must  be  filed.  Creditors  who  have  received  preferences,  fraudu- 
lent conveyances  and  liens  which,  under  sections  previously  dis- 
cussed, may  be  avoided  by  the  trustee,  must,  under  section  57  (g) 
surrender  such  rights  as  a  condition  precedent  to  their  right  to 
receive  dividends  from  the  estate.  If  such  preferences,  convey- 
ances and  liens  are  not  recoverable  by  the  trustee,  because  the 
claimant  is  a  bona  fide  purchaser  or  has  acquired  such  interests 
before  the  beginning  of  the  four  months'  period,  they  need  not 
surrender  such  rights,  but  may  participate  with  all  other  creditors 
for  the  full  amount  of  their  respective  claims.  If  a  creditor  of  a 
bankrupt  whose  claim  is  secured  by  the  individual  undertaking  of 
another  person  does  not  prove  his  claim,  the  surety  is  given  the 
right  by  section  57  (i)  to  prove  in  the  name  of  the  creditor. 


SECTION  11.— RECEIVERSHIPS 

A  receiver  is  a  person  appointed  by  a  court,  upon  whom  are  con- 
ferred certain  rights  and  duties  with  respect  to  property  which  is 
the  subject  of  litigation.  His  chief  duty  is  to  preserve  such 
property  from  loss  pending  the  outcome  of  the  suit.  There  ex- 
ists, obviously,  a  great  variety  of  situations  where  two  or  more 
parties  are  interested  in  the  same  property.  When  these  interests 
become  sharply  antagonistic,  and  litigation  between  the  contending 
claimants  results,  the  property  may  be  so  situated  that  the  very 
fact  of  its  being  the  subject  of  a  judicial  proceeding  will  make  its 


CIl.  10)  REMEDIES  441. 

protection  by  a  disinterested  party  necessary.  The  possibility  of  a 
fraudulent  disposition  of  the  property  during  the  pendency  of 
the  suit  often  serves  as  a  ground  for  the  appointment  of  a  receiver. 
So  also,  in  the  absence  of  a  possible  fraudulent  disposition  of  the 
properties  involved,  the  fact  that  they  are  being  employed  in  some 
productive  enterprise  will  be  sufficient  to  warrant  the  appointment 
of  a  receiver.  The  mere  fact  that  the  property  affected  by  the  liti- 
gation is  yielding  income  may  make  it  advisable  that  a  receiver  be 
appointed  and  directed  to  care  for  the  principal  and  income  until 
the  controversy  is  terminated.  Broadly  speaking,  therefore,  the 
court  will  appoint  a  receiver  to  assume  the  possession  of  prop- 
erty over  which  the  court  has  acquired  jurisdiction  whenever,  as 
a  business  proposition,  it  seems  necessary  or  desirable  to  do  so,  in 
order  to  insure  its  preservation  and  proper  employment  during  the 
time  that  the  litigation  is  pending. 

It  thus  appears  that  the  application  for  the  appointment  of  a 
receiver  generally  will  not  be  an  independent  suit,  for  it  is  not  the 
ultimate  remedy  sought  by  the  complainant.  The  appointment  of 
the  receiver,  for  the  most  part,  is  incidental  to  some  other  relief 
sought.  Accordingly,  in  suits  to  foreclose  mortgages,  or  by  bene- 
ficiaries of  a  trust  against  the  trustee,  by  stockholders  against 
directors  or  against  third  parties  in  the  name  of  the  corporation, 
by  creditors  to  reach  equitable  assets  of  their  debtor,  or  in  con- 
nection with  the  settlement  of  decedents'  estates,  in  bankruptcy 
proceedings  after  the  filing  of  the  petition  and  before  the  appoint- 
ment and  qualification  of  the  trustee,  receivers  may  be  appointed 
by  the  court  to  assume  control  over  the  property  which  is  involved 
in  the  action.  The  remedy,  perhaps,  is  most  frequently  invoked 
by  creditors,  but  it  is  not  exclusively  a  creditors'  remedy. 

We  shall  not  attempt  to  survey  the  extent  of  a  receiver's  powers, 
rights,  and  duties  with  respect  to  the  property  entrusted  to  his 
care,  or  to  define  his  relations  toward  the  parties  involved  and  to 
the  court.  It  is  sufficient  to  observe  that  the  receiver  assumes 
possession  of  the  property  and  is  directed  to  manage  and  protect  it, 
and  to  perform  any  other  acts  which  the  court  may  deem  necessary 
to  protect  the  interests  of  all  parties  concerned.  A  receiver  does 
not  usually  take  title  to  the  property,  as  does  a  trustee  in  bank- 
ruptcy. Generally  the  position  of  the  receiver  is  not  defined  so 
particularly  as  that  of  a  trustee  in  bankruptcy.  There  is  but  one 
kind  of  trustee  in  bankruptcy,  and,  in  every  bankruptcy  proceeding, 
the  ultimate  end  sought  is  substantially  like  that  of  every  other 
bankruptcy  proceeding.  This  is  not  the  case  with  respect  to  re- 
ceivers. There  are  various  kinds  of  receivers,  and  the  suits  in 
connection  with  which  their  appointment  may  be  had  may  be  wide- 
ly variant  in  the  ultimate  relief  sought.  Courts  possessing  the 
jurisdiction  of  courts  of  equity  have  worked  out  a  fairly  well  de- 
fined system  of  rules  with  respect  to  receiverships.  Statutes 
which  deal  with  special  matters  very  commonly  contain  provisions 
with  reference  to  the  appointment  of  receivers.     The  position  of  a 


442  CONTRACTS  (Part  1 

receiver  appointed  under  a  special  statute,  in  some  respects,  would 
differ  from  that  of  a  receiver  appointed  under  the  general  jurisdic- 
tion of  courts  of  equity.  But  in  all  cases  the  receiver  is  chiefly  the 
business  representative  of  the  court,  and  is  usually  selected  for  that 
position  because  of  his  known  capacity  in  dealing-  with  business 
situations  like  that  then  before  the  court. 

One  of  the  most  important  uses  of  a  receivership  proceeding  is 
in  connection  with  the  foreclosure  of  corporate  mortgages  and 
the  reorganization  of  corporations  through  judicial  proceedings. 
It  is  in  this  respect  that  a  receivership  bears  closer  resemblance 
to  a  bankruptcy  proceeding  than  is  true  in  other  cases  of  ap- 
pointments of  receivers.  There  is  this  important  distinction :  A 
bankruptcy  proceeding  more  frequently  results  in  an  actual  and 
permanent  suspension  of  the  business  of  the  bankrupt  concern, 
and  its  tangible  properties  are  sold  for  what  they  will  bring  on 
the  market.  In  a  reorganization  proceeding,  usually  associated 
with  the  foreclosure  of  mortgages  or  other  suits  instituted  by 
creditors,  the  primary  object  is  to  preserve  the  business  as  a  going 
concern,  and  to  this  end  all  of  the  various  steps  in  the  proceeding 
are  directed.  The  bankruptcy  proceeding  is  chiefly  relied  upon 
and  is  better  suited  to  the  winding  up  of  an  insolvent  business, 
which  is  involved  in  such  financial  straits  that  it  has  passed  be- 
yond the  point  of  successful  reorganization.  A  receivership  pro- 
ceeding, on  the  other  hand,  as  an  incident  to  creditors'  suits,  by 
reason  of  its  flexibility,  is  more  suited  to  the  reorganization  of 
the  business  enterprise  than  a  proceeding  in  bankruptcy.  The  re- 
ceivership proceeding,  in  its  relation  to  the  procedure  of  reorgani- 
zation of  going  business  concerns  will  be  ta^ken  up  in  more  detail 
in  connection  with  our  study  of  the  law  of  corporations  in  Part  6. 


Ch.  11)  SPECIAL   TYPES   OF   CONTKACTS  44i 


CHAPTER  XI 


SPECIAL  TYPES  OF  CONTRACTS 

Section 

1.  Introduction. 

2.  Bailments. 

3.  Tlie  Coutrnct  of  Carnage. 

4.  The  Contract  of  Pjpclge. 

5.  Tlie    Contract    of    Suretyship. 


SECTION  1.— INTRODUCTION 

In  this  chapter  a  few  cases  have  been  inserted  dealing  with  cer- 
tain special  types  of  contracts.  It  is  not  to  be  understood,  how- 
ever, that  the  contracts  of  bailment  and  of  suretyship  are  so  far 
special  that  they  are  governed  by  rules  of  law  different  from  the 
rules  applicable  to  contracts  generally.  The  general  principles  of 
the  law  of  contracts  which  we  have  already  stated  do  apply  to 
these  contracts.  But  there  are  some  special  circumstances  which 
must  be  taken  into  consideration.  The  contract  of  bailment,  for 
example,  involves  a  transfer  of  possession  of  personal  property 
from  the  bailor  to  the  bailee.  The  law  of  property,  therefore, 
contributes  something  to  the  sum  total  of  legal  relations  between 
the  parties.  An  owner  of  property  or  a  party  in  rightful  posses- 
sion thereof  possesses  a  great  many^  rights,  privileges,  and  powers 
with  respect  to  such  property  which  are  not  dependent  upon  con- 
tract. Parties  may  add  to  or  subtract  from  these  relations.  The 
situation,  therefore,  between  a  bailor  and  bailee,  is  a  composite  one, 
created  out  of  the  law  of  property  and  of  contracts.  Similarly, 
with  respect  to  the  contract  of  suretyships,  the  surety  has  loaned 
his  credit  to  another  person.  He  has  assumed  a  duty  to  discharge 
that  which,  from  a  business  standpoint,  is  purely  a  duty  of  another 
person.  The  law  must  take  this  aspect  of  the  transaction  into 
consideration.  There  is  every  reason  to  suppose  that  a  person 
who  has  assumed  the  obligation  of  discharging  another  person's 
duty  would  be  entitled  to  greater  consideration  than  the  princi- 
pal debtor.  This  the  law  does  accord  to  him.  The  business  situ- 
ation creates  a  legal  situation,  which  does  not  find  its  counter- 
part in  contracts  which  arise  out  of  other  kinds  of  transactions. 
In  this  sense  the  contract  of  suretyship  is  a  special  type  of  contract. 
In  working  out  the  relations  of  the  parties,  the  doctrines  first  rec- 
ognized by  courts  of  equity  play  a  more  active  part  than  they  do  in 
many  other  kinds  of  contracts.  The  purpose,  therefore,  in  giving 
independent  treatment  to  these  important  types  of  commercial 
contracts,  is  to  ascertain  the  nature  and  extent  of  the  rights  and 
duties  of  the  parties  thereto.    Such  rights  and  duties  are  rarely  de- 


444  CONTRACTS  (Part  1 

fined  in  the  formal  contract,  but  they  have  been  developed  by  a 
course  of  judicial  decisions,  as  resulting  from  promises  implied  in 
fact  or  in  law. 


SECTION  2.— BAILMENTS 

A  bailment  is  a  transaction  involving  the  transfer  of  possession 
of  personal  property  by  one  party,  called  the  bailor,  to  another 
party,  called  the  bailee.  Bailments  are  usually  classified  according 
to  the  primary  object  for  which  the  bailment  was  created.  Ac- 
cordingly, we  may  have  (1)  a  bailment  for  the  benefit  of  the  bailor; 
(2)  a  bailment  for  the  benefit  of  the  bailee ;  (3)  a  bailment  for  the 
benefit  of  both  parties.  One  object  of  such  a  classification  of  bail- 
ments is  to  make  possible  a  distinction  between  the  degree  of  care 
which  a  bailee  in  each  type  of  case  owes  with  respect  to  the  care 
of  the  property.  It  is  obvious  that,  if  A.  borrows  B.'s  umbrella,  A. 
should  exercise  a  higher  degree  of  care  than  he  should  where  B. 
obtains  A.'s  permission  to  leave  his  umbrella  in  A.'s  store.  The 
cases  following  point  out  some  of  the  distinctive  aspects  of  a  bail- 
ment, and  discuss  the  extent  of  the  duty  of  the  bailee  with  respect 
to  the  care  of  the  property. 


BRETZ    V.   DIEHLE   et  al. 

(Supreme  Court  of  Pennsvlvania,   188S.     117  Pa.   5S9,   11   Atl.   893, 
2  Am.  St.  Rep.  706). 

Clark,  J.  The  defendants  in  this  case  are  judgment  creditors  of 
William  D.  Newman,  a  miller  operating  a  steam  flouring  mill  in  the 
town  of  Bedford.  Having  issued  executions,  they  levied  on  some  80 
or  90  barrels  of  flour  and  some  bran,  found  on  the  floor  of  Newman's 
mill.  The  plaintiffs  claimed  the  property  levied  upon,  alleging  that 
it  was  the  product  of  grain  by  them  delivered  to  and  held  by  New- 
man as  their  bailee.  *  *  *  The  plaintiffs,  who  are  farmers  resid- 
ing in  the  vicinity  of  Bedford,  brought  their  grain  to  this  mill.  No 
special  contract  or  arrangement  was  made  with  the  miller  by  any  of 
the  plaintiffs  when  they  deHvered  their  wheat;  but  in  accordance  with 
the  practice  of  the  mill  in  all  cases,  except  where  wheat  was  at  once 
paid  for,  a  receipt  or  memorandum  was  given  in  the  following  form : 

"Crystal  Mills,  Bedford,  Pa.,   September  12,  1884. 
Received  from  D.  W.  Lea  Price.  Am't. 

Four  hundred  and  fifty-five  14-60  bushels  wheat 455.14 

"        rye    

"        corn  

Two  hundred  and  fifty-five  12-32        "        oats  255.12 

"        buckwheat 

"For  use  of  self.  W.  D.  Newman." 

The  mill  was  not  arranged  to  keep  the  several  lots  of  grain  in  sep- 
arate parcels.  It  was  so  constructed  that  all  the  grain  delivered  into 
it  was  hoisted  to  the  second  floor,  emptied  into  a  sink  on  the  first 
floor,  and  from  thence  carried  by  elevators  into  a  bin  on  the  third 
floor,  where,  at  times,  there  was  a  large  accumulated  mass  of  wheat. 
Newman  also  purchased  wheat  in  considerable  quantities,  from  time 
to  time,  which  was  delivered  into  the  mill,  and  disposed  of  as  the 


Ch.  11)  SPECIAL   TYPKS   OF   CONTRACTS  445 

other  wheat.  This  promiscuous  commingling  of  the  grain  into  a  com- 
mon mass  was  in  accordance  with  the  known  usage  of  the  mill,  which 
was  supplied  for  grinding  from  the  mass  of  the  wheat,  without  any 
discrimination  as  to  the  several  lots  or  parcels  in  which  it  was  receiv- 
ed. The  miller  was,  of  course,  under  no  obligation  to  restore  to  the 
plaintiffs  the  specific  or  identical  wheat  which  he  received,  nor  the 
product  of  it  in  flour ;  indeed,  this,  owing  to  the  manner  in  which  the 
business   was  conducted,   was   practically   impossible. 

The  fundamental  distinction  between  a  bailment  and  a  sale  is  that 
in  the  former  the  subject  of  the  contract,  although  in  an  altered  form, 
is  to  be  restored  to  the  owner,  wdiile  in  the  latter  there  is  no  obligation 
to  return  the  specific  article ;  the  party  receiving  it  is  at  liberty  to 
return  some  other  thing  of  equal  value  in  place  of  it.  In  the  one  case, 
the  title  is  not  changed ;  in  the  other,  it  is — the  parties  standing  in 
the  relation  of  debtor  and  creditor.  Thus,  in  Norton  v.  Woodruff,  2 
N.  Y.  153,  a  miller  agreed  to  take  certain  wheat  and  to  give  one  bar- 
rel of  superfine  flour  for  every  four  36-60  bushels  thereof ;  the  flour 
to  be  delivered  at  a  fixed  time,  or  as  much  sooner  as  he  could  make 
it.  As  the  miller's  contract  was  satisfied  by  a  delivery  of  flour  from 
any  wheat,  the  transaction  was  held  to  be  a  sale.  But  in  Mallory  v. 
Willis,  4  N.  Y.  76,  wheat  was  delivered  under  a  contract  "to  be  man- 
ufactured into  flour,"  and  one  barrel  of  the  flour  was  to  be  delivered 
for  every  four  15-60  bushels  of  wheat.  This  transaction  was  by 
the  same  court  held  to  be  a  bailment.  If  a  party,  having  charge  of 
the  property  of  others,  so  confounded  it  wnth  his  own  that  the  line  of 
distinction  cannot  be  traced,  all  the  inconvenience  of  the  confusion 
is  thrown  upon  the  party  who  produces  it.  Where,  however,  the  own- 
er's consent  to  have  their  wheat  mixed  in  a  common  mass,  each  re- 
mains the  owner  of  his  share  in  the  common  stock.  If  the  wheat  is 
delivered  in  pursuance  of  a  contract  of  bailment,  the  mere  fact  that 
it  is  mixed  with  a  mass  of  like  quality,  with  the  knowledge  of  the  de- 
positor or  bailor,  does  not  convert  that  into  a  sale  which  was  originally 
a  bailment,  and  the  bailee  of  the  whole  mass,  of  course,  has  no  great- 
er control  of  the  mass  than  if  the  share  of  each  were  kept  separate.  If 
the  commingled  mass  has  been  delivered  on  simple  storage,  each  is  en- 
titled on  demand  to  receive  his  share;  if  for  conversion  into  flour,  to 
his  proper  proportion  of  the  product.     *     *     * 

It  makes  no  difference  that  the  bailee  had  in  like  manner  contrib- 
uted to  the  mass  of  his  own  wheat,  for,  although  the  absolute  owner 
of  his  owni  share,  he  still  stands  as  a  bailee  to  the  others,  and  he  can- 
not abstract  more  than  that  share  from  the  common  stock,  without 
a  breach  of  the  bailment,  which  will  subject  him,  not  only  to  a  civil 
suit,  but  also  to  a  criminal  prosecution.  But  where  *  *  *  the  un- 
derstanding of  the  parties  was  that  the  person  receiving  the  grain 
might  take  from  it,  or  from  the  flour,  at  his  pleasure,  and  appropriate 
the  same  to  his  own  use,  on  the  condition  of  his  procuring  other  wheat 
to  supply  its  place,  the  dominion  over  the  property  passes  to  the  de- 
positorv,  and  the  transaction  is  a  sale,  and  not  a  bailment.  In  Lyon 
V.  Lenon,  106  Ind.  567.  7  N.  E.  311,  the  distinction  is  thus  stated: 
"If  the  dealer  has  the  right  at  his  pleasure,  either  to  ship  and  sell  the 
same,  on  his  own  account  and  pay  the  market  price  on  demand,  or 
retain  and  re-deliver  the  wheat,  or  other  wheat,  in  the  place  of  it,  the 
transaction  is  a  sale.  It  is  only  when  the  bailor  retains  the  right  from 
the  beginning  to  elect  whether  he  will  demand  the  re-delivery  of  his 


446  CONTRACTS  (Part  1 

property,  or  other  of  like  quality  and  grade,  that  the  contract  will  be 
considered  one  of  bailment.  If  he  surrenders  to  the  other  the  right  of 
election,  it  will  be  considered  a  sale,  with  an  option  on  the  part  of  the 
purchaser  to  pay  either  in  money  or  property  as  stipulated.  The  dis- 
tinction is,  can  the  depositor,  by  his  contract,  compel  a  delivery  of 
wheat,  whether  the  dealer  is  willing  or  not?  If  he  can,  the  trans- 
action is  a  bailment.  If  the  dealer  has  the  option  to  pay  for  it  in 
money  or  other  wheat,  it  is  a  sale."  This  distinction  is  drawn,  of 
course,  with  reference  to  cases  where  grain  is  deposited  in  a  mass, 
as  in  grain  elevators,  etc.  There  are  cases  in  which  the  doctrine  of 
bailment  has  been  carried  much  beyond  the  rule  recognized  in  the 
cases  we  have  cited.     *     *     * 

But  in  the  case  at  bar  we  are  not  called  upon  to  say  what  would 
be  the  effect  upon  tlie  transaction  if  Newman  had  authority,  in  the 
regular  course  of  deahng,  to  ship  or  sell  the  wheat  of  his  customers 
on  his  own  account.  Undoubtedly  he  had  a  right  to  sell  of  the  grain 
or  flour  to  the  extent  of  his  own  share,  that  is  to  say,  what  he  con- 
tributed to  the  common  stock  and  the  tolls  to  which  he  was  entitled. 
But  the  jury  has  found  that  he  had  no  authority  whatever  to  sell  or 
to  abstract  from  the  common  stock  beyond  the  amount  to  which  he 
was  himself  entitled.  In  the  general  charge,  and  also  in  the  answers 
to  the  points  submitted,  the  learned  court  instructed  the  jurors,  in  the 
clearest  manner,  that  if  they  should  find  from  the  evidence  that  New- 
man, by  the  nature  of  his  dealings  with  the  several  plaintiff's,  had  ac- 
quired such  dominion  over  their  wheat  as  authorized  him,  at  his 
pleasure,  not  only  to  grind  it  into  flour,  but  also  to  sell  the  same  for 
his  own  use,  the  transaction  must  necessarily  be  treated  as  a  sale; 
and  that,  in  that  event,  the  plaintiff'  could  not  recover.  This  instruc- 
tion was  repeated  with  marked  emphasis  several  times  during  the 
progress  of  the  charge,  and  it  seems  cjuite  impossible  that  the  jury 
could  have  labored  under  any  misapprehension  as  to  the  nature  of 
the  inquiiy  they  were  to  make.  The  verdict  of  the  jury  was  for  the 
plaintiff,  and  we  must  assume  the  facts  which,  it  is  plain,  the  jury  in 
arriving  at  such  a  verdict  must  have  found,  viz..  that  Newman  had 
no  authority  to  sell  the  grain  delivered  into  his  mill  under  the  arrange- 
ment with  the  plaintiffs ;  that  is  to  say,  their  share  of  the  common 
stock,  nor  the  flour  which  was  the  product  thereof.  It  was  the  plain 
duty  of  Newman,  however,  to  see  to  it  that  at  all  times  the  mill  con- 
tained wheat  or  flour  sufficient  in  amount  to  answer  all  demands  un- 
der the  bailment.  Failing  in  this,  he  was  derelict  in  duty,  and  liable 
under  the  law  for  the  appropriation  and  conversion  into  his  own  use 
of  property  which  did  not  belong  to  him.     *     *     * 

The  learned  court  defined  a  bailment  and  a  sale,  marking  the  dis- 
tinguishing features  of  each,  and  as  the  nature  of  the  transaction  de- 
pended, not  wholly  upon  the  written  receipt,  but  hi  part  on  verbal 
evidence  as  to  the  method  of  conducting  the  business,  the  question 
was  undoubtedly  one  proper  to  be  submitted  to  the  jury.  The  court 
instructed  the  jury,  that  if  certain  facts  existed  the  transaction  was 
a  sale,  otherwise  it  was  but  a'  bailment.  And  the  question  was  prop- 
er for  the  jury  whether  or  not,  under  the  instructions  of  the  court, 
according  to  the  facts  as  the  jury  might  find  them,  the  transaction  was 
a  bailment  or  a  sale. 

On  a  careful  review  of  the  whole  case,  we  find  no  error,  and  the 
judgment  is  affirmed.  ' 


Ch.  11)  SPECIAL   TYPES   OP   CONTRACTS  44T 


PRESTON   V.    PRATHER. 

(Supreme  Court  of  the  United  State<?,  1S91.     137  U.  S.  G04,  11  Sup.  Ct.  162, 

34   L.   Ed.    788.) 

FiiCLD,  J.  By  the  defendants  it  was  contended  below  in  substance, 
and  the  contention  is  renewed  here,  that  the  bonds  being  placed  with 
them  on  special  deposit  for  safe-keeping,  without  any  reward,  prom- 
ised or  implied,  they  were  gratuitous  bailees,  and  were  not  chargeable 
for  the  loss  of  the  bonds,  unless  the  same  resulted  from  their  gross 
negligence,  and  they  deny  that  any  such  negligence  is  imputable  to 
them. 

On  the  other  hand,  the  plaintiffs  contended  below,  and  repeat  their 
contention  here,  that,  assuming  that  the  defendants  were  in  fact  simply 
gratuitous  bailees  when  the  bonds  were  deposited  with  them,  they  still 
neglected  to  keep  them  with  the  care  which  such  bailees  are  bound  to 
give  for  the  protection  of  property  placed  in  their  custody,  and  further, 
that  subsequently  the  character  of  the  bailment  was  changed  to  one  for 
the  mutual  benefit  of  the  parties.    *    *     * 

Undoubtedly,  if  the  bonds  were  received  by  the  defendants  for  safe- 
keeping, without  compensation  to  them  in  any  form,  but  exclusively  for 
the  benefit  of  the  plaintiffs,  the  only  obligation  resting  upon  them  was 
to  exercise  over  the  bonds  such  reasonable  care  as  men  of  common  pni- 
dence  would  usually  bestow  for  the -protection  of  their  own  property  of 
a  similar  character.  No  one  taking  upon  himself  a  duty  for  another 
without  consideration  is  bound,  either  in  law  or  morals,  to  do  more 
than  a  man  of  that  character  would  do  generally  for  himself  under 
like  conditions.  The  exercise  of  reasonable  care  is  in  all  such  cases 
the  dictate  of  good  faith.  An  utter  disregard  of  the  property  of  the 
bailor  would  be  an  act  of  bad  faith  to  him.  But  what  will  constitute 
such  reasonable  care  will  vary  with  the  nature,  value  and  situation  of 
the  property,  the  general  protection  afforded  by  the  police  of  the  com- 
munity against  violence  and  crime,  and  the  bearing  of  surrounding 
circumstances  upon  its  security.  The  care  usually  and  generally 
deemed  necessary  in  the  community  for  the  security  of  similar  prop- 
erty, under  like  conditions,  would  be  required  of  the  bailee  in  such 
cases,  but  nothing  more.  The  general  doctrine,  as  stated  by  text- 
writers  and  in  judicial  decisions,  is  that  gratuitous  bailees  of  another's 
property  are  not  responsible  for  its  loss  unless  guilty  of  gross  negli- 
gence in  its  keeping.  But  gross  negligence  in  such  cases  is  nothing 
more  than  a  failure  to  bestow  the  care  which  the  property  in  its  situ- 
ation demands ;  the  omission  of  the  reasonable  care  required  is  the 
neghgence  which  creates  the  liability ;  and  whether  this  existed  is 
a  question  of  fact  for  the  jury  to  determine,  or  by  the  court  where  a 
jury  is  waived.  *  *  *  fhe  doctrine  of  exemption  from  liability  in 
such  cases  was  at  one  time  carried  so  far  as  to  shield  the  bailees  from 
the  fraudulent  acts  of  their  own  employes  and  officers,  though  their 
employment  embraced  a  supervision  of  the  property;  such  acts  not 
being  deemed  within  the  scope  of  their  employment. 

Thus  in  Foster  v.  Essex  Bank,  17  Mass.  479,  9  Am.  Dec.  168,  the 
bank  was,  in  such  a  case,  exonerated  from  liability  for  the  property 
intrusted  to  it,  which  had  been  fraudulently  appropriated  by  its  cashier,, 
the  Supreme  Judicial  Court  of  Massachusetts  holding  that  he  had 
acted  without  the  scope  of  his  authority,  and,  therefore,  the  bank  was 


448  CONTRACTS  (Part  1 

not  liable  for  his  acts  any  more  than  it  would  have  been  for  the  acts 
of  a  mere  stranger.     *     *     * 

As  stated  above,  the  reasonable  care  which  persons  should  take  of 
property  intrusted  to  them  for  safe-keeping  without  reward  will  neces- 
sarily vary  with  its  nature,  value  and  situation,  and  the  bearing  of 
surrounding  circumstances  upon  its  security.  The  business  of  the 
bailee  will  necessarily  have  some  effect  upon  the  nature  of  the  care 
required  of  him,  as,  for  example,  in  the  case  of  bankers  and  banking 
institutions,  having  special  arrangements,  by  vaults  and  other  guards, 
to  protect  property  in  their  custody.  Persons  therefore  depositing 
valuable  articles  with  them,  expect  that  such  measures  will  be  taken 
as  will  ordinarily  secure  the  property  from  burglars  outside  and  from 
thieves  within,  and  that  whenever  ground  for  suspicion  arises  an  ex- 
amination will  be  made  by  them  to  see  that  it  has  not  been  abstracted 
or  tampered  with ;  and  also  that  they  will  employ  fit  men,  both  in  abil- 
ity and  integrity,  for  the  discharge  of  their  duties,  and  remove  those 
employed  whenever  found  wanting  in  either  of  these  particulars.  An 
omission  of  such  measures  would  in  most  cases  be  deemed  culpable 
negligence,  so  gross  as  to  amount  to  a  breach  of  good  faith,  and  con- 
stitute a  fraud  upon  the  depositor. 

It  was  this  view  of  the  duty  of  the  defendants  in  this  case,  who 
were  engaged  in  business  as  bankers,  and  the  evidence  of  their  neglect, 
upon  being  notified  of  the  speculations  in  stocks  of  their  assistant 
cashier,  who  stole  the  bonds,  to  make  the  necessary  examination  re- 
specting the  securities  deposited  with  them,  or  to  remove  the  speculat- 
ing cashier,  which  led  the  court  to  its  conclusion  that  they  were  guilty 
of  gross  negligence.  It  was  shown  that  about  a  year  before  the  assist- 
ant cashier  absconded  the  defendant  Kean,  who  was  the  chief  officer 
of  the  banking  institution,  was  informed  that  there  was  some  one  in 
the  bank  speculating  on  the  Board  of  Trade  at  Chicago.  Thereupon 
Kean  made  a  quiet  investigation,  and  the  facts  discovered  by  him 
pointed  to  Ker,  whom  he  accused  of  speculating.  Ker  replied  that  he 
had  made  a  few  transactions,  but  was  doing  nothing  then  and  did  not 
propose  to  do  anything  more,  and  that  he  was  then  about  a  thousand 
dollars  ahead,  all  told.  It  was  not  known  that  Ker  had  any  other 
property  besides  his  salary.  His  position  as  assistant  cashier  gave  him 
access  to  the  funds  as  well  as  the  securities  of  the  bank,  and  he  was  aft- 
erwards kept  in  his  position  without  any  effort  being  made  on  the  part 
of  the  defendants  to  verify  the  truth  of  his  statement,  or  whether  he 
had  attempted  to  appropriate  to  his  own  use  the  property  of  others. 

Again,  about  two  months  before  Ker  absconded,  one  of  the  defend- 
ants, residing  at  Detroit,  received  an  anonymous  communication,  stat- 
ing that  some  one  connected  with  the  bank  in  Chicago  was  speculat- 
ing on  the  Board  of  Trade.  He  thereupon  wrote  to  the  bank,  calling 
attention  to  the  reported  speculation  of  some  of  its  employees,  and 
suggesting  inquiry  and  a  careful  examination  of  its  securities  of  all 
kinds.  On  receipt  of  this  communication  Kean  told  Ker  what  he  had 
heard,  and  asked  if  he  had  again  been  speculating  on  the  Board  of 
Trade.  Ker  replied  that  he  had  made  some  deals  for  friends  in  Can- 
ada, but  the  transactions  were  ended.  The  defendants  then  entered 
upon  an  examination  of  their  books  and  securities,  but  made  no  effort 
to  ascertain  whether  the  special  deposits  had  been  disturbed.  Upon 
this  subject  the  court  below,  in  giving  its  decision  (Prather  v.  Kean, 
29  Fed.  498),  after  observing  that  the  defendants  knew  that  Ker  had 


Ch.  11)  SPECIAL  TYPES   OF  CONTRACTS  449 

been  engaged  in  business  which  was  hazardous  and  that  his  means 
were  scant,  and  after  commenting  upon  the  demoraHzing  effect  of 
speculating  in  stocks  and  grain,  as  seen  in  the  numerous  speculations, 
embezzlements,  forgeries  and  thefts  plainly  traceable  to  that  cause, 
and  the  free  access  by  Ker  to  valuable  securities,  which  were  trans- 
ferable'by  delivery,  easily  abstracted  and  converted,  and  yet  his  being 
allowed  to  retain  his  position  without  any  effort  to  see  that  he  had 
not  converted  to  his  own  use  the  property  of  others,  or  that  his  state- 
ments were  correct,  held  that  it  was  gross  negligence  in  the  defendants 
not  to  discharge  him  or  place  him  in  some  position  of  less  responsi- 
bility.   In  this  conclusion  we  fully  concur. 

The  second  position  of  the  plaintiff's  is  also  well  taken,  that,  as- 
suming the  defendants  were  gratuitous  bailees  at  the  time  the  bonds 
were  placed  with  them,  the  character  of  the  bailment  was  subsequently 
changed  to  one  for  the  mutual  benefit  of  the  parties.  It  appears  from 
the  findings  that  the  plaintiffs,  subsequently  to  their  deposit,  had  re- 
peatedly asked  for  a  discount  of  their  notes  by  the  defendants,  oft'er- 
ing  the  latter  the  bonds  deposited  with  them  as  collateral,  and  that  such 
discounts  were  made.  When  the  notes  thus  secured  were  paid,  and  the 
defendants  called  upon  the  plaintiffs  to  know  what  they  should  do 
with  the  bonds,  they  were  informed  that  they  were  to  hold  them  for  the 
plaintiffs'  use  as  previously.  The  plaintiffs  had  already  written  to  the 
defendants  that  they  desired  to  keep  the  bonds  for  an  emergency,  and 
also  that  they  wished  at  times  to  overdraw  their  account,  and  that  they 
would  consider  the  bonds  as  security  for  such  overdrafts.  From  these 
facts  the  court  was  of  opinion  that  the  bonds  were  held  by  the  defend- 
ants as  collateral  to  meet  any  sums  which  the  plaintiffs  might  over- 
draw; and  the  accounts  show  that  they  did  subsequently  overdraw  in 
numerous  instances. 

The  deposit,  by  its  change  from  a  gratuitous  bailment  to  a  security 
for  loans,  became  a  bailment  for  the  mutual  benefit  of  both  parties,  that 
is  to  say,  both  were  interested  in  the  transactions.  For  the  bailor  it 
obtained  the  loans,  and  to  that  extent  was  to  his  advantage ;  and  to  the 
bailee  it  secured  the  payment  of  the  loans,  and  that  was  to  his  ad- 
vantage also.  The  bailee  was  therefore  required,  for  the  protection 
of  the  bonds,  to  give  such  care  as  a  prudent  owner  would  extend  to 
his  own  property  of  a  similar  kind,  being  in  that  respect  under  an  ob- 
ligation of  a  more  stringent  character  than  that  of  a  gratuitous  bailee, 
but  differing  from  him  in  that  he  thereby  became  liable  for  the  loss 
of  the  property  if  caused  by  his  neglect,  though  not  amounting  to  gross 
negligence.     *     *     * 

It  follows,  therefore,  that  whether  we  regard  the  defendants  as 
gratuitous  bailees  in  the  first  instance,  or  as  afterwards  becoming 
bailees  for  the  mutual  benefit  of  both  parties,  they  w.ere  liable  for  the 
loss  of  the  bonds  deposited  with  them.  And  the  measure  of  the  re- 
covery was  the  value  of  the  bonds  at  the  time  they  were  stolen. 

Judgment  affirmed. 
B.&  B.Bus.Law— 29 


450  CONTRACTS  (Part  1 


RUBIN  V.  HUHN. 

(Supreme  Judicial  Court  of  Massacliusetts,  1918.     229  Mass.  126, 
118  N.  E.  290,  4  A.  L.  R.  1190.) 

Action  by  Myer  Rubin  against  Samuel  I.  Huhn.  There  was  a  find- 
ing for  plaintiff,  and  the  case  was  reported  to  the  appellate  division  of 
the  municipal  court  of  the  city  of  Boston,  which  dismissed  the  report, 
and  defendant  appeals. 

Pierce,  J.  The  defendant  assumed  at  most  the  obligation  of  a 
gratuitous  bailee  when,  in  the  lobby  of  a  theater  crowded  with  peo- 
ple, he  received  from  one  Wyner  a  pair  of  diamond  earrings  in  a  box 
and  at  the  request  of  Wyner  then  and  there  undertook  to  inspect, 
examine  and  appraise  them  without  reward.  *  *  *  The  duty 
which  the  law  imposes  on  gratuitous  bailees  is  that  the  bailee  shall  act 
in  good  faith ;  that  is,  shall  use  tlie  degree  of  care  in  the  performance 
of  the  undertaking  which  is  measured  by  the  carefulness  which  the 
depository  uses  toward  his  own  property  of  similar  kind  under  like 
circumstances.     *     *     * 

In  an  action  of  contract  or  of  tort  for  breach  of  duty  imposed  by 
law,  the  mere  fact  "that  the  defendant  dropped  one  of  the  earrings  and 
it  was  lost,"  is  not  sufficient  evidence  of  his  gross  negligence  to  war- 
rant a  finding  for  the  plaintiff.  The  ruling  of  the  judge  "that  the  de- 
fendant, in  handling  and  dealing  with  the  earrings  did  not  exercise 
such  care  as  a  reasonably  prudent  man  would  have  exercised  under 
the  circumstances,"  imposed  upon  the  defendant,  a  gratuitous  bailee, 
a  standard  of  care  which  measures  the  duty  of  a  bailee  for  hire.  This 
was  manifest  error.     *     *     * 

It  follows  that  the  order  of  the  municipal  court,  "Report  dismissed," 
must  be  affirmed.     *     *     * 


BECK  V.  WILKINS-RICKS  CO. 

(Supreme  Court  of  North  Carolina,  1920.     179  N.  C.  231.  102  S.   E.  313, 

9  A.   L.  R.   554.) 

Action  for  damages  for  the  destruction  of  an  automobile  while  in 
the  defendant's  garage  for  repairs.  The  plaintiff  took  his  car  to  the 
garage  for  certain  minor  repairs.  During  the  night  the  building  was 
destroyed  by  fire  and  the  car  with  it.  At  close  of  plaintiff's  evidence 
the  court  sustained  a  motion  for  judgment  as  of  nonsuit,  and  the  plain- 
tiff excepted  and  appealed. 

Clark,  C.  J.  The  defendant  as  bailee  assumed  liability  of  ordi- 
nary care  for  the  safe-keeping  and  the  return  of  the  machine  to  the 
bailor  in  good  condition.  The  bailee  did  not  assume  liability  as  in- 
surer, and  therefore  did  not  become  liable  for  the  return  of  the  prop- 
erty in  good  condition  if  he  observed  the  ordinary  care  devolved  upon 
him  by  reason  of  the  bailment.  If  the  machine  had  been  injured  or 
stolen  or  destroyed  by  fire  while  in  his  custody,  the  defendant  would 
not  be  liable  if  such  care  had  been  observed.  On  the  other  hand,  the 
mere  fact  that  the  property  had  been  destroyed  by  fire  or  stolen  did 
not  absolve  him  from  responsibility,  any  more  than  he  would  have 
been  absolved  if  it  had  been  injured  in  his  custody,  unless  he  had 
shown  that  he  had  used  the  care  required  of  him  by  virtue  of  his  bail- 
ment.   The  burden  of  proving  negligence  was  on  the  plaintiff',  and  this 


Ch.  11)  SPECIAL  TITES   OF   CONTRACTS  451 

burden  does  not  shift;  but  when  it  was  shown,  or  admitted,  that  the 
machine  was  not  returned  by  reason  of  its  being  destroyed  or  stolen, 
Or  that  it  was  returned  in  injured  condition,  it  was  the  duty  of  the 
defendant  to  "go  forward"  with  proof  to  show  that  it  had  used  proper 
care  in  the  baihnent.  Therefore  it  was  error  for  the  court  to  with- 
draw the  case  from  the  jury  and  thus  to  hold,  as  a  matter  of  law,  that 
the  defendant  had  exercised  proper  care.     *     *     * 

It  is  sufficient  to  say  *  *  *  that  the  failure  of  the  bailee  to 
return  the  property,  with  the  admission  that  it  has  been  burned, 
made  out  a  prima  facie  case,  which  devolved  upon  the  defendant  the 
duty  of  going  forward  with  proof  that  it  had  discharged  its  duty  of 
proper  care  while  intrusted  with  the  custody  of  the  plaintiff's  automo- 
bile. Upon  the  evidence,  this  was  the  proper  subject  of  inquiry  which 
the  plaintift  was  entitled  to  have  investigated  by  the  jury. 

The  judgment  of  nonsuit  is  reversed.     *     *     * 


SECTION  3.— THE  CONTRACT  OF  CARRIAGE 

The  contract  between  shipper  and  carrier  is  a  bailment  with  the 
added  obligation  upon  the  bailee  to  transport  and  deliver  the  prop- 
erty bailed.  Carriers  are  of  two  kinds,  common  carriers  and  pri- 
vate carriers.  A  common  carrier  is  a  carrier  either  of  goods  or  pas- 
sengers, or  both,  who  holds  himself  out  as  one  engaged  in  the 
business  of  furnishing  transportation  for  all  those  who  may  request 
such  service.  A  common  carrier  serves  the  public  generally.  The 
common  instances  of  common  carriers  are  the  railroads,  the  street 
railways,  steamship  lines,  express  companies,  and  fast  freight  lines. 

The  contract  of  the  common  carrier  to  transport  goods  differs 
from  the  contract  of  the  private  carrier  in  that,  for  reasons  of  pub- 
lic policy,  certain  obligations  have  been  imposed  by  law  upon  the 
common  carrier,  irrespective  of  the  carrier's  assent,  which  are  not 
imposed  upon  the  private  carrier.  Stated  in  its  broadest  form,  the 
common  carrier  is  an  insurer  for  the  safe  and  expeditious  trans- 
portation of  the  goods  which  it  has  received  for  carriage;  that  is, 
the  common  carrier  will  be  liable  for  loss  or  damage  to  the  goods 
whether  the  loss  or  damage  was  caused  by  its  negligence  or  not. 
This  is  virtually  the  imposition  of  an  absolute  liability.  There  are, 
however,  certain  common-law  exceptions  to  this  rule  of  absolute 
liability.  These  exceptions  are  taken  up  in  the  cases  following. 
After  noting  the  common-law  exceptions  it  will  be  found  in  the 
cases,  that  the  liability  of  the  common  carriers  as  a  matter  of 
practice  has  been  cut  down  still  further  by  contract  between  ship- 
per and  carrier.  The  question  as  to  the  extent  of  the  common 
carrier's  liability  then  narrows  itself  down  to  the  inquiry  as  to 
the  legality  of  these  limitations  of  liability. 

This  inquiry  has  two  aspects:  First,  to  what  extent  may  the 
liability  of  the  common  carriers  be  limited  under  common  law  prin- 
ciples? Second,  to  what  extent  have  statutes  of  the  various  states 
and  of  Congress  changed  these  common  law  principles?  It  scarce- 
ly needs  to  be  mentioned  that  the  body  of  law  usually  referred  to 


452  CONTRACTS  (Part  1 

as  the  law  of  carriers,  is  very  extensive,  and,  while  its  content  is  in 
large  measure  made  up  of  rules  developed  by  the  application  of 
general  principles  of  the  law  of  contract  and  of  torts,  knowledge  of 
its  subject-matter  could  not  be  gained  without  a  study  of  the  cases 
which  have  arisen  in  this  field.  The  few  cases  here  presented 
merely  call  attention  to  some  of  the  more  important  aspects  of  the 
contract  between  shipper  and  carrier. 


SEABOARD  AIR  LINE  RY.   v.   MILLIN. 

(Supreme  Court  of  Florida,  1915.     70  Fla.  4.50,  70  South.  467,  L.  R.  A.  1916D, 
982,  Ann.  Cas.   1918A,  576.) 

Whitfield,  J.  An  action  was  brought  by  Mullin  against  the  car- 
rier to  recover  damages  for  the  loss  of  freight  injured  by  a  flood  in 
transit.  There  was  judgment  for  the  plaintiff,  and  the  defendant  took 
writ  of  error.     *     *     * 

A  carload  of  household  goods  being  transported  in  interstate  com- 
merce from  Ocala,  Fla.,  to  Youngstown,  Ohio,  was  negligently  de- 
layed en  route  before  it  reached  Atlanta,  Ga.  After  leaving  Atlanta 
and  before  reaching  destination  the  goods  were  injured  by  an  un- 
precedented flood— an  act  of  God — which  could  not  reasonably  have 
been  foreseen  when  the  negligent  delay  occurred.  If  there  had  been 
no  delay  in  the  transportation  before  reaching  Atlanta,  the  shipment 
might  have  been  completed  without  injury  from  the  flood. 

The  liability  of  a  common  carrier  of  goods  is  that  of  an  insurer; 
and  in  cases  of  loss  of  or  injury  to  goods  intrusted  to  it  for  trans- 
portation no  excuse  avails  the  carrier,  except  that  such  loss  or  injury 
was  caused  by  the  act  of  God,  or  by  the  public  enemies  of  the  state  or 
by  the  sole  fault  of  the  shipper  or  his  agent.  1  Moore  on  Carriers, 
306.     *     *     * 

Where  in  the  course  of  transportation  goods  are  injured  by  an 
unprecedented  flood  and  there  is  no  negligence  on  the  part  of  the 
common  carrier  in  taking  care  of  the  goods  or  otherwise,  the  loss 
is  attributable  to  the  flood  as  an  act  of  God,  and  the  carrier  is  not 
liable.  *  *  *  g^t  where  the  flood  should  have  been  anticipated 
in  time  to  save  the  goods,  or  the  carrier  was  negligent  in  not  protect- 
ing the  goods,  or  exposed  the  goods  to  the  flood,  or  tortiously  with- 
held the  goods,  or  so  deviated  from  the  proper  route  as  to  amount  to 
a  conversion  of  the  goods,  or  the  negligence  of  the  carrier  contributes 
directly  to  the  injury,  or  the  carrier  fails  to  provide  reasonably  ade- 
quate and  safe  facilities  which  directly  contributed  to  the  injury,  the 
carrier  is  liable.     [Citing  cases.] 

In  Read  v.  Spaulding,  30  N.  Y.  360,  86  Am.  Dec.  426,  Green- 
Wheeler  Shoe  Co.  V.  Chicago,  R.  I.  &  P.  R.  Co.,  130  Iowa,  123,  106 
N.  W.  498,  5  L.  R.  A.  (N.  S.)  882,  8  Ann.  Cas.  45,  *  *  *  and 
other  somewhat  similar  cases,  the  courts  hold  that  when  there  is  a 
negligent  delay  by  a  common  carrier  in  transporting, goods,  and  sub- 
sequently before  reaching  destination  the  goods  are  injured  by  an 
act  of  God  that  could  not  reasonably  have  been  foreseen  at  the  time  of 
the  negligent  delay,  the  carrier  is  liable.  *  *  *  g^ch  holdings  are 
presumably  predicated  upon  the  theory  that  the  delay  is  a  concurring 
and  proximate  cause  of  the  loss  or  injury,  or  that  because  of  the  delay 
the  law  enlarges  the  liability  of  the  common  carrier  by  withdrawing  the 


Ch.  11)  SPECIAL   TYPES   OF   CONTPvACTS  453 

exemption  from  liability  that  usually  exists  when  goods  in  transit  are 
injured  by  an  act  of  God, 

The  United  States  Supreme  Court  and  the  courts  of  a  number 
of  the  states  hold  that  a  delay  in  transportation  which  places  the 
shipment  in  the  track  of  an  unprecedented  flood  is  a  remote  and  not 
a  proximate  cause  of  an  injury  to  the  shipment  by  the  flood,  and 
the  carrier  is  not  liable  merely  because  of  the  delay.  Such  courts 
base  the  exemption  of  the  carrier  from  liability  upon  the  ground  that 
the  delay  was  too  remote  and  that  the  proximate  cause  of  the  injury, 
to  wit,  the  destructive  act  of  God,  could  not  have  been  foreseen  and 
provided  against  as  a  probable  result  of  the  negligent  delay.  In  this 
view  the  carrier  is  held  not  liable  even  though  the  injury  would  not 
have  occurred  but  for  the  previous  delay  in  transportation  which  caus- 
ed the  shipment  to  be  in  the  track  of  the  flood.     *     *     * 

Actionable  negligence  exists  when  a  loss  or  injury  to  one  with- 
out fault  results  directly  from  another's  mere  negligence,  or  when  the 
loss  or  injury  sustained  by  one  is  such  as  results  in  ordinary  natural 
sequence  from  the  negligence,  or  such  as  naturally  and  ordinarily 
should  have  been  regarded  as  a  probable,  not  as  a  merely  possible, 
result  of  the  simple  negligence  of  another.  Conversely,  wdien  the  loss 
or  injury  is  not  a  direct  result  of  the  mere  negligence,  and  the  loss 
or  injury  is  not  a  natural  ordinary  sequence  or  such  as  naturally  and 
ordinarily  should  have  been  regarded  as  a  probable,  and  not  a  merely 
possible,  result  of  the  simple  negligence,  the  negligence  is  not  action- 
able. *  *  *  If  an  independent  efficient  cause  intervenes  between 
the  negligence  and  the  injury,  and  the  original  negligence  does  not 
directly  contribute  to  the  force  or  effectiveness  of  the  intervening  cause, 
the  original  negligence  is  not  regarded  as  a  proximate  cause  of  the 
injury,  even  though  the  injury  might  not  have  occurred  but  for  the 
original  negligence.  A  proximate  cause  stands  next  in  causal  rela- 
tion to  the  eft'ect.  *  *  *  ^  proximate  cause  produces  the  result 
in  continuous  sequence,  and  without  which  the  result  would  not  have 
occurred.  *  *  *  j^  this  case  the  carrier  was  merely  negligent  in 
delaying  the  shipment,  there  being  no  conversion  in  law -or  deviation 
from  the  proper  route  or  malconduct  or  lack  of  reasonably  adequate 
and  safe  facilities.  There  w-as  subsequent  to  the  delay  "no  negligence 
which  in  any  manner  contributed  to  the  loss  or  damage,"  as  is  expressly 
stipulated.  An  assumption  that  the  goods  would  not  have  been  in- 
jured had  the  carrier  not  negligently  delayed  the  shipment  en  route 
before  the  flood  happened  will  not  conclusively  show  liability  of  the 
carrier,  since  the  negligent  delay  did  not  directly  cause  or  contribute 
to  the_ injury  and  had  no  causal  relation  to,  and  did  not  contribute  to, 
the  injury  or  to  the  effectiveness  of  the  flood,  the  direct  cause  of  the 
injury,  and  any  character  of  injury  to  the  shipment  from  an  unprece- 
dented flood  could  not  reasonably  be  regarded  as  being  an  ordinary 
natural  sequence  or  as  naturally  and  ordinarily  a  probable  result  oi 
the  merely  negligent  delay  during  a  period  when  there  was  nothing  to 
foretell  an  unusual  flood  on  the  route.     *     *     * 

The  Interstate  Commerce  Act  does  not  render  carriers  liable  for 
injuries  to  shipments  that  are  caused  by  an  act  of  God.  *  *  * 
The  delay  in  transportation  prior  to  the  injury  was  "caused  by"  the 
defendant,  but  the  injury  to  the  goods,  was  "caused  by"  an  unprece- 
dented flood — an  act  of  God — the  preceding  negligence  of  the  carrier 


454  CONTRACTS  (Part  1 

in  delaying  the  shipment  having-  merel}^  a  casual  relation  and  not  a 
causal  relation  to  the  act  of  God  and  the  injury. 
The  judgment  is  reversed. 


ALASKA  COAST  CO.  v.  ALASKA  BARGE  CO. 

(Supreme  Court  of  Washington,  1914.     79  Wash.  216,  140  Tac.  334, 
L.  R.  A.  1915C,  423.) 

GosE,  J.  This  is  an  action  upon  a  charter  party  for  damages  sus- 
tained to  a  steamboat,  it  being  alleged  that  the  charterer  breached  its 
contract  in  failing  to  return  the  boat  in  good  condition. 

The  appellant,  being  the  owner  of  the  steamship  Jeannie,  chartered 
it  to  the  respondent  for  voyages  from  Pnget  Sound  to  ports  in  south- 
eastern Alaska.     *     *     * 

After  the  Jeannie  v^as  turned  over  to  the  respondent,  it  struck  some 
unknown,  submerged  object  in  Frederick  Sound  in  Alaskan  waters, 
threw  a  i^ropeller  blade,  and  otherwise  damaged  the  ship.  The  ship 
was  returned  to  appellant  in  damaged  condition,  and  this  action  is 
brought  to  recover  the  amount  of  such  damages.     *     *     * 

The  first  question  to  be  considered  is  :  Was  the  accident  which  caused 
the  damage  an  "act  of  God"?     *     *     * 

The  facts  touching  the  cause  of  the  accident  are  these:  The  chief 
engineer  testified :  "I  know  she  struck  something  hard,  something  sub- 
merged, and  broke  one  of  the  blades,  and  put  everything  out  of  line. 
*  *  *  She  gave  a  sudden  stop  and  then  started  off.  *  *  * 
Struck  something  submerged.  I  don't  know  whether  it  was  a  log 
or  a  chunk  of  ice,  or  it  might  have  been  a  rock."  The  master  of  the 
ship  testified  that  the  accident  happened  in  the  middle  of  Frederick 
Sound,  3  miles  from  land,  in  about  125  fathoms  of  water,  in  clear 
weather,  with  the  sea  "smooth  as  glass."  He  further  said :  "I  felt 
a  jar,  but  you  can  feel  a  jar  when  a  ship  loses  a  blade.  It  might  be 
a  submerged  body;  it  probably  was;  I  don't  know.  I  want  to  say 
that  I  don't  know.  I  just  felt  the  jar."  The  accident  happened  in 
the  month  of  September,  in  the  daytime.  It  was  stipulated  that  the 
chief  mate  would,  if  called  as  a  witness,  testify  that  he  was  watch  offi- 
cer on  the  bridge  at  the  time  of  the  accident,  and  that  he  did  not  see 
or  hear  of  any  floating  objects  at  or  near  that  time.  The  testimony 
does  not  show  whether  icebergs  were  to  be  anticipated  at  the  time 
and  place  of  the  accident. 

This  is  far  from  showing  that  the  act  could  not  have  happened  by 
the  intervention  of  man.  It  leaves  the  cause  of  the  accident  to  specu- 
lation. The  most  that  can  be  said  is  that  it  may  have  been  caused  by. 
the  act  of  man.  We  are  not  required  to  adopt  the  strict  rule  laid 
down  by  Judge  Shipman  and  quoted  in  the  excerpt  from  Ihe  Majestic, 
viz.,  that,  if  it  were  possible  that  the  injury  was  caused  by  the  act 
of  man,  the  respondent  should  be  held.  Under  the  authorities,  it  is 
at  least  required  to  show  by  a  preponderance  of  the  evidence  that  an 
"act  of  God"  was  the  cause  of  the  injurv.  In  this  it  has  signally 
failed.     *     *     * 

The  case  will  be  remanded,  with  directions  to  the  trial  court  to  ascer- 
tain the  damage  and  enter  judgment  for  the  amount  thereof.     *     *     * 


Ch.  11)  SPECIAL  TYPES  OF   CONTRACTS  455 

MORRISOiN  &  CO.,  Limited,  v.  SHAW,    SAVILL  &  ALBION  CO.,  Limited. 
(Commercial  Court,  1916.     {191G]  1  K.  B.  Div.  747.) 

The  action  was  brought  to  recover  the  sum  of  £4013.  19s.  7d.,  the 
agreed  value  of  158  bales  of  dumped  greasy  wool  shipped  at  Napier, 
New  Zealand,  in  the  defendants'  steamship  Tokomaru,  for  carriage 
to  London  under  two  bills  of  lading. 

BailhachE,  J.  The  defendants'  steamship  Tokomaru,  bound  from 
New  Zealand  to  London  with  a  valuable  cargo  on  board,  was  making 
for  the  port  of  Havre  on  January  30,  1915.  She  was  within  seven  or 
eight  miles  of  the  coast  and  some  twelve  or  thirteen  miles  from  Havre, 
when  at  about  9  o'clock  in  the  morning  she  was  torpedoed  by  the  Ger- 
man submarine  U21  and  sank  with  her  cargo.  Amongst  the  cargo  were 
158  bales  of  greasy  wool  belonging  to  the  plaintiffs,  who  held  two 
bills  of  lading  covering  this  shipment  at  Napier  in  New  Zealand. 
Both  bills  of  lading  are  in  the  same  form  and  both  are  dated  Novem- 
ber 19,  1914.  The  agreed  value  of  the  wool  is  £4013.  19s.  7d.,  and 
the  plaintiffs  sue  the  defendants  for  this  sum  upon  the  simple  and,  as 
they  allege,  sufficient  grotmd  that  the  wool  was  lost  while  the  Toko- 
maru was  deviating  from  her  voyage  to  London. 

The  defendants  deny  that  there  was  any  deviation.  They  assert 
that  the  Tokomaru  was  intending  to  call  at  Havre  to  discharge  a  par- 
cel of  frozen  meat,  and  that  her  so  doing  was  within  the  liberties  re- 
served to  them  by  the  bills  of  lading  held  by  the  plaintiff's.  Alter- 
natively, and  while  admitting  that  deviation  destroys  the  bill  of  lading 
exceptions,  they  say  that  they  were  common  carriers,  with  the  com- 
mon-law exceptions  of  act  of  God  and  the  king's  enemies,  and  that 
they  are  thus  protected,  and  they  further  say  that  the  deviation  was 
not  the  cause  of  the  loss.  It  is  between  these  conflicting  contentions 
that  I  have  to  decide.     *     *     * 

The  real  question  is :  Were  the  defendants  entitled  to  call  there  un- 
der the  terms  of  their  bill  of  lading?  In  deciding  this  question  I 
must  bear  in  mind  that  deviation  has  always  been  looked  upon  as  a 
grave  breach  of  contract.  *  =h  *  jj^  j^-iy  judgment  the  Tokomaru 
was  not  justified,  to  quote  their  own  words,  "in  deviating  from  our 
ordinary  route  without  specific  provision  being  made  for  it  in  the  bill 
of  lading."  That  sentence  exactly  expresses  my  view.  In  my  judg- 
ment, when  the  route  and  ports  of  call  of  a  line  of  steamships  have 
become  stereotyped,  mere  general  words  in  their  own  bill  of  lading 
giving  liberty  to  call  at  intermediate  ports  will  not  justify  their  calling 
at  some  entirely  fresh  intermediate  port.  The  truth  is  the  defend- 
ants were  tempted  by  a  high  rate  of  freight  to  run  risks  which  they 
recognized  as  possible,  but  regarded  as  improbable.  Unfortunately  the 
improbable  happened. 

The  remaining  points  may  be  dealt  with  briefly.  The  effect  of  devi- 
ation is  to  displace  the  contract  of  carriage  during  and  after  devia- 
tion. *  *  *  From  the  point  of  deviation,  at  any  rate,  the  ship- 
owner becomes  at  best  a  common  carrier.  The  defendants  say  that 
he  is  a  common  carrier  with  the  common-law  exceptions  of  act  of 
God  and  king's  enemies  in  his  favour.  Let  me  assume  that,  of  what 
use  are  those  exceptions  to  the  defendants  in  this  case?  As  I  under- 
stand it  the  law  stands  thus.  When  a  ship  deviates  and  loss  of  or 
damage  to  cargo  occurs,  either  by  act  of  God  or,  as  here,  by  the 


456  CONTRACTS  (Part  1 

king's  enemies,  it  is  not  open  to  her  owners  to  set  up  either  exception. 
Those  exceptions  apply  and  apply  only  to  a'  carrier  who  is  perform- 
ing his  contract,  and  never  to  a  carrier  who  is  breaking  it,  unless  he 
can  show  that  the  loss  or  damage  must  have  occurred  in  any  event. 

*  *  *  The  most  that  can  be  said  is  that  the  Tokomaru  might  have 
been  torpedoed  if  she  had  continued  on  her  course  to  London,  and 
that  avails  the  defendants  nothing.  The  only  case  that  occurs  to  me 
as  likely  to  arise  in  practice  in  which  a  shipowner  can  hope  to  escape 
liability  for  damage  to  or  loss  of  goods  during  or  after  deviation  is 
when  the  goods  perish  from  inherent  vice  and  would  have  so  perished 
without  deviation.     *     *     * 

The  defendants  lastly  say  that  the  deviation  was  not  the  cause  of 
the  loss,  and  that  the  plaintiffs  cannot  recover  because  they  cannot 
show  that  the  natural  and  probable  result  of  deviating  to  Havre  was 
that  the  Tokomaru  would  be  torpedoed.  This  seems  to  me  rank  her- 
esy. A  shipowner  is  an  insurer  of  the  goods  he  carries,  subject,  if 
there  is  a  special  contract,  to  the  contractual  exceptions,  and  subject, 
if  there  is  no  special  contract,  to  the  common  law  exceptions  of  act 
of  God,  the  king's  enemies,  and  inherent  vice.  If  the  goods  are  lost 
while  in  his  ship  it  is  not  for  the  goods  owner,  in  the  first  instance, 
to  prove  anything  but  the  loss.  The  shipowner,  if  he  denies  liability, 
must  then  set  up  the  particular  exception  upon  which  he  relies  and 
bring  himself  within  it. 

Here  the  exception  is  the  king's  enemies,  but  the  defendants  are 
in  the  difficulty  pointed  out  by  Lord  Watson  in  Hamilton,  Fraser  & 
Co.  V.  Pandorf  &  Co.  (1887)  12  App.  Cas.  518,  526,  where  he  said: 
'"When  a  shipowner  *  *  *  claims  the  benefit  of  the  exception, 
the  court  will,  if  necessary,  go  behind  the  proximate  cause  of  dam- 
age, for  the  purpose  of  ascertaining  whether  that  cause  was  brought 
into  operation  by  the  negligent  act  or  default  of  the  shipowner  or  of 
those  for  whom  he  is  responsible."  This  is  equally  true  whether  the 
exception  be  contractual  or  implied  by  law.  Deviation  leaves  a  ship- 
owner defenceless  in  the  face  of  such  a  loss  as  occurred  in  this  case. 

*  *     * 

I  have  to  add  that  throughout  this  judgment  whenever  I  have  spoken 
of  "deviation"  I  must  be  taken  to  mean  wrongful  deviation. 
My  judgment  is  for  the  plaintiff's  for  £4013.  19s.  76..  and  costs. 


FAUCHER  V.  WILSON. 

(Supreme  Court  of  New  Hainiishire,   1895.     68  N.  H.  338,  38  Atl.  1002, 

39  L.   R.  A.  431.) 

The  defendant  was  engaged  in  the  business  of  trucking  goods  for 
hire  from  the  railway  freight  station  in  Manchester  to  different  stores 
in  the  city.  On  one  of  the  warmest  days  in  the  summer  of  1891,  he 
transported  a  hogshead  of  molasses  from  the  freight  station  to  the 
plaintiff's  store,  on  Elm  street,  a  distance  of  a  little  over  half  a  mile. 
By  reason  of  the  fermentation  of  the  molasses,  the  hogshead  burst 
while  being  unloaded.  The  plaintift''s  loss  was  not  caused  by  any  want 
of  ordinary  care  on  the  part  of  the  defendant. 

ChasK,  J.  *  *  *  [Even]  if  the  defendant  was  a  common  carrier, 
he  is  not  liable  for  the  plaintiff's  loss,  since  it  happened  from  the  oper- 
ation of  natural  laws,  which  a  common  carrier  does  not  insure  against. 


Ch.  11)  SPECIAL  TYPES  OF   CONTRACTS  457 

*  *  *  In  Farrar  v.  Adams,  1  Bull.  N.  P.  69,  it  is  said  that  "if  an 
action  were  brought  against  a  carrier  for  negligently  driving  his  cart, 
so  that  a  pipe  of  wine  was  burst,  and  was  lost,  it  would  be  good  evi- 
dence for  the  defendant  that  the  wine  was  upon  the  ferment,  and, 
when  the  pipe  burst,  he  was  driving  gently."  It  being  found  that  the 
plaintiff's  loss  was  not  due  to  any  want  of  ordinary  care  on  the  part 
of  the  defendant,  there  must  be  judgment  for  the  defendant.    *    *    * 


McCarthy  et  ai.  v.  louisville  &  n.  r.  co. 

(Supreme  Court  of  Alabama,  1893.    102  Ala.  193,  14  South.  370, 
48  Am.  St.  Rep.  29.) 

Action  by  McCarthy  &  Baldwin  against  the  Louisville  &  Nashville 
Railroad  Company  for  failure  to  deliver  a  consignment  of  terra  cotta 
tiling  in  good  condition.  From  a  judgment  for  defendant,  plaintiffs 
appeal. 

McClELLan,  J.  *  *  =i=  In  October,  1890,  the  Pioneer  Fireproof 
Construction  Company  delivered  to  the  Chicago,  Burlington  &  Quincy 
Railroad  Company  at  Ottawa,  111.,  four  car  loads  of  terra  cotta  for  car- 
riage, and  consigned  to  plaintiffs  at  Birmingham,  Ala.  The  defendant 
was  also  a  common  carrier  operating  a  connecting  line  of  railway  on 
the  route  from  Ottawa  to  Birmingham,  and  as  such  received  the  con- 
signment from  the  initial  carrier,  "and  undertook  to  deliver  the  same 
to  plaintiffs  at  Birmingham  for  a  reward."  This  undertaking  was  not 
performed,  the  complaint  avers,  but,  to  the  contrary,  the  defendant  "did 
not  deliver  all  of  said  goods  to  them  (the  plaintiffs),  and  did  not  de- 
liver said  goods  to  the  plaintiffs  in  good  or  proper  condition,  or  in  the 
condition  they  were  in  when  shipped  and  consigned  to  plaintiffs,  but 
that  said  goods  when  delivered  were  badly  broken  and  injured,  and  a 
large  part  thereof  rendered  wholly  unfit  for  use."  The  damage  to 
the  goods  is  laid  at  $400,  which  the  complaint  seeks  to  recover. 

It  is  manifest  that  the  case  made  by  the  averment  of  these  facts 
tendered  no  issue  of  negligence  vel  non  on  the  part  of  the  defendant. 
The  contract  averred  is  an  unconditional  common-law  contract  of 
carriage  without  reservations  or  exceptions.  By  its  terms  the  defend- 
ant insured  the  safe  delivery  of  the  goods  to  the  consignee,  and  as- 
sumed liability  for  any  loss  or  injury  resulting  from  any  cause  except 
such  as  afforded  the  carrier  a  defense  at  common  law.  The  strictest 
proof  of  all  possible  care  on  the  part  of  the  carrier  in  the  transporta- 
tion and  delivery  of  the  goods  would  have  been  no  defense,  and,  of 
course,  proof  of  the  carrier's  negligence  was  in  no  wise  essential  to  a 
recovery.  The  defenses  which  a  carrier  under  such  a  contract  may  in- 
terpose to  an  action  for  failure  to  deliver  in  good  condition  are  com- 
monly mentioned  as  two  only,  namely,  that  the  loss  or  injury  was 
due  either  to  the  act  of  God,  or  to  the  act  of  a  public  enemy.  But 
there  is  in  reality  a  third,  resting  on  the  fault  of  the  owner  of  the  goods 
or  his  agent.  This  latter  defense,  while  the  fault  involved  in  it  may 
consist  merely  of  negligence  imputable  to  the  plaintiffs,  is  in  no  sense, 
and  bears  little  analogy  to,  the  defense  of  contributory  negUgence 
available  in  actions  against  common  carriers  of  passengers,  some- 
times in  actions  against  carriers  of  live  stock,  and  even,  it  may  be,  in 
actions  against  carriers  of  goods — inanimate  things — under  contracts 
of  affreightment  which  limit  liability  to  loss  or  injury  occasioned  by 
the  carrier's  negligence.     Nowhere  in  the  books  can  any  reference  be 


458  CONTRACTS  (Part  1 

found  to  the  defense  of  contributory  negligence  against  the  common- 
law  liability  of  common  carriers  of  goods ;  and,  in  the  nature  of  things, 
there  can  be  no  such  defense,  to  speak  with  any  approach  to  legal  ac- 
curacy. *  *  *  The  rule  governing  this  class  of  cases  cannot  be 
more  perspicuously  stated,  perhaps,  than  by  comparing  it  with  and  dif- 
ferentiating it  from  the  doctrine  which  obtains  in  respect  of  causes  of 
action  resting  primarily  on  defendant's  negligence  in  the  carriage  of 
persons.  In  these  latter  cases  the  contributory  negligence  of  the  plain- 
tiiT  neutralizes  and  renders  innocuous  the  causal  negligence  of  the  de- 
fendant, and  destroys  a  cause  of  action  resting  upon  it.  But  in  the 
other  class  of  cases— that  to  which  the  case  at  bar  belongs — negligence 
upon  either  hand  is  regarded  from  an  entirely  different  standpoint,  and 
accorded  an  entirely  different  and  contrary  effect  and  operation,  so  to 
speak,  on  the  rights  of  the  parties.  The  unaided,  uncontributed-to 
neghgence  of  the  plaintiff  producing  the  injury  is  a  defense ;  but  where 
there  is  negligence  also  on  the  part  of  the  defendant,  without  which, 
notwithstanding  plaintiff's  fault,  the  injury  would  not  have  happened, 
this  fault  of  the  defendant  neutralizes  and  eviscerates  the  negligence 
of  the  plaintiff  as  a  ground  of  defense.  In  the  one_  case,  plaintiff's 
contributory  negligence  destroys  the  cause  of  action ;  in  the  other,  de- 
fendant's concurring  negligence  destroys  the  defense. 

The  evidence  tended  to  show  that  the  goods  for  injury  to  which  this 
action  is  prosecuted  were  improperly  and  negligently  packed  or  loaded 
by  the  consignor  who  sold  the  goods  to  plaintiffs,  and  it  afforded  an  in- 
ference, or  rather,  room  for  an  inference,  that  but  for  this  fault  of  the 
seller  and  consignor,  the  injury  would  not  have  occurred.  But,  though 
the  jury  had  found  in  hne  with  this  tendency  of  the  evidence,  and  de- 
duced the  conclusion  therefrom  that  plaintiffs,  or  those  for  whose  acts 
or  omissions  in  the  premises  plaintiffs  were  responsible,  were  at_  fault, 
and  that  such  fault  had  a  causal  connection  with  the  injury,  it  was 
yet  their  duty  to  indulge  the  presumption  that  the  defendant  was  also 
negligent  in  and  about  the  transportation  and  delivery  of  the  goods, 
and  that  this  negligence  aided  plaintiffs'  negligence  to  the  result  com- 
plained of,  there  being  no  evidence  whatever  on  the  part  of  the  defend- 
ant, upon  whom  the  burden  in  this  regard  rested,  nor,  indeed,  any 
averment,  to  the  contrary.  It  follows,  on  this  state  of  case,  the  evi- 
dence without  conflict  showing  the  injury,  and  the  defendant  having 
failed  both  in  averment  and  proof  to  bring  itself  within  the  exception 
under  which  it  in  some  measure  attempted  to  shield  itself  from  lia- 
bility, that  the  jury  should  have  been  instructed,  as  requested  in  writ- 
ing, to  find  for  the  plaintiffs  if  they  believed  the  evidence.    *    *    * 

Reversed  and  remanded. 

ADAMS  EXPRESS  CO.  v.  CRONINGER. 

(Supreme  Court  of  the  United  States,  1913.     226  U.  S.  491,  33  Sup.  Ct.  148, 
57  L.  Ed.  314,  44  L.  R.  A.  [N.  S.]  257.) 

This  was  an  action  in  the  circuit  court  of  Kenton  county,  Kentucky, 
against  the  Express  Company  to  recover  the  full  market  value  of  a 
small  package  containing  a  diamond  ring  which  was  delivered  by  the 
plaintiff  below  to  the  Express  Company  at  its  office  in  Cincinnati, 
Ohio,  consigned  to  J.  W.  Clendenning  at  Augusta,  Georgia.  The 
package  was  never  delivered. 

The  Express  Company  made  defense  by  answer.  The  plaintiff  de- 
murred to  the  answer  as  not  containing  a  defense,  which  demurrer 


Ch.  11)  SPECIAL   TYPES   OF   CONTRACTS  4=59 

was  sustained.  The  company  declined  to  further  plead,  whereupon 
the  circuit  court  gave  judgment  for  the  sum  of  $137.52,  being  the 
full  value  of  the  ring  and  interest. 

LuRTON,  J.  The  answer  relies  upon  the  act  of  Congress  of  June 
29,  1906,  being  an  act  to  amend  the  Interstate  Commerce  Act  of  1887, 
as  the  only  regulation  applicable  to  an  interstate  shipment ;  and  avers 
that  the  limitation  of  value,  declared  in  its  bill  of  lading,  was  valid 
and  obligatory  under  that  act.  This  defense  was  denied.  This  con- 
stitutes the  federal  question  and  gives  this  court  jurisdiction. 

Under  the  law  of  Kentucky  this  contract,  limiting  the  plaintiff's 
recovery  to  the  agreed  or  declared  value,  was  invalid,  and  the  shipper 
was  entitled  to  recover  the  actual  value,  "unless  sufficient  facts  are 
shown,  independently  of  the  special  contract,  to  avoid  the  contract  for 
fraud  or  to  create  an  estoppel  at  common  law." 

The  original  Interstate  Commerce  Act  of  February  4,  1887,  24 
Stat.  379,  c.  104,  was  extensively  amended  bv  the  act  of  June  29,  1906, 
34  Stat.  584,  c.  3591  (U.  S.  Comp.  St.  §§  8604a,  8604aa).  We  may 
pass  by  many  of  the  changes  and  amendments  made  by  the  latter  act 
as  not  decisive,  and  come  at  once  to  the  far  more  important  amend- 
ment made  in  section  20,  an  amendment  bearing  directly  upon  the 
carrier's  liability  or  obligation  under  interstate  contracts  of  shipment, 
and  generally  referred  to  as  the  Carmack  Amendment.     *     *     * 

This  amendmient  came  under  consideration  in  Atlantic  Coast  Line 
v.  Riverside  Mills,  219  U.  S.  186,  31  Sup.  Ct.  164,  55  L.  Ed.  167,  31 
L.  R.  A.  (N.  S.)  7,  but  the  opinion  and  judgment  were  confined  to  that 
provision  of  the  act  which  made  the  initial  carrier  liable  for  a  loss 
upon  the  line  of  a  connecting  carrier,  the  property  having  been  re- 
ceived under  a  bill  of  lading  which  confined  the  liability  of  the  initial 
carrier  to  loss  occurring  upon  its  own  line. 

The  significant  and  dominating  features  of  that  amendment  are 
these : 

First.  It  affirmatively  requires  the  initial  carrier  to  issue  "a  re- 
ceipt or  bill  of  lading  therefor,"  when  it  receives  "property  for  trans- 
portation from  a  point  in  one  state  to  a  point  in  another." 

Second.  Such  initial  carrier  is  made  "liable  to  the  lawful  holder 
thereof  for  any  loss,  damage,  or  injury  to  such  property  caused  by  it." 
Third.  It  is  also  made  liable  for  any  loss,  damage,  or  injury  to 
such  property  caused  by  "any  common  carrier,  railroad  or  transpor- 
tation company  to  which  such  property  may  be  delivered  or  over 
whose  line  or  lines  such  property  may  pass." 

Fourth.  It  affirmatively  declares  that  "no  contract,  receipt,  rule  or 
regulation  shall  exempt  such  common  carrier,  railroad,  or  transporta- 
tion company  from  the  liability  hereby  imposed." 

Prior  to  that  amendment  the  rule  of  carrier's  liability,  for  an  in- 
terstate shipment  of  property,  as  enforced  in  both  federal  and  state 
courts,  was  either  that  of  the  general  common  law  as  declared  by  this 
court  and  enforced  in  the  federal  courts  throughout  the  United  States, 
Hart  V.  Pennsylvania  Railroad,  112  U.  S.  331,  5  Sup.  Ct.  151,  28  L. 
Ed.  717;  or  that  determined  by  the  supposed  public  policy  of  a  par- 
ticular state,  Pennsylvania  Railroad  v.  Hughes,  191  U.  S.  477,  24 
Sup.  Ct.  132,  48  L.  Ed.  268;  or  that  prescribed  by  statute  law  of  a 
particular  state,  Chicago,  etc.,  Railroad  v.  Solan,  169  U.  S.  133.  18 
Sup.  Ct.  239,  42  L.  Ed.  688. 


460  CONTRACTS  (Part  1 

Neither  uniformity  of  obligation  nor  of  liability  was  possible  until 
Congress  should  deal  with  the  subject.  The  situation  was  well  de- 
picted by  the  Supreme  Court  of  Georgia  in  Southern  Pacific  Co.  v. 
Crenshaw,  5  Ga.  App.  675,  687,  63  S.  E.  865,  where  the  court  said: 

"Some  states  allowed  carriers  to  exempt  themselves  from  all  or  a 
part  of  the  common-law  liability,  by  rule,  regulation,  or  contract; 
others  did  not.  The  federal  courts  sitting  in  the  various  states  were 
following  the  local  rule,  a  carrier  being  held  liable  in  one  court  when 
under  the  same  state  of  facts  he  would  be  exempt  from  liability  in 
another;  hence  this  branch  of  interstate  commerce  was  being  sub- 
jected to  such  a  diversity  of  legislative  and  judicial  holding  that  it 
was  practically  impossible  for  a  shipper  engaged  in  a  business  that 
extended  beyond  the  confines  of  his  own  state,  or  for  a  carrier  whose 
lines  were  extensive,  to  know  without  considerable  investigation  and 
trouble,  and  even  then  oftentimes  with  but  little  certainty,  what  would 
be  the  carrier's  actual  responsibility  as  to  goods  delivered  to  it  for 
transportation  from  one  state  to  another.  The  congressional  action 
has  made  an  end  to  this  diversity ;  for  the  national  law  is  paramount 
and  supersedes  all  state  laws  as  to  the  rights  and  liabilities  and  ex- 
emptions created  by  such  transaction.  This  was  doubtless  the  pur- 
pose of  the  law ;  and  this  purpose  will  be  efi^ectuated,  and  not  impair- 
ed or  destroyed  by  the  state  court's  obeying  and  enforcing  the  provi- 
sions of  the  federal  statute  where  applicable  to  the  fact  in  such  cases 
as  shall  come  before  them." 

That  the  legislation  supersedes  all  the  regulations  and  policies  of 
a  particular  state  upon  the  same  subject  results  from  its  general  char- 
acter. It  embraces  the  subject  of  the  liability  of  the  carrier  under  a 
bill  of  lading  which  he  must  issue  and  limits  his  power  to  exempt  him- 
self by  rule,  regulation  or  contract.  Almost  every  detail  of  the  sub- 
ject is  covered  so  completely  that  there  can  be  no  rational  doubt  but 
that  Congress  intended  to  take  possession  of  the  subject  and  super- 
sede all  state  regulation  with  reference  to  it.  Only  the  silence  of 
Congress  authorized  the  exercise  of  the  police  power  of  the  state  upon 
the  subject  of  such  contracts.  But  when  Congress  acted  in  such  a 
way  as  to  manifest  a  purpose  to  exercise  its  conceded  authority,  the 
regulating  power  of  the  State  ceased  to  exist.     *     *     * 

What  is  the  liability  imposed  upon  the  carrier?  It  is  a  liability 
to  any  holder  of  the  bill  of  lading  which  the  primary  carrier  is  re- 
quired to  issue  "for  any  loss,  damage  or  injury  to  such  property 
caused  by  it,"  or  by  any  connecting  carrier  to  whom  the  goods  are 
delivered.  The  suggestion  that  an  absolute  liability  exists  for  every^ 
loss,  damage  or  injury,  from  any  and  every  cause,  would  be  to  make 
such  a  carrier  an  absolute  insurer  and  liable  for  unavoidable  loss  or 
damage  though  due  to  uncontrollable  forces.  That  this  was  the  intent 
of  Congress  is  not  conceivable.  To  give  such  emphasis  to  the  words, 
"any  loss  or  damage,"  would  be  to  ignore  the  qualifying  words,  "caus- 
ed by  it."  The  liability  thus  imposed  is  limited  to  "any  loss,  injury  or 
damage  caused  by  it  or  a  succeeding  carrier  to  whom  the  property  may 
be  delivered,"  and  plainly  implies  a  liability  for  some  default  in  it's 
common  law  duty  as  a  common  carrier.     *     *     * 

We  come  now  to  the  question  of  the  validity  of  the  provision  in 
the  receipt  or  bill  of  lading  limiting  liabiHty  to  the  agreed  value  of 
fifty  dollars,  as  shown  therein.    This  limiting  clause  is  in  these  words : 

"In  consideration  of  the  rate  charged  for  carrying  said  property, 


Ch.  11)  SPECIAL  TYPES   OF   CONTRACTS  4G1 

which  is  regulated  by  the  value  thereof  and  is  based  upon  a  valua- 
tion of  not  exceeding  fifty  dollars  unless  a  greater  value  is  declared, 
the  shipper  agrees  that  the  value  of  said  property  is  not  more  than 
fifty  dollars,  unless  a  greater  value  is  stated  herein,  and  that  the  com- 
pany shall  not  be  liable  in  any  event  for  more  than  the  value  so  stated, 
nor  for  more  than  fifty  dollars  if  no  value  is  stated  herein." 

The  answer  states  that  the  schedules  which  the  express  company 
had  filed  with  the  Interstate  Commerce  Commission  showed  rates 
based  upon  valuations ;  and  that  the  lawful  and  established  rate  for 
such  a  shipment  as  that  made  by  the  plaintiff  from  Cincinnati  to  Au- 
gusta, having  a  value  not  in  excess  of  fifty  dollars,  was  twenty-five 
cents,  while  for  the  same  package  if  its  value  had  been  declared  to  be 
one  hundred  and  twenty-five  dollars,  the  amount  for  which  the  plain- 
tiff sues  as  the  actual  value,  the  lawful  charge  according  to  the  rate 
filed  and  published  would  have  been  fifty-five  cents.  It  is  further 
averred  that  the  package  was  sealed,  and  its  contents  and  actual  value 
unknown  to  the  defendant's  agent. 

That  no  inquiry  was  made  as  to  the  actual  value  is  not  vital  to  the 
fairness  of  the  agreement  in  this  case.  The  receipt  which  was  ac- 
cepted showed  that  the  charge  was  based  upon  a  valuation  of  fifty 
dollars  unless  a  greater  value  should  be  stated  therein.  The  knowl- 
edge of  the  shipper  that  the  rate  was  based  upon  the  value  is  to  be 
presumed  from  the  terms  of  the  bill  of  lading  and  of  the  published 
schedules  filed  with  the  Commission.  That  presumption  is  strength- 
ened by  the  fact  that  across  the  top  of  this  bill  of  lading  there  was 
this  statement  in  bold  type :  "This  company's  charge  is  based  upon  the 
value  of  the  property,  which  must  be  declared  by  the  shipper." 

That  a  common  carrier  cannot  exempt  himself  from  liability  for  his 
own  negligence  or  that  of  his  servants  is  elementary.  *  *  *  The 
rule  of  the  common  law  did  not  limit  his  liability  to  loss  and  dam- 
age due  to  his  own  negligence,  or  that  of  his  servants.  That  rule 
went  beyond  this  and  he  was  liable  for  any  loss  or  damage  which  re- 
sulted from  human  agency,  or  any  cause  not  the  act  of  God  or  the 
public  enemy.  But  the  rigor  of  this  liability  might  be  modified 
through  any  fair,  reasonable  and  just  agreement  with  the  shipper 
which  did  not  include  exemption  against  the  negligence  of  the  carrier 
or  his  servants.  The  inherent  right  to  receive  a  compensation  com- 
mensurate with  the  risk  involved  the  right  to  protect  himself  from 
■fraud  and  imposition  by  reasonable  rules  and  regulations,  and  the  right 
to  agree  upon  a  rate  proportionate  to  the  value  of  the  property  trans- 
ported. 

It  has  therefore  become  an  established  rule  of  the  common  law  as 
declared  by  this  court  in  many  cases  that  such  a  carrier  may  by  a 
fair,  open,  just  and  reasonable  agreement  limit  the  amount  recovera- 
ble by  a  shipper  in  case  of  loss  or  damage  to  an  agreed  value  made  for 
the  purpose  of  obtaining  the  lower  of  two  or  more  rates  of  charges 
proportioned  to  the  amount  of  the  risk.     *     *     * 

That  such  a  carrier  might  fix  his  charges  somewhat  in  proportion 
to  the  value  of  the  property  is  quite  as  reasonable  and  just  as  a  rate 
measured  by  the  character  of  the  shipment.  The  principle  is  that  the 
charge  should  bear  some  reasonable  relation  to  the  responsibility,  and 
that  the  care  to  be  exercised  shall  be  in  some  degree  measured  by  the 
bulk,  weight,  character  and  value  of  the  property  carried. 

Neither  is  it  conformable  to  plain  principles  of  justice  that  a  ship- 


462  CONTRACTS  (Part  1 

per  may  understate  the  value  of  his  property  for  the  purpose  of  reduc- 
uig  the  rate,  and  then  recover  a  larger  value  in  case  of  loss.  Nor 
does  a  limitation  based  upon  an  agreed  value  for  the  purpose  of  ad- 
justing the  rate  conflict  with  any  sound  principle  of  public  policy. 
The  reason  for  the  legality  of  such  agreements  is  well  stated  in  Hart 
V.  Pennsylvania  Railroad,  supra: 

"The  limitation  as  to  value  has  no  tendency  to  exempt  from  lia- 
bility for  negligence.  It  does  not  induce  want  of  care.  It  exacts 
from  the  carrier  the  measure  of  care  due  to  the  value  agreed  on. 
The  carrier  is  bound  to  respond  in  that  value  for  negligence.  The 
compensation  for  carriage  is  based  on  that  value.  The  shipper  is 
estopped  from  saying  that  the'  value  is  greater.  The  articles  have  no 
greater  value,  for  the  purposes  of  the  contract  of  transportation,  be- 
tween the  parties  to  that  contract.  The  carrier  must  respond  for  neg- 
ligence up  to  that  value.  It  is  just  and  reasonable  that  such  a  con- 
tract, fairly  entered  into,  and  where  there  is  no  deceit  practiced  on 
the  shipper,  should  be  upheld.  There  is  no  violation  of  public  policy. 
On  the  contrary,  it  would  be  unjust  and  unreasonable,  and  would  be 
repugnant  to  the  soundest  principles  of  fair  dealing  and  of  the  free- 
dom of  contracting,  and  thus  in  conflict  with  public  policy,  if  a  ship- 
per should  be  allowed  to  reap  the  benefit  of  the  contract  if  there  is 
no  loss,  and  to  repudiate  it  in  case  of  loss." 

The  statutory  liability,  aside  from  responsibility  for  the  default 
of  a  connecting  carrier  in  the  route,  is  not  beyond  the  liability  imposed 
by  the  common  law  as  that  body  of  law  applicable  to  carriers  has 
been  interpreted  by  this  court  as  well  as  many  courts  of  the  States. 
*  *  *  ^p^g  exemption  forbidden  is,  as  stated  in  Bernard  v.  Adams 
Express  Co.,  205  Mass.  254,  259,  91  N.  E.  325,. 327,  28  L.  R.  A.  (N. 
S.)  293,  18  Ann.  Cas.  351,  "a  statutory  declaration  that  a  contract 
of  exemption  from  liability  for  negligence  is  against  public  policy  and 
void."  This  is  no  more  than  this  court,  as  well  as  other  courts  ad- 
ministering the  same  general  common  law,  have  many  times  declared. 
In  the  same  case,  just  such  a  stipulation  as  that  here  involved  was 
upheld,  the  court  saying: 

"But  such  a  contract  as  we  are  considering  in  this  case  is  not  an 
exemption  from  liability  for  negligence  in  the  management  of  prop- 
erty, within  the  meaning  of  the  statute.  It  is  a  contract  as  to  what  the 
property  is,  in  reference  to  its  value.  The  purpose  of  it  is  not  to 
change  the  nature  of  the  undertaking  of  the  common  carrier,  or  limit 
his  obligation  in  the  care  and  management  of  that  which  is  entrusted 
to  him.  It  is  to  describe  and  define  the  subject  matter  of  the  contract. 
so  far  as  the  parties  care  to  define  it,  for  the  purpose  of  showing  of 
what  value  that  is  which  comes  into  the  carrier's  possession,  and  for 
Avhich  he  must  account  in  the  performance  of  his  duty  as  a  carrier. 
It  is  not  in  any  proper  sense  a  contract  exempting  him  from  liability 
for  the  loss,  damage  or  injury  to  the  property,  as  the  shipper  describes 
it  in  stating  its  value  for  the  purpose  of  determining  for  what  the 
carrier  shall  be  accountable  upon  his  undertaking,  and  what  price  the 
shipper  shall  pay  for  the  service  and  for  the  risk  of  loss  which  the 
carrier  assumes." 

In  Greenwald  v.  Barrett,  199  N.  Y.  170,  92  N.  E.  218,  35  L.  R. 
A.  (N.  S.)  971,  the  same  conclusion  was  reached  as  to  the  nature  of 
the  liability  imposed  and  the  purport  of  the  exemption  forbidden,  the 
court,  among  other  things,  saying: 


Ch.  11)  SPECIAL  TYPES  OF   CONTRACTS  463 

"The  language  of  the  enactment  does  not  disclose  any  intent  to 
abrogate  the  right  of  common  carriers  to  regulate  their  charges  for 
carriage  by  the  value  of  the  goods  or  to  agree  with  the  shipper  upon  a 
valuation  of  the  property  carried.  It  has  been  the  uniform  practice  of 
transportation  companies  in  this  country  to  make  their  charges  de- 
pendent upon  the  value  of  the  property  carried  and  the  propriety  of 
this  practice  and  the  legality  of  contracts  signed  by  the  shipper  agree- 
ing upon  a  valuation  of  the  property  were  distinctly  upheld  by  the 
Supreme  Court  of  the  United  States  in  Hart  v,  Penn.  R.  R.  Co.,  112 
U.  S.  331,  341,  5  Sup.  Ct.  151,  28  L.  Ed.  717."    *    *    * 

That  a  carrier  rate  may  be  graduated  by  value  and  that  a  stipula- 
tion limiting  recovery  to  an  agreed  value  made  to  adjust  the  rate  is 
recognized  by  the  Interstate  Commerce  Commission,  see  In  re  Re- 
leased Rates,  13  Interst.  Com.  Com'n  R.  550. 

We  therefore  reach  the  conclusion  that  the  provision  of  the  act 
forbidding  exemptions  from  liability  imposed  by  the  act  is  not  violated 
by  the  contract  here  in  question. 

The  demurrer  to  the  answer  of  the  defendant  below  should  have 
been  overruled. 

For  this  reason  the  judgment  is  reversed,  with  direction  to  overrule 
the  demurrer,  and  for  such  proceedings  as  are  not  inconsistent  with 
this  opinion. 


In  re  CUMMINS  AMENDMENT. 
(Interstate  Commerce  Commission,   1915.     33   Interst.  Com.   Com'n  R.  682.) 

By  ths  Commission.  For  many  years,  if  not,  indeed,  from  the 
origin  of  railroad  transportation  in  this  country,  common  carriers  by 
railroad  have  sought,  by  provisions  in  shipping  contracts,  bills  of 
lading,  tariff  publications,  etc.,  to  limit  their  common-law  liability, 
not  only  as  insurers  again.5t  loss  or  damage  to  property  received  by 
them  for  transportation,  but  also  as  tort-feasors  for  loss  or  damage 
caused  by  their  negligence.    *    *    * 

By  adoption  of  the  "Carmack  Amendment"  (U.  S.  Comp.  St.  §§ 
8604a,  86(>4aa),  so  called,  to  the  Act  to  Regulate  Commerce,  approved 
June  29,  1906,  the  Congress  provided  that  a  common  carrier  receiving 
property  for  transportation  from  a  point  in  one  state  to  a  point  in  an- 
other state  should  issue  a  receipt  or  bill  of  lading  therefor  and  be  liable 
to  the  lawful  holder  thereof  for  any  loss,  damage,  or  injury  to  such 
property  caused  by  it  or  by  any  common  carrier  to  which  such  property 
might  be  delivered,  or  over  whose  lines  such  property  might  pass,  and 
declared  that  no  contract,  receipt,  rule,  or  regulation  should  exempt 
such  common  carrier  from  the  liability  thereby  imposed.  It  was  pro- 
vided that  nothing  in  that  amendment  should  deprive  any  holder  of 
such  receipt  or  bill  of  lading  of  any  remedy  or  right  of  action  which  he 
had  at  that  time  under  existing  law. 

Since  that  time,  beginning  in  1913,  with  Adams  Express  Co.  v. 
Croninger,  226  U.  S.  491,  33  Sup.  Ct.  148,  57  L.  Ed.  314,  44  L.  R.  A. 
(N.  S.)  257,  the  Supreme  Court  of  the  United  States  has  decided  in 
a  number  of  cases,  all  of  which  followed  Hart  v.  P.  R.  R.,  112  U.  S. 
331,  5  Sup.  Ct.  151,  28  L.  Ed.  717,  that  where  the  shipper  has  his  choice 
of  two  rates,  the  higher  carrying  unlimited  carrier's  liability,  and  in  "a 
fair,  just,  and  reasonable  agreement"  declares  or  agrees  that  the  value 


464  CONTRACTS  (Part  1 

of  his  shipment  is  a  certain  sum  and  thereby  secures  a  reduced  trans- 
portation rate,  he  is  bound  by  that  declaration  or  agreement,  estopped 
from  claiming  or  recovering  more  than  that  value  in  case  of  loss  of  or 
damage  to  the  property,  and  conclusively  presumed  to  have  known 
the  governing  tariff. 

On  March  4,  1915,  *  *  *  the  [first]  Cummins  Amendment  was 
approved.  *  *  *  'it  is  perfectly  plain  that  the  purpose  of  this  law 
is,  except  as  otherwise  provided  therein,  to  invalidate  all  limitations 
of  carrier's  liability  for  loss,  damage,  or  injury  to  property  transported 
caused  by  the  initial  carrier  or  by  another  carrier  to  which  it  may  be 
delivered  or  which  may  participate  in  transporting  it.    *     *     *^ 

The  so-called  uniform  bill  of  lading,  which  has  been  in  use  in  offi- 
cial and  Western  Classification  territories,  contains,  and  has  contained, 
a  provision  that  claims  for  loss  or  damage  must  be  presented  to  the 
carrier  within  four  months,  but  until  the  Croninger  Case,  supra,  wab 
decided  by  the  Supreme  Court,  no  effort  was  made  by  the  carriers 
generally  to  enforce  or  to  observe  that  provision.  After  the  Cron- 
inger Case  was  decided  the  carriers  adopted  an  entirely  different 
course  and  took  the  position  that  this  provision  was  in  the  bill  of  lad- 
ing, the  terms  of  the  bill  of  lading  were  in  the  rate  schedules,  and 
therefore  it  was  unlawful  to  depart  from  that  requirement.  This 
created  a  general  controversy,  and  the  sudden  change  from  ignoring 
a  rule  to  hterally  enforcing  it  necessarily  created  multitudes  of  un- 
just discriminations.  The  question  was  presented  to  and  considered 
by  the  Commission,  and  as  the  fair  and  only  means  of  composing  the 
situation  and  avoiding  endless  controversy  and  litigation,  the  Commis- 
sion issued  its  report.  In  the  Matter  of  Bills  of  Lading,  29  Interst. 
Com.  Com'n  R.  417. 

The  Cummins  Amendment  makes  it  unlawful  for  the  carrier  to  fix 
a  period  for  giving  notice  of  claims  shorter  than  ninety  days,  for  the 
filing  of  claims  shorter  than  four  months,  and  for  the  institution  of 
suits  shorter  than  two  years.  The  law  does  not  indicate  the  time  or 
date  from  which  these  several  periods  of  time  shall  be  computed. 
*    *    * 

It  is  to  be  remembered  that  the  Cummins  Amendment  is  not  a  sep- 
arate statute,  but  is  an  amendment  to  the  act.  It  must,  therefore,  be 
construed  as  a  part  of,  and  in  connection  with  other  portions  of  the 
act,  and  in  such  a  way  as  to  give  effect  to  the  whole  statute.  There 
does  not  seem  to  be  any  indication  of  legislative  intent  to  change  any 
provision  of  the  act  other  than  that  part  known  as  the  Carmack  Amend- 
ment.    *    *     * 

The  legislation  is  aimed  at  specified  contracts  and  declares  them  to 
be  unlawful.  The  lawful  rates  on  file  at  this  time,  therefore,  are  the 
rates  providing  for  the  limited  liability.  The  Cummins  Amendment, 
by  making  contracts  limiting  liability  for  loss  caused  by  the  carriers 
unlawful,  does  not  destroy  these  rates,  but  they  remain  in  eft'ect  and  are 
lawfully  applicable,  for  the  10  per  cent,  increased  rates  are  merely 
additional  and  can  not  stand  in  and  of  themselves. 

Applying  correct  rules  of  interpretation,  the  Cummins  Amendment 
does  not  automatically  bring  into  eft'ect  the  increased  rates  named  in 
the  classifications  and  tariff  publications  as  applicable  to  shipments 
which  are  not  made  subject  to  the  terms  of  the  uniform  or  carrier's 
bill  of  lading. 


Ch.  11)  SPECIAL   TYPES   OF   CONTRACTS  465 

May  the  carriers  lawfully  provide  in  their  tariffs  and  rate  schedules 
that  their  liability  shall  be  for  the  full  value  of  the  property  at  the  time 
and  place  of  shipment?    *     *     * 

The  Cummins  Amendment  clearly  places  upon  the  carriers  liability 
for  the  full  actual  loss,  damage,  or  injury  to  the  property  transported 
\yhich  is  caused  by  them,' and  it  makes  unlawful  any  limitation  of  that 
liability,  or  of  the  amount  of  recovery  thereunder,  in  any  receipt,  bill 
oi  lading,  contract,  rule,  regulation,  or  tariff  filed  with  this  Commis- 
sion, without  respect  to  the  manner  or  form  in  .which  such  limitation 
is  sought  to  be  made.  The  loss  or  damage  must,  apparently,  be  either 
as  of  the  time  and  place  of  shipment,  time  and  place  of  loss  or  dam- 
age, or  time  and  place  of  destination.  Where  rates  are  lawfully  de- 
pendent upon  declared  values,  the  property,  of  which  the  value  of  the 
property  may  constitute  an  element,  and  such  classification  is  neces- 
sarily as  of  the  time  and  place  of  shipment.  It  is  therefore  believed 
that  the  liability  of  the  carrier  may  be  limited  to  the  full  value  of  the 
property  so  classified  and  established  as  of  the  time  and  place  of  ship- 
ment. 

poes  the  amendment  to  the  act  apply  to  export  and  import  shipments 
to  and  from  foreign  countries  not  adjacent  to  the  United  States? 

This  must  be  answered  in  the  negative,  in  view  of  the  fact  that, 
while  specifically  stating  that  its  terms  shall  apply  to  property  received 
for  transportation  from  certain  points  to  certain  other  points,  it  makes 
no  reference  to  shipments  from  a  point  in  the  United  States  to  a  point 
in  a  nonadjacent  foreign  country,  or  from  a  nonadjacent  foreign 
country  to  a  point  in  the  United  States, 

In  the  proviso,  "that  if  the  goods  are  hidden  from  view  by  wrap- 
ping, boxing,  or  other  means,  and  the  carrier  is  not  notified  as  to  the 
character  of  the  goods,"'  what  is  the  proper  interpretation  to  be  placed 
upon  the  words  "and  the  carrier  is  not  notified  as  to  the  character  of 
the  goods"?    *    *    * 

The  word  "character"  as  here  used  clearly  relates  primarily  to  value, 
or  to  those  qualities  affecting  value,  and  when  the  entire  proviso  is 
considered  the  meaning  seems  to  be  that  if  the  qualities  affecting  value 
of  the  goods  are  hidden  from  the  carrier's  view,  or  are  not  known  to 
the  carrier,  the  proviso  applies.    *    *     * 

When  the  goods  are  not  hidden  from  view,  and  the  carrier  is  ad- 
vised as  to  their  character,  all  contracts  or  agreements  purporting  to 
limit  the  liability  of  the  carrier  for  loss  or  damage  caused  by  it  are 
made  void.  A  carrier,  after  the  Cummins  Amendment  goes  into  effect, 
may  not  contract  to  limit  its  liability  for  loss  or  damage  caused  by  it 
to  the  property.  There  is,  however,  no  inhibition  as  to  the  limitation 
of  the  liability  of  a  carrier  for  losses  not  caused  by  it  or  a  succeeding 
carrier  to  which  the  property  may  be  delivered.  The  amendment 
has  expressly  reapplied  the  limitation  of  the  prior  act  with  respect 
to  loss  or  damage  caused  by  the  carriers  chargeable  therewith.  It 
follows,  therefore,  that  the  interpretation  applied  to  the  act  before 
it  was  amended  is  equally  applicable  to  the  amendment  in  so  far  as  the 
latter  affects  the  right  of  a  carrier  to  establish  rates  conditional  upon 
the  shipper's  assumption  of  the  entire  risk  of  loss  attributable  to 
causes  beyond  the  carrier's  control.  From  this  it  follows  that  under 
the  amendment  a  contract  or  a  tariff  may  lawfullv  limit  to  a  reason- 
able maximum  the  liability  of  a  carrier  for  losses  which  it  does  not 
B.&  B.Bus.Law— 30 


466  CONTRACTS  (Parti 

cause.  It  follows  further  that  the  rates  provided  by  such  tariff  may  be 
proportionate  to  the  risk  assumed. 

This  provision  of  the  statute  as  to  goods  concealed  from  view  and 
of  the  character  of  which  the  carrier  is  not  advised  clearly  prescribes 
the  right  of  carriers  under  the  direction  or  approval  of  the  Commis- 
sion to  provide  for  a  graduation  of  rates  in  accordance  with  the  de- 
clared value  of  the  property  transported.  The  liability  provided  by 
the  rates  so  established  by  the  Commission  is  applicable  no  less  to 
instances  of  loss  or  damage  chargeable  to  the  negligence  of  the  carrier 
than  to  those  occasioned  by  causes  beyond  the  carrier's  control.  But 
the  carriers  may  not  contract  to  limit  their  liability  for  loss,  damage, 
or  injury  caused  by  them  to  property  the  character  of  which  is  mani- 
fested by  the  shipment  itself  or  otherwise  disclosed. 

In  this  connection  it  has  been  suggested  that  the  carrier  might  pro- 
vide that  in  the  event  the  shipper  refused  to  declare  the  value  the 
higher  rates  would  apply.  This  suggestion  cannot  be  approved.  If 
the  rate  is  lawfully  conditioned  upon  the  value  as  declared  by  the 
shipper,  it  is  as  much  the  shipper's  duty  to  declare  the  true  value  of 
the  shipment  as  it  is  his  duty  to  declare  the  name  of  a  commodity 
tendered  for  shipment  as  to  which  there  are  no  different  rates. 

It  is  important  to  keep  in  mind  that  the  carriers  are  not  prohibited 
from  making  different  rates  dependent  upon  the  value  of  different 
grades  of  a  given  commodity ;  that,  except  as  covered  by  the  Cummins 
amendment ;  and  that  if,  in  any  instance,  the  shipper  declares  the  value 
to  be  less  than  the  true  value  in  order  to  get  a  lower  rate  than  that 
to  which  he  would  otherwise  be  entitled,  he  violates,  and  is  subject  to 
the  penalty  prescribed  in,  section  10  of  the  act.  The  carrier  would 
also  be  subject  to  the  same  penalty  in  such  a  case  if,  having  knowledge 
that  the  value  represented  is  not  the  true  value,  it  nevertheless  accepts 
the  shipper's  representation  as  to  value  for  the  purpose  of  applying 
the  rate. 

Do  the  terms  of  the  Cum.mins  Amendment  apply  to  the  transpor- 
tation of  baggage?  This  must  apparently  be  answered  in  the  affirma- 
tive. Transportation  of  baggage  is  a  part  of  the  contract  for  trans- 
portation of  the  passenger.     =i<     *     * 

The  necessity  for  revision  of  the  bills  of  lading,  live  stock  contracts, 
and  other  similar  contracts  of  carriage,  as  well  as  of  certain  parts  of  the 
carriers'  classifications  and  rate  schedules,  is  manifest.    *    *    * 

If,  in  a  proper  manner  and  a  proper  proceeding,  it  shall  be  made  to 
appear  that,  with  regard  to  any  commodity  or  commodities,  the  exist- 
ing rates  do  not  afford  the  carriers  proper  compensation  for  the  serv- 
ices they  perform  and  the  risk  which  is  imposed  upon  them,  it  could 
hardly  be  denied  that  the  rates  on  such  commodities  might  properly 
be  increased  in  a  sufficient  amount  to  properly  compensate  the  car- 
riers for  their  added  risk  and  liability.  Where  rates  are  lawfully  based 
upon  declared  values  the  difference  in  rates  should  be  no  more  than 
fairly  and  reasonably  represents  the  added  insurance.     *     *     * 


Ch.  11)  SPECIAL   TYPES   OF   CONTRACTS  467 

SECTION  4.— THE  CONTRACT  OF  PLEDGE 


HAT^L  V.   PAGE.  ,^> 

(Supreme  Court  of  Georgia.  1848.     4  Ga.  428,  48  Am.  Dec.  235.) 

Nisbe;t,  J.  It  appears  by  the  record,  that  the  defendant,  acting  as 
agent  for  the  plaintiff  below,  sold  certain  goods  for  his  principal,  and 
at  the  same  time  a  small  amount  of  goods  of  his  own;  and  took  in 
payment  for  the  whole,  a  note  upon  six  months'  time.  The  plaintiff' 
brought  trover  for  the  note.     *     *     * 

On  the  day  that  the  goods  were  delivered  to  the  defendant,  the  plain- 
tiff received  from  him  two  notes,  as  collateral  security,  for  the  pay- 
ment of  the  price  of  them.  One  of  these  notes,  one  hundred  and  thirty- 
five  dollars  in  amount,  was  paid  to  him.  The  payment  was  after  this 
suit  was  commenced,  and  subsequent  to  the  service  of  a  process  of  gar- 
nishment upon  the  plaintiff,  sued  out  at  the  instance  of  other  creditors 
of  the  defendant.  Upon  the  motion  for  a  new  trial,  it  was  claimed  that 
the  verdict  was  erroneous,  in  this :  That  this  sum  of  one  hundred  and 
thirty-five  dollars  was  not  allowed  as  a  credit  to  the  defendant.  The 
court,  upon  this  point,  ruled  "that  by  the  evidence  this  sum  was  held 
subject  to  summons  of  garnishment  at  the  instance  of  Hall's  (the  de- 
fendant's) creditors.  It  is  very  certain  that  either  Hall  or  his  creditors 
have  a  right  to  that  money.  Both  cannot  have  it,  and  Page  (the  plain- 
tiff) cannot  be  delayed  in  his  suit  until  the  controversy  between  Hall 
and  his  creditors  shall  be  ended.  The  jury,  therefore,  properly  refused 
to  abate  Page's  damages  for  that  sum."  The  opinion  of  the  court  thus 
expressed,  is  excepted  to.  We  cannot  assent  to  the  doctrine,  that 
collateral  securities,  pledged  bona  fide  for  the  payment  of  a  debt  with- 
out any  trust  reserved,  belongs  to  the  pledgor  or  his  creditors ;  that 
is  to  say,  that  they  belong  to  him  or  them,  in  any  sense,  which  will 
defeat  the  pledgee's  right  to  them,  or  which  is  the  same  thing,  to 
money  raised  on  them  as  security  for  his  debt.  That  right  is  para- 
mount to  the  rights  of  other  creditors,  and  is  good  against  the  pledgor 
himself,  until  the  debt  is  paid.  The  pendency  of  a  garnishment  makes 
no  difference.  The  pendency  of  this  suit  assumes  that  the  debt  is 
due.  If  this  action  can  be  sustained — if  that  assumption  be  true — 
upon  the  trial,  it  was  competent  for  the  court  to  appropriate  the  money 
received  on  the  collaterals,  to  the  plaintiff,  and  of  course  to  credit  the 
defendant.  It  ought  to  have  been  so  appropriated.  There  was  no  ne- 
cessity to  await  an  issue  on  the  garnishment.  The  court,  on  the  trial 
of  this  suit,  had  jurisdiction  of  the  matter.  It  did,  in  fact,  exercise 
that  jurisdicton  by  determining  that  this  money  belonged  to  the  de- 
fendant or  his  creditors.  If  it  belonged  to  the  defendant,  it  was 
pledged  to  pay  this  very  debt.  The  creditors  of  the  defendant  had  no 
rights  in  it,  until  the  pledgee  is  paid.  There  could,  therefore,  be  no 
controversy  about  it,  between  the  defendant  and  the  creditors,  until 
the  debt  of  the  plaintiff  is  paid.  But  the  debt,  by  the  record,  is  not 
paid.  The  very  question  is:  Shall  it  be  now  paid,  to  the  extent  of 
the  money  in  hand?  The  plaintiff  is  not  delayed  at  all.  He  is  ex- 
pedited; for  a  judgment  that  this  money  be  allowed  as  a  credit  to  the 
defendant,  is  an  instantaneous  payment  to  him.  An  appropriation  in 
this  way  to  the  plaintiff  would  protect  him  on  the  trial  of  the  garnish— 


468  CONTRACTS  (Part  1 

ment.  Whether  appropriated  or  not,  his  rights  in  this  money  are  para- 
mount to  those  of  the  garnishing  creditors.  There  is  nothing  in  this 
record,  it  may  be  proper  to  remark,  which  impeaches  the  fairness  of 
this  pledge.  It  is  not  obnoxious  to  the  act  of  1818,  or  any  other  law 
of  the  state.  Upon  the  traverse  of  the  plaintifif's  answer  to  the  gar- 
nishment (he  answering  truly,  as  this  record  discloses  the  facts),  I  ap- 
prehend that  the  garnishing  creditors  could  not  get  a  judgment  against 
the  plaintift",  until  they  had  first  proven  that  his  debt  was  paid.  In 
that  event,  it  is  true,  these  collaterals  and  this  money  would  belong  , 
to  the  defendant  or  his  creditors.    But  only  in  that  event. 

We  examine  this  doctrine  a  little.  We  say  that  the  deposit  of  these 
notes  in  the  hands  of  the  plaintiff,  as  collateral  security  for  this  debt, 
is  a  pawn  or  pledge.  A  pledge  is  a  bailment  of  personal  property  as 
security  for  some  debt  or  engagement.  Story  on  Bailm.  §  286.  Or- 
dinarily goods  and  chattels  are  the  subject  of  pledges;  but  money, 
debts,  negotiable  instruments,  choses  in  action,  etc.,  may  by  the  com- 
mon law  be  delivered  in  pledge.     *     *     * 

What  are  the  rights  of  the  pledgee  in  the  thn-ig  pledged  generally  ? 
In  virtue  of  the  pawn,  he  acquires  a  special  property  in  the  thmg,  and 
is  entitled  to  the  exclusive  possession  of  it,  during  the  time,  and  for 
the  objects  for  which  it  is  pledged.  The  right  of  possession  is  exclu- 
sive— that  is,  it  is  good  against  all  the  world,  for  the  purpose  for 
which  it  is  pledged— in  this  case,  that  purpose  is  the  payment  of  a 
debt.  For  that  purpose,  the  right  to  the  thing  is  perfect.  It  yieldsto 
no  other  right  which  did  not  attach  upon  it,  in  the  shape  of  a  lien,  prior 
pledge,  or  some  claim  existing  prior  to  the  pledge,  and  good  in  law. 
It  is  perfect  against  the  pledgor.  For  if  he  wrongfully  get  posses- 
sion, a  suit  in  favor  of  the  pawnee  will  lie  against  him  for  the  thing, 
or  for  damages.  He  can  bring  an  action  for  it,  also  against  a  stranger, 
or  an  action  against  the  stranger  for  damages.     *     *     * 

He  has  also  a  right  to  sell  the  pledge,  where  there  has  been  a  de- 
fault in  the  pledgor ;  if  there  is  no  stipulated  time  when  the  debt  shall 
be  paid,  the  pawnee  may  sell  upon  demand  and  notice.  *  *  *  He 
may  file  a  bill  in  equity  for  foreclosure  and  sale,  or  upon  demand  and 
notice  proceed  to  sell,  ex  mero  motu,  at  his  election.  *  *  *  These 
are  the  principal  rights  of  the  pawnee.  What,  specially,  are  the  rights 
of  the  pawnee  of  negotiable  securities?  He  may  recover  and  receive 
the  money  due  thereon;  he  may  bring  suit  upon  them  in  his  own 
name.  *  *  *  He  may  sell  them,  and  if  he  sells  to  a  bona  fide 
purchaser,  the  latter  acquires  an  absolute  property,  if  he  buys  without 
notice.     *     *     * 

It  is  not  necessary  to  pursue  this  subject  in  detail.  The  pawnee 
is  entitled  to  receive  the  money  due  on  his  collateral  securities,  and 
to  hold  it  against  his  pawner  and  all  the  world,  until  he  is  paid.  When 
a  pledge  is  made  for  the  benefit  of  the  pledgee  and  a  third  person, 
who  is  also  a  creditor,  and  the  fund  raised  is  insufficient  to  pay  both, 
the  pledgee,  being  a  creditor  in  possession,  is  entitled  to  preference. 
*  *  *  If  this  is  true  as  to  other  creditors,  when  there  is  a  stipula- 
tion in  their  behalf,  a  fortiori,  it  is  true  as  to  creditors  generally,  as 
to  whom  there  is  no  stipulation.  The  rights  of  the  holder  of  negotia- 
ble instruments  as  collateral  securities,  in  them,  were  considered  by 
this  court  in  the  case  of  Bond  v.  Central  Bank,  2  Ga.  106,  and  in  Gib- 
son V.  Conner,  3  Ga.  52,  53.  In  the  latter  case  we  say :  "The  trans- 
ferror parts  with,  and  the  transferee  acquires,  the  legal  title  to  the 


Ch.  11)  SPECIAL  TYPES   OP   CONTRACTS  469 

negotiable  paper  thus  transferred — the  latter  may  sue  on  it  in  his  own 
name,  and  although  the  original  debt  is  not  extinguished,  the  creditor 
has  the  right  to  apply  the  proceeds  of  the  securities,  when  realized,  to 
its  extinction — nay,  he  is  bound  to  do  it,  and  whatever  he  does  realize 
on  them  is  a  payment  pro  tanto."  If  it  be  the  right  of  the  pledgee 
to  apply  money  collected  on  the  securities,  it  is  the  right  of  the  pledgor 
to  consider  money  thus  in  hand  as  a  payment.  If  such  is  the  law  of  the 
case,  he  (the  defendant)  is  entitled,  the  case  being  made,  to  have  it 
so  declared,  and  to  have  a  credit  on  the  original  debt.  This  the  court 
ought  to  do,  if  for  no  other  reason  than  to  avoid  litigation.  As  before 
stated,  the  court  had  jurisdiction,  in  this  case,  of  this  subject-matter, 
and  we  think  it  erred  in  not  ruling  that  this  money  was  by  law  to  be 
appropriated  to  the  plaintiff's  debt,  and  as  a  consequence,  that  the 
defendant  was  entitled  to  a  credit  for  the  amount  of  it. 
Upon  these  grounds  we  remand  the  case. 


SECTION  5.— THE  CONTRACT  OF  SURETYSHIP 

A  surety  is  one  who  is  under  contract  to  pay  the  debt  of  another. 
The  contract  assumes  various  forms.  At  the  time  of  a  sale  of 
goods  by  C.  to  D.,  S.  may  promise  to  pay  if  D.  does  not.  Or  D. 
may  give  his  note  for  the  purchase  price  to  C,  S.  signing  as  in- 
dorser,  or  S.  may  sign  as  a  joint  maker  with  D.  In  all  these  cases, 
if  S.  assumed  his  obligation  to  enable  D.  to  obtain  credit  with  C, 
S.  is  a  surety  for  D.,  the  principal  debtor.  The  liability  of  S.  to  C. 
is  not  identical  in  the  three  cases  supposed,  for  in  one  case  he  has 
assumed  a  collateral  or  secondary  obligation  on  a  simple  contract, 
in  another  he  is  secondarily  liable  on  a  negotiable  instrument,  and 
in  the  last  case  he  is  primarily  liable  on  a  negotiable  instrument. 
But  in  many  respects  S.  sustains  the  same  relation  to  C.  and  D.  in 
all  three  cases,  as  well  as  in  other  cases  where  the  contract  of 
suretyship  assumes  other  forms. 

The  law  of  suretyship,  or  of  principal  and  surety,  is  usually 
treated  as  a  branch  of  the  law  separate  and  distinct  from  the  gen- 
eral law  of  contracts.  However,  the  relation  of  S.  to  C.  and  D. 
is  contractual,  and  accordingly  these  general  principles  of  the 
law  of  contract  are  applicable.  In  addition,  we  find  that  a  number 
of  principles  of  law  developed  by  courts  of  equity  materially  aft'ect 
the  legal  relations  of  the  parties.  We  are  here  interested  in  noting, 
very  briefly,  indeed,  some  of  the  more  important  rights  of  the 
feuret3^  Looking  at  the  subject  from  the  standpoint  of  the  law  of 
contracts,  the  problem  in  the  main  is  to  ascertain  the  terms  of  the 
contract.  As  will  appear,  some  of  the  most  important  terms  and 
conditions  in  the  contract  of  suretyship  are  implied,  either  in  fact 
or  in  law. 


470  CONTRACTS  (Part  1 

BOATMEN'S  SAVINGS  BANK  V.  JOH^"SON  et  al. 
(St.  Louis  Court  of  Appeals,  Missouri,  1887.  24  Mo.  App.  316.) 
Thompson,  J.  The  single  question  presented  by  this  record  is 
whether  an  indorser  or  surety  is  released  by  a  composition  agreement 
between  the  holder  of  the  obligation  and  the  maker,  acceptor,  or  other 
principal  debtor,  which  composition,  in  express  terms,  reserves  every 
right  and  remedy  which  the  holder,  or  obligee,  has  against  other  per- 
sons. The  question  must  be  answered,  upon  authority,  that  such  agree- 
ment does  not  discharge  the  indorser  or  surety. 

Two  principles  are  universally  conceded  in  respect  of  the  rights 
of  sureties,  and  are  not  disputed  by  the  parties  to  this  proceeding :  (1) 
That  a  valid  agreement  between  a  creditor  and  his  principal  debtor, 
whereby  the  creditor,  in  consideration  of  the  payment  of  a  part  of  the 
debt,  discharges  the  principal  debtor,  will,  without  more,  operate  to 
discharge  a  surety.  (2)  That  an  agreement  between  a  creditor  and 
his  principal  debtor,  whereby  the  creditor  agrees,  for  a  consideration, 
to  extend  the  time  of  payment,  will,  without  more,  operate  to  dis- 
charge a  surety.  But  it  is  an  exception  to  the  former  of  these  rules, 
equally  well  settled,  that  such  an  agreement  will  not  operate  to  dis- 
charge a  surety  where  the  agreement  itself  contains  an  express  reser- 
vation of  the  remedies  of  the  creditor  against  sureties,  or  agains^t  all 
persons  other  than  the  principal  debtor,  who  may  be  liable.    *    *'    * 

It  is  an  equally  well-settled  exception  to  the  second  of  these  rules  that 
such  an  agreement  will  not  operate  to  discharge  a  surety,  where  the 
agreement  itself  contains  an  express  reservation  of  the  remedies  of 
the  creditor  against  sureties,  or  against  all  persons  other  than  the 
principal  debtor  who  m'ay  be  liable.  *  ===  '^  These  two  exceptions 
to  the  two  rules  above  stated  rest  upon  the  same  principle.  They  are 
grounded  upon  the  principle  that,  where  a  contract  expressly  reserves 
the  remedy  of  the  creditor  against  other  persons  (which  includes  sure- 
ties), the  sureties  are  in  no  way  prejudiced  by  the  agreement.  By 
entering  into  such  an  agreement,  the  principal  debtor  impliedly  consents 
that  whatever  remedies  his  sureties  have  against  him  shall  remain 
open  to  them.  They  are  thereafter  at  liberty  to  pay  the  debt  at  once, 
and  proceed  immediately  against  their  principal  for  reimbursement. 
An  examination  of  many  decisions  shows  that  the  principles  which 
support  these  two  exceptions  to  the  respective  rules  above  stated  are 
precisely  the  same.  Courts  adopt  the  same  mode  of  reasoning  in  the 
two  cases,  and  cite  interchangeably  decisions  where  the  agreement  was 
for  a  discharge  of  the  principal  debtor,  and  where  it  was  merely  for 
an  extension  of  time  to  him. 

This  principle  has  been  applied  in  a  number  of  cases  where  the 
agreement  was  merely  that  the  creditor  would  not  sue  the  principal 
debtor  within  a  stated  period  of  time.  *  *  *  In  these  cases,  where 
there  is  a  reservation  of  the  remedies  of  the  creditor  against  all  other 
persons,  or  against  sureties,  the  reasons  upon  which  the  courts  refuse 
to  discharge  the  sureties,  are  twofold:  (1)  The  reason  above  stated, 
that  the  agreement  in  no  way  prejudices  the  surety  as  to  any  remedy 
which  he  may  have  against  his  principal.  (2)  The  additional  reason 
that  a  covenant  not  to  sue  cannot  be  pleaded  in  bar  of  an  action,  in 
case  it  is  brought  in  violation  of  the  covenant,  the  courts  proceeding 
upon  the  refinement  that  such  a  covenant  affords  merely  the  ground  of 


Ch.  11)  SPECIAL  TYPES   OF   CONTRACTS  471 

an  action  for  damages.  This  distinction  was  noticed  by  our  Supreme 
Court  in  Rucker  v.  Robinson,  38  Mo.  154,  90  Am.  Dec.  412. 

Whether  it  is  well  or  ill  founded,  we  need  not  now  consider.  As- 
suming that  it  is  well  founded,  the  defendant's  position  is  not  helped, 
because,  in  the  cases  where  the  agreement  was  merely  an  agreement 
not  to  sue,  the  courts  have  universally  rested  their  decisions  as  well 
upon  the  reason  that  the  sureties  were  not  prejudiced  by  the  agreement, 
and  hence  not  discharged,  as  upon  the  reason  that  the  agreement  did 
not  prevent  the  creditor  from  suing  the  principal  debtor  at  any  time. 
An  examination  of  numerous  cases  convinces  us  that,  with  one  or 
two  isolated  exceptions,  they  afford  no  ground  for  raising  the  distinc- 
tion, which  has  been  attempted  in  this  case,  between  agreements  not 
to  sue  and  agreements  to  discharge  the  principal  debtor  entirely,  re- 
serving rights  against  all  other  persons.     *     *     * 

We  find,  then,  that  the  exception  to  the  general  rule,  which  sup- 
ports the  plaintiff's  claim  in  this  case,  has  been  thoroughly  settled  in 
England,  and  in  this  country,  by  the  most  authoritative  courts ;  and 
as  we  have  no  jurisdiction  to  change  the  law,  we  must  hold  that  the 
circuit  court  erred  in  the  view  that  the  defendant  was  not  liable,  and 
in  nonsuiting  the  plaintiff".     *     *     * 

The  judgment  will  be  reversed,  and  the  case  remanded.     *     *     * 


UTTKRSON  V.  ELMORE  et  al. 

'(Springfield  Court  of  Appeals,  Missouri,  1911.''  154  Mo.  App.  646,  136  S.  W.  9.) 

Gray,  J.  This  is  a  suit  brought  by  the  plaintiff  against  D.  R.  El- 
more &  Son,  and  Sam  Jones  and  M.  Beckman,  for  $321.71.  In  July, 
1908.  the  plaintiff  made  a  contract  with  said  Elmore  &  Son  to  build  a 
residence  for  him.  At  the  time  the  contract  was  made,  a  bond  was 
executed  by  the  contractors  to  the  plaintiff,  with  the  defendant  Jones 
and  Beckman  as  sureties,  in  the  sum  of  $1,000,  for  the  completion  of 
the  building  according  to  plans  and  specifications.  The  contractors 
failed  to  complete  the  building  according  to  the  contract  or  the  plans 
and  specifications,  and  also  failed  to  pay  bills  for  material,  so  that  the 
plaintiff,  in  addition  to  the  contract  price,  was  compelled  to  pay 
the  above  sum. 

This  suit  was  instituted  against  the  contractors  and  the  sureties. 
The  cause  was  tried  before  the  court  without  a  jury,  resulting  in  a 
judgment  in  favor  of  the  plaintiff  and  against  the  contractors  for 
$259.45,  but  in  favor  of  the  sureties.  The  plaintiff  appealed  from 
that  judgment  to  this  court,  and  the  only  question  for  decision  here 
is  whether  the  trial  court  was  right  in  excusing  the  sureties  on  tlie 
bond. 

The  written  contract  for  the  completion  of  the  building,  entered 
into  between  the  plaintiff  and  the  contractors,  expressly  authorized 
changes  in  the  work  and  in  the  plans  and  specifications.  The  bond, 
however,  was  conditioned  for  the  performance  of  the  contract,  but 
read  as  follows :  "If  the  said  D.  R.  Elmore  &  Son  shall  duly  perform 
said  contract  by  completing  the  building  as  described  by  the  plans  and 
specifications  and  deliver  it  up  free  from  liens  or  claims  then  this 
obligation  shall  be  void."  The  contract  provided  the  work  should  be 
done  within  a  specified  time  and  a  penalty  of  a  certain  amount  per 
day  was  added  for  the  failure  so  to  do.     The  plans  and  specifications 


472  CONTRACTS  (Part  1 

made  no  provision  for  any  changes,  and  contained  no  clause  requiring 
the  work  to  be  done  within  a  specified  time,  or  a  penalty  for  failure 
to  do  so.  The  sureties  claim  that  without  their  consent  the  plaintiff 
and  the  contractors  made  alterations  and  changes  in  the  building,  and 
on  account  thereof  they  were  released. 

The  only  testimony  relating  to  the  changes  was  given  by  the  plain- 
tiff. He  testified  that  the  doors  were  made  six  inches  larger  than 
called  for  in  the  plans,  and  he  paid  the  contractors  therefor  $2.50; 
that  another  change  was  made  in  a  door,  and  he  paid  therefor  50 
cents ;  that  a  change  was  made  in  the  way  of  attaching  rafters,  re- 
sulting in  extra  plastering,  amounting  to  $17.75;  that  a  change  was 
made  in  the  balcony,  by  leaving  out  one  window  and  moving  one,  and 
that  he  paid  the  contractors  extra  therefor  the  sum  of  $18;  that  shin- 
gles were  substituted  for  ridge  poles  at  the  extra  expense  of  $2.25. 
He  also  testified  to  a  number  of  other  changes  made  under  an  agree- 
ment between  himself  and  the  contractors  without  the  consent  of  the 
sureties,  but  that  said  changes  in  no  wise  increased  the  cost  of  the 
building. 

Had  the  bond  been  conditioned  that  the  contractors  should  con- 
struct the  building  according  to  the  contract,  then  the  changes  made 
under  an  agreement  between  the  plaintiff  and  the  contractors  would 
not  release  the  sureties.  The  contract  expressly  provided  that  chang- 
es might  be  made,  and  where  the  contract  so  reads  and  the  bond  is 
conditioned  for  its  faithful  performance,  then  the  surety  is  liable,  not- 
withstanding the  changes.  *  *  *  The  bond  in  this  case  does  not 
provide  for  the  completion  of  the  contract  by  the  contractors  in 
all  its  details.  It  simply  provides  for  the  completion  of  the  contract 
"by  completing  the  building  as  described  by  the  plans  and  specifica- 
tions." 

It  must  be  accepted  as  the  settled  law  of  this  state  that  there  is  no 
implied  obligation  on  the  part  of  a  surety  that  he  has  undertaken  more 
or  other  than  that  expressed  in  his  contract,  and  it  is  only  to  the  ex- 
tent and  in  the  manner  and  under  the  circumstances  pointed  out  that 
he  is  bound.  *  *  *  It  is  also  well  settled  that  any  substantial 
change  made  in  the  contract  by  the  principal  and  the  contractor,  with- 
out the  consent  of  the  surety,  will  release  the  latter  regardless  wheth- 
er the  alterations  were  injurious  or  beneficial  to  the  surety.     *     *     * 

In  this  case  the  sureties'  undertaking,  when  strictly  construed,  only 
required  the  performance  of  the  contract  to  the  extent  of  complet- 
ing the  building  according  to  the  plans  and  specifications.  Their  liabil- 
ity, therefore,  is  not  to  be  measured  by  obligations  requiring  the  com- 
pletion of  the  building  according  to  a  contract  in  which  are  provisions 
for  changes  and  alterations.     *     *     * 

The  second  count  of  plaintifif's  petition  is  based  upon  the  fact  that 
the  contractors  did  not  complete  the  building  within  the  time  specified 
in  the  contract.  The  contract  provided  liquidated  damages  of  $3  per 
day  for  each  day  the  work  remained  incomplete  after  the  time  specified 
for  its  completion  in  the  contract.  At  the  beginning  of  the  trial  the 
defendants  objected  to  the  introduction  of  testimony  on  said  count,  for 
the  reason  that  it  did  not  state  a  cause  of  action  against  the  sureties. 
The  court  sustained  the  objection  as  to  the  sureties,  and  plaintiff  ac- 
quiesced in  such  ruling  by  making  no  point  thereon  in  his  motion  for 
new  trial. 


Ch.  11)  SPECIAL   TYPES   OF   CONTRACTS  473 

As  we  have  stated,  the  condition  of  the  bond  was  not  for  the  full 
performance  of  the  contract  in  every  particular,  and  therefore  the 
sureties  were  not  liable  for  the  failure  to  perform  that  part  of  the 
contract.  This  part  of  the  opinion  is  written  solely  for  the  purpose 
of  illustrating  the  other  issue  in  the  case.  Inasmuch  as  the  bond  is 
not  conditioned  for  the  performance  of  all  the  terms  of  the  contract, 
the  liabihty  of  the  sureties  must  be  limited  to  the  parts  of  the  contract 
mentioned  and  described  in  the  bond,  to  wit,  by  completing  the  build- 
ing as  described  by  the  plans  and  specifications. 

The  contention  of  appellant  is  that  the  changes  were  so  immaterial 
that  they  should  be  ignored.  There  is  much  merit  in  this  contention. 
If  we  were  free  from  controlling  decisions  in  this  state,  we  might 
adopt  appellant's  view.  But  in  Beers  v.  Wold,  116  Mo.  179,  22  S. 
W.  620,  the  contract  price  for  the  work  was  over  $31,000.  The  real 
expense  and  cost  of  changes  amounted  to  a  little  over  $221.  The 
contention  was  that  they  were  so  immaterial  that  they  should  be  ig- 
nored. The  Supreme  Court,  speaking  through  Black,  J.,  said:  "Can 
it  be  said  these  changes,  taken  as  a  whole,  were  so  small  that  the 
law  will  take  no  notice  of  them?  We  think  not.  No  case  to  which  we 
are  cited  will  justify  any  such  conclusion.  To  a  suit  to  recover  the 
expense  brought  about  by  these  alterations,  it  would  be  no  answer  to 
say  that  they  were  immaterial.  These  changes  destroyed  the  identity 
of  the  contract,  and  that  is  sufficient  to  discharge  the  sureties."  This 
case  is  in  point,  and  we  are  bound  by  it. 

In  addition  to  the  changes  heretofore  enumerated  and  which  were 
made  at  an  increased  cost,  there  were  numerous  changes  made  by 
agreement  between  the  plaintiff  and  the  contractors.  Some  of  them  in 
no  manner  affected  the  actual  cost  of  the  building,  and  a  number  of 
them  decreased  the  cost  thereof.  But  when  all  the  alterations  are 
taken  together,  they  substantially  changed  the  contract,  and  under  the 
rule  in  this  state  that  the  surety  has  the  right  to  stand  on  the  very 
letter  of  his  contract,  and  that  any  material  change  in  the  same,  with- 
out his  consent,  releases  him,  we  are  of  the  opinion  that  the  trial  court 
did  not  err  in  holding  the  sureties  were  not  liable  in  this  case,  and  the 
judgment  will  be  affirmed.    *    *    * 


BLANCHARD  v.   BLANCHARD. 

(Court  of  Appeals  of  New  York,  1911.     201  N.  Y.  134,  94  N.  E.  630, 
37  L.  R.  A.   [N.  S.]  783.) 

Action  by  Esther  F.  Blanchard,  as  administratrix  of  the  estate  of 
Flint  Blanchard,  deceased,  against  Amos  F.  Blanchard.  Appeal  by 
defendant  from  judgment  in  favor  of  plaintiff. 

Collin,  J.  The  defendant  on  May  12,  1900,  made  his  negotiable 
promissory  note  for  $1,100.15,  payable  with  interest  to  the  order  of 
Flint  Blanchard  and  to  mature  August  12,  1900.  Flint  Blanchard 
indorsed  it  for  the  accommodation  of  the  defendant,  who  then  deliv- 
ered it  to  and  received  thereupon  from  Daniel  Griswold  the  sum  of 
$1,100.15.  Flint  Blanchard  on  July  9,  1900,  waived  demand  of  pay- 
ment and  notice  of  the  nonpayment  thereof.  The  defendant  made  no 
payment  upon  the  note.  Flint  Blanchard  made  two  small  payments 
thereon,  and  after  his  death,  February  17,  1906,  and  plaintiff's  appoint- 
ment, March  5,  1906,  plaintiff'  paid  February  19,  1907,  to  Griswold 
upon  his  demand  $1,101.50,  the  amount  unpaid  thereon;    the  statute 


474  CONTRACTS  (Part  1 

of  limitations  being  then  invocable  by  the  defendant,  but  not  by  the 
plaintiff,  because  the  18  months  next  succeeding  the  death  of  Flint 
Blanchard  were  not  a  part  of  the  time  limited  for  the  commencement 
of  an  action  upon  his  indorsement  against  his  administratrix.  Code 
Civ.  Proc.  §  403.  The  action,  commenced  October  8,  1907,  rests  upon 
the  payment  of  moneys  for  the  use  of  the  defendant  and  the  contract, 
miplied  by  law,  of  the  defendant  to  repay  them.  The  defendant's 
counsel  takes  the  position  that  the  making,  indorsement,  and  delivery 
of  the  note  created  an  express  contract  between  the  defendant  and 
Flint  Blanchard,  which  was  not  annulled  or  changed  through  the  pay- 
ments to  Griswold,  the  existence  of  which  prohibits  or  bars  an  im- 
plication, and  plaintiff  is  confined  to  an  action  upon  the  note,  to  which 
the  statute  of  limitations  is  a  perfect  defense,  and  that  the  conse- 
quent loss  of  plaintiff  is  the  result  of  the  failure  of  her  intestate  and 
herself  to  take  up  and  sue  the  note  within  the  six  years  from  Au- 
gust 12,  1906. 

The  doctrine  of  implied  contract  is  firmly  placed  in  our  system  of 
jurisprudence.  With  whatever  reason  or  logic  it  and  the  legal  fic- 
tion which  it  in  part,  at  least,  is  may  be  characterized  as  a  mythical 
creation  or  an  usurpation,  it  is  too  inveterate  and  useful  to  be  eithei 
shattered  or  discarded;  nor  are  we  called  upon  to  justify  its  exist- 
ence by  writing  of  the  beneficial  part  it  has  worked  in  the  historical 
development  of  the  law.  The  law  is  practical  and  has  as  a  purpose 
to  adjudge,  through  just  and  general  principles  and  continuity,  the  ac- 
tual disputes  growing  out  of  the  conduct  and  transactions  of  those 
under  its  jurisdiction.  If  it  is  not  in  all  respects  logical  and  conform- 
able to  pure  reason,  no  more  are  the  conduct  and  transactions  which 
are  the  causes  of  those  disputes. 

This  action  is  ex  contractu  and  has  no  support  other  than  a  con- 
tract to  be  by  the  law  implied  from  the  facts  and  conditions  estab- 
lished herein.  In  case  the  law  refuses  to  declare  the  contract,  the 
action  fails.  The  note  of  the  defendant  must  be  eliminated  as  the 
basis  of  a  recovery.  Under  the  facts,  does  the  law  imply  a  contract 
on  the  part  of  the  defendant  to  pay  the  plaintiff  the  amounts  paid  by 
herself  and  her  intestate  by  reason  of  his  indorsement? 

Those  payments  were  not  voluntary.  As  to  Griswold,  the  indorse- 
ment was  the  agreement  of  Flint  that  on  due  presentment  the  note 
should  be  paid  according  to  its  tenor,  and  that,  if  it  were  dishonored 
and  the  necessary  proceedings  on  dishonor  were  duly  taken  he  would 
pay  the  amount  thereof  to  the  holder,  *  *  *  which  at  the  time  of 
the  payments  had  become  certain  and  obligatory.     *     *     * 

The  relation  as  to  the  debt  between  the  defendant  and  Flint,  in 
so  far  as  it  is  involved  in  this  action,  was  that  of  principal  and  sure- 
ty. *  *  *  The  defendant,  when  he  procured  the  indorsement,  im- 
pliedly engaged  that  he  would  indemnify  Flint  and  reimburse  him  in 
case  he  was  not  compelled  to  pay.  This  engagement  was  not  created 
by  the  note.  *  *  *  The  failure  of  the  defendant  to  pay  the  note 
did  not  constitute  a  cause  of  action  in  favor  of  Flint  against  the  de- 
fendant, but  a  payment  by  Flint  did.  A  cause  of  action  accrued  when 
he  paid,  and  the  statute  of  limitations  then  began  to  run.  Each  of 
the  payments  made  by  Flint  or  the  plaintiff'  was  within  the  six  years 
next  before  the  commencement  of  the  suit,  and  was  not  barred  by  the 
statute  of  limitations.     *     *     * 

The  judgment  should  be  affirmed,  with  costs. 


'Ch.  11)  SPECIAL   TYPES   OF   CONTRACTS 


475 


GIESEKE   V.  JOHNSON. 
(Supreme  Court  of  Indiana,  ISSS.     115  Ind.  308,  17  N.  E.  573.) 

ZoLLARS,  J.  J.  H.  Gieseke  and  appellee  executed  a  promissory 
note  to  the  First  National  Bank  of  Vincennes  in  which  was  a  stipula- 
tion for  the  payment  of  attorney's  fees  for  collection. 

Although  not  shown  upon  the  face  of  the  note,  appellee  was  surety 
for  Gieseke.  Before  the  maturity  of  the  note  Gieseke  died,  and  ap- 
pellant was  appointed  administrator  of  his  estate.  After  the  maturity 
of  the  note  appellee  paid  it,  but  paid  no  attorney's  fees.  Subsequent- 
ly he  filed  his  claim  against  the  estate  of  Gieseke,  stating  therein  the 
amount  thus  paid,  setting  out  a  copy  of  the  note,  and  claiming  attor- 
ney's fees  for  its  collection.  The  court  below  allowed  the  claim,  and 
included  in  its  judgment  $15  as  such  attorney's  fees. 

Is  appellee  entitled  to  recover  such  attorney's  fees?  That  is  the 
only  question  for  decision  here. 

We  are  satisfied  that  he  is  not.  One  sufficient  reason  why  he  is  not 
is  that  he  is  entitled  to  recover  the  amount  paid  to  the  bank,  with  in- 
terest, and  no  more.  His  right  of  action  is  for  indemnity  only,  and 
rests  upon  an  implied  promise  on  the  part  of  the  principal.  Hence  it 
is  that  a  surety  cannot  maintain  an  action  against  his  principal  until 
he  has  paid  something,  and  then  only  for  the  amount  paid,  with  in- 
terest.    In  this  state  the  rate  of  such  interest  is  regulated  bv  statute. 

*  *  *  O  J 

By  the  terms  of  the  note  the  makers  agreed  to  pay  to  the  bank  rea- 
sonable attorney's  fees  for  its  collection ;  but  the  principal  maker  of 
the  note^  did  not  thereby  agree  to  pay  to  appellee,  as  his  surety,  such 
attorney's  fees,  nor  any  ot^r  amount.  As  already  stated,  the  rights 
of  the  surety  and  the  obligation  of  the  principal,  as  between  them- 
selves, ma  case  like  this,  rests  upon  an  implied  promise  on  the  part 
of  the  principal  maker  which  arises  under  the  law  for  the  indemnity 
of  the  surety. 

The  action  by  appellee,  the  surety,  against  the  principal  maker,  is 
not  uppn  the  note,  but  upon  the  implied  promise  of  indemnity.  And 
hence  it  is  that  his  right  of  action  is  not  limited  by  the  statute  of  lim- 
itations applicable  to  the  note,  but  by  the  statute  of  limitations  applica- 
ble to  accounts  and  contracts  not  in  writing,  which,  in  this  state,  is 
six  years.     *     *     * 

Upon  any  view  that  may  be  taken  of  the  case,  the  attorney's  fee 
should  not  have  been  allowed,  and  to  that  extent  the  judgment  is  too 
large.    *    *    * 

BINGHAM  V.  MElARS  et  al. 

(Supreme  Court  of  North  Dakota,  1S94.     4  N.  D.  437,  61  N   W   808 
27  L.   R.  A.  257.) 

Corliss,  J.  The  defendants  were  sureties  on  an  undertaking  given 
on  appeal  to  this  court  from  a  judgment.  Their  only  defense  to  this 
action  against  them  on  the  undertaking  is  that  the  principal  on  whose 
behalf  they  signed  the  undertaking  assigned  to  the  plaintifif,  as  col- 
lateral to  the  claim  on  which  such  judgment  was  rendered,  certain 
promissory  notes  secured  by  real  estate  mortgages,  and  that  such  col- 
lateral security  is  sufficient  to  pay  such  judgment  and  all  expenses; 
that  they  have  notified  the  plaintifif  that  he  must  resort  to  such  collater- 


476  CONTRACTS  (Part  1 

al  to  collect  his  claim,  but  that  he  has  failed  to  do  so.  Under  the  cir- 
cumstances of  this  case,  these  facts  do  not  constitute  a  defense.  The 
general  rule  is  that  the  surety  has  no  right  to  insist  that  the  creditor 
shall  first  proceed  against  the  principal  debtor,  or  any  security  which 
such  debtor  may  have  given  him.  Upon  default  the  surety  may  at  once 
be  sued.  1  Brandt,  Sur.  §  97.  It  is  true  that  in  cases  characterized  by 
exceptional  features,  equity  may  compel  the  creditor  to  resort  first  to 
the  property  of  the  principal  debtor  where  this  will  occasion  no  in- 
convenience or  delay  to  the  creditor.  *  *  *  But  the  facts  of  this 
litigation  do  not  call  for  the  application  of  this  rule.  *  *  * 
[Judgment  for  plaintiff  affirmed.] 

On  Rehearing,  1895. 

The  earnestness  with  which  counsel  for  defendants  have  pressed 
upon  us  their  application  for  rehearing  constrains  us  to  go  more  fully 
into  the  discussion  of  the  exceedingly  interesting  question  presented  on 
this  appeal.  In  their  main  features,  the  English  common  law  and  the 
Roman  civil  law  dift'ered  radically  from  each  other  touching  the  right 
of  the  surety  to  require  the  creditor  to  proceed  against  the  principal 
debtor  or  the  security  coercing  payment  by  the  surety.  In  the  earlier 
period  of  Roman  jurisprudence,  the  right  of  the  surety  to  compel  the 
creditors  to  resort  first  to  the  principal  to  collect  his  demand  appears 
to  have  been  well  established;  but  the  rule  was  gradually  departed 
from.  Justinian,  however,  restored  it,  and  from  his  time  the  doctrine 
was  universally  recognized  throughout  the  empire.  It  has  been  in- 
corporated in  the  jurisprudence  of  many  of  the  nations  of  Europe. 
*  *  *  But  it  never  .secured  a  footing  in  England.  There  the  con- 
trary doctrine  has  prevailed  from  the  earliest  times.  The  common- 
law  rule  is  that  the  surety  must  pay  and  s^ek  reimbursement  from  the 
principal  or  out  of  the  securities  the  latter  lias  given  the  creditor.  This 
was  always  the  rule  in  courts  of  law.  But  in  equity  and  in  bankruptcy 
proceedings  ^  rule  somewhat  analogous  to  that  of  the  civil  law  grew 
up.  This  rule,  however,  was  less  sweeping  in  its  effects  upon  the 
creditor  than  the  rule  promulgated  by  Justinian.  It  more  carefully 
guarded  his  rights  from  prejudice.  The  English  law  regarded  the 
promise  of  the  surety  as  am  absolute  promise,  unless  it  was  in  terms 
conditional.  The  surety  was  under  the  same  obligation  as  the  princi- 
pal to  pay  the  debt.  The  courts  of  law  therefore  ignored  the  equities 
between  the  principal  and  the  surety  when  the  creditor  was  seeking 
to  collect  his  claim  of  the  latter. 

In  equity,  also,  the  promise  of  the  surety  was  looked  upon  as  an 
unconditional  promise ;  but  equity,  unlike  the  law,  would  not  under  all 
circumstances,  refuse  to  consider  the  rights  of  the  surety  in  his  rela- 
tion to  the  principal ;  and  whenever  a  case  arose,  special  in  its  charac- 
ter, calling  for  the  aid  of  equity  to  protect  the  surety  from  injury,  that 
court,  true  to  its  traditions  and  its  fundamental  principles,  extended 
relief  to  the  surety,  whenever  it  could  do  so  without,  on  the  other  hand, 
affecting  the  right  of  the  creditor  to  the  payment  of  his  debt  according 
to  the  terms  of  his  contract.  But  in  all  such  cases  equity  required  that 
the  creditor  should  be  saved  from  delay,  from  expense,  and  from  all 
risk.  *  *  *  When  the  object  of  the  surety's  appeal  to  equity  was  to 
compel  the  creditor  to  exhaust  the  collaterals  in  his  hands  before  pro- 
ceeding against  the  surety,  the  foundation  of  equitable  relief  was  the 
inability  of  the  surety  himself  to  enforce  such  collateral  after  paying 


Ch.  11)  SPECIAL   TYPES   OP   CONTRACTS  477 

the  debt,  or  the  possibility  that  the  creditor  by  some  act  had  impaired 
its  value  or  destroyed  its  legality.  The  mere  fact  that  the  creditor 
held  security  for  the  debt  did  not  entitle  the  surety  to  appeal  to  equity 
for  a  decree  that  the  creditor  look  first  to  such  security  for  his  pay. 
In  such  a  case  the  surety  could  protect  himself  by  paying  the  claim, 
and  being  subrogated  to  the  creditor's  rights  to  the  security.  But  if, 
after  payment  by  him,  he  could  not  enforce  such  security,  or  if  grave 
doubt  existed  as  to  its  legality  because  of  some  act  of  the  creditor  with 
respect  to  it,  then  a  special  case  was  presented,  necessitating  the  in- 
terference of  equity  to  prevent  injustice  to  the  surety.    ''=    *     * 

The  general  rule  that  some  peculiar  equity  must  exist  in  favor  of 
the  surety — that  the  case  must  be  an  exceptional  one  to  entitle  the 
surety  to  relief — applies  as  fully  when  the  surety  is  seeking  to  compel 
the  creditor  to  first  sue  the  principal  as  when  he  is  insisting  that  the 
creditor  shall  first  exhaust  the  security  he  holds.  These  rules  of  the 
common  law  constitute  the  law  of  this  state,  so  far  as  they  have  not 
been  changed  by  statute.  We  will  shortly  come  to  that  subject.  Now, 
it  is  obvious  that  defendants'  answer  discloses  no  special  equity  in 
their  favor.  The  security  which  they  ask  the  court  to  compel  the 
creditor  to  exhaust  they  can  secure  absolute  control  of  by  themselves 
paying  the  claim  they  owe.  As  between  the  creditor  to  whom  a  debt 
is  owing  and  the  surety  who  owes  it,  equity  very  properly  declares  that 
the  creditor  ought  not  to  be  compelled  to  enforce,  for  the  benefit  of  the 
surety,  the  security  he  holds,  but  that  the  surety  himself  should  pay  the 
debt,  and  enforce  such  security  for  his  own  benefit.    ''''    *    * 

The  rehearing  is  denied.     The  judgment  is  affirmed.     All  concur. 


FREW  V.   SCOULAR. 

(Supreme  Court  of  Nebraska,  1917.     101  Neb.  131,  162  N.  W.  496, 
L.  R.  A.  191TF,  1065.) 

Rose;,  J.  This  is  an  action  for  contribution  between  sureties. 
*  »  >i=  'fi^Q  bond  matured  May  15,  1894,  and  was  secured  by  a  mort- 
gage on  land  in  Scotland,  where  all  the  parties  resided  except  de- 
fendant, a  resident  of  Nebraska.  *  =^  "•=  It  is  alleged  further  that 
the  laws  of  Scotland  do  not  bar  an  action  on  the  bond  for  40  years. 
The  suit  is  brought  against  George  Scoular  to  compel  contribution 
in  the  sum  of  $2,999,  his  alleged  liability  as  one  of  three  solvent  sure- 
ties. Defendant  pleaded  that  he  signed  the  bond  in  Nebraska,  that  he 
was  then,  and  has  since  been,  a  resident  thereof,  and  that  the  action 
is  barred  here  by  the  statute  of  limitations — a  five-year  period.    *    *     * 

Should  defendant's  plea  of  the  statute  of  limitations  be  sustained? 
The  question  may  be  stated  thus :  May  a  surety  in  whose  favor  the 
statute  of  limitations  has  not  run,  who  has  done  nothing  to  suspend 
its  operation  and  who  has  been  compelled  to  pay  the  debt  of  his  prin- 
cipal, exact  contribution  from  a  cosurety  in  another  state,  though  un- 
der the  laws  thereof  the  creditor's  claim  against  the  latter  was  barred 
when  the  principal's  debt  was  paid?  While  the  decisions  appear  to 
be  in  conflict,  the  better  reason  and  the  weight  of  authority  seem  to 
support  the  rule  requiring  contribution.    *    *    -•'■ 

In  Camp  v.  Bostwick,  20  Ohio  St.  337,  5  Am.  Rep.  669,  it  was  con- 
tended, as  in  the  present  case,  that,  since  the  statute  of  limitations  had 
barred  an  action  by  the  creditor  against  the  defendant  before  the  plain- 
titt  paid  the -debt,  defendant  received  no  benefit  from  such  payment  and 


478  CONTRACTS  (Parti 

was  not  liable  for  contribution.    In  answer  to  this  argument  the  court 

said : 

"If  the  right  of  a  cosurety  to  claim  contribution  rested  upon  the 
doctrine  of  subrogation  to  the  rights  of  the  creditor,  the  proposition 
might  be  true..  The  doctrine  of  subrogation  has  its  origin  in  the  re- 
lation of  principal  and  surety,  whereby  a  surety  who  pays  the  debt 
of  his  principal,  is  in  equity,  substituted  in  the  place  of  the  creditor, 
and  is  entitled  to  all  the  rights  which  the  creditor  may  have  against  his 
principal.  But  the' doctrine  of  contribution  has  its  origin  in  the  re- 
lation of  cosureties  or  other  joint  promisors  in  the  same  degree  of 
obligation.  It  is  not  founded  upon  the  contract  of  suretyship.  *  *  * 
It  is  an  equity  which  springs  up  at  the  time  the  relation  of  cosureties 
is  entered  into,  and  ripens  into  a  cause  of  action  when  one  surety  pays 
more  than  his  proportion  of  the  debt.  *  *  *  From  this  relation 
the  common  law  implies  a  promise  to  contribute  in  case  of  unequal 
payments  by  cosureties.  But  equity  resorts  to  no  such  fiction.  It 
equalizes  burdens  and  recognizes  and  enforces  the  reasonable  expec- 
tations of  cosureties  because  it  is  just  and  right  in  good  morals,  and 
not  because  of  any  supposed  promise  betw^een  them.  This  equity,  hav- 
ing once  arisen  between  cosureties,  this  reasonable  expectation  that 
each  will  bear  his  share  of  the  burden  is,  as  it  were  a  vested  right  in 
each,  and  remains  for  his  protection  until  he  is  released  from  all  his 
liabilitv  in  excess  of  his  ratable  share  of  the  burden.  Neither  the 
creditor,  the  principal,  the  statute  of  limitations,  nor  the  death  of  a 
party,  can  take  it  away."    *    *     * 

The  question  is  not  whether  the  statute  of  limitations  runs  against 
a  surety's  claim  for  contribution,  but  when  does  the  cause  of  action 
for  contribution  accrue  ?  Ordinarily  the  statute  of  limitations  does  not 
commence  to  run  until  the  cause  of  action  accrues.  _  The  right  of  a 
surety  to  contribution  does  not  arise  until  he  has  paid  more  than  his 
proportion  of  the  debt  or  until  his  liability  has  been  determined  by 
judgment.    *     *    * 

"In  considering  the  questions  involved,  it  should  be  borne  in  mind 
that  this  is  an  action  for  contribution.  Contribution  does  not  rest 
upon  contract,  but  on  the  broad  equitable  principle  that  equaHty  is 
equity.  Justice  and  fair  dealing  demand  that  where  one  or  more  par- 
ties sign  the  same  obligation  and  become  equally  obligated  in  pre- 
cisely the  same  degree  thereby,  and  stand  upon  the  same  footing  as 
to  their  liabilities  thereunder,  one  of  the  number  shall  not  be  com- 
pelled to  assume  the  whole  burden  for  his  associates,  but  may  compel 
them  to  share  equally  with  him  any  loss  that  may  occur  as  the  result 
of  their  joint  liability.  In  actions  for  contribution,  therefore,  the 
principle  seems  now  to  be  well  established  that  parol  evidence  is  ad- 
missible to  show  the  true  relations  existing  between  the  several  par- 
ties bound  by  a  written  obligation.  *  *  *  Such  evidence  is  not  of- 
fered to  contradict  or  vary  the  contract  contained  in  the  writing,  but 
simply  to  show  the  actual  relations  subsisting  between  the  joint  mak- 
ers of  the  note  and  the  real  nature  of  the  contract  between  them.  Such 
facts  are  not  a  part  of  the  contract  and  do  not  affect  its  terms,  but  are 
wholly  collateral  to  it.  To  support  his  claim  for  contribution,  there- 
fore, the  plaintiff  clearly  had  the  right  to  show  his  true  relations  to 
the  note,  and  this  without  regard  to  the  knowledge  of  the  defendant." 
Bulkeley  v.  House,  62  Conn.  459,  26  Atl.  352,  21  L.  R.  A.  247. 

If  defendant  was  not  one  of  the  sureties,  he  is  not  liable  for  con- 


Ch.  11)  SPECIAL  TYPES   Of   CONTRACTS  479 

tribution.     The  trial  court  therefore  erred  in  excluding  evidence  on 
this  issue. 

It  follows  that  the  judgment  is  reversed,  and  the  cause  remanded 
for  further  proceedings. 


ASSETS    REALIZATION   CO.    v.    AMERICAN    BONDING    CO.    OF 
BALTIMORE  et  al. 

(Supreme  Court  of  Ohio,  191 .3.     S8  Ohio   St.  216.  102  N.  E.  719, 
Ann.  Cas.  1915A,  1194.) 

Newman,  J.  *  *  *  It  is  well  settled  that,  where-  one  of  two  or 
more  sureties  for  the  same  obligation  has  paid  more  than  his  share  of 
the  debt,  he  is  entitled  to  contribution  from  his  co-sureties  to  reim- 
burse him  for  the  excess  paid  over  his  share  in  order  to  equalize  the 
common  burden.  Numerous  authorities  have  been  cited  in  support 
of  this  proposition,  but  it  is  to  be  observed  that  they  speak  of  a  com- 
mon burden,  and  it  is  where  parties  are  bound  to  discharge  a  common 
obligation  that  they  are  to  be  treated  as  cosureties.  It  is  uniformly 
held,  as  we  understand  it,  that  the  relation  of  cosuretyship  exists  only 
where  there  is  a  right  of  contribution.  In  the  case  under  considera- 
tion this  right  is  wanting.  Not  one  of  the  bonding  companies  was 
bound  to  equalize  the  loss  with  the  others  in  case  of  default.  When 
one  company  paid  its  portion  of  the  loss  (the  portion  fixed  by  its  bond), 
no  claim  arose  in  its  favor  against  any  of  the  other  companies  and  no 
further  demand  could  be  made  against  it.  Its  obligation  was  fully  dis- 
charged and  the  liability  terminated. 

Our  attention  has  been  directed  to  many  cases  and  we  shall  refer 
briefly  to  a  few  of  them  bearing  upon  the  question  under  considera- 
tion.    *     *     * 

In  B.  &  O.  R.  Co.  V.  Walker,  45  Ohio  St.  588,  16  N.  E.  481,  the 
court  quotes  from  2  Wait's  Actions  &  Def .  288,  as  follows :  "The  doc- 
trine of  contribution  rests  upon  the  broad  principle  of  justice  that, 
where  one  has  discharged  a  debt  or  obligation  which  others  were  equal- 
ly bound  with  him  to  discharge  and  thus  removed  a  common  burden, 
the  others  who  have  received  a  benefit  ought  in  conscience  to  refund 
to  him  a  ratable  proportion.  It  depends  rather  upon  principles  of 
equity  than  upon  contract." 

It  seems,  then,  that  the  test  of  cosuretyship  is,  as  stated  by  counsel, 
common  liability  upon  the  same  obligation.  In  the  case  at  hand  there 
was  no  common  liability.  Each  surety  by  its  bond  obligated  itself  for 
a  fixed  portion  of  the  debt.  The  authorities  uniformly  hold  that  the 
doctrine  of  contribution  has  its  origin  in  the  relation  of  cosureties  and 
is  not  founded  upon  the  contract  of  suretyship ;  that  it  is  an  equity 
which  springs  up  at  the  time  the  relation  of  cosureties  is  entered  into 
and  ripens  into  a  cause  of  action  when  one  surety  pays  more  than  his 
portion  of  the  debt.  It  equaUzes  burdens  and  recognizes  and  enforces 
the  reasonable  expectations  of  cosureties,  because  it  is  just  and  right 
in  good  morals,  and  not  because  of  any  supposed  promise  between 
them.  This  equity  having  once  arisen  between  cosureties,  this  reason- 
able expectation  that  each  will  bear  his  share  of  the  burden  is,  as  it 
were,  a  vested  right  in  each  and  remains  for  his  protection  until  he  is 
released  of  all  his  liability  in  excess  of  his  ratable  share  of  the  bur- 
den.    *     *     * 


480  CONTRACTS  (Part  1 

The  bonding  companies  in  this  case  did  not  obligate  themselves  to 
discharge  the  whole  debt  of  the  depositary  in  case  of  default  but  an 
aliquot  part  thereof.  There  was  no  common  burden  to  discharge. 
Therefore  there  was  no  such  thing  as  equalizing  the  discharge.  There 
was  no  such  thing  as  one  of  the  companies  performing  the  duty  of  all 
the  companies  or  the  payment  of  the  whole  debt ;  but,  to  repeat,  when 
one  of  the  companies  paid  its  portion,  that  was  a  termination  of  its 
liability,  and  no  right  arose  in  its  favor  against  any  of  the  other  com- 
panies.    *     *     * 

WASCO  COUNTY  v.  NEW  ENGLAND  EQUITABLE  INS.  CO  et  al. 

(Supreme  Court  of  Oregon.  1918.     SS  Or.  465,.  172  Pac.  126.  L.  E.  A.  1918D, 
732,   Ann.  Cas.   1918E,  656.) 

Action  by  the  County  of  Wasco  against  the  New  England  Equitable 
Insurance  Company  and  others,  wherein  the  named  defendant  and  the 
French  &  Co.  Bank  were  interpleaded.  From  a  decree  in  favor  of  the 
bank,  the  named  defendant  appeals. 

Wasco  county  brought  this  suit  in  interpleader  so  that  the  court  could 
decide  whether  the  sum  of  $920  held  by  the  county  should  be  paid  to 
the  New  England  Equitable  Insurance  Company,  a  corporation,  here- 
inafter referred  to  as  the  bank. 

On  June  14,  1915,  Henry  Cromer  entered  into  a  contract  to  con- 
struct a  certain  highway  for  the  county.  A  bond,  signed  by  the  con- 
tractor as  principal  and  the  insurance  company  as  surety,  was  delivered 
to  the  county,  as  required  by  chapter  142,  Laws  1913,  and  was  filed 
in  the  office  of  the  county  clerk  on  June  17,  1915.  The  contract  obli- 
gated the  contractor,  as  required  by  statute,  to  pay  all  persons  supply- 
ing labor  or  material  for  the  prosecution  of  the  work,  chapter  61, 
Laws  1913.  The  written  contract  also  provided  that  "  *  *  *  the 
partial  payments  under  this  contract  and  the  final  payment  thereon 
shall  be  as  provided  by"  chapter  142,  Laws  1913.  The  bond  was  given 
to  secure  the  performance  of  the  contract  and  payment  to  all  persons 
supplying  labor  or  material  for  the  prosecution  of  the  work  provided 
for  in  the  contract.  Cromer  entered  upon  the  performance  of  the  con- 
tract and  constructed  a  portion  of  the  highway.  Monthly  estimates 
were  made  of  the  work  done  by  Cromer,  and  the  county  paid  him 
75  per  cent,  of  the  amount  earned,  as  shown  by  such  estimates,  and 
retained  the  remaining  25  per  cent.,  as  stipulated  by  the  written  con- 
tract between  Cromer  and  the  county  and  as  required  by  chapter  142, 
Laws  1913,  then  in  force.  Cromer  continued  in  the  performance  of 
his  contract  until  about  September  10,  1915,  when  he  was  obliged  to 
quit  because  his  equipment  had  been  attached  by  creditors.  A  volun- 
tary petition  in  bankruptcy  was  filed  by  Cromer  on  October  7,  1915, 
and  he  was  subsequently  adjudged  a  bankrupt.  -Negotiations  between 
the  county  and  the  insurance  company  resulted  in  an  agreement,  on 
October  25,  1915,  terminating  the  contract  with  Cromer  and  releasing 
the  insurance  company  from  its  obligation  to  complete  the  highway 
upon  payment  by  it  of  all  the  outstanding  labor  and  material  claims 
against  the  contractor.  The  insurance  company  paid  claims  made 
against  Cromer,  and  approved  by  him,  totaling  $3,907.22. 

On  August  5,  1915,  the  bank  loaned  $200  to  Cromer  and  took  his 
promissory  note  for  that  amount,  and  at  the  same  time  Cromer  signed 
and  delivered  to  the  bank  an  order,  directing  the  county  to     "  *     *     * 


Ch.  11)  SPECIAL  TYPES  OP  CONTRACTS  481 

pay  to  French  &  Co.,  bankers,  all  money  due  on  August  estimate  for 
work  done  on  the  J.  T.  Harper  road  contract.  Please  also  pay  all 
retained  percentage  upon  completion  of  contract."  The  order  was 
presented  to  the  county  and  filed  in  the  office  of  the  county  clerk  on 
August  6,  1915.  Cromer  borrowed  an  additional  $800  from  the  bank 
on  August  11,  1915,  upon  his  note  for  that  amount.  Cromer  "got  this 
money  from  French  &  Co.  on  the  representations  that  it  was  to  pay 
bills  for  labor  and  material  for  the  construction  of  the  road."  The 
money  loaned  to  the  contractor  upon  the  two  notes  was  placed  to  his 
credit  in  the  bank,  and  was  checked  out  by  him  for  labor  performed  up- 
on and  material  furnished  for  the- road.  When  the  $200  note  was  given, 
it  was  understood  between  the  bank  and  Cromer  that  he  was  "to  have 
$800  more" ;  and  the  order  upon  the  county  "was  given  to  reimburse 
them  (the  bank)  for  the  money  gotten  on  both  of  these  notes."  When 
Cromer  discontinued  work  the  county  had  in  its  hands  the  sum  of  $920 
which  it  had  retained  out  of  the  monthly  estimates  made  during  the 
progress  of  the  work.  The  complaint  filed  by  the  county  was  accom- 
panied with  a  tender  of  $920  to  the  clerk  of  the  court.  The  insurance 
company  and  the  bank  each  answered,  and  each  asserted  the  right  to 
receive  the  money.  The  decree  of  the  court  was  for  the  bank  and  the 
insurance  company  appealed. 

Harris,  j.  *  *  *  'pj-,g  question  for  decisions  is  whether  the 
insurance  company  or  the  bank  is  entitled  to  receive  the  $920  which 
the  county  had  reserved  from  the  monthly  estimates.  The  insurance 
company  resorts  to  the  doctrine  of  subrogation  to  support  its  claim, 
while  the  bank  contends  that  countervailing  equities  preclude  the  ap- 
plication of  the  rule  of  subrogation.  Subrogation  is  not  a  matter  of 
strict  right,  nor  does  it  necessarily  rest  on  contract,  but  it  is  purely  eq- 
uitable in  its  nature;  and,  since  it  is  a  creature  of  equity,  it  will  not 
be  enforced  where  it  will  work  injustice  to  the  rights  of  those  having 
equal  equities.  *  *  *  In  Spencer  on  Suretyship,  §  133,  the  au- 
thor says :  "The_  right  of  subrogation  may  be  generally  described  as 
the  equity  by  which  a  person  who  is  secondarily  liable  for  a  debt  and 
has  paid  the  same  is  put  in  the  place  of  the  creditor  so  as  to  entitle 
him  to  make  use  of  all  the  securities  and  remedies  possessed  by  the 
creditor,  in  order  to  enforce  the  right  of  exoneration  or  indemnifica- 
tion as  against  the  principal  debtor." 

A  clear  enunciation  of  the  nature  of  subrogation  appears  in  the  much- 
quoted  opinion  delivered  by  Chancellor  Johnson  in  Gadsden  v.  Brown, 
Speers'Eq.  (S.  C.)  37,  where  it  is  said  that:  "The  doctrine  of  subro- 
gation is  a  pure  unmixed  equity,  having  its  foundation  in  the  princi- 
ples of  natural  justice,  and  from  its  very  nature  never  could  have  been 
intended  for  the  relief  of  those  who  were  in  a  condition  in  which  they 
were  at  liberty  to  elect  whether  they  would  or  would  not  be  bound; 
and,  as  far  as  I  have  been  enabled  to  learn  its  history,  it  never  has  been 
so  applied.  If  one  wath  the  perfect  knowledge  of  the  facts  will  part 
with  his  money,  or  bind  himself  by  his  contract,  in  a  sufficient  con- 
sideration, any  rule  of  law  which  would  restore  him  his  money  or 
absolve  him  from  his  contract,  would  subvert  the  rules  of  social  or- 
der. It  has  been  directed  in  its  application  exclusively  to  the  relief 
of  those  that  were  already  bound,  who  could  not  but  choose  to  abide 
the  penalty.  Sureties,  for  example,  who  have  before  become  bound 
are  amongst  the  especial  objects  of  its  care.  Thus,  if  a  surety  pays 
B.&  B.Bus.Law— 31 


482  CONTRACTS  (Part  1 

the  debt  of  his  principal,  he  is  entitled  to  stand  in  the  place  of  the 
creditor,  and  to  have  the  benefit  of  all  securities,  funds,  liens,  and  eq- 
uities, to  which  the  creditor  was  entitled." 

While  in  some  of  its  phases  the  doctrine  of  subrogation  seems  to 
have  been  expanded  in  recent  years,  it  is  not  now  necessary,  nor  would 
it  be  proper  in  the  instant  case,  to  attempt  to  fix  the  exact  limits  of 
its  application,  but  it  is  sufiicient-to  say  that,  as  between  the  insurance 
company,  the  contractor,  and  the  county,  the  surety  is  in  a  position  to 
claim  the  benefits  of  subrogation  because  it  has  paid  debts  due  to  third 
persons,  and  when  paying  such  debts  it  acted  on  compulsion  and  not 
as  a  mere  volunteer.     =1=     *     * 

The  fact  that  the  insurance  company  is  a  compensated  surety  does 
not  affect  its  right  to  claim  the  benefits  of  subrogation.  It  is  true 
that  the  rule  of  strictissimi  juris,  which  is  generally  available  to  those 
who  are  sureties  without  compensation,  is  usually  relaxed  when  ap- 
plied to  a  paid  surety.  In  this  jurisdiction  the  rule  is  that  a  hired 
surety  must  show  that  his  rights  have  been  injuriously  affected  before 
he  can  defeat  his  contract  of  suretyship.  *  *  *  A  court  of  eq- 
uity grants  the  right  of  subrogation  because  the  surety  has  paid  the 
debt  of  the  principal,  and  the  right  of  subrogation  is  not  dependent 
upon  whether  the  surety  was  or  was  not  paid  to  sign  the  bond.  It 
is  enough  that  the  surety  was  obliged  to  pay  and  did  pay  the  debt. 

*         Hs  * 

The  bank  relies  upon  the  rule  that  subrogation  will  not  be  allowed 
where  it  will  work  injustice  to  the  rights  of  those  havmg  equal  equities. 
*  *  *  The  bank  contends  that  the  written  order  signed  by  Cromer, 
directing  the  county  to  pay  to  the  bank  all  money  due  on  the  August 
estimate  and  "all  retained  percentage,"  operated  as  an  equitable  as- 
signment of  the  fund,  and  entitles  the  bank  to  be  paid  in  full  out  of 
the  fund  to  the  exclusion  of  the  surety  and  all  general  creditors  of 
the  contractor.  *  *  *  'pj^g  money  which  Cromer  borrowed  from 
the  bank  was  actually  used  to  pay  for  labor  and  material  furnished 
during  the  prosecution  of  the  work ;  and  the  bank  contends  that  the 
surety  received  the  benefit  of  the  bank's  money,  and  that  therefore 
it  would  be  inequitable  to  permit  the  surety  to  be  subrogated  to  the 
rights  of  the  county,  and  thus  permit  the  surety  to  reap  where  the  bank 
has  sown. .  All  parties  would  probably  concede  that  the  insurance  com- 
pany would  be  entitled  to  claim  the  benefits  of  subrogation  in  the  ab- 
sence of  the  bank,  and  hence  the  question  for  decision  is  whether  the 
written  order,  plus  the  fact  that  the  money  which  was  loaned  upon 
the  faith  of  the  written  order  was  actually  used  to  pay  for  labor  per- 
formed upon  and  material  furnished  for  the  work,  wrought  such  an 
equitable  assignment  of  the  fund  as  to  preclude  the  surety  from  claim- 
ing the  benefits  of  subrogation.  The  inquiry  naturally  involves  an  ' 
exarnination  of  the  relative  rights  of  the  parties  to  the  fund  and  a 
consideration  of  the  fundamental  reasons  upon  which  those  rights  are 
based. 

By  his  written  contract  Cromer  agreed  to  pay  all  claims  for  labor 
and  material  furnished  during  the  prosecution  of  the  work,  and  also 
to  complete  the  road.  By  its  bond  the  surety  obligated  itself  to  pay 
all  labor  and  material  claims  not  paid  by  Cromer,  and  to  complete  the 
contract  if  Cromer  did  not.  The  law  required  this  bond  to  be  given, 
and  directed  that  it  should  contain  these  provisions.    The  written  con- 


Ch.  11)  SPECIAL   TYPES   OF   CONTRACTS  '       483 

tract  also  provided  for  monthly  estimates  of  the  work,  and  that  75 
per  cent,  of  the  amount  earned  each  month  should  be  paid  to  Cromer, 
while  the  remaining  25  per  cent,  should  be  retained  by  the  county 
"until  the  completion  and  acceptance  of  said  work" ;  and  the  law  also 
required  this  provision  to  be  written  into  the  contract.  Chapter  142, 
Laws  1913.  Since  the  bank  was  bound  to  know  the  law,  it  is  deemed 
to  have  known  that  the  contract  with  Cromer  provided  that  25  per 
cent,  of  each  monthly  estimate  should  be  reserved  by  the  county,  that 
a  bond  was  given,  and  that  the  bond  obligated  the  surety  to  pay  all 
claims  for  labor  and  material.  Moreover,  the  bank  did  in  truth  know 
that  the  county  had  retained,  and  would  continue  to  retain,  a  percentage 
of  each  monthly  estimate  because  the  very  language  of  the  written 
order  imports  such  knowledge.  It  must  be  remembered,  too,  that  the 
money  in  controversy  includes  nothing  but  the  25  per  cent,  reserved 
out  of  the  monthly  estimates. 

The  percentage  reserved  by  the  county  out  of  each  monthly  esti- 
mate served  to  secure  the  county  against  any  loss  it  might  sustain 
on  account  of  the  nonperformance  of  the  contract ;  and  when  Cromer 
abandoned  his  contract  the  county  had  a  right  to  hold  this  fund  to 
secure  itself  against  any  damages  that  might  have  resulted  from  a 
nonperformance  of  the  contract  by  Cromer.  *  *  *  fYi^  right  of 
the  county  to  retain  a  specified  percentage  dates  from  the  time  the  con- 
tract was  entered  into,  and  it  must  be  conceded  that,  until  the  claims 
for  labor  and  material  are  paid,  the  county's  right  to  the  fund  is  su- 
perior to  that  of  the  bank,  claiming  by  an  equitable  assignment  from 
the  contractor. 

When  the  insurance  company  fulfilled  its  obligations  and  paid  the 
debts  incurred  by  Cromer  for  labor  and  material,  it  was  entitled  to 
call  upon  a  court  of  equity  and  be  subrogated  to  the  rights  which  the 
county  could  have  asserted  against  the  fund.  *  *  *  The  right  of 
subrogation  dates  back  to  the  time  when  the  insurance  company  en- 
tered into  the  contract  of  suretyship.  *  *  *  if  ^he  right  of  the 
county  to  hold  and  to  apply  the  moneys  is  superior  to  the  claim  of  the 
bank,  and  if  by  paying  the  claims  for  labor  and  material  the  surety 
is  subrogated  to  the  right  of  the  county,  as  of  the  date  of  the  con- 
tract of  suretyship,  it  necessarily  and  inevitably  follows  that  the  right 
asserted  by  the  surety  is  superior  to  the  claim  made  by  the  bank. 

When  the  bank  loaned  its  money  it  knew  that  before  Cromer  en- 
tered upon  the  performance  of  his  contract  he  had  given  a  bond 
signed  by  a  surety,  and  that  the  law  required  the  county  to  reserve  25 
per  cent,  of  each  monthly  estimate.  From  the  date  of  the  contract 
of  suretyship  the  bank  was  bound  to  know  that  the  insurance  com- 
pany had  an  equity  in  the  funds  to  be  reserved ;  and  when  the  bank 
loaned  its  money  it  did  something  that  it  was  not  obliged  to  do,  and  it 
must  be  deemed  to  have  acted  with  a  full  knowledge  of  the  right 
of  the  surety.  The  contractor  and  the  bank  could  not  create  a  lien  in 
favor  of  the  bank  upon  the  reserved  fund  and  make  it  paramount  to 
a  prior  and  then  existing  lien  of  the  surety.     *     *     * 

It  follows  that  the  insurance  company  is  entitled  to  be  subrogated 
to  the  right  of  the  county.  The  decree  of  the  circuit  court  is  reversed, 
and  a  decree  will  be  entered,  awarding  the  $920  to  the  insurance  com- 
pany.    *     *     * 


PART  II 
AGENCY 


Chapter 


Introduction. 
I.     Source  and  Scope  of  the  Agent's  Power. 
II.     Relations  of  the  Principal  and  Third  Persons. 
III.     Termination  of  the  Relation. 
IV.     Relations  of  the  Principal  and  Agent. 
V.    Relations  of  the  Agent  and  Third  Persons. 


INTRODUCTION 

The  law  of  agency  deals  with  the  problems  which  arise  out  of  the 
business  relationship  of  employer  and  employee.  The  terms  "em- 
ployer" and  "employee"  are  used  loosely  to  describe  various  rela- 
tionships, some  of  which  are  differently  constituted,  have  different 
objects,  and  produce  different  results.  To  illustrate:  (1)  One 
may  employ  a  laborer  to  mow  one's  lawn,  a  chauffeur  to  care  for 
one's  automobile,  or  a  delivery  boy  to  deliver  goods.  (2)  One 
may  employ  a  landscape  gardener  to  lay  out  a  garden,  an  operator 
of  a  garage  to  keep  and  repair  a  car,  or  a  transfer  company  to 
move  household  goods.  (3)  A.  may  employ  B.  to  purchase  goods 
for  him  from  C,  or  to  act  as  a  general  manager  of  his  store.  (4) 
Or  one  may  employ  a  telegraph  company  to  deliver  a  message  to 
another,  containing  an  oft'er  to  buy  goods  from  the  person  to  whom 
the  message  was  sent.  All  of  these  situations  have  some  elements 
in  common.  In  general,  they  may  all  be  called  relationships  of  em- 
ployer and  employee,  but  in  some  respects  there  are  differences. 

Employments  listed  under  groups  (1)  and  (2)  possess  this  com- 
mon aspect:  That  in  none  of  them  is  it  likely  that  th?  perform- 
ance of  the  assigned  duties  will  result  in  bringing  the  employer 
into  new  contractual  relations  with  any  third  party.  But  there 
is  this  important  difference  between  the  cases  referred  to  in  (1)  and 
(2)  :  In  the  first  class  of  cases  the  employer  possesses  the  right 
to  direct  the  manner  of  executing  the  work  to  a  greater  extent 
than  is  true  in  cases  of  the  second  class.  A.  has  a  greater  measure 
of  control  over  his  own  personal  chauffeur  than  he  does  over  the 
driver  of  a  Yellow  taxicab.  This  difference  in  the  facts  produces 
diff'erent  legal  results.  For  example,  the  owner  of  the  car  will  be 
liable  for  torts  committed  by  his  chauffeur  while  acting  within  the 
course  of  his  employment,  but  the  employer  will  not,  as  a  general 
rule,  be  liable  for  the  torts  committed  by  the  driver  of  the  taxicab. 
The  relation  of  employer  and  employee  which  falls  within  the  first 
group  is  more  narrowly  designated  as  that  of  master  and  servant, 
while  in  the  second  group  the  relation  is  that  of  employer  and  in- 
dependent contractor. 

B.&B.Bus.Law  (484) 


INTRODUCTION  485 

Employments  falling-  within  classes  (3)  and  (4)  have  this  in 
common :  The  act  of  the  employer  may  result  in  creating  new  con- 
tractual relations  between  the  employer  and  the  employee.  In 
this  respect  employments  in  groups  (3)  and  (4)  differ  from  the  em- 
ployments in  groups  (1)  and  (2).  Employments  in  groups  (3) 
and  (4)  are  dissimilar,  in  that  in  group  (3)  the  employer  has  the 
right  to  control  the  employee's  manner  of  performing  his  duty  to  a 
much  greater  extent  than  he  does  in  the  case  referred  to  in  group 
(4).  Accordingly,  employments  in  group  (3)  produce  the  relation- 
ship of  principal  and  agent.  No  special  terms  are  used  to  describe 
the  relationship  between  the  parties  to  the  type  of  contract  set 
forth  in  group  (4).  The  telegraph  company  could  be  called  an 
independent  contractor  and  the  sendor  of  the  message  the  em- 
ployer. 

It  is  not  to  be  inferred  that  we  have  one  set  of  legal  principles 
applicable  to  masters  and  servants  and  another  set  of  principles 
applicable  to  employers  and  independent  contractors.  Many  doc- 
trines apply  equally  to  both  relations.  But  in  the  master  and  serv- 
ant relationship  the  parties  are  in  a  fiduciary  relation,  which  creates 
duties  not  present  in  the  other  cases.  So,  also,  with  respect  to  the 
relation  of  principal  and  agent,  as  compared  with  other  employ- 
ments, such  as  that  of  a  telegraph  company  to  transmit  and  de- 
liver a  telegram,  many  rules  of  law  are  alike  applicable  to  both; 
but,  again,  there  is  a  fiduciary  relation  between  the  principal  and 
agent,  which  is  the  basis  for  rights  and  duties  not  found  in  the 
other  case.  Also  the  employee's  dealings  with  the  third  parties  will 
not  produce  the  same  legal  consequences. 

The  cases  in  the  following  five  chapters  do  not  deal  with  the  two 
kinds  of  relations  which  have  been  described  as  those  of  employer 
and  independent  contractor.  Indeed,  there  is  no  necessity  for  so 
doing,  because  all  we  have  here  is  a  simple  contract  between  two 
persons,  of  whom  one  has  agreed  to  perform  personal  services  in 
return  for  some  consideration  from  the  other  party — usually  mon- 
ey. The  law  of  contracts  governs  the  formation  of  the  contract, 
fixes  its  rights  and  duties,  defines  what  constitutes  a  breach,  etc. 
In  other  words,  it  is  merely  one  type  of  a  simple  contract,  and  ac- 
cordingly is  governed  by  the  law  of  simple  contracts. 

The  cases  in  the  following  chapters  in  Part  II  deal  with  the  re- 
lations of  principal  and  agent  and  master  and  servant  These  two 
relations  have  this  important  element  in  common :  There  is  a 
fiduciary  relation  between  the  parties;  that  is,  the  employer, 
whether  he  has  employed  another  to  mow  his  lawn  or  to  go  out  and 
buy  goods  for  him,  has  necessarily  reposed  in  the  employee  a  cer- 
tain trust  and  confidence.  He  has  intrusted  him  with  the  perform- 
ance of  certain  acts.  Obviously  this  very  fact  will  operate  as  a 
source  of  correlative  rights  and  duties,  which  are  not  expressly 
agreed  upon  by  the  parties,  but  imposed  upon  them  by  law. 
Perhaps  many  of  such  rights  and  duties  may  properly  be  regard- 
ed as  originating  in  mutual  promises  implied  in  fact,  but  at  any 


486  AGENCY  (Part  2 

rate  many  of  them  are  not  made  the  subject  of  actual  discussion 
by  the  parties.  There  is  no  particular  necessity  or  advantage  in 
attempting  to  distinguish  between  the  relations  of  master  and 
servant  and  those  of  principal  and  agent.  In  fact,  it  is  doubtful 
whether  a  real  distinction  in  legal  effect  can  be  drawn.  It  is  some- 
times said  that  a  servant  does  not  make  contracts,  but  performs 
menial  work,  while  an  agent  makes  contracts  for  his  principal,  and 
is  therefore  on  a  more  dignified  plane.  This  would  place  architects, 
engineers,  and  others  similarly  employed,  as  regards  many  of  their 
duties,  on  a  lower  plane  than  that  occupied  by  the  waiter  in  the 
restaurant,  who  is  the  medium  through  which  his  employer  makes 
contracts  with  the  patrons  of  the  cafe. 

The  use  of  the  expressions  "master  and  servant"  and  "principal 
and  agent"  is  often  convenient,  but  any  attempted  distinctions  of 
this  sort,  wdien  drawn  for  the  purpose  of  discovering  or  produc- 
ing different  legal  effects  from  specified  acts,  'is^largely  unprofita- 
ble. There  is  a  difference,  of  course,  in  employing  one  to  spade 
one's  garden  and  employing  another  to  buy  goods  for  one  on  cred- 
it. So,  also,  is  there  a  difference  between  pine  trees  and  mahogany 
trees.  But  both  kinds  of  trees  are  used  in  the  manufacture  of  furni- 
ture, and  when  the  trees  or  the  furniture  are  sold  the  resulting  con- 
tracts are  governed  by  the  same  rules  of  law.  The  rights,  duties, 
and  powers  of  the  bell  boy  are  fixed  by  the  same  principles  that 
define  the  like  relations  of  the  general  manager  to  the  corporation 
which  employs  him  and  to  third  parties  with  whom  he  comes  in 
contact. 

Coming  now,  more  specifically,  to  the  questions  with  which  we 
shall  be  concerned  in  the  following  chapters,  it  is  apparent  that 
we  have  three  sets  of  relations  with  which  to  deal:  (1)  The  re- 
lations between  the  employer  and  third  parties,  which  come  into 
existence  as  a  result  of  the  employment;  (2)  the  relations  be- 
tween the  employer  and  the  employee;  and  (3)  the  relations  be- 
tv.'^een  the  employee  and  third  persons,  with  whom  he  has  come  in 
contact  because  of  his  employment. 

When  will  an  act  done  by  the  employee,  whether  called  an  agent 
or  a  servant,  bring  into  existence  correlative  rights  and  duties  be- 
tween the  employer  and  third  persons?  Where  the  employee  is 
hired  to  spade  the  garden,  the  chance  of  his  having  any  dealings 
with  third  parties  is  not  great ;  but  it  is  possible  that  he  may  over- 
turn the  sod  on  a  neighbor's  lot.  If  he  does  so,  by  accident  or  oth- 
erwise, will  his  employer  be  liable?  Stated  broadly,  under  what 
circumstances  may  an  employee  render  his  employer  liable  for  torts 
committed  by  him?  Again,  when  the  employer  has  sent  his  em- 
ployee out  to  sell  or  buy  goods  for  him,  under  what  circumstances 
will  the  act  of  the  employee  result  in  a  contract  between  the  em- 
ployer and  the  third  party?  This  is  the  question  raised  in  Chap- 
ter I ;  that  is,  in  this  chapter  we  shall  be  seeking  for  the  rules 
of  law  which  indicate  the  source  and  extent  of  an  agent's  power 
to  bind  his  principal  on  a  contract. 


INTRODUCTION  487 

The  cases  in  this  topic  contain  a  great  deal  of  discussion  as  to 
the  agent's  authority.  This  is  not  the  entire  question.  A  contract 
between  the  principal  and  third  party  will  result  from  an  act  of  the 
agent  when,  and  only  when,  the  agent  possessed  power  to  enter 
into  it.  Authority  is  one  source  of  power,  but  it  is  not  the  only 
source.  Authority  is  the  power  which  the  principal,  either  express- 
ly or  by  implication  of  fact,  confers  upon  the  agent.  But  some- 
times the  law  provides  that  an  agent  will  possess  power  to  bind  his 
principal,  not  only  when  the  principal  did  not  in  fact  confer  au- 
,  thority  upon  the  agent  to  do  the  specific  act,  but  actually  instruct- 
ed him  not  to  do  so.  The  terminology  which  one  meets  in  this  line 
of  cases  tends  to  complicate  the  problem,  and  tends  to  exaggerate 
the  difficulty  in  the  real  situation.  The  courts  discuss  express  au- 
thority, implied  authority,  apparent  authority,  ostensible  authority, 
incidental  authority,  authority  by  necessity,  authority  arising  from 
custom  and  usage,  and  authority  arising  from  estoppel.  Some- 
times the  term  "power"  is  used  interchangeably  with  the  term 
"authority."  It  seems  preferable  to  use  the  word  "power"  to  de- 
scribe the  agent's  relation  to  his  principal,  whenever  by  his  own 
voluntary  act  he  may  create,  alter,  or  extinguish  his  principal's 
relation  to  a  third  party.  The  term  is  broad  enough,  therefore,  to 
describe  the  creation,  modification,  or  extinguishment  of  contract 
relations  between  the  principal  and  a  third  party,  and  also  it  will 
include  the  imposition  of  a  legal  liability  upon  the  principal  arising 
from  the  commission  of  some  torts  by  the  agent. 

There  are  only  two  real  sources  of  power:  (1)  The  power 
which  arises  from  the  principal's  consent ;  and  (2)  the  power 
which  arises  by  operation  of  law,  in  the  absence  of  the  principal's 
consent.  Consent,  of  course,  does  not  necessarily  mean  actual 
mental  consent.  The  law  looks  for  facts.  When  discovered,  if  to 
the  court  it  appears  that  the  facts  justify  the  inference  that  the 
principal  gave  consent,  the  power  is  said  to  exist  in  the  agent. 
Express  power  would  be  based  upon  the  actual  words  spoken  or 
written  by  the  principal  to  the  agent.  Implied  power  would  be 
based,  not  on  language,  but  on  conduct.  When  P.  employs  A. 
to  act  as  general  manager  of  his  store,  it  is  often  said  that  A.  is 
thereby  given  apparent  authority  to  do  what  general  managers  of 
similar  stores  are  accustomed  to  do.  This  is  true.  But  this  ap- 
parent authority  is  real  power.  It  is  not  absolutely  necessary  to 
employ  the  word  "apparent."  By  appointing  A.  as  a  general  man- 
ager, P.  confers  power  upon  A.,  the  source  of  which  is  the  consent 
of  P.,  and  the  limits  of  the  power  are  fixed  by  resort  to  custom  and 
usage.  P.  knows  these  usages,  or,  if  in  fact  he  does  not  know 
them,  justice  demands  that  his  rights  and  duties  be  fixed  just  as  if 
he  were  aware  of  their  existence. 

To  put  the  matter  in  another  way,  the  extent  of  the  agent's  pow- 
er will  be  ascertained  by  a  process  of  interpreting  the  words,  "A., 
I  appoint  you  as  general  manager  of  my  store."  This  will  be  ac- 
complished by  resort  to  custom  and  usage,  to  the  conduct  of  the 


488  AGENCY  (Part  2 

principal  and  the  agent,  and  to  the  course  of  dealing  between  them. 
Incidental  authority  and  authority  arising  from  necessity,  upon 
analysis,  will  usually  appear  to  rest  upon  the  consent  of  the  prin- 
cipal; the  nature  and  extent  of  such  authority  being  fixed  by  a 
similar  process  of  interpretation  of  the  words  or  the  conduct  by 
the  principal  and  the  agent. 

The  term  "ostensible  authority"  is  frequently  used  as  synony- 
mous with  "estoppel."  An  estoppel  is  a  rule  of  law  which,  when 
applied,  prevents  a  person  from  telling  the  truth.  Usually,  of. 
course,  one's  rights  and  duties  should  be  fixed  only  after  a  discov- . 
ery  and  a  utilization  of  the  truth.  But  sometimes,  if  all  truth  were 
taken  into  consideration,  injustice  would  result.  If  P.  says  to  A., 
"Act  as  general  manager  of  my  store,  but  do  not  buy  goods  on 
credit  from  X.,"  and  A.  accepts  and  buys  goods  on  the  credit  of 
P.  from  X.,  there  will  be  many  cases  where  P.  would  be  estopped 
from  stating  that  he  did  not  confer  power  on  A.  to  enter  into  such 
a  contract.  With  reference  to  the  source  and  scope  of  authority, 
the  principal  point  to  note  is  that,  whatever  terms  may  be  used  in 
describing  the  situation,  an  agent's  power  originates  and  is  bound- 
ed by  the  consent  of  the  principal,  or  it  originates  without  his  con- 
sent, even  in  actual  opposition  to  his  intention,  solely  because  the 
law  deems  it  just  to  do  so.  The  most  important  series  of  problems, 
therefore,  is  to  determine  the  circumstances  under  which  con- 
tractual rights  and  duties  will  be  created  between  the  principal  and 
a  third  party,  by  reason  of  the  act  of  the  agent.  The  first  three 
chapters  deal  with  various  phases  of  this  problem. 

Two  problems  remain:  (1)  That  which  concerns  itself  with  the 
relations  between  the  principal  and  agent;  (2)  that  which  deals 
with  the  relations  between  the  agent  and  third  persons.  In  both 
we  are  dealing  with  rights  and  duties  which  arise  from  contract, 
and  which  arise  by  operation  of  law  in  the  absence  of  contract. 
The  relation  between  principal  and  agent  is  largely  contractual, 
but  may  exist  where  many  of  the  important  features  of  an  ordinary 
contract  are  wanting.  The  relation  of  principal  and  agent  has 
been  defined  as  follow^s : 

"Agency  is  a  consensual  relationship  in  which  one  (the  agent) 
holds  in  trust  for  and  subject  to  the  control  of  another  (the  princi- 
pal) a  power  to  affect  certain  legal  relations  of  that  other."  ^ 

The  relations  between  the  agent  and  third  party  will  usually  be 
those  which  are  imposed  by  the  law,  irrespective  of  contract ;  but, 
in  some  instances,  there  will  result  true  contractual  relations  be- 
tween the  agent  and  third  party  with  whom  he  has  dealt. 

1  Professor  Warren  A.  Seavey,  The  Rationale  of  Agency,  29  Yale  Lav? 
Journal,  859  (1920). 


Ch.  1)  SOURCE  AND   SCOPE  OF  THE  AGENt's  POWER  489 

»  CHAPTER  I 
SOURCE  AND  SCOPE  OF  THE  AGENT'S  POWER 

Section 

1.  Powers  Arising  from  Express,  Implied,  and  Incidental  Authority,  Neces- 

sity and  Estoppel,  Considered  Generally. 

2.  Illustrations. 


SECTION  1.— POWERS  ARISING  FROM  EXPRESS, 
IMPLIED,  AND  INCIDENTAL  AUTHORITY 
NECESSITY  AND  ESTOPPEL,  CON- 
SIDERED GENERALLY 


ST.  LOUIS   GUNNING  ADVERTISING  CO.  v.  WANAMAKER  &   BROWN. 

(St.  Ix)uis  Court  of  Appeals,  Missouri,  1905.     115  Mo.  App.  278,  90  S.  W.  787.) 
Action  by  the   St.  Louis   Gunning  Advertising   Company   against 
Wanamaker  &  Brown.     From  a  judgment  in  favor  of  plaintiff,  de- 
fendant appeals. 

_  GooDE,  J.  This  is  an  action  to  recover  rentals  alleged  to  be  due  for 
six  rnonths'^  advertising  on  billboards  at  different  stations  in  the  city 
of  St.  Louis.  Both  plaintiff  and  defendant  are  incorporated  com- 
panies, the_  former  engaged  in  business  in  the  city  of  St.  Louis  and 
the  latter  in  Philadelphia.  The  advertisements  were  ordered  by  a 
written^  contract  signed :  "Wanamaker  &  Brown,  A.  Lurie,  Selling 
Agent."  The  defense  is  that  Lurie  had  no  authority  to  bind  the  de- 
fendant. Plaintiff  relies  on  both  an  original  authority  to  Lurie,  and; 
in  default  of  such  authority,  ratification  by  the  defendant.  The  ad- 
vertisements were  painted  and  displayed  at  the  different  stations  in 
accordance  with  the  contract,  and  the  aggregate  rentals  of  $.S0  a 
month,  for  six  months,  were  earned.  Lurie  formerly  represented  the 
defendant,  a  merchant  tailor,  in  Kansas  City.  He  opened  a  store  of 
the  same  sort  at  Tenth  and  Olive  streets,  in  St.  Louis,  in  the  early 
part  of  1903,  under  an  arrangement  by  which  he  was  to  bear  the  rent 
and  other  expenses.  The  defendant  furnished  Lurie  with  some  $600 
worth  of  goods  for  display  purposes  and  samples;  he  giving  a  bond 
to  indemnify  defendant  against  loss  from  having  furnished  the  goods. 
Lurie  took  orders  for  men's  clothing,  and  the  suits  were  manufac- 
tured in  Philadelphia  and  shipped  from  there  to  St.  Louis  for  deliv- 
ery to  customers.  He  was  charged  for  clothing  shipped  to  him,  wheth- 
er accepted  or  rejected  by  the  customer,  and  his  profit  was  the  differ- 
ence between  the  price  he  paid  and  what  he  got.  He  was  carried  on 
the  books  of  the  company  as  an  agent,  and  the  stationery  used  by  him 
ran  in  the  name  of  Wanamaker  &  Brown. 

A  sign  hung  above  the  store  containing  the  name  of  Wanamaker 
&  Brown;  but  there  is  a  dispute  as  to  whether  the  words  "A.  Lurie, 
Selling  Agent,"  were  on  it.  Defendant  knew  the  sign,  whichever  way 
it  read,  was  there,  as  it  had  a  photograph  of  the  store  showing  the 
sign.  Lurie  was  entirely  in  charge  of  the  St.  Louis  business  and  gave 
the  order  to  the  plaintiff  for  the  advertisements  which  constitute  the 
subject-matter  of  this  action.  The  order  was  given  July  16,  1903, 
and  on  November  20,   1903,  before  the  expiration  of  the  term  for 


490  AGENCY  (Part  2 

which  the  signs  were  ordered,  and  when  three  months'  rent  was  due, 
plaintiff  wrote  to  Wanamaker  &  Brown  in»  Philadelphia,  stating  that 
Lurie,  as  defendant's  representative  had  ordered  the  bulletin  board 
advertisements  for  six  months,  what  rent  was  due,  and  that  he  had 
not  made  payment,  but,  in  excuse,  said  he  had  received  no  check  from 
the  home  office.  In  the  letter  plaintiff"  requested  the  defendant  to  take 
the  matter  up,  and  have  at  least  a  partial  payment  made.  The  de- 
fendant wrote  to  Lurie  on  the  subject,  protesting  against  the  expense, 
but  did  not  write  the  plaintiff  in  answer  to  its  letter,  though  an  an- 
swer was  requested.  *  *  *  Defendant  wrote  Lurie  the  following 
letter:  "November  25,  1903.  Mr.  A.  Lurie,  St.  Louis,  Mo.— Dear 
Sir:  We  have  had  so  much  trouble  with  the  business  in  St.  Louis 
that  we  have  finally  lost  all  patience  and  shall  discontinue  any  con- 
nection forthwith.  The  last  thing  to  come  to  our  notice  is  the  con- 
tract made  for  six  months'  billboard  advertising  and  the  concern  has 
appealed  to  us  for  payment.  *  *  *  w,"g  have  placed  the  settlement 
of  all  matters  with  the  attorneys  who  will  hand  you  this  letter.  *  *  * 
Yours  truly,  Wanamaker  &  Brown."     *     *     =!= 

A  verdict  for  $300  was  returned  in  favor  of  the  plaintiff,  and, 
judgment  having  been  entered  on  it,  the  defendant  appealed.    *     *     * 

The  silence  of  a  principal,  after  receiving  notice  that  his  agent. 
has  assumed  to  bind  him  by  an  unauthorized  act,  may  be  a  fact  to 
be  weighed  on  the  issue  of  whether  the  principal  ratified  the  act,  or 
may  raise  a  presumption  that  he  ratified  it,  according  to  circumstances, 
If  the  controversy  between  the  agent  and  the  third  party  is  completed 
before  the  principal  is  notified,  so  that  no  detriment  can  result  to  the 
third  party  from  the  silence  of  the  principal,  his  failure  to  repudiate 
the  act  is  evidence,  to  be  considered  with  other  facts  in  the  case,  that 
he  adopted  it  as  his  own  or  ratified  it.  *  *  *  But  if  the  transac- 
tion is  still  in  progress,  and  the  silence  of  the  principal  after  notice 
induces  the  party  dealing  with  the  agent  to  pursue  a  course  which 
would  be  detrimental  to  him,  if  the  principal  is  not  held  bound,  a  rat- 
ification of  the  unauthorized  act  will  be  presumed.  This  result  will 
obtain  when  the  person  dealt  with  is  induced  to  alter  in  any  way  his 
position  to  his  detriment,  as  by  parting  with  money  or  property  on 
the  assumption  that  the  agent's  act  was  valid,  or  omitting  to  take 
steps  against  the  agent,  or  otherwise  to  improve  his  position.  *  *  * 
An  examination  of  numerous  cases  has  shown  that  in  every  instance 
wherein  the  presumption  of  ratification  was  raised  because  of  a  prin- 
cipal's silence  some  change  in  the  position  of  tlie  parties  concerned 
occurred  subsequent  to  notice  to  the  principal  which  would  have  re- 
sulted in  injustice  to  the  party  dealt  with  by  the  agent  if  the  principal 
had  been  excused  on  the  score  of  want  of  authority  in  the  agent.  We 
cite  illustrative  decisions  on  the  point.     *    *    * 

The  real  ground  on  which  the  principal  is  held  liable  under  such 
circumstances  is  that  of  estoppel,  though  it  is  often  said  that  the 
principal  ratified  what  was  done  by  his  agent  by  remaining  silent. 
*  *  *  In  its  genuine  sense  ratification  depends  on  intention.  It  is 
the  voluntary  assumption,  on  full  information,  of  any  unauthorized  act 
or  agreement  by  the  party  in  whose  behalf  it  was  done  or  made.  The 
intention  to  ratify  may  be  manifested  by  express  words  or  by  con- 
duct. Either  may  establish  that  the  principal  elected  to  adopt  the 
act  or  agreement  as  his  own ;  and  the  election  once  made  with  knowl- 
edge of  the  facts  becomes  irrevocable.     Besides  a  true  ratification  in- 


Ch.  1)  SOURCE   AND   SCOPE   OF   THE   AGENt's   POWER  491 

teiitionally  made,  the  law  recognizes  a  constructive  one  where  none 
was  intended.  The  latter  sort  of  ratification  is  a  legal  presumption, 
raised  against  the  principal  because  he  has  behaved  in  such  a  way  that 
the  party  dealt  with  by  the  agent  would  be  injured  if  the  transaction 
was  repudiated.  It  is  really  an  equitable  estoppel,  and  is  regulated 
by  the  law  of  estoppel.  The  estoppel  may  arise  from  the  fact  that  the 
principal  was  silent  when  he  ought  to  have  declared  his  intention  not 
to  be  bound  by  the  agent's  act,  provided,  as  said  above,  his  silence  leads 
the  party  dealt  with  to  alter  his  position  for  the  worse.  This  is  identi- 
cal with  the  principles  governing  estoppel  by  acquiescence  in  instances 
not  involving  the  relation  of  principal  and  agent.  The  question  often 
arises  directly  between  an  agent  and  his  principal  in  cases  where  the 
latter  tries  to  hold  the  former  responsible  for  acting  without  author- 
ity. In  such  litigation,  if  the  principal  does  not  promptly  repudiate  the 
transaction,  but  waits  until  doing  so  will  cause  loss  to  the  agent,  or 
until  it  appears  that  the  transaction  will  cause  loss,  instead  of  profit, 
to  himself,  he  will  be  estopped  to  deny  responsibility.  A  large  class 
of  cases  which  frequently  present  the  matter  for  decision  is  where  a 
broker  or  commission  merchant  has  bought  or  sold  property  for  a 
principal  contrary  to  instructions.  In  such  instances  the  principal 
is  not  permitted  to  remain  silent  after  notice  in  order  to  watch  the 
course  of  the  market  and  determine  whether  he  will  adopt  or  repudiate 
the  deal  according  as  it  may  prove  profitable  or  the  reverse.  *  *  * 
In  the  present  case  it  is  certain  the  advertising  to  November  20th- 
was  not  done  by  plaintiff  in  reliance  on  defendant's  failure  to  answer 
the  letter  of  that  date;  and  hence  defendant's  silence  is  not  ground 
to  estop  it  from  denying  liability  for  installments  of  rent  which  had 
accrued  previously.  In  other  words,  the  presumption  that  it  ratified 
the  contract  Lurie  made  with  plaintiff  ought  not  to  be  raised  merely 
from  its  silence  when  notified  of  the  contract.  But  it  is  estopped  to 
disclaim  liability  for  the  rent  of  the  bulletin  boards  accruing  subse- 
quent to  the  date  it  had  notice.  Plaintiff  requested  a  reply  to  its  let- 
ter, and,  in  view  of  the  fact  that  Lurie  was  conducting  business  in  d-e- 
fendant's  name,  a  reply  should  have  been  made.  In  commercial  affairs 
prompt  answers  to  such  notifications  are  rather  strictly  insisted  on  by 
the  law.  Plaintiff  supposed  it  had  a  contract  with  defendant  and  was 
furnishing  the  advertising  service  on  that  supposition.  Hence  the 
presumption  is  fair  that,  if  defendant  had  repudiated  the  contract, 
plaintiff  would  have  terminated  the  service  at  once.  The  advertising 
tended  to  increase  defendant's  sales,  and  was  beneficial  to  it,  as  well 
as  to  Lurie.     Therefore  defendant  was  interested  in  its  continuance. 

The  proposition  is  advanced  by  plaintiff's  counsel  that  the  defend- 
ant is  liable  because  Lurie's  contract  for  advertising  fell  within  the 
scope  of  his  authority  as  selling  agent,  and  the  trial  court  should  have 
been  directed  a  verdict  for  their  client  on  that  ground.  *  *  *  j^. 
must  be  kept  in  mind  that  in  what  is  said  concerning  the  apparent 
powers  pertaining  to  Lurie  as  agent  we  mean  such  powers  or  author- 
ity as  would  have  appeared  to  belong  to  him  if,  in  fact,  he  had  been 
appointed  agent  by  the  defendant — such  authority  as  a  man  would 
seem  to  possess  if  designated  as  selling  or  sales  agent  and  placed  in 
charge  of  a  stock  of  merchandise  for  the  purpose  of  selling.  *  *  * 
The  facts  on  which  hangs  the  answer  to  this  question  stand  undisputed, 
and  are  these :    The  defendant's  main  business  office  or  establishment 


492  AGEXCY  (Part  2 

is  in  Philadelphia.  The  evidence  goes  to  show  defendant  is  a  tailor- 
ing concern  of  prestige  and  reputation.  It  had  intrusted  Lurie  with 
a  considerable  stock  of  goods  suitable  to  be  manufactured  into  men's 
clothing.  He  was  commissioned  to  open  an  establishment  in  defend- 
ant's name,  in  a  large  city,  and  procure  orders  for  tailor-made  gar- 
ments by  showing  the  goods  in  his  custody  and  ostensibly  selling  cloth 
off  the  bolts.  The  garments  were  manufactured  in  defendant's  Phila- 
delphia establishment  according  to  orders  and  measurements  taken  by 
Lurie  in  St.  Louis  and  transmitted,  but  the  impression  gathered  from 
the  evidence  is  that  this  fact  was  not  known  to  the  customers,  nor  in- 
tended to  be.  Lurie  was  permitted  to  display  defendant's  name  on 
signs  and  stationery,  with  his  own  name  beneath,  and  followed  by  the 
title  "Selling  Agent."  That  the  character  of  his  agency  was  special, 
and  not  general,  was  denoted  by  his  title  of  selling  or  sales  agent,  and 
as  such  plaintiff  dealt  with  him.  Those  are  the  facts  on  which  the 
authority  in  him  to  make  the  contract  for  advertising  in  defendant's 
name  is  affirmed  and  denied.  To  the  public  eye  the  business  Lurie 
conducted  must  have  appeared  to  belong  to  the  defendant,  and  to  be 
a  branch  establishment  under  the  management  of  an  employe.  The 
title  by  which  that  employe  was  designated  signified  that  he  was  not.  a 
vice  principal  or  general  manager,  but  one  appointed  to  perform  a  par- 
ticular duty  and  therefore  of  restricted  powers,  among  which  the 
primary  power  was  to  make  sales.  The  public  had  the  right  to  assume 
he  was  authorized  to  sell — to  take  and  fill  orders  for  men's  garments ; 
for  that  act  was  within  the  main  purpose  of  his  commission  as  signi- 
fied by  the  title  "selling  agent."  He  had  no  express  power  to  incur 
expense  in  defendant's  name  for  advertising,  either  on  bulletin  boards 
or  in  other  modes.  This  does  not  mean  that  he  had  neither  real  nor 
apparent  power  to  do  so ;  but  simply  that  the  power  was  not  ex- 
pressed in  the  words  of  his  commission.  The  power  was  not  explicitly 
conferred.  Whether  or  not  it  was  implicitly  conferred,  or  whether,  in 
view  of  the  character  and  circumstances  of  the  agency,  it  appeared  to 
have  been  conferred,  we  must  determine. 

It  has  proved  difficult,  and,  we  may  say,  impossible,  to  reach  a  con- 
fident  conclusion  on  these  points,  w'hich,  as  will  appear  below,  we 
deem  to  converge  into  a  single  point  when  narrowly  scrutinized.  The 
books  teem  with  adjudications  about  what  acts  of  various  sorts  agents 
may  or  may  not  do  beyond  the  express  words  of  their  commissions ; 
but  no  case  very  analogous  to  this  one  has  been  found  in  an  exhaustive 
search  for  precedent.  Therefore  we  have  been  compelled  to  resort  to 
elementary  principles  and  rules.  But  among  the  general  rules  by 
which  the  authority  of  agents  is  controlled  are  two  that,  in  their  strug- 
gle for  enforcement,  conflict  in  close  cases ;  and  which  of  the  two 
ought  to  control  the  decision  in  this  controversy,  as  likely  in  many 
others,  is  hard  to  say.  One  rule  seeks  to  protect  principals  against 
wrongful  assumptions  of  authority  by  agents ;  and  to  do  this  gives  spe- 
cial weight  to  the  doctrine  that  a  man  has  the  right  to  extend  or  to 
restrict  the  powers  of  his  agent  as  his  judgment  dictates.  The  other 
rule  seeks  to  protect  the  public  against  losses  due  to  the  appearance 
of  power  in  an  agent ;  and  therefore  emphasizes  the  maxim  that  where 
one  of  two  persons,  both  free  from  a  fraudulent  motive,  must  lose  in 
consequence  of  the  act  of  one  of  them,  he  whose  innocent  act  entailed 
the  loss  must  bear  it. 


Ch.  1)  SOURCE   AND   SCOPE   OF   THE  AGENT's   POWER  493 

This  principle  lies  at  the  root  of  most  of  the  rules  concerning  the 
apparent  authority  of  agents.  Story  on  Agency,  §  127,  and  note.  The 
perplexity  in  particular  cases,  and  in  this  one,  is  to  know  whether  the 
third  party,  by  failing  to  inquire  as  far  as  prudence  demanded  con- 
cerning the  agent's  authority  to  do  the  contested  act,  brought  about  a 
situation  from  which  the  loss  must  occur,  or  whether  the  situation 
was  due  to  the  principal's  having  unwittingly  lent  to  his  agent  the 
semblance  of  right  to  do  the  act.  That  problem  arises  when  there  is 
no  doubt  that  the  authority  the  agent  assumed  to  have  was  never  in- 
tentionally conferred  on  him.  But  it  is  by  no  means  always  easy  to  say 
whether  or  not  the  authority  for  a  given  act  was  conferred,  either  by 
design  or  inadvertence.  It  is  usually  plain  that  it  was  or  was  not 
within  the  language  of  the  agent's  commission;  the  language  being  un- 
disputed. In  the  present  case  it  is  plain  that  express  authority  to 
advertise  was  not  given;  for  no  authority  but  to  sell  was  expressed. 
But  it  is  not,  for  that  reason,  plain  that  Lurie  was  not  authorized  to 
advertise  as  a  measure  essential  to  the  performance  of  the  duty  to 
sell ;  no  positive  restriction  against  advertising  having  been  imposed 
on  him.  As  intimated  above,  real  authority  may  be  implicitly,  as  well 
as  explicitly,  contained  in  a  commission.  Hence  it  is  to  be  ascertained 
if  LvUrie  was  impliedly  commissioned  to  contract  for  advertising  or 
appeared  to  be. 

Text-writers  are  accustomed  to  enumerate  categorically  the  sources 
of  an  agent's  authority ;  and  it  will  be  useful  to  examine  those  sources 
for  light  on  the  point  in  hand.  Putting  aside  authority  expressly 
vested,  which  Lurie  lacked,  authority  by  ratification  which  has  been 
considered  above,  and  that  springing  from  the  right  to  assume  powers 
to  avoid  loss  in  an  emergency,  which  is  not  germane  to  the  facts,  there 
remain  the  authority  derived  from  custom  or  general  usage,  that  de- 
rived from  a  principal's  conduct  in  permitting  an  agent  to  act  outside 
the  scope  of  his  commission  as  expressed  in  the  language  used,  and 
that  authority  called  "incidental,"  which  accompanies  express  author- 
ity. One  ground  of  liability  on  the  part  of  a  principal  which  is  akin 
to,  or  a  corollary  of,  the  two  sources  of  authority  last  stated,  may 
be  found  in  the  following  rule  recognized  by  the  books :  Where  a  man 
has  placed  an  agent  in  such  a  position  that  a  person  of  ordinary  pru- 
dence, conversant  with  the  usages  of  the  business  and  the  nature  of  the 
particular  business,  is  led  to  believe  the  agent  has  a  certain  authority, 
and,  without  negligence,  deals  with  him  on  that  assumption,  the  prin- 
cipal is  estopped  to  repudiate  the  agent's  act  or  agreement.     *     *     * 

No  proof  was  adduced  in  the  present  case  to  show  what  are  the  cus- 
tomary powers  of  agents  like  Lurie,  and  we  know  not  that  there  is 
a  custom  attaching  any  power  to  them.  Neither  was  there  proof  that 
the  defendant  had  recognized  contracts  made  by  him  in  its  name, 
or  tolerated  a  course  of  business  which  would  entitle  the  plaintiff  to 
believe  in  his  right  to  make  the  contract  in  issue.  If  defendant  had 
done  what  gave  plaintiff  the  right  to  presume  in  favor  of  Lurie's  au- 
thority, so  as  to  estop  it  from  denying  responsibility,  it  is  because  his 
being  in  charge  of  an  establishment  conducted  by  him  as  sales  agent, 
in  defendant's  name,  would  so  naturally  raise  the  belief  in  a  prudent 
mind  that  he  was  authorized  to  make  the  agreement  in  dispute  that, 
according  to  the  law  of  estoppel,  the  defendant  ought  to  be  held.  If 
defendant  is  exonerated,  it  is  because  the  words  "selling  agent"  were 


494  AGENCY  (Part  2 

such  notice  to  plaintiff  of  the  limit  of  Lurie's  authority  that  it  was  put 
on  inquiry,  and  contracted  at  its  peril  if  it  failed  to  inquire.     *     *     * 

But,  aside  from  this  matter  of  estoppel,  Lurie  may  have  had  actual 
authority  for  the  contract,  because  to  advertise  was  necessary  in  order 
to  sell.  The  law  presumes  a  principal  intends  to  vest  an  agent  with 
power  to  do  auxiliary  acts  which  are  essential  to  the  discharge  of  the 
agency,  unless  they  are  forbidden.  And  even  when  they  are  forbidden, 
but  the  party  dealt  with  was  unaware  of  the  fact,  the  same  presumption 
arises.  Though  all  apparent  authority  is  actual  authority  in  legal  ef- 
fect, sometimes  it  is  real  as  proceeding  from  the  intention  of  the  prin- 
cipal, and  sometimes  fictitious  as  legally  presumed.  Now,  when  the 
vaHdity  of  an  agent's  agreement  or  act  is  drawn  into  question  and 
depends  on  an  incidental  authority,  the  rule  that  he  may  do  all  things 
necessary  to  accomplish  the  purposes  of  the  agency,  and  the  rule  that 
the  principal  is  bound  by  an  estoppel  if  he  has  attached  such  cir- 
cumstances to  the  agency  as  to  induce  reliance  on  the  agent's  power  to 
agree  or  act  in  a  matter,  would  seem  to  converge  and  be,  in  effect,  only 
different  methods  of  giving  effect  to  one  principle,  to  wit,  that  an  in- 
cidental authority  must  spring  from  necessity.  In  other  words,  third, 
parties  will  not  be  held  justified  in  assuming  power  in  a  special  agent 
to  do  a  given  act  as  incidental  to  his  agency,  unless  the  act  is  neces- 
sary to  the  execution  of  the  appointment.  Does  this  rule  mean  that 
the  thing  done  must  have  been  absolutely  indispensable  or  appropriate, 
or  merely  convenient?  If  it  is  indispensable,  in  what  respect?  In- 
dispensable in  order  to  start  the  business  of  the  agency  or  to  make  it 
a  success?  And  who  shall  decide  upon  the  necessity — the  court  or 
the  jury?    Is  it  an  issue  of  law  or  of  fact? 

As  to  the  first  question,  we  find  a  diversity  of  rules,  or,  at  least  of 
statements.  It  has  been  declared  to  be  the  duty  of  third  persons  deal- 
ing with  an  agent,  when  the  nature  of  the  agency  is  known  (i.  e.,  that 
it  is  special),  to  ascertain  the  extent  of  the  authority  the  agent  ma)^ 
exercise ;  and  that  the  principal  will  not  be  bound  by  any  act  not  war-- 
ranted  expressly  by,  or  fairly  and  necessarily  implied  from,  the  terms 
of  the  authority  delegated.  *  *  *  Advertising  is  an  appropriate 
means  for  attracting  custom  and  making  sales ;  and,  if  the  authorities 
just  cited  state  the  rule  accurately  for  special  agents,  undoubtedly 
Lurie  had  the  power  to  incur  moderate  charges  for  advertising.  But 
to  bind  a  principal  by  any  contract  made  by  a  special  agent,  which  a 
court  or  jury  may  deem  appropriate  to  the  purpose  of  the  appointment, 
would  encroach  greatly  on  the  doctrine  that  holding  an  agent  out  as 
special  warns  the  public  to  inquire  concerning  the  scope  of  his  au- 
thority. Much  of  the  protection  to  principals  afforded  by  that  doc- 
trine would  be  lost,  and  lax  dealings  with  agents  by  third  parties  en- 
couraged. Under  the  guise  of  powers  appropriate  toi  the  chief  duty, 
of  an  agent,  principals  could  be  involved  in  contracts  and  enterprises 
foreign  to  their  intention,  and  which  they  never  authorized.  It  is  a 
reasonable  view  that  a  special  commission,  such  as  Lurie  held,  is  given 
in  order  to  retain  in  the  principal  control  over  the  business  or  trans- 
action confided  to  the  agent,  except  in  so  far  as  the  latter  is  empowered 
to  act  either  by  the  terms  of  his  commission  or  usage  or  necessity.  In 
our  judgment  it  is  best  to  be  conservative  in  making  one  person  re- 
sponsible for  what  another  does.  Much  injustice  results  daily  from 
unduly  extending  such  responsibility,  both  in  cases  of  principals  and 
agents  and  masters  and  servants.     It  is  true  that  the  business  of  this 


Ch.  1)  SOURCE   AND   SCOPE   OF  THE  AGENt's   POWER  495 

age  requires  manifold  agencies  unknown  to  the  past;  and  true  that  the 
transaction  of  affairs  with  the  celerity  demanded  by  the  spirit  of  the 
times  requires  that  principals,  especially  incorporated  companies, 
should  be  bound  by  the  doings  and  agreements  of  their  agents  more 
than  they  formerly  were.  But  it  is  true,  too,  that  the  facilities  for  as- 
certaining the  authority  conferred  on  agents  have  been  vastly  increased. 
Where  once  a  slow  mail  might  be  weeks  or  months  in  bringing  an  an- 
swer to  an  inquiry,  now  the  railroad  or  telegraph  will  bring  it  in  a 
few  hours  or  minutes.  There  seems  to  be  no  good  reason  for  relax- 
ing the  rules  on  this  subject,  whose  justice  has  been  proved  by  long 
experience. 

The  few  cases  we  have  found,  which  treat  of  the  powers  of  an  agent 
in  charge  of  goods,  have  justified  incurring  expense  for  the  principal 
only  when  it  was  absolutely  necessary,  as  opposed  to  expedient,  to  do 
so,  like  renting  a  storeroom  or  borrowing  money  to  pay  freight  on  the 
goods  so  as  to  get  them  from  a  carrier.  *  *  *  The  word  "neces- 
sary," in  common  usage,  connotes  different  degrees  of  necessity.  *  *  * 
It  sometimes  means  indispensable;  at  others,  needful,  requisite,  inci- 
dental or  conducive.  *  *  *  In  its  primary  sense  it  signifies  a  thing 
or  act  without  which  some  other  thing  or  act  cannot  exist  or  be  done. 
*  *  *  Lurie's  authority  was  special.  Now,  as  Lurie  was  not  given 
entire  control  over  the  particular  business,  but  only  the  right  to  do  spe- 
cific acts  (make  sales),  he  was  a  special  agent.  *  *  *  Therefore  the 
natural  inference  is  that  as  to  policies  and  expedients  to  promote  the 
business,  but  not  indispensable  to  its  successful  management,  and  about 
the  wisdom  of  which  opinions  might  differ,  the  defendant  intended  to 
reserve  the  decision  to  itself ;  and  for  that  reason  gave  Lurie  a  title 
which  denoted  restricted  authority.  Hence  our  opinion  is  that  the 
word  "necessary,"  as  applied  to  determine  in  this  case  the  agent's  pow- 
er to  do  an  incidental  act,  should  be  held  to  mean  an  act  or  measure 
requisite  to  enable  him  to  discharge  his  main  duty — something  more 
urgently  required  than  is  signified  by  the  words  "appropriate,"  "suit- 
able," or  "expedient."  It  should  not  be  held  to  mean  an  act  without 
which  the  agent  could  not  move  at  all  toward  achieving  the  main  ob- 
ject of  the  agency;  or  without  which,  at  a  given  stage,  efforts  to  per- 
form must  absolutely  cease ;  but  one  requisite  for  the  achievement  of 
it  according  to  the  desire  and  intention  of  the  principal — an  act  nec- 
essary in  the  sense  that  the  main  scope  and  object  of  the  agency  must 
fail  unless  it  is  done.  We  speak,  of  course,  in  view  of  the  fact  that 
no  usage  on  the  subject  is  shown.  We  think  an  instruction  in  the  pres- 
ent case  defining  the  word  in  the  sense  we  have  indicated  would  be 
correct.  The  tailoring  business  can  be  carried  on  without  extensive 
advertising  on  bulletin  boards,  or  otherwise;  but  advertising  is  used 
as  a  means  to  increase  business  in  cities  where  competition  is  keen.  It 
is  a  good  means  to  build  up  custom  and  sometimes  may  be  necessary, 
according  to  the  meaning  of  the  word  we  have  pointed  out  as  the 
proper  one  to  adopt  in  the  present  case,  though  not  necessary  in  the 
sense  that  the  business  is  absolutely  impracticable  without  it.     *     *     * 

Text-writers  give  long  schedules  of  acts  which  the  courts  have  de- 
cided agents  may  do  or  not  as  incident  to  their  duty;  such  as,  the 
incidental  powers  of  cashiers,  adjusters  of  insurance  losses,  factors, 
•managers  of  plantations,  superintendents  of  mines,  and  other  kinds  of 
agents.  Most  of  these  adjudications  turn  on  usage  having  vested  the 
agent  with  the  right  he  exercised.     No  doubt  around  many  agencies 


496  AGENCY  (Part  2 

which  are  of  wide  and  ancient  vogue,  for  instance  bank  cashiers,  cus- 
tom has  so  firmly  crystalUzed  many  acts  as  incidentally  authorized  that 
the  courts  are  justified  in  judicially  noticing  and  enforcing  the  cus- 
tom. As  said,  the  existence  of  the  usage  is  a  question  of  fact,  and  its 
effect  on  a  contested  transaction  a  question  of  law.    *    *     *    ^ 

It  appears  to  accord  with  the  definition  of  apparent  authority  com- 
monly given  in  text-books  that  it  is  such  authority  as  a  reasonably 
prudent  man,  using  diligence  and  discretion,  in  view  of  the  principal's 
conduct,  would  naturally  suppose  the  agent  to  possess.  Much  of  the 
apparent  authority  of  an  agent,  whether  asserted  as  incidental,  or  on 
usage,  or  on  the  agent's  previous  course  of  dealing  rests  on  the  princi- 
ples of  the  doctrine  of  estoppel.  The  question  is  rather  what  third 
persons  had  the  right  to  believe  concerning  the  agent's  powers  than 
what  powers  the  principal  intended  to  confer.     *     *     * 

To  give  effect  in  the  present  case  to  sound  principles,  we  think  the 
jury  should  be  instructed  that  before  they  can  hold  the  defendant  liable 
on  the  ground  that  Lurie  had  authority,  as  an  incident  of  his  duties  as 
selling  agent,  to  contract  in  defendant's  name  for  advertising,  they 
must  find  the  advertising  was  reasonable  in  amount  and  necessary,  in 
view  of  all  the  circumstances  in  which  Lurie  was  placed,  and  not  mere- 
ly appropriate  or  useful,  and  that,  if  they  so  find,  the  plaintifif  was  jus- 
tified in  relying  on  Lurie's  apparent  authority  to  contract  for  it,  unless 
plaintiff  had  knowledge  that  he  did  not  possess  the  authority,  or  the 
facts  were  such  that  a  prudent  man,  in  the  exercise  of  ordinary  dili- 
gence, would  not  have  relied  on  his  apparent  authority. 

The  judgment  is  reversed,  and  the  cause  remanded. 


SECTION  2.— ILLUSTRATIONS 


FABER-MrSSER  CO.  v.  WIT.LIAM  E.  DEE  CLAY  MFG.  CO. 

(Supreme  Court  of  Illinois,  1920.     291  111.  240,  126  N.  E.  186.) 

Carter,  J.  Appellant,  the  Faber-Musser  Company,  a  corporation 
engaged  in  business  at  Peoria,  111.,  brought  suit  in  assumpsit  in  the 
circuit  court  of  Sangamon  county  against  appellee,  the  William  E. 
Dee  Clay  Manufacturing  Company,  an  Illinois  corporation,  whose 
factory  is  located  at  Mecca,  Ind.,  to  recover  $20,000  damages  for  failure 
to  deliver  fire  brick  contracted  for  by  appellant  from  appellee  through 
appellee's  agent,  Matthew  M.  Dee.  *  *  *  ^^  ^j^g  close  of  appel- 
lant's case  the  court  gave  a  peremptory  instruction  directing  a  verdict 
for  appellee.     *     *     *     The  cause  is  brought  here  by  appeal. 

The  evidence  shows  that  appellant  is  a  dealer  in  building  materials 
and  that  appellee  is  a  manufacturer  of  fire  brick  and  clay  products. 
Appellee  maintains  an  office  at  Springfield,  111.  (the  only  office  it  has 
in  this  state),  which  is  in  charge  of  its  agent,  Matthew  M.  Dee.  The 
contract  sued  on  consists  of  an  order  and  letter  attached  thereto,  bear- 
ing date  May  14,  1917,  addressed  to  appellee  and  signed  by  appellant. 
Opposite  the  signature  of  appellant  to  the  order  appears :  "Accepted 
— Wm.  E.  Dee  Clay  Mfg.  Co.,  per  Matthew  M.  D'ee."  The  evidence 
shows  that  Matthew  M.  Dee  was,  and  had  been  for  several  years,  in 
charge  of  the  office  of  appellee  at  Springfield.    As  we  understand  the 


Ch.  1)  SOURCE  AND   SCOPE   OF   TOE  AGENT's   POWER  497 

record,  the  evidence  shows  that  the  signs  on  this  office  indicated  that 
it  was  the  sales  office  of  appellee.     *     *     * 

The  evidence  also  tends  to  show  that  the  Springfield  agent  of  ap- 
pellee had  frequently  solicited  orders  from  appellant,  but  that  prior 
to  May  14,  1917,  he  had  been  unable  to  obtain  any  order ;  that  on  April 
18,  1917,  the  appellant  wrote  a  letter  to  William  E.  Dee  at  Spring- 
field asking  him  to  quote  prices  on  fire  brick;  that  Matthew  M.  Dee, 
the  agent  then  in  charge  of  the  Springfield  office,  complied  with  the 
request  and  quoted  prices  by  a  letter  written  on  stationery  bearing  the 
printed  letter  head  above  set  forth,  designating  the  Springfield  office  as 
the  Western  sales  office;  that  on  May  14,  1917,  in  response  to  a  tele- 
phone call  from  appellant,  Matthew  M.  Dee  went  to  Peoria  and  the 
order  in  question  was  then  prepared  in  duplicate ;  that  on  the  dupli- 
cate copy  retained  by  appellant  appear  the  words:  "Accepted — Wm. 
E.  Dee  Clay  Mfg.  Co.,  per  Matthew  M.  Dee."  *  *  *  May  16, 
1917,  appellee,  by  letter  from  its  principal  office  in  Indiana,  refused  to 
accept  the  order.     *     *     * 

Appellant  argues  that  appellee  held  Matthew  M.  Dee  out  to  the  world 
as  its  agent,  and  that  as  such  agent  he  was  authorized  to  make  con- 
tracts such  as  the  one  sued  on.  *  *  *  The  law  is  well  settled  that 
a  principal  is  bound  equally  by  the  authority  which  he  actually  gives 
his  agent  and  by  that  which  by  his  own  acts   he   appears  to   give. 

*  *  *  "A  general  agent,  unless  he  acts  under  a  special  and  limit- 
ed authority,  impliedly  has  power  to  bind  his  principal  by  whatever  is 
usual  and  proper  to  effect  such  a  purpose  as  is  the  subject  of  his  em- 
ployment, and  in  the  absence  of  known  limitations  third  persons  dealing 
with  such  a  general  agent  have  a  right  to  act  on  the  presumption  that 
the  scope  and  character  of  the  business  he  is  employed  to  transact  meas- 
ures the  extent  of  his  authority,  and  to  hold  the  principal  responsible 
for  the  agent's  acts  within  such  authority."  2  Corpus  Juris,  581, 
See,  to  the  same  effect,  21  R.  C.  L.  854.     *     *     * 

The  evidence  shows,  without  contradiction,  that  appellee  is  an  Illi- 
nois corporation;  that  since  its  organization  the  only  office  it  has  had 
in  Illinois  is  the  Springfield  office,  and  that  Matthew  M.  Dee,  the  agent 
who_  took  this  order,  has  been  in  entire  charge  of  that  office  for  seven 
or  eight  years.  The  evidence  of  William  E.  Dee,  the  president  of  the 
appellee  corporation,  is  to  the  effect  that  his  brother,  Matthew  M.  Dee, 
was  a  traveling  salesman,  whose  duty  it  was  to  solicit  orders  for  ap- 
pellee with  his  authority,  limited  to  the  approval  and  acceptance  by 
appellee  at  its  principal  office  in  Indiana.  It  would  be  a  somewhat  un- 
usual_  proceeding  for  a  state  to  require  that  every  corporation  organ- 
ized in  the  state  for  pecuniary  profit  should  have  a  principal  office  in 
some  county  in  the  state,  and  yet  to  assume  that  such  office  could  be  a 
principal  office  and  not  have  some  one  in  charge  who  could  bind  the 
corporation  in  business  matters.  A  person  of  ordinary  prudence,  con- 
versant with  business  usages  and  the  nature  of  business  affairs,  it 
would  seem,  would  be  justified  in  presuming  that  a  person  in  charge 
of  such  principal  office  in  this  state  would  be  authorized  to  bind  the 
cornpany  in  any  business  transaction  within  the  scope  of  its  ordinary 
business. 

There  can  be  no  question  that  Matthew  M.  Dee  accepted  the  order. 

*  *  *  .  There  is  no  question  on  this  record  as  to  the  agency  of  Mat- 
thew M.  Dee  for  the  appellee  company.    The  only  question  in  that  re- 

B.&  B.Brs.LAW— 32 


498  AGENCY  (Part  2 

spect  is  as  to  the  extent  of  his  agency,  and  under  the  authorities  just 
cited  the  letter  heads  used  by  appellee's  agent  at  the  Springfield  office 
were   admissible    in    evidence    to    show    the   extent    of    such    agency. 

We  think  the  evidence  in  this  record  was  of  such  a  nature  on  the 
question  of  the  extent  of  Matthew  M.  Dee's  agency  that  the  contract 
here  under  consideration  should  have  been  submitted  to  the  jury  and 
that  the  trial  court  erred  in  giving  a  peremptory  instruction  to  find  for 
appellee.     *     *     * 

The  judgments  of  the  appellate  and  circuit  courts  will  be  reversed, 
and  the  cause  remanded  to  the  circuit  court  for  further  proceedings 
in  harmony  with  the  views  herein  stated. 


GORE   V.   CANADA  LIFE   ASSURANCE   CO. 

(Supreme  Court  of  Michigan,  1898.     119  Mich.  136,  77  N.  W.  650.) 

Action  by  Henry  H.  Gore  against  the  Canada  Life  Assurance  Com- 
pany.   There  was  a  judgment  for  plaintiff,  and  defendant  brings  error. 

Hooker,  J.  The  plaintiff  brought  an  action  against  the  defendant, 
and  recovered  a  judgment  for  a  balance  claimed  to  be  due  him  for 
commissions  upon  insurance  premiums  obtained  from  policies  writ- 
ten for  defendant's  patrons  upon  his  solicitation.  The  defendant  has 
brought  the  case  to  this  court  by  writ  of  error. 

At  the  threshold  of  the  case  is  the  question  whether  the  plaintiff 
sustained  contract  relations  with  the  defendant.  His  claim  is  that 
he  was  employed  on  behalf  of  the  defendant  by  one  Glass,  with  the 
subsequent  approval  of  Bucknell,  who  was  called  the  "manager  of 
the  Michigan  branch."  The  defendant  asserts  that  it  made  a  contract 
with  some  men  named  Cox,  living  in  London,  Ontario,  by  which  tliey 
had  control  of  its  business  in  Michigan  and  some  other  states,  upon 
a  commission  of  50  per  cent,  upon  new  business,  they  to  employ  and 
pay  their  own  subordinates;  and  that  they  established  a  branch  of- 
fice for  Michigan,  which  they  maintained  under  the  charge  of  Buck- 
nell, who  was  called  "manager  of  the  Michigan  branch  of  the  Canada 
Life  Assurance  Company,"  who  was  paid  by  a  share  of  the  commis- 
sion on  Michigan  business  and  an  allowance  made  by  the  Coxes.  It 
is  claimed  that  Glass  was  engaged  by  them  upon  similar  terms ;  that 
he  was  designated  "inspector  of  agencies"  ;  that  he  was  not  authoriz- 
ed to  employ  any  agents  for  the  company,  but  was  at  liberty  to  divide 
his  own  commissions,  as  he  pleased,  with  any  whom  he  should  see 
fit  to  engage  to  help  him.    *    *    * 

[After  reviewing  certain  evidence,  the  court  continued:]  We  think 
it  evident  that  the  arrangement  made  with  the  Coxes,  and  through 
them  with  others,  did  not  contemplate  authority  to  pledge  the  credit 
of  the  company  in  the  employment  of  agents,  and  that  neither  Cox 
nor  Bucknell  understood. that  he  had  such  authority.  Glass,  who  was 
employed  as  superintendent,  or  inspector  of  agencies,  or,  as  he  says, 
given  exclusive  right  to  work  the  south  half  of  Michigan,  had  no 
greater  authority.  We  think,  therefore,  that  the  plaintiff's  claim  must 
fall,  unless  it  can  be  said  that  he  had  a  legal  right  to  understand  that 
he  was  to  look  to  the  defendant  for  his  pay  by  reason  of  its  holding 
out  Bucknell  and  Glass  as  its  agents  with  authority  to  bind  it  in  such 
matters. 


Ch.  1)  SOUItCE  AND   SCOPE   OF   THE   AGEXt's   POWER  499 

The  plaintiff,  Gore,  testified  that  he  entered  the  employment  of  the 
defendant  upon  terms  made  by  Mr.  Glass,  whose  position  was  inspec- 
tor of  agencies.  On  being  asked  to  state  his  arrangements  with  Mr. 
Glass,  he  said :  "Mr.  Glass,  when  I  first  arranged  with  him,  told  me 
that  forty  per  cent,  was  the  amount  paid  all  agents.  I  was  to  solicit 
insurance  and  whenever  it  was  necessary  I  was  to  call  upon  him  to 
go  with  me,  to  assist  in  closing  up  any  insurance  I  might  get  in  pro- 
cess of  working.  I  was  to  work  in  Detroit.  He  told  me  a  written 
contract  was  not  necessary."  On  cross-examination  he  said :  "I  did 
not-  know  anything  about  his  arrangements  with  the  company,  ex- 
cept such  as  he  had  told  me.  It  was  later  that  I  made  a  contract  with 
him,  and  then  I  came  to  Detroit.  The  day  I  reached  Detroit  I  talked 
it  over  with  Mr.  Glass.  *  *  *  He  said  he  was  the  authorized  agent 
of  the  company,  and  I  was  to  work  for  the  Canada  Life,  and  I  could 
advertise  as  such.  *  *  *  As  long  as  Glass  was  there,  I  was  with 
him.  It  was  as  late  as  May  any  way,  and  I  think  quite  a  little  after 
that.    *    *    *    I  was  not  under  Bucknell  until  Glass  left." 

There  are  two  theories  upon  which  the  plaintiff  might  recover  his 
compensation  from  the  company:  First,  that  Glass  actually  had  au- 
thority to  make  a  contract  that  it  should  pay  him ;  and,  second,  that 
the  company's  conduct  was  such  as  to  justify  his  belief  that  Glass 
had  such  authority,  though  in  fact  he  was  not  authorized  to  do  so. 
Under  the  uncontradicted  testimony  we  must  say  that  the  company 
never  authorized  Glass  to  make  such  a  contract.  If  the  plaintiff'  is 
to  recover,  it  must  be  by  reason  of  a  holding  out  bv  the  company  of 
Glass  as  having  such  authority.  To  sustain  the  theory,  the  agreement 
of  Glass  has  no  force.  It  was  admissible  for  the  single  purpose  of 
showing  the  plaintiff's  understanding  upon  the  subject,  but  it  was  no 
direct  evidence  of  authority.  Mechem,  Ag.  §  276.  "Persons  dealing 
with  agents  must  ascertain  their  authority.  In  approaching  the  con- 
sideration of  the  inquiry  whether  an  assumed  authority  exists  in  a 
given  case,  there  are  certain  fundamental  principles  which  must  not 
be  lost  sight  of.  Among  these  are,  as  has  been  seen,  that  the  law  in- 
dulges in  no  bare  presumptions  that  an  agency  exists ;  it  must  be 
proved  or  presumed  from  facts ;  that  the  agent  cannot  establish  his 
own  authority,  either  by  his  representations  or  by  assuming  to  exer- 
cise it ;  that  an  authority  cannot  be  established  by  mere  rumor  or 
general  reputation ;  that  even  a  general  authority  is  not  an  unlimited 
one,  and  that  every  authority  must  find  its  ultimate  source  in  some 
act  of  the  principal.  Persons  dealing  with  an  assumed  agent,  there- 
fore, whether  the  assumed  agency  be  a  general  or  a  special  one,  are 
bound  at  their  peril  to  ascertain  not  only  the  fact  of  the  agency,  but 
the  extent  of  the  authority ;  and,  in  case  either  is  controverted,  the 
burden  of  proof  is  upon  them  to  establish  it."  There  was  nothing  in 
Glass'  relation  to  the  company  which  gave  the  plaintiff  to  understand 
that  he  had  such  authority.  Glass  says  that  he  was  an  inspector  of 
agencies.  Plaintiff's  counsel  says  that  he  was  superintendent  of  agen- 
cies. There  is  nothing  in  the  testimony  to  show  that  an  inspector  or 
superintendent  of  agencies  was  given  such  authority,  and  there  is  no 
such  legal  presumption.  If,  as  the  word  imports,  his  business  was 
to  superintend  or  inspect  the  work  of  agents,  it  does  not  imply  the 
right  to  appoint  agents,  and  make  contracts  with  them  upon  behalf 
of  the  company.     So  that  at  the  time  he  made  the  contract  with  Glass 


500  AGENCY  (Part  2 

he  had  no  right  to  assume  that  Glass  had  such  authority  from  anything 
except  the  statements  and  acts  of  Glass.    *    *    * 

The  claim  is  made  that  Bucknell  was  held  out  as  a  general  agent, 
and  therefore  that  Gore  had  a  right  to  assume  that  he  was  authorized 
to  employ  him,  or  ratify  the  act  of  Glass.  Bucknell  had  charge  of 
the  Michigan  branch  or  office  for  Cox,  who  had  a  contract  to  work 
the  territory.  The  Coxes  were  the  ones  who  were  held  out  as  general 
agents,  if  there  were  any  general  agents,  and  we  do  not  find  anything 
showing  that  Bucknell  was  a  general  agent,  of  the  company.  Gore 
himself  testified  that  he  did  not  know  what  his  arrangement  was. 
There  is  nothing  to  show  that  he  was  misinformed  by  the  company, 
or  that  he  even  tried  to  ascertain.  He  may,  perhaps,  have  known  that 
the  circulars  of  the  company  contained  his  name  as  manager  of  the 
Michigan  branch,  but  that  is  all.  We  do  not  intend  that  it  shall  be 
understood  that  we  are  of  the  opinion  that  a  general  agency,  so  called, 
necessarily  carries  with  it  the  authority  to  appoint  special  agents  for 
the  company.  Manifestly,  any  agency,  general  or  special,  is  no  more 
than  the  principal  chooses  to  make  it,  unless  he  undertakes  to  limit 
the  effect  of  the  power  which  others  have  a  right  to  suppose  he  has 
conferred,  when  he  will  be  estopped  to  deny  such  power.     *    *    * 

Bucknell  was  advertised  as  manager  of  the  Michigan  branch,  and 
neither  Glass  nor  Bucknell,  nor  even  the  Coxes  themselves,  had  au- 
thority to  issue  a  policy,  but  merely  to  obtain  and  submit  applications 
to  the  head  office,  as  the  witnesses  call  it,  of  the  company.  The  true 
test  after  all,  is  not  a  real  or  imaginary  distinction  between  the  gen- 
eral or  special  agents.  It  is  a  question  whether  the  agent,  general  or 
special  as  the  case  may  be,  has  acted  within  the  apparent  scope  of  the 
authority  confided.  *  *  *  There  is  no  testimony  in  this  case  that 
warrants  the  conclusion  that  Bucknell  had  general  authority  to  ap- 
point agents  and  conduct  defendant's  business  in  Michigan.  *  *  * 
He  was  manager  of  the  Michigan  branch,  but  that  does  not  justify  a 
guess  by  court  or  jury  that  binding  the  company  by  the  appointment 
of  agents  for  it  was  within  the  general  scope  of  the  authority  actually 
given  him.  In  1  Pars.  Cont.  p.  43,  it  is  said:  "We  think  the  distinc- 
tion between  a  general  agency  and  a  special  agent  useful,  and  suf- 
ficiently definite  for  practical  purposes,  although  it  may  have  been 
pressed  too  far  and  relied  upon  too  much  in  determining  the  responsi- 
bility of  a  principal  for  the  acts  of  an  agent.  It  may,  indeed,  be  said 
that  every  agency  is,  under  one  aspect,  special,  and  under  another, 
general.  No  agent  has  authority  to  be  in  all  respects  and  for  all  pur- 
poses an  alter  ego  of  his  principal,  binding  him  by  whatevef  the  agent 
may  do  in  reference  to  any  subject  whatever;  and  therefore  the  agen- 
cy must  be  special  so  far  as  it  is  limited  by  place  or  time,  or  the  extent 
or  character  of  the  work  to  be  done.  On  the  other  hand,  every  agen- 
cy must  be  so  far  general  that  it  must  cover  not  merely  the  precise 
thing  to  be  done,  but  whatever  usually  and  rationally  belongs  to  the 
doing  of  it.  Of  late  years,  courts  seem  more  disposed  to  regard  this 
distinction,  and  the  rules  founded  upon  it,  as  altogether  subordinate  to 
that  principle  which  may  be  called  the  foundation  of  the  law  of  agen- 
cy, namely,  that  a  principal  is  responsible,  either  when  he  has  given  to 
an  agent  sufficient  authority,  or  when  he  justifies  a  party  dealing  with 
his  agent  in  believing  that  he  has  given  to  this  agent  this  authority." 
We  cannot  say  that  this  evidence  tends  to  prove  that  the  appointment 
of  agents  usually  and  rationally  belongs  to  the  doing  of  the  business 


Ch.  1)  SOURCE  AND   SCOPE   OP  THE  AGENT's   POWER  501 

confided  to  Bucknell,  and  we  certainly  cannot  say  it  as  a  matter  of 
law.    *    *    * 

The  judgment  is  reversed,  and  a  new  trial  ordered. 


BRAGER  V.  LEVY  et  al. 

(Court  of  Appeals  of  Maryland,  1914.     122  Md.  554,  90  Atl.  102.) 

Action  by  Adolph  Levy  and  another,  copartners  trading  as  Levy  & 
Markowitz,  against  Albert  A.  Brager.  From  a  judgment  for  plain- 
tiffs, defendant  appeals. 

Thomas,  J.  This  suit  was  brought  on  the  common  counts  in  as- 
sumpsit to  recover  the  contract  price  of  goods  claimed  to  have  been 
sold  by  the  appellees  to  the  appellant.  The  defendant  (appellant)  plead- 
ed the  general  issue  plea,  and  the  trial  in  the  court  below  resulted  in 
a  judgrnent  for  the  plaintiffs,  from  which  the  defendant  has  appealed. 

The  evidence  shows  that  the  defendant  conducted  a  large  depart- 
ment store  in  Baltimore  city,  and,  in  the  conduct  of  that  business, 
employed  a  "buyer"  for  each  department  of  the  store.  One  of  the 
duties  of  the  "buyer"  was  to  make  out  orders  for  goods  required  in 
his  department  and  submit  them  to  the  manager  or  proprietor  for 
his  approval  or  confirmation.  The  "buyer"  was  not  authorized  to 
purchase  goods,  but  his  authority  in  that  connection  was  limited  to 
selecting  and  making  out  the  orders  for  the  goods  needed  in  his  depart- 
ment and  submitting  them  to  the  manager  or  proprietor,  for  his  ap- 
proval and  signature.     *     *     * 

In  May,  1911,  the  defendant  employed  William  S.  Winstein  as  "buy- 
er" for  the  boys'  and  children's  clothing  department  of  his  store,  and 
he  was  given  one  of  the  order  books  referred  to,  and  used  it  in  making 
out  orders  for  goods  needed  in  his  department.  The  plaintiffs,  who 
were  engaged  in  business  in  New  York,  knew  Winstein,  and  in  May, 
1911,  wrote  their  agent  and  traveling  salesman,  Samuel  Markowitz,  to 
go  to  see  Winstein.  Markowitz  had  never  sold  goods  to  or  had  any 
dealings  with  the  defendant,  and  had  never  sold  goods  in  Baltimore. 
He  went  to  the  defendant's  store  to  see  Winstein  on  the  31st  of  May, 
1911,  and  he  states  that  Winstein  introduced  him  to  Carey,  the  assist- 
ant "buyer"  for  the  department  in  which  Winstein  was  engaged,  and 
told  him  that  Carey  was  the  "head  man."  Later  on  the  same  day  Win- 
stein and  Carey  met  him  by  appointment  at  the  Howard  House,  where 
he  exhibited  to  them  his  samples,  and  Winstein  gave  him  a  written 
order  for  goods  amovmting  to  $1,098,  to  be  shipped  to  the  defendant 
September  1,  1911.  *  *  *  Qn  September  2,  1911,  the  plaintiffs 
shipped  to  the  defendant  a  part  of  the  goods  ordered  by  Winstein, 
to  the  amount  of  $893.50.  When  they  arrived  in  Baltimore  the  de- 
fendant refused  to  accept  them.     *     *     * 

The  evidence  further  shows  that  the  order  given  by  Winstein  to 
Markowitz  was  never  signed  or  approved  by  the  manager  or  the  de- 
fendant, and  that  neither  of  them  knew  that  the  order  had  been  given 
until  after  the  goods'  arrived.     *     *     * 

As  we  have  said,  the  evidence  shows  that  Winstein,  who  gave  the 
order  for  the  goods,  was  not  authorized  by  the  defendant  to  purchase 
them.  *  *  *  The  appellees  contend,  however,  that  the  mere  fact 
that  he  was  called  "buyer"  for  the  department  in  which  he  was  em- 
ployed was  sufficient  to  warrant  the  plaintiff's  or  their  agent  in  assum- 


502  AGENCY  ^  (Part  2 

ing  that  he  had  full  authority  to  order  the  goods,  and  that  the  defend- 
ant cannot  rely  upon  any  limitations  upon  his  authority  of  which  the 
plaintiffs  were  not  advised.  *  *  *  jf  Winstein  had,  in  fact,  been 
employed  as  "buyer"  for  the  defendant,  with  authority  to  purchase 
goods  for  the  defendant,  or  if  there  had  been  any  transactions  be- 
tween the  plaintiffs  and  the  defendant  as  would  have  justified  the  as- 
sumption by  the  plaintiffs  that  he  was  authorized  to  purchase  on  ac- 
count of  the  defendant,  the  principle  relied  upon  by  the  appellees  would 
undoubtedly  apply,  and  the  plaintiffs  would  not  be  bound  by  any  secret 
instructions  of  the  defendant  to  his  agent. 

But  we  know  of  no  case  holding  that  the  mere  fact  that  an  employe 
is  called  a  "buyer"  clothes  him  with  power  to  bind  his  principal  by 
contracts  wholly  without  the  scope  of  his  employment.  The  well- 
recognized  doctrine  that  a  general  authority  to  an  agent  cannot  be  lim- 
ited by  private  instructions  not  known  to  third  persons  dealing  with  him 
certainly  cannot  be  applied  to  a  case  where  no  such  general  authority 
exists. 

The  general  rule  is  that  the  power  of  an  agent  to  bind  his  principal 
rests  upon  the  authority  conferred  upon  him  by  the  principal,  and  per- 
sons dealing  with  an  alleged  agent  are  put  upon  inquiry  as  to  the 
extent  of  his  authority.  The  rule  as  to  the  apparent  scope  of  an  agent's 
authority  is  well  stated  in  31  Cyc.  1331,  where  it  is  said:  "While  as 
between  the  principal  and  the  agent  the  scope  of  the  latter's  authority 
is  that  authority  which  is  actually  conferred  upon  him  by  his  principal, 
which  may  be  limited  by  secret  instructions  and  restrictions,  such  in- 
structions and  restrictions  do  not  affect  third  persons  ignorant  thereof ; 
and  as  between  the  principal  and  third  persons  the  mutual  rights  and 
liabilities  are  governed  by  the  apparent  scope  of  the  agent's  authority, 
which  is  that  authority  which  the  principal  has  held  the  agent  out  as 
possessing  or  which  he  has  permitted  the  agent  to  represent  that  he 
possesses  and  which  the  principal  is  estopped  to  deny.  The  apparent 
authority  so  far  as  third  persons  are  concerned  is  the  real  authority, 
and  when  a  third  person  has  ascertained  the  apparent  authority  with 
which  the  principal  has  clothed  the  agent,  he  is  under  no  further  obli- 
gation to  inquire  into  the  agent's  actual  authority.  The  authority  must, 
however,  have  been  actually  apparent  to  the  third  person  who,  in  or- 
der to  avail  himself  of  his  rights  thereunder,  must  have  dealt  with  the 
agent  in  reliance  thereon,  in  good  faith,  and  in  the  exercise  of  reason- 
able prudence,  in  which  case  the  principal  will  be  bound  by  the  acts  of 
the  agent  performed  in  the  usual  and  customary  mode  of  doing  such 
business,  although  he  may  have  acted  in  violation  of  private  instruc- 
tions, for  such  acts  are  within  the  apparent  scope  of  his  authority. 

Although  these  rules  are  firmly  established,  their  application  to  a 
particular  case  is  extremely  difficult.  The  liability  of  the  principal  is 
determined  in  any  particular  case,  however,  not  merely  by  what  was 
the  apparent  authority  of  the  agent,  but  by  what  authority  the  third 
person,  exercising  reasonable  care  and  prudence,  was  justified  in  be- 
lieving that  the  principal  had  under  the  circumstances  conferred  upon 
his  agent,"  Applying  this  statement  of  the  rule  to  the  case  under  con- 
sideration, the  evidence  shows  that  the  principal  had  done  nothing  to 
clothe  Winstein  with  the  apparent  authority  to  purchase  goods  on  his 
account,  and  that  the  plaintiffs  and  their  agent,  without  any  inquiry 
as  to  the  extent  of  his  authority,  and  in  entire  disregard  of  the  es- 


Ch.  1)  SOURCE   AND   SCOPE  OF  THE  AGENt's   POWER  503 

lablished  usage  and  custom  among  department  stores  in  Baltimore  city, 
relied  exclusively  upon  the  bare  fact  that  he  was  called  the  "buyer"  for 
the  department  in  which  he  was  engaged.  To  hold  a  principal  re- 
sponsible for  purchases  made  by  an  agent  who  was  never  authorized 
or  permitted  to  make  them,  and  where  such  purchases  are  wholly 
without  the  scope  of  his  employment,  would  place  every  man  in  busi- 
ness at  the  mercy  of  his  employes.     *     *     * 

Judgment  reversed,  with  costs  to  the  appellant  without  awarding  a 
new  trial. 

EXCHANGE  BANK   v.  THROWER. 
(Supreme  Court  of  Georgia,  1903.     118  Ga.  433,  45  S.  E.  316.) 

Action  by  the  Exchange  Bank  against  M.  L.  Thrower.  Judgment 
for  defendant,  and  plaintiff  brings  error. 

Prince  was  the  agent  of  the  Manhattan  Insurance  Company  for 
Georgia  and  Alabama.  Brinsfield  was  his  cashier.  Two  New  York 
drafts,  payable  to  James  T.  Prince,  Manager,  were  indorsed  by  the 
latter,  "James  T.  Prince,  Manager,  by  Kelly  Brinsfield,  Cashier,"  and 
cashed  by  Thrower,  who  deposited  the  same  with  the  Exchange  Bank 
of  Atlanta  to  his  credit.  The  drafts  were  paid,  and  Prince  having  de- 
nied the  authority  of  the  cashier  to  indorse,  the  bank  refunded  to  him 
the  proceeds,  on  his  agreement  to  indemnify  it  in  case  of  its  failure 
to  recover  the  same  from  Thrower.  The  bank  sued  for  the  recovery 
of  the  money,  and  the  question  involved  here  is  as  to  the  cashier's  au- 
thority to  indorse  in  blank  and  to  collect  the  drafts. 

Eamar,  J.  Authority  to  borrow  money  is  among  the  most  dangerous 
powers  which  a  principal  can  confer  upon  an  agent.  Whoever  lends 
to  one  claiming  the  right  to  make  or  indorse  negotiable  paper  in  the 
name  of  another  does  so  in  the  face  of  all  the  danger  signals  of  busi- 
ness. He  need  not  lend  or  discount  until  assured  beyond  doubt  that  the 
principal  has  in  fact  appointed  an  agent  who  by  the  stroke  of  a  pen 
may  wipe  out  his  present  fortune,  and  bind  his  future  earnings.  The 
very  nature  of  the  act  is  a  warning,  and  if  the  lender  parts  with  his 
money,  he  does  so  at  his  own  peril.  If  the  power  was  not  in  fact  con- 
ferred, he  must  bear  the  loss  occasioned  by  his  own  folly.  A  power 
so  perilous  is  not  to  be  implied  from  acts  which  in  other  matters  less 
hazardous  might  create  an  agency.  It  must  be  conferred  in  express 
terms,  or  be  necessarily  and  inevitably  inferable  from  the  very  nature 
of  the  agency  actually  created.  So  strict  is  the  rule  that  it  will  not 
be  presumed  even  from  an  appointment  of  one  as  general  agent,  unless 
the  character  of  the  business  or  the  duties  of  the  agent  are  of  such  a 
nature  that  he  was  bound  to  borrow  in  order  to  carry  out  his  instruc- 
tions and  the  duties  of  the  office.     *     *     * 

While  the  agent  here  was  given  the  rather  high  title  of  "cashier," 
that,  of  itself,  did  not  clothe  him  with  the  powers  which  might  have 
been  exercised  by  an  officer  bearing  that  title  if  employed  by  a  bank. 
In  view  of  the  reluctance  with  which  the  law  presumes  the  existence 
of  the  power  to  borrow,  this  title  will  be  considered  to  indicate  that  he 
was  a  cash  keeper,  rather  than  a  cash  borrower.  Nor  will  the  fact  that 
he  was  authorized  to  fill  out  the  blank,  and  indorse  drafts  with  a  rub- 
ber stamp  reading,  "Pay  to  the  order  of  the  Third  National  Bank  for 

deposit.     James  T.  Prince,  Manager,  by  Cashier,"  be  treated 

as  authority  to  indorse  in  blank.     On  the  contrary,  the  character  of 


504  AGENCY  (Part  2 

the  stamp  itself  indicated  that  the  principal  only  authorized  a  restrict- 
ed indorsement  for  the  mere  purpose  of  allowing  the  bank,  rather  than 
the  agent,  to  collect.  It  does  not  import  a  general  authority  to  in- 
dorse, nor  does  possession  of  the  draft  indicate  that  the  agent  had  the 
right  to  discount  the  draft  or  collect  the  proceeds. 

The  stringent  rules  of  agency  are  intended  to  protect  a  principal 
against  unauthorized  acts,  but  not  to  shield  one  who  has  in  fact  confer- 
red such  authority,  or  ratified  his  conduct.  Here  the  plaintiff  denied 
that  any  authority  had  been  given  further  than  that  implied  in  con- 
ferring the  title  "cashier,"  and  the  right  to  use  the  stamp  above  copied. 
It  denied  that  Prince  had  knowledge  of  the  conduct  on  the  part  of 
Brinsfield,  or  that  he  in  any  manner  ratified  the  indorsements  or  col- 
lections which  were  shown  to  have  been  made  by  him.  The  testimony 
for  the  defendant  was  to  the  contrary,  and  was  to  the  effect  that  the 
trouble  was  not  so  much  a  want  of  authority  to  indorse,  as  the  im- 
proper use  Brinsfield  made  of  the  money  after  it  was  collected;  that 
he  was  a  general  agent,  indorsing  drafts, .  handling  the  cash,  paying 
out  money,  occasionally  drawing  checks,  and  in  full  and  complete 
charge  of  the  business  during  the  frequent  and  necessary  absences  of 
the  principal;  that  he  had  discounted  another  draft  with  Thrower 
some  months  before,  for  $394,  which  was  paid  without  objection ;  that 
on  these  and  other  like  drafts,  indorsed  in  the  same  way,  of  which 
Prince  denied  knowledge,  Brinsfield  had  collected  some  $8,500,  which 
he  had  appropriated  to  his  own  use ;  that  he  originally  wrote  the  in- 
dorsements in  his  own  handwriting  before  the  stamp  above  referred 
to  was  prepared ;  and  that  there  were  other  stamps  in  the  office  used  by 
him,  on  which  the  words  "for  deposit"  were  wanting,  apparently  con- 
templating that  he  had  authority  to  indorse  in  blank  and  to  collect. 
The  evidence,  while  conflicting,  was  sufficient  to  sustain  the  verdict  for 
the  defendant.  We  have  no  power  to  interfere  where  the  judge  of  the 
lower  court  has  re-examined  the  evidence  on  the  motion  for  a  new 
trial,  and  by  his  refusal  to  set  it  aside  expressed  himself  as  fully  satis- 
fied with  the  verdict. 

Judgment  affirmed. 

CHARLES  MOE  CO.  v.  J.  H.  LOGUE  CO. 
(Appellate  Court  of  Illinois,  First  District,  190.3.     108  111.  App.  128.) 

BalIv,  p.  J.  October  18,  1901,  Logue,  the  president  of  appellee, 
gave  a  diamond  to  one  Stein,  to  show  to  a  prospective  customer.  It 
was  not  given  Stein  to  sell.  He  was  to  return  it  at  2  p.  m.  of  the 
same  day,  as  another  customer  had  the  refusal  of  it.  Instead  of  car- 
rying out  this  agreement  Stein  pawned  the  stone  to  appellant  for  $100. 
Logue  made  demand  on  appellant  for  its  return.  The  latter  refused 
to  comply  unless  the  sum  it  had  loaned  upon  fhe  diamond  was  repaid. 
Thereupon  appellee  brought  replevin,  and  recovered  a  judgment  for 
$160,  from  which  judgment  this  appeal  was  taken.     *     *     * 

It  is  an  elementary  rule  of  the  law  of  personal  property  that  no  man 
can  be  deprived  of  it  without  his  consent,  or  by  operation  of  law. 
Another  fundamental  rule  is  that  no  one  can  sell  a  right  which  he 
does  not  have ;  that  the  purchaser  takes  nothing  more  than  the  rights 
of  his  vendor.  With  us  the  exceptions  to  this  last  rule  arise  only 
where  the  property  is  money  or  negotiable  paper.  In  all  other  cases 
the  purchaser  cannot  retain  the  property  as  against  the  owner  unless 
it  appear  that  the  seller,  by  sale  and  delivery  to  him,  though  induced 


Ch.  1)  SOURCE   AND   SCOPE   OF  THE  AGENT's   POWER  505 

by  fraudulent  pretenses,  had  the  indicia  of  title.  Possession  of  per- 
sonal property  is  indicative  of  title,  but  it  is  not  title ;  and  that  alone- 
will  not  protect  the  purchaser  from  the  effects  of  a  demand  by  the 
real  owner.     *     *     * 

The  judgment  of  the  circuit  court  is  affirmed. 


SiSnTH  PREMIER  TYPEWRITER  CO.  v.  NATIONAL  HARTEL  LIGHT  OO. 

(Supreme  Court  of  New   York,  Appellate   Term,   1911.     72   Misc.   Rep.   405, 

130  N.  Y.  Supp.  136.) 

Seabury,  J.  This  action  was  brought  to  recover  $100  alleged  to  be 
the  agreed  price  of  a  typewriter  sold  and  delivered  to  the  defendant 
corporation.  The  evidence  is  insufficient  to  establish  that  the  defend- 
ant purchased  or  ratified  the  alleged  purchase  of  the  typewriter.  It 
appears  from  the  record  that  the  defendant  had  "m  its  employ  a  book- 
keeper. On  November  10,  1910,  the  defendant's  bookkeeper,  under 
the  express  direction  of  an  officer  of  the  defendant,  signed  an  order 
for  one  typewriter.  This  typewriter  was  delivered  and  paid  for.  On 
December  1,  1910,  the  same  bookkeeper  signed  a  second  order  for  an 
additional  typewriter.  The  typewriter  was  delivered  to  the  defend- 
ant._  Upon  receiving  the  typewriter,  the  defendant  promptly  re- 
pudiated the  order  given  by  the  bookkeeper,  and  requested  the  plain- 
tiff to  remove  the  typewriter  from  the  defendant's  place  of  business. 

The  record  affirmatively  shows  that  the  bookkeeper  had  no  actual 
authority  to  make  the  purchase.  While  it  is  true  that  authority  of  an 
assumed  agent  to  make  a  purchase  will  be  implied,  where  the  alleged 
principal  has  repeatedly  recognized  and  approved  of  similar  acts,  still 
a  single  act  done  under  express  authority  is  insufficient  to  justify  the 
inference  that  the  assumed  agent  has  the  apparent  authority  to  sub- 
ject the  alleged  principal  to  Hability  upon  subsequent  purchases  made 
without  actual  authority.  *  *  *  As  the  bookkeeper  was  without 
actual  or  apparent  authority  to  make  the  purchase,  the  defendant  was 
not  bound  by  his  act  in  attempting  so  to  do.     *    *     * 

[Judgment  reversed;   new  trial  granted.] 


McCULLOUGH  v.  HITCHCOCK. 

(Supreme  Court  of  Errors  of  Connecticut,  1899.  71  Conn.  401,  42  Atl.  83.) 
_  Suit  for  specific  performance  by  Mary  J.  McCullough  against  Mel- 
ville C.  Hitchcock.  There  was  decree  for  defendant,  and  plaintiff 
appeals. 

Upon  the  trial  of  the  cause,  the  plaintiff,  to  prove  the  averment  of 
her  complaint,  offered  in  evidence  a  certain  letter,  as  follows  (it  was 
admitted  that  the  defendant  was  the  owner  of  the  land,  and  that  An- 
derson &  Mead  were  real  estate  agents  or  brokers) : 

"Ansonia,  Conn.,  Nov.  23,  1896.  Messrs.  Anderson  &  Mead, 
Bridgeport,  Conn.— Gentlemen :  I  have  a  building  lot  on  William  St., 
E.  D.,  that  I  would  like  to  sell,  if  I  can  do  so  at  any  advantage.  It 
is  located  next  to  the  residence  of  S.  W.  Hubbell,  268  Wm.  St.  As 
I  am  not  a  resident  of  Bpt.,  I  do  not  know  the  value  of  said  lot ;  but 
could  you  not  look  at  the  lot,  and  give  me  an  idea  of  its  value,  and,  if 
possible,  find  a  purchaser  for  same  ?    Yours,  truly,  M.  C.  Hitchcock." 

"For  lot  next  to  268  William  St.    Anderson  &  Mead,  per  T." 

Andrews.  C.  J.     *     *     *     Anderson  &  Mead  had  no  authorit^^  to 


506  AGENCY  (Part  2 

make  a  written  contract  binding  on  the  defendant  to  convey  the  land 
in  question,  unless  it  can  be  found  in  the  letter  of  November  23,  1896. 
That  letter  does  not,  in  terms,  purport  to  give  any  such  authority. 
The  contention  of  the  plaintiff  is  that  such  authority  is  implied  from 
the  request  in  the  letter  to  find  a  purchaser ;  that  it  is  a  custom  of  the 
real-estate  business  that  a  broker  authorized  to  find  a  purchaser  for 
lands  may  sign  a  binding  contract  for  the  sale  of  that  land.  We  do 
not  understand  any  such  custom  to  exist  in  this  state.  A  custom  can 
exist  only  as  a  matter  of  fact.     *     *     * 

There  is  no  finding  that  any  such  custom  prevails  in  Connecticut, 
and  there  is  no  case  cited  .which  recognizes  any  such  rule.  A  real- 
estate  broker  or  agent  is  one  who  negotiates  the  sales  of  real  prop- 
erty. His  business,  generally  speaking,  is  only  to  find  a  purchaser 
who  is  willing  to  buy  the  land  upon  the  terms  fixed  by  the  owner.  He 
has  no  authority  to  bind  the  principal  by  signing  a  contract  of  sale. 
A  sale  of  real  estate  involves  the  adjustment  of  many  matters  besides 
the  fixing  of  the  price.  The  delivery  of  the  possession  has  to  be  set- 
tled; generally  the  title  has  to  be  examined;  and  the  conveyance, 
with  its  covenants,  is  to  be  agreed  upon  and  executed  by  the  owner. 
All  of  these  things  require  conferences,  and  time  for  completion. 
These  are  for  the  determination  of  the  owner,  and  do  not  pertain  to 
the  duties,  and  are  not  within  the  authority,  of  a  real-estate  agent. 
For  these  obvious  reasons,  and  others  which  might  be  suggested,  it  is 
a  wise  provision  oi  the  law  which  withholds  from  such  an  agent,  as 
we  think  it  does,  any  implied  authority  to  sign  a  contract  of  sale  in 
behalf  of  his  principal.    *     *     * 

There  is  no  error.    The  other  judges  concurred. 


PIOKERT  V.  MARSTON  et  al. 

(Supreme  Court  of  Wisconsin,  1SS7.     68  Wis.  465,  .32  N.  W.  .550, 
60  Am.  Eep.  S76.) 

Cassoday,  J.  The  evidence  is  undisputed  that  the  fish  were  in 
good  condition  when  shipped  to  the  defendants  from  Boston,  and 
worthless  when  they  reached  the  defendants  at  La  Crosse.  The  de- 
fendants made  the  contract  of  purchase  at  La  Crosse  with  the  plain- 
tiff's traveling  salesman,  who  resided  at  Chicago.  There  was  evi- 
dence tending  to  prove  that  the  fish  shipped  were  not  the  fish  order- 
ed ;  and  also  that,  by  the  terms  of  the  contract,  the  fish  ordered  were 
guarantied  by  the  traveling  salesman  to  reach  the  defendants  in  La 
Crosse  in  good  merchantable  condition.  The  evidence  on  the  part 
of  the  plaintiff  was  to  the  effect  that  the  traveling  salesman  had  no  au- 
thority to  make  such  guaranty,  nor  any  assurance  as  to  the  condition 
in  which  the  fish  should  be  on  reaching  La  Crosse ;  and  that  he  so  in- 
formed the  defendants  about  a  month  prior  to  the  taking  of  the  order 
in  question.  The  issue  made  does  not  arise  between  the  principal  and 
agent,  but  between  tlie  principal  and  the  defendants  who  made  the 
contract  of  purchase  with  the  agent.  The  agency,  and  the  right  to 
contract  for  the  sale,  are  admitted.  But  the  authority  to  make  the 
guaranty  or  warranty  is  denied.  Beyond  question,  an  agent  may  bind 
his  principal,  if  he  does  not  exceed  the  power  with  which  he  is  .os- 
tensibly invested,  notwithstanding  he  has  secret  instructions  from  his 
principal  to  the  contrary.    *    *    * 

Assuming  that  the  traveling  salesman  had  no  actual  authority  to 


Ch.  1)  SOUUCE   AND   SCOPE   OF   THE   AGENT's   POWEU  507 

make  such  guaranty  or  warranty  of  the  fish,  then  it  became  important 
to  determine  whether  his  authority  to  sell,  or  contract  for  the  sale, 
clothed  him  with  an  implied  authority  to  make  such  guaranty  or  war- 
ranty. "The  general  rule  is,  as  to  all  contracts,  including  sales," 
said  a  late  learned  author,  "that  the  agent  is  authorized  to  do  whatever 
is  usual  to  carry  out  the  object  of  his  agency,  and  it  is  a  question  for 
the  jury  to  determine  what  is  usual.  If,  in  the  sale  of  the  goods  con- 
fided to  him,  it  is  usual  in  the  market  to  give  a  warranty,  the  agent 
may  give-  that  warranty  in  order  to  eft'ect  a  sale."  2  Benj.  Sales, 
.(4th  Amer.  Ed.)  §  945,  p.  824.     *    *    * 

Thus,  in  Dingle  v.  Hare,  supra  [97  E.  C.  L.  145]  Erie,  C.  J.,  ob- 
served:, "The  strong  presumption  is  that,  when  a  principal  author- 
izes an  agent  to  sell  goods  for  him,  he  authorizes  him  to  give  all  such 
warranties  as  are  usually  given  in  the  particular  trade  or  business ;  " 
and  Byles,  J.,  added:  "An  agent  to  sell  has  a  general  authority  to 
do  all  that  is  usual  and  necessary  in  the  course  of  such  employment." 
So  in  Smith  v.  Tracy,  supra  [36  N.  Y.  79],  Porter,  J.,  speaking  for 
the  court,  said :  "The  rule  applicable  to  such  a  case  is  stated  with 
•discrimination  and  accuracy  in  our  leading  text-book  (Parsons)  on 
the  law  of  contracts :  'An  agent  employed  to  sell,  without  express 
power  to  warrant,  cannot  give  a  warranty  which  shall  bind  the  princi- 
pal, unless  the  sale  is  one  which  is  usually  attended  with  warranty.'  " 

Here  the  plaintifif  offered  to  prove,  by  different  witnesses  having 
the  requisite  knowledge,  the  general  custom  of  the  trade,  as  known 
and  universally  followed  by  dealers  in  fish,  as  to  their  being  warranted 
or  guarantied  against  spoiling  or  turning  red  in  transit;  but  it  was 
excluded,  and,  as  we  think,  erroneously,  under  the  rules  'of  law  above 
stated.  It  would  seem,  however,  that,  to  be  binding  upon  the  de- 
fendants, such  custom  should  be  known  to  them,  or  exist  in  their 
section  of  the  country.  Thus,  in  Graves  v.  Legg,  supra  [2  Hurl  &  N. 
210],  it  was  said  by  Cockburn,  C.  J.:  "The  only  question  is,  wheth- 
er, when  a  merchant  residing  in  London  contracts  with  a  Liverpool 
merchant  in  Liverpool,  he  is  bound  by  the  usage  of  trade  at  Liverpool. 
We  think  that,'  as  he  employed  an  agent  at  Liverpool  to  make  a  con- 
tract there,  it  must  be  taken  to  have  been  made  with  all  the  incidents 
of  a  contract  entered  into  at  Livei-pool,  and  one  is  that  notice  to  the 
buyer's  agent  is  notice  to  the  principal." 

The  judgment  [for  plaintiff]  is  reversed,  and  the  cause  is  remanded 
for  a  new  trial.  

SOHULTZ    V.    GRIFFIN. 

(Court  of  Appeals  of  New  York,  1890.     121  N.  Y.  294,  24  N.  E.  480, 
18  Am.  St.  Rep.  82.5.) 

Andrews,  j.  *  *  *  The  rule  that  an  agent  to  sell  personal  prop- 
erty has  implied  power  to  warrant,  in  the  absence  of  any  restriction, 
where  sale  with  warranty  is  usual  and  customary  in  similar  cases.. 
was  declared  in  Nelson  v.  Cowing,  6  Hill,  336,  substantially  overruling 
Gibson  V.  Colt,  7  Johns.  390.  There  seems  to  be  no  well-founded  dis- 
tinction between  real  and  personal  property,  requiring  a  different  con- 
struction of  an  agency  for  sale  in  the  two  cases.  The  great  prepon- 
derance of  authority  now  is  that  a  power,  without  restriction,  to  sell 
and  convey  real  estate  gives  authority  to  the  agent  to  deliver  deeds 
with  general  warranty  binding  on  the  principal,  where,  under  the  cir- 
cumstances, this  is  the  common  and  usual  mode  of  assurance,    *    *    * 


508  AGENCT  (Part  2 


HAHNENFELD  v.  WOLFF.  't 

(Common  Pleas  of  New  York  City  and  County,  1895.    15  Misc.  Rep.  133, 
36  N.  Y.  Supp.  473.) 

BiscHOFf',  J.  It  was  conceded  by  the  defendant  that  the  sale  was 
made  to  him  through  the  instrumentaHty  of  one  Grimshaw,  and  it 
conclusively  appeared  from  the  invoice  in  defendant's  possession,  and 
produced  by  him,  upon  which  the  alleged  payments  to  Grimshaw  were 
receipted  for  by  the  latter,  that  the  defendant,  before  such  payments, 
knew  the  plaintiff,  and  not  Grimshaw,  to  be  his  vendor.  Grimshaw 
was  employed  by  the  plaintiff  to  solicit  orders  from  customers,  and 
did  not  appear  to  have  been  intrusted  with  the  possession  of  the  whole 
or  any  part  of  the  merchandise  sold.  Under  these  circumstances  the 
payments  to  Grimshaw  were  made  by  the  defendant  at  his  peril  of  the 
former's  want  of  authority.  It  is  well  settled  that  an  agent  to  solicit 
orders  merely,  or  to  sell  goods,  who  has  not  the  possession  of  the 
goods,  has  no  implied  or  apparent  authority  to  receive  payment.    *    *    * 

Judgment  reversed,  and  new  trial  ordered. 


PAYNE  V.  POTTER. 

(Supreme  Court  of  Iowa,  1859.     9  Iowa,  549.) 

Replevin  for  a  horse.    Judgment  for  plaintiff,  and  defendant  appeals. 

Stockton,  J.  The  first  assignment  of  error  is  upon  the  charge  of 
the  court.  The  rule  of  law  is  that  no  man  is  bound  by  the  act  of  an- 
other, without  or  beyond  his  consent;  and  where  an  agent  acts  under 
a  special  or  express  authority,  whether  written  or  verbal,  the  party 
dealing  with  him  is  bound  to  know  at  his  peril  what  the  power  of  the 
agent  is,  and  to  understand  its  legal  eft'ect;  and  if  the  agent  exceed 
the  boundary  of  his  legal  power,  the  act,  as  concerns  the  principal, 
is  void.  *  *  *  The  power  must  be  pursued  with  legal  strictness,  and 
the  agent  can  neither  go  beyond  nor  beside  it.  The  act  must  be  legally 
identical  with  that  authorized  to  be  done  or  the  principal  is  not  bound. 
*  *  *  So  it  is  held  that  an  agent  to  whom  a  horse  is  given  to  sell 
for  the  principal,  cannot  deliver  him  in  payment  of  his  own  debt,  and 
the  owner  may  recover  the  horse  from  a  purchaser  to  whom  he  has 
been  so  delivered.    *    *    * 

And  it  is  held  that  a  special  authority  or  direction  to  sell,  does  not 
authorize  a  sale  on  credit,  unless  commercial  custom  has  given  rise  to 
such  an  understanding  in  some  particular  business.  The  question 
whether  in  such  case  a  discretion  to  sell  on  credit  is  given,  must  de- 
pend on  the  authority  in  the  particular  case.  In  May  v.  Mitchell,  5 
Humph.  (Tenn.)  365,  a  principal  delivered  to  an  agent  three  mules  to 
be  taken  to  the  southern  market,  and  to  be  sold  for  the  best  price  that 
he  could  get,  and  the  proceeds  to  be  returned ;  the  agent  took  them  to 
the  south  and  sold  them  on  credit,  and  the  purchaser  proved  insolvent ; 
it  was  held  that  the  agent  was  vested  with  a  discretionary  power  to  sell 
upon  the  best  terms  that  could  be  procured  according  to  the  course  of 
trade  in  that  part  of  the  country  to  which  the  mules  were  carried,  and 
as  this  was  proved  to  be  on  credit,  the  agent  was  held  not  to  be  liable 
to  the  principal. 

Every  general  power  necessarily  implies  the  grant  of  every  matter 
necessary  to  its  complete  execution.    *    *    *    in  the  absence  of  special 


Ch.  1)  SOURCE  AND   SCOPE   OF   THE   AGEXt's  POWER  509 

instruction  to  the  contrary,  and  in  the  absence  of  such  prescription  as 
to  the  manner  of  doing  the  act,  as  implies  an  exclusion  of  any  other 
manner,  an  authority  or  direction  to  do  an  act,  or  accomplish  a  particu- 
lar end,  implies  and  carries  with  it  authority  to  use  the  necessary  means 
and  inducements,  and  to  execute  the  usual  legal  and  appropriate  meas- 
ures proper  to  perform  it.  And  not  only  are  the  means  necessary  and 
proper  for  the  accom.plishment  of  the  end  included  in  the  authority, 
but,  also,  all  the  various  nieans  which  are  justified  or  allowed  by  the 
usages  of  trade.  Thus  (says  Judge  Story)  if  an  agent  is  authorized 
to  sell  goods,  this  will  be  construed  to  authorize  the  sale  to  be  made  on 
credit  as  well  as  for  cash,  if  this  course  is  justified  by  the  usages  of 
trade,  and  the  credit  is  not  bevond  the  usual  period.  Story  on  Agency, 
§  60. 

We  think  it  results  from  the  rules  laid  down  that  the  burden  lay 
upon  the  defendant  to  show  that  the  sale  by  the  agent  on  credit  was 
justified  by  the  usages  of  trade,  and  that  the  credit  given  was  not 
unreasonable.  Without  such  proof  the  authority  of  the  agent  could 
not  be  construed  into  an  authority  to  sell  for  cash ;  and  in  this  view 
there  was  no  error  in  the  charge  of  the  court  to  defendant's  prejudice. 

^       sj;       * 

Judgment  reversed. 


GAGE   V.   CALLANAN. 

(Supreme  Court  of  New  York,   Special  Term.  1908.     57  Misc.  Eep.  479, 
109  N.  Y.  Supp.  S44.)    ' 

Kellogg,  J.  A  chauffeur  of  the  defendant,  in  driving  the  defend- 
ant's car  from  Troy  to  Whitehall,  broke  down  at  Saratoga,  and  pro- 
cured the  plaintiff  to  make  temporary  repairs  thereon.  In  leaving  the 
shop  he  told  employes  of  the  plaintiff  to  come  and  get  the  car  if  he 
broke  down  again,  and  to  make  all  necessary  repairs  thereon  to  place 
it  in  first-class  condition.  He  did  so  break  down.  He  then  sent  a  mes- 
sage to  the  plaintift-  to  come  and  get  the  car  and  repair  it  as  above  men- 
tioned. The  plaintiff'  took  the  car  to  his  shop.  Before  repairing  it  he 
wrote  the  defendant  several  letters  at  his  home  address,  telling  him 
what  had  been  done,  and  asking  if  he  should  carry  out  the  instructions 
of  the  chauff"eur.  He  received  no  reply  whatever.  He  then  proceeded 
to  repair  the  car.    These  facts  are  abundantly  established  by  the  proof. 

Evidently  the  chauffeur  had  no  implied  or  apparent  authority  to  or- 
der permanent  repairs,  or  any  repairs  other  than  such  as  were  neces- 
sary to  enable  him  to  proceed  upon  his  journey.  This  was  evident  to 
the  plaintiff  himself ;  for  he  placed  no  reliance  upon  the  word  of  the 
chauff'eur,  writing  the  owner  himself  for  instructions.  The  owner  ig- 
nored his  letters.  Clearly  the  plaintiff  was  in  no  way  deceived  as  to 
the  chauffeur's  authority.  Clearly  he  knew  that  he  had  no  authority 
to  order  the  repairs  in  question.  The  case,  therefore,  is  precisely  as 
if  the  chauff'eur  had  not  given  the  orders  in  question,  merely  leaving  the 
car  in  plaintiff''s  shop  for  safe-keeping.  If  the  plaintiff'  had  then  sug- 
gested repairs  to  the  defendant,  and  received  no  response  to  his  sug- 
gestion, he  could  not  then  have  made  repairs  except  at  his  own  cost 
and  risk.  So  in  this  case.  The  plaintiff  is,  therefore,  not  entitled  to 
recover  his  repair  bill. 

It  is  otherwise  as  to  his  bill  for  storage.  Th^  chauffeur  had  the 
right  to  place  the  broken-down  car  in  the  plaintift"s  custody  for  safe- 


510  AGENCY  (Part  3 

keeping.  The  defendant  was  informed  that  he  had  done  so.  He  did 
not  interfere  with  the  plaintiff's  custody  of  the  car,  but  left  it  with  him 
for  a  long  period  of  time.  He  certainly  is  liable  for  the  keep  of  the  car. 
The  plaintiff'  has  placed  the  value  of  the  car's  storage  at  $537.50.  ^I 
think  this  sum,  although  undisputed,  is  excessive.  The  sum  of  $250 
would  amply  repay  the  plaintiff.  Judgment  is  accordingly  ordered  in 
the  plaintiff's  favor  for  $250  and  costs. 


BANK  OF  BATAVIA  v.  NEW  YORK,  L.  E.  &  W.  R.  CO. 

(Court  of  Appeals  of  New  York,  1887.     106  N.  Y.  195,  12  N.  E.  4.33, 
60  Am.  Rep.  440.) 

Finch,  J.  It  is  a  settled  doctrine  of  the  law  of  agency  in  this  state 
that,  where  the  principal  has  clothed  his  agent  with  power  to  do  an 
act  upon  the  existence  of  some  extrinsic  fact  necessarily  and  peculiarly 
within  the  knowledge  of  the  agent,  and  of  the  existence  of  which  the 
act  of  executing  the  power  is  itself  a  representation,  a  third  person 
dealing  with  such  agent  in  entire  good  faith,  pursuant  to  the  apparent 
power,  may  rely  upon  the  representation,  and  the  principal  is  estopped 
from  denying  its  truth,  to  his  prejudice.  *  *  *  /^  discussion  of 
that  doctrine  is  no  longer  needed  or  permissible  in  this  court,  since  it 
has  survived  an  inquiry  of  the  most  exhaustive  character,  and  an  as- 
sault remarkable  for  its  persistence  and  vigor.  If  there  be  any  ex- 
ception to  the  rule  within  our  jurisdiction,  it  arises  in  the  case  of 
municipal  corporations  whose  structure  and  functions  are  sometimes 
claimed  to  justify  a  more  restricted  liability.  The  application  of  this 
rule  to  the  case  at  bar  has  determined  it  in  favor  of  the  plaintiff,  and 
we  approve  of  that  conclusion. 

One  Weiss  was  the  local  freight  agent  of  the  defendant  corpora- 
tion at  Batavia,  whose  duty  and  authority  it  was  to  receive  and  for- 
ward freight  over  the  defendant's  road,  giving  a  bill  of  lading  there- 
for specifying  the  terms  of  the  shipment,  but  having  no  right  to  issue 
such  bills  except  upon  the  actual  receipt  of  the  property  for  transporta- 
tion. He  issued  bills  of  lading  for  60  barrels  of  beans  to  one  Wil- 
liams, describing  them  as  received  to  be  forwarded  to  one  Comstock 
as  consignee,  but  adding,  with  reference  to  the  packages,  that  their 
contents  were  unknown.  Williams  drew  a  draft  on  the  consignee,  and 
procured  the  money  upon  it  of  the  plaintiff  by  transferring  the  bills 
of  lading  to  secure  its  ultimate  payment.  It  turned  out  that  no  barrels 
of  beans  were  shipped  by  Williams,  or  delivered  to  the  defendant,  and 
the  bills  of  lading  were  the  product  of  a  conspiracy  between  him  and 
Weiss  to  defraud  the  plaintiff'  or  such  others  as  could  be  induced  to 
advance  their  money  upon  the  faith  of  the  false  bills.     *     *     * 

The  bills  were  made  for  the  precise  purpose,  so  far  as  the  agent 
and  Williams  were  concerned,  of  deceiving  the  bank  by  their  repre- 
sentations, and  every  bill  issued  not  stamped  was  issued  with  the  ex- 
pectation of  the  principal  that  it  would  be  transferred  and  used  in 
the  ordinary  channels  of  business,  and  be  relied  upon  as  evidence  of 
ownership  or  security  for  advances.  Those  thus  trusting  to  it  and 
affected  by  it  are  not  accidentally  injured,  but  have  done  what  they 
who  issued  the  bill  had  every  reason  to  expect.  Considerations  of  this 
character  provide  the  basis  of  an  equitable  estoppel,  without  reference 
to  negotiability  or  directness  of  representation. 


Ch.  1)  SOURCE   AND    SCOPE   OF   THE  AGEXt's   POWER  511 

It  is  obvious,  also,  upon  the  case  as  presented,  that  the  fact  or  con- 
dition essential  to  the  authority  of  the  agent  to  issue  the  bills  of  lading- 
was  one  unknown  to  the  bank,  and  peculiarly  within  the  knowledge 
of  the  agent  and  his  principal.  If  the  rule  compelled  the  transferee 
to  incur  the  peril  of  the  existence  or  absence  of  the  essential  fact,  it 
would  practically  end  the  large  volume  of  business  founded  upon 
transfers  of  bills  of  lading.  Of  whom  shall  the  lender  inquire?  And 
how  ascertain  the  fact?  Naturally  he  would  go  to  the  freight  agent 
who  had  already  falsely  declared  in  writing  that  the  property  had 
been  received.  Is  he  any  more  authorized  to  make  the  verbal  rep- 
resentation than  the  written  one?  Must  the  lender  get  permission 
to  go  through  the  freight-house  or  examine  the  books?  If  the  prop- 
erty is  grain,  it  may  not  be  easy  to  identify;  and  the  books,  if  dis- 
closed, are  the  work  of  the  same  freight  agent.  It  seems  very  clear 
that  the  vital  fact  of  the  shipment  is  one  peculiarly  within  the  knowl- 
edge of  the  carrier  and  his  agent,  and  quite  certain  to  be  unknown  to 
the  transferee  of  the  bill  of  lading,  except  as  he  relies  upon  the  rep- 
resentation of  the  freight  agent.     *     *     * 

The  judgment  should  be  affirmed,  with  costs.^ 


NATIONAL,  BANK  OF  COINIIMERCE  v.  CHICAGO,  B.  &  N.  R.  CO. 

(Supreme  Court  of  Minnesota,  1890.     44  Minn.  224,  46  N.  W.   342,  560, 
9  L.  R.  A.  263,  20  Am.  St.  Eep.  566.) 

Mitchell,  J.  *  *  *  A  carrier,  in  issuing  a  bill  of  lading  for 
property  delivered  to  him  for  transportation,  does  not  warrant  the 
title  of  the  shipper.  But  what  is  the  rule  where  no  property  was  ever 
delivered  at  all  for  transportation,  and  the  agent  of  the  carrier,  either 
fraudulently  or  through  mistake  or  negligence,  issues  a  false  bill  of 
lading,  which  passes  into  the  hands  of  a  bona  fide  consignee  or  in- 
dorsee for  value?  There  is  an  unbroken  line  of  authorities  in  Eng- 
land that,  even  as  against  a  bona  fide  consignee  or  indorsee  for  value, 
the  carrier  is  not  estopped  by  the  statements  of  the  bill  of  lading,  is- 
sued by  his  agent,  from  showing  that  no  goods  were  in  fact  received 
for  transportation.  *  *  *  It  is  also  the  settled  doctrine  of  the 
federal  courts.  *  *  *  ^^^  text-writers  all  agree  that  the  over- 
whelming weight  of  authority  is  on  this  side.  *  *  *  f  ^g  reason- 
ing by  which  this  doctrine  is  usually  supported  is  that  a  bill  of  lading 
is  not  negotiable  in  the  sense  in  which  a  bill  of  exchange  or  promis- 
sory note  is  negotiable,  where  the  purchaser  need  not  look  beyond 
the  instrument  itself ;  that  so  far  as  it  is  a  receipt  for  goods  it  is  sus- 
ceptible of  explanation  or  contradiction,  the  same  as  any  other  receipt ; 
that  the  whole  question  is  one  of  the  law  of  agency ;  that  it  is  not  with- 
in the  scope  of  the  authority  of  the  shipping  agent  to  issue  bills  of 
lading  where  no  property  is  in  fact  received  for  transportation ;  that 
the  extent  of  his  authority,  either  real  or  apparent,  is  to  issue  bills  of 
lading  for  freight  actually  received;    that  his  real  and  apparent  au- 

2  The  rule  of  this  case  has  been  codified  in  section  22  of  the  Federal  Bills 
of  Lading  Act  of  1916  (U.  S.  Comp.  St.  §  8604kk),  and  in  section  23  of  the 
Uniform  Bills  of  Lading  Act.  The  Uniform  Bills  of  Lading  Act  has  been 
adopted  in  Arizona,  California,  Connecticut,  Idaho,  Illinois,  Iowa,  Louisiana, 
Maine,  Maryland,  Massachusetts,  Michigan,  Minnesota,  Missouri,  New  Hamp- 
shire, New  York,  North  Carolina,  Ohio,  Penns.vlvania.  Rhode  Island,  Yei- 
mont,  Washington,  Wisconsin,  Alaska,  and  the  Philippine  Islands. 


512  AGENCY  (Part  2 

thority — i.  e.,  the  power  with  which  his  principal  has  clothed  him  in 
the  character  in  which  he  is  held  out  to  the  world — is  the  same,  viz., 
to  give  bills  of  lading  for  goods  received  for  transportation ;  and  that 
this  limitation  upon  his  authority  is  known  to  the  commercial  world, 
and  therefore  any  person  purchasing  a  bill  of  lading  issued  by  the 
agent  of  a  carrier  acts  at  his  own  risk  as  respects  the  existence  of  the 
fact  (the  receipt  of  the  goods)  upon  which  alone  the  agent  has  au- 
thority to  issue  the  bill,  the  rule  being  that,  if  the  authority  of  an  agent 
is  known  to  be  open  for  exercise  only  in  a  certain  event,  or  upon  the 
happening  of  a  certain  contingency,  or  the  performance  of  a  certain 
condition,  the  occurrence  of  the  event,  or  the  happening  of  the  con- 
tingency, or  the  performance  of  the  condition,  must  be  ascertained  by 
him  who  would  avail  himself  of  the  results  ensuing  from  the  exer- 
cise of  the  authority.  An  examination  of  the  authorities  also  shows 
that  they  apply  the  same  principle  whether  the  bill  of  lading  was  issued 
fraudulently  and  collusively  or  merely  by  mistake.  The  only  states 
that  we  have  found  in  which  a  contrary  rule  has  been  adopted  are 
New  York,  Kansas,  Nebraska,  apparently  Illinois,  and  perhaps  Penn- 
sylvania.    *     *     * 


EOHREOUGH  v.  UNITED  STATES  EXPRESS  CO. 

(Supreme  Court  of  Appeals  of  West  Virginia,  1901.     50  W.  Va.  148, 
40  S.  E.  398,  88  Am.  St.  Rep.  849.) 

Action  by  A.  F.  Rohrbough  against  the  United  States  Express  Com- 
pany.   Judgment  for  plaintiff,  and  defendant  brings  error. 

PoFFENBARGER,  J.  This  is  an  action  brought  by  A.  F.  Rohrbough 
against  the  United  States  Express  Company  before  a  justice  of  the 
peace  of  Barbour  county  in  July,  1898,  for  the  recovery  of  $200,  the 
amount  of  four  $50  express  money  orders  alleged  to  have  been  is- 
sued by  said  company  at  its  office  in  Belington,  in  said  county,  and  $5 
protest  fees  on  the  same.    *    *    * 

The  evidence  shows  that  the  express  company  had  its  office  in  the 
railway  station  building  at  Belington,  and  J.  V.  L.  Thrall  was  the  agent 
of  said  company,  and  also  of  the  Adams  Express  Company  and  of  the 
Baltimore  &  Ohio  Railroad  Company  and  the  West  Virginia  Central 
&  Pittsburg  Railroad  Company.    There  were  three  other  men  working 

in  the  office,  Darl  Elliott,  J.  M.  Parsons,  and Scroll.    Scroll  was  a 

telegraph  oi^erator  employed  by  the  West  Virginia  Central  &  Pittsburg 
Railroad  Company,  and  "a  general  helper  in  the  office,"  and  attended  to 
the  express  business  for  Thrall.  He  issued  money  orders,  and  signed 
Thrall's  name  to  them,  in  the  space  provided  on  the  orders  for  counter- 
signing them.  The  instructions  and  rules  of  the  company  required  the 
agent,  in  countersigning  money  orders,  to  subscribe  his  name  person- 
ally ;  but  in  this  instance  Thrall  had  permitted  Scroll  to  attend  to  the 
business  for  probably  a  year,  and  to  sign  his  name.  The  evidence  does 
not  show  that  the  company  had  any  knowledge  of  the  fact  that  its 
business  was  being  so  transacted  at  that  place.  On  the  10th  day  of 
June,  1898,  the  plaintiff'  deposited  $200  at  the  office  at  Belington,  and 
took  the  four  money  orders  in  question  in  Heu  thereof,  intending  to 
send  them  to  the  bank  at  Grafton.  Scroll  received  the  money  and  is- 
sued the  orders,  signing  Thrall's  name.  Whether  Scroll  ever  put  the 
money  into  the  safe  o^  the  money  drawer  of  the  company  is  not  known, 
but  on  the  next  day  he  disappeared,  and  the  money  in  question,  as 


Ch.  1)       SOURCE  AND  SCOPE  OF  THE  AGENT's  POWER  513 

well  as  considerable  other  money  obtained  in  the  same  way,  disap- 
peared also.  It  seems  that  he  reported  about  the  time  he  left  that  the 
office  had  been  robbed.  The  rate  of  charges  printed  on  each  money 
order  was  18  cents,  making  72  cents  on  the  four  orders  in  question. 
This  Scroll  did  not  collect,  and  Rohrbough  says  he  had  frequently 
purchased  money  orders  there,  and  that  Scroll  had  never  charged  him 
any  fees  on  them. 

Upon  this  state  of  facts,  the  defendant  insists  that  it  is  not  liable  for 
the  amount  claimed  upon  the  orders,  and  relies  upon  the  principles  of 
law  holding  that  power  conferred  upon  an  agent  is  based  vipon  the 
special  confidence  or  trust  which  the  principal  has  in  the  power  or 
authority,  express  or  implied,  cannot  be  delegated  by  the  agent,  so  as 
to  bind  the  principal.  *  *  *  A  further  contention  is  that,  because 
the  fees  were  not  charged  and  collected,  the  act  of  Scroll  in  issuing 
the  orders  was  not  the  act  of  Thrall,  the  agent,  or  the  act  of  the  com- 
pany, even  if  Thrall  could  have  delegated  his  authority,  and  also  that 
the  express  company  is  not  responsible  for  the  appearance  of  author- 
ity on  the  part  of  Scroll  caused  by  Thrall  permitting  him  to  attend  to 
his  business,  for  the  reason  that  the  company  had  no  notice  of  the 
fact  that  he  was  so  acting.    *    *    * 

In  determining  whether  there  is  sufficient  evidence  to  sustain  the 
finding  and  judgment,  it  becomes  necessary  to  ascertain  the  general 
principles  of  law  governing  cases  of  this  kind.  "An  agent  who  has  a 
bare  power  or  authority  must  execute  it  himself,  and  can  delegate  his 
authority  to  no  other."  1  Am.  &  Eng.  Enc.  Law,  368.  But  there  is 
another  principle  of  law  laid  down  in  Titus  v.  Railroad  Co.,  46  N.  J. 
Law,  398,  which  allows  some  latitude  to  agents  of  that  class,  and  ma- 
terially qualifies  and  restricts  the  general  proposition.  Where  a  known 
usage  of  trade  justifies,  or  necessity  requires,  the  employment  of  sub- 
agents,  such  agents  may  be  employed,  but  only  to  perform  ministerial 
acts.  The  agent  himself  must  determine  by  his  own  judgment  and  dis- 
cretion what  should  be  done,  and  he  may  then  authorize  persons  to  car- 
ry into  effect  the  purposes  of  his  employment.  He  cannot,  however, 
turn  his  principal's  business  over  to  the  judgment  and  discretion  of 
another,  and  bind  his  principal  by  the  acts  and  conduct  of  the  latter. 
"The  agent  is  bound  to  follow  faithfully  the  instruction  of  his  princi- 
pal, and  act  within  the  scope  of  his  authority."  1  Am.  &  Eng.  Enc. 
Law,  369.  Bitt  this  rule  has  its  qualification,  also.  "Where  a  devia- 
tion from  the  strict  performance  of  his  authority  is  due  to  necessity 
or  unforeseen  emergencies,  which  are  themselves  not  due  to  the  agent's 
default,"  the  rule  must  yield.  And  "where  the  agent  is  commissioned 
to  do  any  act,  nothing  being  said  as  to  the  mode  of  performance,  he 
will  have  an  implied  power  to  perform  his  duties  in  accordance  with 
any  recognized  usage  or  mode  of  dealing,"  1  Am.  &  Eng.  Enc.  Law, 
370,  371. 

This  court  lays  down  the  following  proposition  with  reference  to 
insurance  agents,  whose  duties  are  very  similar  to  those  of  express 
companies,  in  point  7  of  the  svUabus  in  Deitz  v.  Insurance  Co.,  33  W. 
Va.  526,  11  S.  E._  50,  25  Am.  St.  Rep.  908:  "No  insurance  agent  can 
be  expected  by  his  company  to  attend  to  all  the  details  of  his  business 
in  person.  The  company  must  and  should  be  construed  to  anticipate 
the  employment  of  clerks  to  attend  to  the  office  when  the  agent  is  ab- 
sent or  sick.  When  the  agent's  clerk  is  authorized  and  intrusted  to 
B.&  B.Bus.Law— 33 


514  AGENCY  (Parts 

examine  property  and  write  out  a  policy  thereon,  his  contract  and 
knowledge  are  the  contract  and  knowledge  of  the  agent,  and  any  ac- 
cidental mistake  which  he  may  make  is  the  mistake  of  the  agent,  and 
will  be  corrected  in  a  court  of  law  in  an  action  on  the  policy."  A 
general  proposition  of  law  laid  down  in  1  Am.  &  Eng.  Enc.  Law  (2d 
Ed.)  978,  and  well  supported  by  decided  cases,  is  that  "when  an  agent 
is  engaged  to  perform  acts  of  a  purely  ministerial  or  mechanical  char- 
acter, or  acts  which  do  not  call  for  the  exercise  of  judgment,  dis- 
cretion, or  skill,  in  respect  to  acts  other  than  such  as  are  ministerial, 
he  may  authorize  another  to  perform  them."  At  page  978  it  is  said: 
"The  same  principle  is  applicable  in  cases  of  agents  empowered  to  exe- 
cute bills  of  exchange,  to  sign  subscription  papers,  to  sign  insurance 
policies,  to  contract  risks,  to  deliver  policies  and  renewals,  to  collect 
premiums,  and  to  give  security  therefor."  This  is  supported  by  Sayre 
V.  Nichols,  7  Cal.  535,  68  Am.  Dec.  280;  Lingenfelter  v.  Insurance  Co., 
19  Mo.  App.  252.  In  the  latter  case  the  court  decided  that:  "An 
agent  has  no  power  to  delegate  his  agency  to  another,  or  to  sublet  it. 
But  he  may  employ  clerks  and  subagents,  whose  acts,  if  done  in  his 
name  and  recognized  by  him  either  specially  or  according  to  his  usual 
mode  of  dealing  with  them,  will  be  regarded  as  his  acts,  and'  as  such 
binding  on  the  principal."  The  transaction  out  of  which  this  case 
grows  is  more  in  the  natvire  of  banking  business  than  express  busi- 
ness, although  it  is  extensively  done  by  express  companies.     *     *     * 

The  express  company  had  another  agent,  whose  duty  it  was  to  travel 
over  a  certain  territory,  and  inspect  all  the  offices  of  the  company  in 
said  territory,  and  check  up  the  books  and  accounts  of  the  agents. 
This  man  had  from  time  to  time  inspected  the  Belington  office.  He 
must  have  known  that  Thrall,  being  the  agent  of  another  express 
company  and  two  railroad  companies,  and  having  three  other  persons 
in  the  office,  would  find  it  necessary  to  intrust  the  transaction  of  more 
or  less  of  the  business  to  persons  other  than  himself.  The  employment 
of  clerks  and  assistants  under  such  conditions  and  circumstances  is 
usual,  and  seems  to  be  necessary.  Scroll  was  acting  in  the  presence 
and  under  the  very  eye  of  the  duly-appointed  agent.  He  was  in  the 
office  of  the  agent,  transacting  the  business  of  the  company.  He  did 
this  for  a  year  or  more.  Thrall  himself  doing  very  little  of  the  business. 
In  obtaining  the  four  money  orders  in  question,  Rohrbough  simply 
transacted  business  in  that  office  as  he  had  done  on  several  prior  occa- 
sions. Aside  from  the  fact  that  he  paid  no  fees,  as  he  ought  to  have 
done,  and  as  he  must  have  known  he  should  have  done,  there  is  nothing 
in  the  circumstances  and  facts  of  the  case  calculated  to  suggest  to  him 
that  there  was  anything  irregular  or  unusual  in  the  mode  of  trans- 
acting business  in  that  office.  It  is  true  that  the  company  reposed  its 
confidence  and  trust  in  Thrall,  the  agent,  and  had  nothing  to  do  direct- 
ly with  Scroll,  but  the  agent  in  charge  of  the  office  of  the  company 
permitted  these  orders  to  go  out  in  exchange  for  Rohrbough's  money. 
Thrall  had  not  abandoned  the  office  or  his  agency.  He  was  still  in 
charge,  and  to  all  appearances  the  business  of  the  company  was  con- 
ducted in  obedience  to  his  judgment,  discretion,  and  control,  but  exe- 
cuted in  its  details  in  a  ministerial  way  by  an  assistant,  just  as  is  usual 
in  any  other  office  in  which  considerable  business  is  done. 

The  order  says  on  its  face  that  it  must  be  countersigned  by  the  agent, 
but  not  that  he  shall  sign  his  name  personally.  That  direction  is  con- 
tained in  a  set  of  rules  furnished  the  agents  by  the  company,  which 


Ch.  1)  SOURCE   AND   SCOPE   OF   THE   AGENt's   POWER  515 

are  not  made  public,  and  of  which  parties  deaHng  with  them  have  no 
notice.  Moreover,  they  relate  not  to  what  the  agents  may  do  but  how 
they  may  execute  their  powers.  If  they  related  to  the  extent  of  the  pow- 
ers or  authority  of  the  agent  to  contract,  the  question  would  be  a  more 
serious  one.  The  company  had  put  Thrall  in  control  of  its  business, 
and  held  him  out  to  the  public  as  its  agent,  clothed  with  all  the  au- 
thority usually  pertaining  to  such  agencies,  and  without  notifying  the 
public  in  any  way  that  it  required  him  to  personally  sign  his  name  to 
the  orders ;  and  Rohi'bough  had  no  notice  of  the  requirement.  "A 
principal  is  bound  by  the  acts  of  the  agent,  whether  general  or  special, 
within  the  authority  he  has  actually  given  him,  which  includes  not  only 
the  precise  act  which  he  expressly  authorizes  him  to  do,  but  also  what- 
ever usually  belongs  to  the  doing  of  it,  or  is  necessary  to  its  perform- 
ance. Beyond  that,  he  is  bound  by  the  acts  of  the  agent  within  the 
apparent  authority  which  the  principal  himself  knowingly  permits  the 
agent  to  assume,  or  which  he  holds  the  agent  out  to  the  public  as  pos- 
sessing." 1  Am.  &  Eng.  Enc.  Eaw  (2d  Ed.)  988.  The  company  did 
not  specifically  hold  ThraU  out  to  the  public  as  having  authority  to 
allow  another  person  to  sign  his  name  to  the  orders ;  but  it  did  so  hold 
him  out  as  having  authority  to  issue  the  orders,  and  that  includes  coun- 
tersigning them,  and  did  not  make  public  the  specific  instruction  to 
personally  sign  them.  If  an  agent  disregards  specific  instructions  as 
to  the  mode  of  executing  his  powers,  his  acts  are  nevetheless  binding 
upon  his  principal,  as  regards  third  parties  having  no  notice  of  such 
instructions.  1  Am.  &  Eng.  Enc.  Law  (2d  Ed.)  994.  *  *  *  So, 
if  the  case  turned  solely  upon  the  failure  of  Thrall  to  personally  sign 
the  orders,  and  his  permitting  Scroll  to  sign  his  name  and  to  do  the 
other  ministerial  acts  of  receiving  the  money  and  issuing  the  orders, 
the  case  would  be  for  the  plaintift". 

There  are,  however,  other  facts  to  be  considered.  Rohrbough  says 
Scroll  charged  him  no  fees  on  the  money  orders,  and  that  he  had  been 
in  the  habit  of  obtaining  them  at  that  office  from  Scroll  without  pay- 
ing fees.  *  *  *  I'he  evidence  shows  that  it  was  apparent  to  Rohr- 
baugh  that  the  agent  had  no  authority  to  make  such  a  contract  on  be- 
half of  his  principal.  *  *  *  If  Rohrbough  had  not  been  a  party  to 
the  transaction,  and  had  not  known  that  the  agent  was  acting  in  excess 
of  his  powers,  he  might  hold  the  company  responsible  to  him.  But 
he  was  a  party  to  it,  and  did  know  of  the  failure  of  the  agent  to  act 
within  the  limits  of  his  powers.  *  *  *  Rohrbough  had  knowledge 
of  conduct  on  the  part  of  Scroll  which  was  well  calculated  to  arouse  a 
suspicion  on  the  part  of  any  ordinarily  prudent  man,  and  sufficient 
to  deter  him  from  transacting  any  business  with  him.  He  must  have 
regarded  as  unusual,  and  as  importing  infidelity  to  the  company,  the 
conduct  of  Scroll  in  coming  to  him  repeatedly  and  soliciting  him  to 
turn  over  money  to  him  in  exchange  for  orders  of  the  company,  with- 
out requiring  payment  of  the  ordinary  charges  thereon.     *     *     * 

The  judgment  must  be  reversed,  and  judgment  for  the  defendant 
must  be  entered. 

PLANKIXTON  PACKING  CO.  v.  BERRY. 
(Supreme  Court  of  Michigan.  1917.     199  Mich.  212.  165  N.  W.  676.) 
It  is  sought  to  recover  the  price  of  two  shipments  of  meat,  consign- 
ed by  plaintift'  to  defendant  upon  the  order  of  one  Roy  Berry.    The 
goods  were  invoiced  at  $193.13. 


516  AGENCY  (Part  2 

Plaintiff  is  a  corporation,  conducting  a  Avholesale  meat  business  at 
Milwaukee,  Wis.  In  May,  1914,  defendant's  son,  Roy  Berry,  bought 
out  a  retail  meat  business  in  Petoskey,  which  he  conducted  from  that 
time  until  early  in  October  of  the  same  year,  when  he  failed.  About 
the  time  the  market  was  opened,  the  defendant,  Alice  Berry,  a  resi- 
dent of  Petoskey,  gave  her  son  $200  to  put  into  the  business.  He  was 
then  about  31  years  of  age,  and  was  not  residing  with  his  mother,  but 
was  married  and  maintaining  a  home  of  his  own.  Upon  receiving  the 
$200,  he  at  once  opened  a  checking  account  with  a  local  bank  under 
the  designation  of  "Alice  Berry,  Shop  Account."  Defendant  did  not 
know  of  this  arrangement  in  advance ;  but,  immediately  after  opening 
the  account,  Roy  told  her  what  he  had  done,  and  explained  that  it 
would  be  necessary  for  her  to  sign  the  checks.  To  her  inquiry  why 
he  had  put  the  account  in  her  name,  he  merely  replied:  "Well,  it's 
all  right ;  you  can  check  it  out."  And  she  let  it  stand  that  way  with- 
out protest. 

Within  a  few  days  defendant  began  to  receive  letters  bearing  the 
return  card  of  various  wholesale  meat  firms.  She  testified  that  she 
did  not  open  these  letters,  but  sent  for  her  son  and  asked  for  an  ex- 
planation, saying  it  did  not  look  right  for  letters  to  come  in  her  name 
from  meat  firms,  and  that  he  replied :  "That  is  all  right.  Don't  wor- 
ry about  that  at  all.  That  money  was  in  your  name  and  you  have 
to  sign  those  checks.  Now  that  is  all  there  is  to  it.  There  is  nothing 
out  of  the  way  with  it." 

She  claims  that  nothing  further  was  said  about  the  matter,  and  that 
she  continued  to  turn  over  to  him  all  letters  from  meat  firms  that  came 
addressed  to  her,  without  opening  them  and  without  further  inquiry. 
The  checks  on  the  bank  account  were,  according  to  defendant's  testi- 
mony, signed  by  her  in  blank  and  delivered  to  her  son.  She  claims  she 
did  not  know  the  amounts  of  the  checks,  nor  to  whom  they  were  to 
be  made  payable.  She  admits  that  the  canceled  checks  were  returned 
to  her  by  the  bank,  but  states  that  she  burned  them  without  examining 
them  to  see  how  they  had  been  filled  out. 

Plaintiff's  salesman,  William  Schrader,  called  at  the  meat  market 
every  week  and  took  orders  for  meat,  and  the  goods  ordered  through 
him  were  shipped  by  plaintiff,  consigned  and  invoiced  to  Alice  Berry, 
and  were  obtained  from  the  carriers  by  Roy  Berry.  Mr.-  Schrader 
collected  each  week  from  Roy  Berry  the  amount  due  for  goods  re- 
ceived by  him  the  preceding  week,  as  per  terms  of  the  orders,  and  the 
payments  were  made  by  checks  signed  "Alice  Berry,  Shop  Account," 
and  delivered  to  Schrader  by  Roy  Berry.  Mr.  Schrader  testified  that 
occasionally  the  check  was  not  ready  when  he  came,  and  that  he  would 
wait  while  Roy  went  over  to  his  mother's  to  get  a  check  signed.  De- 
fendant claims  she  had  no  knowledge  that  any  goods  were  being  pur- 
chased in  her  name  or  upon  her  credit,  nor  that  Roy  Berry  was  deal- 
ing with  plaintiff. 

Before  the  account  was  opened  with  Mrs.  Berry,  plaintiff,  through 
its  credit  manager,  made  the  usual  investigations  as  to  the  identity 
and  responsibility  of  defendant,  and  upon  the  basis  of  the  informa- 
tion obtained  extended  credit  to  her,  and  to  her  alone.  Neither  prior 
to  nor  during  the  continuance  of  these  dealings  did  plaintiff  ever  in- 
quire of  defendant  herself  as  to  the  authority  of  Roy  Berry  to  order 
goods  shipped  in  her  name  and  upon  her  credit.  Mr.  Schrader  testi- 
fied he  never  saw  Mrs.  Berry  nor  had  any  conversation,  writing,  or 


Ch.  1)  SOURCE   AND   SCOPE   OF  THE  AGENt's   POWER  517 

correspondence  with  her,  though  she  conthiued  to  reside  in  Petoskey 
during  the  entire  period  of  these  transactions.  All  goods  ordered  by 
Roy  Berry  of  plaintiff  were  paid  for,  except  those  which  came  in  the 
two  shipments  in  question,  which,  together,  represent  the  last  order 
Berry  gave.  When  Schrader  arrived  in  Petoskey  the  week  after  this 
order  was  given,  he  found  that  Berry  had  failed  and  that  the  market 
was  closed.  This  was  in  the  early  part  of  October,  1914.  He  saw 
Berry,  however,  and  asked  him  on  several  occasions  to  pay  for  these 
goods,  and  Berry  said  that  he  would  take  care  of  it. 

Suit  was  brought  by  plaintiff  against  Alice  Berry  before  a  justice 
of  the  peace,  who  rendered  judgment  in  favor  of  defendant,  and 
upon  appeal  the  trial  in  the  circuit  court,  without  a  jury,  resulted  in 
a  like  judgment. 

KuHN,  C.  J.  *  *  *  This  case  was  tried  before  the  court,  and  the 
learned  trial  judge  at  the  conclusion  of  the  hearing  made  written  find- 
ings of  fact  and  of  his  conclusions  of  law.     *     *     * 

The  judge  made  the  following  finding:  "There  is  no  evidence  in 
this  case  of  anything  said  or  done  by  defendant,  with  knowledge  on 
her  part  that  plaintiff  might  be  led  to  rely  thereon,  tending  to  show 
that  Roy  Berry  had  authority  to  buy  any  goods  in  her  name  or  upon 
her  credit." 

With  this  conclusion  we  cannot  agree,  because  we  are  of  the  opin- 
ion that  this  record  discloses  that  the  defendant,  by  her  course  of 
conduct,  permitted  it  to  appear  that  her  son  was  her  agent  for  the 
purpose  of  conducting  this  business,  and,  because  of  her  conduct  in 
relation  thereto,  she  is  estopped  to  deny  such  agency  to  the  injury  of 
the  plaintiff,  who  in  good  faith  and,  as  we  believe,  in  the  exercise  of 
reasonable  prudence,  dealt  with  the  agent  on  the  faith  of  such  ap- 
pearances. The  issuing  by  her  of  the  blank  checks  over  a  period  of 
several  months,  the  receipt  of  letters  from  the  meat  packers,  the 
knowledge  that  the  checks  were  to  be  used,  and  were  used,  in  the 
business  of  the  meat  market,  and  the  failure  of  the  defendant  to  ex- 
amine the  letters  or  the  paid  and  canceled  checks  as  returned  to  her 
by  the  bank,  was  such  a  course  of  conduct  oh  her  part,  in  our  opin- 
ion, as  to  force  the  legal  conclusion  that  her  authority  to  her  son  to 
act  for  her  as  agent  would  be  conclusively  presumed  so  far  as  it  may 
be  necessary  to  protect  the  rights  of  the  plaintiff,  who  relied  thereon 
in  good  faith  and  in  the  exercise  of  reasonable  prudence. 

The  general  rule  is  thus  stated  by  Mr.  Mechem,  in  his  work  on 
Agency,  in  discussing  this  question,  paragraph  246,  where  it  is  said: 
"Gathering  together  all  of  these  elements,  it  may  be  stated  as  a  gen- 
eral rule  that  whenever  a  person  has  held  out  another  as  his  agent 
authorized  to  act  for  him  in  a  given  capacity,  or  has  knowingly  and 
without  dissent  permitted  such  other  to  act  as  his  agent  in  that  capac- 
ity, or  where  his  habits  and  course  of  dealing  have  been  such  as  to 
reasonably  warrant  the  presumption  that  such  other  was  his  agent  au- 
thorized to  act  in  tliat  capacity — whether  it  be  in  a  single  transaction 
or  in  a  series  of  transactions — his  authority  to  such  other  to  so  act 
for  him  in  that  capacity  will  be  conclusively  presumed  to  have  been 
given,  so  far  as  it  may  be  necessary  to  protect  the  rights  of  third  per- 
sons who  have  relied  thereon  in  good  faith  and  in  the  exercise  of  rea- 
sonable prudence;  and  he  will  not  be  permitted  to  deny  that  such 
other  was  his  agent  authorized  to  do  the  act  he  assumed  to  do,  pro- 


518  AGENCY  (Part  2 

vided  that  such  act  was  withhi  the  real  or  apparent  scope  of  the  pre- 
sumed authority."     *     *     * 

Upon  this  record  the  circuit  judge  should  have  entered  a  judgment 
for  the  plaintiff  for  the  amount  of  its  claim.  The  case  will  be  re- 
versed, and  a  new  trial  granted,  with  costs  to  the  appellant. 


WHEELER  V.  McGUIRE  et  al. 
(Supreme  Court  of  Alabama,  1888.    86  Ala.  398,  5  South.  190,  2  L.  R.  A.  SOS.) 

Action  by  McGuire,  Scroggins  &  Co.  against  Joseph  Wheeler,  to  re- 
cover for  goods  sold.  Verdict  was  rendered  for  plaintiffs,  and  de- 
fendant appeals. 

CivOPTON,  J.  Appellees  seek  to  recover  the  price  of  certain  goods, 
which  they  allege  were  sold  and  delivered  to  appellant  through  T.  A. 
Tatham,  as  his  agent.  The  agency  was  not  disputed,  but  defendant 
contends  that  Tatham  was  in  his  employ  merely  as  a  clerk,  and  was 
not  authorized  to  purchase  goods  on  a  credit  and  bind  him.  The  plain- 
tiffs contend  that  Tatham  .was  a  general  agent,  having  authority  to 
transact  all  of  defendant's  mercantile  business,  or  was  held  out  by 
defendant,  or  permitted  to  hold  himself  out,  as  such,  so  as  to  justify 
the  belief  that  he  was  clothed  with  the  powers  of  a  general  agent. 
The  question  mainly  controverted  by  the  parties  relates  to  the  charac- 
ter of  the  agency  and  the  extent  of  his  authority. 

The  general  rule  is  that  one  who  deals  with  an  agent  is  bound  to 
ascertain  the  nature  and  extent  of  his  authority,  but  in  the  applica- 
tion of  the  rule  a  distinction  is  observed  between  general  and  special 
agencies.  The  power  to  do  everything  necessary  to  its  accomplishment 
may  be  included  in  a  particular  agency,  so  that  private  instructions 
as  to  the  particular  mode  of  execution,  which  are  not  intended  to  be 
communicated  and  are  not  communicated  to  the  party  with  whom  the 
agent  may  deal,  will  not  be  regarded  as  limitations  on  his  power.  But 
with  this  qualification  a  special  authority  must  be  strictly  pursued.  A 
general  agent  may  exceed  his  express  authority,  and  the  principal, 
nevertheless,  be  bound.  The  scope  and  character  of  the  business 
which  he  is  empowered  to  transact  is,  as  to  third  persons,  the  extent 
and  measure  of  his  authority.  By  his  appointment  the  principal  is 
regarded  as  saying  to  the  public  that  he  has  the  authority  to  transact 
the  business  in  the  usual  and  customary  modes.  Secret  limitations 
on  his  power,  or  private  instructions  as  to  the  mode  of  transacting 
the  business,  will  not  affect  the  rights  of  third  persons  who  have  no 
notice  of  such  limitations  or  instructions. 

When  a  general  agent  transacts  the  business  intrusted  to  him  with- 
in the  usual  and  ordinary  scope  of  such  business,  he  acts  within  the 
extent  of  his  authority,  and  the  principal  is  bound,  provided  the  party 
dealing  with  the  agent  acts  in  good  faith,  and  is  not  guilty  of  negli- 
gence which  proximately  contributes  to  the  loss.  *  *  *  Third  per- 
sons, dealing  with  a  person  as  a  general  agent,  are  not  acquitted  of  all 
duty  to  inquire  and  ascertain  the  character  and  extent  of  his  agency ; 
but  if  on  inquiry  ascertained  to  be  general,  actually  or  apparently, 
they  are  not  bound  to  inquire  whether  there  are  secret  limitations  or 
private  instructions,  unless  they  have  knowledge  of  facts  which  should 
put  them  on  such  inquiry.  As  to  these  issues,  the  burden  is  on  the 
plaintiffs  to  establish  by  proof  that  Tatham  was  the  general  agent  of 
defendant,  or  that  the  latter,  by  acts,  conduct,  or  negligence,  justified 


Ch.  1)        SOURCE  AND  SCOPE  OP  THE  AGENt's  POWER  519 

the  belief  that  he  had  authority  to  purchase  goods  on  credit  for  the 
store.  If  these  issues  be  found  in  favor  of  plaintiffs,  no  subsequent 
misconduct  of  the  agent,  misappropriating  the  goods  or  otherwise,  will 
affect  their  rights. 

After  having  given  a  general  charge,  which  in  the  main  is  in  accord 
with  the  foregoing  principles,  the  court  instructed  the  jury,  at  the 
instance  of  the  plaintiff's,  that  if  defendant  employed  Tatham,  and  put 
him  in  charge  of  his  retail  store  at  Wheeler's  Station,  to  conduct  his 
mercantile  business,  and  placed  money  to  his  credit  in  Louisville,  Ky.. 
and  Nashville,  Tenn.,  and  authorized  him  to  use  this  money,  and  also 
that  taken  in  from  cash  sales,  to  replenish  the  stock,  and  instructed 
him  not  to  purchase  on  credit,  he  was,  as  to  innocent  third  persons, 
the  general  agent  of  defendant  in  that  business,  and  had  authority  to 
do  whatever  was  usual  or  customary  in  conducting  the  same;  and  if 
plaintiffs  sold  to  Tatham,  as  such  agent,  the  goods  for  the  price  of 
which  this  suit  is  brought,  their  verdict  must  be  for  plaintiffs,  unless 
they  had  notice  that  Tatham's  authority  was  limited  to  purchases  for 
cash.  In  considering  the  correctness  of  the  instruction,  any  evidence, 
if  there  be  such,  tending  to  show  that  Tatham  was  apparently  clothed 
with  the  powers  of  a  general  agent,  cannot  be  taken  into  consideration. 
The  proposition  of  the  charge  is  that  as  to  third  persons  the  facts  re- 
cited therein,  of  themseh^es,  without  the  aid  of  extrinsic  facts  and  cir- 
cumstances, constituted  Tatham  a  general  agent,  possessing  authority 
to  purchase  goods  on  credit.  In  other  words,  he  was  a  general  agent 
as  to  plaintiffs,  though  they  may  have  known  the  terms  of  his  em- 
ployment, including  the  deposit  of  money  with  which  to  purchase 
goods,  except  the  instruction  not  to  purchase  on  credit. 

The  most  general  powers  that  may  be  conferred  on  an  agent  are 
necessarily  limited  to  the  business  or  purpose  for  which  the  agency  is 
created.  The  terms  of  the  employment  of  Tatham,  "in  charge  of  his 
retail  store  at  Wheeler's  Station  to  conduct  his  mercantile  business," 
in  connection  with  the  limitations  on  his  authority  to  purchase,  limit 
his  powers  as  a  general  agent  to  the  transaction  of  the  local  mercan- 
tile business  of  defendant.  In  the  matter  of  buying  goods,  his  power 
was  expressly  restricted  to  the  use  of  money  specially  deposited  for 
that  purpose,  and  to  cash  receipts.  In  appointing  Tatham  his  agent, 
defendant  withheld  power  to  buy  and  pledge  his  credit  under  any  cir- 
cumstances. By  the  terms  of  the  commission,  Taiham  may  be  re- 
garded a  general  agent  to  conduct  the  local  business  of  the  store,  with 
special  powers  to  purchase.  To  construe  it  otherwise  would  be  to 
establish  a  rule  that  a  merchant  who  furnishes  his  clerk  with  funds 
to  purchase  goods  .and  make  immediate  payment  clothes  him  with 
power  to  buy  on  his  principal's  credit,  and  that  persons  dealing  with 
him  are  relieved  of  the  obligation  to  ascertain  the  nature  and  extent 
of  his  warrant  of  authority.  This  would  press  too  far  the  applica- 
tion of  the  doctrine  of  general  agency.     *     *     * 

[For  this  and  other  reasons,  the  judgment  was  reversed,  and  the 
cause  remanded  for  a  new  trial.] 


520  AGENCY  (Part  2 

CHAPTER  II 
RELATIONS  OF  THE  PRINCIPAL  AND  THIRD  PERSONS 

Section 

1.  Rights  and  Liabilities  of  tlie  Disclosed  Principal. 

2.  Rights    and    Liabilities    of    the    Undisclosed    Principal. 

3.  Ratification. 

4.  Master's  Liability  for  Torts  of  the  Servant. 


SECTION  1.— RIGHTS  AND  LIABILITIES  OF  THE 
DISCLOSED   PRINCIPAL 

It  appears  from  the  preceding  chapter  that,  if  an  agent  enters 
into  a  contract  with  a  third  party  in  the  name  of  his  principal  and 
with  power  to  do  so,  either  as  a  result  of  authority  granted  to 
him  by  the  principal  or  because  the  law,  under  the  circumstances, 
attaches  a  liability  upon  him  in  the  absence  of  a  direct  grant  of  au- 
thority, the  resulting  contract  is  between  the  principal  and  the 
third  party.  The  rights  and  duties  of  the  principal  and  the  third 
party,  in  this  event,  are  of  the  same  nature  as  they  would  have 
been,  had  the  parties  entered  into  a  contract  without  the  inter- 
vention of  the  agent.  No  cases  are  here  inserted  to  illustrate  fur- 
ther this  fundamental  principle  of  the  law  of  agency.  The  first 
series  of  cases  is  concerned  with  the  question :  In  what  form  must 
an  agent  sign  his  principal's  name  to  a  contract  or  other  written 
instrument  in  order  to  bind  the  principal,  and  in  order  to  avoid  his 
own  personal  liability  on  such  contract?  We  are  assuming  a  case 
where  the  agent  possesses  the  requisite  power  to  bind  his  principal, 
and  the  remaining  question  is:  Did  the  agent  enter  into  the  con- 
tract in  behalf  of  his  principal,  or  did  he  execute  the  contract  in  his 
own  behalf? 

The  last  case  in  the  section  discusses  a  situation  which  has  an 
important  bearing  upon  the  principal's  liability.  Frequently  one's 
rights  and  duties,  particularly  with  respect  to  property,  are  affected 
by  the  knowledge  or  lack  of  knowledge  of  some  fact.  In  the  event 
that  the  agent  possesses  the  knowledge  which  is  material  in  a  given 
transaction,  are  the  principal's  rights  to  be  affected,  just  as  though 
he,  individually,  possessed  such  knowledge?  Is  notice  to  an  agent 
notice  to  the  principal? 


SIMONDS   et  al.   v.  HEARD   et  al. 

(Supreme  Judicial  Court  of  Massachusetts,  1839.     23  Pick.  120, 
34  Am.  Dec.  41.) 

This  was  assumpsit  upon  a  contract  in  writing,  dated  May  4,  1837, 
between  the  plaintiffs  and  the  defendants,  for  the  construction  of  the 
abutments  of  a  bridge  by  the  plaintiff's. 

The  introductory  part  of  the  contract  was  in  the  following  words: 
"Agreement  between  Horace  Heard,  Eli  Sherman  and  Newell  Heard 
[the  defendants],  committee  of  the  town  of  Wayland,  on  the  one  part, 
and  William  Simonds  and  John  Chaplin  [the  plaintiffs],  on  the  other 


Ch.  2)  RELATIONS   OF   THE   PRIXCIPAL  AND   THIRD   PERSONS  521 

part;"  and  after  a  specific  description  of  the  work  to  be  done,  the 
contract  proceeded  as  follows :  "Said  Simonds  and  Chaplin  hereby 
warrant  the  above  walls  to  stand  firmly  and  in  good  order  for  one 
year  from  the  completing  of  the  same,  and  are  to  take  as  much  of  the 
old  bridge  as  they  need  for  platform  for  said  walls  and  also  all  the 
wall  near  there.  Said  committee  are  to  pay  said  Simonds  and  Chap- 
lin the  sum  of  three  hundred  and  seventy-five  dollars,  when  said  work 
is  completed,  provided  said  Simonds  and  Chaplin  give  a  sufficient  bond 
with  sureties  for  the  warranty  as  expressed  within."  The  contract 
was  signed  by  the  defendants  with  their  own  names,  simply,  and  by 
the  plaintiffs. 

Shaw,  C.  J.  Two  points  were  made  for  the  defendants  in  the  pres- 
ent case:  First,  that  the  defendants  having  acted  as  a 'committee  of 
the  town  of  Wayland,  in  making  the  contract  with  the  plaintiffs,  and 
that,  in  relation  to  the  erection  of  a  bridge,  in  which  they  had  no  per- 
sonal concern,  but  which  was  the  concern  of  the  town,  and  being  duly 
authorized  by  the  town  to  act  in  their  behalf,  were  not  personally 
liable  to  an  action  on  the  contract;  and,  secondly,  that  the  work  had 
not  been  executed  according  to  contract. 

The  latter  was  submitted  to  the  jury  as  a  question  of  fact,  who 
found  for  the  plaintiffs,  that  the  contract  had  been  duly  executed  on 
their  part.  The  other  is  a  question  of  law,  and  turns  upon  the  con- 
struction of  the  contract,  which  is  set  forth  in  the  case.  It  has  been 
fully  argued,  and  many  authorities  are  cited  on  both  sides. 

The  question,  whether  a  contract  made  by  persons  acting,  or  pro- 
fessing to  act,  as  agents  for  others,  binds  their  principals,  or  themselves, 
or  both,  is  often  one  of  great  difficulty.  The  cases  run  so  closely  into 
each  other  that  whether  a  particular  contract  falls  within  one  or  the 
other  of  these  lines  it  is  not  easy  to  determine. 

Some  rules  are  well  settled ;  as,  where  an  agent  acts  within  the  scope 
of  his  authority,  and  professes  to  act  in  the  name  and  behalf  of  his 
principal,  he  is  not  personally  liable.  So,  one  standing  and  acting  in 
a  public  capacity,  who  makes  a  contract  in  behalf  of  the  public,  is 
not  personally  liable.  *  *  *  But  this  rule  is  not  applicable  to  the 
present  case,  it  not  being  a  contract  in  behalf  of  the  public,  but,  at 
most,  of  a  corporation  capable  of  making  contracts  and  liable  to  an 
action  on  its  contracts,  *  *  *  We  think  also  that  it  is  manifest, 
from  the  subject-matter  of  the  contract,  and  from  their  describing 
themselves  as  a  committee,  that  they  were  acting  under  some  authority 
from  the  town. 

But  without  going  into  all  the  distinctions  on  this  very  prolific  sub- 
ject, there  is  one  rule,  well  established  by  authorities,  and  defined  with 
a  "good  degree  of  certainty,  which  is  applicable  to  this  case.  It  is 
this,  that  although  an  agent  is  duly  authorized,  and  although  he  might 
avoid  personal  liability  by  acting  in  the  name  and  behalf  of  his  prin- 
cipal, still,  if  by  the  terms  of  his  contract  he  binds  himself  personally, 
and  engages  expressly  in  his  own  name  to  pay,  or  perform  other  ob- 
ligations,  he   is    responsible,   though   he   describe   himself    as   agent. 

*  *  *  Where  one,  as  president  of  an  incorporated  company,  hav- 
ing authority  to  make  notes,  signed  a  promissory  note  by  which  he 
promised  to  pay,  it  was  held  that  he  was  liable,  upon  the  personal 
engagement  and  promise  to  pay,  though  he  described  himself  as  pres- 
ident of  such  company,  and  that  it  was  not  the  note  of  the  company. 

*  *     *     A  known  agent  of  a  country  bank,  drawing  a  bill  and  di- 


522  AGENX'Y     .       ^  (Part  2 

recting  the  drawees  to  place  the  amount  to  tlie  account  of  such  bank, 
was  held  personally  liable.  *  *  *  In  a  more  recent  case,  where 
the  solicitors  to  the  assignees  of  a  bankrupt,  gave  an  agreement  to 
this  effect,  "We,  as  solicitors,  etc.,  do  hereby  undertake  to  pay,"  it  was 
held,  that  they  were  personally  bound.  Burrell  v.  Jones,  3  Barn.  & 
Aid.  47.  In  this  case  Mr.  Justice  Bayley  says:  "It  is  clear  that  an 
agent  may  so  contract  as  to  make  himself  personally  liable,  and  I 
think  the  words  here  used,  'we  undertake,'  are  sufficient  to  place  the 
defendants  in  that  situation."  Norton  v.  Herron,  1  Carr.  &  Payne, 
648 ;   Eaton  v.  Bell,  5  Barn.  &  Aid.  34. 

In  examining  this  contract,  the  court  are  of  opinion  that  it  falls 
clearly  within  this  rule.  The  introductory  part  is  an  agreement  "be- 
tween Horace  Heard,  Eli  Sherman  and  Newell  Heard,  committee  of 
the  town  of  Wayland,  on  the  one  part,  and  William  Simonds  and  John 
Chapin,  on  the  other  part";  and  after  a  specific  description  of  the 
work  to  be  done,  the  contract  on  the  part  of  the  defendants  is  this: 
"Said  committee  are  to  pay  said  Simonds  and  Chapin  the  sum  of  ^three 
hundred  and  seventy-five  dollars,  when  said  work  is  completed,"  etc. 

Two  things  are  here  observable.  The  first  is,  that  they  do  not  pro- 
fess to  act  in  the  name  or  behalf  of  the  town,  otherwise  than  as  such 
an  intention  may  be  implied  from  describing  themselves  as  a  commit- 
tee. But  such  description,  although  it  may  have  some  weight,  is  far 
from  being  conclusive,  and  in  many  of  the  cases  cited,  a  similar  des- 
ignation was  used,  which  was  held  to  be  a  mere  descriptio  personarum, 
and  designed  to  show  for  whose  account  the  contract  was  made,  and 
to  whose  account  the  amount  paid  under  such  contract  should  be 
charged.  The  second  and  more  decisive  circumstance  respecting  this 
contract  is,  that  here  is  an  express  undertaking  on  the  part  of  the 
committee  to  pay.  "Said  committee  are  to  pay  said  Simonds  and 
Chapin,"  etc.  Having  described  themselves  as  a  committee,  this  un- 
dertaking is  as  strong  and  direct  as  if  the  names  had  been  repeated, 
and  Heard,  Sherman,  and  Heard  had  promised  to  pay. 

The  court  are  therefore  of  opinion  that,  by  the  terms  of  this  con- 
tract, the  committee  intended  to  bind  themselves,  and  did  become  per- 
sonally responsible,  and  that  the  action  is  well  brought  against  them. 
*     *     * 

Judgment  on  the  verdict  for  the  plaintiffs. 


AVERY  et  al.  v.  DOUGHERTY. 
(Supreme  Court  of  Indiana,  1SS5.    102  Ind.  443,  2  N.  E.  123,  52  Am.  Rep.  680.) 

Elliott,  J.  In  the  promissory  notes  upon  which  the  complaint  of 
the  appellee  is  founded,  the  description  of  the  payee  is  Oliver  R.  Dough- 
erty. The  answer  to  the  complaint  is  in  two  paragraphs,  but,  as  they 
are  substantially  the  same,  it  is  only  necessary  to  give  a  synopsis  of 
one  of  them.  It  is  alleged  that  the  sole  consideration  of  the  notes  was 
the  execution  of  a  leas^  by  the  plaintiff  to  the  defendants  Monroe  and 
Madison  Avery.     *     *     * 

The  introductory  clause  of  the  lease  reads  thus:  "This  agreement, 
made  this  25th  day  of  December,  1880,  between  Randolph  Marshall, 
agent  of  Oliver  Dougherty,  guardian  of  his  minor  children,  and  Madi- 
son Avery  and  Monroe  Avery,"  and  the  instrument  is  signed,  "Ran- 
dolph V.  Marshall,  Agent  of  O.  R.  Dougherty." 

The  appellee's  counsel  assert  that  the  lease  is  executed  by  Marshall, 


Ch.  2)  RELATIONS   OF   THE   PRINCIPAL   AND   THIRD   PERSONS  523 

and  not  by  Dougherty,  and  that  the  allegation  that  it  was  executed 
by  the  latter  is  overthrown  by  the  exhibit.  *  *  *  It  is  also  true 
that  mere  descriptive  words  are  regarded  as  simply  describing  the  per- 
son. *  *  *  The  rule  is  firmly  ingrafted  in  our  law,  but  it  is  not 
easy  to  find  any  real  ground  for  it  in  this  country,  where  there  are  no 
titles,  designating  rank  or  condition  in  life.  In  England  there  was 
reason  for  the  rule;  here  there  is  none.  The  better  doctrine  would 
be  that  the  words  annexed  to  the  name  may  be  explained  by  extrinsic 
evidence;  but  the  rule  has  been  too  long  and  too  firmly  settled  to  be 
shaken  now.  While  accepting  the  general  rule  to  be  that  stated,  the 
American  authorities  agree  that,  if  the  contract  itself  shows  that  the 
words  were  not  used  as  merely  descriptive  of  the  person,  they  will 
not  be  so  regarded,  but  will  be  assigned  their  real  meaning.  In  the 
instrument  before  us  it  clearly  appears  that  Marshall  was  the  agent 
of  the  lessor,  and  acted  as  such,  for  we  find  this  recited :  "That  the 
said  Marshall,  agent  as  aforesaid,  has  rented  to  Madison  and  Monroe 
Avery."  There  are  other  provisions  in  the  instrument  clearly  show- 
ing that  Marshall  executed  the  lease  as  the  agent  of  Dougherty,  and 
we  have  no  doubt  that  it  should  be  treated  as  having  been  executed  by 
him,  and  that  the  improper  description  of  the  lessor  in  the  introductory 
clause  of  the  lease  must  be  attributed  to  the  unskillfulness  of  the 
draftsman  of  the  instrument.  *  *  * 
Judgment  affirmed. 

WHITNEY  V.  WYMA'N  et  al. 
(Supreme  Court  of  the  United  States,  1S79.  101  U.  S.  892.  25  K  Ed.  1050.) 
SwAYNE,  J.  This  action  was  brought  to  recover  the  value  of  cer- 
tain machinery  manufactured  by  the  plaintiff  in  error,  which  he  al- 
leged he  had  sold  and  delivered  to  the  defendants.  The  defendants 
insisted  that  they  had  contracted  for  and  received  the  machinery  in 
behalf  of  a  corporation  of  which  they  were  officers,  and  that  hence  they 
were  not  personally  liable.  The  plaintiff  lived  in  Massachusetts  and 
the  defendants  in  Michigan. 

The  latter  addressed  a  letter  to  the  former,  which  was  as  follows : 

"Grand  Haven,  Feby.  1,  1869. 
"Baxter  Whitney,  Esq.,  Winchenden,  Mass. : 

"Sir:  Our  company  being  so  far  organized,  by  direction  of  the 
officers,  we  now  order  from  you,  manufactured  and  shipped,  at  as  early 
date  as  possible — for  the  manufacture  of  the  Mellish  fruit  basket — 1 
large  rounding  lathe,  1  quart  do.  do.,  2  lathes  for  peach  basket  bottoms, 
3  do.  do.  quart  do.  do.,  pint  do.  do.  Also  the  necessary  small  fixtures 
for  clasping,  etc.  of  which  Mr.  Whitney  is  advised,  and  will  give  you 
more  definite  order.  Charles  Wyman, 

"Edward  P.  Ferry, 
"Carlton  L.  Storrs, 
"Prudential  Committee  Grand  Haven  Fruit  Basket  Co." 
To  which  the  plaintiff  replied : 

"Winchenden,  Mass.,  Feb.  10,  1869. 
"Grand  Haven  Fruit  Basket  Company : 

"Gentlemen:  Yours  of  the  1st  inst.  is  received,  in  which  you  order 
machinery  for  fruit  baskets,  etc.  I  had  already  anticipated  your  order 
by  commencing  on  the  machinery  on  Mr.  Whitney's  verbal  order,  and 
I  am  now  driving  it  with  all  the  force  I  can  get  on  it. 

"Yours  respectfully,  Baxter  D.  Whitney." 


524  AGENCY  (Part  2 

*  *  *  The  plaintiff  charged  the  defendants  individually  on  his 
books  for  the  machinery.  His  draft  [on  the  defendants]  was  protest- 
ed.    *     *     * 

The  machinery  was  delivered  at  Grand  Haven,  and  the  freight  was 
paid  by  Edward  P.  Ferry  as  the  treasurer  of  the  corporation.  The 
draft  of  Baxter  was  protested,  because  it  was  addressed  to  the  drawees 
individually.  They  claimed  that  he  had  no  right  so  to  draw  on  them. 
*     *     * 

The  court  instructed  the  jury,  in  substance,  that  the  letter  of  the 
prudential  committee  of  February  1,  1870,  bound  the  corporation  and 
not  the  defendants,  if  there  was  then  a  corporation  and  the  defendants 
were  authorized  by  it  to  give  the  order.  *  *  *  fhe  plaintiff  ex- 
cepted to  these  instructions.  *  *  *  The  jury  found  for  the  de- 
fendants. 

Where  the  question  of  agency  in  making  a  contract  arises,  there  is 
a  broad  line  of  distinction  between  instruments  under  seal  and  stipu- 
lations in  writing  not  under  seal,  or  by  parol.  In  the  former  case  the 
contract  must  be  in  the  name  of  the  principal,  must  be  under  seal,  and 
must  purport  to  be  his  deed  and  not  the  deed  of  the  agent  covenanting 
for  him.     *     *     * 

In  the  latter  case  the  question  is  always  one  of  intent ;  and  the  court, 
being  untrammeled  by  any  other  consideration,  is  bound  to  give  it 
effect.  As  the  meaning  of  the  law-maker  is  the  law,  so  the  meaning 
of  the  contracting  parties  is  the  agreement.  Words  are  merely  the 
symbols  they  employ  to  manifest  their  purpose  that  it  may  be  carried 
into  execution.  If  the  contract  be  unsealed  and  the  meaning  clear, 
it  matters  not  how  it  is  phrased  nor  how  it  is  signed,  whether  by  the 
agent  for  the  principal  or  with  the  name  of  the  principal  by  the  agent 
or  otherwise. 

The  intent  developed  is  alone  material,  and  when  that  is  ascertained 
it  is  conclusive.  Where  the  principal  is  disclosed,  and  the  agent  is 
known  to  be  acting  as  such,  the  latter  cannot  be  made  personally  liable 
unless  he  agreed  to  be  so. 

Looking  at  the  letter  of  the  defendants  of  the  first  of  February,  1869, 
and  the  answer  of  the  plaintiff  of  the  10th  of  that  month,  we  cannot 
doubt  as  to  the  understanding  and  meaning  of  both  parties  with  re- 
spect to  the  point  in  question. 

The  former  advised  the  latter  of  the  progress  made  in  organizing  the 
corporation ;  that  the  order  was  given  by  the  direction  of  its  officers, 
and  the  letter  is  signed  by  the  writers  as  the  "Prudential  Committee 
of  the  Grand  Haven  Fruit  Basket  Co.,"  which  was  the  name  in  full 
of  the  corporation.  The  plaintiff'  addressed  his  reply  to  the  "Grand 
Haven  Fruit  Basket  Co.,"  thus  using  the  name  of  the  corporation  as 
the  party  with  whom  he  knew  he  was  dealing,  and  omitting  the  names 
of  the  defendants,  and  their  designation  as  a  committee,  according  to 
the  style  they  gave  themselves  in  their  letter. 

It  seems  to  us  entirely  clear  that  both  parties  understood  and  meant 
that  the  contract  was  to  be  and,  in  fact,  was  with  the  corporation,  and 
not  with  the  defendants  individually.  *  *  *  The  record  shows 
clearly  that  the  plaintiff  was  not  entitled  to  recover,  and  that  the  ver- 
dict and  judgment  are  right.     *     *     * 

The  judgment  of  the  Circuit  Court  is  affirmed. 


Ch.  2)         RELATIONS   OF  THE   PRINCIPAL  AND  THIRD   PERSONS  525 


SMITH  et  al.  v.  ALEXANDER. 
(Supreme  Court  of  Missouri,  1860.    31  Mo.  193.) 

EwiNG,  J.  This  was  an  action  on  the  following  instrument :  "$500. 
St.  Louis,  Mo.,  July  22,  1855.  Ninety  days  after  date,  I  promise  to 
pay  to  the  order  of  Messrs.  Smith  &  Co.  five  hundred  dollars,  for  value 
received,  negotiable  and  payable  without  defalcation  or  discount. 
[Signed]     J.  H.  Alexander,  Treas'r  Ohio  &  Miss.  R.  R.  Co." 

On  the  trial,  the  plaintiff  having  read  the  note  in  evidence,  the  de- 
fendant introduced  testimony  showing  that  he  was  the  treasurer  of 
the  Ohio  &  Mississippi  Railroad,  and  tendingto  prove  that  the  note 
sued  on  was  given  by  him  in  liquidation  of  an  indebtedness  due  to  the 
plaintiffs  from  that  company,  and  that  defendant  received  no  consid- 
eration for  the  giving  of  said  note.  The  ruling  of  the  court  was  ex- 
cepted to  by  the  plaintiff  in  admitting  this  evidence,  as  also  in  giving 
and  refusing  instructions. 

The  general  rule  usually  laid  down  respecting  sealed  contract  is 
not  applicable  in  its  full  extent  to  written  contracts  not  under  seal. 
In  reference  to  these,  it  is  said  to  be  clear  from  the  authorities  that  it 
is  not  indispensable,  in  order  to  bind  the  principal,  that  such  a  con- 
tract should  be  executed  in  the  name  and  as  the  act  of  the  principal. 
It  will  be  sufficient  if  upon  the  whole  instrument  it  can  be  gathered, 
from  the  terms  thereof,  that  the  party  describes  himself  and  acts  as 
agent  and  intends  thereby  to  bind  the  principal  and  not  to  bind  him- 
self.    Story,  Ag.  §  160. 

And  in  reference  to  corporations  (as  to  which  the  tendency  of  mod- 
ern decisions,  it  would  seem,  is  to  relax  somewhat  the  strict  rules  on 
this  subject)  it  is  said  that  if,  from  the  contract  itself,  or  from  this 
coupled  with  the  conduct  of  the  parties  thereto,  it  appears  that  credit 
was  given,  not  to  the  agent,  but  to  the  corporation,  and  it  appears  to 
have  been  the  intent  of  the  parties  that  the  corporation  should  be  bound, 
the  corporation  is  alone  liable,  irrespective  of  the  particular  form  of 
the  contract. 

Owing  to  the  great  diversity  in  the  form  of  the  instruments  involv- 
ing questions  of  this  character,  the  adjudged  cases  furnish  no  general 
rule  more  definite  than  that  referred  to ;  and  many  of  them  have  little 
applicability  to  other  cases  except  in  their  general  principles.  In  some 
of  the  authorities  cited,  the  execution  of  the  instrument  in  the  form  of 
that  before  us  has  been  held  the  individual  obligation  of  the  person 
signing  it,  and  not  that  of  the  individual  or  company  indicated  by  th? 
addition  to  the  signature,  such  addition  being  regarded  merely  as  de- 
scriptio  personarum,  while  in  others  it  has  been  held  sufficient  on  its 
face  to  avoid  personal  liability.  Although  it  would  appear  to  be  by  no 
means  settled  that  such  a  mode  of  execution — the  mere  addition  of 
the  official  character  to  the  name — is  tantamount  to  a  disclaimer  of 
personal  responsibility,  it  is  deemed  such  an  indication  of  the  rep- 
resentative character  as  to  warrant  a  resort  to  parol  evidence,  not  of 
course  to  contradict  or  vary  the  writing,  but  to  explain  it.  The  pur- 
pose of  introducing  parol  evidence  in  such  cases  is  to  prove  extrinsic 
circumstances,  by  which  the  respective  liability  of  the  principal  and 
agent  may  be  determined,  such  as  to  which  the  consideration  passed 
and  credit  was  given,  the  agent's  authority,  etc.  When  the  names  of 
both  principal  and  agent  appear  on  the  instrument,  and  the  contract, 


526  AGENCY  (Part  2 

though  in  the  name  of  the  agent,  discloses  a  reference  to  the  business  of 
the  principal,  so  that  the  instrument  as  it  stands  is  consistent  with  ei- 
ther view  of  its  being  the  engagement  of  the  principal  or  of  the  agent, 
parol  evidence  is  admissible  in  a  suit  against  the  agent  to  charge  him 
by  showing  either  that  credit  was  given  to  him  or  that  he  had  not  au- 
thority to  bind  the  principal,  or  to  discharge  him  by  proving  that  the 
consideration  passed  directly  to  his  principal,  etc.  1  Amer.  Lead.  Case, 
453,  and  authorities  there  cited. 

Justice  Johnson,  in  Mechanics'  Bank  v.  Bank  of  Columbia,  5  Wheat. 
336,  5  L.  "Ed.  100,  says  it  is  enough  for  the  purpose  of  the  defendant 
to  establish  that  there  existed  on  the  face  of  the  paper  circumstances 
from  which  it  might  reasonably  be  inferred  that  the  transaction  was 
either  an  individual  or  a  corporate  one,  in  which  case  it  becomes  in- 
dispensable to  resort  to  extrinsic  evidence  to  remove  the  doubt.  In 
that  case  parol  evidence  was  admitted  to  prove  that  character  or  ca- 
pacity in  which  the  check  was  drawn;  and  the  only  evidence  on  its 
face  of  its  being  a  corporate  transaction  was  the  corporate  name  in  the 
caption.  A  mere  addition  to  the  name  of  the  party  signing  a  contract 
cannot  be  regarded  as  a  certain  indicium  that  it  was  made  on  behalf 
of  another.  Where,  however,  it  is  doubtful  from  the  face  of  the  con- 
tract whether  it  was  intended  to  operate  as  a  personal  engagement  of 
the  party  signing  it,  or  to  impose  an  obligation  on  some  third  person 
as  his  principal,  parol  evidence  is  admissible  to  show  the  true  charac- 
ter of  the  transaction.     *     *     * 

In  this  view  of  the  case,  we  see  no  error  in  giving  the  instruction 
asked  by  the  defendant  and  refusing  those  asked  by  the  plaintiff. 

Judgment  affirmed.     *     *     * 


HALL    &    BROWN    WOODWORKING    MACHINE    CO.    v.    HALEY 
FL'RNITURE  &  MFG.  CO.  et  al. 

(Supreme  Court  of  Alabama,    1911.      174   Ala.   190,   5G    South.   726, 
L.  R.  A.  191SB,  924.) 

SoJ^iERViivivE,  J.  This  is  an  action  of  detinue  by  the  appellant 
against  the  Haley  Furniture  &  Manufacturing  Company,  and  W.  T. 
Archer,  assignee.  The  appellee  duly  intervened  as  claimant  of  the 
property  sued  for,  filing  his  affidavit  of  claim,  and  the  appropriate 
issue  was  made  up,  and  the  trial  proceeded  thereon.  The  affidavit 
did  not  state  the  nature  of  the  right  of  tlie  claimant  as  required  by 
Code,  §  6043.    *    *     * 

The  subject-matter  of  the  suit  is  a  lot  of  machinery  sold  by  the 
plaintiff  to  said  Haley  Company  in  February,  1906,  and  delivered  in 
April  following,  except  one  item  which  reached  the  consignee  as  late 
as  about  June  12th.  Only  about  one-third  of  the  purchase  money  was 
to  be  paid  on  delivery,  and  to  secure  the  payment  of  the  balance  the 
vendor  retained  the  title  and  possessory  right  in  itself  until  the  price 
of  the  machinery  was  fully  paid,  as  shown  by  the  written  contract 
and  notes  in  evidence.  This  written  contract  was  filed  for  record  on 
August  3,  1906,  and  in  the  meantime,  on  June  18,  1906,  the  claim- 
ant Sheffield  Company  (now  appellee)  loaned  to  the  defendant  Haley 
Company  $6,000,  the  latter  executing  to  the  former  as  security  there- 
for a  mortgage  deed  conveying  certain  property  in  the  city  of  Sheffield 
described  as  "all  of  block  numbered  four  hundred  and  forty-eight 
(•448)  together  with  all  buildings  and  improvement?  thereon,  and  all 


Ch.  2)  RELATIONS   OF   THE   PRINCIPAL   AND   THIRD   PERSONS  527 

machinery  and  appliances  thereat,  together  with  the  appurtenances." 
It  does  not  appear  that  this  mortgage  has  ever  been  foreclosed. 

The  tendency  of  the  testimony  of  the  two  witnesses,  C.  L.  Haley 
and  J.  J.  Challen,  introduced  by  the. plaintiff,  was  to  show  that  in  the 
loan  transaction  of  June  18th,  in  which  the  Haley  Company  secured 
the  loan  of  $6,000  from  the  Sheffield  Trust  Company,  the  Trust  Com- 
pany was  represented  by  one  J.  W.  Worthington,  who  was  a  director 
and  stockholder,  but  not  an  officer,  in  said  Trust  Company;  that  said 
Worthington  was  at  the  same  time  president  of  the  Sheffield  National 
Bank;  that  said  witnesses,  who  were  respectively  president  and  sec- 
retary and  treasurer  of  the  Haley  Company,  negotiated  with  said 
Worthington  in  the  months  of  January,  February,  March,  and  April, 
1906,  for  the  purpose  of  getting  a  loan  for  the  Haley  Company ;  that 
Worthington  promised  to  get  such  a  loan  for  them,  and  stated  that  he 
would  secure  it  from  a  trust  company  about  to  be  organized;  that 
during  these  negotiations  in  January  and  February  it  was  explained 
to  Worthington  that  the  loan  was  to  be  used  in  the  purchase  of  the 
machinery  in  controversy;  that  the  contract  of  sale  between  the 
plaintiff  and  said  Haley  Company,  one  of  the  terms  of  which  provided 
for  the  reservation  of  the  title  and  right  of  possession  until  the  pur- 
chase money  was  paid,  was  exhibited  to  Worthington  and  its  terms 
gone  over  with  him,  and  then  left  with  him  for  several  days  for  his  in- 
spection; that  the  Sheffield  Trust  Company  was  not  organized  and 
had  no  existence  until  May  26,  1906;  and  that  no  conversations  with 
Worthington,  nor  information  to  him  as  to  the  status  of  the  title  to 
the  machinery  occurred  on  or  after  May  26,  nor  any  later  than  March, 
1906.  For  the  claimant,  all  of  the  testimony  as  to  information  given 
him  concerning  plaintiff's  claim  to  the  machinery  is  vigorously  denied 
by  Worthington,  as  well  as  any  knowledge  whatever  on  his  part  of 
such  a  claim,  either  before  or  during  his  agency.     *     *     * 

On  motion  of  the  claimant,  the  trial  court  excluded  all  the  testi- 
mony of  the  two  witnesses  Haley  and  Challen  as  to  conversations  and 
transactions  between  them  and  J.  W.  Worthington  relative  to  the 
property  sued  for,  and  relative  to  their  negotiations  with  him  for  a 
loan  from  the  claimant  company;  the  ground  of  objection  being,  sub- 
stantially, that  any  notice  to  Worthington  of  plaintiff's  claim,  before 
the  organization  of  the  claimant  company,  and  hence  before  his  agen- 
cy for  it  began,  was  not  notice  to  the  claimant,  nor  binding  on  it.  The 
question  presented  by  this  mling  is  the  vital  question  in  the  case. 

By  a  long  line  of  decisions,  this  court  is  thoroughly  committed  to 
the  rule  that  knowledge  acquired  by  an  agent  prior  to  his  agency,  or 
in  regard  to  matters  outside  the  line  of  his  duty,  or  while  pursuing 
his  own  or  some  other  person's  business,  is  not  notice  to  his  principal 
of  such  fact  or  facts,  and  is  not  binding  upon  him,     *    *     * 

The  fundamental  requirement  is  that  such  knowledge  on  the  part 
of  an  agent  to  bind  his  principal  "must  be  limited  to  such  knowledge 
or  information  as  comes  to  the  agent  in  transacting  the  business  of 
his  principal."  Central  of  Ga.  Ry.  Co.  v,  Joseph,  125  Ala.  319,  28 
South.  37.  This  is  a  simple  rule,  easy  of  application,  and  just  in  its 
results. , 

Where  the  agent's  knov/ledge  is  of  this  character,  it  is  construc- 
tive notice  to  the  principal  entirely  regardless  of  the  principal's  ac- 
tual knowledge.  *  *  *  This  is  usually  explained  by  saying  that  the 
law  conclusively  presumes  that  the  agent  has  in  fact  communicated 


528  AGENCY  (Part  2 

his  knowledge  to  his  principal.  We  think,  however,  that  the  better 
and  more  logical  explanation  is  that  with  respect  to  the  given  trans- 
action ;  the  agent  is  in  law  identified  with  his  principal ;  that  knowl- 
edge that  comes  to  the  agent,  while  acting  in  such  matter  for  his 
principal,  would  have  come  to  the  principal  had  he  been  acting  for 
himself;  and  that,  as  a  rule  of  policy  and  justice,  he  must  be  equal- 
ly charged  therewith.     *     *     * 

But  on  either  theory,  the  rule  is  not  a  rule  of  evidence  merely,  as 
is  sometimes  declared,  but  a  rule  of  substantive  law.  The  Alabama 
rule,  as  above  defined,  is  not  in  accord  with  the  weight  of  authority 
in  other  jurisdictions,  as  pointed  out  by  Mr.  Freeman  in  his  valuable 
note  to  Trentor  v.  Pothen,  46  Minn.  298,  49  N.  W.  129,  24  Am.  St. 
Rep.  228-233,  where  the  cases  on  both  sides  are  collected  and  dis- 
cussed; and  as  shown  by  Mr.  Pomeroy  in  his  third  edition  of  Equity 
Jurisprudence  (volume  2,  §  672,  and  notes).  It  appears  from  these 
authorities  that  the  more  generally  accepted  rule  is  that  the  agent's 
knowledge,  though  acquired  previously  to  his  agency,  if  retained  by 
him  and  carried  with  him  into  the  subsequent  business  which  he  trans- 
acts for  his  new  principal,  is  notice  to  the  latter  whether  communicat- 
ed to  him  or  not. 

This  rule  we  regard  as  both  illogical  and  unjust — a  criticism  which  is 
fully  vindicated  by  a  consideration  of  the  numerous  and  unpractical 
qualifications  and  exceptions  which  courts  expounding  the  rule  have 
been  compelled  to  adopt.  In  this  connection  we  note  Mr.  Pomeroy's 
observation  that  "several  of  the  ablest  English  judges  have,  in  recent 
cases,  expressed  a  decided  opinion  against  the  rule  itself,  and  while 
considering  themselves  bound  by  it,  as  far  as  it  is  settled,  have  wished 
that  it  should  be  abrogated  by  the  Legislature."  2  Pom.  Eq,  Jur.  (3d 
Ed.)  §  672,  note  1.  We  adhere  to  the  rule  as  settled  by  our  own  cases 
cited  above.    *    *    * 

Constructive  notice  to  the  principal  through  the  actual  knowledge 
of  the  agent  is  not  a  rule  of  evidence,  but  one  of  substantive  law. 
Given  notice  to  or  knowledge  of  the  agent,  received  while  so  acting, 
and  the  principal  is  conclusively  bound  by  it ;  not  because  he  ever 
knows  it  in  fact,  because  his  actual  knowledge  is  utterly  immaterial, 
but  because  as  to  the  thing  the  agent  is  doing  the  agent  is  in  law  the 
principal,  and  the  principal  is  in  law  the  agent.  Their  legal  identity 
is  complete.  Nor  can  it  matter,  in  this  aspect  of  the  rule,  whether 
the  agent  has,  or  has  not,  private  reasons  or  interests  which  make  it 
likely  or  even  certain  that  he  will  not  inform  his  principal,  as  correct- 
ly ruled  in  First  Nat.  Bank  v.  Allen,  100  Ala.  476,  14  South.  335,  27 
L.  R.  A.  426,  46  Am.  St.  Rep.  80. 

On  the  other  hand,  the  actual  knowledge  of  the  principal,  when  ma- 
terial,, may  be  proved  like  any  other  fact.  It  is  the  duty  of  an  agent 
to  inform  his  principal  of  every  material  fact  within  his  knowledge, 
no  matter  when  acquired,  bearing  upon  the  subject-matter  of  his 
agency,  which  may  affect  the  interests  of  his  principal  with  respect 
thereto ;  and  it  will  be  presumed  that  he  has  discharged  this  duty. 
*  *  *  Here  we  have  a  true  rule  of  evidence — a  presumption  of  law 
that  a  duty  has  been  discharged,  from  which  follows  the  further  pre- 
sumption that  the  principal  has  acquired  the  knowledge  of  his  agent. 
But  this  presumption  like  others  of  a  similar  nature,  is  disputable,  and 
not  conclusive.  Unless  rebutted,  it  is  sufficient  to  fasten  upon  the 
principal,  not  an  unreal  constructive  notice  which  is  incontestable,  but 


Ch.  2)  RELATIONS   OF   THE   PRINCIPAL  AND   THIRD   PERSONS  529 

simply  an  implied  actual  notice  which  is  contestable.  A  failure  to 
distinguish  between  these  entirely  distinct  principles  has,  in  our  judg- 
ment, produced  most  of  the  confusion  and  contrariety  of  judicial 
opinion  which  seems  to  have  always  attended  the  consideration  of 
this  subject  by  the  courts.  See  the  cases  cited  in  31  Cyc.  1594,  note 
50.     *    *     * 

The  rule  of  implied  notice,  as  above  stated,  unless  there  is  direct 
evidence  showing  that  the  imputed  knowledge  was  present  in  the 
agent's  mind  during  his  agency,  must  obviously  depend  upon  the  an- 
terior presumption  of  fact  that  the  knowledge  in  question  has  thus 
persisted  in  his  memory,  so  as  to  be  available  for  communication  sea- 
sonably to  his  principal. 

The  law  does  not  presume  that  a  fact  once  known  is  never  forgot- 
ten, for  this  is  contrary  to  all  human  experience.  Nor  is  the  remote- 
ness or  lateness  of  its  acquisition  as  knowledge  by  the  agent  in  all 
cases  the  most  important  consideration,  for  all  experience  teaches  that 
much  that  we  learned  in  the  remote  past  ineradicably  persists  in  our 
memories,  while  unimportant  events  of  yesterday  have  been  already 
forgotten.  This  particular  issue  then  rests  in  inference,  and  is  for  the 
jury  to  determine. 

If  the  jury  find  that  the  knowledge  was  present  in  the  agent's  mind 
during  the  execution  of  the  agency,  then  they  must  find  as  matter  of 
law  that  the  principal  was  duly  informed,  unless  they  are  reasonably 
satisfied  to  the  contrary  from  other  evidence  before  them.  We  do 
not  mean  to  say  that  the  agent's  prior  knowledge  may  not  be  so  remote 
in  point  of  time,  or  so  lacking  in  clearness  or  apparent  importance,  as 
to  justify  the  trial  court  in  presuming,  prima  facie,  that  it  has  been 
forgotten.    *    *    * 

The  information  acquired  by  Worthington  from  the  witnesses  Haley 
and  Challen.  being  acquired  prior  to  the  period  of  his  agency  for 
claimant,  did  not  operate  as  constructive  notice  of  it.  But  their  tes- 
timony in  this  regard  was  admissible  in  evidence  for  the  purpose  of 
showing  actual  knowledge  of  plaintiff's  claim  on  the  part  of  the  claim- 
ant corporation,  under  the  principles  above  declared;  and  its  exclu- 
sion was  error  prejudicial  to  appellant. 

Other  assignments  of  error  need  not  be  noticed,  as  the  questions 
presented  will  hardly  recur  upon  another  trial. 

Reversed  and  remanded,     *     *    * 


SECTION  2.— RIGHTS  AND  LIABILITIES  OF  THE 
UNDISCLOSED  PRINCIPAL 


LINDQUIST  V.   DICKSON. 

(Supreme  Court  of  Minnesota,  1906.    98  Minn.  369,  107  N.  W.  958,  6  L.  R.  A. 
[N.  S.]  729,  8  Ann.  Cas.  1024.) 

Action  by  August  Lindquist  against  Ella  M.  Dickson.  There  was 
a  verdict  for  plaintiff,  and  from  an  order  denying  motion  for  a  new 
trial,  defendant  appeals. 

Start,  C.  J.  Action  to  recover  from  the  defendant,  as  an  undis- 
closed principal,  for  labor  and  material  performed  and  furnished  by 
B.&  B.Bus.Law— 34 


530  AGENCY  (Part  2 

the  plaintiff  in  decorating  and  repairing  her  house,  pursuant  to  an 
alleged  contract  made  for  her  by  her  husband,  Joseph  M.  Dickson. 
The  complaint  alleged,  in  effect,  that  at  the  time  the  contract  was 
entered  into  with  the  husband  he  was  in  fact  acting  as  agent  for  his 
wife,  the  defendant,  but  he  failed  to  disclose  to  the  plaintiff  the  fact 
of  such  agency,  or  the  fact  that  she  was  the  real  party  in  interest  and 
owned  the  house,  the  decorating  and  improvement  of  which  was  the 
subject-matter  of  the  contract;  that  the  plaintiff  performed  the  contract 
on  his  part;  that  he  was  not  paid  therefor;  and  that  he  commenced  an 
action  against  the  husband  to  recover  the  balance  due  him  on  the 
contract,  and  on  August  29,  1904,  he  recovered  judgment  against  him 
for  the  sum  of  $273.68,  no  part  of  which  has  been  paid ;  and  further 
that  thereafter  (in  the  month  of  October,  1904)  the  plaintiff  learned  for 
the  first  time  that  the  defendant  was  the  real  party  in  interest,  and  that 
the  contract  was  made  for  her  by  her  husband  as  her  agent.  This 
action  was  commenced  in  the  month  of  June,  1905.  *  *  *  The  trial 
resulted  in  a  verdict  in  favor  of  the  plaintiff  for  the  amount  stated,  and 
the  defendant  appealed  from  an  order  denying  her  motion  for  a  new 
trial.     *     *     * 

It  is  not  controverted  that  the  plaintiff,  at  the  time  the  contract 
was  made,  understood  that  the  house  he  was  to  decorate  and  improve 
belonged  to  the  husband,  and  that  he  was  dealing  with  him  as  prin- 
cipal, and  further  that  he  recovered  judgment  against  the  alleged  agent 
upon  the  same  claim  which  is  the  basis  of  this  action,  in  ignorance  of 
such  alleged  agency.  It  is  the  contention  of  the  defendant  that  such 
judgment  is  a  bar  to  this  action.  The  general  rule  is  that,  where  a 
simple  contract,  by  parol  or  writing,  is  made  by  an  authorized  agent 
without  disclosing  his  principal,  and  the  other  contracting  party  subse- 
quently discovers  the  real  party,  he  may  abandon  his  right  to  look 
to  the  agent  personally  and  resort  to  the  principal.  *  *  *  But 
whether  the  creditor  can  proceed  against  the  undiscovered  principal, 
after  he  has  obtained  a  judgment  on  his  claim  against  the  agent,  is  a 
question  as  to  which  the  adjudged  cases  are  conflicting.  In  the  case 
of  Kingsley  v.  Davis,  104  Mass.  178,  the  creditor,  after  being  fully 
informed  that  the  party  with  whom  he  made  the  contract  was  acting 
for  an  undiscovered  principal,  brought  an  action  against  the  agent  and 
recovered  judgment  for  his  claim.  Afterwards  he  brought  an  action 
against  the  principal  to  recover  for  the  same  claim,  and  the  court  held 
that  the  action  against  the  principal  could  not  be  maintained  for  the 
reason  that :  "The  general  principle  is  undisputed  that,  when  a  person 
contracts  with  another  who  is  in  fact  an  agent  of  an  undiscovered  prin- 
cipal, he  may  upon  the  discovery  of  the  principal  resort  to  him  or 
to  the  agent  with  whom  he  dealt  at  his  election.  But  if,  after  having 
come  to  a  knowledge  of  all  the  facts,  he  elects  to  hold  the  agent,  he 
cannot  resort  to  the  principal."  In  Beymer  v.  Bonsall,  79  Pa.  298,  it 
was  held  that  nothing  short  of  satisfaction  of  the  judgment  against  the 
agent  would  discharge  the  principal. 

The  case  of  Kingsley  v.  Davis  suggests  the  true  basis  for  solving 
the  question.  It  is  a  question  of  election.  Election  implies  full  knowl- 
edge of  the  facts  necessary  to  enable  a  party  to  make  an  intelligent  and 
deliberate  choice.  *  *  *  We  therefore  hold  upon  principle,  and 
what  seems  to  be  the  weight  of  judicial  opinion,  that:  If  a  person  con- 
tracts with  another,  who  is  in  fact  an  agent  of  an  undisclosed  princi- 
pal, and,  after  learning  all  the  facts,  brings  an  action  on  the  contract 


Ch.  2)  RELATIONS   OP   THE   PRINCIPAL   AND   THIRD   PERSONS  531 

and  recovers  judgment  against  the  agent,  such  judgment  will  be  a 

bar  to  an  action  against  the  principal.     But  an  unsatisfied  judgment 

against  the  agent  is  not  a  bar  to  an  action  against  the  undiscovered 

principal  when  discovered,  if  the  plaintiff  was  ignorant  of  the  facts 

as  to  the  agency  when  he  prosecuted  his  action  against  the  agent. 
*     *     * 

Order  affirmed. 


VAN    DYKE    V.    VAN    DYKE. 
(Supreme  Court  of  Georgia,  1905.    123  Ga.  6S6,  51  S.  E.  5S2,  3  Ann.  Cas.  978.) 

Mary  J.  Van  Dyke  brought  suit  against  Alice  M.  Van  Dyke,  alleg- 
ing in  brief  as  follows :  The  defendant  is  indebted  to  the  plaintiff  in 
the  sum  of  $1,440,  besides  interest,  which  indebtedness  was  created 
as  follows :  On  April  25,  1899,  E.  A.  Van  Dyke,  the  husband  of  the 
defendant,  who  the  plaintiff"  knew  had  been  the  owner  of  32  shares  of 
the  capital  stock  of  the  Merchants'  National  Bank,  of  St.  Paul,  Minn., 
came  to__the  plaintiff',  and  informed  her  that  the  stock  had  been  as- 
sessed 45  per  cent,  of  its  face  value,  and  that  it  was  necessary,  in  or- 
der to  prevent  it  from  being  sold,  to  pay  the  assessment,  and  that  he 
should  send  to  the  bank  at  once  the  arnount  of  the  assessment,  and 
requested  plaintiff'  to  lend  him  the  sum  for  that  purpose.  Plaintiff 
loaned  him  the  amount,  and  the  money  was  used  in  paying  off  and 
discharging  the  assessment  of  the  stock.  The  stock  was  in  fact  then 
standing  on  the  books  of  the  bank  in  the  name  of  the  defendant.  It 
was  afterwards  sold,  and  the  proceeds  were  sent  by  a  check  payable 
to  the  order  of  defendant,  and  were  used,  as  defendant  claims,  by  her, 
to  the  extent  of  $1,440,  in  paying  for  certain  improvements  on  land 
which  she  claims  to  own.  At  the  time  the  loan  was  made  the  plaintiff 
did  not  know  that  the  stock  stood  in  the  name  of  the  defendant,  but 
believed  that  it  belonged  to  her  husband.  Believing  him  to  be  the 
true  owner,  she  took  from  him  a  note  for  the  amount  of  the  loan. 
A  copy  of  the  note  is  attached  to  the  declaration.  She  has  since  learned 
that  at  tlie  time  she  made  the  loan  Van  Dyke  was  acting  as  agent  for 
his  wife  in  borrowing  the  sum  to  pay  off  the  assessment  on  the  stock. 
Plaintiff  elects  to  proceed  against  the  defendant  as  the  undisclosed 
principal  for  whom  the  money  was  borrowed.  By  reason  of  the  facts 
aforesaid  "defendant  became  liable  to  plaintiff'  in  the  sum  of  $1,440 
besides  interest."     *     *     * 

On  motion  the  court  dismissed  the  action  on  two  grounds:  First, 
that  the  declaration  set  out  no  cause  of  action,  for  the  reason  that  the 
allegations  disclosed  that  it  was  based  on  a  contract  under  seal,  and 
in  such  a  case  the  law  would  not  permit  the  plaintiff  to  proceed  against 
the  undisclosed  principal  when  discovered;  and,  second,  that  the  al- 
legations of  the  petition  disclosed  that  the  plaintiff  parted  with  her 
money  on  an  express  contract  under  seal,  and  no  action  can  be  main- 
tained against  the  defendant  for  money  had  and  received.  The  plain- 
tiff excepted. 

Lumpkin,  j.  *  *  *  fhe  general  rule  with  reference  to  holding 
an  undisclosed  principal  liable  upon  the  contract  of  his  agent  is  thus 
stated  in  Civ.  Code  1895,  §  3024:  "If  an  agent  fails  to  disclose  his 
principal,  yet,  when  discovered,  the  person  dealing  with  the  agent 
rnay  go  directly  upon  the  principal,  under  the  contract,  unless  the  prin- 
cipal shall  have  previously  accounted  and  settled  with  the  agent."    This 


532  AGENCY  (Part  3 

is  a  codification  of  the  law  as  it  stood  prior  to  the  original  Code  of 
1863,  and  is  not  an  innovation  resulting  from  legislative  enactment.  In 
Lenney  v.  Finley,  118  Ga.  718,  45  S.  E.  593,  it  was  held  that:  "The 
rule  that  an  undisclosed  principal  shall  stand  liable  for  the  contract  of 
his  agent  does  not  apply  when  the  contract  is  under,  seal.  Accordingly, 
a  lease  under  seal,  executed  by  an  agent  as  lessee  in  his  individual 
name,  and  which  does  not  purport  to  be  executed  on  behalf  of  the 
principal,  is  not  binding  upon  the  latter,  although  it  appears  from  ex- 
trinsic evidence  that  the  lessee  was  the  general  agent  to  conduct  a 
business  for  his  principal,  and  that  the  premises  were  leased  to  be 
used  in  such  business."  We  are  asked  to  review  and  reverse  this 
decision,  but  the  court  declines  to  change. the  ruling  then  made.  An 
examination  of  the  authorities  cited  in  the  opinion  will  show  that  it 
was  not  without  foundation.  ***!„!  Am.  &  Eng.  Enc,  L.  (2d 
Ed.)  1141,  it  is  said:  "It  has  been  laid  down  as  a  common-law  doc- 
trine that,  when  a  contract  is  made  by  an  instrument  under  seal,  no 
one  but  a  party  to  the  instrument  is  liable  to  be  sued  upon  it,  and 
therefore,  if  made  by  an  agent  or  attorney,  it  must  be  in  the  name  of 
the  principal,  in  order  that  he  may  be  a  party,  because  otherwise  he 
is  not  bound  by  it.  *  *  *  Some  of  the  later  decisions,  however, 
qualify  this  doctrine  by  holding  that  when  a  sealed  contract  has  been 
executed  in  such  form  that  it  is  in  law  the  contract  of  the  agent,  and 
not  of  the  principal,  but  the  principal's  interest  in  the  contract  appears 
upon  its  face,  and  he  has  received  the  benefit  of  the  performance  by 
the  other  party,  and  has  ratified  and  confirmed  it  by  acts  in  pais,  and 
the  contract  is  one  which  would  have  been  valid  without  a  seal,  the 
instrument  will  be  binding  on  the  principal."  *  *  *  Some  courts 
hold  that  negotiable  instruments  do  not  fall  within  the  general  rule, 
and  that  an  unnamed  principal  cannot  be  sued  on  them.  See  Clark 
on  Contracts,  §  275,  p.  519  and  notes. 

It  is  contended  that  the  rule  applies  only  to  instruments  which  were 
speciahies  at  common  law,  as  to  which  a  seal  was  necessary ;  and  that 
in  cases  where  the  instrument  would  be  valid  without  a  seal  the  ad- 
dition of  a  seal  would  not  bring  it  within  the  rule.  There  are  some 
authorities  holding  or  tending  to  hold  this  to  be  the  rule.  See  Stowell 
V.  Eldred,  39  Wis.  614;  Wagoner  v.  Watts,  44  N.  J.  Law,  126; 
Shuetze  v.  Bailey,  40  Mo.  69,  75.  The  distinction  drawn  in  this  line 
of  authorities,  however,  has  not  been  followed  in  Georgia.  *  *  * 
From  what  has  been  said  it  follows  the  plaintiff  could  not  have  re- 
covered against  the  defendant  on  the  note  given  by  the  husband  of 
the  latter. 

It  is  contended,  however,  that,  whether  the  plaintiff  can  recover  on 
the  note  or  not,  she  has  a  cause  of  action  against  the  defendant  aside 
from  the  note,  under  the  facts  alleged.  The  case  of  Farrar  v.  Lee, 
10  App.  Div.  130,  41  N.  Y.  Supp.  672,  was  very  similar  to  that  now 
under  consideration.  It  is  there  said:  "That  the  liability  rested  en- 
tirely upon  the  bond,  in  which  any  preliminary  contract  was  merged ; 
that,  as  the  bond  was  signed  by  Tanner  [the  agent]  in  his  own  name, 
and  not  as  agent  for  Lee  [the  principal],  it  was  not  competent  to  trans- 
fer by  parol  evidence,  or  in  any  other  way,  from  Tanner  to  Lee,  the 
obligation  which  Tanner  had  assumed  personally."  In  the  case  of 
Lenney  v.  Finley,  supra,  it  was  contended  that,  if  the  concealed  prin- 
cipal was  not  Hable  on  the  contract  of  lease  by  reason  of  its  being  un- 
der seal,  nevertheless,  having  occupied  the  premises  and  used  them 


Ch.  2)  RELATIONS   OF  THE  PRINCIPAL  AND   THIRD   PERSONS  5j33 

for  the  purpose  of  conducting  business,  she  was  Hable  to  the  plaintiff. 
This  contention  was  denied  by  the  court.     *     *     * 

Under  the  allegations  of  the  petition  the  trial  court  committed  no 
error  in  sustaining  the  demurrer. 

Judgment  affirmed.  

FRADLEY  v.   HITLAM). 

(United  States  Circuit  Court,  Southern  District  of  New  York,  1888. 
37  Fed.  49.  2  L.  R.  A.  749.) 

Libel  by  one  Fradley  against  Hyland  for  supplies  furnished  one 
Gibson,  respondent's  agent  in  charge  of  a  canal  boat.  Decree  for 
libelant  as  to  the  first  cause  of  action,  and  respondent  appeals. 

Wallace,  J.  The  libel  sets. forth  two  causes  of  action  for  sup- 
plies purchased  by  one  Gibson.  *  *  *  The  facts  which  appear  in 
evidence  are  these:  During  the  period  in  which  the  supplies  were 
purchased,  one  Gibson,  who  was  the  owner,  and  was  managing  certain 
canal  boats  of  his  own,  was  employed  by  the  appellant,  to  manage 
certain  canal  boats  for  the  latter.  Gibson  was  to  obtain  employment 
for  the  boats,  and  return  the  net  earnings  monthly  to  appellant,  after 
paying  for  all  repairs  and  supplies,  and  deducting  his  own  commis- 
sions. His  instructions  were  not  to  obtain  supplies  upon  credit,  but, 
if  not  in  funds  from  the  earnings,  to  call  upon  the  appellant.  Month- 
ly settlements  of  account  took  place  between  Gibson  and  the  appel- 
lant, in  which  Gibson  was  allowed  all  items  for  supplies  paid  or  con- 
tracted for  by  him  against  the  earnings  of  the  boats,  and  a  considera- 
ble fund  was  always  left  in  his  hands  by  the  appellant.  Gibson  ceased 
to  act  as  appellant's  agent  September  1,  1886.  The  supplies  were 
sold  to  him  prior  to  that  time.  The  libelant  supposed  that  Gibson  was 
the  owner  of  all  the  boats  he  was  managing,  and  dealt  with  him  as 
such,  selling  him  suppHes  for  all  indiscriminately,  charging  the  price 
to  him,  and  taking  his  notes  from  time  to  time,  or  those  of  one  Isliam, 
his  clerk.  The  claim  to  recover  the  part  of  these  supplies  used  on 
appellant's  boats  is  the  first  cause  of  action  set  forth  in  the  libel. 
*    *    * 

As  to  the  first  cause  of  action  no  question  is  made  by  the  appellant 
that  it  is  not  of  admiralty  cognizance,  but  he  insists  that  he_  is  not 
liable  as  a  principal  for  the  supplies  sold  to  his  agent  by  the  libelant, 
under  the  circumstances  of  the  case.  The  general  rule  is  familiar  that, 
when  goods  are  bought  by  an  agent,  who  does  not  at  the  time  dis- 
close that  he  is  acting  as  agent,  the  seller,  although  he  has  relied  solely 
upon  the  agent's  credit,  may,  upon  discovering  the  principal,  resort  to 
the  latter  for  payment.  But  the  rule  which  allows  the  seller  to  have 
recourse  against  an  undisclosed  principal  is  subject  to  the  qualifica- 
tion stated  by  Lord  Mansfield  in  Railton  v.  Hodgson,  4  Taunt.  576, 
and  by  Tenterden,  C.  J.,  and  Bayley,  J.,  in  Thomson  v.  Davenport, 
9  Barn.  &  C.  78.  As  stated  by  Mr.  Justice  Bayley,  it  is  "that  the 
principal  shall  not  be  prejudiced  by  being  made  personally  liable  if 
the  justice  of  the  case  is  that  he  should  not  be  personally  liable.  If 
the  principal  has  paid  the  agent,  or  if  the  state  of  accounts  between 
the  agent  here  and  the  principal  would  make  it  unjust  that  the  seller 
should  call  on  the  principal,  the  fact  of  payment  or  such  a  state  of 
accounts  would  be  an  answer  to  the  action  brought  by  the  seller, 
where  he  has  looked  to  the  responsibility  of  the  agent."  The  prin- 
cipal must  respond  to  and  may  avail  himself  of  a  contract  made  with 


534  AGENCY  (Part  2 

another  by  an  undisclosed  agent.  When  he  seeks  to  enforce  a  bar- 
gain or  purchase  made  by  his  agent  the  rule  of  law  is  that,  if  the 
agent  contracted  as  for  himself,  the  principal  can  only  claim  subject 
to  all  equities  of  the  seller  against  the  agent.  In  the  language  of 
Parke,  B. :  "He  must  take  the  contract  subject  to  all  equities,  in  the 
same  way  as  if  the  agent  were  the  sole  principal"  (Beckham  v.  Drake, 
9  Mees.  &  W.  98),  and  accordingly  subject  to  any  right  of  set-off  on 
the  part  of  the  seller  (Borries  v.  Bank,  29  L.  T.  N.  S.  689). 

Thus  the  rights  of  the  principal  to  enforce  and  his  liability  upon, 
a  contract  of  sale  or  purchase  made  by  his  agent,  without  disclosing 
the  fact  of  the  agency,  are  precisely  co-extensive,  as  regards  the  oth- 
er contracting  party,  if  the  limitation  of  his  liability  is  accurately 
stated  in  the  earlier  cases.  The  qualification  of  the  principal's  liability 
to  respond  to  his  agent's  contract,  as  stated  in  the  earlier  authorities 
mentioned,  was  narrowed  by  the  interpretation  adopted  in  Heald  v. 
Kenworthy,  10  Exch.  739,  to  the  effect  that  the  principal  is  not  dis- 
charged from  full  responsibility  unless  he  has  been  led  by  the  conduct 
of  the  seller  to  make  payment  to  or  settle  with  the  agent ;  and  the  doc- 
trine of  this  case  has  been  reiterated  in  many  subsequent  cases,  both 
in  England  and  in  this  country,  where  the  agent  did  not  contract  as 
for  himself,  but  as  a  broker,  or  otherwise  as  representing  an  undis- 
closed principal.  One  of  the  more  recent  English  cases  of  this  class 
is  Davison  v.  Donaldson,  9  O.  B.  Div.  623.  But,  as  is  shown  in  Arm- 
strong V.  Stokes,  L.  R.  7  Q.  B.  599,  the  version  of  Heald  v.  Kenwor- 
thy, while  a  correct  interpretation  of  the  rule  of  the  principal's  lia- 
bility, when  applied  to  cases  in  which  the  seller  deals  with  the  agent 
relying  upon  the  existence  of  an  undisclosed  principal,  is  not  to  be 
applied  in  those  in  which  the  seller  has  given  credit  solely  to  the  agent, 
supposing  him  to  be  the  principal.  This  case  decides  that  the  prin- 
cipal is  not  liable  if  he  has  in  good  faith  paid  the  agent  at  a  time  when 
the  seller  still  gave  credit  to  the  agent,  and  knew  of  no  one  else.  See, 
also.  Irvine  v.  Watson,  5  O.  B.  Div.  102. 

Under  such  circumstances  it  is  immaterial  that  the  principal  has  not 
been  misled  by  the  seller's  conduct  or  laches  into  paying  or  settling 
with  his  agent.  It  is  enough  to  absolve  him  from  liability  that  he  has 
in  good  faith  paid  or  settled  with  his  agent.  In  that  case  the  court 
was  dealing  with  a  contract  made  by  an  agent  which  was  within  the 
scope  of  the  authority  conferred  on  him,  but  which  was  nevertheless 
made  by  the  agent  as  though  he  were  acting  for  himself  as  princi- 
pal. In  the  present  case  Gibson  had  no  authority  at  all  to  make  a  pur- 
chase upon  the  credit  of  the  appellant.  But  as  it  appears  that  appel- 
lant, in  the  monthly  settlements  of  account  with  Gibson,  allowed  him 
out  of  the  earnings  charges  for  supplies  for  which  the  latter  had  not 
actually  paid,  he  must  be  deemed  to  have  authorized  Gibson  to  pur- 
chase supplies  for  him  upon  Gibson's  own  credit.  Under  the  circum- 
stances, if  Gibson  had  purchased  supplies,  purporting  to  act  as  an 
agent  of  appellant  in  doing  so,  appellant,  by  consenting  to  their  being 
used  for  his  benefit,  and  by  allowing  the  price  in  his  settlements  with 
Gibson,  would  have  been  liable  to  those  who  sold  to  him  upon  the  the- 
ory of  ratification.  But,  as  Gibson  did  not  assume  to  act  as  agent  in 
making  the  purchases,  there  is  no  basis  for  applying  the  doctrine  of 
ratification. 

Very  different  considerations  govern  the  case  in  which  an  agent 
who  assumes  to  represent  an  undisclosed  principal  buys  of  a  seller 


Ch.  2)  RELATIONS   OF   THE  PRINCIPAL  AND  THIRD   PERSONS  535 

upon  credit,  and  one  in  which  the  agent  assumes  to  be  acting  for 
himself,  and  the  seller  deals  with  him,  and  gives  him  exclusive  cred- 
it, supposing  him  to  be  the  only  principal.  In  the  first,  if  the  agent 
has  authority,  express  or  implied,  to  buy  upon  credit  for  the  princi- 
pal, or  ostensible  authority  to  do  so,  upon  which  the  seller  relies,  then, 
by  the  familiar  rules  of  law,  the  contract  is  the  contract  of  the  prin- 
cipal, and  is  none  the  less  so  because  the  name  of  the  principal  does 
not  happen  to  have  been  disclosed.  The  principal  is  bound  by  the 
acts  of  his  agent  within  the  scope  of  his  real  or  apparent  authority; 
and  the  seller  understands  that,  even  though  he  may  hold  the  agent 
personally  responsible,  he  may  also  resort  to  the  undisclosed  principal. 
But  in  the  other,  as  the  seller  does  not  rely  upon  any  ostensible  au- 
thority of  the  one  with  whom  he  contracts  to  represent  a  third  person, 
he  can  only  resort  to  the  third  person  as  principal,  and  charge  him  as 
such,  when  the  purchase  is  made  by  one  having  lawful  authority  to 
bind  the  third  person.  It  is  immaterial,  in  such  a  case,  whether  the 
contract  is  made  by  an  agent  who  is  employed,  in  a  continuous  employ- 
ment or  in  a  single  transaction,  by  a  principal,  or  whether  he  is  one 
who  may  be  deemed  a  general,  instead  of  a  special  agent.  "When  the 
agency  is  not  held  out  by  the  principal  by  any  "acts  or  declarations  or 
implications  to  be  general  in  regard  to  the  particular  act  or  business, 
it  must  from  necessity  be  construed  according  to  its  real  nature  and 
extent;  and  the  other  party  must  act  at  his  own  peril,  and  is  bound 
to  inquire  into  the  nature  and  extent  of  the  authority  actually  con- 
ferred. In  such  a  case  there  is  no  ground  to  contend  that  the  principal 
ought  to  be  bound  by  the  acts  of  the  agent  beyond  what  he  has  ap- 
parently authorized,  because  he  has  not  misled  the  confidence  of  the 
other  party  who  has  dealt  with  the  agent."    Story,  Ag.  §  133. 

It  is  therefore  difficult  to  understand  how,  as  an  original  proposi- 
tion, it  could  be  reasonably  maintained  that  there  is  any  liability  on 
the  part  of  one  who  has  employed  another  to  manage  his  interests  in  a 
business,  or  series  of  transactions,  in  which,  as  an  incident,  purchases 
of  goods  are  to  be  made,  has  given  him  instructions  not  to  purchase 
on  credit,  and  has  supplied  him  with  funds  to  purchase  for  cash,  to 
a  seller  who  has  sold  to  the  person  employed  upon  credit,  and  dealt 
with  him  as  the  only  principal.  *  *  *  Qf  course  he  would  be  liable, 
and  the  instructions  not  to  buy  on  credit  would  go  for  nothing,  if  he 
did  not  supply  the  agent  with  funds  to  pay  for  the  necessary  goods, 
because  in  that  case  the  agent  would  have  implied  authority  to  buy 
them  on  credit.  So,  also,  in  a  case  which  may  be  supposed,  where  a 
principal  knows,  or  ought  to  know,  that  the  agent  is  buying 'on  credit 
in  his  own  name,  yet  the  principal  takes  all  the  income  of  the  business 
without  making  any  provision  for  payment  to  those  who  have  trusted 
the  agent,  the  principal  would  be  liable,  because  in  such  a  case  his  con- 
duct would  be  inconsistent  with  good  faith,  and  he  ought  not  to  be 
permitted  to  avail  himself  of  the  benefits  without  incurring  full  re- 
sponsibility for  the  agent's  acts.  But  it  is  probably  too  late  to  con- 
sider the  questions  thus  suggested  upon  principle;  and  it  may  be  ac- 
cepted as  law  that  the  seller,  under  the  circumstances  of  a  case  Hke 
the  present,  upon  discovery  of  the  principal,  can  resort  to  and  recover 
of  him,  if  he  has  not  bona  fide  paid  the  agent  in  the  meantime,  or 
has  not  made  such  a  change  in  the  state  of  the  account  between  the 
agent  and  himself  that  he  would  sufifer  loss  if  he  should  be  compelled 
to  pay  the  seller.     Story,  Ag.  §  291 ;      *     *     *     Laing  v.  Butler,  V 


536  AGENCY  (Part  3 

Hun,  144.  In  the  case  last  cited  the  court  used  this  language: 
"Where  the  purchase  has  been  made  by  the  agent  upon  credit  au- 
thorized by  the  principal,  but  without  disclosing  his  name,  and  pay- 
ment is  subsequently  made  by  the  principal  to  the  agent  in  good  faith 
before  the  agency  is  disclosed  to  the  seller,  then  the  principal  would 
not  be  liable." 

According  to  these  authorities,  if  it  should  be  conceded  that  the 
facts  in  the  present  case  warrant  the  inference  that  the  appellant  gave 
Gibson  authority  to  buy  either  upon  his  own  credit  or  upon  the  credit 
of  the  appellant,  the  libelant  cannot  recover.  It  certainly  is  not  ma- 
terial that  the  appellant  did  not  pay  Gibson,  or  make  any  settlement 
with  him,  on  account  of  the  libelant's  demands  specifically.  It  is 
enough  that  he  did  settle  with  Gibson  for,  and  allowed  him  to  retain 
in  his  hands  sufficient  moneys  to  pay,  all  outstanding  liabilities  con- 
tracted by  him  for  the  appellant's  benefit,  including  the  demands  of 
the  libelant.  At  the  time  of  the  last  settlement  the  appellant  had  paid 
the  libelant's  demands  and  all  outstanding  liabilities  contracted  by  Gib- 
son as  between  Gibson  and  himself,  and  this  was  before  the  libelant 
knew  any  principal  in  the  purchases  other  than  Gibson  himself. 
*     *    * 

The  libel  is  dismissed,  with  the  costs  of  this  court  and  of  the  Dis- 
trict Court.  

HUBBARD  V.  TEN  BROOK. 

(Supreme  Court  of  Pennsylvania,  1889.     124  Pa.  291,  16  Atl.  817, 
2  L.  R.  A.  823,  10  Am.  St.  Rep.  585.) 

Mitchell,  J.  *  *  *  The  agency,  though  stated  in  the  objection- 
able form  of  an  inference  from  the  previously  recited  evidence  is 
clearly  intended  to  be  averred,  and  may  fairly  be  so  treated.  Taking 
the  statement,  therefore,  in  its  plain  intent,  it  sets  out  that  plaintiff  sold 
and  delivered  a  quantity  of  hams  to  one  Sides,  who  was  conducting  a 
grocery  business  in  his  own  name,  but  with  the  property  and  as  the 
agent  of  defendants.  The  defendants  filed  an  affidavit  of  defense,  and 
a  supplementary  one,  the  substance  of  which  is  that  *' Sides  was  not 
the  agent  of  defendants  to  purchase  from  plaintiffs,  or  any  one  else," 
and  that  he  "was  employed  as  salesman  only  by  said  defendants,  with- 
out any  authority  whatever  to  act  for  or  bind  defendants  for  the  pur- 
chase of  any  goods  or  merchandise  upon  credit  of  the  said  defend- 
ants." We  have  thus  the  question  presented  whether  an  agent  may 
be  put  forward  to  conduct  a  separate  business  in  his  own  name,  and 
the  principal  escape  liability  by  a  secret  limitation  on  the  agent's  au- 
thority to  purchase.  The  answer  is  not  at  all  doubtful.  A  man  con- 
ducting an  apparently  prosperous  and  profitable  business  obtains  credit 
thereby,  and  his  creditors  have  a  right  to  suppose  that  his  profits  go 
into  his  assets  for  their  protection  in  case  of  a  pinch  or  an  unfavora- 
ble turn  in  the  business.  To  allow  an  undisclosed  principal  to  absorb 
the  profits,  and  then,  when  the  pinch  comes,  to  escape  responsibility 
on  the  ground  of  orders  to  his  agent  not  to  buy  on  credit,  would  be  a 
plain  fraud  on  the  public.  No  exact  precedent  has  been  cited.  None 
is  needed. 

The  rule  so  vigorously  contended  for  by  the  plaintiiT  in  error,  that 
those  dealing  with  an  agent  are  bound  to  look  to  his  authority,  is  freely 
conceded;  but  this  case  falls  within  the  equally  established  rule  that 
those  clothing  an  agent  with  apparent  authority  are,  as  to  parties  deal- 


Ch.  2)  RELATIONS  OF  THE   PRINCIPAL   AND   THIRD   PERSONS  537 

ing  on  the  faith  of  such  authority,  conclusively  estopped  from  deny- 
ins;-  it.  The  affidavits  set  up  no  available  defense,  and  the  judgment  is 
affirmed. 


SECTION  3.— RATIFICATION 


DEMPSEY    V.    CHAMBERS. 

(Supreme  Judicial  Court  of  Massachusetts,  1891.     154  Mass.  330, 
28  N.  E.  279,  13  L.  R.  A.  219,  26  Am.  St.  Rep.  249.) 

Holmes,  J.  This  is  an  action  of  tort  to  recover  damages  for  the 
breaking  of  a  plate-glass  window.  The  glass  was  broken  by  the  neg- 
ligence of  one  McCullock  while  delivering  some  coal  which  had  been 
ordered  of  the  defendant  by  the  plaintiff.  It  is  found  as  a  fact  that 
McCullock  was  not  the  defendant's  servant  when  he  broke  the  win- 
dow, but  that  the  "delivery  of  the  coal  by  [him]  was  ratified  by  the  de- 
fendant, and  that  such  ratification  made  McCullock  in  law  the  agent 
and  servant  of  the  defendant  in  the  delivery  of  the  coal."  On  this 
finding  the  court  ruled  "that  the  defendant,  by  his  ratification  of  the 
delivery  of  the  coal  by  McCullock,  became  responsible  for  his  negli- 
gence in  the  delivery  of  the  coal."  The  defendant  excepted  to  this 
ruling,  and  to  nothing  else.  We  must  assume  that  the  finding  was  war- 
ranted by  the  evidence,  a  majority  of  the  court  being  of  the  opinion 
that  the  bill  of  exceptions  does  not  purport  to  set  forth  all  the  evi- 
dence on  which  the  finding  was  made.  Therefore  the  only  question 
before  us  is  as  to  the  correctness  of  the  ruling  just  stated. 

If  we  were  contriving  a  new  code  to-day  we  might  hesitate  to  say 
that  a  man  could  make  himself  a  party  to  a  bare  tort  in  any  case  merely 
by  assenting  to  it  after  it  had  been  committed.  But  we  are  not  at  lib- 
erty to  refuse  to  carry  out  to  its  consequences  any  principle  which  we 
believe  to  have  been  part  of  the  common  law  simply  because  the  grounds 
of  policy  on  which  it  must  be  justified  seem  to  us  to  be  hard  to  find 
and  probably  to  have  belonged  to  a  different  state  of  society. 

It  is  hard  to  explain  why  a  master  is  liable  to  the  extent  that  he  is 
for  the  negligent  acts  of  one  who  at  the  time  really  is  his  servant,  act- 
ing within  the  general  scope  of  his  employment.  Probably  master  and 
servant  are  "feigned  to  be  all  one  person"  by  a  fiction  which  is  an 
echo  of  the  patria  potestas  and  of  the  English  frankpledge.  *  *  * 
Possibly  the  doctrine  of  ratification  is  another  aspect  of  the  same  tra- 
dition. The  requirement  that  the  act  should  be  done  in  the  name  of 
the  ratifying  party  looks  that  way.     *     *     * 

The  earliest  instances  of  liability  by  way  of  ratification  in  the  Eng- 
lish law,  so  far  as  we  have  noticed,  were  where  a  man  retained  prop- 
erty acquired  through  the  wrongful  act  of  another.  *  *  *  gy^-  i^ 
these  cases  the  defendant's  assent  was  treated  as  relating  back  to 
the  original  act,  and  at  an  early  date  the  doctrine  of  relation  was 
carried  so  far  as  to  hold  that,  where  a  trespass  would  have  been  justi- 
fied if  it  had  been  done  by  the  authority  by  which  it  purported  to  have 
been  done,  a  subsequent  ratification  might  also  justify  it.     *     *     * 

If  we  assume  that  an  alleged  principal,  by  adopting  an  act  which  was 
unlawful  when  done  can  make  it  lawful,  it  follows  that  he  adopts  it  at 
his  peril,  and  is  liable  if  it  should  turn  out  that  his  previous  command 
would  not  have  justified  the  act.     It  never  has  been  doubted  that  a 


538  AGENCY  (Part  2 

man's  subsequent  agreement  to  a  trespass  done  in  his  name  and  for  his 
benefit  amounts  to  a  command  so  far  as  to  make  him  answerable. 
*     *     * 

Doubts  have  been  expressed,  which  we  need  not  consider,  whether 
this  doctrine  apphed  to  a  case  of  a  bare  personal  tort.  *  *  *  If 
a  man  assaulted  another  in  the  street  out  of  his  own  head,  it  would 
seem  rather  strong  to  say  that  if  he  merely  called  himself  my  serv- 
ant, and  I  afterwards  assented,  without  more,  our  mere  words  would 
make  me  a  party  to  the  assault,  although  in  such  cases  the  canon  law 
excommunicated  the  principal  if  the  assault  was  upon  a  clerk.  *  *  * 
Perhaps  the  application  of  the  doctrine  would  be  avoided  on  the  ground 
that  the  facts  did  not  show  an  act  done  for  the  defendant's  bene- 
1^^      *     *     * 

But  the  language  generally  used  by  judges  and  text-writers,  and 
such  decisions  as  we  have  been  able  to  find,  is  broad  enough  to  cover 
a  case  like  the  present,  when  the  ratification  is  established.     *     *     * 

The  question  remains  whether  the  ratification  is  established.  As 
we  understand  the  bill  of  exceptions,  McCullock  took  on  himself  to 
deliver  the  defendant's  coal  for  his  benefit,  and  as  his  servant,  and  the 
defendant  afterwards  assented  to  McCullock's  assumption.  The  rati- 
fication was  not  directed  specifically  to  McCullock's  trespass,  and  that 
act  was  not  for  the  defendant's  benefit,  if  taken  by  itself,  but  it  was 
so  connected  with  McCullock's  employment  that  the  defendant  would 
have  been  liable  as  master  if  McCullock  really  had  been  his  servant 
when  delivering  the  coal.  We  have  found  hardly  anything  in  the 
books  dealing  with  the  precise  case,  but  we  are  of  opinion  that  con- 
sistency with  the  whole  course  of  authority  requires  us  to  hold  that 
the  defendant's  ratification  of  the  employment  established  the  rela- 
tion of  master  and  servant  from  the  beginning,  with  all  its  incidents,  in- 
cluding the  anomalous  liability  for  his  negligent  acts.  *  *  *  f^ie 
ratification  goes  to  the  relation,  and  establishes  it  ab  initio.  The  rela- 
tion existing,  the  master  is  answerable  for  torts  which  he  has  not 
ratified  specifically,  just  as  he  is  for  those  which  he  has  not  com- 
manded, and  as  he  may  be  for  those  which  he  has  expressly  forbid- 
den.    *     *     * 

For  these  reasons,  in  the  opinion  of  a  majority  of  the  court,  the 
exceptions  must  be  overruled. 


ROSEBERRY   et  al.  v.  HART-PARR   CO. 
(Supreme  Court  of  Minnesota,  1920.     176  N.  W.  175,  145  Minn.  142.) 

Action  by  W.  A.  Roseberry  and  E.  A.  Bjork,  copartners  doing 
business  under  the  name  and  style  of  Roseberry  &  Bjork,  against  the 
Hart-Parr  Company.  Verdict  for  plaintiffs,  motion  for  new  trial 
denied,  and  defendant  appeals.     Order  affirmed. 

Lees,  C.  In  September,  1917,  plaintifils  signed  an  order  for  the 
purchase  from  defendant  of  an  oil  tractor.  They  claim  that  it  was 
represented  to  them  that  the  factory  or  wholesale  price  of  the  tractor 
was  $2,915.  This  was  the  price  specified  in  the  order,  and  it  was  tO' 
be  paid  by  the  execution  of  three  notes  of  $800  each  and  by  the  deliv- 
ery of  a  Universal  tractor,  valued  at  $515,  which  plaintiffs  owned.  In 
obtaining  the  order,  defendant  was  represented  by  its  agents,  Mjoen 
and  Schweich,  The  order  was  accepted,  the  notes  executed,  and  the- 
Universal  tractor  delivered  and  the  tractor  ordered  was  shipped  to 


Ch.  2)  RELATIONS   OP   THE   PRINCIPAL   AND   THIRD   PERSONS  539 

plaintiffs  who  paid  the  freight  charges,  amounting  to  $124.  In  April, 
1918,  one  of  the  notes  being  overdue  and  unpaid,  it  was  agreed  that 
plaintiffs  should  return  the  tractor  and  that  defendant  should  sell  it 
and  credit  them  on  their  notes  with  the  amount  received.  This  agree- 
ment was  carried  out;  the  tractor  being  resold  for  $1,750.  In  Jan- 
uary, 1919,  plaintiffs  learned  of  facts  which  led  them  to  believe  that 
the  factoi-y  price  of  the  tractor  when  they  ordered  it  was  $1,750  in- 
stead of  $2,915,  and  in  February  they  brought  this  action,  demand- 
ing judgment  for  the  unpaid  balance  of  their  notes  together  with  $515 
for  their  old  tractor  and  $124  freight  paid  on  the  new  one,  or,  in 
lieu  thereof,  judgment  for  the  return  and  cancellation  of  the  notes 
and  for  $639  and  interest. 

The  complaint  alleged  that  to  induce  plaintiffs  to  sign  the  or- 
der, defendant's  agents  falsely  represented  that  the  factory  price  of 
the  tractor  was  $2,915;  that  the  representation  was  made  with  intent 
to  deceive  plaintiffs ;  that  they  believed  it  to  be  true  and  were  thereby 
induced  to  make  the  purchase ;  and  that  in  fact  such  price  was  only 
$1,750.  There  was  a  trial  by  jury,  and  plaintiff's  had  a  verdict  for 
the  full  amount  of  their  claim.  A  motion  for  a  new  trial  was  denied, 
and  defendant  appeals.     *     *     * 

Plaintiffs  were  allowed,  over  defendant's  objection,  to  testify  that 
they  were  induced  to  sign  the  order  because  Mjoen  told  them  he  would 
sell  them  the  tractor  at  the  wholesale  or  factory  price  and  save  them 
the  dealer's  commission,  and  that  such  price  was  $2,915.  The  second 
contention  is  that  the  court  erred  in  receiving  this  testimony  in  view 
of  the  following  provisions  contained  in  the  order ;  "  *  *  *  No 
employe  of  Hart-Parr  Company  unless  authorized  in  writing  from 
party  duly  empowered  to  delegate  such  authority,  has  any  authority 
to  bind  the  company  by  any  statement,  act,  or  agreement."     *     *     * 

It  is  claimed  that  it  precludes  plaintiffs  from  asserting  that  defend- 
ant was  bound  by  the  alleged  misrepresentation  because  they  had  no- 
tice that  defendant  would  not  recognize  or  be  bound  by  any  state- 
ments made  by  its  agents  unless  they  were  printed  in  the  order  blank 
it  supplied  or  were  authorized  in  writing  by  the  company.  This  con- 
tention runs  counter  to  a  settled  principle  of  the  law  of  agency.  It  is 
this :  When  a  principal  retains  the  benefits  of  a  contract  obtained  for 
him  by  his  agent,  he  cannot  repudiate  the  acts  of  the  agent  which  in- 
duced the  other  party  to  the  contract  to  enter  into  it  on  the  ground  that 
such  acts  were  unauthorized.  Defendant  is  here  insisting  that  it  has 
the  right  to  retain  plaintiffs'  notes  and  the  Universal  tractor.  It  may 
be  granted  that  in  the  first  instance  it  neither  authorized  nor  knew  of 
the  representations  made  by  its  agents,  but  when  this  action  was 
brought  and  it  asserted  a  right  to  the  fruits  of  their  acts,  even  though 
they  were  done  without  authority,  it  assumed  the  same  responsibility 
for  them  as  though  they  had  been  authorized  and  were  within  its 
knowledge  originally.  This  court  has  stated  the  rule  substantially  as 
follows :  One  who  adopts  the  unauthorized  act  of  another  done  in 
his  behalf  and  receives  the  benefits  thereof  is  held  to  adopt  and  ratify 
the  instrumentalities  by  which  such  benefits  were  obtained.  By  ac- 
cepting a  contract  procured  by  the  fraud  of  his  agent,  even  though 
the  agent  acted  contrary  to  his  authority,  he  takes  the  contract  with 
whatever  taint  attached  to  its  origin.     *     *     * 

The  claim  that,  if  the  alleged  misrepresentation  may  be  shown,  a 
new  term  is  added  to  the  order  in  violation  of  the  parol  evidence  rule, 


540  AGENCY  (Part  2 

cannot  be  sustained.  Parol  evidence  is  always  admissible  to  show 
that  a  party  to  a  contract  was  induced  to  enter  into  it  through  fraudu- 
lent representations.  The  purpose  of  such  evidence  is  to  show  that  the 
contract  was  procured  by  fraud  and  impeach  its  validity  as  a  whole, 
and  not  to  change  or  modify  its  terms.  *  *  *  We  hold  that  the 
testimony  under  consideration  was  properly  received  and  that  defend- 
ant was  not  entitled  to  a  dismissal  at  the  close  of  plaintiff's  case. 
*    *    * 

Finding  no  error  in  the  record  the  order  denying  a  new  trial  is  af- 
firmed. 

BAILEY  et  al.  v.  PARDRIDGE  et  al. 

(Supreme  Court  of   Illinois,  1890.     134  111.   ISS,  27   N.   E.  89.) 
Assumpsit  by  Joel  J.  Bailey  &  Co.  against  C.  W.  &  E.  Pardridge, 
for  goods  sold  to  defendants  for  plaintiffs  by  one  Holmes,  a  salesman 
for  plaintiffs.    Defendants  obtained  judgment,  which  was  affirmed  by 
the  appellate  court.     Plaintiffs  bring  error. 

Craig,  J.    The  question  presented  by  this  record  is  one  not  entire- 
ly free  from  difficulty.    As  to  the  main  features  of  the  case  there  is  no 
substantial  controversy  in  regard  to  the  facts.     Holmes  had  posses- 
sion of  the  samples,  and  claimed  authority  to  sell  and  receive  the 
pay  therefor.     The  defendants  purchased  the  samples,  paid  Holmes 
for  them  by  check,  pavable  to  Joel  J.  Bailey  &  Co.  or  bearer,  and  he 
delivered  the  goods.     So  far  as  appears,  defendants  acted  in  perfect 
good  faith,   relying  upon  the  representations  of   Holmes.     *     *     * 
But  it  may  be  said  that  Holmes  was  not  empowered  by  plaintiffs  to  sell 
the  goods ;   that  he  merely  held  the  samples  as  a  means  to  solicit  or- 
ders.   A  sufficient  answer  to  this  position  is  that  the  acts  of  plaintiffs 
since  the  sale  may  be  regarded  as  a  ratification.     Where  the  owner, 
where  goods  have  been  sold  without  authority,  sues  the  purchaser  for 
the  amount  of  the  contract  price  for  which  the  goods  were  sold,  the 
sale,  although  unauthorized,  will  be  regarded  as   ratified.     *     *     * 
In  the  case  under  consideration,  as  soon  as  plaintiffs  learned  of  the 
sale  they  made  out  a  bill  according  to  the  contract  price,  presented  it 
to  the  defendants,  and  demanded  payment  for  the  goods.     This  was 
followed  by  the  present  action  of  assumpsit  to  collect  the  amount 
for  which  the  goods  were  sold.     If,  therefore,  Holmes  made  the  sale 
without  direct  authority,  these  acts  of  the  plaintiffs,  after  full  knowl- 
edge of  the  sale,  may  be  treated  as  a  ratification  of  the  sale  made  by 
Holmes.     The  case  then  stands  in  this  position:     Holmes  had  pos- 
session of  the  goods,  claiming  the  right  to  sell.    He  called  on  the  de- 
fendants, and  they  bought  the  goods.    He  delivered  the  goods,  collect- 
ed the  pay,  and  gave  defendants  a  receipt  acknowledging  full  pay- 
ment.   Plaintiffs  first  deny  authority  to  sell,  but  by  their  acts  concede 
the  power  of  sale,  but  they  deny  authority  to  collect  the  pay  for  the 
goods.    This  they  cannot  do.    The  power  of  sale,  or  the  sale  without 
authority,  subsequently  ratified,  carried  with  it  the  implied  power  to 
receive  payment.     Had  the  sale  been  repudiated  by  the  plaintiffs,  and 
an  action  brought  to  recover  the  goods,  a  different  question  would 
arise ;    but  that  course  was  not  pursued.     *     *     * 
The  judgment  of  appellate  court  will  be  affirmed. 


Ch.St)         RELATIONS   OF   THE  PRINCIPAL  AND   THIRD   PERSONS  541 


HENRY   et   al.   v.    HEEB. 

(Supreme  Court  of  Indiana,  1888.     114  Ind.  .275,  16  N.  E.  606, 
5  Am,   St.  Rep.  613.) 

MiTchi;ll,  C.  J.  This  was  a  suit  by  Nicholas  Heeb  against  Henry 
Heeb,  John  F.  Schonert,  and  James  D.  Henry,  to  recover  the  amount 
of  two  promissory  notes  signed  by  Heeb  and  Schonert,  who  were  part- 
ners, as  principals,  and  by  James  D.  Henry,  as  surety.  The  con- 
troversy is  between  the  plaintiff,  and  the  appellant,  Henry,  and  relates 
exclusively  to  the  note  described  in  the  second  paragraph  of  the  com- 
plaint, the  execution  of  which  Henry  denied  under  oath.  To  the  de- 
nial of  the  latter  the  plaintiff  replied,  in  substance,  that  the  defendant, 
after  having  obtained  full  knowledge  that  the  plaintiff  held  the  note  in 
controversy  ratified  and  confirmed  the  same,  and  promised  to  pay  it, 
and  accepted  a  chattel  mortgage  covering  the  partnership  property  of 
Heeb  &  Schonert,  the  principal  debtors,  as  indemnity  against  any  lia- 
bility which  might  exist  on  account  of  his  having  become  surety  on  the 
note.  This  was  held  to  be  a  sufficient  reply.  *  *  *  Relevant  to  the 
issue  made  by  the  plea  of  non  est  factum,  and  the  reply  thereto,  and 
to  the  evidence  pertaining  to  that  feature  of  the  case,  the  court  in- 
structed the  jury,  in  substance,  that  if  the  appellant,  after  having  ob- 
tained full  knowledge  upon  the  Subject  of  whether  or  not  he  executed 
the  note,  ratified  and  confirmed  the  same,  and  promised  to  pay  it,  he 
would  be  liable  for  the  amount  thereof.  The  judgment  was  favorable 
to  the  plaintiff  below.    *    *    * 

It  does  not  appear  that  the  promise  of  the  appellant  induced  the 
plaintiff"  to  change  his  position  in  any  manner,  or  that,  in  reliance  there- 
on, he  surrendered  any  right  or  benefit  whatever.  There  is,  therefore, 
no  element  of  estoppel  in  the  case  as  presented  in  the  pleading  or  in- 
struction of  the  court.'  The  appellant  contends  that  a  person  whose 
name  has  been  forged  to  a  note  cannot  ratify  or  adopt  the  criminal  act 
so  as  to  become  bound,  unless  facts  have  intervened  which  create  an 
estoppel,  and  preclude  him  from  setting  up  as  a  defense  that  his  sig- 
nature is  not  genuine.  There  appears  to  be  an  irreconcilable  conflict 
in  the  decisions  of  the  courts  of  last  resort  on  this  question.  Thus,  in 
Wellington  v.  Jackson,  121  Mass.  157,  the  supreme  judicial  court  of 
Massachusetts,  following  its  earlier  decisions,  held  that  one  whose 
signature  had  been  forged  to  a  promissory  note,  who,  yet  with  knowl- 
edge of  all  the  circumstances,  and  intending  to  be  bound  by  it,  ac- 
knowledged the  signatin-e,  and  thus  assumed  the  note  as  his  own,  was 
bound  to  the  same  extent  as  if  the  note  had  been  signed  by  him  origi- 
nally, without  regard  to  the  question  whether  or  not  the  acknowledg- 
ment amounted  to  an  estoppel  in  pais.  *  *  *  There  are  other  cases 
which,  while  seeming  to  lend  support  to  the  doctrine  that  a  forged 
signature  may  be  ratified,  nevertheless  turn  upon  the  proposition  that 
the  holder  of  the  note  had  in  some  way  acted  in  reliance  upon  the 
promise  or  admission  of  the  person  whose  name  appeared  on  the  note, 
or  that  the  latter  had  received  or  participated  in  the  consideration  for 
which  the  note  had  been  given,  and  was  therefore  estopped  to  deny  the 
genuineness  of  his  signature.  Still  other  decisions  depend  upon  prin- 
ciples which  distinguish  them  from  cases  involving  the  doctrine  of 
ratification  or  adoption  of  forged  instruments  purely.  Bank  v.  Keene, 
53  Me.  103;  *  *  *  Livings  v.  Wiler,  32  111.  387;  Bank  v.  War- 
ren, 15  N.  Y.  577.    *    *    * 


542  AGENCY  (Part  3 

It  is  a  well-established  rule  of  law  that  if  one  not  assuming  to  act 
for  himself  does  an  act  for  or  in  the  name  of  another,  upon  an  assump- 
tion of  authority  to  act  as  the  agent  of  the  latter,  even  though  without 
any  precedent  authority  whatever,  if  the  person  in  whose  name  the  act 
was  performed  subsequently  ratifies  or  adopts  what  has  been  so  done, 
the  ratification  relates  back  and  supplies  original  authority  to  do  the 
act.  In  such  a  case  the  principal  is  bound  to  the  same  extent  as  if 
the  act  had  been  done  in  the  first  instance  by  his  previous  authority ; 
and  this  is  so  whether  the  act  be  detrimental  to  the  principal  or  to  his 
advantage,  or  whether  it  be  founded  in  tort  or  contract.  The  reason 
is  that  there  was  an  open  assumption  to  act  as  the  agent  of  the  party 
who  subsequently  adopted  the  act.  The  agency  having  been  knowingly 
ratified,  the  ratification  becomes  equivalent  to  original  authority. 
*  *  *  So,  if  a  contract  be  voidable  on  account  of  fraud  practiced 
on  one  party,  or  if,  for  any  reason,  it  might  be  avoided,  yet  if  the  party 
having  the  right  to  avoid  the  contract,  being  fully  informed,  deliber- 
ately confirms  or  ratifies  it,  even  though  this  be  done  without  a  new 
consideration,  and  after  acts  have  been  done  which  would  have  re- 
leased the  person  affected,  the  party  thus  ratifying  is  thereby  preclud- 
ed from  obtaining  the  relief  he  otherwise  might  have  had.    *    *    * 

The  ratification  or  adoption  of  a  forged  instrument,  or  of  a  con- 
tract which  is  prohibited  by  law,  or  made  in  violation  of  a  criminal 
statute,  involves  altogether'  different  principles.  One  who  commits 
the  crime  of  forgery  by  signing  the  name  of  another  to  a  promissory 
note  does  not  assume  to  act  as  the  agent  of  the  person  whose  name  is 
forged.  Upon  principle,  there  would  seem  to  be  no  room  to  apply  the 
doctrine  of  ratification  or. adoption  of  the  act  in  such  a  case.  Where 
the  act  done  constitutes  a  crime,  and  is  committed  without  any  pre- 
tense of  authority,  it  is  difficult  to  understand  how  one  \yho  is  in  a 
sense  the  victim  of  the  criminal  act  may  adopt  or  ratify  it,  so  as  to 
become  bound  by  a  contract  to  Vv^hich  he  is  to  all  intents  and  purposes 
a  stranger,  and  which,  as  to  him,  was  conceived  in  a  crime,  and  is  to- 
tally whhout  consideration.  As  has  been  well  said,  it  is  impossible, 
in  such  a  case,  to  attribute  any  motive  to  the  ratifying  party  but  that 
of  concealing  the  crime,  and  suppressing  the  prosecution;  "for 
why  should  a  man  pay  money  without  consideration  when  he  him- 
self had  been  wronged,  unless  constrained  by  desire  to  shield  the  guil- 
ty party  ?"  The  distinction  made  in  many  well-considered  cases  seems 
to  be  this :  Where  the  act  of  signing  constitutes  the  crime  of  forgery, 
while  the  person  whose  name  has  been  forged  may  be  estopped  by  his 
admissions,  upon  which  others  may  have  changed  their  relations,  from 
pleading  the  truth  of  the  matter,  to  their  detriment,  the  act  from 
which  the  crime  springs  cannot,  upon  consideration  of  public  policy,  be 
ratified  without  a  new  consideration  to  support  it.  *  *  *  In  case 
of  a  known  or  conceded  forgery,  we  are  unable  to  discover  any  princi- 
ple upon  which  a  subsequent  promise  by  the  person  whose  name  was 
forged  can  be  held  binding,  in  the  absence  of  an  estoppel  in  pais,  or 
without  a  new  consideration  for  the  promise.     *     *    * 

The  ratification  which  the  law  interdicts,  relates  only  to  such  acts 
as  clearly  appear  to  have  been  done  in  violation  of  a  criminal  stat- 
ute; the  motive  of  the  ratifying  party  being,  presumably,  the  con- 
cealment of  the  crime,  or  the  suppression  of  its  prosecution.  Where, 
however,  as  in  the  present  case,  the  act  ratified  is  of  an  ambiguous 
character,  and  may  as  well  be  attributed  to  a  mistaken  assumption 


Ch.  2)  RELATIONS   OF   THE   PRINCIPAL   AND   THIRD   PERSONS  543 

of  authority,  as  to  a  purpose  to  commit  a  crime,  public  policy  does 
not  prohibit  the  adoption  or  ratification  of  the  act.  Nor  can  it  be  said 
to  be  without  consideration,  especially  where,  as  in  the  present  case, 
indemnity*  has  been  accepted.  These  conclusions  lead  to  an  affirm- 
ance of  the  judgment.    *    *    * 


KEIGHLEfY,   MAXSTED   &   CO.   v.   DURANT. 

(House  of  Lords,  1901.     [19011  App.  Cas.  240,  70  L.  J.  K.  B.  [N.  S.]  662, 
84  L.  T.  [N.  S.]   777,  17  Times  L.  R.  527,  1  B.  R.  C.  351.) 

Lord  DavEy.  My  Lords,  the  facts  necessary  to  raise  the  question 
of  law  on  which  the  learned  judges  have  differed  may  be  thus  stated: 
Roberts  made  a  contract  in  his  own  name  to  purchase  a  large  quantity 
of  wheat  from  Durant  &  Company,  the  present  respondents.  Roberts 
bought  on  his  own  account,  and  without  any  authority  from  the  ap- 
pellants to  buy  the  wheat  on  joint  account  with  them,  but  (it  may  be 
assumed  for  the  purpose  of  the  present  judgment)  intending  that  the 
appellants  should  have  the  benefit  of  the  contract  on  joint  account  with 
himself,  if  they  chose  to  accept  it,  and  hoping  and  expecting  that  they 
would  do  so.  The  appellants  did  afterwards  agree  with  Roberts  to 
take  to  the  purchase  on  joint  account  with  him.  Roberts  was  unable 
to  fulfill  his  contract,  and  thereupon  the  respondent  sued  the  appel- 
lants, as  undisclosed  principals.  At  the  close  of  the  plaintiffs'  case  the 
learned  counsel  for  the  appellants  submitted  that  there  was  no  case, 
and,  after  some  argument.  Day,  J.,  gave  judgment  for  the  appellants, 
holding  that  there  had  been  a  failure  to  prove  any  ratification  by  them 
— meaning,  as  appears  from  what  he  had  previously  said,  that  no  rati- 
fication was  legally  possible  in  the  circumstances. 

The  question  of  law,  therefore,  is  whether  a  contract  made  by  a 
man  purporting  and  professing  to  act  on  his  own  behalf  alone,  and  not 
on  behalf  of  a  principal,  but  having  an  undisclosed  intention  to  give 
the  benefit  of  the  contract  to  a  third  party,  can  be  ratified  by  that 
third  party,  so  as  to  render  him  able  to  sue  or  liable  to  be  sued  on 
the  contract.  In  the  course  of  his  judgment  Collins,  L.  T-,  says  that 
the  point  has  never  been  actually  decided,  though  he  admits  there  are 
numerous  dicta  upon  it  which  have  become  the  foundation  of  state- 
ments in  text-books  more  or  less  adverse  to  the  present  respondent's 
contention,  and  he  says  that  the  question  'must  now  be  determined  on 
principle.     *     *     * 

Lord  Macnaghtun.  *  *  *  As  a  general  rule,  only  persons 
who  are  parties  to  a  contract,  acting  either  by  themselves  or  by  an 
authorized  agent,  can  sue  or  be  sued  on  the  contract.  A  stranger  can- 
not enforce  the  contract,  nor  can  it  be  enforced  against  a  stranger. 
That  is  the  rule ;  but  there  are  exceptions.  The  most  remarkable  ex- 
ception, I  think,  results  from  the  doctrine  of  ratification  as  established 
in  English  law.  That  doctrine  is  thus  stated  bv  Tindal.  C.  J.,  in  WW- 
son  v.  Tumman  (1843)  6  Mann.  &  G.  at  p.  242,  6  Scott,  N.  R.  894,  1 
Dowl.  &  L.  513,  12  L.  J.  C.  P.  N.  S.  306:  "That  an  act  done,  for  an- 
other, by  a  person,  not  assuming  to  act  for  himself,  but  for  such 
other  person,  though  without  any  precedent  authority  whatever,  be- 
comes the  act  of  the  principal,  if  subsequently  ratified  by  him,  is  the 
known  and  well-established  rule  of  law.  In  that  case  the  principal  is 
bound  by  the  act,  whether  it  be  for  his  detriment  or  his  advantage,  and 


544  AGENCY  (Part  3 

whether  it  be  founded  on  a  tort  or  on  a  contract,  to  the  same  effect  as 
by,  and  with  all  the  consequences  which  follow  from,  the  same  act  done 
by  his  previous  authority."  And  so  by  a  wholesome  and  convenient 
fiction,  a  person  ratifying  the  act  of  another,  who,  without  authority, 
has  made  a  contract  openly  and  avowedly  on  his  behalf,  is  deemed 
to  be,  though  in  fact  he  was  not,  a  party  to  the  contract.  Does  the 
fiction  cover  the  case  of  a  person  who  makes  no  avowal  at  all,  but 
assumes  to  act  for  himself  and  no  one  else?  If  Tindal,  C.  J.'s  state- 
ment of  the  law  is  accurate,  it  would  seem  to  exclude  the  case  of  a 
person  who  may  intend  to  act  for  another,  but  at  the  same  time  keeps 
his  intention  locked  up  in  his  own  breast;  for  it  cannot  be  said  that 
a  person  who  so  conducts  himself  does  assume  to  act  for  anybody  but 
himself.  But  ought  the  doctrine  of  ratification  to  be  extended  to  such 
a  case?  On  principle  I  should  say  certainly  not.  It  is,  I  think,  a 
well  established  principle  in  English  law  that  civil  obligations  are 
not  to  be  created  by,  or  founded  upon  undisclosed  intentions.  That 
is  a  very  old  principle.     *     *     * 

Lord  Robertson.  *  *  *  With  tlie  Master  of  the  Rolls,  and 
in  his  words,  I  hold  that,  "unless  the  contract  made  by  the  unauthor- 
ized agent  purports  or  professes  *  *  *  to  have  been  entered  into 
on  behalf  of  another  *  *  *  then  that  contract  made  by  the  un- 
authorized agent  was  not  capable  of  being  ratified  by  a  stranger  to  it." 
To  speak  of  the  "purporting  or  professing"  as  if  this  were  one  condi- 
tion, more  or  less,  or  ratification,  seems  to  me  to  be  rather  an  under- 
statement. All  are  agreed  that  there  must  be  some  special  relation  be- 
tween the  ratifier  and  the  contract  other  than  and  antecedent  to  his 
claiming  the  contract.  To  hold  otherwise  would  be  to  admit  extrava- 
gant results.  It  seems  to  me  that  the  whole  hypothesis  of  ratification 
is,  that  the  ultimate  ratifier  is  already  in  appearance  the  contractor,  and 
that  by  ratifying  he  holds  as  done  for  him  what  already  bore,  pur- 
ported or  professed  to  be  done  for  him.  *  *  *  Whether  the  un- 
authorized agent  be  marked  out  as  an  agent  by  what  he  says,  or  by 
what  he  wears,  is,  of  course,  a  mere  matter  of  circumstance  and  of 
evidence ;  but  an  agent  he  must  be  known  to  be,  and  as  agent  he  must 
act.     *     *     * 

Lord  LindlEy.  *  *  *  The  explanation  of  the  doctrine  that  an 
undisclosed  principal  can  sue  and  be  sued  on  a  contract  made  in  the 
name  of  another  person  with  his  authority  is,  that  the  contract  is  in 
truth,  although  not  in  form,  that  of  the  undisclosed  principal  himself. 
Both  the  pirincipal  and  the  authority  exist  when  the  contract  is  made ; 
and  the  person  who  makes  it  for  him  is  only  the  instrument  by  which 
the  principal  acts.  In  allowing  him  to  sue  and  be  sued  upon  it,  effect 
is  given,  so  far  as  he  is  concerned,  to  what  is  true  in  fact,  although  that 
truth  may  not  have  been  known  to  the  other  contracting  party. 
*     *     * 

The  reasons  upon  which  a  real  principal  not  disclosed  can  sue  or  be 
sued  on  a  contract  made  on  his  behalf  by  an  agent  acting  with  his 
authority  have  no  application  to  contracts  made  by  one  person  for 
another,  but  without  any  authority  from  him.  Some  other  reason 
must  be  found  to  permit  a  person  to  sue  or  be  sued  upon  a  contract 
not  entered  into  by  him  through  an  agent  or  otherwise. 

The  principle  relied  on,  and  the  only  principle  which  by  our  law 
can  be  invoked  with  any  chance  of  success,  is  that  known  as  ratifica- 
tion, by  which  an  approval  of  what  has  been  done  is  sometimes  treated 


Ch.  2)  RELATIONS   OF   THE   PRINCIPAL   AND   THIRD   PERSONS  545 

as  equivalent  to  a  previous  authority  to  do  it.  The  mere  statement  of 
the  general  nature  of  what  is  meant  by  ratification  shows  that  it  rests 
on  a  fiction.  Where  a  man  acts  with  an  authority  conferred  upon  him, 
no  fiction  is  introduced ;  but  where  a  man  acts  without  authority  and 
an  authority  is  imputed  to  him  a  fiction  is  introduced,  and  care  must 
be  taken  not  to  treat  this  fiction  as  fact.     *     *     * 

The  doctrine  of  ratification  as  hitherto  applied  in  this  country  to 
contracts  has  always,  I  believe,  in  fact  given  effect  in  substance  to 
the  real  intentions  of  both  contracting  parties  at  the  time  of  the  con- 
tract, as  shown  by  their  language  or  conduct.  It  has  never  yet  been 
extended  to  other  cases.    The  decision  appealed  from  extends  it  very 

materially,  and  I  can  find  no  warrant  or  necessity  for  the  extension. 
*     *     * 

Order  appealed  from  reversed,  and  judgment  of  Day,  J.,  restored, 
with  costs  here  and  below.     *     *     * 


KLINE  BEOS.  &  00.  v.  ROYAL  INS.  CO.,  Limited. 

(United  States  Circuit  Court.  Southern  District  of  New  York,  1911. 
192   Fed.   378.)      " 

Hand,  District  Judge.  These  are  four  actions  upon  fire  insurance 
policies  issued  by  four  differeflt  companies.  *  *  *  There  seems 
to  be  no  escape  from  the  conclusion  that  by  his  contract  with  the  de- 
fendants Mcintosh  did  not  bind  the  corporation  to  pay  the  premium. 
Furthermore,  the  board  of  directors  never  learned  of  the  policies  un- 
til after  the  fire,  and  did  not  therefore  ratify  them  up  to  that  time. 
At  least,  there  is  no  evidence  upon  that  question,  and  the  burden  rests 
with  the  plaintiff.  As  I  view  it,  no  subsequent  ratification  was  possi- 
ble. After  the  fire  Mcintosh  tendered  the  premium,  and  after  that 
the  defendants  repudiated  any  liability. 

The  facts,  therefore,  raise  two  questions:  First,  whether  a  third 
party  who  has  made  a  contract  with  an  unauthorized  agent  on  behalf 
of  his  principal  is  bound  before  the  principal  has  ratified;  and  sec- 
ond, if  not,  whether  the  occurrence  of  a  fire  before  the  unauthorized 
application  for  the  policy  has  been  ratified  prevents  its  future  ratifi- 
cation so  as  to  bind  the  company.  Upon  the  first  question,  there  is 
no  doubt  some  division  of  authority.  In  England  the  law  now  is  that 
the  third  party  may  not  withdraw,  provided  the  principal  ratifies  the 
contract  in  season.  Bolton  Partners  v.  Lambert,  41  Ch.  D.  295 ;  In  re 
Tiedemann  (1899)  2  O.  B.  D.  66.  *  *  *  On  the  other  hand,  in  Wis- 
consin (Dodge  v.  Hopkins,  14  Wis.  630;  Atlee  v.  Bartholomew  et  al., 
69  Wis.  43,  33  N.  W.  110,  5  Am.  St.  Rep.  103),  and  apparently  in  Illi- 
nois (Cowan  V.  Curran,  216  111.  598,  75  N.  E.  322),  the  whole  unauthor- 
ized contract  seems  to  amount  only  to  an  offer  by  the  third  person,  which 
must  be  accepted  de  novo  by  the  principal,  a  rule  certainly  at  variance 
with  the  well-established  law  that  an  uncommunicated  ratification  by 
the  principal  will  bind  him.  The  English  case  proceeds  on  the  civil- 
law  maxim,  "Omnis  ratihabitio  retrotrahitur,"  though  it  by  no  means 
follows,  because  a  ratification  relates  back  when  once  a  valid  contract 
is  made,  that  the  third  party  is  bound  meanwhile,  and  may  not  with- 
draw while  the  principal  remains  unbound. 

Now,  relation  back  is  in  the  sense  here  used  a  fiction,  and  certainly 
B.&  B. Bus. Law— 35 


546  AGENCY  (Part  2 

should  not  be  extended  to  cover  unjust  cases,  of  which  this  is  one, 
a.s  I  shall  show.  In  so  far  as  by  the  maxim  it  is  only  meant  to  say 
that  a  ratification  carries  with  it  by  implication  the  intention  of  the 
principal  that  the  contract  shall  in  fact  date  from  the  time  when  it 
was  made  between  the  agent  and  the  third  party,  it  is  unobjectionable 
in  principle,  and  accords  with  the  facts ;  but,  if  taken  in  the  sense  that 
the  law  will  regard  both  parties  as  bound  from  the  date  of  the  con- 
tract, it  merely  misstates  the  facts,  because,  by  hypothesis,  the  prin- 
cipal is  not  bound  before  ratification.  All  that  the  law  can  do  is  to 
hold  the  third  party  bound  from  the  outset,  and  that  by  the"  mere 
force  of  authority.  It  certainly  serves  no  useful  purpose  to  cloak  that 
authority  in  a  phrase  which  misstates  the  truth  in  Latin,  unless  it 
accords  with  the  principles  of  the  law  of  contracts,  or  at  least  produces 
just  results  at  the  expense  of  those  principles. 

Upon  principle  the  doctrine  does  not  appear  to  be  correct,  and  it 
has  been  criticised  by  text-writers.  Wambaugh,  9  Harv.  L.  R.  60; 
31  Cyc.  1291.  The  contract  of  insurance  is  bilateral,  and,  until  the 
principal  ratifies,  he  is  by  hypothesis  under  no  obligation  to  pay  the 
premium.  If  so,  there  is  until  then  no  consideration  to  support  the 
counter  promise  of  the  third  person,  for  a  consideration  implies  a 
legal  obligation,  and  his  promise  ought  not  in  principle  to  bind  him, 
being  indeed  nudum  pactum.  Second.  The  result  is  unfair  to  the 
third  party,  since  it  permits  the  principal  to  speculate  on  the  value  of 
the  contract,  while  he  himself  remains  unbound.  If  it  proves  advan- 
tageous, he  may  ratify.  If  not,  he  may  repudiate.  There  is  no  just 
ground  for  giving  him  such  an  advantage  over  the  third  party  merely 
because  of  an  unknown  defect  in  the  agent's  powers.  In  view  of  the 
dearth  of  authority  in  this  country  and  especially  of  any  decisions 
binding  upon  me,  I  do  not  think  that  I  should  follow  the  rule  in  Bolton 
V.  Lambert,  supra,  but  rather  what  I  cannot  but  believe  to  be  the  result 
necessary  under  the  principles  of  the  laws  of  contract.     *     *     * 

The  next  question  is  whether,  if  the  contract  was  not  binding  upon 
either  party  until  Mcintosh  tendered  the  premium,  the  occurrence  of 
the  fire  terminated  that  possibility.  *  *  *  There  is  no  difference 
of  judicial  opinion  so  far  as  I  can  find  upon  the  proposition  that  the 
insurer  is  not  bound,  where  the  insured  at  the  time  of  the  binding 
of  the  bargain  had  learned  that  the  loss  has  happened  or  the  risk 
has  changed  since  the  original  appHcation.  The  only  difference  be- 
tween those  cases  and  the  case  at  bar  is  this :  That  here  the  insurer  like- 
wise knew  that  the  loss  had  occurred,  and  nevertheless  did  not  with- 
draw from  the  contract.  This  fact  would  perhaps  be  irrelevant  in  any 
case,  even  if  the  insurer  did  not  formally  withdraw  his  offer  upon  learn- 
ing of  the  loss,  for  it  might  be  held  that  to  withdraw  it  after  a  loss 
has  occurred  would  be  an  idle  ceremony ;  but  that  question  is  not  up 
at  present,  because  the  defendants  had  no  knowledge  that  Alclntosh 
had  not  bound  the  plaintiff'  to  pay  the  premium,  and  that  their  own 
undertaking  had  therefore  been  without  consideration  from  the  out- 
set. They  certainly  dealt  with  him  in  good  faith,  and  were  not  called 
upon  to  disaffirm  a  contract  which,  so  far  as  they  knew,  was  binding 
upon  them.  If,  however,  it  be  once  admitted  that  it  was  not  binding 
upon  them  until  ratified,  it  could  not  be  ratified  or  accepted  by  paying 
a  premium  after  the  risk  had  ceased  and  the  fundamental  condition 
of  the  promise  no  longer  existed.  This  would  be  quite  obvious  had 
the  offer  never  been  accepted  at  all,  before  the  loss,  but,  if  the  policy 


Ch.  2)  RELATIONS   OF   THE   miNCIPAL   AND   THIRD    PERSONS  547 

was  not  binding  while  unratified,  the  situation  was  the  same  as  though 
the  offer  had  never  been  accepted.     *     *     * 
[Verdict  directed  for  defendants.] 


SECTION  4.— MASTER'S  LIABILITY  FOR  TORTS  OF  THE 

SERVANT 


KINGAN  &  CO.   V.   SILVERS  et  al. 
(Appellate  Court  of  Indiana.  1S94.     13  Ind.  App.  SO,  37  N.  E.  413.) 

Appeal  from  a  judgment  for  defendant  in  an  action  on  a  prom- 
issory note  bearing  interest  at  8  per  cent.,  "after  maturity."  The  note 
was  procured  by  plaintiff's  traveling  salesman,  one  Nichols,  who,  with- 
out the  consent  or  knowledge  of  defendants,  altered  it  by  striking 
out  the  words  "after  maturity"  and  inserting  words  so  as  to  make  it 
bear  8  per  cent,  interest  "from  date."  Plaintiff's  never  approved  the 
alteration,  and  now  sue  upon  the  note  as  originally  made.  It  was  no 
part  of  the  duty  of  Nichols  to  make  settlements,  nor  to  take  notes,  but 
in  this  instance  he  had  been  instructed  by  plaintiffs  to  procure  from 
defendants  a  note  to  cover  their  indebtedness  to  plaintiffs,  and  to 
transmit  the  same  to  his  principals. 

LoTz,  J.  [after  stating  the  facts,  and  pointing  out  the  general  prin- 
ciple that  public  policy  demands  that  a  material  alteration  of  a  writ- 
ten instrument  shall  destroy  it  so  as  to  prevent  a  recovery  upon  it]. 
The  change  in  the  note  was  not  made  by  the  plaintiff's  order  or  direc- 
tion, but  it  intrusted  certain  business  to  another  as  its  agent,  and  such 
person  made  the  alteration.  If  the  alteration  was  made  by  the  agent 
while  in  the  transaction  of  the  principal's  business,  and  in  the  scope 
of  his  authority,  then  the  act  of  the  agent  is  the  act  of  the  principal ; 
"Qui  facit  per  alium  facit  per  se."  The  solution  of  this  case  depends 
upon  the  relation  existing  between  Nichols  and  the  plaintiff  at  the  time 
the  alteration  was  made.  If  he  was  the  plaintiff's  agent,  and  the  act 
was  within  the  scope  of  his  authority,  then  his  act  must  be  deemed  the 
act  of  the  plaintiff',  and  the  law  is  with  the  defendants.  If  his  posi- 
tion was  that  of  a  mere  stranger  to  the  note,  then  the  law  is  with  the 
plaintiff.     *     *     * 

The  appellees  further  insist  that  Nichols  was  the  agent  of  the  payee 
in  making  the  alteration ;  that  he  was  acting  in  the  line  of  his  agency, 
and  under  color  of  his  employment;  that  his  wrongful  act  is  imputable 
to  his  principal.  In  support  of  this  position  appellees'  learned  coun- 
sel say  this  upon  the  legal  maxim,  "  'Whatever  a  man  sui  juris  may 
do  of  himself,  he  may  do  by  another,'  and,  as  a  correlative,  whatever 
is  done  by  such  other  in  the  course  of  his  employment  is  deemed  to  be 
done  by  the  party  himself.  On  this  principle,  the  liability  of  one  per- 
son for  the  acts  of  another  who  is  employed  in  the  capacity  of  an 
agent  is  extended  to  the  wrongful  and  tortious  acts  of  the  latter  com- 
mitted in  the  line  and  under  color  of  the  agency,  although  such  un- 
lawful acts  were  not  contemplated  by  the  employment,  and  were  done 
by  the  agent  in  good  faith,  and  by  mistake.  In  other  words,  wdiere  a 
principal  directs  an  act  to  be  done  by  an  agent  in  a  lawful  manner,  but 
the  agent  errs  in  the  mode  of  executing  his  authority  to  the  prejudice 


548  AGENCY  (Part  2 

of  another  person,  the  principal  will  be  held  responsible."  This  is 
a  correct  statement  of  the  law.     *     *     * 

At  the  time  Nichols  made  the  alteration  of  the  note,  was  he  the 
agent  or  servant  of  the  plaintiff  in  respect  to  his  duties  pertaining  to 
said  note?  It  is  averred  that  he  was  the  traveling  salesman,  but  that 
he  was  not  a  general  agent,  and  had  no  authority  to  make  settlements 
or  take  notes  on  plaintiff's  account,  nor  was  that  any  part  of  his  du- 
ties ;  that,  being  about  to  go  to  Lebanon  in  the  course  of  his  duties  as 
such  traveling  salesman,  the  ^laintiff  instructed  him  to  procure  for 
plaintiff  from  the  defendants  l  note  en  account  of  an  indebtedness  due 
from  them  to  the  plaintiff.  But  the  averments  of  the  complaint  neg- 
ativing the  fact  of  agency  will  not  control  if  it  appear  from  all  the 
averments  that  the  legal  relation  of  agency  exists.  The  same  person 
may  be  a  special  agent  for  the  same  principal  in  several  dift'erent  mat- 
ters. Nichols  was  the  agent  of  the  plaintiff  to  sell  goods.  He  was 
also  its  agent  to  procure  the  note.  We  are  here  concerned  with  the 
latter  agency  only.  Did  his  relation  as  agent  cease  when  he  obtained 
the  note,  or  did  it  continue  until  the  note  was  delivered  to  the  plain- 
tiff? If  the  agency  ceased  when  the  note  was  obtained  by  him,  what 
relation  did  he  sustain  to  the  plaintiff  in  the  interval  of  time  between 
the  delivery  to  him  and  the  delivery  to  the  plaintiff?  *  *  *  When 
Nichols  was  engaged  in  treating  with  the  defendants  concerning  the 
note,  he  was  an  agent.  When  the  note  was  delivered  to  him,  it  was 
in  law  delivered  to  the  plaintiff,  and  he  ceased  to  treat  or  deal  with 
the  defendants.  All  his  duties  concerning  the  note  then  related  to  the 
plaintiff.  It  was  his  duty  to  carry  and  deliver  it  to  the  plaintiff.  In 
doing  this  he  owed  no  duty  to  the  defendants.  He  ceased  to  be  an 
agent,  because  he  was  not  required  to  deal  further  with  third  parties. 
He  was  then  a  mere  servant  of  the  plaintiff,  charged  with  the  duty 
of  faithfully  carrying  and  delivering  the  note  to  his  master.  When 
Nichols  made  the  alteration  in  the  note  he  was  the  servant,  and  not  the 
agent,  of  the  plaintiff.     >i=     *     * 

Upon  what  principle  is  the  master  liable  for  the  wrongful  acts  of  his 
servant?  This  inquiry  carries  us  back  to  the  very  dawn  of  jurispru- 
dence. The  modern  idea  of  law  is  that  it  consists  of  those  rules  of 
conduct  prescribed  and  enforced  by  the  sovereign  power  of  the  state. 
But,  as  Mr.  Justice  Stephen  truly  remarks:  "It  is  not  till  a  very  late 
stage  of  its  history  that  law  is  regarded  as  a  series  of  commands  is- 
sued by  the  sovereign  power  of  the  state."  As  a  matter  of  historical 
fact,  ancient  laws  were  not  commands.  They  were  not  issued  by 
political  superiors,  nor  were  they  enforced  by  punishment  or  other- 
wise. "They  were  merely  customs  sanctioned  by  usage,  voluntarily 
observed  with  that  strong  devotion  to  usage  which  always  character- 
izes uncivilized  nations."  Vengeance  on  the  part  of  the  person  in- 
jured is  the  foundation  of  all  legal  redress.  The  early  history  of  all 
political  societies  shows  the  same  system  of  private  revenge  and  per- 
sonal redress  for  injuries.  Each  person  avenged,  in  whatever  man- 
ner he  deemed  right,  the  injuries  done  him.  The  tribal  customs  not 
only  sanctioned  his  doing  so,  but  perhaps  required  him  to  do  so.  If 
he  failed  to  avenge  an  injury  or  wrong,  he  was  brought  under  the  ban 
of  public  contumely.  The  spirit  of  retaliation  is  deeply  rooted  in  hu- 
man nature.  Retribution  in  kind  is  the  first  impulse  of  the  savage 
mind  on  sustaining  an  injury.  An  eye  for  an  eye,  a  tooth  for  a  tooth; 
whoso  sheddeth  man's  blood,  by  man  shall  his  blood  be  shed — was  the 


Ch.  2)  RELATIONS  OF  THE  PRINCIPAL  AND   THIRD   PERSONS  549 

rule  of  all  early  and  savage  communities.  If  one  man  killed  another, 
custom  permitted,  and  perhaps  required,  that  the  blood  relatives  of 
the  deceased  should  avenge  his  death  by  killing  the  slayer. 

The  Romans  were  the  most  civilized  of  all  the  ancient  peoples. 
Their  law^s  form  the  basis  of  all  modern  jurisprudence.  Moyle,  in 
speaking  of  the  Roman  law^,  well  says :  "Before  the  establishment  of 
a  regular  judicature,  the  injured  person,  with  his  kinsmen  or  de- 
pendents, made  a  foray  against  the  wrongdoer,  and  swept  away  his 
cattle,  and  with  them  perhaps  his  wife  and  children ;  or  he  threatened 
him  with  supernatural  penalties  by  'fasting'  upon  him,  as  in  the  east, 
even  at  the  present  day ;  or,  finally,  he  reduced  his  adversary  to  serv- 
itude, or  took  his  life."  1  Moyle,  Just.  Inst.  p.  614.  The  family  or 
tribe  of  the  person  who  had  committed  an  offense  might  escape  the 
vengeance  of  their  adversaries  by  delivering  up  or  surrendering  the 
offending  member.  As  society  slowly  and  gradually  emerged  from 
this  depth  of  barbarism,  a  custom  arose  by  which  the  person  who  in- 
flicted the  injury  might  buy  off  the  vengeance  of  the  injured.  If  the 
parties  could  not  agree  on  the  amount  to  be  paid,  the  tribal  assembly 
fixed  it.  These  tribal  assemblies,  met  for  the  purpose  of  fixing  the 
price  of  vengeance,  are  the  prototypes  of  modern  courts.  The  idea 
that  a  society  or  the  state  was  injured  by  a  wrong  inflicted  upon  one 
of  its  members  or  upon  his  property  was  of  much  later  growth.  If 
a  man's  slave  inflicted  an  injury  upon  another,  the  injured  party  was 
entitled  to  wreak  his  vengeance  upon  the  immediate  cause  of  the  in- 
jury. This  same  principle  extended  to  animals  and  inanimate  objects. 
But  the  master  or  owner  might  buy  off  the  vengeance  of  the  injured 
person  by  a  money  consideration,  and  thereby  save  the  life  of  his 
slave  or  injury  to  his  property. 

This  digression  into  the  history  of  law  may  seem  inappropriate  to 
the  decision  of  this  case,  but  a  knowledge  of  the  history  of  tliat  branch 
of  law  with  which  any  principle  is  connected  is  often  necessary  before 
the  true  bearings  and  the  limits  of  its  application  can  be  fully  deter- 
mined. Principles  which  have  originated  from  certain  causes  are 
sometimes  misapplied  simply  because  there  is  a  similarity  in  the  "facts 
of  two  different  cases,  and  sometimes  the  true  principle  is  overlooked 
or  forgotten,  and  a  new  one  invented,  to  explain  rules  which  from  a 
historical  standpoint  are  well  established.  The  law  is  sometimes  said 
to  be  the  perfection  of  human  reason,  and  it  is  further  said  that  when 
the  reason  fails  the  law  fails.  But  these  expressions,  when  applied 
to  certain  conditions,  are  often  mere  platitudes.  The  law  does  not  al- 
ways proceed  logically,  for  "the  life  of  the  law  has  not  been  logic; 
it  has  been  experience.  *  *  *  Many  things  which  we  take  for 
granted  have  had  to  be  laboriously  brought  out  or  thought  out  in  times 
past.'"     Holmes,  Com.  Law,  p.  1. 

The  principle  involved  in  this  case  is  that  of  the  master's  liability 
for  the  tort  of  his  servant.  Let  us  take  a  common  illustration :  The 
driver  of  a  grocer's  cart  negligently  runs  over  another  in  the  street, 
the  person  injured  being  without  fault.  The  grocer  is  liable  for  the 
negligence  of  his  servant,  the  driver.  But  why,  or  upon  w^hat  prin- 
ciple? It  is  sometimes  said  that  the  reason  for  the  master's  liability 
in  such  cases  is  his  negligence  in  employing  an  unskillful  servant.  If 
this  were  really  the  true  reason,  the  logical  result  would  be  that,  if  the 
master  was  guilty  of  no  negligence  in  employing  the  servant,  he  would 
not  be  liable.    This,  however,  we  know  does. not  follow.     It  is  no  de- 


550  AGENCY  (Part  2 

fense  that  the  master  used  the  greatest  care  in  employing  his  servant. 
Again,  suppose  an  engineer  or  servant  of  a  railroad  company  willfully 
run  a  train  of  cars  over  another  person,  we  know  the  company  is  lia- 
ble for  the  wrongful  act  of  its  servant,  and  that  it  is  no  excuse  for 
the  company  to  say  it  did  not  authorize  the  act,  and  that  it  was  done 
without  the  knowledge  or  consent  of  the  company,  or  against  its  ex- 
press will  or  order.  It  is  difficult  to  understand  this  principle  of  lia- 
bility unless  we  approach  it  from  the  side  of  history.  It  is,  in  reality. 
a  survival  of  the  ancient  doctrine  that  the  master  or  owner  was  liable 
for  the  act  of  his  slave,  and  for  injuries  committed  by  animals  in  his 
possession.  The  ancient  idea  was  that  the  family  of  the  master,  in- 
cluding his  slaves,  his  animals,  and  all  other  property,  was  a  unity ; 
and  that  the  personality  of  the  master  affected  all  of  his  property; 
that,  as  he  was  entitled  to  all  the  benefits  of  ownership,  he  must  accept 
the  consequences  flowing  from  injuries  caused  by  his  property.  He 
might  buy  ofif  the  vengeance  of  the  injured  person,  or  he  might  ap- 
pease it  by  surrendering  the  offending  property  to  the  person  aggriev- 
ed. In  Roman  law  there  was  a  class  of  actions  known  as  "noxal  ac- 
tions," which  provided  for  this  vicarious  liability.  The  defendant 
had  the  option  of  surrendering  the  delinquent,  instead  of  paying  dam- 
ages. 

In  ancient  times  the  masses  were  slaves ;  in  modern  times  the  mass- 
es are  freemen.  When  slaves  became  freemen,  the  master  was  shorn 
of  his  power  to  surrender  the  delinquent  servant ;  but  he  still  contin- 
ues to  be  liable  for  the  acts  of  this  servant  done  in  the  line  of  the  em- 
ployment. This  principle  of  liability  originates  in  slavery,  and  in  the 
power  and  domain  that  the  master  exercised  over  the  members  of  his 
family.  But  it  may  be  said  that,  as  the  master  has  ceased  to  have 
any  property  in  his  servants,  and  as  he  is  shorn  of  his  power  to  sur- 
render a  delinquent,  the  reason  for  the  rule  fails,  and  that  the  law 
must  fall  within  the  reason,  and  that  this  would  result  in  exonerating 
the  master  from  all  liability  in  all  such  cases.  It  is  true  that  the  pow- 
er of  surrendering  the  delinquent  has  ceased,  but  it  is  not  true  that  the 
personality  of  the  master  has  ceased  to  affect  his  servants.  The  will  of 
the  master  dominates  an}^  given  enterprise.  He  calls  to  his  aid  serv- 
ants and  appliances.  The  servant  surrenders  his  time,  and  in  a  meas- 
ure permits  the  will  of  the  master  to  dominate  and  control  his  actions. 
He  is  the  instrument  of  his  master  in  accomplishing  certain  ends.  The 
servant  is  placed  in  the  position  and  given  the  opportunity  to  commit 
the  wrong  by  the  will  of  the  master.  In  a  qualified  sense,  the  servant 
is  the  representative  of  the  master.  Without  the  controlling,  dominat- 
ing influence  of  the  master's  will,  there  is  but  the  remotest  probability 
that  the  servant  would  have  been  placed  in  the  position  or  given  the 
opportunity  to  commit  the  particular  wrong.  Anciently,  the  liability 
of  the  master  was  not  limited  by  the  duties  imposed  upon  his  slave. 
When  a  servant  became  a  freeman  he  was  no  longer  a  member  of  the 
master's  family,  and  he  could  not  properly  be  said  to  be  the  represen- 
tative of  his  master,  except  in  the  line  of  the  employment.  Modern 
jurisprudence  properly  and  justly  limits  the  liability  of  the  master  to 
the  acts  of  his  servant  done  within  the  scope  of  his  employment. 
There  is  still  substantial  and  just  grounds  for  the  principle  that  the 
master  is  liable  for  the  wrongful  acts  of  his  servant.  No  liability  aris- 
es against  the  master  for  the  wrongful  acts  of  his  servant  unless  the 


Ch.  2)  RELATIONS   OP   THE   PRINCIPAL   AND   THIRD   PERSONS  551 

servant  has  perpetrated  an  injury  either  upon  the  person  or  property 
of  another.    *    *    * 

[Judgment  for  defendants  reversed.] 


JENSEN  V.   BARBOUR. 
(Supreme  Coiut  of  Montana,  1S95.     15  Mont.  582,  .39  Pac.  906.) 
De  Witt,  J.     Plaintiff's  complaint  is  for  damages  for  personal  in- 
juries sustained  while  riding  on  defendant's  horse  street  car.    The  dis- 
trict court  upon  the  trial  directed  the  jury  to  find  for  the  defendant. 
Plaintiff  appeals   from  the  judgment,   assigning  error  in  that  order. 

*  *  *  There  was  evidence  that  the  plaintiff,  a  boy  five  years  of  age, 
was  riding  on  the  front  platform  of  the  horse  car,  with  the  knowledge 
of  the  driver,  and  that  the  car  struck  a  stone,  and  jolted  the  plaintiff 
off,  and  ran  over  him,  inflicting  the  injuries  complained  of.     *     *     * 

The  question  presented  is  whether  the  person  immediately  causing 
the  injury  to  plaintiff  stood  in  the  relation  of  a  servant  of  defendant, 
or  whether  he  was  the  servant  of  an  independent  contractor,  for 
whose  acts  of  negligence  the  defendant  was  not  liable.  The  defendant 
was  the  owner  of  a  street-car  franchise  in  the  city  of  Great  Falls.  He 
had  built  a  car  track  extending  over  six  or  seven  blocks,  and  had  one 
or  two  cars  on  the  track.  Defendant  lived  in  Helena.  J.  O.  Gregg, 
of  Great  Falls,  was  his  agent,  acting  for  him  in  relation  to  this  street- 
car franchise,  track,  and  cars.  Gregg  was  also  one  of  the  owners  of 
the  railway.  Defendant,  Barbour,  was  trustee  of  the  railway.  He  was 
sued  apparently  as  trustee,  and  also  personally.  It  seems  that  the 
railway  people  were  not  operating  their  line  very  extensively,  for  Mr. 
Gregg  testified  that  he.  as  agent  for  the  trustee,  hired  one  Vaughn  to 
run  the  car  one  trip  a  day.  Gregg  says  that  the  contract  with  Vaughn 
was  that  he  was  to  be  paid  so  much  money  per  month  to  haul  the  car 
over  the  line  once  a  day  each  way,  and  to  furnish  a  driver.  In  pur- 
suance to  this  arrangement  Vaughn  furnished  the  driver,  and  was 
moving  the  car  along  the  track  at  the  time  the  plaintiff'  was  injured. 

Defendant  contended  that  by  virtue  of  this  employment  Vaughn 
wan  as  independent  contractor,  and  that  defendant  was  not  liable  for 
the  negligence  of  Vaughn's  driver.  Mr.  Gregg,  however,  testified  that 
there  was  nothing  as  to  collecting  fares  in  this  contract  with  Vaughn. 
In  fact  fares  were  not  collected.  *  *  *  The  track  and  rolling  stock 
were  not  delivered  into  the  possession  of  Vaughn  at  all.  He  did  noth- 
ing more  than  to  haul  the  car  the  one  trip  a  day.  Mr.  Gregg  further 
testified ;  *  *  *  "I  had  no  direct  control  over  the  drivers,  but  I 
ordered  Mr.  Vaughn  to  see  that  the  drivers  kept  the  boys  away.  I 
was  trying  to  protect  the  property.  I  had  driven  the  plaintiff'  off  the 
cars  several  times.  The  contract  with  Vaughn  was  that  I  was  to  pay 
him  so  much  money  a  month  to  haul  the  car  over  the  line  each  way 
once  a  day,  and  furnish  a  driver.  I  had  nothing  to  do  with  the  draw- 
ing of  the  car  backward  and  forward,  or  directing  the  manner  in  which 
it  should  be  done.  I  sometimes  spoke  to  Vaughn  about  matters  con- 
cerning  the    protecting    of   the   property   and   driving   the   boys    off'. 

*  *  *"  Under  these  facts  the  district  court  held  that  Vaughn  was 
an  independent  contractor,  and  that  the  defendant  was  not  liable  for 
his  negligence. 

To  draw  the  distinction  between  independent  contractors  and  serv- 
ants is  often  difficult,  and  the  rules  which  courts  have  undertaken  to 


552  AGENCY  (Part  2 

lay  down  on  this  subject  are  not  always  simple  of  application.  A  rule 
as  often  quoted  as  any  is  stated  in  the  syllabus  of  the  case  of  Bibb's 
Adm'r  v.  Railroad  Co.,  87  Va.  711,  14  S.  E.  163,  after  an  able  review 
of  the  authorities,  as  follows:  "Independent  contractor  is  one  who 
renders  service  in  the  course  of  an  occupation,  and  represents  the 
will  of  his  employer  only  as  to  the  result  of  his  work,  and  not  as  to  the 
means  wherebv  it  is  accomplished,  and  is  usually  paid  by  the  job." 
Brackett  v.  Liibke,  4  Allen  (Mass.)  138,  81  Am.  Dec.  694,  is  also  a 
leading  case.  The  opinion  states  as  follows:  "The  distinction  on 
which  all  the  cases  turn  is  this:  If  the  person  employed  to  do  the 
work  carries  on  an  independent  employment,  and  acts  in  pursuance  of 
a  contract  with  his  employer  by  which  he  has  agreed  to  do  the  work 
on  certain  specified  terms,  in  a  particular  manner,  and  for  a  stipulated 
price,  then  the  employer  is  not  liable.  The  relation  of  master  and  serv- 
ant does  not  subsist  between  the  parties,  but  only  that  of  contractor 
and  contractee.  The  power  of  directing  and  controlling  the  work  is 
parted  with  by  the  employer,  and  given  to  tha  contractor.  But,  on 
the  other  hand,  if  the  work  is  done  under  a  general  employment,  and 
is  to  be  performed  for  a  reasonable  compensation,  or  for  a  stipulated 
price,  the  employer  remains  liable,  because  he  retains  the  right  and 
power  of  directing  and  controlling  the  time  and  manner  of  executing 
the  work,  or  of  refraining  from  doing  it,  if  he  deems  it  necessary  or 
expedient.  This  distinction  is  recognized  in  the  cases  adjudged  by  this 
court.    *    *    *" 

The  respondent  argues  that  Vaughn  represented  the  will  of  his  em- 
ployer only  as  to  the  result  of  his  work,  and  not  as  to  the  manner  of  its 
performance;  that  is  to  say,  that  Vaughn  contracted  to  deliver  to  his 
employer  the  result  of  putting  the  car  over  the  track  once  a  day  by  his 
own  methods.  But  so  it  might  be  argued  that  one's  coachman  con- 
tracts to  produce  the  result  of  conveying  his  master  from  his  house 
to  his  office,  or  wherever  he  may  wish  to  go ;  or  one's  cook  contracts  to 
produce  the  result  of  placing  before  his  master  his  daily  food.  But 
such  is  not  the  sense  in  which  the  word  "result"  is  used  in  the  rule. 
We  think  the  word  "result,"  as  so  used,  means  a  production  or  product 
of  some  sort,  and  not  a  service.  One  may  contract  to  produce  a  house, 
a  ship  or  a  locomotive  and  such  house,  or  ship  or  locomotive  produced 
is  the  "result."  Such  "results"  produced  are  often,  and  probably  gen- 
erally, by  independent  contractors.  But  we  do  not  think  that  plowing 
a  field,  mowing  a  lawn,  driving  a  carriage  or  a  horse  car  for  one  trip 
or  for  many  trips  a  day  is  a  "result"  in  the  sense  that  the  word  is  used 
in  the  rule.  Such  acts  do  not  result  in  a  product.  They  are  simply  a 
service.  *  *  *  j^  would  perhaps  be  difficult  to  draw  a  clear,  dis- 
tinction between  the  relations  which  Mr.  Gregg  held  to  the  railway 
property  and  the  drivers,  and  that  of  any  person  admittedly  having 
supervision  over  them.  No  superintendent  assumes  control  over  every 
minute  detail  of  an  employe's  work.  In  all  work  which  demands  suf- 
ficient intelligence  to  require  a  man  instead  of  a  machine,  the  man 
must  be  left  to  direct  his  own  movements  to  some  extent.  But  it  is 
clear,  from  our  review  of  Mr.  Gregg's  testimony,  that  he  did  not  con- 
sider the  driver  of  the  car  as  the  servant  of  a  contractor  independent 
of  the  railway  people.  *  *  *  yi^.  Gregg  qualified  his  statement 
somewhat  by  an  attempt  to  disclaim  any  supervision  of  tiie  actual  mov- 
ing of  the  car,  but  we  think  that  his  testimony  as  a  whole  did  not 
place  Vaughn  in  the  position  of  an  independent  contractor. 


Ch.  2)  RELATIONS   OF   THE   PRINCIPAL   A>sD   THIRD   PERSONS  553 

After  stating  any  rule  which  is  to  determine  whether  one  is  an  inde- 
pendent contractor  or  a  servant,  it  is  very  easy,  by  a  httle  casuistry, 
to  construe  any  person  who  performs  a  service  to  be  an  independent 
contractor.  We  have  endeavored  to  point  out  such  dangers.  We  think 
that  the  district  court  fell  into  just  such  a  mistake.  If  Vaughn,  in 
this  case,  is  an  independent  contractor,  a  very  few  steps  further  in 
the  same  direction  of  construction  would  make  all  servants  independent 
contractors.  We  are  wholly  satisfied  that  Vaughn  was  not  an  in- 
dependent contractor,  but.  on  the  contrary,  stood  in  the  relation  of  an 
employe  for  wages  of  defendant  in  this  case.  The  judgment  is  there- 
fore reversed,  and  the  case  is  remanded  for  a  new  trial. 


STONE   V.   HILLS. 

(Supreme  Court  of  Errors  of  Connecticut,  1877.     45  Conn.  44, 
29  Am.  Rep.  635.) 

Trespass  on  the  case,  for  an  injury  by  reason  of  the  negligence  of 
the  defendants'  servant.  The  defendants  were  operating  a  paper-mill 
in  the  town  of  Glastonbury  and  had  in  their  employment  one  Smith, 
as  a  driver  of  their  team.  On  that  day  they  directed  him  to  carry  a 
load  of  paper  from  the  mill  and  deliver  it  to  one  Taylor  at  a  point  in 
the  same  town  four  and  a  half  miles  distant,  and  to  return  from  thence 
by  way  of  Nipsic  with  a  load  of  wood.  On  reaching  Taylor's,  the 
latter  requested  Smith  to  deliver  the  paper  at  the  warehouse  of  Tracy 
&  Co.  in  Hartford,  four  and  one-half  miles  distant  from  Taylor's, 
and  to  go  from  thence  to  a  railway  freight  station  in  the  city  and  get 
some  freight  belonging  to  Taylor  and  transport  the  same  to  his  place. 
Smith  acceded  to  Taylor's  request,  and  while  he  was  in  the  station, 
paying  Taylor's  freight  bill,  the  horses,  which  he  had  negligently  left 
unhitched  and  unattended,  being  frightened  by  a  passing  train,  ran 
up  the  street  and  against  the  plaintiff's  wagon,  and  injured  it  to  the 
extent  of  $18.42,  besides  making  it  necessary  for  him  to  spend  $6  in 
addition  for  the  use  of  another  wagon. 

Pardee,  J.  The  rule  is  that  for  all  acts  done  by  a  servant  in  obedi- 
ence to  the  express  orders  or  directions  of  the  master,  or  in  the  exe- 
cution of  the  master's  business,  within  the  scope  of  his  employment, 
and  for  acts  in  any  sense  warranted  by  the  express  or  implied  author- 
ity conferred  upon  him,  considering  the  nature  of  the  services  requir- 
ed, the  instructions  given  and  the  circumstances  under  which  the  act 
is  done,  the  master  is  responsible;  for  acts  which  are  not  within  these 
conditions  the  servant  alone  is  responsible.  We  cite  a  few  from  the 
many  cases  in  which  the  rule  has  been  judicially  illustrated  and  applied. 

In  Mitchell  v.  Crassweller,  13  C.  B.  237,  the  defendant's  carman 
having  finished  the  business  of  the  day  returned  to  their  shop  in  Wel- 
beck  street  with  their  horse  and  cart,  and  obtained  the  key  of  the 
stable,  which  was  close  at  hand;  but  instead  of  going  there  at  once 
and  putting  up  the  horse,  as  was  his  duty,  he  drove  to  Euston  square, 
and  on  his  way  back  negligently  drove  over  the  plaintiff ;  and  it  was 
held  that  the  carman  was  not  at  the  time  engaged  in  his  master's  busi- 
ness so  as  to  make  him  liable.  Maule,  J.,  said:  "At  the  time  of  the 
accident  the  servant  was  not  going  a  roundabout  way  to  the  stable, 
and  as  one  of  the  cases  expresses  it,  making  a  detour.  He  was  not 
engaged  in  the  business  of  his  employer.  But  in  violation  of  his  duty, 
so  far  from  doing  what  he  was  employed  to  do,  he  did  something  to- 


554  AGENCY  (Part  2 

tally  inconsistent  with  his  duty,  a  thing  having  no  connection  what- 
ever with  his  employer's  service.  The  servant  only  is  liable  and  not 
the  employer.  All  the  cases  are  reconcilable  with  that.  The  master 
is  liable  even  though  the  servant  in  the  performance  of  his  duty  is 
guilty  of  a  deviation  or  failure  to  perform  it  in  the  strictest  and  most 
convenient  manner.  But  when  the  servant,  instead  of  doing  that  which 
he  is  employed  to  do,  does  seme  thing  which  he  is  not  employed  to  do 
at  all,  the  master  cannot  be  said  to  do  it  by  his  servant,  and  therefore 
is  not  responsible  for  the  negligence  of  the  servant  in  doing  it."  In 
Storey  v.  Ashton,  L.  R.,  4  O.  B.  476,  the  defendant  intrusted  his  serv- 
ant with  his  horse  and  cart  for  the  day,  and  when  his  work  was  end- 
ed and  it  was  his  duty  to  drive  home,  he,  for  a  purpose  of  his  own 
and  without  authority  express  or  implied  from  his  master,  drove  in 
an  entirely  different  direction  and  by  his  carelessness  injured  the  plain- 
tiff.    The  court  held  that  the  master  was  not  liable. 

In  Sleath  v.  Wilson,  9  C.  &  P.  607,  Erskine,  J.,  said  in  his  chargeto 
the  jury:     "But  whenever  the  master  has  intrusted  the  servant  with 
the  control  of  the  carriage,  it  is  no  answer  that  the  servant  acted  im- 
properly in  the  management  of  it.     *     *     *     The  master,  in  such  a 
case,  will  be  liable,  and  the  ground  is.  that  he  has  put  it  in  the  serv- 
ant's power  to  mismanage  the  carriage  by  intrusting  him  with   it." 
In  Storey  v.  Ashton,  Cockburn,  C.  J.,  said:     "I  think  the  judgment  of 
Maule  and  Cresswell,  JJ.,  in  Mitchell  v.  Crassweller,  expresses  the 
true  view  of  the  law,  and  the  view  which  we  ought  to  abide  by ;_  and 
that  we  cannot  adopt  the  view  of  Erskine,  J.,  in  Sleath  v.  Wilson, 
that  it  is  because  the  master  has  intrusted  the  servant  with  the  con- 
trol of  the  horses  and  cart  that  the  master  is  responsible.     The  true 
rule  is  that  the  master  is  only  responsible  so  long  as  the  servant  can 
be  said  to  be  doing  the  act,  in  the  doing  of  which  he  is  guilty  of  neg- 
ligence, in  the  course  of  his  employment  as  servant.     I  am  very  far 
from  saying,  if  the  servant  when  going  on  his  master's  business  took 
a  somewhat  longer  road,  that  owing  to  this  deviation  he  would  cease 
to  be  in  the  employment  of  the  master,  so  as  to  divest  the  latter  of  all 
liability;    in  such  cases  it  is  a  question  of  degree  as  to  how  far  the 
deviation  could  be  considered  a  separate  journey.     Such  a  considera- 
tion is  not  applicable  to  the  present  case,  because  here  the  carman 
started  on  an  entirely  new  and  independent  journey,  which  had  noth- 
ing at  all  to  do  with  his  employment.     It  is  true  that  in  Mitchell  v. 
Crassweller  the  servant  had  got  nearly  if  not  quite  home,  while,  in 
the  present  case,  the  carman  was  a  quarter  of  a  mile  from  home ;   but 
still  he  started  on  what  may  be  considered  a  new  journey  entirely  for 
his  own  business,  as  distinct  from  that  of  his  master;    and  it  would 
be  going  too  far  to  say  that  tmder  such  circumstances  the  master  was 
liable."     In  the  same  case,  Mellor,  J.,  said:     "But  here,  though  the 
carman  started  on  his  master's  business,  and  had  delivered  the  wine 
and  collected  the  empty  bottles,  when  he  had  got  within  a  quarter  of 
a  mile  from  the  defendant's  office  he  proceeded  in  a  directly  opposite 
direction,  and  as  soon  as  he  started  in  that  direction  he  was  doing 
nothing  for  his  master;    on  the  contrary,  every  step  he  drove  was 
away  from  his  duty."     In  Cormack  v.  Digby,  Ir.  Rep.  (9  Com.  Law 
Series)  557,  a  servant  had  leave  from  his  master  to  go  for  the  day 
to  a  neighboring  town  to  transact  business  of  his  own,  and  borrowed 
his  master's  horse  and  cart  for  the  purpose;   he  afterward  proposed, 
and  the  master  assented,  that  he  should  bring  home  some  meat  from 


Ch.  2)  RELATIONS   OF   THE   PRINCIPAL   AND   THIRD    PERSONS  555 

the  tovyn  for  the  master;  by  neghgent  driving  he  injured  the  plaintiff. 
Held,  in  an  action  against  the  master  for  the  negligence  of  the  servant, 
that  the  court  could  not  hold  as  matter  of  law,  upon  the  evidence,  that 
the  master  was  responsible  for  the  negligence  of  the  servant. 

In  Lamb  v.  Palk.  9  C.  &  P.  629,  where  a  servant  driving  his  mas- 
ter's horse  got  off  the  carriage  and  look  hold  of  a  horse  standing  be- 
fore a  van  and  caused  the  van  to  move  so  as  to  make  room  for  the 
carriage  to  pass,  whereby  a  packing  case  fell  from  the  van  and  broke 
the  thills  of  the  plaintiff's  gig,  it  was  held  that  the  master  was  not 
liable  for  the  injury.  In  Woodman  v.  Joiner.  10  Jur.  (N.  S.)  852,  the 
plaintiff  permitted  the  defendant  to  use  his  shed  temporarily  as  a  car- 
penter's shop,  and  the  defendant's  workman  in  lighting  his  pipe  set 
the  shed  on  fire :  the  court  held  that  the  defendant  was  not  liable  in 
an  action  for  negligence,  saying,  "\\'e  have  had  much  doubt  upon  this 
question,  but  have  all  arrived  at  the  conclusion  that  there  is  no  lia- 
bility. If  the  servant  had  been  guilty  of  any  negligence  relating  to 
his  employment,  it  may  be  that  the  defendant  would  have  been  liable." 
In  Campbell  v.  City  of  Providence,  9  R.  I.  262,  the  defendant,  a  hack 
owner,  employed  a  person  as  a  day  driver.  He  used  the  hack  at  night 
without  the  master's  consent  or  knowledge.  Held,  that  the  master 
could  not  be  held  responsible  for  an  omission  on  the  part  of  the  driver 
to  comply  with  the  terms  of  a  city  ordinance  during  the  time  of  such 
unauthorized  use  of  the  hack.    *     *     *  ^ 

In  the  case  before  us  the  servant  left  the  einployers'  premises  under 
precise  instructions  as  to  the  place  to  which  their  team  was  to  be 
driven  and  as  to  the  merchandise  to  be  transported ;  and  under  in- 
structions equally  precise  as  to  the  route  to  be  taken  in  returning,  and 
as  to  what  he  should  bring  home.  These,  therefore,  covered  the  en- 
tire period  of  his  contemplated  absence;  nothing  was  left  to  his  op- 
tion or  discretion ;  nothing  to  chance ;  and  in  fact  the  deviation  was 
not  occasioned  or  even  suggested  by  any  unforeseen  event  in  connection 
with  the  employers'  business ;  the  record  shows  no  obligation,  express 
or  implied,  upon  them  to  deliver  the  paper  elsewhere  than  in  North 
Glastonbury,  nor  that  the  journey  thence  to  Hartford,  even  if  suc- 
cessfully accomplished,  would  have  been  for  their  advantage  or  profit; 
it  was  not  connected  with,  did  not  grow  out  of,  did  not  contribute  to, 
the  successful  completion  of  their  business.  When,  therefore,  the 
servant  accepted  instructions  from  Taylor  and  became  a  carrier  of 
merchandise  for  him  to  and  from  a  railroad  station  in  an  adjoining 
town,  he  temporarily  threw  off  his  employers'  authority,  abandoned 
their  business  and  left  their  service.  They  are  not  responsible  for 
his  negligence  on  this  occasion.  There  is  error  in  the  judgment  com- 
plained of. 

STAPT.ETON  v.    INDEPENDENT   BREWING   CO. 

(Supreme  Court  of  ^riohigan,  1917.     198  Mich.  170,  164  N    W    5*^0 
L.    R.   A.    191SA,    916.) 

Moore,  J.  This  suit  arises  as  a  result  of  an  automobile  accident. 
The  suit  was  commenced  in  the  justice  court  to  recover  the  sum  of 
$375  for  damages  done,  as  a  result  of  the  accident  to  a  wagon  and 
team  of  horses  belonging  to  plaintiff.  The  automobile  which  caused 
the  accident  was  owned  by  the  defendant,  but  at  the  time  of  the  ac- 
cident above  referred  to  it  had  loaned  it  to  the  Detroit  Axle  Company 
to  be  used  in  the  Detroit  Axle  Company's  business,  and  at  this  par- 


556  AGENCY  (Part  2 

ticular  time  the  automobile  was  being  driven  by  an  employe  of  the 
Detroit  Axle  Company.    *    *    * 

Counsel  for  appellant  say  there  is  but  one  question  presented  for 
determination— i.  e.:  "If  an  employe  of  the  Detroit  Axle  Company 
engaged  in  that  company's  business,  negligently  operates  an  automobile 
owned  by  another  party,  is  the  owner  of  that  automobile  liable  where 
there  is  no  relation  of  master  and  servant,"  but  where  the  automobile 
is  so  used  with  the  consent  of  the  owner? 

The  question  involves  a  construction  of  section  29  of  Act  No.  302 
of  the  Public  Acts  of  1915.  The  portion  of  that  section  necessary  to 
an  understanding  of  this  case  reads  as  follows : 

"Sec.  29.  Civil  Actions.  Nothing  in  this  act  shall  be  construed  to 
curtail  or  abridge  the  right  of  any  person  to  prosecute  a  civil  action  for 
damages  by  reason  of  injuries  to  person  or  property  resulting  from 
the  negligence  of  the  owner  or  operator  or  his  agent,  employe  or  serv- 
ant, of  any  such  motor  vehicle,  or  resulting  from  the  negligent  use  of 
the  highway  by  them  or  any  of  them.  The  owner  of  a  motor  vehicle 
shall  be  liable  for  any  injury  occasioned  by  the  negligent  operation 
of  such  motor  vehicle,  whether  such  negligence  consists  in  violation 
of  the  provisions  of  the  statutes  of  this  state  or  in  the  failure  to 
observe  such  ordinary  care  in  such  operation  as  the  rules  of  the  com- 
mon law  require:  Provided,  that  the  owner  shall  not  be  liable  unless 
said  motor  vehicle  is  being  driven  by  the  express  or  implied  consent 
or  knowledge  of  such  owner."    *    *    *  • 

It  is  true  that  the  automobile  has  become  so  perfected  that  it  may 
not  be  classed  as  a  "dangerous  instrumentality"  when  intelligently 
managed.  It  will  not  shy,  balk,  back  up,  or  run  away  when  properly 
directed,  but  may  do  all  of  these  when  managed  by  an  inexperienced, 
incompetent,  or  reckless  driver.  When  in  t\vS  control  of  such  a  one 
it  becomes  an  exceedingly  destructive  agency  as  the  daily  toll  of  lives 
and  the  many  injuries  to  persons  chronicled  by  the  newspapers  at- 
tests. If  the  owner  of  such  agency  consents  to  turn  it  over^  to  the 
control  of  an  incompetent  or  reckless  chauffeur  he  is  not  deprived  of 
any  legal  right  by  holding  him  liable  for  its  negligent  operation  when 
in  such  control  and  a  greater  degree  of  safety  to  the  general  public 
is  likely  to  follow. 

The  present  statute,  while  safeguarding  the  rights  of  persons  hav- 
ing occasion  to  use  the  streets,  does  not  unreasonably  infringe  upon 
the  rights  of  those  able  to  own  automobiles.  The  owner  of  an  automo- 
bile is  supposed  to  know,  and  should  know,  about  the  qualifications 
of  the  persons  he  allows  to  use  his  car,  to  drive  his  automobile,  and 
if  he  has  doubts  of  the  competency  or  carefulness  of  the  driver  he 
should  refuse  to  give  his  consent  to  the  use  by  him  of  the  machine. 
The  statute  is  within  the  police  power  of  the  state. 

Judgment  is  affirmed,  with  costs  to  the  plaintiff. 


GERSTEIN  V.  C.  F.  ADAMS  CO. 
(Supreme  Court  of  Wisconsin,  1919.     169  Wis.  504,  173  N.  W.  209.) 

Action  by  Gertrude  Gerstein  against  the  C.  F.  Adams  Company. 
Judgment  for  plaintiff,  and  defendant  appeals. 

This  action  was  commenced  in  the  civil  court  for  Milwaukee  county 
to  recover  damages  for  assault  and  battery.     A  general  verdict  was 


Ch.  2)  RELATION'S   OF   THE  PRINCIPAL  AND  THIRD   PERSONS  557 

rendered  in  favor  of  the  plaintiff  assessing  damages  at  $685.  An  ap- 
peal was  taken  to  the  circuit  court,  where  the  judgment  of  the  civil 
court  was  affirmed.    Defendant  appealed  to  this  court. 

Kerwin,  J.  The  evidence  in  this  case  tends  to  show  the  employes 
of  the  defendant,  at  the  time  of  the  alleged  injury,  were  attempting 
to  collect  the  balance  due  on  a  clock  sold  and  delivered  by  defendant  to 
plaintiff;  that  said  employes  forcibly  took  the  clock  from  the  home 
of  plaintiff,  and  in  so  doing  committed  an  assault  and  battery  upon  her, 
kicking  and  severely  injuring  her;  that  they  forcibly  took  possession 
of  the  clock  after  plaintiff'  had  failed  to  pay  the  balance  due.  Said 
employes  denied  that  they  assaulted  or  beat  plaintiff  or  used  any  force 
in  taking  the  clock.  Plaintiff  testified  that  at  the  time  in  question  she 
was  alone,  and  that  the  employes  of  the  defendant  came  to  her  home 
and  demanded  all  the  money  due  on  the  clock.  She  said  she  owed  $3 
and  would  pay  50  cents  and  the  balance  later,  but  one  of  the  employes 
said,  "No;  I  have  to  have  all  the  money."  Then  they  entered  the 
room  where  the  clock  was  and  immediately  took  it,  and  she  tried  to 
stop  them,  and  thev  struck  her,  and  she  fell.  They  ran  ^way,  taking 
the  clock  with  them,  and  she  lay  on  the  floor  half  an  hour  and  could 
not  get  up.    She  bought  the  clock  on  the  installment  plan. 

The  evidence  is  practically  undisputed  that  the  clock  was  taken  by 
the  employes  of  the  defendant  while  engaged  in  the  course  of  their 
employment;  hence  their  employer,  the  defendant  here,  was  liable 
for  the  negligent  or  wrongful  act  of  his  servants  committed  while  en- 
deavoring to  perform  a  duty  delegated  to  them  by  the  master  notwith- 
standing the  method  adopted  by  the  servants  may  not  have  been  au- 
thorized, and  even  may  have  been  prohibited,  by  the  master.    *    *    * 

Judgment  affirmed. 


FIELD  et  al.  v.  KANE. 
(Appellate  Court  of  Illinois,   First  District,  1901.     99  111.  App.   1.) 

This  suit  was  brought  in  trespass  by  appellee  to  recover  damages  for 
a  false  arrest  of  the  appellee  by  appellants.  The  evidence  discloses 
that  appellee  had  been  for  a  long  time  a  customer  of  the  appellants, 
and  that  she  had  a  credit  or  "charge"  account  with  appellants;  that 
at  the  time  in  question  she  visited  the  store  of  appellants  and  after 
examining  certain  wares  upon  the  third  floor,  started  away  from  the 
store,  having  made  no  purchase.  She  took  the  elevator,  and  upon 
reaching  the  main  floor  left  the  building.  After  she  was  upon  the 
street  Mr.  Claribut,  an  employe  of  appellants,  whose  duties  were  those 
of  usher  on  the  third  floor  of  the  store,  followed  her,  placed  his  hand 
upon  her  arm,  and  caused  her  to  return  to  the  store  with  him,  where 
she  was  taken  into  a  room  and  interviewed  by  others  of  appellants' 
employes.  Appellee  testified  that  Claribut  opened  her  cloak  and  put  his 
hand  into  her  pocket,  and  that  he  stated  to  Mr.  Weber,  another  of  ap- 
pellants' employes,  "This  lady  has  stolen  a  candlestick."  Claribut  tes- 
tified to  actions  of  appellee  while  in  the  store,  which  evidently  aroused 
his  suspicion,  and  that  he  followed  her  out  of  the  building  and  asked 
her  "if  she  hadn't  got  something  there  that  didn't  belong  to  her,"  to 
which  appellee  replied  that  he  had  made  a  mistake,  and  that  he  there- 
upon requested  her  to  step  into  the  store  with  him.  He  testified  that 
in  conducting  appellee  back  into  the  store  he  had  put  his  hand  under 
her  arm,  "just  as  I  would  escort  any  lady."    He  denied  that  he  or  any 


558  AGENCY  (Part  2 

other  person  had  searched  appellee.     Appellee  testified  that  Claribut 
"grabbed  her  by  the  shoulder"  when  taking  her  back  to  the  store. 

No  article  belonging  to  appellants  was  discovered  in  the  possession 
of  appellee,  and  it  was  not  contended  upon  the  trial  that  she  had  in 
fact  taken  anything.  The  appellants  pleaded  the  general  issue.  The 
issues  were  submitted  to  a  jury,  and  they  found  appellants  guilty  and 
assessed  appellee's  damages  at  $475.  From  judgment  upon  that  ver- 
dict this  appeal  is  prosecuted. 

Sears,  J.  [after  finding  that  there  were  present  the  essential  ele- 
ments of  a  wrongful  arrest  and  detention].  Greater  difficulty  is  to  be 
found  in  the  second  question  presented,  viz.,  as  to  whether  appellants 
are  liable  for  this  conduct  of  their  employe.  The  learned  counsel  for 
the  appellants  cites  and  relies  upon  the  decision  of  the  New  York 
court  in  Mali  v.  Lord,  39  N.  Y.  381,  100  Am.  Dec.  448.  The  opinion 
in  that  case  proceeds  upon  the  theory  that  a  principal  can  not  im- 
pliedly and  without  express  direction  authorize  another  to  do  thatas 
agent  which  the  principal  could  not  himself  lawfully  do.  The  decision 
supports  the  contention  of  counsel.  For  here  the  appellants  did  not, 
in  express  terms,  authorize  Claribut  to  detain  appellee  nor  could  it 
be  said  that  appellants  themselves  might,  under  the  facts  of  this  case, 
lawfully  detain  her.  The  same  reasoning  would  exonerate  the  prin- 
cipal from  liability  in  every  case  where  an  agent  made  a  wrongful 
arrest  without  express  direction  from  the  principal.  We  are  of  opin- 
ion that  the  basis  of  the  decision  is  not  sound,  and  that  it  lacks  the 
support  of  the  weight  of  authority  in  this  country.    *    *    *    ^ 

In  the  case  under  consideration  Claribut  was  employed  in  a  man- 
ner which  made  it  his  duty  to  protect  his  employer's  wares  against 
thieves.  That  he  might  lawfully  stop  a  thief  who  was  carrying  off 
any  of  those  wares,  can  scarcely  be  questioned.  This  authority  is  to 
be  implied  from  the  nature  of  his  employment.  If  the  authority  to 
detain  one  who  actually  was  carrying  away  the  goods  of  the  master 
is  implied,  and  the  act  of  the  agent  is  in  that  respect  the  act  of  the 
master,  then  when  the  agent  wrongfully  exercises  this  implied  au- 
thority by  detaining  one  under  suspicion  of  guilt  who  is  in  f-act  in- 
nocent, it  would  seem  as  clearly  to  be  the  act  of  the  master  done  by  the 
servant,  wrongfully,  to  be  sure,  yet  in  the  exercise  of  the  implied 
authority. 

The  fact  that  the  exercise  of  the  implied  authority  was  wrongful, 
does  not  of  itself  exclude  a  liability  of  the  master.  The  criterion  is, 
was  the  act  within  the  general  scope  of  the  implied  authority  conferred 
on  the  agent.  If  so,  the  wrongful  exercise  of  it,  although  not  ex- 
pressly directed  by  or  contemplated  by  the  master,  will  yet  render  the 
master  liable.  In  Arasmith  v.  Temple,  11  111.  App.  39,  this  court 
said :  "That  a  master  is  liable  for  a  trespass  committed  by  his  servant 
bona  fide  as  such  and  in  the  line  of  his  employment,  although  willful 
on  the  part  of  the  servant,  has  been  often  declared  by  the  Supreme 
Court  of  this  state.  *  *  *  The  act  of  the  servant  within  the  scope 
of  his  authority,  with  all  its  characteristics,  whether  of  willfulness, 
negligence  or  unskillfulness,  is  deemed  to  be  the  act  of  the  master. 
And  everything  done  by  the  servant  bona  fide  as  such  and  in  the  line 
of  his  employment,  is  within  the  scope  of  his  authority.  The  master's 
direction  to  do  it  is  impliedly  or  conclusively  presumed  from  the  re- 
lation existing  between  them.  *  *  *  Having  set  the  servant  to  work 
about  his  own  business  with  the  right  to  direct  and  control  him  as  to 


Ch.  2)  RELATIONS   OF   THE   PRINCIPAL   AND   THIRD   PERSONS  550 

the  manner  of  doing  it,  he  ought  to  answer  to  others  for  whatever  in- 
jury they  suffer  by  reason  of  what  he  so  does  or  of  the  manner  in 
which  he  does  it;  and  equally  so  whether  it  be  willful  or  only  careless 
or  unskillful."    *    *    * 

Authorities  which  do  not  follow  the  reasoning  of  the  Mali  Case, 
but  proceed  upon  a  different  and  opposite  interpretation  of  the  law, 
are  found  in  Staples  v.  Schmid,  18  R.  I.  224,  26  Atl.  193,  19  L.  R. 
A.  824;  Mallach  v.  Ridley,  47  Hun,  638,  9  N.  Y.  Supp.  922;  Rounds 
V.  D.  &  L.  W.  R.  Co.,  64  N.  Y.  129,  21  Am.  Rep.  597.  In  Staples  v. 
Schmid,  supra,  the  Rhode  Island  court  held  a  shopkeeper  liable  for  a 
wrongful  arrest  of  a  customer  by  an  employe  of  the  shopkeeper,  al- 
though there  was  no  express  direction  by  the  principal,  and  the  only 
authority  of  the  agent  to  act  in  the  matter  for  the  principal  was  the 
implied  authority  arising  from  his  duty  to  protect  his  employer's 
property.     The  court  said : 

"It  is  quite  true  that  the  master  would  have  no  right  to  arrest  and 
search  an  innocent  person ;  but  it  is  equally  true  that  he  would  have 
the  right  to  detain  a  thief  and.  to  recapture  his  property  from  him. 
The  case  therefore  was  one  where  the  act,  aside  from  any  excessive 
force,  might  be  lawful  or  unlawful,  according  to  whether  the  supposed 
circumstances  were  real  or  unreal.  The  servant  was  left  in  a  situa- 
tion where  he  was  obliged  to  determine  the  fact  and  where  his  duty  to 
his  master  depended  upon  his  decision.  The  decision  was  his,  as  the 
substitute  of  the  master,  and  the  act  was  one  intended  by  him  to  be 
for  his  master's  benefit  and  which  his  duty  required  if  the  facts  were 
as  supposed.  Hence,  as  to  third  persons,  it  was  the  master's  act. 
The  criterion  of  the  master's  liability  can  never  be  whether  the  act 
would  have  been  lawful  for  the  master  to  have  done  in  the  circum- 
stances as  they  actually  existed.  It  remains  to  apply  these  princi- 
ples to  the  case  at  bar.  The  servant  in  this  case  was  left  with  an  as- 
sistant in  charge  of  his  master's  store.  His  ordinary  duties  undoubt- 
edly were  to  show  goods  and  to  sell  them  to  customers.  It  was,  how- 
ever, equally  his  duty  to  protect  his  master's  property  from  pilfering. 
The  acts  complained  of  were  evidently  done  with  that  intention.  The 
arrest  was  for  the  purpose  of  searching  for  and  recovering  the  mas- 
ter's property,  not  with  the  object  of  punishing  crime  against  the  pub- 
lic. The  establishment  was  not  a  railroad  station  where  the  multi- 
plicity of  employes  confines  each  one  to  a  narrow  round  of  duties,  where 
special  officers  are  stationed  to  preserve  order  and  detain  criminals, 
nor  a  large  dry  goods  emporium  where  detectives  and  watchmen  are 
employed  to  guard  against  thieves.  The  servant  here  was  salesman 
and  custodian  in  one.  Whatever  the  master  might  do  in  the  protection 
of  his  property,  he  expected  his  servant  to  do  in  his  absence.  If  the 
servant  had  seen  the  plaintiff  take  up  and  secrete  the  package  of  spoons 
in  question  and  had  allowed  her  to  walk  away  with  them  unmolested, 
could  any  one  say  that  he  had  not  been  derelict  in  his  duty  to  his 
master?  If  in  the  performance  of  this  duty  he  mistook  the  occasion 
for  it,  or  exceeded  his  powers  or  employed  an  improper  degree  of 
compulsion,  the  mistake  and  the  excess  must  be  answered  for  by  the 
master." 

We  are  of  opinion  that  if  it  was  properly  determined  that  the 
implied  authority  of  Claribut  included  the  protecting  of  the  wares  of 
appellants  against  thieves,  then  the  wrongful  act  of  Claribut  in  detain- 
ing appellee  upon  an  unfounded  suspicion  that  she  had  committed  a 


560  AGENCY  (Part  3 

theft,  was  the  act  of  appellants.  Whether  the  implied  authority  of 
the  usher  included  such  protection  of  the  appellants'  property,  was, 
upon  the  facts  here,  a  question  for  the  jury,  and  we  are  not  prepared 
to  hold  that  the  conclusion  expressed  in  the  general  verdict  is  against 
the  weight  of  the  evidence.     *     *     * 

Claribut  was  usher  upon  the  floor  where  the  appellee  was  suspected 
of  having  committed  a  theft.  As  such,  his  plain  duty  was  to  protect 
his  employer's  wares  there.  It  does  not  appear  that  there  was  any 
other  employe  of  appellants  upon  that  floor  whose  specific  duty  it  was 
to  act  in  the  matter,  and  to  whom  Claribut  should  have  reported  the 
circumstances  before  acting.  If  the  suspicions  of  Claribut  had  been 
well  founded,  it  would  have  been  a  useless  thing  to  have  gone  in 
search  of  a  detective  while  a  theft  was  being  committed  in  his  pres- 
ence, and  if  the  culprit  in  such  case  had  escaped  through  his  inatten- 
tion he  would  have  been  derelict  in  his  duty.  In  the  Rhode  Island 
case  the  court  held  the  shopkeeper  to  respond  for  actual  damages  only. 
No  question  arises  in  the  case  under  consideration  as  to  any  such 
limitation  of  the  recovery,  as  no  complaint  is  made  that  the  damages 
awarded  are  excessive.     *     *     * 

The  judgment  is  affirmed. 


MERCHANTS'  NAT.   BANK   OF    SAVANNAH   v.   GUILMARTIN. 
(Supreme  Court  of  Georgia,  1892.    S8  Ga.  797,  15  S..E.  831,  17  L.  R.  A.  322.) 

Action  by  L.  J.  Guilmartin  against  the  Merchants'  National  Bank 
of  Savannah  to  recover  for  the  loss  of  a  special  deposit  of  valuables 
feloniously  appropriated  by  defendant's  cashier.  Judgment  for  plain- 
tiff.    Defendant  brings  error. 

Lumpkin,  J.  The  main  question  raised  in  the  record  is  whether  a 
bank,  which,  through  the  cashier,  received  from  one  of  its  customers 
a  special  deposit  of  valuable  securities,  to  be  kept  simply  for  the  de- 
positor's accommodation,  and  returned  to  him  on  demand,  shall  be 
held  liable  for  the  felonious  appropriation  of  the  securities  by  the 
cashier  to  his  own  use,  he  taking  them  while  they  were  in  the  bank. 
The  answer  to  this  question  depends  on  the  nature  of  the  duty  as- 
sumed by  the  bank  with  respect  to  the  deposit.  Such  a  deposit  be- 
longs to  the  class  of  bailments  termed  "gratuitous,"  and  the  test  of  the 
bailee's  liability  on  a  loss  of  the  property  is  to  inquire  whether  he 
exercised  the  full  amount  of  diligence  which  the  law  exacts  as  the 
measure  of  his  duty  in  keeping  the  property.  Each  kind  of  bailment 
imposes  on  the  bailee  the  obligation  to  use  a  degree  of  care  commen- 
surate to  some  extent  with  his  interest  in  the  transaction.  If  the  bail- 
ment is  for  the  benefit  exclusively  of  the  bailee,  he  must  use  extraor- 
dinary care ;  if  for  the  mutual  benefit  of  the  parties,  ordinary  care ; 
and  if  for  the  exclusive  benefit  of  the  bailor,  slight  care  will  sufiice. 
Thus  the  essence  of  a  contract  of  bailment  on  the  part  of  the  bailee 
is  for  diligence  of  the  required  degree,  and  when  he  has  used  such  dili- 
gence his  contract  is  performed,  and  he  discharged,  although  the  prop- 
erty may  be  lost  during  his  custody  of  it.  Accordingly  we  find  the  au- 
thorities holding  that  the  bank  is  not  liable  for  the  loss  of  a  special 
deposit,  to  keep  which  it  receives  no  compensation,  by  the  theft  of 
its  cashier  or  other  servant,  provided  it  has  not  been  guilty  of  gross 
negligence  in  any  respect.     *     *     *     fiig  bank  may  be  guilty  of  neg- 


Ch.  2)  RELATIONS  OF  THE   PRINCIPAL  AND   THIRD   PERSONS  561 

ligence,  and  liable  accordingly,  in  employing  or  retaining  an  unfit  per- 
son in  the  position  of  cashier.  But  when  it  does  its  full  duty  in  select- 
ing a  proper  person,  and  in  not  disregarding  indications  of  dishonesty 
which  ought  to  arouse  suspicion  and  investigation,  then  it  is  not  re- 
sponsible to  one  who  has  obtained  from  it  the  favor  of  barely  keep- 
ing specific  property  without  recompense,  though  the  cashier  steal  the 
property  so  put  in  his  charge.  The  law,  as  disclosed  by  the  authorities, 
seems  to  consider  that,  in  the  case  of  a  gratuitous  special  deposit,  there 
is  consideration  enough  in  the  bare  custody  of  the  property  to  insure 
its  being  kept  without  gross  negligence,  but  not  enough  to  bind  the  bank 
as  an  absolute  insurer  of  its  servant's  honesty. 

But  it  has  been  strongly  urged  that  the  bank,  as  master,  is  liable 
for  the  fraud  of  the  cashier,  its  servant,  in  the  course  of  its  business. 
This  is  the  point  of  most  difficulty.  Every  bailee  is  bound  to  exer- 
cise good  faith,  and  abstain  from  fraud,  in  keeping  the  property.  Bad 
faith  is  at  least  as  bad  as  gross  negligence,  and  entails  as  much  liability. 
The  application  of  this  is  easy  where  the  very  person  to  whom  the 
property  was  intrusted  is  guilty  of  the  fraud.  But  suppose  the  mas- 
ter, being  the  bailee,  is  personally  blameless,  and  his  servant  is  the 
guilty  one,  shall  the  master  be  held  liable?  At  common  law  there  was 
once  some  authority  that  the  master  was  not  liable  for  the  unauthor- 
ized willful  tort,  which  of  course  included  fraud,  of  his  servant. 

But  the  better  view  is  that  the  master  is  liable  for  every  tort  by  the 
servant  which  is  within  his  authority,  or  is  committed  in  the  prosecu- 
tion and  within  the  scope  of  the  business.  It  is  often  hard  to  draw  the 
line  between  torts  within  and  torts  without  the  master's  business.  On 
the  question  now  to  be  decided  the  cases  hold  that  the  act  of  the  cashier. 
by  which  he  appropriates  exclusively  to  himself  a  gratuitous  special 
deposit  in  the  bank,  is  not  an  act  done  in  the  bank's  business,  and 
within  the  scope  of  his  employment'.  The  custody  of  the  deposit  im- 
plies no  act  to  be  done,  but  only  a  mere  continuance  of  possession 
until  a  return  of  the  property  is  demanded.  The  cashier  had  nothing 
to  do  about  it  except  suffer  it  to  remain  in  a  safe  place  of  deposit. 
Consequently,  in  taking  it  to  himself,  he  is  said  to  "step  aside"  from 
his  employment  to  do  an  act  for  his  personal  gain,  regardless  of  the 
business  for  which  he  was  engaged.  Such  an  act  is  lacking  both  in  the 
rendition  of,  and  in  the  intent  to  render,  any  service  to  the  employer. 
The  cashier  does  not,  as  a  matter  of  fact,  act  with  the  bank's  author- 
ity, and,  furthermore,  does  not  essay,  or  even  profess,  to  act  in  its 
behalf.  He  represents  nobody  but  himself.  He  throws  off  all  alle- 
giance to  his  master  and  takes  the  part  of  a  common  enemy  to  all  con- 
cerned. He  becomes  the  same  as  a  stranger  from  without,  who  by  rob- 
bery, burglary,  or  stealth  deprives  the  bank  of  a  special  deposit ;  and 
the  authorities  hold  that  the  bank  is  not  chargeable  with  such  a  loss, 
in  the  absence  of  gross  negligence,  but  is  liable  if  grossly  negligent. 
Such  a  fraud,  by  a  well-selected  servant,  duly  supervised,  is  not  to  be 
imputed  to  the  bank  as  its  owri  fraud.  The  bank  cannot  be  said  to  have 
stolen  when  there  is  on  its  own  part  no  participation  in  the  theft,  no  ap- 
propriation, and  no  intent  to  appropriate  the  property.  Of  course,  if 
the  bank  derive  profit  or  benefit  from  its  servant's  speculation,  it  is 
liable.  *  *  *  The  common  law  appears  to  be  that  a  master  gener- 
ally is  not  liable  for  the  servant's  fraud  or  willful  tort  unless  he  is 
acting  at  the  time  by  the  master's  express  authority  or  in  the  conduct 
B.&  B. Bus. Law— 36 


562  AGENCY  (Part  2 

of  his  business;   that  is  to  say,  at  his  actual  or  implied  instance.     The 
servant  must,  in  the  wrongful  act,  be  acting  or  intending  to  act  in 
behalf  of  the  master,  and  in  the  course  of  his  employment. 
Judgment  reversed. 

MICK    V.  ROYAL   EXCHANGE   ASSURANCE. 

(Court  of  Errors  and  Appeals  of  New  Jersey,  1914.     87  N.  J.  Law,  607, 
91  Atl.  102,  52  L.  R.   A.   [N.   S.]   1074.) 

Parker,  J.  The  question  to  be  determined  is  whether  the  forfeiture 
clause  in  a  standardized  fire  insurance  policy,  making  it  void  "in  case 
of  any  fraud  or  false  swearing  by  the  insured  touching  any  matter 
relating  to  this  insurance  or  the  subject  thereof,  whether  before  or  after 
a  loss,"  is  under  any  circumstances  available  to  the  company  after  a 
loss,  when  there  is  fraud  in  the  claim  committed  by  an  agent  of  the  in- 
sured without  specific  knowledge  thereof  or  assent  thereto  by  the  insur- 
ed himself,  and,  if  so,  whether  the  circumstances  of  this  case  are  such 
as  to  make  the  forfeiture  applicable.    *    *    * 

The  responsibility  of  an  innocent  principal  for  the  fraud  of  an  agent 
has  been  one  of  the  vexed  questions  of  the  law.  That  an  innocent  prin- 
cipal cannot,  as  a  general  proposition,  be  permitted  to  benefit  by  the 
fraud  of  his  agent,  has  been  settled  in  this  court.  It  seems  to  be 
settled  that  a  principal  is  not  liable  in  tort  for  deceit,  upon  fraudulent 
representations  made  by  his  agent  without  his  knowledge  or  consent; 
*  *  *  the  remedy  in  such  case  resting  on  a  rescission  of  the  con- 
tract. But  this  seems  to  relate  mainly  to  the  form  of  the  remedy.  In 
many  cases  the  controlling  factor  was  the  extent  of  the  agent's  au- 
thority; and  such  authority  was  held  to  have  been  exceeded  in  such 
cases  as  National  Iron  Armor  Co..  v.  Bruner,  19  N.  J.  Eq.  331 ;  Ken- 
nedy v.  Parke,  17  N.  J.  Eq.  415.  While  in  others,  the  scope  of  the 
authority  was  held  to  cover  the  fraudulent  acts  and  the  principal  had 
to  suffer.  *  *  *  Naturally,  when  an  agent  intrusted  with  powers 
to  deal  with  a  particular  subject  matter  misuses  those  powers  so  as 
to  deal  unlawfully,  and  the  principal  is  sought  to  be  held  responsible, 
the  plea  is  that  the  powers  are  exceeded,  and  the  unlawful  acts  are 
not  within  the  scope  of  the  agency.  But,  as  was  said  by  Mr.  Justice 
Willes  in  the  leading  case  of  Barwick  v.  English  Joint  Stock  Bank, 
L.  R.  2  Exch.  259.  36  L.  J.  Exch.  147,  12  E.  R.  C.  298:  "In  all  these 
"cases  it  may  be  said,  as  it  was  said  here,  that  the  master  had  not  author- 
ized the  particular  act,  but  he  has  placed  the  agent  in  his  place  to  do 
that  class  of  acts,  and  he  must  be  answerable  for  the  manner  in  which 
that  agent  has  conducted  himself  in  doing  the  business  which  it  was 
the  act  of  his  master  to  place  him  in." 

That  case  was  quite  generally  considered  to  limit  the  responsibility 
of  the  principal  for  fraudulent  acts  of  the  agent  to  those  committed  for 
the  benefit  of  the  principal ;  but  this  misapprehension  is  set  right  by 
the  House  of  Lords  in  the  recent  case  of  Lloyd  v.  Grace,  Smith  &  Co., 
1912  A.  C.  176,  where  a  solicitor  was  held  accountable  for  the  fraudu- 
lent procurement  of  a  transfer  of  property  from  a  client  by  the  so- 
licitor's managing  clerk,  though  the  solicitor  in  no  way  benefited  or 
could  benefit  thereby,  knowing  nothing  of  the  transaction.  The  rule  is 
laid  down  that,  irrespective  of  the  question  of  benefit,  the  principal  is 
liable  for  the  fraud  of  the  agent  acting  within  the  scope  of  his  au- 
thority.   These,  and  other  English  cases,  are  cited  with  approval,  and 


Ch.  2)  RELATIONS   OF   THE   PRINCirAL   AND   THIRD   PERSONS  5Go 

the  general  question  discussed  by  Mr.  Justice  Kalisch,  speaking  for 
this  court  in  Corona  Kid  Co.  v.  Lichtman,  84  N.  J.  Law,  363,  86  Atl. 
371.  In  this  state  we  have  decided,  it  is  true,  that  in  such  case  an  ac- 
tion of  deceit  will  not  lie  against  the  innocent  principal ;  but  those 
decisons  go  to  the  form  of  the  remedy  and  not  to  the  denial  of  relief. 
That  fraud  of  an  agent  within  the  scope  of  his  employment  will  in- 
validate a  contract  so  procured  by  him  for  his  principal,  may  be  con- 
sidered settled  and  is  not  disputed  here.    *    *     * 


RHODA  V.  AXNIS. 
(Supreme  Judicial  Court  of  Maine,  1SS3.     75  Me.  17.  46  Am.  Rep.  354.) 

Danforth,  J.  This  is  an  action  to  recover  damages  for  deceit  in 
the  sale  of  a  farm.  The  representations  complained  of  were  made  by 
the  defendant's  son  acting  in  her  behalf.  The  jury  were  instructed 
that  the  "defendant  was  responsible  for  all  the  acts  and  representations 
of  her  agent  in  making  the  sale."  This  instruction  does  not  make  her 
responsible  for  the  acts  or  representations  of  any  person  who  was 
not  her  agent,  or  for  such  as  were  not  made  in  fv:rtherance  of  the 
sale,  or  to  accomplish  that  end.  These  things  were  first  to  be  found  by 
the  jury  under  proper  instructions  as  to  the  law.  We  must  then  as- 
sume that  the  son  had  authority  as  agent  for  his  mother  to  make  a  sale 
of  the  farm,  that  the  representations,  so  far  as  they  were  submitted 
to  the  jury,  were  made  by  him  as  a  part  of  the  negotiation  for  the 
purpose  of  bringing  about  the  sale,  that  by  means  of  them  it  was 
brought  about,  the  conveyance  was  made,  and  that  the  defendant  re- 
ceived the  proceeds  of  the  sale.  In  fact,  all  these  things  are  conceded. 
The  verdict  afifirms  the  fraudulent  character  of  the  representations, 
and  that  in  making  them  the  agent  acted  within  the  scope  of  his  au- 
thority. This  would  seem  to  bring  the  case  within  the  well  established 
law,  that  the  principal  is  responsible  for  such  acts  of  his  agent  as  are 
done  within  the  scope  of  his  authority,  to  do  the  principal  act. 

In  fact,  this  principle  of  law  is  conceded  in  this  case,  but  it  is  de- 
nied that  the  defendant  is  liable  in.  this  form  of  action.  It  is  said  that 
being  personally  innocent  of  the  fraud,  she  cannot  be  convicted  of  that 
which  has  been  committed  by  another  with  no  authority  from  her, 
except  that  which  results  from  his  agency.  This  may  be  true  in  a  crim- 
inal prosecution,  but  not  in  a  civil  action.  If  she  is  liable  that  liability 
must  be  ascertained  in  the  proper  form  of  action.  Here  is  no  con- 
tract of  any  kind,  express  or  implied,  between  the  parties  which  can 
afford  any  remedy  for  the  injury  of  which  the  plaintiff  complains.  He 
claims  that  a  wrong,  for  which  the  defendant  is  responsible,  has  been 
done  him.  For  that  wrong  he  seeks  a  remedy.  What  remedy  can  he 
have  except  an  action  of  tort?  The  counsel  says  two.  He  may  re- 
scind the  contract,  and  recover  back  the  consideration  paid,  or  in  an 
action  for  money  had  and  received,  recover  the  profits  accruing  from 
the  fraud.  But  neither  of  these  may  be  adequate  to  his  injury.  If 
he  rescinds  the  contracts  he  may  perhaps  lose  all  the  consideration 
paid,  and  it  would  be  difficult,  if  not  impossible,  to  ascertain  the 
amount  received  on  account  of  the  fraud,  if  that  should  be  held  to  dif- 
fer from  the  amount  of  damages  recoverable  in  this  form  of  action. 
But  how  does  this  change  of  form  relieve  the  defendant's  feelings  or 
reputation?     In  either  case  the  action  is  founded  upon  a  fraud,  and 


564  AGENCY  (Part  2 

one  which  must  be  proved.  In  either  case  it  is  not  her  own  fraud  but 
that  of  another  for  whose  doings  she  is  legally,  though  perhaps  not 
morally,  responsible. 

The' counsel  relies  largely,  if  not  entirely,  upon  the  English  cases  to 
support  his  views  and  some  of  them  do  so.  But  an  examination  of 
them  will  show  that  they  are  conflicting,  many  of  them  decidedly  sus- 
taining the  instruction  given  to  the  jury  in  this  case.  It  will  however 
be  noticed  that  in  the  most,  if  not  all  of  them,  the  form  of  the  action 
is  not  considered  material.  The  object  is  to  limit  the  extent  of  the  lia- 
bility to  the  advantages  received  from  the  fraud,  applying  a  somewhat 
different  test  to  the  amount  of  dama^ges  to  be  recovered. 

The  American  cases  are  more  unfform,  and  sustain  the  instruction 
complained  of,  both  as  to  the  form  of  action  and  extent  of  liability. 
Bigelow  on  page  23,  says:  "In  America  it  has  generally  been  held 
that  an  action  of  deceit  may  be  maintained  against  the  principal ;  but 
the  cases  are  at  variance  as  to  the  ground  of  liability."  As  are  the 
cases,  so  we  find  the  text-books  uniform  in  sustaining  the  liability  of 
the  principal  in  actions  of  tort  for  the  wrongful  acts  of  the  agent  done 
within  the  scope  of  his  authority,  even  though  the  principal  himself 
is  innocent.    *    *    * 

As  already  seen  all  the  cases,  both  here  and  in  England,  hold  the 
principal  liable  for  the  fraud  of  the  agent  to  some  extent  when  he  has 
adopted  the  contract  into  which  that  fraud  has  entered,  and  if  liable, 
we  see  no  good  reason  why  that  liability  should  not  be  co-extensive 
with  the  injury  in  accordance  with  the  great  weight  of  authority.  If 
he  would  avoid  this  he  may,  as  undoubtedly  the  law  would  authorize 
him  to  do,  repudiate  the  contract,  and  restore  to  the  injured  party 
what  has  been  taken  from  him.  But  in  this  case  no  such  offer  has 
been  made,  but  defendant  still  holding  the  fruits  of  what  the  jury  have 
pronounced  a  fraud,  denies  any  liability  on  her  part.    *    *    * 

Exceptions  overruled. 


Ch.  3)  TERMINATION   OF  THE   RELATION  565 

CHAPTER  III 
TERMINATION  OF  THE  RELATION 

Section 

1.  What   Constitutes   a   Termination   of   the   Relation? 

2.  Irrevocable  Powers. 

3.  Effect  of  Terminating  the  Relation. 


SECTION  1.— WHAT    CONSTITUTES    A    TERMINATION 
OF  THE  RELATION? 


AHERX  V.   BAKER. 

(Supreme  Court  of  Minnesota.  1S85.  34  Minn.  98,  24  N.  W.  341.) 
Vandkrburgh,  J.  The  defendant,  on  the  ninth  day  of  September, 
1884,  specially  authorized  one  Wheeler,  as  his  agent,  to  sell  the  real 
property  in  controversy,  and  to  execute  a  contract  for  the  sale  of  the 
same.  He  in  like  manner  on  the  same  day  empowered  one  Fairchild 
to  sell  the  same  land ;  the  authority  of  the  agent  in  each  instance  being 
limited  to  the  particular  transaction  named.  On  the  same  day,  Wheeler 
effected  a  sale  of  the  land,  which  was  consummated  by  a  conveyance. 
Subsequently,  on  the  tenth  day  of  September,  Fairchild,  as  agent  for 
defendant,  and  having  no  notice  of  the  previous  sale  made  by  Wheeler, 
also  contracted  to  sell  the  same  land  to  this  plaintiff,  who,  upon  de- 
fendant's refusal  to  perform  on  his  part,  brings  this  action  for  dam- 
ages for  breach  of  the  contract. 

This  is  a  case  of  special  agency,  and  there  is  nothing  in  the  case  go- 
ing to  show  that  the  plaintiff  would  be  estopped  from  setting  up  a 
revocation  of  the  agency  prior  to  the  sale  by  Fairchild.  A  revocation 
may  be  shown  by  the  death  of  the  principal,  the  destruction  of  the 
subject-matter,  or  the  determination  of  his  estate  by  a  sale,  as  well 
as  by  express  notice.  The  plaintiff  [defendant?]  had  a  right  to  em- 
ploy several  agents,  and  the  act  of  one  in  making  a  sale  would  pre- 
clude the  others  without  any  notice,  unless  the  nature  of  his  contract 
with  them  required  it.  In  dealing  with  the  agent  the  plaintiff'  took 
the  risk  of  the  revocation  of  his  agency.  *  *  * 
Order  affirmed,  and  case  remanded. 


CLAFLIN  et  al.  v.  LENHEIM. 
(Court  of  Appeals  of  New  York,  1876.     66  N.  Y.  301.) 

Rapallo,  J.  The  plaintiffs  seek  to  recover  in  this  action  the  price 
of  certain  merchandise  which  they  allege  that  they  sold  and  delivered 
to  the  defendant,  through  his  brother  H.  S.  Lenheim,  as  his  agent. 

To  establish  the  agency,  they  proved  that  this  brother  of  the  defend- 
ant had,  for  several  years  prior  to  July,  1867,  conducted  the  business 
of  a  store  at  Meadville,  Pennsylvania,  in  the  name  of  the  defendant, 
and  had  been  in  the  habit  of  purchasing  goods  for  that  store  from 


566  AGENCY  (Part  2 

the  plaintiffs.  These  purchases  were  all  made  in  the  name  and  on  the 
credit  of  the  defendant,  and  the  bills  thereof  were  rendered  to  and 
paid  by  him. 

The  defendant  concedes,  in  his  testimony,  that  previous  to  a  fire 
which  took  place  in  July,  1867,  in  the  store  at  Meadville,  his  brother 
was  authorized  by  him  to  make  purchases  and  carry  on  that  store  in 
his  (the  defendant's)  name,  but  contends  that  after  the  fire  he  termi- 
nated such  authority.  The  purchases  for  which  this  action  was  brought 
were  made  by  the  brother,  for  the  Meadville  store,  in  November  and 
December,  1869,  in  the  name  of  the  defendant.  The  plaintiffs  claim 
that  they  had  no  notice  of  the  revocation  of  the  agency,  and  sold  on 
the  credit  of  the  defendant. 

The  last  bill  paid  bv  the  defendant  for  goods  sold  for  the  Mead- 
ville store,  was  for  upwards  of  $8,000,  and  was  paid  in  August,  1867. 
It  was  for  goods  sold  before  the  fire.  There  was  a  difficulty  between 
the  plaintiffs  and  the  defendant  about  this  bill.  An  action  was  brought 
upon  it  and  an  attachment  issued  against  the  property  of  the  defend- 
ant, and  he  was  required  to  pay  the  costs  of  these  proceedings,  ^Vhich 
he  did  in  August,  1867.  The  defendant  had  for  several  years  previ- 
ously carried  on  another  store  at  Great  Bend,  Pennsylvania,  and  had 
been  in  the  habit  of  purchasmg  goods  from  the  plaintiffs  for  that 
store;  but  after  this  difffculty  he  suspended  all  his  dealings  with  the 
plaintiffs  until  the  month  of  October,  1869,  when  he  resumed  his  busi- 
ness relations  with  them  by  the  purchase  of  goods,  personally,  for  the 
store  at  Great  Bend.  In  the  following  months  of  November  and  De- 
cember, 1869,  the  brother  made  the  purchases  now  in  controversy,  in 
the  name  of  the  defendant,  for  the  Meadville  store. 

The  defendant  gave  evidence  on  the  trial  tending  to  show  actual  no- 
tice to  the  plaintiffs  of  the  revocation  of  the  agency,  after  the  fire  of 
July,  1867.  It  was  conceded  that  the  plaintiff's  had  notice  of  the 
burning  of  the  store  at  Meadville,  but  the  evidence  of  notice  of  the 
revocation  of  the  agency  was  controverted. 

The  court  submitted  to  the  jury  the  question  whether  the  plain- 
tiff's had  notice  of  the  revocation,  but  charged  that  if  the  jur>'  came 
to  the  conclusion  "that  the  circumstances  of  the  case  were  such,  in- 
dependently of  the  question  of  notice,  that  in  fair  dealing  between 
man  and  man  plaintiff's  should  have  inquired  by  telegraph  or  by  letter 
of  the  defendant  at  Great  Bend  whether  he  continued  the  Meadville 
store,  and  whether  the  brother  continued  to  have  authority  to  buy 
goods  in  his  name,  that  will  end  the  recovery  in  this  case,''  and,  fur- 
ther, that  if  the  jury  came  to  the  conclusion  "that  no  notice  in  fact 
was  given  and  that  the  circumstances  were  such  as  to  put  the  plaintiff's 
fairly  upon  inquiry  as  to  whether  that  business  was  continued  by 
•  the  defendant  and  the  brother  had  authority  to  continue  it  by  making 
these  purchases,  that  ends  the  responsibility  on  the  part  of  the  de- 
fendant." Exceptions  were  duly  taken  to  the  portions  of  the  charge 
above  quoted. 

It  is  a  familiar  principle  of  law  that  when  one  has  constituted  and 
accredited  another  his  agent  to  carry  on  a  business,  the  authority  of 
the  agent  to  bind  his  principal  continues,  even  after  an  actual  revoca- 
tion, until  notice  of  the  revocation  is  given,  and.  as  to  persons  who 
have  been  accustomed  to  deal  with  such  agent,  until  notice  of  the  revo- 
cation is  brought  home  to  them.  The  case  of  such  an  agency  is  analo- 
gous to  that  of  a  partnership,  and  the  notice  of  revocation  of  the  agency 


Ch.  3)  TERMINATION   OF   THE   RELATION  567 

is  governed  by  the  same  rules  as  notice  of  the  clissohition  of  a  part- 
nership. As  to  persons  who  have  been  previously  in  the  habit  of 
dealing  with  the  firm,  it  is  requisite  that  actual  notice  should  be 
brought  home  to  the  creditor,  or  at  least,  that  the  credit  should  have 
been  given  under  circumstances  from  which  notice  can  be  inferred. 
Where  the  circumstances  are  controverted,  or  where  notice  is  sought 
to  be  inferred,  as  a  fact,  from  circumstances,  the  question  is  for  the 
jury;  they  must  determine,  as  a  question  of  fact,  whether  the  party 
claiming  against  the  partnership  or  the  principal,  did  have  notice  of 
the  dissolution  or  revocation ;  and  there  being  some  evidence  of  the 
fact  of  notice,  the  court,  in  the  present  case,  properly  submitted  to 
the  jury  this  question  of  fact. 

But  the  court  submitted  to  the  jury  the  further  question  whether, 
independently  of  the  question  of  notice  in  fact,  the  circumstances  were 
such  as  to  put  the  plaintiffs  on  inquiry  as  to  whether  the  authority 
of  the  agent  continued,  and  charged  them  that  if  they  were,  the  plain- 
tiffs were  charged  with  notice  of  the  facts  which  the  inquiry  would 
have  disclosed.  In  other  words,  the  question  was  submitted  to  the 
jury  whether,  although  the  plaintiffs  had  no  notice  in  fact,  they  had 
constructive  notice  of  the  revocation  of  the  agency. 

Assuming  that  the  doctrine  of  constructive  notice  is  applicable  to 
cases  of  this  description,  what  circumstances  amount  to  constructive 
notice  is  a  question  of  law.  Where  the  facts  are  in  dispute,  a  mixed 
question  of  law  and  fact  is  presented,  and  then  of  course  the  question 
is  to  be  determined  by  the  jury,  under  instructions  by  the  court,  as 
to  the  effect  of  the  circumstances  which  they  may  find  to  have  ex- 
isted. But  the  question  whether  circumstances  which  are  undisputed, 
or  are  found  by  the  jury,  are  sufficient  to  put  a  party  on  inquiry  and 
thus  charge  him  with  constructive  notice,  is  not  for  the  jury  but  for 
the  court. 

In  this  case,  throwing  out  of  view  the  evidence  bearing  upon  the 
question  of  actual  notice,  there  was  no  controversy  about  the  facts. 
These  were,  that  the  store  at  Meadville  was  burnt  in  July,  1867,  and 
the  plaintiffs  knew  of  the  fire;  that  the  plaintiffs  brought  an  action 
and  issued  an  attachment  against  the  defendant  for  the  bill  then  due 
for  goods  furnished  to  the  store  at  Meadville ;  that  this  claim  and  the 
costs  of  the  proceedings  were  paid  by  the  defendant  in  August,  1867, 
and  the  defendant  thereafter  suspended  all  dealings  with  the  plain- 
tiffs until  October,  1869,  when  he  resumed  them,  and  that  in  Novem- 
ber, 1869,  the  brother  resumed  his  purchases  for  the  Meadville  store, 
from  the  plaintiffs  on  credit,  in  the  name  of  the  defendant.  Whether 
these  circumstances  were  sufficient  to  put  the  plaintiffs  on  inquiry,  or 
in  other  words,  whether  they  amounted  to  constructive  notice  of  the 
fact  which  an  inquiry  would  have  disclosed,  viz.  the  revocation  of  the 
agency,  was  a  question  of  the  law,  to  be  determined  by  the  court, 
and  it  was  error  to  submit  it  to  the  jury.     *     *     * 

This  error,  however,  would  not  be  ground  for  reversing  the  judg- 
ment if  it  appeared  that  the  court  would  have  been  justified  in  hold- 
ing, as  a  matter  of  law,  that  the  circumstances  were  sufficient  to  put 
the  plaintiffs  on  inquiry,  and  we  must,  therefore,  examine  that  ques- 
tion. 

The  mere  fact  that  the  store  at  Meadville  was  burnt  did  not  indicate 
that  the  defendant  intended  to  discontinue  business  there;  and  if  busi- 
ness had  been  promptly  resumed  and  purchases  for  that  store  renewed 


568  AGENCY  (Part  2 

by  the  defendant's  brother,  there  could  have  been  no  reason,  in  the 
absence  of  any  notice  from  the  defendant,  to  suppose  that  the  agency 
had  been  discontinued.  The  principal  feature  in  the  case  is  the  delay 
of  two  years  and  upwards  between  the  fire  and  the  resumption  of 
purchases,  by  the  defendant's  brother,  for  the  Meadville  store.  But, 
under  the  circumstances,  this  delay  might  well  have  been  attributed  by 
the  plaintiffs  to  the  difficulty  between  them  and  the  defendant,  in  July 
and  August,  1867,  which  resulted  in  the  defendant  suspending  all  deal- 
ings with  the  plaintiffs,  notwithstanding  that  he  continued  his  business 
at  Great  Bend.  And  when  the  defendant,  in  1869,  resumed  his  deal- 
ings with  the  plaintiffs,  without  giving  them  notice  of  any  change  in 
his  business  arrangements  with  his  brother,  at  Meadville,  the  plaintiffs 
were  warranted  in  believing  that  the  suspension  of  the  dealings  of  the 
brother  was  attributable  to  the  same  cause  which  had  deterred  the  de- 
fendant himself  from  making  purchases;  and  when,  immediately 
after  the  defendant  himself  resumed  dealings,  the  brother  applied  to 
make  purchases  as  before,  for  the  Meadville  store,  the  plaintiffs  would 
not,  naturally,  attribute  the  suspension  of  deaUngs  for  that  store,  in 
the  meantime,  to  a  revocation  of  the  agency,  nor  suspect  that  the 
brother  was  committing  a  fraud.  We  must,  in  considering  the  por- 
tion of  the  charge  excepted  to,  assume,  as  we  have  assumed,  that  no 
notice  was  given  by  the  defendant  to  the  plaintiffs  that  he  had  dis- 
continued his  business  at  Meadville  or  revoked  the  authority  of  his 
brother,  and  that  the  plaintiffs  knew  nothing  of  it,  for  the  charge  ex- 
pressly submits  the  question  of  constructive  notice,  independently  of 
the  question  of  notice  in  fact,  and  expressly  states  that  the  jury  are 
to  pass  upon  it  in  case  they  find  that  there  was  no  notice  in  fact. 

We  think  that  the  circumstances  existing  at  tlie  time  of  the  sale 
of  the  goods  in  question  were  not  sufficient  to  constitute  constructive 
notice  of  the  revocation  of  the  agency,  and  that  the  case  should  have 
been  submitted  to  the  jury  only  upon  the  question  of  notice  in  fact. 
In  this  there  is  no  hardship  upon  the  defendant;  it  was  his  duty, 
after  he  had  accredited  his  brother  for  a  series  of  years  as  authorized 
to  deal  in  his  name  and  on  his  responsibility,  when  he  terminated  that 
authority,  to  notify  all  parties  who  had  been  in  the  habit  of  dealing 
with  his  agent,  as  the  plaintiffs  had  been  to  his  knowledge.  This  was 
an  act  easily  performed  and  would  have  been  a  perfect  protection  to 
him  and  prevented  the  plaintiff's  from  being  deceived.  Justice  to  par- 
ties dealing  with  agents  requires  that  the  rule  requiring  notice  in 
such  cases  should  not  be  departed  from  on  slight  grounds,  or  dubious 
or  equivocal  circumstances  substituted  in  place  of  notice.  If  notice 
was  not  in  fact  given,  and  loss  happens  to  the  defendant,  it  is  at- 
tributable to  his  neglect  of  a  most  usual  and  necessary  precaution. 

The  jury  may  have  been  satisfied  that  notice  was  given,  but  under 
the  charge  they  may  have  rendered  their  verdict  solely  on  the  ground 
of  constructive  notice;  the  judgment  must,  therefore,  be  reversed  and 
a  new  trial  ordered,  with  costs  to  abide  the  event. 

Judgment  reversed. 


Ch.  3)  TERMINATION  OF  THE   RELATION  569 


BURCH    V.    AMERICUS    GROCERY    CO. 
(Supreme  Court  of  Georgia,  1906.     125  Ga.  153,  53  S.  E.  1008.) 

Action  by  the  Americus  Grocery  Company  against  J.  B.  Burch. 
Judgment  for  plaintiff.    Defendant  brings  error. 

Evans,  J.  The  Americus  Grocery  Company  sued  J.  B.  Burch  for 
a  balance  alleged  to  be  due  on  open  account.  The  only  item  in  dispute 
was  one  of  May  8,  1903,  for  a  certain  quantity  of  tobacco.  The  de- 
fendant contended  that  this  item  was  purchased  by  his  clerk,  Mike 
Burch,  after  he  had  left  his  employment,  and  that  he  neither  authoriz- 
ed, nor  ratified  the  purchase  nor  received  the  tobacco.  On  the  other 
hand,  the  plaintiff  insisted  that  Mike  Burch  was  the  general  agent  of  the 
defendant  in  the  management  of  his  store,  and  as  such,  on  previous . 
occasions,  had  ordered  goods  of  plaintiff  on  defendant's  account,  and 
that  the  plaintiff',  without  notice  that  Mike  Burch  was  no  longer  em- 
ployed by  the  defendant,  took  the  order  in  the  defendant's  name  and 
shipped  the  goods  to  the  defendant,  as  was  usual  in  the  past  transac- 
tions. *  *  *  When  the  merchandise,  to  recover  the  price  of  which 
the  present  action  was  brought,  was  ordered  of  the  plaintiff  by  Mike 
Burch,  he  was  not  in  the  employment  of  the  defendant,  and  had  not 
been  for  two  months  past.  Neither  the  plaintiff  company  nor  its 
"drummer"  was  aware  at  the  time  of  receiving  the  order  that  Mike 
Burch  was  no  longer  in  the  service  of  the  defendant.  *  *  *  Upon 
these  facts  the  jury  returned  a  verdict  in  favor  of  the  plaintiff  for  the 
value  of  the  goods,  which  verdict  the  trial  judge  refused  to  set  aside 
on  motion  for  a  new  trial.    *    *    * 

It  is  a  general  rule  of  law,  therefore,  upon  which  there  seems  to  be 
no  conflict  of  authorities,  that  all  acts  of  a  general  agent  within  the 
scope  of  his  authority,  as  respects  third  persons,  will  be  binding  on  the 
principal,  even  though  done  after  revocation,  unless  notice  of  such 
revocation  has  been  given  to  those  persons  who  have  had  dealings  with 
and  who  are  apt  to  have  other  dealings  with  the  agent  upon  the 
strength  of  his  former  authority."  1  Clark  &  Skyles  on  Agency,  § 
173  (b).  *  *  *  The  term  "actual  notice"  is  intended  to  be  under- 
stood in  its  strictly  legal,  technical  sense,  and  is  not  to  be  confounded 
with  actual  knowledge,  which,  as  was  pointed  out  in  Clarke  v.  Ingram, 
107  Ga.  570,  33  S.  E.  802,  is  by  no  means  a  synonymous  or  inter- 
changeable term.  "Notice  is  actual  when  one  either  has  knowledge  of 
a  fact  or  is  conscious  of  having  the  means  of  knowledge,  although  he 
may  not  use  them."  It  may  be  either  "express  notice,"  or  simply  "im- 
plied notice"  ;  notice  communicated  by  direct  and  positive  informa- 
tion from  persons  cognizant  of  the  fact,  or  notice  such  as  "arises  when 
the  party  to  be  charged  is  shown  to  have  had  knowledge  of  such  facts 
and  circumstances  as  would  lead  him,  by  the  exercise  of  due  diligence, 
to  a  knowledge  of  the  principal  fact."  1  Parsons  on  Contracts  (9th 
Ed.)  71. 

In  the  present  case  no  express  notice  was  shown,  and  the  controlling 
issue  was  whether  or  not  the  plaintiff  had  "implied  notice"  that  there 
had  been  a  revocation  of  the  agency,  within  the  meaning  of  Civ.  Code 
1895,  §  3933,  which  declares  that:  "Notice  sufficient  to  excite  atten- 
tion and  put  a  party  on  inquiry  is  notice  of  everything  to  which  it  is 
afterwards  found  such  inquiry  might  have  led.  Ignorance  of  a  fact, 
due  to  negUgence,  is  equivalent  to  knowledge  in  fixing  the  rights  .of 
parties."     The  only  circumstance  upon   which   the   defendant  could 


570  AGENCY  (Part  2 

rely  as  suggesting  the  necessity  of  making  inquiry  whether  the  agen- 
cy had  been  terminated  was  that  the  order  for  the  goods  was  given  to 
the  plaintiff's  salesman  three  miles  from  the  defendant's  store,  where 
the  agent  had  been  employed.  The  defendant  was  engaged  in  the  saw- 
mill business,  and  his  "commissary"  was  run  in  connection  with  that 
business,  as  an  adjunct  to  it,  and  not  as  a  wholly  independent  enterprise. 
When  the  order  for  the  goods  was  taken,  ]\Iike  Burch,  who  still  as- 
sumed to  act  as  the  defendant's  agent,  was  superintending  the  erection 
of  a  sawmill.  That  it  did  not  belong  to  the  defendant  or  was  not  to 
be  used  in  connection  with  his  business  was  not  self-apparent,  nor  was 
the  fact  that  Mike  Burch  was  not  at  the  time  engaged  in  his  custom- 
ary duties  at  the  commissary  calculated  to  put  the  plaintiff's  salesman 
on  notice  that  he  had  left  the  service  of  the  defendant.  Moreover, 
the  salesman  had  first  driven  by  the  store  of  the  defendant  and  in- 
quired for  Mike  Burch,  who  had  theretofore  been  in  charge  of  it.  In- 
stead of  being  notified  that  Mike  Burch  was  no  longer  in  the  defend- 
ant's employ,  the  salesman  was  told  where  IMike  Burch  could  be 
found.  Under  these  circumstances  it  is  not  strange  that  the  salesman 
should  assume  that  the  employes  at  the  store  of  the  defendant  under- 
stood that  he  had  called  on  business,  as  theretofore,  and  wished  to  see 
the  defendant's  representative,  nor  is  it  remarkable  that,  after  being 
informed  as  to  his  whereabouts  but  given  no  intimation  that  he  was 
no  longer  the  defendant's  agent,  the  drummer  should  entertain  no 
doubt  as  to  the  continuance  of  the  general  agency. 

The  jury,  after  considering  all  the  facts  and  circumstances  brought 
to  light  at  the  trial,  found  agamst  the  contention  of  the  defendant  that 
due  caution  and  prudence  on  the  part  of  the  plaintiff's  drummer  ought 
to  have  suggested  to  him  the  propriety  of  making  inquiry,  if  he  did 
not  divine  the  truth.  The  burden  of  proof  was  upon  the  defendant 
to  establish  his  defense  that  the  plaintiff  was  affected  with  implied 
notice.  *  *  *  The  plaintiff  being  a  creditor  of  the  defendant  and 
having  had  numerous  business  transactions  with  his  accredited  agent 
was  entitled  to  receive  a  formal  notification  from  him  of  the  termina- 
tion of  the  agency,  or  the  legal  equivalent  of  such  a  notification.  The 
plaintiff  could  not  in  good  faith  remain  passive,  so  long  as  the  defend- 
ant failed  in  his  legal  duty  to  take  active  measures  to  impart  notice. 
*  *  *  The  defendant  was  admittedly  at  fault,  having  failed  to  take 
any  steps  to  give  notice  to  the  plaintiif,  whereas  the  plaintiff"  had  not 
omitted  to  perform  any  legal  duty  owing  to  the  defendant,  and  the 
plaintiff's  drummer  admittedly  acted  in  entire  good  faith.  The  jury 
took  the  view  that  the  plaintiff  should  not  be  called  on  to  suffer  the 
loss.  "In  this  there  is  no  hardship  upon  the  defendant,"  as  was  point- 
ed out  by  Rapallo,  J.,  in  Claflin  v.  Lenheim,  66  N.  Y.  301,  who  added 
that  it  was  the  defendant's  duty,  "after  he  had  accredited  his  brother 
for  a  series  of  years  as  authorized  to  deal  in  his  name  and  on  his  re- 
sponsibility, when  he  terminated  that  authority,  to  notify  all  parties 
who  had  been  in  the  habit  of  dealing  with  his  agent,  as  the  plaintiffs 
had  been  to  his  knowledge.  This  was  an  act  easily  performed,  and 
would  have  been  a  perfect  protection  to  him  and  prevented  the  plain- 
tiffs from  being  deceived.  Justice  to  parties  dealing  with  agents  re- 
quires that  the  rule  requiring  notice  in  such  cases  should  not  be  de- 
parted from  on  slight  grounds,  or  dubious  or  equivocal  circumstances 
substituted  in  place  of  notice.  If  notice  was  not  in  fact  given,  and  loss 
happens  to  the  defendant,  it  is  attributable  to  his  neglect  of  a  most 


Ch.  3)  TERMIXATION   OF   TIIK    RELATION  571 

usual  and  necessary  precaution."  The  verdict  of  the  jury  appears 
to  be  in  accord  both  with  the  strict  law  and  the  common  justice  of  the 
case,  and  it  should  not  be  set  aside  unless  the  court  below  committed 
some  error  which  was  obviously  calculated  to  bring  about  a  result 
which  would  not  otherwise  have  been  probable.  *  *  * 
Judgment  affirmed. 


CLAYTON   V.   MERRETT  ot  al. 
(Supreme   Court  of  Mif;sissippi,   1S76.     52  Miss.   ."53.) 

Chalmi;rs,  J.  Leroy  M.  Wiley,  a  resident  of  Georgia,  intrusted  to 
his  agent,  James  Drane,  of  Choctaw  county,  Miss.,  a  note  against  G. 
B.  &  T.  D.  Merrett,  and  with  it  a  deed  to  be  delivered  to  them  on  pav- 
ment  of  the  note.  Drane  placed  the  note  in  the  hands  of  Tucker  & 
Green,  attorneys,  for  collection.  The  attorneys  filed  a  bill  and  ob- 
tained decree  for  sale  of  the  land,  and  the  same  was  sold  by  the  com- 
missioner appointed  for  that  purpose  by  the  chancery  court.  The  Mer- 
retts  bought  at  the  sale,  paid  the  purchase  money  directly  to  the  at- 
torneys. Tucker  &  Green,  and  withdrew  the  deed,  which  had  been  pre- 
viously tendered  and  filed  with  the  bill,  and  the  same  recorded.  James 
Drane  having  died  during  the  pendency  of  the  suit.  Tucker  &  Green 
paid  over  the  money  which  they  received  to  his  executrix. 

After  all  these  transactions  had  occurred,  it  was  discovered  for  the 
first  time  that  Leroy  M.  Wiley  had  died  before  the  institution  of 
the  suit  in  his  name,  and  nearly  two  years  before  the  payment  of  the 
money.  Some  time  thereafter  appellant,  Clayton,  administered  upon 
his  estate  in  this  state  (where  the  deceased  owned  other  claims  and 
owed  some  debts),  and  filed  his  bill  against  the  Merretts  to  compel  them 
to  pay  again  the  amount  due  on  the  land.  The  bill  sets  forth  the 
above  facts,  and  is  aided  by  an  agreement  of  counsel,  in  which  it  is 
admitted  that  neither  Drane  nor  Tucker  &  Green  nor  the  Merretts 
knew  of  Wiley's  death  at  the  time  of  payment  by  the  latter. 

Two  principal  points  are  raised  by  the  demurrer:  1st.  The  six 
years  statute  of  limitations.  2d.  That  the  payment  being  made  in  ig- 
norance by  all  parties  of  the  death  of  Wiley,  is  good.     *    *    * 

Upon  the  second  point  it  is  admitted  that  the  former  legal  proceed- 
ings, having  been  commenced  and  prosecuted  in  Wiley's  name  after 
his  death,  are  void,  and  that  the  deed  abstracted  from  the  papers,  and 
recorded,  conveyed  no  title ;  but  it  is  contended  that  the  payment  of 
the  money  was  good,  because  made  in  ignorance  that  the  death  of  the 
principal  had  revoked  the  agency. 

There  are  several  cases  which  seem  to  hold  that  although,  as  a  g€n- 
eral  principle,  death  revokes  an  agency  and  renders  null  every  act  of 
the  agent  thereafter  performed,  yet  that  where  a  payment  has  been 
made  in  ignorance  of  the  death,  such  payment  will  be  good.  The 
leading  case  so  holding  is  that  of  Cassiday  v.  McKenzie,  4  Watts  & 
S.  (Pa.)  282,  39  Am.  Dec.  7(y,  where,  in  an  elaborate  opinion,  this 
view  is  broadly  announced.  It  is  referred  to,  and  seems  to  have  been 
followed,  in  the  case  of  Dick,  Ex'r,  v.  Page  et  al.,  17  Mo.  234,  57  Am: 
Dec.  267;  but  in  this  latter  case  it  appeared  that  the  estate  of  the 
deceased  principal  had  received  the  benefit  of  the  money  paid,  and 
therefore  the  representative  of  the  estate  might  well  have  been  held 
to  be  estopped  from  suing  for  it  again.  *  *  *  jj^  Stout  v.  Iberry, 
10  M.  &  W.  1,  a  wife  purchased  provisions  on  the  husband's  credit, 


572  AGENCY  (Part  2 

during  his  absence,  and,  as  was  afterwards  developed,  after  his  death. 
In  an  action  to  hold  her  personally  liable  for  the  goods  it  was  held 
that  she  originally  had  full  authority  to  contract  the  debt  in  her  hus- 
band's name ;  that  she  was  guilty  of  no  wrong  and  suppressed  no  in- 
formation in  doing  so;  that  the  person  supplying,  her  took  equally 
with  herself  the  chance  of  the  continued  life  of  the  absent  husband ; 
that  his  death,  being  the  act  of  God,  should  work  her  no  harm,  and 
she  was  therefore  acquitted  of  the  debt.  It  seems  to  have  been  con- 
ceded that  the  estate  of  the  husband  was  not  bound,  and  the  result 
would  appear  to  be  that  the  unfortunate  tradesman  lost  his  debt  alto- 


gether. 


These  cases,  in  so  far,  at  least,  as  they  announce  the  doctrine  under 
discussion,  are  exceptional.  The  Pennsylvania  case,  supra,  is  be- 
lieved to  stand  almost,  if  not  quite,  alone  in  announcing  the  principle 
in  its  broadest  scope.  The  overwhelming  weight  of  authority  is  to 
the  effect  that  the  death  of  the  principal  operates  as  an  instantaneous 
revocation  of  the  agency  where  it  is  a  naked  power,  unaccompanied 
with  an  interest,  and  that  every  act  of  the  agent  thereafter  performed 
is  null  so  far  as  the  estate  of  the  principal  is  concerned.  This  rule 
frequently  operates  very  unjustly  and  produces  very  great  hardship. 
A  party  dealing  with  an  insolvent  agent,  upon  the  faith  of  his  well- 
known  authority  from  a  wealthy  and  distant  principal,  is  suddenly 
confronted  with  the  fact  that  the  authority  had  ceased,  by  the  death 
of  the  principal,  one  day  or  perhaps  one  hour  before  his  transaction 
occurred.  Impressed  with  the  hardship  of  such  a  case,  the  civil  law 
adopts  the  rule  contended  for  in  the  case  at  bar,  and  renders  valid 
a  contract  executed  or  payment  made  under  such  circumstances. 

The  Scotch  law  is  said  to  be  similar.  Judge  Story  regrets  that  this 
beneficent  rule  does  not  prevail  under  the  common  law,  and  insinu- 
ates a  doubt  as  to  whether  that  system  is  altogether  liable  to  the  re- 
proach which  he  seems  to  think  that  the  opposite  doctrine  casts  upon 
it.  Story  on  Agency,  §  495,  and  notes.  It  will  be  observed,  however, 
that  the  distinction  which  he  undertakes  to  draw,  in  his  desire  to  rid 
the  common  law  of  what  he  regards  as  a  defect,  is  only  the  case  of  an 
agency  coupled  with  an  interest,  as  to  which  it  is  well  settled  that  the 
act  of  the  agent,  performed  in  ignorance,  and  sometimes  even  with 
full  knowledge,  of  the  death  of  the  principal,  is  binding. 

Several  states  of  the  Union,  among  which  are  said  to  be  Maryland 
and  Georgia,  have  by  statute  adopted  the  rule  of  the  civil  law  on  this 
subject.    2  Kent's  Com.  646,  note. 

However  wise  such  legislation  may  seem  to  be,  and  however  great 
the  injustice  produced  in  particular  cases  by  the  contrary  doctrine, 
undoubtedly  the  common  law  rule  is  that  death  revokes  the  agency  and 
nullifies  all  acts  thereafter  performed.  This  doctrine  rests  upon  the 
obvious  principle  that  as  a  dead  man  can  do  no  act  for  himself,  so 
no  man  can  do  an  act  for  him.  When,  therefore,  the  agent  under- 
takes to  act  in  his  name,  he  is  acting  for  a  being  not  in  existence.  To 
hold  his  act  valid  is  not  to  bind  the  dead  man,  but  to  bind  his  heirs 
and  representatives,  who  are  thus  held  liable  for  the  acts  of  one  whom 
they  never  appointed,  and  whom  perhaps  they  would  be  unwilling  to 
trust.  Whether  a  system  of  jurisprudence  which  would  accomplish 
this  result  would  be  found  in  the  long  run  less  productive  of  injustice 
than  our  present  rule  may  well  be  doubted.  At  all  events  we  are  satis- 
fied that  such  is  not  now  the  law.     *     *    * 


Ch.  3)  TERMINATION  OF  THE  RELATION  573 

We  -would  remark  that  the  case  at  bar  is  not  one  where  the  death  of 
the  principal  occurred  within  a  few  hours  or  days  before  the  payment, 
but  that  nearly  two  years  intervened  between  the  two  events.  If  the 
principle  is  the  same,  it  does  not,  at  least,  present  a  case  where  it  was 
physically  impossible  for  the  debtor  to  know  that  the  power  of  the 
agent  had  been  terminated  by  the  death  of  the  principal. 

The  views  of  the  court  below  seem  not  to  have  been  in  accordance 
with  the  views  here  announced,  and  were  therefore  erroneous.  We 
observe,  however,  that  complainant,  Clayton,  who  is  the  administra- 
tor of  Wiley,  fails  to  make  the  heirs  of  his  intestate  defendants  to  the 
bill.  This  should  have  been  done,  inasmuch  as  the  legal  title  to  the 
land  was  in  them.  No  objection  to  this  was  urged  either  in  the  court 
below  or  in  this  court,  but  the  absence  of  a  necessary  party  renders  it 
impossible  to  proceed  with  the  bill  in  its  present  aspect. 

So  much  of  the  decree  of  the  court  below  as  sustains  the  demurrer 
is,  therefore,  affirmed:  so  much  of  it  as  dismisses  the  bill  is  reversed, 
and  the  cause  is  retained,  and  remanded  with  leave  to  complainant  to 
amend  his  bill  within  ninety  days,  or  such  further  time  as  to  the  chan- 
cellor may  seem  proper,  *  *  *  ^^  which  the  bill,  if  not  amended, 
shall  stand  dismissed. 


SECTION  2.— IRREVOCABLE  POWERS 


TERWILLIGER  v.  ONTARIO,  C.  &  S.  R.  CO. 
(Court  of  Appeals  of  New  York,  1S96.     149  N.  Y.  86,  43  N.  E.  432.) 

The  action  was  brought  to  recover  the  purchase  price  of  1,224  rail- 
road ties,  alleged  in  the  complaint  to  have  been  sold  and  delivered  by 
the  defendant  in  the  months  of  February  and  March,  1890,  for  the 
price  of  $602.55.  The  answer,  among  other  things,  alleges  that  the 
plaintiff,  for  a  good  and  valuable  consideration,  authorized  one  Wheeler 
to  sell  the  ties  to  the  defendant,  and  to  receive  the  pay  therefor  for 
his  own  use,  and  that  thereafter  Wheeler  sold  the  ties  to  the  defendant, 
and  that  the  defendant  paid  him  therefor  in  full.  The  issues  were 
referred  to»a  referee  for  trial. 

Andre;ws,  C.  J.  The  principal  question  on  this  appeal  arises  on 
the  exception  by  the  defendant  to  the  refusal  of  the  referee  to  make 
any  finding  upon  the  question  whether  the  plaintiff,  in  the  summer 
of  1889,  authorized  Wheeler  to  sell  the  ties  to  the  defendant,  and  apply 
the  proceeds  of  the  sale  in  payment  for  the  timber  which  had  been 
cut  by  the  plaintiff",  without  authority,  from  Wheeler's  lands.  The 
evidence  upon  this  question  was  conflicting.  The  defense  rested  sub- 
stantially upon  the  assertion  that  such  authority  was  given ;  that  it 
was  executed  by  a  sale  and  delivery  of  the  ties  thereunder  by  Wheeler 
to  the  defendant ;  and  that,  the  defendant  having  subsequently  paid 
Wheeler  therefor,  the  debt  was  discharged.  The  refusal  of  the  referee 
to  pass  upon  the  question  of  Wheeler's  original  authority  was  put  upon 
the  ground  that,  assuming  it  to  have  been  given,  it  was  subsequently 
revoked  by  the. act  of  the  plaintiff  in  himself  selling  and  delivering  the 
ties  to  the  defendant.  It  became,  therefore,  as  the  referee  held,  an 
immaterial  issue,  which,  if  found  in  favor  of  the  defendant,  would  not 
aff'ect  the  result,  since,  by  the  general  rule,  an  authority  once  given,  if 


o74  AGENCY  (Part  3 

revoked  before  execution,  except  where  an  element  of  estoppel  inter- 
venes, is  the  same  as  to  third  persons  as  though  it  had  never  existed. 
The  primary  question  presented  by  this  ruHng  of  the  referee  involves 
an  inquiry  into  the  nature  of  the  authority  given  by  the  plaintiff  to 
Wheeler.  It  is  to  be  conceded,  for  the  purpose  of  this  appeal,  that 
Wheeler  possessed  the  authority  which  the  evidence  on  the  part  of  the 
•defendant  tended  to  establish,  and  that  it  was  conferred  for  the  pur- 
poses which,  by  direct  evidence  or  by  fair  inference,  can  be  collected 
from  the  evidence  most  favorable  to  the  defendant.  If  the  author- 
ity conferred  on  Wheeler  was  a  mere  naked  authority,  by  which  we 
understand  an  authority  in  the  execution  of  which  the  agent  has  no 
other  interest  than  that  which  springs  from  his  employment  as  agent 
and  his  right  to  earn  his  compensation,  then,  according  to  the  gen- 
eral rule,  it  was,  while  executory,  revocable  at  any  time,  at  the  pleas- 
ure of  the  plaintiff.  In  case  of  a  naked  power,  the  authority  of  the 
agent,  derivative,  and  not  original,  ceases  when  the  principal,  for  what- 
ever reason,  withdraws  the  delegation  and  terminates  the  agency. 
There  is  a  qualification  of  the  rule  where  the  agent  has  entered  upon 
the  execution  of  the  authority  before  revocation,  and  has  so  bound  him- 
self that  a  retraction  of  the  authority  would  subject  him  to  liability. 
In  such  cases  the  principal  cannot  revoke  the  authority  as  to  the  part 
of  the  transaction  remaining  unexecuted,  at  least  not  without  indem- 
nifying the  agent.     *     *     * 

But  an  authority  may  be  irrevocable  by  reason  of  its  purpose  and 
the  circumstances  attending  its  creation.  The  cases  of  an  authority 
coupled  with  an  interest  are  of  this  character.  What  constitutes  an 
authority  coupled  with  an  interest  was  considered  in  one  of  the  mas- 
terly judgments  of  Chief  Justice  Marshall,  in  Hunt  v.  Rousmanier, 
8  Wheat.  174,  5  L.  Ed.  589.  In  that  case  the  owner  of  an  interest 
in  a  certain  vessel,  then  at  sea,  to  secure  a  loan  of  money,  executed 
to  the  lender  contemporaneously  with  the  loan  a  power  of  attorney 
authorizing  him  to  sell  the  borrower's  interest  in  the  vessel,  which 
power,  by  its  terms,  was  to  become  void  on  payment  of  the  loan.  The 
iDorrower  died  before  payment,  and  the  question  was  presented  wheth- 
er his  death  operated  to  revoke  the  power.  It  was  decided  that  the 
power  was  revoked  by  the  death  of  the  grantor.  The  general  doc- 
trine that  a  power  must  be  exercised  in  the  name  of  the  principal, 
and  does  not  survive  his  death,  was  held  to  be  applicable.  But  the 
court,  in  the  decision  of  the  question,  proceeded  to  consider  the  ex- 
ception to  the  rule  in  cases^  where  the  power  was  coupled  with  an  in- 
terest, and  to  define  the  meaning  of  that  phrase.  In  a  luminous  state- 
ment the  Chief  Justice  confined  the  scope  of  the  exception  to  cases 
where,  together  with  the  power,  there  was  vested  in  the  donee  an 
estate,  right,  or  interest  in  the  subject  of  the  power,  as  distinguished 
from  an  interest  in  the  proceeds  of  the  power  when  exercised.  In 
the  former  case  he  declared  that  the  power  would  not  be  extinguished 
by  the  death  of  the  creator  of  the  power,  because  it  attached  to  the 
estate  of  the  donee  in  the  subject  of  the  power,  and  was  capable  of 
execution  in  his  own  name  after  the  death  of  the  principal,  unlike 
cases  where  the  power  was  unconnected  with  any  interest  in  the  thmg 
itself,  and  the  only  interest  was  in  the  execution  of  the  power.  The 
distinction  between  the  cases  of  a  powder  given  for  the  purpose  of  a 
power  given  for  the  same  purpose,  but  supplemented  by  a  transfer 
•of  an  interest,  seems  technical ;   but  in  the  latter  case  it  at  least  pre- 


Ch.  3)  TERMINATION   OF   THE   RELATION  575 

serves  the  substance  and  efifectuates  the  intent,  while  it  obviates  in 
the  particular  case  the  general  doctrine  that  a  power  is  determined 
by  the  death  of  the  creator  of  the  power.  In  Watson  v.  King,  4  Camp. 
272,  Lord  Ellenborough,  in  a  case  very  similar  to  that  of  Hunt  v. 
Rousmanier,  also  held  that  a  power  of  attorney  to  a  creditor  to  sell 
a  vessel  was  revoked  by  the  death  of  the  principal,  and  upon  the 
same  ground,  namely,  that  it  could  not  thereafter  be  executed  in  his 
name.  The  same  point  was  ruled  in  equity  in  Lepard  v.  Vernon,  2 
Ves.  &  B.  51,  where  it  was  held  that  a  power  given  to  a  creditor  to 
receive  a  debt,  expressly  for  the  purpose  of  liquidating  the  claim,  un- 
accompanied, however,  by  any  assignment  of  the  debt,  was  revoked 
by  the  death  of  the  principal.  Knapp  v.  Alvord,  10  Paige,  205,  40 
Am.  Dec.  241,  is  an  illustration  of  a  power  coupled  with  an  interest. 
There  a  power  of  attorney  to  sell  a  stock  of  goods  and  apply  the  pro- 
ceeds upon  liabilities  incurred  and  to  be  incurred  by  the  donee  of  the 
power  was  given,  accompanied  by  the  possession  of  the  goods,  and  it 
w^as  held  that  it  was  not  revoked  by  the  death  of  the  principal,  be- 
cause it  was  a  power  coupled  wdth  ^i  interest.  The  fact  that  the  pos- 
session of  the  goods  accompanied  the  powder  was  the  controlling  point 
in  the  decision. 

Testamentary  powers,  from  their  nature,  necessarily  survive  the 
death  of  the  testator.  They  usually  accompany  some  estate  given  by 
the  will  to  the  donee  of  the  power,  or  are  regarded  as  trusts,  which, 
if  accepted,  the  donee  is  in  conscience  bound  to  execute.  *  *  * 
There  are  other  familiar  cases  of  irrevocable  powers,  because  coupled 
with  an  interest,  such  as  powers  of  sale  accompanying  mortgages,  or 
powers  to  do  other  acts  affecting  real  or  personal  property,  to  make 
effectual  an  interest  or  right  in  the  subject  of  the  power  vested  in  the 
donee,  and  to  which  the  power  is  auxiliary.  Powers  of  this  character 
are  neither  revocable  by  the  grantor  of  the  power,  nor  are  they  re- 
voked by  his  death.  *  *  *  Chief  Justice  Marshall's  definition  of 
a  power  coupled  with  an  interest  has  been  generally  accepted  in  this 
countr}%  but  in  some  cases  his  classification  has  not  been  accurately  ob- 
served. See  Hutchins  v.  Hebbard,  34  N.  Y.  24.  Indeed,  the  English 
courts  give  a  wider  meaning  to  the  phrase  than  in  the  close  definition 
of  Chief  Justice  IMarshall.  In  Watson  v.  King,  supra.  Lord  Ellen- 
borough  speaks  of  the  power  in  that  case  as  a  power  coupled  with  an 
interest,  and  in  Smart  v.  Sandars,  5  C.  B.  895,  Wilde,  C.  J.,  refer- 
ring to  the  authorities,  said :  "The  result  seems  to  be  that,  where  an 
agreement  is  entered  into  on  a  sufficient  consideration,  whereby  an 
authority  is  given  for  the  purpose  of  securing  some  benefit  to  the  donee 
of  the  authority,  such  an  authority  is  irrevocable.  This  is  what  is 
usually  meant  by  an  authority  coupled  with  an  interest."  The  dis- 
tinction between  the  English  and  American  cases  is  rather  in  words 
than  substance.  Upon  the  same  facts  the  decisions  in  both  judica- 
tttres  are  the  same.  Both  in  Hunt  v.  Rousmanier  and  Watson  v.  King 
the  death  of  the  principal  was  held  to  revoke  the  power,  although  in 
one  case  it  was  regarded  as  a  power  coupled  with  an  interest,  and 
in  the  other  that  it  w^as  not. 

But  there  are  classes  of  powers  which  are  irrevocable  by  the  act 
of  the  principal,  although  they  do  not  come  within  Chief  Justice  Mar- 
shall's definition  of  powers  coupled  with  an  interest.  This  is  clearly 
recognized  by  that  eminent  judge  in  the  case  to  which  reference  has 


576  AGENCY  (Part  2 

been  made.  After  stating  the  general  rule  that  a  power  may  at  any 
time  be  revoked  by  the  party  conferring  it,  he  says :  "But  this  general 
rule,  which  results  from  the  nature  of  the  act,  has  sustained  some 
modification.  Where  a  letter  of  attorney  forms  part  of  a  contract, 
and  is  security  for  money,  or  for  the  performance  of  any  act  which 
is  deemed  valuable,  it  is  generally  made  irrevocable  in  terms,  or,  if  not 
so,  is  deemed  irrevocable  in  law;"  and  he  proceeds  to  state  that  the 
power  to  sell  the  vessel  by  Rousmanier  in  that  case  could  not  have  been 
revoked  by  him  during  his  life,  but,  not  being  a  power  coupled  w/ith 
an  interest,  it  was  revoked  by  his  death.  Kent  uses  similar  language. 
He  says  (2  Kent,  Comm.  644) :  "But  where  it  [power  of  attorney] 
constitutes  part  of  a  security  for  money,  or  is  necessary  to  give  effect 
to  such  security,  or  where  it  is  given  for  a  valuable  consideration,  it  is 
not  revocable  by  the  party  himself,  though  it  is  necessarily  revoked 
by  his  death."  And  Story,  in  his  work  on  Bailments,  §  209,  says: 
"But  if  it  is  given  as  part  of  a  security,  as  if  a  letter  of  attorney  is 
given  to  collect  a  debt  as  a  security  for  money  advanced,  it  is  irrevoca- 
ble by  the  party,"     This   doctrine  has   support   in   adjudged   cases. 

In  the  cases  referred  to,  the  authority  was  conferred  by  formal 
written  powers  of  attorney.  But  unless  an  authority  given  is  for  the 
performance  of  some  act  which  by  statute  or  by  the  common  law  the 
agent  cannot  perform  in  the  name  of  his  principal  unless  thereunto  au- 
thorized in  writing,  we  can  perceive  no  legal  distinction  in  the  applica- 
tion of  the  doctrine  between  formal  written  power  and  an  informal 
oral  authority.  *  *  *  Unless  there  was  a  consideration  for  the  au- 
thority conferred  on  Wheeler  to  sell  the  ties  and  apply  the  proceeds 
on  his  claim,  it  is  plain  that  it  was  not  irrevocable.  *  *  *  With- 
out going  into  particulars,  it  is  sufficient  to  say  that  the  evidence  given 
on  the  part  of  the  defendant  would,  in  our  opinion,  justify  an  infer- 
ence that  Wheeler  accepted  the  arrangement  proposed  by  the  plain- 
tiff, and  forbore  the  pursuit  of  his  lumber  or  its  proceeds,  in  reliance 
upon  the  authority  given  him  by  the  plaintiff'  to  sell  the  ties,  and  ap- 
ply the  proceeds  on  his  claim. 

The  position  of  an  agent  holding  an  irrevocable  power  for  the  sale 
of  chattels,  not  connected  with  possession  of  the  property  or  any  in- 
terest in  the  nature  of  a  title,  general  or  special,  in  the  subject  of 
the  power,  is  peculiar.  ^'  *  *  The  fact  that  possession  does  not  go 
with  the  power  subjects  the  holder  of  the  power  to  the  risk  that  the 
purpose  of  the  power  may  be  frustrated  by  a  transfer  by  the  owner  of 
the  chattels  to  a  purchaser  in  good  faith  for  value  without  notice. 
It  will  be  for  the  court  or  jury  on  a  new  trial  to  determine,'  upon  the 
facts  found,  whether  there  was  any  valid  consideration  within  the 
law  applicable  to  executory  contracts  to  uphold  the  authority.  If  such 
consideration  existed,  then  we  are  of  the  opinion  that  the  authority  was 
irrevocable,  and  that  the  payment  by  the  defendant  to  Wheeler,  under 
the  contract  made  with  him,  was  binding  upon  the  plaintiff'.  In  our 
opinion,  the  referee  erred  in  refusing  to  find  upon  the  question  of  au- 
thority in  Wheeler  to  sell  the  ties  and  apply  the  proceeds  on  his  claim. 
If  no  such  authority  existed,  there  is  no  defense  to  the  action.  If 
it  was  given,  but  was  not  based  upon  any  consideration  which  the 
law  deems  sufficient  to  uphold  an  executory  contract,  then  we  are  of 
opinion  that  it  was  revocable,  and  that  it  was  a  question  of  fact  upon 


Ch.  3)  TERMINATION  OF  THE   RELATION  577 

the  evidence  whether  there  was  an  actual  revocation  before  the  defend- 
ant paid  Wheeler.  The  judgment  should  be  reversed,  and  a  new  trial 
ordered.     *     *     * 


SECTION  3.— EFFECT  OF  TERMINATING  THE 
RELATION 


ATLANTIC   COAST  REALTY   CO.    v.   TOWNSEND. 

(Supreme  Court  of  Api^eals  of  Virginia,  1919.    124  Va.  490,  98  S.  E.  684.) 

Plaintiff,  a  land  brokerage  concern,  secured  of  defendant's  testa- 
tor the  exclusive  right,  for  a  year,  to  sell  certain  lands  of  testator,  un- 
der an  agreement  whereby  the  lands  were  to  be  divided  into  small  lots 
and  the  company  to  receive  $40,000, out  of  the  proceeds  of  sale.  Tes- 
tator made  a  sale  of  the  land  himself  before  the  end  of  the  year,  and 
claimed  that  this  worked  a  revocation  of  plaintiff's  agency.  The 
company  brings  action  for  damages  for  breach  of  the  contract.  Judg- 
ment sustaining  demurrer  to  declaration.  Plaintiff"  brings  a  writ  of 
error. 

Ke;IvLY,  J.  *  *  *  ]s^o  question  as  to  rights  of  third  persons  is 
here  involved,  and  therfe  is  no  claim  that  the  agency  was,  in  a  techni- 
cal sense,  coupled  with  an  interest.  Under  the  facts  as  alleged  in  the 
declaration,  it  is  not  denied,  and  it  is  clear,  that  the  defendant  not 
only  had  the  power  to  revoke,  but  did  in  fact  effectually  revoke,  the 
agent's  authority,  by  making,  on  his  own  behalf  and  independent  of 
the  agency,  a  sale  of  the  subject-matter  of  the  contract.  *  *  *  It 
by  no  means  follows  that  such  a  revocation  can  be  made  by  the  prin- 
cipal as  a  matter  of  right  and  without  liability  to  his  agent.  The  lat- 
ter question  depends  upon  the  character  and  terms  of  the  agent's 
contract.  Quoting  again  from  2  C.  J.  at  page  533,  the  following  gen- 
eral and  comprehensive  statem.ent  is  peculiarly  germane  in  this  con- 
nection: "As  between  principal  and  agent,  the  right  to  terminate  the 
agency  depends  upon  the  ordinary  principles  of  contract,  and  is  gov- 
erned by  the  same  rules  as  apply  to  any  other  contract  of  employ- 
ment. Although,  as  has  been  stated,  a  principal  has  the  undoubted 
power,  so  far  as  the  agency  is  executory,  to  revoke  the  agent's  au- 
thority, it  by  no  means  follows  that  he  has  always  a  right  to  do  so, 
since  the  contract  of  agency  may  provide  otherwise.  Accordingly,  if 
he  revokes  the  agency  in  violation  of  the  contract,  he  becomes  liable 
to  the  agent  for  the  damages  caused  thereby,  although  it  should  be 
observed  in  this  connection  that  the  agent  is  limited  to  his  action  for 
damages;  the  courts  will  not  specifically  enforce  the  contract  against 
the  principal.  But  if  the  contract  of  agency  contains  no  terms  indi- 
cating the  creation  of  an  agency  for  a  definite  period,  or  if  the  contract 
is  not  supported  by  a  sufficient  consideration,  it  is  terminable  at  will, 
and  the  principal  by  revoking  the  authority  incurs  no  liability  to  the 
agent,  unless  the  agent  has  entered  upon  performance  of  the  contract 
so  that  a  revocation  of  his  authority  will  work  him  legal  injury." 
*     *     * 

It  follows  from  these  authorities,  to  which  many  more  might  be 
added,  that,  when  an  agency  is  not  such  as  to  constitute  what  in  legal 
B.&  B.Bus.Law— 37 


578  AGENCY  (Part  2 

parlance  is  called  a  power  coupled  with  an  interest,  and  no  third  par- 
ty's rights  are  involved,  the  agency,  so  long  as  it  remains  unexecuted, 
may  be  effectually  revoked  at  the  will  of  the  principal,  but  that  a 
wrongful  revocation  will  nevertheless  render  him  liable  in  damages 
to  his  agent.  In  other  words,  the  agency  may  always  be  revoked, 
but  the  contract  of  employment  will  not  necessarily  be  thereby  rescind- 

In  the  instant  case  we  are  of  opinion  that  a  valuable  consideration 
for  the  agreement  itself,  as  distinguished  from  the  mere  chance  of 
the  agent  to  earn  a  commission  or  compensation,  was  sufficiently  al- 
leged in  the  declarations ;  and,  while  the  agency  was  not  coupled  with 
such  an  interest  as  to  make  it  irrevocable,  the  contract  which  created 
it  was  a  mutual  agreement  between  competent  parties  for  a  lawful 
purpose  and  upon  a  valuable  consideration,  with  the  result  that  neither 
party  could  violate  it  without  becoming  responsible  to  the  other  for 
the  breach.    *     *    * 

Reversed. 


SHEAHAN  V.  NATIONAL  S.  S.  CO. 

(United  States  Circuit  Court  of  Appeals,  Second  Circuit,  1S9S.     87  Fed.  167, 

30  C.  C.  A.  593.) 

Judgment  for  defendant,  and  plaintiff  sued  out  this  writ  of  error, 
Pe;r  Curiam.  This  is  an  action  to  recover  damages  for  breach  of 
contract.  The  plaintiff  was  the  sole  witness,  and  the  only  contract 
with  defendant  which  his  testimony  tended  to  establish  was  one  made 
in  1867,  whereby  defendant  employed  him  as  its  agent  to  sell  tickets 
on  commission,  with  no  limitation  as  to  time  or  provision  requiring 
notice  of  termination.  After  he  had  continued  in  such  employment 
about  nine  years,  defendant  abruptly  terminated  the  contract.  In  the 
absence  of  any  provision  requiring  notice  as  a  condition  precedent  to 
termination,  or  of  any  clause  fixing  a  term  of  employment,  defendant 
was  entitled  to  dismiss  its  agent  at  pleasure,  without  thereby  giving 
plaintiff  a  cause  of  action  for  damages  sustained  by  reason  of  such 
discharge.    The  judgment  of  the  circuit  court  is  affirmed. 


Ch.  4:)  KELATIONS   OF   THE   PRINCIPAL   AND   AGENT  579 


CHAPTER  IV 
RELATIONS  OF  THE  PRINCIPAL  AND  AGENT 

Section 

1.  Rights  of  the  Principal  Against   the  Agent. 

2.  Rights  of  the  Agent  Against  the  Principal. 


SECTION  1.— RIGHTS  OF  THE  PRINCIPAL  AGAINST 

THE  AGENT 


TBOMAS  V.   BEAVER  DA]\I  INIFG.   CO. 

(Supreme  Court  of  Wisconsin,  1914.     1.57  Wis.  427,  147  N.  W.  364, 
Ann.  Cas.  1916A,  1020.) 

Action  to  recover  on  a  contract  of  employment.  Plaintiff  claimed 
he  was  employed  by  defendant  for  one  year  at  a  salary  of  twelve 
hundred  dollars,  payable  in  monthly  installments  of  one  hundred  dol- 
lars, and  that  before  expiration  of  such  period  he  was  discharged 
without  cause  and  sues  for  damages  to  the  extent  of  the  wages  he  might 
otherwise  have  earned. 

There  was  evidence  tending  to  prove  that  plaintiff  did  not  devote  all 
his  time  to  the  performance  of  his  duties ;  that  he  was  unnecessarily 
absent  therefrom  one  or  two  days  a  week  on  several  occasions,  and 
that  once  he  was  absent  for  some  three  weeks  and  made  no  account 
thereof  to  defendant.  There  was  also  evidence  tending  to  prove  that 
plaintiff  charged  as  expenses  $2  per  day,  regularly,  when  away  from 
home,  whether  he  spent  this  amount  or  not  and  sometimes  when  he 
did  not  spend  anything.  There  was  also  evidence  tending  to  prove 
that  he  disobeyed  instructions  on  several  occasions. 

There  was  further  evidence  that  defendant  notified  plaintiff  by 
letter  that  his  contract  would  expire  by  a  particular  date  mentioned, 
because  the  corporation  had  concluded  to  change  its  mode  of  selling, 
to  which  plaintiff  replied  that  he  should  decline  to  accept  a  discharge 
except  upon  the  conditions  mentioned  in  the  contract,  to  which  de- 
fendant replied  that,  for  plaintiff's  benefit,  he  would  be  retained  thir- 
ty days  longer,  if  he  so  desired,  but  that  at  the  end  of  that  time  his 
services  would  be  dispensed  with,  adding:  "If  it  will  be  any  relief 
to  you  we  will  notify  you  to  the  effect  that  you  have  proved  incompe- 
tent to  handle  our  line,  and  furthermore  that  you  have  had  certain 
instructions  that  you  have  not  followed  out  as  per  our  instructions. 
We  hope  this  will  be  sufficient  notice."  At  the  close  of  the  evidence 
the  court  directed  a  verdict  for  plaintiff  because  of  there  not  being 
any  satisfactory  evidence  of  conduct  on  plaintiff's  part  warranting 
his  discharge,  and  because  he  was  not  in  fact  discharged  for  bad  con- 
duct. 

Marshall,  J.  If  when  respondent  was  discharged  there  existed 
an  uncondoned  justification  therefor,  regardless  of  whether  it  was 
then  known  to  appellant,  or  whether  the  reason  assigned  for  such  dis- 
charge was  sufficient,  the  trial  court  erred  in  holding  that  appellant 


580  AGENCY  (Part  2 

was  precluded  by  the  first  or  any  notice  of  discharge  from  providing 
an  existing  ground  not  therein  referred  to.     *     *     * 

Under  the  terms  of  the  contract  appellant,  acting  in  good  faith  and 
within  the  terms  of  its  contract,  had  a  right  to  determine  for  itself 
whether  any  of  the  stipulated  grounds  for  discharging  respondent 
existed.  There  being  at  the  best  for  respondent,  evidence  tending  to 
prove  incompetency  and  several  substantial  violations  of  contract  du- 
ty, the  trial  court  erred  in  directing  a  verdict  in  respondent's  favor. 

Any  mexcusable  substantial  violation  by  an  employee  of  instruc- 
tions, or  neglect  of  duty  of  a  substantial  character,  or  any  misconduct 
inconsistent  with  the  relations  of  master  and  servant  and  which  might 
injuriously  affect  the  former's  business,  regardless  of  any  express 
agreement  on  the  subject,  constitutes  good  ground  for  discharging 
the  employee. 

What  constitutes  sufficient  ground  for  discharging  an  employee 
is  matter  of  law  unless  provided  for  in  the  contract  of  employment; 
but,  where  the  facts  are  in  dispute,  the  case,  under  proper  instruc- 
tions, should  be  submitted  to  the  jury. 

It  is  considered  here  that  the  case  was  not  so  clearly  in  favor  of 
appellant  as  to  require  condemnation  of  the  refusal  to  direct  a  verdict 
in  its  favor,  since  before  the  commencement  of  the  action,  it  duly 
tendered  respondent  the  amount  due  him  for  the  time  he  served  and 
kept  the  tender  good;  but  that  appellant's  rights  were  entirely  mis- 
conceived in  directing  the  verdict  for  respondent. 

The  judgment  is  reversed,  and  cause  remanded  for  a  new  trial. 


s:mith  v.  hereing-hali^marvin  safe  CO. 

(Supreme  Court  of  New  York,  Appellate  Term,  1909.     115  N.  Y.  Supp.  204.) 

Action  by  Abram  V.  Smith  against  the  Herring-Hall-Marvin  Safe 
Company.     From  a  judgment  for  plaintiff,  defendant  appeals. 

GiLDKRSLEKvE,  P.  J.  *  *  *  Plaintiff  swears  that  he  was  hired 
to  act  as  sales  manager  at  defendant's  office,  No.  400  Broadway,  New 
York  City;  that  he  sometimes  went  on  a  trip  previous  to  November 
12,  1907,  and  always  had  his  traveling  expenses  paid ;  that,  when  or- 
dered to  Philadelphia,  he  called  at  defendant's  office  and  expressed 
his  willingness  to  go  if  the  defendant  would  pay  his  expenses,  which 
defendant's  officers  declined  to  do ;  that  defendant's  officer  finally 
gave  him  a  ticket  one  way,  and  he  went  to  Philadelphia;  that  "they 
(defendant's  officers)  would  not  tell  me  what  they  wanted  of  me  in 
Philadelphia,  and  not  finding  what  was  required,  and  as  they  would 
not  pay  my  expenses  over  there,  I  came  back  to  New  York." 

On  November  18,  1907,  upon  his  return  from  Philadelphia,  plaintiff 
wrote  to  defendant's  president  as  follows :  "Your  letter  of  November 
12th,  ordering  me  to  report  to  Mr.  Green,  627  Chestnut  St.,  Phila- 
delphia, on  the  14th,  received.  On  the  statement  by  Mr.  W.  H.  Smith, 
executive  secretary,  that  no  hotel  expenses  would  be  allowed  me,  but 
that  I  must  pay  same,  I  desire  to  say  that  my  contract  with  the  com- 
pany was  for  specific  duties  in  New  York,  which  I  am  now  and  have 
been  willing  to  perform  to  the  end  of  my  contract,  January  1,  1908, 
and  that  I  respectfully  decline  to  comply  with  the  order." 

Upon  receipt  of  this  letter  the  defendant's  executive  secretary  wrote 
to  plaintiff'  as  follows :  "We  are  m  receipt  of  your  letter  of  the  18th 
inst.,  and  note  that  you  decline  to  comply  with  our  order  to  report  at 


Ch.  4)  RELATIONS   OF  THE  PRINCIPAL  AND   AGENT  581 

our  Philadelphia  office  for  services  at  that  point.  Inasmuch  as  you 
refuse  to  obey  our  instructions,  we  consider  ourselves  released,  effec- 
tive this  date,  from  further  payment  on  your  contract."    *     *    * 

If  the  orders  of  defendant  were  unreasonable,  the  plaintiff  could 
refuse  to  obey  them,  without  subjecting  himself  to  dismissal  upon  legal 
grounds,  and  the  question  of  unreasonableness  depended  upon  the 
circumstances  of  the  case.  Wood's  Master  &  Servant  (2d  Ed.)  p. 
227.  The  general  rule  is  that  a  master  has  the  right  to  give  reasona- 
ble orders  to  a  servant,  even  though  the  master  knows  that  the  work 
required  is  distasteful  to  the  servant,  and  even  though  the  master 
gives  the  order  with  the  expectation  that  the  servant  will  leave  the 
employment  rather  than  obey,  as  the  motive  of  the  master  is  unim- 
portant, and  the  servant  is  bound  to  obey  all  reasonable  orders,  even 
if  given  in  bad  faith,  while  he  is  not  bound  to  obey  unreasonable  or- 
ders, even  when  given  in  good  faith.     *     *     * 

Plaintiff  began  his  employment,  as  we  have  seen,  as  manager  of  the 
New  York  office,  and,  although  he  made  trips  for  defendant  to  other 
cities  from  time  to  time,  it  was  on  the  uhderstanding  that  his  expenses 
should  be  paid,  which  was  done,  notwithstanding  the  silence  of  the 
contract  in  this  respect.  Defendant  refused  to  pay  plaintift''s  expens- 
es in  Philadelphia.  Plaintiff  also  swears  that  he  is  married  and  has 
a  family,  with  whom  he  resides  at  his  "beautiful  home"  at  Ridgefield 
Park,  N.  J.,  near  New  York,  and  that  he  never  would  have  agreed  to 
any  proposition  to  go  away  for  any  length  of  time  from  his  home; 
but  there  is  nothing  to  show  notice  of  this  situation  to  defendant. 
Under  these  circumstances,  can  it  be  said  that  it  was  unreasonable  for 
defendant  to  order  plaintiff  to  report  to  the  Philadelphia  office?  How 
long  he  was  to  remain  in  that  city,  under  the  said  order,  does  not  ap- 
pear. Although  plaintiff  claims  himself  that  he  was  hired  as  manager 
of  defendant's  New  York  office,  when  defendant  offered  evidence  to 
show  a  general  or  frequent  custom  in  the  trade  to  transfer  such  agents 
from  one  city  to  another,  the  court  ruled  out  such  testimony.  Evi- 
dence of  such  a  custom  would  seem  to.  have  a  dii'ect  bearing  upon 
the  question  of  the  reasonableness  of  the  order  in  question.  It  seems 
to  us  that  the  judgment  should  be  reversed. 

Judgment  reversed,  and  new  trial  ordered. 

Dayton,  J.  (dissenting).  It  cannot  be  said  that  the  contract  was 
definite  as  to  place  of  employment  or  duties  to  be  performed.  The 
evidence  is  that  plaintiff  resided  with  his  family  near  New  York  City. 
It  is^  not,  therefore,  probable  that  he  accepted  an  employment  which 
required  a  change  of  residence. 

I  vote  for  an  affirmance,  with  costs. 


CITY  OF  EAST  GRAND  FORKS  V.  STEELE  et  al. 

(Supreme  Court  of  Minnesota,  1913.    121  Minn.  296,  141  N.  W.  181,  45  L.  R.  A. 
[N.  S.]  205,  Ann.  Gas.  1914C,  720.) 

^  Taylor,  C.  The  complaint,  in  form,  sets  forth  four  causes  of  ac- 
tion. The  trial  court  sustained  a  demurrer  to  the  first  cause  of  action, 
and  overruled  demurrers  to  each  of  the  other  three.  Both  parties  ap- 
peal. 

The  following  brief  outline  of  the  facts  alleged  in  the  complaint  will 
serve  to  indicate  the  questions  presented : 


582  AGENCY  (Part  2 

The  defendants,  representing  themselves  to  be  expert  accountants, 
and  able  to  detect  any  irregularities  in  the  transactions  of  the  city 
officers,  contracted  with  the  city  to  investigate  and  audit  the  books, 
accounts,  and  financial  transactions  of  the  city  and  of  its  officers  for 
the  year  1908,  and  especially  the  books,  accounts,  and  financial  trans- 
actions of  the  city  clerk,  for  the  sum  of  $150.  The  city  clerk,  in  addi- 
tion to  his  ordinary  duties  as  clerk,  was  also  employed  to  collect  mon- 
ey due  the  city  for  electric  lights,  water  and  sewer  assessments,  and  li- 
cense fees,  and  had  given  a  surety  bond  to  secure  the  faithful  perform- 
ance of  these  additional  duties.  The  investigation  of  these  collections, 
and  of  whether  they  had  been  properly  accounted  for,  was  included 
in  the  duties  of  the  defendants.  They  made  the  investigation  and 
audit,  and  in  February,  1909.  reported  to  the  city  that  all  books  and 
accounts  had  been  correctly  kept  and  all  funds  properly  accounted  for. 
Plaintiff,  believing  they  had  made  a  correct  report  and  had  properly 
performed  their  work,  paid  them  the  full  contract  price  therefor. 

In  December,  1909,  defendants  again  contracted  with  the  city  to  make 
a  similar  investigation  and  audit,  concerning  both  the  years  1908  and 
1909,  for  the  sum  of  $500.  They  made  such  investigation  and  audit, 
and  reported  the  result  thereof.  Plaintiff^,  still  believing  that  they  had 
made  a  correct  report  and  had  properly  performed  their  work,  paid 
them  the  full  contract  price  for  this  second  audit.  In  fact,  the  clerk 
had  embezzled  the  sum  of  $1,984.26  during  the  year  1908,  and  the 
further  sum  of  $5,339  during  the  year  1909,  and  prior  to  the  investiga- 
tion made  by  the  defendants.  The  defendants  failed  to  discover  and 
disclose  these  defalcations,  by  reason  of  incompetence  and  negligence. 
They  were  discovered  and  disclosed  by  an  investigation  made  by  the 
state  examiner  immediately  after  defendants  had  completed  their  sec- 
ond audit.  If  in  making  their  first  audit  defendants  had  discovered 
and  reported  the  defalcation  then  existing,  it  could  have  been  recov- 
ered from  the  surety  company,  and  the  clerk  would  have  been  re- 
moved from  office,  and  his  subsequent  embezzlement  could  not  have 
occurred.  The  surety  company  became  insolvent  before  the  investi- 
gation made  by  the  state  examiner,  and  the  amount  of  the  defalcations 
of  the  clerk  has  been  wholly  lost  to  the  city. 

The  plaintiff  seeks  to  recover  the  following  items,  and  states  each  as 
a  separate  cause  of  action:  (1)  The  sum  of  $5,339,  embezzled  by 
the  clerk  after  the  first  audit  and  before  the  second  audit.  (2)  The 
sum  of  $1,984.26,  embezzled  by  the  clerk  prior  to  the  first  audit.  (3) 
The  compensation  paid  the  defendants  for  making  the  first  audit.  (4) 
The  compensation  paid  the  defendants  for  making  the  second  audit. 

The  damages  claimed  on  account  of  the  losses  resulting  from  the 
defalcations  of  the  clerk  and  the  insolvency  of  his  surety  are  too  re- 
mote to  be  recovered,  without  shov^^ing  the  existence  of  special  cir- 
cumstances, known  to  defendants,  from  which  they  ought  to  have 
known  that  such  losses  were  likely  to  result  from  a  failure  to  disclose 
the  true  condition  of  affairs.  Such  losses  are  neither  the  natural  nor 
the  proximate  consequences  of  the  failure  of  defendants  to  make  a 
proper  audit.  Neither  are  any  facts  shown  from  which  it  may  be  in- 
ferred that  a  loss  from  either  of  these  causes  was  or  ought  to  have 
been  contemplated,  when  the  contract  was  made,  as  likely  to  result 
from  a  breach  of  duty  on  the  part  of  defendants.    *    *    * 

There  mav  be  circumstances  under  which  the  negligence  of  an  expert 


Ch.  4)  RELATIONS   OF   THE   PRINCIPAL   AND   AGENT  583 

accountant  may  make  him  liable  for  losses,  as  where  he  is  employed 
to  determine  the  amount  that  should  be  exacted  from  a  surety  for  the 
default  of  his  principal ;  but  the  facts  alleged  in  the  complaint  do  not 
bring  this  case  within  any  such  rule. 

Defendants. represented  themselves  as  expert  accountants,  which  im- 
plied that  they  were  skilled  in  that  class  of  work.  In  accepting  em- 
ployment as  expert  accountants,  they  undertook,  and  the  plaintiff  had 
the  right  to  expect,  that  in  the  performance  of  their  duties  they  would 
exercise  the  average  ability  and  skill  of  those  engaged  in  that  branch 
of  skilled  labor.  They  were  employed  to  ascertain,  among  other  things, 
whether  any  irregularities  had  occurred  in  the  financial  transactions 
of  the  city  clerk,  and,  if  so,  the  nature  and  extent  of  such  irregularities. 
If,  from  want  of  proper  skill,  or  from  negligence,  they  did  not  disclose 
the  true  situation,  they  failed  to  perform  the  duty  which  they  had  as- 
sumed, and  failed  to  earn  the  compensation  which  plaintiff  had  agreed 
to  pay  them  for  the  proper  performance  of  such  duty. 

The  v/otk  of  an  expert  accountant  is  of  such  technical  character  and 
requires  such  peculiar  skill  that  the  ordinary  person  cannot  be  ex- 
pected to  know  whether  he  performs  his  duties  properly  or  otherwise, 
but  must  rely  upon  his  report  as  to  the  thoroughness  and  accuracy  of 
his  work.  The  full  contract  price  having  been  paid  in  the  belief,  in- 
duced by  defendants'  report,  that  such  report  disclosed  fully  and  ac- 
curately the  condition  of  the  city's  accounts,  the  city  is  entitled  to  re- 
cover back  the  amounts  so  paid,  upon  proving  that,  through  the  in- 
competence or  the  negligence  of  defendants,  the  report  was  in  sub- 
stance misleading  and  false. 

The  order  sustaining  the  demurrer  to  the  first  cause  of  action  is 
affirmed.  The  order  overruling  the  demurrer  to  the  second  cause  of 
action  is  reversed.  The  orders  overruling  the  demurrers  to  the  third 
and  fourth  causes  of  action  are  affirmed. 


G.  A.  KELLY  PLOW  CO.  v.  LONDON. 

(Court  of  Civil  Appeals  of  Texas,  1910.    59  Tex.  Civ.  App.  208, 
125   S.   W.   974.) 

Action  by  R.  W.  Lond9n  against  the  G.  A.  Kelly  Plow  Company. 
From  a  judgment  for  plaintiff,  defendant  appeals. 

Hodge;s,  J.  This  suit  w^as  instituted  in  the  court  below  by  the  ap- 
pellee against  the  appellant  to  recover  damages  for  the  breach  of  a 
contract.  *  *  *  The  material  facts  *  *  *  show  that  the  appel- 
lant is  a  private  corporation  engaged  in  the  business  of  manufactur- 
ing and  selling  plows  and  other  farming  implements,  with  its  place  of 
business  and  principal  office  at  Longview,  Tex.  Some  time  prior  to 
February,  1907,  G.  A.  Kelly,  the  president  of  the  company,  who  had 
been  actively  engaged  in  the  management  of  its  affairs,  desired  to  re- 
tire, and  turned  over  the  business  almost  entirely  to  R.  M.  Kelly,  his 
son,  who  was  at  the  time  secretary  and  treasurer.  *  *  *  R.  M. 
Kelly  had  known  the  appellee  for  about  10  years  prior  to  the  time 
when  they  began  their  negotiations  which  resulted  in  the  contract  re- 
ferred to  in  the  pleadings.  *  *  *  After  several  meetings,  in  a 
conversation  concerning  the  details  of  which  there  is  some  conflict  in 
the  testimony,  a  written  contract  was  entered  into,  by  which  London 
was  employed  by  the  appellant  as  sales  manager  for  five  years  at  a 
salar}'-  of  $333.33  per  month,  payable  monthly.     *     *     *     After  the 


584  AGENCY  (Part  2 

execution  of  this  contract,  London  entered  upon  the  duties  of  his  po- 
sition and  continued  therein  till  August  6,  1907,  at  which  time  he 
claimed  that  he  was  injured  in  a  wreck  on  a  Texas  &  Pacific  Railway 
train  while  going  from  Dallas  to  Longview.  From  that  time  until 
October  4th  he  did  not  perform  any  services  for  the  appellant.  On 
the  latter  date  he  made  a  settlement  with  the  railway  company  in 
which  he  was  paid  $4,100  compensation  for  injuries  which  he  claimed 
had  been  received  in  the  wreck  referred  to.  He  then  returned  to 
work  for  the  appellant,  and  continued  in  its  sei^vice  till  he  was  dis- 
charged April  4,  1908. 

The  two  principal  witnesses  concerning  the  making  of  the  contract 
were  R.  M.  Kelly  and  the  appellee.  There  is  much  conflict  between 
them  as  to  the  details  of  the  conversations  which  they  had  at  differ- 
•ent  times  before  the  making  of  the  contract.  The  effect  of  the  tes- 
timony of  Kelly  was  that  at  the  first  meeting  between  him  and  London 
before  making  the  contract  the  latter  represented  to  him  that  he  was 
then  getting  $250  per  month  from  the  Parlin  &  Orendorff ,  Liiplement 
Company,  but  would  accept  the  position  offered  for  $300  per  month. 
Witness  further  stated  that  he  afterwards  met  London  in  Dallas,  and 
was  there  told  by  him  that  Mr.  Robinson,  the  local  manager  for  the 
Parlin  &  Orendorff  Implement  Company  "was  all  broken  up  and 
torn  to  pieces"  about  his  (London's)  leaving;  and  that  London  told 
him  that  Robinson  had  told  him  (London)  that  he  would  meet  any 
price  that  the  Kelly  Plow  Company  could  afford  to  pay  him ;  that,  if 
it  offered  him  $3,600,  he  would  meet  that;  if  it  offered  him_ $4,000  he 
would  meet  that,  and,  if  that  was  not  satisfactory  he  (London)  could 
go  to  the  bookkeeper  and  tell  him  what  would  be  satis factoiy,  and 
that  it  would  be  all  right  with  him  (Robinson).  Kelly  says  this  led 
him  to  believe  that  London  was  an  exceedingly  valuable  man  in  that 
line  of  business,  and  that  Robinson  had  implicit  confidence  in  him,  that 
he  had  formed  a  very  high  opinion  of  London  and  believed  everything 
the  latter  told  him.  He  further  testified  that  London  *  *  *  stated 
to  him  (Kelly)  that,  when  he  went  back  to  the  Parlin  &  Orendorff 
Implement  service  from  the  Studebaker  Company  he  received  a  tele- 
gram from  W.  H.  Parlin,  of  Canton,  Ohio,  the  president  of  the  im- 
plement company,  congratulating  him  on  returning  to  the  service  of 
the  company,  and  that  the  telegram  closed  as  follows :  *T  hope  noth- 
ing will  allow  you  to  leave  our  service  again."     *     *     * 

Kelly  further  testified  that  on  August  6,  1907,  London  claimed  that 
he  received  injuries  in  a  wreck  on  the  Texas  &  Pacific  Railway;  that 
be  saw  him  examined,  but  could  not  see  anything  wrong.  He  then 
began  to  make  an  investigation  about  the  matter  and  also  about  the  sal- 
ary. *  *  '^  He  went  to  Dallas  in  October,  some  time  during  the  Pair, 
and  called  to  see  Mr.  Robinson  of  the  Parlin  &  Orendorff  Implement 
Company,  asked  Robinson  what  salary  London  was  getting  at  the 
time  he  employed  him  prior  to  that  time,  and  was  told  that  it  was  $200 
a  month.  *  *  *  j^g  ^^y^  ^i-^^j-^  when  London  returned  to  work,  he 
never  told  him  he  had  settled  his  claim  with  the  railway,  or  intimated 
that  he  had  any  claim  against  the  railway  company ;  that,  when  he 
reported  for  work,  he  looked  as  well  as  ever.     *    ^    * 

W.  M.  Robinson,  the  manager  of  the  Parlin  &  Orendorff  Imple- 
ment Company,  testified  that  London  was  in  the  employ  of  the  Parlin 
&  Orendorff  Implement  Company  at  a  salary  of  $200  per  month; 
that  his  contract  was  to  work  by  the  year  at  a  salary  of  $2,400  per 


Ol  4)  ■RET.ATIOXS  OF  THE  PB  INCIPAL  AND   AGENT  585 

year  to  be  paid  monthly  at  $200  per  month,  and  that  he  was  not  to 
receive  aay  additional  compensation;  that  some  time  about  March 
or  April,  19®7,  London  told  him  that  the  Kelly  Plow  Company  had 
offered  him  a  salary  of  $3,600  per  annum,  and  he  told  the  appellee 
that  it  was  a  larger  amount  than  he  could  afford  to  pay,  and  that,  if 
he  could  make  the  arrangement  he  (Robinson)  was  not  disposed  to 
stand  in  his  way,  and  advised  him  to  accept  the  position. 

As  to  the  fraud  which  it  is  alleged  the  appellee  perpetrated  upon 
the  railway  company  in  procuring  a  settlement  by  which  he  was  paid 
$4,100  as  compensation  for  injuries  claimed,  appellant  offered  testi- 
mony tending  to  show  that  the  shock  to  the  coach  in  which  the  appellee 
was  at  the  time  riding  was  so  slight  that  no  injury  could  have  result- 
ed ;  that  an  observation  of  the  physical  condition  of  the  appellee  after 
the  wr-eck  failed  to  disclose  any  evidences  of  the  injuries  he  claimed. 
There  was  also  testimony  of  doctors  who  had  made  an  examination 
of  London  to  the  effect  that,  if  he  was  injured  at  all,  it  was  only  in  a 
slight  degree.  Considered  in  its  entirety,  the  evidence  offered  by  ap- 
pellant upon  this  phase  of  the  defense  tended  to  show  that  London's 
injuries  were  simulated,  and  that  he  had  by  dishonorable  means,  false 
statements  and  misrepresentations  perpetrated  a  fraud  upon  the  rail-  - 
way  company  for  the  purpose  of  obtaining  money.  As  opposed  to 
this,  there  was  testimony  on  the  part  of  the  appellee  tending  to  show 
that  his  injuries  were  real  and  that  he  had  made  no  false  represen- 
tations to  the  company  and  had  not  been  guilty  of  any  of  the  miscon- 
duct charged. 

Upon  a  trial  before  a  jury  a  verdict  was  rendered  in  favor  of  the 
appellee  for  the  sum  of  $3,000.    *    *    * 

The  uncontroverted  evidence  shows  that  by  the  terms  of  his  con- 
tract with  the  appellant  London  was  to  take  charge  of  the  sales  de- 
partment of  the  business  of  the  G.  A.  Kelly  Plow  Company;  that  he 
assumed  supervision  of  all  the  traveling  salesmen  employed,  had  the 
right  to  fix  prices  of  the  product  placed  upon  the  market,  and  to  make 
special  prices  in  competitive  territory,  passed  upon  the  contracts  of 
sale  when  made,  and  was  vested  with  such  full  authority  and  discre- 
tion as  might  make  him  the  representative  of  his  employer  in  that 
department  of  the  service.  This  necessarily  placed  him  in  a  position 
of  trust  and  confidence,  and  one  of  much  importance  to  the  appellant. 
The  jury  might  very  properly  have  inferred  that  such  employment 
would  carry  with  it  implicit  reliance  by  the  principal,  not  only  upon 
the  competency  of  the  agent,  but  upon  his  honesty  and  integrity  as 
well.  They  might  have  concluded  that  this  reliance  was  one  of  the 
essentials  without  which  the  functions  assumed  by  the  agent  could 
not  be  adequately  and  satisfactorily  performed.     *     *     * 

The  argument  of  the  appellee  proceeds  upon  the  theory  that  the 
materiality  of  the  misrepresentations  and  fraud  charged  must  be 
tested  by  their  immediate  effect  upon,  and  relation  to,  the  subject- 
matter  of  the  contract,  the  business  of  the  appellant.  We  are  unable 
to  appreciate  the  force  of  that  argument  as  applied  to  the  facts  of  this 
case.  Here  the  question  is,  Has  the  agent  shown  himself  unworthy 
of  the  confidence  and  trust  which  his  position  implies  should  be  re- 
posed in  him?  and  not  as  to  whether  he  has  been  guilty  of  any  breach 
of  his  contract,  or  has  adopted  a  course  of  conduct  that  will  injuri- 
ously affect  the  business  of  his  principal  in  the  future,  li  the  differ- 
ent acts  of  deception,  misrepresentation,  and   fraud  charged  in  the 


586  AGENCY  (Part  2i 

answer  of  the  appellant  be  true,  then  we  cannot  say  that  a  jury  would 
not  be  justified  in  concluding  that  they  were  inconsistent  with  the  re- 
lations London  sustained  by  his  contract.  Every  one  who  seeks  and 
obtains  employment  in  positions  of  trust  and  confidence  impliedly 
warrants  that  he  is  an  honest  man,  and  the  employer  has  the  right  to 
expect  the  possession  of  that  personal  integrity  that  will  not  lead  to 
disappointment  if  he  relies  implicitly  upon  the  honor  and  fidelity  of 
his  employee. 

When  the  principal  discovers  that  his  agent  or  the  master  his 
servant  is  lacking  in  those  moral  qualities  that  he  had  a  right  to  ex- 
pect and  rely  upon  in  making  the  particular  contract,  in  other  words, 
ascertains  that  his  employee  is  not  an  honest  man  and  cannot  be 
trusted — why  should  he  not  have  the  right  to  discharge?  If  he  may 
discharge  for  incompetency,  either  physical  or  mental,  why  should 
he  not  have  the  same  right  when  moral  unfitness  is  shown,  where  moral 
qualifications  form  an  important  consideration  in  making  the  contract  ? 
We  see  no  good  reason  why  an  employer  should  not  be  permitted  to 
rid  himself  of  a  dishonest  and  corrupt  employee  upon  a  discovery  of 
that  fact,  without  waiting  till  he  has  himself  been  victimized  by  such 
corruption  and  dishonesty.  He  would  have  the  right  to  assume  that  a 
man  who  would  deliberately  make  a  false  statement  about  one  matter 
would  be  equally  perfidious  about  another ;  that  a  man  who  would 
willfully  and  knowingly  perpetrate  a  fraud  upon  one  party  for  the 
sole  purpose  of  obtaining  money  would,  when  to  his  interest  to  do  so, 
defraud  his  employer  also.  Hence,  the  materiality  of  the  facts  plead- 
ed in  this  case  must  be  tested  by  their  effect  upon  the  appellee  as 
tending  to  show  a  degree  of  moral  depravity  inconsistent  with  the  po- 
sition he  held  in  the  service  of  the  appellant.  It  was  for  that  reason 
unimportant  that  the  false  statements  and  misconduct  alleged  related 
to  matters  in  no  way  connected  with  the  subject-matter  of  the  con- 
tract, or  did  not  amount  to  a  breach  of  duty  toward  the  employer. 
No  agent  occupying  a  position  of  trust  and  confidence  can  say  that  his 
principal  had  no  right  to  assume  that  he  was  honest  and  truthful,  or 
that  his  lack  of  personal  integrity  furnished  no  just  grounds  for  a 
discharge.    *    *    * 

No  man  is  compelled  to  be  dishonest  or  to  be  guilty  of  fraudulent 
conduct.  Neither  should  any  other  be  compelled  to  continue  such  a 
person  in  a  position  of  trust  simply  because  he  took  him  for  a  man 
of  integrity  and  gave  him  employment.  It  is  no  answer  to  say  that 
an  employer  should  first  acquaint  himself  with  the  character  of  his 
agent.  It  would  ill  become  any  man  to  say  that  another  should  not 
have  trusted  him.     *     *    * 

The  judgment  of  the  district  court  is  reversed,  and  the  cause  re- 
manded. 


ESSEX  TRUST  CO.  v.  ENWRIGHT  et  al. 

(Supreme  Judicial  Court  of  Massachusetts,  1913.    214  Mass.  507,  102  N.  E.  441, 
47  L.  R.  A.  [N.  S.]  567.) 

This  is  a  bill  in  which  the  plaintiff  seeks  to  have  the  defendant  en- 
joined from  interfering  with  the  possession  held  by  it  and  by  the  Lynn 
Publishing  Company  of  the  premises  occupied  by  the  Essex  Trust 
Company  or  the  Publishing  Company  in  Lynn,  and  from  instituting 
any  proceedings  for  their  eviction ;    and  it  further  seeks  to  have  the 


Ch.  4)  RELATIONS   OF   THE   PRINCIPAL   AND    AGENT  587 

defendant  enjoined  from  transferring  a  lease  of  said  premises  given 
to  him  by  the  International  Trust  Company,  and  prays  that  defendant 
may  be  decreed  to  hold  said  lease  as  "constructive  trustee"  for  the  ben- 
efit of  the  Essex  Trust  Company  or  the  Lynn  Publishing  Company, 
and  that  he  be  ordered  to  assign  said  lease  to  the  plaintiff  to  hold  as 
trustee. 

LoRiNG,  J.  The  question  on  which  the  decision  in  this  case  de- 
pends is  this :  In  case  a  reporter  on  a  newspaper  in  the  course  or  by 
reason  of  his  employment  learns  that  the  premises  on  which  the  busi- 
ness of  publishing  the  paper  is  conducted  are  of  peculiar  value  to 
his  employer  or  one  carrying  on  his  business,  has  he  the  right  with 
out  his  employer's  knowledge  to  take  a  lease  of  the  premises  and  hold 
them  as  his  own  to  the  injury  of  his  employer's  property?     *     *     * 

The  doctrine  invoked  by  the  plaintiff  in  this  suit  had  its  origin  in 
two  decisions  by  Lord  Eldon.  In  Yovatt  v.  Winward,  1  Jac.  &  W. 
394,  the  defendant  (formerly  employed  as  a  clerk  by  the  plaintiff,  who 
was  a  veterinary  surgeon)  was  enjoined  from  using  medicines  com- 
pounded from  the  plaintiff''s  recipes  which  he  (the  defendant)  had  sur- 
reptitiously copied  while  in  the  plaintiff's  employ-.  In  Abernethy  v. 
Hutchinson,  3  L.  J.  (O.  S.)  Ch.  209,  the  publication  in  the  Lancet  of 
lectures  on  surgery  delivered  by  the  plaintiff  at  St.  Bartholomew's 
Hospital,  which  the  defendants  had  obtained  from  the  students  at- 
tending the  lectures,  was  enjoined.     *     *     * 

Since  then  the  doctrine  has  been  applied  in  England  in  a  number 
of  cases.  In  Helmore  v.  Smith,  30  Ch.  D.  449,  a  clerk  was  committed 
for  contempt  on  its  being  shown  that  he  had  taken  a  copy  of  the  cus- 
tomers of  a  business  conducted  by  a  receiver  appointed  by  the  court 
and  that  he  had  solicited  their  custom  for  a  competing  business  which 
he  had  set  up  for  himself.  A  similar  decision  as  to  the  use  of  a  list 
of  the  plaintiff's  customers  surreptitiously  copied  by  a  clerk  was  made 
in  Robb  v.  Green,  [1895]  2  O.  B.  1.  In  Merryweather  v.  Moore,  [1892] 
2  Ch.  518,  a  clerk  was  enjoined  from  communicating  to  a  svibsequent 
employer  the  details  of  machinery  manufactured  by  his  former  em- 
ployer, the  plaintiff;  and  in  Lamb  v.  Evans,  [1893]  1  Ch.  218,  the  de- 
fendants who  were  employed  to  secure  advertisements  for  the  plain- 
tiff's Trades  Directory,  and  who  by  the  terms  of  their  employment 
furnished  at  their  own  expense  the  blocks  and  materials  necessary  for 
producing  the  advertisements,  were  enjoined  from  using  the  blocks 
and  materials  so  obtained  in  aid  of  a  competing  directory.  In  the 
latest  of  these  cases,  Kirchner  v.  Gruban,  [1909]  1  Ch.  413, -422,  Eve, 
J.,  states  the  doctrine  of  these  cases  in  these  words:  "I  think  it  is 
abundantly  clear  upon  the  authority  of  Robb  v.  Green,  [1895]  2  Q.  B. 
I,  that  the  real  principle  upon  which  the  employee  is  restrained  from 
making  use  of  confidential  information  which  he  has  gained  in  the 
employment  of  some  other  person^  is  that  there  is  in  the  contract  of 
service  subsisting  between  the  employer  and  employee  an  implied  con- 
tract on  the  part  of  the  employee  that  he  will  not,  after  the  service  is 
determined,  use  information  which  he  has  gained  while  the  service 
has  been  subsisting,  to  the  detriment  of  his  former  employer." 

This  doctrine  was  applied  by  this  court  in  Peabody  v.  Norfolk,  98 
Mass.  452,  96  Am.  Dec.  664.  In  that  case  the  plaintiff  having  invented 
a  process  of  manufacturing  gunny  cloth  from  jute  butts  had  built 
a  factory  where  gunny  cloth  had  been  so  manufactvired.  The  defend- 
ant Norfolk  had  been  employed  by  him  as  an  engineer  in  his  factory, 


588  AGENCY  (Part  3 

and  had  agreed  not  to  disclose  to  others  the  construction  of  the  ma- 
chinery. On  leaving  the  plaintiff's  employ  Norfolk  imparted  the  na- 
ture of  the  machinery  to  one  Cook,  who  knew  of  Norfolk's  agreement. 
Both  were  enjoined.     *     *     * 

The  plaintiff  is  entitled  to  a  decree  directing  the  defendant  to  as- 
sign to  the  plaintiff'  the  lease  obtained  by  him  on  being  paid  the  rent, 
if  any,  paid  by  him  under  it  and  to  its  costs. 


NALTNER  et   al.   v.   DOLAN. 
(Supreme  Court  of  Indiana,  1SS6.    108  Ind.  500,  8  N,  E.  289,  58  Am.  Rep.  61.) 

Mitchell,  j.  *  *  *  Dolan,  who  at  the  time  the  suit  was  com- 
menced lived  in  Illinois,  owed  Naltner  $600  then  due.  The  appellants, 
as  attorneys,  had  in  their  hands  for  collection  a  claim  in  favor  of 
Dolan  against  the  Indiana,  Bloomington  &  Western  Railway  Company, 
which  Dolan,  on  the  thirteenth  day  of  September,  1882,  transferred, 
for  value,  to  Montague.  On  February  24,  1883,  the  day  on  which 
the  attachment  suit  was  commenced,  appellants  received  from  the 
clerk  of  the  United  States  district  court  for  the  district  of  Indiana 
checks  for  something  over  $80,000,  which  was  in  payment  of  claims 
against  the  Indiana,  Bloomington  &  Western  Railway  Company ;  which 
payment  was  made  to  them  in  behalf  of  Dolan  and  many  other  of 
their  clients.  Dolan's  claim  against  the  company  was  $600.  Upon 
receiving  the  check  they  deposited  it  with  the  Indiana  Banking  Com- 
pany, which  was  then  in  good  standing,  the  deposit  being  to  the  credit 
of  themselves,  in  their  firm  name.  The  money  thus  received  belonged 
to  some  hundreds  of  their  clients,  and  the  computation  of  interest,  and 
the  dividend  to  each  of  his-  share,  required  several  days  of  continu- 
ous work  before  distribution  could  be  made.  The  appellants  were 
lawyers,  partners,  actively  engaged  in  practice.  They  had  an  ac- 
count at  the  bank  in  question,  in  which  all  money  collected  for  and 
belonging  to  their  various  clients  were  deposited  and  checked  out  in 
the  firm  name,  but  such  moneys  were  not  mingled  with  their  own. 

Before  they  had  time  or  opportunity  to  pay  out  the  money  in  con- 
troversy, the  appellants  were  garnished  at  the  suit  of  Naltner.  They 
received  notice  of  the  assignment  to  Montague,  February  28,  1883, 
four  days  after  the  suit  was  commenced.  Montague,  within  a  few 
months  after  giving  notice  of  his  claim,  and  while  the  proceedings  in 
garnishment  were  pending,  made  demand  on  the  garnishee  defendant 
for  the  money  remaining  in  their  hands  which  were  derived  from  the 
Dolan  claim.  On  the  ninth  day  of  August,  1883,  the  Indiana  Banking 
Company,  having  until  that  time  continued  in  good  standing  and  cred- 
it, failed.  A  receiver  was  appointed  for  the  bank,  August  13,  1883. 
The  appellants  brought  the  certificate  of  the  receiver  of  the  bank  for 
the  money  in  dispute  into  court,  ^nd  offered  to  surrender  it  to  the 
person  entitled,  as  the  court  should  direct.  The  amount  remaining  in 
their  hands,  in  the  manner  above  stated,  was  $445.69.  Conclusions 
of  law  were  stated  favorable  to  a  recovery  by  Montague  against  the 
appellants  of  the  amount  thus  remaining  in  their  hands. 

Do  the  facts  found  warrant  the  conclusion  of  law  stated?  Money 
belonging  to  a  client,  having  been  received  by  the  attorneys  in  payment 
of  a  claim  left  with  them  for  collection,  the  transmission  of  such  money 
having  been  arrested  by  garnishee  process  before  an  opportunity  for 
transmitting  it  occurred,  the  question  is,  having  acted  in  the  utmost 


Ch.  4)  RELATIONS  OF   THE   PRINCIPAL  AND   AGENT  589 

good  faith,  and  without  any  suggestion  of  fault  or  neglect,  are  the 
attorneys  responsible  for  the  continued  solvency  of  the  bank  in  which 
such  funds  were  deposited  in  their  own  name,  but  not  mingled  with 
their  own  funds,  notwithstanding  the  bank  was  in  good  credit  when  the 
deposit  was  made? 

The  receipt  of  money  by  an  attorney,  under  the  circumstances  dis- 
closed in  this  case,  does  not  pro  facto  create  the  technical  relation  of 
debtor  and  creditor  between  the  attorney  and  client.  It  is  because 
it  does  not  that  a  suit  cannot  be  maintained  by  the  latter  against  the 
former  without  first  making  a  demand.  Money  so  collected  belongs 
to  the  client.  The  attorney  occupies  towards  it  the  relation  of  a  trus- 
tee, so  long  as  he  chooses  to  treat  and  preserve  the  fund  as  a  trust 
fund.  The  circumstances  under  which  he  will  be  liable  for  its  loss 
are  precisely  those  which  .govern  in  the  case  of  any  other  trustee. 
While  it  is  preserved  in  its  trust  character,  if  he  exercises  the  same 
caution  in  respect  to  depositing  it,  if  a  deposit  becomes  necessary  or 
proper,  as  a  prudent  man  would  in  regard  to  his  own  money,  and  a 
loss  happens,  he  will  be  excused.     *     *     * 

The  authorities,  however,  distinguish  between  cases  in  which  the 
deposit  was  made  in  such  a  manner  as  to  preserve  its  trust  character 
on  the  books  of  the  bank  in  which  the  fund  was  deposited,  and  those 
in  which  the  owner  of  the  fund  might  be  put  to  the  trouble  of  prov- 
ing, by  extraneous  evidence,  that  the  fund  was  not  the  individual 
money  of  his  trustee.  Whenever  a  trustee,  unless  properly  authorized ' 
to  do  so,  puts  the  fund  in  such  shape  as  to  invest  himself  with  a  legal 
title  to  it,  the  cestui  que  trust  has  his  election  either  to  treat  the 
fund,  according  to  the  appearance  of  things,  as  the  property  of  the 
trustee,  and  regard  the  latter  as  his  debtor,  or  he  may  demand  that 
the  title  be  transferred  to  him.  If  a  deposit  is  made  in  such  manner 
as,  on  the  face  of  the  books  of  the  bank  in  which  the  deposit  is  made, 
to  authorize  the  trustee,  his  assignee  or  legal  representative,  to  claim 
it  as  the  fund  of  the  depositor,  the  cestui  que  trust  has  the  option  to 
do  likewise.     *     *     * 

In  case  it  becomes  the  duty  of  an  agent  or  trustee  to  deposit  money 
belonging  to  his  principal,  he  can  escape  the  risk  only  by  making  the 
deposit  in  his  principal's  name,  or  by  so  distinguishing  it  on  the  books 
of  the  bank  as  to  indicate,  in  some  way,  that  it  is  the  principal's  money. 
If  he  deposit  in  his  own  name,  he  will  not,  in  case  of  loss,  be  permit- 
ted to  throw  such  loss  on  his  principal.  In  such  a  case  the  good  faith 
or  intention  of  the  trustee  is  in  no  way  involved.  Having,  for  his 
personal  convenience,  or  from  whatever  motive,  deposited  the  money 
in  his  own  name,  thereby  vesting  himself  with  a  legal  title,  it  follows, 
as  a  necessary  consequence,  when  loss  occurs,  he  will  not  be  permitted 
to  say,  as  against  his  cestui  que  trust,  that  the  fact  is  not  as  he  volun- 
tarily made  it  appear. 

What  the  legal  or  equitable  rights  of  the  real  owner  of  the  fund 
would  be  in  such  a  case,  as  against  the  bank,  or  as  against  attaching 
creditors  of  the  depositor,  has  been  the  subject  of  much  discussion 
and  of  some  diversity  of  opinion.     *     *     * 

Whatever  diversity  of  opinion  may  be  found  in  respect  to  the  rights 
of  the  bank,  or  other  creditors  of  the  depositor,  the  authorities  agree 
that  a  trustee  who  either  invests  or  deposits  trust  money  in  his  own 
name,  without  in  some  way  designating  it  as  trust  property,  will  be 
responsible  for  any  loss  that  may  occur  to  the  fund  while  so  invested 


590  AGENCY  (Part  2 

or  deposited.  Having  put  the  owner  of  the  fund  to  the  hazard  of  los- 
ing it,  or  of  maintaining  its  trust  character  by  such  proof  ahunde  as 
may  be  available  to  him,  the  trustee  thereby  gives  the  former  the  privi- 
lege of  treating  the  latter  as  his  debtor,  or  of  supplying  the  proof,  or 
accepting  his  admission  of  the  facts,  at  his  option. 

Appl3ang  the  principles  stated  to  the  facts  found,  the  conclusion 
follows  that  the  appellants  assumed  the  risk  that  the  bank  in  which 
the  fund  was  deposited  in  their  name,  and  from  which  it  could  only 
have  been  drawn  by  their  check,  would  be  able  to  respond  with  the 
money  when  their  check  for  it  should  be  presented.  The  fact  that 
none  but  money  belonging  to  clients  was  deposited  in  the  account  in 
which  the  fund  in  question  was  placed  does  not  alter  the  case.  The 
controlling  consideration  is  that  it  was  deposited  to  the  credit  of  the 
firm,  without  anything  to  designate  or  preserve  its  trust  character. 
They  took  and  retained  the  legal  title  to  the.  deposit  in  themselves. 
In  the  event  of  a  controversy,  the  character  of  the  fund  would  have 
depended  wholly  on  extraneous  proof.  This  being  so,  the  owner  had 
the  right  to  elect  to  stand  upon  the  title  to  the  deposit  as  he  found  it. 
Having  so  elected,  there  is  no  rule  of  law  which  authorizes  any  in- 
quiry into  the  motives  for  so  taking  the  title,  short  of  an  express  or 
implied  direction  from  the  owner  of  the  fund. 

The  judgment  [for  plaintiff]  is  affirmed,  with  costs. 


HOLMES  V.  OILMAN  et  al. 

(Court  of  Appeals  of  New  York,  1893.     138  N.  Y.  369,  34  N.  E.  205, 
20  L.  R.  A.  566,  34  Am.  St.  Rep.  463.) 

This  is  an  appeal  by  the  plaintiff  from  an  order  of  the  general  term 
of  the  supreme  court  of  the  first  department,  which  reversed  upon  the 
facts  as  well  as  the  law  so  much  of  a  judgment  entered  upon  the  re- 
port of  a  referee  as  was  in  favor  of  the  plaintiff,  and  granted  a  new 
trial  of  the  issues  involved  before  another  referee.  The  action  was 
brought  for  the  purpose  of  having  an  account  taken  of  all  of  certain 
moneys  alleged  to  have  been  wrongfully  abstracted  from  a  partner- 
ship by  one  Arthur  C.  Oilman,  who  was  one  of  the  partners,  and  in- 
vested by  him  in  certain  policies  of  insurance  in  favor  of  his  wife  and 
children.  The  complaint  asked  also  that  the  amount  of  the  insurance 
money  collected  on  such  policies  might  be  impressed  with  a  trust  in 
favor  of  the  plaintiff,  who  was  one  of  the  partners  in  such  firm,  and 
the  assignee  of  the  other  members  excepting  Oilman,  and  that  the  de- 
fendant the  Union  Trust  Company  (with  which  the  moneys  collected 
on  the  insurance  policies  had  been  deposited)  might  be  directed  to  pay 
such  moneys  over  to  the  plaintiff.  Other  relief  was  asked  which  was 
appropriate  to  the  case  stated  in  the  complaint.  The  answer  denied  the 
chief  allegations  contained  in  such  complaint,  and  upon  the  issues 
thus  raised  the  parties  proceeded  to  trial  before  a  referee.  The  fol- 
lowing are  the  material  facts : 

In  December,  1880,  Arthur  C.  Oilman  became  a  member  of  the  firni 
of  J.  H.  Labaree  &  Co.,  dealers  in  teas  and  coffees  in  New  York  City, 
and  continued  such  member  until  his  death,  which  occurred  sudden-^ 
ly  on  the  15th  of  December,  1890.  During  all  this  time  he  was  a  trust- 
ed member  of  the  firm,  and  practically  had  exclusive  charge  of  its  of- 
fice affairs,  which  included  the  management  of  the  firm  bank  account 
and  the  making  of  all  notes  and  other  paper  issued  in  the  business  of 


Ch.  4)  RELATIONS   OF   THE   PRINCIPAL   AND   AGENT  591 

the  firm.  For  several  years  prior  to  his  death  he  had  prepared  semi- 
annual statements  purporting  to  show  the  financial  condition  of  the 
firm,  and  these  statements  he  had  rendered  to  its  different  members. 
The  last  one  had  been  rendered  as  of  the  date  December  1,  1890,  and 
showed  the  firm  with  assets  exceeding  liability  by  nearly  the  amount 
of  $200,000.  This  statement  was  received  by  the  plaintiff  (who  resided 
in  Cincinnati)  about  December  11,  1890.  For  some  reason,  which  is 
not  made  plain  by  the  proof,  and  soon  after  the  above  date,  the  members 
of  the  firm  commenced  an  examination  as  to  its  condition,  and  the  ex- 
amination was  not  concluded  until  after  Oilman's  death,  when  it  was 
discovered  that  the  firm  was  insolvent  by  more  than  $36,000.^  Further 
investigation  brought  to  light  the  fact  that  Oilman,  commencing  in  the 
year  1882,  and  continuing  down  to  his  death,  had  wrongfully  and 
fraiidulently  taken  from  the  assets  of  the  firm  large  sums  of  money, 
which  he  had  wrongfully  appropriated  to  his  own  use.  By  reason  of 
this  dishonest  conduct  on  the  part  of  Oilman  the  firm  was,  in  Decem- 
ber, 1890,  insolvent,  instead  of  having  a  surplus  of  nearly  $200,000,  and 
it  was  done  by  means  of  false  entries  in  the  books  of  the  firm,  spread 
over  the  period  of  about  eight  years.  There  were  found  among  his 
papers  in  the  safe  at  the  office  of  the  firm  four  policies  of  insurance 
upon  his  life;  one  for  $5,000  issued  and  dated  March  9,  1880,  and 
three  other  policies,  aggregating  $45,000,  and  issued  between  the 
dates  April,  1884,  and  January,  1888;  also  two  certificates  of  his 
membership  in  a  benefit  association,  one  dated  in  August,  1881,  and  the 
other  in  January,  1885.  Each  of  the  four  policies  was  issued  on  Oil- 
man's application,  made  in  the  name  of  his  wife,  and  each  was  in 
terms  payable  to  her.  The  certificates  were  also  issued  on  his  ap- 
plication, signed  by  him,  in  which  he  stated  he  desired  his  death  loss 
to  be  paid  to  his  wife.  It  does  not  appear  that  any  of  the  premiums 
upon  any  of  the  policies  were  paid  by  Mrs.  Oilman,  or  with  funds 
provided  by  her,  or  that  she  had  any  knowledge  of  the  existence  of  the 
policies  prior  to  her  husband's  death.  All  of  the  premiums  on  the 
above  mentioned  policies,  aggregating  about  $4,000  were  paid  by  Oil- 
man out  of  the  firm  funds,  and  the  premiums  which  fell  due  after  the 
year  1882  on  the  above  mentioned  $5,000  policy  were  also  paid  from 
such  funds.     *    *    * 

The  policies  of  insurance  having  been  collected  and  paid  into  the 
trust  company,  the  plaintiff  and  the  defendant  Mrs.  Oilman  each 
claimed  the  right  to  recover  the  whole  sum,  amounting  to  over  $56,- 
000.  The  referee  awarded  the  above  mentioned  $5,000  policy  which 
was  dated  and  issued  in  March,  1880,  to  the  defendant,  subject  to 
the  lien  of  about  $1,000  of  premiums  becoming  due  subsequent  to  1882, 
and  paid  by  Oilman  out  of  the  funds  of  the  firm.  The  policy  itself 
was  taken  out  prior  to  any  conversion  of  firm  funds,  and  the  premiums 
thereon  prior  to  1882  were  paid  by  Oilman  out  of  his  own  funds.  The 
policies  aggregating  $45,000  were  obtained  and  maintained  as  the 
referee  finds,  from  the  funds  of  the  firm,  which  the  evidence  traces 
and  identifies  as  thus  invested.  The  referee,  therefore,  awarded  all 
the  moneys  collected  on  those  three  policies  to  the  plaintiff.  He  award- 
ed to  the  defendant,  Mrs.  Oilman,  the  amounts  of  the  two  certificates 
of  insurance  in  the  benefit  associations,  on  the  ground  that  the  plain- 
tiff had  failed  to  show  that  they  had  been  either  procured  or  maintain- 
ed from  the  funds  of  the  firm.  The  defendant  Mrs.  Oilman  appealed 
irom  this  judgment  entered  upon  the  report  of  the  referee  to  the  gen- 


592  ,  AGENCY  (Part  2 

eral  term  where  the  judgment  was  reversed,  and  a  new  trial  granted  as 
to  the  amount  awarded  to  the  plaintiff.    *    *    * 

Peckham,  j,  *  *  *  The  claim  of  the  plaintiff  to  recover  the 
moneys  arising  from  the  payments  of  these  policies  is  based  upon  the 
principle  which  allows  a  cestui  que  trust  to  follow  trust  funds,  and  to 
appropriate  to  himself  the  property  into  which  such  funds  have  been 
changed,  together  with  the  increased  value  of  such  property  provided 
the  trust  fund  can  be  clearly  ascertained,  traced  and  identified,  and 
provided  the  rights  of  bona  fide  purchasers  for  value  without  notice 
do  not  intervene.  The  right  has  its  basis  in  the  right  of  property, 
and  the  court  proceeds  on  the  principle  that  the  title  has  not  been 
affected  by  the  change  made  of  the  trust  funds,  and  the  cestui  que 
trust  has  his  option  to  claim  the  property  and  its  increased  value  as 
representing  his  original  fund.  The  right  to  follow  and  appropriate 
ceases  only  when  the  means  of  ascertainment  fail.  It  is  a  question  of 
title.  *  .  *  *  It  is  somewhat  akin  to  the  principle  decided  in  Sils- 
bury  v.  McCoon,  3  N.  Y.  379,  53  Am.  Dec.  307,  where  corn  was 
wrongfully  taken  from  its  owner,  and  converted  into  whisky.  The 
courtheld  the  property  was  not  changed  in  the  hands  of  the  wrongdoer, 
and  the  whisky  belonged  to  the  owner  of  the  original  material,  no  mat- 
ter how  much  it  had  been  increased  in  value.  The  case  of  Pennell  v. 
Deffell,  53  Eng.  Ch.  372,  388,  389,  discusses  the  principle  as  thus  stated, 
and  agrees  to  it.  That  a  partner  occupies,  a  fiduciary  position  with 
regard  to  his  copartners  and  the  funds  of  the  firm,  and  will  not  be  per- 
mitted to  make  a  personal  profit  out  of  the  use  of  such  funds,  is,  I 
think,  clearly  established.  Although  partners  do  not  in  the  strict  sense 
of  the  term,  occupy  the  position  of  trustees  towards  each  other  and 
towards  the  firm  funds,  yet  the  position  is  one  of  a  fiduciary  nature, 
calling  for  the  maintenance  and  exercise  of  the  greatest  good  faith 
between  them.  Such  a  relationship  authorizes  the  same  remedy  on  be- 
half of  the  wronged  partner  as  would  exist  against  a  trustee,  strictly 
so  called  on  behalf  of  a  cestui  que  trust.  *  *  *  The  right  to  fol- 
low the  funds  springs  from  the  fiduciary  nature  of  Oilman's  position 
with  regard  to  them. 

These  general  positions  are  not  really  denied  by  the  defendant.  It 
is  claimed,  however,  that  the  tracing  and  identification  of  the  funds 
have  not  been  sufficiently  proved  in  fact,  and  it  is  also  urged  that 
there  has  been  an  actual  mingling  of  firm  funds  with  the  private  funds 
of  Oilman  in  the  purchase  and  maintenance  of  the  policies.  I  have 
looked  carefully  through  the  evidence  upon  these  questions  of  fact, 
and  I  think  the  findings  of  the  referee  are  fully  sustained  and  that  no 
exception  can  prevail  on  such  grounds.  If  these  preliminary  questions 
be  decided  against  him  the  counsel  for  defendant  then  urges  that  the 
rule  clearly  is  if  the  trust  fund  has  become  mingled  with  money  or 
property  of  the  trustees  or  others,  equity  impresses  the  proceeds  with 
a  trust  to  an  amount  equal  to  the  original  trust  fund  and  interest,  and 
will  go  no  further.  He  then  claims  that  the  firm  funds  which  went  to 
the  purchase  of  the  policies  and  the  payment  of  the  annual  premiums 
were  mingled  with  the  property  right  of  the  wife,  called  her  "insur- 
able interest"  in  her  husband's  life,  and  so  the  policies  were  not  wholly 
the  result  of  the  use  of  those  firm  funds  and  therefore  the  plaintiff 
can  have  only  a  lien  on  the  policies  or  the  moneys  arising  from  their 
payment,  to  the  amount  of  the  premiums  paid  with  the  firm  funds,  and 
the  interest  thereon.     This  is  really  the  chief  question  in  the  case. 


Ch.  4)  RELATIONS   OF  THE  PRINCIPAL  AND   AGENT  593 

Where  moneys  have  been  misappHed,  and  have  been  used  as  a  por- 
tion of  a  larger  amount,  which  has  been  invested  in  other  property,  the 
property  thus  acquired  does  not,  as  a  whole,  belong  to  the  owner  of 
the  moneys  misapplied.  It  does  not  belong  to  him  because  it  has  not 
been  purchased  or  acquired  wholly  with  his  money  or  funds,  and  hence 
it  is  that  such  property  is  held  charged  with  a  lien  at  least,  to  the  amount 
of  the  trust  funds  invested  in  it.  It  is  not  necessary  to  here  decide  it, 
because  we  take  another  view  of  the  facts,  but  I  am  not  all  prepared 
to  admit  that  under  no  circumstances  is  the  cestui  que  trust  entitled 
to  recover  back  anything  more  than  the  amount  of  his  property  and 
interest,  where  there  has  been  a  mingling  of  funds.  In  case  the  trustee 
took  a  thousand  dollars  of  trust  funds  and  five  hundred  of  his  own, 
and  purchased  property,  which  advanced  in  value  to  twice  its  original 
sum,  I  have  seen  no  case  where  the  point  has  been  determined  that  the 
whole  increased  value  belongs  to  the  trustee  and  that  only  the  original 
sum  wrongfully  taken  and  interest,  can  be  given  to  the  cestui  que  trust, 
although  it  was  by  reason  of  the  wrongful  use  of  the  trust  funds  that 
the  trustee  was  enabled  to  realize  such  value.  If,  in  such  case,  the 
cestui  que  trust  were  not  allowed  to  at  least  participate  proportionately 
in  this  increased  value,  it  would  appear  to  be  a  violation  of  the  princi- 
ple that  the  trustees  cannot  ever  be  permitted  to  make  a  profit  out  of  the 
ase  of  the  trust  funds.  It  seems  to  me  to  be  a  case  for  the  application 
of  the  doctrine  that  the  parties  became  co-owners  of  the  property  at  the 
option  of  the  cestui  qui  trust,  in  the  proportion  which  their  various 
contributions  bore  to  the  sum  total  invested.  In  this  case,  however, 
the  defendant  is  enabled  to  claim  a  mingling  of  funds  and  property 
only  by  treating  the  right  of  a  wife  to  insure  the  life  of  her  husband 
for  her  benefit  as  a  species  of  property  which  has  been  mingled  with 
the  funds  of  the  firm,  the  result  of  the  combination  being  the  procure- 
ment of  the  policies. 

We  do  not  regard  this  right  as  property  in  any  such  light  as  to 
bring  the  case  within  the  principle  of  the  authorities  upon  the  subject 
of  a  mingling  of  funds  in  the  purchase  or  acquisition  of  other  proper- 
ty. The  right  of  a  wife  to  insure  the  life  of  her  husband  for  her  own 
benefit  is  not  property.  It  is  more  in  the  nature  of  a  power  or  a  privi- 
lege to  make  a  valid  contract.  It  is  a  status  and  not  a  property  right. 
The  common  law  upon  motives  of  public  policy  held  that  there  must 
be  what  was  termed  an  "insurable  interest"  in  the  life  which  was  in- 
sured, or  else  the  policy  was  a  dangerous  kind  of  a  wager,  and  there- 
fore void.  To  take  a  policy  out  of  such  a  class  it  was  necessary  to 
show  that  the  insured  had  some  interest  in  the  continuance  of  the  life 
of  the  cestui  que  vie.  Who  had  such  an  interest  as  to  give  a  right  of 
insurance  was  frequently  a  matter  of  some  discussion  and  of  possible 
doubt.  It  may  not  even  now  perhaps  be  said  that  the  precise  nature, 
character,  and  extent  of  the  interest  in  another's  life;  which  shall  ren- 
der that  life  insurable,  have  been  formally  and  plainly  laid  down.  It 
is  said  by  the  federal  supreme  court  that  one  essential  is  that  the  pol- 
icy shall  be  obtained  in  good  faith,  and  not  for  the  purpose  of  specu- 
lating upon  the  hazard  of  a  life  in  which  the  insured  has  no  interest. 
Connecticut  Mutual  Life  Insurance  Co.  v.  Schaefer,  94  U.  S.  457,  460, 
24  L.  Ed.  251,  253.  An  interest  which  is  insurable  must  be  an  interest 
in  favor  of  the  continuance  of  the  life,  and  not  an  interest  in  its  loss 
or  destruction.  *  *  * 
B.&  B.Bus.Law— 38 


594  AGENCY  (Part  2 

Whether  at  common  law  or  under  the  provisions  of  our  statute  the 
procurement  of  poHcies  of  insurance  in  the  wife's  name,  under  the 
facts  developed  in  this  case,  does  not  prevent  the  cestui  que  trust  from 
following  and  claiming  the  trust  funds  or  their  proceeds,  if  the  pro- 
ceeds of  these  policies  had  been  greater  than  the  whole  amount  of  the 
indebtedness  of  the  husband  to  the  cestui  que  trust,  arising  out  of  the 
husband's  breach  of  trust,  we  do  not  decide  what  might  in  equity  be 
the  different  rights  of  the  wife  and  such  cestui  que  trust  in  the  bal- 
ance, or  whether  any  different  rule  could  be  logically  applied.  The 
husband  in  this  case  converted  over  $200,000  of  what  stood  in  the  na- 
ture of  a  trust  fund,  and  the  plaintiff  recovers  only  a  little  over  one- 
fourth 'thereof  in  case  the  judgment  on  the  referee's  report  be  affirmed. 
We  simply  decide  the  case  now  before  us.  As  to  other  questions  dis- 
cussed in  the  defendant's  brief,  we  have  carefully  considered  them,  and 
we  think  there  was  no  error  in  the  result  arrived  at  by  the  referee. 

The  order  of  the  general  term  is  therefore  reversed  and  the  judg- 
ment entered  upon  the  report  of  the  referee  is  affirmed,  with  the  costs 
to  the  plaintiff  at  general  term  and  in  this  court.  All  concur.  Judg- 
ment accordingly. 

FIRST  NAT.  BANK  OF  PAWNEE  CITY  v.  SPRAGUE. 

(Supreme  Court  of  Nebraska,  1892.   '34  Neb.  318,  51  N.  W.  846,  15  L.  R.  A.  498. 

33  Am.  St.  Rep.  644.) 

Action  by  H.  W.  Sprague  against  the  First  National  Bank  of 
Pawnee  City  to  recover  the  proceeds  of  a  certain  draft.  Verdict  and 
judgment  for  plaintiff.    New  trial  denied.     Defendant  brings  error. 

Post,  J.  On  the  3d  day  of  February,  1888,  at  Pawnee  City,  in 
this  state,  the  defendant  in  error  drew  a  sight  draft  on  Davis  &  Wedd, 
residing  at  Canon  City,  Colo.,  of  which  the  following  is  a  copy: 
"$85.75.  First  National  Bank,  Pawnee  City,  Neb.,  Feb.  3,  1888. 
Pay  to  the  order  of  Plrst  National  Bank  of  Pawnee  City,  Neb.,  eighty- 
five  and  75-100  dollars,  with  exchange  and  collection  charges ;  value 
received;  and  charge  the  same  to  account  of  H.  W.  SpraguE.  To 
Mess.  Davis  &  Wedd,  Canon  City,  Colo.  No.  C.  5238."  The  said 
draft  was  by  the  drawer  left  with  the  plaintiff  in  error  at  its  banking 
house  in  Pawnee  City  for  collection,  and  by  it  forwarded  for  collec- 
tion to  the  exchange  Bank  of  Canon  City,  Colo.,  and  by  the  latter 
collected  in  full  from  the  drawees.  The  last-named  bank  failed,  with- 
out having  remitted  the  proceeds  of  said  draft;  and  no  part  thereof 
has  been  paid,  either  to  the  plaintiff  or  the  defendant  in  error.  There 
is  no  controversy  with  reference  to  the  facts  on  this  branch  of  the 
case.  Defendant  in  error  was  a  customer  of  the  bank,  and  was  in 
the  habit  of  shipping  butter  to  parties  at  distant  points,  and  making 
sight  drafts  therefor,  payable  to  its  order,  credit  being  given  him  for 
the  proceeds  thereof  when  collected.  It  further  appears  that  defend- 
ant in  error  was  permitted  by  the  bank  to  overdraw  his  account  by 
reason  of  such  collections.  It  does  not  appear  that  plaintiff  in  error 
was  in  the  habit  of  making  any  charge  for  collecting  said  drafts. 
*  *  *  There  is  no  pretense  that  the  bank  in  this  case  was  guilty  of 
negligence  in  forwarding  the  draft,  in  the  selection  of  its  correspond- 
ent, or  in  giving  instructions  to  the  latter  with  reference  to  the  collec- 
tion, or  remittance  of  the  money  when  collected. 

The  only  question  for  consideration  is  whether  the  plaintiff  in  er- 
ror, in  view  of  the  facts  stated,  is  answerable  for  the  default  of  the 


Ch.  4)  RELATIONS   OF   THE   PRINCIPAL   AND   AGENT  595 

bank  at  Canon  City.  The  court,  on  its  own  motion,  gave  the  following 
instruction:  "The  court  instructs  the  jury  that  when  a  home  bank  re- 
ceives for  collection  merely  a  draft  drawn  upon  a  person  residing  in 
another  place,  which  draft,  from  the  nature  of  the  business  and  gen- 
eral usage  in  such  cases,  will  have  to  be  transmitted  for  collection  to 
some  correspondent  bank  at  the  place  where  the  debtor  resides,  and 
for  the  collection  of  which  draft  the  home  bank  will  receive  only  the 
customary  exchange,  in  the  absence  of  any  express  agreement  between 
the  parties  to  the  contrary,  the  home  bank,  if  it  exercises  due  and  or- 
dinary care  in  selecting  such  correspondent  bank,  and  transmits  such 
draft  for  collection  to  such  correspondent  bank,  will  not  be  liable  for 
the  default  or  failure  of  such  correspondent  bank  to  remit  moneys 
collected  by  it  upon  such  draft."  If  this  instruction  correctly  states 
the  law  applicable  to  the  case,  the  motion  for  a  new  trial  should  have 
been  sustained.  The  courts,  as  well  as  text-writers,  differ  widely  up- 
on the  question  presented.  It  is  held  by  the  courts  of  the  United 
States,  New  York,  New  Jersey,  Ohio,  Indiana,  Minnesota,  and  perhaps 
others,  following  the  English  cases,  that  where  a  note  or  bill  is  re- 
ceived for  collection  by  a  bank,  and  by  it  transmitted  to  a  correspond- 
ent at  a  distance  for  presentment  and  demand,  the  latter  is  the  agent 
of  the  transmitting  bank  only,  w^hich  will  be  liable  for  the  defaults 
of  its  correspondent.  *  *  *  The  leading  case  holding  this  is  Allen 
V.  Bank,  22  Wend.  215,  34  Am.  Dec.  289,  in  which,  by  a  vote  of  14  to 
10  senators,  the  opinion  of  Chancellor  Walworth  in  the  same  case  was 
overruled,  and  which  has  since  then  been  followed  and  approved  by 
the  Court  of  Appeals  in  numerous  cases.  It  will  be  observed,  too,  that 
when  this  rule  was  adopted  by  the  Supreme  Court  of  the  United  States 
(Hoover  v.  Wise,  91  U.  S.  308,  23  L.  Ed.  392),  dissenting  opinions 
were  filed  by  Justices  Miller,  Clifford,  and  Bradley.  Mr.  Freeman, 
in  a  note  to  Allen  v.  Bank,  34  Am.  Dec.  315,  while  expressing  a  pref- 
erence for  the  rule  above  stated,  says:  "The  preponderance  of  au- 
thority is  against  the  principal  case  and  in  favor  of  the  rule  that  the 
liability  of  a  bank  taking  a  note  or  bill  for  collection,  which  is  paya- 
ble at  a  distance,  extends  merely  to  the  selection  of  a  suitable  and  com- 
petent agent  at  the  place  of  payment,  and  to  the  transmission  of  the 
paper  to  such  agent  with  proper  instructions,  and  that  the  correspond- 
ing bank  is  the  agent,  not  of  the  transmitting  bank,  but  of  the  holder, 
so  that  the  transmitting  bank  is  not  liable  for  the  default  of  the  cor- 
respondent where  due  care  has  been  used  in  selecting  such  correspond- 
ent." *  *  *  A  discussion  of  the  reasons  which  have  so  often  been 
advanced  by  courts  in  support  of  the  opposing  views  of  the  question 
involved  will  not  be  profitable  in  this  connection.  In  our  opinion,  the 
rule  stated  in  the  instruction  given  by  the  court  and  set  out  above  is 
not  only  in  accord  with  the  weight  of  authority,  but  is  sustained  by 
reasons  sounder  in  themselves,  and  more  in  consonance  with  the  prin- 
ciples which  underlie  and  determine  the  relations  of  principal  and 
agent. 

This  is  believed  to  be  a  typical  case,  and  to  be  fairly  illustrative  of 
the  method  of  making  collections  through  the  agency  of  banks  in  this 
country  at  this  time.  Whatever  may  have  been  the  reasons  arising 
out  of  the  business  methods  existing  at  the  time  Allen  v.  Bank  was 
decided  for  the  rule  adopted  therein,  the  reason  for  such  a  rule  is 
wanting  in  view  of  the  present  changed  conditions.  Banks,  as  a  gen- 
eral  rule,   have   now   no   facilities    for   making:  collections   at  distant 


596  AGENCY  (Pait2 

points,  not  enjoyed  by  the  business  public  at  large.  Formerly  they 
may  have  enjoyed  a  monopoly  of  information  relative  to  location, 
names,  and  credit  of  banks  at  distant  or  remote  points.  To-day,  how- 
ever, business  men,  by  means  of  the  information  derived  from  the 
press  and  the  numerous  directories  at  their  command,  may  collect  their 
bills  through  the  medium  of  banks  at  the  place  of  payment  as  cheap- 
ly, safely,  and  expeditiously  as  their  local  bank.  It  is  more  conven- 
ient, and  therefore  more  frequent,  for  customers  to  deposit  drafts  and 
acceptance  with  their  home  banks  for  collection,  paying  therefor  the 
cost  of  exchange  only.  In  this  case,  for  instance,  the  bank  not  only 
made  the  collections  for  defendant  in  error  without  charge,  but  allow- 
ed him  to  overdraw  on  account  thereof,  thus  realizing  on  his  paper  at 
once.  As  said  by  Chancellor  Walworth  in  Allen  v.  Bank,  there  is, 
in  cases  like  this,  no  consideration  sufficient  to  support  an  undertaking 
by  a  bank  to  answer  for  the  default  of  a  correspondent  where  it  has, 
without  fraud  or  negligence,  in  proper  time  forwarded  the  paper  to  a 
reputable  correspondent,  with  proper  instructions,  and  when  the  loss 
is  not  occasioned  by  the  act  or  omission  of  any  of  its  immediate  agents 
or  servants. 

The  theory  of  those  cases  which  hold  the  remitting  bank  liable  in 
such  cases  is  that  the  advantage  of  exchange  between  different  points 
is  a  sufficient  inducement  for  banks  to  assume  the  liability  sought  to 
be  imposed.  This  may  be  conceded,  so  far  as  the  inconvenience  and 
costs  of  collection  is  concerned,  but  to  us  it  seems  wholly  inadequate 
as  a  consideration  for  an  implied  undertaking  to  insure  against  loss 
on  account  of  the  fraud  or  insolvency  of  a  correspondent.  The  Su- 
preme Court  of  Tennessee,  in  Louisville  Bank  v.  First  Nat.  Bank,  8 
Baxt.  101,  35  Am.  Rep.  691,  after  a  thorough  examination  of  the  cases 
on  the  subject,  summarizes  as  follows:  "The  more  reasonable  and 
just  construction  of  the  undertaking  of  the  bank  in  which  the  bill  is 
deposited  for  collection  is  that,  when  the  bill  is  payable  at  another 
and  distant  place,  the  bank  so  receiving  the  bill  discharges  itself  of 
liability  by  transmitting  the  same,  in  due  time  to  a  suitable  and  reputa- 
ble bank  or  other  agent  at  the  place  of  payment;  and  in  such  case  it 
is  manifest  that  a  sub-agent  must  be  employed ;  and  the  assent  of  the 
principal  is  implied,  as  it  cannot  be  said  that  the  receiving  bank  was  ex- 
pected or  bound  to  send  one  of  its  own  officers  to  the  distant  point  of 
payment  for  the  purpose  of  personally  attending  to  the  collection  for 
the  very  inadequate  compensation  usually  paid  to  banks  for  such 
service."  To  the  views  thus  expressed  we  give  our  unqualified  assent. 
The  motion  for  a  new  trial  should  have  been  sustained. 

The  judgment  of  the  district  court  is  reversed,  and  the  case  remand- 
ed for  further  proceedings  by  the  district  court.  The  other  judges 
concur. 


Ch.  4)  RELATIONS  OF  THE  PRINCIPAL  AND   AGENT  597 

SECTION  2.— RIGHTS  OF  THE  AGENT  AGAINST  THE 

PRINCIPAL 


FOX   V.   RYAN. 

(Supreme  Court  of  Illinois,  1909.     240  111.  391,  88  N.  E.  974.) 

Action  by  John  F.  Fox  against  Patrick  Ryan.  Plaintiff  had  judg- 
ment, and  defendant  appeals. 

Farmer,  C.  J.  This  is  an  action  of  assumpsit  begun  in  the  superior 
court  of  Cook  county  to  recover  $4,000  commissions  claimed  by  ap- 
pellee, plaintiff  below,  to  be  due  him  for  services  as  a  broker  in  effect- 
ing a  sale  of  mining  stock  for  appellant.  The  declaration  contained 
the  common   counts  only,  to  which  the  general  issue  was  pleaded. 

The  second  proposition  asked  by  the  appellant  was  that  merely  pro- 
curing a  person  to  enter  into  a  contract  for  the  purchase  of  property 
does  not  entitle  a  broker  to  commissions  unless  such  person  was  ready 
willing,  and  able  to  make  the  payments,  including  deferred  payments, 
named  in  the  contract.  The  court  modified  this  proposition  by  adding, 
"unless  the  defendant  accepted  the  purchaser."  The  proposition  as 
modified  was  correct.  Where  a  broker  is  employed  to  sell  property 
by  the  owner,  if  he  produces  a  purchaser  within  the  time  limited  by  his 
authority  who  is  ready,  willing,  and  able  to  purchase  the  property 
upon  the  terms  proposed  by  the  seller,  he  is  entitled  to  his  commis- 
sions, even  though  the  seller  refuses  to  perform  the  contract  on  his 
part.  In  such  case,  however,  it  is  necessary  for  the  broker  to  prove 
the  readiness,  willingness,  and  ability  of  the  purchaser  to  take  the 
property  on  the  terms  proposed.  But,  where  the  seller  accepts  the 
purchaser  and  enters  into  a  valid  contract  of  sale  with  him,  the  bro- 
ker's commission  is  earned  whether  the  purchaser  subsequently  fails 
to  perform  his  contract  and  makes  the  payments  agreed  upon  or 
not.  There  are  cases  in  other  states  holding  otherwise,  but  in  Wilson 
V.  Mason.  158  111.  304,  311,  42  N.  E.  134,  136,  49  Am.  St.  Rep.  162. 
this  court  refused  to  follow  those  cases,  denominating  them  as  ex- 
treme and  exceptional.    *    *    * 

Judgment  affirmed. 

CLARK   V.    HOVEY. 

(Supreme  Judicial  Court  of  Massachusetts,  1914.     217  Mass.  485, 
105   N.    E.   222.) 

RuGG,  C.  J.  This  is  an  action  to  recover  for  services  as  a  real  es- 
tate broker.  The  plaintiff  was  employed  by  the  defendant  to  sell  cer- 
tain real  estate,  and  he  procured  a  purchaser  who  executed  a  contract 
for  sale  of  it  with  the  defendant.  Simultaneously  with  this  contract 
the  following  agreement  was  entered  into  between  the  plaintiff  and 
the  defendant :  "It  is  agreed  by  and  between  Ewen  A.  Clark,  broker, 
and  Freeland  E.  Hovey,  owner,  that  concerning  the  agreement  for 
sale  of  property  #  2  and  #  6  Cambridge  street,  Boston,  from  Hovey 
to  Jeremiah  Green,  for  the  sum  of  $60,000,  that  said  Clark  agrees  to 
accept  the  sum  of  $500  in  full  payment  of  commission  and  for  his  full 
compensation  in  the  matter,  and  said  Hovey  agrees  to  pay  said  sum. 


598  AGENCY  (Part  2 

It  is  further  agreed  bv  both  parties  that  this  $500  shall  not  be  paid 
from  the  first  $5,000  paid  Hovey,  of  which  $500  has  been  paid  to-day, 
but  shall  be  paid  by  Hovey  to  Clark  from  the  first  $500  received  by 
Hovey  from  Green  after  the  $5,000  has  been  paid.  In  other  words, 
Clark  will  not  make  any  claim  for  commission  unless  Hovey  receives 
more  than  $5,000  in' cash  from  the  sale." 

The  contract  for  sale  was  never  carried  out  because  the  defendant 
could  not  give  a  good  title  by  reason  of  certain  restrictions.  The  ques- 
tion is  whether,  under  these  circumstances,  the  plaintiff  is  entitled  to 
his  commission. 

The  rights  of  the  parties  depend  upon  the  terms  of  their  agreement, 
which  is  in  writing  and  not  ambiguous.  It  fixes  the  price  which  the 
plaintiff  was  to  receive.  It  stipulates  in  unequivocal  words  that  the 
compensation  shall  not  be  paid  by  the  defendant  until  after  he  has  re- 
ceived $5,000  on  account  of  the  sale.  As  matter  of  construction,  this 
means  that  it  is  a  condition  to  his  being  able  to  recover  any  commis- 
sion that  the  defendant  shall  have  received  $5,000  in  cash  from  the 
sale.  Its  effect  is  not,  as  in  some  of  the  cases  relied  on  by  the  plaintiff, 
to  fix  a  time  beyond  which  the  broker  shall  not  be  called  upon  to  wait 
for  his  pay,  but  it  establishes  a  moment  before  the  arrival  of  which 
he  cannot  ask  for  his  compensation.  There  is  nothing  in  the  record 
to  indicate  that  the  employer  of  the  broker  has  failed  through  any 
volition  of  his  own  to  carry  out  the  contract. 

The  written  agreement  between  the  parties  supersedes  the  ordinary 
rule  that  the  broker  has  earned  his  commission  when  he  has  procured 
the  execution  of  a  valid  agreement  for  sale.  It  follows  that  the  judg- 
ment of  the  lower  court  was  wrong.    *     *    * 

Judgment  for  the  defendant. 


LABINSKS   V.   HOLST. 
(Supreme  Court  of  New  York,  Appellate  Term,  1903.     84  N.  Y.  Supp.  991.) 

Blanchard,  J.  The  plaintiff  was  employed  by  one  Greenstein  as 
a  bookkeeper,  and  he  brought  this  action  against  the  defendant  to 
recover  $100  for  commissions  which  he  claims  to  have  earned  by 
having  induced  his  employer,  Greenstein,  to  enter  into  two  contracts 
with  the  defendant.  The  court  below  found  in  his  favor,  and  the  de- 
fendant appeals. 

-  A  reversal  of  the  judgment  is  asked  on  several  grounds,  but  only 
one  need  be  considered.  The  appellant  contends  that  the  plaintiff  is 
not  entitled  to  the  commissions  for  the  reason  that  said  commissions 
would  be  in  derogation  of  his  employer's  interest.  This  contention  is 
supported  by  abundant  authority.  The  plaintiff  had  no  right,  while 
in  the  employment  of  Greenstein,  to  use  his  influence  to  induce  his 
employer  to  make  any  contract  in  which  the  plaintiff  had  a  personal 
interest,  without  first  fully  disclosing  the  fact  of  such  interest  to  his 
employer,  *  *  *  and  the  evidence  that  the  plaintiff's  employer  had 
knowledge  of  such  personal  interest  of  the  plaintiff  must  be  clear  and 
convincing.  Greenstein  denied  positively  that  he  had  such  knowledge. 
If  the  commissions  are  due  and  payable  at  all,  Greenstein  would  seem 
to  be  entitled  to  them,  and  not  the  plaintiff.  Howe  v.  Savory,  49  Barb. 
403,  affirmed  51  N.  Y.  631. 

The  judgment  appealed  from  should  be  reversed,  and  a  new  trial 
ordered.     *     *    * 


Ch.  4)  RELATIONS   OP  THE   PRINCIPAL  AND   AGENT  599 


LOCKWOOD  et  al.  v.  ROBBINS. 
(Supreme  Court  of  Indiana,  1890.     125  Ind.  398,  25  N.  E.  455.) 

Mitchell,  J.  Leon  Robbins  filed  a  claim  for  three  years  and  six 
months'  work  and  labor  against  the  estate  of  Alonzo  Lockwood,  de- 
ceased. *  *  *  'pj^g  material  facts  as  returned  in  a  special  verdict 
were  that  the  plaintiff,  a  minor  about  12  years  old,  without  father  or 
other  guardian,  entered  the  decedent's  service  in  1876,  and  continued 
therein  until  March,  1880,  during  which  time  he  performed  service 
for  the  latter  at  his  instance  and  request,  of  the  value,  after  deducting 
board,  clothing,  washing,  and  mending  furnished  by  the  decedent,  of 
$80.  The  services  were  not  performed  under  any  contract  between 
the  plaintiff  and  decedent,  nor  between  the  latter  and  any  other  per- 
son authorized  to  contract  for  the  plaintiff. 

Upon  the  facts  found,  the  court  very  properly  entered  judgment 
for  the  plaintiff.  It  does  not  appear  that  the  plaintiff  was  taken  into 
the  decedent's  family  and  cared  for  and  treated  as  a  member  thereof. 
On  the  contrary,  he  entered  his  service  and  performed  labor  at  the  de- 
cedent's instance  and  request,  and,  although  there  was  no  special  con- 
tract for  remuneration,  the  law  raises  an  implied  obligation  to  pay 
what  the  services  were  reasonably  worth.  *  *  *  "VVhere  one  is 
taken  into  the  family  of  another,  and  is  regarded  and  treated  in  every 
respect  as  a  member  of  the  household,  then,  even  though  there  may 
be  no  ties  of  blood,  there  is  no  implied  obligation  to  pay  for  services 
rendered  on  the  one  hand,  nor  for  board  furnished  on  the  other. 
*    *    *    The  present  is,  however,  not  such  a  case. 

The  judgment  is  affirmed,  with  costs. 


McMULLAN  v.  DICKINSON  CO. 

(Supreme  Court  of  Minnesota,  1895.     60  Minn.   156,  62  N.  W.  120, 
27  D.  R.  A.  409,  51  Am.  St.  Rep.  511.) 

Canty,  J.  On  the  25th  of  February,  1892,  the  plaintiff  entered 
into  a  written  agreement  with  the  defendant  corporation,  whereby  it 
agreed  to  employ  him  as  its  assistant  manager,  from  and  after  that 
date,  as  long  as  he  should  own  in  his  own  name  50  shares  of  the 
capital  stock  of  said  corporation,  fully  paid  up,  and  the  business  of 
said  corporation  shall  be  continued,  not  exceeding  the  term  of  the 
existence  of  said  corporation,  and  pay  him  for  such  services  the  sum 
of  $1,500  per  annum,  payable  monthly  during  that  time,  and  whereby 
he  agreed  to  perform  said  services  during  that  time.  He  has  ever 
since  owned,  as  provided,  the  50  shares  of  said  stock,  and  performed 
said  services  ever  since  that  time  until  the  28th  of  October,  1893,  when 
he  was  discharged  and  dismissed  by  the  defendant  without  cause.  He 
alleges  these  facts  in  his  complaint  in  this  action,  and  also  alleges 
that  he  has  been  ever  since  he  was  so  dismissed,  and  is  now,  ready 
and  willing  to  perform  said  services  as  so  agreed  upon,  and  that  there 
is  now  due  him  the  sum  of  $125  for  each  of  the  months  of  March 
and  April,  1894,  and  prays  judgment  for  the  sum  of  $250.  The  de- 
fendant in  its  answer,  for  a  second  defense,  alleges  that  on  March  2, 
1894,  plaintiff  commenced  a  similar  action  to  this  for  the  recovery  of 
the  sum  of  $512,  for  the  period  of  time  from  his  said  discharge  to 
the  1st  of  March,  1894,  alleging  the  same  facts  and  the  same  breach. 


600  AGENCY  (Part  2 

and  that  on  April  16,  1894,  he  recovered  judgment  in  that  action 
against  this  defendant  for  that  sum  and  costs,  and  this  is  pleaded  in 
bar  of  the  present  action.  The  plaintiff  demurred  to  this  defense,  and 
from  an  order  sustaining  the  demurrer  the  defendant  appeals. 

The  plaintiff  brought  each  action  for  installments  of  wages  claimed 
to  be  due,  on  the  theory  of  constructive  service.  The  doctrine  of  con- 
structive service  was  first  laid  down  by  Lord  EUenborough  in  Gandell 
V.  Pontigny,  4  Camp.  375,  and  this  case  was  followed  in  England  and 
this  country  for  a  long  time  (Wood,  Mast.  &  Serv.  254),  and  is  still 
upheld  by  several  courts  (Isaacs  v.  Davies,  68  Ga,  169;  Armfield  v. 
Nash,  31  Miss.  361 ;  Strauss  v.  Meertief,  64  Ala.  299,  38  Am.  Rep. 
8).  It  has  been  repudiated  by  the  courts  of  England  (Goodman  v.  Po- 
cock,  15  Adol.  &  E.  [N.  S.]  574;  Wood,  Mast.  &  Serv.  254),  and  by 
many  of  the  courts  in  this  country  (Id. ;  and  notes  to  Decamp  v.  Hewitt, 
43  Am,  Dec.  204),  as  unsound  and  inconsistent  with  itself,  as  it  as- 
sumes that  the  discharged  servant  has  since  his  discharge  remained 
ready,  willing,  and  able  to  perform  the  services  for  which  he  was  hired, 
while  sound  principles  require  him  to  seek  employment  elsewhere,  and 
thereby  mitigate  the  damages  caused  by  his  discharge.  His  remedy 
is  for  damages  for  breach  of  the  contract,  and  not  for  wages  for  its 
performance.  But  the  courts,  which  deny  his  right  to  recover  wages 
as  for  constructive  service,  have  denied  him  any  remedy  except  one 
for  damages,  which,  if  seemingly  more  logical  in  theory,  is  most  ab- 
surd in  its  practical  results.  These  courts  give  him  no  remedy  ex- 
cept the  one  which  is  given  for  the  recovery  of  loss  of  profits  for  the 
breach  of  other  contracts,  and  hold  that  the  contract  is  entire,  even 
though  the  wages  are  payable  in  installments,  and  that  he  exhausts  his 
remedy  by  an  action  for  a  part  of  such  damages,  no  matter  how  long 
the  contract  would  have  run  if  it  had  not  been  broken.  *  *  *  No 
one  action  to  recover  all  the  damages  for  such  a  breach  of  such  a 
contract  can  furnish  any  adequate  remedy,  or  do  anything  like  sub- 
stantial justice  between  the  parties. 

By  its  charter  the  life  of  this  corporation  is  thirty  years.  If  the  ac- 
tion is  commenced  immediately  after  the  breach,  how  can  prospective 
damages  be  assessed  for  this  thirty  years,  or  for  even  one  year?  To 
presume  that  the  discharged  servant  will  not  be  able  for  a  large  part 
of  that  time  to  obtain  other  employment,  and  award  him  large  dam- 
ages, might  be  grossly  unjust  to  the  defendant.  Again,  the  servant 
is  entitled  to  actual  indemnity,  not  to  such  speculative  indemnity  as 
must  necessarily  be  given  by  awarding  him  prospective  damages.  His 
contract  was  not  a  speculative  one,  and  the  law  should  not  make  it 
such.  That  men  can  and  do  find  employment  is  the  general  rule,  and 
enforced  idleness  the  exception.  It  should  not  be  presumed  in  advance 
that  the  exceptional  will  occur.  This  is  not  in  conflict  with  the  rule 
that,  in  an  action  for  retrospective  damages  for  such  a  breach,  the 
burden  is  on  the  defendant  to  show  that  the  discharged  servant  could 
have  found  employment.  In  that  case,  as  in  others,  reasonable  dili- 
gence will  be  presumed.  When  it  appears  that  he  has  not  found  em- 
ployment or  been  employed,  there  is  no  presumption  that  it  was  his 
fault,  and,  under  such  circumstances,  it  will  be  presumed  that  the  ex- 
ceptional has  happened.  But  to  presume  that  the  exceptional  will  hap- 
pen is  very  different.  In  an  action  for  such  a  breach  of  a  contract  for 
services,  prospective  damages  beyond  the  day  of  trial  are  too  con- 
tingent and  uncertain,  and  cannot  be  assessed.     *     *     *     Then,  if  the 


Ch.  4)  RELATIONS   OF   THE   PRINCIPAL  AND   AGENT  601 

discharged  servant  can  have  but  one  action,  it  is  necessary  for  him  to 
starve  and  wait  as  long  as  possible  before  commencing  it.  If  he  waits 
longer  than  six  years  after  the  breach,  the  statute  of  limitations  will 
have  run,  and  he  will  lose  his  whole  claim.  If  he  brings  his  action 
within  the  six  years,  he  will  lose  his  claim  for  the  balance  of  the  time 
after  the  day  of  trial.  Under  this  rule,  the  measure  of  damages  for 
the  breach  of  a  30  year  contract  is  no  greater  than  for  the  breach  of 
a  6  or  7  year  contract.  Such  a  remedy  is  a  travesty  on  justice.  Al- 
though the  servant  has  stipulated  for  a  weekly,  monthly,  or  quarterly 
income,  it  assumes  that  he  can  live  for  years  without  any  income, 
after  which  time  he  will  cease  to  live  or  need  income.  The  fallacy  lies 
in  assuming  that,  on  the  breach  of  the  contract,  loss  of  wages  is  analo- 
gous to  loss  of  profits,  and  that  the  same  rule  of  damages  applies,  while 
■  in  fact  the  cases  are  wholly  dissimilar,  and  there  is  scarcely  a  parallel 
between  them.  In  the  one  case  the  liability  is  absolute;  in  the  other 
it  is  contingent.     *     *     * 

It  is  our  opinion  that  the  servant  wrongfully  discharged  is  entitled 
to  indemnity  for  loss  of  wages,  and  for  the  full  measure  of  this  in- 
demnity the  master  is  clearly  liable.  This  liability  accrues  by  install- 
ments on  successive  contingencies.  Each  contingency  consists  in  the 
failure  of  the  servant  without  his  fault  to  earn,  during  the  installment 
period  named  in  the  contract,  the  amount  of  wages  which  he  would 
have  earned  if  the  contract  had  been  performed,  and  the  master  is 
liable  for  the  deficiency.  This  rule  of  damages  is  not  consistent  with 
the  doctrine  of  constructive  service,  but  it  is  the  rule  which  has  usu- 
ally been  applied  by  the  courts  which  adopted  that  doctrine.  Under 
that  doctrine  the  master  should  be  held  liable  to  the  discharged  serv- 
ant for  wages  as  if  earned,  while  in  fact  he  is  held  only  for  indemnity 
for  loss  of  wages.  The  fiction  of  constructive  service  is  false  and 
illogical,  but  the  measure  of  damages  given  under  that  fiction  is  correct 
and  logical.  It  is  simply  a  case  of  a  wrong  reason  given  for  a  correct 
rule.  Instead  of  rejecting  the  false  reason  and  retaining  the  correct 
rule,_  many_  courts  have  rejected  both  the  rule  and  the  reason.  In' our 
opinion,  this  rule  of  damages  should  be  retained;  but  the  true  ground 
on  which  it  is  based  is  not  that  of  constructive  service,  but  the  liability 
of  the  master  to  indemnify  the  discharged  servant,  not  to  pay  him 
wages,  and  this  indemnity  accrues  by  installments.  The  original  breach 
is  not  total,  but  the  failure  to  pay  the  successive  installments  consti- 
tutes successive  breaches.  Since  the  days  of  Lord  Ellenborough  this 
class  of  cases  has  been  in  some  courts  an  exception  to  the  rule  that 
there  can  be  but  one  action  for  damages  for  the  breach  of  a  contract, 
and  there  are  strong  reasons  why  it  should  be  an  exception.  Because 
the  discharged  servant  may,  if  he  so  elects,  bring  successive  actions 
for  the  installments  of  indemnity  as  they  accrue,  it  does  not  follow 
that  he  cannot  elect  to  consider  the  breach  total,  and  bring  one  action 
for  all  his  damages,  and  recover  all  of  the  same  accruing  up  to  the 
time  of  trial.  *  *  *  But  the  wrongdoer  can  have  no  such  election. 
He  should  not  be  allowed  to  take  advantage  of  his  own  wrong,  and, 
for  the  purpose  of  preventing  the  use  of  any  adequate  remedy  and 
defeatmg  any  adequate  recovery,  to  insist  that  his  own  breach  is  total. 
The  order  appealed  from  should  be  affirmed.     So  ordered. 


G02  AGENCY  (Part  2 

BACON  V.  FOUllTH  NAT.  BANK. 
(City  Court  of  New  York,  Trial  Term,  1889.    9  N.  Y.  Supp.  435.) 

McAdam,  C.  J.  The  fees  paid  to  the  attorneys  in  Boston  were  ex- 
pended under  circumstances  from  which  the  law  impHes  a  request  to 
pay  for  them  on  the  part  of  the  plaintiff.  Legal  advice  and  services 
may  be  as  necessary  to  protect  the  property  as  the  aid  of  a  physician 
or  surgeon  is  to  protect  life.  Neither  may  prove  serviceable  in  some 
cases,  in  others  extremely  so,  depending  in  a  measure  on  results. 
Prudence  requires  their  employment  in  all  cases  wherein  property  or 
life  is  imperiled.  It  would  be  negeligence  not  to  to  employ  profes- 
sional aid  in  cases  requiring  it.  The  result  does  not  determine  the 
propriety  of  the  employment.  The  condition  of  things  at  the  time 
must  decide  that.  A  party  who  acts  according  to  the  best  lights  that 
can  be  obtained  at  the  moment  is  not  negligent,  but  discreet.  It  is  ele- 
mentary that  an  agent  is  not  permitted  to  reap  any  of  the  profits  of 
his  agency  properly  belonging  to  his  principal;  so,  on  the  other  hand, 
he  is  entitled  to  be  indemnified  against  all  losses  which  have  been  in- 
nocently sustained  by  him  on  the  same  account.  *  *  *  The  naked 
depositary  ought  neither  to  be  injured  nor  benefited  in  any  respect 
by  the  trust  undertaken  by  him.  In  an  emergency  he  has  an  implied 
authority  to  incur  expenses  on  behalf  of  the  owner  for  the  preserva- 
tion of  the  property.     *     *     * 

It  is  a  familiar  rule  that  an  agent  has  the  duty  of  taking  such  steps 
as  are  reasonably  necessary  for  the  protection  of  his  principal's  in- 
terests, and  for  the  preservation  of  his  principal's  property,  and  that, 
having  made  outlays  for  that  purpose,  he  is  entitled  to  reimbursements 
at  the  hands  of  his  principal.  *  *  *  The  reason  of  the  rule  is 
that  a  request  on  the  part  of  the  principal  is  inferred  where  the  ad- 
vances are  made  in  the  regular  course  of  business,  or  even  on  the  spur 
of  some  pressing  urgency  not  provided  for  by  any  rule,  since  the  em- 
ployer may  fairly  be  taken  to  have  authorized  the  employed  to  make 
the  expenditure  under  any  circumstances  that  a  prudent  man  would 
conceive  necessary  for  the  safeguard  of  his  interest.  * '  *  *  In 
Harter  v.  Blanchard,  64  Barb.  617,  the  rule  was  applied  to  the  case 
of  a  horse  which,  while  in  the  bailee's  possession,  had  his  leg  broken ; 
and  it  was  held  that  the  bailee  had,  from  the  nature  of  the  case,  an 
impHed  authority  to  contract  in  behalf  of  the  bailor  with  a  competent 
farrier  for  the  care  of  the  animal.  Indeed,  this  just  rule  of  implied 
authority  and  indemnity  pervades  the  law  of  principal  and  agent, 
and  of  bailments  as  well.  The  expenditure  made  by  the  Maverick  Na- 
tional Bank  was  the  proper  exercise  by  it  of  the  discretion  conferred 
by  the  nature  of  the  transaction.  It  was  reasonable  in  amount,  the 
services  rendered  were  necessary,  and  there  is  no  principle  of  justice 
that  requires  that  it  should  lose  the  amount  so  paid.  The  expenditure 
was  to  protect  the  plaintiff's  interest  in  the  property ;  was  made  for 
his  sole  benefit,  at  a  place  far  distant  from  his  residence,  and  impliedly 
at  his  request.  The  expenditure,  being  a  proper  one,  was  legally  au- 
thorized, and  is  a  good  counterclaim  against  the  plaintiff ;  and,  the  cause 
of  action  for  the  balance  of  his  demand  having  been  legally  discharged 
by  payment  into  court,  it  follows  that  there  must  be  judgment  for  the 
defendant,  with  costs  from  the  time  of  such  payment.     *     *     * 


Ch.  4)  RELATIONS   OF   THE   PRINCIPAL   AND   AGENT  603 


NEW  YORK  CENT.  R.  CO.  v.  WHITE. 

(Supreme  Court  of  the  United  States,  1917.    243  U.  S.  188,  37  Sup.  Ct.  247, 
61  L.  Ed.  667,  L.  R.  A.  1917D,  1,  Ann.  Cas.  1917D,  629.) 

PiTNKY,  J.  A  proceeding  was  commenced  by  defendant  in  error  be- 
fore the  Workmen's  Compensation  Commission  of  the  State  of  New- 
York,  estabHshed  by  the  Workmen's  Compensation  Law  of  that  state, 
to  recover  compensation  from  the  New  York  Central  &  Hudson  River 
Railroad  Company  for  the  death  of  her  husband,  Jacob  White,  who  lost 
his  life  September  2,  1914,  through  an  accidental  injury  arising  out  of 
and  in  the  course  of  his  employment  under  that  company.  The  Com- 
mission awarded  compensation  in  accordance  with  the  terms  of  the 
law ;  its  award  was  affirmed,  without  opinion,  by  the  Appellate  Divi- 
sion of  the  Supreme  Court  for  the  Third  Judicial  Department,  whose 
order  was  affirmed  by  the  Court  of  Appeals  without  opinion.     *    *     * 

We  turn  to  the  constitutional  question.  The  Workmen's  Compen- 
sation Law  of  New  York  establishes  forty-two  groups  of  hazardous 
employments,  defines  "employee"  as  a  person  engaged  in  one  of  these 
employments  upon  the  premises,  or  at  the  plant,  or  in  the  course  of 
his  employment  away  from  the  plant  of  his  employer,  but  excluding 
farm  laborers  and  domestic  servants;  defines  "employment"^  as  in- 
cluding employment  only  in  a  trade,  business,  or  occupation  carried 
on  by  the  employer  for  pecuniary  gain,  "injury"  and  "personal  injury" 
as  meaning  only  accidental  injuries  arising  out  of  and  in  the  course 
of  employment,  and  such  disease  or  infection  as  naturally  and  un- 
avoidably may  result  therefrom;  and  requires  every  employer  subject 
to  its  provisions  to  pay  or  provide  compensation  according  to  a  pre- 
scribed schedule  for  the  disability  or  death  of  his  employee  resulting 
from  an  accidental  personal  injury  arising  out  of  and  in  the  course  of 
the  employment,  without  regard  to  fault  as  a  cause,  except  where  the 
injury  is  occasioned  by  the  wilful  intention  of  the  injured  employee 
to  bring  about  the  injury  or  death  of  himself  or  of  another,  or  where 
it  results  solely  from  the  intoxication  of  the  injured  employee  while 
on  duty,  in  which  cases  neither  the  injured  employee  nor  any  depend- 
ent shall  receive  compensation.  By  section  11  the  prescribed  liability 
is  made  exclusive,  except  that,  if  an  employer  fail  to  secure  the  pay- 
ment of  compensation  as  provided  in  section  50,  an  injured  employee, 
or  his  legal  representative,  in  case  death  results  from  the  injury,  may, 
at  his  option,  elect  to  claim  compensation  under  the  act,  or  to  maintain 
an  action  in  the  courts  for  damages,  and  in  such  an  action  it  shall  not 
be  necessary  to  plead  or  prove  freedom  from  contributory  negligence, 
nor  may  the  defendant  plead  as  a  defense  that  the  injury  was  caused 
by  the  negligence  of  a  fellow  servant,  that  the  employee  assumed  the 
risk  of  his  employment,  or  that  the  injury  was  due  to  contributory  neg- 
ligence. 

Compensation  under  the  act  is  not  regulated  by  the  measure  of  dam- 
ages applied  in  negligence  suits,  but,  in  addition  to  providing  medical, 
surgical,  or  other  like  treatment,  it  is  based  solely  on  loss  of  earning 
power,  being  graduated  according  to  the  average  weekly  wages  of  the 
injured  employee  and  the  character  and  duration  of  the  disability, 
whether  partial  or  total,  temporary  or  permanent;  while  in  case  the 
injury  causes  death,  the  compensation  is  known  as  a  death  benefit,  and 
includes  funeral  expenses,  not  exceeding  $100,  payments  to  the  sur- 
viving wife  (or  dependent  husband)  during  widowhood  (or  dependent 


604  AGENCY  (Part  2 

widowerhood)  of  a  percentage  of  the.  average  wages  of  the  deceased, 

and  if  there  be  a  surviving  child  or  children  under  the  age  of  eighteen 
years  an  additional  percentage  of  such  wages  for  each  child  until  that 
age  is  reached.  There  are  provisions  invalidating  agreements  by- 
employees  to  waive  the  right  to  compensation,  prohibiting  any  assign- 
ment, release,  or  commutation  of  claims  for  compensation  or  benefits 
except  as  provided  by  the  act,  exempting  them  from  the  claims  of 
creditors,  and  requiring  that  the  compensation  and  benefits  shall  be  paid 
only  to  employees  or  their  dependents.  Provision  is  made  for  the  es- 
tablishment of  a  Workmen's  Compensation  Commission  with  adminis- 
trative and  judicial  functions,  including  authority  to  pass  upon  claims 
to  compensation  on  notice  to  the  parties  interested.  The  award  or  de- 
cision of  the  Commission  is  made  subject  to  an  appeal,  on  questions 
of  law  only,  to  the  Appellate  Division  of  the  Supreme  Court  for  the 
Third  Department,  with  an  ultimate  appeal  to  the  Court  of  Appeals 
in  cases  where  such  an  appeal  would  lie  in  civil  actions.  A  fund  is 
created,  known  as  "the  state  insurance  fund,"  for  the  purpose  of  in- 
suring employers  against  liability  under  the  law,  and  assuring  to  the 
persons  entitled  the  compensation  thereby  provided.  The  fund  is  made 
up  primarily  of  premiums  received  from  employers,  at  rates  fixed  by 
the  Commission  in  view  of  the  hazards  of  the  dift'erent  classes  of  em- 
ployment, and  the  premiums  are  to  be  based  upon  the  total  pay  roll 
and  number  of  employees  in  each  class  at  the  lowest  rate  consistent 
with  the  maintenance  of  a  solvent  state  insurance  fund  and  the  cre- 
ation of  a  reasonable  surplus  and  reserve. 

Elaborate  provisions  are  laid  down  for  the  administration  of  this 
fund.  By  section  50,  each  employer  is  required  to  secure  compensation 
to  his  employees  in  one  of  the  following  ways:  (1)  By  insuring  and 
keeping  insured  the  payment  of  such  compensation  in  the  state  fund; 
or  (2)  through  any  stock  corporation  or  mutual  association  author- 
ized to  transact  the  business  of  workmen's  compensation  insurance  in 
the  state;  or  (3)  "by  furnishing  satisfactory  proof  to  the  Commis- 
sion of  his  financial  ability  to  pay  such  compensation  for  himself,  in 
which  case  the  Commission  may,  in  its  discretion,  require  the  deposit 
with  the  Commission  of  securities  of  the  kind  prescribed  in  section  13 
of  the  Insurance  Law,  in  an  amount  to  be  determined  by  the  Commis- 
sion, to  secure  his  liability  to  pay  the  compensation  provided  in  this 
chapter."  If  an  employer  fails  to  comply  with  this  section,  he  is  made 
liable  to  a  penalty  in  an  amount  equal  to  the  pro  rata  premium  that 
would  have  been  payable  for  insurance  in  the  state  fund  during  the 
period  of  noncompliance ;  besides  which,  his  injured  employees  or 
their  dependents  are  at  liberty  to  maintain  an  action  for  damages  in 
the  courts,  as  prescribed  by  section  11. 

In  a  previous  year,  the  legislature  enacted  a  compulsory  compensa- 
tion law  applicable  to  a  limited  number  of  specially  hazardous  employ- 
ments, and  requiring  the  employer  to  pay  compensation  without  re- 
gard to  fault.  *  *  *  This  was  held  by  the  Court  of  Appeals  in  Ives 
V.  South  Buffalo  R.  Co.,  201  N.  Y.  271,  94  N.  E.  431,  34  E.  R.  A.  (N. 
S.)  162,  Ann.  Cas.  1912B,  156,  1  N.  C.  C.  A.  517,  to  be  invalid  because 
in  conflict  with  the  due  process  of  law  provisions  of  the  state  Consti- 
tution and  of  the  Fourteenth  Amendment.    Thereafter,  and  in  the  year 

1913,  a  constitutional  amendment  was  adopted,  effective  January  1, 

1914.  *    *    * 


Ch.  4)  RELATIONS   OF   THE   PRINCIPAL   AND   AGENT  605 

In  December,  1913,  the  Legislature  enacted  the  law  now  under  con- 
sideration. *  *  '■'•  The  scheme  of  the  act  is  so  wide  a  departure  from 
common-law  standards  respecting  the  responsibility  of  employer  to 
employee  that  doubts  naturally  have  been  raised  respecting  its  consti- 
tutional validity.  The  adverse  considerations  urged  or  suggested  in 
this  case  and  in  kindred  cases  submitted  at  the  same  time  are:  (a) 
That  the  employer's  property  is  taken  without  due  process  of  law,  be- 
cause he  is  subjected  to  a  liability  for  compensation  without  regard 
to  any  neglect  or  default  on  his  part  or  on  the  part  of  any  other  person 
for  whom  he  is  responsible,  and  in  spite  of  the  fact  that  the  injury 
may  be  solely  attributable  to  the  fault  of  the  employee;  (b)  that  the 
employee's  rights  are  interfered  with,  in  that  he  is  prevented  from 
having  compensation  for  injuries  arising  from  the  employer's  fault 
commensurate  with  the  damages  actually  sustained,  and  is  limited  to 
the  measure  of  compensation  prescribed  by  the  act;  and  (c)  that  both 
employer  and  employee  are  deprived  of  their  liberty  to  acquire  proper- 
ty by  being  prevented  from  making  such  agreement  as  they  choose  re- 
specting the  terms  of  the  employment. 

In  support  of  the  legislation,  it  is  said  that  the  whole  common-law 
doctrine  of  employer's  liability  for  negligence,  with  its  defenses  of  con- 
tributory negligence,  fellow  servant's  negligence,  and  assumption  of 
risk,  is  based  upon  fictions,  and  'is  inapplicable  to  modern  conditions 
of  employment ;  that  in  the  highly  organized  and  hazardous  industries 
of  the  present  day  the  causes  of  accident  are  often  so  obscure  and  com- 
plex that  in  a  material  proportion  of  cases  it  is  impossible  by  any  meth-' 
od  correctly  to  ascertain  the  facts  necessary  to  form  an  accurate  judg- 
ment, and  in  a  still  larger  proportion  the  expense  and  delay  required 
for  such  ascertainment  am.ount  in  effect  to  a  defeat  of  justice;  that, 
under  the  present  system,  the  injured  workman  is  left  to  bear  the 
greater  part  of  industrial  accident  loss,  which,  because  of  his  limited 
income,  he  is  unable  to  sustain,  so  that  he  and  those  dependent  upon 
him  are  overcome  by  poverty  and  frequently  become  a  burden  upon 
public  or  private  charity;  and  that  litigation  is  unduly  costly  and  te- 
dious, encouraging  corrupt  practices  and  arousing  antagonisms  be- 
tween employers  and  employees. 

In  considering  the  constitutional  question,  it  is  necessary  to  view 
the  matter  from  the  standpoint  of  the  employee  as  well  as  from  that 
of  the  employer.  For,  while  plaintiff  in  error  is  an  employer,  and 
cannot  succeed  without  showing  that  its  rights  as  such  are  infringed, 
*  *  *  vet,  as  pointed  out  by  the  Court  of  Appeals  in  the  Jensen 
Case  (215  N.  Y.  526,  109  N.  E.  600,  L.  R.  A.  1916A,  403,  Ann.  Cas. 
1916B,  276),  the  exemption  from  further  liability  is  an  essential  part 
of  the  scheme,  so  that  the  statute,  if  invalid  as  against  the  employee, 
is  invalid  as  against  the  employer. 

The  close  relation  of  the  rules  governing  responsibihty  as  between 
employer  and  employee  to  the  fundamental  rights  of  liberty  and  prop- 
erty is,  of  course,  recognized.  But  those  rules,  as  guides  of  conduct, 
are  not  beyond  alteration  by  legislation  in  the  public  interest.  No 
person  has  a  vested  interest  in  any  rule  of  law,  entitling  him  to  insist 
that  it  shall  remain  unchanged  for  his  benefit.  *  *  *  The  common 
law  bases  the  employer's  liability  for  injuries  to  the  employee  upon 
the  ground  of  negligence;  but  negligence  is  merely  the  disregard  of 
some  duty  imposed  by  law ;  and  the  nature  and  extent  of  the  duty  may 
be  Iriodified  by  legislation,  with  corresponding  change  in  the  test  of 


006  AGENCY  (Part  2 

negligence.     Indeed,  liability  may  be  imposed  for  the  consequences  of 
a  failure  to  comply  with  a  statutory  duty,  irrespective  of  neghgence 

in  the  ordinary  sense ;    safety  appliance  acts  being  a  familiar  instance. 

*  *     * 

The  fault  may  be  that  of  the  employer  himself,  or — most  frequently 
— that  of  another  for  whose  conduct  he  is  made  responsible  according 
to  the  maxim  respondeat  superior.  In  the  latter  case  the  employer 
may  be  entirely  blameless,  may  have  exercised  the  utmost  human  fore- 
sight to  safeguard  the  employee ;  yet,  if  the  alter  ego,  while  acting 
within  the  scope  of  his  duties,  be  negligent — in  disobedience,  it  may 
be,  of  the  employer's  positive  and  specific  command — the  employer  is 
answerable  for  the  consequences.  It  cannot  be  that  the  rule  embodied 
in  the  maxim  is  unalterable  by  legislation. 

The  immunity  of  the  employer .  from  responsibility  to  an  employee 
for  the  negligence  of  a  fellow  employee  is  of  comparatively  recent 
origin,  it  being  the  product  of  the  judicial  conception  that  the  prob- 
ability of  a  fellow  workman's  negligence  is  one  of  the  natural  and  or- 
dinary risks  of  the  occupation,  assumed  by  the  employee  and  pre- 
sumably taken  into  account  in  the  fixing  of  his  wages.  The  earliest 
reported  cases  are  Murray  v.  South  Carolina  R.  Co.  (1841)  1  McMul. 
L.  385,  398,  36  Am.  Dec.  268;  Farwell  v.  Boston  &  W.  R.  Corp. 
(1842)  4  Mete.  (Mass.)  49,  '^7.  38  Am.  Dec.  339,  15  Am.  Neg.  Cas. 
407;  Hutchinson  v.  York,  N.  &  B.  R.  Co.  (1850)  L.  R.  5  Exch.  343, 
351,  19  L.  J.  Exch.  N.  S.  296,  299,  14  Jur.  837,  840,  6  Eng.  Ry.  & 
C.  Cas.  580.  *  *  *  The  doctrine  has  prevailed  generally  throughout 
the  United  States,  but  with  material  differences  in  different  jurisdic- 
tions respecting  who  should  be  deemed  a  fellow  servant  and  who  a 
vice  principal  or  alter  ego  of  the  master,  turning  sometimes  upon  re- 
fined distinctions  as  to   grades  and  departments   in  the  employment. 

*  *    *    It  needs  no  argument  to  show  that  such  a  rule  is  subject  to 
modification  or  abrogation  by  a  state  upon  proper  occasion. 

The  same  may  be  said  with  respect  to  the  general  doctrine  of  as- 
sumption of  risk.  By  the  common  law  the  employee  assumes  the  risks 
normally  incident  to  the  occupation  in  which  he  voluntarily  engages ; 
other  and  extraordinary  risks  and  those  due  to  the  employer's  negli- 
gence he  does  not  assume  until  made  aware  of  them,  or  until  they  be- 
come so  obvious  that  an  ordinarily  prudent  man  would  observe  and  ap- 
preciate them;  in  either  of  which  cases  he  does  assume  them,  if  he 
continues  in  the  employment  without  obtaining  from  the  employer  an 
assurance  that  the  matter  will  be  remedied ;  but  if  he  receive  such  an 
assurance,  then,  pending  performance  of  the  promise,  the  employee 
does  not,  in  ordinary  cases,  assume  the  special  risk.  >i=  *  *  Plainly, 
these  rules,  as  guides  of  conduct  and  tests  of  liability,  are  subject  to 
change  in  the  exercise  of  the  sovereign  authority  of  the  state. 

So,  also,  with  respect  to  contributory  negligence.  Aside  from  in- 
juries intentionally  self-inflicted,  for  which  the  statute  under  consid- 
eration affords  no  compensation,  it  is  plain  that  the  rules  of  law  upon 
the  subject,  in  their  bearing  upon  the  employer's  responsibility,  are 
subject  to  legislative  change;  for  contributory  negligence,  again,  in- 
volves a  default  in  some  duty  resting  on  the  employee,  and  his  duties 
are  subject  to  modification. 

It  may  be  added,  by  way  of  reminder,  that  the  entire  matter  of  lia- 
bility for  death  caused  by  wrongful  act,  both  within  and  without  the 
relation  of  employer  and  employee,  is  a  modern  statutory  innovation, 


Ch.  4)  RELATIONS   OF   THE   PRINCIPAL   AND   AGENT  607 

in  which  the  states  differ  as  to  who  may  sue,  for  whose  benefit,  and 
the  measure  of  damages. 

But  it  is  not  necessary  to  extend  the  discussion.  This  court  re- 
peatedly has  upheld  the  authority  of  the  states  to  establish  by  legis- 
lation departures  from  the  fellow-servant  rule  and  other  common-law 
rules  affecting  the  employer's  liability  for  personal  injuries  to  the 
employee.     *     *     * 

The  statute  under  consideration  sets  aside  one  body  of  rules  only  to 
establish  another  system  in  its  place.  If  the  employee  is  no  longer  able 
to  recover  as  much  as  before  in  case  of  being  injured  through  the  em- 
ployer's negligence,  he  is  entitled  to  moderate  compensation  in  all 
cases  of  injury,  and  has  a  certain  and  speedy  remedy  without  the  diffi- 
culty and  expense  of  establishing  negligence  or  proving  the  amount 
of  the  damages.  Instead  of  assuming  the  entire  consequences  of  all 
ordinary  risks  of  the  occupation,  he  assumes  the  consequences,  in  ex- 
cess of  the  scheduled  compensation,  of  risks  ordinary  and  extraordi- 
nary. On  the  other  hand,  if  the  employer  is  left  without  defense  re- 
specting the  question  of  fault,  he  at  the  same  time  is  assured  that  the 
recovery  is  limited,  and  that  it  goes  directly  to  the  relief  of  the  des- 
ignated beneficiary.     *     *     * 

The  act  evidently  is  intended  as  a  just  settlement  of  a  difficult  prob- 
lem, affecting  one  of  the  most  important  of  social  relations,  and  it  is 
to  be  judged  in  its  entirety.  We  have  said  enough  to  demonstrate  that, 
in  such  an  adjustment,  the  particular  rules  of  the  common  law  affect- 
ing the  subject  matter  are  not  placed  by  the  Fourteenth  Amendment 
beyond  the  reach  of  the  lawmaking  power  of  the  state;  and  thus  we 
are  brought  to  the  question  whether  the  method  of  compensation  that 
is  established  as  a  substitute  transcends  the  limits  of  permissible  state 
action. 

We  will  consider,  first,  the  scheme  of  compensation,  deferring  for 
the  present  the  question  of  the  manner  in  which  the  employer  is  re- 
quired to  secure  payment. 

Briefly,  the  statute  imposes  liability  upon  the  employer  to  make 
cornpensation  for  disability  or  death  of  the  employee  resulting  from 
accidental  personal  injury  arising  out  of  and  in  the  course  of  the  em- 
ployment, without  regard  to  fault  as  a  cause  except  where  the  injury 
or  death  is  occasioned  by  the  employee's  wilful  intention  to  produce 
it,  or  where  the  injury  results  solely  from  his  intoxication  while  on 
duty ;  it  graduates  the  compensation  for  disability  according  to  a  pre- 
scribed scale  based  upon  the  loss  of  earning  power,  having  regard  to 
the  previous  wage  and  character  and  duration  of  the  disability;  and 
measures  the  death  benefits  according  to  the  dependency  of  the  sur- 
viving wife,  husband,  or  infant  children.  Perhaps  we  should  add  that 
it  has  no  retrospective  effect,  and  applies  only  to  cases  arising  some 
months  after  its  passage. 

Of  course,  we  cannot  ignore  the  question  whether  the  new  arrange- 
ment is  arbitrary  and  unreasonable,  from  the  standpoint  of  natural 
justice.  Respecting  this,  it  is  important  to  be  observed  that  the  act 
applies  only  to  disabling  or  fatal  personal  injuries  received  in  the 
course  of  hazardous  employment  in  gainful  occupation.  Reduced  to 
its  elements,  the  situation  to  be  dealt  with  is  this :  Employer  and  em- 
ployee, by  mutual  consent,  engage  in  a  common  operation  intended 
to  be  advantageous  to  both ;  the  employee  is  to  contribute  his  person- 
al services,  and  for  these  is  to  receive  wages,  and,  ordinarily,  nothing 


608  AGENCY  (Part  2 

more;  the  employer  is  to  furnish  plant,  facilities,  organization,  capi- 
tal, credit,  is  to  control  and  manage  the  operation,  paying  the  wages 
and  other  expenses,  disposing  of  the  product  at  such  prices  as  he  can 
obtain,  taking  all  the  profits,  if  any  there  be,  and,  of  necessity,  bear- 
ing the  entire  losses.  In  the  nature  of  things,  there  is  more  or  less  of 
a  probability  that  the  employee  may  lose  his  life  through  some  acci- 
dental injury  arising  out  of  the  employment,  leaving  his  widow  or 
children  deprived  of  their  natural  support;  or  that  he  may  sustain  an 
injury  not  mortal,  but  resulting  in  his  total  or  partial  disablement, 
temporary  or  permanent,  with  corresponding  impairment  of  earning 
capacity.  The  physical  suffering  must  be  borne  by  the  employee 
alone;  the  laws  of  nature  prevent  this  from  being  evaded  or  shifted 
to  another,  and  the  statute  makes  no  attempt  to  afford  an  equivalent  in 
compensation.  But,  besides,  there  is  the  loss  of  earning  power — a 
loss  of  that  wliich  stands  to  the  employee  as  his  capital  in  trade.  This 
is  a  loss  arising  out  of  the  business,  and,  however  it  may  be  charged 
up,  is  an  expense  of  the  operation,  as  truly  as  the  cost  of  repairing 
broken  machinery  or  any  other  expense  that  ordinarily  is  paid  by  the 
employer. 

Who  is  to  bear  the  charge?  It  is  plain  that,  on  grounds  of  natural 
justice,  it  is  not  unreasonable  for  the  state,  while  reheving  the  em- 
ployer from  responsibility  for  damages  measured  by  common-law 
standards  and  payable  in  cases  where  he  or  those  for  whose  conduct 
he  is  answerable  are  found  to  be  at  fault,  to  require  him  to  contribute 
a  reasonable  amount,  and  according  to  a  reasonable  and  definite  scale, 
by  way  of  compensation  for  the  loss  of  earning  power  incurred  in 
the  common  enterprise,  irrespective  of  the  question  of  negligence,  in- 
stead of  leaving  the  entire  loss  to  rest  where  it  may  chance  to  fall — 
that  is,  upon  the  injured  employee  or  his  dependents.  Nor  can  it  be 
deemed  arbitrary  and  unreasonable,  from  the  standpoint  of  the  em- 
ployee's interest,  to  supplant  a  system  under  which  he  assumed  the 
entire  risk  of  injury  in  ordinary  cases,  and  in  others  had  a  right  to 
recover  an  amount  more  or  less  speculative  upon  proving  facts  of 
negligence  that  often  were  difficult  to  prove,  and  substitute  a  system 
under  which,  in  all  ordinary  cases  of  accidental  injury,  he  is  sure  of 
a  definite  and  easily  ascertained  compensation,  not  being  obliged  to 
assume  the  entire  loss  in  any  case,  but  in  all  cases  assuming  any  loss 
beyond  the  prescribed  scale. 

Much  emphasis  is  laid  upon  the  criticism  that  the  act  creates  lia- 
bility without  fault.  This  is  sufficiently  answered  by  what  has  been 
said,  but  we  may  add  that  liability  without  fault  is  not  a  novelty  in 
the  law.  The  common-law  liability  of  the  carrier,  of  the  innkeeper, 
or  him  who  employed  fire  or  other  dangerous  agency  or  harbored  a 
mischievous  animal,  was  not  dependent  altogether  upon  questions  of 
fault  or  negligence.  Statutes  imposing  liability  without  fault  have 
been  sustained.     *     *     * 

The  provision  for  compulsory  compensation,  in  the  act  under  con- 
sideration, cannot  be  deemed  to  be  an  arbitrary  and  unreasonable  ap- 
plication of  the  principle,  so  as  to  amxOunt  to  a  deprivation  of  the  em- 
ployer's property  without  due  process  of  law.  The  pecuniary  loss 
resulting  from  the  employee's  death  or  disablement  must  fall  some- 
where. It  results  from  something  done  in  the  course  of  an  operation 
from  which  the  employer  expects  to  derive  a  profit.  In  excluding  the 
qu-^stion  of  faylt  as  a  cause  of  the  injury,  the  act  in  effect  disregards 


Ch.  4)  RELATIONS   OF   THE   PRINCIPAL   AND   AGENT  609 

the  proximate  cause  and  looks  to  one  more  remote — the  primary  cause, 
as  it  may  be  deemed — and  that  is,  the  employment  itself.  For  this, 
both  parties  are  responsible,  since  they  voluntarily  engage  in  it  as  co- 
adventurers,  with  personal  injury  to  the  employee  as  a  probable  and 
foreseen  result.  In  ignoring  any  possible  negligence  of  the  employee 
producing  or  contributing  to  the  injury,  the  lawmaker  reasonably  may 
have  been  influenced  by  the  belief  that,  in  modern  industry,  the  ut- 
most diligence  in  the  employer's  service  is  in  some  degree  inconsistent 
with  adequate  care  on  the  part  of  the  employee  for  his  own  safety ; 
that  the  more  intently  he  devotes  himself  to  the  work,  the  less  he  can 
take  precautions  for  his  own  security.  And  it  is  evident  that  the  con- 
sequences of  a  disabling  or  fatal  injury  are  precisely  the  same  to  the 
parties  immediately  ai?ected,  and  to  the  community,  whether  the  proxi- 
mate cause  be  culpable  or  innocent.  Viewing  the  entire  matter,  it 
cannot  be  pronounced  arbitrary  and  unreasonable  for  the  state  to  im- 
pose upon  the  employer  the  absolute  duty  of  making  a  moderate  and 
definite  compensation  in  money  to  eveiy  disabled  employee,  or,  in  case 
of  his  death,  to  those  who  were  entitled  to  look  to  him  for  support 
in  lieu  of  the  common-law  liability  confined  to  cases  of  negligence. 

This,  of  course,  is  not  to  say  that  any  scale  of  compensation,  how- 
ever insignificant,  on  the  one  hand,  or  onerous,  on  the  other,  would  be 
supportable.  In  this  case,  no  criticism  is  made  on  the  ground  that 
the  compensation  prescribed  by  the  statute  in  question  is  unreasonable 
in  amount,  either  in  general  or  in  the  particular  case.  iVny  question 
of  that  kind  may  be  met  when  it  arises. 

But,  it  is  said,  the  statute  strikes  at  the  fundamentals  of  constitution- 
al freedom  of  contract.  *  *  *  \Ye  recognize  that  the  legislation 
under  review  does  measurably  limit  the  freedom  of  employer  and 
employee  to  agree  respecting  the  terms  of  employment,  and  that  it  can- 
not be  supported  except  on  the  ground  that  it  is  a  reasonable  exercise 
of  the  police  power  of  the  state.  In  our  opinion  it  is  fairly  supporta- 
ble upon  that  ground.  And  for  this  reason:  The  subject  matter  in 
respect  of  which  freedom  of  contract  is  restricted  is  the  matter  of  com- 
pensation for  human  life  or  limb  lost  or  disability  incurred  in  the 
course  of  hazardous  employment,  and  the  public  has  a  direct  interest 
in  this  as  affecting  the  common  welfare.     *     *     * 

We  have  not  overlooked  the  criticism  that  the  act  imposes  no  rule 
of  conduct  upon  the  employer  with  respect  to  the  conditions  of  labor 
in  the  various  industries  embraced  within  its  terms,  prescribes  no  duty 
with  regard  to  where  the  workmen  shall  work,  the  character  of  the 
machinery,  tools,  or  appliances,  the  rules  or  regulations  to  be  estab- 
lished, or  the  safety  devices  to  be  maintained.  This  statute  does  not 
concern  itself  with  measures  of  prevention,  which  presumably  are  em- 
braced in  other  laws.  But  the  interest  of  the  public  is  not  confined 
to  these.  One  of  the  grounds  of  its  concern  with  the  continued  life 
and  earning  power  of  the  individual  is  its  interest  in  the  prevention  of 
pauperism,  with  its  concomitants  of  vice  and  crime.  And,  in  our  opin- 
ion, laws  regulating  the  responsibility  of  employers  for  the  injury  or 
death  of  employees,  arising  out  of  the  employment,  bear  so  close  a 
relation  to  the  protection  of  the  lives  and  safety  of  those  concerned 
that  they  properly  may  be  regarded  as  coming  within  the  category  of 
police  regulations.  *  *  * 
B.&B.Bus.Law— 39 


GIO  AGENCY  (Part  2 

No  question  is  made  but  that  the  procedural  provisions  of  the  act  are 
amply  adequate  to  afford  the  notice  and  opportunity  to  be  heard  re- 
quired by  the  Fourteenth  Amendment.  The  denial  of  a  trial  by  jury 
is  not  inconsistent  with  "due  process."     *     *     * 

The  objection  under  the  "equal  protection''  clause  is  not  pressed. 
The  only  apparent  basis  for  it  is  in  the  exclusion  of  farm  laborers  and 
domestic  servants  from  the  scheme.  But,  manifestly,  this  cannot  be 
judicially  declared  to  be  an  arbitrary  classification,  since  it  reasonably 
may  be  considered  that  the  risks  inherent  in  these  occupations  are 
exceptionally  patent,  simple,  and  familiar.     *     *     * 

We  conclude  that  the  prescribed  scheme  of  compulsory  compensa- 
tion is  not  repugnant  to  the  provisions  of  the  Fourteenth  Amendment, 
and  are  brought  to  consider,  next,  the  manner  in  which  the  employer 
is  required  to  secure  payment  of  the  compensation.  By  section  50, 
this  may  be  done  in  one  of  three  ways :  (a)  State  insurance ;  (b)  in- 
surance with  an  authorized  insurance  corporation  or  association ;  or 
(c)  by  a  deposit  of  securities.  The  record  shows  that  the  predecessor 
of  plaintiff  in  error  chose  the  third  method,  and  with  the  sanction  of 
the  Commission,  deposited  securities  to  the  amount  of  $300,000,  under 
section  50,  and  $30,000  in  cash  as  a  deposit  to  secure  prompt  and  con- 
venient payment,  under  section  25,  with  an  agreement  to  make  a  fur- 
ther deposit  if  required.  This  was  accompanied  with  a  reservation  of 
all  contentions  as  to  the  invalidity  of  the  act,  and  had  not  the  effect  of 
preventing  plaintiff  in  error  from  raising  the  questions  we  have  dis- 
cussed. 

The  system  of  compulsory  compensation  having  been  found  to  be 
within  the  power  of  the  state,  it  is  within  the  limits  of  permissible  reg- 
ulation, in  aid  of  the  system,  to  require  the  employer  to  furnish  satis- 
factory proof  of  his  financial  ability  to  pay  the  compensation,  and  to 
deposit  a  reasonable  amount  of  securities  for  that  purpose.  The  third 
clause  of  section  50  has  not  been,  and  presumably  will  not  be,  con- 
strued so  as  to  give  an  unbridled  discretion  to  the  Commission ;  nor  is 
it  to  be  presumed  that  solvent  employers  will  be  prevented  from  becom- 
ing self-insurers  on  reasonable  terms.  No  question  is  made  but  that 
the  terms  imposed  upon  this  railroad  company  were  reasonable  in  view 
of  the  magnitude  of  its  operations,  the  number  of  its  employees,  and 
the  amount  of  its  pay  roll  (about  $50,000,000  annually) ;  hence  no 
criticism  of  the  practical  effect  of  the  third  clause  is  suggested. 

This  being  so,  it  is  obvious  that  this  case  presents  no  question  as  to 
whether  the  state  might,  consistently  with  the  Fourteenth  Amendment, 
compel  employers  to  effect  insurance  according  to  either  of  the  plans 
mentioned  in  the  first  and  second  clauses.  There  is  no  such  compul- 
sion, since  self-insurance  under  the  third  clause  presumably  is  open 
to  all  employers  on  reasonable  terms  that  it  is  within  the  power  of  the 
state  to  impose.  Regarded  as  optional  arrangements,  for  acceptance 
or  rejection  by  employers  unwilling  to  comply  with  that  clause,  the 
plans  of  insurance  are  unexceptionable  from  the  constitutional  stand- 
point. Manifestly,  the  employee  is  not  injuriously  affected  in  a  con- 
stitutional sense  by  the  provisions  giving  to  the  employer  an  option 
to  secure  payment  of  the  compensation  in  either  of  the  modes  pre- 
scribed, for  there  is  no  presumption  that  either  will  prove  inadequate 
to  safeguard  the  employee's  interests. 

Judgment  affirmed. 


Ch.  5)      RELATIONS  OF  THE  AGENT  AND  THIRD  PERSONS         611 


CHAPTER  V 
RELATIONS  OF  THE  AGENT  AND  THIRD  PERSONS 

Section 

1.  Rights  of  the  Ag-?nt  Against  Third  Persons. 

2.  Rights  of  Third  Persons  Against  the  Agent. 


SECTION  1.— RICxHTS  OF  THE  AGENT  AGAINST  THIRD 

PERSONS 


ROWE  V.   RAND. 
(Supreme  Court  of  Indiana,  1887.     Ill  Ind.  206,  12  N.  E.  377.) 

NiBLACK,  J.  *  *  *  An  agent  may  sue  in  his  own  name — First, 
when  the  contract  is  in  writing,  and  is  expressly  made  with  him,  al- 
though he  may  have  been  known  to  act  as  agent ;  secondly,  when  the 
agent  is  the  onily  known  or  ostensible  principal,  and  is  therefore,  in 
contemplation  of  law,  the  real  contracting  party ;  thirdly,  when,  by 
the  usage  of  trade,  he  is  authorized  to  act  as  owner,  or  as  a  principal 
contracting  party,  notwithstanding  his  well-known  position  as  agent 
only.  But  this  right  of  an  agent  to  bring  an  action  in  certain  cases  in 
his  own  name  is  subordinate  to  the  rights  of  the  principal,  who  may, 
unless  in  particular  cases  where  the  agent  has  a  lien  or  some  other 
vested  right,  bring  suit  himself,  and  thus  suspend  or  extinguish  the 
right  of  the  agent.     *     *     * 

NAMQUIT  WORSTED  CO.  v.  WHITMAN  et  al. 

(United  States  Circuit  Court  of  Appeals.  First  Circuit,  1915.     221  Fed.  49, 

136  C.  C.  A.  .JTo.) 

Action  by  William  Whitman  and  others  against  the  Namquit  Wor- 
sted Company.    Judgment  for  plaintiff,  and  defendant  brings  error. 

The  action  was  on  a  contract  for  the  sale  of  "50,000  lbs.  3-grade 
white  worsted  yarn  for  delivery  during  Oct.,  Nov.,  and  Dec,  '09." 

Putnam,  Circuit  Judge.  This  case  was  submitted  to  the  District 
Court  with  the  statutory  waiver  of  a  jury.  The  plaintiffs,  now  the 
defendants  in  error,  executed  the  contract  sued  on  in  their  own  names. 
The  real  principal  whom  they  represented  was  the  Arlington  Mills. 
The  evidence  shows  that  the  plaintiffs  were  selling  agents  of  all  its 
product,  and,  of  course,  they  were  entitled  to  their  commission  on 
the  transaction. 

By  the  settled  rules  of  the  English  courts,  which  have  been  adopted 
in  the  United  States,  the  plaintiffs  were  entitled  to  sue  in  their  own 
names,  both  because  they  executed  the  contract  in  their  own  names, 
and  because  they  had  an  interest  in  the  contract  to  the  extent  of  their 
commission.  Tjie  rule  is  exceptional,  as  stated  in  Chitty  on  Contracts 
(11th  Am.  Ed.)  pp.  316,  317,  and  also  as  stated  more  fully  in  Mechem 
on  Agency  (2d  Ed.)  §  2024.  In  the  notes  to  the  latter  there  is  a  list 
of  cases  showing  that  the  rule  has  been  fully  adopted  by  the  courts  in 


C12  AGENCY  (Part  2 

the  United  States.  As  it  appears  in  the  authorities  cited,  the  suit 
brought  in  the  name  of  an  agent  covers  the  interests  of  both  agent  and 
principal;  and  the  form  of  proceedings  is  anomalous,  as  shown  by 
Mechem,  and  also  in  Colburn  v.  Phillips,  13  Gray  (Mass.)  64,  66.  On 
the  latter  account,  the  practice  shows  that  the  pleadings  which  were 
made  in  this  case  are  sufficient ;  and  we  add  no  comment  in  reference 
to  them. 

Where  there  are  so  many  errors  assigned  in  comparison  with  the 
substantial  matters  in  question  as  we  find  here,  each  will,  as  usual,  be 
treated  briefly.  The  first  point  made  by  the  plaintiff  in  error  is  based 
on  the  proposition  that  there  is  no  evidence  that  the  plaintiffs  were 
agents  of  the  Arlington  Mills.  The  court  found  that  J.  H.  Merrill, 
who  signed  the  contract  with  the  plaintiffs,  "was  duly  authorized  to 
sign,  and  did  sign,  on  behalf  of  the  Xamquit  Worsted  Company." 
The  contract  itself  which  Merrill  signed  used  the  words,  "from  Arling- 
ton Mills,"  and  the  court  found  that  the  parties  had  previously  ex- 
ecuted contracts  similar  to  this  one,  and  had  had  extensive  dealings 
of  a  similar  character.  We  think,  therefore,  there  can  be  no  doubt 
that  the  Namquit  Company  assumed  and  understood  that  the  contract 
was  for  the  benefit  of  the  Arlington  Mills. 

The  point  is  also  made  that  the  damage  alleged  was  not  capable  of 
being  estimated  under  the  contract  and  the  testimony ;  but,  in  view 
of  the  fact  that  the  court  adopted  the  lowest  scale  of  damages  sug- 
gested in  the  case,  there  is  no  difficulty  on  this  point.  Nor  do  we 
find  any  difficulty  in  the  other  matter  of  fact  which  was  made  an  ele- 
ment in  the  errors  assigned  that  a  certain  approval  of  the  plaintiff's  was 
lacking.     *     *     * 

The  judgment  of  the  District  Court  is  affirmed,  with  interest ;  and 
the  costs  of  appeal  are  allowed  to  the  defendants  in  error.     *     *     * 


MISSOURI  PAC.  RY.  CO.  v.  PERU-VAN  ZANDT  IMPLEMENT  CO.  ' 

(Supreme  Court  of  Kansas,  1906.    73  Kan'.  295,  85  Pac.  408,  6  L.  R.  A. 
[N.  S.]  1058,  117  Am.  St.  Rep.  468,  9  Ann.  Cas.  790.) 

Action  by  the  Peru- Van  Zandt  Implement  Company  against  the 
Missouri  Pacific  Railway  Company.  Judgment  for  plaintiff".  De- 
fendant brings  error. 

The  Port  Huron  Engine  &  Thresher  Company,  of  Port  Huron, 
Mich.,  manufactures  threshing  machines  and  sells  them  throughout 
the  country  through  local  agents.  The  plaintiff',  defendant  in  error, 
is  its  ''gent  at  Hutchinson,  Kan.  By  the  contract  of  agency,  it  is  the 
duty  of  the  Peru- Van  Zandt  Implement  Company,  to  advertise,  in- 
troduce, and  sell  the  machines  to  those  desiring  to  purchase,  and,  when 
a  sale  is  made,  an  order  is  taken  from  the  purchaser,  in  writing,  di- 
recting the  Port  Huron  Company  to  ship  the  machinery  desired,  stat- 
ing price,  manner  of  payment,  and  other  particulars  constituting  the 
conditions  of  sale,  which  order  is  signed  by  the  purchaser  and  de- 
livered to  the  local  agent.  This  order  is  forwarded  to  the  Port  Huron 
Company  by  the  agent  making  the  sale.  Upon  this  order  the  machin- 
ery is  shipped  by  the  designated  route  and  consigned  to  the  local  agent. 
It  is  the  duty  of  the  agent  to  receive  the  machinery  and  hold  posses- 
sion thereof  until  payment  is  made  or  secured  as  stipulated  in  the  or- 
der of  the  buyer.     In  completing  the  sale  the  agent  takes  in  payment 


Ch.  5)      RELATIONS  OF  THE  AGENT  AND  THIRD  PERSONS        013 

cash,  notes,  mortgages,  or  other  security  as  directed,  but  deUvers  the 
machinery  only  after  the  sale  has  been  approved  by  the  Port  Huron 
Company.  Until  such  approval  and  delivery,  the  title  to  the  machin- 
ery does  not  pass  from  the  seller.  The  Peru- Van  Zandt  Company  re- 
ceives for  its  services  in  making  such  sales  a  commission  of  40  per 
cent,  of  the  selling  price.  *  *  *  The  Peru-Van  Zandt  Company, 
under  this  employment,  sold  two  machines  for  the  aggregate  sum  of 
$920,  and  took  from  the  purchasers  written  orders  therefor,  which 
were  duly  forwarded  to  the  Port  Huron  Company.  Upon  receipt  of 
the  orders,  the  machines  were  shipped  over  the  road  of  the  plaintiff 
in  error,  consigned  to  the  Peru- Van  Zandt  Implement  Company,  at 
Larned,  Kan.,  with  stopover  to  partly  unload  at  Seward,  Kan.,  being 
the  points  where  the  purchasers  lived.  The  bill  of  lading  contained 
nothing  to  indicate  the  relation  existing  between  the  consignor,  the 
Port  Huron  Company,  and  the  consignee,  whether  that  of  vendor  and 
vendee,  or  principal  and  agent.  The  machines  were  shipped  June  12, 
1903,  and  in  ordinary  course  would  have  arrived  at  destination  within 
10  days,  but  on  account  of  negligent  delays  they  did  not  arrive  until 
some  time  in  the  month  of  August,  long  after  the  threshing  season  had 
closed  and  the  sale  contracts  had,  for  that  reason,  been  canceled.  By 
the  contract  of  shipment,  the  freight  was  payable  before  the  delivery 
of  machinery  to  consignee.  The  consignee  declined  to  pay  the  freight, 
claiming  that  the  damages  suffered  on  account  of  delay  far  exceeded 
the  amount  of  the  freight  bill.  The  carrier  refused  to  deliver  the 
goods  until  the  freight  was  paid.  Thereupon  the  defendant  in  error 
demanded  that  the  machinery  be  delivered  to  it  without  payment  of 
freight,  and,  upon  refusal,  commenced  this  suit.  The  demand  was 
made  in  the  name  of  the  Port  Huron  Company,  by  the  Peru-Van  Zandt 
Company  as  agent.  The  petition  alleges  that  the  plaintiff  is  the  agent 
and  factor  of  the  Port  Huron  Company,  and  avers  the  facts  consti- 
tuting their  relationship,  substantially  as  hereinbefore  set  forth.  In 
the  first  cause  of  action  the  plaintiff  asks  judgment  for  the  amount 
of  commission  lost  by  it,  and  in  the  second  cause  of  action  it  demanded 
judgment  for  the  value  of  the  machines.  The  carrier  retained,  and 
still  keeps,  possession  of  the  machines.  The  plaintiff  recovered  judg- 
ment for  the  price  for  which  the  machines  were  sold.  Plaintiff'  in  er- 
ror brings  the  case  here  for  review. 

Gravks,  J.  *  *  *  It  is  insisted  that  the  plaintiff  has  no  interest 
in  the  machinery  in  controversy,  and,  therefore,  cannot  maintain  an 
action  for  its  conversion.  *  *  *  There  is  considerable  confusion 
among  the  authorities  as  to  whether  the  con.«iignee  or  consignor  is 
the  proper  party  plaintiff  in  an  action  against  a  carrier,  but  the  rule 
that  £.  suit  for  the  conversion  of  goods  must  be  brought  by  the  owner, 
or  one  having  a  beneficial  interest  in  the  property  converted,  seems 
to  be  fairly  well  established.  Hutchinson  on  Carriers,  §§  731-734. 
*  =i=  *  The  consignee  is  always  presumed  to  possess  the  necessary 
ownership,  until  the  contrary  is  shown.  *  *  *  The  ownership  need 
not  be  extensive.  An  agent,  factor,  broker,  bailee  or  other  person 
having  rights  in  the  property  to  be  protected,  may  maintain  an  action, 
and  recover  both  for  himself  and  the  general  owner.     *    *    * 

We  think  the  plaintiff  in  this  case  had  sufficient  interest  in  the 
property  to  enable  it  to  maintain  this  action.  In  Railroad  v.  Mower 
Co.,  76  Me.  251,  a  case  very  similar  to  this,  the  court  said:  "Ordi- 
narily, when   a  plaintiff  sustains  his  action,  it  is  presumed  that  the 


614  AGENCY  (Part  2 

whole  amount  of  damages  recovered  will  belong  to  him.  In  fact,  the 
injury  to  him  or  to  his  property  is  the  measure  of  his  damages.  But, 
while  this  is  the  general  rule,  there  are  exceptions,  not  to  the  extent 
or  measure  of  damages,  but  to  the  interest  the  plaintiff  may  have  in 
them.  It  is  true  that  an  action  cannot  be  maintained  unless  the  plain- 
tiff has  an  interest  in  the  subiect-matter  of  the  suit,  but  he  may  do  so 
when  he  is  not  interested  to  "the  full  extent  of  the  damages  to  be  re- 
covered. Such  are  the  familiar  cases  of  injury  to  property  in  which 
there  is  a  general  and  special  owner,  as  bailor  and  bailee,  consignor 
and  consignee,  principal  and  factor.  *  *  *  In  the  case  of  Express 
Co.  V.  Armstead,  50  Ala.  352.  it  is  said:  "The  consignee  of  goods 
has  a  right  to  sue  for  their  loss  by  the  carriei,  notwithstanding  an- 
other party  may  be  the  owner  of  them.  The  obligation  is  to  deliver  to 
him.  Generally  the  property  vests  in  him  by  the  mere  delivery  to 
the  carrier.  Although  the  absolute  or  general  owner  of  personal  prop- 
erty may  support  an  action  for  any  injury  thereto,  if  he  have  the 
right  of  immediate  possession,  this  does  not  necessarily  divest  the 
right  of  the  consignee  to  sue,  notwithstanding  he  has  never  had  the 
actual  possession." 

A  judgment  in  favor  of  the  plaintiff  can  work  no  harm,  as  it  is  a 
bar  to  an  action  for  the  same  injury  by  the  Port  Huron  Company. 

*  *  *  The  plaintiff  holds  in  trust  for  the  Port  Huron  Company, 
whatever  remains  of  the  amount  recovered,  after  payment  of  its  com- 
mission. A  consignee  has  a  right  to  withhold  freight  bill  when  its 
damages  exceed  that  amount,  and  in  such  a  case  the  refusal  of  the 
carrier  to  deliver  the  goods  until  the  freight  is  paid  amounts  to  a  con- 
version.   *    ''■'    * 

No  error  appearing,  the  judgment  of  the  district  court  is  affirmed. 

*  *    * 


MORAN  V.  DUNPHY. 

(SuTH-eme  Judicial  Court  of  Massachusetts,  1901.     177  Mass.  485,  59  N.  E.  125, 
52  L.  R.  A.  115,  83  Am.  St.  Rep.  289.) 

Action  by  one  Moran  against  one  Dunphy,  in  which  plaintiff  sought 
to  recover  of  defendant  for  making  statements  to  one  Cowan,  by 
whom  plaintiff  was  employed,  of  such  a  character  that  Cowan  dis- 
charged the  plaintiff.  The  superior  court  sustained  defendant's  de- 
murrer, and  plaintiff  appealed. 

Holmes,  C.  J.  *  *  *  We  cannot  admit  a  doubt  that  maliciously 
and  without  justifiable  cause  to  induce  a  third  person  to  end  his  em- 
ployment of  the  plaintiff,  whether  the  inducement  be  false  slanders  or 
successful  persuasion,  is  an  actionable  tort.     *     *     * 

We  apprehend  that  there  no  longer  is  any  difficulty  in  recognizing 
that  a  right  to  be  protected  from  malicious  interference  may  be  inci- 
dent to  a  right  arising  out  of  a  contract,  ahhough  a  contract,  so_  far 
as  performance  is  concerned,  imposes  a  duty  only  on  the  promisor. 
Again,  in  the  case  of  a  contract  of  employment,  even  when  the  em- 
ployment is  at  will,  the  fact  that  the  employer  is  free  from  liability  for 
discharging  the  plaintiff  does  not  carry  with  it  immunity  to  the  de- 
fendant who  has  controlled  the  employer's  action  to  the  plaintiff's 
harm.  The  notion  that  the  employer's  immunity  must  be  a  noncon- 
ductor, so  far  as  any  remoter  liabilitv  was  concerned,  troubled  some 
of  the  judges  in  Allen  v.  Flood  [1898]  App.  Cas.  1,  but  is  disposed 
of  for  this  commonwealth  by  the  cases  cited.     *     *     *     So,  again,  it 


Ch.  5'      RELATIONS  OF  THE  AGENT  AND  THIRD  PERSONS        615 

may  be  taken  to  be  settled  by  Plant  v.  Woods,  176  Alass.  492,  501, 
502,  57  N.  E.  1011,  51  L.  R.  A.  339,  79  Am.  St.  Rep.  30,  that  motives 
may  determine  the  question  of  liability ;  that,  while  intentional  in- 
terference of  the  kind  supposed  may  be  privileged  if  for  certain  pur- 
poses, yet,  if  due  only  to  malevolence,  it  must  be  answered  for.  On 
that  point  the  judges  were  of  one  mind.  *  *  *  Finally,  we  see  no 
sound  distinction  between  persuading  by  malevolent  advice  and  ac- 
complishing the  same  result  by  falsehood  or  putting  in  fear.  In  all 
cases  the  employer  is  controlled  through  motives  created  by  the  de- 
fendant for  the  unprivileged  purpose.  It  appears  to  us  not  to  matter 
which  motive  is  relied  upon.  If  accomplishing  the  end  by  one  of  them 
is  a  wrong  to  the  plaintiff,  accomplishing  it  by  either  of  the  others 
must  be  equally  a  wrong. 

It  follows  from  what  we  have  said  that  we  are  of  opinion  that  both 
counts  of  the  declaration  disclose  a  good  cause  of  action.    *     *    * 

Demurrer     *     *     *     overruled. 


SECTION  2.— RIGHTS  OF  THIRD  PERSONS  AGAINST 

THE  AGENT 


FAEINIERS'  CO-OPERATIVE  TRUST  CO.  V.  FLOYD. 

(Supreme  Court  of  Ohio,  1S90.    47  Ohio  St.  525.  26  N.  E.  110,  12  L.  R.  A.  346, 

21  Am.  St.  Rep.  846.) 

Williams,  j,  *  *  *  The  courts  of  this  country  and  of  Eng- 
land, with  few  exceptions,  adhere  to  the  doctrine  so  clearly  laid  down 
by  Mr.  Justice  Story  in  his  Commentaries  on  the  Law  of  Agency,  where 
it  is  said : 

"Wherever  a  party  undertakes  to  do  any  act  as  the  agent  of  an- 
other, if  he  do  not  possess  any  authority  from  the  principal  there- 
for, or  if  he  exceeds  the  authority  delegated  to  him;  he  will  be  per- 
sonally responsible  therefor  to  the  person  with  whom  he  is  dealing 
for  or  on  account  of  his  principal.  There  can  be  no  doubt  that  this 
is,  and  ought  to  be,  the  rule  of  law  in  the  case  of  a  fraudulent  rep- 
resentation made  by  the  agent,  that  he  has  due  authority  to  act  for 
the  principal ;  for  it  is  an  intentional  deceit.  The  same  rule  may 
justly  apply  where  the  agent  has  no  such  authority,  and  he  knows  it, 
and  he  nevertheless  undertakes  to  act  for  the  principal,  although  he  in- 
tends no  fraud.  But  another  case  may  be  put,  which  may  seem  to  ad- 
mit of  more  doubt ;  and  that  is,  where  the  party  undertakes  to  act 
as  an  agent  for  the  principal,  bona  fide,  believing  that  he  has  due  au- 
thority, but  in  point  of  fact  he  has  no  authority,  and  therefore  he  acts 
under  an  innocent  mistake.  In  this  last  case,  how^ever,  the  agent  is 
held  by  law  to  be  equally  as  responsible  as  he  is  in  the  two  former  cases, 
although  he  is  guilty  of  no  intentional  fraud  or  moral  turpitude. 

"This  whole  doctrine  proceeds  upon  a  plain  principle  of  justice;  for 
every  person  so  acting  for  another,  by  a  natural,  if  not  by  a  necessary, 
implication,  holds  himself  out  as  having  competent  authority  to  do  the 
act;  and  he  thereby  draws  the  other  party  into  a  reciprocal  engage- 
ment. *  *  *  If  he  has  no  such  authority,  and  acts  bona  fide,  still 
he  does  a  wrong  to  the  other  party ;  and  if  that  wrong  produces  an 
injury  to  the  latter,  owing  to  his  confidence  in  the  truth  of  an  ex- 


G16  AGRNCY  (Part  2 

press  or  implied  assertion  of  authority  by  the  agent,  it  is  perfectly 
just  that  he  who  makes  such  an  assertion  should  be  personally  responsi- 
ble for  the  consequences,  rather  than  that  the  injury  should  be  borne 
by  the  other  party,  who  has  been  misled  by  it.  Indeed,  it  is  a  plain 
principle  of  equity,  as  well  as  of  law,  that  where  one  of  two  innocent 
persons  must  suffer  a  loss,  he  ought  to  bear  it  who  has  been  the  sole 
means  of  producing  it,  by  inducing  the  other  to  place  a  false  confidence 
in  his  acts,  and  to  repose  upon  the  truth  of  his  statements."  Story, 
Ag.  §  264.  In  the  note  to  this  section  many  cases  which  sustain  the 
text  are  cited.  And  in  the  notes  to  Thomson  v.  Davenport,  in  2  Smith, 
Lead.  Cas.  pt.  l,' commencing  on  page  408  of  the  eighth  edition,  a 
number  of  the  cases  on  the  same  subject  are  collected.  In  addition  to 
those,  other  cases  might  be  referred  to,  among  them  the  following: 
Walker  v.  Bank,  9  N.  Y.  582;  White  v.  Madison,  26  N.  Y.  117; 
Weare  v.  Gove,  44  N.  H.  196.  In  the  last  case  cited  above  it  is  held, 
that  "although  no  fraud  or  wrongful  motive  can  be  imputed  to  the 
agent,  still  his  act  is  an  affirmation  that  he  has  authority  to  make  the 
contract,  and  he  may  justly  be  held  responsible  for  the  truth  of  it; 
and  it  is  no  more  than  reasonable  that  he  should  suffer  the  conse- 
quences of  his  mistake  rather  than  the  party  who  is  misled  by  it,  be- 
cause, before  holding  himself  out  as  such  agent,  it  is  his  duty  to  ascer- 
tain whether  his  claim  so  to  act  is  well  founded  or  not ;  and  he  surely 
cannot  be  heard  to  complain  that  others  have  confided  in  his  assertion 
of  authority,  and  upon  the  strength  of  it  have  entered  into  reciprocal 
engagements  with  him.  Even  if  wholly  innocent  of  any  wrongful  pur- 
pose, his  case  falls  within  the  familiar  principle  that  when  one  of  two 
innocent  persons  must  suft'er  a  loss  it  ought  to  be  borne  by  him  who 
has  been  the  means  of  causing  it,  by  inducing  the  other  to  confide  in 
the  truth  of  his  representations." 

While,  however,  the  authorities  generally  agree  that  where  a  person, 
not  having  in  fact  authority  to  make  a  contract  as  agent,  yet  does  so 
under  the  bona  fide  belief  that  such  authority  is  vested  in  him,  is  never- 
theless personally  responsible  to  those  who  contract  with  him  in  ig- 
norance of  his  want  of  authority,  a  diversity  of  opinion  is  found  in  the 
cases  in  regard  to  the  exact  nature  of  the  liability,  and  the  character 
of  the  action  by  which  it  may  be  enforced.  In  Jenkins  v.  Hutchinson, 
13  Adol.  &  E.  (N.  S.)  746,  it  is  intimated  by  Erie,  J.,  that  an  action 
of  deceit  would  lie  in  such  cases,  notwithstanding  the  good  faith  of  the 
agent,  and  some  authorities  may  be  found  to  that  effect.  Another 
class  of  cases  hold  that  the  liability  is  upon  the  contract ;  but  it  is  be- 
lieved that  whether  the  agent  is  so  liable  depends  upon  the  intention 
of  the  parties  as  discovered  from  the  contract  itself ;  and  on  this  ques- 
tion the  form  of  the  agreement  and  the  mode  of  signature  may  be  quite 
conclusive.  The  rule,  as  stated  in  Story  on  Agency,  is  that  an  agent 
cannot  be  sued  on  the  very  instrument  itself,  as  a  contracting  party, 
unless  there  be  apt  words  to  charge  him.  Section  264a.  Still  another 
class  of  cases  establish  the  rule,  which  we  are  inclined  to  adopt,  that 
in  cases  like  the  one  we  are  considering  the  agent  is  liable  upon  his 
implied  promise  that  he  possesses  the  authority  he  assumes  to  have. 
2  Smith,  Lead.  Cas.  (8th  Ed.)  pt.  1,  p.  408,  and  cases  there  cited; 
Lewis  V.  Nicholson,  83  E.  C.  L.  512.  In  White  v.  Madison,  supra,  in 
a  learned  opinion,  it  is  held  that  the  liability  of  the  agent  in  such  cases 
rests  upon  the  ground  that  he  warrants  his  authority,  and  not  that 
the  contract  is  to  be  deemed  his  own.     *     *     * 


Ch.  5)  RELATIONS   OF   THE   AGENT   AND   THIRD   PERSONS  617 


TIIILMAXY    V.   IOWA  PAPER   BAG   CO.  et   al. 

(Supreme  Court  of  Iowa,  1800.     108  Iowa,  .357,  70  N.  W.  2G1, 
75  Am.  St.  Rep.  250.) 

Action  to  recover  the  purchase  price  of  a  car  load  of  paper  shipped 
to  the  Iowa  Paper  Bag  Company.  Defendant  Daggett  having  signed 
the  Iowa  National  Bank's  letter  of  guaranty  of  the  bag  company's  ob- 
ligations on  account  of  the  paper,  was  made  a  defendant  in  this  case. 
From  a  judgment  dismissing  plaintiff's  petition,  he  appeals. 

Deemer,  J.  *  *  *  We  now  turn  to  the  main  point  in  the  case, 
and  first  to  the  proposition  that  defendant  Daggett  is  liable  because 
of  the  form  of  the  guaranty.  It  is  signed,  "Iowa  National  Bank,  by 
William  Daggett,  V.  P."  Clearly,  this  is  an  obligation  of  the  con>- 
pany;  and  the  form  of  the  signature  just  as  clearly  indicates  that  Dag- 
gett signed  it  in  a  representative  capacity,  and  not  as  an  individual. 
To  hold  that  the  contract  binds  Daggett  personally,  we  must  eliminate 
the  preposition  "by"  and  hold  that  the  initials  "V.  P."  are  "descriptio 
personae."  This  we  cannot  do,  as  it  is  not  our  province  to  make  con- 
tracts for  parties.  The  use  of  the  pronouns  "we"  and  "our"  in  the 
letter  of  guaranty  is  of  no  significance.  They  are  often  used  in  re- 
ferring to  a  corporation  as  a  collection  of  individuals.  There  is  no 
cjuestion  in  our  minds  but  that  all  parties  to  this  contract  regarded  it 
as  the  obligation  of  the  bank,  and  not  of  the  defendant  Daggett  in  his 
individual  capacity ;  and  as  this  is  the  proper  legal  construction  of  the 
instrument,  nothing  further  need  be  said  on  the  first  proposition  urged 
by  appellant's  counsel. 

As  to  the  second  proposition,  the  rule  has  been  broadly  stated  over 
and  over  again  that  when  an  agent  contracts  in  excess  of  his  author- 
ity, or  acts  without  authority,  or  assumes  to  have  authority  when  he 
has  none,  or  for  any  reason  fails  to  bind  his  principal  he  is  himself 
bound.  *  *  *  That  this  is  the  general  rule  must  be  conceded,  and 
as  applied  to  the  facts  of  the  cited  cases,  it  is  correct.  But,  like  nearly 
every  other  general  rule,  it  is  subject  to  exceptions,  some  of  which 
we  will  notice. 

The  reasons  generally  given  for  the  rule  are:  (1)  That  as  the  agent 
assumes  to  represent  a  principal,  he  cannot  be  heard  to  say  that  he 
had  no  authority,  or  that  there  was  in  fact  no  principal  to  be  bound ; 
for  if  he  assumes  to  represent  another,  he  impliedly  warrants  that  there 
is  such  another,  and  that  he  has  authority  to  represent  him.  If,  then, 
there  is  no  principal,  or  the  agent  has  no  authority  to  act  for  him, 
an  action  will  lie  for  deceit  or  misrepresentation.  (2)  The  law  as- 
sumes that  the  contract  was  intended  to  bind  some  one,  and  if  the 
principal  is  not  bound,  the  contract  must  be  that  of  the  agent.  This 
last  rule  is  generally  applied  to  executed  contracts.  In  such  cases  ac- 
tion will  lie  for  benefits  received  by  the  agent.  Some  cases  go  to  the 
extent  of  rejecting  all  parts  of  the  contract  relating  to  the  obligation 
of  the  principal,  and  then  treat  it  as  the  personal  contract  of  the  agent. 
*  *  *  A  third  reason  for  the  rule  is  that  the  agent  impliedly  war- 
rants his  authority  to  act  for  his  principal,  and  if  he  has  no  such 
power,  an  action  lies  for  breach  of  warranty.  Now,  it  is  apparent 
that  if  the  party  with  whom  the  agent  contracts  has  notice  of  the 
facts  relating  to  the  authority  of  the  agent,  and  is  as  fully  advised  as 
to  his  atithority  as  the  agent  himself,  there  can  be  no  action  for  de- 
ceit.    And  so  the  text-writers  have  generally  stated  this  as  an  excep- 


G18  AGEN-CY  (Part  2 

tion  to  the  general  rule.     ^lechem  on  Agency,  at  sections   545   and 
'546,  thus  states  the  law  : 

"Sec.  545.  *  *  *  Of  course,  if  the  other  party  knew,  or  by 
the  exercise  of  reasonable  care  might  have  discovered,  the  want  of 
authority,  he  cannot  recover.  This  implied  warranty  by  the  agent  of 
his  authority  must  ordinarily  be  limited  to  its  existence  as  a  matter 
of  fact,  and  not  be  held  to  include  a  warranty  of  its  adequacy  or  suf- 
ficiency in  point  of  law. 

"Sec.  546.  Where,  however,  the  agent,  acting  in  good  faith,  fully 
discloses  to  the  other  party  at  the  time  all  the  facts  and  circumstances 
touching  the  authority  under  which  he  assumes  to  act,  so  that  the 
other  party,  from  such  information  or  otherwise,  is  fully  informed  as 
to  the  existence  and  extent  of  his  authority,  he  cannot  be  held  liable. 
It  is  material,  in  these  cases,  that  the  party  claiming  a  want  of  author- 
ity in  the  agent  should  be  ignorant  of  the  truth  touching  the  agency. 
If  he  has  full  knowledge  of  the  facts,  or  of  such  facts  as  are  sufficient 
to  put  him  upon  inquiry,  and  he  fails  to  avail  himself  of  such  knowl- 
edge, or  of  the  means  of  knowledge  reasonably  accessible  to  him,  he 
cannot  say  that  he  was  misled  simply  on  the  ground  that  the  other 
assumed  to  act  as  agent  without  authority.  Of  course,  if  the  agent 
conceals  or  misrepresents  material  facts  to  the  detriment  of  the  other 
party,  he  cannot  claim  exemption." 

Judge  Story,  in  his  valuable  work  on  Agency,  section  265,  says: 
"This  doctrine,  however,  as  to  the  liability  of  the  agent,  where  he  con- 
tracts in  the  name  and  for  the  benefit  of  the  principal,  without  hav- 
ing due  authority,  is  founded  upon  the  supposition  that  the  want  of 
authority  is  unknown  to  the  other  party,  or,  if  known,  that  the  agent 
undertakes  to  guarantee  a  ratification  of  the  act  by  the  principal.  But 
circumstances  may  arise  in  which  the  agent  would  not  or  might  not 
be  held  to  be  personally  liable,  if  he  acted  without  authority,  if  that 
want  of  authority  was  known  to  both  parties  or  unknown  to  both 
parties." 

Abundant  authorities  are  cited  by  each  author  in  support  of  these 
propositions.  The  same  thought  is  equally  applicable  to  the  third  rea- 
son above  given  for  the  general  rule.  And  it  may  be  further  said  that 
the  implied  warranty  of  the  agent  does  not  relate  to  the  power  of  the 
principal  to  enter  into  the  particular  contract.  He  simply  covenants 
that  he  has  authority  to  act  for  his  principal,  not  that  the  act  of  the 
principal  is  legal  and  binding.  Hence,  it  has  been  justly  said  that  the 
contract  must  be  one  which  the  law  would  enforce  against  the  prin- 
cipal, if  it  had  been  authorized  by  him,  else  the  anoma4y  would  exist 
of  giving  a  right  of  action  against  an  assumed  agent  for  an  unau- 
thorized representation  of  his  power  to  make  the  contract,  when  a 
breach  of  the  contract  itself,  if  it  had  been  authorized,  would  have 
furnished  no  ground  of  action  against  the  principal.     *     *     * 

In  the  case  now  under  consideration  the  defendant  Daggett  made 
no  representations  as  to  his  authority  save  that  contained  in  the  letter 
itself.  He  is  guilty  of  no  actionable  deceit,  unless  it  be  found  in  the 
fact  that  he  signed  the  letter  of  guaranty  as  vice-president,  and  thus 
represented  that  he  had  authority  to  represent  his  bank.  He  had  this 
authority,  if  any  officer  of  a  national  bank  has  it,  for  no  question  is 
made  as  to  his  authority  to  represent  the  bank  in  the  making  of  any 
contract  it  is  authorized  to  execute.  The  action  is  not,  then,  based  upon 
any  misrepresentation  as  to  his  authority,  but  upon  the  invalidity  of 


Ch.  5)  RELATIONS   OF   THE   AGENT   AND   THIRD   PERSONS  619 

the  contract  itself  as  between  plaintiff  and  the  bank.  There  was  no 
actionable  deceit,  for  the  plaintiff  is  presumed  to  know  as  much  about 
the  powers  of  national  banks  as  the  defendant.  There  is,  as  we  have 
said,  no  implied  warranty  by  an  agent  that  his  principal  has  authority 
to  make  the  contract.  As  a  rule,  that  is  a  question  of  law,  of  which 
each  party  has  equal  knowledge.  In  the  case  against  the  bank  we 
held  that  national  banks  have  no  authority  to  enter  into  such  contracts, 
and  as  the  plaintiff  has  no  right  of  action  against  the  bank  upon  a 
contract  of  guaranty,  such  as  the  one  in  suit,  no  recovery  should  be 
permitted  against  the  agent;  for  this  would  hold  every  agent  to  a 
warranty  of  legality  of  his  principal's  contracts.  As  we  have  seen, 
this  is  not  the  obligation  of  the  agent.  The  second  reason  sometimes 
given  for  the  general  rule  of  liability  of  the  agent  does  not  appear 
to  us  to  be  sound.  By  the  application  of  this  principle  a  new  contract 
is  made  for  the  parties.  An  engagement  is  created  which  the  parties 
did  not  intend  to  assume,  and  the  decided  weight  of  authority  is  against 
such  rule.     *     *     * 

We  do  not  think  that  Daggett,  the  agent,  is  personally  liable  under 
the  facts  disclosed,  and  the  judgment  is  affirmed. 


CLARK    et   al.   v.    O'ROURKE, 

(Supreme  Court   of  Michigan,   1896.     Ill  Mich.   108,   69  IST.   W.  147, 
66  Am.  St.   Rep.  389.) 

Assumpsit  by  Clark,  Farnham  &  Co.,  a  partnership,  against  C. 
O'Rourke  and  others,  who  were  the  building  committee  of  an  unincor- 
porated church  association,  for  lumber  furnished  for  the  erection  of 
a  church.  The  lumber  was  charged  to  the  church  association.  De- 
fendants contended  that  credit  had  been  extended  to  the  association 
and  to  defendants  personally,  and  that  plaintiffs  had  agreed  to  look 
for  their  pay  to  funds  to  be  raised  by  church  subscriptions,  donations, 
and  fairs.     Judgment  for  plaintiffs.     Defendants  bring  writ  of  error. 

Grant,  J.  The  church  organization  had  no  legal  existence.  It 
could  neither  sue  nor  be  sued.  The  members  of  the  society  were  not 
partners.  Those  of  the  society  who  were  actually  instrumental  in  in- 
curring the  liabilities  for  it  are  liable  as  either  principals,  or  agents 
having  no  legal  principal  behind  them.  Members  of  the  society  who 
either  authorized  or  ratified  the  transactions  are  liable,  while  those  who 
did  not  are  exempt  from  liability.     *     *    * 

The  testimony  does  not  justify  the  conclusion  that  the  plaintiffs 
agreed  to  trust  to  the  proceeds  of  fairs,  etc.,  for  their  pay.  *  *  * 
Neither  can  we  accede  to  the  proposition  that  there  was  evidence 
tending  legitimately  to  show  that  the  credit  was  given  to  this  unin- 
corporated and  irresponsible  society.  It  was  natural  that  plaintiff's 
should  enter  the  account  upon  their  books  as  they  did,  but  a  jury 
would  not  be  justified  in  drawing  the  conclusion  from  this  alone  that 
they  agreed  to  look  to  such  members  of  this  society  as  they  might 
be  able  to  show  authorized  or  ratified  the  purchase  from  them.  In 
both  reason  and  authority,  this  is  of  no  particular  significance.  The 
alleged  principal  was  a  myth,  and  the  entry  means  no  more  than  that 
the  credit  was  given  to  those  forming  the  association,  or  to  those  who 
stood  sponsors  for  it,  and  were  conducting  its  business  and  obtaining- 
the  credit.  *  *  *  These  defendants  were  the  active  managers,  and, 
with  the  other  two  members  of  the  committee,  were  in  sole  charge  of 


620  AGKNCY  (Part  2 

the  work,  and,  under  the  law  and  the  facts,  were  properly  held  re- 
sponsible. The  law  does  not,  under  such  circumstances,  leave  the 
creditors  to  search  out  the  individual  members  of  the  society  who  have 
authorized  the  transaction,  but  holds  those  liable  who  have  dealt  with 
the  creditors  in  the  capacity  of  agents  or  principals.  *  *  * 
The  judgment  is  affirmed. 


LEE  V.  MATHEWS. 
(Supreme  Court  of  Alabama,  1S46.     10  Ala.  682,  44  Am.   Dec.  498.) 

Trover  for  the  value  of  slaves.  By  a  deed  of  marriage  settlement, 
the  slaves  were  conveyed  to  a  trustee  for  the  benefit  of  Mrs.  Battle. 
Battle  and  wife,  removing  from  North  Carolina  to  Alabama,  took  the 
slaves  with  them.  A  sheriff  sold  the  slaves  as  the  property  of  Battle. 
Defendant,  acting  as  agent  of  Rebecca  Shamburger,  bought  the  slaves 
at  sheriff's  sale.  The  slaves  were  delivered  to  defendant  soon  after 
the  sale.  Judgment  below  for  defendant.  Plaintiff  brings  writ  of  er- 
ror. 

Ormond,  J.  *  *  *  The  slaves  being  conveyed  by  the  antenuptial 
contract,  to  "the  trustee,  for  the  sole  and  separate  use  of  the  wife,  no 
inference  can  arise  from  the  fact,  that  they  were  in  the  joint  posses- 
sion of  herself  and  her  husband ;  such  must  of  necessity  be  the  case, 
when  the  husband  resides  under  the  same  roof  with  his  wife.  *  *  * 
From  these  considerations,  it  appears,  that  the  slaves  were  not  subject 
to  sale,  as  the  property  of  Battle,  and  it  follows,  that  the  purchaser 
is  liable  to  the  trustee,  in  an  action  of  trover  for  the  value. 

It  is  further  argued  that  this  action  cannot  be  maintained  against 
the  present  defendant,  because  in  the  purchase  of  the  slaves  he  acted 
as  the  agent  of  Mrs.  Shamburger,  disclosed  his  agency  at  the  time, 
and  took  the  bill  of  sale  in  her  name,  and  did  not  retain  the  possession 
but  for  a  short  period  as  such  agent,  the  slaves  having  been  delivered 
up  to  his  principal,  long  before  this  suit  was  brought.  Our  first  im- 
pression was,  that  the  defendant,  having  acted  merely  as  the  agent 
of  another  person,  and  having  parted  with  the  possession  before  he 
received  notice  of  the  title  of  the  plaintiff,  was  not  responsible  in  this 
action,  but  that  the  suit  must  be  brought  against  the  principal.  Sub- 
sequent reflection  has  satisfied  us  that  we  were  mistaken,  and  that  the 
principle  upon  which  we  relied,  does  not  govern  such  cases  as  this. 

The  general  rule  of  law,  that  agents  properly  authorized,  acting  for 
a  known  principal,  without  any  personal  undertaking,  are  not  indi- 
vidually responsible,  does  not  apply  to  torts,  because  no  one  can  law- 
fully command  another  to  commit  a  wrong.  It  is  also  clear,  that 
every  unlawful  intermeddling  with  the  goods  of  another  is  a  conver-- 
sion ;  and  it  is  no  answer  to  the  true  owner,  that  the  person  so  receiv- 
ing the  goods,  was  ignorant  of  his  title,  or  that  he  received  them  for 
the  use  or  benefit  of  another.  The  taking,  or  receiving  of  them,  be- 
ing a  conversion,  his  subsequent  disposition  of  them,  will  not  exonerate 
him  from  liability.  It  is  equally  certain,  that  the  title  of  the  true  own- 
er cannot  be  divested,  without  his  consent,  the  only  exception  to  this 
rule  being,  that  of  a  purchase  in  market  overt,  which  has  no  application 
here.  These  principles  are  fully  asserted  in  the  cases  of  Perkins  v. 
Smith,  1  Wils.  328,  and  Stephens  v.  Elwall,  4  Man.  &  Sel.  259. 

In  both  these  cases  the  action  was  brought  against  a  servant,  who 
had  received  the  goods  of  a  bankrupt  for  his  employer,  and  had  parted 


Ch.  5)  RELATIONS   OF   THE   AGENT    AND   THIRD    PERSONS  621 

with  them  before  the  action  was  brought.  In  the  last  cited  case,  the 
act  of  bankruptcy  was  secret,  and  the  defendant  merely  received  the 
goods  from  another  agent  of  the  principal,  who  purchased  them  after 
a  secret  act  of  bankruptcy,  and  had  transmitted  them  to  his  principal 
in  the  United  States,  before  any  demand  was  made  of  him,  or  he  was 
apprised  of  the  facts  of  the  case ;  yet  he  was  held  liable  to  the  as- 
signee of  the  bankrupt.  Lord  Ellenborough,  in  giving  the  opinion  of 
the  court,  thus  expounds  the  law :  "The  only  question  is,  whether 
this  is  a  conversion  of  the  clerk,  which  was  undoubtedly  so  in  the 
master.  The  clerk  acted  under  an  unavoidable  ignorance,  and  for  his 
master's  benefit,  when  he  sent  the  goods  to  his  master ;  but  neverthe- 
less, his  acts  may  amount  to  a  conversion,  for  a  person  is  guilty  of  a 
conversion  who  intermeddles  with  my  property,  and  disposes  of  it; 
and  it  is  no  answer,  that  he  acted  under  authority  from  another,  who 
had  himself  no  authority  to  dispose  of  it.  And  the  court  is  governed 
by  the  principle  of  law.  and  not  by  the  hardship  of  any  particular  case." 
Although,  therefore,  this  may  appear  to  be  a  hard  case,  it  is  perfectly 
clear  the  defendant,  in  receiving  the  slaves,  was  guilty  of  a  conversion, 
although  he  was  ignorant  of  the  title  of  the  plaintiff,  and  was  acting 
merely  as  the  agent  of  another,  and  consequently  liable  to  be  sued  in 
this  form  of  action.    *    *    * 

Let  the  judgment  be  reversed,  and  the  cause  remanded  for  further 
proceedings. 


ILLINOIS  CENT.  R.  CO.  et  al.  v.  COLEY. 

(Court  of  Appeals  of  Kentucky,  1905.     121  Ky.  385,  89  S.  W.  234, 
1  L.  R.  A.   [N.  S.]  370.) 

Action  by  Mary  Coley  against  the  Illinois  Central  Railroad  Com- 
pany and  another.     From  a  judgment  for  plaintiff,  defendants  appeal. 

HoBSON,  C.  J.  On  August  7,  1902,  appellee,  Mary  Coley,  then 
Mary  Koerner,  was  being  driven  in  a  spring  wagon  across  the  Ten- 
nessee street  crossing  of  the  Illinois  Central  Railroad  in  Paducah. 
The  wagon  was  struck  by  a  backing  engine  on  the  railroad.  Two 
of  the  occupants  of  the  wagon  were  thrown  out  and  killed,  and  Mary 
Coley  sustained  painful  and  serious  injuries,  to  recover  for  which  she 
filed  this  action  against  the  railroad  company  and  the  engineer  in 
charge  of  the  engine.     *     *     * 

If  Kotheimer  [the  engineer,  a  defendant]  negligently  ran  the  en- 
gine against  the  wagon  in  which  appellee  was  riding,  and  hurt  her,  he 
is  liable  to  her  for  her  injuries.  The  fact  that  he  did  not  own  the  en- 
gine, or  that  he  was  operating  it  in  the  service  of  the  railroad  company, 
makes  him  none  the  less  liable  for  his  personal  wrong.  If,  in  operating 
the  engine,  he  was  acting  as  the  agent  of  the  railroad  company,  and 
his  act  was  its  act,  then  it  is  also  responsible  to  her  upon  the  principle 
that  he  who  does  an  act  by  another  does  it  himself.  If  both  he  and  it 
are  liable  for  the  wrong,  they  were  both  wrongdoers,  and,  being  wrong- 
doers, may  be  sued  jointly.  A  person  injured  in  this  state  is  not 
required  to  bring  separate  actions  against  the  wrongdoers,  but  he  may 
sue  any  or  all  of  them  at  his  election,  the  jury  may  find  separate  ver- 
dicts, and  he  may  recover  against  some  and  not  against  others.    *    *    * 

Judgment  affirmed. 


622  AGioxcY  (Part  2 


BAIRD  V.  SHIPMAN. 

(Supreme  Court  of  Illinois,  1890.    132  111.  16.  23  N.  E.  384,  7  L.  R.  A.  128. 
22    Am.    St.   Rep.   504.) 

Per  Curiam.  The  following  opinion  of  the  appellate  court  fully 
presents  the  question  arising  upon  this  record: 

GarnKTT,  p.  J.  This  is  an  appeal  from  a  judgment  for  damages, 
founded  on  the  alleged  negligence  of  appellants,  by  which  the. death  of 
Joseph  Garnett,  appellee's  intestate,  is  said  to  have  been  caused.  The 
place  where  the  injury  happened  was  in  a  barn  situated  on  premises 
on  Michigan  avenue,  in  Chicago,  belonging  to  Aaron  C,  Goodman, 
who  was  then,  and  for  several  years  before  had  been,  a  resident  of 
Hartford,  Conn.  Appellants  were  his  agents  for  renting  the  premises 
during  the  years  1884  and  1885,  and  during  both  years  were  carrying 
on  the  real  estate  business  in  Chicago.  On  the  trial,  evidence  was 
given  tending  to  show  that  they  had  in  fact  complete  control  of  the 
premises,  with  the  residence  and  barn  thereon,  repairing  the  same,  in 
their  discretion;  and  there  was  no  proof  that  in  such  matters  they 
received  any  directions  from  the  owner.  The  property  was  rented  by 
appellants  to  Emma  R.  Wheeler  and  A.  R.  Tillman  from  April  1, 
1884,  to  April  30,  1885,  and  to  Emma  R.  Wheeler  from  May  1,  1885, 
to  April  30,  1886.  Both  leases  were  in  writing,  and  by  the  terms  of 
each  lease  the  tenants  covenanted  to  keep  the  premises  in  good  repair. 
The  tenant  in  the  last  lease  rented  the  premises  to  Nellie  E.  Pierce, 
who  occupied  the  same  from  April  28  to  September,  1885.  The  evi- 
dence tends  to  prove  that  vdien  the  lease  was  made  to  Emma  R. 
Wheeler  the  large  carriage  door  to  the  barn  was  in  a  very  insecure 
condition,  and  that  appellants,  through  one  Warner,  the  manager  of 
their  renting  department,  verbally  agreed  with  Mrs.  Wheeler  to  put 
the  premises  in  thorough  repair.  Nothing  was  done  to  improve  the 
condition  of  the  door;  and  on  June  12,  1885,  while  the  deceased,  an 
expressman  by  occupation,  was  engaged  in  delivering  a  load  of  kind- 
ling in  the  barn  for  one  of  the  parties  living  in  the  house,  the  door, 
weighing  about  400  pounds,  fell  from  its  fastenings,  and  injured  him 
to  such  an  extent  that  he  died  the  next  day. 

"Appellants  make  two  points :  (1)  That  the  verdict  is  clearly 
against  the  weight  of  the  evidence ;  (2)  that  they  were  the  agents  of 
the  owner,  (Goodman.)  and  liable  to  him  only  for  any  negligence  at- 
tributable to  them.  There  is  nothing  more  than  the  ordinary  conflict 
of  evidence  found  in  such  cases,  presenting  a  question  of  fact  for  the 
jury ;  and  the  finding  must  be  respected  by  this  court,  in  deference  to 
the  well-settled  rule. 

"The  other  point  is  not  so  easily  disposed  of.  An  agent  is  liable 
to  his  principal  only  for  mere  breach  of  his  contract  with  his  prin- 
cipal ;  but  he  must  have  due  regard  to  the  rights  and  safety  of  third 
persons.  He  cannot  in  all  cases  find  shelter  behind  his  principal. 
If,  in  the  course  of  his  agency  he  is  intrusted  with  the  operation  of  a 
dangerous  machine,  to  guard  himself  from  personal  liability,  he  must 
use  proper  care  in  its  management  and  supervision,  so  that  others,  in 
the  use  of  ordinary  care,  will  not  suffer  in  life,  limb,  or  property. 
*  *  *  jt  is  not  his  contract  with  the  principal  which  exposes  him 
to,  or  protects  him  from,  liability  to  third  persons,  but  his  common- 
law  obligation  to  so  use  that  which  he  controls  as  not  to  injure  another. 
That   obligation  is  neither  increased   nor  diminished  by   his  entrance 


Ch.  5)      RELATIONS  OF  THE  AGENT  AND  THIRD  PERSONS         623 

upon  the  duties  of  agency ;  nor  can  its  breach  be  excused  by  the  plea 
that  his  principal  is  chargeable.  *  *  *  If  the  agent  once  actually 
undertakes  and  enters  upon  the  execution  of  a  particular  work,  it  is 
his  duty  to  use  reasonable  care  in  the  manner  of  executing  it,  so  as 
not  to  cause  any  injury  to  third  persons  which  may  be  the  natural 
consequence  of  his  acts ;  and  he  cannot  escape  this  duty  by  abandon- 
ing its  execution  midway,  and  leaving  things  in  a  dangerous  condition, 
by  reason  of  his    having  so    left  them    without  proper    safeguards. 

*  *  *  A  number  of  authorities  charged  the  agent,  in  such  cases,  on 
the  ground  of  misfeasance,  'as  distinguished  from  nonfeasance.  Me- 
chem,  in  his  work  on  Agency,  §  572,  says:  'Some  confusion  has  crept 
into  certain  cases  from  a  failure  to  observe  clearly  the  distinction  be- 
tween nonfeasance  and  misfeasance.  As  has  been  seen,  the  agent  is 
not  liable  to  strangers  for  injuries  sustained  by  them,  because  he  did 
not  undertake  the  performance  of  some  duty  which  he  owed  to  his 
principal,  and  imposed  upon  him  by  his  relation,  which  is  nonfeasance. 
Misfeasance  may  involve,  also,  to  some  extent,  the  idea  of  not  doing, 
as  where  the  agent,  while  engaged  in  the  performance  of  his  under- 
taking, does  not  do  something  which  it  was  his  duty  to  do  under  the 
circumstances— does  not  take  that  precaution,  does  not  exercise  that 
care,  which  a  due  regard  for  the  rights  of  others  requires.  All  this  is 
not  doing ;  but  it  is  not  the  not  doing  of  that  which  is  imposed  upon 
the  agent  merely  by  virtue  of  his  relation,  but  of  that  which  is  imposed 
upon  him  by  law,  as  a  responsible  individual,  in  common  with  all  other 
members  of  society.  It  is  the  same  not  doing  which  constitutes  ac- 
tionable negligence  in  any  relation.'     *     *     * 

"The  rule  *  *  *  is  sufficient  to  charge  appellants  with  damages, 
under  the  circumstances  disclosed  in  this  record.  They  had  the  same 
control  of  the  premises  in  question  as  the  owner  would  have  had  if 
he  had  resided  in  Chicago,  and  attended  to  his  own  leasing  and  re- 
pairing. In  that  respect,  appellants  remained  in  control  of  the  prem- 
ises until  the  door  fell  upon  the  deceased.  There  was  no  interruption 
of  the  causal  relation  between  them  and  the  injured  man.  They  were, 
in  fact,  for  the  time  being,  substituted  in  the  place  of  the  owner,  so  far 
as  the  control  and  management  of  the  property  was  concerned.  The 
principle  that  makes  an  independent  contractor,  to  whose  control  prem- 
ises upon  which  he  is  working  are  surrendered,  Hable  for  damages 
to  strangers  caused  by  his  negligence,  although  he  is  at  the  time  doing 
the  work  under  contract  with  the  owner,  *  *  *  would  seem  to  be 
sufficient  to  hold  appellants.  *  *  *  When  appellants  rented  the 
premises  to  Mrs.  Wheeler  in  the  dangerous  condition  shown  by  the 
evidence,  they  voluntarily  set  in  motion  an  agency  which,  in  the  ordi- 
nary and  natural  course  of  events,  would  expose  persons  entering  the 
barn  to  personal  injury.  Use  of  the  barn,  for  the  purpose  for  which  it 
was  used  when  the  deceased  came  to  his  death,  was  one  of  its  ordinary 
and  appropriate  uses,  and  might,  by  ordinary  foresight,  have  been 
anticipated.  If  the  insecure  condition  of  the  door  fastening  had  aris- 
en after  the  letting  to  Mrs.  Wheeler,  a  different  question  would  be 
presented;  but,  as  it  existed  before  and  at  the  time  of  the  letting,  the 
owner  or  persons  in  control  are   chargeable  with   the   consequences. 

*  *    *     Neither  error  is  well  assigned,  and  the  judgment  is  affirmed." 
We  fully  concur  in  the  legal  proposition  asserted  in  the  foregoing 

opinion,  and  deem  it  unnecessary  to  add  to  what  is  therein  said  in 
support  of  that  proposition.     The  judgment  is  affirmed. 


G24  ^  AGENCY  (Part  2 


LANDELL  v.  LYBRAND  et  al. 

(Supreme  Court  of  Pennsylvania,  1919.     264  Pa.  406,  107  Atl.  783, 
8   A.   L.    R.  461.) 

Trespass  by  Edwin  A.  Landell,  Jr.,  against  William  M.  Lybrand 
and  others,  copartners  trading  as  Lybrand,  Ross  Bros.  &  Montgom- 
ery.    From  a  judgment  for  defendants,  plaintiff  appeals. 

Per  Curiam.  Appellees,  defendants  below,  are  certified  public  ac- 
countants, and,  as  such,  audited  the  books  and  accounts  of  the  Em- 
ployers' Indemnity  Company  for  the  year  1911.  The  appellant,  plain- 
tiff below,  averred  in  his  statement  of  claim  that  he  had  been  induced 
to  buy  11  shares  of  the  capital  stock  of  that  company,  at  the  price  of 
$200  per  share,  on  the  strength  of  the  report  made  by  the  appellees  as 
to  its  assets  and  liabilities  at  the  close  of  the  year  1911  ;  the  report 
having  been  shown  to  him  by  some  one  who  suggested  that  he  purchase 
the  stock.  A  further  averment  was  that  the  report  was  false  and  un- 
true, that  the  stock  purchased  by  him  on  the  strength  of  it  is  value- 
less, and  for  the  loss  he  sustained  he  averred  the  defendants  were  lia- 
ble. To  enforce  this  liability  an  action  in  trespass  was  brought 
against  them.  In  their  affidavit  of  defense  they  averred  that  the 
statement  of  claim  disclosed  no  cause  of  action,  and  asked  that  this 
be  disposed  of  by  the  court  below  as  a  matter  of  law.  *  *  *  j^ 
was  so  disposed  of  by  the  court  below  in  entering  judgment  for  the 
defendants. 

There  were  no  contractual  relations  between  the  plaintiff  and  de- 
fendants, and,  if  there  is  any  liability  from  them  to  him,  it  must  arise 
out  of  some  breach  of  duty,  for  there  is  no  averment  that  they  made 
the  report  with  intent  to  deceive  him.  The  averment  in  the  statement 
of  claim  is  that  the  defendants  were  careless  and  negligent  in  making 
Iheir  report ;  but  the  plaintiff  was  a  stranger  to  them  and  to  it,  and,  as 
no  duty  rested  upon  them  to  him,  they  cannot  be  guilty  of  any  negli- 
gence of  which  he  can  complain.  *  *  *  This  was  the  correct  view 
of  the  court  below,  and  the  judgment  is  accordingly  affirmed. 


FOLWELL  y.  MILLER  et  al. 

(United  States?  Circuit  Court  of  Appeals,  Second  Circuit,  1906.     145  Fed.  495, 
75  C.  C.  A.  489,  10  L.  R.  A.  [N.  S.]  332,  7  Ann.  Cas.  455.) 

Wali^acE,  Circuit  Judge.  The  trial  judge  in  the  court  below  direct- 
ed a  verdict  for  the  defendant,  upon  the  ground  that  it  appeared  by 
the  evidence  that' the  defendant  had  not  participated  in  the  publication 
of  the  libel  which  was  the  subject  of  the  action.  The  principal  as- 
signment of  error  challenges  the  correctness  of  this  ruling. 

The  facts  proved  upon  the  trial  were  these:  The  libel  was  pub- 
lished in  the  New  York  Times,  a  newspaper  owned  by  a  corporation 
in  which  the  defendant  was  the  principal  stockholder,  and  of  which 
he  was  the  president.  The  defendant  was  also  at  the  time  editor  in 
chief  of  the  newspaper,  having  general  supervision  of  the  editorial 
and  news  departments ;  but  the  news  department  was  under  the  im- 
mediate charge  of  a  subordinate  editor.  The  libel  consisted  of  a  news 
item,  which  was  received  by  the  news  editor  during  the  night  of  April 
5th,  and  was  published  in  the  issue  which  went  to  press  on  the  morn- 
ing of  April  6th.     The  defendant  was  absent  during  the  period  cov- 


Ch.  5)  RELATIONS   OF   THE   AGENT   AND   THIRD   PERSONS  625 

ered  by  the  reception  and  the  pubhcation  of  the  hbel  from  the  editorial 
rooms  and  the  building  in  which  the  newspaper  was  printed,  and  had 
no  knowledge  of  the  publication  until  a  subsequent  day. 

That  the  defendant  was  not  liable  merely  because  he  was  president 
of  the  corporation  and  a  stockholder  is  a  proposition  which  does  not 
require  extended  discussion.  The  president  of  the  corporation  is  an 
agent  of  very  extensive,  but  not  unlimited,  powers.  He  is  not  personally 
liable  because  of  his  official  capacity,  any  more  than  are  the  directors 
or  stockholders,  for  torts  committed  by  the  corporation,  in  the  ab- 
sense  of  personal  participation  in  the  tortious  act.  As  an  agent  he  is 
not  liable  for  the  acts  of  misfeasance  or  nonfeasance  of  his  subor- 
dinate agents  or  employees.     *     *    ■'' 

Whether  the  defendant  was  liable  because  of  his  relation  to  the 
newspaper  as  editor  in  chief,  notwithstanding  the  libel  was  published 
without  his  knowledge  or  complicity,  is  a  more  debatable  question.  If 
that  relation  is  one  in  which  the  editor  is  merely  an  agent  and  the 
proprietor  is  the  principal,  and  the  liability  of  the  editor  is  to  be  tested 
by  the  ordinary  rules  of  the  law  of  principal  and  agent,  it  is  plain,  as 
has  been  already  stated,  that  he  would  not  be  liable  for  any  tortious  act 
committed  without  his  privity  by  another  agent  of  the  principal, 
whether  such  other  agent  be  one  of  higher  or  lower  grade.  On  the 
other  hand,  if  the  liability  of  the  editor  is  coextensive  with  that  of  the 
proprietor,  it  is  not  affected  or  qualified  by  the  circumstance  that  the 
publication  was  made  without  any  personal  participation  on  his  part. 
It  has  long  been  the  settled  rule  that  when  a  libel  is  published  in  a 
newspaper  the  fact  alone  is  sufficient  evidence  to  charge  the  proprietor 
with  the  guilt  of  its  publication,  and  he  is  not  permitted  to  show  in 
exculpation  that  he  was  not  privy  nor  assenting  to,  nor  encouraging, 
the  publication.  Although  it  may  have  been  published,  contrary  to  his 
express  orders,  by  a  servant,  if  this  was  in  the  usual  course  of  the 
servant's  employment,  the  proprietor  is  liable.  *  *  *  It  has  never 
been  distinctly  decided  that  the  liability  of  the  editor  is  coextensive 
with  that  of  the  proprietor. 

Some  of  the  text-writers  indulge  in  general  statements  which  imply 
that  the  liability  is  coextensive,  but  the  authorities  which  they  cite  do 
not  justify  the  impHcation.  The  only  carefully  considered  adjudication 
upon  the  point  which  we  have  been  able  to  find  is  Smith  v.  Utley,  92 
Wis.  133,  65  N.  W.  744,  35  L.  R.  A.  620.  In  that  case  the  court  de- 
clared :  "That  the  managing  editor  of  a  newspaper  is  equally  liable 
with  the  proprietor  and  publisher  for  the  consequences  in  a  civil  ac- 
tion for  the  publication  of  the  libelous  afticle ;  and  this  is  so  whether 
he  knew  of  the  publication  or  not,  for  it  is  his  business  to  know,  and 
mere  want  of  knowledge  constitutes  no  defense."    *    *    * 

Notwithstanding  these  adjudications,  we  are  not  convinced  that  the 
editor's  liability  is  commensurate  with  that  of  the  proprietor.  Of 
course,  he  is  liable  equally  with  the  proprietor  when  he  has  personally 
assisted  in  any  manner  in  the  preparation,  revision,  or  otherwise  of 
the  publication  of  the  libel.  There  is  doubtless  a  presumption  of  fact 
that  the  managing  editor  has  supervised  the  contents  of  the  news- 
paper, and  performed  the  duties  of  his  office  in  that  behalf.  So  doubt- 
less when  it  appears  that  he  has  actually  done  so,  the  fact  that  he  has 
omitted  to  notice  some  of  the  contents  will  not  relieve  him  from  the 
consequences  of  his  participation.  But  when  it  appears  affirmatively 
B.<S:  B.Bus.Law— 40 


626  AGENCY  (Part  2 

that  he  was  not  on  duty  duruig  any  part  of  the  time  between  the  recep- 
tion of  the  hbelous  matter  by  the  newspaper  and  the  pubhcation,  and 
could  not  have  had  any  actual  part  in  composing  or  publishing,  we 
think  he  cannot  be  held  liable  without  disregarding  the  settled  rule  of 
law  by  which  no  man  is  bound  for  the  tortious  act  of  another  over 
whom  he  has  not  a  master's  power  of  control.  The  action  of  libel  is 
not  based  upon  neglect  of  duty,  but  is  for  a  positive  tort;  and  there 
is  no  reason  upon  which  an  editor,  any  more  than  any  other  individual, 
can  be  held  responsible  for  such  a  tort  when  it  appears  that  he  was 
actually  innocent  of  all  complicity  in  it.     *    *     * 

The  owner  of  the  newspaper  is  liable  for  whatever  may  be  published 
in  it,  because  all  those  who  are  engaged  in  preparing  and  publishing  it 
are  his  servants,  and  the  publication  is  an  act  within  the  scope  of  their 
employment.  It  is  therefore  deemed  the  act  of  the  owner  himself,  and, 
although  done  without  his  knowledge,  or  contrary  to  his  express  in- 
structions, he  must  bear  the  consequences.  The  same  principle  ap- 
plies to  every  tort  committed  by  a  servant  in  the  course  of  his  em- 
ployment, whether  it  is  a  mere  neglect  or  a  tort  of  a  willful  and  mali- 
cious quality.  The  editor,  however,  exercises  a  delegated  authority 
for  the  owner,  and  consequently  is  but  an  agent  of  the  owner,  even 
though  he  be  the  editor  in  chief.  His  subordinates  are  not  his  agents 
or  servants,  because  the  power  to  select  them  and  discharge  them  be- 
longs to  the  owner,  and  they  are  not  under  his  control  when  that 
power  resides  in  a  higher  agent,  notwithstanding  he  is  permitted  to 
control  them  when  the  owner  does  not  see  fit  to  intervene.  It  is  im- 
possible to  differentiate  the  relation  of  an  editor  and  proprietor  from 
that  of  an  agent  and  principal.  We  conclude  that  the  trial  judge  cor- 
rectly ruled  that  the  defendant  was  not  liable  for  the  act  of  his  sub- 
ordinate under  the  circumstances  of  this  case.    *     *     * 


RAY  COUNTY   SAVINGS  BANK  v.   BUTTON. 
(Supreme  Court  of  Missouri,  1909.     224  Mo.  42,  123  S.  W.  47.) 

Lamm,  J.  Suit  for  fraud  and  deceit.  Defendant  was  vice  president 
of  a  corporation  known  as  "Strahorn-Hutton-Evans  Commission  Com- 
pany." It  will  be  called  the  "company."  Plaintiff  will  be  called  the 
"bank."  The  bank  bought  at  a  discount  from  the  company  a  note 
known  as  the  "Huntley  note,"  for  which  it  paid  $5,856.49.  Failing 
to  collect  from  the  payors  or  the  indorser  (the  company),  the  bank 
sues  to  recover  that  sum  from  defendant.  A  jury  being  waived,  the 
court  gave  judgment  for  $6;882.07,  filing  the  following  memoran- 
dum :  "While  a  decision  for  the  plaintiff  in  this  case  must  necessarily 
result  in  great  hardship  to  the  defendant,  yet  it  is  the  duty  of  the  court 
to  declare  the  law  as  announced  by  the  Supreme  Court  of  the  state, 
and  under  the  facts  and  the  law  as  thus  declared  the  judgment  must 
be  for  the  plaintiff*."     From  that  judgment,  defendant  appeals. 

The  pith  of  the  petition  is  that  the  bank  was  doing  a  general  bank- 
ing business  at  Richmond ;  that  the  company  had  an  office  in  Kansas 
City,  Kan.,  under  the  control  of  defendant,  one  of  its  executive  offi- 
cers ;  that  the  company  on  May  26,  1903,  "was  in  a  failing  condition, 
all  of  which  was  well  known  to  said  T.  S.  Hutton" ;  that  in  Septem- 
ber, 1901,  William  M.  and  Kate  Huntley  were  the  owners  of  1,180 
head  of  cattle  ranging  near  Rush  Springs,  Ind.  T.,  and  executed  a 


Ch.  5)      RELATIONS  OF  TOR  AOENT  AND  THIRD  PERSONS         627 

chattel  mortgage  on  them  to  secure  to  the  company  their  notes  ag- 
gregating about  $20,000;   that  subsequently  such  shipments  were  made 

of  said  cattle  to  the  company  that  "on  the  day  of  December, 

1902"  the  cattle  were  reduced  to  545  head;  that  on  said  day  in  De- 
cember the  company  took  possession  of  said  remnant  and  sold  them 
to  one  Peery,  who.  in  turn,  executed  a  chattel  mortgage  on  certain 
cattle,  including  said  remnant,  to  secure  his  note  to  the  company  for 
$12,041.65;  that  all  security  was  thereby  withdrawn  from  the  Hunt- 
ley chattel  mortgage ;  that  the  Huntleys  were  then  and  are  now  in- 
solvent ;  that  afterwards,  on  the  29th  of  April,  1903,  said  company 
"by  direction  of  the  defendant,  well  knowing  that  the  security  orig- 
inally given  by  the  chattel  mortgage  *  *  '''  was  no  longer  avail- 
able and  had  been  exhausted  either  by  sale,  -death,  theft,  or  by  stray- 
ing of  cattle  away,  and  with  intent  to  cheat  and  defraud,  did  procure 
from  William  M.  Huntley,  acting  for  himself  and  as  agent  for  Kate 
Huntley,  their  certain  promissory  note"  a  renev/al  note;  that  "defend- 
ant, for  the  purpose  of  selling  said  renewal  note  to  plaintiff,  falsely 
and  fraudulently  represented  '•'  *  *  that  said  note  was  secured  on 
1,180  head  of  cattle"  by  its  form  of  chattel  mortgage,  "and  falsely 
and  fraudulently  pretended  that  said  cattle  were  then  at  or  near  Rush 
Springs,  Ind.  T.,  and  subject  to  said  mortgage,  all  of  which  was  un- 
true." These  false  and  fraudulent  representations  are  alleged  to  have 
been  made  by  a  letter  of  date  May  26,  1903.  The  recitals  in  the  note 
are  then  set  forth;  one  of  them  being:  "That  this  note  is  given  in  re- 
newal of  unpaid  indebtedness,  secured  by  a  chattel  mortgage  on  1,180 
head  of  cattle,  given  by  (Kate  Huntley,  by  W.  M.  Huntley,  agent, 
and  W.  M.  Huntley)  to  Strahorn-Hutton-Evans  Commission  Com- 
pany, date  September  21,  1902,  filed  for  record  at  Ardmore,  I.  Ty.,  on 
27th  day  of  September,  1901."  In  connection  with  that  recital  in 
the  note  inclosed  with  defendant's  letter,  it  is  charged  *  *  *  that 
the  letter  states  as  follows :  "You  will  note  that  all  these  are  renew- 
als except  oiie  note,  for  which  ample  provision  is  made  in  our  form 
of  mortgage,  and  all  this  paper  will  be  met  promptly  at  its  maturity." 
It  is  next  charged  that  by  such  statement  in  said  letter  "defendant 
fraudulently  intended  to  cause  plaintiff  to  believe  and  did  cause  plain- 
tiff' to  believe  that  said  note  was  a  renewal  of  unpaid  indebtedness"  se- 
cured on  the  1,180  cattle,  as  recited  in  said  note.  It  is  next  alleged 
that  the  bank  relied  on  such  fraudulent  and  false  representations,  pre- 
tenses, and  statements  contained  in  said  note  "and  set  forth  in  said 
letter,"  and,  believing  the  same  to  be  true,  bought  said  note  "at  the 
request  of  defendant  and  at  his  request  paid"  said  sum  therefor; 
that  shortly  thereafter  the  company  "proved  to  be  insolvent,  and  was 
at  the  time  of  said  purchase  and  now  is  insolvent,  which  fact  was  and 

is  well  known  to  defendant."  The  answer  was  a  general  denial. 
*     *     * 

If  Hutton  is  liable,  it  is  on  the  wording  of  his  letter  of  May  26. 
1903,  as  vice  president,  and  not  because  of  any  other  specification 
of  fraud  in  the  petition. 

There  is  a  promise  in  that  letter  to  the  effect  that  all  the  paper 
inclosed  for  discount  would  be  met  promptly  at  maturity.  Something 
is  made  of  that  phrase  by  respondent's  counsel.  It  is  suggested  as  an 
element  in  the  fraud,  or,  if  net  an  element,  at  least  a  bit  of  color  paint- 
ing the  fraud  a  darker  hue.  But  we  know  of  no  principle  of  law  mak- 
ing a  promise  to  pay  a  debt  when  due  or  an  assertion  that  a  debt  will 


628  "  AGENCY  (Part  2 

be  paid  promptly  when  due  an  actionable  element  in  fraud.  Frauds, 
either  in  civil  or  criminal  law,  are  not  based  on  prognostications.  Who 
may  know  what  a  day  will  bring  forth  ?  No  man  stands  condemned  in 
the  law  because  hope  springs  in  his  breast,  or  because  out  of  the  full- 
ness of  his  heart  his  mouth  speaketh  in  that  regard.  Therefore  the 
law  does  not  interdict  prophesying  the  expression  of  sanguine  business 
hopes  and  beliefs  in  events  to  come.  The  suggestion  in  hand  comes 
with  ill  grace  from  the  plaintiff.  It  jauntily  took  gainful  chances,  rest- 
ing in  futuro,  somewhat  on  the  very  edge  of  conservative  banking; 
for  it  not  only  dealt  in  cattle  paper,  but  in  a  sense  it  dealt  in  paper  cat- 
tle— "sight  unseen" — cattle  roaming  in  unknown  far-away  pastures, 
purporting  to  be  owned  by  men  unknown  to  the  bank.  Preliminary  to 
investing  it  clapped  an  eye  on  no  hoof  of  cattle,  but  its  course  of  deal- 
ing with  the  company  must  be  held  to  have  rested  largely  on  the  rela- 
tion of  indorser  and  indorsee.  It  took  paper  expecting  the  indorser 
would  protect  it  in  the  first  instance  at  least.    *     *     * 

Finally,  we  come  to  this  proposition :  Is  defendant  personally  liable 
because  ^of  the  statement  in  the  letter  that,  "You  will  note  that  all 
these  are  renewals  except  one  note,  for  which  ample  provision  is  made 
in  our  form  of  mortgage"  ?  Counsel  argue  that  taking  that  statement 
in  the  letter  in  connection  with  the  narration  in  the  Huntley  note  in- 
closed a  case  is  made.  We  do  not  think  so.  This  because:  (a)  The 
petition  counts  on  fraud  and  deceit.  In  that  form  of  action  the  scien- 
ter is  an  indispensable  element.  The  petition  therefore  alleges  guilty 
knowledge  in  Hutton — knowledge  that  the  narrations  in  the  Huntley 
note  were  false— and  an  averment  is  made  that  his  letter  of  May  2oth, 
1903,  was  intended  to  make  and  did  make  those  false  narrations  ef- 
fective. As  we  have  seen  there  was  an  utter  failure  of  proof  on  the 
scienter  strictly  speaking,  (b)  But  counsel  say  (and  this  proposition 
may  be  conceded  to  them)  that  there  may  be  such  recklessness  in  stat- 
ing facts  as  takes  the  place  of  actual  guilty  knowledge,  stands  as  and 
for  a  technical  scienter,  and  amounts  to  fraud  and  deceit.  In  this  be- 
half they  argue  that  the  narrations  in  the  Huntley  note,  coupled  with 
the  statement  in  the  letter,  amount  to  an  assertion  that  the  enclosed 
note  was  actually  secured  by  1,180  cattle  at  the  very  time,  and  that, 
conceding  Hutton  was  ignorant  of  the  facts,  yet  his  statement  of  fact, 
as  a  fact,  being  itself  false,  amounts  to  proof  of  the  allegation  that  he 
"falsely  and  fraudulently  represented  the  said  note  was  secured  on  1,- 
180  head  of  cattle."  and  "falsely  and  fraudulently  pretended  that  said 
cattle  were  then  at  or  near  Rush  Springs,  Ind.  T.,  and  subject  to  said 
mortgage." 

Attending  to  this  view  of  the  case,  what  does  the  letter  itself  say? 
The  alleged  poisonous  words  are :  "You  will  note  that  all  these  are 
renewals,  except  one  note,  for  which  ample  provision  is  made  in  our 
form  of  mortgage."  As  a  preliminary  remark,  it  is  proper  to  say  that 
we  should  solve  all  doubts  in  favor  of  good  faith,  and  not  wring  a 
fraudulent  meaning  from  the  words  by  enlarging  the  meaning  by  an 
interpretation  either  too  loose  or  too  bland.  Now,  the  notes  inclosed 
in  the  letter,  save  one,  were  "renewals."  Hence  there  was  neither 
false  suggestion  nor  suppressio  veri  in  using  that  term.  The  words 
"for  which"  refer  back  to  the  word  "renewals."  Hence  those  words 
may,  v/ithout  alteration  in  sense,  be  amplified  into  "for  which  re- 
newals." What  kind  of  provision  was  made  ?  The  answer  is :  "Am- 
ple provision."     Where  was  ample  provision  made?     The  answer  is: 


Ch.  5)  RELATIONS   OF   THE   AGENT   AND   THIRD    PERSONS  629 

"In  our  form  of  mortgage."  What  does  "provision"  mean  except  a 
clause  contractual  in  character  or  dealing  with  the  subject-matter  (i. 
e.,  renewals)  ?  In  the  connection  it  is  used,  "ample"  means  full,  com- 
plete, sufficient.  So  that  on  just  analysis  the  language  of  the  letter 
must  be  held  to  mean:  "All  these  notes  (save  one)  are  renewal  notes, 
for  which  renewals  there  is  a  full  mortgage  clause  or  provision  inserted 
in  the  form  of  chattel  mortgages  used  by  this  company" — which  is  no 
more  and  no  less  than  to  say  that  the  company's  form  of  mortgage  is 
so  written  as  to  contemplate  and  provide  for  renewal  notes.  The  sum 
of  it  all  being  as  said,  we  find  the  record  discloses  that  the  mortgage 
had  such  provision.  Therefore,  taken  by  or  large,  the  language  com- 
plained of  in  the  letter  was  literally  true.  As  we  have  seen,  then,  the 
words  of  the  letter  do  not  import  that  the  very  note  inclosed  was  at 
the  very  time  the  note  was  sent  in  to  the  bank  secured  on  1,180  head 
of  cattle  at  or  near  Rush  Springs,  I.  T.,  and  subject  to  the  mortgage, 
as  alleged  in  the  petition  and  as  argued  here. 

But  learned  counsel  for  respondent  argue,  as  said,  that  the  narra- 
tions of  the  letter  must  be  read  in  connection  with  the  narrations  of 
the  inclosed  Huntley  note,  and  that,  read  together,  they  assert  that 
the  Huntley  renewal  note  was  secured  by  that  number  of  cattle  then 
at  the  above  point  in  the  Indian  Territory  and  subject  to  the  mortgage. 
The  first  question  to  settle  in  this  view  of  the  case  is  whether  the 
representation  made  by  the  Huntleys  in  their  note  is  a  representation 
bv  Hutton.  Is  it  the  law  that  when  the  president  of  a  bank  signs  a  let- 
ter prepared,  say,  by  the  cashier,  and  incloses  in  the  letter  a  bundle 
of  instruments  or  documents  furnished  by  the  cashier  to  be  sent  as 
an  inclosure  with  the  letter,  that  the  president  makes  all  the  recitations 
in  these  documents  and  instruments  his  own  by  merely  inclosing  them 
Avith  his  letter?  And  this,  too,  to  fasten  actual  fraud  upon  him?  If 
we  take  that  view  of  it,  an  agent  of  a  corporation  assumes  a  liability 
and  responsibility  hitherto  unhinted  at  and  undreamed  of  in  the  phi- 
losophy of  the  law.  We  deem  the  proposition  unsound  on  its  face  ;  for 
the  law  must  comport  with  reason.  To  know  the  law  one  must  know 
the  reason  of  the  law,  and  what  says  our  Lord  Coke?  "He  who 
knoweth  the  law,  and  knoweth  not  the  reason  thereof,  soon  forgetteth 
his  superfluous  learning."  *  *  *  jf  ^g  were  to  hold  (which  we 
shall  not,  in  this  form  of  action  counting  on  actual  fraud)  that  Hutton 
was  charged  with  notice  of  what  the  books  showed  had  become  of  the 
whole  1,180  cattle,  yet  that  does  not  fasten  such  recklessness  upon  him 
as  would  amount  to  proof  of  the  scienter  and  therefore  of  fraud.  It 
would  be  a  novel  proposition  in  ethics  and  a  most  anxious  and  vexing 
precedent  in  commercial  law  to  hold  that  Hutton,  ignorant  of  the  facts 
and  innocent  of  wrongful  intention,  could  be  held  so  reckless  as  to  be 
guilty  of  fraud  in  stating  what  he  personally  did  not  know  to  be  true, 
when,  in  the  usual  course  of  the  company's  business,  a  trusted  employee 
(presumably  familiar  with  all  the  facts)  prepared  a  statement  for  him 
to  sign  and  which  he  did  sign  in  good  faith  relying  on  such  emplovee. 

We  shall  not  swell  this  opinion  by  extended  excerpts  from  decided 
cases,  but  content  ourselves  with  quoting  from  the  syllabus  of  a  lead- 
ing case  decided  in  the  House  of  Lords,  and  which,  as  pointed  out 
by  learned  counsel,  met  the  approval  of  this  court  in  Bank  v.  Byers, 
139  Mo.  653,  41  S.  W.  32.S.  The  case  referred  to  is  Derry  et  al.  v. 
Peek,  14  App.  Cas.  (L.  Rep.)  337.  The  syllabi  correctly  formulate  the 
propositions  ruled  and  are  apposite  and  lucid  statements  of  acceptable 


630  AGENCY  (Part  2 

law — in  part  reading  as  follows :  "In  an  action  of  deceit  the  plaintiff 
must  prove  actual  fraud.  Fraud  is  proved  when  it  is  shown  that  a 
false  representation  has  been  made  knowingly,  or  without  belief  in 
its  truth,  or  recklessly,  without  caring  whether  it  be  true  or  false.  A 
false  statement,  made  through  carelessness  and  without  reasonable 
ground  for  believing  it  to  be  true,  may  be  evidence  of  fraud,  but  it 
does  not  necessarily  amount  to  fraud.  Such  a  statement,  if  made  in 
the  honest  belief  that  it  is  true,  is  not  fraudulent,  and  does  not  render 
the  person  making  it  liable  to  an  action  of  deceit."  The  doctrine  of 
the  Derry  Case  accords  with  the  doctrines  of  this  court.  *  *  *  And, 
applying' that  doctrine  to  the  facts  here,  we  must  acquit  defendant  of 
actual  fraud  or  of  such  recklessness  in  statement  as  supplies  proof  of 
the  scienter  and  amount  to  such  fraud.  Says  Bleckley,  J-,  in  Hull 
V.  Myers,  90  Ga.  677.  16  S.  E.  654:  "Good  sense,  good  morality,  and 
good  law  are  one  and  the  same  so  long  as  they  are  not  sundered  vio- 
lently by  legislation  or  ignorantly  by  judicial  error."  And  in  our  opin- 
ion it  is  good  sense,  good  morality,  and  good  law  to  rule  as  announced. 
It  is  settled  law  that  an  agent,  such  as  Hutton  was,  is  not  liable  to 
third  persons  for  mere  negligence  in  nonfeasance.  In  such  cases  the 
rule  is:  Let  the  master  answer  (respondeat  superior).  But  no  agent 
masquerading  under  the  cloak  of  a  corporate  name  may  escape  lia- 
bility for  an  actual  fraud  working  an  injury  to  a  third  person.  The 
general  rule  is  that  in  matters  ex  contractu  a  third  person  dealing  with 
the  known  agent  of  another,  whether  that  other  be  a  person  or  a  cor- 
poration is  deemed  to  deal  (not  on  the  credit  of  the  agent,  but)  on 
that  of  the  principal.  If  that  rule  does  not  obtain  in  a  given  case,  it 
is  because  fraud  avoids  the  rule,  and  thereby  the  door  to  liability 
swings  wide  open  to  an  action  ex  delicto.  Now,  fraud  is  commonly 
deeply  hid  away.  Often  it  can  only  be  got  at  by  inference.  It  is 
scarcely  ever  proved  by  admissions ;  for  it  blows  no  trumpet.  One 
cannot  put  his  finger  on  it  and  say,  "Lo,  here  it  is!"  or  "There  it 
is!" — palpable  to  the  touch.  But  it  is  got  at  by  following  its  tracks 
from  results  back  to  the  inception  of  the  affair  or  from  the  inception 
of  the  affair  forward  to  results.  Nevetheless  actual  fraud  is  malevo- 
lent and  willful  act.  The  difficulty  of  proving  it  does  not  dispense  with 
the  necessity  of  the  proof.  It  must  not  be  deduced  from  mere  sus- 
picion. It  is  not  proved  by  insinuation  and  innuendo.  It  is  never 
given  body  and  form  by  mere  presumptions.  So  that,  where  one  of 
two  tiews  are  open,  as  in  the  case  at  bar.  the  one  noble  and  the  other 
ignoble,  courts  of  justice  out  of  tenderness  to  humanity  will  not  belittle 
mankind  by  taking  the  ignoble  rather  than  the  noble  view.  Applying 
that  doctrine  to  this  case  it  is  clear  the  judgment  against  the  defend- 
ant is  wrong.    *    *    * 


PART  III 

NEGOTIABLE  INSTRUMENTS 

Chapter 

Introduction. 
I.    Formal    Requisites. 
II.     Eiglit  of  tlie  Holder  to  Complete,  to  Sue  Upon,  and  to  Negotiate  the 
Instrument. 
III.     Who  are  Holders  in  Due  Course. 
IV.     Rights  of  the  Holder  Against  the  Maker  and  Acceptor. 

v.     Rights  of  the  Holder  Against  Indorsers  and  the  Drawer. 
VI.     Presentment,  Notices  of  Dishonor,  and  Protest. 
VII.     Discharge. 


INTRODUCTION 

The  commercial  world  is  familiar  with  a  number  of  instruments 
of  credit,  which  are  usually  negotiable:  Promissory  notes;  bills 
of  exchange;  certificates  of  deposit;  corporate  bonds;  checks; 
drafts;  trade  acceptances;  bank  acceptances;  certain  types  of 
bills  of  lading;  warehouse  receipts,  etc.  Not  all  of  such  instru- 
ments possess  the  characteristic  of  negotiability,  but  generally 
such  instruments  are  negotiable. 

All  of  these  instruments  may  be  classified  into  one  of  two 
groups:  Notes  and  bills  of  exchange.  The  distinguishing  char- 
acteristic is  that  on  a  note  there  are  two  parties,  the  maker  and 
the  payee,  while  on  a  bill  of  exchange  there  are  three  parties,  the 
draw^er,  the  drawee,  and  the  payee. 

It  is  important  to  understand  and  to  keep  in  m.ind  throughout 
the  study  of  negotiable  instruments  the  primary  purpose  which  is 
sought  to  be  accomplished  by  their  use.  The  leading  object  is  to 
give  to  certain  kinds  of  obligations,  evidenced  by  a  writing,  at- 
tributes and  characteristics  which  will  make  these  instruments 
perform  the  function  of  money.  Negotiable  instruments  are  used 
instead  of  money.  It  is  absolutely  necessary  to  do  so,  because 
there  is  an  ifisufficient  supply  of  money  in  the  country  to  supply 
the  needs  of  business.  A  comparison  of  bank  clearings  with  the 
figures  showing  the  volume  of  gold,  silver,  and  paper  money  in 
circulation,  shows  emphatically  that  a  great  bulk  of  business  trans- 
actions is  carried  through  by  means  of  credit  instruments.  Very 
few  purchases  are  actually  paid  for  in  money.  Throughout  the 
study  of  the  law  of  negotiable  instruments  we  must  therefore 
keep  in  mind  the  fact  that  these  instruments  are  called  upon  to 
do  the  work  of  money.  If  that  point  is  noted,  it  will  explain  many 
detailed  rules,  which  otherwise  might  seem  purely  arbitrarv 

It  has  been  said  that  negotiable  instruments  are  used  in  place 
of  money.  It  is  perfectly  apparent,  of  course,  that  the  personal 
obligation  of  any  individual  is  not  as  valuable  as  gold  and  silver 
coin,  or  the  various  issues  of  paper  money.  The  promise  of  A. 
to  pay  a  specified  sum  of  money  is  not  as  valuable  as  the  promise 
of  the  United  States  government  to  pay  the  same  amount  of  mon- 
B.&B.Bus.Law  (631) 


632  NEGOTIABLE   INSTRUMENTS  (Part  3 

ey.  The  law  of  negotiable  instruments  does  not  attempt  the  im- 
possible task  of  making-  the  obligation  of  a  person  who  signs  a 
note  or  bill  of  exchange  as  valuable  as  a  gold  certificate,  but  there 
are  a  great  many  things  which  the  law  can  do  to  induce  people 
to  take  negotiable  instruments  instead  of  money. 

At  this  point  it  is  well  to  recall  some  of  the  principles  of  the 
law  of  simple  contracts.  We  saw  in  our  study  of  contracts  that 
there  are  a  great  many  kinds  of  cases  where  one  person  may  think 
that  he  has  a  right  to  recover  a  sum  of  money  from  another  per- 
son, but  where  the  law  denies  him  a  right  of  recovery.  It  may  be 
because  there  was  no  valid  offer  in  the  first  place.  It  may  be  be- 
cause there  was  no  acceptance  of  a  valid  offer.  It  may  be  that 
there  was  no  consideration  to  support  the  promises  which  result- 
ed from  the  acceptance  of  an  offer.  It  may  be  that,  although  in 
the  beginning  there  was  an  enforceable  contract  between  the  par- 
ties, the  obligor  subsequently  discharged-  his  obligation  by  pay- 
ment or  otherwise.  We  also  examined  a  number  of  cases  where, 
in  the  beginning,  there  was  a  binding  contract,  but  where  the 
obligee's  right  to  demand  performance  by  the  obligor  was  depend- 
ent upon  the  obligee's  performing  his  obligation.  In  such  a  case 
the  obligor's  promise  was  simply  conditioned  upon  the  perform- 
ance of  a  promise  by  the  obligee.  Again,  we  found  cases  where 
the  obligee  had  obtained  the  promise  of  the  obligor  by  fraudulent 
representations. 

With  all  of  these  phases  of  the  law  in  mind,  we  then  took  up 
the  study  of  the  assignability  of  contract  rights,  and  we  found 
that  the  obligee  could,  in  many  instances,  but  not  in  others,  sell 
his  right  to  a  third  party.  Such  a  transaction  is  called  an  assign- 
ment. As  a  general  principle,  it  appeared  that  the  assignee  of 
such  chose  in  action  acquired  no  rights  which  were  superior  to 
those  possessed  by  his  assignor.  To  put  the  proposition  in  other 
words,  we  discovered  that  the  obligor,  if  he  had  any  of  the  de- 
fenses, such  as  want  of  consideration,  failure  of  Qonsideration, 
payment,  fraud,  or  prior  breach  of  contract,  could,  when  he  was 
sued  by  the  assignee,  set  up  any  of  these  defenses.  The  assignee 
could  recover  from  the  obligor  only  when  the  assignor  could  have 
recovered  from  the  obligor. 

We  have  now  approached  a  little  nearer  to  the  law  of  negotiable 
instruments.  It  is  apparent  that  a  business  man  would  not  be 
willing  to  take  the  note  or  check  or  other  bill  of  exchange  from 
the  payee,  or  from  one  to  whom  the  payee  had  sold  the  instru- 
ment, if  he  incurred  all  of  the  risk  that  an  assignee  of  an  ordinary 
chose  in  action  incurs.  A  business  man,  if  he  is  taking  the  obli- 
gation of  a  third  party  whom  he  does  not  know,  would  want  to 
feel  at  least  that  there  was  no  question  but  that  that  individual 
owed  the  amount  of  money  which  was  called  for  by  the  instru- 
ment. He  may  be  willing  to  take  the  risk  of  that  person's  sol- 
vency, but  he  would  like  to  be  free  from  all  of  the  ordinary  de- 
fenses which  are  available  in  suits  on   simple  contracts.     And  so 


INTRODUCTION  633 

the  law  of  negotiable  instruments  has  taken  an  entirely  different 
view  of  the  rights  of  the  person  who  purchases  the  obligation  of 
a  third  party. 

The  most  fundamental  doctrine  in  the  whole  law  of  negotiable 
instruments  is  the  proposition  that  the  purchaser  of  a  negotiable 
instrument  before  it  is  due,  who  has  no  knowledge  of  the  existence 
of  a  defense  between  the  original  parties,  takes  it  free  from  all 
these  defenses.  Except  in  a  very  few  cases,  such  as  forgery  of 
the  maker's  or  drawer's  name,  the  bona  fide  purchaser  before 
maturity  can  rest  assured  that  the  instrument  evidences  the  un- 
(|uestioned  legal  obligation  of  the  parties  whose  names  appear 
thereon.  The  only  risk  the  purchaser  takes  is  that  the  parties  are 
insolvent.  The  elimination  of  all  these  personal  defenses  goes  a 
long  way  toward  making  commercial  instruments  as  valuable  as 
money.  Having  regard  for  the  enormous  volume  of  business  done, 
the  risk  of  insolvency  is  relatively  small.  In  this  way,  therefore, 
the  law  has  singled  out  certain  kinds  of  choses  in  action  which  we 
call  negotiable  instruments,  and  has  given  to  them  attributes 
which  are  not  common  to  ordinary  choses  in  action.  The  effect 
is  to  make  them  much  more  desirable  and  valuable  than  they 
otherwise  would  be.  There  are  a  great  many  rules  in  the  law 
of  negotiable  instruments,  but  most  of  them  are  subordinate  to 
this  one  doctrine,  or  they  are  the  natural  outgrowth  of  its  appli- 
cation to  varied  situations. 

The  above  statement  explains  in  general  what  we  mean  by  the 
term  "negotiable,"  and  we  find  that  in  its  most  important  sense 
the  term  "negotiable"  means  the  attribute  or  quality  of  assign- 
ability free  from  equities  or  defenses.  There  are  two  ideas  here : 
First,  the  idea  that  the  owner  of  a  negotiable  instrument  has  the 
power  to  sell  it.  The  second  idea  brings  out  the  legal  effect  of 
such  sale,  that  the  purchaser  takes  it  free  from  the  ordinary  de- 
fenses which  exist  between  the  original  parties.  The  term  "nego- 
tiable" also  carries  with  it  the  idea  that  it  is  assignable  in  a  par- 
ticular way,  viz.  by  indorsement,  or  in  some  cases  by  delivery. 
The  law  has  simply  prescribed  a  number  of  ways  by  which  an 
owner  may  dispossess  himself  of  title  and  vest  that  title  in  an- 
other. The  different  methods  of  indorsement  and  the  legal  effect 
of  each  will  be  developed  in  the  cases.  It  is  simply  necessary  at 
this  point  to  call  to  mind  the  fact  that  the  term  "negotiable"  car- 
ries with  it  the  notion  that  the  instrument  so  described  is  assign- 
able by  indorsement. 

We  shall  also  come  to  find  out  that,  when  a  person  brings  a  suit 
upon  an  instrument  which  is  described  as  negotiable,  the  law  rais- 
es a  presumption  that  the  instrument  evidences  a  then  existing 
legal  obligation.  The  importance  of  this  rule  of  presumption  is 
that  the  plaintiff'  is  under  no  obligation  to  introduce  any  evidence 
to  support  his  right  to  sue  upon  the  instrument,  other  than  the 
bare  introduction  in  evidence  of  the  instrument  which  is  the  sub- 
ject of  the  action.     WHien  a  person  brings  an  action  for  breach  of 


()34  NEGOTIABLE   INSTRUMENTS  (Part  3 

an  ordinary  simple  contract,  the  plaintiff  is  required  to  introduce 
affirmative  proof  that  there  was  an  offer,  that,  it  was  accepted,  that 
there  was  consideration,  that  he  performed  his  part  of  the  con- 
tract, and  that  the  defendant  did  not  perform.  In  a  suit  upon  a 
negotiable  instrument,  the  plaintiff,  in  the  first  instance,  is  not 
required  to  do  this.  The  plaintiff  makes  out  his  case  by  merely 
introducing  the  note  in  evidence.  Eventually,  of  course,  he  may 
be  required  to  introduce  testimony  to  rebut  what  the  defendant 
has  put  in  the  way  of  defense,  but  he  is  not  required  to  do  so  in 
the  first  instance. 

The  law  of  negotiable  instruments  has  had  a  history  somewhat 
different  from  the  history  of  other  branches  of  the  law.  If  we  go 
back  to  the  period  of  English  history  from  the  time  of  William 
the  Conqueror  on  down  to  the  beginning  of  the  seventeenth  cen- 
tury, we  shall  not  find  in  the  law  of  that  period  anything  which 
resembles  what  we  to-day  know  as  the  law  of  negotiable  instru- 
ments. For  reasons  not  necessary  to  recount  here,  the  law  per- 
taining to  contracts  and  the  methods  of  enforcing  them  was  ap- 
parently not  suitable  for  the  needs  of  business.  And  so  we  find  a 
special  branch  of  law  called  the  Law  Merchant.  Perhaps  it  is  not 
correct  to  speak  of  it  as  law  at  all.  We  do  find  a  great  number 
of  commercial  practices,  customs,  and  understandings  recognized 
by  merchants  of  that  time,  in  accordance  with  which  they  con- 
ducted their  business.  Furthermore,  we  find  that  these  under- 
standings were  enforced  by  special  courts.  These  courts  were 
not  parts  of  the  judicial  system  of  England,  but  were  special  tri- 
bunals organized  and  presided  over  by  merchants  themselves.  Not 
only  do  we  find  these  special  merchants'  courts  in  England,  but  also 
on  the  continent  of  Europe.  To  the  customs  and  practices  of  the 
merchants  during  this  early  period  has  been  applied  the  term 
"Law  Merchant."  In  the  Law  Merchant  we  find  the  roots  of  the 
law  of  negotiable  instruments  as  we  know  it  to-day.  The  Law 
Merchant,  however,  dealt  with  many  matters  other  than  practices 
concerning  bills  of  exchange,  but  we  are  interested  in  it  here  only 
in  so  far  as  it  is  necessary  to  note  the  origin  of  the  law  of  Nego- 
tiable Instruments. 

From  the  beginning  of  the  seventeenth  century  on  down  until 
the  middle  of  the  eighteenth  century,  a  development  in  the  Law 
Merchant  occurred.  The  special  courts  disappeared  and  we  find 
the  common-law  courts  of  England  performing  the  functions 
theretofore  performed  by  the  special  courts.  The  customs  of  the 
merchants  did  riot  become  laws  of  England.  Instead,  we  find  that 
when  one  merchant  sued  another  merchant  in  the  common-law 
courts  the  parties  were  alloAved  to  prove  that  they  were  mer- 
chants, and  then  they  were  allowed  to  prove  the  mercantile  cus- 
tom in  accordance  with  which  merchants  had  theretofore  acted. 
When  such  customs  and  rules  were  proved  to  exist,  the  common- 
law  courts  would  adjudicate  the  rights  of  these  parties  upon  the 
basis  of  the  Law  Merchant  and  not  upon  the  rules  of  the  common 


INTRODUCTION  635 

law.  Oftentimes  to-day  the  parties  to  a  suit  are  allowed  to  prove 
the  existence  of  a  custom,  and  when  so  proved  the  courts  will 
hold  that  the  parties  evidently  entered  into  their  transaction  in  the 
light  of  this  particular  custom,  and  in  this  way  the  custom  be- 
comes an  effective  and  binding-  rule  of  law,  at  least,  as  far  as  that 
case  is  concerned.  It  was  the  same  with  respect  to  the  rules  of 
the  Law  Merchant  during  the  period  of  which  we  are  now  speak- 
ing. The  parties  were  allowed  to  prove  the  custom  and  as  such 
it  governed  the  transaction. 

From  the  time  of  Lord  Mansfield,  about  the  middle  of  the  eight- 
eenth century,  on  down,  extending  over  considerable  periods  of 
time,  a  further  development  in  the  Law  Merchant  occurred.  In- 
stead of  enforcing  mercantile  custom  merely  as  a  custom,  the  cus- 
tom became  a  binding  rule  of  law.  It  was  due,  very  largely,  to 
the  commanding  influence  of  Lord  Mansfield  that  the  customs  of 
merchants  were  thus  incorporated  into  the  great  body  of  the  com- 
mon law.  It  must  not  be  understood,  however,  that  the  customs 
of  the  merchants  Avorked  their  way  into  the  common-law  system 
without  change.  These  customs  had  to  adjust  themselves  to  an 
already  existing  legal  system.  A  great  many  changes  were 
brought  about  as  a  result  of  the  introduction  of  these  new  rules. 
From  this  point,  the  middle  of  the'  eighteenth  century,  on  down 
until  nearly  the  close  of  the  nineteenth  century  the  development 
of  the  law  of  negotiable  instruments  was  similar  to  that  which 
occurred  in  other  branches  ot  the  law;  i.  e.,  by  judicial  decisions. 
Near  the  close  of  the  nineteenth  century  a  further  development 
occurred.  At  this  time  the  law  of  negotiable  instruments,  in  Eng- 
land as  in  the  United  States,  was  to  be  found  almost  entirely  in 
the  decisions  of  the  courts.  There  were  hundreds  of  such  deci- 
sions. Access  to  this  body  of  the  law  was  possible  only  for  those 
who  were  trained  in  the  methods  of  finding  it.  It  was  therefore 
thought  desirable  to  collect  the  rules  from  the  numerous  cases  and 
to  put  them  into  the  form  of  a  statute  so  that  the  general  prin- 
ciples of  the  law  might  be  more  readily  available.  Accordingly  a 
statute  was  drawn  and  enacted  by  the  British  Parliament  in  1882. 
Shortly  after  this  event  the  movement  for  codification  of  certain 
branches  of  the  law  became  an  active  one  in  the  United  States. 
Under  the  auspices  of  the  American  Bar  Association,  there  was 
organized  the  body  of  Commissioners  on  Uniform  State  Laws. 
This  Commission  was  charged  with  the  duty  of  ascertaining  what 
branches  of  the  law  should  be  reduced  to  statutory  form  and  of 
drafting  the  acts.  It  was  thought  that  the  enactment,  into  the 
form  of  a  statute,  of  certain  portions  of  the  law  would  bring  about 
substantial  uniformity  throughout  the  several  states  and  that 
there  would  be  some  gain  in  simplicity  of  statement  and  in  ren- 
dering the  general  principles  more  accessible.  One  of  the  first 
subjects  approached  by  the  Commissioners  on  Uniform  State 
Laws  was  that  of  negotiable  instruments.  Having  the  model  of 
the  English  Bills  of  Exchange  Act  of  1882  before  them  an  act  was 


G36  NEGOTIABLE   INSTRUMENTS  (Part  3 

drawn  up  which  was  called  the  Negotiable  Instruments  Law. 
The  act,  finally  approved  by  the  Commissioners  on  Uniform  State 
Laws,  was  recommended  for  passage  to  the  several  states  in  1896. 

At  the  present  time  (1921)  the  act  has  been  adopted  in  all  of  the 
states  of  the  Union  except  Georgia.  The  Negotiable  Instruments 
Law  should  not,  therefore,  be  thought  of  as  something  new,  which 
came  into  existence  at  the  date  of  its  passage  in  a  particular  state. 
In  the  main,  the  rules  of  law  which  theretofore  existed  in  judicial 
decisions  were  not  changed,  b)Ut  were  simply  restated  in  statutory 
form.  In  a  number  of  instances,  however,  prior  to  the  act,  con- 
flicts in  the  decisions  had  developed  on  particular  points.  For 
example,  some  states  held  that  if  a  completed  instrument,  payable 
to  bearer  was  stolen  before  delivery,  it  would  not  be  a  valid  con- 
tract in  the  hands  of  an  innocent  holder.  But  in  other  states  the 
courts  held  that  such  an  instrument  could  be  enforced  by  the  inno- 
cent holder.  Throughout  the  whole  law,  wherever  conflicts  of  de- 
cisions had  developed,  the  Commissioners  on  Uniform  State  Laws 
adopted  what  in  their  opinion  was  the  better  rule.  In  a  partic- 
ular state,  therefore,  the  adoption  of  the  Negotiable  Instruments 
Law  may  have  had  the  effect  of  changing  some  existing  rules, 
though  perhaps  not  many. 

The  development  which  is  going  on  to-day  is  the  interpretation 
of  the  numerous  sections  of  the  act  by  judicial  decisions,  and  we 
shall  find  in  our  study  of  the  cases  that  there  is  still  some  con- 
flict in  the  decisions  of  the  courts.  It  is  impossible,  of  course,  to 
have  absolute  uniformity,  because  individuals,  even  courts,  will 
not  always  attach  the  same  meaning  to  words  and  phrases  that 
other  individuals  and  other  courts  do.  The  most  that  can  be  hoped 
for  is  uniformity  in  general  principles  and  this  has  been  attained 
to  a  considerable  degree.  Nevertheless,  for  the  individual  who 
has  a  particular  lawsuit  upon  a  particular  bill  or  note,  it  is  of  con- 
siderable importance  to  him  to  know  how  the  courts  of  his  state 
will  interpret  the  law  with  respect  to  this  instrument,  and  also 
to  know  that  other  courts  in  other  states  may  decide  differently 
with  respect  to  the  same  instrument  under  the  same  set  of  facts. 

The  study  of  the  law  of  negotiable  instruments  is  not  altogeth- 
er easy.  The  first  difficulty  is  a  difficulty  wdiich  is  not  peculiar  to 
the  law  of  negotiable  instruments,  viz.  the  natural  inherent  diffi- 
culty in  applying  language  to  varying  states  of  fact.  For  example, 
when  a  rule  of  law  states  that  an  instrument  to  be  negotiable  must 
contain  an  unconditional  promise  or  order  to  pay  a  sum  certain  in 
money,  each  word  in  the  definition  contains  the  germ  of  an  infinite 
number  of  lawsuits.  In  ordinary  discourse  it  is  not  necessary 
that  words  be  used  with  technical  accuracy  at  all  times,  and  even 
if  we  do  not,  no  great  harm  results,  but  whenever  a  suit  is  brought 
upon  an  instrument,  the  situation  is  quite  different.  In  such  case 
the  court  is  called  upon  to  state  with  considerable  exactness  what 
sorts  of  transactions  fall  within  or  without  certain  specified  words, 
phrases  or  statements  of  general  principle. 


INTRODUCTION  637 

The  other  difficulty  in  the  study  of  the  law  of  negotiable  in- 
struments arises  from  the  fact  that  there  are  several  parties  whose 
names  appear  on  such  instruments.  Unless  one  is  careful  to  note 
the  relation  of  the  plaintiff  and  of  the  defendant  with  respect  to 
the  paper  the  case  will  not  be  understood.  It  is  very  important 
at  the  outset,  to  make  certain  who  the  plaintiff  is,  whether  he  is 
maker  of  a  note,  drawer  of  a  bill  of  exchange,  drawee  or  payee  or 
indorser,  and,  likewise  to  determine  who  the  defendant  is.  In  this 
connection  it  might  be  well  to  recall  the  various  parties  to  nego- 
tiable paper  and  the  names  which  are  commonly  employed  to  de- 
scribe them.  In  a  promissory  note  the  promisor  is  called  the 
maker.  His  name  will  usually  appear  in  the  lower  right  hand  cor- 
ner. The  party  to  whom  he  owes  the  money  and  to  whom  the 
instrument  was  delivered  is  the  payee.  His  name  appears,  usually, 
in  the  center  of  the  instrument  on  the  blank  line  there  provided. 
When  the  payee  sells  the  instrument  to  a  third  party,  the  payee 
generally  must  indorse  the  instrument.  The  payee  by  such  act 
dos  not  cease  to  be  a  payee,  but  in  addition  he  becomes  an  in- 
dorser. The  party  to  whom  he  sold  the  note  is  then  called  an  in- 
dorsee. On  the  face  of  a  bill  of  exchange  there  are  always  three 
parties.  The  person  who  draws  it,  that  is  the  person  who  issues 
the  order  to  another  to  pay  money  for  him,  is  called  the  drawer. 
The  person  who  was  ordered  by  the  drawer  to  pay  money  for  the 
drawer  is  called  the  drawee.  The  drawer's  name  usually  appears 
in  the  lower  right  hand  corner,  the  drawee's  name  sometimes  ap- 
pears in  the  lower  left  hand  corner,  sometimes  at  the  top  of  the 
instrument.  The  party  to  whom  the  instrument  is  made  payable, 
is  called  the  payee.  Sometimes  a  bill  of  exchange  is  drawn  not 
for  immediate  payment  but  for  acceptance,  the  time  of  payment 
being  postponed.  In  such  a  case  as  this,  the  person  upon  whom 
the  bill  has  been  drawn  is  called  the  drawee,  at  least  he  is  so 
called  until  the  time  he  agrees  in  due  form  to  pay  the  bill.  After 
that  time  the  drawee  becomes  an  acceptor.  The  acceptor  of  a  bill 
of  exchange  occtipies  the.  same  position  with  respect  to  the  in- 
strument that  is  occupied  by  the  maker  of  a  note.  We  are  deal- 
ing therefore,  with  makers  of  notes,  payees  of  notes  and  payees 
of  bills  of  exchange,  indorsers  of  notes,  indorsers  of  bills  of  ex- 
change, indorsees  of  notes,  indorsees  of  bills  of  exchange,  and, 
drawers  and  drawees  of  bills  of  exchange. 

It  appears,  therefore,  that,  in  the  main,  the  law  of  negotiable 
instruments  is  a  part  of  the  general  law  of  contracts.  The  larger 
problems  in  this  branch  of  the  law,  are  to  determine,  in  the  light 
of  the  uses  to  which  negotiable  instruments  are  put:  (1)  What 
kinds  of  instruments  may  properly  be  called  negotiable ;  (2)  what 
are  the  rights  and  liabilities  of  the  parties  to  negotiable  instru- 
ments in  the  various  situations  which  may  be  presented.  The  first 
chapter  is  devoted  to  the  first  question,  the  remaining,  chapters 
are  concerned  with  the  second. 


638  NEGOTIABLE   INSTRUMENTS  (Part  3 

CHAPTER  I 
FORMAL  REQUISITES 

Section 

1.  Introduction. 

2.  Writin^^  and  Signature. 

3.  Necessity  for  a  Promise  or  Order. 

4.  The  I'romise  or  Order  Must  be  Unconditional. 

5.  Time  of  Payment  Must  be  Certain. 

6.  Tlie  Instrument  IMust  be  Payable  in  Money. 

7.  The  Sum  to  be  Paid  Must  be  Certain. 

8.  The  iTistrument  Must   be   Payable   to  Order  or  Bearer. 

9.  Provisions  Not  Affecting  Negotiability. 

10.  Designati-on  of   Parties   to   Negotiable   Instruments. 

11.  Date    of    the    Instrument. 

12.  Interpretation  of  Ambiguous  Instruments. 

13.  Consideration. 

14.  Delivery. 


SECTION  1.— INTRODUCTION 

We  have  already  noted  that  negotiable  instruments  possess 
certain  characteristics  which  do  not  attach  to  ordinary  claims  for 
money.  The  purchaser  of  such  an  instrument  may  acquire  rights 
against  the  maker,  acceptor,  or  indorsers  which  were  not  pos- 
sessed by  the  seller.  It  is  perfectly  clear,  therefore,  that  if  the  ne- 
gotiable instrument  creates  rights  fundamentally  different  from 
the  rights  created  by  non-negotiable  claims  the  law  must  define 
with  considerable  exactness  what  kinds  of  claims  are  to  be  treated 
as  negotiable.  This  point  deserves  considerable  emphasis.  It  is 
the  function  of  the  courts  and  legislatures  to  draw  the  line  be- 
tween negotiable  contracts  and  non-negotiable  contracts  so  dis- 
tinctly that  one  will  be  able  to  note  the  fact  at  a  glance.  Of  course 
this  is  an  ideal  not  capable  of  actual  realization  but  nevertheless 
the  law  attempts  to  draw  the  line  sharply  and  distinctly.  The 
twilight  zone  between  negotiable  and  non-negotiable  instruments 
must  be  made  as  narrow  as  possible. 

As  far  as  the  general  definition  of  a  negotiable  instrument  is  con- 
cerned, it  is  simple ;  but  the  application  of  the  general  principles 
to  varied  states  of  fact  causes  considerable  difficulty.  It  makes 
a  great  deal  of  difference  to  the  parties  whether  the  instrument  is 
negotiable  or  not.  If  the  instrument  is  non-negotiable,  defenses 
available  to  the  maker  may  be  successfully  interposed  against  the 
purchaser  from  the  original  payee. 

There  is  a  natural  tendency  to  think  that  any  instrument  is  ne- 
gotiable if  it  appears  that  the  parties  have  made  use  of  some  print- 
ed form  of  a  note,  check,  or  other  bill  of  exchange.  Perhaps  most 
of  such  forms  are  negotiable,  but  many  of  them  are  not.  On  the 
other  hand,  one  may  execute  and  deliver  a  negotiable  instrument 
and  not  know  that  one  is  doing  so.  A  debtor,  in  writing  a  letter 
to  his  creditor,  may  inadvertently,  perhaps,  employ  the  language 


Ch.  1)  FORMAL   REQUISITES  639 

which  converts  his  letter  into  a  negotiable  instrument.  Some- 
times documents  of  considerable  length  are  made  use  of  in  con- 
nection with  some  business  transaction  which  at  first  sight  ap- 
pear to  be  simple  contracts  but  there  may  be  contained  therein 
the  necessary  language  to  make  the  instrument  negotiable. 

What,  then,  is  the  definition  of  a  negotiable  instrument?  To 
put  the  question  in  other  words :  What  language  must  appear 
on  the  instrument  if  it  is  to  have  the  characteristics  of  negotia- 
bility? What  language  must  not  be  inserted  in  the  instrument? 
What  language  may  be  incorporated  therein  without  affecting  ne- 
gotiability? The  answers  to  these  questions  will  not  be  taken  up 
in  just  this  order,  but  the  sections  of  the  Negotiable  Instruments 
Law  and  the  cases  following  may  be  looked  at  from  these  three 
points  of  view.  The  specific  requirements  of  negotiability  repre- 
sent attempts  to  carry  out  into  details  the  broad  requisite  of  cer- 
tainty. 


SECTION  2.— WRITING  AND  SIGNATURE 

The  Negotiable  Instruments  Law  provides: 

Section  1,  subsec.  1.  That  an  instrument  to  be  negotiable  must 
be  in  writing  and  signed  by  the  maker  or  drawer. 

Section  132.  The  acceptance  must  be  in  writing  and  signed  by 
the  drawee. 

Obviously  there  must  be  such  a  requirement  as  that  here  speci- 
fied. May  the  writing  be  in  pencil,  or  by  rubber  stamp?  It  has 
been  held  that  such  is  a  writing.  WHiat  is  a  signature?  The  sign- 
ing of  one's  name,  yes.  But  what  is  his  name?.  Suppose  a  man 
by  the  name  of  John  Smith  signs  a  note  with  the  name  George 
Edwards.  May  John  Smith  be  sued?  Yes,  because,  for  the  pur- 
pose of  this  instrument,  his  signature  is  that  of  George  Edwards. 
Suppose  John  Smith  signs,  in  the  space  provided  for  the  signa- 
ture, the  number  123;  is  John  Smith  bound?  Other  cases  may  be 
presented,  but  such  questions  rarely  arise.  Does  the  word  "sig- 
nature" carry  with  it  the  requirement  that  it  shall  appear  in  any 
particular  place,  such  as  the  lower  right-hand  corner?  If  he  signs 
his  name  at  the  top,  or  on  the  back,  has  he  signed  the  instrument? 


SECTION  3.— NECESSITY  FOR  A  PROMISE  OR  ORDER 

N.  I.  L.,  Section  1,  subsec,  2,  An  instrument  to  be  negotiable 
must  contain     *     *     *     a  promise  or  order. 

What  is  a  promise?  What  is  an  order?  A  debtor  hands  to  his 
creditor  a  paper  bearing  his  signature  on  which  is  written  "I  owe 
you,  A,  B.,  $100."  Is  this  a  promise?  No;  because  the  debtor  has 
simply  acknowledged  that  he  owes  a  debt  but  he  has  not  prom- 
ised to  pay  it.  Suppose  the  instrument  read:  "I  owe  you,  A.  B,, 
$100,  due  on  demand."     Is  this  a  promise?     The  debtor  has  not 


G40  NEGOTIABLE   INSTRUMENTS  (Part  3 

used  the  word  "promise  ;"  but  has  he  not  used  language  the  equiva- 
lent of  the  word  "promise''?  Probably  so,  because  the  words  "due 
on  demand"  carry  with  them  by  implication  the  meaning  that  if 
the  creditor  does  demand,  the  debtor  will  pay ;  therefore,  the  debtor 
has  promised,  ^^'hat  is  the  principle  involved?  Suppose  an  in- 
strument contains  these  words :  "Please  let  the  bearer  have 
$100."  Is  this  an  order?  Hardly;  it  is  more  like  a  request  for 
a  loan  of  money.  "Please  pay  A.  $100."  Is  this  an  order?  Yes; 
because  the  word  "pay"  is  imperative  and  it  is  an  order  although 
modified  by  the  use  of  respectful  language. 


SECTION  4.— THE  PROMISE  OR  ORDER  MUST  BE 
UNCONDITIONAL 

We  come  now  to  one  of  the  most  important  and  at  the  same  time 
one  of  the  troublesome  questions  connected  with  our  study  of 
formal  requirements  of  negotiable  instruments.  When  is  a  promise 
or  order  unconditional?  Before  the  enactment  of  the  Negotiable 
Instruments  Law,  the  courts  were  confronted  with  this  question 
with  considerable  frequency.  The  Negotiable  Instruments  Law 
attempted  a  definition,  and  it  will  be  our  purpose  in  the  cases 
which  follow  to  discover  what  promises  have  been  held  to  be  con- 
ditional and  what  promises  are  regarded  by  the  courts  as  uncondi- 
tional. The  sections  of  the  Negotiable  Instruments  Law  bearing 
on  this  question  are  as  follows : 

Section  1,  subsec.  2.  An  instrument  to  be  negotiable  must 
contain  an  unconditional  promise  or  order  to  pay  a  sum  certain  in 
money. 

Section  3.  An  unqualified  order  or  promise  to  pay  is  uncondi- 
tional within  the  meaning  of  this  Act  though  coupled  with:  (1) 
An  indication  of  a  particular  fund  out  of  which  reimbursement  is 
to  be  made,  or  a  particular  account  to  be  debited  with  the  amount ; 
or  (2)  a  statement  of  the  transaction  which  gives  rise  to  the  in- 
strument. But  an  order  or  promise  to  pay  out  of  a  particular  fund 
is  not  unconditional. 

It  will  be  noticed  that  Section  3  does  not  lay  down  rules  sep- 
arate and  distinct  from  the  rule  of  Section  1,  subsection  2.  Section 
3  merely  defines  more  particularly  what  constitutes  a  conditional 
promise  or  order  under  certain  circumstances. 


FIRST  NAT.  BANK  v.  LIGIITNER. 

(Supreme  Court  of  Kans;as,  1900.     74  Kan.  736.  .«S  Pao.   .50.  8  L.  R.  A. 
[N.  S.]  2.31,  118  Alii.  St.  Rep.  353,  11  Aim.  Cas.  596.) 

The  First  National  Bank  of  Hutchinson  brought  this  action  against 
George  W.  Lightner  on  a  check  and  an  order,  of  which  the  latter  reads 
as  follows : 


Ch,  1)  FORMAL  REQUISITES  641 

/'Hutchinson,    Kansas,   Aug.    10,    1903. 
"G.  W.  Lightner,  Offerle,  Kansas — Dear  Sir:     Pay  to  the  order 
of  the  First  National  Bank  of  Hutchinson,  Kansas,  on  account  of  con- 
tract between  you  and  the  Snyder  Planing  Mill  Co.  $1,500. 

"The  Snyder  Planing  Mill  Co., 

"Per  J.  F.  Donnell,  Treas. 
"Accepted.    G.  W.  Lightner." 

Defendant  contended  that  said  orders  were  nonnegotiable,  and  were 
subject  to  the  same  defenses  in  the  hands  of  the  First  National  Bank 
of  Hutchinson,  Kan.,  as  if  they  had  remained  in  the  hands  of  the 
Snyder  Planing  Mill  Company. 

Porter,  J.  The  main  controversy  is  whether  the  orders  given  by 
the  planing  mill  company  to  the  bank,  and  accepted  by  defendant,  are 
negotiable  instruments.  *  *  *  Each  of  them,  therefore,  possesses 
all  the  essential  elements  of  a  bill  of  exchange  unless  the  words  quoted 
make  them  payable  out  of  a  particular  fund  and  conditionally  so  that 
the  acceptance  is  thereby  qualified.  The  law  is  well  settled  that  a  bill 
or  note  is  not  negotiable  if  made  payable  out  of  a  particular  fund. 
*  *  *  But  a  distinction  is  recognized  where  the  instrument  is  simply 
chargeable  to  a  particular  account.  In  such  a  case  it  is  beyond  ques- 
tion negotiable ;  payment  is  not  made  to  depend  upon  the  sufficiency 
of  the  fund  mentioned,  and  it  is  mentioned  only  for  the  purpose  of  in- 
forming the  drawee  as  to  his  means  of  reimbursement.    *    *     * 

The  test  in  every  case  is  said  to  be :  "Does  the  instrument  carry 
the  general  personal  credit  of  the  drawer  or  maker,  or  only  the  credit 
of  a  particular  fund?"  *  *  *  A  promise  to  pay  a  certain  sum  "out 
of  my  next  quarter's  mail  pay,  which  becomes  due  January  1,  1883," 
was  held  in  Nichols  v.  Ruggles,  76  Me.  25,  to  be  an  absolute  promise 
to  pay  a  certain  sum  of  money.  In  Haussoullier  v.  Hartsinck,  7  T. 
R.  (Durnford  &  East),  7Z?),  it  was  held  that  an  instrument  promising 
to  pay  a  certain  sum  "being  a  portion  of  a  value,  as  under  deposit  in 
security  for  the  payment  hereof,"  was  a  promissory  note  payable  at 
all  events.  In  Pierson  v.  Dunlop,  2  Cowp.  571,  an  order  which  was 
to  be  charged  "to  freight"  was  held  negotiable.  A  note  expressed  to 
be  in  payment  of  certain  tracts  of  land  was  held  negotiable.  Bank  v. 
Michael,  96  N.  C.  53,  1  S.  E.  855.  Likewise  a  note  which  stated  that 
it  was  given  in  consideration  of  certain  personal  property,  the  title  of 
which  was  not  to  pass  unless  the  note  was  paid.  Chicago  Railway 
Co.  V.  Merchants'  Bank,  136  U.  S.  268,  10  Sup.  Ct.  999,  34  L.  Ed. 
349.  *  *  *  In  Corbett  v.  Clark  and  another,  45  Wis.  403,  30  Am. 
Rep.  763,  an  order  to  pay  a  certain  sum  "and  take  the  same  out  of 
our  share  of  the  grain,"  referring  to  grain  harvested  or  growing  on 
certain  farms,  accepted  by  the  drawee,  was  said  to  be  a  valid  bill  of 
exchange,  and  the  order  and  acceptance  absolute,  the  words  above 
quoted  merely  indicating  the  means  of  disbursement.  In  Redman  v. 
Adams,  51  Me.  429,  a  bill  directing  the  drawee  to  charge  the  amount 
against  the  drawer's  share  of  fish  caught  on  a  certain  schooner  is 
held  valid  and  negotiable.  One  of  the  leading  cases  is  Macleed  v. 
Snee,  2  Strange,  765.  There  a  bill  of  exchange  was  dated  May  25th 
for  the  payment  of  a  certain  sum  one  month  after  date,  "as  my  quar- 
terly half-pay  to  be  due  from  24th  of  June  to  27th  of  September  next, 
by  advance."  This  was  held  a  negotiable  bill  of  exchange.  In  Spur- 
gin  V.  McPheeters,  42  Ind.  527,  an  instrument  in  the  following  form 
B.&  B.Bus.Law-41 


642  NEGOTIABLE   INSTRUMENTS  (Part  3 

was  said  to  possess  all  the  requisites  of  a  bill  of  exchange:  "Green- 
castle,  Ind.,  Aug.  22d,  1870.  Mr.  D.  j\I.  Spurgin — Sir,  please  pay  to 
Jesse  McPheeters,  or  order,  the  sum  of  one  hundred  and  nineteen 
dollars  on  said  bill  of  1%  in.  lumber,  and  oblige  the  firm  of  Geo.  W. 
Hinton  &  Co." 

In  Whitney  v.  Eliot  National  Bank,  137  Mass.  351,  50  Am.  Rep. 
316,  the  drafts  or  bills  of  exchange  were  in  the  ordinary  form  except 
that  they  contained  the  direction  to  "charge  the  same  to  account  of 
250  bbls.  meal  ex  schooner  Aurora  Borealis."  The  court  said :  "This 
direction  to  charge  the  amount  of  the  bills  to  a  particular  account, 
we  think,  does  not  make  them  payable  conditionally,  or  out  of  a  par- 
ticular fund ;  they  are  still  payable  absolutely,  and  are  negotiable,  and 
do  not  constitute  an  assignment  of  a  particular  fund,  or  of  a  part  of 
a  particular  fund.     *    *     *  " 

Our  negotiable  instrument  law  *  *  *  jg  merely  declaratory  of 
the  common  law  upon  the  subject.  *  *  *  Plaintiff  and  defendant 
agree  upon  the  abstract  proposition  of  law  involved  in  the  contro- 
versy. Counsel  for  defendant  concedes  that  an  instrument,  negotia- 
ble in  itself,  is  not  changed  in  character,  or  rendered  nonnegotiable 
"by  a  recital  of  the  consideration  or  a  direction  as  to  how  the  drawee 
shall  reimburse  himself"  ;  but  insists  that  the  insertion  of  the  words 
"on  account  of"  has  the  same  effect  as  the  words  "out  of  the  proceeds 
of."  The  controversy  is  thus  narrowed  do.wn  to  whether  the  words 
"on  account  of  contract  between  you  and  the  Snyder  Planing  Mill  Co." 
amount  to  a  direction  to  pay  out  of  a  particular  fund,  or,  on  the  other 
hand,  are  to  be  considered  as  simply  indicating  the  fund  from  which 
the  drawee,  Lightner,  might  reimburse  himself.  Many  of  the  cases  at- 
tach but  little  importance  to  the  words  "account  of,"  and  give  the  same 
effect  to  them  as  to  the  words  "out  of."  7  Cyc.  579.  *  *  *  We  are 
of  the  opinion  that  these  orders  cannot  be  construed  as  drawn  upon 
a  particular  fund.  Beyond  question,  there  are  many  authorities  which 
hold  similar  expressions  to  indicate  an  intention  to  charge  a  particular 
fund.  *  *  *  Averett's  Adm'r  v.  Booker,  15  Grat.  (Va.)  163,  76 
Am.  Dec.  203 ;  Rice  v.  Porter's  Adm'rs,  16  N.  J.  Law,  440 ;  7  Cyc. 
578  (b). 

The  weight  of  authority  and  reason  supports  the  proposition  that 
the  words  amount  to  no  more  than  an  indication  of  the  fund  from 
which  the  drawee  is  to  reimburse  himself.  The  words  used  are  sub- 
stantially the  same  as  though  the  orders  read  "and  charge  to  account 
of  contract  with  Snyder  Planing  Mill  Company,"  or  "credit  to  ac- 
count of  contract,"  etc.     *     *     * 

In  our  view  they  were  negotiable  and  the  language,  moreover,  not 
even  ambiguous.  It  follows  that  defendant  was  not  entitled  to  recoup 
his  damages  for  the  failure  to  complete  the  barn ;  and  the  findings  of 
the  court,  therefore,  require  a  judgment  for  plaintiff  for  the  amount 
due  upon  the  order. 


NATIONAL  BANK   OF   NEWBURY  V.  WENTWORTH. 

(Supreme  Judicial  Court  of  Massachusetts,  1914.  218  Mass.  30,  105  N.  E.  626.) 
BralEY,  J.  *  *  *  The  plaintiff  bank  is  the  indorsee,  and  the 
presiding  judge  was  warranted  upon  the  evidence  in  finding  that  it  is 
a  holder  in  due  course  unless  the  words  written  by  the  defendant  on 
the   face  of   each  note,  "value  received   as  per   contract,"   make  his 


Ch.  1)  FORMAL   REQUISITES  643 

promise  as  maker  conditional  upon  the  performance  by  the  payee  of 
the  preceding  contract  between  them  appearing  in  the  record,  for 
the  sale  and  shipment  of  lumber.  *  *  *  if  the  words  had  been, 
"subject  to  the  contract' for  lumber,"  or  even  "subject  to  the  contract," 
the  principle  invoked  would  have  been  applicable.  The  notes  would 
not  have  been  the  defendant's  unconditional  promise  to  pay  a  definite 
sum.     *     *     * 

But  while  the  defendant  doubtless  intended  to  guard  against  the 
payment  of  money  for  which  in  the  future  he  did  not  receive  an  equiv- 
alent, *  *  *  the  language  used  does  not  affect  the  payment  of  the 
amounts  shown  by  the  notes.  By  their  position,  the  words  well  might 
lead  the  plaintiff  who  is  not  charged  with  actual  notice  to  understand 
that  they  were  not  to  be  disconnected  and  applied  to  an  independent 
outstanding  agreement  by  which  the  promise  was  to  be  modified  or 
restricted,  but  they  referred  solely  to  the  consideration  for  which  the 
notes  were  given.  *  *  *  We  are  unable  consequently  to  distin- 
guish the  case  at  bar  from  Taylor  v.  Curry,  109  Mass.  36,  12  Am. 
Rep.  661,  where  the  phrase  relied  on  to  destroy  negotiability  was,  "for 
value  received  on  policy  No.  33,386."  It  was  said  by  Mr.  Chief  Jus- 
tice Chapman  in  delivering  the  opinion  of  the  court:  "The  words 
*  *  *  do  not  express  any  contingency  as  to  the  payment  of  the 
notes,  or  refer  to  any  fund  out  of  which  they  are  to  be  paid,  but  ap- 
pear to  refer  to  the  consideration  for  which  they  are  given.  Such  a 
reference  may  be  for  mere  convenience,  or  for  any  other  reason,  but  it 
cannot  be  interpreted  as  a  modification  of  the  promise."    "■'•    *    * 

By  the  terms  of  the  report  judgment  is  to  be  entered  for  the  plaintiff 
for  the  amount  of  each  note  with  interest  from  maturity,  and  costs. 


FIRST  NAT.  BANK  OF  SNOHOMISH   v.   SULLIVAN  et  al. 

(Supreme  Court  of  Washington,  3911.     66  Wash.  375,  119  Pac.  820, 
Ann.  Cas.  1913C,  930.) 

Ellis,  J.  *  *  *  ^^^^  ^^^^  question  presented  for  our  consid- 
eration is  that  of  the  negotiability  or  nonnegotiability  of  the  note. 
*  *  *  The  note  here  in  question  obviously  conforms  to  this  defini- 
tion, unless  it  is  made  conditional  as  to  amount  or  uncertain  as  to 
time  by  the  following  sentence:  "This  note  is  given  to  take  up  the 
freight  and  rehandling  of  N.  P.  car  43607  and  proceeds  from  resale  of 
said  car  shall  apply  on  this  note."  It  is  clear  that  the  note,  exclusive 
of  this  sentence,  is  not  obnoxious  to  the  definition  in  either  of  these 
particulars.  *  *  *  They  do  not  stipulate  either  expressly  or  by 
any  implication,  necessary  or  otherwise,  that  the  note  shall  be'payable 
only  out  of  the  proceeds  of  the  resale  of  the  car  of  shingles.  Nor  do 
they  make  the  payment  contingent  upon  or  subject  to  a  resale.  There 
is  no  provision  that  demand  shall  be  postponed  to  a  resale.  This  note 
like  every  other  written  instrument  must  be  construed  as  a  whole  so 
as  to  give  effect  to  every  part  of  it  if  possible.  This  can  only  be  done  , 
by  holding  the  whole  amount  due  and  payable  on  demand,  and  that  the 
proceeds  of  the  sale  of  the  shingles  in  case  of  a  resale  before  demand 
shall  be  applied  on  the  amount,  but,  in  case  of  resale  after  demand, 
the  proceeds  shall  go  to  reimburse  pro  tanto  the  makers  of  the  note. 
This  gives  effect  to  every  word  in  the  note,  and  makes  it  an  absolute 


644  NEGOTIABLE  INSTRUMENTS  (Part  3 

promise  to  pay  on  demand  with  the  designation  of  a  fund  to  reim- 
burse the  maker  for  such  payment.     *     *     * 

The  third  section  of  the  negotiable  instrument  act  *  *  *  defines 
an  unconditional  promise  as  follows :  "An  unqualified  order  or  promise 
to  pay  is  unconditional  within  the  meaning  of  this  act,  though  coupled 
with  (1)  an  indication  of  a  particular  fund  out  of  which  reimburse- 
ment is  to  be  made,  or  a  particular  account  to  be  debited  with  the 
amount ;  or  (2)  a  statement  of  the  transaction  which  gives  rise  to  the 
instrument.  But  an  order  or  promise  to  pay  only  out  of  a  particular 
fund  is  not  unconditional,"  This  section  is  held  but  declaratory  of  the 
common  law.     *     *     * 

The  reference  to  the  consideration  of  the  note  and  the  direction  to 
apply  the  proceeds  of  the  resale  of  the  shingles  thereon  must  therefore 
be  construed  in  the  same  manner,  and  as  having  the  same  effect  as  un- 
der the  law  merchant  at  common  law.  The  true  test  in  every  case  is 
and  was  at  common  law,  Does  the  general  credit  of  the  maker  accom- 
pany the  instrument?  If  it  does,  the  note  is  negotiable;  otherwise  it 
is  not.  *  *  *  In  an  early  case,  Haussoullier  v.  Hartsinck,  7  Durn- 
ford  &  East's  Reports,  p.  733,  decided  by  the  Court  of  King's  Bench 
in  1798,  the  note  read  as  follows:  "No.  300.  Original  Security  Bank 
London  No.  300.  35  Cornhill.  This  7th  day  of  September  1797.  £25. 
On  the  19th  day  of  November  next  and  after  that  date  on  demand 

we  promise  to  pay  to or  bearer  £25,  being  a  portion  of  a  value 

as  under  deposited  in  security  for  the  payment  hereof,  according  to  the 
receipt  in  our  hands.  Hartsinck  and  Co."  The  ground  of  defense 
was  the  same  as  here,  and  is  reported  as  follows :  "That  the  notes  were 
not  payable  at  all  events,  but  payable  out  of  a  particular  fund  alluded 
to  in  the  notes,  in  case  that  fund  should  be  sufficient.  That  the  sum 
secured  by  one  of  them  was  described  as  'a.  portion  of  a  value  as,'  etc., 
in  terms  pointing  out  the  fund  out  of  which  it  was  to  be  paid.  That 
the  payee  was,  of  course,  to  resort  to  that  fund,  and  not  to  the  makers 
at  all  events."  "But,"  continues  the  report,  "the  court  said  they  were 
clearly  of  opinion  that,  though  as  between  the  original  parties  to  the 
transaction  the  payment  of  the  notes  was  to  be  carried  to  a  particular 
amount,  the  defendants  were  liable  on  these  notes  which  were  payable 
at  all  events." 

It  cannot  fail  to  be  noted  that  the  language  used  in  the  note  in 
that  case  was  much  more  capable  of  the  construction  contended  for 
than  that  of  the  note  before  us._  In  Walker  v.  Woolen,  54  Ind.  164, 
23  Am.  Rep.  639,  a  note  reading  "six  months  after  date,  or  before,  if 
made  out  of  the  sale  of  Drake's  horse  hay-fork  and  hay  carrier,  I 
promise  to  pay,"  etc.,  was  held  to  be  an  absolute  promise  to  pay,  and 
the  note  was  held  negotiable.  *  *  *  The  negotiability  of  notes  and 
drafts  is  favored  in  law,  and,  whenever  the  promise  can  be  held  un- 
conditional without  doing  violence  to  the  ordinary  meaning  of  the  lan- 
guage used,  it  will  be  so  held.  *  *  *  Following  the  decisive  trend 
of  authority,  both  ancient  and  modern,  we  hold  the  note  here  in  ques- 
tion a  negotiable  instrument. 

The  judgment  is  affirmed. 


Ch.  1)  FORMAL  REQUISITES  645 


SIEGEL  et  al.   V.  CHICAGO  TRUST  &   SAV.   BANK. 

(Supreme  Court  of  Illinois,  1890.     131  111.  569,  23  N.  E.  417,  7  L.  R.  A.  537, 

19  Am.  St.  Rep.  51.) 

Assumpsit  by  the  Chicago  Trust  &  Savings  Bank  against  Siegel, 
Cooper  &  Co.  Judgment  for  plaintiff  affirmed  by  the  appellate  court. 
Defendants  appeal. 

Shope;,  C.  J.  This  was  an  action  of  assumpsit,  by  appellee  against 
appellants,  upon  the  following  instrument :  "Form  B.  Dalziel's  Rail- 
way Advertising.  $300.00.  Chicago,  March  5,  1887.  On  July  1st, 
1887,  we  promise  to  pay  D.  Dalziel,  or  order,  the  sum  of  three  hun- 
dred dollars,   for  the  privilege  of  one   framed  advertising  sign,  size 

X ,  in  one  end  of  each  of  159  street-cars  of  the  North 

Chicago  City  Railway  Co.  for  a  term  of  three  months  from  May  15, 

1887.     No.  .     Siegel,  Cooper  &  Co." — which  was  indorsed  by 

Dalziel,  the  payee,  to  appellants,  for  value,  on  the  day  of  its  execu- 
tion. 

The  first  question  presented  is,  is  this  instrument  negotiable?  And 
this  question  has  been  answered  affirmatively  by  the  circuit  and  ap- 
pellate courts.  The  appellate  court  having  affirmed  the  judgment  in 
favor  of  the  plaintiff,  the  case  is  brought  here  by  appeal,  upon  cer- 
tificate of  importance,  granted  by  that  court.  It  appears  that,  before 
the  time  when  the  privilege  of  advertising  was  to  commence,  Dalziel 
forfeited  any  right  he  may  have  acquired  to  use  the  cars  in  the  man- 
ner indicated,  and  the  privilege  specified  never  was  furnished  appel- 
lant; and  it  is  insisted  that  the  instrument  is  a  simple  contract  only, 
and  that  therefore  the  same  defense,  failure  of  consideration,  is  avail- 
able against  the  indorsees  of  the  paper  for  value  and  before  due,  as 
might  be  interposed  against  such  paper  in  the  hands  of  the  payee.  It 
is  also  insisted  that  the  instrument  shows  on  its  face  that  payment  de- 
pended upon  a  condition  precedent  to  be  performed  by  the  payee,  and 
therefore  the  indorsees  took  it  with  notice,  and,  by  the  failure  of  the 
payee  to  perform  the  condition,  no  right  of  recovery  exists  in  the  in- 
dorsees. 

It  is  not  contended  that  the  indorsees  had  any  other  notice  than  that 
contained  in  the  instrument  itself ;  and  it  is  apparent  that  at  the  time 
of  its  indorsement,  which  was  the  day  of  its  execution,  no  right  to 
the  consideration  had  accrued  to  the  maker.  It  is  a  promise  to  pay 
a  certain  sum  of  money  at  a  day  certain,  for  a  consideration  there- 
after to  be  rendered,  and  depends  for  its  validity  upon  the  implied 
promise  of  the  payee  to  furnish  the  consideration  at  the  time  and  in 
the  manner  stipulated.  That  is,  it  is  a  promise  to  pay  a  sum  certain 
on  a  particular  day,  in  consideration  of  the  promise  of  the  payee  to 
do  and  perform  on  his  part.  A  promise  is  a  valuable  consideration 
for  a  promise. 

But  the  question  remains  whether  the  statement,  or  the  recital  of 
the  consideration,  on  the  face  of  the  instrument,  impairs  its  negotia- 
bility, and  in  this  instance  amounted  to  a  condition  precedent.  The 
mere  fact  that  the  consideration  for  which  a  note  is  given  is  recited 
in  it,  although  it  may  appear  thereby  that  it  was  given  for  or  in 
consideration  of  an  executory  contract  or  promise  on  the  part  of  the 
payee,  will  not  destroy  its  negotiability,  unless  it  appears  through  the 
recital  that  it  qualifies  the  promise  to  pay,  and  renders  it  conditional 


646  NEGOTIABLE    INSTRUMENTS  (Part  3 

or  uncertain,  either  as  to  the  time  of  payment  or  the  sum  to  be  paid." 
*  *  *  The  most  that  can  be  said  of  a  recital  in  the  instrument  it- 
self of  the  consideration  upon  which  it  rests  is  that  the  indorsee,  tak- 
ing it  before  maturity,  is  chargeable  with  notice  of  the  recital.  Such 
recital,  however,  is  not  sufficient  of  itself  to  advise  him  that  there  was, 
or  would  necessarily  be,  a  failure  of  consideration,  but  that,  if  at  the 
time  of  the  indorsement  the  consideration  has  in  fact  failed,  the  recital 
might  be  sufficient  to  put  him  upon  inquiry,  and,  in  connection  with 
other  facts,  amount  to  notice.  *  *  *  The  case  at  bar  does  not, 
however,  fall  within  the  rule  just  stated ;  for  the  assignment  was  made 
the  same  day  the  note  was  made,  and  by  the  terms  of  the  recital  it 
was  apparent  the  payee  was  required  to  do  no  act  till  the  15th  of  May 
following,  an  interval  of  70  days.     *     *     * 

If  therefore,  it  be  conceded,  as  it  must,  that  a  condition  inserted  m 
a  promissory  note  postponing  the  day  of  payment  until  the  happen- 
ing of  some  uncertain  or  contingent  event  will  destroy  its  negotiability, 
and  render  the  instrument  a  mere  agreement,  yet,  under  the  author- 
ities, if  by  the  instrument  the  maker  promises  to  pay  a  sum  certain, 
at  a  day  certain,  to  a  certain  person,  or  his  order,  such  instrument 
must  be  regarded  as  negotiable  although  it  also  contains  a  recital  of 
the  consideration  upon  which  it  is  based,  and  although  it  further  ap- 
pear that  such  consideration,  if  executory,  may  not  have  been  per- 
formed.    Here  the  money  was  payable  absolutely  on  the  1st  day  of 
July,   1887,  a  time  when  the  contract  for  the  advertising  could  not 
have  been  complete.     If  the  instrument  had  remained  the  property  of 
the  payee,  and  upon  its  maturity  suit  had  been  brought,  it  is  clear  that 
no  plea  of  partial  failure  of  consideration  could  have  been  sustained, 
for  the  reason  that  the  entire  term  had  not  then  expired,  and  for  the 
reason  that  the  promise  of  the  makers  was  based  upon  the  promise  of 
the  payee  to  perform  his  undertaking  at  a  time  subsequent  to  the  day 
fixed  for  payment.     No  analysis  of  the  instrument  itself  is  necessary. 
The  most  careful  examination  of  it  will  fail  to  disclose  a  condition 
precedent  to  the  payment  of  the  money  at  the  time  stipulated.     Xor  is 
there  anything  in  the  recital  of  the  consideration  to  put  the  indorsees 
upon  inquiry  at  the  time  indorsement  was  made.     Indeed,  it  is  clear 
'  that  at  that  time  no  inquiry  would  have  led  to  notice  that  Dalziel  would 
fail  to  comply  with  his  contract  on  the  15th  of  May  thereafter,  when 
the  term  was  to  commence.     All  that  the  recitals  would  give  notice 
of  was  that  the  note  was  given  in  consideration  of  an  agreement  on 
the  part  of  the  payee  that  the  privilege  of  advertisement  named  should 
be   enjoyed  by   the   makers    for   three   months   from    May    15,    1887. 
Giving  to  the  language  employed  its  broadest  possible  meaning,  it  can- 
not be  construed  as  notice  to  the  indorsees  of  the  future  breach  of 
the  contract  by  Dalziel.     The  presumption  of  law  would  be  that  the 
contract  would  be  carried  out  in  good  faith,  and  the  consideration  per- 
formed as  stipulated.     The  makers  had  put  .their  promissory  note  into 
the  hands  of  Dalziel  upon  an  expressed  consideration  which  they  were 
thereafter  to  receive,  and  for  the  performance  of  which  they  had  seen 
fit  to  rely  upon  the  undertaking  of  Dalziel;    and  we  are  aware  of  no 
rule  by  which  they  can  hold  these  indorsees  for  value,  before  due  and 
before  the  time  of  performance  was  to  begin,  chargeable  with  notice 
that  the  promise  upon  which  the  makers  relied  would  not  be  kept  and 
performed.     *     *     * 

The  judgment  of  the  appellate  court  will  be  affirmed. 


Ch.  1)  FORMAL  REQUISITES  647 


FLEMING  V.  SHERWOOD. 

(Supreme  Court  of  North  Dakota,  1912.     24  N.  D.  144    139  N    W    101 
43  L.  It.  A.   [N.  S.]  945.) 

^  Early  in  May,  1908,  one  H.  Q.  Turner,  a  collecting  agent  for  Fetzer 
&  Co.,  telephoned  from  Fargo  to  defendant,  a  farmer  at  Verona,  that 
m  settlmg  up  the  Fetzer  &  Co.  business  in  North  Dakota  he  had  two 
drills  which  he  proposed  to  sell  the  defendant  for  $50.  ,  It  was 
agreed  that  the  drills  should  be  delivered  to  the  defendant  at  Verona, 
N.  D.,  in  the  June,  following.  A  note  dated  May  12,  1908,  was  sent 
by  Turner  to  the  defendant  and  was  signed  by  the  defendant  and  re- 
turned by  mail.  The  note  was  as  follows:  "October  1st  after  date 
I  promise  to  pay  to  Fetzer  &  Co.  or  order,  fifty  and  no/ 100  dollars 
with  interest  at  seven  per  cent,  per  annum  from  maturity  until  paid, 
with  all  attorneys  fees  for  collection  of  this  note  unless  not  collectible 
by  law.  Value  received,  waiving  all  right  of  valuation  or  appraise- 
ment law,  homestead  or  other  exemption  as  to  this  debt.  Payee's 
ownership  of  goods  account  of  which  this  note  is  given,  the  account 
thereof  and  contract  condition  of  original  sale  are  not  affected  by  ac- 
cepting this  note  until  receipt  of  full  amount  due  thereon."  This  note 
was  on  June  9,  1908,  sold  to  the  plaintiff,  who  testifies  that  at  such 
time  he  had  no  knowledge  of  any  defenses  thereto.  The  evidence 
showed  that  Fetzer  &  Co.  did  not  ship  the  drills  to  defendant  at  any 
time,  nor  did  the  defendant  ever  receive  such  property.  The  iury 
thereupon  rendered  a  verdict  in  favor  of  the  defendant,  judg- 
ment was  rendered  in  favor  of  the  defendant.     Plaintiff  appeals. 

Bruce,  J.  *  =i^  *  The  principal  error  is  that  alleged  to  have  been 
committed  by  the  trial  court  in  holding  that  the  note  in  controversy 
was  not  negotiable.     *     *     * 

_  We  are  of  the  opinion  that  the  note  was  not  negotiable.  The  ques- 
tion before  us  is  an  exceedingly  difficult  one  to  determine,  as  are  usual- 
ly all  questions  which  involve  a  construction  of  the  statutes.  In  con- 
sidering the  same  we  must  bear  in  mind  that  we  are  construing  the 
provisions  of  the  so-called  Uniform  Negotiable  Instruments  Act,  and 
not  of  the  former  statutes  of  this  state  nor  of  the  law  merchant.'  We 
must,  however,  consider,  to  a  greater  or  less  degree,  these  former 
statutes  and  the  law  merchant,  as  their  provisions'  and  interpretation 
are  all  that  we  have  to  go  by  in  construing  many  of  the  doubtful  pro- 
visions of  the  codified,  uniform  law\  We,  in  fact,  have  been  able  to 
find  no  cases  since  the  adoption  of  the  uniform  act  in  this  state  which 
have  directly  passed  upon  the  question  before  us.     *     '^     * 

The  specific  question  which  we  are  called  upon  to  decide  is  whether 
the  special  clause  in  the  instrument  before  us  to  the  effect  that  "payee's 
ownership  of  goods  account  of  which  this  note  is  given,  the  account 
thereof  and  contract  condition  of  original  sale  are  not  affected  by  ac- 
cepting this  note  until  the  receipt  of  the  full  amount  due  thereon," 
has  the  effect  of  neutralizing  the  otherwise  positive  agreement  to 
pay  and  of  destroying  the  negotiability  of  the  instrument.  The  Uni- 
form Negotiable  Instruments  Act  *  *  *  provides,  among  other 
things,  that  "an  instrument  to  be  negotiable  *  *  *  (2)  must  con- 
tain an  unconditional  promise  or  order  to  pay  a  certain  sum  in  mon- 
ey," *  *  *  This  latter  provision,  however,  is  qualified  by  section 
3,  Avhich  provides.  *  *  *  that  "an  unqualified  order  or  promise 
to  pay  is  unconditional   within  the  meaning  of  this  chapter   though 


648  NEGOTIABLE   INSTRUMENTS  (Part  3 

coupled  with  *  *  *  a  statement  of  the  transaction  which  gives 
rise  to  the  instrument."  The  question,  then,  before  us  resolves  it- 
self into  the  question  whether  the  promise  to  pay  is  unconditional. 

There  is  a  conflict  in  the  authorities  under  the  law  merchant,  and 
under  the  statutes  which  were  based  upon  it,  as  to  the  effect  of  a 
reservation  of  title  in  the  vendor  of  goods  which  is  noted  on  the  face 
of  the  instrument.     Some  of  the  cases  make  the  distinction  turn  upon 
the  fact  of  possession.     Some  hold  that  where  the  right  of  possession 
is  in  the  vendee,  and  the  seller  has  merely  a  naked  title  subject  to  the 
interest  of  the  buyer,  while  the  buyer  has  the  right  of  possession  and 
the  contingent  right  to  a  title  which  would  vest  absolutely  on  the  pay- 
ment of  the  agreed  price  without  further  act  on  the  part  of  the  seller, 
the  transaction  is  a  security  transaction  and  not  a  conditional   sale, 
and  that  the  note  is  none  the  less  negotiable.     They  hold,  however, 
that  where  the  possession  is  retained  by  the  seller  until  the  full  pay- 
ment of  the  purchase  price,  as  well  as  the  title,  the  note  is  not  negotia- 
ble, since  the  agreement  to  pay  is  conditioned  upon  the  fact  of  delivery, 
which  is  within  the  control  of  the  vendor,  and  who,  on  the  failure  to 
pay  at  maturity,  might  cancel  the  agreement  and  retain  the  property. 
They,  in  short,  hold  that  in  such  cases  there  is  no  positive  agreement 
to  pay,  but  rather  that  the  transfer  of  title  and  possession  and  pay- 
ment  shall  be  simultaneous   acts.     Some  reach  this  conclusion   even 
where  the  possession  is  in  the  vendee,  holding  that  the  transfer  of  ti- 
tle is  contingent  upon  payment  and  the  promise  to  pay  is  therefore 
conditional.     Others  hold  that  the  reservation  of  title  in  an  instrument 
incorporates  into  the  same  a  dual  contract,  and  for  this  reason  renders 
it  nonnegotiable.     Others  still  hold  that  the  reservation  of  title,  even 
though  coupled  with  possession  or  the  right  to  retake  possession  even 
after  delivery  if  the  vendor  feels  himself  insecure,  and  this  whether 
before  or  after  the  time  when  the  payment  has  become  due,  does  not 
have  the  effect  of  rendering  the  instrument  nonnegotiable,  provided 
that  the  promise  to  pay  is  in  itself  unconditional.     There  can  be  no 
doubt,  however,  that  the  weight  of  authority  under  the  law  merchant 
and  the  former  statutes  is  against  the  negotiability  of  a  note  which 
upon  its  face  retains  title  in  the  vendor,  and  this  whether  the  posses- 
sion is  retained  by  the  vendor  or  not.    7  Cyc.  581 ;   Sloan  v.  McCarty, 
134  Mass.  245.     *    *     * 

A  much  stronger  case,  of  course,  for  nonnegotiability,  is  presented 
where  both  the  title  and  the  right  of  possession  are  reserved  in  the 
vendor,  and  this  seems  to  be  the  case  with  the  note  before  us.  It  is  to 
be  noted  that  the  reservation  in  the  instrument  is  a  reservation  to  the 
vendor  of  the  "ownership"  of  the  goods.  *  *  *  We  thus  find  a 
note  before  us  which  reserves  in  the  vendor  the  right  to  use  and  pos- 
sess. The  term,  in  fact,  is  broader  than  either  the  term  "title"  or 
"possession,"  and  includes  both.  "The  owner  of  property  is  one  who 
has  dominion  of  a  thing,  real  or  personal,  corporeal  or  incorporeal, 
which  he  has  a  right  to  enjoy  and  to  do  with  as  he  pleases,  either  to 
spoil  or  destroy  it  as  far  as  the  law  permits,  unless  he  is  prevented  by 
some  agreement  or- covenant  which  restrains  his  right."  *  *  *  We 
thus  have  in  the  case  at  bar  a  promissory  note  which  reserves  to  the 
vendor  the  right  to  the  possession  of  the  goods,  as  well  as  the  title, 
and  which  also  is  open  to  the  charge  of  uncertainty  in  that  it  refers 
to  the  terms  and  conditions  of  a  contract,  the  exact  nature  of  which  is 
undisclosed.     Even  under  the  most  liberal  rule,   such   a  contract  or 


Ch.  1)  FORMAL  REQUISITES  649 

note  does  not  evidence  an  unconditional  promise  to  pay,  and,  though 
the  evidence  discloses  that  there  was  a  parol  agreement  that  delivery 
of  the  goods  should  be  made,  the  written  note  negatives  this  agree- 
ment, and  the  facts  disclose  that  no  such  delivery  was  ever  made. 

We  realize  that  *  *  *  the  Negotiable  Instruments  Act  provides 
that  an  unqualified  order  or  promise  to  pay  is  unconditional  within  the 
meaning  of  the  chapter  though  coupled  with  "a  statement  of  the  trans- 
action which  gives  rise  to  the  instrument."  We  have  in  this  case, 
however,  something  more  than  the  statement  of  the  transaction.  In 
fact,  there  is  no  statement  of  the  transaction  at  all.  We  have  a  "ref- 
erence" to  a  transaction  and  to  a  contract  which  may  be  entirely  in- 
consistent with  an  unconditional  promise  to  pay,  and  an  express  agree- 
ment of  reservation  of  ownership  which  in  itself  makes  the  agree- 
ment to  pay  conditional.  The  contract  disclosed  is  that  of  a  conditional 
sale,  and  not  of  a  security  transaction.  Whether  even  a  security  trans- 
action was  intended  to  be  permitted  by  the  statute  is  a  matter  which  is 
of  no  little  doubt.  Those  interested  in  the  preparation  of  the  original 
Uniform  Act  certainly  were  in  doubt  on  the  question.  See  Brannan's 
Negotiable  Instruments  Law,  p.  6  [3d  Ed.,  p.  17].  We  may  certainly 
rest  assured  that  a  reservation  of  ownership  was  never  intended  by 
the  Legislature.  Not  only  are  we  led  to  this  conclusion  from  an  ex- 
amination of  the  authorities,  but  from  a  perusal  of  the  act  itself.  If 
such  reservation  was  intended  to  be  permitted,  why  did  the  act  *  *  * 
specially  provide  that  an  authorized  sale  of  collaterals  should  not  af- 
fect the  negotiability  of  the  instrument,  and  say  nothing  of  the  reserva- 
tion of  title  or  ownership,  or  the  right  of  possession  of  the  principal 
article  sold.  Those  who  adopted  the  instrument  could  not  have  been 
blind  to  the  state  of  the  law  upon  the  question — to  the  fact  that  even 
upon  the  question  of  the  reservation  of  title  there  was  a  conflict  in  the 
authorities,  and  that  there  were  no  authorities  in  favor  of  the  as- 
sumption of  negotiability  where  both  the  title  and  the  entire  right  of 
possession  were  reserved.  A  few  words  might  have  settled  the  con- 
troversy in  favor  of  the  negotiability,  but  they  were  not  spoken.  Nu- 
merous other  mooted  questions  were  settled  by  the  act,  among  them 
the  effect  of  a  provision  for  payment  out  of  a  specified  fund,  the  au- 
thorization of  a  confession  of  judgment,  etc.,  all  of  which  were  moot- 
ed under  the  law  merchant  and  the  former  statutes.  The  silence  of 
the  Legislature  on  the  question  involved  in  this  case  is  to  us  almost, 
if  not  entirely,  conclusive.     *     *     * 

Judgment  affirmed. 


WELCH  et  al.  v.  OWENBY. 
(Supreme  Court  of  Oklahoma,   1918.     175  Pac.   746.) 

Pryor,  C.  This  is  an  action  brought  by  C.  A.  Owenby  against 
Harry  Welch,  M.  Van  Matre,  and  J.  N.  Moore,  on  a  promissory 
note  in  the  sum  of  $600.  The  defense  to  the  note  was  that  the  exe- 
cution of  the  same  was  procured  by  fraud  and  deceit.  At  the  close  of 
the  evidence  the  trial  judge  directed  the  jury  to  return  a  verdict  for 
the  plaintiff  which  the  jury  did,  and  judgment  was  rendered  thereon. 
From  this  judgment  defendants  appeal. 

The  plaintiff  became  the  holder  of  the  note  in  due  course  before 
maturity,  for  a  valuable  consideration,  and  without  notice  of  any  de- 
fenses or  equities.     The  defendants  admit  that  the  correctness  of  the 


650  NEGOTIABLE   INSTRUMENTS  (Part  3 

judgment  of  the  trial  court  depends  upon  whether  or  not  the  note  is 
negotiable.    The  note  is  as  follows : 

"$600.00  Ft.  Smith,  Ark.,  Sept.  20,  1911. 

"On  or  before  the  1st  day  of  October,  1914,  for  value  received,  the 
undersigned  promise  to  pay  to  Ark.  Valley  Breeding  Co.  or  order  six 
hundred  00/100  dollars  with  8  per  cent,  interest  per  annum  from 
date  until  paid,  negotiable  and  payable  at  Little  Rock,  Ark. ;  it  being 
given  for  Percheron  stallion  named  Robert,  No.  40681,  with  the  un- 
derstanding and  agreement  between  the  maker  of  this  note  and  Ark. 
Valley  Breeding  Co.,  that  the  above  described  property  is  and  shall 
remain  in  said  Ark.  V^alley  Breeding  Co.,  with  full  power  of  disposi- 
tion without  notice,  in  such  manner  as  he  may  see  fit,  until  paid  for. 
This  note  is  the  first  of  a  series  of  three,  and  if  default  is  made  in 
the  payment  of  one,  then  all  shall  become  due  and  payable  at  once. 
"P.  O.— Keota,  Okl.  [Signed]       Harry  W.  Welch. 

"M.  Van  Matre. 

"J.  N.  Moore. 

"T.  D.  Smith." 
Indorsed:     "Ark.  Valley  Breeding  Co.,  W.  H.  McMurray,  Sec't." 

It  will  be  observed  that  this  note  is  certain  as  to  amount,  date  of 
maturity,  and  the  promise  to  pay  is  unconditional ;  that  it  is  a  per- 
fect negotiable  instrument  in  every  particular,  unless  the  subjoined 
statement  that  the  note  is  given  for  stallion  which  is  delivered  to  the 
maker  of  the  note  with  the  understanding  that  the  stallion  shall  re- 
main the  property  of  the  payee  with  full  power  to  dispose  of  tire  same, 
until  the  note  is  paid,  renders  it  nonnegotiable.  There  is  nothing  in 
this  subjoined  statement  that  makes  any  of  the  provisions  of  the  note 
conditional  or  qualifies  them;  it  is  just  a  mere  statement  of  what  the 
note  is  given  for  and  the  security  for  the  payment  of  the  note.  There 
is  nothing  in  the  statement  which  accelerates  or  retards  the  maturity 
of  the  note. 

This  note  was  executed  after  the  taking  effect  of  the  Negotiable  In- 
struments statute.  Section  4053,  Revised  Laws  of  Oklahoma  of  1910, 
provides  that  promise  to  pay  is  unconditional,  though  coupled  with 
a  statement  of  the  transaction  which  gives  rise  to  the  instrument. 
*  *  *  In  the  case  of  Chicago  Ry.  Equipment  Co.  v.  Merchants' 
Bank,  136  U.  S.  268,  10  Sup.  Ct.  999,  34  L.  Ed.  349,  the  Supreme 
Court  of  the  United  States,  in  holding  that  a  subjoined  statement  in 
a  promissory  note  similar  to  the  one  in  the  note  under  consideration 
would  not  affect  its  negotiability,  used  the  following  language: 
"  *  *  *  The  agreement  by  w^hich  the  vendor  retains  the  title,  and 
by  which  the  notes  are  secured  on  the  cars,  is  collateral  to  the  notes, 
and  does  not  affect  their  negotiability.  It  does  not  qualify  the  promise 
to  pay  at  the  time  fixed,  any  more  than  would  be  done  by  an  agree- 
ment, of  the  same  kind,  embodied  in  a  separate  instrument,  in  the  form 
of  a  mortgage.    *    *    *  » 

In  the  light  of  the  statute  and  the  foregoing  authorities,  the  sub- 
joined statement  in  said  note  did  not  render  said  note  conditional  or 
uncertain  as  to  any  of  the  essentials  of  a  negotiable  instrument.  *  *  * 
The  court  therefore  committed  no  prejudicial  error  in  holding  that  the 
defenses  interposed  were  not  good  against  said  note  in  the  hands  of 
an  innocent  purchaser. 

The  judgment  of  the  trial  court  therefore  should  be  affirmed. 


Ch,  1)  FORMAL  REQUISITES  651 


FARMERS'   NAT.    BANK   OF   TECUMSEH    v.   McCALIy. 

(Supreme  Court  of  Oklahoma.  1910.     25  Okl.  000,  100  Par.  866, 
20   L.  R.   A.    [N.   S.]   217.) 

Williams,  J,  The  following  cjuestions  are  raised  by  this  record: 
(1)  Was  the  note  of  December  19,  1905,  which  is  claimed  to  have 
been  secured  by  the  mortgage  on  the  wagon  and  two  mules,  negotia- 
ble in  character  and  entitled  to  all  the  privileges  and  exemptions  of 
negotiable  paper?  [The  note  contained  the  following  clause:  "Ad- 
ditional security  wagon  and  two  mules."] 

It  was  uniformly  held  by  the  Supreme  Court  of  the  territory  of 
Oklahoma  that  a  note  containing  a  stipulation  for  the  payment  of  an 
attorney's  fee  is  not  negotiable.  *  .  *  *  The  rule,  however,  has  been 
changed  by  statute,  which,  however,  does  not  apply  to  this  case. 
*  *  *  In  the  case  at  bar  the  note  on  its  face  is  negotiable,  but  it 
is  insisted  by  the  defendant  in  error  that  the  mortgage  securing  pay- 
ment of  same  provides  for  an  attorney's  fee  in  the  event  of  foreclo- 
sure and  that  such  provision  also  shall  be  construed  as  included  in 
the  note,  thereby  rendering  it  nonnegotiable.  There  is  a  conflict  of 
authority  on  this  question.  The  great  weight  seems,  however,  to  be 
against  the  contention  of  defendant  in  error,  supporting  the  rule  that 
a  covenant  or  mortgage  which  is  framed  purely  for  the  purpose  of 
security  and  for  enforcement  of  which  resort  could  be  had  only  to  the 
property  mortgaged  and  not  a  part  of  any  debt  by  virtue  of  the  note, 
but  on  account  of  the  terms  of  the  mortgage,  the  terms  and  conditions 
thereof  being  limited  to  providing  security  for  the  indebtedness,  does 
not  affect  the  negotiability  of  the  note.  Thorp  v.  Mindeman,  123  Wis. 
149,  101  N.  W.  417,  68  L.  R.  A.  146,  107  Am.  St.  Rep.  1003.  *  *  * 
The  highest  court  of  California  *  *  *  holds  that  such  stipulation 
in  a  mortgage  to  secure  a  note  negotiable  on  its  face  renders  the  same 
nonnegotiable.  Meyer  v.  Weber,  133  Cal.  681,  65  Pac.  1110.  In  this 
case,  however,  the  decision  was  rendered  by  a  divided  court,  four 
members  supporting  and  three  dissenting.  In  Michigan,  the  adjudi- 
cations are  not  in  harmony.  In  Missouri,  North  Dakota,  Pennsylvania, 
and  Wisconsin  the  governing  rule  is  contrary  to  that  of  California,  and 
harmonizes  wJth  the  case  of  Thorp  v.  Mindeman.  *  *  *  f  he  Kan- 
sas decisions  also  seem  to  be  in  harmony  with  them.  However,  when 
the  provisions  of  the  mortgage  by  direct  stipulation  in  the  note  are 
made  a  part  thereof,  the  same  in  that  event  may  be  rendered  non- 
negotiable.  But  that  is  not  now  before  this  court.  *  *  *  1'he  ad- 
judications of  the  highest  court  in  Nebraska  also  seem  to  be  in  accord- 
ance with  the  rule  announced  above  as  appearing  to  be  supported  by  the 
weight  of  authority.     *     *     * 

It  is  further  insisted,  however,  that  section  793,  Wilson's  Rev.  &  Ann. 
St.  Okl.  1903,  which  provides,  "Several  contracts  relating  to  the  same 
matters,  between  the  same  parties,  and  made  as  parts  of  substantially 
one  transaction,  are  to  be  taken  together,"  concludes  this  question  in 
favor  of  the  defendant  in  error.  This  section  was  borrowed  by  the 
lawmakers  of  the  territory  of  Oklahoma  from  the  statutes  of  Dakota 
Territory.  The  same  statute  was  retained  in  force  in  the  state  of 
North  Dakota.  In  the  case  of  First  National  Bank  of  St.  Thomas  v. 
Flath,  10  N.  D.  281,  86  N.  W.  867,  *  *  *  this  section  was  con- 
strued and  held  to  constitute  a  rule  of  interpretation  merely  and  united 
several  contracts  into  a  single  contract  only  for  such  purposes,  and  that 


652  NEGOTIABLE   INSTRUMENTS  (Part  3 

a  real  estate  mortgage  and  the  notes  secured  thereby  did  not  constitute 
a  single  contract,  but  remained  as  separate  contracts,  except  for  the 
purposes  of  interpretation.  No  authority  is  cited  by  the  defendant  in 
error  construing  such  provision  otherwise.  We  necessarily  conclude 
that  the  stipulation  in  the  mortgage  regarding  attorney's  fees  does  not 
render  the  note  of  December  19th  nonnegotiable.     *     *     * 


BATCFIELDER  v.  COUNCIL  GROVE   WATER  CO. 
(Court  of  Appeals  of  New  York,  1892.     131  N.  Y.  42,  29  N.  E.  801.) 

Action  on  certain  bonds  by  Benjamin  F.  Batchelder  against  the 
Council  Grove  Water  Company.  From  a  judgment  whereby  it  was 
adjudged  that  plaintiff  was  not  entitled  to  recover  the  principal  of 
said  bonds,  plaintiff  appeals. 

RuGER,  C.  J.  This  action  was  brought  in  September,  1889,  to  re- 
cover the  principal  and  interest  of  three  several  mortgage  bonds  for 
$1,000  each,  payable  July  1,  1912.  It  is  therefore  apparent  that  the 
action,  except  on  the  coupons  for  interest,  was  prematurely  brought, 
unless  there  are  other  circumstances  appearing  in  the  case,  showing  that 
an  earlier  day  for  the  payment  of  the  bonds  had  been  provided.  It 
is  claimed  that  these  circumstances  appear  from  a  clause  in  the  bond, 
reading  as  follows:  "In  case  of  default  in  the  payment  of  any  of 
the  interest  coupons  attached  to  this  bond  in  the  manner  provided  in 
the  trust  deed  and  mortgage  hereinafter  mentioned,  then,  and  in  that 
case,  the  principal  sum  of  this  bond  shall  become  due  in  the  manner 
and  with  the  effect  provided  in  the  said  trust  deed  or  mortgage."  De- 
fault having  been  made  in  the  payment  of  the  coupons,  the  plaintiff 
claims  that  the  bond  became  absolutely  due,  and  entitled  him  to  en- 
force its  payment  in  any  way  available  to  any  holder  of  a  past-due 
obligation.  This  claim  would,  undoubtedly,  be  sustainable,  provided 
the  bond  had  stopped  with  the  words,  "the  principal  sum  shall  become 
due" ;  but  it  did  not,  in  fact,  stop  there,  but  continued  with  the  f ol-  . 
lowing  qualification  of  the  previous  sentence :  "In  the  manner  and  with 
the  effect  provided  in  the  said  trust  deed  or  mortgage." 

It  therefore  becomes  necessary  to  refer  to  the  trust  deed  or  mort- 
gage to  determine  the  extent  and  character  of  the  qualifications,  for 
it  cannot  be  disputed  but  that  this  clause  made  the  provisions  of  the 
trust  deed  an  essential  part  of  the  contract  between  the  bondholder  and 
his  obligor.  The  clause  in  the  trust  deed  to  which  the  bond  referred 
reads  as  follows:  "If  default  be  made  by  the  said  party  of  the  first 
part  in  any  half  year's  interest  on  any  of  said  bonds,  and  the  war- 
rants or  coupons  for  such  interest  shall  have  been  presented  and  its 
payment  demanded,  and  such  default  shall  have  continued  for  six 
months  after  such  demand,  without  the  consent  of  the  holders  of  such 
coupon  or  bond,  then  and  thereupon  the  principal  of  all  of  said  bonds 
hereby  secured  shall  be  and  become  immediately  due  and  payable,  any- 
thing in  such  bonds  to  the  contrary  notwithstanding,  and  the  said  party 
of  the  second  part  may  so  declare  the  same,  and  notify  the  party  of 
the  first  part  thereof,  and  upon  the  written  request  of  the  holders  of 
a  majority  of  the  said  bonds  then  outstanding  shall  proceed  to  collect 
both  principal  and  interest  of  all  such  bonds  outstanding  by  foreclo- 
sure and  sale  of  said  property,  or  otherwise,  as  herein  provided."    This 


Ch.  1)  FORMAL  REQUISITES  653 

clause  plainly  limits  the  effect  of  the  provision  making  the  principal  of 
the  bonds  due  upon  the  failure  to  pay  semiannual  interest,  and  it  pre- 
scribes the  manner  in  which  such  a  breach  of  the  contract  shall  be 
made  available.  It  authorizes  the  trustee,  upon  the  request  of  a  ma- 
jority of  the  bondholders,  to  foreclose  the  mortgage  and  distribute 
the  proceeds  realized  thereby  equally  among  the  bondholders. 

By  prescribing  the  effect  which  the  clause  shall  have  on  the  contract, 
and  the  particular  manner  in  which  a  default  in  the  payment  of  in- 
terest shall  be  availed  of,  it  impliedly  excludes  all  other  methods,  and 
confines  the  bondholder  to  the  remedies  expressly  authorized.  If  the 
method  provided  by  the  mortgage  be  pursued,  it  subjects  the  action 
to  be  taken  by  the  bondholders  to  the  will  of  a  majority,  and  insures 
that  course  of  action,  with  respect  to  the  property  of  the  debtor,  which 
will  inure  to  the  best  interest  of  the  bondholders  as  a  class.  This  pre- 
vents individual  bondholders  from  pursuing  an  individual  course  of 
action,  and  thus  harassing  their  common  debtor,  and  jeopardizing  the 
fund  provided  for  the  common  benefit.  The  manifest  equity  and  jus- 
tice of  such  a  proceeding  indicates  the  intent  of  the  parties  in  drafting 
the  form  of  the  bond.  The  plaintiff's  right  of  action  is  based  solely 
upon  the  language  of  his  contract,  and,  if  he  does  not  make  out  a  right 
to  recover  by  virtue  of  its  terms,  his  action  must  necessarily  fail. 

We  think  that  the  reasonable  construction  of  the  contract  requires 
us  to  hold  that  the  principal  sum  of  the  mortgage  debt,  upon  the  fail- 
ure to  pay  interest  thereon,  was  not  intended  to  be  made  payable  ex- 
cept in  the  manner  specifically  provided  by  the  terms  of  the  mort- 
gage. *  *  *  Any  other  holding  would  authorize  the  individual 
bondholders  to  pursue  the  company  and  strip  it  of  its  present  funds 
and  rights  of  action,  and  destroy  its  capacity  to  carry  on  its  business, 
and  thereby  protect  its  creditors.  It  is  not  reasonable  to  suppose  that 
the  bondholders,  as  a  class,  intended  to  make  a  contract  which  should 
lead  to  that  result.  It  was,  of  course,  correct  for  the  trial  court  to 
authorize  judgment  to  be  given  for  the  past-due  coupons,  as,  by  the 
express  terms  of  the  contract,  as  manifested  by  the  mortgage,  bond,  and 
coupon,  the  interest  was  made  payable  unconditionally  on  a  specified 
day ;  and  this  was  entirely  consistent  with  the  holding  that  the  princi- 
pal sum  was  not  due,  because,  by  the  terms  of  the  contract,  it  was  not 
made  unconditionally  payable  on  the  happening  of  the  event  mentioned. 

It  follows,  from  these  views,  that  the  judgment  below  should  be 
affirmed.     *     *     * 


The  conflict  of  authority  as  regards  the  interpretation  of  the 
term  "condition"  concerns  two  distinct  matters:  (1)  There  is  an 
absence  of  entire  unanimity  of  opinion  as  to  what  words  will  have 
the  effect  of  rendering  a  promise  in  an  instrument  expressly  con- 
ditional. (2)  There  is  a  more  serious  conflict  on  the  question 
whether  the  term  "condition"  is  to  be  so  interpreted  as  to  include 
conditions  implied  in  law  as  well  as  express  conditions  or  wheth- 
er its  meaning  is  to  be  confined  exclusively  to  express  conditions. 
With  respect  to  the  first,  all  courts  would  agree  that  a  promise 
reading,  "I  promise  to  pay  P.  or  order  $100  upon  condition  that  P. 
performs  a  contract  this  day  entered  into  by  the  maker  and  the 
payee,"  would  be  a  conditional  promise  and  the  instrument  would 


654  NEGOTIABLE   INSTRUMENTS  (Part  3 

accordingly  be  nonnegotiable.  In  place  of  the  expression  "upon 
condition  that,"  if  there  be  substituted  the  phrase  "subject  to," 
the  same  result  would  be  reached.  If,  instead  of  the  words  "sub- 
ject to,"  there  be  used  the  words  "as  per"  there  would  be  some 
disagreement  as  to  whether  these  words  should  be  given  the  same 
effect  as  the  words  "upon  condition  that"  or  "subject  to."  Most 
courts  would  hold  that  the  words  "as  per"  are  not  the  legal  equiva- 
lent of  the  words  "upon  condition  that"  or  "subject  to."  This 
type  of  conflict  of  authority  is  not,  however,  a  serious  matter,  nor 
can  it  be  entirely  removed ;  for  the  question  as  to  what  words 
are  to  be  treated  as  synonymous  with  other  words  is  one  upon 
Avhich  there  is  likely  to  continue  a  justifiable  difference  of  opinion. 

The  conflict  of  authority  which  is  chiefly  featured  in  the  pre- 
ceding cases  is  of  a  more  serious  nature  because  it  is  the  result 
of  a  difference  of  opinion  as  to  which  of  two  possible  fundamental 
theories  is  applicable  to  the  situation.  Some  courts  proceed  upon 
the  theory  that  the  only  way  in  which  a  promise  or  order  in  an 
instrument  may  be  rendered  conditional  is  by  the  insertion,  in 
such  promise  or  order,  of  words  which  expressly  qualify  the  prom- 
ise. Other  courts  proceed  upon  the  theory  that  such  promise  or 
order  may  be  rendered  conditional  by  implication,  that  is,  by  re- 
sort to  the  doctrine  of  conditions  implied  in  law.  The  typical  sit- 
uation arises  when  the  instrument  contains  a  recital  of  the  con- 
tract, mortgage,  pledge  or  other  transaction  or  of  language  which 
refers  to  some  extrinsic  agreement,  which  gave  rise  to  the  execu- 
tion and  delivery  of  the  instrument.  It  is  to  be  remembered  that 
the  words,  "I  promise  to  pay  P.  or  order,"  etc.,  or  the  words,  "Pay 
P.  or  order,"  etc.,  appearing  on  an  instrument,  constitute  a  prom- 
ise or  an  order  which  is  wholly  separate  and  distinct  from  any 
other  promise  appearing  on  the  same  or  other  instrument,  al- 
though the  promisee  may  be  the  same  in  each.  For  convenience, 
the  former  may  be  called  the  commercial  specialty  promise  or  or- 
der. The  other  will  usually  be  simple  contractual  promises  or 
promises  contained  in  a  mortgage,  pledge,  or  other  agreement,  or 
will  consist  of  some  language  referring  to  such  extrinsic  instru- 
ments. 

The  courts  that  proceed  upon  the  theory  that  the  commercial 
specialty  promise  or  order  may  be  rendered  conditional  by  a  con- 
dition implied  in  law  arrive  at  this  result  apparently  in  the  fol- 
lowing manner,  to  illustrate :  M.  executes  and  delivers  his  prom- 
issory note  to  P.  The  commercial  specialty  promise  reads :  "I 
promise  to  pay  P.  or  order,  $100,"  there  being  no  language  con- 
nected with  this  promise  which  in  any  sense  expressly  qualifies  the 
duty  therein  evidenced.  The  same  instrument,  let  us  suppose, 
contains  a  recital  of  an  executory  contract  between  the  maker  and. 
the  payee,  and  also  contains  an  assertion  that  the  note  grew  out 
of  this  contract  transaction.  Looking  at  the  simple  contract  alone, 
if  it  be  found  that  under  the  law  of  simple  contracts,  there  exists 
therein  any  condition,  either  express  or  implied  in  law,  precedent. 


Ch.  1)  FORMAL   REQUISITES  655 

or  subsequent  to  the  duty  of  M.  to  pei;form  his  simple  contract  ob- 
ligation, it  is  possible  to  urge  that  this  condition  will  also  operate 
to  qualify  the  commercial  specialty  promise.  This  result  can  be 
reached  only  by  holding  that  the  commercial  specialty  promise 
may  be  rendered  conditional  by  the  application  of  the  doctrine  of 
conditions  implied  in  law.  And  this  is  true  even  in  a  case  where 
the  recital  of  the  simple  contract  shows  that  there  is  an  express 
condition  precedent  or  subsequent  to  the  duty  of  M.  to  perform  his 
simple  contract  obligation.  In  such  a  situation  the  maker,  M.,  has 
simply  made  two  promises  to  pay  that  which,  from  a  business  point 
of  view,  is  a  single  debt.  The  fact  that  he  has  expressly  condi- 
tioned one  of  these  promises — the  simple  contract  promise — does 
not  thereby  evidence  an.  intention  to  condition  the  commercial 
specialty  promise.  In  fact,  the  contrary  inference  is  the  more  rea- 
sonable. 

It  is  believed  that  the  better  theory  is  that  a  condition  implied 
in  law  should  not  render  the  commercial  specialty  promise  or  or- 
der conditional ;  that  the  only  way  to  condition  such  a  promise  or 
order  is  by  the  definite  incorporation,  in  the  commercial  specialty 
promise,  of  appropriate  language  which  is  sufficient  to  create  an 
express  condition  precedent  or  subsequent  to  the  duty  of  the  maker 
or  drawee  to  pay.  Such  a  rule  will  be  commercially  mpre  desirable, 
because  a  purchaser  may  then  be  able  to  decide  more  readily  wheth- 
er the  instrument  offered  to  him  is,  or  is  not,  negotiable.  If  com- 
mercial instruments  are  to  be  rendered  conditional  by  every  kind 
of  conditions  implied  in  law,  the  free  circulation  of  commercial 
paper  is  clogged  beyond  a  point  which  is  desirable  or  necessary. 
Moreover,  the  interpretation  here  indicated  tends  to  bring  thjs 
portion  of  the  law  into  greater  harmony  with  the  rule  that  a  pur- 
chaser for  value  before  maturity  of  a  negotiable  instrument  will 
take  free  from  personal  defenses  and  equities  of  ownership  unless 
he  takes  in  bad  faith.  The  same  considerations  of  commercial 
expediency  underlie  both  rules.  One  who  purchases  an  instru- 
ment which  is  conditioned  only  by  implication  of  law  is  not  in 
the  situation  analogous  to  that  of  a  purchaser  in  bad  faith.  A  pur- 
chaser of  an  instrument  conditioned  only  by  implication  is  in  sub- 
stantially the  same  position,  as  far  as  operative  facts  are  concerned, 
as  a  purchaser  of  an  unquestioned  negotiable  instrument  with  con- 
structive notice  of  outstanding  equities  and  defenses.  The  pur- 
chaser with  constructive  notice  is  not  deemed  to  be  a  purchaser 
in  bad  faith.  On  parity  of  reasoning,  one  who  purchases  an  instru- 
ment which  contains  a  promise  or  order  conditioned  only  by  im- 
plication arising  from  real  conditions  in  a  different  contract,  mort- 
gage, or  other  transaction,  should  take  the  instrument  as  it  ap- 
pears to  be — as  an  unconditional  promise  or  order. 


656  NEGOTIABLE   INSTRUMENTS  (Part  3 


SECTION  5.— TIME  OF  PAYMENT  MUST  BE  CERTAIN 

Commercial  paper  would  not  be  suitable  for  circulation  if  the 
holder  is  unable  to  ascertain  at  what  time  the  right  to  demand 
payment  is  to  arise.  The  law,  therefore,  requires  certainty  in  the 
time  of  payment.  But  what  degree  of  certainty  will  satisfy  this 
requirement?  This  question  is  one  of  considerable  difficulty.  Be- 
fore the  adoption  of  the  Negotiable  Instruments  Law,  the  test  of 
certainty  was  not  clearly  worked  out ;  nor  has  the  present  statute 
done  very  much  toward  solving  some  of  these  questions. 

There  are  four  possible  ways  of  fixing  maturity:  (1)  By  desig- 
nating a  future  day;  e.  g.,  June  1,  1935.  (2)  By  giving  an  option 
to  the  holder  to  demand  payment  at  any  time.  (3)  By  giving  an 
option  to  the  obligor — maker,  acceptor,  etc. — to  pay  when  he  sees 
fit.  (4)  By  declaring  that  the  instrument  shall  mature  upon  the 
happening  of  some  event  over  which  neither  of  the  parties  has 
any  control.  Combinations  of  these  various  methods  of  fixing  a 
time  of  maturity  may  be  made.  An  instrument  may  bear  a  fixed 
maturity,  subject  to  an  earlier  payment  (a)  at  the  option  of  the 
maker;  (b)  at  the  option  of  the  holder;  (c)  upon  the  performance 
of  a  specified  act  by  the  maker  or  upon  the  occurrence  of  some 
extrinsic  event. 

The  sections  of  the  Negotiable  Instruments  Law  involved  are 
as  follows : 

Section  1,  subsec.  3.  An  instrument  to  be  negotiable  must  be 
payable  on  demand  or  at  a  fixed  or  determinable  future  time. 

Section  7.  An  instrument  is  payable  on  demand:  (1)  When  it 
is  expressed  to  be  payable  on  demand,  or  at  sight,  or  on  presenta- 
tion ;  or  (2)  in  which  no  time  of  payment  is  expressed ;  (3)  where 
an  instrument  is  issued,  accepted,  or  indorsed  when  overdue,  it  is, 
as  regards  the  person  so  issuing,  accepting,  or  indorsing  it,  payable 
on  demand. 

Section  4.  An  instrument  is  payable  at  a  determinable  future 
time  within  the  meaning  of  the  act,  which  is  expressed  to  be  pay- 
able: (1)  At  a  fixed  period  after  date  or  sight;  or  (2)  on  or  be- 
fore a  fixed  or  determinable  future  time  specified  therein;  or  (3) 
on  or  at  a  fixed  period  after  the  occurrence  of  a  specified  event, 
which  is  certain  to  happen,  though  the  time  of  happening  be  un- 
certain. An  instrument  payable  upon  a  contingency  is  not  nego- 
tiable and  the  happening  of  the  event  does  not  cure  the  defect. 

By  implication,  the  following  section  is  involved: 

Section  2.  The  sum  payable  is  a  sum  certain  within  the  mean- 
ing of  this  act,  although  it  is  to  be  paid  *  *  *  (2)  by  stated 
installments;  or  (3)  by  stated  installments,  with  a  provision  that 
upon  default  in  payment  of  any  installment  or  of  interest  the  whole 
shall  become  due. 

Before  passing  to  a  consideration  of  the  cases,  it  may  be  well 
to  note  here  that  we  are  now  discussing  a  series  of  situations  anal- 


Ch.  1)  FORMAL  REQUISITES  657 

ogons  to,  but  essentially  different  from,  the  problems  taken  up  un- 
der the  head  of  conditional  promises.  A  promise  to  pay  upon  con- 
dition is  different  from  an  unconditional  promise  to  pay  at  some 
indeterminate  future  time.  It  is  important  to  note  this  because  the 
requirement  of  certainty  in  the  time  of  payment  adds  another  ele- 
ment. Proof  that  the  promise  is  unconditional  is  not  sufficient. 
The  proof  must  go  further  and  show  that  this  unconditional  prom- 
ise is  payable  at  some  fixed  or  determinable  future  time. 

Section  7  of  the  Negotiable  Instruments  Law,  above  quoted, 
shows  that  there  are  two  general  situations  where  an  instrument 
is  payable  on  demand ;  i.  e.,  where  the  instrument  is  made  ex- 
pressly payable  on  demand,  and  where  by  implication  the  instru- 
ment is  payable  on  demand.  Where  the  words  "payable  on  de- 
mand," "payable  at  sight,"  or  "payable  on  presentation"  are  used 
the  instrument  is  expressly  made  payable  on  demand.  It  is  per- 
haps more  common  to  find  the  words  "on  demand"  in  promissory 
notes,  and  the  words  "at  sight"  in  bills  of  exchange.  No  doubt 
other  words  could  be  used  which  would  have  the  same  legal  ef- 
fect as  those  which  are  here  referred  to. 

An  instrument  will  be  deemed  payable  on  demand  wherever 
there  is  no  language  used  thereon  which  deals  with  the  matter 
of  the  time  of  payment.  A  fair  interpretation  of  such  an  instru- 
ment is  that  it  was  intended  to  confer  upon  the  holder  the  right 
to  demand  payment  at  any  time.  So  the  law  provides  that  where 
no  time  of  payment  is  expressed  the  instrument  is  payable  on  de- 
mand.   A  check  furnishes  a  common  illustration. 

It  appears  from  an  examination  of  sections  4  and  2,  that  there 
are  two  general  situations  which  satisfy  the  requirement  that  the 
instrument  be  payable  at  a  fixed  or  determinable  future  time:  (1) 
Where  the  instrument  has  but  one  date  of  maturity  and  that  date 
is  fixed,  either  (a)  by  designating  it  in  the  usual  way  by  the  date 
of  month  and  year,  or  (b)  by  fixing  it  with  reference  to  some 
event  which  is  bound  to  happen,  though  the  time  of  happening  is 
uncertain;  or  (2)  when  the  instrument  bears  two  possible  dates 
of  maturity,  the  one,  usually  the  later  one,  being  fixed  in  accord- 
ance with  rule  (1)  (a)  or  (b)  the  other  or  earlier  date  of  maturity 
being  fixed  by  the  performance  of  some  act  by  the  holder,  or  by 
maker,  or,  by  the  occurrence  of  some  specified  event  which  is  not 
wholly  within  the  control  of  either  party. 

To  restate  the  situation,  we  have  two  general  questions:  (1) 
When  is  an  unconditional  promise  or  order  payable  on  demand? 
(2)  When  is  an  unconditional  promise  or  order  payable  at  a  de- 
terminable future  time?  No  independent  consideration  of  ques- 
tion 1  need  be  given,  for  this  question  is  sufficiently  adverted  to  in 
the  cases  following  which  deal  primarily  with  situations  involving 
the  second  question.  The  principal  difficulty  arises  when  the 
question  presented  is :  What  constitutes  a  determinable  future 
time?  This  question  is  involved  in  the  two  situations  noted  above: 
B.&  B.Bus.Law— 42 


•658  NEGOTIABLE   INSTRUMENTS  (Part  3 

(a)  Where  there  is  but  one  maturity  and  this  maturity  is  fixed 
by  reference  to  a  specified  date  or  to  an  event  which  is  bound  to 
happen;  (b)  where  there  are  two  dates  of  maturity,  the  one  fixed 
by  the  designation  of  a  specified  date  or  an  event  bound  to  happen 
but  subject  to  acceleration  into  an  earher  maturity  upon  the  ex- 
ercise of  an  option  by  the  holder  to  demand  payment,  or  of  an 
option  in  the  obligor  to  pay  before  the  fixed  date,  or  upon  the  oc- 
currence of  some  event  which  is  not  wholly  within  the  control  of 
either  the  holder  or  the  obligor  named  in  the  instrument.  In  short : 
(1)  When  is  an  event  bound  to  happen,  within  the  meaning  of 
the  rule  requiring  certainty  in  the  time  of  payment?  (2)  When 
will  the  performance  of  an  act  referred  to  in  an  acceleration  clause 
be  deemed  to  be  at  option  of  the  holder  or  of  the  obligor,  as  dis- 
tinguished from  the  occurrence  of  some  contingent  event  which 
is  not  within  the  control  of  either  the  holder  or  the  obligor?  It 
may  be  remarked  that  the  last  sentence  of  section  4,  subsection  3, 
which  reads :  "An  instrument  payable  upon  a  contingency  is  not 
negotiable,  and  the  happening  of  the  event  does  not  cure  the  de- 
fect"— in  reality  adds  nothing  to  the  foregoing  affirmative  require- 
ments with  respect  to  certainty  in  the  time  of  payment. 


IMcCLENATHAN   v.  DAVIS. 

(Supreme  Court  of  Illinois,  1909.     243  111.  S7,  90  N.  E.   265, 
27  L.  R.  A.   [N.   S.]   1017.) 

Action  by  C.  V.  McClenathan  against  Emmons  Davis  and  another. 
A  judgment  for  plaintiff  was  aftirmed  by  the  Appellate  Court  for  the 
Third  District,  and  defendant  Davis  appeals. 

Farmer,  C.  J.  This  is  an  action  of  assumpsit,  brought  by  appellee, 
as  indorsee,  against  appellant,  Emmons  Davis,  as  maker,  and  Eliza- 
beth Gamble,  as  indorser  and  guarantor,  of  the  following  written  in- 
strument : 

"For  value  received  I  promise  to  pay  Elizabeth  Gamble,  or  order,  the 
sum  of  fifteen  hundred  dollars  in  twelve  months  after  I  shall  become 
the  legal  owner  of  one  hundred  and  fifteen  acres  of  land  conveyed  to 
me  by  my  father,  H.  V.  Davis,  reserving  to  him,  H.  V.  Davis,  a  life 
estate  in  said  land,  by  which  at  his  death  I  am  to  become  possessed  of 
and  the  owner  in  fee  of  said  one  hundred  and  fifteen  acres,  situated, 
in  the  southeast  corner  of  section  30,  in  township  18  north,  range  11 
east  of  the  third  P.  M.,  Champaign  county,  Illinois. 

"Emmons  Davis. 

"March  6,  1894. 

"Witness:     Thomas  J.  Smith. 

'"Indorsed  and  payment  guaranteed. 

"Elizabeth  Gamble." 

*  *  *  Appellant's  contention  is  that  the  instrument  sued  on  is 
not  a  promissory  note,  because  it  is  not  payable  at  a  specified  time 
which  must  certainly  arrive,  but  is  payable  upon  a  contingency,  which 
may  or  may  not  happen.  The  contingency  upon  which  it  is  argued 
the'  payment  depends  is  the  actual  ownership  and  possession  of  the 
land  by  appellant,  and  it  is  said  this  may  never  happen,  because  it  may 


Ch.  1)  FORMAL    UEQriSITES  659' 

be  that  the  grantor  in  the  deed  had  no  title  to  the  land,  or  that  appellant 
might  fail  to  record  his  deed,  and  the  grantor  make  another  deed  to 
an  innocent  purchaser,  or  that  appellant  might  before  the  death  of  nis 
father  have  joined  with  him  in  a  conveyance  to  a  third  person,  there- 
by destroying  appellant's  estate  and  interest  in  the  land  before  the 
life  estate  of  his  father  was  terminated.  We  think  there  is  no  merit 
in  this  position  of  appellant.  It  is  not  claimed  that  there  is  any  basis 
for  the  contention  that  it  might  possibly  turn  out  appellant's  father  had 
no  title  to  the  land  conveyed,  and  as  to  the  other  alleged  contingencies 
it  was  in  the  power  of  appellant  to  prevent  them  happening.  Besides, 
we  do  not  consider  them  contingencies,  within  the  meaning  of  the  law, 
that  could  afifect  the  certainty  of  the  time  for  the  payment  of  the  in- 
strument sued  on.  Properly  analyzed  and  understood,  that  instrument 
recites  that  H.  V.  Davis  had  conveyed  to  appellant  115  acres  of  land, 
reserving  a  life  estate  therein;  that  appellant  was  to  become  the  own- 
er in  fee  and  possessed  of  said  land  upon  his  father's  death,  and  he 
promised  to  pay  Elizabeth  Gamble  $1,500  within  12  months  after  he 
became  such  owner  of  said  land — i.  e.,  within  12  months  after  his 
father's  death.  The  payment  was  not  dependent  upon  a  contingencv 
that  might  never  happen.  The  death  of  H.  V.  Davis  would  entitle  ap- 
pellant to  the  possession  of  the  land,  and  his  death  was  certain  to  hap- 
pen.    *     *     * 

Judgement  affirmed. 


SACKETT  V.  PALMER. 

(Supreme  Court  of  New  York,  1857.     2r,  Barb.  179.) 

This  action  was  brought  upon  an  instrument  in  the  following  words  : 
■'$550.  Ninety  days  after  the  dissolution  of  the  copartnership  between 
Nelson  Chapin.  of  the  party  of  the  first  part,  in  said  copartnership, 
and  J.  F.  Palmer,  of  the  party  of  the  second  part  in  said  copartnership, 
and  the  settling  of  the  books  of  the  said  firm,  I,  in  behalf  of  the  party 
of  the  second  part,  promise  to  pay  to  the  said  Nelson  Chapin,  of  the 
party  of  the  first  part,  five  hundred  and  fifty  dollars ;  the  interest  to 
be  paid  annually  by  the  aforesaid  J.  F.  Palmer,  of  the  party  of  the 
second  part,  in  the  aforesaid  copartnership. 

"[Signed]      Nelson  Palmer." 

Johnson,  J,  The  instrument  on  which  the  action  is  brought  is  noi 
a  promissory  note.  It  is  payable  ninety  days  after  the  happening  of 
two  events,  one  of  which  may  never  happen.  '''  *  *  It  is  not  shown 
by  the  evidence  how  long  the  partnership  was  to  continue  by  the 
agreement  of  the  partners.  It  was  certain,  however,  that  there  would 
at  some  time  be  a  dissolution,  by  the  death  of  one  of  the  partners,  if 
not  otherwise.  That  e^'ent  was  sufficiently  certain.  But  the  settling 
of  the  books  of  the  firm  w^as  an  event  which  might  never  happen.  It 
would  not  inevitably  happen.  It  might,  and  probably  would,  after  a 
dissolution,  in  due  course  of  law.  But  that  is  not  enough;  if  it  might 
not  happen,  the  instrument  is  not  a  promissory  note.    *     *    * 

The  defendant  is  therefore  entitled  to  judgment  upon  the  case. 


6G0  NEGOTIABLE   INSTRUMENTS  (Part  3 


JOSEPH   V.    CATRON. 

(Supreme  Court  of  New  Mexico.  1905.     13  N.  M.  202,  SI  Pac.  439, 
1  L.  R.  A.  [N.  S.]  1120.) 

Action  by  Thomas  B.  Catron  against  Antonio  Joseph.  Judgment  for 
plaintiff.    Defendant  brings  error. 

Pope,  J.  *  *  *  The  contract  here  sued  on  *  *  *  is  as  fol- 
lows :  '''Fernando  de  Taos,  New  Mexico,  November  22,  1873.  Upon 
the  confirmation  by  the  Congress  of  the  United  States  of  that  certain 
land  grant  known  as  the  Canon  de  Chama,  otherwise  called  San  Joa- 
quin del  Rio  de  Chama  Grant,  I  promise  to  pay  Mr.  Samuel  Ellison 
or  order  the  sum  of  Five  Hundred  Dollars  in  current  funds  of  the 
United  States.     Antonio  Joseph.  Frederick  MuUer."     *     *     * 

We  come  now  to  consider  the  third  proposition,  to  which  the  briefs 
of  counsel  and  the  oral  argument  have  been  mainly  directed.  Is  the  in- 
strument here  sued  on  a  negotiable  instrument?  If  it  is  such  an  in- 
strument, then  it  is  presumed  to  have  been  given  upon  valuable  con- 
sideration, and,  having  been  acquired  before  maturity  by  a  bona  fide 
purchaser  for  value,  could  not  be  subject  to  any  defenses  existing  be- 
tween the  original  parties  of  which  plaintiff  had  no  notice.  If,  on  the 
other  hand,  the  instrument  was  not  negotiable,  very  different  questions 
supervene. 

The  rule  is  recognized  by  each  of  the  parties  that,  in  order  to  con- 
stitute a  negotiable  instrument,  the  fact  of  the  maturity  of  the  instru- 
ment at  som.e  time  must  be  morally  assured ;  it  must  be_  certain  to 
accrue.  *  *  *  The  cases  bearing  upon  this  precise  point  are  not 
numerous,  and  those  cited  by  the  parties  in  their  briefs  are,  as  a  rule, 
not  in  point,  for  the  obvious  reason  that  death  is  an  absolute  certainty, 
and  a  note  contingent  upon  death  is  thus  contingent  upon  something 
which  is  bound  to  occur.  Equally  as  apart  from  this  proposition  are 
the  cases  relied  upon  by  plaintiff  known  as  the  "Southern  War  cases," 
involving  questions  as  to  the  negotiability  of  notes  payable  within  a 
certain  time  after  the  cessation  of  war  between  the  Confederate  States 
and  the  United  States  of  America,  or  the  establishment  of  peace  be- 
tween those  then  contending  portions  of  our  reunited  nation.  Such 
obligations  were  likewise  contingent  upon  an  event  which  was  morally 
certain  to  happen.  In  human  experience,  no  war  has  ever  existed 
which  has  not  come  to  an  end,  and  none  can  be  conceived  of  that  will 
not  have  at  some  time  a  termination.  *  *  *  But  does  the  confirma- 
tion of  a  land  grant  by  Congress  stand  upon  the  same  basis? 

It  is  urged  by  the  plaintiff'  that  it  does,  for  the  reason  pointed  out 
in  one  or  two  English  cases  of  great  antiquity.  The  first  of  these  is 
the  case  of  Andrews  v.  Franklin,  1  Strange,  22,  wherein  the  condi- 
tion of  the  note  was  "payable  two  months  after  a  certain  ship  of  His 
Majesty's  service  should  be  paid  off."  This  note  was  objected  to.  as 
depending  upon  a  contingency  which  might  never  happen,  but  the  court 
held  otherwise  upon  the  ground  that  the  '"paying  off'  of  a  ship"  is  a  thing 
of  public  nature.  Also  there  is  cited  the  case  of  Evans  v.  Underwood, 
1  Wils.  262,  wherein  a  note  was  held  negotiable,  the  terms  of  which 
were,  "I  promise  to  pay  to  George  Pratt  or  order  eight  pounds,  upon 
the  receipt  of  his,  the  said  George  Pratt's  wages  due  from  His  Majes- 
ty's ship,  the  Suffolk."  In  that  case  the  court  contented  itself  with  cit- 
ing and  following  the  case  of  Andrews  v.  Franklin.  We  have  been 
referred  to  no  American  cases  in  which  the  doctrine  of  Andrews  v. 


Ch,  1)  FORMAL   REQUISITES  601 

Franklin  has  been  followed  or,  indeed,  countenanced.  *  *  *  On 
the  other  hand,  wherever  these  two  cases  have  been  cited  by  the  text- 
writers  or  the  reports,  it  has  been  to  question  their  soundness.  In- 
deed, doubts  have  even  been  expressed  as  to  whether  Andrews  v. 
Franklin  was  ever  actually  decided,  and  Evans  v.  Underwood  has 
been  particularly  criticised  upon  the  ground  that,  while  the  paying 
off  of  a  public  ship  may  be  a  moral  certainty,  it  is  by  no  means  to  be 
considered  equally  certain  that  a  particular  person  will  receive  wages 
therefrom.    *     *    * 

But  indulging  to  these  two  cases  the  high  respect  which  must  be 
accorded  them,  both  because  of  their  age  and  the  high  character  of 
the  English  tribunal  enunciating  them,  we  are  of  opinion  that  they  do 
not  lead  to  the  conclusion  that  the  confirmation  of  a  land  grant  by  Con- 
gress is  a  moral  certainty.  The  United  States  has  never  become  bound 
by  treaty  nor  by  international  law  to  the  confirmation  of  all  private 
land  claims  in  the  territory  of  New  Mexico,  nor  for  the  confirmation 
of  all  claims  which  may  be  asserted  by  interested  parties  to  be  land 
grants.  The  extent  to  which  the  nation  went  in  the  treaty  of  Guad- 
alupe Hidalgo  was  to  pledge  itself  that,  in  the  territories  conveyed  by 
the  treaty,  property  of  every  kind  should  be  inviolably  respected.  This 
was  simply  a  declaration  of  international  morals.  But  the  manner  of 
that  recognition  in  the  case  of  an  imperfect  grant — and  plaintiff,  in  his 
brief,  concedes  and  contends  that  this  was  such — was  exclusively  for 
Congress  to  determine.  *  *  *  The  presence  of  these  possibilities 
establishes  that  at  the  time  this  obligation  was  made  a  confirmation 
was  not  bound  to  occur ;  it  was  not  a  moral  certainty ;  the  instrument 
was  not  payable  at  a  time  fixed,  beyond  peradventure ;  the  instrument 
was  not  negotiable.    *    *    * 

The  case  will  be  reversed  and  remanded  for  further  proceedings  in 
accordance  with  this  opinion. 


NATIONAL  BANK  OF  COMMERCE  v.  KENNEY   et  al. 

(Supreme  Court  of  Texas,  1904.     98  Tex.  293,  S3  S.  W.  368.) 

Gaines,  C.  j.  *  *  *  The  question  *  *  *  presents  itself,  is 
the  note  in  question  a  negotiable  promissory  note?  The  Court  of 
Civil  Appeals  held  that  it  was  not.  In  this  ruling,  however,  w^e  do 
not  concur.  The  ground  upon  which  it  is  claimed  that  the  note  is 
nonnegotiable  is  that  the  time  of  its  payment  is  uncertain.  This  claim 
is  predicated  upon  the  following  provision  in  the  note :  "The  makers 
and  endorsers  hereof  hereby  severally  waive  protest,  demand  and  no- 
tice of  protest,  and  non-payment  in  case  this  note  is  not  paid  at  ma- 
turity, and  agree  to  all  extensions  and  partial  payments  before  or 
after  maturity  without  prejudice  to  holder."  If,  as  is  argued,  the 
effect  of  the  stipulation  is  to  give  the  right  to  the  maker  without  the 
consent  of  the  holder,  or  to  the  holder  without  the  consent  of  the 
maker,  to  appoint  another  day  of  payment  and  thereby  extend  the 
time,  it  may  be  that  it  would  render  the  instrument  not  negotiable. 
But  we  do  not  think  it  capable  of  that  construction.  It  does  not  say 
that  either  the  holder  or  the  maker  may  extend  the  note.  It  merely 
makes  a  provision  in  case  the  time  of  payment  may  be  extended. 
How  extended?  It  seems  to  us  the  extension  meant  is  that  which 
takes  place  when  the  debtor  and  creditor  make  an  agreement  upon  a 


662  NEGOTIABLE   INSTRUMENTS  (Part  3 

valuable  consideration  for  the  payment  of  the  debt  on  some  day  sub- 
sequent to  that  previously  stipulated.  The  obvious  purpose  of  the 
provision,  taken  as  a  whole,  was  merely  to  relieve  the  holder  of  the 
paper  from  the  burdens  made  necessary  by  the  rigid  requirements  of 
the  mercantile  law  in  order  to  secure  the  continued  liability  of  the  in- 
dorsers  and  sureties  upon  the  paper.  Therefore  what  was  meant  by 
the  stipulation  as  to  the  extension  of  time  was  simply  that,  in  case  the 
holder  and  the  maker  should  agree  upon  an  extension,  the  sureties 
and  indorsers  should  not  be  discharged.  The  holder  and  maker  of 
any  note  may  at  any  time  agree  upon  an  extension;  therefore  the  fact 
that  they  may  have  that  right  does  not  affect  the  negotiability  of  the 
paper.  It  is  usually  said  that,  in  order  to  make  an  instrument  negotia- 
ble under  the  law  merchant,  the  time  of  payment  must  be  certain.  But 
a  note  payable  "on  or  before"  a  certain  date  is  negotiable.  The  maker 
of  such  a  note  has  the  right  to  pay  before  the  day  named,  but  the  hold- 
er cannot  demand  payment  before  that  day.  So,  in  that  case,  the  time 
at  which  the  maker  may  elect  to  pay  is  uncertain,  but  the  time  at 
whicJi  the  holder  may  demand  payment  is  certain.  It  follow^s  that,  if 
the  holder  has  the  absolute  right  to  demand  payment  at  a  certain  day, 
the  note  is  negotiable.  This  is  but  an  illustration  of  what  we  under- 
stand to  be  the  general  rule.  There  being  nothing  in  the  stipulation 
under  consideration  which  gave  any  one  the  right  to  demand  of  the 
holder  of  the  note  an  extension  of  the  time  of  payment,  we  think  the 
time  at  which  he  could  demand  payment  was  fixed,  and  that  therefore 
it  was  a  negotiable  note.     *    *    * 


PIOLLIDAY   STATE   BANK  v.  HOFFMAN. 

(Supreme  Court  of  Kansas,  1911.     85  Kan.  71,  116  Pac.  2.S9.  35  L.  R.  A. 
[N.  S.]  390,  Ann.  Cas.  1912D,  1.) 

Porter,  J.  The  bank  brought  this  action  on  a  promissory  note 
given  by  C.  B.  Hoft'man  to  the  Merchants'  Refrigerating  Company 
for  shares  of  its  capital  stock.  Hoffman  admitted  the  execution  of  the 
note  and  alleged  a  total  failure  of  consideration.  On  the  trial  he  in- 
troduced evidence  tending  to  show  that  the  stock  for  which  the  note 
was  given  was  valueless,  and  that  he  was  induced  to  purchase  the  same 
by  the  false  and  fraudulent  representations  of  J.  E.  Brady,  president 
of  and  acting  for  the  refrigerating  company.  The  plaintiff  introduced 
evidence  tending  to  show  that  it  purchased  the  note  in  due  course, 
without  notice  of  defenses.  At  the  close  of  the  evidence,  the  court 
directed  a  verdict  for  the  plaintiff  for  the  amount  of  the  note,  with 
mterest.     The  defendant  appeals. 

The  case  turns  upon  the  question  whether  the  note  is  negotiable. 

It  reads  as  follows:     "$4,500.00.     No.  .     Kansas  City,  Mo., 

Sept.  ISth,  190 — .  Due  ,  Six  months  after  date  for  value  re- 
ceived I  promise  to  pay  to  the  order  of  Merchants'  Refrigerating 
Company,  Kansas  City,  Missouri,  forty  .five  hundred  and  no/ 100 
dollars  at  the  office  of  the  Merchants'  Refrigerating  Company,  Kan- 
sas City,  Mo.,  with  interest  from  maturity  until  paid  at  the  rate  of 
six  per  cent,  per  annum.  To  secure  the  payment  of  this  note  and  of 
any  and  all  other  indebtedness  which  I  now  owe  to  the  holder  hereof, 
or  may  owe  him  at  any  time  before  the  payment  of  this  note  I  have 
hereto  attached,  as  collateral  security  the  following:     Stock  certificate 


Ch.  1)  FORMAL   REQUISITES  663 

No.  137  of  the  capital  stock  of  the  Merchants'  Refrigeratinc^  Compa- 
ny, calhng  for  50  shares  of  the  stock ;  par  value  $5,000.  The  above" 
collateral  has  a  market  value  of  $6,250.00.  If,  in  the  judgment  of  the 
holder  of  this  note,  said  collateral  depreciates  in  value,  the  undersigned 
agrees  to  deliver  when  demanded  additional  security  to  the  satisfac- 
tion of  said  holder ;  otherwise  this  note  shall  mature  at  once.  Any 
assignment  or  transfer  of  this  note,  or  obligations  herein  provided 
for,  shall  carry  with  it  the  said  collateral  securities  and  all  rights  under 
this  agreement.  And  I  hereby  authorize  the  holder  hereof  on  default 
of  this  note,  or  any  part  thereof,  according  to  the  terms  hereof,  to 
sell  said  collateral  or  any  part  thereof,  at  public  or  private  sale  and 
with  or  without  notice,  and  by  such  sale  the  pledgor's  right  of  redemp- 
tion shall  be  extinguished.    C.  B.  Hoffman,"    ^'-    *    * 

The  defendant  contends  that  *  *  *  ^\^q  ^ote  is  nonnegotiable 
for  three  reasons :  (1)  It  is  not  for  a  sum  certain ;  (2)  it  is  not  due  at 
a  fixed  or  determinable  future  time ;  (3)  it  contains  promises  to  do 
acts  in  addition  to  the  payment  of  money.     *     *     * 

In  our  opinion  the  most  serious  objection  to  the  form  of  the  note, 
the  particular  provision  which  most  clearly  destroys  the  negotiable 
character  of  the  instrument,  is  the  agreement  as  to  matters  other  than 
the  payment  of  money.  This  is  the  stipulation  by  which  the  maker 
agrees  to  deliver,  when  demanded,  additional  collateral  security  to  the 
satisfaction  of  the  holder,  in  default  of  which  the  note  shall  mature  at 
once.  It  would  hardly  be  dift'erent  if  the  note  recited  that  it  was  se- 
cured by  a  chattel  mortgage  upon  certain  live  stock,  and  contained  an 
agreement  that  in  case  their  value  should  depreciate,  and  the  holder 
should  deem  the  security  insufficient,  the  maker  would,  on  demand,  ex- 
ecute and  deliver  to  the  holder  a  mortgage  upon  certain  real  estate  for 
such  amount  as  would  satisfy  the  holder,  and  that  otherwise  the  note 
should  mature  at  once.     *     *     * 

The  negotiable  instruments  law,  which  is  merely  declaratory  of  the 
mercantile  law  on  the  subject,  contains  a  provision  which,  as  we  con- 
strue it,  makes  the  note  in  the  instant  case  nonnegotiable.  Section 
5258  of  the  General  Statutes  of  1909  reads:  "An  instrument  which 
contains  an  order  or  promise  to  do  any  act  in  addition  to  the  payment 
of  money  is  not  negotiable."  The  section  then  enumerates  certain 
things  which  are  not  to  be  regarded  as  falling  within  the  inhibition. 
None  of  these  exceptions  cover  such  a  promise  as  the  one  under  con- 
sideration. 

The  note  is  nonnegotiable  for  the  further  reason  that  the  same  pro- 
vision renders  doubtful  and  uncertain  the  time  at  which  it  shall  be- 
come due.  If  the  maker  shall  fail  when  demanded  to  furnish  addition- 
al security  to  the  satisfaction  of  the  holder,  the  note  shall  mature  at 
once.  It  is  argued  that  this  is  no  dift'erent  in  principle  from  the  pro- 
vision that  default  in  the  payment  of  any  installment  shall  accelerate 
the  maturity  of  the  note,  and  cases  are  cited  in  which  we  have  held 

that    a   similar    provision   will    not   render    the   note    nonnegotiable. 

*  *     * 

*  *  *  The  negotiable  instruments  law  itself  expressly  declares 
that  a  negotiable    instrument  may    contain  provisions    of   this    kind. 

*  *  *  The  distinction  between  such  a  stipulation  and  the  one  in 
question  lies  in  the  fact  that  in  the  one  instance  the  maturity  is  accel- 
erated by  the  default  of  the  maker  alone,  and  the  default  is  to  consist 
in  his  failure  to  pay  money.     Here  the  maturity  of  the  note  is  to  be 


664  NEGOTIABLE  INSTRUMENTS  (Part  3 

accelerated  by  the  failure  of  the  maker  to  do  something  in  addition 
to  the  payment  of  money,  and  both  contingencies  are  made  to  depend 
upon  something  over  which  he  has  not  the  absolute  control.  It  is 
within  the  power  of  the  holder,  by  refusing  assent  to  what  the  maker 
has  done,  arbitrarily  to  make  the  note  due  at  any  time  between  the 
date  of  its  execution  and  six  months  thereafter.  If  the  holder  is  not 
satisfied  with  the  additional  security,  the  note  matures  at  once,  and 
thus  the  time  at  which  it  may  mature  would  depend  upon  the  time  at 
which  the  holder  declared  himself  dissatisfied  with  the  security  de- 
livered by  the  maker.  The  effect  of  this  stipulation  is  to  leave  the  time 
when  payable  uncertain  and  indefinite,     *     *     * 

The  law  of  commercial  paper,  like  all  other  substantive  law.,  is  the 
creature  of  growth.  Founded  on  the  custom  and  usages  of  merchants, 
it  is  the  combined  result  of  reason  and  experience  slowly  modified  by 
the  necessities  and  changes  in  commercial  affairs.  The  methods  of 
modern  business  and  the  interests  of  maker  and  holder  alike  require 
the  deposit  of  collateral  securities,  with  the  power  in  the  holder  to 
sell  the  same  at  maturity.  *  *  *  The  statute  (negotiable  instruments 
act)  provides  that  an  instrument  otherwise  negotiable  is  not  affected 
by  a  provision  which  "(2)  authorizes  a  confession  of  judgment  if  the 
instrument  be  not  paid  at  maturity;  or  (3)  waives  the  benefit  of  any 
law  intended  for  the  advantage  or  protection  of  the  obligor." 

In  former  opinions  this  court  has  frequently  referred  to  the  con- 
flict of  authority  in  the  decisions  respecting  the  effect  of  collateral 
provisions  of  this  character  in  promissory  notes  and  bills  of  exchange. 
*  *  *  The  adoption  in  recent  years  of  the  negotiable  instruments 
law  by  so  many  of  the  states  was  in  response  to  the  general  desire 
for  uniformity  in  respect  to  commercial  paper.  The  application,  how- 
ever, by  the  courts  of  legal  principles  to  particular  facts  has  not  reach- 
ed scientific  exactness,  and  never  will.  It  is  hardly  to  be  expected, 
therefore,  that  the  courts  of  the  different  states  which  have  adopted 
the  act  will  always  agree  in  the  construction  and  application  of  its 
provisions.  Actual  uniformity  in  the  law  of  negotiable  instruments 
will  remain  a  dream  more  or  less  iridescent ;  substantial  uniformity  is 
all  that  can  be  hoped  for.  The  conclusions  we  have  reached  with  re- 
spect to  the  instrument  in  question  are  in  harmony  with  the  fonner 
decisions  of  this  court  and  accord  with  our  view  of  the  proper  con- 
struction to  be  given  to  the  language  of  the  statute. 

The  trial  court  erred  in  holding  the  instrument  negotiable  and  in 
directing  a  verdict.    The  judgment  will  therefore  be  reversed.   *   *   * 


FINLEY  V.  SMITH,  Banking  Com'r. 

(Court  of  Appeals  of  Kentucky,  1915.     165  Ky.  445,   177  S.  W.  262, 
L.  R.  A.  1915F,  777.) 

Carroll,  j.  *  *  *  The  remaining  question  is:  Was  this  note 
a  negotiable  instrument  within  the  meaning  of  the  Negotiable  Instru- 
ments Law?     *     *     * 

Looking  to  these  pertinent  sections  1,  2  and  5,  for  the  description 
of  a  negotiable  instrument,  the  argument  is  made  that  this  note  is  not 
a  negotiable  instrument,  because,  in  addition  to  containing  an  uncon- 
ditional promise  to  pay  the  $2,500  four  months  after  date  to  the  Madi- 
sonville  Savings  Bank,  it  contains  the  further  promise  that,  if  the 
collateral  deposited  as  security  for  the  payment  of  the  note  should 


Ch.  1)  FORMAL  REQUISITES  665 

depreciate  in  value,  the  maker  "will  deposite  and  pledge  with  said  bank 
such  additional  security  as  it  may  from  time  to  time  require,  and  in 
default  of  such  deposit  *  *  *  this  note,  at  the  option  of  the  bank, 
shall  become  due  and  payable." 

Accordingly,  it  is  said  that  the  promise  to  pledge,  if  required,  ad- 
ditional security,  and  the  condition  that  the  note  should  become  due 
upon  the  failure  to  pledge  additional  security  demanded,  take  it  out 
of  the  class  of  negotiable  instruments,  because  it  is  provided  in  sec- 
tion 5,  supra,  that :  "An  instrument  which  contains  an  order  or  prom- 
ise to  do  an  act  in  addition  to  the  payment  of  money  is  not  negotia- 
ble." 

It  will  be  observed  that  the  note  is,  in  the  first  place,  an  uncondi- 
tional promise  to  pay,  at  a  fixed  time,  a  certain  sum  of  money,  to  the 
order  of  a  specified  person.  So  that  the  qualities  of  the  paper  to 
which  attention  is  drawn  as  rendering  it  nonnegotiable  are  to  be  found 
in  the  clauses  following  what  we  may  call  the  terms  of  the  note  proper. 
This  arrangement,  however,  of  the  matter  contained  in  the  paper,  does 
not  affect  the  question  raised,  because  the  whole  of  the  paper  must  be 
considered  in  ascertaining  its  character  as  a  negotiable  or  nonnegotia- 
ble instrument.     *     *     * 

It  will  be  observed  that  under  section  2  the  fact  that  a  note  is  pay- 
able in  stated  installments,  with  a  provision  that  upon  default  in  the 
payment  of  any  installments  the  whole  should  become  due,  does  not 
affect  its  negotiable  character.  It  will  also  be  noticed  that  section  5 
provides  that  the  negotiable  character  of  a  note  is  unaffected  by  a  pro- 
vision authorizing  the  sale  of  collateral  security,  or  a  provision  that 
gives  the  holder  an  election  to  require  something  to  be  done  in  lieu 
of  the  payment  of  money.  So  that  the  only  provision  in  this  note  that 
can  be  said  not  to  be  expressly  authorized  by  the  Negotiable  Instrument 
Law  is  the  clause  pledging  the  maker  to  deposit  on  demand  additional 
security  under  penalty  of  precipitating  the  maturity  of  the  paper. 

We  may  therefore  limit  the  inquiry  involving  the  negotiable  char- 
acter of  this  paper  to  the  consideration  of  two  questions:  (1)  The 
promise  of  the  maker  to  pledge,  if  required,  additional  security ;  and 
(2)  the  provision  that  the  failure  to  do  this  should,  at  the  option  of 
the  holder,  accelerate  the  maturity  of  the  paper.  This  brings  before 
us  for  decision  new  questions  in  the  construction  of  the  Negotiable 
Instrument  Law,  and  it  is  rather  unfortunate  that  the  decisions  of  other 
courts  of  last  resort,  to  which  these  questions  have  been  submitted,  are 
not  harmonious.  The  purpose  of  the  author  of  this  law  was  to  secure 
uniform  legislation  throughout  the  United  States,  on  the  subject  of 
commercial  paper,  so  that  a  person  in  any  one  state  might,  by  ex- 
amining the  law  on  this  subject  in  his  own  state,  be  advised  as  to  the 
condition  of  the  like  law  in  other  states.  And,  so  far  as  legislation  is 
concerned,  it  may  be  said  that  the  desired  end  to  be  secured  by  uni- 
form legislation  has  been  accomplished.  But  uniform  legislation  on 
any  subject  necessarily  loses  much  of  its  value  and  usefulness  unless 
it  is  followed  by  uniform  construction  by  the  courts  to  which  the 
legislation  is  submitted  for  construction. 

This  uniformity  of  construction,  however  desirable,  is  scarcely  pos- 
sible of  attainment,  because  a  court  of  last  resort,  when  new  questions 
involving  the  construction  of  statutes  are  presented,  will  very  reason- 
ably and  naturally  adopt  that  construction  that  it  conceives  to  be  prop- 
er, while  another  court  of  last  resort  in  considering  the  same  question 


6G6  NEGOTIABLE   INSTRUMENTS  (Part  3 

of  construction  might  with  the  same  honesty  of  purpose  reach  an  en- 
tirely different  conclusion.  This  condition  is  forcibly  illustrated  in 
the  conflicting  views  of  the  courts  upon  the  particular  question  now 
before  us.  For  example,  the  Supreme  Court  of  Kansas,  in  the  case 
of  Holliday  State  Bank  v.  Hoffman,  85  Kan.  71,  116  Pac.  239,  35 
L.  R.  A.  (N.  S.)  390,  Ann.  Cas.'  1912D,  1,  held  that  an  otherwise  ne- 
gotiable note,  wnth  collateral  security  attached,  which  provided  that, 
"if  in  the  judgment  of  the  holder  of  this  note  said  collateral  depreci- 
ates in  value,  the  undersigned  agrees  to  deliver  when  demanded  ad- 
ditional security  to  the  satisfaction  of  said  holder;  otherwise  this  note 
shall  mature  at  once,"  was  rendered  nonnegotiable  by  this  additional 
promise,  and  for  the  further  reason,  as  stated  by  the  court,  that  the 
time  of  the  maturity  of  the  note  was  rendered  doubtful  and  uncertain 
by  the  provision  that  upon  the  failure  of  the  payee  to  deliver  the  ad- 
ditional security  the  note,  at  the  option  of  the  holder,  should  mature 
at  once. 

On  the  other  hand,  the  United  States  Circuit  Court  of  Appeals 
for  the  Seventh  Circuit,  in  Kennedy  v.  Broderick,  216  Fed.  137,  132 
C.  C.  A.  381,  L.  R.  A.  1915B,  472,  ruled  that  a  condition  in  a  note 
that,  "if  in  the  judgment  of  the  holder  of  this  note  said  collateral  de- 
preciates in  value,  the  undersigned  agrees  to  deliver  when  demanded 
additional  security  to  the  satisfaction  of  said  holder ;  otherwise  this 
note  shall  mature  at  once" — did  not  affect  its  negotiable  quality. 
^     ^     ^ 

Without  citation  of  further  authority,  we  are  inclined  to  adopt  the 
view  that  the  conditions  relied  on  as  destroying  the  negotiable  char- 
acter of  this  note  do  not  accomplish  that  purpose.  The  essential  things 
pointed  out  in  section  1  of  the  act  are:  (1)  That  the  instrument  must 
be  in  writing,  signed  by  the  maker;  (2)  must  contain  an  uncondi- 
tional promise  to  pay  a  sum  certain  in  money;  (3)  must  be  payabk 
on  demand  or  at  a  fixed  future  time ;  (4)  must  be  payable  to  the 
order  of  a  specified  person  or  to  bearer.  And  the  independent  promise 
in  this  note  pledging  the  holder  upon  demand  to  put  up  additional  col- 
lateral did  not  substantially  aff'ect  any  of  these  requirements.  The 
promise  to  strengthen  the  collateral  under  penalty  of  the  note  matur- 
ing at  once  did  not  change  the  date  of  its  maturity  any  more  than  w^ould 
the  provision  in  a  note  payable  in  installments  that  upon  default  in 
the  payment  of  the  installment  the  whole  should  become  due. 

We  think  the  promise  to  do  an  act  in  addition  to  the  payment  of 
money  that  will  render  the  note  not  negotiable  must  be  a  promise  that 
conflicts  with  some  one  of  the  essential  characteristics  of  a  negotiable 
note ;  or,  as  applied  to  the  case  in  hand,  it  must  be  a  promise  to  do 
something  that  would  affect  the  unconditional  promise  contained  in 
the  body  of  the  instrument  as  the  time  fixed  for  its  maturity.  The  Ne- 
gotiable Instrument  Law,  in  section  2,  permits  a  note  to  be  made  pay- 
able in  installments  with  a  provision  that  upon  default  in  the  payment 
of  any  installment  the  whole  shall  become  due.  Under  this  provision, 
if  any  installment  of  a  note  payable  in  installments  at  a  fixed  time  is 
not  paid,  this  delinquency  precipitates  the  maturity  of  the  note  and 
thereby  changes  the  time  fixed  for  its  maturity  as  certainly  as  does  the 
stipulation  that,  if  the  value  of  the  collateral  is  impaired,  other  col- 
lateral should  be  supplied  or  else  the  note  will  become  due. 

It  is  quite  usual  to  pledge  collateral  as  security  for  the  payment  of 
a  negotiable  note,  and  we  do  not  think  that  any  narrow  construction 


Ch.  1)  FORMAL   REQUISITES  .  667 

of  the  law  should  be  adopted  that  would  have  the  effect  of  impairing 
the  value  of  this  kind  of  security  or  that  would  deny  to  the  holder  the 
right  to  insist  that,  if  the  value  of  the  collateral  deposited  should  be- 
come impaired,  the  maker  must  strengthen  it  or  else  precipitate  the 
maturity  of  the  paper.  This  condition  in  the  note  is  merely  supple- 
mentary to  the  fixed  and  controlling  promises  and  is  really  nothing 
more  than  additional  security  for  the  payment  of  the  instrument.  It 
is  not,  strictly  speaking,  "an  order  or  promise  to  do  an  act  in  addition 
to  the  payment  of  money,"  but  is  rather  an  order  or  promise  to  do  an 
act  that  will  better  secure  the  promise  to  pay  the  money  stipulated  at 
the  time  fixed  in  the  note.  If  this  condition  or  promise  would  disturb 
the  negotiability  of  commercial  paper,  the  effect  would  necessarily  be 
to  lessen  the  value  of  collateral  as  security,  because  holders  of  paper 
would  not  be  disposed  to  accept  collateral,  much  of  which  has  a  fluctu- 
ating value,  if  they  were  denied  the  right  to  insist  that  its  value  should 
be  maintained  in  an  amount  sufficient  to  serve  the  purpose  for  which 
it  was  accepted. 

Being  of  the  opinion  that  the  instrument  sued  on  was  negotiable  pa- 
per, the  iudgment  is  reversed,  with  directions  for  a  new  trial  in  con- 
formity with  this  opinion. 


NICKELL  V.  BRADSHAW  et  al. 
(Supreme  Court  of  Oregon,  1919.     94  Or.  580,  183  Pac.  12,  11  A.  L.  R.  62.3.) 

B.elle  Nickell  brought  this  action  against  R.  H.  Bradshaw,  as  the 
maker,  and  against  Efiie  May  Terrill,  as  an  indorser,  of  a  promissory 
note.  Involuntary  judgment  of  nonsuit  against  Belle  Nickell.  The 
plaintiff  appealed. 

On  August  9,  1910,  R.  H.  Bradshaw  delivered  to  Effie  May  Terrill 
his  promissory  note  which  reads  as  follows : 

$2,000.  Med  ford,  Oregon,  Aug.  9th,  1910. 

"Five  years  from  date  without  grace,  I  promise  to  pay  to  the  order 
of  Effie  May  Terrill  for  value  received,  with  interest  from  date,  pay- 
able annually  at  the  rate  of  6  per  cent,  per  annum,  until  paid,  principal 
and  interest  payable  in  U.  S.  gold  coin,  at  Farmers'  &  Fruit  Growers' 
Bank  of  Medford,  Oregon ;  and  in  case  suit  or  action  is  instituted  to 
collect  this  note  or  any  portion  thereof,  I  promise  to  pay  such  addition- 
al sum  of  money  as  the  court  may  adjudge  reasonable  as  attorney's 
fees  in  such  suit  or  action.  R.  H.  Bradshaw. 

"Due  if  ranch  is  sold  or  mortgaged." 

Harris,  J.  *  *  *  j^  is  contended  ^hat  the  note  sued  upon  is  a 
nonnegotiable  instrument.  This  contention  proceeds  upon  the  theory 
that  the  words,  "due  if  ranch  is  sold  or  mortgaged,"  made  the  time  of 
payment  so  uncertain  that  it  cannot  be  said  that  the  note  was  payable 
"at  a  fixed  or  determinable  future  time."    *    '■'"    * 

The  three  sections  of  our  Code  to  which  attention  has  been  directed 
correspond  with  sections  184,  1,  and  4  of  the  Uniform  Negotiable  In- 
struments Law  which  has  been  adopted  by  all  the  states  of  the  Union 
except  Georgia  and  Texas.  *  *  *  If  the  words,  "due  if  ranch  is 
sold  or  mortgaged,"  are  omitted  from  the  instrument,  it  concededly  be- 
comes a  negotiable  promissory  note  within  the  meaning  of  section  6017, 
L.  O.  L.,  because  it  contains  a  promise  to  pay  "five  years  from  date," 
which  is,  speaking  as  of  the  date  of  the  note,  a  fixed  future  time.    If, 


G68  .  NEGOTIABLE  INSTRUMENTS  (Part  3 

on  the  other  hand,  the  words,  "five  years  from  date,"  are  erased,  the 
paper  is  admittedly  transformed  into  a  nonnegotiable  instrunient,  be- 
cause it  then  becomes  payable  "if  ranch  is  sold  or  mortgaged,"  which, 
if  standing  alone  and  yiewed  by  itself,  was  at  the  time  of  the  execution 
of  the  instrument  a  "contingency"  within  the  meaning  of  section  5837, 
L.  O.  L.  We  are  not  permitted,  however,  to  cancel  any  word  found  m 
the  instrument,  and  hence  the  whole  of  the  paper  must  be  considered 
in  determining  whether  the  instrument  is  or  is  not  negotiable.  Fm- 
ley  V.  Smith,  165  Ky.  445,  177  S.  W.  262,  L.  R.  A.  1915F,  177,  780. 
It  will  be  observed  that  the  writing  does  not  in  express  terms  say^that 
the  debt  becomes  due  if  the  ranch  is  sold  or  mortgaged  before  "five 
years  from  date,"  and  yet  such  is  the  obvious  intent  and  meaning  of 
the  whole  writing.  The  debt  becomes  due  at  all  events  "five  years 
from  date,"  and  the  debt  cannot  extend  beyond  that  fixed,  certain,  and 
definite  period  because  the  moment  the  five-year  period  ends  the  debt 
is  due  and  any  other  interpretation  of  the  writing  would  completely 
nuUify  the  words  "five  years  from  date" ;  but,  if  the  ranch  is  sold  or 
mortgaged  prior  to  the  expiration  of  that  fixed  future  time,  then  the 
promisor  agrees  to  pay  the  debt  at  the  time  of  such  sale  or  mortgage. 
*     *    * 

The  words,  "due  if  ranch  is  sold  or  mortgaged,"  do  not  extend  the 
date  of  payment,  but  upon  the  contrary  they  serve  only  to  accelerate 
the  maturity  of  the  debt.  Stated  broadly,  the  overwhelming  weight 
of  authority  is  to  the  effect  that,  Vv^here  a  note  is  made  payable  on  a 
definite  day  and  also  contains  a  conditional  promise  to  pay  at  an  earlier 
time,  the  instrument  is  not  rendered  nonnegotiable  by  the  acceleration 
clause.  *  *  *  The  books  contain  a  variety  of  cases  involving  ac- 
celeration clauses.  More  common  illustrations  are  found  in  instru- 
ments which  provide  that  a  default  in  the  payment  of  interest  or  in 
the  payment  of  an  installment  shall  mature  the  debt.  Other  familiar 
examples  are  furnished  by  adjudications  where  a  series  of  notes  have 
been  given  for  a  single  debt  with  a  provision  in  each  note  ^at  default 
in  the  payment  of  any  one  shall  mature  all  the  unpaid  notes.  While 
nearly  allthe  courts  have  decided  that  a  default  in  the  payment  of  in- 
terest or  in  the  payment  of  an  installment  or  a  failure  to  pay  one  of  a 
series  of  notes  is  such  an  acceleration  clause  as  does  not  destroy  the 
negotiability  of  an  instrument,  yet  there  are  recorded  instances  where 
courts  have  held  that  acceleration  clauses  of  the  kind  mentioned  im- 
pair the  negotiability  of  the  instruments  otherwise  negotiable. 

As  alreadv  stated,  the  general  principle  has  been  firmly  established, 
in  despite  of  occasional  dissenting  voices,  that  an  acceleration  clause 
does  not  necessarily  destroy  the  negotiability  of  an  instrument.  The 
chief  difficulty,  however,  is  encountered  whenever  an  attempt  is  made 
to  formulate  a  rule  by  which  to  determine  the  validity  of  all  accelera- 
tion provisions;  and  it  is  probably  impossible  to  formulate,  even  in 
the  most  general  language,  any  rule  which  will  include  all  acceleration 
provisions  that  have  been  held  sufficient,  and  at  the  same  time  serve 
as  a  safe  and  certain  guide  in  all  jurisdictions.  This  difficulty  is  nei- 
ther greater  nor  less  now  than  it  was  previous  to  the  adoption  of  the  ne- 
gotiable instruments  law.  For  example,  there  is  a  class  of  cases  deal- 
ing with  instruments  having  provisions  to  the  effect  that  if  at  any  time 
the  holder  of  the  note  deems  himself  insecure  he  may  declare  the  debt 
due ;  or  to  the  effect  that  the  holder  may,  if  he  deems  himself  insecure. 


Ch.  1)  FORMAL  REQUISITES  669 

call  upon  the  maker  for  additional  security  when  the  value  of  the  se- 
curity given  at  the  time  of  the  execution  of  the  writing  becomes  impair- 
ed, and  if  the  maker  fails  to  respond  with  additional  security  the  holder 
may  declare  the  debt  due. 

The  adjudications  assignable  to  this  class  are  divided  in  their  views; 
but  the  majority  of  the  cases  decided  under  the  provisions  of  the  ne- 
gotiable instruments  law,  as  well  as  the  majority  of  those  decided  in 
jurisdictions  where  the  negotiable  instruments  law  had  not  yet  been 
adopted,  have  ruled  that  this  kind  of  a  condition  in  an  acceleration 
clause  renders  the  instrument  nonnegotiable.  *  *  *  Holliday  State 
Bank  v.  Hoffman.  85  Kan.  71,  116  Pac.  239,  35  L.  R.  A.  (N.  S.)  390, 
Ann.  Cas.  1912D,  1.  *  *  *  Contra:  Empire  National  Bank  v. 
High  Grade  Oil  Refining  Co.,  260  Pa.  255,  103  Atl.  602 :  Finley  v. 
Smith,  165  Ky.  445,  177  S.  W.  262,  L.  R.  A.  1915F,  777.  *  *  * 
The  cases  holding  that  an  instrument  is  not  negotiable  if  it  contains 
a  clause  giving  the  holder  the  right  to  declare  the  debt  due  if  he  deems 
himself  insecure  are  based  primarily  upon  the  objection  that  the  date 
of  maturity  is  placed  wholly  tinder  the  control  of  the  holder,  is  com- 
pletely dependent  upon  his  whim  or  caprice,  and  is  independent  of  any 
act  done  or  omitted  by  the  maker ;  and,  if  there  is  the  further  stipula- 
tion that  the  maker  will  furnish  added  security  when  called  upon, 
then  there  is,  of  course,  an  affirmative  promise  of  the  maker  to  do 
an  act  in  addition  to  his  promise  to  pay  money.    *    *    * 

It  is  apparent  from  what  has  already  been  said  that  some  jurisdic- 
tions go  further  than  others  in  their  approval  of  acceleration  clauses ; 
and  consequently  a  rule  containing  language  as  broad  as  the  rule  in 
some  jurisdictions  would  be  too  broad  for  others,  and  a  formula  which 
is  only  broad  enough  for  the  latter  would  not  be  broad  enough  for  the 
former.  In  this  jurisdiction  the  holding  in  Reynolds  v.  Vint,  7Z  Or. 
528,  144  Pac.  526,  and  in  Western  Farquhar  Mach.  Co.  v.  Burnett,  82 
Or.  174,  161  Pac.  384,  condemns  acceleration  clauses  which  are  en- 
tirely under  the  control  of  the  holder  and  completely  dependent  upon 
his  whim  or  caprice  independent  of  any  act  of  the  maker;  but,  since 
neither  of  those  decisions  condemns  all  acceleration  clauses,  we  have 
no  hesitancy  in  declaring  that  we  prefer  to  keep  company  with  the 
majority  of  the  other  jurisdictions  by  giving  approval  to  certain 
kinds  of  acceleration  clauses. 

What  we  deem  to  be  the  better  rule  is  best  expressed  by  language 
found  in  Ernst  v.  Steckman,  74  Pa.  13,  15  Am.  Rep.  542,  where  a  note, 
payable  "twelve  months  after  date  (or  before,  if  made  out  of  the  sale 
of  W.  S.  Coffman's  Improved  Broadcast  Seeding  Machine),"  was  held 
to  be  negotiable.  In  concluding  the  opinion  the  court  there  said: 
"The  principle  to  be  deduced  from  the  authorities  is  this :  To  con- 
stitute a  negotiable  promissory  note,  the  time,  or  the  event,  for  its  ulti- 
mate payment,  must  be  fixed  and  certain;  yet  it  may  be  made  subject 
to  contingencies,  upon  the  happening  of  which,  prior  to  the  time  of  its 
absolute  payment,  it  shall  become  due.  The  contingency  depends  upon 
some  act  done  or  omitted  to  be  done  by  the  maker,  or  upon  the  occur- 
rence of  some  event  indicated  in  the  note ;  and  not  upon  any  act  of  the 

payee  or  holder,  whereby  the  note  may  become  due  at  an  earlier  day." 
*    *    * 

The  respondent  has  argued  that  the  debt  represented  by  the  note 
automatically  became  due  when  the  conveyance  was  made  to  Frederick 


670  NEGOTIABLE   INSTRUMENTS  (Part  3 

T.  I,ewis  on  January  18.  1913;  but  the  answer  is  that  the  thoroughly 
established  and  indeed  almost  universal,  if  not  the  universal,  rule  is 
that  the  acceleration  clause  is  not  self-executing,  but  it  merely  confers 
an  option  upon  the  holder  to  treat  the  debt  as  due.    *    *    * 


To  summarize  the  situation  with  respect  to  the  requirement  of 
certainty  in  the  time  of  payment,  the  actual  state  of  the  law  is 
open  to  a  double  criticism.  In  the  first  place,  it  muy  well  be  urged 
that  section  4,  subsection  3,  is  too  great  a  relaxation  of  the  require- 
ment of  certainty  in  the  time  of  payment.  This  section  has  merely 
codified  existing  law.  Even  if  the  case  of  •  an  instrument  made 
payable  within  a  specified  time  after  the  death  of  a  designated  per- 
son be  regarded  as  sufficiently  certain — and  the  policy  of  this  rule 
may  be  doubted — still  the  opportunity  thus  afforded  to  hold  that 
other  events  such  as  the  arrival  of  a  ship  or  the  maturing  of  a  crop 
operate  as  continual  temptations  to  override  the  requirement  ot 
certainty  in  the  time  of  payment.  As  has  been  well  said  by  Pro- 
fessor Chafee,^  with  reference  to  this  class  of  commercial  instru- 
ments, "  *  *  *  the  obligors  on  the  instrument  ought  to  know 
the  time  of  payment  definitely,  so  that  the  primary  party  may  have 
funds  ready  as  the  day  approaches,  and  the  secondary  parties  may 
watch  him  and  protect  themselves  if  he  appears  unprepared  to 
pay.  Good  business  policy  requires  that  men  shall  foresee  the 
maturity  of  their  obligations  and  adjust  their  affairs  accordingly. 
Because  of  these  specific  objections,  the  paper  is  unsuited  to  rapid 
circulation  in  the  legitimate  money  market." 

A  second  criticism  may  be  directed  at  the  view  that  an  instru- 
ment bearing  a  fixed  maturity  but  subject  to  acceleration  into  an 
earlier  maturity  upon  the  happening  of  some  event,  in  form  ex- 
trinsic, but  in  reality  conferring  an  option  on  the  holder  to  de- 
mand payment,  is  payable  at  an  uncertain  time.  Where  the  instru- 
ment is  made  to  riiature  before  the  fixed  date  (a)  when  the  holder 
deems  himself  insecure,  or  (b)  when  the  obligor  does  any  act  cal- 
culated to  impair  the  security,  or  (c)  upon  the  depreciation  of  col- 
lateral deposited  by  the  obligor  with  the  holder,  the  event  is  not 
so  far  contingent  as  to  require  the  holding  that  the  time  of  pay- 
ment is  uncertain.  In  legal  eft"ect  the  instrument  is  payable  at 
the  fixed  date  but  subject  to  earlier  maturity  at  the  option  of  the 
holder.  As  far  as  the  holder  is  concerned,  the  instrument  is  de- 
mand paper.  Of  course  an  instrument  which  bore  a  fixed  date  of 
maturity,  but  was  subject  to  an  earlier  maturity  upon  the  happen- 
ing of  some  event  wholly  contingent,  as  for  example,  an  instrument 
payable  at  a  fixed  date  but  subject  to  an  earlier  payment  if  the 
price  of  cotton  on  the  exchange  dropped  below  a  specified  figure, 
may  be  regarded  as  uncertain  in  the  time  of  payment,  though  even 
here  it  is  possible  to  take  the  view  that  the  existence  of  the  fixed 

1  Acceleration   Provisions  in   Time  Paper,  .32    Harvard    Law   Review,   754. 


Ch.  1)  FORMAL   REQUISITES  671 

date  saves  tile  instrument  from  the  perils  of  uncertainty.  In- 
deed, under  the  Negotiable  Instruments  Law  as  in  force  in  Wis- 
consin, such  an  instrument  would  be  negotiable.  The  Wisconsin 
statute  contains  the  following  clause  which  is  not  found  in  the 
Uniform  Act:  "An  instrument  is  payable  at  a  determinable  fu- 
ture time,  within  the  meaning  of  this  act  which  is  expressed  to  be 
payable  at  a  fixed  period  after  date  or  sight,  though  payable  before 
then  on  a  contingency." 

Professor  Chafee,  in  the  same  article,  has  suggested  the  follow- 
ing rules  with  respect  to  acceleration  provisions : 

I.  An  instrument  with  an  acceleration  provision  in  order  to  be 
negotiable  must  conform  to  the  following  requirement:  The  ulti- 
mate time  of  payment  must  be  obvious  from  the  bare  inspection 
of  the  instrument;  and  payment  can  be  accelerated  only  by  the 
performance  of  an  act  regularly  incident  to  the  collection  of  the 
paper. 

II.  The  ultimate  time  of  payment  is  the  maturity  of  the  instru- 
ment for  all  purposes  with  respect  to  persons  who  have  not  re- 
ceived notice  that  the  fact  which  was  to  accelerate  payment  has 
occurred. 

III.  The  time  fixed  by  the  acceleration  provision  is  the  maturity 
of  the  instrument  for  all  purposes  with  respect  to  persons  who 
have  received  notice  that  the  fact  which  was  to  accelerate  payment 
has  occurred. 


SECTION  6.— THE   INSTRUAIENT  MUST   BE  PAYABLE 

IN  MONEY 

N.  I.  L.,  Section  1,  subsec.  2.  An  instrument  to  be  negotiable 
must  contain  an  unconditional  promise  or  order  to  pay  a  sum  cer- 
tain in  money. 

N.  I.  L.,  Section  132.  The  acceptance  of  a  bill  must  not  express 
that  the  drawee  will  perform  his  promise  by  any  other  means  than 
the  payment  of  money. 

N.  I.  L.,  Section  6,  subsec.  5.  The  validity  and  negotiable  char- 
acter of  an  instrument  are  not  affected  by  the  fact  that  it  desig- 
nates a  particular  kind  of  current  money  in  which  payment  is  to 
be  made. 

What  is  money?  Until  recently  this  question  was  frequently 
litigated,  and  its  solution  occasioned  considerable  difficulty.  The 
courts  were  by  no  means  agreed  as  to  what  kinds  of  media  of 
exchange  were  to  be  included  in  the  term  "money."  To-day  the 
question  is  of  much  less  practical  importance ;  but  it  still  exists, 
and,  inasmuch  as  the  Negotiable  Instruments  Law  has  not  at- 
tempted a  definition,  the  old  question  is  occasionally  presented. 

How  may  the  question  be  presented?  Suppose  we  take  the 
case  of  a  promissory  note.  The  promise  therein  may  read:  (1) 
I  promise  to  pay  A.  or  order  one  hundred  bushels  of  wheat,  or  (2) 
one  hundred  dollars,  or  (3)  one  hundred  dollars  in  current  funds 


672  NEGOTIABLE   INSTRUMENTS  (Part  3 

or  in  currency,  or  (4)  particular  kind  of  media  in  circulation,  such 
as  national  bank  notes.  Federal  Reserve  notes,  gold  certificates, 
Federal  Reserve  Bank  notes,  gold  coin.  United  States  notes,  Lib- 
erty bonds,  or  (5)  one  hundred  dollars  in  British  pounds  sterling, 
or  (6)  one  hundred  British  pounds  sterling.  Do  any  or  all  of  these 
things  fall  within  the  meaning  of  the  word  "money"?  Where  the 
instrument  is  payable  in  dollars,  the  problem  is  easy,  for  whatever 
constitutes  a  dollar  will  be  money,  and  the  instrument  will  be  ne- 
gotiable, although  it  may  not  be  clear  what  sort  of  media  of 
exchange  may  be  validly  tendered  in  satisfaction  of  the  debt.  In 
that  question  we  are  not  interested  here.  We  are  interested  only 
in  determining  what  language  used  in  description  of  a  particular 
kind  of  medium  of  exchange  when  expressly  incorporated  in  the  in- 
strument will  have  the  effect  of  taking  away  the  important  char- 
acteristics of  negotiability. 

The  cases  which  gave  rise  to  the  greatest  difficulty  were  those 
where  the  instrument  provided  that  the  debt  evidenced  thereby 
was  to  be  paid  in  currency,  or  current  funds  or  in  some  specified 
kind  of  circulating  media  such  as  national  bank  notes.  Professor 
Greely,  in  reviewing  these  early  cases,  has  said :-  "Prior  to  fed- 
eral legislation  virtually  prohibiting  the  issue  of  state  bank  notes, 
much  litigation  arose  involving  the  negotiability  of  instruments 
payable  in  'current  funds,'  'current  bank  notes,'  'currency,'  etc. 
At  that  time  the  money  in  actual  use  was,  in  many  places,  state 
bank  notes  which  were  depreciated,  and  had  largely  or  completely 
displaced  legal  tender.  When  instruments  were  drawn  payable 
in  'current  funds'  or  'currency'  the  question  whether  (a)  they 
were  payable  in  the  local  depreciated  currency,  or  in  legal  tender, 
or  in  legal  tender  and  bank  notes  circulating  at  par  therewith,  and 
(b)  whether  they  were  negotiable  or  not,  were  important  and  diffi- 
cult. Different  rules  were  laid  down  in  different  jurisdictions.  In 
Illinois  it  was  held  that  such  instruments  were  payable  only  in 
legal  tender  or  funds  circulating  at  par  therewith,  and  not  in  the 
depreciated  local  currency.  That  so  regarded,  the  instruments 
were  negotiable.  In  Iowa  it  was  held  that  instruments  so  payable 
were  prima  facie  payable  in  the  depreciated  local  currency,  and 
were  not  negotiable  (not  being  payable  in  money),  but  became 
negotiable  if  it  were  shown  by  evidence  that  the  word  'currency' 
or  'current  funds'  actually  designated  legal  tender  or  funds  the 
practical  equivalent  thereof.  In  some  states  such  instruments 
were  held  to  be  payable  in  the  local  depreciated  money,  and  not 
in  legal  tender  or  its  equivalent  and  so  regarded,  were  by  some 
courts  held  to  be  negotiable  and  by  others  not.  The  tendency  of 
the  authorities  was  to  regard  as  negotiable,  paper  payable  in  legal 
tender  or  in  funds  passing  current  at  par  therewith." 

Where  an  instrument  is  payable  in  currency,  the  word  "cur- 
rency" may  mean  legal  tender  only  or  it  may  include  other  media 
of  exchange  circulating  at  par  therewith.     A  court  may  hold  that 

2  Uniform  Negotiable  Instruments  Law,  10  Illinois  Law  Review,  267. 


Ch.  1)  FORMAL   REQUISITES  673 

nothing  is  money  unless  it  is  legal  tender,  or  a  court  may  hold 
that  any  medium  of  exchange  is  money  which,  although  it  is  not 
legal  tender,  circulates  at  par  with  legal  tender.  Most  courts 
held  that  in  order  for  circulating  media  to  constitute  money  they 
must  be  legal  tender.  With  respect  to  this  controversy  Professor 
Oliphant  concludes  that  "anything  which  for  a  substantial 
period  of  time  and  throughout  any  important  commercial 
community  is  by  general  consent  used  and  treated  in  common  pay- 
ments as  cash  in  the  ordinary  course  and  transaction  of  business 
is  money."  ^  Professor  Oliphant  aptly  observes  that  any  other 
rule  would  result  in  the  extraordinary  situation  that  a  repeal  of 
our  legal  tender  laws  would  leave  us  without  negotiable  instru- 
ments. 

Professor  Brannan  has  argued  that  the  section  should  be  amend- 
ed by  provid^ing  that  instruments  payable  in  currency,  current 
funds  and  the  like  should  be  deemed  negotiable  and  that  these 
added  words  should  be  defined  in  the  act  to  mean  legal  tender  and 
circulating  media  circulating  at  par  therewith.* 

The  following  cases  illustrate  various  situations  that  involve 
the  sections  above  quoted. 


ROBERTS  V.   SMITH  et  al. 

.(Supreme  Court   of  Vennont,    1886.     58    Vt   492,   4   Atl.   709, 
56  Am.  Rep.  567.) 

Ve;aze:y,  J.  Ahhough  it  has  long  been  settled  in  this  state  that  a 
written  contract  having  the  usual  form  of  a  promissory  note,  but  pay- 
able in  some  specific  article,  may  be  treated  as  a  promissory  note  as 
to  the  form  of  declaring  upon  it,  and  the  necessity  of  proof  of  consid- 
eration, and  in  some  other  respects,  *  *  *  yet  such  an  instrument 
is  not  negotiable  because  not  payable  in  money.  *  *  *  The  instru- 
ment declared  upon  was  not  even  a  promise  to  pay  a  given  sum  in 
specific  articles,  but  only  to  pay  "one  ounce  of  gold."  It  stands,  for 
consideration,  upon  the  question  of  the  sufficiency  of  the  declaration, 
under  the  demurrer  thereto,  as  though  it  were  a  promise  to  pay  one 
bushel  of  wheat.  This  suit  is  by  a  purchaser  from  the  payee.  The 
plaintifif  cannot  stand  upon  the  first  count,  as  the  instrument  declared 
upon  is  not  negotiable,  and  no  promise  by  the  defendant  to  the  plain- 
tiff is  alleged.     *     *    * 

It  is  but  a  promise  to  pay,  that  is,  deliver,  a  certain  article  of  mer- 
chandise definite  in  amount.  Because  gold  enters  into  the  composition 
of  money  we  cannot  assume  that  "an  ounce  of  gold"  is  nioney,  or  that 
it  has  a  fixed  and  unvarying  value.  The  contract  in  question  lacks,  not 
only  the  quality  of  negotiability,  but  certainty  and  precision  as  to  the 
amount  to  be  paid.  Upon  failure  to  perform,  there  would  be  no  defi- 
nite specified  sum  due,  as  in  case  of  a  promissory  note.  The  declara- 
tion is  drawn  upon  the  theory  that  the  instrument  wiis  a  promissory 

3  The  Theory  of  Money  in  the  Law  of  Commercial  Instruments,  29  Yale 
Law  Journal.  606. 

4  Some  Necessai'y  Amendments  of  the  Negotiable  Instruments  Law,  26 
Harvard  Law  Review,  493. 

B.&  B.Bus.Law— 43 


G74  NEGOTIABLE    INSTRUMENTS  (Part  3 

note  except  in  respect  to  negotiability.  No  value  is  alleged  in  the 
thing  promised.  The  pleader  claims  to  be  entitled  to  the  value  of  a 
commodity,  without  alleging  it  has  any  value.  It  is  plainly  impossible 
to  apply  to  this  paper  a  form  of  declaration  adapted  solely  to  a  prom- 
issory note.  Although  it  has  form  of  a  promissory  note,  it  is  not 
such.  *  *  *  It  niust  be  treated  as  a  simple  contract  for  the  deliv- 
ery of  merchandise.  As  a  declaration  upon  such  a  contract  it  is  want- 
ing in  proper  averments  as  to  consideration,  as  to  value,  and  as  to 
breach  and  damages.  *  *  * 
Judgment  reversed. 

MILLIKAN   V.   SECIKITY   TRUST  CO. 
(Supreme  Court  of  Indiana.  1918.     187  Ind.  ."07.  118  N.  E.  568.) 
TowNSEND,  J.    *    *    *    Appellant's  eighth  paragraph  of  answer  is, 
in  substance,  that  appellee  at  the  time  of  the  purchase  of  said  note  ex- 
ecuted in  payment  therefor  a  certificate  of  deposit,  as  follows : 

"Security  Trust  Compa'iy. 
"Certificate  of  Deposit.  No.  2341. 

"Indianapolis,  Ind.,  Dec.  4th,  1912. 
"American  Standard  Life  Assurance  Co.  has  deposited  with  this 
company  live  thousand  dollars  payable  to  the  order  of  same,  in  cur- 
rent funds  on  the  return  of  this  certificate  properly  indorsed.  June 
1st,  1913.  With  interest  at  two  per  cent,  per  annum  for  the  time 
specified  only.     Not  subject  to  check.- 

"Countersigned:       R.  A.  Young,   Secretary. 
"Be^t  McBride,  President." 

Then  this  paragraph  is,  in  substance,  that  the  note  was  dishonored 
at  maturity,  that  appellee  had  notice  of  the  dishonor,  and  that  appel- 
lee with  such  notice  paid  the  certificate.  If  the  certificate  is  not  ne- 
gotiable, the  paragraph  is  bad.  ,, 

Appellant  contends  that  this  certificate  is  not  negotiable  because  it 
is  payable  in  "current  funds."  One  of  the  elements  of  negotiability  is 
that  an  instrument  be  payable  in  money,  and  the  question  is  whether 
"current  funds"  means  money.  There  is  some  confusion  in  the  deci- 
sions of  this  court  on  this  point.  In  the  case  of  Drake  v.  Markle, 
21  Ind.  433,  83  Am.  Dec.  358,  a  certificate  of  deposit  payable  "in  cur- 
rency" was  held  to  be  payable  in  money  and  negotiable.  Although  no 
particular  stress  seems  to  have  been  laid  upon  the  point  of  its  being 
payable  in  "currency,"  yet  the  court  sets  out  the  instrument  and  seems 
to  have  had  this  question  in  view.  In  the  case  of  the  National  Bank, 
etc.,  V.  Ringel,  51  Ind.  393,  this  court  held  that  a  certificate  of  deposit 
payable  "in  current  funds"  was  not  negotiable  because  it  lacked  one  of 
the  essentials  not  being  payable  in  money. 

Beginning  with  the  issue  of  United  States  Treasury  notes,  declared 
to  have  the  quality  of  legal  tender,  it  has  been  the  practice  of  drawers 
of  bills  of  exchange  and  makers  of  promissory  notes  to  indicate  pay- 
ment in  gold  or  silver  or  such  notes,  and  from  that  time  the  terms  "cur- 
rent funds"  and  "currency"  have  been  used  to  designate  any  of  these, 
all  being  current  and  declared  by  statute  to  be  legal  tender.  The  bet- 
ter rule  now  seems  to  be  that  instruments  of  the  kind  in  question,  pay- 
able in  "current  funds"  or  in  "currency,"  are  payable  in  money.   *   *   * 

We  therefore  hold  that  this  certificate  of  deposit  is  payable  in 
money,  and  is  negotiable  as  an  inland  bill  of  exchange.     *     *     * 


Ch.  1)  FOKMAL   UHQUISITKS  675 

EASTMAN  V.  SUNSET  PARK  LAND  CO.  et  al. 

(District  Court  of  Appeal,  Second  District,  Califoniiii,  1917.    35  Cal.  App.  02S, 

170  Pac.  G42.) 

CoNRivY.  P.  J.  The  plaintiff,  being  the  owner  of  a  promissory  note 
made  by  the  defendant  Stmset  Park  Land  Company  in  favor  of  de- 
fendant T.  G.  Rickman,  brought  this  action  and  obtained  judgment, 
from  which  the  Sunset  Park  Land  Company  appeals.  It  is  admitted 
that  the  judgment  should  be  sustained  if  the  note  was  a  negotia1:)le  in- 
strument. Appellant  contends  that  the  note  was  not  a  negotiable  in- 
strument because  by  its  terms  it  was  made  payable  "in  LTnited  States 
gold  coin."     *     *     * 

We  are  of  the  opinion  that  a  note  which  is  made  payable  in  United 
States  gold  coin  is  a  note  payable  in  money  only,  notwithstanding  the 
fact  that  the  note  prescribes  a  particular  kind  of  money.  *  *  *  We 
think  that  the  note  in  question  was  a  negotiable  instrument,  and  there- 
fore the  judgment  is  affirmed. 


BROWN  et  al.  v.  PERERA. 

(Supreme  Court  of  New  York,  Appellate  Division,  1918.     176  N.  Y.  Supp.  215.) 

The  following  is  the  opinion  of  Lf.vEnTritt,  referee,  in  the  court 
below : 

The  plaintiff  composing  the  firm  of  Redmond  &  Co.,  bankersin  the 
city  of  New  York,  bring  this  action  for  the  alleged  conversion  by 
the  defendant  of  foreign  moneys  bought  and  received  by  him  from  the 
plaintiffs'  defaulting  employe  and  agent. 

In  the  years  1913  and  1914  the  plaintiffs  were  conducting  a  foreign 
exchange  department  as  a  branch  of  their  business.  In  that  depart- 
ment the  moneys  of  various  foreign  governments  were  bought  and 
sold.  One  Thomas  Piptone,  the  defaulting  agent,  was  the  manager  of 
that  department.  The  foreign  moneys  on  hand  were  in  his  personal 
custody,  and  his  authority  to  sell  such  moneys  was  unrestricted. 
*  *  *  Early  in  the  year  1913  Piptone,  who  was  known  to  the  de- 
fendant as  the  manager  of  the  plaintiffs'  foreign  exchange  department, 
informed  the  defendant  that  he,  Piptone,  was  starting  a  specie  business 
for  the  plaintiffs,  and  was  receiving  from  customers  foreign  moneys 
to  sell  at  the  best  market  rates.  Thereafter,  in  the  course  of  that  year 
and  in  the  first  half  of  1914,  Piptone  several  times  a  month  brought  to 
the  defendant's  place  of  business  foreign  moneys  for  sale,  and  usually 
received  cash  in  payment  therefor.  *  *  *  fhe  moneys  sold  on 
these  nine  occasions  embraced  issues  of  Italy,  Germany,  Austria-Hun- 
gary, France,  Switzerland,  and  Belgium,  of  the  value  of  upwards  of 
$24,000.  It  is  for  the  conversion  of  these  moneys  that  the  action  was 
brought.  They  belonged  to  the  plaintiffs,  and  Piptone  never  accounted 
for  any  of  the  proceeds,  but  appropriated  them.  He  has  been  convict- 
ed of  the  larceny  of  moneys  sold  in  one  of  those  transactions.    *    *    * 

As  to  the  foreign  moneys  purchased  by  the  defendant  in  the  nine 
transactions,  some  of  the  essential  elements  of  a  conversion  are  pres- 
ent. From  the  circumstance  that  checks  for  purchase  money  to  the 
order  of  Pagano  were  requested  on  these  nine  occasions,  it  is  reasona- 
bly clear  that  in  each  instance  Piptone  was  acting  with  the  preconceiv- 
ed intent  to  appropriate  the  proceeds,  and  hence  w^as  guilty  of  embez- 


676  NEGOTIABLE   INSTRUMENTS  (Part  3 

zHng  the  foreign  moneys.  Therefore  whatever  title  the  defendant  had 
was  obtained  from  a  thief.  Furthermore,  the  defendant  has  disposed 
of  those  monevs  and  thereby  converted  them,  unless  his  title  was  good. 
The  point  has"  been  raised  that  there  was  no  sufficient  demand  upon 
the  defendant  for  the  restoration  of  the  moneys  to  support  an  action 
for  conversion,  but  as  the  defendant  had  placed  it  beyond  his  power 
to  comply,  the  omission  to  demand  is  no  obstacle  to  the  maintenance  of 
the  action.  Pease  v.  Smith,  61  N.  Y.  477;  Ochs  v.  Pohly,  87  App. 
Div.  92,  84  N.  Y.  Supp.  l.  *  *  *  There  is  no  evidence,  or  even  a 
suggestion,  that  the  defendant's  title  was  affected  by  knowledge  or  no- 
tice that  the  moneys  he  received  had  been  stolen.  The  plaintiffs' 
claim  must  therefore  rest  upon  the  proposition  that  the  defendant, 
having  purchased  from  a  thief,  obtained  no  title.  That  would  be  so 
if  foreign  money  is,  in  legal  contemplation,  a  mere  commodity  or  arti- 
cle of  merchandise.  The  contrary  would  be  true  if  such  money  has 
the  quaUties  of  transferability  possessed  by  the  circulating  medium  of 
the  United  States.  The  whole  question  is  whether  foreign  money,  ac- 
quired under  the  circumstances  here  existing,  must  be  treated  as  a 
commodity  merelv,  the  title  to  which  did  not  pass  from  the  owner,  or 
is  money,  title  to  wdiich  was  acquired  by  the  innocent  holder,  even 
though  he  purchased  it  from  one  who  had  no  title.    , 

Upon  a  historical  and  practical  consideration  of  the  subject,  it  ap- 
pears that  foreign  money  is  not  ipso  facto  a  mere  commodity.  _  Such 
moneys  have  circulated  as  an  actual  medium  of  exchange  in  this  and 
other' countries,  both  with  and  without  special  statutory  sanction.  The 
United  States  Constitution,  art.  1,  §  8,  cl.  5,  confers  authority  on 
Congress  "to  coin  money,  regulate  the  value  thereof,  and  of  foreign 
coin.  *  *  *"  Various  European  coins  had  circulated  freely  as  a 
medium  of  exchange  in  the  colonies.  The  framers  of  the  Constitu- 
tion contemplated  that  the  coins  of  certain  European  governments 
would  constitute  a  necessary  part  of  the  current  moneys  of  this  coun- 
try. Accordingly,  by  chapter  5  of  the  act  of  February  9,  1793  (1 
Stat.  300),  Congress  made  the  gold  coins  of  Great  Britain,  France, 
Spain,  Portugal  and  the  silver  coins  of  France  and  Spain,  a  legal 
tender  at  fixed  valuations,  and  this  law,  as  renewed  from  time  to  time, 
remained  in  force  until  repealed  by  the  act  of  February  21,  1857  (U 
Stat.  163,  c.  56).  Foreign  coins  are  thus  moneys  of  the  Constitution, 
and  are  accorded  more  positive  recognition  by  that  instrument  than 
the  paper  issues  of  this  government.  Such  coins  had  a  general  cir- 
culation  for  a  long  period  of  our  history,  sometimes  under  adverse 
conditions.  In  the  argument  of  the  Legal  Tender  Cases,  12  Wall.  475, 
20  L.  Ed.  at  page  294,  this  statement  was  made :  "Your  honors  will 
recollect  how  often  in  the  days  of  the  Spanish  piece  for  12^2  cents, 
we  accepted  12  cents  instead  and  took  Spanish  quarters  with  holes 
drilled  through  them  equally  with  perfect  coin."  It  is  interesting  to 
find  that  Canada  has  no  gold  coinage,  and  has  made  the  gold  coins  of 
the  United  States  and  of  England  legal  tender  to  dll  amounts.  Aluhle- 
man's  Monetary  Systems  of  the  World,  p.  147. 

No  one  would  deny  that,  if  foreign  money  is  a  legal  tender,  it  pos- 
sesses all  the  attributes  of  money.  Is  it  relegated  to  the  status  of 
merchandise  merely  by  reason  of  the  taking  away  of  the  legal  tender 
quality?  Much  of  the  money  of  this  country  does  not  possess  that 
quality  except  for  certain  purposes  or  in  limited  amounts,  and'  yet 
the  title  to  such  moneys  would  be  indisputable  in  the  hands  of  one 


Ch.  1)  FORMAL  BEQUISITES  677 

who  took  them  in  good  faith  and  for  value,  in  any  legitimate  transac- 
tion and  to  any  amount.  The  American  trade  dollar  for  many  years 
prior  to  1887,  when  its  coinage  was  prohibited,  was  not  a  legal  tender, 
though  it  must  have  possessed  the  attributes  of  money  in  the  transac- 
tions in  which  it  was  intended  to  be  used.  Foreign  moneys,  as  well 
as  domestic  moneys,  which  are  both  legal  tender,  may,  of  course,  be 
treated  as  money  by  voluntary  agreement.  Near  the  border  line  be- 
tween two  nations,  the  moneys  of  both  circulate  with  almost  equal 
freedom.  Canadian  coins  are  extensively  circulated  as  a  medium  of 
exchange  in  the  northern  portion  of  our  border  states.  In  many  parts 
of  Canada  the  paper  and  silver  moneys  of  the  United  States,  as  well  as 
gold,  are  readily  accepted.  Certain  European  moneys,  as  the  franc,  are 
frequently  received  as  a  medium  of  exchange  in  countries  other  than 
that  in  which  they  are  issued.  It  would  be  a  startling  proposition  to 
hold  that  in  all  such  cases  the  foreign  money  is  a  mere  commodity 
which  may  be  recovered  by  the  owner  from  the  innocent  holder.  The 
evidence  shows  that  in  the  city  of  New  York  some  of  the  department 
stores  receive,  at  certain  rates  in  payment  for  goods,  European  mon- 
eys, such  as  are  involved  in  this  case,  and  give  change  in  American 
money.  The  extent  to  which  foreign  money  may  circulate,  as  a  medium 
of  exchange  varies  according  to  circumstances,  and  depends  upon  the 
needs  of  commerce,  familiarity  with  the  value  of  the  money,  and  the 
certainty  that  it  can  be  disposed  of  at  the  same  value  at  which  it  is 
received.  The  circulation  of  money  is  nothing  more  than  the  aggre- 
gate of  the  transactions  in  which  the  individuals  have  been  and  are 
willing  to  receive  that  money.  The  legal  attributes  of  the  money  can 
hardly  be  made  to  depend  upon  the  number  of  these  transactions. 
Even  money  of  the  country  may  not  circulate.  At  one  period  in  our 
history,  when  the  value  of  gold  as  compared  with  silver  materially  ex- 
ceeded the  established  ratio  of  coinage,  gold  disappeared  from  circula- 
tion, and  "the  country  retained,  instead,  only  silver  and  gold  coins  of 
those  countries  whose  gold  coinage  bore  a  true  relation  to  the  existing 
value  of  gold  and  silver."  Argument  in  Legal  Tender  Cases,  12  Wall. 
457,  20  L.  Ed.  293. 

The  plaintiffs,  however,  contend  that  in  no  event  is  the  defendant 
protected,  because  he  was  the  purchaser  of  the  foreign  money  at  a 
price  paid  in  American  money,  and  that  in  such  transactions  the  for- 
eign money  is  the  subject  of  purchase  and  sale,  and  not  the  medium 
with  wdiich  the  purchase  and  sale  is  effected.  This  statement  has  a 
certain  plausibility,  but  the  transaction  actually  is  the  exchange  of  the 
foreign  money  for  the  domestic  at  a  certain  rate.  The  foreign  money 
is  received  as  a  representative  of  value  just  as  the  domestic  money  is 
paid  as  a  representative  of  value.  The  fact  that  one  kind  of  money 
may  be  sold  and  purchased  in  terms  of  another  kind  of  money  is  not 
of  controlling  significance.     *     *     * 

The  foregoing  general  considerations  indicate,  to  my  mind,  that 
foreign  money  in  its  nature  and  inherent  qualities  is  not  different  from 
domestic  money.  Whether  it  is  received  under  sanction  of  a  legal 
tender  statute,  or  in  border  transactions,  or  by  certain  merchants  in 
accordance  with  a  special  practice,  or  by  money  changers  in  exchange 
for  American  money  at  prevailing  rates,  it  is  received,  not  as  an  arti- 
cle useful  or  valuable  in  itself,  but  merely  as  a  token  or  representative 
of  value  issued  by  a  responsible  government. 

The  legal  principles  and  precedents  governing  this  subject  may  now 


678  NEGOTIABLE   IXSTUUMENTS  (Part  3 

be  considered.  The  foreign  moneys  here  involved  were,  with  an  insig- 
nificant exception,  paper  bills.  All  of  the  moneys  of  Austria-Hungary 
and  Belgium  received  by  the  defendant,  valued  at  $596.85,  were,  in 
form,  promises  to  pay  to  bearer.  The  plaintififs  therefore  concede, 
and  the  authorities  clearly  establish,  that  these  moneys  are  within  the 
protection  of  Negotiable  Instruments  Law,  *  *  *  and  so  cannot 
be  the  basis  of  recovery  in  this  action.  The  evidence  also  shows  that 
an  indeterminable  portion  of  the  moneys  of  other  governments  were 
negotiable  instruments  in  form.  In  this  state  of  the  proof,  these  other 
moneys  cannot  be  treated  as  subject  to  the  law  governing  negotiable 
instruments.  They  cannot  be  regarded  as  promises  to  pay  money,  and 
the  question  therefore  is  whether,  under  principles  of  law  outside  of 
the  law  of  negotiable  instruments,  they  possess  the  negotiable  quality. 

The  rule  that  the  owner  of  personal  property  cannot  be  divested  of 
title  without  his  consent  has  been  established  from  the  earliest  period 
of  the  common  law.  Also  of  ancient  origin  and  equally  familiar  is 
the  exception  to  that  rule  that  good  title  to  money,  and  bills  and  notes 
payable  to  bearer,  is  acquired  by  a  bona  fide  transferee  even  from  a 
thief.  The  principle  embodied  in  this  exception  was  established  by 
the  old  custom  of  merchants,  which  "before  the  end  of  the  thirteenth 
century  was  already  conceived  as  a  body  of  rules  which  stood  apart 
from  the  common  law."  Pollock  &'  Maitland's  History  of  English 
Law  (2d  Ed.)  vol.  1,  p.  467.  At  that  stage  these  rules  were  applied 
merely  as  the  general  custom  of  commercial  transactions  and  had  to 
be  specifically  pleaded,  but  later  they  became  a  part  of  the  common 
law.     *     *     * 

There  are  two  noteworthy  features  of  the  law  merchant.  First,  it 
vv-as  not  limited  to  the  law  of  bills  and  notes,  as  may  sometimes  be 
supposed,  but  embraced  a  large  body  of  rules  governing  commercial 
dealings.  Thus  Christian,  in  his  note  to  1  Blackstone's  Commentaries, 
72,  quoted  in  1  Cranch  (U.  S.  Appendix,  note  A,  p.  373),  says  that 
"the  law  mercatoria,  or  custom  of  merchants  *  *  *  described  only 
a  great  division  of  the  law  of  England,"  and  includes  "the  laws  re- 
lating to  bills  of  exchange,  insurance  and  all  mercantile  contracts.'' 
And  Sir  Matthew  Hale,  in  his  History  of  the  Common  Law  of  Eng- 
land (3d  Ed.)  p.  25,  speaks  of  the  lex  mercatoria  as  a  branch  of  the 
law,  "applied  under  its  proper  rules  to  the  business  of  trade  and  com- 
merce." The  second  feature  is  that  the  rules  of  the  law  merchant  were 
international  in  conception,  governing  transactions  between  the  mer- 
chants and  traders  of  dififerent  countries.  In  Pollock  &  Maitland's 
History  of  Enghsh'Law  (2d  Ed.)  vol.  1,  p.  467,  it  is  stated:  "These 
rules  are  not  conceived  to  be  purely  English  law ;  they  are,  we  may 
say,  ius  gentium,  known  to  merchants  throughout  Christendom,  and 
could  we  now  recover  them  we  might  find  some  which  had  their  origin 
on  the  coasts  of  the  Mediterranean."  And  in  De  La  Chaumette  v. 
Bank  of  England,  2  Barn.  &  Ad.  385,  Lord  Tenderden  refers  to  "the 
custom  of  merchants,  which  was  part  of  the  common  law  introduced 
into  this  country  in  consequence  of  the  practice  in  other  countries." 
The  international  character  of  the  law  merchant  is  emphasized  by  the 
fact  that  foreign  bills  of  exchange  had  a  secure  standing  under  the 
rules  long  before  inland  bills  were  recognized.  In  Bromwich  v.  Lord 
(1696)  2  Lutwyche,  1585,  Chief  Justice  Treby  said  that  "bills  of  ex- 
change at  first  were  extended  only  to  merchant  strangers  trading  with 


Ch.  1)  FORMAL   RKQnsiTKS  679 

English  merchants,  and  afterwards  to  inland  bills  between  merchants 
trading  one  with  another  here  in  England." 

In  this  system  of  rules,  which  sprung  into  existence  and  has  been 
perpetuated  for  the  sole  purpose  of  facilitating  trade  and  rendering 
commercial  transactions  certain  and  secure,  we  may  naturally  expect 
to  find  that  the  very  corner  stone  of  the  structure  is  the  rule  which 
guarantees  the  untrammeled  transferability  of  money.     That  such  is 
the  case  is  shown  by  many  authorities,  both  ancient  and  modern.     A 
few  representative  cases  may  be  cited :     In  Crawford  v.  Royal  Bank 
(1749)  reported  in  Ross  on  Bills  and  Promissory  Notes,  229,  the  ac- 
tion was  to  recover  a  lost  or  stolen  note  for  pounds  sterling,  which 
was  identified  in  the  hands  of  a  bona  fide  holder  for  value.     The  de- 
fendant  successfully    contended  "that   such   is   the  nature   of   money 
and  bank  notes,  which  serve  the  purpose  of  money,  that  a  bona  fide 
purchaser  or  possessor  is  not  subjected  to  a  rei  vindicatio,  because 
such  a  claim  would  be  an  impediment  to  commerce."     The  court  said 
they  were  unanimous  on  two  points :     "That  money  is  not  subject  to 
any  vitium  reale,  and  that  it  cannot  be  vindicated  from  a  bona  fide  pos- 
sessor, however  clear  the  proof  of  the  theft  may  be.     Second.     That 
bank  books  serving  the  purposes  of  money  must  be  entitled  to  the 
same  privileges."    In  Moss  v.  Hancock,  [1899]  2  O.  B.  3,  Judge  Chan- 
nell  said:     "Now  all  the  considerations  which  could  have  induced  the 
Legislature  to  protect  holders  of  stolen  negotiable  instruments  must 
apply  equally  to  stolen  money  taken  bona  fide.     In  fact,  it  is  because 
bills   of  exchange,   etc.,  are  like  currency  that  they   are  negotiable." 
In  Merchants'  Loan  &  Trust  Co.  v.  Lamson,  90  111.  App.  18,  the  court 
said :     "The  rule  is  applied  to  commercial  paper,  bvit  the  same  rule  ap- 
plies with  even  greater  force  to  currency.     Indeed  the  rule  as  applied 
to  negotiable  paper  is  derived  from  and  based  upon  the  English  rule 
as  originally  applied  to  coin  or  other  forms  of  currency.     The  excep- 
tion to  the  general  rule  of  the  common  law  that  the  purchaser  of  a  chat- 
tel can  accjuire  no  better  title  than  the  Vendor,  w^as  first  applied  to 
mone}^,  i.  e.,  currency,  and  then  extended  to  negotiable  paper."     In 
Depew  V.  Robards,  17  Mo.  580,  the  court  said:    "At  an  early  period  of 
our  commercial  law,  it  was  held  that  money  and  bills  payable  to  bear- 
er, though  stolen,  could  not  be  recovered  after  they  had  been  passed 
away  to  a  bona  fide  holder,  and  this  by  reason  of  the  course  of  trade 
which  creates  a  property  in  the  holder.  •  They  pass  by  delivery  only, 
and  are  considered  as  cash,  and  the  possession  of  a  bona  fide  holder 
always  carries  with  it  the  property.     This  rule  is  founded  on  the  ne- 
cessity of  sustaining  the  credit  of  that  which  is  used  as  a  medium  of 
exchange  in  commercial  transactions."     The  language  of  these  cases 
and  many  others  that  might  be  cited  conclusively  shows  that  under 
the  law  merchant  bills  and  notes  were  given  the  quality  of  negotiabil- 
ity  simply  because  they  represented  money  and  answered  a   similar 
purpose  in  commerce.     But  the  free  and  safe  transferability  of  money 
was  fundamental.     Commercial  paper  shone,  as  it  were,  by  reflected 
light,   and  derived  its  negotiable  qualities   from  its   similarity  to  the 
money  in  which  it  was  payable.     Hence  it  is  that  bills  and  notes  paya- 
ble in  anything  but  money  are  not  negotiable.     In  Bouvier's  Institutes 
(vol.  1,  p.  458)  the  author  states  the  well-established  rule  that  a  bill  of 
exchange  "must  not  be  for  the  payment  of  merchandise,  or  of  other 
things  than  such  as  are  considered  as  money."     And  in  Jamieson  v. 


680  NEGOTIABLE   INSTRUMENTS  (Part  3 

Farr,  2  N.  C.  182,  the  court  said:  "Bonds  for  specific  articles  could 
never  answer  the  purposes  of  trade,  not  being  the  representatives  of 
any  certain  value  as  money  is.  *  *  "*'  For  these  reasons  the  law 
has  never  made  bonds  for  specific  articles  negotiable,  but  only  bills, 
notes  and  bonds  for  money." 

From  these  principles  it  would  necessarily  follow  th^t  if  the  money 
of  foreign  governments  was  considered  as  having  the  qualities  of 
merchandise  and  not  the  qualities  of  money,  a  bill  or  note  payable  in 
foreign  money  would  not  be  negotiable.  The  rule  is  well  settled,  how- 
ever, that  a  bill  or  note  payable  in  specific  foreign  money  is  negotiable. 
Mr.  Chitty,  m  his  work  on  Bills  and  Notes,  at  page  160,  lays  down 
the  rule  that  a  bill  of  exchange  may  be  payable  in  "the  money  of  any 
country."  Judge  Story,  in  his  work  on  Promissory  Notes,  §  17,  says : 
"But,  provided  the  note  be  for  the  payment  of  money  only,  it  is  wholly 
immaterial  in  the  currency  of  what  country  it  may  be  payable.  It 
may  be  payable  in  the  money  or  currency  of  England  or  France  or 
Spain  or  Holland  or  Italy,  or  of  any  other  country."  In  Daniel  on 
Negotiable  Instruments  it  is  said  that  "it  is  not  necessary  that  the  mon- 
ey should  be  that  current  in  the  place  of  payment  or  where  the  bill  is 
drawn;    it  may  be  in  the  money  of  any  country  whatever."     *     *     * 

This  rule  that  paper  payable  in  foreign  money  is  negotiable  cannot 
be  understood  or  justified  except  upon  the  assumption  that  the  foreign 
money  itself  possesses  like  qualities  of  negotiability.  The  law  mer- 
chant would  never  have  conferred  upon  the  paper  promise  or  direc- 
tion to  pay  a  higher  commercial  dignity  and  security  than  is  possessed 
by  the  thing  in  which  the  paper  is  payable.  Incidentally,  in  answer  to 
the  plaintiff's  contention  that  foreign  moneys  must  be  treated  as  a 
commodity  when  purchased  with  money  of  the  realm,  it  is  to  be  ob- 
served that  bills  and  notes  payable  in  foreign  money  are  negotiable, 
even  though  the  subject  of  purchase  and  sale  is  domestic  money. 

Going  a  step  further,  we  find  that  English  bank  notes,  which  were 
treated  as  money,  were  held  to  be  negotiable  both  in  that  and  other 
countries  so  as  to  confer  an  indefeasible  title  on  the  innocent  holder. 
In  Miller  v.  Race,  1  Burrow,  456,  in  which  it  was  held  that  an  Eng- 
lish bank  note,  though  stolen,  became  the  property  of  an  innocent 
holder.  Lord  Mansfield  said:  "The  whole  fallacy  of  the  argument 
(to  the  contrary)  lies  in  comparing  bank  notes  to  what  they  do  not 
resemble  and  what  they  should  not  be  compared  with,  viz.  to  goods  or 
to  securities  or  documents  for  debts.  Now  they  are  not  goods  or  se- 
curities, nor  are  they  so  esteemed,  but  are  treated  as  money  or  cash 
in  the  ordinary  course  and  transaction  of  business  by  the  general  con- 
sent of  mankind,  which  gives  them  the  credit  and  currency  of  money 
in  all  intents  and  purposes.  *  *  *  The  bank  note  is  constantly  and 
universally,  both  at  home  and  abroad,  treated  as  money,  as  cash  and 
paid  and  received  as  cash,  and  it  is  necessar}^  for  the  purpose  of  com- 
merce that  their  currency  should  be  established  and  secured."  De  La 
Chaumette  v.  Bank  of  England,  2  Barn.  &  Ad.  385,  was  an  action  of 
trover  involving  the  title  to  a  bank  note  which  had  been  stolen  and 
afterwards  came  into  the  hands  of  a  money  changer  of  Paris  for 
value  and  without  notice.  It  was  held  that  the  purchaser  acquired  a 
good  title.  The  decision  was  based  upon  St.  3  and  4  Anne,  which 
made  "all  notes"  negotiable ;  but  that  is  immaterial,  as  the  statute  was 
probably  only  declaratory  of  the  law  merchant  (1  Cranch,  U.  S.,  Ap- 
pendix, note  A,  p.  418),  and  in  any  event  became  a  part  of  the  com- 


Ch.  1)  FORMAL  REQUISITES  681 

mon  law.  Lord  Tenderclen  said:  "A  note  payable  to  bearer,  there- 
fore, is  transferable  abroad  just  as  an  English  bill  of  exchange  drawn 
in  England  and  remitted  to  a  foreign  country  would  be.  It_  may  be 
that  great  injury  has  been  suffered  of  late  by  the  facility  enjoyed  of 
sending  stolen  notes  abroad ;  but.  on  the  other  hand,  the  negotiability 
of  English  notes  in  foreign  countries  is  a  great  convenience,  as  it  saves 
the  necessitv  of  carrying  abroad  specie." 

While  in  'this'  case  "the  court  treated  the  note  as  a  negotiable  mstru- 
ment,  it  is  evident  that  the  court  would  unhesitatingly  have  reached 
the  same  conclusion  had  the  note  been  treated  as  money.  In  Par- 
sons on  Notes  and  Bills  (vol.  2,  p.  355)  the  author  quotes  Lord  Ten- 
derden  as  saying  on  an  earlier  consideration  of  the  same  case:  "We 
are  to  take  care  that  we  do  not  prevent  the  circulation  of  the  Bank 
of  England  notes  in  foreign  countries.  It  would  be  very  inconvenient 
to  merchants  and  travelers  if  we  should  do  that."  Raphiel  v.  Bank 
of  England,  17  C.  B.  161,  was  another  case  in  which  the  title  of  a 
money  broker  of  Paris  to  a  stolen  Bank  of  England  note,  acquired 
innocently  and  for  value,  was  upheld.  From  these  cases  it  is  perfect- 
ly clear  that  the  English  judges  accepted  as  fundamental  the  proposi- 
tion that  one  who  in  good  faith  received  English  money  abroad  acquir- 
ed an  indefeasible  title.  Nor  is  authority  in  this  state  lacking.  In 
Steinhart  v.  Boker.  34  Barb.  436.  it  was  held  that  one  to  whom  stolen 
Bank  of  England  notes  were  paid  by  a  thief  in  discharge  of  a  debt 
took  good  title  if  ignorant  of  the  theft,  and  was  not  bound  to  inquire 
into  the  title  of  the  one  from  whom  he  received  them.  Whether  the 
court  regarded  the  notes  as  money  or  as  promissory  notes  cannot  be 
material,  because  under  the  law  merchant,  as  has  been  seen,  paper  is 
only  negotiable  because  it  is  supposed  to  answer  the  same  purpose  in 
commerce  as  the  money  in  which  it  is  payable. 

In  view  of  the  international  origin  of  the  law  merchant  and  its  pri- 
mary purpose  to  facilitate  and  safeguard  commercial  transactions.  i<- 
is  hardly  conceivable  that  the  notion  could  ever  have  found  accept- 
ance that  money  becomes  a  mere  personal  chattel  as  soon  as  it  passes 
beyond  the  domain  of  the  country  issuing  it.     Merchants,  traders,  and 
travelers  naturally,  in  many  instances,  took  the  moneys  of  their  coun- 
tries into  foreign  lands.     There  such  moneys  might  be  acceptable  to 
Those  with  whom  they  dealt,  or,  if  not,  could  be  exchanged  for  do- 
mestic currency  through  the  money  changer.     Glimpses  of  the  extent 
to  which  moneys  of  England  were  employed  in  foreign  countries  may 
be  found  in  the  decided  cases.     In  De  La  Chaumette  v.  Bank  of  Eng- 
land, supra,  the  following  facts  were  stated:     "It  was  the  practice  for 
persons  traveling  from  this  country  into  France  to  take,  for  the  pur- 
pose of  paying  their  expenses,  bank  notes,  and  for  persons  residing 
or  domiciled  in  France  to  receive  the  same  in  payment.     *     *     *     It 
was  also  the  usual  practice  in  Paris  for  bankers  or  other  persons  to 
make  remittances  from  Paris  to  persons  residing  in  England  in  Eng- 
lish money  and  bank  notes,  and  for  the  purpose  of  making  such  re- 
mittances to  purchase  of  the  money  changers  in  Paris  at  the  rate  of 
exchange  between  Paris  and  London  for  the  time  being  English  money 
and  bank  notes."    The  exchange  of  moneys  was  an  extensive  business 
in  earlier  as  well  as  modern  times,  and  was  one  of  the  necessities  of 
commerce.     In  Malynes'  Work  on  the  Lex  Mercatoria,  published  in 
1622,  are  found  elaborate  tables  setting  forth  the  values  in  English 
money  of  the  moneys  of  a  large  number  of  foreign  nations.     At  the 


GS2  NEGOTIABLE   INSTRUMENTS  (Part  3 

present  time  in  the  city  of  New  York  alone  dealings  in  foreign  nion- . 
eys  amount  to  many  millions  yearly.  It  will  readily  be  seen  to  what 
extent  transactions  between  the  citizens  of  different  countries  would 
be  hampered  if  the  title  to  foreign  money  were  subject  to  the  rules 
governing  chattels.  The  money  changer  would  have  to  take  such 
money  subject  to  any  defect  of  title,  and  so  would  the  merchant  or 
tourist  who  received  it  from  the  money  changer.  There  is  not  in  any 
treatise  or  decided  case  on  the  law  merchant,  so  far  as  I  have  been 
able  to  discover,  a  suggestion  that  any  distinction  exists  in  respect 
to  negotiability  between  domestic  and  foreign  moneys.  It  is  highly 
significant  as  reflecting  an  ancient  and  uninterrupted  custom  that  in 
this  city,  as  the  evidence  shows,  dealers  in  foreign  moneys  and  mer- 
chants who  accept  it  in  payment  for  goods  receive  it  from  a  stranger 
as  readily  as  from  a  known  customer  and  without  any  concern  as  to 
the  title. 

Two  decisions,  mainly  relied  on  by  the  plaintiffs,  require  brief  no- 
tice. '  One  is  Chapman  v.  Cole,  12  Gray  (Mass.)  141,  71  Am.  Dec.  739. 
The  action  was  conversion  for  a  gold  coin,  known  and  current  in 
California  as  "Moffatt's  Issue."  The  plaintiff  had  passed  the  coin  by 
mistake  for  a  half  dollar  to  a  person  who  passed  it  on  by  like  mistake 
to  the  defendant.  The  court  held  that  the  plaintiff'  was  entitled  to  re- 
cover because  the  gold  piece  was  not  money  and  was  subject  to  the 
rules  of  law  governing  chattels.  Evidently  this  coin  was  nothing  more 
than  a  piece  of  gold  coined  by  a  man  named  IMoffatt.  It  was  used  a^ 
currency  in  a  certain  locality  because  the  people  had  confidence  in 
the  maker  and  accepted  his  name  as  a  certificate  of  the  quantity  and 
quality  of  the  metal.  It  was  not  issued  by  any  competent  governmen- 
tal authority.  The  law  merchant,  with  all  its  solicitude  for  the  securi- 
ty of  commercial  transactions,  has  never  gone  so  far  as  to  extend  the 
qualities  of  negotiability  to  coins  manufactured  by  individuals.  A  bill 
or  note  payable  in  "Moffatt's  Issue"  would  obviously  not  be  negotiable. 
This  decision  therefore  does  not  in  any  way  militate  against  the  views 
herein  expressed. 

The  other  case  is  Moss  v.  Hancock,  [1899]  2  O.  B.  3,  wherein  it  was 
held  that  a  i5  gold  piece,  coin  of  the  realm,  that  had  been  stolen  and 
sold  by  the  thief  to  a  dealer  in  curiosities,  could  be  recovered  by  the 
owner.  Apparently  the  gold  piece  was  rare  and  of  more  than  its  nom- 
inal value,  and  the  decision  turned  upon  the  question  whether  the 
defendant  had  received  the  coin  as  money  or  currency  or  as  an  arti- 
cle valuable  in  itself.  As  Judge  Darling  expressed  the  question,  "I 
ask  myself  was  this  gold  piece  passed  on  its  character  as  coin  of  cur- 
rency, or  was  it  rather  the  subject  of  a  sale  as  an  article  of  virtu?" 
He  came  to  the  conclusion  that  it  was  "the  subject  of  a  sale  as  a  medal 
might  have  been  to  a  dealer  in  old  and  curious  things."  And  Judge 
Channell  thought  that  the  coin  had  been  "dealt  with  as  if  it  were  a 
medal,  or  ancient  coin,  or  other  curiosity."  The  decision  was  evidently 
correct  in  principle,  as  applied  either  to  domestic  or  foreign  moneys. 
but  it  does  not  control  the  present  case,  where  the  moneys  purchased 
by  the  defendant  were  received  by  him  simply  as  representative  of 
the  values  expressed  thereon  and  in  their  character  as  moneys  of  the 
governments  which  issued  them. 

The  conclusion  that  the  defendant  obtained  good  title  to  these  mon- 
eys is  certainly  in  accordance  with  the  equities  of  the  case.  The  plain- 
tiffs intrusted  these  moneys  to  their  manager,  gave  him  authority  to 


Ch.  1)  FOUMAL   REQnsiTKS  683 

remove  them  from  the  premises  and  sell  them  wherever  the  best  prke 
could  be  obtained.  They  maintained  nu  supervision  over  him.  While 
the  case  may  not  technically  be  governed  by  the  principle  that  as  be- 
tween two  innocent  parties  the  loss  must  fall  upon  the  one  whose  con- 
duct made  the  loss  possible,  it  certainly  comes  within  the  spirit  of  that 
rule  Freudenheim  v.  Gutter.  201  N.  Y.  94,  94  N.  E.  640;  Knox  v. 
Eden  Musee  Co.,  148  N.  Y.  453,  42  N.  E.  988,  31  L.  R.  A.  779,  51 
Am.  St.  Rep.  700. 

Judgment  should  be  rendered  for  the  defendant. 

Per  Quriam.     Judgment  affirmed,  with  costs. 


IIEBBLETHWAITE  v.  FLINT  et  al. 

(Supreme  Court  of  New  York.  Appellate  Division,  191S.     185  App.  Div.  240. 

17.3  N.  Y.  Siipp.  81.) 

Putnam,  j.  *  *  *  On  July  2,  1898,  the  plaintiff  had  borrowed 
of  defendants  56  contos  of  reis  Brazilian,  "payable  at  the  rate  of  ex- 
change of  71/2  pence  per  milreis,"  for  which  he  gave  his  demand  note, 
made  and  delivered  at  Manaos.  *  *  =^  It  is  contended  that  this 
note  was  not  negotiable,  because  payable  "in  foreign  currency  of  fluc- 
tuating value  in  the  United  States."  Our  Negotiable  Instruments  Law 
*  *  *  declares  that  the  negotiable  character  of  such  an  instrument 
is  not  affected  by  the  fact  that  it  "designates  a  particular  kind  of  cur- 
rent money  in  which  payment  is  to  be  made."  Here  the  note  was  made 
in  Brazil,  payable  in  its  national  currency,  which  was  stabilized  by  a 
specific  rate  of  exchange  into  British  sterling.  It  was  negotiable  by 
the  law  merchant.     =1^     *     * 

If  this  note  be  held  not  negotiable,  a  personal  demand  on  plaintiff 
would  be  necessary,     *     *     * 


It  w^ould  seem  to  follow  from  the  preceding  section  that,  if  an 
instrument  contained  a  promise  or  order  to  do  an  act  in  addition 
to  the  payment  of  money,  the  promise  as  a  whole  would  not  be  to 
pay  in  money,  and  that  therefore  the  instrument  would  be  non- 
negotiable.     Nevertheless  section  5  provides : 

An  instrument  which  contains  an  order  or  promise  to  do  any 
act  in  addition  to  the  payment  of  money  is  not  negotiable. 


COOLIDGE  &  McCLAINE  v.   SALTMARSII  et  al. 
(Supreme  Court  of  Washington,  1917.     96  AVash.  541,  165  Par.  508.) 

Per  Curiam.  The  plaintiff  Coolidge  &  McClaine,  a  corporation,  as 
holder  of  a  promissory  note  and  mortgage  executed  by  Robert  S.  Salt- 
marsh  and  ]\Iargaret  Saltmarsh,  brought  an  action  against  them  to 
foreclose  the  same,  making  a  party  defendant  also  William  McCowat, 
who  held  a  subsequent  mortgage  covering  the  same  land.  The  court 
rendered  decree  foreclosing  the  Coolidge  &  McClaine  mortgage.  On 
issues  raised  between  the  Saltmarshes  and  McCowat  on  the  latter's 
note  and  mortgage  which  he  held  by  transfer  from  the  original  payee, 
the  court  held  that  the  note  was  a  nonnegotiable  one  and  therefore 


684  NEGOTIABLE   INSTRUMENTS  (Part  3 

subject,  in  the  hands  of  McCowat  as  assignee,  to  all  the  defenses  which 
the  makers  had  against  the  original  payee.  The  defendant  McCowat 
appeals. 

The  attorneys  for  both  appellant  and  respondents  agree  that  the  only 
issue  in  the  case  is  the  negotiability  of  the  note,  it  having  been  estab-  • 
lished  that  it  was  procured  by  fraud  on  the  part  of  D.  Ryrie,  the  orig- 
inal payee,  from  whom  it  had  been  purchased  by  appellant.     *     *     * 

The  Negotiable  Instruments  Act  (Rem.  Code,  §  3392)  declares  that 
an  instrument  "must  contain  an  unconditional  promise  or  order  to  pay 
a  sum  certain  in  money"  in  order  to  be  negotiable.  The  note  in  ques- 
tion, in  addition  to  being  for  a  sum  named,  also  contains  a  promise 
to  pay  any  taxes  assessed  upon  the  note  or  upon  the  mortgage  secur- 
ing it.  We  held,  in  Bright  v.  Offield,  81  Wash.  442,  143  Pac.  159, 
that  such  a  provision  in  the  note  renders  it  nonnegotiable.  In  that  case 
there  was  involved  a  provision  in  the  note  for  payment  of  taxes,  which 
constituted  an  impHed  rather  than  a  direct  promise  by  the  maker  to 
pay  them.  The  court  there  said:  "Since  the  amount  of  these  taxes, 
rates,  and  assessments  is  uncertain,  the  amount  of  recovery  would  be 
uncertain.  This  provision,  therefore,  renders  the  note  not  merely  an 
unconditional  piromise  to  pay  a  sum  certain,  but  also,  in  necessary 
effect,  a  conditional  promise  to  pay  an  uncertain  sum." 

The  fact,  as  urged  by  appellant,  that  there  was  no  law  in  force  in  this 
state  for  the  taxation  of  notes  and  mortgages,  would  not  detract  from 
the  effect  of  the  rule.  There  always  remains  a  possibility  during  the 
life  of  such  contracts  that  they  may  be  subjected  to  the  liability  of  tax- 
ation, and  a  promise  in  the  note  to  pay  any  taxes  thereon  would  leave 
the  amount  to  be  paid  indeterminate  and  open  to  conjecture  upon  the 
contingency  of  future  legislation.     *     *     * 

The  finding  and  conclusion  of  the  court  as  to  the  nonnegotiable  char- 
acter of  the  note  in  controversy  is  in  accord  with  the  case  cited,  and, 
as  the  case  is  controlling,  the  judgment  will  stand  affirmed. 


HOLLIDAY  STATE  BANK  v.  HOFFMAX. 

(Supreme  Court  of  Kansas.  1911.     85  Kan.  71,  116  Pac  239, 
35  L.  B.  A.  [N.  S.]  39<J,  Ann.  Cas.  1912D,  1.) 

See  ante,  p.  662,  for  a  report  of  the  case. 


FINLEY  V.  SMITH,  Banking  Com'r. 

(Court  of  Appeals  of  Kentucky,  1915.     165  Ky.  415,  177  S.  W.  262, 
L.  II.  A.  1015F,  777.) 

See  ante,  p.  664,  for  a  report  of  the  case. 


SECTION  7.— THE  SUM  TO  BE  PAID  MUST  BE  CERTAIN 

The  Negotiable  Instruments  Law^  provides: 

Section  1,  subsec.  2.  An  instrument  to  be  negotiable  must  con- 
tain an  unconditional  promise  or  order  to  pay  a  sum  certain  in 
money. 


Ch.  1)  FORMAL   REQUISITES  685 

Section  2.  The  sum  payable  is  a  sum  certain  within  the  mean- 
ing of  this  act,  although  it  is  to  be  paid:  (1)  With  interest;  or 
(2)  By  stated  installments;  or  (3)  By  stated  installments  with  a 
provision  that  upon  default  in  payment  of  any  installment,  or  of 
interest  the  whole  shall  become  due;  or  (4)  With  exchange  wheth- 
er at  a  fixed  rate  or  at  the  current  rate ;  or  (5)  With  costs  of  col- 
lection or  an  attorney's  fee,  in  case  payment  was  not  made  at  ma- 
turity. 


McCORXICK  V.  SWEM  et  al. 
(Supreme  Court  of  Utah,  1909.     36  Utah,  6,  102  Pac.  626,  20  Ann.  Cas.  1368.) 

Action  by  W.  S.  McCornick,  doing  business  as  McCornick  &  Co. 
against  J.  M.  Swem  and  another.  From  a  judgment  for  plaintiff,  de- 
fendants appeal. 

Frick,  J.  Respondent,  in  his  complaint,  in  substance,  alleged:  That 
on  the  1st  day  of  September,  1904,  appellants,  at  Salt  Lake  City,  Utah, 
executed  and  delivered  their  certain  promissory  note  for  the  sum  of 
$1,167,  payable  in  four  months  from  said  date,  to  the  order  of  the 
Northern  Light  Mining  &  Milling  Company,  a  corporation,  at  McCor- 
nick &  Co.'s  Bank,  in  Salt  Lake  City,  with  interest  at  10  per  cent,  per 
annum.  The  note  also  contained  the  following  provision:  "In  case 
this  note  is  collected  by  an  attorney,  either  with  or  without  suit,  we 
hereby  agree  to  pay dollars  attorney  fee."  It  was  further  al- 
leged: "That,  immediately  upon  the  execution  and  delivery  of  said 
note,  the  same  was,  before  maturity,  for  a  valuable  consideration,  and 
in  good  faith,  purchased  by  this  plaintiff  (respondent)  from  the  payee 
thereof,  which  payee  duly  indorsed  and  delivered  the  same,  and  plain- 
tiff is  now  and  ever  since  has  been  the  owner  and  holder  of  the  same." 
That  no  part  of  the  principal  or  interest  of  said  note  has  been  paid  ex- 
cept the  sum  of  $791.22.  That  $100  is  a  reasonable  attorney's  fee. 
*     *     * 

Appellants'  counsel  further  insists  that  the  note  in  question  was  non- 
negotiable  upon  its  face  because,  if  it  provided  for  an  attorney's  fee 
at  all,  it  was  for  an  indefinite  and  uncertain  sum,  and  hence  destroyed 
the  certainty  required  in  negotiable  instruments.  Before  the  adoption 
of  the  so-called  "negotiable  instruments  law,"  the  authorities  upon  this 
question  were  in  hopeless  conflict  with,  perhaps,  the  greater  number 
of  cases  in  favor  of  holding  promissory  notes  containing  attorney's  fee 
clauses  as  negotiable.  Since  the  adoption  of  that  law  by  a  large  num- 
ber of  states,  including  Utah,  the  holdings  have  become  more  uniform, 
and  it  is  now  generally  held  that  a  provision  in  a  promissory  note  that 
the  maker  thereof  will  pay  a  specific  amount  named,  or  a  certain  per 
cent,  of  the  amount  due,  or  a  reasonable  amount,  as  an  attorney's  fee, 
does  not  affect  either  the  certainty  or  the  negotiability  of  the  instru- 
ment. 

The  further  contention  is  made  that  the  provision  in  the  note,  in  the 
form  in  which  it  was  executed,  was,  in  legal  effect,  an  agreement  not 
to  pay  an  attorney's  fee ;  but,  if  this  is  not  its  effect,  then  in  view  that 
the  note  did  not  specify  any  amount,  nor  in  terms  provide  for  a  rea- 
sonable sum  as  an  attorney's  fee,  that  this  was  the  same  as  if  no  pro- 
vision to  pay  an  attorney's  fee  had  been  incorporated  into  the  note. 
Counsel  have  not  cited  any  cases  either  for  or  against  this  proposi- 


G86  NEGOTIABLE   INSTRUMENTS  (Part  3 

tion.  As  an  original  proposition,  and  in  view  that  in  cases  like  the 
one  at  bar  an  attorney's  fee  is  recoverable  only  by  virtue  of  some  agree- 
ment, there  seems  considerable  force  to  the  contention  made  by  coun- 
sel. We  have  devoted  considerable  time  in  making  a  somewhat  thor- 
ough research  of  both  text-books  and  reports,  but  have  been  unable 
to  find  either  text-writer  or  case  which  sustains  counsel's  contention. 
Upon  the  other  hand,  we  have  found  cases  in  which  it  is  held  that, 
where  the  amount  is  left  blank  in  an  attorney's  fee  clause,  it  is  tanta- 
mount to  a  promise  to  pay  a  reasonable  sum  as  an  attorney's  fee. 

We  feel  constrained  to  follow  the  cases  in  which  it  is  so  held. 
*  *  *  In  case  the  amount  is  not  expressly  agreed  upon,  it  is  the 
duty  of  the  court  to  limit  the  fees  to  a  fair  and  reasonable  sum,  in 
view  of  all  the  circumstances.  It  has  frequently  been  held  that,  even 
when  the  amount  has  been  agreed  upon,  it  is  nevertheless  subject  to 
control  by  the  courts ;  and  therefore,  if  it  appears  to  the  court  that 
the  amount  agreed  upon  is  unfair,  unjust,  or  unreasonable,  the  court 
should  permit  a  recovery  only  for  what  is  reasonable  under  all  the 
circumstances  the  same  as  where  no  amount  has  been  agreed  upon.  It 
seems  to  us,  however,  and  cjuite  a  number  of  the  courts  so  hold,  that 
prima  facie  the  amount  agreed  upon  should  be  assumed  as  the  proper 
fee  to  be  allowed,  and  unless  it  is  clearly  obvious  to  the  court,  or  is 
made  to  appear,  that  the  amount  stipulated  for  is  unjust,  oppressive, 
or  unreasonable,  in  view  of  all  the  circumstances  of  the  case,  the 
stipulated  amovmt  should  be  allowed.     *     *     * 

The  judgment  is  affirmed. 


UNION  NAT.  BANK   v.  MAYFIELD  et  al. 
fSnpreme  Court  of  Oklahoma,  1917.    169  Pac.  626.) 

RuMMONS,  C.  *  *  *  The  sole  question  involved  in  this  appeal  is 
the  negotiability  of  the  promissory  note  sued  upon  by  plaintiff.  The 
only  provision  in  the  note  necessary  to  be  considered  in  determining 
this  question  is  as  follows:  "With  interest  at  the  rate  of  9  per  cent, 
per  annum,  payable  annually  from  date  until  due :  Provided,  how- 
ever, if  the  note  is  paid  on  or  before  maturity,  interest  shall  be  only  7 
per  cent." 

Plaintifif  relies  for  a  reversal  of  this  cause  upon  the  case  of  Securitv 
Trust  &  Savings  Bank  v.  CTlcichmann.  50  Okl.  441,  150  Pac.  908,  L.  R. 
A.  191 5F,  1203.  The  opinion  in  that  case  was  written  by  Commis- 
sioner Devereux,  following  Savings  Bank  v.  Landis,  17  Okl.  530,  132 
Pac.  1101,  and  overruling  Randolph  v.  Hudson,  12  Okl.  516,  74  Pac. 
946,  and  Bracken  v.  Fidelity  Trust  Co.,  42  Okl.  118.  141  Pac.  6,  L.  R. 
A.  1915B,  1216.  In  the  case  cited  it  is  held  that  "a  note  dated  May  1, 
1905,  which  provides,  'with  interest  from  date  if  not  paid  when  due.' 
is  a  negotiable  instrument."  In  Randolph  v.  Hudson,  supra,  it  is  held 
that  a  note  reading  "  '30  days  after  date  I  promise  to  pay  to  the  order 
of  J.  H.  Thomas  $275.00,  with  interest  at  the  rate  of  12  per  cent,  from 
date  if  not  paid  at  maturity,'  was  not  negotiable."  In  Citizens'  Sav- 
ings Bank  v.  Landis,  supra,  it  was  held  that  a  note  reading  "December 
1,  1907,  after  date,  for  value  received,  we  jointly  and  severally  promise 
to  pay  McLaughlin  Brothers  or  order  $1,200.00  at  the  Walters  Nation- 
al Bank,  of  Walters,  Oklahoma,  with  interest  at  6  per  cent,  per  an- 
num, before  maturity,  and  thereafter  at  10  per  cent,  per  annum  until 


Ch.  1)  FORMAL   REQUISITES  687 

paid,  interest  payable  annually,"  was  a  negotiable  instrument.  In 
Bracken  v.  Fidelity  Trust  Co.,  supra,  it  was  held  that  a  note,  contain- 
ing the  following  provisions :  "With  interest  at  6  per  cent,  per  annum 
before  maturity  and  thereafter  with  interest  at  10  per  cent,  per  annum 
until  paid.  Interest  payable  with  note"  was  nonnegotiable.  Since  the 
handing  down  of  the  opinion  in  the  case  of  Security  Trust  &  Savmgs 
Bank  v.  Gleichmann,  this  court  has  held  in  an  opinion  written  by  Com- 
missioner Bleakmore,  following  Farmers'  Loan  &  Trust  Co.  v.  McCoy, 
32  Okl.  277,  122  Pac.  125,  40  L.  R.  A.  (N.  S.)  177,  that  a  note  payable 
in  installments,  containing  a  stipulation  that  if  paid  within  15  days 
from  date  a  discount  of  6  per  cent,  would  be  allowed  was  uncertam 
as  to  the  amount  necessary  to  satisfy  it  at  the  time  of  its  execution, 
and  therefore  was  not  negotiable.  First  National  Bank  of  Iowa  City 
V.  Watson,  56  Okl.  495,  155  Pac.  1152. 

This  case  is  the  only  one  of  the  cases  cited  interpreting  a  promis- 
sory note  executed  since  the  adoption  of  the  Uhiform  Negotiable  In- 
struments Act.  It  is,  however,  in  direct  conflict  with  the  case  of  Se- 
curity Trust  &  Savings  Bank  v.  Gleichmann,  supra,  and  in  harmony 
with 'the  opinion  of  Randolph  v.  Hudson,  supra.  In  the  body  of  the 
opinion  it  is  said :  "The  sum  payable— that  is,  the  amount  for  which, 
by  the  terms  of  the  instrument,  the  maker  became  liable,  and  which  he 
might  tender  and  pay  in  full  satisfaction  of  his  obligation— was,  at 
the  date  thereof,  to  a  certain  extent  dependent  upon  his  will ;  he  had 
the  right  to  pay  a  greater  or  less  sum  than  the  principal ;  he  could,  if 
he  saw  fit,  within  the  prescribed  period,  discharge  his  debt  at  94  per 
cent,  or  thereafter  pay  100  per  cent,  on  the  dollar.  Under  such  con- 
dition, the  sum  payable  was,  at  the  time  of  the  execution  of  the  in- 
strument, clearly  indefinite  and  uncertain.  Unless  the  rule  of  the  law 
of  merchant  which  obtained  in  this  jurisdiction  with  respect  to  the 
certainty  required  in  the  sum  payable  in  a  negotiable  instrument  has 
been  changed  by  the  statute,  supra,  such  rule  still  governs,  and  the  note 
in  question  is  nonnegotiable.  In  our  opinion,  it  is  obvious  that  the  stat- 
utory provisions  above  quoted  do  not  purport  to  prescribe  a  rule  in  this 
regard  different  from  that  recognized  by  the  courts  of  this  state  be- 
fore their  enactment,  in  a  case  where  a  promissory  note  provided  for 
the  discount  of  a  principal  sum  otherwise  payable,  if  at  the  option  of 
the  maker,  payment  is  made  before  maturity." 

In  the  instant  case  the  same  criticism  of  the  note  sued  on  occurs  as  in 
the  case  last  quoted.  The  sum  to  be  paid  upon  the  instrument  was  at 
the  option  of  the  maker.  If  he  chose  to  pay  it  on  or  before  maturit}-, 
the  interest  upon  the  principal  was  to  be  computed  at  the  rate  of  7 
per  cent.  If  he  neglected  to  pay  until  after  maturity,  the  interest  was 
to  be  comptited  at  9  per  cent.  So  that  it  would  be  impossible  for  any 
one  to  compute  with  certainty  the  amount  due  upon  this  note  at  any 
date  in  the  future.  We  think  the  writer  of  the  opinion  in  the  case  of 
Security  Trust  &  Savings  Bank  v.  Gleichmann,  supra,  fell  into  error 
in  applying  the  rule  laid  down  in  Savings  Bank  v.  Landis,  supra,  to 
the  note  in  controversy  in  his  case.  In  the  case  of  Savings  Bank  v. 
Landis,  supra,  there  was  no  uncertainty  as  to  the  amount  due  accord- 
ing to  the  terms  of  the  note.  It  was  provided  that  the  note  should 
bear  interest  at  6  per  cent,  before  maturity,  and  thereafter  at  the  rate 
of  10  per  cent.  From  the  face  of  the  note  there  could  be  computed 
with  certainty  the  amount  that  would  be  due  thereon  at  any  time  in  the 
future;    so  there  was  no  uncertainty  as  to  the  sum  payable.     In  the 


688  NEGOTIABLE   INSTRUMENTS  (Part  3 

Security  Trust  &  Savings  Bank  Case,  however,  if  the  note  was  paid 
at-  maturity  it  bore  no  interest.  A  failure  to  pay  at  maturity  made  it 
bear  interest  from  its  date  six  months  prior  to  maturity.  The  sum 
payable,  therefore,  became  indefinite  and  uncertain,  arid  depended  upon 
the  option  of  the  maker. 

One  of  the  requisites  of  negotiability  under  the  Uniform  Negotiable 
Instruments  Act  is  that  the  instrument  must  contain  an  unconditioned 
promise  or  order  to  pay  a  sum  certain  in  money.  We  think  that  the 
note  in  the  instant  case  fails  to  comply  with  the  provision  of  the  act 
as  to  the  interest  to  be  paid,  nor  does  it  fall  within  any  of  the  excep- 
tions contained  in  sections  4052,  4055.  4056.  Revised  Laws  1910,  su- 
pra [Negotiable  Instruments  Law,  §§  2,  5,  and  6].  We  feel  convinced 
that  the  rule  laid  down  in  First  National  Bank  of  Iowa  City  v.  Watson, 
supra,  is  a  correct  interpretation  of  our  Negotiable  Instruments  Act, 
and  we  therefore  follow  the  rule  announced  in  that  case.  The  case  of 
Security  Trust  &  Savings  Bank  v.  Gleichmann,  supra,  so  far  as  the 
rule  announced  in  the  sixth  syllabus  in  that  case,  and  so  far  as  the  same 
overrules  the  case  of  Randolph  v.  Hudson,  supra,  is  overruled. 

The  judgment  of  the  court  below  should  be  affirmed. 


SECTION  8.— THE  INSTRUMENT  MUST  BE  PAYABLE 
TO  ORDER  OR  BEARER 

Previous  sections  have  shown  that  an  instrument  to  be  nego- 
tiable (1)  must  contain  a  written  promise  or  order;  (2)  that  the 
promise  or  order  must  be  unconditional ;  (3)  that  the  uncondi- 
tional promise  or  order  must  be  payable  at  a  fixed  or  determinable 
future  time ;  (4)  that  the  promise  or  order  must  be  to  pay  in 
money ;  (5)  that  the  sum  to  be  paid  must  be  certain.  There  is 
the  further  requirement  that  the  instrument  must  be  payable  to 
order  or  to  bearer. 

Section  1,  subsec.  4.  An  instrument  to  be  negotiable  must  be 
payable  to  order  or  to  bearer.  Negotiable  instruments  are  usually 
drawn  payable  to  a  designated  person  or  order,  or  simply  to 
bearer.  As  a  matter  of  safety  these  words  should  always  be  used. 
But  the  act  does  not  require  that  these  specific  words  alone  must 
be  used,  for  Section  10  provides :  The  instrument  need  not  follow 
the  language  of  this  act,  but  any  terms  are  sufficient  which  clearly 
indicate  an  intention  to  conform  to  the  requirements  hereof. 

Instruments  payable  to  order  or  to  bearer  are  alike  only  in  that 
either  of  these  words  satisfy  the  requirements  that  the  instrument 
to  be  negotiable  must  contain  words  of  negotiability.  In  other 
respects  different  legal  effects  are  produced.  In  general,  it  may 
be  said  that  an  instrument  payable  to  order  must  be  indorsed  be- 
fore it  may  be  negotiated,  while  an  instrument  payable  to  bearer  is 
negotiable  by  delivery  without  indorsement.  These  differences 
will  be  further  discussed  in  Chapter  II. 


Ch.  1)  FORMAL   REQUISITES  689 


FORREST  V.  SAFETY  BANKING  &  TRUST  GO. 
(United  States  Circuit  Court,  1909.     174  Fed.  345.) 

J.  B.  McPherson,  District  Judge.  This  suit  is. brought  upon  a  cer- 
tificate of  deposit  issued  bv  the  defendant  in  the  following  words : 
"No.  1853.  Philadelphia,  Janry.  2,  1909.    $3,'000.00. 

"Peter  F.  Fallon  has  deposited  in  the  Safety  Banking  &  Trust  Com- 
pany three  thousand  dollars  to  the  credit  of  himself  payable  in  cur- 
rent funds  on  return  of  this  certificate  properly  indorsed  on  July  1, 
1909.     Interest  3y2  per  cent,  per  annum. 

"H.  J.  Colver,  Cashier.  H.  L.  Rock,  Secty. 

"This  certificate  of  deposit  is  not  subject  to  check  and  is  only  pay- 
able at  maturity." 

The  certificate  was  properly  indorsed  in  blank  by  Fallon,  and  passed 
into  the  possession  and  apparent  ownership  of  j.  J.  West  not  long 
after  its  date.  In  March,  1909,  West  transferred  it  by  delivery  to  the 
plaintiff.  William  S.  Forrest,  for  a  valuable  consideration  *  *  * 
in  payment  of  his  own  debt.  Payment  having  been  refused  at  maturity, 
Forrest  sued  in  his  own  name,  and  the  principal  question  for  decision 
is  whether  the  action  is  properly  brought  in  that  form. 

The  answer  must  be  in  the  affirmative  if  the  certificate  is  a  negotiable 
instrument,  and  to  this  point,  therefore,  the  inquiry  should  be  directed. 
It  is  undoubtedly  true  that,  if  the  decisions  in  Pennsylvania  are  to  gov- 
ern, this  court  must  hold  that  the  plaintiff  cannot  sue  in  his  own  name. 
^     ^     ^ 

The  question,  however,  may  for  the  moment  be  considered  as  one  of 
general  commercial  law.  and  in  that  region,  as  is  well  known,  a  fed- 
eral court  is  not  bound  by  the  decisions  of  a  particular  state,  but  may 
follow  its  own  opinion,  or  an  adverse  current  of  authority  elsewhere. 

In  5  Cyc,  at  page  520,  the  result  of  the  authorities  is  summarized 
as  follows :  "Whether  a  certificate  of  deposit  is  a  note  or  merely  a  re- 
ceipt for  money  has  long  puzzled  the  courts.  Such  certificate,  however, 
if  containing  proper  words  to  express  that  intention,  is  negotiable  in 
the  usual  manner  by  indorsement,  and  although  not  negotiable  in  fact, 
if  negotiable  in  form,  it  may  be  assigned.  Moreover,  where  they  are 
negotiable,  their  transfer  is  governed  by  the  rules  that  apply  to  prom- 
issory notes,  as  is  al«o  the  liability  of  the  parties  thereon."  *  *  * 
The  present  certificate  is  in  effect  payable  to  Fallon  or  his  order,  for 
this  is  necessarily  implied  by  the  phrase  "properly  indorsed." 

As  it  seems  to  me,  these  authorities  conclusively  establish  the  right 
of  the  plaintiff  to  maintain  this  suit  in  his  own  name,  if  the  question  is 
to  be  decided  as  one  of  general  commercial  law.  The  defendant  con- 
tends, however,  that  the  Negotiable  Instruments  Act  of  Pennsylvania, 
passed  in  1901  (P.  L.  194),  decides  the  point  against  such  right,  and 
that  this  court  is  bound  to  follow  the  statute.  Certificates  of  deposit 
are  not  referred  to  in  the  act  by  name,  and  I  have  been  referred  to  no 
decision  of  the  Supreme  Court  of  Pennsylvania  that  construes  the 
statute  upon  any  question  now  relevant.  If,  therefore,  the  act  applies 
to  the  present  controversy,  I  think  that  the  defendant's  position  may  be 
disposed  of  in  a  few  words.  *  *  *  Believing,  therefore,  that  the 
Negotiable  Instruments  Act,  which  is  intended  to  bring  about  the  uni- 
form treatment  of  legal  questions  in  a  most  important  branch  of  com- 
B.&  B.Bus.Law.— 44 


690  NEGOTIABLE   INSTRUMENTS  (Part  3 

mercial  law,  should  receive  a  construction  that  is  in  harrnony  with 
a  widely  prevailing  view  (where  such  a  construction  is  possible),  and 
having  been  pointed  to  nothing  in  the  statute  that  requires  me  to  hold 
that  certificates  of, deposit  are  not  included  within  its  description  of 
negotiable  instruments,  1  conclude  that  the  instrument  sued  on  is  ne- 
gotiable under  the  act,  and  that  the  action  was  properly  brought  in 
tlie  name  of  the  holder.    *    *    * 


The  Negotiable  Instruments  Law  contains  two  additional  sec- 
tions in  explanation  of  the  circumstances  under  which  an  instru- 
ment is  to  be  deemed  payable  to  order  or  to  bearer. 

Section  8.  The  instrument  is  payable  to  order  where  it  is  drawn 
payable  to  the  order  of  a  specified  person  or  to  him  or  his  order. 
It  may  be  drawn  payable  to  the  order  of  (1)  a  payee  who  is  not 
maker,  drawer,  or  drawee.;  or  (2)  the  drawer  or  maker;  or  (3) 
the  drawee;  or  (4)  two  or  more  payees  jointly;  or  (5)  one  or 
more  of  several  payees ;  or  (6)  the  holder  of  an  office  for  the  time 
being. 

Section  184.  Where  a  note  is  drawn  to  the  maker's  own  order, 
it  is  not  complete  until  indorsed  by  him. 

The  first  clause  makes  it  clear  that  it  is  immaterial  whether  the. 
instrument  reads  "payable  to  the  order  of  P.,"  or  "pay  P.  or  order." 
Subsections  1,  2  and  3  assert  propositions  obviously  true.  It 
should  be  noted,  hov/ever,  where  an  instrument  is  drawn  payable 
to  the  order  of  the  maker  or  drawer,  that  it  must  also  be  indorsed 
by  the  drawer  and  delivered  before  any  rights  can  be  acquired 
thereunder.  Subsections  4  and  5  provide  that  there  may  be  more 
than  one  payee;  in  the  one  case,  where  the  payees  have  a  joint 
interest,  and,  in  the.  other,  where  there  is  no  joint  interest — i.  e.,  a 
case  of  alternative  payees.  Before  the  act  some  courts  held  that 
an  instrument  payable  to  payees  in  the  alternative  was  not  ne- 
gotiable because  it  was  uncertain  as  to  who  the  payee  was.  Like- 
wise, subsection  6  changed  the  law  of  many  states  wherein  it  was 
held  that  if  an  instrument  were  made  payable  to  such  a  person  as 
at  the  time  of  maturity  should  hold  a  certain  office  the  instrument 
was  non-negotiable  because  the  payee  was  not  designated  with 
reasonable  certainty.     Such  an  instrument  is  now  negotiable. 

The   Negotiable  Instruments   Law  provides : 

Section  9.  The  instrument  is  payable  to  bearer  (1)  when  it  is 
expressed  to  be  so  payable ;  (2)  when  it  is  payable  to  a  person 
named  therein  or  bearer,  or,  (3)  when  it  is  payable  to  the  order 
of  a  fictitious  or  non-existing  person  and  such  fact  was  known  to 
the  person  making  it  so  payable,  (4)  when  the  name  of  the  payee 
does  not  purport  to  be  the  name  of  any  person,  or  (5)  when  the 
only  or  last  indorsement  is  an  indorsement  in  blank. 

When  the  instrument  reads,  "pay  bearer,"  or  if,  instead  of  using 
the  word  "bearer,"  some  word  o^similar  import  is  used,  the  instru- 
ment is  payable  to  bearer.     This  is  the  simplest  case. 


Ch.  1)  FORMAL   KKQl'lSITES  691 

The  second  clause  declares  that  an  instrument  which  is  expressed 
to  be  payable  to  "P.  or  bearer,"  is  payable  to  bearer.  The  inser- 
tion of  the  payee's  name  does  not  change  the  status  of  the  instru- 
ment. P.'s  interest  in  the  instrument  arises  not  from  the  fact 
that  his  name  appears  therein  but  because  he  is  the  bearer.  Be- 
fore the  act,  some  cases  held  that  because  there  was  a  named 
payee  therein,  such  fact  destroyed  the  effect  of  the  word  "bearer" 
and  that  the  instrument  was  not  payable  to  bearer.  This  rule  has 
been  changed  by  the  Negotiable  Instruments  Law. 

The  third  clause  opens  up  a  number  of  situations  which  involve 
certain  principles  of  the  Law  of  Negotiable  Instruments  which 
we  have  not  taken  up.  The  consideration  of  this  section  will  be 
postponed  to  a  later  chapter.  All  that  need  be  borne  in  mind  here 
is  that  in  this  case  where  the  instrument  declares  that  it  is  payable 
to  a  named  payee  specified  therein  or  to.  his  order,  the  law  regards 
the  instrument  not  as  payable  to  some  person  or  order,  but,  on 
the  contrary,  treats  the  instrument  just  as  though  it  read,  payable 
to  bearer.  The  real  difficulty  arises  when  we  attempt  to  ascertain 
the  circumstances  under  which  the  payee  will  be  deemed  to  be  a 
fictitious  or  non-existing  payee,  and,  when  we  attempt  to  find  out 
what  person  must  know  that  fact.  The  situations  where  this  sec- 
tion is  involved  will  be  taken  up  in  chapter  V. 

Clause  4  provides  that  an  instrument,  in  legal  effect,  is  payable 
to  bearer,  although  the  words  "or  order"  appear  therein,  if  the 
name  of  the  payee  does  not  purport  to  be  the  name  of  any  person. 

It  is  sometimes  convenient  to  draw  instruments,  particularly 
checks,  payable  to  some  particular  account;  such  as  to  "cash,"  "to 
draft,"  "to  bills  payable"  and  the  like.  These  words  appear  in  the 
space  provided  for  the  name  of  the  payee.  Suppose  a  check  is 
drawn  payable  "to  cash  or  bearer."  Obviously  this  instrument 
is  payable  to  bearer  because  it  is  expressly  so  payable.  But 
suppose  the  check  is  payable  to  "cash  or  order,"  how  is  such  an  in- 
strument to  be  construed?  Here  we  have  no  payee  who  is  capable 
of  indorsing  and  therefore  if  the  instrument  is  to  -be  regarded  as 
a  negotiable  instrument  the  words  "or  order"  must  be  given  a  legal 
effect  dift'erent  from  that  .which  they  normally  have.  Any  other 
construction  would  make  it  impossible  for  an  instrument  payable- 
"to  cash  or  order"  to  circulate.  For  these  reasons  the  law  provides 
that  where  the  payee  does  not  purport  to  be  the  name  of  any  per- 
son, such  an  instrument  is  payable  to  bearer. 

Suppose  an  instrument  is  payable  to  "the  person  who  lives  at 
126  West  Main  street,"  in  a  specified  city,  or  "to  the  Chamber  of 
Commerce" — which,  let  us  assume,  is  an  unincorporated  associa- 
tion— are  these  two  instruments  payable  to  bearer  because  the 
payee  does  not  purport  to  be  the  name  of  any  person?  This  lan- 
guage, while  it  does  not  specify  the  name  of  a  particular  person, 
does  sufficiently  describe  the  payees  so  that  they  may  be  identi- 
fied within  the  meaning  of  the  last  clause  of  section  8,  subsection 
6,  which  provides  that,  where  the  instrument  is  payable  to  order 


692  NEGOTIABLE   INSTRUMENTS  (Part  3 

the  payee  must  be  named  or  otherwise  indicated  with  reasonable 
certainty.  Any  instrument  which  indicates  the  payee  with  rea- 
sonable certainty  cannot  be  regarded  as  payable  to  a  payee  which 
does  not  purport  to  be  the  name  of  any  person.  It  is  only  where 
the  language  used  in  the  space  provided  for  the  name  of  the  payee 
cannot  be  construed  as  indicating  a  particular  payee  that  section 
9,  subsection  4,  discussed,  applies. 


CLEARY  V.  DE  BECK  PLATE  GLASS  CO. 

(Supreme  Court  of  New  York,  Appellate  Term,  1907.     54  Misc.  Rep.  537, 
104  N.  Y.  Supp.  831.) 

Action  by  Frances  A.  Cleary  against  the  De  Beck  Plate  Glass  Com- 
pany.   From  a  judgment  for  plaintiff,  defendant  appeals, 

GiLDERSLEiiVE,  P.  J.  Plaintiff  sued  to  recover  on  a  check  payable 
to  the  order  of  "Cash,"  signed  *  *  *  by  A.  M.  De  Beck,  as  presi- 
dent, of  the  defendant  company.  Upon  the  trial  the  plaintiff's  at- 
torney produced  the  check.  It  was  admitted  as  evidence  without  ob- 
jection. *  *  *  It  was  also  shown  that  the  check  had  been  presented 
to  the  bank  upon  which  it  was  drawn  on  several  occasions,  and  pay- 
ment demanded  and  refused.  The  answer  of  defendant  was  a  general 
denial.  No  evidence  other  than  the  production  of  the  check  was  giv- 
en by  the  plaintiff'  as  to  its  ownership.  This  constituted  prima  facie 
evidence  of  the  plaintiff's  ownership.  *  *  *  How  or  in  what  man- 
ner the  plaintiff  became  possessed  of  the  check  does  not  appear. 
*  *  *  Payment  of  the  check  by  the  defendant  under  the  circum-' 
stances  disclosed  by  the  testimony  here  is  ample  protection  to  it. 

Judgment  affirmed. 


SECTION  9.— PROVISIONS     NOT     AFFECTING     NEGO- 
TIABILITY 

The  Negotiable  Instruments  LaAv  contains  a  few  provisions 
which  expressly  permit  the  incorporation  of  certain  kinds  of 
clauses  in  the  instrument  without  destroying  its  negotiability. 
The  act  does  expressly  provide  that  omissions  of  certain  clauses 
shall  not  affect  negotiability.  The  clauses  which  may  be  inserted 
without  affecting  negotiability  relate  to  the  rights  of  the  holder 
with  respect  to  the  collection  of  the  debt.  These  rights  are  alike 
in  that  they  are  acquired  by  contract,  the  evidence  of  which  ap- 
pears on  the  instrument.  They  are  unlike  in  that  two  of  them 
confer  upon  the  holder  rights  with  respect  to  the  manner  of  ob- 
taining payment  of  the  debt  which,  in  the  absence  of  said  con- 
tract would  not  have  been  conferred  upon  him  by  the  law.  The 
remaining  two  special  rights  conferred  upon  the  holder  arise  from 
an  express  waiver  by  the  obligor  on  the  instrument  of  rights  which, 
under  the  law\  he  has  already  possessed. 

Section  5,  subsection  1.     The  negotiable  character  of  an  instru- 


Ch.  1)  FORMAL  REQUISITES  693 

ment  otherwise  negotiable  is  not  affected  by  a  provision  which 
authorizes  the  sale  of  collateral  securities  in  case  the  instrument 
be  not  paid  at  maturity. 

VALLEY  NAT.  BANK  OF  CHAMBEIISBURG  v.  CROWELL. 

(Supreme  Court  of  Pennsylvania,  1892.     148  Pa.  284,  23  Atl.  1068, 
33  Am.  St.  Rep.  824.) 

Per  Curiam.  The  only  question  in  this  case  was  whether  the  note 
in  controversv  was  negotiable.  It  is  in  the  usual  form  of  negotiable 
paper,  but  it  is  contended  that  its  negotiability  is  destroyed  by  reason 
of  the  following  provision  contained  therein:  "Having  deposited 
herewith  a  like  amount  of  Crowell  Company  mortgage  bonds  as  col- 
lateral security,  which  we  authorize  the  holder  of  this  note,  upon  the 
non-performance  of  this  promise  at  maturity,  to  sell  either  at  broker's 
board,  or  at  a  public  or  private  sale,  without  demanding  payment  of 
this  note  or  the  debt  due  thereon,  and  without  further  notice,  and  ap- 
ply the  proceeds,  or  as  much  thereof  as  may  be  necessary,  to  the  pay- 
ment of  this  note  and  all  necessary  charges,  holding  us,  as  makers  and 
indorsers,  responsible  for  any  deficiency." 

We  find  nothing  in  this  to  destroy  the  negotiability  of  the  note.  The 
mere  giving  of  collateral  security  with  a  promissory  note  does  not 
destroy  its  negotiability.  In  the  case  at  hand  the  amount  of  the  note 
is  not  uncertain,  nor  is  there  any  question  about  the  time  of  payment. 
And  the  payment  is  not  made  dependent  upon  any  condition  what- 
ever. The  agreement,  that  if  the  collateral  proves  insufficient  for  the 
payment  of  the  note,  and  all  necessary  expenses  and  charges,  the  mak- 
ers will  be  responsible  for  any  deficiency,  neither  increases  nor  de- 
creases the  responsibility  of  the  makers.  It  merely  requires  them  to  do 
what  the  law  would  compel  them  to  do  without  such  an  agreement. 


Section  5,  subsection  4.  The  negotiable  character  of  an  instru- 
ment otherwise  negotiable  is  not  affected  by  a  provision  which 
gives  the  holder  an  election  to  require  something  to  be  done  in 
lieu  of  payment  of  money. 


PRATT  V.  HIGGINSON   et  al. 

(Supreme   Judicial   Court  of    ^Massachusetts,    1918.     230   Mass.   256, 
119  N.  E.  G61,   1  A.   L.   R.   714.) 

BralEy,  J.  The  plaintiff,  the  owner  of  a  4  per  cent,  coupon  bond 
of  the  United  States  of  the  par  value  of  $1,000  payable  to  bearer,  and 
of  a  4  per  cent,  convertible  gold  bond  of  the  American  Telegraph  & 
Telephone  Company  of  the  par  value  of  $1,000  payable  to  the  Old 
Colony  Trust  Company,  trustee,  or  to  bearer,  deposited  the  bonds  in 
a  safe  deposit  box  from  which  they  were  purloined  by  one  Bassett, 
who  passed  them  over  to  one  Small  for  the  purpose  of  having  them 
sold.  The  bonds  were  delivered  by  Small  to  the  defendants,  a  firm 
of  bankers  and  brokers,  by  whom  they  were  sold  in  the  ordinary  course 
of  business,  and  after  deducting  the  customary  commission,  and  the 
stamp  tax,  remitted  the  balance  to  Small,  who  after  taking  out  his 


694  NEGOTIABLE   INSTRUMENTS  (Part  3 

compensation  paid  the  remainder  to  Bassett.  The  ])laintifif  upon  dis- 
covery notified  the  defendants  of  the  theft,  and  then  brought  this  ac- 
tion to  recover  the  vakie  of  the  bonds.     *     *     ■" 

The  question  for  decision  therefore  is  whether  the  defendants  who 
received  and  sold  the  bonds  and  accounted  for  the  proceeds  to  the  ap- 
parent owner,  without  notice  of  any  infirmity  in  the  title,  or  of  any 
circumstances  which  should  have  put  them  upon  inquiry,  can  be  held 
responsible  in  damages  by  the  true  owner  for  conversion.  The  de- 
fendants undoubtedly  exercised  dominion  over  the  bonds  by  converting 
them  into  money.  If  the  property  had  consisted  of  chattels  or  non- 
negotiable  documents  of  which  certificates  of  stock  are  an  example, 
the  plaintifif's  title  would  not  have  been  divested  by  a  sale  even  to  a 
purchaser  for  value  and  in  good  faith.  '^  *  *  But  to  this  rule 
there  is  a  well-recognized  exception  where  the  property  consists  of 
negotiable  securities.  *  *  *  The  provision  shown  by  the  word 
"convertible,"  that  the  holder  at  maturity  will  receive  the  face  of  the 
bond  in  money,  or  at  his  option  an  equivalent  in  stock  of  the  corpora- 
tion does  not  destroy  negotiability.  It  is  a  negotiable  instrument  with- 
in the  meaning  of  R.  L.  c.  73.  §  22,  subsec.  4,  and  section  18  [Negotia- 
ble Instruments  Law.  §  5.  subsec.  4,  and  section  1],  and  possesses  the 
essential  attributes  of  commercial  paper,  for  the  conversion  of  which 
the  defendants  on  the  record  cannot  be  charged.     '^    *     * 

We  are  accordingly  of  opinion  that  judgment  should  be  entered  for 
the  defendants.     *     *     * 


Section  5,  subsection  3.  The  negotiable  character  of  an  instru- 
ment otherwise  negotiable  is  not  affected  by  a  provision  v^^hich 
waives  the  benefit  of  any  law  intended  for  the  advantage  or  pro- 
tection of  the  obligor. 

This  section  preserves  the  negotiability  of  an  instrument,  even 
though  it  contains  a  clause  in  which  the  maker  waives  the  rights 
which  he  rtiay  have  under  certain  laws.  There  are  many  rights 
which  are  the  subject  of  waiver.  For  example,  statutes  usually 
provide  that  a  certain  amount  of  property  shall  be  exempt  from 
sale  on  execution.  One  exemption  law  for  the  benefit  of  the  indi- 
vidual himself  as  distinguished  from  his  family,  may  be  waived. 
Special  defenses  of  a  surety  are  also  the  subject  of  waiver.  The 
right  to  due  presentment  and  to  receive  notice  of  dishonor  may 
be  waived.  There  are  any  number  of  rights  which  conceivably 
may  be  the  subject  of  waiver  in  negotiable  instruments.  This  pro- 
vision does  not  provide  that  all  such  waivers  will  be  legal.  It  is 
deemed  to  be  against  public  policy  to  permit  a  person  to  be  bound 
by  his  agreement  waiving  certain  kinds  of  rights  which  the  law 
gives  him.  The  waiver,  whether  enforceable  or  not,  will  not  de- 
stroy negotiability. 

Section  5,  subsection  2.  The  negotiable  character  of  an  instru- 
ment otherwise  negotiable  is  not  affected  by  a  provision  which  au- 
thorizes a  confession  of  judgment  if  the  instrument  be  not  paid 
at  maturity. 


Ch.  1)  FORMAL   REQUISITES  G95 

.  A  word  in  explanation  of  the  judgment  note  may  be  added.  A 
judgment  has  the  effect  of  determining  finally  that  the  defendant 
owes  the  plaintiff'  the  sum  of  money  specified  in  the  judgment. 
The  judgment  also  operates  as  a  lien  on  the  debtor's  land,  and  as 
a  lien  on  personal  property  as  soon  as  the  execution  is  placed  in 
the  hands  of  the  sheriff  for  service. 

The  law  requires  that  a  person  cannot  be  proceeded  against  un- 
less he  is  notified  by  summons.  Usually  the  summons  must  be 
personally  served  upon  the  defendant.  If  he  cannot  be  found,  the 
action  will  be  ineffective.  A  creditor,  therefore,  although  legally 
entitled,  will  not  always  be  able  to  obtain  a  judgment.  Even  in 
a  case  where  the  debtor  may  be  found  and  served  with  notice  of 
the  pending  action,  considerable  time  may  elapse  before  the  judg- 
ment is  obtained.  Usually  the  law  provides  that  the  defendant 
shall  have  from  three  to  ten,  twenty  or  thirty  days  before  he  is 
required  to  answer  the  plaintiff's  declaration.  After  this  comes 
the  trial,  and  if  the  business  of  the  court  is  heavy  it  may  not  be 
possible  to  have  the  case  heard  for  weeks,  months,  and  occasion- 
ally a  trial  may  not  be  had  for  one  or  two  years.  The  plaintiff, 
therefore,  is  required  to  wait  for  this  long  period  before  he  obtains 
his  judgment.  Anything  may  happen  in  the  meantime.  The  de- 
fendant may  lose  all  of  his  property  by  speculation,  concealment, 
or  otherwise,  so  that  when  the  judgment  is  obtained  it  will  be 
worth  nothing. 

The  foregoing  was  inserted  for  the  purpose  of  emphasizing  the 
importance  of  the  confession  of  judgment  clause  in  promissory 
notes.  The  effect  of  the  clause  is  a  waiver  of  the  debtor's  right  to 
be  personally  served  with  summons  and  of  the  right  to  a  trial.  To 
illustrate :  If  A.  holds  a  note  signed  by  M.  as  maker,  which  con- 
tains a  confession  of  judgment  clause,  instead  of  instituting  a  suit 
against  M.  in  the  ordinary  way  and  waiting,  for  a  trial,  A.  will 
simply  hand  the  note  to  some  attorney  who  will  as  it  were,  admit 
in  writing,  on  behalf  of  the  maker,  that  the  debt  is  due — notice 
that  the  clause  may  expressly  empower  any  attorney  to  do  this — 
and  another  attorney,  in  behalf  of  the  holder,  will  take  the  note  be- 
fore some  judge,  even  though  such  judge  may  not  then  be  holding 
court,  and  the  judge,  thereupon,  will  enter  judgment  on  the  note. 
The  entire  process  will  require  less  than  half  an  hour,  whereas 
without  such  clause  a  judgment  could  not  be  obtained  for  weeks 
or  months.  Immediately  following  the  entry  of  the  judgment, 
property  owned  by  the  maker  may  be  levied  upon  and  sold  to  sat- 
isfy the  judgment,  or  his  wages  or  bank  account  or  other  debts 
may  be  garnished.  It  is  still  possible  for  the  judgment  creditor 
to  have  the  judgment  vacated  upon  his  filing  an  affidavit  showing 
a  defense.  The  trial  will  then  proceed  as  in  the  ordinary  case. 
But  in  the  meantime  the  judgment,  will  still  constitute  a  lien  on 
the  defendant's  property. 

The  provision  of  the  Negotiable  Instruments  Law  merely  pro- 
vides that  if  such  a  clause  be  inserted  in  the  note  that  such  clause 


696  NEGOTIABLE   INSTRUMENTS  (Part  3 

docs  not  render  the  instrument  non-negotiable.  That  is,  the  priv- 
ilege conferred  upon  the  holder  of  converting  a  negotiable  instru- 
ment into  a  judgment  does  not  destroy  negotiability. 

This  provision  of  the  Negotiable  Instruments  Law  does  not  de- 
clare that  a  confession  of  judgment  clause  shall  be  legal.  A  court 
is  still  left  free  to  hold  that  because  of  the  hardships  upon  the 
defendant  such  a  clause  is  to  be  deemed  against  public  policy 
and  therefore  unenforceable,  and  some  states  do  so  hold. 

If  the  clause  on  an  instrument  bearing  a  fixed  maturity  author- 
izes confession  of  judgment  at  any  time  after  date,  it  has  been 
held  that  the  instrument  is  non-negotiable  because  uncertain  in  the 
time  of  payment.  The  sections  of  the  Negotiable  Instruments 
Law  do  not  absolutely  require  such  holding;  for,  in  efifect,  the  in- 
strument is  one  with  a  fixed  maturity  subject  to  acceleration  at 
the  option  of  the  holder  and  could  be  held  negotiable  under  Sec- 
tion 4(2)  providing  that  "an  instrument  is  payable  at  a  determinate 
future  time  which  is  expressed  to  be  payable  on  or  before  a  fixed 
or  determinable  future  time  specified  therein." 

Section  6  (3).  The  validity  and  negotiable  character  of  an  in- 
strument is  not  affected  by  the  fact  that  it  does  not  specify  the 
place  where  it  is  drawn  or  the  place  where  it  is  payable,  or  (4)  bears 
a  seal. 


SECTION  10.— DESIGNATION   OF  PARTIES  TO   NEGO- 
TIABLE INSTRUMENTS 

There  are  three  possible  parties  to  a  note:  The  maker;  the 
payee ;    and  the  indorsers. 

N.  I.  L.,  Section  184.  A  negotiable  promissory  note  within  the 
meaning  of  this  act  is  an  unconditional  promise  in  writing  made 
by  one  person  to  another  signed  by  the  maker  engaging  to  pay  on 
demand,  or  at  fixed  or  determinable  future  time,  a  sum  certain  in 
money  to  order  or  to  bearer.  Where  a  note  is  drawn  to  the  mak- 
er's own  order,  it  is  not  complete  until  indorsed  by  him. 

On  a  bill  of  exchange  there  are  four  possible  parties:  The  draw- 
er:   the  drawee:    the  payee;    and  the  indorsers. 

N.  I.  L.,  Section  126,  A  bill  of  exchange  is  an  unconditional  or- 
der in  writing  addressed  by  one  person  to  another,  signed  by  the 
person  giving  it,  requiring  the  person  to  whom  it  is  addressed  to 
pay  on  demand  or  at  a  fixed  or  determinable  future  time  a  sum 
certain  in  money  to  order  or  to  bearer. 

N.  I,  L.,  Section  185.  A  check  is  a  bill  of  exchange  drawn  on  a 
bank  payable  on  demand.  Except  as  herein  otherwise  provided, 
the  provisions  of  this  act  applicable  to  a  bill  of  exchange  payable 
on  demand  apply  to  a  check. 

N.  I,  L.,  Section  87.  Where  the  instrument  is  made  payable  at 
a  bank  it  is  equivalent  to  an  order  to  the  bank  to  pay  the  same  for 
the  account  of  the  principal  debtor  thereon. 

The   drawee   becomes  an   acceptor  after  acceptance.     There   may 


Ch.  1)  FORMAL   REQUISITES  697 

be  an  acceptor  who  is  not  the  drawee.  Such  an  acceptor  is  called 
an  "acceptor  for  honor".  The  practice  of  accepting  for  honor  is 
rarely  resorted  to.  The  following  sections  of  the  act  prescribe  the 
circumstances  under  which  a  person  will  be  deemed  to  be  a  party 
to  a  negotiable  instrument.  The  nature  and  extent  of  the  rights 
and  liability  of  the  various  parties  is  the  subject  matter  of  suc- 
ceeding chapters.  We  are  interested  here  only  in  formal  require- 
ments. When  will  a  person  be  regarded  as  a  maker,  drawer,  payee, 
drawee,  acceptor,  or  indorser  of  an  instrument? 

(a)     OBLIGORS    GENEHALLY 

Section  18.  No  person  is  liable  on  the  instrument  whose  signa- 
ture does  not  appear  thereon,  except  as  herein  otherwise  expressly 
provided.  But  one  who  signs  in  a  trade  or  assumed  name  will  be 
liabl*  to  the  same  extent  as  if  he  had  signed  in  his  own  name. 

Section  17,  subsection  7.  Where  an  instrument  containing  the 
words,  "I  promise  to  pay,"  is  signed  by  two  or  more  persons,  they 
are  deemed  to  be  jointly  and  severally  liable  thereon. 

Section  19.  The  signature  of  any  party  may  be  made  by  a  duly 
authorized  agent.  No  particular  form  of  appointment  is  neces- 
sary for  this  purpose ;  and  the  authority  of  the  agent  may  be  es- 
tablished as  in  other  cases  of  agency. 

Section  20.  Where  the  instrument  contains  or  a  person  adds 
to  his  signature  words  indicating  that  he  signs  for  or  on  behalf  of 
a  principal,  or  in  a  representative  capacity,  he  is  not  liable  on  the 
instrument  if  he  was  duly  authorized;  but  the  mere  addition  of 
words  describing  him  as  an  agent,  or  as  filling  a  representative 
character,  without  disclosing  his  principal,  does  not  exempt  him 
from  personal  liability. 

Section  21.  A  signature  by  "procuration"  operates  as  notice 
that  the  agent  has  but  a  Hmited  authority  to  sign,  and  the  prin- 
cipal is  bound  only  in  case  the  agent  in  so  signing  acted  within  the 
actual  limits  of  his  authority. 


DANIEL  V.    BUTTNER  et   al. 
(Supreme  Court  of  Washington,  1905.     38  Wash.  556,  80  Pac.  811.) 

HadlEy,  J.  This  suit  was  brought  to  recover  of  the  defendants, 
Buttner  and  Glidden,  for  an  alleged  personal  liability  upon  a_  written 
instrument  of  which  the  following  is  a  copy:  "German  American  In- 
vestment Co.  Inc.  No.  409.  $600.00.  Seattle,  Wash.,  Feb.  8,  1902. 
Received  from  Herman  Daniel  $600.00  (Six  Hundred  Dollars)  which 
we  promise  to  pay  six  (6)  months  after  date  with  interest  at  the  rate 
of  eight  (8)  per  cent,  per  annum.  Wm.  H.  Buttner,  President.  H.  M. 
Glidden,  Secy."     *     *     *  '  _     _ 

We  have  somewhat  extensively  discussed  the  question  of  liability 
arising  out  of  the  fraud,  inasmuch  as  the  transcript,  statement  of 
facts,  and  briefs  are  largely  devoted  to  that  subject.  But,  aside  from 
that,  we  think  the  judgment  of  the  court  was  right  upon  another 
ground  which  is  urged  by  respondent.     It  will  be  observed  by  refer- 


G98  ■  NEGOTIABLE   INSTRUMENTS  (Part  3 

ence  to  the  note  that,  while  the  signatures  are  each  followed  by  words 
indicating  a  representative  character,  yet  no  principal  is  disclosed. 
The  words  ''German  American  Investment  Co.,  Inc.,"  at  the  top 
constitute  no  material  part  of  the  instrument.  The  original  is  before 
us,  and  it  shows  that  the  above  words  were  merely  lithographed  upon 
a  blank  form  of  receipt  which  was  used  as  a  paper  upon  which  to  write 
the  note.  Appellant's  name  is  followed  by  the  following,  "Secy."' 
Assuming  that  the  letters  designate  him  in  the  representative  character 
of  secretary,  yet  they  disclose  no  principal.  What  purports  to  be  the 
seal  of  the  German  American  Investment  Company  is  impressed  upon 
the  paper,  but  by  no  reference  is  it  made  a  part  of  the  note  itself.  There 
are  no  apt  words  used  in  the  note  showing  that  the  corporation  is  ob- 
ligated. Therefore,  although  appellant's  signature  is  followed  by  an 
abbreviated  word  indicating  a  representative  capacity,  yet,  no  obligated 
principal  being  discosed,  he  cannot  escape  personal  liability  under  sec- 
tion 20  of  our  Negotiable  Instruments  Law.  *  '^^  *  The  signatures 
to  this  instrument  come  squarely  within  the  terms  of  the  above  section, 
and  the  signers  are  personally  liable. 

For  all  the  foregoing  reasons  we  think  the  judgment  [for  plaintififj 
of  the  lower  court  was  right,  and  it  is  affirmed. 


JUMP  V.   SPARLING. 

(Supreme    .Judicial    Court   of   Massachusetts,    1914.      218    Mass.    324, 
105    N.    E.    878.) 

Action  by  Edwin  R.  Jump,  trustee  in  bankruptcy,  of  David  F.  Burns,, 
against  John  H.  Sparling.  From  an  order  of  the  appellate  division  of 
the  municipal  court  of  the  City  of  Boston  dismissing  a  report  by  the 
trial  justice,  plaintiff  appeals. 

RuGG,  C.  J.     This  is  an  action  upon  a  "promissory  note  of  the  tenor 
following : 
"$596.20.  Boston,  Nov.  19th,  1908. 

"On  demand  after  date  we  promise  to  pay  to  the  order  of  David  F. 
Burns  five  hundred  and  ninety-six  20-100  dollars.  Payable  at  State 
Street  Trust  Co.,  Boston,  Mass. 

"A'alue  received  with  interest. 

"J.  H.  Sparling,  Treas.  Stratton  Engine  Co. 
"David  F.  Burns,  Pres.  Stratton  Engine  Co." 

The  plaintifif  is  the  trustee  in  bankruptcy  of  the  payee.  Oral  evi- 
dence was  received  to  the  effect  that  both  Burns  and  the  defendant 
signed  the  note  in  their  respective  capacities  as  officers  of  the  Stratton 
Engine  Company.     *     *     * 

Under  the  law  previous  to  the  enactment  of  the  Negotiable  Instru- 
ments Act,  the  defendant  corporation  would  not  have  been  held  on 
this  note.  It  would  have  been  not  the  note  of  the  corporation,  but  sim- 
ply the  individual  note  of  the  two  individuals  who  signed.  *  *  *  A 
change  in  the  law  in  this  respect  has  been  wrought  by  that  act.  [Court 
quotes  section  20.] 

These  words  plainly  imply  that  if  the  person  signing  a  promissory 
note  adds  to  his  signature  words  describing  himself  an  agent  or  as 
occupying  some  representative  position  which  at  the  same  time  dis- 
closes the  name  of  the  principal,  he  shall  be  exempted  from  personal 


Ch.  1)  .  FORMAL   REQUISITES  699 

liability,  while  if  he  omits  the  name  of  the  principal,  although  adding 
words  of  agency,  he  will  be  held  liable  personally  and  the  words  of 
agency  will  be  treated  simply  as  descriptio  personae.  In  this  respect 
the  common-law  rule  of  this  commonwealth  whereby  agents  bind  them- 
selves by  a  form  of  signing  a  note  such  as  the  one  at  bar,  even  though 
acting  with  authority.  *  *  *  is  abrogated.  The  agent  now  relieves 
himself  from  liability  by  a  form  of  signature  whereby  he  is  described  as 
agent  of  a  disclosed  principal.  '^  *  *  Where  a  trustee  executes  a 
note  in  his  trust  capacity  he  is  liable  personally.  Of  course,  if  one 
signs  as  agent  when  he  is  not,  he  is  liable  as  principal. 

Although  the  law  on  this  point  in  other  jurisdictions  before  the  pas- 
sage of  the  negotiable  instruments  act  may  have  differed  from  that  of 
this  commonwealth,  the  result  here  reached  appears  to  be  in  harmony 
with  the  rule  now  generally  prevailing  under  that  act.     *     *     * 

The  plaintiff  as  trustee  in  bankruptcy  has  no  greater  rights  in  this 
respect  than  the  bankrupt  himself  had.     *     *     * 

Order  dismissing  report  afiirmed. 


(b)     PAYEE 

Section  8,  subsection  6.  Where  the  instrument  is  payable  to 
order  the  payee  must  be  named  or  otherwise  indicated  with  rea- 
sonable certainty. 

Section  42.  "Where  an  instrument  is  drawn  or  indorsed  to  a 
person  as  "cashier"  or  other  fiscal  officer  of  a  bank  or  corporation, 
it  is  deemed  prima  facie  to  be  payable  to  the  bank  or  corporation 
of  which  he  is  such  officer,  and  may  be  negotiated  by  either  the 
indorsement  of  the  bank  or  corporation,  or  the  indorsement  of  the 
officer, 

(c)     DRAWEE 

Section  1,  subsection  5.  Where  the  instrument  is  addressed  to 
a  drawee  he  must  be  named  or  otherwise  indicated  therein  with 
reasonable  certainty. 

Section  128.  A  bill  may  be  addressed  to  two  or  more  drawees 
jointly,  whether  they  are  partners  or  not;  but  not  to  two  or  more 
drawees  in  the  alternative  or  in  succession. 

Section  131.  The  drawer  of  a  bill  and  any  indorser  may  insert 
thereon  the  name  of  a  person  to  whom  the  holder  may  resort  in 
case  of  need,  that  is  to  say,  in  case  the  bill  is  dishonored  by  non- 
acceptance  or  non-payment.  Such  a  person  is  called  the  referee  in 
case  of  need.  It  is  in  the  option  of  the  holder  to  resort  to  the 
referee  in  case  of  need  or  not,  as  he  may  see  fit. 

The  practice  of  inserting  the  name  of  a.  referee  in  case  of  need 
IS  uncommon  in  this  country. 

Section  130,  Where  in  a  bill  drawer  and  drawee  are  the  same 
person,  or  where  the  drawer  is  a  fictitious  person,  or  a  person  not 
having  capacity  to  contract,  the  holder  may  treat  the  instrument, 
at  his  option,  either  as  a  bill  of  exchange  or  a  promissory  note. 


700  NEGOTIABLE   INSTRUMENTS  (Part  3 

(d)  ACCEPTOR 
The  person  upon  whom  a  bill  has  been  drawn,  until  acceptance, 
is  called  the  drawee ;  after  acceptance  it  is  proper  to  refer  to  such 
party  as  the  acceptor.  We  are  interested  here  in  noting  the  cir- 
cumstances under  which  one's  status  will  change  from  that  of  a 
drawee  to  that  of  an  acceptor.  The  term  "acceptance"  is  used  to 
describe  the  act  by  which  the  drawee  becomes  bound  to  the  hold- 
er to  pay  the  amount  called  for  by  the  bill.  The  acceptance  is  an 
operative  fact  which  produces  certain  legal  effects  upon  the  rela- 
tions of  the  acceptor  and  the  drawer,  of  the  acceptor  and  the  hold- 
er, and  of  the  holder  and  the  drawer  and  indorsers.  We  are  not 
here  interested  in  the  nature  and  scope  of  the  various  legal  effects 
of  an  acceptance.  We  are  concerned  only  with  the  question :  what 
evidentiary  facts  are  sufficient  to  constitute  an  acceptance.  It 
should  be  apparent,  that,  while  these  matters  relate  to  the  form 
of  the  instrument  the  rules  to  be  taken  up  do  not  prescribe  requi- 
sites for  negotiability.  The  instrument,  when  it  leaves  the  hands 
of  the  party  executing  it  either  is  or  is  not  then  negotiable.  Noth- 
ing that  may  happen  subsequently  will  change  its  status.  The  ac- 
ceptance may  occur  prior  or  subsequent  to  the  execution  and  de- 
livery of  the  instrument.  The  group  of  facts  constituting  the  ac- 
ceptance operates  merely  to  affect  the  legal  relations  of  the  va- 
rious parties  to  the  bill  but  does  not  determine  or  affect  nego- 
tiability. 

The  following  sections  of  the  Negotiable  Instruments  Law  are 

involved : 

Section  132.  The  acceptance  of  a  bill  is  the  signification  by  the 
drawee  of  his  assent  to  the  order  of  the  drawer.  The  acceptance 
must  be  in  writing  and  signed  by  the  drawee.  It  must  not  express 
that  the  drawee  will  perform  his  promise  by  any  other  means  than 
the  payment  of  money. 

Section  191.  "Acceptance"  means  an  acceptance  completed  by 
delivery  or  notification. 

Section  133.  The  holder  o£  a  bill  presenting  the  same  for  ac- 
ceptance may  require  that  the  acceptance  be  written  on  the  bill, 
and,  if  such  request  is  refused  may  treat  the  bill  as  dishonored. 

Section  134.  Where  an  acceptance  is  written  on  paper  other 
than  the  bill  itself,  it  does  not  bind  the  acceptor  except  in  favor  of 
a  person  to  whom  it  is  shown  and  who,  on  the  faith  thereof,  re- 
ceives the  bill  for  value. 

Section  135.  An  unconditional  promise  in  writing  to  accept  a 
bill  before  it  is  drawn  is  deemed  an  actual  acceptance  in  favor  of 
every  person  who,  upon  the  faith  thereof,  receives  the  bill  for 
value. 

Section  138.  A  bill  may  be  accepted  before  it  has  been  signed 
by  the  drawer,  or  while  otherwise  incomplete,  or  when  it  is  over- 
due, or  after  it  has  been  dishonored  by  a  previous  refusal  to  ac- 
cept, or  by  nonpayment.     But  when  a  bill  payable  after  sight  is 


Ch.  1)  FORMAL  REQUISITES  701 

dishonored  by  non-acceptance  and  the  drawee  subsequently  ac- 
cepts it,  the  holder,  in  the  absence  of  any  different  agreement,  is 
entitled  to  have  the  bill  accepted  as  of  the  date  of  the  first  pre- 
sentment. 

Section  187.  Where  a  check  is  certified  by  the  bank  on  which 
it  is  drawn,  the  certification  is  equivalent  to  an  acceptance. 

Section  136.  The  drawee  is  allowed  twenty-four  hours  after 
presentment,  in  which  to  decide  whether  or  not  he  will  accept  the 
bill;  but  the  acceptance,  if  given,  dates  as  of  the  day  of  presenta- 
tion. 

Section  137.  Where  a  drawee  to  whom  a  bill  is  delivered  for 
acceptance  destroys  the  same,  or  refuses  within  twenty-four  hours 
after  such  delivery,  or  within  such  other  period  as  the  holder  may 
allow,  to  return  the  bill  accepted  or  nonaccepted  to  the  holder,  he 
will  be  deemed  to  have  accepted  the  same. 

Section  139.  An  acceptance  is  either  general  or  qualified.  A 
general  acceptance  assents  without  qualification  to  the  order  of 
the  drawer.  A  qualified  acceptance  in  express  terms  varies  the  ef- 
fect of  the  bill  as  drawn. 

Section  140.  An  acceptance  to  pay  at  a  particular  place  is  a 
general  acceptance,  unless  it  expressly  states  that  the  bill  is  to  be 
paid  there  only  and  not  elsewhere. 

Section  141.     An  acceptance  is  qualified,  which  is 

(1)  Conditional,  that  is  to  say,  which  makes  payment  by  the 
acceptor  dependent  on  the  fulfillment  of  the  condition  therein 
stated; 

(2)  Partial,  that  is  to  say,  an  acceptance  to  pay  part  only  of  the 
amount  for  which  the  bill  is  drawn ; 

(3)  Local,  that  is  to  say,  an  acceptance  to  pay  only  at  a  par- 
ticular place ; 

(4)  Qualified  as  to  time; 

(5)  The  acceptance  of  some  one  or  more  of  the  drawees,  but 
not  of  all. 

Section  161.  Where  a  bill  of  exchange  has  been  protested  for 
dishonor  by  non-acceptance,  or  protested  for  better  security,  and 
is  not  overdue,  any  person  not  being  a  party  already  liable  thereon 
may,  with  the  consent  of  the  holder,  intervene  and  accept  the  bill 
supra  protest  for  the  honor  of  any  party  liable  thereon,  or  for  the 
honor  of  the  person  for  whose  account  the  bill  is  drawn.  The  ac- 
ceptance for  lionor  may  be  for  part  only  of  the  sum  for  which  the 
bill  is  drawn;  and  where  there  has  been  an  acceptance  for  one 
party,  there  may  be  a  further  acceptance  by  a  different  person  for 
the  honor  of  another  party. 

Section  162.  An  acceptance  for  honor  supra  protest  must  be  in 
^writing,  and  indicate  that  it  is  an  acceptance  for  honor,  and  must 
be  signed  by  the  acceptor  for  honor. 

Section  163.  Where  an  acceptance  for  honor  does  not  express- 
ly state  for  whose  honor  it  is  made,  it  is  deemed  to  be  an  accept- 
ance for  the  honor  of  the  drawer. 


702  NicrxOTiABLE  ixsTur^rEXTS  (Part  3 

Section  178.  Where  a  bill  is  drawn  in  a  set  each  part  of  the  set 
being  numbered  and  containing  a  reference  to  the  other  parts, 
the  whole  of  the  parts  constitutes  one  bill. 


COLCORD  V.  BANCO  DE  TAMAULIPAS. 

(Supreme  Court,    xVppellate   Division,  1918.     181   App.   Div.   295, 
168  N.  y.  Supp.  710.) 

Action  by  Alan  H.  Colcord  against  the  Banco  de  Tamaulipas.  From 
an  order  overruling  demurrers  to  the  complaint,  defendant  appeals. 

DowLiNG,  J.  The  facts  upon  which  the  two  causes  of  action  here- 
in are  based  are  set  forth  in  the  complaint  as  follows :  The  First  State 
Bank  &  Trust  Company  (assignor  of  the  claim  in  question  to  plaintiff) 
Is  a  banking  corporation  organized  under  the  laws  of  the  state  of  Tex- 
as, and  having  its  principal  place  of  business  at  Laredo,  Tex.  It  is 
hereinafter  referred  to  as  the  State  Bank.  Defendant  is  a  banking 
corporation  organized  under  the  laws  of  the  Republic  of  Mexico,  and 
having  its  principal  place  of  business  at  Tampico  in  the  state  of  Tam- 
aulipas, Republic  of  Mexico.  On  February  28,  1914,  C.  Barreda,  as 
municipal  president  of  the  city  of  Nuevo  Laredo,  a  municipality  in 
the  Republic  of  Mexico,  made  a  certain  draft  or  bill  of  exchange  in 
writing.  This  (as  well  as  all  the  other  writings  hereinafter  referred 
to)  was  in  the  Spanish  language,  and  translated  into  English  read: 

"$5,000.00  (Mexican  dollars). 

"G.  Laredo,  Tamaulipas,  Feb.  28,  1914. 

"At  three  days'  sight  pay  by  this  bill  of  exchange,  in  this  city,  to  the 
order  of  the  First  State  Bank  of  Laredo,  Texas,  the  sum  of  five  thous- 
and Mexican  dollars.  Value  which  you  will  charge  with  or  without 
notice  to  account  of  C.  Barreda,  Municipal  President. 

"To  the  Bank  of  Tamaulipas,  Tampico,  Tampas. 

"[Indorsement:]  [Seal./]  Municipal  Government  Constitutional 
of  Laredo,  Tamaulipas. 

"[Written:]     G.  Laredo  Tampas,  Feb.  28,  1914.     C.  Barreda. 

"[50  cent  Mexican  stamp  affixed.]" 

Said  draft  was  presented  to  the  State  Bank  for  purchase,  which 
thereupon  sent  the  following  telegram  to  defendant : 

"Laredo,  Texas,  March  3,  1914. 
"Bank  of  Tamaulipas,  Tampico,  Tamps.,  Mex. : 

"Please  telegraph  us  immediately  if  you  will  pay  a  draft  signed  C. 
Barreda,  Municipal  President  Nuevo  Laredo,  for  five  thousand  Mex- 
ican dollars.  First  State  Bank  &  Trust  Co." 

To  this  defendant  replied  as  follows : 

"Tampico,  Mexico,  March  5,  1915. 
"First  State  Bank  &  Trust  Co.,  Laredo,  Texas : 

"Draft  C.  Barreda,  Municipal  President  Nuevo  Laredo,  for  five 
thousand  Mexican  dollars  is  good.  Banco   de  Tamaulipas." 

On  the  same  day  defendant  wrote  the  State  Bank  as  follows : 

"Tampico,  Tam.,  Mex.,  March  5,  1915. 
"First  State  Bank  &  Trust  Co.,  Laredo,  Texas— Dear  Sirs  :     On  this 
date  and  through  the  same  method  we  have  answered  your  telegram 


Ch.  1)  FORMAL   REQI'ISITES  703 

relative  to  Dr.  C.  Barreda's  draft  for  five  thousand  Mexican  dollars, 
which  we  confirm  as  per  inclosed  transcript. 

"Yours  truly.  Banco  de  Tamaulipas. 

"P.  Assemat,  Mgr.  J.  J.  Dias,  Cashier." 

The  transcript  inclosed  was  as  follows : 

"Transcript  of  the  telegram  which  the  Banco  de  Tamaulipas  ad- 
dresses to  First  State  Bank  &  Trust  Co.,  Laredo,  Texas,  on  March  5, 
1914.  'Draft  C.  Barreda,  Mayor  of  New  Laredo,  for  five  thousand' 
dollars  is  good.'  " 

The  State  Bank,  relying  upon  the  faith  of  the  correspondence  quoted, 
bought  the  draft  in  question,  paying  5,000  Mexican  dollars  therefor, 
and  after  indorsing  it,  so  as  to  make  it  payable  to  any  bank,  banker, 
or  trust  company,  transmitted  the  draft,  so  indorsed,  to  defendant, 
and  duly  presented  it  and  demanded  payment.  Thereafter  defendant 
telegraphed  to  the  State  Bank : 

"Tampico,  March  19.  1914. 

"We  return  remittance  9336  because  it  is  not  correct.  We  are 
writing.  •  Banco  de  Tamaulipas." 

The  letter  which  followed  was  in  these  terms : 

"Tampico,  Tam.,  Mex.,  March  19,  1914. 

"First  State  Bank  &  Trust  Co.,  Laredo,  Texas— Dear  Sirs:  We 
confirm  our  telegram  of  even  date  as  per  inclosed  copy.  Accordingly 
we  return  your  remittance  No.  9336  for  its  lacking  of  two  signatures, 
to  wit:  Faustino  Garza's  as  finance  commissioner  and  the  signature  of 
Dr.  Adolfo  Salinas  Puga  as  health  commissioner  of  Nuevo  Laredo. 
It  also  lacks  the  official  seal  of  the  municipal  corporation.  Once  the 
above  requisites  having  been  fulfilled,  we  will  have  no  objection  to  hon- 
oring the  remittance  herewith  returned.  We  have  charged  you  with 
$5.54  for  telegram  expenses.    We  are  yours  respectfully, 

"Banco  de  Tamaulipas, 

"P.  Assemat,  Manager.  J.  J.  Diaz,  Cashier." 

Inclosed  therewith  was  a  copy  of  said  telegram  of  March  19.  1914. 
The  State  Bank  procured  the  signing  of  the  draft  by  the  two  officials 
referred  to  in  the  latter,  and  also  the  affixing  of  the  seal  of  the  munici- 
pal corporation  thereto,  and  in  this  condition  it  was  returned  to  de- 
fendant and  again  duly  presented  for  payment.  The  defendant  re- 
tained the  draft  in  its  possession  from  March  24,  1914,  to  December  8, 
1914,  ignoring  repeated  demands  to  pay  the  same  between  March  29. 
1914,  and  October  31,  1914,  on  which  latter  date  it  refused  payment, 
and  still  refuses  to  pay  the  same.  It  is  alleged  that  when  said  draft 
was  accepted,  and  when  it  was  presented  for  payment,  the  drawer 
thereof  had  deposited  with  the  defendant  funds  sufficient  to  pay  the 
same,  and  which  had  been  so  deposited  for  that  purpose. 

The  first  cause  of  action  is  based  on  the  theory  that  defendant's 
telegram  of  March  5th  constituted  an  acceptance  of  the  draft  in  ques- 
tion and  that  defendant  was  therefore  liable  to  pay  the  same.  I  do  nof 
believe  that  defendant's  telegram  of  March  5th  can  be  interpreted  to 
be  an  acceptance  of  the  draft  in  question,  nor  as  a  j^romise  to  accept 
the  same.  The  State  Bank  telegraphed  defendant  an  explicit  question 
as  to  whether  defendant  would  pay  a  certain  described  draft.  Defend- 
ant did  not  reply  to  this  question  directly,  nor  does  it  appear  that  it 
was  under  any  duty  or  obligation  so  to  do.  The  State  Bank  did  not 
say  in  its  telegram  that  it  was  about  to  buy  the  draft  upon  the  faith  of 


704  NEGOTIABLE   INSTRUMENTS  (Part  3 

defendant's  reply.  Defendant  replied  only  that  the  draft  was  good, 
which  reasonably  meant  only  that  C.  Barreda,  as  municipal  president 
of  Nuevo  Laredo,  then  had  on  deposit  with  defendant  at  least  the  sum 
of  five  thousand  Mexican  dollars,  but  gave  the  State  Bank  no  right  to 
assume  that  defendant  would  hold  the  funds  to  meet  the  draft,  or 
would  itself  accept  or  pav  the  draft.  On  the  contrary,  the  very  form 
of  the  reply,  not  answering  directly  the  question  as  to  whether  defend- 
ant would  pay  the  draft,  was  sufficient  to  put  the  State  Bank  on  its 
guard,  and  cause  it  to  either  require  an  explicit  answer  from  defend- 
ant as  to  whether  it  would  accept  and  pay  the  draft,  or  to  proceed  fur- 
ther at  its  own  risk.  The  defendant  had  no  control  over  the  State 
Bank's  transactions  with  Barreda.  and  it  was  the  business  of  the  State 
Bank  to  protect  itself  in  its  dealings  with  him,  and  to  make  certam 
that  the  draft  would  be  accepted  by  defendant  before  it  parted  with 
its  money  on  the  faith  of  the  draft. 

An  acceptance  is  a  contract,  and  there  are  no  words  used  by  defend- 
ant in  the  telegram  which  can  be  interpreted  to  mean  that  it  agreed 
to  accept  the  draft.  In  First  National  Bank  of  Atchison  v.  Commer- 
cial Bank,  74  Kan.  606,  87  Pac.  746,  8  L.  R.  A.  (N.  S.)  1148,  118  Am. 
St.  Rep.  340.  11  Ann.  Cas.  281,  an  acceptance  was  sought  to  be  based 
upon  the  following  telegrams  passing  between  the  parties : 

''Adrian,  Mich.,  October  15,  1903. 
"First  National  Bank,  Atchison,  Kan. : 

"Is  J.  F.  Donald's  check  on  you  $350  good?    Commercial  Savings 

Bank." 

"Atchison,  Kan.,  October  15,  1903. 

"Commercial  Savings  Bank,  Adrian,  Mich.: 
"J.  F.  Donald's  check  is  good  for  sum  named. 

"First  National  Bank." 

In  that  case  Donald  was  a  depositor  in  the  Kansas  bank  and  drew  a 
check  upon  it  for  $350  to  a  payee  who  indorsed  and  delivered  it  to  a 
third  party,  who  in  turn  indorsed  and  delivered  it  to  the  Michigan 
bank.  Donald  stopped  payment  on  the  check  before  it  was  presented 
for  payment,  and  the  Michigan  bank  sued  the  Kansas  bank  for  the 
face  of  the  check  and  interest,  claiming  it  had  been  accepted  in  writing, 
and  that  it  had  been  purchased  for  value  on  the  faith  of  such  accept- 
ance. The  court  hdd  that  the  drawee  of  a  check  could  not  be  held 
liable  upon  a  claimed  contract  of  acceptance,  external  to  the  bill,  unless 
the  language  used  clearly  and  unequivocally  imported  an  absolute 
promise,  and  that  the  response  that  a  check  was  "good  for  sum  named" 
was  not  such  a  promise.    *    *    * 

So,  also,  in  Kahn"v.  Walton,  46  Ohio  St.  195,  20  N.  E.  203,  it  was 
held  that,  while  an  affirmative  answer  by  the  bank  to  a  general  in- 
quiry whether  checks  of  a  person  named  for  a  specified  sum  are  good 
is  information  that  such  person  has  on  deposit,  subject  to  check,  money 
to  that  amount,  it  does  not  constitute  an  acceptance  or  certification  of, 
or  otherwise  create  an  obligation  on  the  bank  to  pay,  checks  which 
the  inquirer  may  then  hold.  The  telegraphed  query  in  that  case  was, 
"Are  M.  A.  Walton's  checks  for  $2,000  good?"  to  which  the  bank 
answered,  "Yes,  sir."  In  the  course  of  its  opinion  the  court  said :  "It 
is  manifest  there  was  no  acceptance  or  certification  of  the  checks  in 
question  in  this  case.  The  telegraphic  correspondence  between  the 
bank  and  Kahn's  agent  amounted  to  no  more  than  an  assurance  that 


Ch.  1)  FORMAL   REQUISITES  705 

valid  checks  to  the  amount  stated,  drawn  by  WaUon,  or  that  might 
be  drawn  by  him,  were  then  good.  No  particular  checks  were  men- 
tioned in  the  inquiry,  nor  any  intimation  given  that  the  inquirer  had 
received,  or  was  about  to  receive,  such  checks ;  nor  had  the  bank  any 
means  of  identifying  the  checks  to  which  the  inquiry  related.  Its  tele- 
gram, therefore,  did  not  commit  the  bank  to  the  payment  of  any  par- 
ticular check.  At  most,  it  was  information  that  Walton  had,  at  its 
date,  money  on  deposit  to  the  amount  stated,  subject  to  check/"    *    *    * 

In  Myers  v.  Union  National  Bank.  27  111.  App.  254,  the  query  tele- 
graphed to  the  defendant  bank  was,  "Will  drafts  for  $3,800  made  by 
J.  R.  Snyder  on  you  be  paid,  if  presented  Monday?"  to  which  the 
reply  was  sent,  "Drafts  named  are  good  now."  The  funds  of  the 
drawer  having  been  paid  out  to  meet  other  checks,  it  was  sought  to 
hold  the  defendant  for  the  drafts  in  question  as  upon  a  virtual  ac- 
ceptance for  certification.  The  defendant  was  held  not  to  be  liable, 
as  it  had  not  accepted  the  drafts.  The  court  said :  "An  acceptance 
is  a  contract,  and  does  not  differ  from  other  contracts  in  the  essential 
requirement  of  a  meeting  of  minds.  A  bank  is  not  bound  to  accept 
by  telegram  the  checks  or  drafts  of  its  depositors,  although  in  posses- 
sion of  funds  to  pay.  Its  duty  in  such  cases  is  to  accept  a  draft,  or  pay 
a  check,  only  on  presentment.  One  relying  on  a  telegram  as  an  ac- 
ceptance should  see  to  it  that  the  language  used  will,  at  least,  fairly  bear 
the  meaning."     *     *     * 

These  cases  support  the  general  rule  as  laid  down  in  Daniel  on  Ne- 
gotiable Instruments  (6th  Ed.)  vol.  1,  p.  600:  "There  is  no  doubt  that, 
in  the  absence  of  statutory  interdiction,  an  acceptance  may  be  upon  a 
separate  paper,  as  in  a  letter,  for  instance,  as  well  as  upon  the  bill  it- 
self. The  drawee  cannot  be  held  liable  upon  a  contract  of  acceptance 
external  to  the  bill,  unless  the  language  used  clearly  and  unequivocally 
imports  an  absolute  promise  to  pay.  Thus  a  written  promise  to  accept 
an  existing  bill,  or  'that  it  shall  meet  with  due  honor.'  or  that  the  drawee 
'will  accept  or  certainly  pay  it,'  or  any  other  equivalent  language,  has 
been  held  to  amount  to  acceptance.  But  if  the  language  be  equivocal — 
if  it  be  merely  stated,  'Your  bill  shall  have  attention' — it  is  not  suffi- 
cient." 

The  Negotiable  Instruments  Law  of  New  York  *  *  *  provides 
that :  "Where  an  acceptance  is  written  on  a  paper  other  than  the  bill 
itself,  it  does  not  bind  the  acceptor,  except  in  favor  of  a  person  to 
whom  it  is  shown  and  who,  on  the  faith  thereof,  receives  the  bill  for 
value." 

It  follows  as  the  result  of  the  reasoning  of  the  foregoing  cases  that 
the  State  Bank  had  no  right  to  rely  on  defendant's  telegram  that  the 
draft  was  good  in  purchasing  it,  but  should  have  insisted  on  a  direct 
answer  to  a  question  whether  defendant  would  accept  or  pay  the  draft. 
Not  having  done  so,  and  defendant  not  having  said  in  its  telegram  that 
it  would  either  accept  or  pay  the  draft,  the  latter  is  not  liable.  The 
case  of  Garrettson  v.  Bank  (C.  C.)  39  Fed.  163,  7  L.  R.  A.  428,  is  not 
controlling  here,  for  in  that  case  the  question  was,  "Will  you  pay  James 
Tate's  check  on  you  twenty-two  thousand  dollars?  Answer,"  and 
the  reply  was,  "James  Tate  is  good.  Send  on  your  paper."  In  its 
opinion  the  court  laid  stress  on  the  last  words,  "Send  on  your  paper," 
as  clearly  implying  that  it  was  to  be  sent  on  for  payment  and  not 
B.&  B.Bus.Law— 45 


706  NEGOTIABLE   INSTRUMENTS  (Part  3 

merely  for  acceptance.  No  such  words  were  used  in  the  case  at  bar. 
The  demurrer  to  the  first  cause  of  action  should  have  been  sustained. 
The  second  cause  of  action  *  *  *  proceeds  upon  the  theory  that 
the  telegram  of  March  5th  was  not  an  acceptance,  but  an  agreement 
to  accept,  for  the  breach  of  which  defendant  is  equally  liable.  For  the 
reasons  heretofore  assigned,  I  do  not  believe  the  telegram  in  question 
was  an  agreement  to  accept,  any  more  than  it  was  an  acceptance.  In 
so  far  as  plaintiff  pleads  upon  the  alleged  telegram  as  an  agreement  to 
accept,  I  believe  the  complaint  is  demurrable.  Plaintiff  does  not  set 
forth  any  acts  done  bv  his  assignor,  liability  assumed  by  it,  or  moneys 
paid  out  by  it,  after  the  receipt  of  the  defendant's  letter  of  March  19th, 
nor  does  he  seek  to  predicate  any  liability  thereupon.  Had  the  State 
Bank  paid  out  its  moneys  only  after  the  receipt  of  that  letter,  a  very 
different  question  would  have  been  presented.  *  *  *  For  all  these 
reasons,  the  demurrer  to  the  second  cause  of  action  should  also  have 
been  sustained.    *    *    * 

The  order  appealed  from  will  be  reversed.  *  *  *  and  the  demur- 
rers to  the  first  and  second  causes  of  action  sustained.     *     *     * 

Page,  J.  (dissenting).  The  sufficiency  of  the  allegations  of  the  first 
cause  of  action  depends  upon  whether  the  exchange  of  telegrams  of 
March  3d  and  5th  constitutes  an  acceptance  of  the  draft,  so  that  the 
defendant  became  primarily  liable  thereon.  In  my  opinion  it  does.  If 
the  draft  had  been  presented  to  the  defendant,  and  some  one  duly  au- 
thorized had  written  "Good"  upon  the  face  thereof  and  signed  the 
name  of  the  defendant,  there  could  be  no  doubt  but  that  this  \yould  be 
equivalent  to  an  acceptance  of  a  negotiable  bill  of  exchange  in  favor 
of  the  holder  for  the  amount  specified  therein.  *  *  *  The  accept- 
ance, to  be  binding  in  favor  of  a  holder  who  has  parted  with  value 
upon  the  faith  thereof,  does  not  have  to  be  upon  the  instrument  itself. 
The  Negotiable  Instruments  Law  provides:  "Sec.  134.  Acceptance 
by  Separate  Instrument.  Where  an  acceptance  is  written  on  a  paper 
other  than  the  bill  itself,  it  does  not  bind  the  acceptor  except  in  favor 
of  a  person  to  whom  it  is  shown  and  who,  on  the  faith  thereof,  receives 
the  bill  for  value." 

A  telegram  satisfies  the  requirements  of  the  statute;  it  is  a  writing, 
and  the  method  of  its  transmission,  whether  by  mail  or  telegraph,  is 
immaterial.  *  *  *  The  telegram  was  understood  to  be  an  accept- 
ance, and,  relying  thereon,  plaintiff's  assignor  discounted  it.  Fairly 
construed,  I  do  not  believe  that  the  telegram  of  the  defendant  merely 
meant  that  C.  Barreda,  as  municipal  president  of  Nuevo  Laredo  then 
had  on  deposit  with  defendant  at  least  the  sum  of  five  thousand  Mex- 
ican dollars.  The  inquiry  of  plaintiff's  assignor  was:  "Please  tele- 
graph us  immediately  if  you  will  pay  a  draft  signed  C.  Barreda.  Mu- 
nicipal President  Nuevo  Laredo,  for  five  thousand  Mexican  dollars." 
This  was  not  an  inquiry  as  to  the  validity  of  the  draft  or  as  to  the 
sufficiency  of  the  account  of  the  depositor.  It  was  an  explicit  request 
for  an  acceptance  of  a  specified  draft  for  a  definite  amount.  The 
answer  returned  was  such  that,  had  it  been  placed  on  the  draft,  it 
would  have  constituted  an  acceptance.  In  my  opinion  it  should  be  so 
construed.     "'''     ^''     * 

The  opinion  in  the  Circuit  Court  of  Appeals  in  North  Atchison 
Bank  v.  Garrettson,  51  Fed.  168.  2  C.  C.  A.  145,  did  not  lay  stress  on 
the  words  "Send  on  your  paper."  That  court  said:  "The  question 
put  to  the  bank,  and  to  which  an  answer  was  requested,  was  not 


Ch.  1)  FORMAL   REQUISITES  707 

whether  Tate  was  good,  but  whether  the  bank  would  pay  his  check 
for  a  given  sum."  It  cannot  be  supposed  that  the  bank  intended  to 
return  an  ambiguous  answer,  for  the  purpose  of  misleading  the  party 
asking  the  question,  and  therefore,  if  the  answer  had  been  limited  to 
the  words,  "Tate  is  good,"  there  would  have  been  ground  for  holding 
that  the  bank  thereby  intended  an  affirmative  answer  to  the  categori- 
cal question  put  to  it;  but  all  doubt  is  put  at  rest  by  the  remaining 
words  of  the  answer,  "Send  on  your  paper."     *     *    *  - 

Where,  in  the  case  at  bar,  the  defendant  replied  that,  "Draft  C. 
Barreda,  Municipal  President  Nuevo  Laredo  for  five  thousand  Mex- 
ican dollars  is  good,"  the  plaintiff's  assignor  was  justified  in  believing 
that  the  defendant  meant  that  if  the  plaintiff's  assignor  sent  in  the 
draft  it  would  pay  it,  and  where  on  the  faith  of  that  promise  the  plain- 
tiff's assignor  purchased  the  draft,  the  defendant  became  liable  for 
the  payment  of  the  draft. 

The  second  cause  of  action  sufficiently  states  a  promise  of  accept- 
ance, not  alone  from  the  facts  above  mentioned,  but  also  from  the  later 
occurrence.  When  the  draft  was  presented  to  the  defendant  bank,  it 
returned  it,  explaining  that  there  were  two  signatures  and  the  official 
seal  of  the  municipality  lacking.  The  letter  further  said :  "Qnce  the 
above  requisites  having  been  fulfilled,  we  will  have  no  objection  to 
honoring  the  remittance  herewith  returned." 

This  letter  is  evidence  that  the  defendant  considered  itself  bound  by 
the  telegram  of  March  5th.  The  plaintiff's  assignor  secured  the  two 
signatures  and  the  municipal  seal  and  returned  the  same.  It  is  urged 
that  there  is  no  consideration  for  this  promise,  as  the  plaintiff's  as- 
signor had  already  paid  the  money  for  the  draft.  In  my  opinion  the 
performance  of  the  condition  imposed  was  a  sufficient  consideration 
for  the  agreement  to  accept. 

The  fact  that  a  draft  is  discounted  before  acceptance  does  not 
render  the  acceptance  without  consideration.  "It  is  the  settled  law 
of  this  state  that  the  right  of  the  holder  of  the  draft  against  the  ac- 
ceptor is  not  affected  by  the  mere  fact  that  he  discounted  the  draft  be- 
fore acceptance."  Iselin  v.  Chemical  Bank,  16  Misc.  Rep.  437,  438, 
40  N.  Y.  Supp.  388,  389.    *    *    * 

In  my  opinion,  the  order  overruling  the  demurrers  to  both  causes  of 
action  should  be  affirmed. 


ST.  LOUIS  &  SOUTHWESTERN  RY.  CO.   v.   JAMES. 

(Supreme  Court  of  Arkansas.  1906.     78  Ark.  490,  95  S.  W.  804, 
8  Aim.  Cas.  611.) 

Action  by  J.  B.  James  against  the  St.  Louis  &  Southwestern  Rail- 
way Company.  From  a  judgment  for  plaintiff",  defendant  appeals. 
Affirmed  in  part,  and  reversed  in  part. 

RiDDiCK,  J.  This  is  an  action  by  J.  B.  James  against  the  St.  Louis 
&  Southwestern  Railway  Company  to  recover  damages  on  account  of 
the  failure  of  the  company  to  repair  a  building  used  as  a  restaurant 
or  railway  eating  house,  and  which  he  had  leased  from  the  defendant, 
and  also  for  failure  to  pay  board  for  certain  of  its  employes.  *  *  * 
The  company  also  agreed  with  him  that  it  would  pay  all  board  orders 
given  by  its  employes  when,  to  quote  the  language  of  the  contract,  "it 
appears  that  deduction  can  be  made  out  of  the  wages  due  them." 


708  NEGOTIABLE   INSTRUMENTS  (Part  3 

On  the  trial  before  a  jury  the  jury  returned  a  verdict  in  favor  of  the 
plaintiff  for  $35  on  board  orders,  and  for  $147  for  other  damages. 

As  to  the  $147  for  damages  for  the  failure  of  the  company  td  re- 
pair building,  we  think  the  evidence  is  sufficient  to  support  the  ver- 
dict.    *     *     * 

As  to  the  orders  given  by  employes  of  the  company  on  it  in  payment 
for  meals  or  board  due  by  them  to  the  plaintiff,  the  testimony  shows 
that  it  was  the  custom  of  the  company,  when  the  company  was  due  the 
employes  an  amount  equal  to  or  greater  than  the  orders,  to  charge  the 
order  to  the  employe  and  account  to  the  plaintiff  for  the  amount  of 
the  order.  If  nothing  was  due  the  employe,  the  orders  were  returned 
to  the  plaintiff  unless  the  employe  was  still  in  the  service  of  the  com- 
pany, in  which  event  the  orders  were  sometimes  retained  with  the  view 
of  collecting  them  from  future  wages  of  the  employe.  It  does  not  ap- 
pear that  any  objection  to  such  retention  of  the  orders  was  made  by 
James,  and  as  it  was  done  in  his  interest  he  probably  did  not  object 
to  it.  But,  in  instructing  the  jury  on  this  point,  the  court  told  them 
that  the  company  was  liable  for  the  amount  of  such  orders  if  it  kept 
them,  "unaccounted  for,  an  unreasonable  length  of  time  without  noti- 
fying t.he  plaintiff  of  any  reason  why  they  could  not  be  paid."  Now 
counsel  for  plaintiff  contends  that  these  orders,  being  drawn  for  a 
specified  sum,  were  bills  of  exchange  within  the  meaning  of  our  stat- 
ute. *  *  *  and  that  a  failure  to  return  the  same  made  the  compa- 
ny Hable  under  the  following  section,  to  wit:  "Every  person  upon 
whom  a  bill  of  exchange  is  drawn,  and  to  whom  the  same  may  be  de- 
livered for  acceptance,  who  shall  destroy  such  bill,  or  refuse  within 
twenty-four  hours  after  such  delivery,  or  within  such  times  as  the 
holder  may  allow,  to  return  the  bill,  accepted  or  nonaccepted,  to  the 
holder,  shall  be  deemed  to  have  accepted  the  same."    *     *    * 

It  will  be  noticed  that  to  make  the  company  liable  under  this  section 
it  must  be  shown  that  the  orders  were  destroyed,  or  that  there  was  a 
refusal  to  return  the  same.  A  mere  neglect  or  failure  to  return  does 
not  constitute  an  acceptance  under  this  statute.  Statutes  similar  to 
this  are  found  in  many  of  the  states,  and  it  has  been  held  by  courts 
in  several  of  those  states  that  the  refusal  mentioned  in  the  statute  "re- 
fers to  something  of  a  tortious  character,  implying  an  unauthorized 
conversion  of  the  bill  by  the  drawee."  *  *  *  Matteson  v.  Moulton, 
79  N.  Y.  627.  *  *  *  As  it  is  not  shown  that  any  demand  for  the 
return  of  these  orders  had  ever  been  made  on  the  company,  or  that  it 
had  ever  refused  to  return  the  orders,  we  do  not  think  this  statute  has 
any  application  in  this  case  Leaving  out  the  statute,  it  cannot  be 
said  that  a  failure  to  return  a  bill  of  exchange  constitutes  an  accept- 
ance in  this  state,  for  our  statute  expressly  requires  that  an  acceptance, 
to  bind  the  acceptor,  shall  be  in  writing.  *  *  *  jj-,  ^\-^q  absence  of 
any  demand  or  request  for  a  return,  it  is  clear  that  a  mere  failure  to 
return  does  not  in  this  state  bind  the  drawee  as  acceptor.    *    *    * 

The  evidence  showed  that  it  was  the  custom  of  the  company  to  re- 
turn the  orders  which  it  did  not  intend  to  pay,  and  the  failure  of  the 
company  to  return  an  order  was  no  doubt  a  circumstance  tending  more 
or  less  to  show  that  the  employe  by  whom  it  was  drawn  had  money  in 
the  hands  of  the  company  with  which  to  pay  it,  and  that  the  company 
intended  to  pay  it.  But  this  was  not  conclusive,  and  the  company  had 
the  right  to  show  that  the  failure  to  return  was  due  to  other  reasons. 
The  failure  to  return  may  have  been  due  to  oversight,  and  the  plain- 


Ch.  1)  FORMAL   REQUISITES  709 

tiff  may  have  sufifered  no  injury  from  such  faikire.  We  are  there- 
fore of  the  opinion  that  the  court  erred  in  instructing  the  jury  over 
the  objection  of  defendant  that  as  a  matter  of  law  the  company  was 
liable  if  it  kept  the  orders  an  unreasonable  time  without  notifying 
plaintiff  of  its  reasons  for  not  paying  them. 

The  result  is  that  in  our  opinion  the  judgment  should  be  affirmed 
as  to  the  $147  allowed  for  repairs,  but  reversed  as  to  $35  allowed  for 
board,  and  remanded  for  a  new  trial  on  that  cause  of  action. 


(e)     INDORSER 


Section  17,  subsection  6.  Where  a  signature  is  so  placed  upon 
an  instrument  that  it  is  not  clear  in  what  capacity  the  person  mak- 
ing the  same  intended  to  sign  he  is  deemed  to  be  an  indorser. 

Section  31,  An  indorsement  must  be  written  on  the  instrument 
itself  or  upon  a  paper  attached  thereto.  The  signature  of  the  in- 
dorser, without  additional  words,  is  a  sufficient  indorsement. 

Section  63.  A  person  placing  his  signature  upon  an  instrument 
otherwise  than  as  maker,  drawer  or  acceptor,  is  deemed  to  be  an 
indorser,  unless  he  clearly  indicates  by  appropriate  words  his  in- 
tention to  be  bound  in  some  other  capacity. 


MANGOLD    &    GLANDT    BANK    v.    UTTERBACK. 

(Supreme  Court  of  Oklahoma,  1916.     54  Okl.  655,  160  Pac.  713, 
L.  R.  A.  1917B,  364.) 

Mathews,  C.  In  October,  1910,  the  defendant  purchased  from  the 
Denver-Laramie  Realty  Company  certain  shares  of  stock  in  said  com- 
pany and  executed  his  note  to  said  company  in  payment  for  same.  On 
Atigust  14,  1911,  the  note  was  renewed,  and  afterwards  transferred 
to  the  plaintiff  in  error.  A  copy  of  the  note  with  indorsements  is  as 
follows : 
"$1,000.00.  Denver,  Colorado,  August  14,  1911. 

"December  14,  1911,  after  date,  I  promise  to  pay  to  the  order  of 
Denver-Laramie  Realty  Company  one  thousand  &  no/100  Dollars,  for 
value  received.  Payable  at  First  State  Bank  of  Dinger,  Okl.,  with 
interest  at  seven  per  cent.,  from  maturity. 

"[Signed]     W.  T.  Utterback." 
Indorsed  on  back : 
"Payment  Guaranteed.     Protest  waived. 

"The  Denver-Laramie  Realty  Co., 
"By  A.  J.  Spengel,  Treasurer. 
"Northwestern  Land  &  Iron  Co., 
"By  A.  J.  Spengel,  Treasurer." 
On  October  10,   1912,  suit  was  instituted  on  said  note.     *     *     * 
The  defendant  answered  by  general  denial,  admitted  the  execution  of 
the  note,  and  alleged  that  the  note  was  given  for  certain  shares  of  stock 
in  the  Denver-Laramie  Realty  Company,  but  claimed  that  he  was  in- 
duced to  sign  the  same  through  certain  false  and  fraudulent  repre- 
sentations upon  the  part  of  said  company.     Trial  w^as  had  to  a  jury, 


710  NEGOTIABLE   IX8TKUMEXTS  (Part  3 

verdict  was  returned  for  defendant,  and  plaintiff  prosecutes  this  ap- 

The  defendant  advances  the  following  argument  against  the  forego- 
ing contention  of  plaintiff:  "While  the  note  is  negotiable  inform,  the 
indorsement  is  in  no  sense  a  commercial  indorsement.  It  is  a  guar- 
anty of  payment  pure  and  simple;  that  is,  the  words,  'Payment  guar- 
anteed. Protest  waived,'  followed  by  the  signatures  of  the  two  com- 
panies, mean  that  the  companies  guarantee  the  payment  of  the  note 
and  waive  the  protest  thereof.  The  indorsement,  amountmg  to  a 
guaranty  of  payment,  gives  the  plaintiff  in  error  no  standing  as  a  bona 
fide  holder  of  the  note,  but  it  holds  the  same  subject  to  all  defenses 
which  would  be  available  as  against  the  original  payee." 

If  plaintiff's  contention  is  correct  that  the  said  indorsement  upon 
the  note  was  a  commercial  indorsement,  there  being  no  allegations  in 
the  answer  that  defendant  had  notice  of  the  alleged  infirmity  of  the 
note,  then  plaintiff  was  entitled  to  judgment  upon  the  pleadings. 

In  arriving  at  a  decision  on  this  point  we  are  confronted  with  a 
chaotic  conflict  of  opinions  thereon,  and,  as  far  as  our  investigation 
has  led  us,  we  find  that  the  courts  of  but  few,  if  any,  of  the  states  have 
been  consistent  in  declaring  on  this  proposition,  and  our  own  court  is 
in  conflict  thereon.  *  *  *  An  instructive  note  to  the  case  of  Hen- 
drix  V.  Bauhard,  Ann.  Cas.  1913D,  688,  after  giving  a  list  of  the  states, 
including  both  Oklahoma  and  Kansas,  which  hold_  that  a  signed  guar- 
anty on  the  back  of  a  note  makes  the  guarantor  liable  as  an  indorser, 
states  that  the  great  weight  of  authority  supports  that  view.  In  the 
case  last  cited  there  was  written  on  the  back  of  the  note,  "For  value  re- 
ceived we  hereby  warrant  the  makers  of  this  note  financially  good  on 
execution,"  which  was  followed  by  the  signatures  of  the  payees,  and  it 
was  there  held,  if  the  note  was  negotiated  before  maturity  to  a  bona 
fide  purchaser  for  value,  he  would  be  protected  from  any  defense  the 
maker  might  have  against  the  payees. 

The  leading  case  holding  to  this  view  is  a  North  Dakota  case,  Dun- 
ham V.  Peterson,  5  N.  D.  414,  67  N.  W.  293,  36  L.  R.  A.  232,  57  Am. 
St.  Rep.  556,  and  there  the  subject  is  also  treated  with  an  extended  note 
which  declares  that  the  numerical  weight  of  authorities  support  the 
decision  in  Dunham  v.  Peterson.  The  indorsement  on  the  note  in  the 
Dimham  Case  was  as  follows:  "For  value  received,  I  hereby  guar- 
antee the  within  note,  waiving  notice  of  protest  and  demand."  Be- 
neath this  guaranty  the  payee  signed  his  name.  The  court  held  there- 
in that,  when  the  payee  of  a  negotiable  promissory  note  transfers^  it 
by  indorsing  thereon' a  guaranty  of  payment,  the  purchaser  is  an  in- 
dorsee within  the  rule  protecting  an  innocent  purchaser  of  such  paper 
for  value  before  maturity  against  defenses  good  between  the  original 
parties.     *     *     * 

The  case  of  Pattillo  v.  Alexander,  96  Ga.  60,  22  S.  E.  646,  29  L.  R. 
A.  616,  is  an  exhaustive  and  well-considered  one  on  the  point  under 
discussion,  and,  after  reviewing  the  authorities  thereon  at  great  length, 
concludes  that  a  guaranty  written  on  the  back  of  a  negotiable  promis- 
sory note  followed  by  the  signature  of  the  payee  ordinarily  amounts 
to  a  commercial  indorsement.  *  *  *  We  are  not  unmindful  of  the 
fact  that  the  case  of  Ireland  v.  Floyd,  42  Okl.  609,  142  Pac.  401,  L.  R. 
A.  1915C,  661,  is  supported  by  a  respectable  line  of  authorities. 
*  *  *  *  But  we  think  the  better  reasoning  and  greater  v.-eight  of  au- 
thority is  with  the  case  of  McNary  et  al.  v.  Farmers'  Nat.  Bank,  33 


Ch.  1)  FORMAL   REQUISITES  711 

Okl.  1,  124  Pac.  286,  41  L.  R.  A.  (N.  S.)  1009,  Ann.  Cas.  1914B,  248. 
But,  even  if  the  case  of  Ireland  v.  Floyd,  supra,  was  not  opposed  by 
the  case  of  McNary  v.  Farmers'  Nat.  Bank,  supra,  and  by  the  weight 
of  authority  from  other  states,  we  are  inclined  to  the  view  that  it  is 
in  conflict  with  the  Negotiable  Instruments  Law  of  this  state,  adopted 
in  1909. 

Section  17  *  *  *  so  far  as  applicable,  is  as  follows :  "Where 
the  language  of  the  instrument  is  ambiguous,  or  there  are  omissions 
therein,  the  following  rules  of  construction  apply:  *  *  *  Sixth. 
Where  a  signature  is  so  placed  upon  the  instrument  that  it  is  not  clear 
in  what  capacity  the  person  making  the  same  intended  to  sign,  he  is 
to  be  deemed  an  indorser."     *     *     * 

Section  63  :  "A  person  placing  his  signature  upon  an  instrument 
otherwise  than  as  maker,  drawer  or  acceptor  is  deemed  to  be  an  in- 
dorser, unless  he  clearly  indicates  by  appropriate  words  his  intention 
to  be  bound  in  some  other  capacity." 

It  will  be  observed  from  section  63  that  the  tendency  of  the  law, 
when  the  status  of  a  party  who  places  his  name  upon  the  back  of  a 
negotiable  instrument  is  under  consideration,  is  to  resolve  all  doubtful 
cases  towards  holding  the  same  to  be  a  commercial  indorsement  in 
due  course.  This  rule  is  founded  upon  commercial  necessity.  The  un- 
shackeled  circulation  of  negotiable  notes  is  a  matter  of  great  impor- 
tance. The  different  forms  of  commercial  instruments  take  the  place  of 
money.  To  require  each  assignee,  before  accepting  them,  to  inquire 
into  and  investigate  every  circumstance  bearing  upon  the  original  ex- 
ecution and  to  take  cognizance  of  all  the  equities  between  the  original 
parties,  would  utterly  destroy  their  commercial  value  and  seriously 
impede  business  transactions. 

A  simple  indorsement  by  the  payee  of  his  name  upon  a  note  serves 
the  double  purpose  both  of  transferring  the  title  to  the  holder  and  of 
charging  the  payee  with  the  obligation  to  pay  it  in  event  the  maker 
upon  presentation  declines  to  honor  it.  But  before  the  liability  can  be 
fixed  against  the  indorser  there, must  be:  First,  a  demand  made  upon 
the  maker  of  the  note  for  payment;  and,  second,  in  case  the  same  is 
not  paid,  notice  must  be  given  the  indorser.  The  rule  seems  to  be  that 
a  general  guaranty  is  in  law  a  general  indorsement  of  the  instrument, 
Avith  a  waiver  of  the  condition  precedent  of  a  notice  of  nonpayment 
by  the  drawers.     *     *     * 

There  is  no  contention  but  that  in  the  case  at  bar  the  defendant  is 
at  least  a  guarantor.  If  he  be  a  guarantor  only,  then  he  is  not  entitled 
to  the  legal  rights  of  an  indorser  to  be  served  with  notice  of  nonpay- 
ment. Yet  we  find  written  upon  the  back  of  the  instrument  in  con- 
troversy the  very  significant  words  "Protest  waived."  Why  waive  a 
right  that  the  party  did  not  have  ?  It  must  be  presumed  that  the  par- 
ties did  not  intend  to  do  a  useless  and  unnecessary  act  when  these 
words  were  written  upon  the  back  of  the  instrument,  and  the  reasona- 
ble construction  is  that  by  the  entire  indorsement  he  became  an  indorser 
with  the  enlarged  liability  of  being  legally  held  to  payment  without 
notice  of  the  dishonor  of  the  note.  Further,  no  one  can  fairly  say 
that  the  intention  of  defendant  not  to  be  bound  is  clearly  indicated 
from  the  words  written  upon  the  back  of  the  instrument  in  contro- 
versy ;   in  fact,  the  indication  points  the  other  way. 

It  will  be  admitted  that,  where  the  payee  in  a  note  makes  a  written 
assignment  of  the  same  on  the  back  of  the  note,  followed  by  his  sig- 


712  NEGOTIABLE   INSTRUMENTS  (Part  3 

nature,  he  can  with  much  better  logic  argue  that  such  an  act  should 
be  construed  as  an  assignment  only,  and  not  a  commercial  indorsement, 
than  can  one  who  makes  a  guaranty  in  a  similar  way,  yet  in  the  recent 
case  of  Farnsworth  v.  Burdick,  94  Kan.  749,  147  Pac.  863,  under  the 
same  Negotiable  Instruments  Law  as  our  own,  the  Kansas  court  held : 
"Under  the  Negotiable  Instruments  Law  *  *  *  ^  writing  in  these 
words,  'I  hereby  assign  this  note  over  to  E.  H.  Farnsworth,  *  *  *  ' 
signed  by  the  payee,  on  the  back  of  a  negotiable  promissory  note,  is  an 
indorsement  of  the  note." 

Therefore  holding,  as  we  do,  that  the  defendant  was  an  indorser 
of  the  note  in  controversy,  *  *  *  and  the  plaintiff  having  alleged 
that  the  note  was  indorsed  to  it  before  maturity,  for  a  valuable  consid- 
eration, in  due  course  of  business,  and  a  copy  of  said  note  having  been 
attached  to  its  petition  showing  the  indorsement,  and  the  indorsement 
having  not  been  denied  under  oath,  it  follows  that  plaintiff  was  enti- 
tled to  judgment  on  the  pleadings.     *     *     * 


CLARK   V.   TH0:MPS0'N   et   al. 
(Supreme  Court  of  Alabama,  1915.     194  Ala.  504,  69  South.  925.) 

Some;rviIvLE,  J.  Complainant  files  her  bill  for  the  cancellation  of  a 
certain  mortgage  executed  by  herself  and  her  husband  on  her  realty 
to  secure  their  joint  negotiable  note.  *  *  *  The  bill  of  complaint 
was  dismissed  on  the  theory  that  the  respondent  was  a  purchaser  for 
value  in  due  course  of  the  note  and  mortgage,  without  notice  of  the 
infirmity  charged. 

Respondent  bought  the  note  and  mortgage  from  the  payee,  W.  A. 
Thompson ;  the  note  being  payable  to  Thompson,  or  order.  In  order 
to  free  the  note  of  the  defense  available  to  complainant  against  the 
payee,  it  was  necessary  for  respondent  to  acquire  it  in  due  course  by 
indorsement,  as  prescribed  by  the  Negotiable  Instruments  Law. 
*  *  *  "The  indorsement  must  be  written  on  the  instrument  itself 
or  upon  a  paper  attached  thereto."  *  *  *  This  is  but  a  statutory 
affirmation  of  the  rule  of  the  old  law  merchant,  which  allowed  in- 
dorsements to  be  made  upon  an  "allonge" ;  that  is,  upon  a  slip  of 
paper  tacked  or  pasted  on  to  the  instrument  so  as  to  become  a  part 
of  it.  *  *  *  But  the  use  of  the  allonge  was  allowable  only  when 
the  back  of  the  instrument  itself  was  so  covered  with  previous  indorse- 
ments that  convenience  or  necessity  required  additional  space  for  fur- 
ther indorsements.  *  *  *  Section  [31  of  the  Act]  sanctions  the 
use  of  the  allonge,  but  certainly  it  was  not  intended  to  establish  the 
loose  and  undesirable  practice  of  making  regular  indorsements  of  com- 
mercial paper  by  a  writing  on  the  back  of  any  other  paper  or  docu- 
ment to  which  it  might  be  temporarily  attached,  as  by  pinning,  and, 
more  especially,  when  there  is  ample  space  for  indorsement  on  the 
back  of  the  instrument  itself. 

In  a  case  like  this,  arising  under  the  law  merchant,  the  Supreme 
Court  of  Nebraska  has  reached  a  like  conclusion.  Said  the  court : 
"Webster  defines  the  word  'allonge'  to  mean  'a  paper  attached  to  a 
bill  of  exchange  for  receiving  indorsements  too  numerous  to  be  writ- 
ten on  the  bill  itself.'  In  the  case  at  bar  the  mortgage  and  note  were 
not  attached  or  fastened  together;  and,  had  they  been,  as  there  was 
plenty  of  room  remaining  blank  on  the  back  of  the  note  for  indorse- 


Ch.  1)  FORMAL   REQUISITES  713 

ment  thereon,  it  would  be  a  forced  and  inadmissible  construction  to 
treat  the  mortgage  as  an  allonge  of  the  note."  Doll  v.  HoUenback,  19 
Neb.  639,  643,  28  N.  W.  286,  288. 

An  exhaustive  discussion  of  the  subject,  with  citation  of  many  au- 
thorities, will  be  found  in  the  case  of  Bishop  v.  Chase,  156  Mo.  158, 
56  S.  W.  1080,  79  Am.  St.  Rep.  515,  cited  in  1  Words  and  Phrases, 
First  Series,  343.  It  was  there  held  that  a  written  transfer  of  a  note, 
made  on  a  separate  paper  to  which  it  was  pinned,  there  being  room 
on  the  back  of  the  note  itself  for  the  transfer,  was  an  assignment 
merely,  and  not  a  commercial  indorsement. 

In  the  instant  case,  whether  the  note  was  pinned  to  the  mortgage 
or  not,  we  are  constrained  to  treat  its  transfer,  in  the  manner  shown, 
as  a  common-law  assignment  merely,  and  to  hold  that  respondent  was 
not  a  holder  in  due  course.  It  must  be  noted,  however,  that  the  evi- 
dence does  not  show  that  the  note  was  pinned  to  the  mortgage  when 
they  were  transferred  to  respondent,  but  only  when  they  were  deliv- 
ered to  the  payee  nearly  a  year  before ;  and  we  could  not  presume 
that  such  a  superficial  fastening,  evidently  for  temporary  convenience 
only,  still  existed  at  the  date  of  the  transfer. 

It  results  that  the  decree  of  the  chancery  court  must  be  reversed, 
and  a  decree  will  be  here  rendered  granting  to  complainant  the  special 
relief  prayed  for  in  the  bill  of  complaint. 


SECTION  11.— DATE  OF  THE  INSTRUMENT 

Section  11,  Where  the  instrument  or  an  acceptance  or  any  in- 
dorsement thereon  is  dated,  such  date  is  deemed  prima  facie  to  be 
the  true  date  of  the  making,  drav^^ing,  acceptance,  or  indorsement  as 
the  case  may  be. 

Section  12.  The  instrument  is  not  invalid  for  the  reason  only 
that  it  is  antedated  or  postdated,  provided  this  is  not  done  for  an 
illegal  or  fraudulent  purpose.  The  person  to  whom  an  instrument 
so  dated  is  delivered  acquires  the  title  thereto  as  of  the  date  of  de- 
livery. 

Section  17,  subsection  3.  Where  the  instrument  is  not  dated, 
it  will  be  considered  to  be  dated  as  of  the  time  it  was  issued. 

Section  6,  subsection  1.  The  validity  and  negotiable  character 
of  an  instrument  are  not  affected  by  the  fact  that  it  is  not  dated. 

Section  13.  Where  an  instrument  expressed  to  be  payable  at 
a  fixed  period  after  date  is  issued  undated,  or  where  the  accept- 
ance of  an  instrument  payable  at  a  fixed  period  after  sight  is  un- 
dated, any  holder  may  insert  therein  the  true  date  of  issue  or  ac- 
ceptance, and  the  instrument  shall  be  payable  accordingly.  The 
insertion  of  a  wrong  date  does  not  avoid  the  instrument  in  the 
hands  of  a  holder  in  due  course ;  but  as  to  him,  the  date  so  insert- 
ed is  to  be  regarded  as  the  true  date. 


714  NEGOTIABLE   INSTRUMENTS  (Part  3 


SECTION  12.— INTERPRETATION   OF  AMBIGUOUS 
INSTRUMENTS 

Section  17.  Where  the  language  of  the  instrument  is  ambigu- 
ous or  there  are  omissions  therein,  the  following  rules  of  construc- 
tion apply: 

(1)  Where  the  sum  payable  is  expressed  in  words  and  also  in 
figures  and  there  is  a  discrepancy  between  the  two,  the  sum  de- 
noted by  the  words  is  the  sum  payable;  but  if  the  words  are  am- 
biguous or  uncertain,  reference  may  be  had  to  the  figures  to  fix 
the  amount; 

(4)  Where  there  is  a  conflict  between  the  written  and  printed 
provisions  of  the  instrument,  the  written  provisions  prevail; 

(2)  Where  the  instrument  provides  for  the  payment  of  interest, 
without  specifying  the  date  from  which  interest  is  to  run,  the  in- 
terest nms  from  the  date  of  the  instrument,  and  if  the  instrument 
is  undated,  from  the  issue  thereof; 

(5)  Where  the  instrument  is  so  ambiguous  that  there  is  doubt 
whether  it  is  a  bill  or  note  the  holder  may  treat  it  as  either  at  his 
election. 


SECTION  13.— CONSIDERATION 

A  negotiable  instrument  evidences  a  particular  kind  of  con- 
tract. All  contracts,  not  governed  by  the  common-law  rules  ap- 
plicable to  sealed  instruments,  must  be  supported  by  consideration. 
A  negotiable  instrument  is  no  exception  to  the  rule.  Only  those 
operative  facts  which  constitute  consideration  in  the  law  of  simple 
contracts  will  constitute  consideration  for  a  negotiable  contract. 
There  are  some  features  of  the  rule  requiring  consideration  for  ne- 
gotiable instruments  which  are  different  from  the  corresponding 
rule  in  simple  contracts.  As  a  general  rule,  in  a  suit  upon  a  sim- 
ple contract  the  party  alleging  its  existence  must  affirmatively 
prove  that  the  agreement  was  supported  by  consideration.  In  a 
suit  upon  a  negotiable  contract,  the  party  relying  upon  it  as^  a 
ground  of  action  does  not  sustain  the  burden  of  proving  consid- 
eration. With  respect  to  this  feature  the  Negotiable  Instruments 
Law  provides : 

Section  24.  Every  negotiable  instrument  is  deemed  prima  facie 
to  have  been  issued  for  a  valuable  consideration;  and  every  per- 
son whose  signature  appears  thereon  to  have  become  a  party 
thereto  for  value. 

Section  28.  Absence  or  failure  of  consideration  is  matter  of  de- 
fense as  against  any  person  not  a  holder  in  due  course ;  and  par- 
tial failure  of  consideration  is  a  defense  pro  tanto,  whether  the  fail- 
ure is  an  ascertained  and  liquidated  amount  or  otherwise. 


Ch.  1)  FOUMAL   REQT'ISITES  71i 


SHAFFER  V.   BOND. 
(Court  of  Appeals  of  Maryland,  1917.     129  Md.  648,  99  Atl.  973.) 

Boyd,  C.  J.  George  M.  Bond,  the  appellee,  sued  E.  Whyland  Shaf- 
fer, the  appellant,  on  the  common  counts  and  a  special  one  on  a  prom- 
issory note  purporting  to  be  dated  January  2,  1915,  payable  to  the 
order  of  the  appellee  on  demand  for  $4,250,  with  interest,  at  the  Cit- 
izens' National  Bank  of  Laurel.  Md.  The  defendant  pleaded  the 
general  issue,  pleas  of  never  promised  as  alleged  and  never  indebted  as 
alleged,  and,  issue  having  been  joined,  a  trial  was  had,  resulting  in  a 
verdict  in  favor  of  the  plaintiff  for  $4,578.30,  being  the  amount  of 
the  note  with  interest.  From  a  judgment  entered  on  that  verdict  this 
appeal  was  taken.     *     *     * 

The  defendant's  first  prayer  as  offered  was  as  follows:  "The  de- 
fendant prays  the  court  to  instruct  the  jury  that,  if  the  jury  find  from 
the  evidence  in  the  case  that  there  was  no  consideration  moving  from 
the  plaintiff  to  the  defendant  for  the  note,  which  is  the  cause  of  the 
action  in  this  case,  then  their  verdict  must  be  for  the  defendant." 

The  court  modified  that  by  adding  to  it,  "but  the  burden  of  the 
proof  is  on  the  defendant  to  show  want  of  consideration,"  and  grant- 
ed that  prayer  as  modified,  to  which  modification  an  exception  was 
taken.  The  defendant's  fifth  prayer,  which  was  rejected,  asked  the 
court  "to  instruct  the  jury  that,  under  the  pleadings  and  evidence  in 
this  case,  the  burden  of  the  proof  is  upon  the  plaintiff  to  show  that  he 
gave  value  for  the  note  the  cause  of  action  herein  sued  on." 

Those  rulings  present  the  important  question  in  the  case,  namely, 
upon  which  side  was  the  burden  in  reference  to  the  alleged  want  of 
consideration,  under  the  circumstances.  The  Negotiable  Instruments 
Act  was  passed  in  this  state  in  1898,  being  chapter  119  of  the  acts  of 
assembly  of  that  year,  and  now  included  in  article  13  of  the  Annotated 
Code.  Section  43  of  that  article  provides  that;  "Every  negotiable 
instrument  is  deemed  prima  facie  to  have  been  issued  for  a  valuable 
consideration;  and  every  person  whose  signature  appears  thereon  to 
have  become  a  party  thereto  for  value."  And  section  47  is :  "Ab- 
sence or  failure  of  consideration  is  matter  of  defense  as  against  any 
person  not  a  holder  in  due  course ;  and  partial  failure  of  considera- 
tion is  a  defense  pro  tanto,  whether  the  failure  is  an  ascertained  and 
liquidated  amount  or  otherwise."     *     *     * 

The  appellant  cited  McCosker  v.  Banks,  84  Md.  292,  35  Atl.  935,  to 
show  that,  where  there  is  fraud  or  illegality  in  the  inception  of  the 
note,  the  burden  of  proof  is  upon  the  holder  to  show  that  he  is  a  bona 
fide  holder  for  value.  *  *  *  After  stating  the  law  of  this  state  as 
to  the  legal  presumption  that  the  plaintiffs  became  holders  for  value 
before  maturity,  etc.,  the  court  said:  "But  if  the  defendant  shows  by 
such  proof  as  may  be  properly  left  to  the  jury  to  consider,  that  the 
instrument  was  procured  by  fraud,  or  was  fraudulent  in  its  inception, 
or  that  the  consideration  was  illegal,  or  that  it  had  been  lost  or  stolen 
before  it  came  to  the  possession  of  the  holder,  the  burden  of  proof  is 
changed,  and  it  is  then  incumbent  upon  the  plaintiff  to  show  that  he 
acquired  the  note  bona  fide  for  value,  in  the  usual  course  of  business, 
before  maturity,"  etc.     *     *     * 

The  reason  for  the  rule,  as  quoted  above,  does  not  apply  to  an  orig- 
inal party  to  a  suit ;   the  onus  put  on  the  plaintiff  in  such  case  is  only 


716  NEGOTIABLE   INSTRUMENTS  (Part  3 

to  show  that  he  is  a  bona  fide  holder  for  value,  etc.,  not  that  there  was 
no  fraud,  that  the  consideration  was  illegal  in  the  inception  of  the  note, 
etc.  It  is  only  when  fraud  is  shown  on  the  part  of  the  payee  or  some 
one  other  than  himself  that  the  indorsee  is  called  upon  to  prove  that 
he  was  not  aware  of  it  in  that  class  of  case,  and  then  by  reason  of 
the  presumption  which  is  raised  as  stated  above.     *     *     * 

In  8  C.  J.  §  1299,  p.  994,  it  is  said;  "It  is  a  general  rule,  supported 
by  a  multitude- of  decisions,  that  the  burden  of  proof  is  on  defendant 
to  establish  a  defense  of  want,  failure,  or  illegality  of  considerations. 
These  decisions,  while  for  the  most  part  apparently  without  quaUfica- 
tion  on  their  face,  are  subject  to  explanation,  at  least  according  to  the 
rules  laid  down  in  many  jurisdictions,  by  adding  that  what  is  meant  is 
that  defendant  must  produce  some  evidence  to  overcome  the  presump- 
tion of  consideration  arising  from  the  production  of  the  instrument,  in 
order  to  shift  to  plaintiff  the  necessity  for  proving  facts  relating  to 
the  consideration.  In  other  words,  the  rule,  at  least  in  most  of  the 
states,  is  that,  although  a  bill  or  a  note  imports  in  itself  a  considera- 
tion, yet  when  the  evidence  has  been  introduced  to  rebut  the  presump- 
tion of  consideration,  the  burden  shifts  to  plaintiff  to  show  by  a  pre- 
ponderance of  the  evidence  that  there  was  a  consideration;  and  this 
is  so  even  where  the  instrument  on  its  face  recites  a  consideration  as 
by  the  use  of  the  words  'value  received,'  but  it  has  been  held  that 
the  rule  does  not  apply  to  a  defense  of  a  failure  of  consideration." 
*    *    * 

It  must  be  admitted  that  8  C.  J.  994,  3  R.  C.  L.  928,  and  4  Am.  & 
Eng.  Ency.  of  Law,  200,  cited  above,  seem  to  adopt  the  rule  contend- 
ed for  by  the  appellant,  but  it  will  be  observed  that  8  C.  J.  begins  by 
saying  that :  "It  is  the  general  rule,  supported  by  a  multitude  of  de- 
cisions, that  the  burden  is  on  defendant  to  establish  a  defense  of^want, 
failure,  or  illegality  of  consideration."  And  there  are  cited  in  the 
notes  what  may  very  properly  be  called  "a  multitude  of  decisions." 
The  author  concludes  that,  "at  least  according  to  the  rules  laid  down 
in  many  jurisdictions."  it  is  only  meant  to  say  that  the  defendant  is 
called  upon  to  produce  some  evidence  to  overcome  the  presumption 
of  consideration  arising  from  the  production  of  the  instrument,  and 
that  when  that  is  done  the  burden  shifts  to  the  plaintiff.  While  that 
is  undoubtedly  correct  as  to  a  number  of  courts,  it  is  by  no  means  so 
with  all  of  those  cited  in  the  notes.     *     *     * 

In  3  R.  C.  L.  928,  it  is  said :  "Nevertheless  in  a  number  of  juris- 
dictions it  is  asserted  to  be  the  rule  that  the  defense  of  a  want  of 
consideration  for  a  bill  or  note  is  an  affirmative  defense,  and  that,  as 
a  bill  or  note  imports  on  its  face  a  valuable  consideration,  the  burden 
of  estabHshing  that  there  was  no  consideration  falls  upon  the. party 
pleading  that  defense,  or  at  any  rate  when  the  paper,  in  accordance  with 
commercial  usage,  specifies  a  consideration." 

It  is  also  true  that  in  a  number  of  the  states  where  there  are  courts 
of  the  highest  standing  the  rule  contended  for  by  the  appellant  has 
been  adopted.  *  *  *  McKenzie  v.  Oregon  Imp.  Co.,  5  Wash.  409, 
31  Pac.  748,  and  Preas  v.  VolHntine,  53  Wash.  137,  101  Pac.  706,  are 
very  emphatic  in  favor  of  the  appellee's  contention,  and  criticize  some 
of  the  cases  holding  the  opposite  view.  The  cases  in  the  note  in  18 
Ann.  Cas.  204,  cited  as  sustaining  the  appellee's  position,  are  from 
the  reports  of  Alabama,  Arkansas,  California,  District  of  Columbia, 
Georgia,  Illinois,  Iowa,  Kansas,  Kentucky,  Louisiana,  Mississippi,  Mis- 


Ch.  1)  FORMAL   REQUISITES  717 

souri,  New  York,  Ohio,  Oklahoma,  Oregon,  South  Carohna,  South 
Dakota,  Texas,  and  Washington.     *     *     =i= 

Apparently  the  majority  of  courts  in  this  country  have  adopted  the 
view  contended  for  by  the  appellee,  but  it  would  prolong  this  opinion 
(already  longer  than  we  intended)  to  an  unreasonable  extent  if  we 
attempt  to  call  attention  to  all  of  the  cases  cited  which,  adopting  the 
view  of  the  one  side  or  the  other,  can  be  distinguished  or  shown  not  to 
be  applicable  to  the  precise  questions  before  us.  Some  of  those  we  have 
cited  may  be  subject  to  that  criticism. 

So   far   as   the   defense   of    failure   of   consideration   is   concerned, 

*  *  *  it  is  an  affirmative  defense,  and  must  be  proven  by  the  de- 
fendant and  sustained  by  him  throughout,  if  he  relies  on  it.     *     *     * 

If,  then,  the  defendant  in  a  suit  on  a  negotiable  promissory  note, 
which  is  admitted  to  bear  his  signature,  attempts  to  escape  payment  of 
it  by  alleging  fraud,  or  what  is  equivalent  to  fraud  without  the  use  of 
the  term,  in  order  to  show  want  of  consideration  for  the  note,  he 
ought  not  to  complain  if  he  has  the  burden  of  establishing  it  by  a  pre- 
ponderance of  proof,  such  burden  continuing  to  the  end  of  the  case. 

*  *     * 

We  are  of  the  opinion  that  the  better  rule  is  to  hold  that  the  burden 
is  generally  on  the  maker  to  show  a  want  of  consideration  to  a  prom- 
issory note  in  a  suit  between  him  and  the  payee.  There  may  be  cir- 
cumstances which  justify  an  exception  to  such  a  general  rule.  Some- 
times the  facts  may  be  so  peculiarly  within  the  control  of  the  plaintiff 
as  to  place  the  burden  on  him,  or  there  may  be  some  other  reason 
for  making  an  exception,  but  it  seems  to  us  that  it  is  the  wiser  rule 
to  adopt,  in  order  to  make  negotiable  instruments  effective  and  of  the 
value  they  are  supposed  to  be.  When  the  maker  signs  a  negotiable  in- 
strument, it  is  presumed  to  be  for  value,  and,  without  meaning  that 
that  is  necessary,  this  one  states  on  its  face  it  is  for  "value  received." 
In  business  transactions  notes  are  often  taken  in  order  to  settle  all 
questions  about  the  amount  of  liability,  etc.,  and  to  put  them  in  such 
shape  that  they  will  speak  for  themselves,  in  case  of  the  death  of  debtor 
or  creditor,  and  yet,  if  the  burden  is  put  upon  the  payee  to  sustain 
the  consideration,  simply  because  the  maker  denies  it,  they  are  in 
fact  of  little  more  use  between  the  parties  than  an  open  account  would 
be.  The  creditor  may  destroy  his  checks  or  other  evidence,  if  he  has 
any,  tending  to  prove  consideration  for  a  note  which  has  been  in  ex- 
istence for  some  time,  or  has  been  renewed  from  time  to  time,  and 
if  he  has  done  so,  then  the  fact  that  a  negotiable  promissory  note  im- 
ports consideration  and  the  prima  facie  presumption  that  there  was 
value  are  of  little  benefit,  if  the  debtor  can  by  offering  some  evidence 
that  there  was  no  consideration  cast  the  burden  on  the  plaintiff.  It 
is,  of  course,  wise  not  to  make  a  note  or  a  bill  of  exchange  conclusive 
of  a  valid  consideration,  but  the  burden  should  at  least  be  on  the  one 
setting  up  a  want  of  consideration,  and  that  burden  should  not  be 
shifted,  but  should  rest  on  him  to  the  end  of  the  case.     *     *     * 

Judgment  affirmed.     *     *     * 


In  applying  the  doctrine  of  consideration  to  negotiable  instru- 
ments, there  are  some  special  situations  which  may  be  noted 
briefly.     As  between  maker  and  payee  of  a  negotiable  note  no 


718  NEGOTIABLE   INSTRUMENTS  (Part  3 

difficulty  is  presented.  The  payee  may  recover  on  the  instrument 
unless  the  maker  affirmatively  proves  the  absence  of  consideration. 
Suppose  the  payee  makes  a  gift  of  the  instrument  to  A.,  may  A. 
recover?  Certainly  not,  as  against  the  payee  indorser  because 
the  payee  can  show  no  consideration  between  them.  But  may  A., 
the  donee,  recover  from  the  maker?  If  this  were  a  case  of  an  at- 
tempted assignment  by  way  of  gift  of  a  chose  in  action  not  evi- 
denced bv  a  specialty,  the  answer  probably  would  be  no,  because 
such  a  right — not  being  capable  of  actual  or'  constructive  deliv- 
ery, gifts  by  will  excepted — is  not  the  subject  of  a  gift  inter  vivos. 
But  Avhere  we  are  dealing  with  a  special  contract,  such  as  a  ne- 
gotiable instrument,  the  written  evidence  of  the  contract  assimi- 
lates some  of  the  attributes  of  tangible  property,  to  the  extent  that 
some  of  the  principles  of  the  law  of  tangible  property  become  ap- 
plicable. Therefore,  a  negotiable  instrument  which  evidences  a 
contract  between  two  persons  which  is  supported  by  considera- 
tion becomes  capable  of  actual  delivery  and,  therefore,  the  subject 
of  a  valid  gift.  This  result  is  stated  in  the  following  language  of 
the  act: 

Section  26.  Where  value  has  at  any  time  been  given  for  the  in- 
strument, the  holder  is  deemed  a  holder  for  value  in  respect  to 
all  parties  who  become  such  prior  to  that  time. 

Section  25.  Value  is  any  consideration  sufficient  to  support  a 
simple  contract.  An  antecedent  or  pre-existing  debt  constitutes 
value;  and  is  deemed  such  whether  the  instrument  is  payable  on 
demand  or  at  a  future  time. 

Section  27.  Where  the  holder  has  a  lien  on  the  instrument,  aris- 
ing either  from  contract  or  by  implication  of  law^,  he  is  deemed  a 
holder  for  value  to  the  extent  of  his  lien. 

It  will  be  noticed  that  section  26  employs  the  word  "value"  in- 
stead of  "consideration"  and  that  sections  25  and  27  define  "value"" 
to  be  (1)  any  operative  facts  which  constitute  consideration;  (2) 
any  operative  facts  showing  a  transfer  for  a  pre-existing  debt  or 
which  give  rise  to  a  lien  on  the  instrument  transferred,  whether 
such  facts  constitute  consideration  or  not.  The  legal  effect  of 
sections  25  and  27,  in  all  respects  is  not  clear.  The  difficulty 
arises  from  the  fact  that  these  sections  must  be  applied  to  two 
general  situations  which  are  different:  (1)  We  have  the  situa- 
tion where  the  holder,  whether  payee  or  some  subsequent  indorsee, 
is  attempting  to  recover  from  some  prior  party  irrespective  of  his- 
being  a  holder  in  due  course.  (2)  We  have  the  situation  where  a 
holder  is  attempting  to  recover  from  a  prior  party  who  had  a  de- 
fense good  as  against  the  party  with  whom  he  dealt,  and  the 
holder  is  seeking  to  recover  free  from  this  defense.  That  is,  the 
holder  is  asserting  his  right  to  recover  as  a  holder  in  due  course. 
We  are  not  here  concerned  with  the  circumstances  under  which  a 
holder  of  a  negotiable  instrument  will  be  a  holder  in  due  course 
and  as  to  the  nature  of  his  rights  against  prior  parties,  except  to 


Ch.  1)  FORMAL   REQUISITES  719 

note  this  fact:  A  holder,  to  be  a  holder  in  due  course,  must  not 
only  be  a  taker  before  maturity  in  good  faith  and  without  knowl- 
edge of  defenses,  but  he  must  have  given  value.  When  the  word 
"value"  is  used  in  this  latter  sense,  it  is  not  synonymous  with  the 
word  "consideration."  The  rule  requiring  consideration  as  a  con- 
dition precedent  to  the  enforceability  of  mutual  promises,  is  wholly 
distinct  from  the  independent  rule  requiring  the  giving  of  value  as 
a  condition  precedent  to  the  right  to  hold  prior  parties  to  a  nego- 
tiable instrument  free  from  defenses  which  such  parties  had  as 
against  holders  not  in  due  course. 

The  rules  requiring  consideration  in  contracts  and  the  rule  re- 
quiring the  giving  of  value  in  order  to  constitute  one  a  holder  in 
due  course  have  been  kept  distinct  unless  section  25  has  made 
them  identical.  It  may  be  said  that  any  group  of  facts  which  con- 
stitute consideration  will  also  constitute  the  giving  of  value,  but 
under  common  law  rules  one  may  give  value  without  parting  with 
consideration.  If  section  25  has  made  these  two  rules  identical 
then  if  A.  signs  a  note  of  M.  subsequent  to  its  execution  and  de- 
livery to  P.,  he  will  be  bound  to  P.,  even  though  there  was  no 
consideration  between  P.  and  A.  at  the  time  he  signed.  This 
would  make  inapplicable  the  rule  that  past  consideration  is  not 
sufficient  to  support  a  promise.  It  is  possible,  but  not  likely,  that 
the  courts  will  so  interpret  section  25.  We  have  seen,  therefore, 
that  a  holder  may  recover  from  his  immediate  transferor  only  when 
there  is  consideration  between  them.  If  the  holder  did  not  part 
with  consideration,  he  may  still  recover  from  any  prior  party 
who,  for  a  consideration,  was  bound  to  any  prior  party. 

The  application  of  the  doctrine  of  consideration  as  between  the 
parties  to  a  bill  of  exchange  presents  some  special  situations  which 
may  be  noted  briefly.  Suppose  M.  draws  his  check  on  the  D.  bank, 
payable  to  P.  or  order,  and  delivers  the  same  to  P.,  by  way  of  gift, 
what  relations  are  created?  If  the  bank  dishonors  the  instrument, 
P,  cannot  recover  from  M.,  because  there  is  no  consideration  be- 
tween them.  Even  where  D.  has  by  contract  with  M.  bound  itself 
to  honor  M.'s  checks,  and  wrongfully  dishonors  the  instrument, 
P.  still  is  unable  to  recover  from  M.  If  the  drawee  bank  D.  does 
pay  the  check,  D.  may  charge  M.'s  account.  The  act  of  payment 
by  the  drawee,  D.,  was  simply  in  performance  of  its  contract  duty 
to  M.  The  same  result  would  follow  if,  instead  of  paying  the 
amount  of  the  check  to  P.,  the  drawee,  D.,  certified  the  check;  that 
is,  promised  to  pay  it  upon  demand  of  the  holder.  There  need  be 
no  consideration  for  this  promise  between  D.  and  P.,  because  D.'s 
duty  does  not  arise  from  the  apparently  gratuitous  act  of  prom- 
ising to  pay  P.,  but  arises  from  a  contract  between  D,  and  M.  If 
there  were  no  contract  between  M.  and  D.,  and  D.  certified  the 
check.  P.,  being  a  donee,  D.  could  successfully  set  up  absence  of 
consideration  as  a  defense,  for  here  there  is  no  consideration  be- 
tween any  of  the  parties  to  the  instrument.     In  other  words,  the 


720  NEGOTIABLE   INSTRUMENTS  (Part  3 

law  requires  that  there  be  consideration  between  at  least  two  of 
the  parties  but  it  is  not  necessary  that  there  be  consideration  be- 
tween all  parties. 

One  very  common  transaction  which  concerns  negotiable  instru- 
ments involves  the  assumption  by  one  party  of  the  duty  to  dis- 
charge it  to  the  holder,  where  such  party  is  but  lending  his  credit 
to  the  principal  debtor  thereon.  Such  a  person  is  called,  generally, 
a  surety.  A  surety  on  a  negotiable  instrument  is  usually  called  an 
accommodation  party.  All  accommodation  parties  are  sureties  but 
not  all  sureties  are  accommodation  parties.  Obviously,  there  m.ay 
be  sureties  on  contracts  other  than  on  negotiable  instruments. 
The  principles  which  were  adverted  to  in  chapter  XI  of  Contracts, 
dealing  with  the  rights  and  liabilities  of  sureties  generally,  are 
likewise  applicable  to  accommodation  parties.  The  status  of  an 
accommodation  party  is  not  determined  by  the  position  of  his  name 
on  the  instrument.  He  may  be  a  maker,  drawer,  acceptor,  or  an  in- 
dorser.  His  status  is  determined  by  his  relation  to  some  other 
party  to  the  instrument — the  principal  debtor.  Similarly,  the  prin- 
cipal debtor  may  occupy  any  position  on  the  instrument.  The  sec- 
tion of  the  Negotiable  Instruments  Law  following,  in  the  main,  as- 
serts a  proposition  which  is  self-evident  from  the  cases  in  chap- 
ter II  of  Contracts  dealing  with  the  matter  of  consideration. 

Section  29.  An  accommodation  party  is  one  who  has  signed  the 
instrument  as  maker,  drawer,  acceptor  or  indorser  without  receiv- 
ing value  therefor,  and  for  the  purpose  of  lending  his  name  to  some 
other  person.  Such  a  person  is  liable  on  the  instrument  to  a  holder 
for  value,  notwithstanding  such  holder  at  the  time  of  taking  the 
instrument  knew  him  to  be  only  an  accommodation  party. 

There  is  one  special  situation  involving  the  liability  of  accommo- 
dation parties  which  has  given  rise  to  a  conflict  of  authority  which 
has  not  been  definitely  settled  by  the  above  section.  If  the  instru- 
ment is  issued  by  the  accommodated  party,  for  the  first  time  after 
maturity,  may  the  party  who  then  gives  value  hold  the  accommo- 
dation party;  i.  e.,  the  surety?  It  has  been  held  that  the  accommo- 
dation party  is  liable  in  this  case.^  This  holding  is  contrary  to  the 
weight  of  authority  before  the  act,  and  it  has  been  argued  that  this 
decision  is  not  justified  by  the  statute,  but  that,  if  it  is,  the  act 
should  be  amended,  so  as  to  conform  the  weight  of  authority  be- 
fore the  act.^ 


SECTION  14.— DELIVERY 

An  instrument  may  be  in  form  negotiable,  it  may  be  executed 
upon  consideration,  and  it  may  even  be  in  the  hands  of  the  payee, 
but  these  facts  may  occur  under  circumstances  where  it  will  fail 

5  Marling  v.  Jones,  138  Wis.  82,  119  N.  W.  931,  131  Am.  St.  Rep.  996  (1909). 

6  Brannan,  Some  Neoespary  Amendments  of  tlie  Negotiable  Instruments 
Law,  26  Harvard  Law  Review,  494. 


Ch.  1)  FORMAL   REQUISITES  721 

to  be  an  enforceable  contract  because  of  the  absence  of  one  further 
requisite — i.  e.,  delivery.  It  is  to  be  noted  that  the  written  evi- 
dence of  a  negotiable  contract  is,  in  a  fairly  real  sense,  regarded 
as  the  thing  of  value  in  itself,  much  the  same  as  a  gold  or  silver  cer- 
tificate or  national  bank  note  is  regarded  as  a  thing  of  value.  It 
is,  in  part,  for  this  reason  that  the  law  requires,  as  a  condition  pre- 
cedent to  the  enforceability  of  the  contract,  that  there  be  a  delivery 
of  the  instrument.  To  illustrate:  If  M.  purchases  goods  from  P., 
and  executes  a  note  payable  to  P.'s  order,  but  does  not  deliver  it, 
and  thereupon  P.  by  force  or  other  unauthorized  means  obtains 
physical  possession  of  the  note,  the  defense  of  no  delivery  could 
be  successfully  interpreted,  although  M.  might  be  held  liable  on  the 
simple  contract  of  sale  which  gave  rise  to  the  instrument.  This 
rule  and  its  corollaries  are  expressed  in  the  following  sections  of 
the  Negotiable  Instruments  Law : 

Section  16.  Every  contract  on  a  negotiable  instrument  is  in- 
complete and  revocable  until  delivery  of  the  instrument  for  the 
purpose  of  giving  effect  thereto.  As  between  immediate  parties, 
and  as  regards  a  remote  party  other  than  a  holder  in  due  course, 
the  delivery,  in  order  to  be  effectual,  must  be  made  either  by  or  un- 
der the  authority  of  the  party  making,  drawing,  accepting  or  in- 
dorsing, as  the  case  may  be ;  and  in  such  case  the  delivery  may  be 
shown  to  have  been  conditional,  or  for  a  special  purpose  only,  and 
not  for  the  purpose  of  transferring  the  property  in  the  instrument, 
*  *  *  And  where  the  instrument  is  no  longer  in  the  possession 
of  a  party  whose  signature  appears  thereon,  a  valid  and  intentional 
delivery  by  him  is  presumed  until  the  contrary  is  proved. 

Section  15.  Where  an  incomplete  instrument  has  not  been  de- 
livered it  will  not,  if  completed  and  negotiated,  without  authority, 
be  a  valid  contract  in  the  hands  of  any  holder,  as  against  any  per- 
son whose  signature  was  placed  thereon  before  delivery. 

That  portion  of  section  16  which  deals  with  the  right  of  the 
holder  in  due  course  to  hold  a  party  on  a  negotiable  instrument 
from  whom  there  had  been  no  valid  delivery,  w'as  omitted  here  for 
this  question  is  taken  up  in  chapter  IV.  Likewise  with  respect  to 
section  15,  the  rights  of  the  holder  in  due  course  of  a  negotiable 
instrument  which  originally  Avas  incomplete  and  was  not  deliver- 
ed, is  taken  up  in  chapter  IV. 

Section  191,  clause  6,  defines  delivery  as  follows:  "Delivery" 
means  transfer  of  possession,  actual  or  constructive,  from  one  per- 
son to  another.  The  requirement  of  delivery  always  involves  an 
intention  to  vest  in  the  party  to  whom  the  instrument  is  made  pay- 
able, the  rights  of  a  holder,  and  usually  involves  some  physical  act 
which  outwardly  manifests  this  intention.  The  problem  is  there- 
fore, to  determine  what  circumstances  are  sufficient  to  establish 
the  existence  of  the  requisite  intent  and  act, 
B.&  B.Bus.Law— 46 


■7*22  NEGOTIABLE   INSTRUMENTS  (Part  3^ 


PAULSON  et  al.  v.  BOYD  et  al. 

(Supreme  Court  of  Wisconsin,  1908.  137  Wis.  241,  118  N.  W.  841.) 
This  is  an  action  upon  a  promissory  note  by  the  receivers  of  the  Se- 
'curity  Savings  Bank,  Incorporated,  against  the  maker  of  the  note  and 
the  former  owner  of  the  note  as  indorser.  L.  T.  Boyd  is  the  maker 
of  the  note,  and  J.  S.  Elhs  is  the  payee  and  indorser.  It  appears  from 
the  evidence  of  Boyd  and  ElHs  that  the  note  was  given  to  ElHs  by  Boyd 
as  a  part  of  a  transaction  concerning  the  sale  of  some  mining  stock. 
Boyd  was  to  give  his  note  to  Elhs  for  $2,500,  the  purchase  price  of 
the  stock.  The  note,  dated  October  17,  1902,  was  for  six  months,  and 
was  to  be  renewed  twice  for  the  same  length  of  time.  The  testimony 
of  Boyd  as  to  the  terms  of  the  parol  agreement  is  admitted  by  Ellis  to 
be  correct ;  and  the  agreement,  in  effect,  is  embodied  in  Boyd's  evi- 
dence, set  out  in  the  record  as  follows:  "Shortly  prior  to  the  date  of 
the  first  note,  he  persuaded  me  as  a  good  friend  of  his  to  go  into  this 
deal  with  him  and  take  some  of  his  mining  stock.  I  told  him  then  that 
I  had  no  money,  and  that  I  was  in  debt  and  couldn't  afford  to  take  the 
chance.  He  said  he  wouldn't  urge  me  to  do  this  if  he  didn't  know  all 
about  it.  I  stated  that  I  didn't  have  any  money  to  buy  it  with,  and  he 
said,  'That  doesn't  make  any  difference'  and  he  said,  *I  will  carry  it 
with  the  bank,  I  will  carry  it  18  months  if  you  will  pay  the  interest.' 
Then  I  said:  'Suppose  at  the  end  of  18  months,  I  can't  pay  it?'  He 
said:  'Then  I  will  take  it  off  your  hands;  but  I  am  sure  that  you 
will  have  realized  enough  on  it  to  pay  it,  and  make  a  good  profit.'  I 
said,  'I  don't  see  any  reason  why  you  should  do  that  for  me' ;  and  he 
said,  'I  know  you  have  been  up  against  it  pretty  hard,  and  I  would  like 
to  see  you  make  some  money,'  and  I  said,  'That  is  very  friendly  of  you, 
and  I  will  accept  the  offer,'  and  in  that  case  I  took  the  stock  condition- 
ally, and  signed  the  note  which  he  was  to  renew  twice,  and  at  the  ex- 
piration of  the  18  months,  if  I  didn't  want  the  stock,  he  would  take  it 
off  my  hands."  There  was  no  actual  delivery  of  the  certificates  of 
stock  by  Ellis  to  Boyd.  At  the  time  of  this  agreement  Ellis  conducted 
a  private  banking  business  under  the  name  "Security  Savings  Bank." 
Pursuant  to  the  provisions  of  chapter  234,  p.  351,  Eaws  1903,  the 
Security  Savings  Bank  was  incorporated  for  the  purpose  of  succeed- 
ing to  the  business  and  assets  of  the  private  bank  of  the  same  name 
previously  conducted  and  managed  by  J.  S.  Ellis.  The  new  bank 
was  incorporated  August  21,  1903 ;  the  incorporators  and  stockholders 
being  Ellis  and  his  relatives.  At  the  stockholders'  meeting  the  record 
shows  the  following:  "On  motion  it  was  ordered  that  the  board  of  di- 
rectors be  and  are  directed  to  assume  the  liabilities  of  the  private  bank 
heretofore  known  as  the  Security  Savings  Bank  of  Ashland,  Wiscon- 
sin, in  consideration  of  the  transfer  of  the  assets  of  said  bank  to  their 
corporation."  At  the  directors'  meeting  J.  S.  Ellis  was  elected  presi- 
dent, E.  H.  Ellis,  his  brother,  vice  president,  and  Ellis  Kennedy,  a 
nephew  and  former  employe  of  the  president,  was  elected  cashier. 
Under  the  agreement  between  Boyd  and  Ellis,  three  notes  were  given 
by  Boyd  to  Ellis  and  deposited  by  Ellis  at  the  bank.  All  were  payable 
to  the  order  of  Ellis.  Two  of  them  were  made  before  the  incorpora- 
tion of  the  bank,  and  one,  the  note  in  suit,  thereafter.  In  each  instance 
Boyd  and  Ellis  conducted  these  transactions.  The  note  in  suit  was  re- 
ceived by  Ellis  as  president  and  turned  over  to  the  cashier  with  instruc- 
tions.   The  mining  stock  was  always  in  the  possession  of  Ellis  and  the 


Ch.  1)  FORMAL    REQUISITES  723 

transfer  of  the  stock  on  the  books  of  the  corporation  was  not  made 
until  after  the  execution  of  the  last  note.  The  certificate  of  stock  then 
made  out  was  sent  to  Ellis  and  held  by  him.  Boyd  offered  to  transfer 
any  interest  in  the  shares  of  mining  stock  to  which  the  agreement  be- 
tween him  and  Ellis  referred,  and  renewed  this  offer  at  the  trial, 

SiEBECKER,  J.  At  the  trial  the  defendant  Boyd  relied  upon  an  agree- 
ment between  him  and  Ellis,  the  payee  in  the  note  given  by  the  defend- 
ant. The  transaction  between  the  defendant  and  Ellis  for  the  pur- 
chase of  mining  stock  is  admitted  by  Ellis  to  have  constituted  the 
agreement  for  which  the  notes  were  given.  The  primary  question  is : 
What  was  the  parol  agreement  between  these  parties?  The  evidence 
of  it  is  not  voluminous  or  contradictory,  and  is,  in  effect,  that  Ellis 
undertook  to  assist  Boyd  in  securing  the  advantages  of  an  interest  in 
a  mine,  if  it  should  prove  a  profitable  enterprise  at  the  expiration  of 
18  months.  To  accomplish  this,  Boyd  contracted  for  the  purchase  of 
some  mining  stock  from  Ellis  at  an  agreed  price  of  $2,500  upon  the 
following  arrangement :  Since  Boyd  had  no  available  means  to  make 
such  a  purchase,  Ellis  made  him  an  offer  for  such  purchase,  under 
which  Boyd  was  to  give  him  a  note  for  the  amount,  which  Ellis  was 
to  carry  and  renew  for  18  months.  If  the  stock  had  not  then  reahzed 
enough  to  pay  the  purchase  price,  and  Boyd  did  not  then  want  the 
stock,  then  Ellis  was  to  take  it  off  his  hands,  and  cancel  the  note.  The 
stock  realized  nothing,  and  Boyd  insists  that,  under  the  parol  agree- 
ment with  Ellis  at  and  before  the  delivery  to  Ellis  of  the  first  note,  the 
notes  never  went  into  effect  as  completed  contracts.  He  contends  that 
he  was  to  have  the  right  at  the  expiration  of  18  months  to  elect  whether 
he  wanted  the  stock. 

We  are  of  the  opinion  that  the  facts  sustain  this  claim  and  show  such 
an  agreement  between  the  parties.  An  examination  of  the  evidence, 
in  view  of  the  relations  of  the  parties  and  the  considerations  which  in- 
duced him  to  make  and  deliver  the  note,  leads  us  to  the  conclusion 
that  it  was  not  intended  and  agreed  by  them  that  the  note  should  be 
a  present  binding  agreement,  but  that  it  M-as  delivered  to  Ellis  upon 
the  condition  that,  if  Boyd  paid  interest  on  the  sum  for  18  months, 
Ellis  was  to  renev/  the  notes,  as  agreed,  and,  if  at  the  expiration  of 
that  time  Boyd  did  not  want  the  stock,  the  agreement  to  purchase  was 
to  be  terminated  at  Boyd's  election,  and  the  note  canceled.  *  *  * 
Such  oral  agreements  are  not  contradictory  of  the  written  instrument. 
This  rule  was  declared  and  fully  discussed  in  the  recent  case  in  this 
court  of  Hodge  v.  Smith,  130  Wis.  326,  110  N.  W.  192,  where  it  ^yas 
held :  "It  is  familiar  law,  notwithstanding  some  conflict  in  the  author- 
ities, that  a  person  may  manually  deliver  an  instrument,  though  it  be 
in  the  form  of  commercial  paper,  to  another,  on  its  face  containing- 
a  binding  obligation  in  prgesenti  of  such  person  to  such  other,  with  a 
contemporaneous  verbal  agreement  that  it  shall  not  take  effect  until 
the  happening  of  some  specified  event,  and  that  the  paper,  as  between 
the  parties,  wnll  have  no  validity  as  a  binding  contract  till  the  condi- 
tion shall  have  been  satisfied ;  and  that  proof  of  such  condition  does 
not  violate  the  rule  that  a  written  instrument  cannot  be  varied  by  a 
contemporaneous  parol  agreement;  that  such  evidence  only  goes  to 
show  that  the  instrument  never  had  vitality  as  a  contract" — citing 
cases.  It  is  there  also  held  that  this  principle  is  recognized  in  the  ne- 
gotiable instrument  law,  section  16.    *    *     * 

Can  defendant  assert  this  defense  to  the  note  in  the  hands  of  the 


724  NEGOTIABLE   INSTRUMENTS  (Part  3 

new  bank?  This  must  be  answered  in  the  affirmative  in  view  of  the 
circumstances  of  the  transfer  of  the  assets  from  the  private  to  the 
new  bank. 

Timlin,  J.  (dissenting).  *  *  *  The  majority  of  the  court  seem 
to  have  overlooked  the  force  and  significance  of  this  undisputed  evi- 
dence regarding  the  dehvery  of  the  note  in  suit.  *  *  *  The  agree- 
ment to  pay  interest  and  the  payment  of  interest,  the  agreement  to  re- 
new, and  the  renewals  pursuant  to  that  agreement  are  consistent  only 
with  absolute  delivery.  The  agreement  that  the  payee  should  carry  the 
note  at  the  bank  even  where  the  payee  owned  the  carrying  bank  means 
that  the  note  was  considered  by  the  parties  to  have  been  delivered. 
All  of  these  are  inconsistent  with  nondelivery  or  with  conditional  de- 
livery. Again,  in  the  light  of  the  additional  testimony  above  quoted 
interpreted  in  harmony  with  the  pleading,  the  whole  testimony  of 
Bovd  is  plainly  to  the  effect  that  it  was  orally  agreed  that  he  should 
give  his  note  for  $2,500  for  certain  shares  of  mining  stock  to  be  held 
by  the  seller  as  collateral  security  to  that  note,  that  the  note  was  to 
run  six  months  and  to  be  twice  renewed,  Boyd  to  pay  interest  thereon 
and  to  have  the  right  to  avail  himself  of  any  rise  in  the  price  of  the 
stock  in  the  meantime,  but  if  he  did  not  during  or  at  the  end  of  the  18 
months  avail  himself  of  this  right  to  take  the  shares,  Ellis  was  to  take 
or  keep  the  stock  and  cancel  or  discharge  the  note.  There  is  here  no 
evidence  of  nondelivery  or  of  conditional  delivery,  but  rather  evidence 
showing  delivery  coupled  with  an  oral  agreement  that  the  note  should 
be  discharged  or  paid  in  a  certain  manner  differing  from  that  specified 
in  the  instrument  itself.  -  *  =^  I  have  no  doubt  the  oral  contract  be- 
tween Boyd  and  Ellis  collateral  to  this  note  was  founded  upon  a  val- 
uable consideration  and  enforceable  by  Boyd  against  Ellis.  It  was  a 
sale  of  the  shares  to  Boyd  with  an  agreem.ent  to  repurchase  at  the  end 
of  the  18  months  at  the  same  price  at  the  option  of  Boyd.    *    *    * 


Ch.  2)      RIGHT   OF   HOLDER   TO   COMPLETE,  SUE,  AND   NEGOTIATE  725 


CHAPTER  II 

RIGHT  OF  THE  HOLDER  TO  COMPLETE,  TO  SUE  UPON. 
AND  TO  NEGOTIATE  THE  INSTRUMENT 

Section 

1.  Introduction. 

2.  Completion  of  the  Instrument. 

3.  Richt  to  Sue  Prior  Parties. 

4.  Wliat  Constitutes  a   Negotiation. 

5.  Negotiation  by  Special  Indorsement. 

6.  Negotiation  by  Blank  Indorsement. 

7.  Negotiation  by  Restrictive  Indorsement. 

8.  Negotiation  by  Qualified   Indorsement. 

9.  Negotiation  by  Conditional  Indorsement. 

10.  Transfer  of  T'nindorsed  Paper  Payable  to  the  Order  of  the  Transferor. 

11.  Surrender  to  the  Drawee. 

12.  Other  Formal  Requisites  and  Aspects  of  Negotiation. 


SECTION  1.— INTRODUCTION 

The  particular  rights  of  the  holder  of  a  negotiable  instrument 
with  which  we  are  concerned  in  this  chapter  are  those  rights 
which  are  common  to  holders  in  due  course  and  to  holders  not  in 
due  course.  The  special  rights  of  the  holder  in  due  course  consti- 
tute the  subject-matter  of  succeeding  chapters.  The  Negotiable 
Instruments  Law  contains  provisions  relating  to  three  special 
rights  which  are  taken  up  in  this  chapter:  (1)  The  privilege  of 
the  holder  to  fill  in  blanks ;  (2)  the  right  of  the  holder  to  demand 
payment  of  prior  parties;  (3)  the  power  of  the  holder  to  transfer 
the  instrument. 

The  circumstances  which  make  one  a  holder  are  thus  prescribed 
in  the  act: 

Section  191,  clause  7.  "Holder"  means  the  payee  or  indorsee 
of  a  bill  or  note  who  is  in  possession  of  it,  or  the  bearer  thereof. 

Section  191,  clause  4.  "Bearer"  means  the  person  in  possession 
of  a  bill  or  note  which  is  payable  to  bearer. 


SECTION  2.— COMPLETION  OF  THE  INSTRUMENT 

Section  13.  Where  an  instrument  expressed  to  be  payable  at  a 
fixed  period  after  date  is  issued  undated,  or  where  the  acceptance 
of  an  instrument  payable  at  a  fixed  period  after  sight  is  undated, 
any  holder  may  insert  therein  the  true  date  of  issue  or  acceptance, 
and  the  instrument  shall  be  payable  accordingly. 

Section  14.  Where  the  instrument  is  wanting  in  any  material 
particular,  the  person  in  possession  thereof  has  a  prima  facie  au- 
thority to  complete  it  by  filling  up  the  blanks  therein.  And  a  sig- 
nature on  a  blank  paper  delivered  by  the  person  making  the  signa- 
ture in  order  that  the  paper  may  be  converted  into  a  negotiable  in- 
strument operates  as  a  prima  facie  authority  to  fill  it  up  as  such  for 


726  NEOOTIABLK    TXSTRUMENTS  (Part  3 

any  amount.  In  order,  however,  that  any  such  instrument  when 
completed  may  be  enforced  against  any  person  who  becomes  a 
party  thereto  prior  to  its  completion,  it  must  be  filled  up  strictly  in 
accordance  with  the  authority  given  and  within  a  reasonable  time. 

The  clauses  in  sections  13  and  14  dealing  with  the  rights  of  the 
holder  in  due  course  of  instruments  originally  issued  in  blank  and 
subsequently  filled  up  in  excess  of  authority  have  here  been  omit- 
ted, as  these  provisions  concern  the  subject-matter  of  chapters  IV 
and  V.  It  is  to  be  noted  that  the  privilege  of  the  holder  to  fill  in 
blanks,  such  as  to  the  amount,  interest  rate,  place  of  payment,  at- 
torney fees,  the  name  of  the  payee,  etc.,  is  conditional  upon  his 
having  completed  the  instrument  (1)  strictly  in  accordance  with 
the  authority  given,  and  (2)  within  a  reasonable  time.  If  either 
of  these  two  elements  is  wanting,  the  act  will  then  operate  as  a 
material  alteration,  which  avoids  the  instrument  in  the  hands  of 
all  holders  other  than  holders  in  due  course.  The  particular  difii- 
culty  will  be  to  determine  when  authority  has  been  given  to  fill  up 
blanks.  Such  authority  may  be  shown  by  oral  testimony  of  the 
granting  of  express  authority,  whether  by  words  or  conduct;  but 
whether  the  authority  may  legitimately  be  inferred  exclusively 
from  the  fact  that  the  instrument  was  issued  in  blank  is  not  clear. 

Certainly  the  bare  issuance  of  an  instrument  containing  blanks 
as  to  certain  features  which  commonly  are  filled  up  would  not  in 
itself  be  sufficient  in  all  cases  to  confer  authority  to  fill  them  up. 
For  example,  a  blank  as  to  the  rate  of  interest  could  not  be  filled 
up  merely  because  there  appeared  on  the  instrument  such  a  blank. 
Containing  no  express  provision  with  respect  to  the  interest  rate, 
the  instrument  should  be  interpreted  as  stipulating  for  the  legal 
rate.  The  act  of  inserting  another  rate  would  be  a  material  altera- 
tion. There  may  be  a  special  problem  as  regards  the  right  to  fill  in 
the  name  of  the  payee  in  order  paper,  arising  from  the  fact  that  sec- 
tion 8  (6)  provides  that  "where  the  instrument  is  payable  to  order 
the  payee  must  be  named  or  otherwise  indicated  therein  with  rea- 
sonable certainty."  If  this  provision  should  be  interpreted  as 
meaning  that  the  paper  must  be  so  designated  at  the  time  of  issu- 
ance, then  the  holder  would  have  no  right  to  fill  in  the  name  of 
the  payee,  even  if  given  express  authority  to  do  so.  Even  if  this 
interpretation  were  adopted,  a  court  of  equity  would  probably  re- 
form the  instrument  in  accordance  with  the  express  authority 
given. 

SECTION  3.— RIGHT  TO  SUE  PRIOR  PARTIES 

Section  51.  The  holder  of  a  negotiable  instrument  may  sue 
thereon  in  his  own  name ;  and  payment  to  him  in  due  course  dis- 
charges the  instrument. 

The  first  clause  of  this  section  makes  it  clear  that  the  rule  of  the 
common  law  that  an  assignee  of  a  chose  in   action  must  sue  in 


Ch.  2)   RIGHT  OP  HOLDER  TO  COMPLETE,  SUE,  AND  NEGOTL\TE     72" 

the  name  of  his  assignor  is  not  applicable  to  holders  of  negotiable 
instruments.  A  special  indorsee  may  sue  in  his  own  name,  and  also 
a  holder  under  a  blank  indorsement  or  a  holder  of  an  instrument 
on  its  face  payable  to  bearer.  The  definition,  in  section  191,  clause 
4,  of  a  bearer  as  being  the  person  in  possession  of  a  bill  or  note 
which  is  payable  to  bearer,  if  interpreted  in  its  widest  sense,  would 
permit  a  thief  or  finder  of  bearer  paper  to  recover  upon  it.  This 
section  would  probably  not  be  so  interpreted.  Even  if  it  be  con- 
tended that  a  thief  has  legal  title,  it  could  still  be  held  that  all 
remedies  for  the  enforcement  of  his  legal  title  have  been  destroyed 
by  his  wrongful  act.  The  status  of  an  illegal  contract  furnishes  an 
analogy.  In  such  cases  there  is  a  contract  between  the  parties, 
but,  being  illegal,  no  remedies  are  available  for  its  enforcement. 
The  case  of  a  finder  is  more  difficult.  He  is  not  a  wrongdoer;  still 
his  attempt  to  enforce  the  instrument  may  be  taken  as  evidence  to 
convert  the  proceeds  to  his  own  use,  sufficient  to  defeat  his  action 
on  the  instrument,  except  where  such  action  by  the  finder  is  nec- 
essary to  protect  the  interests  of  the  unknown  owner,  as  perhaps 
might  be  the  case  where  the  statute  of  limitations  was  about  to 
run  on  the  instrument.  Certainly  the  finder  would  not  be  per- 
mitted to  sue  against  the  active  opposition  of  the  true  owner,  who 
had  intervened  to  protect  his  rights.  To  have  the  right  to  sue,  it 
is  not  necessary  that  the  plaintiff  be  the  beneficial  owner.  If  he 
has  been  given  power  to  sue  by  the  owner,  that  fact  is  sufficient. 
Payment  to  a  thief  or  finder  of  bearer  paper  by  an  obligor,  who 
had  no  knowledge  that  the  party  demanding  payment  was  a  thief 
or  finder,  would,  however,  discharge  the  obligation. 


LANCASTER    v.    BALTZELL. 
(Supreme  Court  of  Maryland,  1836.     7  Gill  &  J.  468,  28  Am.  Dec.  2-33.) 

Buchanan,  C.  J.  A  bill  or  note,  payable  to  order,  can  only  be  trans- 
ferred by  indorsement ;  and  as  an  action  against  the  acceptor  or  draw- 
er can  only  be  sustained  by  one  who  has  legal  title,  which  cannot  be 
derived  through  the  medium  of  forgery,  it  is  incumbent  on  the  plain- 
tiff in  such  an  action  to  show  his  interest  in  the  bill  or  note,  which 
must  be  done  by  proving  that  it  was  indorsed  by  the  person  to  whom, 
or  to  whose  order,  it  was  made  payable. 

This  is  an  action  by  the  second  indorsee  against  the  maker  of  a 
promissory  note,  payable  to  the  payee  or  order,  which  was  resisted 
at  the  trial  on  the  ground  that  the  first  indorsement,  purporting  to  be 
by  the  payee,  was  a  forgery,  of  which  proof  was  offered  by  the  de- 
fendant. On  the  part  of  the  plaintiffs,  it  was  proved  that  the  de- 
fendant, on  being  called  on  by  their  counsel,  after  the  indorsement  to 
them,  to  pay  the  note,  examined  it,  and  said  it  was  right,  and  he  would 
settle  it  with  them.  Upon  which  the  court  instructed  the  jury  that,  if 
they  believed  the  defendant,  when  the  note  was  presented  to  him  by 
the  counsel  of  the  plaintiffs,  had  examined  the  indorsements,  and  said 
it  was  right,  the  plaintiffs  were  entitled  to  recover,  although  they  might 
believe  the  indorsement  of  the  payee's  name  had  been  forged,  and  not- 
withstanding that  acknowledgment  had  been  made,  after  the  trans- 


728  NEGOTIABLE   INSTRUMENTS  (Part  3 

fer  of  the  note  by  these  indorsements  to  them,  on  an  exception  to  which 
instruction  the  case  is  brought  up. 

Apart  from  the  alleged  conversation  between  the  defendant  and 
the  counsel  of  the  plaintiffs,  it  is  very  clear  that  the  plaintiffs  are  not 
entitled  to  recover,  if  the  first  indorsement  in  the  name  of  the  payee 
of  the  note  was  forged,  as  the  title  was  not  and  could  not  thereby  be 
transferred,  but  continued  in  the  payee,  who,  on  obtaining  possession 
of  the  note,  might  sue  upon  it,  and  recover  against  the  maker,  not- 
withstanding he  should  have  paid  it  to  him,  into  whose  hands  it  came, 
through  the  medium  of  the  forgeij ;  for,  besides  that,  in  such  case 
the  payee  has  not  parted  with  his  title,  the  payee  of  a  note,  whose 
name  is  forged,  knows  nothing  of  it.  and  the  maker,  before  he  pays  it 
to  the  holder  as  indorsee,  should  look  carefully  to  the  indorsements, 
and,  if  one  is  to  suft'er,  the  loss  should  fall  on  him  who  is  most  in  fault, 
or  most  negligent.  . 

The  only  question,  then,  in  this  case  is  whether,  if,  after  the  in- 
dorsements had  been  made,  the  defendant,  on  the  note  being  present- 
ed to  him,  by  the  counsel  of  the  plaintiffs,  examined  the  indorsements 
and  said  it  was  right,  that  makes  any  difference?  And  we  think  it 
does  not.  By  saying  so,  he  gave  no  credit  to  the  note,  and  did  not 
thereby  induce  the  plaintiffs  to  take  it.  That  had  been  done  before, 
and  not  on  the  faith  of  what  he  said.  The  plaintiffs  might  before  they 
took  the  note,  have  inquired  whether  the  first  indorsement  was  by  the 
payee  or  not.  and.  not  having  done  so,  they  must  abide  by  the  conse- 
quence, and  cannot  throw  the  loss  upon  the  defendant,  who  had  done 
nothing  to  mislead  them  or  induce  them  to  take  the  note,  and  who,  if 
made  to  pay  the  amount  in  this  action,  may  be  made  to  pay  it  over 
again  by  the  payee,  whose  right  remains  unimpaired. 

It  is  not  like  the  case  of  a  drawee  of  a  bill,  who.  if  on  being  asked  if 
the  acceptance  is  in  his  handwriting,  says  that  it  is  and  that  it  will 
be  duly  paid,  cannot  afterwards  set  up  as  a  defense  the  forgery  of 
his  name ;  because  by  saying  so  he  had  accredited  the  bill  and  induced 
another  to  take  it.  which  being  his  own  fault,  the  loss  ought  to  fall  on 
him,  and  not  on  another,  who  has  been  induced  to  take  the  bill  on  the 
faith  of  his  assurance. 

Judgment  reversed.  

GREENE  V.    McAULEY. 
(Supreme  Court  of  Kansas,  1905.     70  Kan.  601,  79  Pac.  13.3.  68  L.  R.  A.  308.) 

Action  by  F.  F.  Greene  against  A.  T.  McAuley.  Judgment  for  de- 
fendant, and  plaintiff  brings  error. 

Mason,  J.  F.  F.  Greene  sued  A.  T.  McAuley  upon  two  notes,  for 
$130  each,  executed  by  McAuley  to  H.  E.  Stearns,  and  assigned  in 
writing  by  Stearns  to  the  plaintiff.  Defendant  admitted  the  execution 
and  assignment  of  the  notes,  but  in  his  answer  alleged  that  they  be- 
longed to  Mrs.  Laura  Sims  Thomas,  and  that  plaintiff  did  not  own 
them,  and  had  no  right  to  maintain  an  action  upon  them.  The  case 
was  submitted  to  a  jury  upon  the  issue  of  the  ownership  of  the  notes, 
and  a  verdict  was  given  for  the  defendant.  A  judgment  followed, 
from  which  the  plaintiff  prosecutes  error.  The  principal,  and  in- 
deed the  only  substantial,  question  involved  is  whether  the  evidence 
given  in  behalf  of  the  defendant  had  any  tendency  to  establish  a  de- 
fense. 


Ch.  2)      RIGHT   OF   HOLDER   TO   COMPLETE,  SUE,  AND   NEGOTIATE  729 

The  plaintiff,  while  denying  that  any  person  except  himself  had 
any  interest  whatever  in  the  notes,  contends  that  the  case  is  controlled 
by  the  principle  that  an  action  upon  a  note  may  be  maintained  by  one 
who  holds  the  legal  title,  although  without  beneficial  interest,  and  that, 
as  he  had  possession  of  the  notes,  and  they  were  assigned  to  him  by 
the  payee,  he  was  entitled  to  enforce  their  payment,  whatever  claim 
any  third  person  might  have  had  against  him  with  reference  to  them. 
The  defendant  claims  that  the  principle  invoked  does  not  apply  to  the 
facts  of  the  case.    *    *    * 

The  question  presented,  therefore,  is  this:  Assuming  that  Mrs. 
Thomas'  statements  are  true,  and  that  Greene,  after  promising  that 
he  would  get  the  notes  from  Stearns  and  give  them  to  her,  procured 
Stearns  to  assign  them  to  himself,  and  then  wrongfully  kept  them,  hav- 
ing obtained  them  from  Stearns  in  lieu  of  the  payment  of  rent  which 
was  owing  for  the  use  of  land  belonging  to  Mrs.  Thomas,  but  which 
had  been  made  payable  to  Greene  in  order  to  secure  him  against  a  lia- 
bility from  which  he  had  now  been  released,  do  these  facts  constitute 
a  defense  in  an  action  brought  against  the  maker  of  the  notes  by 
Greene,  not  only  without  the  consent,  but  against  the  objection,  of  Mrs. 
Thomas  ? 

In  jurisdictions  where,  as  in  Kansas,  *  *  *  the  holder  of  the 
naked  legal  title  to  a  promissory  note  may  sue  upon  it,  even  although 
he  may  be  under  obligation  to  account  to  some  third  person  for  the 
entire  proceeds,  it  is  often  said  that  in  such  an  action  the  defendant 
cannot  challenge  the  plaintiff's  right  to  maintain  it,  except  by  a^  show- 
ing of  bad  faith  in  the  transaction.  Dyer  v.  Sebrell,  135  Cal.  597,  67 
Pac.  1036,  and  cases  cited ;  City  Bank  of  New  Haven  v.  Perkins,  29 
N.  Y.  554,  86  Am.  Dec.  332.  But  in  the  decisions  there  is  a  some- 
what singular  lack  of  explanation  or  illustration  as  to  just  w^hat  might 
be  considered  bad  faith,  in  this  connection.  Doubtless  the  phrase  is 
sometimes  used  with  reference  to  a  merely  colorable  transfer  of  title 
by  the  real  owner  to  a  stranger,  had  for  the  purpose  of  embarrassing 
the  maker  of  the  note  in  his  defense.  *  *  *  In  2  Daniel  on  Ne- 
gotiable Instruments,  1191,  it  is  said:  "If  it  were  shown  that  the 
plaintiff,  upon  suing  upon  a  note  payable  to  bearer  or  indorsed  in 
blank,  has  no  interest  in  it,  and,  in  addition,  that  he  is  suing  against 
the  will  of  the  party  beneficially  interested,  he  could  not  recover,  as 
his  conduct  w^ould  be  in  bad  faith."  In  support  of  this  statement  the 
author  cites  Towne  v.  Wason,  128  Mass.  517,  the  syllabus  to  which 
reads:  "It  is  a  good  defense  to  a  promissory  note  that  the  plaintiff, 
although  in  the  possession  of  the  note,  has  no  interest  in  it,  and  is 
prosecuting  the  action,  not  for  the  benefit  of  the  person  beneficially 
interested,  but  against  his  objection."  But  in  that  case  the  defense 
made  was  that  the  plaintiff  had  wrongfully,  and  without  the  consent  of 
the  owner,  obtained  possession  of  the  note  sued  on,  which  was  in- 
dorsed in  blank;  that  he  had  no  title  to  it,  and  never  had  had  any; 
and  that  he  was  not  authorized  to  sue  in  behalf  of  the  owner — in  ef- 
fect, that  he  had  stolen  the  note.  And  the  ground  of  the  decision  w^as 
that  under  the  facts  stated  the  plaintiff  had  no  authority  to  receive 
payment  of  the  note,  and  a  payment  to  him  would  not  have  released  the 
maker.  And  this  suggests  what  we  conceive  to  be  the  true  rule,  of 
general,  if  not  universal,  application — that,  so  far  as  aft'ects  the  ques- 
tion of  the  right  of  the  plaintiff'  to  maintain  the  action,  the  only  inquir>' 
open  to  the  defendant  is  whether  the  plaintiff  has  such  title  to  the 


730  NEGOTIABLE   INSTRUMENTS  (Part  3 

note  that  a  payment  made  to  him  would  be  a  complete  protection  to 
defendant  from  any  further  liability.     *     *     * 

Applying  the  test  suggested  to  the  present  case,  the  question  is: 
Would  McAuley  have  been  completely  protected  in  making  payment 
of  the  notes  to  Greene  ?  True,  according  to  the  contentions  of  defend- 
ant, when  Greene  settled  with  Mrs.  Thomas,  he  agreed  to  procure  the 
notes  from  Stearns  and  turn  them  over  to  her,  and  nothing  was  said 
as  to  his  taking  an  assignment  to  himself  rather  than  to  Mrs.  Thom- 
as. Yet  the  case  is  not  the  same,  for  instance,  as  if  an  agent,  com- 
missioned to  buy  negotiable  paper  for  his  principal,  had  wrongfully 
taken  title  in  his  owm  name.  For  here  it  required  no  authority  from 
Mrs.  Thomas,  to  be  given  at  the  time  of  the  settlement,  for  Greene  to 
collect  the  rent  from  Stearns,  or  for  Stearns  to  pay  Greene.  Stearns, 
having  originally  contracted  to  pay  Greene,  and  not  having  contracted 
to  pay  any  one^  else,  might  have  paid  him  in  cash  or  by  any  other 
method  satisfactory  to  Greene.  In  fact,  he  settled  his  debt  by  as- 
signing the  McAuley  notes  to  Greene — the  person  to  whom,  so  far  as 
he  knew  or  had  occasion  to  inquire,  he  was  indebted.  The  fact  that 
the  notes  here  sued  upon  were  given  by  McAuley  to  Stearns  for  the 
rent  of  Mrs.  Thomas'  land  is  merely  incidental,  and  has  no  bearing  up- 
on the  decision  of  the  controversy.  They  might  be  regarded  as  having 
been  given  for  any  other  consideration  without  affecting  the  rights  of 
the  parties.  Greene  obtained  them  in  exchange  for,  or  in  satisfaction 
of.  a  claim  of  which  Mrs.  Thomas  w-as  the  beneficial  owner,  having 
been  enabled  to  do  so  by  her  voluntarily  allowing  such  claim  to  be 
made  payable  to  him.  She  never  acquired  possession  of,  or  legal  title 
to,  these  notes.  The  effect  of  the  transaction,  from  her  standpoint, 
was  merely  to  charge  Greene  as  trustee  for  her  benefit  with  respect 
to  them.  The  situation  presented  is  closely  analogous  to  that  which 
w^ould  have  arisen  if  Mrs.  Thomas  had  assigned  and  delivered  notes 
originally  pa}-able  to  herself  to  Greene  as  collateral  security,  and  he 
had  retained  them,  after  the  full  satisfaction  of  the  principal  obliga- 
tion, to  secure  which  they  had  been  transferred  to  him.    *    *    * 

The  peculiar  feature  of  the  present  case  is  that  the  equitable  owner 
objects  to  the  holder  of  the  notes  exercising  further  control  over  them, 
and  his  possession  as  to  her  is  wrongful.  Of  course,  the  holder  of  a 
note  unlawfully  acquired  has  no  authority  to  receive  payment,  or  to 
sue  upon  it,  even  although  it  should  bear  a  genuine  indorsement  to  him- 
self. This  might  happen,  for  example,  if  one  holding  a  note  made 
payable  to  himself  were  to  sell  and  deliver  it  without  further  assign- 
ment, and  were  then  to  regain  its  possession  by  theft.  In  such  a  case 
he  would  have  neither  legal  ownership  nor  rightful  possession.  A 
payment  made  to  him  would  afford  no  protection,  and  a  showing  of 
the  facts  would  constitute  a  good  defense  to  an  action  brought  by 
him.  But  where  one  has  rightfully  obtained  possession  of  a  note,  and 
the  legal  title  is  actually  vested  in  him,  although  he  may  be  under  an 
obligation  to  transfer  it  to  another,  so  long  as  these  conditions  exist, 
and  no  effective  measures  are  taken  by  the  equitable  owner  to  enforce 
his  rights,  the  payee  is  justified  in  dealing  with  the  holder,  and  a  pay- 
ment made  to  him  is  a  bar  to  any  further  demand.  This  would  apply 
where  the  pledgee  of  paper  deposited  with  him  as' collateral  security 
retains  it  after  the  satisfaction  of  the  debt  secured,  and  it  applies  here. 
McAuley  would  have  been  completely  protected  by  a  payment  to 
Greene,  who  therefore  had  capacity  to  maintain  the  action. 


Ch.  2)      RIGHT   OF    HOLDER   TO   COMPLETE,  SUE,  AND   NEGOTIATE}  731 

Just  how,  in  such  cases,  the  interests  of  other  claimants  than  the 
holder  of  the  paper  involved  may  be  safeguarded,  is  not  a  matter  for 
present  determination.  It  has  been  held  that,  where  an  action  is 
brought  by  the  holder  of  the  legal  title  to  a  note,  any  one  beneficially 
interested  in  the  proceeds  may  intervene  for  his  own  protection. 
*  *  *  But  we  are  not  required  to  decide  whether  Mrs.  Thomas 
might  have  intervened  in  the  present  case.  There  was  no  necessity 
for  settling  in  this  proceeding  any  dispute  between  her  and  the  plain- 
tiff, for  their  rights  with  respect  to  each  other  remain  unaffected  by  its 
result.     *     *     * 

The  plaintiff  was  equally  entitled  to  recover  the  full  amount  due 
upon  the  notes,  whether  he  owned  them  absolutely,  or  was  required  to 
account  for  their  proceeds  as  a  trustee.     ■'^'     ''•'     * 

The  judgment  will  be  reversed,  and  the  cause  remanded,  with  direc- 
tions to  enter  judgment  for  the  plaintiff  as  prayed  for  in  his  petition. 


SECTION  4.— WHAT  CONSTITUTES  A  NEGOTIATION 

We  are  interested  here  in  noting  the  various  methods  of  nego- 
tiating an  instrument.  Looking  at  the  subject  of  negotiation  from 
the  standpoint  of  the  holder,  the  question  is  as  to  the  power  ^rhich 
the  holder  possesses  in  this  regard.  He  may  part  with  his  entire 
interest  or  he  may  part  with  but  a  portion  of  his  interest.  The 
holder  may  part  with  his  complete  interest  in  more  than  one  way, 
and  thereby  produce  different  legal  eft'ects  as  regards  the  rights  of 
subsequent  parties.  We  shall,  therefore,  be  required  to  look  at  the 
transactions  both  from  the  standpoint  of  the  party  negotiating  and 
the  party  to  whom  it  is  negotiated. 

Section  30.  An  instrument  is  negotiated  when  it  is  transferred 
from  one  person  to  another  in  such  manner  as  to  constitute  the 
transferee  the  holder  thereof.  If  payable  to  bearer  it  is  negotiated 
by  delivery ;  if  payable  to  order  it  is  negotiated  by  the  indorsement 
of  the  holder  completed  by  delivery. 

Section  191,  clause  6,  "Delivery"  means  transfer  of  possession, 
actual  or  constructive,  from  one  person  to  another. 

Section  191,  clause  10.  "Issue"  means  the  first  delivery  of  the 
instrument  complete  in  form,  to  a  person  who  takes  it  as  a  holder. 

Section  191,  clause  8.  "Indorsement"  means  an  indorsement 
completed  by  delivery. 

Section  33.  An  indorsement  may  be  either  special  or  in  blank; 
and  it  may  be  either  restrictive  or  qualified,  or  conditional.       \ 


FARNSWORTH  v.  BURDICK  et  al. 
(Supreme  Court  of  Kansas,  1915.     94  Kan.  749,  147  Pac.  863.) 

Marshall,  J.  This  is  an  action  to  recover  on  a  promissory  note. 
Judgment  was  rendered  in  favor  of  the  plaintiff.  The  defendants 
appeal. 

The  defendants,  Wm.  S.  Burdick  and  A.  M.  Ewing,  in  consideration 
for  a  tract  of  land  in  Mercer  county,  Mo.,  gave  a  stock  of  goods  in 


732  NEGOTIABLE   INSTRUMENTS  (Part  3 

Tola,  Kan.,  a  negotiable  promissory  note  for  the  sum  of  $500,  signed 
by  all  the  defendants,  and  assumed  an  incumbrance  on  the  land  for 
the  sum  of  $890.  The  trade  was  made  with,  and  the  note  given  to, 
J.  A.  Wheeler,  who  negotiated  the  note  to  the  plaintiff  by  writing  on 
the  back  thereof,  "I  here  by  assine  this  note  over  to  E.  H.  Farnsworth 
this  the  Nov.  1st,  1910,"  signed  it,  and  delivered  it  to  the  plaintiff. 
The  plaintiff  became  the  holder  of  the  note  before  it  was  due,  without 
any  notice  that  it  had  been  previously  dishonored.  He  took  it  in  good 
faith,  and  for  value.  At  the  time  it  was  negotiated  to  him,  he  had 
no  notice  of  any  infirmity  in  the  note  or  defect  in  the  title  of  J.  A. 
Wheeler.  The  note  is  complete  and  regular  on  its  face.  The  defense 
is  failure  of  consideration  for  the  note.     Is  this  defense  good? 

Prior  to  the  passage  of  the  Negotiable  Instruments  Law,  *  *  * 
this  court,  in  Hatch  v.  Barrett,  34  Kan.  223,  8  Fac.  129,  said:  "A 
writing  upon  the  back  of  a  promissory  note,  transferred  before  maturity, 
in  these  words ;  '  *  *  *  I^  James  C.  Rogers,  do  hereby  assign  the 
within  note  to  Charles  B.  Hatch,  of  Osage  county,  Kansas.  Said  as- 
signment is  made  without  recourse  on  me,  either  in  law  or  ecjuity. 
J.  C.  Rogers.  Signed  in  the  presence  of  H.  F.  Raymond,  clerk  county 
court,  Washington  county,  Arkansas' — is  not  an  indorsement  in  a 
commercial  sense,  and  will  not  cut  off  the  defenses  of  the  maker." 

This  principle  was  followed  in  *  *  =^  Briggs  v.  Latham,  36  Kan. 
255,  13  Pac.  393,  59  Am.  Rep.  546.  At  the  time  these  decisions  were 
rendered,  the  weight  of  authority  in  this  country  was  that  such  a 
writing  on  the  back  of  a  note  was  an  indorsement,  which  cut  off  the 
equities  and  defenses  of  the  maker,  available  against  the  payee. 

The  Negotiable  Instruments  Law  reduces  to  a  certainty  many 
things  that  prior  to  that  date  were  in  confusion.  This  law  contains 
several  definitions.  One  is  that  "  'delivery'  means  transfer  of  posses- 
sion, actual  or  constructive,  from  one  person  to  another."  Another 
is,  "  'holder'  means  the  payee  or  indorsee  of  a  bill  or  note,  who  is  in 
possession  of  it,  or  the  bearer  thereof."  Still  another  is,  "  'indorse- 
ment' means  an  indorsement  completed  by  delivery."     *     *     * 

Section  30  reads  in  part:  "An  instrument  is  negotiated  when  it 
is  transferred  from  one  person  to  another  in  such  manner  as  to  con- 
stitute the  transferee  the  holder  thereof." 

The  note  sued  on  was  negotiated  within  the  meaning  of  this  section. 
It  was  transferred  from  Wheeler  to  Farnsworth,  and  he  became  the 
holder  thereof.     *     *     * 

The  indorsement  in  this  case  is  special,  in  that  it  specifies  the  per- 
son to  whom  the  note  is  made  payable.  It  is  absolute  and  unrestrictive. 
It  is  not  a  qualified  indorsement,  unless  the  use  of  the  word  "assign" 
makes  it  a  qualified  indorsement.     It  is  not  a  conditional  indorsement. 

Section  63  reads:  "A  person  placing  his  signature  upon  an  in- 
strument otherwise  than  as  maker,  drawer  or  acceptor  is  deemed  to 
be  an  indorser,  unless  he  clearly  indicates  by  appropriate  words  his 
intention  to  be  bound  in  some  other  capacity." 

When  Wheeler  placed  his  name  on  this  note,  he  did  not  do  it  as 
maker,  drawer,  or  acceptor,  and  is  therefore  deemed  to  be  an  indorser, 
unless  the  word  "assign,"  used  by  him,  indicates  "his  intention  to  be 
bound  in  some  other  capacity."  The  authorities  seem  to  be  in  utter 
and  hopeless  confusion  concerning  the  effect  of  the  transfer  of  a  ne- 
gotiable instrument  by  words  like  those  used  here.     This  confusion 


Ch.  2)      RIGHT   OF   HOLDER   TO   COMPLETE,  SUE,  AND   NEGOTIATE  733 

existed  prior  to  the  passage  of  the  uniform  Negotiable  Instruments 
Law,  and  still  exists.  The  weight  of  authority  was,  and  is,  that  this 
is  a  commercial  indorsement.  We  are  of  the  opinion  that  the  "assign- 
ment" of  this  note  is  an  indorsement  thereof,  under  the  Negotiable 
Instruments  Law ;  that  Farnsworth  is  a  holder  in  due  course ;  and 
that  the  makers  of  the  note  cannot  set  up  the  defenses  against  the  note 
that  could  have  been  set  up  against  it  in  the  hands  of  Wheeler.  This 
disposes  of  the  case,  and  compels  an  affirmance  of  the  judgment. 


SECTION  5.— NEGOTIATION  BY  SPECIAL  INDORSEMENT 

Negotiable  Instruments  Law,  Section  34.  A  special  indorse- 
ment specifies  the  person  to  whom  or  to  whose  order,  the  instru- 
ment is  to  be  payable;  and  the  indorsement  of  such  indorsee  is 
necessary  to  the  further  negotiation  of  the  instrument. 

To  illustrate :  If  M.  executes  and  delivers  his  note  payable  to 
P.  or  order,  and  P.  indorses :  "Pay  A.  [Signed]  P." — and  delivers 
to  A.,  the  indorsement  is  special.  The  indorsement,  "Pay  A." 
has  the  same  effect  as  though  it  read,  "Pay  A.  or  order."  As  ex- 
pressly provided  in  section  34,  the  indorsement  of  A.  is  necessary 
to  the  further  negotiation  of  the  bill.  The  instrument  cannot  be 
negotiated  by  mere  delivery.  If  A.'s  indorsement  is  placed  on 
the  instrument  without  his  authority  and  the  instrument  trans- 
ferred to  an  innocent  party,  such  person  would  acquire  no  interest 
in  the  instrument  against  the  special  indorsee  or  any  party  prior  to 
him.  One  cannot  gain  title  to  an  instrument  through  a  forged 
indorsement  as  expressly  provided  in  section  23  as  follows : 

Where  a  signature  is  forged  or  made  without  authority  of  the 
person  whose  signature  it  purports  to  be,  it  is  wholly  inoperative, 
and  no  right  to  retain  the  instrument,  or  to  give  a  discharge  there- 
for, or  to  enforce  payment  thereof  against  any  party  thereto,  can  be 
acquired  through  or  under  such  signature,  unless  the  party  against 
whom  it  is  sought  to  enforce  such  right,  is  precluded  from  setting 
up  the  forgery  or  want  of  authority. 


FIRST  NAT.  BANK  OF  SHENANDOAH,  IOWA,  v.  KELGORD. 
(Supreme  Court  of  Nebraska,  1912.     91  Neb.  178,  135  N.  W.  548.) 

Letton,  J.  This  is  an  action  upon  a  promissory  note  made  by  the 
defendant  payable  to  the  order  of  "Wonder  Stock  Powder  Company." 
The  petitioner  alleges  that  one  James  J.  Doty  is  the  owner  and  pro- 
prietor of  "Wonder  Stock  Powder  Company,"  and  that  the  plaintiff 
before  maturity  and  in  the  usual  course  of  business  purchased  the  note 
for  a  valuable  consideration.  *  *  *  The  cause  was  tried  to  a 
jury  which  returned  a  verdict  for  the  defendant. 

The  note  in  question  is  made  payable  to  "Wonder  Stock  Powder 
Company."  It  is  indorsed  in  blank,  "James  J.  Doty,  Prop."  This 
indorsement  is  clearly  insufficient  under  section  30  of  the  negotiable 
instruments  act  *  *  *  to  constitute  the  plaintiff  a  holder  in  due 
course  of  business.     The  only  evidence  as  to  the  relation  of  Doty  to 


734  NEGOTIABLE   INSTRUMENTS  (Part  3 

the  concern  is  that  of  Albert  A.  Reed,  who  purchased  the  note  for 
the  plaintiff.  He  testifies  that  he  purchased  it  with  59  others  from 
Mr.  Doty,  and  that  Doty  is  sole  proprietor  of  the  "Wonder  Stock 
Powder  Company."  It  is  not  shown  whether  the  Wonder  Stock  Pow- 
der Company  is  a  corporation  of  which  Doty  owns  all  the  stock,  or 
whether  it  is  a  trade-name  used  by  Doty  in  his  individual  business. 

The  purchase  and  delivery  of  the  note  transferred  the  title  to  plain- 
tiff', but  there  being,  so  iar'as  the  evidence  shows,  no  indorsement  by 
the'  payee,  the  transfer  could  not  vest  plaintiff'  with  the  privileges  of 
a  holder  in  due  course,  and  the  note  was  subject  to  the  same  defenses 
as  might  be  set  up  against  the  original  payee. 

Judgment  affirmed. 

SECTION  6.— NEGOTIATION  BY  BLANK  INDORSEMENT 

N.  I.  L.,  Section  34.  An  indorsement  in  blank  specifies  no  in- 
dorsee, and  an  instrument  so  indorsed  is  payable  to  bearer,  and 
may  be  negotiated  by  delivery. 

The  blank  indorsement  consists  simply  in  the  signature  of  the 
holder  accompanied  by  delivery.     Thereafter  the  instrument  may 
be  negotiated  by  delivery  without  indorsement.     It  is  quite  com- 
mon for  the  holder,  who  transfers  an  instrument  which  is  in  such 
form  that  it  may  be  negotiated  by  delivery,  to  indorse  the  same. 
When  this  is  done,  it  is  not  for  the  purpose  of  enabling  the  trans- 
feror to  obtain  title  to  the  instrument,  but  is  done  for  purposes 
quite    diff'erent.     The   indorsement   imposes   upon   the   indorser   a 
liability  to  pay  the  instrument  to  the  holder  in  the  event  that  the 
party  primarily  liable  thereon  fails  to  pay  at  maturity.    If  the  hold- 
er did  not  indorse,  his  liability  as  a  transferor  by  delivery  would 
extend  no  further  than  a  warranty  that  the  instrument  was  genu- 
ine, that  he  had  title  to  it,  that  all  prior  parties  had  capacity  to  con- 
tract, and  that  he  had  no  knowledge  of  any  fact  which  would  im- 
pair the  validity  of  the  instrument  or  render  it  valueless,  and  such 
liability    would   extend   no   further   than   his    immediate    indorsee. 
The  effect  of  the  indorsement  would  be  to  impose  upon  the  in- 
dorser a  liability  to  pay  if  the  instrument  were  not  paid  at  maturity, 
provided  there  was  a  due  presentment  and  due  notice  of  dishonor 
given.     The  liability  of  indorsers  is  discussed  in  detail,  in  a  later 
chapter.    The  point  is  merely  adverted  to  here  to  show  that,  while 
an  indorsement  is  not  necessary  for  the  transfer  of  title  to  a  nego- 
tiable instrument,  which  is  either  payable  to  bearer  on  its  face  or 
became  payable  to  bearer  through  a  blank  indorsement,  oftentimes 
an  indorsement  will  be  necessary  in  order  to  induce  the  transferee 
to  take  the  paper. 

It  should  be  realized  that,  if  a  person  has  in  his  possession  an 
instrument  in  form  transferable  by  delivery,  there  is  always  some 
risk  that  he  may  lose  title  thereto  through  loss  or  theft  of  the  in- 
strument. The  innocent  purchaser  from  a  thief  or  finder  of  bearer 
paper  obtains  title.     This  is  not  so  where  the  innocent  purchaser 


Ch.  2)      RIGHT   OF   HOLDER   TO   COMPLETE,  SUE,  AND   NEGOTIATE  735 

took  the  instrument  under  the  forged  indorsement  of  a  special  in- 
dorsee of  paper  on  its  face  payable  to  order.  In  order  to  guard 
against  the  loss  of  title  through  the  loss  or  theft  of  the  instrument 
while  in  form  negotiable  by  delivery,  and  for  other  purposes,  the 
law  allows  the  holder  to  convert  the  blank  indorsement  into  a 
special  indorsement  by  writing  his  name  above  the  blank  indorse- 
ment following  the  words  "Pay  to."  This  is  accomplished  by  sec- 
tion 35 : 

The  holder  may  convert  a  blank  indorsement  into  a  special  in- 
dorsement by  writing  over  the  signature  of  the  indorser  in  blank 
any  contract  consistent  with  the  character  of  the  indorsement. 

We  have  one  special  problem  relating  to  special  and  blank  in- 
dorsements which  is  of  considerable  importance.  Suppose  an  in- 
strument bears  both  a  special  indorsement  and  a  blank  indorse- 
ment, which  indorsement  controls?  If  an  instrument  is  made  pay- 
able to  bearer  on  its  face,  and  some  holder  negotiates  by  special  in- 
dorsement, does  the  special  indorsement  control?  We  have  al- 
ready noted  that  the  efifect  of  a  blank  indorsement  is  to  convert  the 
paper  into  bearer  paper.  Suppose  a  blank  indorsement  is  fol- 
lowed by  a  special  indorsement;  does  the  special  indorsement  have 
the  effect  of  reconverting  the  instrument  to  order  paper,  so  that 
the  indorsement  of  the  special  indorsee  is  necessary  to  the  further 
negotiation  of  the  instrument?  In  short,  we  have  two  questions: 
(1)  Does  a  special  indorsement  control  a  prior  indorsement  in 
blank?  (2)  Does  a  special  indorsement  control  the  method  of  ne- 
gotiation of  an  instrument  which  on  its  face  is  payable  to  bearer? 

Unfortunately  the  Negotiable  Instruments  Law  is  not  clear  on 
these  questions.  Before  the  act  a  subsequent  special  indorsement 
did'  not  control  paper  which  was  bearer  paper  on  its  face, 
nor  did  it  control  a  prior  blank  indorsement.  If  it  were  once  bearer 
paper,  it  was  always  thereafter  bearer  paper.  Under  the  act,  the 
law  probably  is  that  an  instrument  Avhich  is  payable  to  bearer  on 
its  face  cannot  be  controlled  by  a  subsequent  special  indorsement, 
but  that  an  instrument  which  on  its  face  is  payable  to  the  order  of 
a  named  payee,  and  became  payable  to  bearer  through  a  blank  in- 
dorsement, is  controlled  by  a  subsequent  special  indorsement.  The 
sections  of  the  act  involved  are  as  follows : 

Section  9  (5).  The  instrument  is  payable  to  bearer  when  the 
only  or  last  indorsement  is  an  indorsement  in  blank. 

This  section,  standing  alone,  would  clearly  change  the  common- 
law  rule,  and  the  last  indorsement  in  all  cases  would  control.  If 
the  instrument  were  payable  to  bearer  on  its  face,  a  special  indorse- 
ment would  prevent  further  negotiation  by  delivery  merely.  Also 
if  the  instrument  became  payable  to  bearer  for  the  first  time  by  a 
blank  indorsement,  a  subsequent  special  indorsement  would  con- 
trol, and  the  instrument  could  be  further  negotiated  only  by  the  in- 
dorsement of  the  special  indorsee. 

But  there  are  two  other  sections  of  the  act  involved  which  affect 
the  result: 


736  NEGOTIABLE   INSTRUMENTS  (Part  3 

Section  48.  The  holder  may  at  any  time  strike  out  any  indorse- 
ment which  is  not  necessary  to  his  title.  The  indorser  whose  in- 
dorsement is  struck  out,  and  all  indorsers  subsequent  to  him,  are 
thereby  relieved  from  liability  on  the  instrument. 

If  this  section  means  that  the  transferee  by  delivery  only,  from 
a  special  indorsee,  may  strike  out  the  special  indorsement  and  rely 
upon  any  prior  blank  indorsement,  then  the  subsequent  special  in- 
dorsement will  not  control.  This  interpretation  is  not  reasonable, 
however,  because  the  only  kind  of  indorsement  which  may  be 
stricken  out  is  that  kind  of  indorsement  which  is  not  necessary  to 
the  holder's  title.  The  very  question  we  are  trying  to  solve  is: 
What  indorsements  are  necessary  to  one's  title?  Section  48,  there- 
fore, does  not  aid  us  in  answering  the  questions  raised  above. 

Section  40  has  a  more  direct  bearing  on  these  problems.  This 
section  provides : 

Where  an  instrument,  payable  to  bearer,  is  indorsed  specially, 
it  may  nevertheless  be  further  negotiated  by  delivery;  but  the 
person  indorsing  specially  is  liable  as  indorser  to  only  such  hold- 
ers as  make  title  through  his  indorsement. 

We  are  interested  here  only  in  the  first  clause.  This  states  that 
an  instrument  if  payable  to  bearer  is  indorsed  specially,  it  may 
nevertheless  be  further  negotiated  by  delivery.  This  states  a  rule 
just  the  opposite  from  that  laid  down  in  section  9  (5).  Under 
section  9  (5)  the  last  indorsement  controls.  If  this  is  a  special 
indorsement,  it  would  control  a  prior  blank  indorsement.  Under 
section  40  the  subsequent  special  indorsement  does  not  control  a 
prior  blank  indorsement,  nor  does  it  control  the  manner  of  nego- 
tiating an  instrument  payable  to  bearer  on  its  face. 

If  one  section  is  not  to  be  regarded  as  completely  neutralizing 
the  effect  of  the  other,  the  most  reasonable  way  out  of  the  diffi- 
culty is  to  divide  all  negotiable  instruments  into  two  classes:  (1) 
Those  which  on  their  face  are  payable  to  the  order  of  a  named 
payee;  and  (2)  those  which  on  their  face  are  payable,  either  to 
bearer,  or  to  a  named  payee  or  bearer.  Then  let  section  9  (5) 
apply  only  to  instruments  in  the  first  class,  and  regard  section  40 
as  applicable  only  to  instruments  in  the  second  class.  The  courts 
have  not  yet  passed  upon  this  question,  but,  if  this  be  the  correct 
solution,  our  conclusions  are:  (1)  That  an  instrument  payable  to 
bearer  on  its  face  will  always  be  payable  to  bearer.  A  subsequent 
special  indorsement  will  not  control.  (2)  That  an  instrument 
payable  on  its  face  to  the  order  of  a  named  payee,  if  subsequently 
it  becomes  payable  to  bearer  by  virtue  of  a  blank  indorsement,  a 
subsequent  special  indorsement  will  control  the  prior  indorsement 
in  blank,  and  the  instrument  may  be  further  negotiated  only  by  the 
indorsement  of  the  special  indorsee. 


Ch.  2)      RIGHT  OF   HOLDER  TO   COMPLETE,  SUE,  AND   NEGOTIATE  737 

DAVIS  V.  FIRST  NAT.  BANK  OF  BLAKELY. 

(Supreme  Court  of  Alabama,  1915.  192  Ala.  8,  68  South.  261.) 
Anderson,  C.  J.  The  note  sued  upon  was  executed  by  B.  F.  W. 
Davis  and  was  made  payable  to  himself  or  order  and  was  indorsed 
by  said  Davis  in  blank  before  it  fell  into  the  hands  of  the  plaintiff. 
Therefore,  as  the  last,  and  in  fact  only,  indorsement  was  in  blank, 
the  note  was,  when  acquired  by  the  plaintiff,  payable  to  bearer.  *  *  * 
This  being  the  case,  it  was  negotiated  to  the  plaintiff  and  its  predeces- 
sor by  a  delivery  thereof.  *  *  *  The  trial  court  did  not  err  in  hold- 
ing that  plaintiff  was  the  legal  holder  of  the  note  and  could  maintain  a 
suit  upon  same,  although  not  indorsed  by  the  party  from  whom  it  pur- 
chased same. 

The  judgment  of  the  circuit  court  is  affirmed. 


SECTION  7.— NEGOTIATION  BY  RESTRICTIVE 
INDORSEMENT 

N.  I.  L.,  Section  36.  An  indorsement  is  restrictive,  v^hich  either 
(1)  prohibits  the  further  negotiation  of  the  instrument;  or  (2) 
constitutes  the  indorsee  the  agent  of  the  indorser;  or  (3)  vests 
the  title  in  the  indorsee  in  trust  for  or  to  the  use  of  some  other 
person.  But  the  mere  absence  of  words  implying  power  to  nego- 
tiate does  not  make  an  indorsement  restrictive. 
'  Section  37.  A  restrictive  indorsement  confers  upon  the  indorsee 
the  right  (1)  to  receive  payment  of  the  instrument;  (2)  to  bring 
any  action  thereon  that  the  indorser  could  bring;  (3)  to  transfer 
his  rights  as  such  indorsee,  where  the  form  of  the  indorsement  au- 
thorizes him  to  do  so.  But  all  subsequent  indorsees  acquire  only 
the  title  of  the  first  indorsee  under  the  restrictive  indorsement. 

An  owner  of  a  negotiable  instrument  may  sometimes  desire  to 
part  with  its  possession  and  to  vest  in  the  transferee  certain  spe- 
cial rights,  but  reserving  to  himself  the  real  beneficial  ownership. 
If  a  special  or  blank  indorsement  were  employed  in  such  case,  the 
indorser  incurs  the  risk  that  the  instrument  may  get  into  the  hands 
of  a  purchaser  who  has  no  knowledge  of  the  special  purpose  for 
which  the  transfer  was  made.  Since  the  holder  under  a  blank 
indorsement,  or  the  special  indorsee  under  a  special  indorsement, 
has  it  within  his  power  to  negotiate  to  a  third  party  free  from  the 
restrictions  imposed  by  the  owner,  the  only  method  by  which  a 
negotiation  for  a  special  purpose  may  safely  be  made  is  to  provide 
expressly  on  the  instrument  the' special  purposes  for  which  the 
transfer  is  made.  Such  an  indorsement  is  a  restrictive  indorse- 
ment. There  are  no  particular  words  which  must  be  used  in  order 
to  manifest  the  intention  to  part  with  but  a  limited  right,  but  any 
words  will  be  sufficient  if  they  unequivocally  indicate  that  a  spe- 
cial interest  only  was  transferred.  The  most  distinctive  feature  of 
the  most  common  form  of  a  restrictive  indorsement  is  that  it  con- 
B.&  B.Bus.Law-^7 


738  NEGOTIABLE   IKSTRT'MENTS  (Part  3 

sists  in  language  which  manifests  the  intention  of  the  owner  to 
retain  the  beneficial  interest  in  the  instrument,  and  to  transfer  to 
the  restrictive  indorsee  the  power  to  collect  and  to  sue  upon  the 
instrument.  Such  an  indorsee  becomes  thereby  a  trustee  of^  a 
chose  in  action,  and  an  agent  for  the  owner.  His  rights  and  lia- 
bilities are  then  determined  by  the  law  of  trusts  and  agency.  The 
question  with  which  the  following  case  is  concerned  is:  What 
words  accompanying  the  signature  of  the  holder  will  operate  as  a 
restrictive  indorsement? 

NATIONAL  BANK  OF  COMMERCE  v.  BOSSEMETER  et  al. 

(Supreme  Court  of  Nebraska.  1917.     101  Neb.  96,  162  N.  W.  503, 
L.   R.   A.   1917E,  374.) 

Action  by  the  National  Bank  of  Commerce  against  Ernest  Bosse- 
meyer  and  Frank  Bossemever,  doing  business  under  the  firm  name  and 
style  of  Bossemeyer  Bros.     Judgment  for  defendants,  and  plamtitf 

Letton,  J.  On  January  3,  1911,  defendants,  who  are  grain  dealers 
at  Superior,'  Neb.,  drew  a  sight  draft  upon  a  firm  in  New  Mexico  for 
$729  and  attached  a  bill  of  lading  for  a  car  of  grain  consigned  to  the 
order  of  the  drawer.  They  deposited  the  draft  in  the  First  National 
Bank  of  Superior  (hereinafter  termed  "the  Superior  bank  ),  which 
gave  them  credit  for  the  amount  upon  their  checking  account.  This 
Wa«  done  in  accordance  with  a  custom  whereby  defendants  deposited 
such  drafts  with  bills  of  lading  attached  and  were  given  credit,  with 
the  understanding  that  if  the  draft  was  not  paid  it  should  be  protested, 
and  its  amount,  with  protest  fees,  should  be  charged  back ;  that  if  in- 
terest was  charged  to  the  bank  by  the  correspondent  the  interest  should 
be  charged  to  the  account  of  drawer.  Before  the  draft  was  deposited, 
by  mutual  agreement  the  custom  was  changed  and  such  dishonored 
drafts  were  not  charged  back,  but  defendants,  upon  being  notified  of 
their  return,  would  give  a  check  to  the  bank  to  cover  the  amount  of 
the  draft  and  protest  fees.  This  was  the  custom  in  Superior  between 
banks  and  grain  dealers  generally.  _ 

The  Superior  bank  sent  the  draft  and  bill  of  lading  to  plamtifl:,  its 
correspondent  bank  in  Lincoln,  which  credited  it  with  the  amount  and 
forwarded  the  draft  and  bill  of  lading  to  New  Mexico  through  its 
regular  correspondents.  The  draft  bore  upon  its  face  the  following: 
"Protest  and  return  immediately,  with  all  papers  attached,  if  not  paid 
upon  presentation."  The  indorsement  by  the  Superior  bank  is  as  fol- 
lows :  "Pav  any  bank  or  banker.  All  previous  indorsements  guaran- 
teed." Before  the  draft  reached  New  Mexico  the  Superior  bank  had 
suspended  pavments  and  been  taken  in  charge  by  the  Comptroller  of 
the  Currencv^  Defendants  notified  the  drawee  not  to  pay  the  draft, 
caused  the  car  to  be  delivered,  and  collected  the  amount  due  from 
him.  The  draft  was  protested  and  returned  to  plaintift'.  The  action 
was  brought  against  the  drawers  by  plaintifif  as  a  holder  for  value,  as 
defined  in  section  5344,  Rev.  St.  1913.  Five  similar  transactions  are 
alleged  as  causes  of  action  in  the  petition. 

Several  defenses  are  set  up:  (1)  That  the  drafts  were  deposited 
with  the  Superior  bank  for  collection  only,  to  the  knowledge  of  plain- 
tiff, and  were  received  by  plaintiff  from  that  bank  for  collection.     (2) 


Ch.  2)      RIGHT   OF   IIOLDEK   TO   COMPLETE,  SUE,  AND   NEGOTIATE  739 

That  since  the  Superior  bank  charged  interest  until  the  collection  was 
made,  and  charged  the  drafts  back  if  not  paid,  it  was  not  an  owner  or 
holder  in  due  course,  and  the  same  relation  as  to  the  drafts  being  de- 
posited for  collection  existed  between  the  Superior  bank  and  plaintiff. 
(3)  That  at  the  time  the  drafts  were  received  the  Superior  bank  was 
insolvent,  which  was  known  to  plaintiff  and  to  the  officers  of  the  Su- 
perior bank,  but  unknown  to  defendants,  and  that  when  these  condi- 
tions became  known  defendants  rescinded  the  transaction.  The  action 
was  tried  to  the  court  without  a  jury,  which  found  generally  for  the 
defendants  and  rendered  judgment  of  dismissal.     Plaintiff  appeals. 

*  *    * 

The  question  for  determination  is  whether  the  draft  was  received 
by  the  plaintiff  for  collection,  the  title  and  ownership  remaining  in 
the  Superior  bank,  or,  did  plaintiff  become  a  holder  in  due  course  by 
the  indorsement  and  receipt  of  the  draft  and  the  crediting  of  the  Su- 
perior bank  with  the  amount  thereof?  Defendant  contends  that  the 
indorsement  is  restrictive,  and  shows  that  the  title  did  not  pass ;  that 
since  the  custom  was  that  interest  should  be  charged  between  the  date 
of  the  receipt  of  the  paper  and  the  receipt  of  the  money  m  payment 
thereof,  and  because  if  not  paid  it  was  the  custom  to  charge  the  amount 
and  protest  fees  back  to  the  account  of  the  Superior  bank,  the  draft 
was  taken  for  collection  only. 

Is  the  indorsement  restrictive?  Whatever  may  have  been  held  be- 
fore the  enactment  of  the  Negotiable  Instruments  Act,  it  is  clear  that 
this  question  must  be  determined  by  the  provisions  of  that  statute. 

*  *    * 

There  is  nothing  on  the  face  of  this  indorsement  which  prohibits  the 
further  negotiation  of  the  instrument  or  constitutes  the  indorsee  the 
agent  of  the  indorser,  or  vests  title  in  the  indorsee  in  trust  for  the  use 
of  some  other  person,  and  hence,  by  the  most  elementary  principles 
of  statutory  construction,  the  plain  meaning  of  the  language  must  be 
observed,  and  it  must  be  held  that  the  indorsement  was  not  restrictive. 

In  Bank  of  Indian  Territory  v.  First  Nat.  Bank,  109  Mo.  App.  665, 
83  S.  W.  537,  a  case  which  was  decided  before  the  Negotiable  Instru- 
ments Act  went  into  effect  in  that  state,  it  was  held,  without  any  dis- 
cussion of  the  reasons,  that  an  indorsement  such  as  this  was  a  re- 
strictive indorsement.  In  three  cases  decided  in  that  state  after  the 
act  was  in  force  (National  Bank  of  Rolla  v.  First  Nat.  Bank,  141  Mo. 
App.  719,  125  S.  W.  513;  National  Bank  of  Commerce  v.  Mechanics' 
American  Nat.  Bank,  148  Mo.  App.  1,  127  S.  W.  429;  Citizens'  Trust 
Co.  V.  Ward,  195  Mo.  App.  223,  190  S.  W.  364)  the  same  ruling  was 
made ;  but  in  none  of  these  cases  was  the  language  of  the  statute  con- 
sidered, and  the  holding  is  placed  upon  the  authority  of  the  first  case, 
which,  as  we  have  seen,  was  decided  before  the  act  took  effect.  These 
cases  are  not  authority  upon  the  proposition  as  to  whether  such  an  in- 
dorsement is  restrictive  under  the  provisions  of  the  act.  Furthermore, 
any  bank  receiving  a  draft  with  such  an  indorsement  has  the  right  to 
again  indorse  it  in  blank  or  payable  to  any  particular  bank  or  person. 
This,  of  course,  it  would  have  no  power  to  do  if  the  indorsement  was 
restrictive.  If,  however,  the  words  "for  credit,"  "for  account,"  "for 
collection  and  return,"  iiad  been  added,  the  character  of  the  indorse- 
ment would  have  been  changed  entirely,  and  it  would  have  been  re- 
strictive, showing  upon  its  face  that  the  indorsee  bank  took  it  only  as 
a  collecting  agent,  and  not  as  a  holder  for  value.    *    *    * 


740  NEGOTIABLE  INSTRUMENTS  (Part  3 

In  First  Nat  Bank  of  Belmont  v.  First  Nat.  Bank  of  Barnesville,  58 
Ohio  St.  207,  50  N.  E.  723,  41  L.  R.  A.  584,  65  Am.  St.  Rep.  748,  it 
is  pointed  out  that  the  practice  of  indorsing  checks  "for  collection," 
"for  account"  had  become  almost  universal,  but  when  it  was  decided 
by  the  Supreme  Courts  of  New  York  and  Missouri  that  the  drawee 
bank  could  not  recover  back  money  paid  upon  a  forged  draft  in  the 
one  case  from  a  collecting  bank,  or  in  the  other  from  the  bank  owning 
the  draft,  "it  startled  the  banks  located  in  large  cities,  and  awakened 
them  to  the  dangers  attending  the  payment  of  such  drafts  or  bills,  and 
the  result  was  that  in  the  year  1896,  the  clearing  house  in  the  city  of 
New  York  adopted  a  rule  to  the  effect  that  its  members  should  not 
send  through  the  exchanges  any  paper  having  any  qualified  or  re- 
strictive indorsements,  such  as  'for  collection,'  or  'for  account  of,'  un- 
less all  indorsements  were  guaranteed  by  the  bank  sending  such  paper. 
This  action  was  soon  followed  by  the  clearing  houses  in  other  cities, 
and  in  some  of  them  all  indorsements  are  required  to  be  either _  in 

blank,  or  'pay  to  or  order.'     By  this  action  of  the  clearing 

house's,  indorsements  'for  collection'  or  'for  account  of  have  fallen 
into  disuse,  and  the  banking  business  of  the  country  is  now  done,  al- 
most universally,  upon  unrestricted  indorsements."  We  conclude  then 
that  the  indorsement  by  the  Superior  bank  was  general,  and  not  re- 
strictive. 

Does  the  fact  that,  if  protested,  the  Lincoln  bank  was  entitled  to 
charge  back  the  amount  of  the  draft  and  protest  fees  constitute  it 
merely  an  agent  for  collection  and  not  a  holder  in  due  course  ?  Whde 
there  is  some  conflict  in  the  authorities,  the  better  view  is  that  the  de- 
posit of  a  check  or  draft  in  a  bank  with  a  general  indorsement  and  the 
giving  of  credit  for  its  amount  by  the  bank  to  the  depositor,  in  the  ab- 
sense  of  other  evidence  as  to  the  intention  of  the  parties,  passes  the 
title  to  the  bank,  and  makes  it  a  holder  for  value,  entitled  to  recourse 
on  prior  indorsers  upon  the  protest  of  the  paper.  In  other  words,  when 
such  a  state  of  facts  is  proved  there  is  a  prima  facie  case  made  that 
the  title  has  passed,  and  the  fact  that  it,  the  receiving  bank,  may  charge 
back  a  protested  draft  does  not  affect  the  relation.  In  Higgins  v. 
Hayden,  S3  Neb.  61,  7Z  N.  W.  280,  before  the  enactment  of  the  Ne- 
gotiable Instruments  Act,  it  was  held  that  a  bill  of  exchange  drawn 
to  the  order  of  a  bank  by  its  customer,  the  amount  of  which  was 
placed  to  his  credit,  and  on  which  he  drew,  and  the  bank  paid  checks, 
became  the  property  of  the  bank,  such  conduct  being  inconsistent  with 
the  theorv  of  a  bailment  for  collection.     *     *     * 

That  credit  to  the  drawer  was  entered  by  the  Superior  bank  m  a 
passbook  in  which  was  printed,  "This  bank  in  receiving  out  of  town 
checks  and  other  collection  acts  only  as  your  agent  and  does  not  as- 
sume any  responsibility  beyond  due  diligence  on  its  part,"  cannot  af- 
fect the  right  of  the  plaintiff  to  recover  in  this  case.  The  fact  that 
the  drawers  put  the  paper  in  circulation,  and  that  the  Superior  bank 
was  thus  able  to  negotiate  it  as  its  owner  and  holder,  received  full 
credit  for  it,  the  plaintiff  bank  having  no  knowledge  of  any  infirmity, 
makes  it  a  holder  for  value  as  defined  in  section  5233,  Rev.  St.  1913. 

The  Minnesota  case  (In  re  State  Bank,  56  Minn.  119,  57  N.  W. 
336,  45  Am.  St.  Rep.  454)  is  not  in  conflict  with  these  views,  since  in 
that  case  the  controversy  was  between  the  original  parties,  and  not 
between  a  holder  for  value  vv^ithout  notice  and  the  drawer,  and  stich 
was  the  relation  between  the  parties  in  the  other  cases  cited  in  which 


Ch.  2)      RIGHT  OF   HOLDER  TO   COMPLETE,  SUE,  AND   NEGOTIATE  741 

a  printed  notice  was  on  the  passbook.  *  *  *  The  fact  that  a  custom 
between  banks  and  grain  dealers  is  that  when  any  draft  bearing  a  gen- 
eral indorsement  was  unpaid  it  was  protested  and  either  charged  back 
or  paid  by  the  drawer  is  an  argument  in  favor  of  the  plaintiff's  posi- 
tion and  not  in  favor  of  the  defendant  because  such  a  custom  clearly 
recognizes  the  liability  of  the  drawer  to  pay  a  dishonored  draft  to  the 
indorsee  who  has  failed  to  collect  the  same.  Even  though  by  the  cus- 
tom between  the  drawer  and  the  Superior  bank,  the  drafts  were  taken 
only  for  collection,  there  is  absolutely  no  proof  in  the  record  that  the 
plaintiff  had  any  knowledge  whatever  of  this  state  of  affairs.  It  re- 
ceived the  draft  with  the  general  indorsement  and  credited  the  Su- 
perior bank  with  the  amount  in  its  deposit  account  which  was  drawn 
upon  from  day  to  day. 

Under  section  5379,  Rev.  St.  1913:  "The  drawer  by  drawing  the 
instrument  admits  the  existence  of  the  payee  and  his  then  capacity 
to  indorse ;  and  engages  that  on  due  presentment  the  instrument_  will 
be  accepted  or  paid,  or  both,  according  to  its  tenor,  and  that  if  it  be 
dishonored,  and  the  necessary  proceedings  on  dishonor  be  duly  taken, 
he  will  pav  the  amount  thereof  to  the  holder,  or  to  any  subsequent 
indorser  who  may  be  compelled  to  pay  it.  But  the  drawer  may  insert 
in  the  instrument  an  express  stipulation  negativing  or  limiting  his 
own  liability  to  the  holder."  The  benefit  of  this  liability  in  case  of  dis- 
honor was  transferred  to  plaintiff  by  the  general  indorsement.  When 
the  Superior  bank  closed  its  doors,  its  assets  became  the  property  of 
the  receiver  for  the  purpose  of  liquidating  its  affairs.  The  rights  of 
its  receiver  against  the  plaintiff  or  plaintift''s  right  to  apply  the  fund  in 
its  hands  to  the  payment  of  the  debt  of  the  Superior  bank  are  not  in- 
volved in  this  case,  since  the  receiver  is  not  a  party  to  the  suit  and  the 
case  must  be  determined  without  regard  to  this  fund.  That  the  bank 
was  in  fact  insolvent  at  the  time  of  the  deposit,  under  the  circum- 
stances of  this  case,  does  not  seem  to  be  material:  First,  because 
plaintiff  bank  took  the  draft  in  good  faith  for  value  without  notice  or 
knowledge  of  any  infirmity  in  the  title;  and,  second,  because  the 
drawers  between  the  time  of  the  deposit  of  the  first  drafts  and  the  clos- 
ing of  the  bank  drew  out  over  $4,000  more  than  the  credit  given  and 
within  a  few  hundred  dollars  of  the  total  amount  deposited  within  this 
period,  leaving  the  account  of  the  drawers  substantially  as  it  was  be- 
fore the  drafts  were  deposited. 

Under  the  provisions  of  the  Negotiable  Instruments  Act  and  the 
evidence  in  the  case  the  defendants  are  liable  as  drawers  for  the  full 
amount  of  the  drafts  and  protest  fees. 

The  judgment  of  the  district  court  is  reversed,  and  the  cause  re- 
manded,   with    directions    to    enter   judgment    for    the   amount    due. 


SECTION   8.— NEGOTIATION    BY   QUALIFIED 
INDORSEMENT 

N.  I.  L.,  Section  38.  A  qualified  indorsement  constitutes  the  in- 
dorser a  mere  assignor  of  the  title  to  the  instrument.  It  may  be 
made  by  adding  to  the  indorser's  signature  the  words  "without 
recourse"  or  any  words  of  similar  import.  Such  an  indorsement 
does  not  impair  the  negotiable  character  of  the  instrument. 


742  NEOOTiARi-r:  ixsTKT'MEXTS  (Part  3 

The  indorsement  here  referred  to  is  commonly  called  the  in- 
dorsement "without  recourse."  In  form  it  consists  in  adding  the 
words  "without  recourse,"  or  words  of  similar  import,  either  to 
a  blank  or  special  indorsement.  The  effect  of  the  indorsement 
"without  recourse"  is  to  limit  the  liability  of  the  indorser.  The 
extent  to  which  the  liability  is  so  limited  is  a  subject  in  which  we 
are  not  here  interested.  This  matter  will  be  taken  up  in  the 
chapter  dealing  with  the  liability  of  indorsers. 

At  this  point  we  are  interested  in  the  indorsement  "without  re- 
course," only  in  so  far  as  it  is  necessary  to  note,  first,  that  it  may 
be  added  to  a  blank  or  to  a  special  indorsement  and  that  the  ad- 
dition does  not  aft'ect  the  manner  of  negotiating  the  instrument, 
for  the  last  sentence  of  this  section  states  that  such  an  indorse- 
ment does  not  impair  the  negotiable  character  of  the  instrument. 
If  the  words  were  added  to  a  blank  indorsement  the  instrument  is 
still  negotiated  by  delivery.  If  added  to  a  special  indorsement  the 
instrument  is  negotiated  only  by  the  indorsement  of  the  special  in- 
dorsee. The  transferee  under  either  indorsement  gets  the  title 
just  the  same  as  though  the  words  "without  recourse"  has  been 
omitted,  nor  do  these  words  prevent  such  an  indorser  from  being 
a  holder  in  due  course. 


SECTION  9.— NEGOTIATION  BY  CONDITIONAL 
INDORSEMENT 

N.  I.  L.,  Section  39,  Where  an  indorsement  is  conditional,  a 
party  required  to  pay  the  instrument  may  disregard  the  condi- 
tion, and  make  payment  to  the  indorser  or  his  transferee,  whether 
the  condition  has  been  fulfilled  or  not.  But  any  person  to  whom 
an  instrument  so  indorsed  is  negotiated  will  hold  the  same,  or 
the  proceeds  thereof,  subject  to  the  rights  of  the  person  indorsing 
conditionally. 

In  form  the  conditional  indorsement  is  a  special  indorsement 
with  an  added  term,  illustrated  as  follows:  Pay  A.,  upon  condi- 
tion that  (here  stating  the  condition  upon  which  payment  is  to  be 
made  to  A,),  From  a  practical  standpoint  this  indorsement  is 
of  little  importance.  It  is  seldom  used.  It  is  to  be  noted  that  the 
condition  does  not  affect  the  rights  of  a  party  who  is  bound  to  pay 
the  instrument  for  he  is  allowed  to  disregard  the  condition  and  to 
pay  the  holder  whether  the  condition  has  happened  or  not.  The 
indorsement  affects  only  the  rights  of  the  party  to  whom  pay- 
ment was  made.  If  the  condition  has  not  happened,  the  party 
receiving  payment  will  hold  the  money  virtually  in  trust  for  the 
conditional  indorser. 


Ch.  2)      RIGHT   OF   HOLDER   TO   COMPLETE,  SUE,  AND   NEGOTIATE  743 

SECTION  10.— TRANSFER  OF  UNINDORSED  PAPER 

PAYABLE  TO  THE  ORDER  OF  THE 

TRANSFEROR 

N.  I.  L.,  Section  49.  Where  the  holder  of  an  instrument  pay- 
able to  his  order  transfers  it  for  value  without  indorsing  it,  the 
transfer  vests  in  the  transferee  such  title  as  the  transferor  had 
therein,  and  the  transferee  acquires  in  addition,  the  right  to  have 
the  indorsement  of  the  transferor.  But  for  the  purpose  of  deter- 
mining whether  the  transferee  is  a  holder  in  due  course,  the  nego- 
tiation takes  effect  as  of  the  time  when  the  indorsement  is  actually 
made. 

It  has  heretofore  been  stated  that  where  the  instrument  is  not  in 
form  payable  to  bearer,  it  cannot  be  negotiated  except  by  the 
indorsement  of  the  holder.  While  this  is  strictly  true  the  rule  does 
not  prevent  a  disposition  of  the  instrument  in  some  way  other 
than  by  negotiation.  The  instrument  may  still  be  transferred  with- 
out the  indorsement  of  the  special  indorsee.  There  is  no  one 
word  that  describes  the  status  of  such  a  transferee.  He  cannot 
rightly  be  called  an  indorsee,  but  he  may  be  referred  to  as  a  trans- 
feree of  unindorsed  paper  payable  to  the  order  of  the  transferor. 
In  many  respects  such  a  transferee  is  in  just  as  good  a  position 
as  an  indorsee  occupies,  but  in  some  important  situations  his  po- 
sition is  not  so  strong.  Section  49  gives  to  the  transferee  of  the 
unindorsed  paper  the  same  rights  as  the  transferor  had,  but  no 
greater  rights.  The  indorsee,  if  a  purchaser  for  value  in  good 
faith  before  maturity,  will  be  able  to  enforce  the  instrument  free 
from  most  of  the  defenses  which  the  maker  had  against  the  party 
with  whom  he  dealt.  Moreover,  the  transferee  of  unindorsed 
paper  will  have  greater  difficulty  in  proving  his  right  to  the  in- 
strument than  the  indorsee  would  have  because  there  is  nothing  on 
the  instrument  which  indicates  that  the  party  in  possession  is  the 
owner.  This  section  will  be  referred  to  again  in  the  chapter  deal- 
ing with  the  holder  in  due  course.  In  the  case  following,  is  the 
court  correct  in  saying  that  the  transferee  could  acquire  only  an 
"equitable  title,"  in  the  light  of  the  language  of  section  49  which 
declares  that  "the  transfer  vests  in  the  transferee  such  title  as  the 
transferor  had  therein"? 


CAPITOL  HILL  STATE  BANK  v.  RAWLINS  NAT.  BANK  OF  RAWLINS. 

(Supreme  Ck)urt  of  Wyoming,  1916.    24  Wyo.  423,  160  Pac.  117, 
11  A.  L.  R.  937.) 

Potter,  C.  J.  *  *  *  However,  it  is  well  settled  that  a  negotia- 
ble instrument  payable  to  order  may  be  transferred  by  the  payee  or 
holder  without  indorsement,  though  in  such  case  the  transferee  takes 
only  the  title  and  right  of  the  one  so  transferring  it,  and  does  not  be- 
come the  holder  in  due  course,  but  has  only  the  equitable  instead  of 
the  legal  title.     *     *     *     And  this  principle  is  recognized  by  the  Ne- 


744  NEGOTIABLE   INSTRUMENTS  (Part  3 

gotiable  Instruments  Law.  *  *  *  Therefore,  if  the  plaintiff  had 
shown  a  transfer  of  the  certificate  to  it  by  the  payee,  although  with- 
out indorsement,  it  would  have  been  entitled  to  recover,  in  the  absence 
of  evidence  showing  a  good  defense  as  against  the  payee,  or  that 
would  otherwise  interfere  with  such  recovery.  But  niere  possession 
is  insufficient  to  show  such  a  transfer.     *     *     * 

We  are  aware  that  there  is  a  direct  conflict  in  the  decisions  on  the 
question  of  the  sufficiency  of  mere  possession  to  show  equitable  owner- 
ship, so  as  to  authorize  a  recovery  against  the  maker  by  one  other  than 
the  payee  or  special  indorsee.  The  view  is  maintained  p  a  few  ju- 
risdictions that  possession  is  alone  sufficient  for  that  purpose,  unless 
the  presumption  of  ownership  therefrom  is  rebutted  by  proof.  It  is 
so  held  in  North  Carolina,  while  conceding  that  the  mere  introduction 
of  a  note  in  evidence  does  not  prove  the  payee's  indorsement.     *     *     * 

But  the  clear  weight  of  authority  and  the  better  reasoning,  in  our 
opinion,  sustains  the  rule  that  mere  possession  of  such  an  instrument 
unindorsed  is  not  sufficient  or  prima  facie  evidence  of  even  the  equi- 
table title.  *  *  *  Such  possession  does  not  prove  or  tend  to  prove 
the  transfer  of  a  note  payable  to  order  and  not  shown  to  have  been 
indorsed  by  the  payee.  The  fact  necessary  to  the  equitable  title,  in 
such  case,  is  a  transfer  by  the  payee  or  the  person  to  whose  order  the 
instrument  has  been  made  payable.  Such  proof  is  generally  at  least 
within  the  power  of  the  person  seeking  to  recover  upon  the  instrument, 
if  it  has  been  so  transferred,  while  the  other  party  might  be  wholly 
without  knowledge  or  information  concerning  the  matter.  The  pre- 
sumption of  delivery  from  possession  is  proper  and  reasonable  where 
the  instrument  is  payable  to  bearer;  but  we  see  no  good  reason  for 
giving  effect  to  such  presumption  where  the  instrument  is  payable  to 
order  and  not  indorsed,  so  as  to  overcome  the  usual  and  primary  pre- 
sumption, in  such  case,  that  the  instrument  remains  the  property  of 
the  person  to  whose  order  it  is  made  payable. 

Holding,  therefore,  that  the  proof  was  insufficient  to  entitle  the 
plaintiff  to  recover,  the  judgment  will  be  affirmed. 


SECTION  11.— SURRENDER  TO  THE  DRAWEE 

It  should  be  apparent  that  the  act  of  the  holder  of  a  check  or 
other  bill  of  exchange,  in  surrendering  the  same  to  the  drawee  and 
receiving  payment,  is  a  transaction  essentially  and  materially  dif- 
ferent from  that  of  selling  the  instrument,  and  yet  there  is  some 
confusion  on  this  matter.  An  instrument,  when  transferred  to  a 
purchaser,  is  still  alive.  An  instrument  surrendered  to  a  drawee 
for  payment  is  thereafter,  for  most  purposes,  a  dead  bill.  The 
surrender  of  an  instrument  to  the  drawee  is  not  a  sale.  It  is  quite 
important  to  note  this  fact,  for  the  rights  and  duties  of  the  two 
parties  concerned  are  very  different  in  these  two  cases.  In  the 
first  place,  since  the  surrender  of  a  bill  to  the  drawee  is  not  a 
sale,  the  transfer  is  in  no  sense  a  negotiation  of  the  instrument. 
Therefore  no  indorsement  is  necessary  to  entitle  the  holder  to 
receive  payment.  A  holder,  even  a  special  indorsee,  is  entitled  to 
demand  payment  from  the  drawee  and  to  refuse  to  indorse.    If  the 


Ch.  2)      RIGHT   OF   HOLDER   TO   COMPLETE,  SUE,  AND   NEGOTIATE  745 

drawee  refuses  to  pay  unless  the  holder  indorses,  the  drawee  there- 
by breaks  his  contract  with  the  drawer,  and  the  instrument  is 
dishonored.  If  the  instrument  is  a  check,  and  the  drawee  bank 
refuses  to  pay  unless  the  special  indorsee  indorses,  the  extent  of 
the  damages  which  the  drawer — not  the  holder — may  recover  from 
the  drawee  may  be  considerable.  It  is  a  common  practice  for  the 
holder,  upon  presenting  the  instrument  to  the  drawee,  to  sign  his 
name  on  the  back  of  the  instrument.  If  the  holder  does  sign  his 
name  upon  delivery  of  the  instrument  to  the  drawee,  such  act  is 
not  an  indorsement.     It  is  a  mere  receipt  for  money. 

Another  important  effect,  arising  from  the  fact  that  a  transfer  to 
the  drawee  is  not  a  negotiation,  is  that  such  transferor  assumes 
no  liability  as  an  indorser  to  the  drawee.  Occasionally  we  find 
statements  to  the  effect  that  the  transferor  to  the  drawee,  thereby 
assumes  a  liability  as  an  indorser  to  the  drawee,  but  these  state- 
ments are  not  correct.  No  doubt,  a  transferor  to  the  drawee  could 
enter  into  a  special  contract,  under  which  he  might  warrant  to  the 
drawee  that  certain  things  are  true,  for  example,  that  the  instru- 
ment was  not  forged ;  but  the  point  made  here  is  that  no  such 
liability  rests  on  the  transferor  to  the  drawee,  arising  from  the 
fact  that  at  the  time  he  received  payment  he  signed  a  receipt  for 
the  money  on  the  back  of  the  instrument  then  surrendered  to  the 
drawee. 

It  is,  of  course,  possible  for  a  drawee  to  purchase  the  bill.  Such 
a  case  could  arise,  where  the  drawee  took  a  time  bill  of  exchange 
before  maturity.  This  transaction  might  be  either  a  purchase  or  a 
payment  of  the  bill.  If  the  evidence  showed  an  intent  to  pur- 
chase, the  above  discussion  would  not  be  applicable  to  the  situa- 
tion. 


NATIONAL  BANK  OF  COMMERCE  OF  LINCOLN  v.  FARMERS'  & 
MERCHANTS'  BANK  OP  LINCOLN. 

(Supreme  Court  of  Nebraska,  1910.    87  Neb.  841,  128  N.  W.  522.) 

Fawcett,  J.  *  *  *  What  is  meant  by  "negotiating"  an  instru- 
ment? *  *  *  Counsel  answer  that  question  by  quoting  section  30 
of  article  3  of  the  Negotiable  Instruments  Law,  *  *  *  as  follows : 
"An  instrument  is  negotiated  when  it  is  transferred  from  one  person 
to  another  in  such  manner  as  to  constitute  the  transferee  the  holder 
thereof."  *  *  *  "The  power  to  'negotiate'  a  bill  or  note  is  the 
power  to  indorse  and  deliver  it  to  another,  so  that  the  right  of  action 
thereon  shall  pass  to  the  indorsee  or  holder.  'Negotiation'  means  the 
act  by  which  a  bill  of  exchange  or  promissory  note  is  put  into  circu- 
lation by  being  passed  by  one  of  the  original  parties  to  another  per- 
son." If  A.  gives  B.  a  check  on  C.  Bank,  and  B.  presents  the  check 
at  the  counter  of  C,  no  negotiation  is  necessary  or  had.  He  simply 
demands  and  receives  payment;  but  if  B.  goes  to  D.  store  and  buys  a 
bill  of  goods,  and  tenders  the  indorsed  check  in  payment,  he  negotiates 
the  check.  The  difference  is  clear  and  well  defined.  The  presentation 
by  defendant  of  the  check  in  controversy  for  payment  was  not  a 
"negotiation"  of  the  check  within  the  meaning  of  the  statute  quoted. 


746  NEGOTIABLE   INSTRUMENTS  (Part  3 

Nor  do  we  think  that  the  payment  by  a  bank  of  a  check  drawn  upon 
it  constitutes  such  bank  a  "holder"  within  the  meaning  of  the  stat- 
ute. *  *  *  When  a  check  is  presented  to  the  bank  upon  which  it 
is  drawn,  and  is  paid  by  such  bank,  such  payment  discharges  the  in- 
strument, *  *  *  and  the  bank  is  not  thereafter,  within  the  mean- 
ing of  the  statute,  a  "holder"  of  such  check.     *     *     * 


ANONYMOUS. 
(Ohio  Common  Pleas,  18S2.*  26  Albany  Law  J.  61.) 

The  suit  was  by  the  holder  against  the  drawer  of  a  check.  The 
check  was  payable  to  order,  duly  indorsed  in  blank,  and  transferred 
to  the  plaintiff.  On  presentation  the  bank,  drawee,  demanded  that  the 
holder  should  also  indorse  it.  This  he  refused  to  do,  and  thereupon 
had  the  check  protested,  and  brought  this  suit.  Judge  Jones  holds  that 
the  bank  had  no  right  to  make  such  requirements,  although  it  was 
proved  that  such  was  the  local  custom,  and  holds  that  the  check  was 
properly  dishonored. 

Jones,  J.  A  bank  is  ordinarily  presumed  to  know  the  signatures 
of  its  own  customers  and  depositors;  but  it  will  not  be  seriously 
doubted  that  when  a  check  is  drawn  on  a  bank,  which"  is  a  stranger  to 
the  payee  and  his  signature,  the  bank  is  entitled  to  a  reasonable  time 
in  which  to  ascertain  the  genuineness  of  the  indorsement,  before  pay- 
ing a  check  payable  to  his  order,  and  indeed  some  of  the  authorities 
seem  to  justify  a  bank  or  banker  in  calling  upon  the  holder  of  such 
a  bill  or  check,  when  it  is  reasonable  to  do  so,  to  furnish  proof  that 
the  indorsement  is  the  genuine  one  of  the  payee;  but  in  this  case 
neither  of  these  things  was  required  or  asked.  There  was  no  demand 
by  the  bank  for  proof  of  the  signature,  nor  for  a  reasonable  delay 
to  satisfy  itself  of  the  genuineness  of  the  indorsement ;  but  there  was 
simply  an  absolute  refusal  to  pay,  unless  the  person  who  presented 
the  check  would  indorse  it.  That  this  refusal  to  pay  without  such  in- 
dorsement is  not  justified  by  commercial  law  is,  we  think,  perfectly 
clear ;  it  is  an  attempt  to  limit  the  negotiability  of  such  paper,  and  to 
fix  terms  and  conditions  for  its  payment  not  warranted  by  the  law 
.or  by  the  drawer  of  the  check,  and  to  which  neither  he  nor  the  holder 
is  obliged  to  submit.  The  implicit  contract  of  a  bank  with  its  cus- 
tomers is  to  pay  their  checks  according  to  the  law  merchant. 


SECTION   12.— OTHER  FORMAL  REQUISITES  AND 
ASPECTS  OF  NEGOTIATION 

N.  I.  L.,  Section  31.  The  indorsement  must  be  written  on  the 
instriunent  or  upon  a  paper  attached  thereto.  The  signature  of 
the  indorser,  without  additional  words,  is  a  sufficient  indorsement. 

N.  I.  L.,  Section  32.  The  indorsement  must  be  an  indorsement 
of  the  entire  instrument.  An  indorsement,  which  purports  to 
transfer  to  the  indorsee  a  part  only  of  the  amount  payable,  or 
which  purports  to  transfer  the  instrument  to  two  or  more  indorsees 
severally  does  not  operate  as  a  negotiation  of  the  instrument.    But 


Ch.  2)      KIGHT   OF   HOLDER   TO   COMPLETIO,  SUE,  AND   NEGOTIATE  747 

where  the  instrument  has  been  paid  in  part,  it  may  be  indorsed  as 
to  the  residue. 

N.  I.  L.,  Section  41.  Where  an  instrument  is  payable  to  the  or- 
der of  two  or  more  payees  or  indorsees  who  are  not  partners,  all 
must  indorse,  unless  the  one  indorsing  has  authority  to  indorse 
for  the  others. 

N.  I.  L.,  Section  42.  Where  an  instrument  is  drawn  or  indors- 
ed to  a  person  as  "cashier"  or  other  fiscal  officer  of  a  bank  or  cor- 
poration, it  is  deemed  prima  facie  to  be  payable  to  the  bank  or 
corporation  of  which  he  is  such  officer,  and  may  be  negotiated  by 
either  the  indorsement  of  the  bank  or  corporation,  or  the  indorse- 
ment of  the  officer. 

N.  I.  L..  Section  43.  Where  the  name  of  a  payee  or  indorsee  is 
wrongly  designated  or  misspelled,  he  may  indorse  the  instrument 
as  therein  described,  adding,  if  he  thinks  fit,  his  proper  signature. 

N.  I.  L.,  Section  44.  Where  any  person  is  under  obligation  to 
indorse  in  a  representative  capacity,  he  may  indorse  in  such  terms 
as  to  negative  personal  liability. 

N.  I.  L.,  Section  45.  Except  where  an  indorsement  bears  date 
after  the  maturity  of  the  instrument,  every  negotiation  is  deemed 
prima  facie  to  have  been  effected  before  the  instrument  was  over- 
due. 

N.  I.  L.,  Section  46.  Except  where  the  contrary  appears  every 
indorsement  is  presumed  prima  facie  to  have  been  made  at  place 
where  the  instrument  is  dated. 

N.  I.  L.,  Section  47.  An  instrument  negotiable  in  its  origin  con- 
tinues to  be  negotiable  until  it  has  been  restrictively  indorsed  or 
discharged  by  payment  or  otherwise. 

N.  I,  L.,  Section  22.  The  indorsement  or  assignment  of  the  in- 
strument by  a  corporation  or  by  an  infant  passes  the  property 
therein,  notwithstanding  that  from  want  of  capacity  the  corpora- 
tion or  infant  may  incur  no  liability  thereon. 

N.  I.  L.,  Section  50.  Where  an  instrument  is  negotiated  back 
to  a  prior  party,  such  party  may,  subject  to  the  provisions  of  this 
act,  reissue  and  further  negotiate  the  same.  But  he  is  not  entitled 
to  enforce  payment  thereof  against  any  intervening  party  to  whom 
he  was  personally  liable. 


748  NEGOTIABLE   INSTRUMENTS  (Part  3 

CHAPTER  III 
WHO  ARE  HOLDERS  IN  DUE  COURSE 

Section 

1.  Introduction. 

2.  Must  be  a  Purchaser  for  Value. 

3.  IMust  be  a  Purchaser  Before  Maturity. 

4.  Must  be  a  Purchaser  in  Good  Faith. 

5.  Payee  may  be  a  Holder  in  Due  Course. 

6.  Transferee  from  a  Holder  in  Due  Course  is  a  Holder  in  Due  Course. 

7.  Rights  of  the  Reacquirer. 

8.  Rights  of  a  Transferee  from  a  Holder  in  Due  Course  of  Unindorsed  Pa- 

per Payable  to  the  Order  of  the  Transferor. 


SECTION  1.— INTRODUCTION 

A  party  in  physical  possession  of  a  negotiable  instrument  may 
occupy  one  of  two  positions:  (1)  He  may  have  no  title  to  the  in- 
strument ;  (2)  he  may  have  possession  and  title  to  the  instrument. 
In  the  first  case  the  party  in  possession  is  not  a  holder.  His  pos- 
session may  be  rightful  or  wrongful.  There  are  various  subordi- 
nate positions  which  may  be  held  by  a  person  who  has  no  title  to 
the  instrument  but  does  have  physical  possession.  So,  also,  in  case 
(2),  the  holder  of  the  title  to  the  instrument  may  occupy  one  of 
several 'positions.  The  holder  may  have  the  title  in  trust  for  a 
former  owner  or  for  a  third  party.  He  may  have  the  title  accom- 
panied by  the  same  rights,  no  more,  and  no  less,  than  his  predeces- 
sor in  title  had,  or  he  may  have  the  title  under  circumstances  where 
his  rights  against  prior  parties  are  superior  to  those  possessed  by 
former  owners  of  the  instrument.  The  term  "holder  in  due  course" 
is  used  to  describe  a  holder  of  the  title  who  does  have  rights 
against  prior  parties  which  may  be  greatly  superior  to  those  of 
former  owners  who  are  not  holders  in  due  course.  The  present 
chapter  is  devoted  to  the  consideration  of  the  circumstances  un- 
der which  a  holder  is  to  be  deemed  a  holder  in  due  course.  The 
chapters  following  will  show  to  what  extent  the  rights  of  the 
holder  in  due  course  are  superior  to  the  rights  of  holders  not  in 
due  course. 


SECTION  2.— MUST  BE  A  PURCHASER  FOR  VALUE 

Section  52  (3).  A  holder  in  due  course  is  a  holder  that  took  it 
for  value. 

Section  25.  Value  is  any  consideration  sufficient  to  support  a 
simple  contract.  An  antecedent  or  pre-existing  debt  constitutes 
value;  and  is  deemed  such  whether  the  instrument  is  payable  on 
demand  or  at  a  future  time. 

Section  191,  clause  12.     "Value"  means  valuable  consideration. 

Section  24.     Every  negotiable  instrument  is  deemed  prima  facie 


Ch.  3)  WHO   ARE   HOLDERS   IN  DUE   COURSE  749 

to  have  been  issued  for  a  valuable  consideration ;  and  every  person 
whose  signature  appears  thereon  to  have  become  a  party  there- 
to for  value. 

Section  27.  Where  the  holder  has  a  lien  on  the  instrument, 
arising  either  from  contract  or  by  implication  of  law,  he  is  deem- 
ed a  holder  for  value  to  the  extent  of  his  lien. 

Section  26.  Where  value  has  at  any  time  been  given  for  the 
instrument,  the  holder  is  deemed  a  holder  for  value  in  respect  to 
all  parties  who  became  such  prior  to  that  time. 

The  problem  of  the  interpretation  of  these  sections  is  substan- 
tially the  same  as  that  presented  in  any  transaction  involving  the 
application  of  the  rules  relating  to  the  common-law  requirement 
of  consideration  in  simple  contracts.  There  are  a  few  special  situ- 
ations to  be  noticed. 

Before  the  Negotiable  Instruments  Law,  there  was  a  conflict  of 
authority  as  to  whether  a  transferee  of  negotiable  paper  in  payment 
of  a  pre-existing  debt  was  a  purchaser  for  value.  There  was  the 
same  conflict  in  the  case  where  the  transferee  took,  not  in  pay- 
ment of  a  pre-existing  debt,  but  by  way  of  collateral  security  for 
the  pre-existing  debt.  Section  25  adopts  what  was  the  weight  of 
authority  on  this  question,  but,  it  is  to  be  noticed,  the  section 
makes  no  mention  of  the  case  where  the  transferee  took  by  way  of 
collateral  security.  In  Illinois  the  section  was  so  worded  that  a 
transferee,  who  took  the  instrument  either  in  satisfaction  or  as  se- 
curity for  an  antecedent  or  pre-existing  debt,  was  a  transferee  for 
value.  But  all  courts,  except  those  of  New  York,  which  had  occa- 
sion to  interpret  section  25,  have  held  that  a  transferee  by  way  of 
collateral  security  is  a  holder  for  value.  Recently  the  New  York 
Court  of  Appeals  said  in  a  very  strong  dictum  that  these  earlier  inter- 
pretations were  incorrect.    Following  is  an  extract  from  this  decision : 


KELSO  &  CO.  V.  ELLIS  et  al. 
(Court  of  Appeals  of  New  York,  1918.    224  N.  Y.  528,  121  N.  E.  364.) 

Pound,  j.  *  *  *  Unquestionably,  upon  the  evidence,  plaintiff 
was  a  holder  for  value.  Prior  to  the  passage  of  the  Negotiable  In- 
struments Law,  and  from  the  time  of  the  decision  of  Coddington  v. 
Bay,  20  Johns.  637,  11  Am.  Dec.  342,  it  was  the  law  of  this  state  that, 
in  order  to  constitute  one  a  holder  for  value  as  indorsee  of  negotiable 
paper,  it  was  necessary  that  he  should  part  with  some  present  consid- 
eration and  that  mere  credit  given  on  an  antecedent  debt  was  not  such 
a  consideration;  but  the  Negotiable  Instruments  Law  *  *  *  pro- 
vides that  "an  antecedent  or  pre-existing  debt  constitutes  value"  and 
thus  brings  the  law  of  this  state  into  harmony  with  that  of  the  United 
States. Supreme  Court.  Swift  v.  Tyson,  16  Pet.  1,  10  L.  Ed.  865,  held 
that  the  transfer  of  negotiable  paper  by  indorsement  to  a  creditor  be- 
fore maturity,  merely  as  security  for  an  antecedent  debt  or  in  payment 
thereof,  is  a  transfer  for  value.  The  conflicting  doctrines  of  the  two 
leading  cases  were  for  many  years  the  subject  of  earnest  discussion 
in  the  courts,  and  the  lack  of  a  uniform  rule  on  the  subject  caused  no 


750  NEGOTIABLE   INSTRUMENTS  (Part  3 

little  confusion.  The  New  York  rule  was  so  well  established  that  the 
inertia  of  Coddington  v.  Bay  carried  it  along  for  some  distance  be- 
fore the  external  force  of  the  Negotiable  Instruments  Law  acted  up- 
on it.  Sutherland  v.  Mead,  80  App.  Div.  103,  107,  80  N.  Y.  Supp. 
504;  Roseman  v.  Mahony,  86  App.  Div.  377,  378.  83  N.  Y.  Supp. 
749;  Crawford's  Annotated  Neg.  Inst.  Law.  p.  63.  Even  in  this  court 
a  dictum  in  Bank  of  America  v.  Waydell.  187  N.  Y.  115,  120.  79  N. 
E.  857,  reveals  the  habit  of  bench  and  bar  to  look  to  cases  rather  than 
statutes  for  principles  of  commercial  law  until  attention  is  sharply  di- 
rected to  the  extent  that  the  movement  for  uniformity  of  laws  through 
legislation  has  been  successful  in  New  York  and  many  other  states. 
But  it  is  perfectly  clear  that  for  the  sake  of  uniformity  New  York 
has  abrogated  the  rule  which  had  been  in  force  since  the  year  1822. 
Melton  V.  Pensacola  Bank  &  Trust  Co.,  190  Fed.  126,  132,  111  C.  C. 
A.  166.  Coddington  v.  Bay  and  section  [25]  of  the  Negotiable  Instru- 
ments Law  are  irreconcilable  in  the  mind  of  any  candid  student  of  the 
decisions  in  this  and  other  jurisdictions. 


LASSAS  V.  Mccarty. 

(Supreme  Court  of  Oregon,  1906.     47  Or.  474.  S4  Pac.  76.) 

This  is  a  suit  by  George  Lassas  against  Lettie  McCarty  to  foreclose 
a  mortgage.  The  complaint  states  that  the  defendant,  on  November 
21,  1900,  gave  to  one  G;  L.  Webb  her  promissory  note  for  the  sum  of 
$1,500,  payable  in  one  year,  with  interest  thereon  at  the  rate  of  8  per 
cent,  per  annum,  and  to  secure  the  payment  thereof  she  at  the  same 
time  executed  to  him  a  mortgage  of  certain  real  property  in  Baker 
county,  which  mortgage  was  duly  recorded.  Various  assignments  of 
the  note  and  mortgage  are  set  out,  and  it  is  alleged  that  on  July  2, 
1901,  the  plaintiff  for  a  valuable  consideration  became  the  owner  and 
holder  thereof,  and  that  no  part  of  the  debt  so  secured  has  ever  been 
paid. 

Moore,  J.  *  *  *  This  brings  us  to  a  consideration  of  the  ques- 
tion whether  or  not  plaintiff  secured  the  title  to  the  note  and  mortgage 
under  such  circumstances  as  to  render  him  an  innocent  purchaser 
thereof  for  a  valuable  consideration  and  without  notice  of  the  imposi- 
tion practiced  upon  the  defendant.  An  examination  of  plaintiff's  tes- 
timony shows  that  he  purchased  the  note  before  maturity,  paying  there- 
for $1,000,  which  was  two-thirds  of  its  face  value,  without  knowledge 
of  any  fact  that  would  tend  to  render  the  negotiable  instrument  in- 
valid. It  is  argued  by  defendant's  counsel  that  the  sum  paid  for  the 
note  imparts  notice  of  its  infirmity,  and  hence  plaintiff  was  not  an 
innocent  purchaser  thereof.  *  *  *  Whatever  the  rule  may  be  in 
other  jurisdictions,  it  is  settled  in  this  state  by  statute,  enacted  prior 
to  the  giving  of  the  note  and  mortgage,  that  the  holder  of  a  negotiable 
instrument  in -due  course  may  enforce  payment  for  the  full  amount 
thereof  against  all  parties  liable  thereon.    *    *    * 


Ch.3)  WHO   ARE    HOLDERS   IN    DUE   COURSS  751 

CITIZENS'  STATE  BANK  v.  COWLES. 

(Court  of  Appeals  of  New  York,  1905.     180  N.  Y.  346,  73  N.  E.  33, 
105  Am.  St.  Rep.  765.) 

WiJRNER,  J.  The  action  is  upon  a  check  dated  June  1,  1900,  drawn 
by  the  defendant  upon  the  First  National  Bank  of  Port  Chester,  N.  Y., 
to  the  order  of  W.  W.  Miller  &  Sons,  for  $600.  The  check  was  giv- 
en in  payment  for  a  team  of  horses  purchased  by  the  defendant  from 
the  Millers  under  a  written  guaranty  of  soundness  and  condition,  the 
alleged  breach  of  which  is  now  sought  to'be  interposed  as  a  defense 

The  horses  were  delivered  shortly  after  midnight  on  the  2d  day  ot 
June  and  later  in  the  morning  it  was  discovered  that  one  of  them  was 
ill  from  pneumonia,  as  a  result  of  which  it  died  within  about  nine  days. 
On  Monday  the  4th  of  June,  which  was  the  first  business  day  after 
the  giving  of  the  check,  the  defendant's  son  notified  the  bank  to  stop 
payment  on  the  check,  and  then  communicated  by  telephone  with  one 
of  the  payees,  advising  him  of  the  sickness  of  one  of  the  horses,  and 
of  the  fact  that  payment  of  the  check  had  been  stopped. 

The  payees  indorsed  the  check  to  one  George  M.  Hofifman,  the  presi- 
dent of  the  plaintiff  bank,  and  mailed  it  to  him  at  Little  River,  Kan., 
but  whether  it  was  so  mailed  before  or  after  the  notification  as  to  the 
illness  of  the  horse  does  not  appear.  Hoftman  received  the  check  on 
the  8th  day  of  June,  indorsed  it,  and  within  two  or  three  hours  depos- 
ited it  with  the  plaintiff,  which  credited  the  amount  thereof  to  Hoff- 
man's account,  indorsed  the  check  to  the  National  Bank  of  Kansas 
City  Mo.,  and  sent  it  to  that  bank  for  collection.  What  was  done  with 
the  check  after  that  does  not  appear,  except  as  it  may  be  inferred  from 
the  fact  that  it  was  received  by  the  First  National  Bank  of  Port  Chester 
(on  which  bank  it  was  drawn)  on  the  14th  of  June,  where  it  was  pro- 
tested, and  marked  "Payment  stopped." 

One  of  the  issues  tendered  by  the  defendant's  answer  was  that  the 
plaintiff  was  not  an  innocent  holder  of  the  check  for  value.  Upon 
the  trial  the  plaintiff  made  out  its  case  by  introducing  the  check  m 
evidence,  and  relying  upon  the  presumptions  in  support  of  negotiable 
paper.  *  *  *  The  defendant  then  introduced  evidence  bearing  upon 
the  breach  of  warranty  or  failure  of  consideration  in  the  sale  of  the 

horses. 

It  is  obvious  that  if  the  evidence  would  support  the  inference  that 
the  plaintiff  did  not  buy  the  check,  but  simply  gave  Hoffman  credit 
for  the  amount  upon  its  books,  then  plaintiff  is  not  a  holder  of  the 
check  in  due  course,  within  the  "law  merchant,"  as  that  term  is  now 
defined  in  the  negotiable  instruments  law,  so  as  to  render  its  title -su- 
perior to  the  defenses  which  the  drawer  of  the  check  may  have  against 
the  payees.  Under  the  negotiable  instruments  law  four  elements  must 
concur  to  constitute  such  a  title:  (1)  The  instrument  must  be  com- 
plete and  regular  on  its  face ;  (2)  the  holder  must  receive  it  before  it 
is  overdue,  and  without  notice  that  it  has  been  previously  dishonored, 
if  that  is  the  fact ;  (3)  it  must  have  been  taken  in  good  faith  and  for 
value  •  (4)  it  must  have  been  taken  without  notice  of  any  infirmity  in 
the  instrument  or  defect  in  the  title  of  the  person  negotiating  it.  Neg 
Instruments  Law,  §  91  (Laws  1897,  p.  732,  c.  612).  li  the  plaintiff 
had  not  actually  parted  with  value  before  it  received  notice  of  the  dis- 
honor of  this  check,  it  is  apparent  that  at  least  one  of  these  elements 


752  NEGOTIABLE   INSTRUMENTS  (Part  3 

is  lacking  in  the  plaintiff's  title.  The  authorities  hold  that  the  mere 
crediting  to  a  depositor's  account,  on  the  books  of  a  bank,  of  the 
amount  of  a  check  drawn  upon  another  bank,  where  the  depositor's 
account  continues  to  be  sufficient  to  pay  the  check  in  case  it  is  dishon- 
ored, does  not  constitute  the  bank  a  holder  in  due  course.    *    *    * 

The  view  of  the  evidence  most  favorable  to  the  defendant  would, 
we  think,  have  justified  a  jur)-  in  finding  that  the  amount  of  the  check 
had  simply  been  credited  to  Hoffman's  account,  and  that  no  money 
was  paid  to  him  by  the  plaintiff  upon  the  check  before  the  latter  had 
notice  of  its  dishonor.         ^ 

The  judgments  of  the  courts  below  should  be  reversed,  and  a  new 
trial  granted,  with  costs  to  abide  the  event. 


MERCHANTS'  NAT.  BANK  OF  ST.  PAUL  v.  SANTA  MARIA  SUGAR  CO. 

(Supreme  Court  of  New  York,  Appellate  Division,  1914.     162  App.  Div.  248, 

-147  N.  Y.  Supp.  498.) 

Action  by  the  Merchants'  National  Bank  of  St.  Paul  against  the 
Santa  Maria  Sugar  Company.  From  a  judgment  dismissing  the  com- 
plaint, plaintiff  appeals. 

Clarke,  J.  The  action  was  to  recover  $2,340  on  the  following 
paper  executed  by  defendant  and  delivered  to  the  Americon  Hoist  & 
Derrick  Company  of  St.  Paul : 

'T  shall  pay  to  the  order  of  the  American  Hoist  &  Derrick  Company 
on  the  30th  day  of  August,  1911,  in  the  city  of  New  York,  the  sum 
of  two  thousand  three  hundred  and  forty  ($2,340)  dollars  currency, 
for  amount  of  the  second  installment  agreed  on  of  a  crane  of  their 
manufacture  purchased  on  this  date,  according  to  specifications  of 
their  representative,  Mr".  H.  S.  Johannsen. 

"Dated,  Ingenio,  Santa  Maria,  August  30,  1910. 

"[Signed]      Santa  Maria  Sugar  Company,  Bernard  Pons. 

"For  $2,340.00  Cy.  together  with  interest  at  6%  per  annum  to  Au- 
gust 30,  1911." 

The  complaint  alleged  that  thereafter  and  before  its  maturity,  to 
wit,  on  or  about  March  29,  1911,  said  American  Hoist  &  Derrick 
Company  indorsed  and  delivered  said  note  to  the  plaintiff  for  value. 
*     *     *     In  its  decision  the  court  made  findings  of  fact  as  follows : 

That  before  maturity,  and  on  or  about  the  29th  of  March,  1911, 
the  American  Hoist  &  Derrick  Company  discounted  said  note  with  the 
above-named  plaintiff". 

That  the  plaintiff  credited  the  American  Hoist  &  Derrick  Company, 
which  maintained  a  regular  drawing  account  with  the  plaintiff,  with 
$2,427.36,  the  value  of  said  note. 

That  immediately  after  the  discounting  of  said  note  the  balance  on 
hand  to  the  credit  of  the  American  Hoist  &  Derrick  Company  was 
$22,661.13,  and  that  between  the  date  of  the  discounting  of  said  note, 
which  was  March  29,  1911,  and  the  time  when  the  plaintiff  was  noti- 
fied by  the  defendant  of  the  latter's  objection  to  the  note,  which  was 
some  time  shortly  after  April  26,  1911,  the  American  Hoist  &  Derrick 
Company  deposited  the  sum  of  $129,547.60  with  the  plaintiff  and  with- 
drew from  the  plaintiff  day  by  day  such  sums  as  to  make  the  total  of 
$110,999.58. 


Ch.  3)  WHO   ARE   HOLDERS   IN   DUE   COURSE  753 

That  during  said  period  the  smallest  balance  on  hand  at  the  bank 
to  the  credit  of  the  American  Hoist  &  Derrick  Company  was  $6,294.04 
on  April  18,  1911.     *     *     * 

That  at  maturity  said  note  was  duly  presented  for  payment  to  the 
defendant  and  payment  thereof  demanded,  but  no  part  thereof  was 
paid. 

That  the  plaintiff  at  the  time  it  discounted  said  note  had  no  knowl- 
edge or  suspicion  of  any  defect  or  infirmity  in  the  note  and  had  no 
such  knowledge  or  suspicion  until  its  receipt  of  defendant's  letter 
dated  Santa  Maria,  April  26,  1911. 

And  as  conclusions  of  law :  That  the  said  instrument  is  a  negotia- 
ble promissory  note.  That  the  plaintiff  herein  is  not  a  bona  fide 
holder  for  value  without  notice.     *     *     * 

The  main  question  involved  upon  this  appeal  does  not  seem  to  have 
been  directly  passed  upon  in  this  state.     *     *     * 

The  Trial  Term  found  that  until  one  month  after  plaintiff  had 
discounted  the  instrument  it  had  no  knowledge  or  suspicion  of  any 
infirmity  therein  or  equities  existing.  The  question  therefore  is  wheth- 
er by  discounting  the  note  and  by  the  subsequent  transactions  on  the 
account  it  can  be  considered  that  value  passed  therefor.  Of  course, 
the  mere  discounting  of  the  note  and  placing  the  amount  of  said  dis- 
count to  the  credit  of  the  holder  would  not  then  have  constituted  a 
transfer  for  value,  because  the  bank  w^ould,  under  those  circumstances, 
have  parted  with  nothing,  there  would  have  been  a  mere  bookkeeping 
entry.  *  *  *  But  if  the  sum  had  subsequently  been  checked  out, 
then  value  would  have  passed. 

The  respondent  claims  that  the  bank  always  had  on  account  a  sum 
in  excess  of  the  amount  of  this  note.  The  lowest  balance  on  any  day 
during  the  period  was  upwards  of  $6,000.  But  the  appellant  claims 
that  the  rule  of  law  is,  "The  first  money  in  is  the  first  money  out," 
that  the  first  items  on  the  debit  side  are  charged  against  the  first  items 
on  the  credit  side.  It  paid  out  continually,  and  the  only  reason  that 
it  had  a  balance  at  the  end  of  the  period  was  by  reason  of  a  continual 
flow  of  deposits ;  but  those  subsequent  deposits  went  to  meet  subse- 
quent drawings.  This  credit  was  exhausted  long  before  the  period 
expired. 

In  Fox  v.  Bank  of  Kansas  City,  30  Kan.  441,  1  Pac.  789,  *  *  * 
Mr.  Justice  Brewer  said :  "The  general  rule  as  to  the  application  of 
payments,  there  being  no  special  facts  to  interfere,  is  that  the  first 
payments  go  to  the  oldest  debts ;  so  all  the  money  draw^i  out  by  the 
Emporia  Bank,  in  the  absence  of  some  special  facts,  was  a  payment 
by  the  plaintiff  of  the  oldest  deposits  and  discounts;  and  when,  at 
the  close  of  February  21st,  the  balance  due  February  15th  had  been 
fully  checked  out,  the  plaintiff  had  paid  for  every  deposit  and  dis- 
■  count  made  by  the  Emporia  Bank  prior  to  February  15th.     *     *     *  " 

I  am  of  the  opinion  that,  as  there  is  no  controUing  authority  in  this 
state  to  the  contrary,  we  should  agree  with  the  well-reasoned  opinion 
of  Air.  Justice  Brewer,  supra,  followed  as  it  has  been  in  five  other 
states,  and  applv  the  rule  recognized  in  National  Park  Bank  v.  Sea- 
board Bank,  114  N.  Y.  28-35,  20  N.  E.  632,  11  Am.  St._  Rep.  612, 
that  the  first  debits  are  to  be  charged  against  the  first  credits.  It  fol- 
lows therefore,  upon  the  facts  as  found,  that  the  bank  was  a  bona 
fide  holder  for  value.    The  second  and  third  conclusions  of  law  should 


754  NEGOTIABLE   INSTRUMENTS  (Part  3 

be  reversed  and  a  finding  made  in  lieu  thereof  that  the  plaintiff  is  a 
bona  fide  holder  of  the  note  for  value  without  notice,  and,  in  accordance 
with  the  stipulation,  judgment  should  be  entered  for  the  plaintiff  upon 
the  note  with  costs. 

The  judgment  appealed  from  should  therefore  be  reversed,  and 
judgment  for  the  plaintiff  entered  as  indicated,  with  costs  to  the  ap- 
pellant.    *     *     * 


The  effect  of  section  24  is  merely  to  relieve  the  holder  from 
proving,  in  the  first  instance,  that  he  is  a  purchaser.  The  party 
sued  must  prove  that  the  holder  was  not  a  purchaser^,  e.,  that 
he  did  not  give  value:  otherwise,  it  will  be  presumed  that  the 
holder  gave  value. 

The  effect  of  section  27  is  to  prevent  a  pledgee  or  any  other 
holder  who  has  a  lien  on  the  instrument  from  acquiring  an  interest 
in  the  instrument  greater  than  the  amount  of  the  debt  secured. 
If  P.  owes  A.  $100,  and  P.  transfers  to  A.  a  negotiable  note  exe- 
cuted by  M.  for  $150,  to  secure  the  payment  of  the  $100  debt,  A. 
is  given  only  a  $100  interest  in  the  instrument.  This  does  not 
mean  that  in  all  cases  A.  will  be  prevented  from  recovering  $150 
in  the  event  that  A.  sues  M.  For  example,  if  the  circumstances 
were  such  that  P.  could  have  recovered  $150  from  M.,  then  A., 
although  he  holds  this  $150  note  as  collateral  security  for  $100, 
may  recover  $150  from  M.  But,  under  section  27,  it  is  clear  that 
$100  only  of  this  sum  will  belong  to  A.  The  balance  of  $50  will 
be  held  by  A.  in  trust  for  P.,  which  amount  P.  could  recover  from 
A.  If,  however,  M.  had  some  defense  as  against  P.,  such  as  want 
or  failure  of  consideration,  or  of  fraud,  or  payment  before  maturity, 
then  A.,  in  suing  M.,  could  not  recover  more  than  $100,  the  amount 
of  the  debt,  assuming  that  A.,  in  all  other  respects  was  a  holder  in 
due  course.  Obviously,  if  A.  had  taken  the  note  in  payment  of 
P.'s  debt  to  A.,  instead  of  as  collateral  security  for  the  debt,  A. 
could  then  recover  the  full  amount  of  the  instrument,  $150. 

Section  26  permits  a  donee  of  the  instrument  to  recover  if  any 
prior  party  parted  with  value.  This  section  was  discussed  in 
Chapter  I. 


SECTION  3.— MUST  BE  A  PURCHASER  BEFORE 
MATURITY 

The  theory  underlying  the  rule  that  a  holder,  in  order  to  be  a 
holder  in  due  course,  must  have  purchased  the  instrument  before 
maturity,  is  substantially  the  same  as  that  which  underlies  the  rule 
that  the  holder  in  due  course  must  be  one  who  takes  in  good  faith. 
The  theory  is  that,  if  an  instrument  is  not  taken  up  at  maturity, 
the  inference  is  that  the  person  primarily  liable  for  its  payment, 
who  failed  to  take  it  out  of  circulation  at  maturity,  did  so  because 
he  had  a  good  defense.     The  presumption  is  that  every  one  will 


Ch.  3)  WHO   ARE    HOLDERS   IX   DUE   COURSE  755 

take  up  his  commercial  paper  on  the  day  of  maturity.  The  com- 
mercial world  deals  in  paper  upon  this  assumption.  Of  course, 
many  negotiable  instruments  which  represent  bona  fide  debts  are 
not  always  taken  up  on  the  day  they  fall  due.  Nevertheless  the 
rule  that  a  holder,  in  order  to  be  a  holder  in  due  course,  must  have 
bought  the  instrument,  once  part  of  the  broader  rule  that  he  must 
take  in  good  faith,  is  now  crystallized  into  an  independent  rule, 
having  little  to  do  with  good  faith.  If  an  indorsee  bought  one 
day  after  maturity,  he  could  not  be  a  holder  in  due  course. 

The  rule  being  well  established  and  now  codified,  the  only 
difificulty  arises  in  its  application  to  varied  states  of  fact.  We 
have  three  situations,  which  must  be  dealt  with  separately:  (1) 
Where  the  instrument  bore  a  fixed  date  of  maturity.  (2)  Where 
the  instrument  was  payable  on  demand.  (3)  Where  the  instru- 
ment had  a  fixed  date  of  maturity,  but  subject  to  acceleration 
into  an  earlier  maturity  upon  the  happening  of  some  specified  act 
or  event. 

The  sections  of  the  Negotiable  Instruments  Taw  that  bear  on 
these  questions  are  as  follows : 

Section  52  (2),  A  holder  in  due  course  is  a  holder  who  has 
taken  the  instrument  before  it  v/as  overdue. 

Section  13.  Where  an  instrument  expressed  to  be  payable  at  a 
fixed  period  after  date  is  issued  undated,  or  where  the  acceptance 
of  an  instrument  payable  at  a  fixed  period  after  sight  is  undated, 
any  holder  may  insert  therein  the  time,  date  of  issue  or  accept- 
ance, and  the  instrument  shall  be  payable  accordingly.  The  in- 
sertion of  a  wrong  date  does  not  avoid  the  instrument  in  the  hands 
of  a  holder  in  due  course;  but  as  to  him  the  date  so  inserted  is  to 
be  regarded  as  the  true  date. 

Section  85.  Every  negotiable  instrument  is  payable  at  the  time 
fixed  therein  without  grace.  When  the  day  of  maturity  falls  on 
Sunday,  or  a  holiday,  the  instrument  is  payable  on  the  next  suc- 
ceeding business  day.  Instruments  falling  due  on  Saturday  are 
to  be  presented  for  payment  on  the  next  succeeding  business  day, 
except  that  instruments  payable  on  demand  may,  at  the  option  of 
the  holder,  be  presented  for  payment  before  twelve  o'clock  noon 
on  Saturday  where  that  entire  day  is  not  a  holiday. 

Section  53.  Where  an  instrument  payable  on  demand  is  nego- 
tiated an  unreasonable  length  of  time  after  issue  the  holder  is  not 
deemed  a  holder  in  due  course. 

Section  193.  In  determining  what  is  a  "reasonable  time"  or 
an  "unreasonable  time"  regard  is  to  be  had  to  the  nature  of  the 
instrument,  the  usage  of  trade  or  business  (if  any)  with  respect  to 
such  instruments  and  the  facts  of  the  particular  case. 

Section  86.  Where  the  instrument  is  payable  at  a  fixed  period 
after  date,  after  sight,  or  after  the  happening  of  a  specified  event, 
the  time  of  payment  is  determined  by  excluding  the  day  from 
which  the  time  is  to  begin  to  run  and  by  including  the  date  of 
payment. 


756  NEGOTIABLE   INSTRUMENTS  (Part  3 

Section  52  (2).  A  holder  in  due  course  is  a  holder  who  has  tak- 
en the  instrument  before  it  was  overdue  and  without  notice  that 
it  had  been  previously  dishonored,  if  such  was  the  fact. 

Section  117.  An  omission  to  give  notice  of  dishonor  by  non- 
acceptance  does  not  prejudice  the  rights  of  a  holder  in  due  course 
subsequent  to  the  omission. 

As  regards  the  situation  where  the  instrument  has  a  fixed  date 
of  maturity,  the  purchaser  will  be  able  to  ascertain  from  the  face 
of  the  paper  whether  the  date  of  maturity  has  arrived.  Of  course, 
he  will  run  the  risk  that  the  date  has  been  altered.  If  the  date 
has  been  erased  and  a  later  date  inserted,  the  purchaser's  rights 
will  be  determined  by  the  date  which  the  instrument  originally 
bore.  An  alteration  of  the  date  is  a  material  alteration.  A  per- 
son buying  the  instrument  after  the  actual  date  of  maturity,  but 
before  the  arrival  of  the  altered  date,  will  not  be  a  holder  in  due 
course.    He  is  a  taker  after  maturity. 

Most  of  the  difficulty  in  the  application  of  the  rule  that  a  holder 
in  due  course  must  be  one  who  bought  before  maturity  arises  in 
connection  with  demand  paper  and  paper  which  has  a  fixed  date 
of  maturity,  but  subject  to  earlier  payment  upon  the  happening  of 
a  specified  act  or  event.  As  regards  demand  paper,  we  note  that 
one  who  purchases  it  before  the  lapse  of  a  reasonable  time  from 
date  of  issue  will  be  regarded  as  a  purchaser  before  maturity. 
What  is  a  reasonable  time?  Section  193  provides  that  three  things 
must  be  taken  into  consideration:  (1)  The  nature  of  the  instru- 
ment; (2)  the  usage  of  trade;  and  (3)  the  facts  of  the  particular 
case. 

Since  the  nature  of  the  instrument  must  be  taken  into  consider- 
ation, we  should  expect  to  find  that  what  constituted  a  reasonable 
time  would  differ,  according  as  the  instrument  was  a  demand  note, 
a  demand  bill  of  exchange,  or  a  check.  Generally  speaking,  the 
time  within  which  one  might  safely  buy  a  check  would  be  shorter 
than  in  either  of  the  other  two  cases.  A  demand  note  would  have 
a  longer  life,  and  probably  a  demand  bill  of  exchange  would  have 
a  longer  life  than  a  demand  note;  at  least  it  would  seem  that  a 
foreign  bill  of  exchange  could  freely  circulate  longer  than  a  de- 
mand note.    A  certificate  of  deposit  would  have  a  still  longer  life. 

Demand  instruments  are  due  at  the  moment  of  issue.  The  stat- 
ute of  limitations  as  a  general  rule  begins  to  run  from  date.  Still 
the  law  does  not  regard  such  an  instrument  as  due  as  soon  as  is- 
sued, within  the  meaning  of  the  rule  that  a  holder  in  due  course 
must  be  one  who  takes  before  maturity.  If  it  did,  demand  instru- 
ments would  not  readily  circulate.  But  as  a  matter  of  fact  they 
are  intended  to  circulate  for  a  while,  and  the  question  is :  How 
long?  The  inherent  difficulty  in  being  able  to  ascertain  within 
any  degree  of  certainty  what  a  reasonable  time  is  has  led  a  few 
states  to  define  by  statute  what  shall  constitute  a  reasonable  time. 
Generally  the  matter  is  left  open. 


Ch.  3)  WHO   ARE   HOLDERS   IN  DUE  COURSE  757 

The  statutory  direction  to  look  at  usages  of  trade  in  determining 
what  shall  constitute  a  reasonable  time  is  most  important.  Banks 
sometimes  establish  a  custom  to  hold  demand  notes  for  a  specified 
period  of  time.  This  period  is  not  always  the  same.  The  period 
will  vary  with  the  community  and  with  general  credit  conditions. 
Sometimes  demand  paper  is  held  by  banks  on  the  general  under- 
standing that  demand  will  not  be  made  for  six  months.  Sometimes 
the  period  is  three  months.  In  certain  kinds  of  transactions  the 
period  is  much  shorter.  The  point  is,  however,  that  if  a  custom 
has  developed  in  a  community  to  such  an  extent  as  to  be  fairly 
well  known,  the  period  of  time  which  demand  paper  is  thus  held 
will  fix  the  time  within  which  it  is  safe  for  one  to  buy  demand 
paper. 

The  facts  of  the  particular  case  must  also  be  taken  into  consider- 
ation, and  such  facts  might  even  control  presumptions  arising  from 
the  character  of  the  paper  and  from  observing  business  usage. 
Stipulations  in  regard  to  interest  would  be  important;  Notations 
of  partial  payments  and  of  interest  payments  on  the  instrument 
would  be  important  in  this  connection.  The  field  of  inquiry  is 
obviously  quite  broad.  The  following  cases  illustrate  the  appli- 
cation of  the  rule. 


ESTES  V.  LOVERIXG  SHOE  OO. 

(Supreme  Court  of  Minnesota,  1894.     59  Minn.  504,   61   N.  W.   674, 
50  Am.  St.  Rep.  424.) 

Collins,  J.  *  *  *  It  is  argued  by  counsel  for  appellant  that 
these  checks  were  stale  and  overdue  when  transferred  to  the  plaintiff, 
and  are  therefore  subject  to  any  equitable  defense  which  might  have 
been  available  so  long  as  they  remained  in  the  hands  of  the  payee; 
but  the  decided  weight  of  authority  is  opposed  to  this  claim.  It  is 
to  be  borne  in  mind  that  no  question  as  to  the  discharge  of  an  indorser 
by  delay  in  presentation,  or  by  the  failure  of  the  bank  on  which  the 
checks  were  drawn  in  the  meantime,  arises  here ;  but  the  attack  is 
made  by  the  maker  solely  upon  the  consideration.  As  before  stated, 
the  checks  were  drawn  and  dated  October  26th,  at  St.  Paul,  and 
were  cashed  about  five  days  later  (six  days,  at  most)  in  Denver,  Colo., 
and  there  were  no  circumstances,  except  the  period  of  time  which  had 
passed,  and  the  fact  that  the  payee  was  attempting  to  cash  the  checks 
at  a  point  some  distance  from  the  city  in  which  they  were  drawn,  to 
put  plaintiff  on  his  guard.  In  these  days  of  large  business  enterprises 
and  extraordinary  facilities  for  traveling  there  was  nothing  suspicious 
in  the  fact  that  the  checks  were  presented  at  a  city  distant  from  that 
in  which  they  were  drawn  and  made  payable;  and,  as  to  the  time,, 
the  rule  is  well  settled  that  a  holder  who  in  good  faith  and  for  value, 
takes  a  check  several  days  after  it  is  drawn,  receives  it  without  being 
subject  to  defenses  of  which  he  had  no  notice  before  or  at  the  time  his 
title  accrues.     *     *     * 


758  NEGOTIABLE   INSTKUMENTS  (Part  3 


MOREY  V.  WAKEFIELD  et  al. 
(Supreme  Court  of  Vermont,  1868.    41  Vt.  24,  98  Am.  Dec.  562.) 

PiERPOiNT,  C.  J.  This  action  is  brought  by  the  plaintiff  as  the  in- 
dorsee of  a  promissory  note,  given  by  the  defendant  to  J.  D.  &  H. 
Smith  or  bearer,  payable  on  demand  with  interest,  dated  the  13th  day 
of  July,  1865,  and  sold  and  indorsed  to  the  plaintiff  by  the  payees  in 
the  fore  part  of  May,  1866.  It  is  conceded  that  this  note  was  given 
for  intoxicating  liquor  bought  by  the  maker,  of  the  payees,  to  be  sold 
in  violation  of  law,  and  under  such  circumstances  that,  as  between  the 
original  parties  to  it,  it  could  not  be  enforced. 

The  plaintiff  claims  to  recover  on  the  ground  that  he  is  an  innocent 
holder  for  value,  ignorant  of  the  consideration  for  wHich  it  was  giv- 
en, and  that  he  took  it  in  the  due  course  of  business,  while  it  was  cur- 
rent and  before  it  was  due. 

The  first  question  that  naturally  suggests  itself  is  whether  the  plain- 
tiff did  in  fact  take  this  note  while  current  and  before  it  was  due. 
If  he  did  not,  the  other  questions  which  have  been  discussed,  become 
immaterial,  as  no  question  is  made  by  the  plaintiff  but  that,  if  he  took 
the  note  when  past  due,  he  took  it  subject  to  all  defenses  that  would 
have  been  available  if  the  suit  had  been  by  the  original  payees. 

The  note  was  payable  on  demand  with  interest,  and  was  taken  by  the 
plaintiff  of  the  payees  about  ten  months  after  it  was  executed.  Was 
the  note  then  past  due? 

We  do  not  now  consider  this  an  open  question  in  this  state ;  certain- 
ly not,  so  far  as  defenses  by  the  maker  are  concerned.  This  precise 
question  arose  in  Camp  v.  Scott,  14  Vt.  387.  In  that  case  the  court 
held  that  a  note  payable  on  demand  with  interest,  and  negotiated  two 
months  after  its  date,  was  negotiated  when  it  was  past  due.  and  held 
the  maker  liable  as  the  trustee  of  the  original  payee,  although,  as  the 
law  then  stood  in  this  state,  no  maker  of  a  negotiable  note  could  be 
made  liable 'as  trustee  of  the  payee,  until  the  note  had  become  due  in 
his  hands  unnegotiated.  We  think  this  case  must  be  controlled  by 
that.     *     *     * 

judgment  of  the  county  court  reversed,  and  judgment  for  the  de- 
fendant for  his  cost.  

WEBER  V.  HIRSCH  et  al. 
(Supreme  Court  of  New  York,  Appellate  Term,  1917.     163  N.  Y.  Supp.  1086.) 

Action  by  I.  Newton  Weber  against  Oscar  A.  Hirsch  and  Ah 
Schwartz.    Judgment  for  plaintiff  in  part,  and  he  appeals. 

MuLLAN,  J.  Plaintiff,  having  sued  on  defendant's  demand  note, 
indorsed  to  him  by  the  payee  for  value  and  without  notice  of  any 
equities,  appeals  from  a  judgment  in  his  favor  for  the  amount  of  the 
note  less  the  amount  of  a  debt  due  to  defendant  by  the  payee.  The 
learned  trial  justice  allowed  the  offset  upon  the  theory  that  plaintiff 
was  not  a  holder  in  due  course,  because  of  an  unreasonable  delay  in 
negotiation. 

Whether  a  delay  is  unreasonable  or  not  depends  upon  the  particular 
facts  in  each  case.  Here  the  facts  are  not  in  dispute.  Plaintiff  w^as 
a  brother-in-law  of  the  payee,  and  knew  that  the  defendant  and  the 
payee  were  in  business  together.  The  note  was  indorsed  to  plaintiff 
three  months  and  six  days  after  it  was  made.     We  see  here  no  cir- 


Ch.  3).  WHO   ARE    HOLDERS   IN   DUE   COURSE  759 

cumstance  justifying  a  suspicion  in  the  mind  of  the  holder,  or  indicat- 
ing that  the  delay  in  negotiation  was  "for  an  unreasonable  length  of 
time  after  the  issue  of  the  note,"  within  the  meaning  of  section  4  of 
the  Negotiable  Instruments  Law. 

Judgment  modified,  by  increasing  the  amount  thereof  to  $380.07, 
with  interest  from  November  30,  1915,  and  appropriate  costs  in  the 
court  below,  and,  as  so  modified,  affirmed. 


The  third  case,  above  mentioned,  where  the  instrument  has  a 
fixed  date  of  maturity,  but  is  subject  to  acceleration  into  an  earlier 
maturity  is  one  in  which  there  is  some  conflict  of  authority  as  re- 
gards its  negotiability,  a  situation  which  will  be  most  unfortunate, 
if  the  conflict  becomes  widespread,  because  the  use  of  this  kind  of 
instrument  is  becoming  very  common.  The  problem  is  simply 
this :  A  note  will  contain  a  fixed  date  of  maturity,  and  will  also 
contain  a  clause  authorizing  the  holder  to  confess  judgment  at  any 
time  after  date,  or  to  declare  the  note  due  upon  default  of  interest 
payments  or  of  installments  of  principal,  or  to  declare  the  note 
due  upon  the  depreciation  of  collateral  put  up  by  the  maker  to 
secure  payment  of  the  note,  or  upon  the  ntaker's  failure  to  deposit 
additional  collateral.  We  have  already  discussed  at  some  length 
the  question  as  to  whether  such  an  instrument  is  negotiable,  and 
we  have  found  that  there  is  considerable  conflict  among  the  au- 
thorities— some  holding  that  the  time  of  payment  is  uncertain ;  others 
holding  that  it  is  certain.  Assuming  that  the  instrument  is  held 
to  be  negotiable — and  this  must  be  the  situation  before  our  ques- 
tion arises — is  a  purchaser  of  such  an  instrument  after  the  event 
has  happened  but  before  the  fixed  date  arrives,  a  purchaser  before 
maturity?  If  the  stipulation  is  treated  as  giving  an  option  only  to  the 
holder  to  declare  the  note  due,  and  he  has  not  yet  done  so,  there  is 
no  difficulty  in  holding  that  a  purchaser  is  a  purchaser  before  maturity. 
But  if  the  holder  has  demanded  payment,  and  payment  has  been  re- 
fused, and  the  holder  has  then  negotiated  the  instrument  to  the  pres- 
ent holder,  is  the  latter  a  purchaser  before  maturity?  Again,  suppose 
the  stipulation  be  treated,  not  as  giving  to  the  holder  an  option  to 
declare  the  note  due,  but  as  actually  maturing  the  instrument  upon  the 
happening  of  the  event.  Here  it  is  more  difficult  to  hold  that  a  pur- 
chaser after  this  date,  but  before  the  date  arrives,  is  a  purchaser  before 
maturity.  Of  course,  the  holder  may  not  know  that  the  event  has 
happened,  but  it  would  be  possible  to  require  him  to  ascertain  at 
his  peril  whether  it  had  happened  or  not. 


GILLETTE  et  al.  v.  HODGE  et  al. 

(United  States  Circuit  Court  of  Appeals,  Eighth  Circuit,  1909.     170  Fed.  313, 

9.5  C.  C.   A.  205.) 

Amidon,  District  Judge.  This  was  an  action  brought  by  Hodge 
Bros.,  the  defendants  in  error,  against  the  plaintiffs  in  error,  on  three 
promissory  notes,  dated  April  13,  1903,  payable  to  Robert  Burgess  & 


760  NEGOTIABLE   INSTRUMENTS  (Part  3 

Son,  or  order,  respectively,  July  1,  1904,  1905,  and  1906,  with  interest 
payable  annually.  The  notes  contained  a  provision  that  default  in  the 
payment  of  interest  should  cause  the  whole  note  to  become  imme- 
diately due.  The  plaintiffs  are  private  bankers,  who  discounted  the 
notes  at  the  rate  of  10  per  cent,  on  June  2,  1904,  passing  the  proceeds 
to  the  credit  of  the  payees,  who  afterwards  drew  the  same  in  full. 
The  answer  interposes  two  defenses :  First,  that  the  notes  were  given 
as  the  purchase  price  of  a  stallion,  and  that  the  horse  failed  to  com- 
ply with  the  warranties  made  by  the  vendors ;  second,  that  the  notes 
were  handed  to  the  payees  by  the  defendants  upon  an  express  agree- 
ment that  they  should  not  be  treated  as  delivered  until  the  signature 
of  four  other  persons  named  in  the  answer  should  be  obtained,  and 
that,  unless  such  signatures  should  be  obtained,  the  notes  should  be 
of  no  effect.  To  make  these  defenses  available,  the  defendants  first 
sought  to  show  that  the  notes  were  dishonored  at  the  time  they  were 
acquired  by  the  plaintiffs.  Their  main  reliance  for  establishing  this 
fact  is  the  provision  in  the  notes  that  they  should  become  immediately 
due  if  there  was  default  in  the  payment  of  interest.  The  first  year's 
interest  was  due  April  13,  1904.  This  installment  of  interest  was, 
therefore,  past  due  on  June  2d,  when  plaintiffs  acquired  the  notes ; 
and  it  is  urged  that  this  fact,  when  combined  with  the  clause  of  the 
note  just  referred  to,  caused  the  notes  to  mature  April  13th,  and  that 
they  were,  therefore,  dishonored  at  the  time  of  the  indorsement.  The 
difficulty  with  this  contention  is  that  the  provision  of  the  notes  upon 
which  it  is  based  is  not  self-executory.  It  simply  gave  to  the  holder 
an  option  to  declare  the  notes  due  for  default  in  the  payment  of  in- 
terest. There  is  some  conflict  in  judicial  decisions  as  to  the  effect  of 
such  a  provision  (Hodge  Bros,  v."  Wallace,  129  Wis.  84,  108  N.  W. 
212,  116  Am.  St.  Rep.  938);  but  it  was  expressly  ruled  by  the  Su- 
preme Court  of  the  United  States  in  the  case  of  Chicago  Railroad 
Equipment  Co.  v.  Merchants'  National  Bank,  136  U.  S.  268,  10  Sup. 
Ct.  999,  34  L.  Ed.  349,  that  a  similar  provision  did  not  of  itself  cause 
the  notes  to  mature  upon  default  in  the  payment  of  interest.  *  *  * 
On  quite  elementary  principles,  the  judgment  in  this  case  was  right, 
and  should  be  affirmed. 

CITIZENS'  NAT.  BANK  OF  GLENWOOD  SPRINGS  v.  FIRST  NAT.  BANK 

OF  PORTLAND,  OREGON. 
(Supreme  Court  of  Colorado,  1919.  66  Colo.  426,  182  Pac.  12,  5  A.  L.  R.  587.) 
Denison,  J.  *  *  *  -^Q  transaction  between  the  acceptor  and 
holder  of  a  negotiable  instrument  can  advance  its  maturity  as  against 
a  subsequent  holder  in  due  course,  even  though  it  was  negotiated  after 
such  transaction.  If  it  could,  the  safety  of  negotiable  paper  would  be 
destroyed,  and  the  law  merchant  nullified.  When  a  certified  check  is 
presented  for  payment,  the  debtor  bank,  if  it  has  a  defense  against 
the  holder,  can  protect  itself  by  marking  the  face  of  the  paper,  so  as 
to  destroy  its  negotiability.    *    *    * 


It  is  believed  that,  in  any  and  all  cases  where  the  fixed  date  of 
maturity  has  not  yet  arrived,  a  purchaser  before  the  fixed  date 
should  be  regarded  as  a  purchaser  before  maturity.  This  seems 
to  have  been  provided  for  in  one  case  in  the  Negotiable  Instru- 


Ch.  3)  WHO   ARE   HOLDERS   IN   DUE   COURSE  761 

ments  Law,  and  by  analogy  should  be  extended  to  all  other  cases. 
Section  52  provides  that  a  holder  in  due  course  is  one  who  takes 
the  instrument  before  it  is  overdue  and  without  notice  that  it  had 
previously  been  dishonored,  if  such  was  the  fact,  and  section  117 
provides  that  the  omission  to  give  notice  of  dishonor  by  non- 
acceptance  does  not  prejudice  the  rights  of  a  holder  in  due  course. 
These  sections  refer  to  the  case  of  a  time  bill  of  exchange  which 
was  in  fact  presented  for  acceptance  before  the  date  fixed  for  pay- 
ment. Other  sections  of  the  act  make  this  a  dishonor  of  the  in- 
strument. It  is  then  due  and  the  holder  may  sue  upon  it.  But 
the  effect  of  sections  52  and  117  apparently  enables  a  purchaser  of 
such  instrument  after  dishonor  by  non-acceptance  and  before  the 
arrival  of  the  fixed  date  of  maturity  to  be  a  holder  in  due  course. 
This  rule  should  be  applied  in  all  cases  where  the  instrument  has 
matured  as  the  result  of  the  operation  of  an  acceleration  clause 
before  the  fixed  date  of  maturity  arrives. 


SECTION  4.— MUST  BE  A  PURCHASER  IN  GOOD  FAITH 

In  any  case  where  it  becomes  important  for  the  holder  of  a  ne- 
gotiable instrument,  in  his  suit  thereon  against  the  maker,  drawer, 
or  acceptor,  to  establish  his  position  as  that  of  a  holder  in  due 
course,  the  object  of  the  plaintiff  is  to  be  thereby  enabled  to  shut 
out  defenses  which  the  defendant  had  against  the  party  with  whom 
he  dealt.  If  there  are  no  such  defenses,  it  is  immaterial  whether 
the  plaintiff  is  a  holder  in  due  course  or  not.  If  there  are  de- 
fenses, such  as  lack  or  failure  of  consideration,  fraud,  or  payment 
before  maturity,  the  plaintiff  will  be  able  to  recover  from  the 
defendant  only  in  the  event  that  he  is  a  holder  in  due  course.  It 
is  perfectly  apparent,  therefore,  that  the  holder  acquires  this  ex- 
traordinary right  to  compel  a  person  to  pay  a  sum  of  money  un- 
der these  circumstances,  only  because  the  holder  is  an  innocent 
purchaser.  If  the  holder  has  knowledge  of  this  defense,  there  is  no 
reason  why  he  should  be  given  this  preferred  position.  The  law 
therefore  properly  provides  that,  .unless  the  purchaser  was  a  pur- 
chaser in  good  faith,  he  will  not  be  a  holder  in  due  course.  Sev- 
eral sections  of  the  Negotiable  Instruments  Law  deal  with  the  re- 
quirement of  good  faith. 

Section  52.  A  holder  in  due  course  is  a  holder  who  has  taken 
the  instrument  (1)  complete  and  regular  on  its  face  and  (3)  in 
good  faith;  and  section  52  (4)  that  at  the  time  it  was  negotiated 
to  him  he  had  no  notice  of  any  infirmity  in  the  instrument  or  defect 
in  the  title  of  the  person  negotiating  it. 

Section  56.  To  constitute  notice  of  an  infirmity  in  the  instru- 
ment or  defect  in  the  title  of  the  person  negotiating  the  same,  the 
person  to  whom  it  is  negotiated  must  have  had  actual  knowledge 
of  the  infirmity  or  defect  or  knowledge  of  such  facts  that  his  ac- 
tion in  taking  the  instrument  amounted  to  bad  faith. 

Section  55.     The  title  of  a  person  who  negotiates  an  instrument 


762  NEGOTIABLE   INSTRUMENTS  (Part  3 

is  defective  within  the  meaning  of  this  act  when  he  obtained  the 
instrument,  or  any  signature  thereto,  by  fraud,  duress,  or  force 
and  fear,  or  other  unlawful  means,  or  for  an  illegal  considera- 
tion, or  where  he  negotiates  it  in  breach  of  faith,  or  under  such 
circumstances  as  to  amount  to  fraud. 

Section  54.  Where  the  transferee  receives  notice  of  any  infirm- 
ity in  the  instrument  or  defect  in  the  title  of  the  person  nego- 
tiating the  same  before  he  has  paid  the  full  amount  agreed  to 
be  paid  therefor,  he  will  be  deemed  a  holder  in  due  course,  only  to 
the  extent  of  the  amount  theretofore  paid  by  him. 

Section  59.  Every  holder  is  deemed  prima  facie  to  be  a  holder 
in  due  course;  but  when  it  is  shown  that  the  title  of  any  person 
who  has  negotiated  the  instrument  was  defective,  the  burden  is  on 
the  holder  to  prove  that  he  or  some  person  under  whom  he  claims 
acquired  the  title  as  a  holder  in  due  course.  But  the  last  mention- 
ed rule  does  not  apply  in  favor  of  a  party  who  became  bound  on 
the  instrument  prior  to  the  acquisition  of  such  defective  title. 

It  is  to  be  noticed  that  a  holder,  in  order  to  be  holder  in  due 
course,  must  have  acquired  title  to  the  instrument  without  knowl- 
edge of  two  varieties  of  facts:  (1)  Infirmities  in  the  instrument; 
and  (2)  defects  in  title.  These  two  expressions:  Infirmities  in 
the  instrument  and  defects  in  title  have  a  more  or  less  overlap- 
ping meaning,  but  it  is  necessary  to  note  that  there  are  two  very 
different  kinds  of  rights  possessed  by  other  persons,  which  the 
holder  must  be  unaware  of  if  he  is  to  be  holder  in  due  course.  We 
may  more  accurately  refer  to  these  rights  of  third  parties  as  (1) 
equities  of  defense  and  (2)  equities  of  ownership.  The  expres- 
sion "infirmity  in  the  instrument"  is  used  to  describe  equities  of 
defense,  while  the  expression  "defects  in  title"  describes  a  kind 
of  title  which  is  not  perfect,  a  situation  which  obviously  gives 
rise  to  an  equity  of  ownership  in  some  other  person.  To  illustrate 
the  distinction  between  equities  of  defense  and  equities  of  owner- 
ship :  If  P.  obtains  M.'s  note  by  fraud,  or  without  consideration 
and  P.  negotiates  to  A.,  M.'s  equity  against  P.  is  an  equity  of  de- 
fense— an  infirmity  in  the  instrument.  P.'s  title  is  not  defective. 
On  the  other  hand,  if  P.  obtains  M.'s  note  for  a  consideration  and 
there  is  no  fraud — that  is,  obtains  the  instrument  under  circum- 
stances where  M.  really  is  indebted  to  P.  in  the  sum  specified — we 
have  a  case  where  there  cannot  be  any  infirmity  in  the  instrument, 
any  equity  of  defense.  But  there  may  arise  a  claim  of  ownership 
which  will  render  the  title  of  a  subsequent  holder  defective.  Sup- 
pose P.  intrusts  this  note  to  A.  for  a  special  purpose,  perhaps  with 
directions  to  deposit  it  to  P.'s  account.  Suppose,  further,  that  the 
instrument,  at  the  time  it  left  P.'s  hands,  was  in  such  form  that 
it  could  be  negotiated  by  delivery,  that  is,  was  then  payable  to 
bearer,  either  because  originally  made  payable  to  P.  or  bearer,  or 
because  of  the  blank  indorsement  of  P.  If  the  note  were  payable 
to  P.'s  order,  A.,  by  virtue  of  his  possession  of  a  negotiable  instru- 
ment payable  to  bearer  has  the  legal  power  to  pass  a  good  title  to 


Ch.  3)  WHO   ARE   HOLDERS   IN   DUE   COURSE  763 

an  innocent  purchaser,  but  since  his  possession  was  for  a  special 
purpose,  he  violates  a  contract  duty  in  doing  so.  If  A.,  therefore, 
violates  his  trust  and  negotiates  to  B.,  there  is  an  outstanding 
claim  of  ownership,  an  equity  of  ownership,  in  P.,  and  A.  has  the 
defective  title.  This  is  the  transaction  described  in  the  last  clause 
of  section  55.  Similarly  the  title  of  a  thief  or  finder  of  bearer 
paper  is  likewise  defective.  The  person  who  lost  it  or  from  whom 
it  was  stolen  has  the  equity  of  ownership.  At  this  point  it  should 
be  recalled  that  if  the  person  intrusted  with  the  instrument  for 
the  special  purpose,  or  the  thief  or  the  finder,  had  possession  of 
paper  then  payable  to  the  order  of  the  payee  or  of  some  special  in- 
dorsee, such  party  in  possession  does  not  even  have  a  defective 
title.  He  has  no  title  at  all.  He'  has  no  power  to  negotiate. 
If  the  indorsement  of  the  payee  or  special  indorsee  be  forged,  no 
title  passes  to  the  transferee.  Such  a  transferee,  no  matter  how 
innocent,  cannot  be  a  holder  in  due  course.  He  is  not  even  a 
holder.  He  is  merely  a  person  who  has  physical  possession  of  a 
piece  of  paper  evidencing  a  series  of  contracts  which  is  owned  by 
the  person  whose  name  was  forged  who  in  law  is  still  the  holder. 

Section  55  makes  mention  of  another  kind  of  defect  of  title; 
that  is,  another  situation  out  of  which  may  arise  an  equity  of  own- 
ership. The  first  clause  of  the  section  states  that  a  title  is  de- 
fective when  he,  the  party  who  sold  the  instrument  to  the  person 
now  claiming  to  be  a  holder  in  due  course  (let  us  call  him  A.), 
obtained  the  instrument  by  fraud,  duress,  or  force  or  fear,  or 
other  unlawful  means.  In  the  case  above  discussed  the  instru- 
ment was  assumed  to  have  been  acquired  by  A.  (1)  by  the  volun- 
tary act  of  P.,  the  owner;  (2)  by  finding;  (3)  by  larceny.  In 
each  case,  his  title  was  defective.  We  also  find,  from  the  first  part 
of  section  55  that  A.'s  title  will  be  defective  if  A.  acquires  the  in- 
strument by  fraud,  etc.,  practiced  by  him  upon  P. 

In  speaking  of  defective  titles,  we  should  keep  in  mind  the  vari- 
ous ways  in  which  they  are  created.  Wherever  we  find  a  defec- 
tive title  in  one  person,  there  is  some  other  person  who  has  the 
equity  of  ownership.  And  it  is  the  equity  of  ownership  to  which 
the  holder  in  due  course  is  not  subject. 

To  summarize:  The  holder  in  due  course  takes  free  from  two 
kinds  of  equities  :    Equities  of  defense ;   and  equities  of  ownership. 

We  shall  later  see  that  a  holder  not  in  due  course  will  take 
free  from  some  kinds  of  equities  of  ownership,  but  that  he  cannot 
'  take  free  from  equities  of  defense. 

A  great  deal  of  litigation  over  negotiable  instruments  raises 
questions  relating  to  bad  faith.  If  the  instrument  were  procured 
by  the  payee  from  the  maker  by  fraud,  or  without  consideration, 
or  under  circumstances  revealing  some  other  personal  defense,  it 
is  almost  certain  that  the  payee  will  negotiate  the  instrument  to  a 
holder  in  due  course,  for  that  is  the  only  opportunity  he  has  of 
forcing  collection.  It  will  be  to  the  interest  of  the  payee  to  nego- 
tiate to  one  who  was  absolutely  bona  fide,  but  it  often  happens 


764  NEGOTIABLE   INSTRUMENTS  (Part  3 

that  the  indorsee  from  the  payee  is  so  related  in  business  with  the 
payee  that  he  does  have  some  intimation  of  the  existence  of  the 
defense;  but,  as  the  cases  show,  the  maker  must  be  able  to  charge 
the  holder  with  considerable  knowledge  of  the  situation  before 
he  is  deemed  to  be  a  purchaser  in  bad  faith. 


LUTTON  V.   BAKER. 
(Supreme  Court  of  Iowa,  1919.    187  Iowa,  753,  174  N.  W.  599,  6  A.  L.  R.  1696.) 

The  plaintiff  asserts  that  he  is  an  "innocent  purchaser"  of  a  note 
made  by  Baker  to  Le  Grand  and  that  he  is  entitled  to  have  a  lien  es- 
tablished to  secure  payment  of  said  note.  The  trial  court  gave  him 
judgment  against  Baker  and  established  the  lien  as  prayed.  Baker 
appeals. 

Salinger,  J.  *  *  *  It  is  assigned  the  court  erred  in  holding 
that  the  note  sued  on  could  be  enforced  notwithstanding  failure  to  at- 
tach revenue  stamps  as  required  by  act  of  Congress  *  *  *  in  force 
at  the  time.  *  *  *  The  appellee  responds  *  *  *  that  there  is 
no  evidence  that  the  failure  to  stamp  was  due  to  fraudulent  intent ;  and 
that  in  the  absence  of  such  intent — inter  partes,  at  least — such  failure 
is  of  no  materiality.  That  does  not  quite  meet  the  case.  The  appellee 
asserts  himself  to  be  an  innocent  purchaser  for  value  and  has  the  bur- 
den of  proof  on  that  allegation.  The  defendant  expressly  denied  that 
plaintiff  was  such  purchaser,  and  his  argument  is  that  when  a  note 
which  the  revenue  laws  require  to  be  stamped  is  not  stamped  it  ought 
not  be  held  "complete  and  regular  on  its  face."  *  *  *  Indeed, 
the  note  set  out  in  the  abstract  does  not  purport  to  be  stamped.  And, 
so,  the  buyer  must  have  known  that  the  stamp  law  had  been  disre- 
garded. And  the  sole  question  is  the  effect  of  such  knowledge.  Sec- 
tion 3060a52,  Code  Supplement  1913,  defines  a  holder  in  due  course  to 
be,  among  other  things,  one  who  has  taken  an  instrument  which  "is 
complete  and  regular  upon  its  face."  We  held  in  the  case  of  In  re 
Philpott's  Estate,  169  Iowa,  555,  151  N.  W.  825,  Ann.  Cas.  1917B,  839, 
that  a  note  payable  "on  or  before  four after  date"  is  not  "com- 
plete and  regular  on  its  face,"  is  not  negotiable,  and  he  who  takes  the 
same  is  not  a  "holder  in  due  course."  We  now  hold  that  a  note  which 
lacks  the  stamping  required  by  law  is  not  "complete  and  regular  on  its 
face,"  and  that  therefore  plaintiff  is  not  a  holder  in  due  course,  and 
must  meet  any  defense  that  is  good  against  the  payee  who  transferred 
to  plaintiff. 

The  defendant  maker  does  interpose  defenses  which,  if  proved,  will 
defeat  the  payee  who  transferred  to  plaintiff.  One  of  them  is  that 
when  the  note  was  signed  he  and  Le  Grand  also  signed  a  contract  that 
no  payment  should  be  made  unless  Le  Grand  first  performed  certain 
things  that  he  agreed  to  perform.  Assume  that  all  defenses  but  this 
last  one  have  not  been  established.  That  will  not  destroy  this  last  de- 
fense if  that  be  proved.  Is  it  proved?  The  testimony,  including  that  of 
Humphrey,  a  witness  for  plaintiff,  clearly  establishes  that  such  a  con- 
tract was  made.  The  evidence  that  it  was  never  performed  or  offered 
to  be  performed  is  undisputed.  If  Le  Grand  had  not  sold  the  note,  this 
defense  would  prevent  his  collecting  the  note.  As  said,  this  plaintiff  is 
in  no  better  position  than  Le  Grand.  If  this  were  all,  it  was  error 
to  give  judgment  against  Baker.     *    *    * 


Ch,  3)  WHO  ARE   HOLDERS   IN   DUE   COURSE  765 

The  decree  below  will  be  reversed.  The  trial  court  is  directed  to  dis- 
miss the  petition  and  enter  judgment  for  costs  in  favor  of  appellant 
Louis  Baker.  

ELIAS  V.  WHITNEY. 

(Supreme  Court  of   New  York,  Appellate  Term,   1906.     50  Misc.   Rep.  326, 

98  N.  Y.  Supp.  667.) 

Truax,  J.  *  *  *  The  evidence  showed  that  the  check  in  suit  had 
been  changed  before  it  reached  the  plaintiff,  and  that  a  mere  inspection 
of  the  check  showed  such  change.  There  is  no  evidence  showing  that 
the  defendant  authorized  or  assented  to  the  alteration,  but  the  appel- 
lant says  that  he  is  "a  holder  in  due  course,"  and  not  a  party  to  the 
alteration,  and  that,  under  section  205  of  the  negotiable  instruments 
law  (Laws  1897,  p.  745,  c.  612),  he  may  enforce  payment  on  the  check, 
according  to  its  original  tenor.  Section  91,,  p.  732,  of  the  negotiable 
instruments  law,  states  what  constitutes  a  holder  in  due  course.  Ac- 
cording to  that  section,  a  holder  in  due  course  is  a  holder  who  has 
taken  an  instrument  that  is  complete  and  regular  on  its  face.  This  in- 
strument was  not  complete  and  regular  on  its  face  at  the  time  plaintiff 
took  it.  As  we  have  stated  before,  a  mere  inspection  of  the  instru- 
ment showed  its  defect,  and  therefore,  under  subdivision  41  of  the 
negotiable  instruments  law,  plaintiff  had  notice  of  an  infirmity  in  the 
instrument  at  the  time  he  took  it. 

[Order  setting  aside  verdict  for  plaintiff  is  affirmed.] 


COLE   V.   HARRISON. 

(Supreme  Court  of  New  York,  Appellate  Division,  1915.     167  App.  Div.  336, 

153  N.  Y.  Supp.  200.) 

DowLiNG,  J.  The  action  is  brought  upon  a  promissory  note  made 
by  defendant  to  the  order  of  Donald  McLean,  dated  February  20,  1911, 
for  the  sum  of  $15,000  payable  at  the  National  Park  Bank  three 
months  after  date,  with  interest,  and  indorsed  by  Donald  McLean, 
and  by  him  transferred  to  plaintiff.  It  appears  that  the  defendant 
was  a  client  of  McLean,  who  had  originally  obtained  from  her  cer- 
tain promissory  notes  signed  by  her  to  pay  a  balance  due  on  an  in- 
vestment in  what  is  called  the  "Minwax"  business,  purchased  by  her 
from  Clifford  L.  Aliller  &  Co.  in  January,  1910.  These  notes  were  dis- 
counted at  the  National  Park  Bank,  and  new  notes  were  obtained  from 
her  from  time  to  time  by  McLean;  each  set  of  notes  being  used  os- 
tensibly to  take  up  prior  obligations,  the  latter,  however,  never  being 
returned  to  her.  Finally,  in  February,  1911,  the  defendant's  son  be- 
ing very  ill,  she  signed  at  McLean's  request  four  more  notes,  as  those 
then  in  the  bank  were  due,  and  though  she  at  first  refused,  she  finally 
signed  these  four  notes  in  blank,  on  McLean's  representation  that  he 
was  to  use  them  to  pay  the  balance  due  on  the  Minwax  transaction. 
When  delivered,  the  notes  bore  only  the  defendant's  signature  and  the 
ordinary  printed  matter.  One  of  these  notes  was  filled  in  by  McLean 
with  the  date  February  20,  1911,  the  amount  $15,000,  the  payee  him- 
self, the  place  where  payable  the  National  Park  Bank,  the  time  of 
maturity  three  months,  and  the  addition  of  the  words  "with  interest" 
and  as  filled  in  was  thereafter  indorsed  by  McLean  to  the  plaintiff, 
and  is  the  note  sued  upon.     The  defendant  never  gave  McLean  au- 


706  NEGOTIABLE   INSTRUMENTS  (Part  3 

thority  to  fill  out  the  note  in  the  form  in  which  it  was  finally  trans- 
ferred, nor  to  transfer  it  to  the  plaintiff. 

The  plaintiff  testified  that  he  had  many  times  loaned  money  to  Mc- 
Lean, who  was  also  his  attorney,  and  that  McLean  had  told  him  he 
was  in  trouble  with  a  woman  client  of  his,  whose  money  he  had  taken 
and  invested  in  the  Minwax  Company,  and  who  threatened,  unless  she 
was  paid  back  her  money,  to  begin  disbarment  proceedings  against  him. 
Nothing  was  said  between  them  about  the  note  in  suit.  On  March 
2,  19n,  plaintiff  finally  agreed  to  loan  McLean  $15,000  to  enable  him 
to  pay  off  this  client, 'who  was  pressing  him  for  her  money,  and  on 
March  4th  plaintiff  gave  his  check  to  McLean,  to  the  latter's  order. 
in  the  sum  of  $LS,000  drawn  on  the  Brooklyn  Trust  Company,  which 
was  duly  deposited  by  McLean  for  collection  and  the  proceeds  re- 
ceived by  him  through  the  National  Park  Bank  of  New  York.  Plain- 
tiff testifies  that  on  March  2d  he  promised  McLean,  by  telephone, 
that  he  would  send  him  the  amount  of  this  loan  on  the  4th,  and  that 
lie  did  send  his  check  for  $15,000  on  the  morning  of  March  4th, 
whereupon  McLean  sent  him  the  note  in  suit,  together  with  two  in- 
surance policies,  in  the  sum  of  $10,000  and  $5,000,  respectively.  He 
says  that  he  had  always  received  collateral  security  on  the  other  loans 
he  had  made  to  McLean,  and  that  he  expected  such  security  upon  this 
loan  of  $15,000,  although  nothing  was  said  about  the  need  of  security, 
and  he  had  no  knowledge  of  what  the  nature  thereof  would  be  until  he 
received  McLean's  letter.  Plaintiff  says  that  the  note  and  the  two  in- 
surance policies  were  inclosed  in  the  letter  from  McLean  which  is  in 
evidence,  marked  March  2d;  but  the  letter  itself  contains  no  refer- 
ence of  any  kind  to  the  inclosure  of  a  note  and  refers  only  to  "two 
policies."  It  is  to  be  noted,  also,  that  the  letter  is  dated  March  2d; 
whereas  the  loan  was  not  made  until  March  4th,  and  plaintiff  claims 
he  received  the  letter  after  the  loan  was  made  on  that  date.  No  ex- 
planation is  given  as  to  why  the  letter  contains  no  reference  to  the 
note.  The  assignment  of  the  policies  bore  date  of  March  2d,  the  same 
as  the  letter.  Plaintiff'  says  that  the  omission  of  any  reference  to 
the  $15,000  note  did  not  strike  him  as  strange.  When  the  note  became 
due,  it  was  not  presented  for  payment,  and  no  instructions  had  been 
left  by  plaintiff  with  his  representative  in  this  country  to  present  the 
same  for  payment,  but  simply  instructions  as  to  what  was  to  be  done  in 
regard  to  the  deposit  of  the  partial  payment,  which  had  been  prom- 
ised by  McLean  to  be  made  when  the  note  was  due. 

Plaintiff  never  sued  McLean  upon  the  note,  and  no  demand  was  ever 
made  upon  defendant  for  payment  until  plaintiff's  attorney  wrote  her 
on  December  23,  1913,  nearly  three  years  after  the  maturity  of  the 
note.  Plaintiff  admits  that  he  did  not  inquire  of  McLean  who  the 
maker  of  the  note  was  when  he  received  it,  and,  though  the  note  was 
signed  "L  S.  Harrison,"  and  he  noticed  when  he  received  the  note 
that  the  body  of  it  was  in  McLean's  handwriting,  he  asked  no  questions 
of  any  kind  about  the  note.  There  was  no  evidence  offered  tending 
to  contradict  plaintiff's  version  of  the  transaction.  Under  these 
circumstances  it  would  seem  that,  although  the  plaintiff  was  not  entitled 
to  the  direction  of  a  verdict  in  his  favor,  yet  the  finding  of  the  jury 
against  him  was  against  the  weight  of  the  evidence.     *     *     * 

What  constitutes  good  faith  upon  the  part  of  a  holder  of  a  nego- 
tiable paper  has  been  defined  by  the  Court  of  Appeals  in  the  following 
language:     "He  is  not  bound  at  his  peril  to  be  on  the  alert  for  cir- 


Ch,  3)  WHO   AKE   HOLDERS   IN   DUE   COURSE  7G7  " 

cumstances  which  might  possibly  excite  the  suspicion  of  wary  vigil- 
ance ;  he  does  not  owe  to  the  party  who  puts  the  paper  afloat  the  duty 
of  active  inquiry  in  order  to  avert  the  imputation  of  bad  faith.  The 
rights  of  the  holder  are  to  be  determined  by  the  simple  test  of  honesty 
and  good  faith,  and  not  by  a  speculative  issue  as  to  his  diligence  or 
negligence.  The  holder's  rights  cannot  be  defeated  without  proof  of 
actual  notice  of  the  defect  in  title  or  bad  faith  on  his  part  evidenced 
by  circumstances.  Though  he  may  have  been  negligent  in  taking  the 
paper,  and  omitted  precautions  which  a  prudent  man  would  have 
taken,  nevertheless,  unless  he  acted  mala  fide,  his  title  according  to 
settled  doctrine,  will  prevail."  Cheever  v.  Pittsburg  Ry.  Co.,  150  N. 
Y.  59,  44  N.  E.  701,  34  h.  R.  A.  69,  55  Am.  St.  Rep.  646. 

Had  plaintiff  simply  produced  his  check  to  the  order  of  McLean  for 
the  full  amount  of  the  note,  in  the  absence  of  any  proof  of  knowledge 
on  his  part  of  the  circumstances  under  which  the  note  was  given,  and 
its  diversion  by  McLean,  or  knowledge  by  him  of  facts  making  his 
action  amount  to  bad  faith,  he  would  have  been  entitled  to  recover. 
But  there  are  circumstances  attending  the  transaction  which,  as  they 
depend  for  their  effect  and  bearing  thereupon  solely  on  the  plaintiff's 
testimony,  left  his  credibility  as  to  those  matters  a  question  for  the 
determination  of  the  jury.  Among  these  circumstances  were  the  fact 
that  McLean,  to  plaintiff's  knowledge,  was  financially  embarrassed, 
and  was  threatened  with  disbarment  proceedings  by  a  client  of  his, 
whose  money  was  claimed  to  have  been  misapplied ;  that  this  client  was 
a  woman ;  that  the  note  tendered  plaintiff  was  apparently  signed  in  a 
woman's  handwriting;  that  the  body  of  the  instrument  was  all  filled 
in  to  plaintiff's  knowledge,  in  McLean's  handwriting;  that  the  letter 
claimed  to  have  inclosed  the  note,  and  the  policies  contained  no  refer- 
ence to  the  note ;  that  plaintiff  made  no  inquiry  of  any  kind  as  to  the 
transaction,  or  McLean's  acquisition  of  the  note ;  and  that  no  demand 
was  made  upon  defendant  for  payment  of  the  note  until  a  period  of 
nearly  three  years  had  elapsed.  And  yet,  while  all  these  details  com- 
bined were  sufficient  to  raise  an  issue  of  fact  as  to  plaintiff's  good 
faith  in  the  transaction,  they  were  not  enough  to  justify  a  verdict 
for  the  defendant,  since  something  more  than  mere  suspicion  is  requir- 
ed to  prove  bad  faith  on  the  part  of  the  holder  of  the  note. 

The  judgment  and  order  appealed  from  will  therefore  be  reversed, 
and  a  new  trial  ordered,  with  costs  to  the  appellant  to  abide  the  event. 


WALTERS  V.  ROCK. 
(Supreme  Court  of  North  Dakota,  1908.     18  N.  D.  45,  115  N.  W.  511.) 

Action  by  A.  N,  Walters  against  Jacob  Rock.  Judgment  for  de- 
fendant, and  plaintiff  appeals. 

Morgan,  C.  J.  Action  on  a  promissory  note  by  an  indorsee  claim- 
ing to  be  a  purchaser  in  due  course.  The  answer  alleges  that  the  note 
was  procured  through  fraudulent  representations  on  the  part  of  the 
payee,  and  that  the  plaintiff  took  said  note  with  knowledge  of  the 
fraud  by  which  it  was  executed  and  delivered.  The  jury  found  in 
favor  of  the  defendant.  A  motion  for  a  new  trial  was  made  and  de- 
nied. Plaintiff  appeals  from  the  order  denying  a  new  trial.  The  as- 
signments are  numerous ;  but  the  one  principally  relied  on  is  that  the 
evidence  is  insufficient  to  justify  the  verdict. 


768  NEGOTIABLE    INSTRUMENTS  (Part  3 

The  original  payee  of  the  note  was  one  Dr.  Rea,  of  MinneapoHs, 
who  traveled  as  a  specialist  in  curing  various  diseases.  The  defend- 
ant consulted  him  at  Moorhead,  Minn.,  and  was  informed  that  he  was 
afflicted  with  a  cancer,  and  the  doctor  agreed  to  cure  him  for  $250. 
The  defendant  had  only  $25  in  money,  but  gave  his  note  for  $250  and 
paid  him  $25  in  cash,  which  was  immediately  indorsed  as  a  payment 
on  the  note.  The  doctor  then  treated  him  by  injecting  some  prep- 
aration into  the  alleged  cancerous  growth  and  agreed  to  send  him  some 
more  medicine  by  express.  In  a  very  few  days  the  medicine  came 
by  express,  but  the  defendant  refused  to  accept  it  for  the  reason  that 
it  had  been  consigned  C.  O.  D.  and  required  a  payment  of  $101.50 
before  the  express  company  could  deliver  it  to  him.  The  defendant 
then  consulted  a  local  physician,  who  cured  him  in  about  one  week. 
These  are  the  facts  as  related  by  the  defendant,  and  must  have  been 
found  to  be  true  by  the  jury  in  view  of  the  verdict  in  his  favor.  Ac- 
cepting the  same  as  true,  we  think  that  the  allegation  of  fraud  in  the 
inception  of  the  note  was  sustained.  The  promise  to  cure  the  defend- 
ant must  have  been  made  without  any  intention  of  performing  it.  Un- 
der our  statute  the  making  of  such  a  promise  constitutes  fraud.   *   *   * 

The  evidence  also  amply  sustains  the  fact  that  the  doctor  was  not 
acting  in  good  faith  in  his  representations.  He  did  not  send  the  medi- 
cines in  accordance  with  his  agreement,  but  sent  them  by  express  with 
intent  to  force  a  payment  of  $100  not  due  before  the  medicines  could 
be  used.  He  sold  the  note  very  soon  after  tlie  refusal  to  pay  the  $100 
to  the  plaintiff.  Whether  the  plaintiff  is  an  indorsee  in  due  course  is 
a  question  in  dispute  between  the  parties.  The  plaintiff  claims  that 
the  note  duly  indorsed  was  delivered  to  him  on  June  6th,  and  he  there- 
after paid  $202.50  therefor,  having  purchased  on  a  10  per  cent,  dis- 
count. He  does  not  claim  to  have  paid  for  it  on  that  day,  and  first 
says  that  he  does  not  know  the  day  when  he  paid  for  it.  He  states 
that  he  paid  for  it  later,  when  he  made  a  "settlement"  with  the  doc- 
tor for  some  other  notes.  The  evidence  shows  that  the  plaintiff  was 
accustomed  to  buy  notes  from  the  doctor  regularly,  and  had  been  ac- 
customed to  do  so  for  three  years,  and  that  he  had  some  trouble  in 
collecting  some  of  them  because  the  parties  "did  not  want  to  pay  them." 
He  does  not  specifically  remember  the  reasons  why  the  makers  refused 
to  pay  the  notes,  but  knows  that  he  has  a  considerable  number  of 
these  notes  now  on  hand,  past  due  and  uncollected.  He  made  no 
inquiry  concerning  the  financial  responsibility  of  the  defendant  before 
purchasing  the  note,  unless  from  the  doctor. 

The  defendant  was  a  stranger  to  him.  He  immediately  placed  the 
note  in  the  hands  of  an  agency  for  collection,  although  it  was  not  yet 
due.  He  knew  that  the  doctor  was  accustomed  to  travel  throughout 
the  country  in  his  professional  capacity,  and  took  notes  in  payment  of 
services  performed.  He  says  further :  "I  did  not  know  of  any  dispute 
or  defense  of  the  note  at  the  time  I  purchased  it.  I  did  not  inquire." 
He  nowhere  states  that  he  bought  the  note  in  good  faith.  He  does  not 
state  that  he  had  no  notice  of  defenses  at  the  time  he  paid  for  the 
note.  It  will  be  noted  that  it  was  bought  and  delivered  to  him  on 
June  6th.  He  claims  that  he  paid  for  it  later  when  a  "settlement"  was 
made  for  this  note  and  others.  On  this  question  he  testifies:  "Q. 
At  the  time  that  you  bought  this  note  in  suit  from  Dr,  Rea,  did  you  buy 
any  others  from  him?  A.  I  don't  remember.  O.  But  at  the  time  you 
settled  with  him  for  this  note  you  settled  for  several  others  at  the 


Ch.3)  WHO   ARE    HOLDERS   IN   DUE   COURSE  709 

same  time,  did  you  not?  A.  Very  likely  so.  Q.  Do  you  remember 
when  you  paid  for  the  note  ?  A.  I  do  not."  On  redirect  examination, 
in  response  to  leading  questions,  he  says  that  he  is  positive  that  the 
"settlement"  was  made  prior  to  July  15th,  which  would  be  about 
three  weeks  before  the  note  became  due.  Dr.  Rea  was  also  a  witness, 
and  on  the  question  of  the  negotiation  of  the  note  testified  simply  that 
the  "note  was  sold  before  maturity  on  June  6th."  Nothing  was  stated 
by  him  about  the  time  of  payment  nor  how  paid. 

On  this  testimony  we  are  urged  to  declare  that  the  verdict  is  not 
sustained  by  the  evidence,  and  that  it  is  uncontradicted  that  the  plain- 
tiff was  an  innocent  purchaser.  After  carefully  reading  all  of  the 
testimony  of  the  plaintiff  we  find  it  evasive,  contradictory,  and  of  an 
unsatisfactory  character  to  prove  facts  entirely  within  the  knowledge 
of  himself  and  Dr.  Rea.  There  is  not  even  an  attempt  to  show  that 
there  was  no  notice  of  defenses  on  the  day  that  he  claims  to  have  paid 
for  the  note.  If  he  then  had  notice  of  defenses  to  the  note,  he  would 
not  be  an  innocent  purchaser.    *    *    * 

The  plaintiff's  contention,  therefore,  is  that  he  is  a  bona  fide  holder 
by  virtue  of  purchase  and  payment  before  day  of  maturity.  Payment 
of  value  on  a  purchase  before  maturity  is  prima  facie  evidence  that 
the  purchase  is  in  due  course.  We  think  that  the  record  shows  facts 
sufficient  to  sustain  the  verdict  that  plaintiff  did  not  purchase  in  good 
faith.  Conceding  that  payment  was  made  before  maturity,  we  are 
convinced  that  tlie  jury  had  sufficient  facts  before  them  to  warrant 
the  inference  therefrom  that  plaintiff'  did  not  buy  the  note  in  good 
faith  as  contemplated  by  the  statute  and  the  law  merchant.  A  pur- 
chase in  due  course  means  a  purchase  before  maturity  for  value,  with- 
out notice,  and  in  good  faith.  Plaintiff"  had  handled  Dr.  Rea's  notes 
before  as  an  employe  of  a  collection  firm,  and  had  purchased  a  large 
number  of  his  notes  before.  Many  of  these  notes  were  still  uncollect- 
ed and  past  due.  As  to  some  of  these  notes  payment  had  been  re- 
fused. He  immediately  placed  the  notes  in  other  hands  for  collection 
after  their  purchase.  He  had  no  knowledge,  and  is  not  certain  wheth- 
er he  made  any  inquiry,  as  to  the  financial  responsibility  of  the  mak- 
er. He  and  Dr.  Rea  were  well  acquainted  and  intimate  in  business  re- 
lations. Litigation  had  grown  put  of  some  of  these  purchases  of 
notes  from  Dr.  Rea. 

In  Knowlton  v.  Schultz,  6  N.  D.  417,  71  N.  W.  550,  Judge  Corliss 
said:  "It  may  be  true  in  this  case  that  the  plaintiff  bought  before 
maturity  for  value,  and  without  notice  of  any  defense ;  and  yet  he 
may  not  be  a  purchaser  in  good  faith.  He  may,  when  he  bought,  have 
had  knowledge  of  facts  which  excited  in  his  mind  such  suspicions  as 
to  the  paper  that  he  feared  to  make  an  investigation  lest  it  would  dis- 
close a  defense,  and  therefore  he  carefully  shut  his  eyes  and  bought 
in  the  dark.  In  such  a  case  he  would  not  be  a  purchaser  in  good 
faith" — citing  cases.  "In  this  case  the  plaintiff  is  careful  not  to  state 
that  he  bought  in  good  faith,  nor  does  he  offer  any  explanation  of  the 
circumstances  surrounding  the  purchase.  *  *  *  The  plaintiff', 
having  the  burden  of  proof,  has  failed  to  sustain  it  by  positive  evidence. 
The  inference  of  his  good  faith  to  be  drawn  from  the  other  facts 
sworn  to  by  him  is  by  no  means  strong,  and  the  case  discloses  several 
circumstances  which  cast  grave  doubt  upon  the  fact  of  his  good  faith 
in  the  transaction."  In  the  case  at  bar  we  find  the  same  circumstances 
B.&  B. Bus. Law— 49 


770  NEGOTIABLE   INSTRUMENTS  (Part  3 

practically  as  in  that  case  and  others  that  tend  to  show  bad  faith  in 
not  making  inquiry  concerning  the  title  to  the  note  in  question.  The 
evidence  of  want  of  notice  of  defective  title  at  the  time  the  money  is 
claimed  to  have  been  paid  is  very  unsatisfactory.     *    *    * 

The  plaintiff  also  had  positive  knowledge  of  the  fact  that  payment 
was  refused  on  many  of  Dr.  Rea's  notes.  It  savors  of  a  purpose  to 
avoid  inquiry  amounting  in  law  to  bad  faith.  The  rule  is  stated  by 
Joyce  on  Defenses  to  Commercial  Paper  as  follows  in  section  475 : 
''But,  if  the  acts  of  the  holder  of  the  paper  in  obtaining  the  paper  con- 
stitute bad  faith,  he  will  not  be  entitled  to  protection  as  a  bona  fide 
holder.  It  may,  therefore,  be  stated  as  a  rule  that  suspicious  circum- 
stances alone,  even  though  sufficient  to  put  an  ordinarily  prudent  per- 
son on  inquiry,  will  not,  in  the  absence  of  bad  faith  or  a  willful  dis- 
regard of  the  facts  showing  an  infirmity  of  the  paper,  destroy  the  title 
of  a  taker  of  negotiable  paper  as  that  of  a  bona  fide  holder."  *  *  * 
The  circumstances  shown  by  the  record,  taken  all  together,  are  sufficient 
to  overcome  the  prima  facie  presumption  of  good  faith  raised  by 
proof  of  purchase  for  value  before  maturity.  It  is  well  settled  in  this 
state  that,  when  it  is  shown  that  there  was  fraudln  the  inception  of  a 
note,  the  burden  rests  upon  the  purchaser  to  establish  that  he  pur- 
chased the  same  in  due  course  and  in  good  faith. 

The  order  appealed  from  is  affirmed. 


HARTINGTON  NAT.  BANK  v.  BRESLTN  et  al. 

(Supreme  Court  of  Nebraska,  1910.     SS  Neb.  47.  128  N.  W.  659,  31  L.  E.  A. 
[N.   S.]  130,  Ann.  Cas.  1912B,  1008.) 

Rose;,  J.  This  is  a  suit  on  a  promissory  note  for  $400,  dated  June 
18,  1907,  and  due  six  months  hence.  W.  J.  Breslin  and  John  Wiebel- 
haus  were  makers  and  the  Plartington  National  Bank  was  the  payee 
and  holder.  The  summons  was  not  served  on  Breslin  and  the  con- 
troversy is  between  the  bank  as  plaintiff  and  Wiebelhaus  as  defendant. 
From  a  judgment  on  the  verdict  of  a  jury  for  the  full  amount  of 
plaintiff's  claim,  defendant  has  appealed. 

The  substance  of  the  defense  pleaded  is:  Defendant  and  Breslin 
signed  the  note,  but  left  a  blank  for  the  name  of  the  payee.  It  was 
agreed  between  them  that  the  note  should  be  used  by  Breslin  in  pur- 
chasing a  meat  market  at  Fordyce  from  the  owner  whose  name  was 
at  the  time  unknown  but  which  afterward  was  found  to  be  Jacob 
Hauri.  In  the  event  of  a  purchase  Hauri's  name  was  to  be  inserted 
in  the  blank,  but  otherwise  the  note  was  to  be  returned  to  defendant. 
The  insertion  of  the  name  of  the  bank  as  payee  was  not  authorized  by 
defendant  and  he  never  consented  thereto.  The  proof  of  these  facts 
is  uncontradicted.     *     *     * 

When  the  note  was  delivered  to  plaintiff  it  was  a  perfect  instrument, 
with  the  exception  of  a  blank  for  the  name  of  the  payee.  It  had  not 
been  altered  and  bore  on  its  face  no  intimation  of  the  agreements 
pleaded  as  a  defense.  *  *  *  Afterward  plaintiff  inserted  its  own 
name  in  the  blank  as  payee,  having  had  no  actual  notice  of  the  al- 
leged agreements  between  the  makers. 

Plaintiff  contends  that  defendant  made  no  defense  to  the  note  and 
that  on  the  undisputed  evidence  the  judgment  rendered  was  proper. 
This  position  seems  to  be  correct,  if  the  controversy  is  to  be  determined 
without  regard  to  the  Negotiable  Instruments  Law  of  1905.     *     *     * 


Ch.  3)  WHO   ARK    HOLDERS   IN   DUE   COURSE  771 

According  to  the  rules  of  the  law  merchant,  when  defendant  signed 
the  note  without  restriction,  leaving  a  blank  for  the  name  of  the 
payee,  and  intrusted  it  to  his  comaker,  he  gave  to  a  bona  fide  holder 
implied  authority  to  fill  the  blank  and  perfect  the  instrument.     *     *     * 

Under  the  law  merchant  a  bona  fide  holder  was  permitted  to  insert 
his  name  in  a  blank  left  for  the  name  of  the  payee.  *  *  =(=  On  the 
record  presented  there  can  be  no  doubt  that  in  taking  the  note  the 
bank  acted  honestly,  relying  upon  a  well-established  custom.  *  *  * 
This  rule  should  be  applied  in  the  present  case  unless  it  has  been 
changed  by  statute.  Before  the  note  was  signed,  however,  the  negoti- 
able instruments  law  was  passed  and  by  it  the  transaction  in  contro- 
versy must  be  tested.  Generally  this  act  retains  the  rules  of  the  law 
merchant,  and  its  purpose,  as  suggested  by  its  title,  is  "to  establish  a 
law  uniform  with  the  laws  of  other  states."  While  England,  and  most 
of  the  states  of  this  country,  have  been  consistent  in  making  such  stat- 
utes uniform,  an  examination  of  the  holdings  of  the  courts  in  which 
"those  acts  have  been  construed  indicates  a  diversity  of  opinion.  The 
view,  however,  that  the  provisions  of  section  14  of  the  Nebraska  ne- 
gotiable instruments  act,  which  is  invoked  by  defendant  herein,  change 
the  rules  of  the  law  merchant  in  material  respects  appears  to  be  unani- 
mous.    *     *     * 

Section  14  provides :  "Where  the  instrument  is  wanting  in  any  ma- 
terial particular,  the  person  m  possession  thereof  has  a  prima  facie  au- 
thority to  complete  it  by  filling  up  the  blanks  therein.  And  a  signature 
on  a  blank  paper  delivered  by  the  person  making  the  signature  in  or- 
der that  the  paper  may  be  converted  into  a  negotiable  instrument  op- 
erates as  a  prima  facie  authority  to  fill  it  up  as  such  for  any  amount. 
In  order,  however,  that  any  such  instrument  when  completed  may  be 
enforced  against  any  person  who  became  a  party  thereto  prior  to  its 
completion,  it  must  be  filled  up  strictly  in  accordance  with  the  author- 
ity given  and  within  a  reasonable  time.  But  if  any  such  instrument 
after  completion  is  negotiated  to  a  holder  in  due  course,  it  is  valid 
and  effectual  for  all  purposes  in  his  hands,  and  he  may  enforce  it  as  if 
it  had  been  filled  up  strictly  in  accordance  with  the  authority  given  and 
within  a  reasonable  time."     *     *     * 

Within  the  meaning  of  this  language,  defendant  became  a  party 
to  the  note  "prior  to  its  completion,"  and  therefore  in  order  that  it  may 
be  enforced  against  him  the  blank  "must  be  filled  up  strictly  in  accord- 
ance with  the  authority  given."  *  *  *  That  defendant  gave  plain- 
tifif  no  authority  to  fill  the  blank  with  its  own  name  is  shown  by  un- 
contradicted testimony.  The  verdict  against  him,  therefore,  is  not  sus- 
tained by  sufficient  evidence — a  question  raised  in  both  courts  by  an 
assignment  of  error.  For  this  reason  the  enforcement  of  the  statute 
requires  a  reversal,  which  is  ordered. 


ROCHESTER  &  C.  TURNPIKE  ROAD  CO.  v.  PAVIOUR. 

(Court  of  Appeals  of  New  York,  1900.     164  N.  Y.  2S1,  58  N.  E.  114, 
52  L.  R.  A.  790.) 

Action  by  the  Rochester  &  Charlotte  Turnpike  Road  Company 
against  Robert  S.  Paviour.  From  a  judgment  of  the  Appellate  Di- 
vision, affirming  a  judgment  in  favor  of  plaintiff,  defendant  appeals. 

In  1896  the  plaintiff",  a  domestic  turnpike  corporation,  operated  a 


772  NEGOTIABLE   INSTRUMENTS  (Part  3 

turnpike  which  extended  from  the  city  of  Rochester  to  the  village  of 
Charlotte,  and  one  Marsenus  H.  Briggs  was,  and  for  several  years  had 
been,  its  treasurer.     In   June,    1896,  the  defendant,   who   resided  at 
Rochester,  received  a  letter  from  Mrs.  O.  S.  Warren,  of  Silver  City, 
N.   M.,  inclosing  four  fire  insurance  policies,  and  requesting  hmi  to 
collect  the  premiums  upon  the  same.     Said  policies  were  issued  by 
various  companies,  through   Mrs.  Warren  as  their  agent,  to  Walter 
B.  Duffy,  a  prominent  business  man  of  Rochester,  upon  buildings  sit- 
uated in  Pyramid,  N.  M.     For  several  years  Mrs.  Warren  had  for- 
warded similar  policies  on  this  property  to  the  defendant,  who  had  col- 
lected the  premiums  for  her,  and  remitted  the  same,  after  deducting 
the  amount  agreed  upon  for  his  compensation.     It  was  his  habit  to  de- 
liver the  policies  to  Mr.  Briggs,  \vho  paid  him  the  premiums  thereon, 
sometimes  in  cash  and  sometimes  by  the  check  of  Mr.  Duffy  or  of 
George  C.  Buell,  another  prominent  business  man  of  Rochester,  but 
never  with  the  check  of  the  plaintiff.     The  defendant  did  not  know 
who  was  hable  for  the  premiums  except  as  he  learned  it  from  the  pol- 
icies, and  it  did  not  expressly  appear  what  relation  Mr.  Briggs  sus- 
tained to  the  owner  of  the  property  insured.    Upon  the  receipt  of  said 
letter  in  June,  1896,  the  defendant,  according  to  his  custom,  delivered 
the  policies  to  Mr.  Briggs,  and  in  July  two  other  policies  upon  the  same 
property  were  received  from  Mrs.  Warren,  which  he  also  delivered  to 
Mr.  Briggs,  who  was  a  man  of  repute  and  a  member  of  a  prominent 
law  firm  in  Rochester.     The  premiums  were  not  paid  at  the  time  ei- 
ther set  of  policies  was  delivered;    but,  after  payment  had  been  de- 
mandc-d  several  times  by  the  defendant,  Briggs  gave  him  a  check  on 
account,  dated  June  17,  1896,  drawn  upon  the  Central  Bank  of  Roches- 
ter, payable  to  the  order  of  the  defendant,  for  $150,  signed,  "Rochester 
&  Charlotte  Turnpike  Road  Co.     M.  H.  Briggs,  Treas."    On  the  24th 
of  July  following,  Briggs  gave  the  defendant  a  check,  similar  in  all 
respects,  except  that  it  was  for  the  sum  of  $300,  and  subsequently  he 
paid  the  balance  of  the  premiums  from  his  own  funds.     The  defend- 
ant deposited  these  checks  in  the  Traders'  Bank  of  Rochester,  where 
he  did  his  banking  business,  procured  drafts  for  the  amount  going  to 
^Irs.  Warren,  and  sent  them  to  her.    The  checks  were  paid  upon  pres- 
entation in  the  ordinary  course  of  business  from  moneys  belonging  to 
the  plaintiff  on  deposit  in  the  Central  Bank.     This  action  was  brought 
to  recover  the  amount  paid  by  means  of  these  checks  as  money  of  the 
plaintiff  received  by  the  defendant  to  its  use.     The  plaintiff  had  no  in- 
terest in  the  policies,  and  no  business  relations  with  the  defendant,  and 
was  indebted  neither  to  him  nor  to  Briggs,  who  used  the  checks  with- 
out authority,  and  thus  embezzled  the  money  drawn  thereby.     At  the 
close  of  the  evidence  the  court  directed  a  verdict  for  the  plaintiff'. 

Vann,  J.  By  delivering  the  policies  to  Briggs  without  collecting  the 
premiums'  at  the  time,  the  defendant  apparently  gave  credit  for  the 
same,  and  thus  made  the  debt  his  owm.  At  all  events,  he  subsequently 
treated  it  as  a  debt  ow^ng  by  Briggs  to  himself,  the  same  as  he  had 
similar  claims  under  like  circumstances  in  previous  years.  Briggs  had 
no  authority,  either  actual  or  apparent,  to  give  the  checks  of  the  plain- 
tiff in  payment  of  his  own  debt  or  that  of  a  third  person.  If  the  de- 
fendant knew  or  believed,  or  had  good  reason  to  believe,  that,  in  giv- 
ing the  checks,  Briggs  was  appropriating  the  money  of  the  plaintiff  to 
the  payment  of  his  own  debt,  or  one  that  he  treated  as  his  own,  he  had 
no  right  to  accept  them  without  inquiry.     While  he  was  not  bound  to 


Ch.  3)  WHO   ARE   HOLDERS   IN   DUE   COURSE  773 

be  on  the  watch  for  facts  which  would  put  a  very  cautious  man  on 
his  guard,  he  was  bound  to  act  in  good  faith.  ""  *  *  Even  if  his 
actual  good  faith  is  not  questioned,  if  the  facts  known  to  him  should 
have  led  him  to  inquire,  and  by  inquiry  he  would  have  discovered  the 
real  situation,  in  a  commercial  sense  he  acted  in  bad  faith,  and  the 
law  will  withhold  from  him  the  protection  that  it  would  otherwise 
extend. 

The  checks  themselves  gave  notice  of  a  suspicious  fact,  and  invited 
inquiry  in  relation  thereto.  They  showed  upon  their  face  that  Briggs 
was  apparently  using  the  money  of  the  plaintiff  for  his  own  purposes, 
since  they  were  not  his  checks,  but  the  checks  of  a  corporation  issued 
by  him  as  its  treasurer.  In  the  absence  of  express  authority,  or  of 
that  which  may  be  implied  from  past  conduct  known  to  the  corpora- 
tion, he  could  not  lawfully  use  the  checks,  which  stood  as  its  money, 
for  such  a  purpose,  as  the  defendant  is  presumed  to  have  known.  There 
was  no  express  authority  and  nothing  to  indicate  that  Briggs  was  im- 
pliedly authorized  to  thus  use  the  money  of  the  plaintiff,  and  the  pre- 
sumption was  the  other  way.  The  plaintiff,  as  its  name  indicated,  was 
not  a  trading  corporation,  but  a  local  plank-road  company,  with  no 
authority  to  own  buildings  situated  out  of  the  state.  It  would  be  ex- 
traordinary for  a  concern  which  merely  operated  a  short  plank  roafl 
in  this  state  to  have  any  interest  in  buildings  in  New  Mexico,  or  to  be 
indebted  for  premiums  upon  policies  issued  thereon,  and  the  admitted 
facts  compel  us  to  assume  that  the  defendant  so  regarded  it.  More- 
over, the  policies  themselves,  as  the  defendant  knew,  were  not  issued 
in  the  name  of  the  plaintiff  as  the  owner  of  the  buildings,  and  there  was 
no  connection,  apparent  or  otherwise,  between  it  and  the  policies. 
Without  inquiry  he  accepted  checks  drawn  by  Briggs  as  treasurer  of 
the  plaintiff  in  payment  of  a  debt  which  he  had  no  reason  to  believe 
was  for  it  to  pay,  and  which  he  had  strong  reason  to  believe  had  be- 
come the  debt  of  Briggs  himself.  He  called  for  no  explanation  from 
him,  made  no  inquiry  at  the  office  of  the  plaintiff,  or  of  any  one  repre- 
senting it,  which  would  naturally  have  disclosed  the  fraud,  but  accepted 
the  checks  without  question,  drew  the  money,  and  thereby  ran  the 
risk  of  being  called  upon  to  restore  it. 

The  facts  known  to  the  defendant  should  have  aroused  his  suspicion, 
and  led  him,  as  an  honest  man,  to  make  some  investigation,  before  he 
accepted  the  money  of  a  corporation,  which  owed  him  nothing,  in  pay- 
ment of  a  claim  that  he  held  agamst  some  one  else.  *  *  *  Among 
the  heaviest  losses  in  business  are  those  which  result  from  a  blind  trust 
in  men  on  account  of  their  standing  in  the  community,  without  making 
the  investigation  required  by  common  prudence.  There  was  a  shadow 
on  the  checks,  and  the  defendant  could  not,  in  good  faith,  accept 
them  until  it  disappeared.  By  accepting  them  he  did  an  act  which  he 
had  reason  to  believe  would  affect  the  rights  of  a  third  party,  and  he 
could  not,  in  justice  to  that  party,  ignore  the  suspicion  which  the  facts 
should  have  aroused.  One  who  suspects,  or  ought  to  suspect,  is  bound 
to  inquire,  and  the  law  presumes  that  he  knows  whatever  proper  in- 
quiry would  disclose.  While  the  courts  are  careful  to  guard  the  inter- 
ests of  commerce  by  protecting  the  negotiation  of  commercial  paper, 
they  are  also  careful  to  guard  against  fraud  by  defeating  titles  taken 
in  bad  faith,  or  with  knowledge,  actual  or  imputed,  which  amounts  to 
bad  faith,  when  regarded  from  a  commercial  standpoint.     *     *     * 

As  the  rules  of  law  governing  the  case  are  now  well  settled,  we  shall 


774  NEGOTIABLE   INSTRUMENTS  (Part  3 

refer  to  but  few  authorities,  and  those  of  recent  date  in  this  court. 
In  Wilson  V.  Raih-oad  Co.,  120  N.  Y.  145,  24  N.  E.  384,  17  Am.  St. 
Rep.  625,  it  was  stated,  as  a  general  rule,  "that  one  who  receives  from 
an  officer  of  a  corporation  the  notes  or  securities  of  such  corporation, 
in  payment  of,  or  as  security  for,  a  personal  debt  of  such  officer,  does 
so  at  his  own  peril.  Prima  facie  the  act  is  unlawful,  and,  unless  actu- 
ally authorized,  the  purchaser  will  be  deemed  to  have  taken  them  with 
notice  of  the  rights  of  the  corporation."  It  was  also  held  in  that  case 
that  the  purchaser  of  a  promissory  note,  purporting  to  have  been  is- 
sued by  a  corporation,  who  made  the  purchase  under  circumstances 
which  devolved  upon  him  the  duty  of  inquiry  as  to  its  validity,  as- 
sumes the  risk,  by  failing  to  inquire,  of  proving  that  the  facts  he  could 
have  discovered,  had  he  made  inquiry,  would  have  protected  him.  In 
Gerard  v.  McCormick,  130  N.  Y.  261,  29  N.  E.  115,  14  L.  R.  A.  234, 
an  agent,  who  had  charge  of  certain  premises  known  as  the  "Glass 
Buildings,"  deposited  the  rents  collected  by  him  to  the  credit  of  a  bank 
account  kept  in  his  name  as  "Agent,  Glass  Buildings."  Without  au- 
thority he  gave  a  check  on  this  account,  signed  by  him  as  "Agent,  Glass 
Buildings,"  in  payment  of  his  own  debt.  The  check  was  paid,  and, 
upon  the  trial  of  an  dction  brought  five  years  afterwards  to  recover 
tf^b  amount  thereof,  there  was  no  evidence  of  bad  faith  on  the  part 
of  the  defendant  who  took  the  check,  except  that  afforded  by  the  check 
itself  and  the  nature  of  the  debt.  The  court  held  that  the  form  of 
the  check  was  sufficient  to  indicate  to  the  defendant  the  existence  of  an 
agency,  and  to  put  him  on  inquiry  as  to  the  agent's  authority  to  so 
use  the  money.  In  deciding  the  case,  the  court  said :  "We  think  that 
the  form  of  the  signature  to  the  check  was  sufficient  to  put  the  payee 
on  inquiry  as  to  the  right  of  the  agent  to  pay  his  personal  debt  out  of 
the  fund.  The  buildings  and  the  bank  were  both  well  known,  were  in 
the  same  city,  and  very  near  to  the  place  where  the  check  was  received 
by  the  defendant,  and,  had  an  inquiry  been  made  at  the  bank  or  at  the 
buildings,  it  would  have  been  ascertained  that  the  account  was  held 
by  William  Boswell,  not  as  owner,  but  as  agent  for  these  plaintiffs. 
In  case  a  person  having  notice  that  money  or  property  is  held  by  an- 
other in  a  fiduciary  capacity  receives  it  without  inquiry  from  the  agent, 
in  satisfaction  of  his  personal  debt,  the  sum  or  property  so  received 
may  be  recovered  by  the  true  owner,  unless  the  agent  was  authorized 
to  so  dispose  of  it."  In  Cheever  v.  Railroad  Co.,  150  N.  Y.  59.  67,  44 
N.  E.  701,  34  L.  R.  A.  69,  55  Am.  St.  Rep.  646,  the  paper  was  reg- 
ular on  its  face,  and  this  fact  protected  the  plaintiff;  but  the  court, 
referring  to  "a  case  where  an  officer  of  a  corporation  makes  the  cor- 
porate obligation  payable  to  himself,  and  then  attempts  to  deal  with  it 
for  his  own  benefit,"  said:  "When  paper  of  that  character  is  presented 
by  the  officer  or  agent  of  the  corporation,  it  bears  upon  its  face  suffi- 
cient notice  of  the   incapacity   of   the  officer  or  agent   to   issue   it." 

*  *     * 

In  the  case  at  bar  the  appearances  were  not  deceptive,  but  suggested 
.the   true   state   of    affairs,    which   worked   a    fraud   on   the   plaintiff. 

*  *  *  In  the  case  now  before  us  the  question  of  notice  is  supreme. 
The  checks,  when  read  in  the  light  of  the  facts  known  to  the  defend- 
ant, were  notice  to  him  that  he  was  apparently  accepting  money  from 
one  to  whom  it  did  not  belong,  and  this  cast  upon  him  the  duty  of 
inquiring  into  the  matter  so  as  to  see  whether  the  facts  were  in  ac- 
cord with  the  appearances;   for,  if  they  were,  he  knew  that  he  could 


Ch,  3)  WHO  ARE   HOLDERS   IN   DUE   COURSE  775 

not  honestly  take  the  checks.    The  judgment  appealed  from  should  be 
affirmed,  with  costs. 

FILLEBROWN  et  al.  v.  HAYWARD  et  al. 
(Supreme  Judicial  Court  of  Massachusetts,  1906.     190  Mass.  472,  77  N.  E.  45.) 

Action  by  Charles  B.  Fillebrown  and  others,  as  trustees  in  bank- 
ruptcy of  the  Cable  Rubber  Company,  against  Kezia  W.  Hayward  and 
another.     From  a  decree  in  favor  of  defendants,  complainants  appeal. 

BralEy,  J.  *  *  *  The  question,  however,  of  most  consequence 
remains  for  consideration.  *  *  *  After  the  period  of  service  had 
expired  to  which  reference  already  has  been  made,  the  defendant 
having  resigned  her  offices  as  treasurer  and  director  sold  her  stock 
in  the  corporation  to  one  Cable,  who  then  was  not  only  treasurer  and 
president,  but  with  the  acquiescence  of  the  directors  also  acted  as  rnan- 
ager  of  the  corporation  with  a  general  control  of  its  affairs.  *  *  * 
Upon  the  purchase  of  this  stock  he  made  a  large  money  payment,  and 
gave  his  promissory  notes  for  the  balance,  so  divided  that  one  of  them 
should  mature  at  the  beginning  of  each  month  for  a  period  of  five 
years.  It  was  undisputed  that  upon  these  notes  as  they  severally  ma- 
tured at  least  the  sum  of  $13,000  was  paid  by  checks  drawn  by  him 
from  time  to  time  on  the  treasury  of  the  corporation.  The  books  of 
account  disclose  in  detail  the  number  and  amount  of  these  checks, 
and  a  balance  was  always  struck  by  crediting  as  expense  a  lump  sum 
sufficient  to  offset  the  debit  items.  In  his  dealings  with  the  defend- 
ant, although  in  a  few  instances  when  he  caused  the  checks  to  be  made 
payable  to  the  order  of  the  bookkeeper  who  indorsed  them  either  to 
himself  or  to  the  defendant,  and  upon  one  occasion  when  the  check 
was  made  payable  directly  to  her  order,  this  course  of  dealing  was  uni- 
formly followed.  An  examination  properly  conducted  would  have 
shown  that  when  the  defendant  received  these  monthly  payments  as 
between  himself  and  the  company  his  account  would  have  appeared 
to  have  been  constantly  overdrawn,  but  she  had  no  actual  knowledge 
of  this  condition  of  affairs,  or  that  the  money  she  was  receiving  came 
clandestinely  from  the  corporation  rather  than  lawfully  from  him. 
The  plaintiffs  strenuously  contend  that,  notwithstanding  this,  the  form 
of  the  check  should  have^  suggested  to  her  that  he  was  misappropriating 
the  funds  of  the  company,  and  therefore  she  should  be  charged  with 
constructive  notice  that  he  was  using  corporate  assets  for  the  payment 
of  his  maturing  notes. 

The  early  doctrine  on  this  subject,  so  far  as  it  relates  to  negotiable 
paper,  is  found  in  Ayer  v.  Hutchins,  4  Mass.  370,  372,  3  Ani.  Dec. 
232^  *  *  >fc  where  it  is  said  that  circumstances  which  ordinarily 
would  excite  the  suspicions  of  a  reasonably  prudent  and  careful  man 
were  sufficient  to  put  the  party  receiving  negotiable  paper  not  over- 
due upon  his  inquiry  as  to  suspicious  defects  or  infirmity  of  title  in  the 
prior  holder.  *  *  *  The  rule  thus  formulated  gave  way  later  to 
what  has  been  called  the  modern  doctrine,  that  neither  knowledge  of 
suspicious  circumstances,  nor  doubts  as  to  the  genuineness  of  the  title, 
nor  gross  negligence  on  the  part  of  the  taker,  either  singly  or  together, 
were  sufficient  to  defeat  his  recovery,  unless  amounting  to  proof  of 
want  of  good  faith.     *     *     * 

At  the  time  the  first  note  of  the  series  matured,  and  the  first  check 
in  payment  was  given,  St.  1898,  p.  492,  c.  533,  commonly  known  as 


776  NEGOTIABLE   INSTRUiMENTS  (Part  3 

the  "Negotiable  Instruments  Act,"  now  Rev.  Laws,  c.  73.  had  become 
operative.  B}^  section  56  of  the  original  act,  now  section  7Z  in  the 
revision,  the  common-law  rule  shown  by  these  decisions  relating  to  im- 
plied notice  to  the  purchaser  for  value  of  negotiable  paper  of  a  defect 
in  the  title  of  a  previous  owner  was  codified.  The  plaintiffs  therefore 
cannot  recover  the  proceeds  of  the  checks  unless  the  defendant  took 
them  in  bad  faith,  and  this  inquiry  is  a  question  of  fact.  *  *  * 
If  each  check  was  signed  by  him  as  treasurer,  this  of  itself  was  not 
such  an  affirmative  representation  as  to  indicate  that  he  was  acting 
in  a  fiduciary  capacity  by  which  his  authority  was  restricted  and  lim- 
ited, as  authority  to  draw  and  issue  checks  in  the  name  of  the  cor- 
poration was  incidental  to  his  office,  and  the  holder  in  due  course  of 
business  would  receive  them  under  a  presumption  that  they  were  law- 
fully issued.     *     *    * 

While  the  defendant  may  be  held  to  have  known  that  by  purchasmg 
her  stock  Cable  had  acquired  control  of  the  corporation,  there  does  not 
appear  to  have  been  any  reasonable  ground  for  an  assumption  on  her 
part  that  its  business  under  his  management  was  not  profitable,  or  had 
been  impaired  and  then  ruined,  until  the  company's  assignment  for  the 
benefit  of  its  creditors  was  announced.  Before  her  retirement  for  at 
least  two  years  they  had  been  mutually  engaged  in  conducting  its  busi- 
ness affairs,  and  neither  during  this  period,  or  after  her  withdrawal, 
is  it  shown  that  there  was  anything  in  his  conduct  indicating  to  her 
that  he  was  dishonest  or  incompetent.  There  was  therefore  no  reason 
why  she  should  not  have  retained  her  confidence  in  him,  and,  even  if 
her  former  experience  had  made  her  familiar  with  the  duties  of  the 
office  which  he  held,  it  could  be  found  that  she  received  the  checks 
without  realizing  the  possible  fact  that,  notwithstanding  their  form, 
they  were  drafts  upon  the  funds  of  the  company  in  payment  of  her 
own  debt.  It  is  more  than  probable  that  as  note  after  note  matured  and 
payments  were  thus  made  she  gave  no  thought  to  the  general  trans- 
action, except  to  get  her  pay ;  but,  if  so,  she  still  may  have  inferred 
that  the  money  so  appropriated  was  in  payment  of  his  own  salary,  or 
otherwise  was  being  lawfully  withdrawn.  *  *  *  But  while  she  may  ' 
have  been  incautious  and  unsuspecting,  where  others  more  accustomed 
to  mercantile  affairs  might  have  been  mistrustful,  there  is  no  evidence 
that  at  any  time  she  was  possessed  of  any  knowledge  of  what  undoubt- 
edly to  a  certain  extent  was  an  embezzlement  on  his  part,  or,  having 
doubts  as  to  how  he  obtained  the  money,  she  deliberately  decided  for 
her  own  advantage  not  to  make  any  inquiries  to  ascertain  why  instead 
of  paying  with  checks  drawn  on  a  bank  account  of  his  own,  or  in 
money,  he  used  checks  issued  by  him  as  treasurer,  though  if  such 
conduct  had  been  shown,  then  it  might  be  inferred  that  she  ignored 
significant  facts  with  a  purpose  not  to  know  anything  more,  and  this 
would  have  been  enough  to  indicate  that,  suspecting  something  was 
wrong,  she  intended  to  avoid  the  eft'ect  of  the  evidence.  *  *  * 
But  having  taken  before  maturity  for  a  valuable  consideration  nego- 
tiable paper  which  was  regular  upon  its  face,  without  knowledge  of 
any  defect  in  the  title,  even  if  there  might  have  been  some  circum- 
stances which  would  have  raised  doubts  in  the  mind  of  a  more  pru- 
dent person,  the  defendant's  right  to  retain  the  proceeds  of  the  checks 
cannot  be  divested  without  proof  that  she  knew,. or  in  the  face  of  facts 
sufficient  to  put  her  upon  inquiry  purposely  refrained  from  knowing 
of  the  fraud  of  Cable,  although,  if  obliged  to  bring  suit  upon  them. 


Ch.  P>)  WHO   ARE   HOLDERS   IN   DUE   COURSE  777 

after   evidence  had  been   introduced  in   defense  that  they  had  been 
fraudulently   issued,   the  burden   would  have   remained  upon  her  to 
prove  that  she  was  a  holder  in  good  faith  and  for  value.     *    *    * 
Decree  affirmed. 


SECTION  5.— PAYEE  MAY  BE  A  HOLDER  IN  DUE 

COURSE 

The  preceding  sections  have  shown  that  a  holder,  in  order  to 
acquire  the  advantages  of  being  a  holder  in  due  course,  must  have 
taken  the  instrument  (1)  for  value;  (2)  before  maturity;  and 
(3)  in  good  faith.  The  question  is  sometimes  presented  as  to 
whether  the  payee  who  fulfills  all  of  these  conditions  may  be  a 
holder  in  due  course.  In  the  great  majority  of  cases  the  payee 
cannot  fulfill  all  three  of  these  requirements,  because  the  payee 
will  know  of  the  defense  possessed  by  the  person  with  whom  he 
dealt.  If  the  payee  obtained  an  instrument  by  fraud,  or  without 
consideration  from  the  maker,  clearly  the  payee  cannot  be  a  holder 
in  due  course,  for  he  is  not  a  taker  in  good  faith.  But  it  is  possible 
to  find  a  situation  where  the  payee  does  fulfill  all  three  require- 
ments, and  the  new  question  then  arises  as  to  whether  it  is  possible 
for  the  payee  to  be  regarded  as  a  holder  in  due  course.  It  is  pos- 
sible to  argue  that  no  person  can  be  a  holder  in  due  course  unless 
such  person  acquired  title  from  a  holder.  The  payee  does  not  ac- 
quire title  from  a  holder.  The  answer  to  this  question  all  de- 
pends on  whether  or  not  a  payee  can  be  regarded  as  a  holder,  be- 
cause section  52  of  the  Negotiable  Instruments  Law  provides  that 
a  holder  in  due  course  is  a  holder  who  has  taken  the  instrument  un- 
der the  conditions  which  we  have  heretofore  analyzed.  The  fol- 
lowing sections  of  the  act  are  involved : 

Section  191,  clause  7.  "Holder"  means  the  payee  or  indorsee  of 
a  bill  or  note,  who  is  in  possession  of  it  or  the  bearer  thereof. 

This  section  seems  to  put  an  end  to  the  problem,  for  it  express- 
ly says  that  the  payee  is  a  holder.  But  we  have  already  been  made 
familiar  with  the  situation,  which  frequently  arise^  in  the  law,  that 
the  apparent  meaning  of  one  section  of  a  statute  may  be  cut  down 
or  even  expanded  by  other  sections  of  the  same  act  or  of  a  differ- 
ent act,  and  we  have  that  situation  here. 

The  first  of  the  two  sections  which  may  affect  the  meaning  of 
the  word  "holder,"  as  defined  in  section  191,  is  as  follows: 

Section  .16.  Every  contract  on  a  negotiable  instrument  is  in- 
complete and  revocable  until  delivery  of  the  instrument  for  the 
purpose  of  giving  effect  thereto.  As  between  immediate  parties, 
and  as  regards  a  remote  party  other  than  a  holder  in  due  course, 
the  delivery,  in  order  to  be  effectual,  must  be  made  either  by  or 
under  the  authority  of  the  party  making,  drawing,  accepting  or 
indorsing,  as  the  case  may  be;  and  in  such  case  the  delivery  may 
be  shown  to  have  been  conditional  or  for  a  special  purpose  only, 
and  not  for  the  purpose  of  transferring  the  property  in  the  instru- 


778  NEGOTIABLE   INSTRUMENTS  (Part  3 

ment.  But  where  the  instrument  is  in  the  hands  of  a  holder  in 
due  course,  a  valid  delivery  thereof  by  all  parties  prior  to  him  so 
as  to  make  them  liable  to  him  is  conclusively  presumed.  And 
where  the  instrument  is  no  longer  in  the  possession  of  a  party 
whose  signature  appears  thereon,  a  valid  and  intentional  de- 
livery by  him  is  presumed  until  the  contrary  is  proved. 

This  section  makes  the  defense  of  "no  delivery"  available  be- 
tween immediate  parties  and  remote  parties  other  than  holders  in 
due  course.  May  the  payee  be  a  holder  in  due  course  so  that  the 
defense  of  "no  delivery"  or  of  conditional  delivery  of  a  completed 
instrument  cannot  be  made  successfully  against  him? 

To  be  a  holder  in  due  course  one  must  be  a  holder.  A  payee  is  a 
holder  by  section  191.  But  section  16  states  that  the  defense  of 
"no  delivery"  or  of  "conditional  delivery"  is  available  between 
immediate  parties.  Therefore  our  inquiry  narrows  down  to  this : 
Is  the  payee  one  of  the  immediate  parties  spoken  of  in  section  16? 
If  so,  section  16  controls  section  191  to  this  extent.  This  problem 
is  taken  up  in  the  case  following. 

There  is  a  second  type  of  situation,  wherein  it  is  not  altogether 
clear  whether  a  payee  is  or  is  not  a  holder  in  due  course.  This 
question,  which  is  also  discussed  in  the  case  immediately  follow- 
ing, concerns  instruments  which  were  incomplete  at  the  time 
they  were  intrusted  by  the  maker  or  drawer  to  some  person  for 
delivery  to  the  payee.  Suppose,  for  illustration,  that  the  drawer 
of  a  check  inserts  the  name  of  a  payee,  signs  his  name  as  drawer, 
and  leaves  the  amount  blank,  and  intrusts  the  instrument  to  the 
agent  of  the  drawer  and  authorizes  this  agent  to  fill  up  the  instru- 
ment for  a  specified  amount.  Then  suppose  the  agent  so  intrusted 
with  the  instrument  fills  up  the  instrument  for  an  amount  in  ex- 
cess of  the  authority  given,  and  such  agent  delivers  the  instrument 
to  the  payee,  obtains  the  money  and  fraudulently  converts  it.  May 
the  payee  recover  the  full  amount  from  the  drawer — assuming,  of 
course,  that  the  drawer  was  successful  in  stopping  payment  at  the 
drawee  bank.  This  question  involves  section  14  of  the  Negotiable 
Instruments  Law,  which  provides  as  follows: 

Where  an  instrument  is  wanting  in  any  material  particular,  the 
person  in  possession  thereof  has  a  prima  facie  authority  to  com- 
plete it  by  filling  up  the  blanks  therein.  And  a  signature  on  a 
blank  paper  delivered  by  the  person  making  the  signature  in  order 
that  the  paper  may  be  converted  into  a  negotiable  instrument  oper- 
ates as  a  prima  facie  authority  to  fill  it  up  as  such  for  any  amount. 
In  order,  however,  that  any  such  instrument  when  completed  may 
be  enforced  against  any  person  v/ho  became  a  party  thereto  prior 
to  its  completion,  it  must  be  filled  up  strictly  in  accordance  with 
the  authority  given  and  within  a  reasonable  time.  But  if  any 
such  instrument,  after  completion  is  negotiated  to  a  holder  in  due 
course,  it  is  valid  and  effectual  for  all  purposes  in  his  hands,  and 
he  may  enforce  it  as  if  it  had  been  filled  up  strictly  in  accordance 
with  the  authority  given  and  within  a  reasonable  time. 


Ch.  3)  WHO   ARE   HOLDERS   IN    DUE   COURSE  779 

This  section  makes  it  perfectly  clear  that  a  holder  who  is  not  a 
holder  in  due  course  cannot  recover  from  prior  parties  free  from 
the  defense  that  the  instrument  was  filled  up  in  excess  of  author- 
ity; that  is,  if  there  was  authority  to  fill  up  for  $500,  and  the  in- 
strument were  filled  up  for  $1,000,  a  holder  not  in  due  course  could 
recover  no  more  than  $500,  but  the  probabilities  are  that  such 
holder  not  in  due  course  could  recover  nothing  in  a  suit  on  the 
instrument,  because  the  section  states  that  in  order  that  any  such 
instrument  when  completed  may  be  enforced  *  *  *  j^  must  be 
filled  up  strictly  in  accordance  with  the  authority  given.  It  would 
be  enforcing  the  instrument  to  allow  the  holder  not  in  due  course 
to  recover  $500.  And  it  is  just  that,  which  the  section  states  can- 
not be  done.  However,  if  the  holder  not  in  due  course  had  no 
actual  knowledge  of  the  fraud  there  is  every  reason  to  suppose  that 
he  could  recover  $500  on  the  original  debt ;  that  is,  upon  the  the- 
ory that  he  had  paid  out  $500  at  least  for  the  use  of  the  defendant, 
drawer. 

One  further  observation  is  necessary  before  taking  up  the  par- 
ticular question :  May  the  payee  be  a  holder  in  due  course  of  an 
instrument  delivered  in  an  incomplete  state?  That  point  is  this: 
The  last  clause  of  section  14  states  that  if  any  such  instrument, 
after  completion,  is  negotiated  to  a  holder  in  due  course,  it  is  valid, 
etc. ;  that  is,  the  section  is  stating  that  a  transferee  of  the  instru- 
ment cannot  be  a  holder  in  due  course,  if  such  transferee  took  the 
instrument  before  completion,  or  at  the  time  the  instrument  was 
being  completed.  In  order  to  be  a  holder  in  due  course,  he  must 
have  taken  the  instrument  after  it  was  filled  up ;  that  is,  under 
circumstances  where  he  would  not  know  that  it  was  intrusted  by 
the  maker  or  drawer  to  the  agent  in  an  incomplete  state.  The  law 
was  otherwise  on  this  point  before  the  Negotiable  Instruments 
Law  was  adopted.  Before  the  act,  a  person  who  was  in  all  other 
respects  a  holder  in  due  course  did  not  lose' that  position  merely 
because  he  saw  the  instrument  filled  up  in  his  presence,  or  knew 
that  it  had  been  filled  up  after  the  drawer  intrusted  it  to  his  agent. 
The  Negotiable  Instruments  Law  adopted  the  rule  on  this  point 
w^hich  had  been  adopted  by  the  English  courts. 

Our  question,  then,  narrows  down  to  this:  Assuming  that  the 
payee  took  the  instrument  for  value,  before  maturity,  and  in  good 
faith — i.  e.,  without  knowledge  that  it  was  entrusted  by  the  maker 
or  drawer  in  an  incomplete  state — may  such  a  payer  be  a  holder 
in  due  course?  The  answer  to  this  question  depends  upon  the 
subordinate  question :  Is  it  possible  to  negotiate  an  instrument  to 
the  payee?  Notice  that  the  last  sentence  of  section  14  speaks  of 
negotiating  an  instrument  to  a  holder  in  due  course ;  that  is,  if  the 
instrument  got  into  the  hands  of  the  payee  in  any  other  method 
than  by  negotiation,  it  would  seem  that  the  payee  could  not  be  a 
holder  in  due  course.  Generally  it  is  true  that  we  use  the  word 
"negotiate"  to  describe  a  transfer  of  legal  title  to  a  negotiable  in- 
strument by  the  payee  to  an  indorsee,  or  by  one  indorsee  to  an- 


780  NEGOTIABLE   INSTRUMENTS  (Part  3 

Other  indorsee.  But  may  the  word  "negotiate"  be  used  to  describe 
the  act  of  delivery  by  a  maker  or  drawer  to  the  payee? 

Section  30.  An  instrument  is  negotiated  when  it  is  transferred 
from  one  person  to  another  in  such  manner  as  to  constitute  the 
transferee  the  holder  thereof. 

Section  191,  clause  10.  "Issue"  means  the  first  delivery  of  the 
instrument,  complete  in  form,  to  a  person  who  takes  it  as  a  holder. 

We  now  have  two  questions  before  us:  (1)  May  the  payee 
be  a  holder  in  due  course  of  an  instrument  which  was  in  a  complete 
form  when  it  left  the  hands  of  the  maker  or  drawer?  (2)  May  the 
payee  be  a  holder  in  due  course  of  an  instrument  which  at  the  time 
it  left  the  hands  of  the  maker  or  drawer  was  incomplete  in  some 
material  respect?  Obviously,  in  both  of  these  cases,  the  maker 
or  drawer  must  not  have  dealt  face  to  face  with  the  payee.  There 
will  always  be  some  person  to  whom  the  instrument  was  first 
intrusted  by  the  maker  or  drawer,  and  this  person  at  a  later  time 
dealt  with  the  payee. 

The  next  case  discusses  these  two  questions. 


LIBERTY  TRUST  CO.  V.  TILTON. 
(Supreme  Judicial  Court  of  Massachusetts.  1914.     217   Mass.  462, 
105  N.  E.  605,  L.  R.  A.  1915B,  144.) 

Action  by  the  Liberty  Trust  Company  against  Frank  B.  Tilton. 
Judgment  for  plaintiff  in  the  municipal  court  of  Boston.  From  an  or- 
der dismissing  the  report  to  the  Appellate  Division,  plaintiff  appeals. 

RuGG,  C.  J.  One  Perley  G.  Tilton  signed  a  note  to  the  order  pf 
the  plaintiff  and  presented  it  complete  in  every  respect  except  its 
amount,  which  was  blank,  to  the  defendant  Frank  B.  Tilton,  who  for 
the  accommodation  of  Perley  G.  Tilton  signed  it  in  blank  on  the  back 
upon  the  express  representation  and  agreement  by  Perley  G.  Tilton 
that  the  defendant's  signature  should  not  be  operative  nor  be  deliver- 
ed unless  and  until  one  Leonard  Grant  also  should  sign  on  the  back 
and  that  then  it  should  be  tilled  out  for  $200,  and  no  more.  Leonard 
Grant  did  not  sign  the  instrument,  the  amount  of  $400  was  filled  in  and 
the  instrument,  without  the  knowledge  or  authority  of  the  defendant 
and  in  violation  of  the  agreement  between  him  and  Perley  G.  Tilton, 
was  delivered  complete  in  form  to  the  plaintiff,  the  payee,  who  took  it 
for  value  in  good  faith  and  without  knowledge  of  the  agreement  be- 
tween the  maker  and  defendant. 

The  question  is  whether  the  defendant  is  liable  to  the  plaintiff. 
This  point  has  not  been  decided  in  Massachusetts. 

It  is  plain  that  prior  to  the  enactment  of  the  Negotiable  Instruments 
Act  the  plaintiff  could  recover.  The  payee  could  be  a  bona  fide  holder 
for  value  without  notice.  *  *  *  The  signing  in  blank  authorized  the 
filling  of  the  blank  by  the  one  to  whom  the  signer  delivered  it,  al'though 
the  specific  directions  might  not  have  been  followed.  Androscoggin 
Bank  v.  Kimball,  10  Gush.  373.  This  is  the  general  common-law  rule. 
*  *  *  But  although  the  point  now  in  issue  has  not  been  decided 
expressly  in  this  commonwealth,  in  principle  it  is  covered  by  Boston 
Steel  &  Iron  Co.  v.  Steuer,  183  Masr..  140,  145,  66  N.  E.  646,  97  Am. 
St.  Rep.  426.    In  that  decision  this  case  was  put :    The  maker  handed 


Ch.  3)  WHO   ARE   HOLDERS   IN   DUE   COURSE  781 

a  check  complete  in  every  respect  to  her  husband  upon  express  in- 
structions to  deliver  to  the  payee  on  her  own  account,  but  the  check 
fraudulently  was  handed  by  the  husband  to  the  payee  in  payment  of  a 
debt  due  from  him  to  the  payee,  and  it  was  accepted  in  good  faith  by 
the  payee.  It  was  held  that  the  payee  under  these  circumstances  was 
a  holder  in  due  course.  ""  *  *  The  point  there  decided  in  substance 
was  that  where  the  instrument  when  signed  by  the  party  sought  to  be 
charged  was  complete  as  to  its  form,  a  payee  might  be  a  holder  in  due 
course,  although  the  delivery  was  contrary  to  the  instructions. 

The  effect  of  that  decision  was  to  hold  that  the  words  "immediate 
parties"  as  used  in  section  33,  viz.,  "as  between  immediate  parties,  and 
as  regards  a  remote  party  other  than  a  holder  in  due  course,  the  de- 
livery, in  order  to  be  effectual,  must  be  made  either  by  or  under  the 
authority  of  the  party  making,  drawing,  accepting  or  indorsing,  as 
the  case  may  be ;  and  in  such  case  the  delivery  may  be  shown  to  have 
been  conditional,  or  for  a  special  purpose  only,  and  not  for  the  pur- 
pose of  transferring  the  property  in  the  instrument,"  did  not  necessari- 
ly include  the  payee.  Hence,  "immediate  parties"  in  that  connection 
excludes  a  party  who  is  a  holder  in  due  course.  In  such  case  these 
words  must  be  confined  to  parties  who  are  "immediate"  to  the  condi- 
tions or  limitations  placed  upon  the  delivery  in  the  sense  of  knowing 
or  being  chargeable  with  notice  of  them.  A  payee  who  is  a  holder  in 
due  course  is  not  an  immediate  party  in  the  sense  of  that  section.  This 
result  follows  from  holding  that  a  payee  may  be  a  "holder  in  due 
course"  as  defined  in  section  52  because  he  could  become  such  holder 
only  on  condition  "(4)  that  at  the  time  it  was  negotiated  to  him  he 
had  no  notice  of  any  infirmity  in  the  instrument."  Thus  he  could  not 
be  such  holder  unless  the  paper  was  "negotiated"  to  him.  Therefore 
the  word  "negotiated"  was  held  to  describe  the  means  by  which  a 
payee  might  acquire  a  note.  It  was  given  its  common  legal  significance 
of  concluded  by  bargain  or  agreement.  *  *  *  ^  promissory  note 
complete  as  to  form  and  payable  to  a  named  person  may  be  negotiated 
to  that  person  by  being  sold  to  him  or  taken  by  him  for  value.  This  is 
the  common  and  popular  signification  of  the  word.  It  was  the  sense 
m  which  it  was  used  in  the  law  merchant  prior  to  the  Negotiable  In- 
struments Act.    Its  meaning  has  not  been  changed  by  the  act.    *    *    * 

The  soundness  of  that  decision  in  this  respect  is  confirmed  by  other 
provisions  of  the  act.  Negotiation  is  defined  by  section  30,  whereby 
it  is  provided  that  "an  instrument  is  negotiated  when  it  is  transferred 
from  one  person  to  another  in  such  manner  as  to  constitute  the  trans- 
feree the  holder  thereof."  "Holder"  is  defined  in  section  191  to  be  "the 
payee  or  indorsee  of  a  bill  or  note  who  is  in  possession  of  it."  The  re- 
maining sentence  of  section  30,  viz.,  "If  payable  to  bearer  it  is  nego- 
tiated by  delivery;  if  payable  to  order  it  is  negotiated  by  the  indorse- 
ment of  the  holder  completed  by  delivery,"  was  not  intended  to  in- 
clude all  the  ways  in  which  an  instrument  might  be  negotiated,  nor  to 
restrict  the  comprehensive  terms  of  the  preceding  sentence.  Plainly 
under  these  two  sections  a  negotiable  instrument  payable  to  a  named 
payee  is  negotiated  when  the  physical  possession  of  it  is  handed  for 
value  to  the  person  named  as  payee.  One  effect  of  the  last  sentence 
of  section  30  is  to  describe  the  method  by  which  the  person  who  first 
becomes  holder  may  pass  title.  It  does  not  comprehend  all  the  ways 
by  which  an  instrument  may  be  negotiated. 

The  word  "negotiate"  being  defined  thus  in  the  act,  and  being  given 


782  NEGOTIABLE   INSTRUMENTS  (Part  3 

a  definition  in  conformity  to  that  attached  to  it  by  the  common  law 
before  the  passage  of  the  act,  it  must  be  held  to  have  the  same  mean- 
ing throughout  the  statute  in  the  absence  of  a  strongly  countervailing 
context  requiring  a  different  signification.  There  is  nothing  in  sec- 
tion 14  to  indicate  that  it  there  was  used  in  any  different  sense.   *   *    * 

The  defendant,  not  otherwise  a  party  to  the  instrument,  having 
signed  in  blank  before  deliver}^  became  liable  as  indorser  to  the  payee. 
Section  64. 

It  requires  no  discussion  to  show  that  under  the  circumstances  here 
disclosed  section  32  of  the  act  has  no  bearing.  The  defendant  trans- 
ferred actual  possession  of  the  incomplete  instrument  to  Perley  G.  Til- 
ton.  Thus  it  was  "delivered"  within  the  meaning  of  that  section  so  far 
as  the  defendant  was  concerned.     Section  191. 

The  conclusion  follows  that  the  payee  named  in  a  promissory  note, 
who  purchases  it  com.plete  in  form  for  value  before  maturity,  in  good 
faith  and  without  notice  of  any  infirmity  in  title  or  otherwise,  is  a 
person  to  whom  it  has  been  negotiated  as  holder  in  due  course,  not- 
withstanding it  was  signed  in  blank  by  the  party  to  be  charged,  whose 
mstructions  as  to  the  filling  of  blanks  and  the  delivery  have  not  been 
followed  by  the  one  to  whom  it  was  intrusted  by  him  in  its  incomplete 
state.     *     *     * 

The  conclusion  here  reached  is  at  variance  also  with  Vander  Ploeg 
v.  Van  Zuuk,  135  Iowa,  350,  112  N.  _W.  807,  13  L.  R.  A.  (N.  S.)  490, 
124  Am.  St.  Rep.  275.  But  that  decision,  rendered  since  Boston  Steel 
&  Iron  Co.  V.  Steuer,  183  Mass.  140,  66  N.  E.  646,  97  Am.  St.  Rep. 
426,  recognizes  its  inconsistencies  with  our  case.  Desirable  as  is  uni- 
formity of  interpretation  touching  the  Negotiable  Instruments  Act  by 
courts  of  the  several  states  where  it  is  in  force,  *  *  *  we  remain 
content  with  the  principles  laid  down  in  the  Steuer  Case.  The  rational 
application  of  that  principle  decides  this  case.     *     *     * 

It  was  declared  both  in  Herdman  v.  Wheeler  and  in  Vander  Ploeg 
V.  Van  Zuuk  that  the  judges  were  "very  reluctant  to  come  to  the  con- 
clusion" there  reached.  We  feel  that  the  result  to  which  we  are  led 
by  a  chain  of  reasoning  not  developed  in  either  of  those  cases  is  in 
conformity  with  the  terms  of  the  act,  and,  being  in  accordance  with  the 
common  law,  is  highly  desirable  as  not  upsetting  the  general  under- 
standing and  practice  of  the  commercial  world. 

No  error  is  shown  upon  the  record.  Order  dismissing  report  af- 
firmed. 


For  a  moment,  note  the  business  situation  involved  in  the  preced- 
ing case.  Here  is  a  large  business  establishment.  Its  disburse- 
ments by  checks  run  into  the  hundreds  or  thousands  of  dollars 
every  day,  or  week,  or  month.  The  board  of  directors  may  have 
delegated  authority  to  but  one  man  to  sign  the  company's  name  to 
checks.  Doubtless  such  person  is  a  thoroughly  trustw^orthy  per- 
son, probably  heavily  bonded.  However,  such  person  relies  upon 
information  from  other  employees  as  to  when  obligations  are 
payable.  Perhaps  they  bring  the  statements  received  from  the 
company's  creditors  to  his  office,  and  perhaps  the  checks,  after,  they 
are  drawn,  are  delivered  over  to  these  or  other  employees  to  be 
mailed  or  delivered.     The  points  which  have  just  been  illustrated 


Ch.  3)  WHO   ARE   HOLDERS   IN   DUE   COURSE  783 

show  how  the  fraudulent  agent  may  make  way  with  the  instrument 
in  his  own  interest,  and  the  concern  which  employs  him  will 
stand  the  loss.  If  the  instrument  is  a  completed  instrument,  pay- 
able, let  us  say,  to  P.  or  order,  and  the  agent  is  directed  to  deliver 
this  check  or  note  to  P.  in  payment  of  his  employer's  debt  due 
P.,  we  have  seen  that,  if  the  agent  -transfers  this  instrument  to  P. 
in  payment  of  his  own  debt  due  P.,  the  law  regards  P.  as  a  holder 
in  due  course ;  that  is,  that  the  agent's  debt  was  paid  by  this  check 
and  the  employer's  debt  was  not  paid.  Or  it  is  possible  that  the 
agent  owed  no  debt  at  all  to  P.,  but  transferred  the  instrument  to 
P.  and  obtained  cash  for  it.  P.  is  still  a  holder  in  due  course. 
Where  an  instrument  is  in  form  payable  to  bearer,  it  is  much  easier 
for  a  fraudulent  employee  to  convert  the  instrument;  but  we  see 
here  that  it  is  possible  for  an  agent  in  possession  of  an  instrument 
payable  to  a  payee  or  order,  complete  in  all  respects,  to  make  a 
fraudulent  disposition  of  it  without  forging  the  indorsement  of 
the  payee.  All  he  need  do  is  to  transfer  to  the  payee  for  some 
purpose  of  his  own,  and  the  law  protects  the  payee,  assuming,  of 
course,  that  in  all  other  respects  the  payee  took  in  good  faith. 

However,  it  is  not  nearly  so  common  for  the  fraudulent  agent  of 
the  drawer  to  make  a  fraudulent  disposition  of  a  completed  in- 
strument payable  to  the  order  of  a  named  payee,  because,  after  all, 
it  is  fairly  difficult  for  the  fraudulent  agent  thus  to  deal  with  the 
payee.  It  is  much  more  common  for  frauds  to  be  practiced  upon 
drawers  of  negotiable  instruments  which  were  intrusted  by  the 
drawer  with  his  agent  in  incomplete  form,  who  fills  up  the  instru- 
ment in  excess  of  authority  and  then  fraudulently  converts.  It 
is  easy  for  the  person  who  signs  the  checks  to  affix  his  signature, 
and  then  to  trust  to  his  employee  to  fill  up  the  instrument  for  the 
proper  amount;  but  it  happens  quite  frequently  that  the  trust  is 
abused.  The  probabilities  are  that  an  employee  who  has  suc- 
ceeded in  perpetrating  such  a  fraud  once  will  do  so  frequently. 

It  is  not  possible  to  prevent  all  frauds,  but  a  person  who  is  charg- 
ed with  the  responsibilities  of  disbursing  large  sums  of  money 
should  be  alive  to  the  possibilities  for  the  perpetration  of  fraudu- 
lent schemes,  and,  at  least,  not  court  them  by  making  the  oppor- 
tunity for  success  easier. 


SECTION  6.— TRANSFEREE  FROM  A  HOLDER  IN  DUE 
COURSE  IS  A  HOLDER  IN  DUE  COURSE 

N.  I.  L.,  Section  58.  In  the  hands  of  any  holder  other  than  a 
holder  in  due  course,  a  negotiable  instrument  is  subject  to  the 
same  defenses  as  if  it  were  non-negotiable.  But  a  holder  who 
derives  his  title  through  a  holder  in  due  course  and  who  is  not 
himself  a  party  to  any  fraud  or  illegality  affecting  the  instrument, 
has  all  the  rights  of  such  former  holder  in  respect  of  all  parties 
prior  to  the  latter. 


784  NEGOTIABLE   INSTRUMENTS  (Part  3 


INHABITANTS    OF   THE    TOWNSHIP    OF    MONTCLAIR   v.   RAMSDEI.L. 

(Supreme  Court  of  the  Fiiited  States,  1883.     107  U.   S.  147,  2  Sup.  Ct.  3U1, 

27    L.    Ed.   431.) 

Action  brought  by  defendant  in  error,  Ramsdell,  on  bonds  of  the 
Township  of  Montclair,  issued  in  aid  of  a  railroad  company.  Verdict 
and  judgment  for  plaintiff,  in  the  sum  of  $21,506.49.  Defendant 
brings  this  writ  of  error. 

HarIvAN,  j  *  *  *  Counsel  asked  the  court  to  give,  but  the  court 
refused,  the  following  instructions  to  the  jury:  "If  the  evidence  sat- 
isfies the  jury  that  there  were  circumstances  of  fraud  or  illegality  in 
the  inception  of  the  bonds,  or  in  the  circumstances  under  which  they 
were  issued  and  disposed  of  by  the  commissioners  then  the  plaintiff 
cannot  recover  on  the  bonds  without  some  proof  that  he  purchased 
them  for  value,  or  gave  some  consideration  for  them."     *     *  .  * 

It  is  not  necessary  to  extend  this  opinion  by  a  review  of  the  adju- 
dications in  the  American  and  English  courts  to  which  our  attention 
has  been  called,  or  to  deduce  therefrom  a  general  rule  to  govern 
every  case  in  which  it  may  be  claimed  that  the  proof  upon  the  part 
of  a  defendant  in  a  suit  upon  a  negotiable  security,  requires  the  holder, 
before  he  can  recover,  to  show  that  he  paid  value.  Without  entering 
upon  a  critical  examination  of  the  authorities  upon  this  important 
question  of  commercial  law,  and  assuming,  for  the  purposes  of  this 
case  merely,  that  the  proof,  of  the  exclusion  of  which  the  Township 
complains,  was  competent  evidence  for  some  purposes  under  the  plea 
of  non  est  factum,  we  are  of  opinion  that  the  instruction  in  question 
ought  to  have  been  refused.  Its  rejection  was  proper  for  the  reason, 
if  there  were  no  other,  that  it  required  the  jury,  if  they  believed  either 
fraud  or  illegality  in  the  inception  of  the  bonds  to  have  been  establish- 
ed, to  find  for  the  Township,  unless  the  plaintiff  proved  that  he  pur- 
chased for  value  or  gave  some  consideration  for  them.  Such  is  not 
law ;  for,  if  any  previous  holder  of  the  bonds  in  suit  was  a  bona  fide 
holder  for  value,  the  plaintiff,  without  showing  that  he  had  himself 
paid  value,  could  avail  himself  of  the  position  of  such  previous  holder. 
In  Byles  on  Bills,  119,  124.  it  is  correctly  said  that  "If  any  intermediate 
holder  between  the  defendant  and  the  plaintiff  gave  value  for  the  bill, 
that  intervening  consideration  will  sustain  the  plaintiff's  title."  In 
Hunter  v.  Wilson,  19  h.  J.  (N.  S.)  8,  the  plea  was  that  the  bill  of 
exchange  was  drawn  by  a  named  person,  at  the  request  and  for  the 
accommodation  of  the  defendant,  without  any  consideration  or  value 
whatever,  and  that  it  was  indorsed  by  that  person  without  any  con- 
sideration or  value  given  by  the  plaintiff  for  svtch  indorsement  either 
to  the  defendant  or  to  said  person,  or  to  any  other  person  whatsoever. 
It  was  held  that  the  plea  ought  to  have  contained  a  statement  equiva- 
lent to  an  allegation,  that  none  of  the  previous  parties  to  the  bill  had 
given  value  for  the  indorsement.  One  of  the  judges  remarked  that 
''Some  party  to  the  bill  may  have  given  value  for  it,  so  as  to  vest  a 
valid  title  in  the  plaintiff.  We  cannot  tell  through  how  many  hands  it 
may  have  passed."  It  is  not  necessary  in  this  case  to  hold  that  the 
plea  in  such  a  case  should  aver  that  no  previous  holder  of  a  negotiable 
security  paid  value.  But  the  case  last  cited  is  authority  for  the 
proposition  that  the  present  plaintiff  may  be  protected  by  showing 
that  some  previous  holder  paid  value.    *    *    * 

The  judgment  is  affirmed. 


Ch.  3)  WHO   ARE   HOLDERS   IN   DUE   COURSE  785 

MILES  et  al.  v.  DODSON. 

(Supreme  Court  of  Arkansas,  1912.     102  Ark.  422,  144  S.  W.  908, 
50  L.  R.  A.   [N.  S.]  83.) 

Action  by  C.  W.  Dodson  against  F.  W.  Miles  and  others.  From  a 
judgment  'for  plaintiff,  defendants  appeal. 

FrauExthal,  T.  This  was  an  action  upon  a  note  originally  insti- 
tuted in  the  circuit  court  by  C.  W.  Dodson  against  F.  W.  Miles  and 
the  other  makers  thereof.  The  note  is  a  negotiable  instrument  for 
$575.25,  dated  August  20,  1903,  and  due  January  1,  1905,  payable  to 
the  order  of  E.  H.  Smith.  The  plaintiff  claimed  that  he  was  an  inno- 
cent purchaser  of  the  note.  The  defendants  alleged  payment  of  the 
note  and  that  plaintiff  had  acquired  it  after  its  maturity  and  after 
notice  that  it  had  been  paid.    *     *     * 

It  is  urged  by  counsel  for  defendants  that  the  plaintiff  purchased  the 
note  from  the  bank  in  February,  1905,  which  was  after  its  maturity, 
and,  on  that  account,  was  not  an  innocent  purchaser  thereof,  but  took 
it  subject  to  all  defenses  that  the  makers  had  against  the  original 
payee  Smith,  and  they  cite  to  sustain  this  contention  Nisbett  v.  Brown 
&  Norton,  30  Ark.  590,  and  Sorrells  v.  McHenry,  38  Ark.  127.  But 
under  the  facts  of  this  case  we  do  not  think  that  the  makers  can  resist 
the  payment  of  this  note  by  any  defense  which  they  might  interpose 
to  it  in  the  hands  of  the  original  payee,  even  if  it  should  be  held  that 
the  plaintiff  obtained  the  note  from  the  bank  after  its  maturity.  The 
note  had  been  transferred  by  the  payee,  Smith,  to  Dodson  &  Son  m 
August,  1903,  long  prior  to  its  maturity.  If  Dodson  &  Son  were  at 
that  time  holders  thereof  for  value  in  the  due  course  of  business,  then 
any  subsequent  purchaser  thereof  from  them,  even  though  he  obtained 
it  after  maturity,  would  be  protected  against  any  defense  which  the 
makers  might  have  or  be  entitled  to  assert  against  the  original  payee. 
As  is  said  in  1  Daniel  on  Negotiable  Instruments,  p.  801 :  "As  soon 
as  the  paper  comes  into  the  hands  of  a  holder  unaffected  by  any  defect, 
its  character  as  a  negotiable  security  is  established ;  and  the  power  of 
transferring  it  to  others  with  the  same  immunity  which  attaches  in 
his  own  hands  is  incident  to  his  legal  right  and  necessary  to  sustain 
the  character  and  value  of  the  instrument  and  to  protect  the  bona  fide 
holder  in  its  enjoyment."  And  the  author  further  says:  "If  the  hold- 
er acquired  the  paper  after  maturity  from  one  who  became  a  bona 
fide  holder  for  value  and  without  notice  before  maturity,  he  is  then 
protected  by  the  strength  of  his  transferor's  title."     *    *    * 

The  decree  is,  accordingly,  affirmed. 


SECTION  7.— RIGHTS  OF  THE  REACOUIRER 

N.  I.  L.,  Section  50.  Where  an  instrument  is  negotiated  back 
to  a  prior  party,  such  party  may,  subject  to  the  provisions  of  this 
act,  reissue  and  further  negotiate  the  same.  But  he  is  not  entitled 
to  enforce  payment  thereof  against  any  intervening  party  to  whom 
he  was  personally  liable. 
B.&  B.Bus.Law— 50 


786  NEGOTIABLE   INSTRUMENTS  (Part  3 

N.  I,  L.,  Section  58.  *  *  *  A  holder  who  derives  his  title 
through  a  holder  in  due  course,  and  who  is  not  himself  a  party  to 
any  fraud  or  illegality  affecting  the  instrument,  has  all  the  rights 
of  such  former  holder  in  respect  of  all  parties  prior  to  the  latter. 

N.  I.  L.,  Section  121.  Where  the  instrument  is  paid  by  a  party 
secondarily  liable  thereon,  it  is  not  discharged;  but  the  party  so 
paying  it  is  remitted  to  his  former  rights  as  regards  all  prior 
parties  and  he  may  strike  out  his  own  and  all  subsequent  indorse- 
ments, and  again  negotiate  the  instrument,  except  (1)  where  it  is 
payable  to  the  order  of  a  third  person,  and  has  been  paid  by  the 
drawer;  (2)  and  where  it  was  made  or  accepted  for  accommoda- 
tion, and  has  been  paid  by  the  party  accommodated. 

The  position  occupied  by  a  reacquirer  of  a  negotiable  instru- 
ment is  not  definitely  fixed  by  the  Negotiable  Instruments  Law. 
A  reacquirer  certainly  may  not  recover  from  any  subsequent  party 
for  the  breach  of  the  same  obligation  which  the  reacquirer  by  his 
indorsement  or  deliver}^  owed  to  such  party.  These  obligations 
simply  cancel  each  other.  This  rule  thus  to  prevent  circuity  of  ac- 
tion is  recognized  by  section  50.  The  principal  difficulty  arises 
in  connection  with  sections  58  and  121.  Section  58  prevents  the 
payee,  who  obtained  the  instrument  subject  to  a  defense  as 
against  himself,  from  bettering  his  position  by  negotiating  to  a 
holder  in  due  course  and  then  repurchasing,  but  the  section  permits 
any  person  who  was  not  himself  a  party  to  any  fraud  or  illegality 
to  succeed  to  the  position  of  the  holder  in  due  course.  A  holder, 
who  was  not  a  party  to  the  fraud  might,  however,  have  such  knowl- 
edge of  the  defense  that  he  would  not  be  a  holder  in  due  course. 
By  passing  title  to  a  holder  in  due  course  and  reacquiring,  does 
he  become  a  holder  in  due  course?  Under  the  common  law 
he  did  not,  by  such  reacquisition,  become  a  holder  in  due  course, 
and,  under  section  121,  which  remits  such  party  to  his  former 
rights,  he  could  not  recover  as  a  holder  in  due  course.  Since  he  is 
not  "a  party  to  any  fraud"  but  is  merely  a  party  with  notice  of 
the  fraud  of  a  predecessor  in  title,  under  section  58,  it  would  seem 
that  he  would  be  a  holder  in  due  course.  Most  of  the  cases  under 
the  act  have  held  that  a  reacquirer,  who,  because  of  notice  of  fraud, 
was  not  a  holder  in  due  course  at  the  time  he  negotiated  the  in- 
strument, does  not  succeed  to  the  rights  of  the  holder  in  due  course 
from  whom  he  repurchased.  But  there  are  some  cases,  as  for  ex- 
ample where  the  reacquirer  originally  was  a  donee  from  the  payee, 
or  an  accommodation  indorser,  where  it  would  seem  that  the  re- 
acquirer should  be  deemed  a  holder  in  due  course  if  he  purchased 
from  one  who  occupied  that  position.-^ 

1  See  the  excellent  discussion  of  ttiese  problems  by  Professor  Chafee,  in 
his  article,  "The  Reacquisition  of  a  Negotiable  Instrument  by  a  Prior  Party," 
21  CJolumbia  Law  Review,  538. 


Ch.  3)  WnO  ARE   HOLDERS   IN  DUE  COURSD     •  787 


ARAGON  COFFEE  CO.  v.  ROGERS. 

(Supreme  Court  of  Appeals  of  ^'irginia,  1906.     105  Va.  51,  52  S.  E.  843, 
8  Ann.  Cas.   G23.)    , 

Action  by  Alfred  M.  Rogers  against  J.  W.  Harrison,  doing  business 
under  the  name  and  style  of  Aragon  Coffee  Company.  There  was  a 
judgment  for  plaintiff,  and  defendant  brings  error.     *     *     * 

Kkith,  p.  J.  W.  Harrison,  doing  business  under  the  name  and  style 
of  the  Aragon  Coffee  Company,  of  Richmond  city,  purchased  of  Hills 
Bros.  Co.,  a  corporation  in  the  city  of  New  York,  500  bags  of  coffee, 
for  which  it  made  its  negotiable  note  for  $3,727.02,  dated  January  11, 
1904,  payable  four  months  after  date  to  Hills  Eros.  Co.,  or  order,  at 
Planters'  National  Bank,  Richmond,  Va.  Before  the  maturity  of 
this  note  it  was  indorsed  to  the  National  Park  Bank  of  New  York, 
who  it  is  conceded  acqviired  it  in  the  ordinary  course  of  business,  and 
was  an  innocent  holder  of  it  for  value  and  without  notice.  When  the 
note  fell  due,  payment  was  demanded  and  refused,  and  the  note  was 
duly  protested.  On  November  14,  1904,  this  note  was  indorsed  to 
Alfred  M.  Rogers,  without  recourse,  who  paid  to  the  National  Park 
Bank  $3,841.69,  the  full  amount  represented  by  the  note,  principal, 
and  interest. 

In  March,  1905,  Rogers  sued  the  Aragon  Coffee  Company  upon  this 
note.  The  defendant  pleaded  nil  debet  and  a  plea  of  set-off,  in  which 
he  avers  that  he  purchased  of  Hills  Bros.  Co.  a  certain  lot  of  coffee, 
which  was  represented  to  be  sound  and  as  good.  *  *  *  'pj-^g  -gi^^ 
then  alleges  that  the  coffee  was  not  sound  and  free  from  defects,  but 
was  unsound,  and  that  both  the  sample  and  coffee  had  been  tampered 
with  and  adulterated,  but  so  skillfully  and  cunningly  that  the  defendant 
did  not  discover  the  fraud  and  could  not  have  discovered  it  without 
such  a  careful  examination  as  no  man  would  make  unless  he  had  reason 
to  suspect  the  perpetration  of  a  fraud.  *  *  *  The  plea  further  avers 
that  Hills  Bros.  Co.  is  the  real  plaintiff  in  the  suit,  and  that  it  has 
formed  an  unlawful  combination  with  the  National  Park  Bank  of 
New  York  and  Alfred  M.  Rogers,  the  object  of  which  was  wrongfully 
and  unlawfully  and  by  deceit  to  cut  defendant  off  and  prevent  him 
from  showing  his  rightful  and  lawful  set-offs  and  equities  against 
said  note.  In  conclusion  he  claims  to  have  been  damaged  by  the  fraud 
practiced  upon  him  in  the  sum  of  $1,987.10,  which  sum  he  seeks  to 
have  set  off  against  the  note,  and  the  balance  of  $1,740.92  was  brought 
into  court,  which  the  defendant  stated  he  was  ready  to  pay  to  the 
plaintiff.     *    *    * 

We  observe  in  limine  that  there  is  no  occasion  to  discuss  the  trans- 
action as  between  the  Aragon  Coffee  Company  and  Hills  Bros.  Co. 
The  evidence  is  conclusive  to  show  a  bald  and  iniquitous  fraud.  The 
only  question  which  we  need  to  consider  is  whether  or  not  the  parties 
before  the  court  occupy  such  a  relation  to  the  transaction  as  that,  un- 
der the  law  merchant,  we  must  shut  our  eyes  to  the  truth  and  close  the 
door  upon  all  investigation. 

The  National  Park  Bank,  being  the  holder  for  value  and  without 
notice,  could  transmit  a  complete  title  to  a  third  person,  even  though 
that  third  person  had  knowledge 'of  the  facts  which  would  have  de- 
feated a  recovery  upon  the  note  in  the  hands  of  the  payee ;  the  general 
rule  being  that,  if  a  person  taking  with  notice  purchase  from  one 
without  notice,  he  is  entitled  to  stand  in  the  latter's  shoes  and  take 


788  NEGOTIABLE   INSTRUMENTS  (Part  3 

shelter  under  his  good  faith.  If  it  were  not  so,  the  bona  fide  purchas- 
er without  notice  might  be  unable  to  dispose  of  the  property,  and  thus 
its  value  in  his  hands  be  materially  deteriorated.  A  bona  fide  holder, 
it  is  said,  is  entitled  to  have  the  whole  world  for  his  market. 

But  there  is  an  exception  to  this  rule,  which  is  well  established: 
If  the  payee  sell  negotiable  paper  to  an  innocent  third  party  and  repur- 
chase it,  he  does  not  thereby  acquire  any  better  right  against  the  maker 
than  he  possessed  in  the  first  instance.    *     *    * 

Judge  Cooley,  in  Kost  v.  Bender,  25  Mich.  515,  says :  "As  a  general 
rule,  the  bona  fide  holder  of  negotiable  paper  has  a  right  to  sell  the 
same,  with  all  the  rights  and  equities  attaching  to  it  in  his  own  hands, 
to  whoever  may  see  fit  to  buy  of  him,  whether  such  purchaser  was 
aware  of  the  original  infirmity  or  not.  Without  this  right  he  w^ould 
not  have  the  full  protection  which  the  law  merchant  designs  to  afford 
him,  and  negotiable  paper  would  cease  to  be  a  safe  and  reliable  me- 
dium for  the  exchanges  of  commerce.  For,  if  one  can  stop  the  nego- 
tiability of  paper  against  which  there  is  no  defense,  held  by  another, 
it  is  obvious  that  an  important  element  in  its  value  is  at  once  taken 
away.  But  this  rule  has  never  been  applied  to  a  purchase  by  the  orig- 
inal payee,  and  it  is  not  essential  to  the  protection  of  the  innocent  in- 
dorsee that  it  should  be.  It  cannot  be  very  important  to  him  that 
there  is  one  person  incapable  of  succeeding  to  his  equities,  and  who 
consequently  would  not  be  likely  to  become  a  purchaser.  If  he  may 
sell  to  all  the  rest  of  the  community,  the  market  value  of  his  security 
is  not  likely  to  be  affected  by  the  circumstance  that  a  single  individual 
cannot  compete  for  its  purchase — especially  when  it  is  considered  that 
the  nature  of  the  negotiable  securities  is  such  that  their  market  value 
is  very  little  influenced  by  competition.  Nor  is  there  any  rule  or 
principle  of  law  that  would  be  violated  by  permitting  the  maker  to 
set  up  his  defense  against  the  payee,  when  he  becomes  the  indorsee, 
with  the  same  eft'ect  that  he  might  have  done  before  it  had  been  sold 
at  all ;  nor  is  there  any  valid  reason  against  it." 

In  this  case,  then,  it  was  not  sufficient  for  the  defendant  to  show 
that  there  was  fraud  in  the  transaction  between  him  and  Hills  Bros. 
Co.,  for,  notwithstanding  that  fraud,  the  National  Park  Bank,  being 
a  bona  fide  holder  of  the  note,  could  transmit,  and  Rogers,  the  plaintiff, 
could  acquire,  a  title  to  the  note,  free  from  all  antecedent  equities, 
unless  there  was  evidence  tending  to  prove  that  Rogers  purchased, 
not  for  himself,  but  for  the  original  payee  in  the  note,  Hills  Bros.  Co., 
and  that  this  company  and  not  Rogers  was  the  actual  beneficial  plain- 
tiff. We  will  therefore  consider  the  evidence  in  the  light  of  these 
principles.     *     *     =s= 

[x'Vfter  considering  the  evidence  the  court  continued:]  The  case 
under  consideration  is,  in  our  judgment,  far  stronger  to  show  a  col- 
lusive purchase  upon  the  part  of  Rogers  than  the  one  cited.  The  facts 
which  are  set  forth  in  this  opinion,  coupled  with  the  conduct  of  the 
plaintiff  when  upon  the  stand  as  a  witness,  inexplicable  upon  any 
reasonable  hypotheses,  except  that  he  feared  to  disclose  the  truth  and 
preferred  to  take  the  chance  of  success  by  permitting  the  court  and 
jury  to  grope  for  facts  in  the  dark,  when  a  word  from  him  giving  a 
rational  account  of  his  conduct  would  have  dispelled  all  doubt,  war- 
ranted the  jury  in  believing  that  the  National  Park  Bank,  being  pos- 
sessed of  funds  belonp^ino^  to  Hills  Bros.  Co.,  which  company  was  ul- 
timately liable  to  it  for  the  note,  concluded  not  to  risk  a  lawsuit  but 


Ch.  .*>)  WHO   ARE   HOLDERS   IX   DUE   COURSE  789 

to  look  to  its  immediate  indorser,  Hills  Bros.  Co.,  and  so  informed  that 
company,  which  then  hatched  the  scheme  of  a  purchase  of  the  note 
by  Rogers,  and  thus  hoped  to  consummate  its  fraud. 

We  think,  upon  the  whole  case,  it  was  for  the  jury  to  say  whether 
Rogers  was  a  purchaser  in  good  faith  or  was  conniving  with  Hills 
Bros.  Co.,  to  purchase  the  note  as  their  agent,  in  order  to  defeat  the 
equities  of  the  Aragon  Coffee  Company.  It  follows  that  the  judgment 
upon  the  demurrer  should  have  been  in  favor  of  the  defendant,  and 
this  court  will  enter  such  judgment  as  the  circuit  court  ought  to  have 
rendered. 


RATCLIFFE  v.  COSTELLO  et  al. 
(Supreme  Court  of  Appeals  of  Virginia,  1915.    117  Va.  563,  85  S.  E.  469.) 

Action  by  G.  M.  Ratcliffe  as  indorsee  from  the  payee  N.  B.  Bullock, 
against  Robert  Costello  and  another  as  makers  of  a  note.  There  was  a 
judgment  for  defendant,  and  plaintiff  brings  error. 

KkiTh,  p.  *  *  *  We  have  searched  the  record  in  this  case  dili- 
gently, and  have  been  unable  to  find  a  scintilla  of  evidence  proving,  or 
tending  to  prove,  that  Ratcliffe  had  actual  knowledge  of  any  infirmity 
or  defect,  or  knowledge  of  such  facts  that  his  action  in  taking  the  in- 
strument amounted  to  bad  faith,  but  on  the  contrary  he  stood  before 
the  court,  by  evidence  wholly  uncontradicted,  as  a  holder  in  due 
course  of  an  instrument  complete  upon  its  face,  which  had  not  been 
dishonored,  and  that  he  took  it  in  good  faith  and  for  value,  without  no- 
tice of  any  infirmity  in  the  instrument  or  defect  in  the  title  of  the  per- 
son negotiating  it. 

There  seems  to  have  been  some  misapprehension  with  respect  to  the 
case  of  Aragon  Coffee  Co.  v.  Rogers,  105  Va.  51,  52  S.  E.  843,  8  Ann. 
Cas.  623.  It  will  be  recalled  that  Ratcliffe,  after  he  purchased  the 
notes,  sold  them  with  a  guaranty  to  his  vendees  that  they  should  be 
paid,  and  that  in  order  to  keep  faith  with  them  he  took  the  notes  back 
after  the  first  one  was  protested.  It  is  true  that  when  the  notes  came 
back  to  his  possession  they  came  under  circumstances  which  would 
have  imputed  to  him  knowledge  of  the  infirmities  in  the  instruments, 
but  that  knowledge  did  not  relate  back  so  as  to  impair  his  original 
position  as  a  purchaser  for  value  and  without  notice.  In  the  case  of 
Aragon  Coffee  Company  exactly  the  converse  of  these  facts  existed. 
The  original  payee  in  that  case  was  the  party  guilty  of  a  gross  fraud, 
as  a  result  of  which  the  negotiable  note  in  that  case  was  given.  He 
indorsed  it  to  an  innocent  holder  and  afterwards  repurchased  it ; 
and  the  court  held  that  if  a  payee  sells  a  negotiable  instrument  to  an 
innocent  third  party  and  then  repurchases  it,  he  does  not  thereby  ac- 
quire a  better  title  against  the  maker  than  he  had  in-  the  first  instance. 
We  refer  to  that  case  and  the  authorities  there  cited  as  not  at  all  in 
conflict  with  the  position  of  the  plaintiff'  in  error  in  this  case.    *     *    * 

The  judgment  of  the  circuit  court  must  be  reversed,  the  verdict 
set  aside,  and  the  cause  remanded  for  a  new  trial  to  be  had  not  in  con- 
flict with  the  views  herein  expressed. 


790  NEGOTIABLE   INSTRUMENTS  (Part  3 


COMSTOCK  V.  BUCKLEY  et  al. 

(Supreme  Court  of  Wisconsin,  1910.     141  Wis.  228,  124  N.  W.  414, 
l.'Jo  Am.  St.  Rep.  34.) 

Action  upon  a  promissory  note,  $2,500,  dated  April  21,  1900,  signed 
by  J.  O.  &  W.  S.  Buckley,  a  copartnership,  payable  to  the  order  of 
Thomas  F.  Somers,  at  six  months  date,  with  6  per  cent,  interest,  and 
indorsed  by  Thomas  F.  Somers,  Charles  Buehner,  John  Graf,  Peter 
J.  Somers,  John  Zilg,  C.  S.  Otjen,  H.  F.  Bosworth,  and  W.  E.  Haskin 
in  the  order  aforesaid.  It  appeared  that  said  note,  so  indorsed  without 
any  consideration  to  the  endorsers,  but  for  the  accommodation  of  a 
mining  company  in  which  they  were  all  concerned  and  for  which  the 
two  Buckleys  were  financial  agents,  was  delivered  to  Henry  Herman, 
as  a  note  broker,  to  negotiate  and  pay  over  the  proceeds  to  said  agents ; 
that  said  Herman  during  the  life  of  said  note  did  dispose  of  the  same 
fraudulently,  as  claimed,  to  one  Wight,  an  innocent  holder,  who  paid 
value  to  Herman,  and  concededly  obtained  good  title  to  the  note. 
Herman,  it  is  claimed,  applied  the  proceeds  to  his  own  use  without 
informing  defendants  that  he  had  disposed  of  the  note.  At  maturity 
the  note  was  protested  for  nonpayment,  and  shortly  thereafter,  Octo- 
ber 25,  1900,  was  paid  by  Henry  Herman  and  returned  to  his  posses- 
sion. Thereafter,  November  27,  1900,  Herman  sold  said  note  for 
value  approximating  its  face  to  the  plaintiff,  who  had  notice  of  its 
dishonor,  the  certificate  of  protest  being  attached  and  who  at  the  same 
time  entered  into  an  agreement  with  Herman  for  a  definite  date  of 
extension  of  the  time  of  payment.  At  the  close  of  the  trial,  upon  these 
facts,  the  court  directed  a  verdict  for  the  plaintiff  for  the  full  amount. 
From  judgment  on  such  verdict  the  defendants  appeal. 

Dodge;,  j,  *  *  *  Justification  of  the  action  of  the  trial  court  is 
also  attempted  on  the  ground  that,  by  the  discount  of  the  note  for  full 
value  to  Wight,  he  acquired  a  perfect  title  as  against  all  parties,  and 
that  such  title  he  might  effectively  transfer  to  another,  although  that 
other  were  charged  with  notice  of  some  defects  in  the  title  of  some 
previous  holder.  This  is  undoubtedly  the  general  rule,  and,  if  the  sale 
by  Herman  to  Wight  had  been  an  honest  one  on  Herman's  part,  with- 
in his  authority  as  agent,  then  Wight  might  have  sold  the  note  back  to 
Herman  in  his  individual  capacity,  and  he  have  acquired  a  good  title 
thereby  which  again  he  might  transfer  to  another.     *     *    * 

This  principle,  which  is  so  trite  as  hardly  to  warrant  citation  of  avi- 
thority,  is  recognized  by  the  negotiable  instrument  law,  Section  58. 
*  *  *  If  Herman  made  the  sale  to  Wight  fraudulently,  he  could 
not,  under  this  statute,  acquire  the  good  title  which  Wight  held  only 
by  virtue  of  being  a  holder  of  the  instrument  in  due  course.  When  it 
came  back  to  his  hands,  it  reassumed  the  same  position  it  formerly 
occupied,  and  he  could  dispose  of  it  to  another,  not  an  innocent  holder, 
only  within  the  limits  of  his  own  rights  and  authority.  The  question 
whether  Herman  acted  fraudulently  in  negotiating  the  note  to  Wight 
was  involved  in  conflict  of  evidence  either  received  or  offered  and 
much  uncertainty  of  inference  from  such  evidence  and  should  have 
been  passed  on  by  the  jury ;  as,  also,  the  question  whether  his  payment 
to  Wight  was  an  attempted  purchase  by  him  individually  or  payment 
of  the  note  on  behalf  of  his  principal.    *    *    * 

Judgment  reversed  and  cause  remanded  for  a  new  trial. 


Ch.  3)  WnO   ARE   HOLDKRS   IN   DUE   COURSE  791 

LILL  V.  GLEASON. 
(Supreme  Court  of  Kansas,  1U14.     92  Kan.  754,  142  Pac.  287.) 
Action  by  Michael  Lill  against  Nelson  Gleason.    From  judgment  for 
defendant,  plaintiff  appeals. 

BuRCPi,  J.  On  April  15,  1908,  Nelson  Gleason  executed  and  deliv- 
ered his  negotiable  promissory  note  to  the  Peerless  Machinery  &  Sup- 
ply Company  for  $1,000,  due  on  September  1,  1908.  The  note  was 
given  for  stock  in  the  machinery  company  and  was  accompanied  by 
a  written  contract  permitting  Gleason  to  return  the  stock  and  receive 
liis  note  duly  canceled  by  giving  notice  of  his  intention  to  the  machin- 
ery company  on  or  before  August  1,  1908.  On  July  25,  1908,  the  no- 
tice was  given  but  the  note  was  not  returned.  The  machinery  com- 
pany indorsed  the  note  in  blank  before  maturity  and  left  it  with  the 
Andale  State  Bank  as  security  for  money  to  be  advanced  to  the  ma- 
chinery company  under*  a  contract  providing  that  advancements  should 
be  made  up  to  the  sum  of  $3,500,  when  collateral  security  indorsed 
by  Michael  Lill  was  deposited  with  the  bank.  The  bank  refused  to 
make  any  advancement  on  the  note  until  it  was  indorsed  by  Lill.  Lill 
then  went  to  the  bank  and  wrote  his  name  on  the  back  of  the  note,  pur- 
suant to  a  contract  with  the  machinery  company  to  do  so,  which  con- 
tract provided  for  security  to  Lill  for  his  indorsement  out  of  the  com- 
pany's assets.  The  bank  then  cashed  the  note.  Gleason  had  no  con- 
cern with  any  of  these  transactions.  When  Lill  indorsed  the  note 
and  the  advancement  was  made,  neither  he  nor  the  bank  had  any  no- 
tice of  the  contract  between  Gleason  and  the  machinery  company. 
When  the  note  matured,  Gleason  refused  to  pay.  Upon  demand  of  the 
bank,  Lill  took  up  the  note  and  received  it  without  indorsement  from 
the  bank. 

In  an  action  by  Lill  against  Gleason,  the  court  found  the  foregomg 
facts  and  held  that  Lill  was  not  a  holder  in  due  course,  and  that  Glea- 
son's  defense  to  the  note  under  his  stock  contract  with  the  machinery 
company  was  good.    Lill  appeals. 

The  rights  of  the  parties  are  governed  by  the  Negotiable  Instru-  , 
ments  Law.  *  *  *  Lill  became  a  party  to  the  note  for  the  ac- 
commodation of  the  payee,  *  *  *  and  his  original  status,  so  far 
as  liability  was  concerned,  was  that  of  an  indorser,  since  he  did  not 
indicate  an  intention  to  be  bound  in  some  other  capacity.  *  *  * 
He  thus  became  secondarily  liable  to  all  parties  subsequent  to  the 
payee,  *  *  *  in  this  instance  to  the  Andale  State  Bank.  When 
Lill  paid  the  note  it  was  not  discharged.  It  was  the  policy  of  the  law 
merchant  and  is  the  policy  of  the  Negotiable  Instruments  Law  to 
keep  a  negotiable  instrument  alive  and  negotiable  as  far  as  possible 
until  the  principal  debtor  has  discharged  his  obligation.  Discharge 
could  not  take  place  under  either  section  119  or  section  121,  and  the 
general  rule  is  that  payment  by  a  party  other  than  the  principal  debtor 
does  not  discharge  parties  prior  to  the  one  making  the  payment,  and 
the  payment,  instead  of  extinguishing  the  instrument,  operates  as  a 
transfer  of  it  to  the  party  paying.     *     *     * 

The  contract  of  an  indorser  for  the  accommodation  of  the  payee 
is  wholly  independent  of  that  of  the  maker,  and  such  indorser,  upon 
making  payment,  succeeds  to  the  title  and  rights  of  the  holder  as  against 
the  maker.  *  *  *  Sheahan  v.  Davis,  27  Or.  278,  40  Pac.  405,  28 
L.  R.  A.  476,  50  Am.  St.  Rep.  722. 


792  NEGOTIABLE   INSTRUMENTS  (Part  3 

The  note  having  been  indorsed  by  the  payee  in  blank,  it  became  pay- 
able to  bearer  and  negotiable  by  delivery.  *  *  *  When  it  was  de- 
livered by  the  bank  to  Lill,  he  became  the  bearer  and  holder.  *  *  * 
Having  derived  title  from  the  bank,  which  was  a  holder  in  due  course, 
and  not  having  been  a  party  to  any  fraud  or  illegality  affecting  the  in- 
strument, Lill  became  possessed  of  all  the  rights  of  the  bank  against 
the  maker.  *  *  *  It  made  no  difference  that  the  paper  was  over- 
due and  unpaid,  and  would  have  made  no  difference  if  it  had  been 
shown  that,  when  he  acquired  title,  Lill  had  learned  of  the  contract 
between  Gleason  and  the  supply  company  to  which,  as  between  them, 
the  note  was  subject.  *  ''^  *  The  Negotiable  Instruments  Law 
merely  affirms  the  settled  principle  of  the  law  merchant  that,  when  a 
negotiable  instrument  once  passes  into  the  hands  of  a  holder  by  in- 
dorsement in  due  course,  the  maker's  right  to  interpose  defenses  good 
against  the  payee  is  cut  off  as  to  all  subsequent  holders  not  parties  to 
fraud  or  illegality  affecting  the  instrument.  The  reason  is  that,  if  a 
holder  in  due  course  could  not  invest  his  transferee  with  his  own  ca- 
pacity to  recover  on  the  paper,  his  property  rights  would  be  materially 
and  prejudicially  reduced.     [Court  quotes  section  121.] 

It  is  plain  that  the  expression  "remitted  to  his  former  rights"  does 
not  apply  to  Lill.  He  was  a  party  secondarily  liable  who  paid  the 
instrument,  but  he  had  no  former  rights  to  which  he  might  be  remit- 
ted. After  the  payee  had  indorsed  the  note,  Lill  indorsed  it  to  accom- 
modate the  payee  in  disposing  of  it  to  the  bank.  Standing  in  that  sit- 
uation, Lill  had  no  title  to  the  note  or  claim  on  either  the  maker  or 
the  payee.  After  he  paid  the  note,  he  had  a  right  of  some  kind  against 
somebody — the  right  to  reimbursement  from  the  party  accommodated, 
the  right  to  enforce  the  note  against  the  defaulting  maker,  or  both — 
but  until  he  paid  the  note  no  obligation  arose  in  his  favor  on  the  part 
of  anybody,  and  of  course  the  statute  did  not  remit  him  to  a  situation 
in  which  he  was  entirely  remediless.  The  words  "remitted  to  his 
former  rights"  must  therefore  be  restricted  in  their  application  to  a 
party  secondarily  liable,  who  has  himself  been  connected  with  the  title 
to  the  instrument. 

"Manifestly  this  section  refers  only  to  indorsers  for  value  and  not 
for  mere  accommodation.  An  indorser  for  value  at  some  time  prior 
to  his  indorsement  owned  the  note  with  the  right  to  sue  upon  it  at 
maturity.  With  this  right  he  parted  when  he  discounted  the  paper  by 
indorsement  to  a  purchaser  for  value,  who  in  turn  by  like  process  may 
transfer  the  title  becoming  liable  by  his  indorsement  to  the  new  in- 
dorsee, and  so  on  without  limit  until  the  maturity  of  the  instrument. 
Then  whichever  of  the  successive  indorsers  is  compelled  to  pay  is 
restored  to  his  former  rights,  within  the  meaning  of  this  section,  upon 
striking  out  his  own  and  subsequent  indorsements.  The  case  is  en- 
tirely different,  in  reason,  concerning,  an  accommodation  indorser  or 
a  guarantor.  Neither  of  them  has  any  'former  rights,'  nor,  indeed,  any 
right  whatever,  until  he  pays  the  note  or  bill."  Noble  v.  Beeman- 
Spaulding-Woodward  Co.,  65  Or.  93,  107,  131  Pac.  1006,  1012,  46 
L.  R.  A.  (N.  S.)  162. 

In  the  case  of  Quimby  v.  Varnum,  190  Mass.  211,  76  N.  E.  671, 
it  was  well  said  that  section  128  was  intended  to  apply  where  the  per- 
son secondarily  liable  can  trace  his  title  on  the  face  of  the  note  and  its 
indorsements  through  the  prior  parties  to  the  party  whdm  he  seeks  to 


Ch.  .3)  WHO   ARE    HOLDERS   IN   DUB   COURSE  793 

hold.  This  case,  however,  seems  to  decide  generally  that,  because  an 
accommodation  indorser  has  no  rights  before  he  has  made  payment  to 
which  he  could  b&  remitted,  payment  by  him  extinguishes  the  note. 
Such  a  result  as  to  one  in  Lill's  situation  cannot  be  deduced  from  sec- 
tion 119  or  any  other  section  of  the  Negotiable  Instruments  Law,  is 
opposed  to  the  express  declaration  of  section  121  that  payment  by  a 
party  secondarily  liable  does  not  discharge  the  instrument,  and  is  con- 
trary to  the  policy  of  the  law  merchant.  No  reason  is  apparent  why 
Lill,  after  having  acquired  the  paper,  might  not  have  negotiated  it  to 
another,  had  he  seen  fit  to  do  so.     *     *     * 

One  of  the  defenses  to  the  action  was  that  Lill  acquired  title  to  the 
note  in  December,  1909,  from  the  trustee  in  bankruptcy  of  the  ma- 
chinery company.  Lill  was  a  creditor  of  the  machinery  company  and 
held,  as  collateral  security  for  his  indebtedness,  a  number  of  notes 
which  had  been  to  the  machinery  company.  Lill  compounded  his  in- 
debtedness with  the  trustee,  by  order  of  the  bankruptcy  court  duly 
obtained  in  December,  1909,  and  accepted  in  satisfaction  the  collat- 
eral notes  in  his  possession.  For  some  reason  the  ,Gleason  note  was 
included  in  the  list  of  securities.  Lill  paid  the  note  and  received  it 
from  the  bank  on  March  6,  1909.  At  the  time  the  machinery  company 
was  adjudged  bankrupt,  the  note  belonged  to  the  bank  as  a  holder  in 
due  course.  After  the  bank  transferred  it  to  Lill,  the  note  belonged 
to  him,  and  consequently  the  trustee  in  bankruptcy  had  no  title  what- 
ever to  the  instrument  which  he  could  pass  to  Lill.  If,  in  the  adjust- 
ment of  his  affairs  with  the  estate  of  the  bankrupt,  Lill  secured  a  re- 
lease of  whatever  claim  the  trustee  made  to  the  note,  it  was  no  concern 
of  the  maker,  and  the  title  acquired  from  the  bank  was  not  impaired. 

The  judgment  of  the  district  court  is  reversed,  and  the  cause  is 
remanded,  with  direction  to  enter  judgment  for  the  plaintiff. 


SECTION  8.— RIGHTS  OF  A  TRANSFEREE  FROM  A  HOLD- 
ER IN  DUE  COURSE  OF  UNINDORSED  PAPER  PAY- 
ABLE TO  THE  ORDER  OF  THE  TRANSFEROR 

The  situation  which  we  are  about  to  analyze  is  not  a  common 
one.  It  is  likely  to  arise  wholly  as  a  matter  of  accident.  The 
situation  has  a  double  aspect.  (1)  P.,  the  payee  of  a  negotiable 
instrument  which  is  in  form  payable  to  his  order,  P.  not  being 
a  holder  in  due  course,  transfers  the  instrument  for  value,  before 
maturity,  to  A.,  who  takes  in  good  faith.  We  may  substitute  for 
the  payee  any  other  holder — i.  e.,  any  special  indorsee — provided 
such  special  indorsee  is  not  a  holder  in  due  course,  and  then 
examiiie  into  the  rights  of  his  transferee  who  took  the  instrument 
without  indorsement  of  the  transferor.  The  problem  is  the  same  in 
either  case.  (2)  The  second  aspect  of  the  problem  is  like  the 
first  with  the  exception  that  the  transferor  is  a  holder  in  due 
course.  The  transferor  may  be  the  payee  of  an  instrument  pay- 
able to  his  order  or  a  special  indorsee,  and  he  makes  the  transfer 
Avithout  indorsement.  Is  the  transferee  in  either  of  these  cases  a 
holder  in  due  course?    The  section  involved  is  as  follows: 


794  NEGOTIABLE   INSTRUMENTS  (Part  3 

Section  49.  Where  the  holder  of  an  instrument  payable  to  his 
order  transfers  it  for  value  without  indorsing  it,  the  transfer  vests 
in  the  transferee  such  title  as  the  transferor  had  therein,  and  the 
transferee  acquires,  in  addition,  the  right  to  have  the  indorsement 
of  the  transferor.  But  for  the  purpose  of  determining  whether 
the  transferee  is  a  holder  in  due  course  the  negotiation  takes  ef- 
fect as  of  the  time  when  the  indorsement  is  actually  made. 

Clearly,  the  transferee  of  unindorsed  paper  payable  to  the  order 
of  the  transferor,  such  transferor  not  being  a  holder  in  due  co;Lirse, 
is  not  a  holder  in  due  course,  because  the  section  states  that  the 
transferee  acquires  "such  title  as  the  transferor  had  therein" ;  that 
is,  the  transferee  acquires  only  the  rights  of  his  transferor  and  not 
greater  rights.  Had  he  taken  by  indorsement,  then,  if  he  bought 
for  value,  before  maturity,  and  in  good  faith,  he  would  have  been 
a  holder  in  due  course.  As  stated  above,  this  transaction  is  apt  to 
arise  through  oversight ;  but  it  is  seen  that  it  is  decidedly  to  the 
interest  of  the  transferee  to  see  to  it  that  the  instrument  is  duly 
indorsed  to  him,  so  that  he  will  be  properly  guarded  against  de- 
fenses of  the  maker  or  drawer.  The  section  does  go  on  to  give 
to  such  a  transferee  the  right  to  have  such  indorsement,  but  it 
may  take  considerable  time  to  convert  his  right  into  an  actuality. 
The  right  to  have  a  thing  and  the  actual  possession  of  it  are  very 
different.  It  is  to  be  noticed  that,  if  at  any  time  before  the  trans- 
feree actually  obtains  the  indorsement,  notice  should  come  to  the 
transferee  of  the  existence  of  a  defense  possessed  by  the  maker, 
drawer,  or  acceptor  as  against  the  payee,  such  knowledge  prevents 
the  transferee  from  becoming  a  holder  in  due  course,  because  the 
section  states  that  the  negotiation  takes  effect  "as  of  the  time 
when  the  indorsement  is  actually  made."  Up  until  that  time  the 
transferee  has  only  such  rights  as  his  transferor  had. 

The  second  question  then  arises :  May  the  transferee  of  unin- 
dorsed paper  payable  to  the  order  of  a  transferor  who  was  a  hold- 
er in  due  course,  be  a  holder  in  due  course?  Section  49  speaks  of 
such  person  as  a  transferee.  He  is  not  referred  to  as  a  holder.  We 
have  already  seen  that  only  those  persons  may  be  holders  in  due 
course  who  are  holders,  as  that  term  is  defined  in  the  act.  The 
answer  to  the  above  question  depends,  on  the  question  whether 
such  a  person  can  be  deemed  a  holder  under  section  191  which  de- 
fines a  holder  as  the  "payee  or  indorsee  of  a  bill  or  note  who  is 
in  possession  of  it  or  the  bearer  thereof."  Perhaps  such  a  trans- 
feree is  not  an  indorsee  because  an  indorsee  is  a  person  who  ac- 
quires possession  by  negotiation.  But  is  it  possible  to  urge  that, 
although  a  transferee  is  not  a  holder  and  therefore  is  not  techni- 
cally a  holder  in  due  course,  such  a  transferee  has  all  the  rights  of  a 
holder  in  due  course? 


Ch.  3)  WHO   ARE   HOLDERS   IN   DUE   COURSE  795 


SMITH   V.   NELSON   LAND  &   CATTLE   CO. 

(United  States  Circuit  Court  of  Appeals,  Eighth  Circuit,  1914.     212  Fed.  56. 

128  C.  C.  A.  512.) 

Garland,  Circuit  Judge.  These  are  appeals  from  a  judgment  ren- 
dered in  an  action  brought  by  the  Cattle  Company  against  George 
H.  Smith  et  al.,  for  the  purpose  of  having  certain  promissory  notes,  a 
mortgage  securing  the  same,  and  assigments  of  certain  land  contracts 
and  certificates  executed  for  the  same  purpose  canceled.  Smith  filed 
a  cross-bill,  asking  to  have  the  amount  for  which  he  held  the  notes, 
mortgage,  contracts,  and  certificates  as  security  ascertained,  and  a  sale 
of  the  security  to  satisfy  the  same.  The  trial  court  granted  the  relief 
prayed  by  Smith  as  to  one  note  of  $1,600,  and  canceled  four  other  notes 
of  $3,350  each  as  prayed  by  the  Cattle  Company.  The  facts  which 
determine  the  correctness  of  the  ruling  below  appear  from  the  record 
as  follows :  November  19,  1907,  the  Cattle  Company,  by  Fred  P.  Nel- 
son, president,  and  Gust  A.  Nelson,  secretary  and  treasurer,  Celia  M. 
Nelson,  and  Hugo  E.  Nelson  executed  and  delivered  to  E.  H.  Luikart 
five  promissory  notes.  *  *  *  The  Cattle  Company  was  a  corpora- 
tion, and  signed  the  notes  before  delivery  without  any  consideration 
therefor  passing  to  it.  Luikart,  the  payee  of  the  notes,  for  value  re- 
ceived indorsed  and  delivered  the  notes  in  due  course  to  Roy  C.  Smith 
and  Albert  Anthes,  doing  business  under  the  firm  name  of  Aiithes  & 
Smith.     *     *     * 

The  mortgage  was  duly  assigned  by  Luikart  to  Anthes  &  Smith,  and 
the  land  contracts  and  certificates  transferred  to  them  by  delivery. 
Subsequent  to  the  indorsement  of  the  notes  to  Anthes  &  Smith,  but 
before  maturity,  they  were  transferred  by  them  to  the  defendant  and 
cross-complainant,  George  H.  Smith,  in  part  payment  of  an  antecedent 
debt  owing  to  Smith  by  Anthes  &  Smith.  The  mortgage,  land  con- 
tracts, and  certificates  were  also  transferred  with  the  notes.  The  note 
for  $1,600,  due  November  19,  1908,  was  indorsed  to  George  H.  Smith 
in  blank  by  Anthes  &  Smith.  None  of  the  other  notes  were  indorsed 
by  them.    *    *    * 

Upon  the  foregoing  facts  the  Cattle  Company  claims  that  the  execu- 
tion of  the  notes  by  it  as  an  accommodation  maker,  without  considera- 
tion, was  ultra  vires  and  void,  and  that  the  invalidity  of  the  notes  for 
the  above  reason  can  be  urged  against  George  H.  Smith,  the  present 
owner  and  holder  of  the  same,  for  the  reason  that  *  *  *  George 
H.  Smith  is  not  a  holder  in  due  course.  The  trial  court  decided  *  *  * 
as  to  the  remaining  four  notes  that  George  H.  Smith  was  not  a  holder 
in  due  course,  because  they  were  not  transferred  to  him  by  indorse- 
ment, and  therefore  were  void  in  his  hands  for  want  of  power  in  the 
Cattle  Company  to  execute  the  same.     *     *     * 

It  remains  to  inquire  as  to  the  rights  of  George  H.  Smith.  *  ^=  * 
We  think  that,  if  George  H.  Smith  must  stand  on  the  character  of  his 
own  title,  and  cannot  claim  protection  by  virtue  of  the  title  of  Anthes 
&  Smith,  then  the  ruling  of  the  trial  court  as  to  the  other  four  notes 
was  right.  An  indorsee  of  negotiable  paper  in  due  course  may  obtain 
a  better  title  than  his  indorser,  and  in  that  event  may  stand  upon  such 
title ;  but  is  it  necessary  that  he  be  an  indorsee  in  order  to  claim  the 
title  of  a  transferror,  who  was  an  indorsee  in  due  course?  In  other 
words,  cannot  George  H.  Smith,  although  the  notes  were  transferred 
to  him  by  delivery,  use  the  Anthes  &  Smith  title  to  insulate  the  ultra 


796  NEGOTIABLE   INSTRUMENTS  (Part  3 

vires  attack  of  the  Cattle  Company?  Does  not  the  transferee  for  value 
of  negotiable  paper  obtain  whatever  title  his  transferror  had,  irre- 
spective of  the  mode  of  transfer?  As  we  have  heretofore  said,  these 
notes  are  Kansas  contracts;  and,  if  there  are  statutes  of  that  state 
which  determine  the  legal  position  of  the  holders  thereof,  they  must  be 
enforced.     [Court  here  quotes  section  49.] 

The  last  clause  of  section  49  has  no  application  to  the  question  now 
under  discussion,  for  there  never  was  any  indorsement  of  the  four 
notes  in  question  by  Anthes  &  Smith;    and  counsel   for  George  H. 
Smith  are  not  claiming  that  he  was  an  indorsee  in  due  course,  but 
that  under  the  first  clause  of  this  section    *     *     *     George  H.  Smith 
obtained  whatever  title  Anthes  &  Smith  had.    The  last  section  does  not 
read:     "But  a  holder  in  due  course  who  derives  his  title  through  a 
holder  in  due  course  and  who  is  not,"  etc.     Such  language  would  be 
entirely  useless,  for  if  the  holder  was  a  holder  in  due  course,  he  would 
be  fully  protected  in  any  event.    The  law  was  enacted  in  order  to  pro- 
tect all  holders  of  whatever  character  of  negotiable  paper,  providing 
they  derive  their  title  to  the  same  from  a  holder  in  due  course.     An- 
thes &  Smith  were  holders  in  due  course,  free  from  any  defect  of 
title  of  prior  parties,  and  free  from  defenses  available  to  prior  parties 
among  themselves,  and  could  have  enforced  payment  of  the  notes  for 
the  full  amount  thereof  against  all  parties  liable  thereon.    *    *    *    Be- 
ing suoh  holders  when  they  transferred  the  notes  to  George  H.  Smith 
for  value  without  indorsing  them,  the  transfer  vested  in  George  H. 
Smith  such  title  as  Anthes  &  Smith  had.     *     *     *     This  provision  of 
the  law  negatives  the  idea  that  there  can  be  no  transfer  except  by  in- 
dorsement, for  the  reason  that  the  law  declares  what  title  a  transferee 
shall  acquire,  when  it  is  transferred  to  him  without  indorsement.     It 
is  true  section  58  uses  the  word  "holder"  in  describing  the  persons 
who  shall  derive  their  title  to  negotiable  instruments  from  a  holder  in 
due  course ;   and  counsel  for  the  Cattle  Company  urge  the  proposition 
that  George  H.  Smith  was  not  a  holder  under  the  provisions  of  section 
2  of  the  Negotiable  Instruments  Law  of  Kansas.     That  section  pro- 
vides as   follows:     "Definitions  and  meaning  of  terms.     In  this  act, 
unless  the  context  otherwise  requires:     *     *     =i=     'Holder'  nieans  the 
payee  or  indorsee  of  a  bill  or  note,  who  is  in  possession  of  it,  or  the 
bearer  thereof." 

The  same  section  provides  that  the  word  "bearer"  when  used  in  the 
act  means  the  person  in  possession  of  a  bill  or  note  which  is  payable 
to  bearer.  It  is  claimed  that  George  H.  Smith  was  not  the  bearer  of 
the  notes  because  they  were  not  payable  to  bearer,  and  that  he  was 
not  a  payee  or  indorsee  for  the  reason  that  he  was  not  named  as  payee 
in  the  notes  and  they  are  not  indorsed  to  him.  It  will  be  noticed,  how- 
ever, that  the  law  only  provides  that  these  definitions  shall  apply  un- 
less the  context  of  any  particular  portion  of  the  law  otherwise  requires. 
To  decide  that  the  word  "holder"  as  used  in  the  first  part  of  the  last 
clause  of  section  58,  hereinbefore  quoted,  does  not  include  a  transferee 
like  George  H.  Smith,  who  received  the  notes  in  question  from  Anthes 
&  Smith  without  their  indorsement,  would  be  inconsistent  with  the 
first  clause  of  section  49,  above  quoted,  for  that  section  provides  that 
where  a  holder  of  an  instrument  payable  to  his  order  transfers  it  for 
value  without  indorsing  it,  the  transfer  vests  in  the  transferee  such 
title  as  transferror  has  therein.  This  section  simply  uses  the  words 
"transfer"  and  "transferee,"  and  in  no  way  declares  that  a  transferee 


Ch.  3)  WHO   ARE    HOLDERS   IN   DUE   COURSE  797 

shall  also  be  a  holder  within  the  definition  of  section  2,  above  mentioned. 
We,  therefore,  think,  within  the  language  of  said  section  2,  that  the 
context  of  sections  49  and  58  require  that  the  word  "holder"  used 
in  the  beginning  of  the  last  clause  of  section  58,  should  be  held  to  in- 
clude any  transferee  of  negotiable  paper. 

The  result  of  what  we  have  said  is  that  we  are  of  the  opinion  that 
George  H.  Smith  has  the  same  title  to  the  four  notes  in  controversy 
that  was  possessed  by  Anthes  &  Smith,  by  virtue  of  the  statutes  of 
Kansas,  and  that,  possessing  such  title,  he  is  entitled  to  enforce  pay- 
ment of  the  same  against  the  Cattle  Company.  We  have  thus  far  con- 
sidered the  question  last  discussed  with  reference  to  the  statutes  of 
Kansas,  and  we  think  our  interpretation  of  the  same  is  in  line  with 
the  decision  of  the  Supreme  Court  of  Kansas  in  Underwood  v.  Fosha, 
89  Kan.  768,  133  Pac.  866;  and  we  think  the  weight  of  authority,  in- 
dependent of  statute,  is  in  favor  of  the  views  hereinbefore  expressed. 
*    *     * 

The  case  of  First  National  Bank  v.  McCullough,  50  Or.  508,  93 
Pac.  366,  17  L.  R.  A.  (N.  S.)  1105,  126  Am.  St.  Rep.  758,  is  relied 
upon  by  counsel  for  the  Cattle  Company.  This  case  may  be  said  to 
be  contrary  to  the  views  hereinbefore  expressed.  It  has  been  reported 
in  17  L.  R.  A.  (N.  S.)  1105,  and  an  interesting  note  accompanies  the 
report  of  the  case,  in  which  the  annotator  does  not  agree  with  the  con- 
clusion reached  in  the  case  cited. 

We  place  our  decision  upon  the  statutes  of  Kansas  as  construed  by 
the  Supreme  Court  of  that  state,  and  as  we  construe  them.  We  can- 
not see  how  the  ruling  thus  established  can  work  any  injustice.  The 
Cattle  .Company  could  not  have  avoided  the  notes  on  the  ground  of 
ultra  vires  in  the  hands  of  Anthes  &  Smith,  and  they  are  in  no  worse 
position  now  than  they  would  have  been  if  Anthes  &  Smith  still  owned 
them. 

The  decree  below  is  reversed,  and  the  cause  is  remanded,  with  di- 
rections to  dismiss  the  original  bill  at  the  costs  of  the  complainant  and 
to  enter  a  decree  in  favor  of  the  cross-complainant,  George  H.  Smith, 
as  prayed  for  in  his  cross-bill,  and  that  he  also  recover  his  costs. 


798  NEGOTIABLE   INSTRUMENTS  (Part  3 


CHAPTER  IV 

RIGHTS  OF  THE  HOLDER  AGAINST  THE  MAKER 
AND  ACCEPTOR 

Section 

1.  Introduction. 

2.  Defenses   and    Claims   of   Ovvner.sliip    Not   Available   Against   Holders    in 

Due  CoTirse. 

3.  Defenses   and   Claims   of  Ownership   Available  Against   Holder   in   Due 

Course. 

4.  Right   of    the   Drawee    to    Recover    Money    Paid    to    the    Holder    under 

Mistake. 

5.  Right  of  the  Drawee  with  Respect  to  Instruments  Payable  to  the  Order 

of  a  Fictitious  Payee. 

6.  Relation  of  the  Drawee  Bank  to  the  Drawer. 

7.  Rights  and  Liabilities  of  Parties  with  Respect  to  Acceptances  and  Pay- 

ments for  Honor. 

8.  Bills  in  a  Set. 


SECTION  1.— INTRODUCTION 

A  complete  definition  of  a  negotiable  instrument  would  concern 
itself  with  two  matters:  (1)  Operative  facts;  and  (2)  their  legal 
effect.  The  statement  that  a  particular  written  instrument  is  ne- 
gotiable means  that  certain  facts  operate  to  produce  other  facts. 
Both  of  these  groups  of  facts  must,  to  some  extent,  be  considered 
simultaneously.  Practically,  however,  it  is  impossible  to  do  this 
effectively,  consequently  the  emphasis  is  thrown  first  upon  one 
group,  and  then  upon  the  other.  Not  until  both  groups  of  facts 
have  been  examined  intensively  is  it  possible  to  obtain  a  reasonably 
complete  knowledge  of  the  real  mea*iing  of  a  rule  of  law.  In 
Chapter  I  we  were  interested  in  the  question:  What  facts  will 
operate  to  make  an  instrument  negotiable?  But  we  were  not  con- 
cerned, except  secondarily  with  the  question:  What  are  the 
various  legal  efl:'ects  produced  by  such  an  instrument?  In  Chapter 
II  the  emphasis  was  thrown  upon  some  of  the  legal  eflects  of  nego- 
tiability. Chapter  III  was  an  examination  into  the  detail  facts 
which  render  a  holder  of  a  negotiable  instrument  a  holder  in  due 
course,  but  the  nature  of  the  rights  acquired  by  the  holder  in  due 
course  were  adverted  to  only  incidentally.  The  present  chapter 
and  Chapter  V  following  are  concerned  with  the  inquiry  into  the 
nature  and  extent  of  the  rights  acquired  by  the  holder  in  due 
course,  the  most  important  consequence  of  negotiability.  In  this 
chapter  the  question  is :  What  rights  are  acquired  against  parties 
primarily  liable  on  the  instrument — the  maker  and  acceptor?  In 
the  next  chapter  the  question  is :  What  rights  are  acquired  against 
parties  secondarily  liable  on  the  instrument,  the  drawer  and  in- 
dorsers?  The  chief  problem  is  to  determine  .the  rights  of  the 
holder  in  due  course  against  parties  primarily  and  secondarily  li- 
able, although  we  shall  also  be  inquiring  into  the  rights  against 
the  same  parties  by  holders  not  in  due  course.     That  the  liability 


Ch.  4)         RIGHTS   OP   HOLDER  AGAINST   MAKER   AND   ACCEPTOR  799^ 

of  the  maker  and  acceptor  is  a  primary  liability  is  recognized  by 
the  following  sections : 

Section  60.  The  maker  of  a  negotiable  instrument  by  making 
it  engages  that  he  will  pay  it  according  to  its  tenor,  and  admits  the 
existence  of  the  payee  and  his  then  capacity  to  indorse. 

Section  62.  The  acceptor  by  accepting  the  instrument  engages 
that  he  will  pay  it  according  to  the  tenor  of  his  acceptance,  and 
admits  (1)  the  existence  of  the  drawer,  the  genuineness  of  his 
signature,  and  his  capacity  and  authority  to  draw  the  instrument, 
and  (2)  the  existence  of  the  payee  and  his  then  capacity  to  indorse. 

The  most  distinctive  feature  of  the  law  of  negotiable  instru- 
ments is  the  special  position  accorded  to  the  holder  in  due  course. 
The  Negotiable  Instruments  Law  provides  as  follows: 

Section  57.  A  holder  in  due  course  holds  the  instrument  free 
from  any  defect  of  title  of  prior  parties,  and  free  from  defenses 
available  to  prior  parties  among  themselves,  and  may  enforce  pay- 
ment of  the  instrument  for  the  full  amount  thereof  against  all 
parties  liable  thereon. 

Section  58.  In  the  hands  of  any  holder  other  than  a  holder  in 
due  course,  a  negotiable  instrument  is  subject  to  the  same  defenses 
as  if  it  were  non-negotiable. 

Defenses  which  cannot  be  set  up  to  defeat  the  claim  of  the 
holder  in  due  course  are  called  personal  defenses;  defenses  which 
may  be  successfully  interposed  against  the  holder  in  due  course 
are  called  real  defenses.  All  defenses  and  claims  not  real  are  per- 
sonal. Real  defenses  divide  themselves  into  three  groups:  (1) 
Those  where  in  reality  there  never  was  a  contract  executed  by 
the  party  sued;  (2)  those  where  there  is  a  contract  but  for  rea- 
sons of  public  policy  the  holder  in  due  course  is  not  permitted  to 
enforce  it;  (3)  where  there  was  a  contract  but  the  party  suing  had 
no  title  thereto. 

The  first  group — where  there  never  was  a  contract  executed  by 
the  defendant — is  further  divided  into  three  groups:  (a)  Where 
the  defendant's  name  was  forged  or  otherwise  placed  upon  the 
instrument  without  his  authority ;  (b)  where  the  defendant  did 
sign  the  instrument,  but  did  so  under  such  circumstances  that  he 
had  no  reason  to  suppose  that  he  was  executing  a  negotiable  in- 
strument; (c)  where  the  defendant  knowingly  signed  a  negotiable 
instrument,  but  left  it  in  an  incomplete  state,  the  instrument  get- 
ting into  circulation  without  the  authority  of  the  maker  and  with- 
out negligence  on  his  part.  In  the  second  group  of  cases — where 
there  was  a  real  contract  executed  by  the  defendant — we  have  two 
types  of  situations:  (a)  Certain  kinds  of  illegal  contracts;  (b) 
contracts  executed  by  persons  who  do  not  have  full  capacity  to 
contract.  In  the  third  class,  the  party  attempting  to  enforce  the 
instrument  is  claiming  title  through  a  forged  indorsement,  or  is 
himself  a  thief  or  other  converter  of  bearer  paper. 


800  NEGOTIABLE   INSTRUMENTS  (Part  3 

SECTION  2.— DEFENSES  AND  CLAIMS  OF  OWNERSHIP 

NOT  AVAILABLE  AGAINST  HOLDERS 

IN  DUE  COURSE 

(a)     ABSENCE    OF   CONSIDERATION 


INTERSTATE  FINANCE  CO.  v,  SCHROEDER. 

(Supreme  Court  of  Appeals  of  "West  Virginia,  1914.     74  W.  Va.  67, 

81  S.  E.  552.) 

Miller,  P.  The  action,  begun  before  a  justice,  was  upon  three  ne- 
gotiable instruments,  drafts  or  inland  bills  of  exchange,  dated  Chi- 
cago, 111.,  March  31,  1910,  and  payable  in  six,  eight  and  ten  months  re- 
spectively, at  the  office  of  the  drawer,  drawn  in  its  favor,  by  Commer- 
cial Jewelry  Company,  on  the  defendant  Henry  A.  Schroder,  and  by 
him  duly  accepted,  and  each  for  the  sum  of  forty-eight  dollars. 

The  case  was  tried  in  the  circuit  court  *  *  *  resulting  in  a 
verdict  and  judgment  for  plaintiff  for  $151.92,  the  full  amount  sued  for. 

The  first  complaint  is  that  the  circuit  court  erred  in  refusing  to  per- 
mit defendant  to  prove  by  his  own  evidence  as  against  plaintiff,  failure 
of  consideration,  as  between  drawer  and  drawee ;  and  also  to  exhibit 
and  show  in  evidence  certain  goods  sold  him  by  the  drawer  and  payee, 
and  that  there  was  fraud  and  misrepresentation  practiced  upon  him  by 
said  drawer  "at  the  time  he  accepted  said  negotiable  instruments." 

By  section  59,  *  *  *  every  holder  of  a  negotiable  instrument  is 
prima  facie  holder  in  due  course ;  and  by  section  28,  thereof,  *  *  * 
failure  of  consideration  is  not  a  defense  as  against  a  holder  in  due 
course.  By  section  57,  *  *  *  "a  holder  in  due  course  holds  the 
instrument  free  from  any  defect  of  title  of  prior  parties,  and  free 
from  defenses  available  to  prior  parties  among  themselves  and  may 
enforce  payment  of  the  instrument  for  the  full  amount  thereof  against 
all  parties  liable  thereon."  These  provisions  of  our  new  negotiable  in- 
struments law,  are  merely  declaratory  of  the  law  as  it  previously  ex- 
isted. Said  section  59  further  provides  that  if  it  be  "shown  that  the 
title  of  any  person  who  has  negotiated  the  instrument  was  defective, 
the  burden  is  on  the  holder  to  prove  that  he  or  some  person  under 
whom  he  claims  acquired  the  title  as  a  holder  in  due  course."  But 
failure  of  consideration  does  not  render  title  to  an  instrument  defec- 
tive. By  section  55  of  that  act,  "the  title  of  a  person  who  negotiates 
an  instrument  is  defective  within  the  meaning  of  this  act  when  he  ob- 
tained the  instrument  or  any  signature  thereto,  by  fraud,  duress,  or 
force  and  fear,  or  other  unlawful  means,  or  for  any  illegal  considera- 
tion or  when  he  negotiates  it  in  breach  of  faith,  or  under  such  cir- 
cumstances as  amount  to  a  fraud."  *  *  *  jf  failure  of  considera- 
tion is  admissible  under  the  general  issue,  it  is  not  available  as  against 
a  holder  in  due  course.     *     *     * 

In  view  of  these  provisions  of  the  statute  law,  the  court  below,  we 
think,  properly  ruled  that  the  proposed  proof  of  failure  or  partial 
failure  of  consideration  was  not  admissible  in  evidence  as  against 
plaintiff. 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  801 

It  would  follow  that,  if  the  absence  of  consideration  is  a  personal 
defense,  the  defenses  of  nonfulfillment  of  conditions,  of  breach  of 
contract,  rights  of  set-off,  of  counterclaim,  and  recoupment  would 
also  be  defenses  not  available  against  a  holder  in  due  course. 

(b)  FRAUD 
Transactions  involving  the  procuring  of  negotiable  instruments 
by  fraudulent  representations  are  as  varied  as  human  ingenuity 
can  devise.  Frequently  the  misrepresentations  take  the  form  of 
untrue  statements  knowingly  made  concerning  the  value  or  gen- 
eral characteristics  of  the  property  offered  in  exchange  for  the 
instrument.  Sometimes  the  fraud  consists  in  misrepresenting  the 
solvency  or  the  identity  of  the  person  who  obtains  the  instrument. 
In  whatever  form  the  fraud  arises,  so  long  as  the  party  signing  the 
negotiable  instrument  did  so  under  circumstances  where  it  was 
fair  to  assume  that  the  signer  knew,  or  by  the  exercise  of  reason- 
able care  should  have  known,  that  he  was  executing  a  negotiable 
instrument,  his  defense  is  a  purely  personal  defense,  not  available 
against  a  holder  in  due  course.  A  few  courts  have  reached  a  re- 
sult contrary  to  that  reached  in  the  first  case,  but  it  is  believed 
that  the  Colorado  case  represents  the  better  rule.  If  the  law 
throws  the  loss  upon  the  maker  in  such  a  case  as  this,  it  follows 
quite  clearly  that,  in  the  more  common  types  of  fraudulent  pro- 
curement of  a  negotiable  instrument,  the  defense  of  fraud  is  purely 
personal,  not  available  against  a  holder  in  due  course.  The  case 
is  not  one  where  a  holder  in  due  course  sues  the  drawer,  but  the 
result  would  have  been  the  same,  had  the  suit  arisen  in  this  way. 


T^VYMAN  V.  AVERA  LOAN  &  INVESTMENT  CO. 
(Court  of  Appeals  of  Georgia,  1918.    23  Ga.  App.  136,  98  S.  E.  2.39.) 

Action  by  the  Avera  Loan  &  Investment  Company  against  Reuben 
Twyman.  Judgment  for  plaintiff  upon  a  directed  verdict,  and  defend- 
ant excepts  and  brings  error. 

Bloodworth,  J.  The  motion  for  rehearing  in  this  case  is  based 
upon  the  ground  that  the  court  overlooked  the  following  evidence  of 
defendant:  "He  just  handed  me  the  deed  and  the  other  papers,  and 
said,  'Sign  here,  right  here,'  and  I  thought  I  was  signing  a  receipt 
for  the  deed.  *  *  *  He  did  not  read  to  me  this  paper.  I  did  not 
lead  the  paper.  Mr.  Walker  did  not  read  it  to  me.  I  could  not  read 
it.  No  one  read  it  to  me."  *  *  *  Qn  cross-examination  the  de- 
fendant said:  "I  can  write  and  read  the  English  language.  I  can 
write  some  and  read  a  little  bit — nothing  to  amount  to  anything." 

In  the  evidence  there  is  nothing  to  show  that  the  defendant  made 
any  efifort  to  read  the  note  and  found  that  he  could  not  do  so,  or  that 
at  the  time  he  signed  it  there  existed  any  emergency  which  would  ex- 
cuse his  failure  to  read,  or  that  his  failure  to  read  was  brought  about 
by  any  "misleading  artifice  or  device  perpetrated  by  the  opposite  par- 
ty, amounting  to  actual  fraud  such  as  would  reasonably  prevent  him 
B.&  B.iBus.Law— 51 


802  NEGOTIABLE   INSTRUMENTS  (Part  3 

from  reading  it."  On  the  contrary,  it  clearly  appears  that  he  signed 
the  note  upon  presentation,  without  apprising  himself  of  its  contents 
otherwise  than  by  accepting  statements  with  reference  thereto  made 
by  the  representative  of  the  opposite  party,  and  between  whom  and  de- 
fendant there  existed  no  fiduciary  or  confidential  relation.  *  *  * 
Rehearing  denied. 

BOATSMAN  v.  STOCKMEN'S  NAT.  BANK. 

(Supreme  Court  of  Colorado.  1914.     56  Colo.  495,  13S  Tac.  764, 
50  L.  R.  A.   [N.  S.]  107.) 

Action  by  John  Boatsman,  administrator  of  Carroll  Nichols,  de- 
ceased, against  the  Stockmen's  National  Bank.  Judgment  for  defend- 
ant, and  plaintiff  brings  error. 

Bailey,  J.  Carroll  Nichols,  a  real  estate  dealer  at  the  town  of  Mor- 
rill, Scotts  Bluff  County,  Nebraska,  died  in  April,  1911.  John  Boats- 
man,  as  administrator  of  his  estate,  brought  this  action  in  the  district 
court  of  Morgan  County,  against  the  Stockmen's  National  Bank  oi 
Brush,  Colorado,  by  which  it  is  sought  to  recover  $1,500.00  and  in- 
terest alleged  to  have  been  wrongfully  paid  out  by  it  on  account  of 
Nichols  to  one  H.  M.  Warren  on  a  forged  deed.  The  quarter  section 
of  land  involved  in  the  controversy  is  situate  in  Scotts  Bluff  County, 
Nebraska,  and  is  owned  by  Charles  E.  A-Iurphy,  a  resident  of  Utah. 
Warren  was  also  a  real  estate  dealer,  residing  at  Mitchell,  Nebraska, 
near  Morrill.  Nichols  knew  Warren,  but  did  not  know  Murphy.  On 
May  23d,  1910,  Warren  wrote  Nichols  a  letter  in  the  name  of  Murphy, 
proposing  a  quick  sale  of  the  land  and  soliciting  an  offer  therefor. 
The  name  of  Murphy  was  wrongfully  used,  without  his  knowledge 
or  consent,  throughout  the  whole  transaction.  In  answer  to  that  let- 
ter Nichols  telegraphed  an  offer  of  $2,500.00  for  the  land._  Warren 
acknowledged  receipt  of  the  offer  in  a  letter  dated  May  25th,  1910. 
Four  days  later  Warren  again  wrote  Nichols,  directing  him  to  send 
the  deed  to  the  defendant  bank  at  Brush,  Colorado,  for  execution,  with 
draft  to  pay  for  the  land.  The  deed,  naming  Boatsman  as  grantee, 
who  loaned  Nichols  the  money  to  buy,  was  accordingly  mailed  by 
Nichols  to  Murphy  at  Brush,  Colorado,  which  Warren  received  and 
thereupon  executed,  as  Murphy,  acknowledged  the  same  before  a 
Notary  Public,  presented  it  to  the  defendant  bank  and  requested  pay- 
ment of  the  $2,500.00.  Finding  no  money  at  the  bank,  he  requested  it  to 
telegraph  to  the  Farmers  &  Merchants  Bank  of  Morrill,  Nebraska,  with 
whom  Nichols  did  business,  with  the  following  result: 

"Brush,  Colo.     6— 1st  '10 
"Farmers  and  Merchants  Bank  Morrill  Nebraska 

"Deed  Chas  Murphy  to  John  Boatsman  duly  executed  and  in  our 
hand  Murphy  wants  money  wired  to  this  bank  at  once  or  will  call 
deal  off.  Stockmens   Natl.   Bank." 

"June  2,  1910. 
"Stockmens  National  Bank,  Brush,  Colo. 

"If  warranty  deed  is  regular,  pay  Charles  Murphy  twenty-five  hun- 
dred dollars.    We  remit.    Register  deed  to  us. 

"Farmers  &  Merchants  Bank 

"Morrill,  Nebraska." 


Ch.  4)         RIOIIT.S   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR 


803 


The  defendant  bank  thereupon  paid  Warren  $1,500.00  cash  and  a 
$1,000.00  draft  on  the  City  National  Bank  of  Omaha,  Nebraska,  and 
took  the  deed  for  delivery.  The  following  September  the  imposition 
was  discovered  and  payment  stopped  on  the  draft.  Soon  thereafter 
Warren  was  tried,  convicted  and  sentenced  to  a  term  in  the  Colorado 
penitentiary  on  a  plea  of  guilty  to  a  charge  of  forgery. 

Nichols  demanded  of  the  defendant  bank  the  return  of  the  $1,500.00 
paid  to  Warren  believing  him  to  be  Murphy.  The  bank  refused  pay- 
ment and  this  suit  followed.  A  demurrer  to  the  complaint  was  inter- 
posed and  sustained  upon  the  ground  that  it  stated  no  cause  of  ac- 
tion. Plaintiff  elected  to  stand  by  his  case  as  made,  the  action  was 
dismissed,  and  he  brings  the  case  here  to  review  such  judgment. 

The  gist  of  the  complaint  is  that  the  defendant  bank  negligently  paid 
the  imposter  $1,500.00.  In  such  cases  the  controlling  inquiry  is  wheth- 
er the  drawer,  by  failure  to  use  ordinary  diligence  to  avert  a  loss,  has 
so  increased  the  risk  and  responsibility  of  the  drawee  as  to  take  the 
case  out  of  the  general  rule  of  liability  for  payment  of  money  on  a 
forged  instrument.  When  the  facts  show  that  such  is  the  case,  it  fs 
uniformly  held  that  the  drawer  must  bear  the  loss. 

It  will'be  presumed  that  the  defendant  bank  had  full  knowledge  of 
all  dealings  between  Nichols  and  Warren,  pretending  to  be  Murphy, 
which  the  complaint  discloses.  The  deception  was  complete  as  to  both 
the  defendant  bank  and  Nichols.  Warren  appeared  at  the  bank  with 
the  deed  which  Nichols  had  prepared  and  forwarded,  purporting  to  be 
duly  executed  by  Charles  E.  Murphy  before  a  Notary  Public.^  The 
defendant  bank  telegraphed  the  Nebraska  bank,  with  whom  Nichols 
did  business,  that  Charles  Murphy  had  presented  the  deed  and  awaited 
immediate  remittance  or  the  deal  would  fail.  Nichols  forthwith  sent 
the  money,  and  the  defendant  bank  thereupon  accepted  the  deed  and 
made  payment.  By  the  letter  of  May  29th,  1910,  Warren  requested 
Nichols  to  make  the  draft  payable  to  bearer  to  avoid  identification,  as 
he  was  not  known  in  that  community,  and  stated  that  he  was  very 
anxious  to  get  the  matter  off  his  hands,  that  the  acceptance  of  the 
price  offered  was  a  great  sacrifice  on  his  part  and  must  be  acted  upon 
immediately  if  at  all.  This  is  substantially  a  reiteration  in  these  par- 
ticulars of  the  letter  of  May  25th,  four  days  earlier.  Such  statement 
might  well  have  aroused  the  suspicion  of  an  ordinary  business  man  in 
dealing  with  a  stranger  and  put  him  on  inquir>^ 

But  the  attitude  of  Nichols  is  shown  by  the  fact  that  he  acted  in 
harmony  with  every  suggestion  of  Warren.  The  record  fails  to  show 
that  he  took  any  precaution  for  his  own  protection  against  this  stran- 
ger. Evidently  the  price  asked  was  low,  and  Nichols  was  so  thor- 
oughly interested  in  making  an  advantageous  deal  that  he  completely 
lost  sight  of  the  possibility  of  deception.  By  mailing  the  deed  to 
the  stranger  for  execution,  he  not  only  placed  in  his  hands  an  instru- 
ment peculiarly  well  adapted  to  perpetrate  a  fraud  upon  the  bank,  but 
so  increased  its  ordinary  risk  as  to  take  the  case  out  of  the  general 
rule  applicable  in  cases  of  payment  of  money  on  forged  instruments. 
The  bank  was  fully  justified,  in  the  circumstances  of  this  case,  in  pay- 
ing the  money  to  the  person  presenting  the  deed  duly  acknowledged, 
and  it  discharged  every  duty  imposed  upon  it  by  law  to  escape  liabil- 
ity. The  law  will  not  permit  a  drawer  who  has,  through  lack  of  dili- 
gence, been  misled  into  making  a  direction  for  the  payment  of  money 
on  a  forged  deed,  to  shift  the  burden  of  loss  by  placing  an  undue  and 


804  NEGOTIABLE   INSTRUMENTS  (Part  3 

extraordinary  responsibility  upon  the  drawee  bank.  The  representa- 
tive of  Nichols  is  here  contending  that  such  extraordinary  risk  attaches 
to  the  bank,  notwithstanding  the  total  failure  of  Nichols  to  use  even 
the  most  ordinary  means  to  prevent  deception.  The  rule  of  law  which 
he  claims  is  applicable  does  not  reach  the  present  situation.  Generally 
on  payment  of  money  on  a  forged  instrument,  in  the  absence  of  neg- 
ligence on  the  part  of  the  depositor  whose  check  it  purports  to  be,  the 
bank  cannot  charge  the  amount  to  his  account.  *  *  *  But  where 
there  is  a  failure  on  the  part  of  the  depositor  to  use  diligence  to  avert 
a  loss,  and  such  we  think  may  fairly  be  said  to  be  the  fact  in  the 
present  dispute,  a  different  rule  applies. 

The  rule  is  stated  in  the  case  of  Land  Title  &  Trust  Co.  v.  North- 
western National  Bank,  196  Pa.  230,  46  Atl.  420,  50  L.  R.  A.  75,  79  Am. 
St.  Rep.  717,  as  follows :  "The  reason  of  the  rule  that  when  a  bank 
pays  a  depositor's  check  on  a  forged  indorsement,  or  a  raised  check, 
it  is  held  to  have  paid  it  out  of  its  own  funds  and  cannot  charge  the 
payment  to  the  depositor's  account,  is  that  there  is  an  implied  agree- 
ment by  tlie  bank  with  its  depositor  that  it  will  not  disburse  the  money 
standing  to  his  credit,  except  on  his  order.  *  *  *  It  is  confined  to 
cases  in  which  the  depositor  has  done  nothing  to  increase  the  risk  of 
the  bank.  It  should  not  apply  when  the  check  is  issued  to  one  whom 
the  drawer  intends  to  designate  as  the  payee:  First,  because  m  such  a 
case  the  risk  is  not  the  ordinary  risk  assumed  by  the  bank  in  its  im- 
plied contract  with  its  depositor,  but  a  largely  increased  risk,  as  it 
follows  that  a  check  thus  fraudulently  obtained  will  be  fraudulently 
used ;  the  bank  is  deprived  of  the  protection  afforded  by  the  fact  that 
a  bona  fide  holder  of  a  check  will  exercise  care  to  preserve  it  from 
loss  or  theft,  which  are  the  ordinary  risks ;  there  is  thrown  upon  the 
bank  the  risk  of  antecedent  fraud  practiced  upon  the  drawer  of  the 
check,  of  which  it  has  neither  knowledge  nor  means  of  knowledge." 
*     *     * 

Under  the  facts  here  disclosed,  the  way  was  made  plain  and  easy 
for  the  perpetration  of  a  fraud  upon  the  bank  through  lack  of  care  on 
the  part  of  Nichols  in  sending  a  deed  for  execution  to  a  stranger,  and 
in  arming  him  with  letters  and  telegrams  which,  together  with  the  deed, 
could  be  presented  to  the  bank  as  a  means  of  identification,  so  that 
the  purchase  price  would  be  paid  to  him,  a  perfectly  natural  and  proper 
thing,  under  such  circumstances,  for  the  bank  to  do. 

The  matter  is  thus  reduced  to  the  simple  proposition  that  where 
two  innocent  parties  have  both  been  deceived,  the  loss  must  be  borne 
by  the  one  who  primarily  made  such  loss  possible.  The  vital  mistake 
was  made  by  Nichols  in  dealing  with  Warren  believing  him  to  be 
Murphy.  This  was  the  fundamental  and  primary  error,  the  responsi- 
bility for  which  rests  solely  upon  Nichols.  It  was  this  initial  error 
which  led  directly  to  the  loss.-    *     *     * 

Moreover,  under  the  facts  disclosed,  it  appears  that  the  money  was 
paid  to  the  very  person  to  whom  Nichols  actually  intended  it  should 
be,  the  one  through  whose  agency  the  transaction  was  brought  about. 
It  is  idle  to  say,  as  does  plaintiff,  that  Nichols  never  in  fact  dealt  with 
Warren,  the  imposter;  this  contention  only  goes  to  show  that  the  de- 
ception was  complete.  It  would  be  to  disregard  substantial  facts  to 
say  that  the  actual  intent  of  Nichols,  because  he  mistook  his  physical 
payee,  Warren,  for  his  mental  payee,  ]\Iurphy,  was  not  met  by  pay- 
ment to  the   former.     Nichols   did  not  deal  merely  with  the  name 


Ch.  4)         RIGHTS  OF   HOLDER  AGAINST  MAKER  AND   ACCEPTOR  .805 

"Charles  E.  Murphy,"  but  rather  with  the  physical  entity,  the  human 
agency  indicated  by  that  name,  the  one  who  quickened  him  to  action. 
The  true  Charles  Murphy  was  unknown  to  Nichols,  and  he  naturally 
had  in  mind  only  a  man  with  this  land  to  sell,  the  person  with  whom 
he  corresponded,  Warren.  He  meant  the  money  to  be  paid,  and  it 
was  paid,  to  that  identical  person,  and  the  estate  of  Nichols  must  there- 
fore, as  against  the  bank,  bear  the  loss,  for  his  actual  intent  was_  in 
fact  carried  out.  Names  are  used  as  one  method  only  of  indicating 
identity  of  person,  and  are  in  no  sense  conclusive  on  this  proposition. 
*     *     * 

Judgment  affirmed.    *     *     * 


(c)    DURESS 


FAIRBANKS  v.  SNOW. 

(Supreme  Judicial  Court  of  Massachusetts,   1887.     145  Mass.  153, 
1.S  N.  E.  596,  1  Am.  St.  Rep.  446.) 

HoivMES,  J.  This  is  an  action  upon  a  promissory  note  made  by  the 
defendant  and  her  husband  to  the  order  of  the  plaintiff.  The  de- 
fendant alleges  that  her  signature  was  obtained  by  duress  and  threats 
on  the  part  of  her  husband.  The  judge  below  found  for  the  plaintiff, 
it  would  rather  seem  on  the  ground  that,  whether  there  was  duress 
or  not,  the  defendant  had  ratified  the  note,  which  there  seems  to  have 
been  evidence  tending  to  show  that  she  did.  *  *  *  But,  as  this  may 
not  be  quite  clear,  we  proceed  to  consider  the  only  exception  taken  by 
the  defendant,— the  judge's  refusal  to  rule  that,  if  the  defendant  signed 
the  note  under  duress,  it  was  immaterial  whether  the  plaintiff  knew 
when  he  received  the  note  that  it  was  so  signed.  The  exception  is  to 
this  refusal.  No  doubt,  if  the  defendant's  hand  had  been  forcibly  tak- 
en and  compelled  to  hold  the  pen  and  write  her  name,  the  signature 
would  not  have  been  her  act,  and  if  the  signature  had  not  been  her 
act,  for  whatever  reason,  no  contract  would  have  been  made,  whether 
the  plaintiff  knew  the  facts  or  not.  There  still  is  sometimes  shown 
an  inclination  to  put  all  cases  of  duress  upon  this  ground.  *  *  _  * 
But  duress,  like  fraud,  only  becomes  material,  as  such,  on  the  footing 
that  a  contract  or  conveyance  has  been  made  which  the  party  wishes 
to  avoid.  It  is  well  settled  that  when,  as  usual,  the  so-called  "duress" 
consists  only  of  threats,  and  does  not  go  to  the  height  of  _  such  bodily 
compulsion  as  turns  the  ostensible  party  into  a  mere  machine,  the  con- 
tract is  only  voidable.     *    *     * 

Again,  the  ground  upon  which  a  contract  is  voidable  for  duress  is 
the  same  as  in  the  case  of  fraud,  and  is  that,  whether  it  springs  from 
a  fear  or  a  belief,  the  party  has  been  subjected  to  an  improper  motive 
for  action.  *  *  *  But,  if  duress  and  fraud  are  so  far  alike,  there 
seems  to  be  no  sufficient  reason  why  the  limits  of  their  operation  should 
be  different.  A  party  to  a  contract  has  no  concern  with  the  motives  of 
the  other  party  for  making  it,  if  he  neither  knows  them  nor  is  responsi- 
ble for  their  existence.  It  is  plain  that  the  unknown  fraud  of  a  strang- 
er would  not  prevent  the  plaintiff  from  holding  the  defendant.    *  _  *    * 

The  authorities  with  regard  to  duress,  however,  are  not  quite  so 
clear.  It  is  said  in  Thoroughgood's  Case,  5  Coke,  241,  that,  "if  a 
stranger  menace  A.  to  make  a  deed  to  B.,  A.  shall  avoid  the  deed 


806  NEGOTIABLE   INSTRUMENTS  (Part  3 

which  he  made  by  such  threats,  as  well  as  if  B.  himself  had  threatened 
him,  as  it  is  adjudged,  45,  E.  3,  6a."  Shep.  Touch.  61.  is  to  like  ef- 
fect. See,  also.  Fowler  v.  Butterly,  78  N.  Y.  68,  34  Am.  Rep.  507. 
But  in  43  Year  Book,  E.  3,  6  pi.  15,  which  we  suppose  to  be  the  case 
referred  to.  it  was  alleged  that  the  imprisonment  was  by  the  procure- 
ment of  the  plaintiff;  and  we  know  of  no  distinct  adjudication  of 
binding  authority  that  threats  by  a  stranger,  made  without  knowledge 
or  privity  of  the  partv,  are  good  ground  for  avoiding  a  contract  m- 
duced  by  them.  In  Keilway,  154a,  pi.  3,  "the  defendant  in  debt  plead- 
ed that  he  made  the  obligation  to  the  plaintiff  by  duress  of  imprison- 
ment (on  the  part)  of  a  stranger,  and  the  opinion  of  Rede  and  others 
was  that  this  is  not  a  plea  without  making  the  obligee  party  to  this 
duress."  In  Taylor  v.  Jaques,  106  Mass.  291,  294,  it  was  said  that 
the  defendant  had  to  prove  that  he  signed  the  note  "under  a  reasonable 
and  well-grounded  belief,  derived  from  the  conduct  and  declarations 
■of  the  plaintiffs,  that  if  he  did  not  sign  it  he  would  be  arrested." 

*  *  *  Moreover,  the  older  writers  likened  duress  to  infancy,  and 
took'  a  distinction  between  feoffments,  etc.,  by  the  party's  own  hand, 
and  acts  done  by  letter  of  attorney,  regarding  the  latter  as  wholly  void. 

*  *  *  It  has  been  held  in  New  York  and  some  other  states,  as  well 
as  in  England,  that  a  power  of  attorney  given  by  an  infant  is  void. 

*  *  *  And  if  this  analogy  were  followed  the  contracts  in  all  the 
New  York  cases  which  we  have  cited  would  be  void  by  the  law  of 
that  state  for  want  of  a  personal  delivery  by  the  defendant  to  the  plain- 
tiff.    There  may  be  still  other  explanations  of  the  decisions. 

In  the  present  case  it  does  not  appear  who  delivered  the  note,  and 
does  not  clearly  appear  that  the  defendant  did  not  deliver  it  herself. 
If  any  question  of  authority  were  open,  it  would  have  to  be  noticed 
that  in  Massachusetts  the  distinction  as  to  power  of  attorney  has  been 
so  limited,  if  not  wholly  done  away  with,  with  regard  to  infants,  that 
it  would  be  doubtful,  at  least,  if  it  could  have  any  application  to  the 
case  at  bar.     *     *     * 

However  the  law  may  stand  elsewhere,  we  are  of  opinion  that  the 
ruling  requested  was  wrong  upon  principle  and  authority.  Exception 
overruled. 


(d)     THEFT   OF   A   COIPLETED   IXSTRUTkTEXT 

Section  16.  Every  contract  on  a  negotiable  instrument  is  in- 
complete and  revocable  until  delivery  of  the  instrument  for  the 
purpose  of  giving  effect  thereto.  As  between  immediate  parties, 
and  as  regards  a  remote  party  other  than  a  holder  in  due  course, 
the  delivery,  in  order  to  be  effectual,  must  be  made  either  by  or 
under  the  authority  of  the  party  making,  drav/ing,  accepting  or 
indorsing  as  the  case  may  be;  and  in  such  case  the  delivery  may 
be  shown  to  have  been  conditional,  or  for  a  special  purpose  only, 
and  not  for  the  purpose  of  transferring  the  property  in  the  instru- 
ment. But  where  the  instrument  is  in  the  hands  of  a  holder  in 
due  course,  a  valid  delivery  thereof  by  all  parties  prior  to  him  so 
as  to  make  them  liable  to  him  is  conclusively  presumed.  And 
where  the  instrument  is  no  longer  in  the  possession  of  a  party 


Ch.  4)       RIGHTS  OF  ii6lder  aoaixrt  maker  and  ArcRPTOR  807 

whose  signature  appears  thereon,  a  valid  and  intentional  delivery 
by  him  is  presumed  until  the  contrary  is  proved. 

This  section  does  not  operate  to  protect  a  purchaser  under  a 
forged  or  other  unauthorized  indorsement  of  the  payee  or  of  some 
special  indorsee,  for  the  reason  that  such  a  party  in  possession  of 
the  instrument  not  having  the  title  thereto  would  not  be  .a  holder. 
The  section,  therefore,  is  applicable  only  where  the  instrument  is 
in  form  transferable  by  delivery,  either  because  originally  payable 
to  bearer  or  because  the  last  indorsement  was  in  blank.  Before 
the  Negotiable  Instruments  Law  this  defense  was,  in  some  states, 
available  against  a  holder  in  due  course. 


ANGUS  V.  DOWNS. 

(Supreme  Court  of  Washington,  1915.     85  Wash.   75,  147   Par.  6.30, 
L.   R.  A.   1915E,  351.) 

Action  by  Grace  Angus  against  George  A.  Downs.  Judgment  on 
a  directed  verdict  for  plaintiff,  and  defendant  appeals. 

FuLLERTON,  J.  This  is  an  action  brought,  by  the  respondent,  Grace 
Angus,  against  the  appellant,  George  A.  Downs,  to  recover  upon  a 
promissory  note.  In  her  complaint  the  respondent  alleged  that  the 
note  had  been  assigned  to  her  for  value,  prior  to  maturity,  and  that 
she  was  a  holder  thereof  in  due  course.  The  appellant  interposed  two 
defenses :  First,  that  the  note  was  stolen  from  his  possession  prior  to 
delivery ;  and,  second,  that  the  respondent  was  not  a  holder  of  the 
note  in  due  course.    *    *     * 

Appellant  first  contends  that  a  holder  of  commercial  paper,  although 
received  by  him  in  due  course,  cannot  recover  thereon  against  a  maker 
from  whose  possession  it  has  been  taken  before  delivery  by  theft.  His 
learned  counsel  argue  that  the  question  is  not  controlled  by  the  Nego- 
tiable Instruments  Act,  and  they  cite  many  cases  decided  under  the 
common-law  rules  applicable  to  the  law  merchant  which  sustain  the 
principle  that  recovery  cannot  be  had  under  such  circumstances. 
There  are,  however,  many  cases  maintaining  the  contrary  rule,  and, 
were  we  to  conclude  that  the  act  cited  is  without  application  to  the 
question,  it  would  be  an  interesting  inquiry  to  ascertain  with  which 
side  lay  the  better  reason.  But  we  think  the  act  itself  controlling. 
Section  16  of  the  original  act  *  *  *  provides  in  terms  that,  where 
the  instrument  is  in  the  hands  of, a  holder  in  due  course,  a  valid  de- 
livery thereof  by  all  parties  prior  to  him  so  as  to  make  them  liable  to 
him  is  conclusively  presumed.  Language  could  hardly  be  made  plainer, 
and  is  as  applicable  to  a  holder  in  due  course  of  commercial  paper 
stolen  before  delivery  as  it  is  to  commercial  paper  stolen  subsequent  to 
delivery,  or  commercial  paper  the  title  to  which  is  defective  for  any 
other  reason. 

Judgment  affirmed. 


808  NEGOTIABLK   INSTRUMENTS  (Part  3 


(e)     UNAUTHORIZED  COMPr.ETION   OF  AN  INSTRUMENT  BY 

CUSTODIAN 


LIBERTY   TRUST  CO.   v.  TILTON. 

(Supreme  Judicial  Court  of  Massachusetts,  1914.     217  Mass.  462, 
105  N.  E.  605,  L.  R.  A.  1915B,  114.) 

See  ante,  p.  780,  for  a  report  of  the  case. 


(f)      THEFT   OF   AN   INCOMPLETE   INSTRUMENT   ACCOMPANIED   BY 
NEGLIGENCE   IN  THE  CARE   OF   THE   INSTRUMENT 

N.  I.  L.,  Section  15.  Where  an  incomplete  instrument  has  not 
been  delivered  it  will  not,  if  completed  and  negotiated,  without 
authority,  be  a  valid  contract  in  the  hands  of  any  holder,  as  against 
any  person  whose  signature  was  placed  thereon  before  delivery. 


S.  S.  ALLEN  GROCERY  CO.  v.  BANK  OF  BUCHANAN  COUNTY. 

(Kansas  City  Court  of  Appeals,  Missouri.  1916.     192  Mo.  App.  476, 
182    S.    W.   777.) 

Johnson,  J.  This  is  an  action  against  defendant  bank  by  the  de- 
positor of  a  checking  account  to  recover  a  deposit  of  $2,938.70.  *  *  * 
A  jury  was  waived,  and  after  hearing  the  evidence  the  court  rendered 
judgment  for  defendant.    Plaintiff  appealed. 

At  the  beginning  of  the  trial  the  parties  agreed  that  on  August  27, 
1914,  plaintiff  had  a  deposit  of  $2,938.70  with  defendant  which  was 
payable  on  demand  unless  it  should  be  found  that  defendant  was  jus- 
tified in  charging  against  the  deposit,  as  it  did,  three  checks  dated 
August  15,  1914,  which  bore  the  signature  of  plaintiff,  and  purported 
to  have  been  drawn  to  the  order  of  O.  J.  Rose.  These  checks,  which 
were  for  the  respective  amounts  of  $2,700.95,  $395.60,  and  $195.15, 
were  paid  by  defendant  on  presentation  and  charged  to  the  account 
of  plaintiff.  They  had  been  signed  in  blank  by  plaintiff,  but  had  been 
stolen  from  its  office  by  Rose,  who,  by  forgery,  had  converted  the 
signed  blanks  into  checks  for  the  respective  sums  stated. 

Plaintiff,  a  corporation  operating  a  large  retail  grocery  in  St.  Joseph, 
has  a  president,  secretary,  general  manager,  six  or  seven  chiefs  of  de- 
partments, and  about  fifty  employes.  *  *  *  'phg  president,  S.  S. 
Allen,  alone  has  authority  to  sign  checks  on  behalf  of  the  company, 
and  such  authority  never  has  been  conferred  upon  any  other  officer. 
When  Allen  found  it  necessary  to  be  absent  from  the  city,  it  was  his 
custom  to  sign  a  number  of  blank  checks  and  leave  the  check  book  in 
the  custody  of  the  manager,  with  authority  to  fill  out  the  blanks  and 
issue  checks  for  use  in  carrying  on  the  business  until  his  return.  He 
was  absent  on  his  summer  vacation  when  the  events  under  considera- 
tion occurred,  and,  as  usual,  had  signed  plaintiff's  name  to  a  number 
of  checks,  and  had  left  the  book  with  Mr.  Morrow,  the  manager. 
*  Following  his  usual  practice.  Morrow  had  allowed  this  book  to  re- 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST  MAKER   AND   ACCEPTOR  809 

main  on  the  top  of  his  desk  in  the  office  without  instructions  to  any 
one  respecting  its  safe-keeping,  and,  when  he  had  occasion  to  issue  a 
check,  sometimes  would  draw  it  himself,  and  sometimes  would  have 
the  secretary  or  stenographer  draw  it. 

On  August  15,  1914,  Rose,  a  traveling  salesman  who  hadbeen  sell- 
ing merchandise  to  plaintiff  and  was  well  acquainted  with  its  officers 
and  office  employes,  especially  with  the  manager,  visited  the  office 
during  the  luncheon  hour,  and  found  no  one  there  but  the  stenogra- 
pher. On  being  informed  that  Morrow,  for  whom  he  inquired,  was 
out  for  lunch,  he  asked  and  was  accorded  the  privilege  of  writing 
some  letters,  and  seated  himself  at  Morrow's  desk,  on  which  the  check 
book  was  lying  in  full  view  and,  of  course,  within  easy  reach.  Some 
time  while  at  the  desk  he  surreptitiously  cut  out  a  sheet  from  the  check 
book  which  contained  three  signed  blanks  and  their  stubs.  After  fill- 
ing out  the  blanks  Rose  went  first  to  defendant  bank,  where  he  was 
known  to  the  paying  teller,  and  presented  the  check  for  $395.50,  which 
the  teller  paid,  finding  the  signature  genuine.  Next  he  went  to  the 
Empire  Trust  Company,  where  he  was  also  known,  and  presented  the 
check  for  $2,700.95,  and,  at  his  request,  was  given  a  cashier's  check, 
which  subsequently  he  cashed  at  a  bank  in  Atchison.  Then  he  went 
to  a  jewelry  store  and  passed  off  the  third  check  in  payment  of  a  dia- 
mond he  purchased.  After  this  he  disappeared,  and  thus  far  has  elud- 
ed capture.  The  check  for  $2,700.95  came  to  defendant  through  the 
clearing  house  bearing  the  indorsement  of  the  Empire  Trust  Company, 
and  was  honored  by  defendant  though  its  payment  overdrew  plaintiff's 
account  by  more  than  $600.  The  third  check  for  $195.15  also  passed 
through  the  clearing  house  with  the  indorsements  of  the  jeweler  and 
the  Tootle-Lemon  National  Bank,  and  was  paid  by  defendant,  further 
increasing  the  overdraft.     *     *     * 

The  principal  argument  of  counsel  for  plaintiff  *  *  *  is  that  the 
checks,  never  having  been  delivered  by  plaintiff,  did  not  become  valid 
negotiable  instruments.  *  *  *  Counsel  insist  that  their  position  has 
the  support  of  the  weight  of  authority  as  it  stood  at  the  time  of  the 
passage  of  the  Negotiable  Instruments  Act,  and  is  completely  and  ir- 
refutably sustained  by  that  act.  which  provides:  "Where  an  incom- 
plete instrument  has  not  been  delivered  it  will  not,  if  completed  and 
negotiated  without  authority,  be  a  valid  contract  in  the  hands  of  any 
holder,  as  against  any  person  whose  signature  was  placed  thereon  be- 
fore delivery." 

Especially  is  this  argument  urged  against  the  vaHdity  of  the  checks 
of  $2,700.95  and  $195.15,  the  payment  of  which,  not  being  made  out 
of  funds  of  plaintiff  on  deposit,  was  voluntary  on  the  part  of  defend- 
ant, and  should  be  regarded  as  the  act  of  a  purchaser,  rather  than  that 
of  a  debtor  bound  by  law  to  honor  the  demand  of  his  creditor.   *    *    * 

On  the  theory  of  plaintiff  that  the  position  of  defendant  is  that  of 
a  mere  purchaser  or  innocent  holder  for  value,  the  questions  to  arise 
are  interesting  and  difficult  of  solution.  *  *  *  As  a  general  rule, 
the  delivery  of  an  incomplete  negotiable  instrument  by  the  maker  who 
signs  it  is  indispensable  to  the  creation  of  a  contractual  obligation  on 
the  part  of  such  maker.  Until  delivery  the  instrument  is  but  so  much 
waste  paper.  The  provisions  of  section  9986  are  merely  a  legislative 
enactment  of  this  rule,  which  had  the  support  of  the  great  weight  of 
authority  when  the  Negotiable  Instruments  Act  was  adopted  in  this 
state.    We  think  this  section  was  not  intended  to  abrogate  or  impair 


810  NEGOTIABLE   INSTRUMENTS  _  (Part  3 

other  well-recognized  rules  by  which  in  certain  instances  delivery  by 
the  maker  would  be  implied,  either  from  authority  actually  conferred 
by  him  upon  an  agent,  or  from  conduct  which  should  estop  him  from 
claiming  that  he  had  not  delivered  or  authorized  the  delivery  of  the 
signed  instrument.     *     *     * 

While  estoppels  are  odious  and  will  not  be  lightly  invoked,  they  do 
obtain  in  instances  where  it  would  be  manifestly  unfair  and  unjust 
to  suffer  a  party  to  gain  an  advantage  by  taking  inconsistent  positions, 
and  they  may  be  based  upon  conduct  which  is  so  careless  and  grossly 
negligent  as  to  amount  to  a  willful  indifference  to  the  rights  of  others. 
*  *  *  In  the  supposititious  case  of  a  man  signing  a  check  in  blank 
and  tossing  it  into  a  public  street,  an  act  evincing  such  an  extreme  and 
reckless  departure  from  the  field  of  ordinary  care  and  prudence,  and 
such  a  wanton  indifference  to  the  rights  of  subsequent  purchasers,  or 
others  who  might  innocently  comft  into  possession  of  it,  would  call 
for  the  application  of  the  rule  of  estoppel  and  preclude  the  actor  from 
claiming  that  he  had  not  delivered  the  instrument. 

The  opinion  of  Lord  Bramwell  in  Baxendale  v.  Bennett,  3  O.  B.  Div. 
525,  65  L.  J.  O.  B.  593,  75  L.  T.  254,  4  Eng.  Rul.  Cas.  637,  much 
relied  upon  by  plaintiff,  instead  of  being  an  authority  against  the  dis- 
tinction just  pointed  out,  is  found  to  give  it  express  sanction.  In  that 
case  a  bill  of  exchange  which  the  defendant  had  signed  in  blank  as 
an  indorserhad  been  returned  to  him  unused,  and  he  had  put  it  in  a 
drawer  in  his  desk  in  his  private  chambers,  from  which  a  thief  took  it, 
filled  out  the  blanks,  and  put  it  into  circulation.  Lord  Bramwell 
thought  defendant  had  been  negligent  in  the  care  of  the  paper  if  judg- 
ed by  the  standard  of  care  a  bailee  should  have  followed,  but  in  reach- 
ing the  conclusion  that  not  such  negligence,  but  the  crime  of  the  thief, 
was  the  proximate  cause  of  the  loss,  he  distinguished  the  case  from  the 
earlier  English  cases  of  Young  v.  Grote,  4  Bing.  253,  and  Ingham  v. 
Primrose,  7  C.  B.  (N.  S.)  82,  where  the  negligence  was  so  gross  as 
to  amount  to  recklessness,  on  the  ground  that  they  were  treated  as 
instances  where  the  alleged  maker  or  acceptor  was  held  liable  as  one 
who  had  voluntarily  parted  with  the  instrument.     *     *     * 

Other  authorities  dealing  with  the  subject  *  *  *  (Jq  j-jq^  chal- 
lenge the  view  that  the  conduct  of  the  maker  or  acceptor  of  a  negotiable 
instrument  signed  in  blank  may  be  sufficient  to  create  an  estoppel, 
though  they  do  agree  that  the  mere  signing  and  withholding  from  de- 
livery of  such  paper  is  not  enough  to  constitute  negligence,  and  that 
liability  as  upon  paper  delivered  by  the  maker  or  acceptor  will  not  be 
imputed  from  a  mere  lack  of  ordinary  care  in  the  custody  of  the  pa- 
per after  it  is  signed.  Linick  v.  Nutting,  140  App.  Div.  265,  125  N/Y. 
Supp.  93.     *     *     * 

Certainly  this  case  is  an  authority  sustaining  the  conclusion  that 
Lmder  the  rules  of  the  Negotiable  Instruments  Act  which  are  consid- 
ered and  discussed  the  maker  or  acceptor  may  be  guilty  of  conduct  in 
the  care  of  the  paper  which  would  estop  him  from  disputing  the  title 
of  an  innocent  holder  on  the  ground  that  he  had  not  delivered  the 
paper  or  voluntarily  put  it  into  circulation.  Was  plaintiff  in  the  in- 
stant case  guilty  of  conduct  sufficient  to  raise  an  estoppel  against  the 
claim  that  it  did  not  deliver  the  checks  nor  voluntarily  put  them  into 
circulation?  Allen,  the  president  and  principal  stockholder  of  the 
plaintiff  corporation,  controlled  its  policies  and  business  affairs.  He 
was  an  able,  experienced,  and  careful  merchant  who  had  succeeded  in 


Ch.  4)         RIGHTS   OP   HOLDER   AGAINST   MAKER   AND   ArCEPTOR  811 

building  up  a  large  and  successful  business,  and  it  is  with  much  re- 
luctance that  we  give  expression  to  the  conviction  that  in  adopting  and 
pursuing  the  course  of  business  under  consideration  he  and  the  man- 
ager, who  acted  under  his  orders,  were  grossly  negligent  in  keeping 
the  book  of  signed  blank  checks  in  such  an  exposed  place  without  tak- 
ing any  precautions  to  guard  against  its  spoliation.  In  the  manager's 
use  of  the  book  knowledge  was  imparted  not  only  to  the  employes,  but 
to  others  who  visited  the  office  on  business,  that  it  contained  signed 
blank  checks.  That  fact  may  be  said  to  have  been  publicly  proclaimed, 
and  by  oiYering  such  easy  opportunities  for  the  commission  of  a  crime 
plaintiff  was  as  much  a  tem]:!ter  of  the  criminally  minded  and  morally 
w^eak  to  whom  such  opportunity  might  come  as  it  would  have  been  had 
it  left  money  lying  unwatched  and  exposed  in  the  office,  or,  as  m  one 
of  the  English  cases,  had  signed  a  blank  check  and  tossed  it  into  the 
street.  Certainly  plaintiff,  when  it  signed  the  checks,  must  be  held  to 
have  anticipated  that  in  the  usual  course  of  business  they  would  be 
issued,  and  that  seme  of  them  would  pass  into  the  hands  of  innocent 
holders  for  value  before  presentation  to  defendant  for  payment,  and  it 
owed  a  duty  to  such  holders,  despite  the  fact  that  they  were  under  no 
legal  obligation  to  acquire  title  or  ownership  of  such  paper,  to  exercise 
some  care  in  its  custody  during  the  interim  between  the  signing  and 
delivery  thereof. 

Regarding  defendant  merely  in  the  light  of  an  innocent  holder  for 
value,  we  think  the  facts  of  the  case,  upon  the  plainest  principles  of 
fairness  and  justice,  estop  plaintiff'  from  taking  the  position  that,  as 
to  such  holder,  it  did  not  voluntarily  part  wnth  the  possession  of  the 
checks,  and  therefore  in  law  deliver  them. 

We  have  gone  thus  extensively  into  this  aspect  of  the  case  for  the 
reason  that  we  think  the  position  of  defendant  with  respect  to  the  two 
checks  of  $2,700.95  and  $195.15  should  be  regarded  as  that  of  an  in- 
nocent holder  for  value,  and  not  that  of  a  debtor  bank  to  a  depositor. 
We  are  aware  that  in  some  of  the  cases  cited  by  defendant,  e.  g.,  Trust 
Co.  V.  Conklin,  65  Misc.  Rep.  1.  119  N.  Y.  Supp.  367,  and  Snodgrass 
V.  Sweetser,  15  Ind.  App.  682,  44  N.  E.  648,  no  distinction  appears  to 
be  observed  between  the  status  of  a  bank  which  pays  a  forged  check 
signed  by  the  depositor  out  of  funds  on  deposit  to  his  credit  and  of 
a  bank  which  pays  such  check,  thereby  creating  an  overdraft. 

The  relation  of  banker  and  depositor  is  that  of  debtor  and  creditor, 
and  as  to  a  checking  account  the  contractual  obligation  assumed  by 
the  banker  is  to  pay  on  presentation  the  checks  drawn  by  the  custom- 
er against  the  deposit.  But  the  banker  is  under  no  legal  or  contractual 
duty  to  allow  a  customer  to  overdraw  his  account,  and  as  to  checks 
he  pays  which  cause  an  overdraft  may  be  regarded,  not  as  a  debtor 
who  has  discharged  a  legal  duty  to  a  creditor,  but  as  a  voluntary  pur- 
chaser or  holder  for  value  of  negotiable  paper. 

As  to  the  check  for  $395.60,  which  was  paid  when  plaintiff  had  a 
larger  sum  than  that  on  deposit,  the  relationship  between  the  parties 
was  purely  that  of  depositor  and  banker — creditor  and  debtor— and 
plaintiff  owed  a  duty  of  care  to  the  bank  greater  than  that  which  the 
maker  of  a  negotiable  instrument  owes  to  subsequent  holders  for  val- 
ue. Any  negligent  breach  of  that  duty  which  directly  results  in  loss 
would  charge  the  depositor  with  liability  for  such  loss.  As,  for  ex- 
ample, it  is  well  settled  in  this  state  that,  where  after  delivery  of  a 
completed  check  it  is  raised  by  forgery,  the  loss  must  fall  on  the  mak- 


812  NEGOTIABLE   INSTRUMENTS  (Part  3 

er  if  he  negligently  inserted  the  amount  in  a  way  to  admit  of  the  easy 
addition  by  forgery  of  other  words  and  figures.    *    *    * 

Considering  the  facts  that  a  bank  must  honor  the  checks  of  its  de- 
positor, and  cannot  by  the  exercise  of  any  degree  of  skillful  inspection 
detect  a  forgery  of  a  check  signed  and  delivered  in  blank,  we  think 
every  consideration  of  justice  and  common  sense  sustains  the  conclu- 
sion that  a  depositor  should  affix  his  signature  to  a  blank  check  only 
for  the  purpose  of  directing  the  bank  to  pay  out  the  money,  and  that 
the  risk  of  signing  and  then  keeping  a  blank  check,  whether  the  keep- 
ing be  careful  or  negligent,  should  be  considered  a  risk  the  maker 
voluntarily  assumed.  Trust  Co.  v.  Conklin,  supra.  ***];£  ^^g 
exigencies  of  the  depositor's  situation  create  a  necessity  for  the  sign- 
ing of  checks  in  blank,  and  then  keeping  them  a  time  before  putting 
them_  into  circulation,  why  should  he  not  bear  the  risk  made  by  his  own 
necessities,  rather  than  the  banker,  who  is  a  stranger  to  them,  and  is 
under  the  contractual  duty  to  honor  his  written  orders  for  the  pay- 
ment of  money?  He  is  the  one  who,  in  the  service  of  his  own  interest, 
has  given  occasion  for  the  commission  of  the  wrong,  and,  under  the 
familiar  maxim,  is  the  one  who  should  bear  the  consequences. 

It  follows  from  the  foregoing  considerations  that,  whether  defend- 
ant be  treated  as  an  innocent  purchaser  of  the  checks  for  value  or  as 
a  banker  who  paid  them  in  discharge  of  a  contractual  obligation  to 
a  depositor,  the  loss  of  the  forgeries  should  fall  upon  plaintiff.    *    *    * 


PHlIvLIPS    V.   A.  W.   JOY  CO. 

(Supreme  Judicial  Court  of  Maine.  1916.    114  Me.  403.  DG  Atl.  727, 
L.  R.  A.  1916E,  GOO.) 

Philbrook,  J.  The  plaintiff  is  one  of  the  ticket  agents  of  the 
Maine  Central  Railroad  Company  at  Bangor.  On  the  evening  of  Febru- 
ary 10,  1915,  while  attending  to  his  duties  at  the  office  of  the  com- 
pany, his  telephone  bell  rang,  and  he  answered  the  call.  He  says  he 
was  as  sure  as  one  could  be  that  the  voice  coming  over  the  wire  was 
that  of  Mr.  Wheaton,  who,  as  the  evidence  shows,  was  acting  man- 
ager of  the  defendant  company  at  that  time.  The  sender  of  the  mes- 
sage, whoever  he  might  have  been,  asked  the  plaintiff  if  he  would 
cash  one  of  the  defendant's  checks,  stating  that  the  funds  of  the  de- 
fendant were  locked  up  and  there  was  a  man  who  wanted  a  mileage 
ticket.  The  plaintiff  consented,  and  in  the  course  of  20  minutes  or 
half  an  hour  a  man  came  to  the  window  of  the  ticket  office  who  pre- 
sented a  check  for  $113.75,  payable  to  the  order  of  Earl  S.  Woodbury, 
drawn  on  the  Eastern  Trust  &  Banking  Company,  and  signed  "A. 
W.  Joy  Co.,  by  J.  JF.  Wheaton,  Treas."  The  name  of  the  company  in 
the  signature  was  printed,  but  the  name  and  designation  of  the  signer 
were  written.  In  the  upper  left-hand  corner  were  printed  the  name 
and  business  of  the  defendant  company,  and  just  below  this  printing, 
made  by  a  protectograph  stamp,  were  the  words  and  figures  "Not  over 
one  hundred  twenty  $120$."  The  plaintiff  asked  the  man  if  he  were 
Earl  S.  Woodbury,  and  if  he  were  the  man  about  whom  Mr.  Wheaton 
telephoned,  to  both  of  which  questions  affirmative  answers  were  given. 
The  check  bore  the  earmarks  of  genuineness,  and  plaintiff  says  he  rec- 
ognized the  signature  of  Mr.  Wheaton.    Upon  request,  therefore,  the 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  813 

mileage  book  was  delivered,  and  the  balance  of  the  amount  paid  in  cash  ; 
the  check  having  been  first  indorsed  by  the  payee.  In  due  time  the 
check  was  presented  to  the  trust  company,  but  payment  was  refused. 

While  denying  that  he  ever  telephoned,  as  claimed  by  plaintiff,  IMr. 
Wheaton  admitted  the  signature  upon  the  check  to  be  his  own,  but  said 
this  check  was  signed  by  him  in  blank,  and  that  after  such  signature 
it  had  been  stolen,  the  date,  amount,  and  name  of  the  payee  having  been 
written  in,  and  the  protectograph  stamp  used,  after  the  stealing.  As 
soon  as  the  theft  had  been  discovered  the  trust  company  was  directed 
not  to  pay  the  check  when  presented.  Mr.  Wheaton  testified  that  it 
was  his  custom  to  sign  enough  checks  in  blank  during  the  morning  for 
use  during  the  day,  and  that  Miss  Butler,  the  clerk  and  bookkeeper, 
filled  in  the  dates,  amounts,  and  names  of  the  various  payees  as  oc- 
casion demanded.  The  testimony  shows  that  after  such  signature  by 
Mr.  Wheaton  the  check  book  was  kept  sometimes  in  the  office  safe, 
sometimes  in  the  drawer  of  a  desk  in  the  office,  and  sometimes  on  top 
of  the  desk.  The  plaintiff  testified  that  the  bookkeeper  told  him  it 
would  be  easy  for  anybody  to  come  in  and  abstract  one  of  the  checks 
while  she  was  out  making  change  for  the  men.  This  testimony  was 
not  contradicted  by  Miss  Butler.  Mr.  Wheaton  testified  that  there 
was  nothing  to  prevent  the  general  help  from  access  to  the  office  al- 
l^hough  either  he  or  Miss  Butler  was  supposed  to  be  there  all  the  time. 
On  cross-examination  he  stated  that  the  office  might  have  been  left 
alone,  that  he  had  been  in  the  store  when  there  was  no  one  in  the  of- 
fice, and  that  there  was  no  lock  on  the  office  door.  Miss  Butler,  the 
bookkeeper,  stated  that  occasionally  the  office  had  been  left  alone  for 
10  or  15  minutes,  or  perhaps  a  little  longer  at  times.  On  cross-ex- 
amination she  said  the  check  book  was  left  on  the  desk  quite  often 
during  business  hours. 

It  is  claimed  by  plaintiff,  practically  admitted  by  defendant,  and 
we  have  no  hesitation  in  finding  from  the  record  of  the  case,  that  the 
plaintiff  is  a  bona  fide  holder  of  the  check  for  value,  that  he  took  it 
without  notice  of  any  facts  which  would  impeach  its  validity  between 
the  antecedent  parties,  and  that  he  took  it  under  an  indorsement  made 
before  the  same  became  due.     '^     *     * 

Through  all  the  cases,  and  those  holding  similarly  there  runs  a 
distinction  between  a  completed  piece  of  commercial  paper  with  all 
its  blanks  filled,  including  the  name  of  the  payee  to  whom  delivery 
had  not  been  made,  either  actually  or  constructively,  and  a  paper 
signed  by  the  maker  with  blanks  left  unfilled  as  in  the  case  at  bar. 
The  element  of  negligence  on  the  part  of  the  signer  also  plays  an 
important  part.  It  is  conceded  that  this  check  was  signed  in  blank. 
Was  there  such  negligence  on  the  part  of  the  defendant  company  or 
its  agents  as  will  permit  this  plaintiff  to  recover?  The  case  seems  to 
show  quite  clearly  that  the  check  book  was  left  about  the  office  in 
such  a  way  that  this  check  was,  in  fact,  undoubtedly  stolen,  and,  as 
we  have  already  seen,  according  to  the  plaintiff's  undisputed  testimony, 
the  bookkeeper  admitted  that  "it  would  be  easy  for  anybody  to  come 
in  and  abstract  one  of  the  checks."  Under  all  the  circumstances  it 
seems  to  us,  in  view  of  the  character  of  the  paper  stolen,  its  condi- 
tion as  to  signature  when  stolen,  the  negligence  in  leaving  the  signed 
checks  in  such  environment  that  theft  was  easy,  and  the  apparent 
care  of  the  plaintiff  before  cashing  the  check,  that  we  should  apply 
the  rule  of  estoppel,     *     *     *     as  well  as  the  rule  that,  when  one  of 


814  NEGOTIABLE   INSTRUMENTS  (Part  3- 

two  innocent  persons  must  suffer  by  the  act  of  a  third,  he  who  has 
enabled  such  person  to  occasion  the  loss  must  sustain  it. 

Judgment  for  plaintiff  for  $113.75,  with  interest  from  date  of  the 
writ. 


(g)     I\IATEEIAL    ALTERATION    AS    REGARDS    THE    INSTRUMENT    IN 
ITS  ORIGINAL  FORM 

N.  I.  L.,  Section  124.  Where  a  negotiable  instrument  is  materi- 
ally altered  without  the  assent  of  all  parties  liable  thereon,  it  is 
avoided,  except  as  against  a  party  who  has  himself  made,  author- 
ized or  assented  to  the  alteration,  and  subsequent  indorsers. 

N.  I.  L.,  Section  125.     Any  alteration  which  changes: 

1.  The  date; 

2.  The  sum  payable,  either  for  principal  or  interest; 

3.  The  time  or  place  of  payment; 

4.  The  number  or  the  relations  of  the  parties; 

5.  The  medium  or  currency  in  which  payment  is  to  be  made; 

6.  Or  which  adds  a  place  of  payment  where  no  place  of  payment 
is  specified; 

7.  Or  any  other  change  or  addition  which  alters  the  effect  of 
the  instrument  in  any  respect,  is  a  material  alteration. 

N.  I.  L.,  Section  124.  But  when  an  instrument  has  been  materi- 
ally altered  and  is  in  the  hands  of  a  holder  in  due  course,  not  a 
party  to  the  alteration,  he  may  enforce  payment  thereof  according 
to  its  original  tenor. 


PUBLIC  BANK  OF  NEW  YORK  CITY  v.  KNOX-BURCHARD 
MERCANTILE  CO.  et  al. 

(Supreme  Court  of  Minnesota,  1916.     13.5  Minn.  171,  160  N.  W.  667.) 

Taylor,  C.  Plaintiff  brought  suit  upon  a  promissory  note  for  the 
surn  of  $7,500  and  recovered  a  verdict  against  the  defendant,  *  *  * 
S.  J.  Burchard.     *     *     *     He  appealed. 

The  Knox-Burchard  Mercantile  Company  is  a  Minnesota  corporation 
which  was  engaged  in  the  wholesale  mercantile  business  in  the  city  of 
St.  Paul  until  it  went  into  the  hands  of  a  receiver.  G.  C.  Knox,  A.  M. 
Knox  and  S.  J.  Burchard  were  respectively  the  president,  vice  presi- 
dent and  secretary  of  the  company  and  constituted  its  board  of  direc- 
tors. G.  C.  Knox  and  S.  J.  Burchard  were  the  active  members  of  the 
company  and  conducted  its  business.     *     *     * 

Appellant  claims  that,  as  an  accommodation  maker,  he  joined  with 
G.  C.  Knox  in  executing  a  promissory  note  in  the  sum  of  $10,000  for 
the  personal  debt  of  Knox;  =^  *  *  that  thereafter  G.  C.  Knox 
changed  the  signatures  upon  the  face  of  the  note  by  inserting  above  his 
own  name  with  a  rubber  stamp  the  words,  "Knox-Burchard  Mercan- 
tile Co.,  per,"  by  adding  after  his  own  name  the  abbreviation,  "Pres." 
and  by  adding  after  appellant's  name  the  abbreviation,  "Sec,"  so  that 
the  signature  as  so  changed  reads,  "Knox-Burchard  Mercantile  Co.,. 
per  G.  C.  Knox,  Pres.,  S.  J.  Burchard,  Sec." ;  that  Knox  also  changed 
the  indorsements  upon  the  back  of  the  note.     *     *     =;= 


Ch.4)         UlfJIITS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  815 

The  evidence  in  support  of  appellant's  contention  is  uncontradicted 
and  persuasive,  but  conceding  that  the  note  was  executed  as  the  in- 
dividual note  of  Knox  and  Burchard,  and  that  it  has  been  changed  so 
that  it  now  purports  to  be  the  note  of  the  company  indorsed  by  Knox, 
Burchard,  and  A.  M.  Knox,  does  this  fact  release  Burchard  from  lia- 
bility thereon  ?  Burchard  signed  the  note  and  also  indorsed  it.  His 
signatures  are  genuine  even  if  other  signatures  be  forged.     Plaintiff 

is  a  "holder  in  due  course"  within  the  Negotiable  Instruments  Act. 
*     *     * 

By  virtue  of  this  statute,  a  party  to  a  negotiable  instrument  must 
respond  to  "a.  holder  in  due  course"  upon  the  obligation  which  he 
in  truth  assumed,  notwithstanding  the  fact  that  the  instrument  may 
have  been  changed  so  as  to  import  a  different  obligation.     *     *     * 

N.  I.  L,.,  Section  23,  provides :  "When  a  signature  is  forged  or 
made  without  the  authority  of  the  person  whose  signature  it  purports 
to  be,  it  is  wholly  inoperative,  and  no  right  to  retain  the  instrument, 
or  to  give  a  discharge  therefor,  or  to  enforce  payment  thereof  against 
any  party  thereto,  can  be  acquired  through  or  under  such  signature, 
unless  the  party,  against  whom  it  is  sought  to  enforce  such  right,  is 
precluded  from  setting  up  the  forgery  or  want  of  authority." 

Appellant  seems  to  contend  that  this  is  the  only  section  which  ap- 
plies to  cases  where  a  signature  has  been  forged,  and  that  section  124 
applies  only  to  cases  where  an  alteration  has  been  made  in  the  body 
of  the  instrument  but  not  in  the  signature.  We  think  the  statute  will 
not  bear  this  construction.  Where  a  signature  is  forged  or  made  with- 
out authority,  section  26  provides  that  no  rights  can  be  predicated 
upon  such  forged  or  unauthorized  signature  except  against  a  party  who 
is  precluded  from  asserting  the  forgery  or  want  of  authority,  but  goes 
no  further  than  to  make  such  signature  inoperative  and  to  bar  the 
enforcement  of  rights  founded  thereon.  The  language  is  carefully 
chosen  to  confine  the  effect  of  the  section  to  the  specific  points  covered 
thereby.  It  does  not  purport  to  declare  the  instrument  void,  nor  the 
genuine  signatures  thereon  inoperative.  It  protects  the  party  whose 
signature  has  been  forged  or  affixed  without  his  authority,  but  con- 
tains no  provisions  releasing  other  parties  from  whatever  liability  they 
may  have  assumed. 

To  determine  the  rights  of  the  holder  of  an  altered  instrument  against 
such  other  parties  we  must  have  recourse  to  section  124.  Under  this 
section :  "When  an  instrument  has  been  materially  altered  and  is  in 
"the  hands  of  a  holder  in  due  course,  not  a  party  to  the  alteration,  he 
may  enforce  payment  thereof  according  to  its  original  tenor." 

No  claim  is  made  that  plaintiff  was  a  party  to  the  alteration  in 
question  or  had  any  knowledge  thereof.  According  to  the  original 
tenor  of  the  instrument,  appellant  was  a  maker  as  well  as  an  indorser, 
and  liable  unconditionally  for  its  payment.  According  to  the  instru- 
ment as  altered,  he  appeared  to  be  only  an  indorser,  and  the  verdict 
against  him  was  rendered  on  the  theory  that  his  liability  was  that  of 
an  indorser.  He  was  held  to  no  greater  or  different  liability  than  he 
in  fact  assumed  and  is  not  in  condition  to  complain. 

Order  affirmed. 


816  NEGOTIABLE   INSTRUMENTS  (Part  3 


(h)     MATERIAL  CHANGE  OF  A  COMPLETED  INSTRUMENT  EFFECTED 

OTHERWISE  THAN  BY  ERASURES  MADE  POSSIBLE  BY 

NEGLIGENT  EXECUTION 

A  material  change  of  a  completed  instrument  effected  otherwise 
than  by  erasures,  when  such  change  is  made  possible  by  negligent 
execution  of  the  instrument,  is  a  personal  defense  in  some  states. 
In  other  states  a  change  of  this  sort  is  treated  as  a  material  alter- 
ation, and  the  legal  effect  is  the  same  as  that  produced  by  era- 
sures followed  by  alteration.  We  are  dealing  with  a  situation, 
therefore,  where  the  physical  facts  bear  a  close  resemblance  to  the 
case  of  material  alteration,  and  to  the  filling  in  of  blanks  in  an  in- 
complete instrument.  The  conflict  of  authority  is  therefore  easily 
accounted  for.  Those  courts  which  protect  the  holder  in  due 
course  to  the  full  extent  of  the  change  do  so  for  the  same  general 
reason  that  a  holder  in  due  course  is  protected  when  an  incom- 
plete instrument  has  been  delivered  and  filled  up  in  excess  of 
authority.  Those  courts  which  refuse  protection  to  the  holder  in 
due  course  as  regards  the  instrument  in  its  changed  condition  do 
so  because  they  regard  the  change  to  be  in  legal  effect  a  material 
alteration  effected  by  erasures.  But,  as  appears  from  the  second 
case  following,  even  these  courts  which  refuse  protection  to  the 
holder  in  due  course  will  protect  a  drawee  bank  as  against  the 
claim  of  the  negligent  drawer. 


NATIONAL   EXCHANGE   BANK   OF   ALBANY   v.   LESTER. 

(Court  of  Appeals  of  New  York,  1909.     194  N.  Y.  461,  87  N.  E.  779, 
21  L.  R.  A.  [N.  S.]  402,  16  Ann.  Cas.  770.) 

Action  by  the  National  Exchange  Bank  of  Albany  against  William 
Lester.     From  a  judgment  for  plaintiff,  defendant  appeals. 

The  defendant  was  sued  as  the  accommodation  indorser  upon  a 
note  for  $375  made  by  one  Frank  L.  Fancher  and  acquired  by  the 
plaintiff  bank  before  maturity  in  the  regular  course  of  its  business. 
The  defense  was  that  the  note  as  originally  made  and  indorsed  was 
for  $75  only;  that  the  maker  thereafter,  without  the  knowledge  or 
consent  of  the  indorser,  altered  the  note  by  inserting  in  the  body 
thereof  the  words  "three  hundred"  immediately  in  front  of  the  words 
"seventy-five"  and  the  figure  "3"  immediately  in  front  of  the  figures 
"75,"  thereby  making  the  instrument  apparently  a  note  for  $375  in- 
stead of  $75 ;  and  that  the  maker  thereafter  caused  the  note  as  thus 
altered  to  be  discounted  by  the  plaintiff  bank. 

'  WiLLARD  Bartlett,  J.  As  this  case  went  to  the  jury,  they  might 
well  have  found  that  the  note  in  suit  was  a  note  for  only  $75  when 
originally  prepared  by  the  maker  and  indorsed  at  his  instance  by  the 
defendant,  and  that  it  had  subsequently  been  altered  to  a  note  for  $375 
when  discounted  by  the  plaintiff'  bank.  They  were  instructed  in  sub- 
stance, however,  that  the  indorser  was  liable  for  the  amount  of  the 
note  as  raised  by  the  alteration,  if  he  had  been  careless  and  negligent  in 
placing  his  name  upon  the  instrument  while  there  were  spaces  there- 
on which  permitted  the  insertion  of  the  words  and  figure  wherebv  it 


Ch.  4)         RIGHTS   OP   HOLDER   AGAIxNST   MAKER   AND   ACCEPTOR  817 

was  transmuted  from  a  note  for  $75  into  a  note  for  $375.  Conceding 
that  the  contract  which  he  actually  signed  bound  him  only  to  pay  the 
smaller  amount,  the  jury  were  permitted  to  find  that  in  consequence 
of  his  negligence  in  the  respect  indicated  it  had  become  a  contract 
which  bound  him  to  pay  the  larger  amount  to  a  subsequent  innocent 
holder  of  the  paper. 

In  support  of  the  correctness  of  this  ruling,  the  learned  counsel  for 
the  respondent  asserts  the  doctrine  that  "a  party  to  a  note  who  puts  his 
name  to  it  in  any  capacity  of  liability,  when  it  contains  blanks  uncan- 
celed facilitating  an  alteration  raising  the  amount,  is  liable  for  the  face 
of  the  note  as  raised  to  an  innocent  holder  for  value";  and  he  de- 
clares that  this  doctrine  has  been  approved  and  apparently  adopted 
in  Alabama,  California,  Colorado,  Illinois,  Kansas,  Kentucky,  Louis- 
iana, Michigan,  Missouri,  Nebraska,  and  Pennsylvania.  In  consider- 
ing his  proposition,  it  is  important  to  bear  in  mind  a  radical  distinction 
which  exists  between  two  classes  of  notes  to  which  the  adjudicated 
cases  relate:  (1)  Those  notes  in  which  obvious  blanks  are  left  at  the 
time  when  they  are  made  or  indorsed,  of  such  a  character  as  manifest- 
ly to  indicate  that  the  instruments  are  incomplete  until  such  blanks 
shall  be  filled  up ;  and  (2)  those  notes  which  are  apparently  complete, 
and  which  can  be  regarded  as  containing  blanks  only  because  the  writ- 
ten matter  does  not  so  fully  occupy  the  entire  paper  as  to  preclude  the 
insertion  of  additional  words  or  figures  or  both.  It  is  a  note  of  the; 
latter  class  that  we  have  to  deal  with  here.  One  who  signs  or  indorses 
a  note  of  the  first  class  has  been  held  liable  to  bona  fide  holders  there- 
of, in  some  of  the  cases  cited  by  the  respondent,  according  to  the  terms 
of  the  note  after  the  blanks  have  been  filled,  on  the  doctrine  of  implied 
authority,  while  in  other  cases,  relating  to  notes  of  the  second  class, 
the  liability  of  the  maker  or  indorser  for  the  amount  of  the  note  as 
increased  by  filling  up  the  unoccupied  spaces  therein  is  placed  upon  the 
doctrine  of  negligence  or  estoppel  by  negligence.     *     *     * 

It  has  now,  however,  become  in  America  an  established  rule  that,  if 
the  instrument  was  complete  without  blanks  at  the  time  of  its  deliv- 
ery, the  fraudulent  increase  of  the  amount  by  taking  advantage  of  a 
space  left  without  such  intention  +  *  *  will  constitute  a  material 
alteration,  and  operate  to  discharge  the  maker."  *  *  *  The  rule 
thus  stated  is  sustained  by  the  decisions  of  the  courts  of  last  resort  in 
Massachusetts,  Michigan,  New  Hampshire,  Iowa,  Maryland,  Missis- 
sippi, Arkansas,  and  South  Dakota.  In  my  judgment  it  rests  on  a 
sounder  basis  than  the  opposite  doctrine,  and  accords  better  with  such 
adjudications  of  this  court  as  bear  more  or  less  directly  on  the  ques- 
tion involved.  The  leading  case  sustaining  this  view  is  Greenfield  Sav- 
ings Bank  V.  Stowell,  123  Mass.  196,  25  Am.  Rep.  67.    *    *    * 

No  one  cjuestions  the  proposition  that,  where  a  party  to  commercial 
paper  intrusts  it  to  another  with  a  blank  thereon  designed  to  be  filled 
up  with  the  amount,  such  party  is  liable  to  a  bona  fide  holder  of  the 
instrument  for  the  amount  filled  in,  though  it  be  larger  than  was  stip- 
ulated with  the  person  to  whom  immediate  delivery  was  made.  *  *  * 
But,  where  there  is  no  blank  for  that  purpose  when  the  note  is  in- 
dorsed, the  insertion  of  an  obligation  to  pay  interest  is  a  material  al- 
teration which  invalidates  the  instrument  as  against  the  indorser, 
*  *  *  As  the  law  stood,  he  was  relieved  of  all  liability  whatever 
as  the  effect  of  the  unauthorized  alteration.  Now,  however,  under  the 
B.&  B.Bxjs.Law— 52 


818  .  NEGOTIABLE   INSTRUMENTS  (Part  3 

Negotiable  Instruments  Law,     *     *     *     he  would  be  liable  on  the  pa- 
per according  to  its  original  tenor. 

To  sustain  the  judgment  in  the  case  at  bar  *  *  *  we  must  hold 
that  the  indorser  of  a  promissory  note,  the  amount  of  which  has  been 
fraudulently  raised  *  *  *  is  liable  upon  the  instrument  in  the 
hands  of  a  bona  fide  holder  for  the  increased  amount,  because  of  neg- 
ligence in  indorsing  the  same  when  there  were  spaces  thereon  which 
rendered  the  forgery  easy,  though  the  note  was  complete  in  form. 
To  do  this  would  be  to  create  a  contract  through  the  agency  of  negli- 
gence. *  *  *  An  averment  of  negligence  necessarily  imports  the 
existence  of  a  duty.  What  duty  to  subsequent  holders  of  a  promissory 
note  is  imposed  by  the  law  upon  a  i:>erson  who  is  requested  to  indorse 
the  paper  for  the  accommodation  of  the  maker  and  who  complies  with 
such  request?  It  is  a  complete  instrument  in  all  respects — as  to  date, 
name  of  payee,  time  and  place  of  payment,  and  amount.  There  are, 
it  is  true,  spaces  on  the  face  of  the  instrument  in  which  it  is  possible 
to  insert  words  and  figures  which  will  enlarge  the  amount  and  still 
leave  the  note  apparently  a  genuine  instrument ;  in  other  words,  there 
is  room  for  forgery.  On  what  theory  is  the  indorser  negligent  because 
he  places  his  name  on  the  paper  without  first  seeing  to  it  that  these 
spaces  are  so  occupied  by  cross-lines  or  otherwise  as  to  render  forgery 
less  feasible?  It  can  only  be  on  the  theory  that  he  is  bound  to  assume 
that  those  to  whom  he  delivers  the  paper  or  into  whose  hands  it  may 
come  will  be  likely  to  commit  a  crime  if  it  is  comparatively  easy  to  (Jo 
so.  I  deny  that  there  is  any  such  presumption  in  the  law.  It  would 
be  a  stigma  and  reflection  upon  the  character  of  the  mercantile  com- 
munity and  constitute  an  intolerable  reproach  of  which  they  might 
well  complain  as  without  justification  in  practical  experience  or  the 
conduct  of  business.  That  there  are  miscreants  who  will  forge  com- 
mercial paper  by  raising  the  amount  originally  stated  in  the  instru- 
ment is  too  true,  and  is  evidenced  by  the  cases  in  the  law  reports  to 
which  we  have  had  occasion  to  refer;  but  that  such  misconduct  is  the 
rule,  or  is  so  general  as  to  justify  the  presumption  that  it  is  to  be  ex- 
pected and  that  business  men  must  govern  themselves  accordingly, 
has  never  yet  been  asserted  in  this  state,  and  I  am  not  willing  to  sanc- 
tion any  such  proposition  either  directly  or  by  implication.  On  the 
contrary,  the  presumption  is  that  men  will  do  right  rather  than  wrong. 

I  think  the  judgment  of  the  Appellate  Division  should  be  reversed 
and  a  new  trial  granted.     *    *    * 


TRUST  00.  OF  AMERICA  v.   CONKLIN. 

(Supreme  Court  of  New  York,  Api>ellate  Term,  1909.     65  Misc.  Rep.   1, 
119  N.  Y.  Supp.  367.) 

Action  by  the  Trust  Company  of  America  against  Henry  Conklin. 
From  a  judgment  for  plaintifif,  defendant  appeals. 

Lkhman,  J.  The  plaintifif  seeks  to  recover  from  the  defendant  for 
an  overdraft  of  his  account.  It  appears  that  the  overdraft  arose  from 
the  fact  that  the  defendant  left  the  city,  and  upon  his  departure  gave 
his  bookkeeper  a  number  of  checks,  signed  by  him  in  blank,  in  or- 
der to  provide  funds  for  use  in  his  business.  His  bookkeeper  locked 
the  checks  in  a  drawer  of  the  safe.     One  of  the  defendant's  employes 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  819 

knew  where  the  key  was  hidden,  abstracted  a  blank  check,  and  filled  in 
the  blank  so  that  it  apparently  became  a  complete  instrument  payable 
to  bearer  for  the  sum  of  $200. 

If,  *  *  *  the  plaintiff  has  shown  a  right  to  charge  the  account 
of  this  defendant,  even  though  that  right  arises  by  reason  of  the  neg- 
ligence of  the  defendant,  then  the  plaintiff  may  recover  herein,  al- 
though the  action  is,  in  form,  based  on  contract. 

The  courts  of  this  state  have  been,  however,  averse  to  allowing  re- 
coveries on  the  ground  of  negligence  of  a  party  to  an  instrument. 
*  *  *  In  the  recent  case  of  National  Exchange  Bank  v.  Lester,  194 
N.  Y.  461.  87  N.  E.  779,  21  L.  R.  A.  (N.  S.)  402.  16  Ann.  Cas.  770, 
the  court  held  that  the  indorser  of  a  promissory  note,  the  amount  of 
which  had  been  fraudulently  raised  after  the  indorsement  by  means  of 
a  forgery,  is  not  liable  upon  the  instrument  in  the  hands  of  a  bona  fide 
holder  for  the  increased  amount  because  of  negligence  in  indorsing 
the  instrument,  when  there  were  spaces  thereon  which  rendered  the 
forgery  easy,  although  the  note  was  complete  in  form.    *     *    * 

In  the  present  case  we  have  two  causes  intervening  to  produce  a 
check  which  the  defendant  did  not  intend  to  order  the  plaintiff  to  pay. 
The  defendant  delivered  the  check,  signed  in  blank,  to  an  agent  upon 
whose  fidelity  he  was  bound  to  rely,  and  the  blanks  were  subsecjuent- 
ly  filled  in,  not  by  his  own  agent,  but  by  one  who  obtained  the  check 
through  a  crime.  I  do  not  think  that  the  defendant's  agent  can  be 
considered  negligent  in  his  care  of  the  instrument.  It  is  true  that  it 
was  stolen ;  but  he  kept  it  locked  up  in  a  drawer  under  circumstances 
that  showed  at  least  reasonable  care,  and  he  could  not  presume  that  a 
trusted  porter  would  turn  out  to  be  a  clever  thief.  If  the  defendant  is 
liable  at  all,  it  is  because  he  owed  the  bank  a  duty  which  he  violated 
by  signing  the  check  in  blank. 

We  may,  for  the  purpose  of  this  appeal,  dismiss  entirely  the  question- 
whether  the  defendant  would  be  liable  to  a  bona  fide  holder  for  value. 
The  cjuestion  before  us  is  entirely  one  concerning  the  duties  of  a  de- 
positor to  his  bank.  That  a  depositor  owes  a  real  duty  of  care  to  the 
bank  has  been  frequently  decided,  and  this  duty  is  greater  than  that 
which  the  maker  of  an  instrument  owes  to  subsequent  holders  for 
value.  A  purchaser  of  a  negotiable  instrument  can  take  it  or  not,  at 
his  option,  and  usually,  at  least  to  some  extent,  relies  upon  the  re- 
sponsibility of  the  last  holder.  A  bank,  however,  must  at  its  peril  pay 
out  the  money  deposited,  if  the  depositor  directs  him  to  do  so.    *    *    * 

In  this  case  a  depositor  has  signed  a  blank  check,  and  has  made  it 
possible  for  a  person  obtaining  the  check,  not  only  to  successfully  tam- 
per with  it,  but  has  facilitated,  if  not  invited,  the  forgery  which  was 
actually  successfully  completed.  In  one  sense  he  may  not  have  been 
negligent.  It  is  possible  that  even  a  careful  man  might  be  willing  to 
assume  the  risk  of  theft ;  but  he  owed  a  duty  to  the  bank  to  put  his 
signature  upon  a  blank  check  only  for  the  purpose  of  directing  it  to 
pay  out  the  money,  and,  however  slight  the  risk,  the  depositor  is  the 
person  who  has  assumed  it.  The  bank  could  not  discover  the  forgery 
in  any  possible  way,  because  his  act  had  rendered  such  discovery  prac- 
tically impossible,  and  by  virtue  of  his  contractual  relation  to  the  bank 
he  is  now  bound  to  pay  back  to  the  bank  the  money  which  it  has  paid 
out. 

The  judgment  should  be  afiirmed.    *    *    * 


820  NEGOTIABLE   INSTRUMENTS  (Part  3 


(i)     FORGERY  WHEN  ACCOMPANIED   BY   FACTS   CONSTITUTING   AN 

ESTOPPEL 

The  following  case  arises  between  a  drawee  bank  and  its  depos- 
itor, but  in  so  far  as  the  drawee  is  protected  by  estoppel,  the  doc- 
trine is  equally  applicable  to  a  holder  in  due  course. 


FIRST  NAT.  BANK  OF  BIRMINGHAM  v.  ALLEN. 

(Supreme  Court  of  Alabama,  1893.     100  Ala.  476,  14  South.  335, 
27  L.  R.  A.  426,  46  Am.  St.  Rep.  80.) 

Coleman,  J.  The  plaintiff,  Allen,  a  de'positor,  sued  to  recover  mon- 
ey which  had  been  paid  by  the  defendant  bank  upon  checks  to  which 
plaintift''s  name  had  been  forged  by  his  clerk,  Tomlin.  The  forgeries 
covered  a  period  extending  from  about  the  5th  of  September,  1890, 
to  March  4,  1891,  at  which  latter  point  of  time  the  forgeries  were  first 
actually  known  to  the  depositor.  It  was  a  rule  of  the  bank  about  once 
a  month  to  post  up  the  depositor's  pass  book,  and  render  him  a  state- 
ment, showing  the  deposits  and  checks  and  the  balance.  This  rule 
was  observed  regularly  in  this  case,  and  the  forged  checks,  with  other 
vouchers,  were  delivered  to  the  depositor  monthly  from  September, 
1890,  to  March  4,  1891,  with  his  pass  book.  *  *  *  The  case  was 
tried  without  the  intervention  of  a  jury,  and  judgment  rendered  for 
the  plaintiff,  from  which  judgment  the  defendant  appeals.     *     *     * 

As  the  court  found  for  the  plaintiff,  it  must  have  found  that  the  plain- 
tiff, under  the  facts,  was  not  negligent,  and  was  not  chargeable  with 
knowledge  of  the  forgeries  in  time  to  have  prevented  loss  to  the  defend- 
ant, in  consequence  of  forgeries  perpetrated  after  return  of  prior  forged 
checks  to  the  depositor  with  his  pass  book.  Were  the  conclusions  of 
the  court  authorized  by  the  evidence?  If,  as  matter  of  law,  as  is  insist- 
ed by  the  plaintiff,  Allen,  the  depositor  owed  no  duty  to  the  bank  to  ex- 
amine the  vouchers,  then  the  conclusion  of  the  court  must  be  sustained, 
upon  this  principle,  however  negligent  the  depositor  may  have  been  in 
his  examination  of  the  pass  book  and  vouchers.  In  the  same  line,  but 
not  so  positive,  may  be  cited  Welsh  v.  Bank,  7Z  N.  Y.  424,  29  Am. 
Rep.  175;  Frank  v.  Bank,  84  N.  Y.  209,  Z%  Am.  Rep.  501;  Bank 
V.  Barnes,  65  111.  69,  16  Am.  Rep.  576.  [New  York  cases  are  here 
cited.]  These  New  York  cases  were  fully  reviewed  in  the  case  of 
Bank  v.  Morgan,  117  U.  S.  96,  6  Sup.  Ct.  657,  29  L.  Ed.  811,  in 
which  a  different  rule  is  declared,  and  it  is  held  that  "a  depositor  in 
a  bank,  who  sends  his  pass  book  to  be  written  up,  and  receives  it 
back  with  entries  of  credits  and  debits,  and  his  paid  checks  as  vouchers 
for  the  latter,  is  bound  personally,  or  by  an  authorized  agent,  and  with 
due  diligence,  to  examine  the  pass  book  and  vouchers,  and  report  to 
the  bank  without  unreasonable  delay  any  errors  which  may  be  discov- 
ered in  them;  and,  if  he  fails  to  do  so,  and  if  the  bank  is  thereby 
misled  to  its  prejudice,  he  cannot  afterwards  dispute  the  correctness 
of  the  balance  shown  by  the  pass  book.  *  *  *  Xhe  weight  of 
authority  and  the  best  considered  cases  hold  that  the  depositor  owes 
a  duty  to  the  bank ;  and  when  the  character  of  the  business,  the  rela- 
tions of  the  depositor  and  bank  to  each  other,  and  the  purposes  for 
which  at  prescribed  intervals  the  account  is  stated,  and  pass  book  and 


Ch.  4)         RIGHTS   OF   HOLDER   AGAIXST   MAKER   AND   ACCEPTOR  821 

vouchers  (the  evidence  of  the  bank)  dehvered  to  the  depositor  are  taken 
into  consideration,  the  conchision  of  these  authorities-  is  supported  by 
sound  reason  and  just  principles.     *     *     * 

What  is  the  proper  measure  of  rehef  to  whicli  the  bank  is  entitled 
in  such  cases?  Some  of  the  courts  have  held  that,  if  injury  results  to 
the  bank  by  the  negligence  of  the  depositor,  he  will  be  held  to  have 
adopted  and  ratified  the  payment  of  the  forged  checks.  By  others, 
under  like  circumstances,  the  doctrine  of  estoppel  has  been  applied,  and 
the  depositor  held  to  be  estopped  from  asserting  a  claim  to  the  money 
paid  on  the  forged  checks.  We  do  not  think  that  either  the  doctrine 
of  ratification  or  estoppel  can  be  applied  as  a  just  and  equitable  prin- 
ciple in  all  cases.  Ratification  refers  to  a  past  act  or  transaction,  and, 
as  now  being  considered,  refers  to  the  unauthorized  act  of  an  agent,  or 
the  adoption  of  a  past  act  or  transaction  as  his  own  act,  made  or  ex- 
ecuted by  another,  who  was  not  an  agent.  It  would  strain  the  doc- 
trine of  ratification  to  hold  that  a  person  had  ratified  or  adopted  as 
his  own  the  unauthorized  act  of  another,  of  which  he  had  no  informa- 
tion, or  which  was  promptly  repudiated  as  soon  as  brought  to  his 
knowledge.  So,  where  a  bank  pays  a  forged  check  drawn  in  the  name 
of  one  of  its  depositors,  and  the  depositor  is  wholly,  free  from  neg- 
lect or  fault,  the  bank  owes  the  amount  to  the  depositor.  There  was 
no  act,  omission  to  act,  or  silence  in  such  a  case  on  the  part  of  the  de- 
positor which  induced  the  bank  to  pay  the  forged  check,  or  influenced 
the  action  of  the  bank  in  the  payment  of  the  check.  No  principle  of 
the  law  of  estoppel  can  be  invoked  by  the  bank  against  the  depositor 
under  such  circumstances.  The  depositor  owed  the  bank  a  duty,  which 
was  to  examine  the  pass  book  and  vouchers  with  reasonable  care  and 
diligence.  If  the  depositor  failed  in  his  duty  in  this  respect,  and  the 
bank  was  injured  in  consequence  of  such  omission  of  duty,  the  de- 
positor became  liable  to  the  bank  for  all  such  damage.  The  extent 
of  the  liability  of  the  depositor  is  commensurate  with  the  loss  sus- 
tained in  consequence  of  his  neglect  of  duty;    no  more,  no  less. 

It  would  be  unjust,  unfair  to  the  depositor,  not  sanctioned  by  any 
correct  principle  of  law,  to  permit  the  bank  to  invoke  the  doctrine  of 
ratification  or  estoppel  which  would  exempt  the  bank  from  all  liabil- 
ity incurred  by  its  own  neglect  in  the  payment  of  the  forged  check, 
and  in  many  cases  inflict  upon  the  depositor  a  greater  loss  than  that 
caused  to  the  bank  by  his  neglect  of  duty.  The  damages  sustained 
by  the  bank  as  the  result  of  neglect  of  duty  by  the  depositor  are  as  sus- 
ceptible of  proof  and  measurement  as  arise  in  any  other  case  of  breach 
of  duty  imposed  by  contract.  *  *  *  f^e  evidence  shows  that  sev- 
eral checks  were  forged  by  Tomlin  and  paid  by  the  bank  subsequent  to 
the  time  that  Allen,  the  plaintiff,  was  chargeable  with  notice  that  his 
clerk  was  making  such  unauthorized  use  of  his  name.  As  to  all  such 
subsequent  payments  of  forged  checks  the  bank  is  entitled  to  invoke 
the  equitable  doctrine  of  estoppel.  As  to  these,  it  may  be  fairly  said 
that  the  bank  was  induced  to  pay  and  did  pay  in  consequence  of  the 
silence  of  the  plaintiff  when  it  was  his  duty  to  speak.  The  bank  was 
misled  to  its  injury  by  the  fault  of  the  depositor.  A  very  interesting 
and  instructive  collection  of  leading  cases  on  the  question  under  con- 
sideration may  be  found  in  26  American  Law  Review,  274.     *     *     * 

Reversed  and  remanded. 


822  NEGOTIABLE   INSTRUMENTS  (Part  3 


(j)     DISCHARGE    P.F:F0RE    MATT'RTTY 

N.  I.  L.,  Section  119.  A  negotiable  instrument  is  discharged: 
(1)  By  payment  in  due  course  by  or  on  behalf  of  the  principal 
debtor.  (2)  By  payment  in  due  course  by  the  party  accommo- 
dated, where  the  instrument  is  made  or  accepted  for  accommoda- 
tion. *  *  *  (4-)  gy  3i^y  other  act  which  will  discharge  a  sim- 
ple contract  for  the  payment  of  money. 

N.  I.  L.,  Section  122.  The  holder  may  expressly  renounce  his 
rights  against  any  party  to  the  instrument,  before,  at  or  after  ma- 
turity. An  absolute  and  unconditional  renunciation  of  his  rights 
against  the  principal  debtor  made  at  or  after  maturity  of  the  in- 
strument discharges  the  instrument.  But  a  renunciation  does  not 
affect  the  rights  of  a  holder  in  due  course  without  notice.  A  re- 
nunciation must  be  in  writing,  unless  the  instrument  is  delivered 
up  to  the  person  primarily  liable  thereon. 


MANCHESTER   et  al.  v.   PARSONS. 

(Supreme  Court  of  Appeals  of  West  Virciinia,  1915.     75  W.  Ya.  793, 

84  S.  E.  885.) 

Williams,  J.  By  this  writ  of  error  defendant  seeks  to  reverse  a 
judgment  recovered  against  him  by  Jason  Manchester  and  L.  M.  Elli- 
ott. *  *  *  The  recovery  was  upon  a  negotiable  note  made  by  de- 
fendant, payable  to  Burton  &  Co.,  a  partnership  composed  of  L.  A. 
Burton  and  D.  J.  Grindell,  and  indorsed  to  plaintiffs.  Defendant  filed 
three  pleas  on  which  issues  were  joined.  The  substance  of  the  pleas 
are:  (1)  That  defendant  had  discharged  the  note  by  payment  to  the 
legal  owner  and  holder,  before  the  suit  was  brought.     *     *     * 

After  the  evidence  had  all  been  introduced,  the  court,  on  motion  of 
plaintiffs,  excluded  defendant's  evidence,  and  directed  the  jury  to  re- 
turn a  verdict  for  plaintiff's.  A  motion  to  set  aside  the  verdict  was 
overruled,  exceptions  taken,  and  judgment  entered. 

Burton  &  Co.  was  a  Kenton,  Ohio,  firm,  engaged  in  importing  and 
selling  horses  for  breeding  purposes.  Defendant  lived  at  Parsons,  W. 
Va.,  and  was  engaged  in  breeding  horses.  The  note  is  for  $800,  pay- 
able 18  months  after  date,  to  the  order  of  Burton  &  Co.,  at  the  First 
National  Bank  of  Parsons,  with  6  per  cent,  interest,  and  bears  date 
September  22,  1910.  It  is  proven  that  the  note  was  negotiated  to  plain- 
tiffs by  one  Lee  Whorton,  about  the  1st  of  November,  1910.  Whorton 
was  then  employed  in  selling  horses  for  Burton  &  Co. 

Defendant's  pleas  set  up  affirmative  matters  entailing  on  him  the 
burden  of  proof.  Any  one  of  them,  if  sustained,  would  defeat  recov- 
ery. But  there  is  no  evidence  to  support  any  of  them.  To  sustain 
his  first  plea,  defendant  proved  that  on  the  3d  of  June,  1911,  he  sold 
and  delivered  to  Burton  &  Co.  some  Percheron  colts  for  $1,675.  with 
the  understanding  and  agreement  that  it  was  to  pay  his  note,  and  that 
they  were  to  execute  to  him  their  note  for  the  balance.  He  produced 
a  letter  from  D.  J.  Grindell,  then  a  member  of  the  firm,  but  now  de- 
ceased, dated  June  15,  1911,  acknowledging  receipt  of  the  colts  in  good 
condition,  and  promising  defendant  to  send  him  his  note  and  the  firm's 


Ch,  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND    ACCEPTOR  823 

note  for  the  balance,  soon.  Counsel  contends  that  defendant's  note  was 
thus  discharged.  But  the  uncontradicted  testimony  of  L.  A.  Burton, 
the  surviving  partner,  and  of  Lee  Whorton,  is  that  it  had  been  in- 
dorsed to  plaintiffs,  for  value,  about  the  1st  of  November,  1910,  and 
therefore  payment  to  the  original  holders  did  not  discharge  it. 

Counsel  invokes  subsection  4  of  section  119  of  the  Negotiable  In- 
struments Act  as  authority  for  his  contention.  Section  119  describes 
how  a  note  may  be  discharged,  and  subsection  4  reads:  "By  any  other 
act  which  will  discharge  a  simple  contract  for  the  payment  of  money." 
This  subsection  must  be  interpreted  with  reference  to  the  general  pur- 
pose of  the  Negotiable  Instruments  Act.  It  must  be  read  in  connec- 
tion with  its  other  provisions,  and  made  to  harmonize  with  the  general 
scheme  and  plan  of  the  act.  Thus  viewing  subsection  4,  it  is  apparent 
that  it  was  never  the  legislative  intent  to  make  so  radical  a  change 
in  the  general  law  respecting  negotiable  instruments,  as  would  be 
wrought  by  the  literal  interpretation  contended  for.  It  is  clear,  from 
other  provisions  of  the  act,  as  well  as  from  the  preamble  thereto,  that 
the  Legislature  did  not  contemplate  making  so  vital  and  radical  a 
change  in  the  law,  as  to  permit  equities  between  the  original  parties 
to  a  negotiable  instrument  to  defeat  the  title  of  an  innocent  holder 
for  value  in  due  course.  That  would  counteract  the  purpose  of  the 
statute,  which  was  not  to  revolutionize  the  law,  but  to  amend,  en- 
large, and  re-enact  certain  sections  of  the  statute  law  respecting  ne- 
gotiable instruments,  and  consolidate  and  arrange  in  one  act  the  gen- 
eral laws  on  that  subject,  so  as  to  make  them  uniform  with  the  laws 
of  other  states:  The  acts  which  will  discharge  a  simple  contract 
for  payment  of  money,  in  order  to  effect  a  discharge  of  negotiable  pa- 
per, within  the  contemplation  of  subsection  4,  must  therefore  neces- 
sarily be  limited  to  such  acts  as  relate  to  and  affect  the  holder  of  the 
paper  demanding  payment  of  it.  It  does  not  include  a  holder  for  value 
in  due  course..  Negotiable  paper,  in  the  hands  of  such  holder,  is  not 
discharged  by  payment  made  to  his  transferror,  either  before  or  after 
the  transfer. 

Such  was  the  rule  of  the  common  law  respecting  negotiable  paper, 
and  it  was  clearly  not  the  legislative  purpose  to  change  the  rule.  It 
would  injuriously  affect  the  value  of  commercial  paper,  by  putting  it 
on  a  plane  with  simple  contracts  for  the  payment  of  money.  We  can- 
not conceive  that  the  Legislature  intended  any  such  thing,  although  a 
literal  interpretation  of  the  subsection  in  question  might  indicate  other- 
wise. Other  provisions  of  the  statute  expressly  preserve  the  rights  of 
holders  in  due  course.  Section  52  (sec.  4223)  defines  a  holder  in  due 
course  to  be  one  who  takes  the  paper  in  good  faith  for  value,  without 
notice  of  any  infirmities  in  it  or  defect  in  the  title  of  the  person  ne- 
gotiating it.  And  section  57  (sec.  4228)  says  that  such  an  one  holds 
it  "free  from  any  defect  of  title  of  prior  parties,  and  free  from  de- 
fenses available  to  prior  parties  among  themselves  and  may  enforce 
payment  of  the  instrument  for  the  full  amount  thereof  against  all  par- 
ties liable  thereon."  To  construe  subsection  4  of  section  119,  as  con- 
tended for  by  counsel,  would  defeat  section  57  and  other  provisions 
contained  in  the  act.     *     *     * 

Judgment  affirmed. 


824  NEGOTIABLE   INSTRUMENTS  (Part  3 

(k)     CLAIMS  OF  OWNERSHIP 

The  next  case  illustrates  the  rule  that  a  holder  in  due  course 
takes  free  from  equities  of  ownership.  A  holder  in  due  course 
takes  free  from  both  equities  of  defense  and  equities  of  owner- 
ship. The  most  common  illustration  of  an  outstanding  equity  of 
ownership  arises  where  the  instrument  was  in  form  payable  to 
bearer,  and  therefore  transferable  by  delivery,  and  the  same  is  put 
in  circulation  by  a  thief  or  finder  of  the  instrument.  In  the  fol- 
lowing case,  however,  the  actual  question  raised  is  not  whether  a 
holder  in  due  course  takes  free  from  the  equity  of  ownership,  but 
whether  an  innocent  purchaser  after  maturity,  who  was  not  a 
holder  in  due  course,  takes  free  from  such  equity.  A  contrary  re- 
sult would  be  reached  in  England  and  in  some  states  in  this  coun- 
try. No  case  in  this  country  has  yet  gone  so  far  as  definitely  to 
hold  that  an  innocent  purchaser  of  an  instrument  stolen  and  ne- 
gotiated after  maturity  takes  free  from  the  equity  of  ownership, 
but  it  has  been  strongly  argued  that  such  a  purchaser  should  be 
protected,  for  the  reason  that  while  a  purchase  after  maturity 
does  in  a  sense  put  one  on  notice  of  the  possibility  of  a  defense, 
arising  from  the  fact  that  it  is  still  outstanding,  but  that  a  pur- 
chase after  maturity  in  no  real  sense  puts  one  on  notice  of  any- 
thing other  than  defenses.  In  no  way  does  it  indicate  the  possi- 
bility of  an  outstanding  equity  of  ownership.  Moreover,  there 
would  be  no  way  of  ascertaining  who  it  was  who  held  such  equity 
of  ownership.  Such  person's  name  may  not  appear  on  the  in- 
strument or  it  may  have  been  that  he  never  was  in  the  chain  of 
title,  as  would  be  the  case  where  the  holder  of  the  equity  furnish- 
ed the  money  for  the  purchase  of  the  instrument.  Of  course,  if 
the  purchaser  after  maturity  bought  from  a  holder  in  due  course 
such  purchaser  would  be  protected  for  other  reasons. 


GARDNER  v.  BEACON  TRUST  CO.  et  al. 

(Supreme  Judicial  Court  of  Massacliusetts,  1906.     190  Mass.  27,  76  N.  E.  455, 
2  L.  R.  A.   [N.  S.]  767,  112  Am.  St.  Rep.  303,  5  Ann.  Oas.  581.) 

Morton,  J.  This  is  a  bill  in  equity  brought  by  the  plaintiff,  a  minor, 
by  her  next  friend  and  guardian,  to  compel  the  defendant  the  Beacon 
Trust  Company  to  assign  and  deliver  to  her  a  mortgage  and  the  note 
thereby  secured,  alleged  to  have  been  fraudulently  obtained  from  the 
plaintiff's  guardian  by  one  Edwin  M.  Thayer,  since  deceased,  and 
fraudulently  assigned  by  him  to  the  trust  company.  As  to  certain  of 
the  defendants  the  bill  was  dismissed,  and  a  decree  was  entered  in  favor 
of  the  plaintiff'  against  the  trust  company  and  other  defendants.  The 
case  is  here  on  appeal  by  the  trust  company.  All  of  the  evidence  is 
reported. 

Briefly  stated  the  facts  are  as  follows :  In  January,  1903,  the  plain- 
tiff was  the  owner  of  a  mortgage  and  the  note  thereby  secured  for 
$1,500,  on  land  in  Quincy,  given  by  the  defendant  Brown  to  one  Hattie 
E.   Carr  and  transferred  by  successive  assignments  to  the  plaintiff. 


Ch.  4)         RIGHTS   OF   HOLDER   AGAIXST   MAKER   AND    ACCEPTOR 


825 


Her  mother,  Mary  E.  Gardner,  now  Mary  E.  Wales,  was  her  guardian. 
The  note  and  mortgage  had  been  long  overdue.  By  means  of  fraudu- 
lent misrepresentations  that  the  owner  of  the  equity  wished  to  pay  off 
the  mortgage,  Thayer  obtained  from  the  plaintifif's  guardian  an  as- 
signment of  the  no'te  and  mortgage  to  himself,  and  subsequently  as- 
signed them  to  the  trust  company  as  security  for  a  note  of  $2,000  for 
money  borrowed  by  him  of  the  company.  The  trust  company  took  the 
assignment  in  good  faith,  for  value,  and  without  any  notice  of  Thayer's 
fraud,  or  of  any  defect  in  his  title,  unless  the  fact  that  it  took  them 
when  overdue  constituted  such  notice.    *    *     * 

The  question  is  whether,  assuming  for  the  moment  the  validity  of 
the  transfer  by  the  plaintiff's  guardian  to  Thayer,  which  will  be  con- 
sidered later,  the  fact  that  the  note  and  mortgage  were  overdue  when 
the  trust  company  took  them  so  affected  their  title  as  to  postpone  their 
right  to  that  of  the  defrauded  owner.  The  general  rule  is  thus  stated 
by  Lord  Herschel  in  London  Joint  Stock  Bank  v.  Simmons  [1892]  A. 
C.  20L  215 :  "The  general  rule  of  law  is,  that  where  a  person  has 
obtained  the  property  of  another  from  one  who  is  dealing  with  it  with- 
out the  authority  of  the  true  owner,  no  title  is  acquired  as  against  that 
owner,  even  though  full  value  be  given,  and  the  property  be  taken  in 
the  belief  that  an  unquestionable  title  is  being  obtained,  unless  the 
person  taking  it  can  show  that  the  true  owner  has  so  acted  as  to  mis- 
lead him  into  the  belief  that  the  person  dealing  with  the  property  had 
authority  to  do  so.  If  this  can  be  shown,  a  good  title  is  acquired  by 
personal  estoppel  against  the  true  owner."  He  then  goes  on  to  say 
that  there  is  an  exception  in  the  case  of  negotiable  instruments,  man- 
ifestly meaning  those  not  yet  due,  and  that  as  to  them  any  person  in 
possession  of  them  can  convey  a  good  title,  even  if  acting  in_  fraud  of 
the  true  owner.  This  is  the  only  exception  mentioned  by  him  to  the 
general  rule  which  he  lays  down,  and  which  would  seem,  therefore,  to 
have  been  regarded  by  him  as  applying  to  overdue  negotiable  notes 
as  well  as  to  other  property  when  circumstances  brought  them  within 
it.  Applying  the  rule  thus  laid  down,  or  the  rule  that,  where  one  of 
two  innocent  persons  must  suffer  in  consequence  of  the  fraud  of  an- 
other, the  loss  must  fall  upon  the  one  who,  by  his  trust  and  confidence, 
has  enabled  the  perpetrator  of  the  fraud  to  commit  it,  *  *  *  it 
would  seem  plain  that  the  loss  in  this  case  should  fall  upon  the  plaintiff", 
unless  the  fact  that  the  note  and  mortgage  were  overdue  makes  a  dif- 
ference.   *    *    * 

The  purchaser  of  an  overdue  negotiable  note  takes  it  subject  to  all 
the  equities,  if  any,  that  are  attached  to  it  at  the  time  of  the  transfer 
in  favor  of  the  maker,  the  owner,  or  of  third  parties.  *  *  *  j{ 
there  are  no  equities  attached  to  the  note  the  purchaser  gets  as  good 
a  title  after  as  before  maturity.  *  *  *  And  it  makes  no  diff'erence 
that  the  note  is  dishonored.  If  there  are  equities  attached  to  it,  he 
takes  it  subject  to  them.  This  is  what  is  meant  when  it  is  said  that 
the  purchaser  has  no  better  title,  legal  or  equitable,  than  his  transferror 
had,  and  that  the  note  is  subject  in  his  hands  to  the  same  infirmities 
of  title  as  against  the  true  owner,  and  to  the  same  defenses  as  against 
the  maker,  that  it  was  subject  to  in  the  hands  of  his  transferror. 

*  *    *     If,  for  instance,  an  overdue  note  is  stolen  from  the  owner,  a 
subsequent   purchaser    acquires   no   title   as    against   the  true  owner, 

*  *     *     or  if  an  overdue  note  has  been  paid  by  the  maker,  and  is 
fraudulently  put  in  circulation  by  the  payee,  a  purchaser,  though  for 


S26  NEGOTIABLE    INSTRUMENTS  (Part  3 

value  and  in  good  faith,  takes  it  subject  to  the  defense  of  payment  by 
the  maker.  In  such  a  case  the  very  fact  that  the  note  is  dishonored  is 
sufficient  to  put  the  purchaser  upon   inquiry  as  against   the  maker. 

:>         S:        * 

But  the  case  is  very  different  where  the  owner  of  an  overdue  note 
transfers  it,  under  circumstances  which  enable  his  transferee  to  deal 
with  it,  though  obtained  by  fraud,  as  if  he  were  the  true  owner,  and 
v.hen  an  innocent  purchaser  for  value  takes  it  from  such  transferee 
before  the  transfer  has  been  avoided.  In  such  a  case  no  equity  attaches 
to  the  note  in  favor  of  the  true  owner  as  against  the  innocent  purchaser 
for  value,  since  it  was  by  his  own  act  that  the  perpetrator  of  the  fraud 
was  enabled  to  commit  it.  The  true  owner  of  an  overdue  note  may 
deal  with  it  as  with  any  other  property,  and  the  mere  fact  that  the 
note  is  overdue  does  not,  in  such  a  case,  in  the  absence  of  anything 
in  the  transaction  to  suggest  suspicion,  put  a  purchaser  upon  inquiry 
any  more  than  a  purchaser  is  bound  in  any  other  case  to  inquire  into 
the  title  of  his  vendor.  *  *  *  The  possibility  that  the  title  may  have 
been  obtained  by  fraud  exists  in  all  cases ;  but  that  is  not  enough  to 
put  a  purchaser  upon  inquiry.  Any  other  view  would  ^  put  upon  the 
innocent  purchaser  for  value  of  overdue  negotiable  paper  the  onus  of  a 
defective  title,  no  matter  how  much  he  may  have  been  misled  by  the  con- 
duct of  the  true  owner.  We  do  not  think  that  such  is  the  law.  *  *  * 
The  above  principle  was  recognized,  though  it  was  held  that  the  facts 
did  not  bring  the  case  within  it.  So  far,  therefore,  as  the  plaintiff  re- 
lies upon  the  fact  that  the  note  and  mortgage  were  overdue  when  taken 
by  the  trust  company,  her  contention  must  fail.     ''^     '•''     * 

The  result  is  that  so  much  of  the  decree  as  adjudges  that  the  mort- 
gage remains  and  still  is  the  property  of  the  plaintiff,  and  orders  the 
trust  company  to  assign  and  convey  its  interest  in  the  same  to  her,  is 
reversed.^     *     *     * 


SECTION  3.— DEFENSES  AND  CLAIMS  OF  OWNERSHIP 

AVAILABLE  AGAINST  HOLDER  IN  DUE 

COURSE 

(a)     FORGERY 

It  is  obvious  that  a  person  whose  name  has  been  forged  to  a 
negotiable  instrument  should  not  be  held  liable  thereon  to  any 
one.  The  necessities  of  business  do  not  require  that  such  a  risk 
of  loss  should  be  borne  by  the  party  whose  name  was  forged.  It  is 
more  just  to  thro\v  the  loss  on  the  holder  in  due  course,  because 
he  will  always  have  a  remedy  against  the  party  from  whom  he 
acquired  the  instrument.  Eventually  either  the  liability  will  be 
thrown  back  upon  the  forger,  or  the  loss  w^ill  fall  upon  the  person 
who  dealt  with  the  forger.  Of  course,  where  it  is  not  a  case  of 
technical  forgery,  as.  for  example,  where  an  agent  signs  his  prin- 
cipal's name  in  the  absence  of  power  to  do  so,  there  is  more  reason 
for  throwing  the  loss  on  the  principal ;    but  the  reasons  have  not 

1  See  the  exhaustive  (liscii.ssion  of  this  and  related  questions  by  Professor 
Zechariah  Chafee,  Jr.,  in  his  article  on  Rights  in  Overdue  Paper,  31  Harvard 
Law  Review,  1104. 


Ch.   1)  RIGHTS    OF    HOLDER    APxAINST    MAKER   AND    ACrEPTOR  827 

been  deemed  strong  enough  to  impose  such  a  liability  upon  him. 
The  established  rules  of  agency  govern.  The  section  involved  is 
as  follows : 

Section  23.  Where  a  signature  is  forged  or  made  without  the 
authority  of  the  person  whose  signature  it  purports  to  be,  it  is 
wholly  inoperative,  and  no  right  to  retain  the  instrument,  or  to 
give  a  discharge  therefor,  or  to  enforce  payment  thereof  against 
any  party  thereto,  can  be  acquired  through  or  under  such  signa- 
ture, unless  the  party,  against  whom  it  is  sought  to  enforce  such 
right,  is  precluded  from  setting  up  the  forgery  or  want  of  au- 
thority. 

MAURMAIR   V.   NATIONAL   BANK   OF   COMMERCE    OF   TULSA. 
(Supreme  Court  of  Oklahoma,  1916.     158  Pac.  .349.) 

RtttenhousE.  C.  This  action  was  brought  by  Louis  Maurniair  to 
recover  $1,170.30  of  and  from  the  National  Bank  of  Commerce  of 
Tulsa,  Okl,  wherein  it  was  alleged  that  plaintiff  deposited  such  sum 
in  the  bank,  and  the  bank  refused  to  pay  the  same  upon  demand.  An 
answer  was  filed,  alleging  payment,  except  the  sum  of  $130.30,  which 
it  was  alleged  is  on  deposit  subject  to  plaintiff's  check.  A  general  de- 
nial was  filed  to  the  answer. 

The  question  presented  at  the  trial  related  to  the  payment  of  three 
checks,  of  $90,  $440,  and  $510,  which  were  paid  by  the  bank,  and 
which  plaintiff  claimed  were  signed,  either:  (1)  By  affixing  his  sig- 
nature thereto  without  his  knowledge  or  consent,  by  means  of  de- 
ception practiced  upon  him  by  a  third  party  placing  a  carbon  paper 
under  some  papers  to  which  he  knowingly  affixed  his  signature  and 
the  checks  placed  thereunder  with  such  carbon  paper,  thereby  obtain- 
ing carbon  copies  of  his  original  signature  written  by  himself;  or  (2) 
that  the  signatures  to  such  checks  were  not  his  original  signatures, 
but  were  affixed  to  said  checks  by  some  third  party  without  the  knowl- 
edge of  plaintiff,  by  obtaining  an  original  copy  of  the  signature  of  plain- 
tiff and  undertaking  to  duplicate  the  same,  making  an  original  so  sim- 
ilar to  that  of  plaintift''s  as  to  pass  undetected;  or  (3)  by  means  of 
tracing  the  same  on  carbon  copies. 

Instruction  No.  6  told  the  jury  that  if,  from  a  preponderance  of  the 
evidence,  they  found  that  the  two  checks,  Exhibits  11  and  12,  were 
signed  by  plaintiff  either  by  directly  affixing  his  signature,  or  affixing 
his  signature  thereto  without  his  knowledge  or  consent,  but  by  nieans 
of  deception  practiced  upon  him  by  a  third  party,  by  placing  carbon 
papers  between  some  paper  on  which  he  knowingly  affixed  his  original 
signature  and  the  checks  thereunder,  and  thereby  obtained  carbon  copies 
of  his  original  signature  written  by  himself,  in  either  event  the  law 
considers  such  signature  as  his  original  signature  binding  upon  him. 
and,  if  the  bank  paid  such  checks,  believing  the  signature  to  such 
checks  to  be  genuine,  the  plaintiff  would  not  be  entitled  to  recover. 

The  Negotiable  Instruments  Law  of  this  state  *  *  *  defines  the 
effect  of  forgery  of  a  negotiable  instrument  as  follows:  [Section  23 
quoted.]  The  instruction  allowed  the  bank  to  recover  if  the  jury 
found  the  checks  were  obtained  through  deception  practiced  upon 
plaintiff  by  third  parties  by  placing  carbon  papers  between  some  papers 
on  which  he  knowingly  affixed  his  signature  and  the  checks  thereunder 


828  NEGOTIABLE   INSTRUMENTS  (Part  3 

without  his  knowledge  or  consent.  In  this  there  was  error.  The  pro- 
curement of  the  signature,  as  contended  by  plaintiff,  was  without  his 
knowledge  or  consent.  The  instruments  would  therefore  be  wholly 
inoperative,  and  no  one  would  have  a  right  to  enforce  payment^  thereof 
unless  plaintiff  be  precluded  from  setting  up  the  forgery  by  his  negli- 
gence ;  and  under  the  pleadings  and  instructions  in  this  case  no  issue 
was  made  that  the  plaintiff  was  so  precluded.  The  test  as  to  whether 
an  artifice  or  trick  of  this  character  constitutes  forgery  is  v^hether  the 
signature  is  procured  in  such  a  manner  as  to  be  the  voluntary  act  of  the 
signer.  If  it  is  procured  in  such  a  manner  that  it  is  without  the  as- 
sent of  the  signer,  and  not  a  voluntary  act  on  his  part,  then  no  liability 
attaches. 

The  error  in  this  instruction,  as  we  see  it,  is  that  the  jury  was  told 
that,  if  the  signatures  were  procured  by  deception,  no  recovery  could  be 
had.  The  law  is  that,  if  the  signatures  were  procured  by  deception 
without  negligence  on  the  part  of  the  signer,  then  a  recovery  could  be 
had.  The  question  of  whether  or  not  plaintiff  was  precluded  from 
setting  up  the  forgery  on  account  of  his  own  negligence  was  not  sub- 
mitted to  the  jury  and  in  order  to  have  properly  instructed  the  jury  on 
the  question  of  the  deception  in  procuring  the  signature  it  would  have 
been  necessary  to  have  told  them  that  plaintiff  could  have  recovered 
under  such  conditions  unless  he  was  precluded  from  setting  up  the 
forgery  as  provided  in  section  23,  supra. 

The  judgment  should  be  reversed,  and  the  cause  remanded  for  a  new 
trial.  

ROBB  V.  PENNSYLVANIA    CO.   FOR  INSURANCE  ON  LIVES   & 
GRANTING  ANNUITIES. 

(Supreme  Court   of  Pennsylvania,    1S9S.     186  Pa.   4.56,   40  Atl.   909, 
41  L.  R.  A.  695,  65  Am.  St.  Rep.  868.) 

Action  by  Thomas  Robb  against  the  Pennsylvania  Company  for  In- 
surance on  Lives  &  Granting  Annuities.  Judgment  for  plaintiff  was 
affirmed  by  the  Superior  Court,  and  defendant  again  appeals. 

The  opinion  of  the  Superior  Court  is  as  follows  (RicE,  P.  J.) : 

"This  was  an  action  to  recover  the  amount  of  a  bank  deposit.  The 
defense  was  that  the  money  had  been  paid  out  on  checks  purporting 
to  be  drawn  by  the  plaintiff.  The  jury  have  determined  by  their  ver- 
dict that  the  signatures  were  forged,  and  no  question  is  raised  as  to  the 
correctness  of  this  finding.  But  there  was  evidence  that  the  signatures 
were  made  by  a  third  person,  by  the  unauthorized  and  criminal  use  of 
a  rubber  stamp  which  the  plaintiff  owned  and  kept  in  his  safe.  Upon 
this  evidence  a  novel  and  interesting  question  is  raised.  The  defend- 
ant's first  proposition  is  that  if  a  depositor,  without  the  knowledge  of 
his  bank,  has  a  rubber  stamp  made,  which  is  a  substantial  fac  simile 
of  his  bank  signature,  he  cannot  hold  the  bank  responsible  for  a  loss 
which  occurs  by  reason  of  the  imauthorized  signing  by  a  third  person 
of  the  depositor's  signature  to  a  check  by  means  of  this  stamp.  It 
will  be  observed  that  this  proposition  assumes  that  the  depositor  is  re- 
sponsible for  the  loss,  although  there  is  no  negligence  on  his  part  in 
the  manner  of  keeping  the  stamp.    *    *    * 

"A  bank  is  bound  to  know  the  signature  of  its  depositor;  and,  if  it 
pays  ou^  the  money  on  a  forged  check,  it  cannot  charge  the  depositor 
with  the  amount,  but,  as  against  him,  must  bear  the  loss.  It  may  be 
conceded  that  the  relation  of  the  depositor  to  the  bank  implies  a  duty 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  829 

on  his  part  to  subject  it  to  no  extraordinary  risks  with  regard  to  pay- 
ment of  his  checks,  which  he  may  avoid  by  the  exercise  of  ordinary 
care  and  prudence.  But  we  cannot  assent  to  the  proposition  that  it 
is  negHgence  per  se  for  him  to  have  in  his  possession  a  harmless  and 
useful  thing,  and  one  lawful  for  him  to  have,  but  which,  in  the  hands 
of  a  thief  breaking  into  his  house  or  his  safe,  may  be  used  to  forge 
his  signature.  If  he  commits  the  use  of  it  to  an  agent,  selected  by  him- 
self, or  leave  it  in  such  a  place  as  to  invite  the  use  of  it  for  illegitimate 
purposes,  there  would  be  plausibility  in  the  contention  that  he  should 
be  deemed  to  contemplate  such  use  as  one  of  the  natural  and  probable 
consequences  of  his  act.  But,  where  he  has  used  due  care  in  securing 
it  against  unlawful  use  by  others,  it  cannot  be  said  that  his  mere  pos- 
session of  the  thing  was  the  proximate  cause  of  the  mispayment  of  the 
money  to  one  who  unlawfully  possessed  himself  of  it,  and  used  it  to 
commit  a  forgery. 

"The  defendant's  second  proposition  is  that,  even  if  the  court  did 
not  err  in  leaving  the  question  of  negligence  to  the  jury,  the  instruc- 
tions given  by  the  court  were  insufficient  and  erroneous,  and  laid  down 
a  wrong  standard  of  negligence.  In  order  to  discuss  this  proposition 
properly,  it  will  be  necessary  to  state  some  of  the  undisputed  facts : 
In  1893  the  plaintiff,  as  president  of  a  corporation,  had  occasion  to 
send  put  a  large  number  of  invitations  to  a  banquet,  and,  in  order  to 
save  himself  the  labor  of  writing  his  name  so  often,  had  a  rubber 
stamp  made  which  would  make  a  fac  simile  of  his  signature.  For  a 
time  the  stamp  was  kept  in  the  company's  office,  but  after  he  resigned 
the  presidency  it  was  sent  to  his  private  office,  which  he  rented  from  a 
gentleman  who  had  the  adjoining  office.  With  this  office,  he  was  en- 
titled to  the  services  of  an  office  boy  of  about  sixteen  years  of  age.  For 
about  nine  months  he  employed  this  boy  for  errands  and  messages, 
including  the  sending  of  him  to  bank  to  draw  money  on  checks.  He 
never  had  occasion  to  doubt  the  boy's  honesty.  When  the  rubber  stamp 
was  returned  to  the  plaintift  from  the  corporation  office,  he  placed  it 
in  a  compartment  inside  of  a  fireproof  safe.  He  locked  this  compart- 
ment, and  put  the  key  in  a  drawer  in  the  safe,  behind  some  papers,  and 
covered  it  up.  He  then  locked  the  drawer,  and  put  the  key  in  another 
unlocked  drawer  in  the  safe.  He  then  locked  the  safe,  and  put  the 
key  in  a  little  box.  which  he  put  in  a  wooden  drawer  or  box,  and  this 
was  kept  on  top  of  another  safe.  The  plaintiff's  surmise  was  that  the 
office  boy  had  watched  his  moves,  found  where  he  kept  the  safe  key, 
opened  the  safe,  and  rummaged  around  until  he  found  the  stamp,  and 
with  it  signed  the  two  checks  Assuming  this  theory  to  be  correct,  it 
turned  out  that,  notwithstanding  the  plaintiff's  precautions  to  guard 
the  stamp,  it  was  not  kept  where  it  would  be  absolutely  inaccessible  to 
others.  It  follows  that  an  unqualified  affirmance  of  the  defendant's 
second  point  would  have  been  equivalent  to  binding  instructions  to 
find  for  the  defendant. 

"But,  for  the  reasons  given  in  our  discussion  of  the  first  proposi- 
tion, the  defendant  was  not  entitled  to  such  instructions.  The  practical 
effect  would  be  to  hold  the  owner  of  a  rubber  stamp  up  to  the  same 
standard  of  responsibility  as  the  owner  of  a  vicious  animal;  in  other 
words,  to  hold  that  he  is  bound  to  keep  the  stamp,  at  all  hazards,  where 
a  trespasser  or  a  thief  cannot  possibly  get  possession  of  it  and  use  it. 
This  is  not  the  standard  of  his  responsibility  to  the  bank  in  which  he 
is  a. depositor,  or  to  the  public.     He  is  not  an  insurer  against  its  un- 


830  NEGOTIABLE    INSTRUMENTS  (Part  3 

lawful  use,  but  it  may  be  conceded  that  he  is  responsible  for  the  con- 
sequences of  his  neghgence  in  keeping  it.  He  is  bound  to  exercise 
the  care  of  an  ordinarily  prudent  man.  To  adopt  the  language  of  the 
learned  trial  judge,  was  it  put  away  in  such  a  manner  as  was.  in  view 
of  all  the  probabilities  of  the  case,  sufficient  to  protect  the  stamp  from 
being  improperly  used?  This  was  a  question  of  fact  for  the  jury, 
and  was  fairly  submitted.  There  are  cases  in  which  the  court  can  de- 
termine that  omissions  constitute  negligence,  but  they  are  exceptional, 
— those  in  which  the  precise  measure  of  duty  is  determinate ;  the  same 
under  all  circumstances.  What  constitutes  negligence  when  the  stand- 
ard shifts,  not  according  to  any  certain  rule,  depends  upon  the  facts 
and  circumstances  developed  at  the  trial,  and  cannot  be  determined  by 
the  court,  but  must  be  submitted  to  the  jury.  *  "^^  *  The  defendant 
has  no  just  cause  to  complain  of  the  submission,  or  of  the  manner  of 
the  submission,  of  that  question  to  the  jury.  Judgment  affirmed." 
*     *     * 

[Judgment  also  affirmed  in  Supreme  Court.] 


(I))     FRAUD 

In  these  cases  the  obligor  either  knowingly  has  signed  his  name 
but  has  not  knowingly  signed  a  negotiable  instrument,  or  has  not 
knowingly  signed  his  name,  or  it  may  be  that  he  has  knowingly 
signed  his  name  but  has  done  so  under  circumstances  where  it 
was  impossible  for  him  to  do  otherwise.  These  situations  in  legal 
efifect  are  forgeries  and  section  23  above  quoted  may  be.  regarded 
as  the  statutory  basis  for  the  defense. 


GREEN   V.   WILKIE. 

(Supreme  Court  of  Iowa.  ISm.     98  Iowa.  74,  66  X.  W.  1046.  .36  L.  R.  A.  4.34, 

60  Am.  St.  Rep.  184.) 

Granger,  J.  This  action  is  on  a  promissory  note  for  $1,000,  and 
to  foreclose  a  mortgage  given  to  secure  the  same.  The  note  and 
mortgage  were  given  to  one  Lena  Fuerth,  April  1,  1893.  The  note 
was  assigned  by  Lena  Fuerth  to  plaintiff,  who  resides  in  Massachu- 
setts, about  May  5,  1893,  for  a  consideration  of  $950.  The  defendant 
does  not  deny  that  he  signed  the  note  and  mortgage,  but  he  bases  his 
defense  thereto  on  substantially  the  following  facts:  That  Joe  Fuerth 
is  the  husband  of  Lena  Fuerth,  and  a  real-estate  agent  at  jMarshall- 
town,  Iowa;  that  he  (defendant)  was  about  to  sell  a  piece  of  land  giv- 
en him  by  his  father,  and  purchase  another  piece ;  that  he  went  to  the 
office  of  joe  Fuerth,.  wdio  was  acting  for  the  man  to  whom  he  was  sell- 
ing, and  the  sale  and  the  purchase  were  completed ;  that,  as  to  the  land 
given  him  by  his  father,  his  father  had  a  lease  or  contract  by  which  de- 
fendant was  to  pay  a  certain  rent  therefor  while  he  remained  single ; 
that,  to  enable  defendant  to  sell  the  land,  the  lease  or  contract  was  re- 
leased; that  afterwards  Fuerth  suggested  that  defendant  give  his 
father  a  lease  of  the  land  purchased,  and  a  note  in  lieu  of  the  one  re- 
leased, which  defendant  agreed  to  do;  that  defendant  is  illiterate,  and 
cannot  read  w-riting  or  printing,  and  can  only  write  his  name ;  that 
Fuerth,  instead  of  making  the  note  and  lease,  wrote  the  note  and  mort- 


Ch.  4)  RIGHTS    OF    HOLDER    AGAINST   MAKKR    AND    ACCEPTOR  831 

gage  ill  suit,  which  defendant  signed,  thinking  them  to  be  the  note  and 
lease  agreed  upon ;  that  he  never  received  anything  from  Lena  Fuerth 
for  said  note,  and  never  agreed  to  make  any  such  note.  The  purchase 
of  the  note  in  suit  was  made  by  Wilham  Andrews  as  agent  for  the 
plaintiff,  and  it  appears  that  the  plaintiff  knew  nothing  of  the  note  till 
after  it  was  purchased.  The  facts  as  to  the  fraudulent  execution  of 
the  note  are  not  in  dispute.  It  may  be  stated  as  a  fact  that,  when  de- 
fendant signed  the  note  and  mortgage,  he  supposed  he  was  signing  a 
lease  to  his  father  and  a  note  for  $100. 

There  is  something  of  a  hopeless  conflict  of  authorities  touching 
the  liability  of  persons  whose  names  appear  to  negotiable  paper, 
through  fraudulent  means,  and  the  paper  is  in  the  hands  of  innocent 
holders.  It  would  be  useless  to  attempt  a  reconciliation  of  them. 
There  are  numerous  cases  in  which  parties,  intending  to  sign  a  con- 
tract, have,  through  fraudulent  misrepresentation,  placed  their  sig- 
natures to  negotiable  instruments,  which  have  fallen  into  the  hands  of 
innocent  purchasers.  There  is  a  very  respectable  line  of  authorities 
holding  that,  in  the  absence  of  negligence,  the  maker  of  such  an  ins.tru- 
ment  is  protected.  Whitney  v.  Snyder,  2  Lans.  (N.  Y.)  477 ;  Walker 
V.  Ebert,  29  Wis.  196,  9  Am.  Rep.  548;  Anderson  v.  Walter,  34  Mich. 
113:  Bank  v.  Lierman,  5  Neb.  247;  Puffer  v.  Smith,  57  111.  527. 
*  *  *  See,  as  bearing  somewhat  on  the  question.  Bank  v.  Zeims 
(Iowa)  61  N.  W.  483.  This  case  is  thought  to  be  distinguishable  from 
those  because  of  the  fact  that  in  this  there  was  an  intent  to  give  a 
promissory  note.  In  this  respect,  also,  there  is  something  of  a  conflict 
of  authority,  but  it  is  not  so  marked.  The  rule  is  many  times  stated 
that  there  is  a  distinction  between  cases  in  which  a  party,  through 
fraudulent  misrepresentations,  signs  an  instrument  which  he  intends 
to  be  a  negotiable  promissory  note,  and  where,  through  such  misrep- 
resentation, he  signs  what  he  does  not  intend  to  be  such  an  instrument ; 
and  much  is  claimed  in  this  case  because  defendant  intended  to  give 
a  note.    See  Whitnev  v.  Snvder,  supra. 

The  case  of  Douglass  v.'  flatting,  29  Iowa,  498.  4  Am.  Rep.  238, 
is  cited  by  appellee  as  explanatory  of  Chapman  v.  Rose,  56  N.  Y.  137, 
15  Am.  Rep.  401.  The  latter  case  announces  the  rule  that  before  one 
whose  name  is  fraudulently  obtained  to  a  note,  upon  misrepresentations 
that  the  instrument  is  something  else,  can  be  held,  it  must  appear  that 
it  was  not  the  result  of  negligence  on  the  part  of  the  signer.  It  will  be 
well  to  notice  in  this  connection  that  in  Douglass  v.  Matting  the  rule 
of  the  case  is  announced  on  the  theory  of  the  culpable  carelessness  of 
the  maker  of  the  instrument.  It  is  there  said :  "Now,  it  would  be 
manifestly  unjust  to  permit  the  maker,  while  admitting  the  genuine- 
ness of  his  signature,  to  defeat  the  note,  on  the  ground  that,  through 
his  own  culpable  carelessness  while  dealing  with  a  stranger,  he  signed 
the  note  without  reading  it,  or  attempting  to  ascertain  its  true  con- 
tents." *  *  *  In  Bank  v.  Steffes,  54  Iowa.  214,  6  N.  W.  267.  a 
note  was  given  for  a  greater  amount  than  agreed  upon,  through  a 
fraud  of  the  payee,  and  it  was  assigned  before  maturity.  The  issues 
did  not  involve  the  question  of  negligence  in  its  execution.  It  is  there 
said  that  it  Avas  incumbent  on  the  maker  to  show  freedom  from  neg- 
ligence. It  is  then  said  that  it  is  not  certain  that  he  could  be  allowed 
to  set  up  fraud  as  against  the  plaintiff  (an  innocent  holder)  even  by 
showing  that  he  was  free  from  negligence.  It  cites  Whitney  v.  Snyder, 
supra,  and  later  cites  Griffiths  v.  Kellogg,  39  Wis.  290,  20  Am.  Rep. 


832  NEGOTIABLE   INSTRUMENTS  (Part  3 

48,  in  which  a  note  intended  to  be  given  for  $47.50  was,  by  fraud,  made 
to  read  $76.25.  The  note  passed  into  the  hands  of  an  innocent  in- 
dorsee. It  is  said  in  the  opinion  that  the  note  "was  as  httle  hers  as  if 
the  transaction  between  her  and  the  hghtning  rod  man  had  not  taken 
place,  and  he  had  forged  the  note.  If  not  forgery,  it  was  akin  to 
forgery."  The  HabiHty  of  the  maker  was  made  to  turn,  when  the 
fraud  was  estabhshed,  on  the  fact  of  her  negUgence  in  placing  her 
name  to  the  paper.  The  case  copies  from  Chipman  v.  Tucker,  38  Wis. 
43,  20  Am.  Rep.  1,  as  follows:  "The  inquiry  in  such  cases  goes  back 
to  the  questions  of  negotiability,  or  of  the  transfer  of  the  supposed 
paper  to  a  purchaser  for  value,  before  maturity,  and  without  notice, 
challenges  the  origin  or  existence  of  the  paper  itself,  and  the  proposi- 
tion to  show  that  it  is  not  in  fact  or  in  law  what  it  purports  to  be, 
namely,  the  promissory  note  of  the  proposed  maker." 

The  facts  of  this  case  come  within  the  rule  of  the  Wisconsin  cases, 
and  do  not  contravene  any  rule  announced  in  our  own  state.  The  de- 
fendant was  an  illiterate  man,  who  could  not  read  nor  write,  except 
that  he  could  barely  write  his  own  name.  He  had  no  contractual  re- 
lations whatever  with  Fuerth  or  his  wife.  There  was  nothing  to  put 
him  on  his  guard  against  fraud  being  practiced  upon  him.  The  note 
and  mortgage  that  he  gave  he  had  never  contemplated  in  any  way,  and 
the  doing  of  such  a  thing  was  as  foreign  to  his  purpose  as  if  he  had 
merely  intended  to  lease  or  contract  to  his  father  without  any  note. 
It  seems  that  the  papers  were  prepared  in  the  absence  of  defendant. 
In  his  testimony  he  says,  speaking  of  Fuerth:  "I  met  him  on  the 
street  one  day,  and  he  said  to  me,  'The  lease  is  already  drawn  up,  and 
all  you  have  to  do  is  to  sign  it.'  I  went  into  the  ofifice  with  him,  and 
asked  him  to  read  it.  He  said  he  was  in  a  hurry,  and  wanted  to  go  to 
dinner,  and  had  some  other  business  to  attend  to  after  dinner.  I 
asked  him  if  it  was  just  a  straight  lease  to  my  father  for  so  much 
rent,  and  he  said :  'Yes,  it  is.  You  can  rely  on  my  honor  and  word 
for  it.'  I  then  asked  him  to  read  it,  and  he  said  it  was  no  need.  I 
signed  what  he  called  a  note  and  lease."  This  is  in  no  way  contradict- 
ed, and  we  are  warranted  in  accepting  it  as  truth.  It  is  not  denied  in 
argument. 

There  was  nothing  at  that  time  to  awaken  suspicion  as  to  Fuerth, 
and  the  case  is  peculiar  in  this:  that,  as  the  business  was  between 
defendant  and  his  father,  there  could  be  no  motive  for  Fuerth  to  make 
the  papers  in  any  way  except  as  agreed  upon.  In  most  of  the  cases 
where  negligence  is  considered,  the  party  relieved  has  had  an  adverse 
interest,  because  of  which  one  might  the  more  readily  anticipate  that 
advantage  would  be  taken.  This  was  a  case  remarkably  free  from  rea- 
son or  grounds  of  suspicion.  What  was  really  done  would  not  have 
been  anticipated  by  any  discreet  person.  In  fact,  the  situation  was 
such  as  to  disarm  one  of  suspicion,  because  of  Fuerth's  absolute  want 
of  interest  in  the  business  to  be  done.  We  think  the  case  is  free  from 
negligence  on  the  part  of  defendant.  This  being  so,  he  comes  within 
the  rule  by  which  a  party  may  be  protected.  It  is  to  be  remembered 
that  the  rule  we  apply  is  not  the  usual  one  in  which  innocent  holders 
of  negotiable  paper  are  protected  against  fraud.  *  *  *  jj-^  g^^h 
cases  there  is  a  note,  but  the  bona  fides  of  it  is  questioned.  In  this 
case  the  note  has  never  existed  in  the  sense  of  the  minds  of  the  par- 
ties meeting  to  give  it  validity,  and  there  is  no  negligence  to  render 
the  defendant  liable  on  other  grounds.     *     *     *    Under  these  author- 


Ch.  4)         RIGHTS  OF   HOLDER  AGAINST  MAKER  AND   ACCEPTOR  833 

ities — and  they  have  strong  support — we  think  the  defendant  is  not 
liable  on  the  note,  because  he  was  never  a  party  to  such  a  contract, 
and  he  has  been  guilty  of  no  negligence  by  which  the  plaintiff  has  been 
misled.  He  has  violated  no  legal  obligation  because  of  which  another 
is  injured. 

The  plaintiff's  petition  should  be  dismissed.    Reversed. 


GREEN  et  al.  v.  GUNSTEN  et  al. 

(Supreme  Court  of  Wisconsin,  191,3.     154  Wis.  69,   142  N.   W    261 
46  L.  R.  A.   [N.   S.]  212.) 

ViNjE,  J.  (after  stating  the  facts).  It  is  admitted  that  defend- 
ant Gunsten  was  an  accommodation  maker  of  the  note  if  it  was 
executed  under  such  circumstances  as  to  constitute  him  a  maker  in 
any  sense.  Plaintiffs  claim  they  were  holders  in  diie  course,  which 
claim  the  defendant  Gunsten  disputes.  The  trial  court,  in  the  dispo- 
sition, of  the  case,  evidently  treated  plaintiffs  as  such  holders,  and  we 
shall  assume  that  they  were.  That  raises  the  question  whether  or  not 
total  or  complete  drunkenness  on  the  part  of  the  accommodation  maker 
of  a  note  at  the  time  of  the  execution  and  delivery  thereof  is  a  defense 
as  against  a  holder  in  due  course. 

On  the  grounds  of  public  policy  and  the  necessities  of  commerce, 
some  courts  have  held  that  complete  drunkenness  on  the  part  of  the 
maker  of  a  note  at  the  time  of  its  execution  and  delivery  is  no  de- 
fense against  a  holder  in  due  course.  *  *  *  The  basis  for  the  rule 
is  thus  stated  by  Joyce,  Defenses  to  Com.  Paper,  §  69 :  "The  reasons 
underlying  this  rule  are  that,  when  a  man  has  voluntarily  put  himself 
in  such  a  condition  and  a  loss  must  fall  on  one  of  two  innocent  per- 
sons, it  should  fall,  on  him  who  occasioned  it.  It  is  also  founded  on 
principles  of  public  policy  and  the  necessities  of  commerce.  The 
circulation  and  currency  of  negotiable  paper  should  not  be  unneces- 
sarily impeded,  and,  if  drunkenness  of  the  maker  were  a  defense  to 
a  note  in  the  hands  of  an  indorsee,  it  would  clog  and  embarrass  the 
circulation  of  commercial  paper,  and  no  man  could  safely  take  it  with- 
out ascertaining  the  condition  of  the  maker  or  drawer  when  it  was 
given,  though  there  be  nothing  unusual  or  suspicious  about  the  ap- 
pearance of  the  note."  That  this  rule  is  founded,  at  least  in  part,  upon 
substantial  grounds  of  public  policy  cannot  be  denied.  Though  it 
should  be  observed  that  drunkenness  alone,  without  the  fraud  or  fault 
of  another,  does  not  lead  to  the  signing  of  notes.  In  every  case,  as  in 
the  case  at  bar,  the  drunken  maker  has  been  taken  advantage  of  by  a 
designing  payee  or  third  party,  and  it  is  not  strictly  correct  to  say 
that  the  fault  is  that  of  the  drunken  maker  alone.  Were  that  so, 
there  would  be  more  reason  for  applying  the  rule  that,  where  loss  must 
fall^  upon  one  of  two  innocent  persons,  it  should  fall  on  him  who  oc- 
casioned it.  Nor  can  a  holder  in  due  course  always  rest  upon  the 
assumption  that  the  maker  of  a  note  is  competent  to  execute  it.  In- 
sanity of  the  maker  is  a  good  defense  against  a  bona  fide  holder,  for 
the  latter  takes  it  charged  with  constructive  notice  of  the  legal  dis- 
ability of  the  maker.    *    *    * 

It  is  no  greater  hardship  to  charge  a  holder  in  due  course  with  con- 
structive notice  of  the  incapacity  of  the  maker  resulting  from  com- 
plete drunkenness  than  from  insanity.  It  is  deemed  that  a  doctrine 
B.&  B.Bus.Law— 53 


834  NEGOTIABLE   INSTRUMENTS  (Part  3 

more  in  consonance  with  the  spirit  of  our  decisions  is  stated  by  Daniel 
as  follows:  ''If  the  drunkenness  were  so  complete  as  to  suspend  all 
rational  thought,  the  better  opinion  is  that  any  instrument  signed  by 
the  party  would  be  utterly  void,  even  in  the  hands  of  a  bona  fide 
holder  wihout  notice,  for,  although  it  may  have  been  the  party's  own 
fault  that  such  an  aberration  of  mind  was  produced,  when  produced, 
it  suspend(;d  for  the  time  being  his  capacity  to  consent,  which  is  the 
first  essential  of  a  contract."  1  Daniel,  Neg.  Inst.  (5th  Ed.)  §  214; 
*  *  *  But  the  drunkenness  must  be  so  complete  as  to  deprive  the 
maker  of  the  use  of  his  faculties.  *  *  *  Intoxication  merely  to  the 
extent  that  he  cannot  give  the  attention  to  it  that  a  reasonably  prudent 
man  would  be  able  to  give  is  not  sufficient. 

The  reason  for  the  rule  is  that  there  can  be  no  valid  contract  where 
there  is  no  mind  capable  of  contracting.  That  drunkenness  may  be 
so  complete  as  to  render  a  person  utterly  incapable  of  comprehending 
the  nature  of  his  acts  or  that  he  is  acting  at  all  is  a  fact  as  sad  as  it  is 
true.    *    *    * 

If  com])lete  drunkenness,  by  which  is  meant  drunkenness  to  such  an 
extent  as  to  wholly  destroy  for  the  time  being  the  rational  faculties 
of  the  mind,  renders  a  note  absolutely  void  as  between  maker  and 
payee,  then,  under  the  provisions  of  our  Negotiable  Instrument  Law 
it  is  void  in  the  hands  of  a  holder  in  due  course. 

Section  1676 — 25  provides :  "The  title  of  a  person  who  negotiates 
an  instrument  is  defective  within  the  meaning  of  this  act  when  he 
obtains  the  instrument,  or  any  signature  thereto,  by  fraud,  duress, 
or  force  or  fear,  or  other  unlawful  means  or  for  an  illegal  considera- 
tion, or  when  he  negotiates  it  in  breach  of  faith,  or  under  such  cir- 
cumstances as  amount  to  a  fraud  and  the  title  of  such  person  is  abso- 
lutely void  when  such  instrument  or  signature  was  so  procured  from  a 
person  who  did  not  know  the  nature  of  the  instrument  and  could  not 
have  obtained  such  knowledge  by  the  use  of  ordinary  care."  ^     *     *     * 

By  the  provisions  of  this  law  it  will  be  seen  that  a  holder  in  due 
course  takes  no  title  where  the  note  was  absolutely  void  in  its  incep- 
tion, as  where  there  was  no  maker  capable  of  executing  the  instru- 
ment. This  result  follows  for  the  obvious  reason  that  no  life,  or  va- 
lidity, can  be  given  by  transfer  to  that  which  is  absolutely  void.  It  is 
the  same  as  if  it  had  no  existence  at  all.  And  it  is  but  the  expression  of 
the  rule  embodied  in  the  decisions  of  this  court.    *    *    * 

Plaintiffs  argue  that  the  rule  of  ordinary  care,  as  applied  in  negli- 
gence cases,  obtains  under  the  provisions  of  section  57  of  the  Ne- 
gotiable Instruments  Law.*  It  is  not  necessary  to  decide  the  ques- 
tion in  this  case.  The  jury  found  that  at  the  time  Gunsten  signed  the 
note  he  was  so  completely  intoxicated  that  he  was  temporarily  de- 
prived of  his  reason  and  understanding.  Manifestly,  while  in  such 
condition,  the  rule  of  ordinary  care  does  not  apply.  He  was  incapable 
of  exercising  any  care  whatever.  Nor  can  it  be  held  that  he  should  have 
exercised  care  not  to  get  drunk,  for,  as  before  observed,  the  signing 
of  notes  is  not  the  usual  or  probable  result  of  drunkenness.  It  is  other- 
wise as  to  a  personal  injury.  A  man  may  well  reasonably  anticipate 
that  if  he  gets  drunk  and  becomes  unable  to  care  for  himself  he  rnay, 
without  the  fault  of  another,  sustain  bodily  harm,  or  even  death  itself. 

2  The  portion  in  antique  type  is  section  55  of  tbe  uniform  act ;  the  rest 
is  a  Wisconsin  amendment. 


Ch.  4)         RIGHTS   OF   HOLDKR   AGAINST   MAKER   AND   ACCEPTOR  835 

But  a  drunken  man,  if  left  alone  and  not  taken  advantage  of  by  others, 
is  not,  as  a  mere  result  of  the  drunkenness,  likely  to  sign  notes  or  exe- 
cute any  other  contracts.  The  law  does  not  favor  drunkenness :  nor 
does  it  place  in  the  hands  of  a  drunkard  any  shield  against  his  con- 
scious or  rational  acts.  It  simply  says  that  when,  through  drunken- 
ness or  any  other  means,  a  man  is  temporarily  or  permanently  wholly 
incapacitated  from  exercising  his  rational  faculties,  then  he  shall  not 
be  liable  upon  what  purports  to  be  a  contract  entered  into  while  in 
such  state,  because  a  mind  bereft  of  reason  or  conscious  rational  action 
is  incapable  of  consenting  or  contracting.  In  speaking  of  the  early 
English  doctrine  holding  that  a  man  should  not  be  allowed  to  stultify 
himself  by  alleging  his  own  lunacy  or  imbecility,  Daniel  says:  "Such 
doctrine  sounds  more  like  the  gibberish  of  a  lunatic  than  like  the  decree 
of  a  humane  and  enlightened  lawyer.  *  *  *  " 
Judgment  affirmed. 

(c)     THEFT  OF  AN  INCOMPLETE  INSTRUMENT 
N.  I.  L.,  Section  15.     Where  an  incomplete  instrument  has  not 
been  delivered  it  will  not,  if  completed  and  negotiated,  without  au- 
thority, be  a  valid  contract  in  the  hands  of  any  holder,  as  against 
any  person  whose  signature  was  placed  thereon  before  delivery. 


LINICK   V.  A.   .J.   NUTTING   &   CO. 

{Supreme  Court  of  New  York,  Appellate  Division,  1910.     140  App.  Div.  2Qr,. 

125  N.   Y.  Supp.  93.) 

Action  by  Louis  Linick  against  A.  J.  Nutting  &  Co.  From  a  judg- 
ment dismissing  the  complaint,  plaintiff  appeals. 

Burr,  J.  On  July  20,  1909,  plaintiff  signed  his  name  to  a  blank 
check.  Thereafter  David.  Ryckoft"  and  Benjamin  Silberman  stole  the 
check,  filled  in  the  name  of  F.  A.  Mann  as  payee  and  the  sum  of 
$147.87  as  the  am.ount  thereof,  and  presented  it  to  the  State  Bank, 
where  plaintiff  kept  his  account,  and  procured  it  to  be  certified.  There- 
after they  indorsed  said  check  with  the  name  of  F.  A.  Mann  and  passed 
it  to  defendant  for  value,  who  collected  the  amount  thereof  from  the 
said  bank.  Plaintiff,  having  taken  up  said  check  from  the  bank,  now 
sues  defendant  as  for  money  had  and  received  for  the  amount  of  the 
check. 

The  question  submitted,  and  which  we  are  called  upon  to  decide,  is 
whether  defendant  obtained  any  title  to  the  check  which,  as  against 
the  plaintiff,  was  a  valid  obligation  for  $147.87.  As  a  general  rule, 
one  can  only  part  with  title  to  personal  property  by  his  voluntary  act 
or  by  conduct  sufficient  to  create  an  estoppel.  In  the  case  of  com- 
mercial paper  it  was  long  ago  held  that,  when  by  voluntary  act  a  party 
intrusts  another  with  such  paper  with  a  blank  thereon  designed  to  be 
filled  up  with  a  stipulated  amount,  such  party  is  liable  to  a  bona  fide 
holder  of  the  instrument,  although  the  amount  inserted  was  larger 
than  that  agreed  upon.  So,  if  the  place  of  payment  is  left  blank  when 
the  maker  delivers  it,  the  insertion  of  a  different  place  of  payment 
than  that  agreed  upon  will  not  avoid  such  paper  in  the  hands  of  an  in- 
nocent holder  for  value.  *  *  *  The  authorities  are  not  harmonious 
as  to  the  basis  of  this  liability.     Some  deem  that  is  rests  upon  an  im- 


836  NEGOTIABLE  INSTRUMENTS  (Part  3 

plied  authority  conferred  by  the  maker  upon  the  person  to  whom  it 
was  deUvered'to  fill,  in  the  blanks,  and  others  upon  estoppel  by  reason 
of  negligence.  Nat.  Exchange  Bank  v.  Lester,  194  N.  Y.  461-465,  87 
N.  E.  779,  21  L.  R.  A.  (N.  SO  402,  16  Ann.  Cas.  770.  Upon  neither  of 
these  grounds  can  the  plaintiff  be  charged  in  this  case.  Certainly  not 
upon  the  ground  of  implied  authority,  for  that  doctrine  grows  out  of 
the  relation  of  principal  and  agent,  and  there  is  no  such  relation  be- 
tween a  thief  and  his  victim.  There  is  a  vast  difference  in  the  rule  of 
liability  upon  negotiable  instruments  between  a  case  where  the  pos- 
session has  been  parted  with  by  the  affirmative  act  of  the  maker  in  an 
incomplete  state,  and  one  where  his  parting  with  such  possession  is 
the  result  of  a  crime.  The  rule  that  the  bona  fide  holder  of  an  in- 
complete instrument,  negotiable  but  for  some  lack  capable  of  being 
supplied,  has  an  implied  authority  to  supply  the  omission,  and  to  hold 
the  maker  thereon,  only  applies  where  the  latter  has  by  his  own  act, 
or  the  act  of  another,  authorized,  confided  in,  or  invested  with  appar- 
ent authority  by  him,  put  the  instrument  in  circulation  as  negotiable 
paper.    *     *    * 

None  of  the  circumstances  connected  with  the  theft  of  this  paper 
appear,  except  that  it  was  stolen,  and  that  the  persons  guilty  of  the 
crime  have  been  tried,  convicted,  and  sentenced  for  the  same.  Plain- 
tiff, therefore,  cannot  be  charged  with  negligence  giving  rise  to  an  es- 
toppel, unless  a  man  is  guilty  of  negligence  in  writing  his  name  upon  a 
piece  of  paper  which  by  some  possibility  may  afterwards  be  stolen 
from  him,  which  paper  afterwards  comes  into  the  hands  of  a  third  per- 
son who  is  an  entire  stranger  to  the  transaction,  with  words  written 
over  the  signature  which  are  sufficient  in  form  to  make  it  a  check  or 
note.  Actionable  negligence  involves,  first,  the  existence  of  a  duty; 
second,  the  omission  to  exercise  ordinary  and  reasonable  care  in  con- 
nection therewith;  and,  third,  injury  resulting  in  consequence  thereof. 
In  view  of  the  contractual  relation  existing  between  the  bank  and  its 
depositor,  some  duty  of  care  may  be  owing  to  it.  The  bank,  by  the 
terms  of  its  contract  with  him,  is  bound  to  pay  on  his  account  to  the 
holder  of  paper  bearing  his  genuine  signature  the  amount  called  for, 
if  such  amount  is  to  his  credit.  But  a  third  person  is  under  no  obliga- 
tion to  honor  his  paper.  He  can  take  it  or  not  as  he  pleases,  and  as  a 
rule  such  paper  is  accepted  in  reliance  upon  the  immediate  transferrer 
thereof.  Trust  Co.  of  America  v.  Conklin,  65  Misc.  Rep.  1,  119  N.  Y. 
Supp.  367.  What  duty,  therefore,  is  owing  to  him?  Again,  at  the 
risk  of  being  charged  with  lack  of  ordinary  care  and  prudence,  must 
one  guard  against  the  possibility  of  a  crime  being  committed?  It  has 
been  held  that  where  the  maker  of  a  completed  negotiable  instrumeni 
has  parted  with  its  possession,  but  it  is  in  such  form  that  it  is  possible 
to  make  alterations  in  it,  he  is  not  guilty  of  negligence  in  thus  deliver- 
ing it,  for  the  reason  that  he  is  not  bound  to  assume  that  the  person 
to  whom  he  delivers  it  will  be  likely  to  commit  a  crime  because  it  is 
apparently  easy  to  do  so.  Nat.  Exchange  Bank  v.  Lester,  supra.  The 
drawer  of  a  check  is  not  bound  so  to  prepare  it  that  nobody  else  can 
successfully  tamper  with  it.  *  *  *  Much  less  can  a  party  be  held 
liable  for  negligence  because  it  is  possible  that  he  may  be  deprived 
of  the  possession  of  an  incomplete  negotiable  instrument  by  a  crime. 
He  is  not  bound  to  anticipate  nor  guard  against  such  an  act. 

No  case  has  been  cited  holding  a  maker  liable  under  such  circum- 
stances.    We  have  found  two  well-considered  cases  to  the  contrary. 


Ch.  4)         RIGHTS  OF   HOLDER  AGAINST  MAKER  AND   ACCEPTOR  837 

Burson  v  Huntington,  21  Mich.  416,  4  Am.  Rep.  497;  Baxendale  v. 
Bennett,  L.  R.  3  Q.  B.  Div.  525.  *  *  *  The  rule  of  law  laid  down 
in  Baxendale  v.  Bennett  has  now  passed  into  the  statute.  [Section 
22  ]     *    *    * 

We  conclude,  therefore,  that  the  delivery  of  a  promissory  note  by 
the  maker  is  necessary  to  a  valid  inception  of  the  contract. _  The  pos- 
session of  such  a  note  by  the  payee  or  indorsee  is  prima  facie  evidence 
of  delivery;  but  if  it  appear  that  the  note  has  never  been  actually  de- 
livered, and  that  without  any  confidence,  or  negligence,  or  fault  of  the 
maker,  but  by  force  or  fraud,  it  was  put  in  circulation,  there  can  be 
no  recovery  upon  it,  even  when  in  the  hands  of  an  innocent  holder. 

Defendant  contends  that,  as  against  the  plaintiff,  the  bank  was  jus- 
tified in  paying  out  the  plaintiff's  money  on  the  check,  and  cites  in  sup- 
port of  his .  contention.  Trust  Co.  of  America  v.  Conklin,  supra.  If 
so,  it  was  not  because  the  check  was  a  valid  check  in  the  hands  of  a 
third  person,  but  because  of  the  peculiar  contract  relation  between  the 
bank  and  its  depositor.  We  are  not  called  upon  to  decide  this,  since 
it  seems  to  be  conceded  that,  if  the  check  was  not  a  valid  obligation 
in  the  hands  of  the  defendant,  this  action  will  lie  as  for  money  had  and 
received. 

The  judgment  appealed  from  must  be  reversed,  and  a  new  trial  or- 
dered ;  costs  to  abide  the  event.    *    *    * 


(d)     CONTRACTS   DECLu\RED   VOID   BY   STATUTE 

If  a  Statute  declares  a  particular  kind  of  contract  void  the  usual 
interpretation  of  the  statute  is  that  the  contract  is  void  even  in  the 
hands  of  a  holder  in  due  course.  Such  statutes  are  common  with 
respect  to  gambling  and  usurious  contracts.  The  Negotiable  In- 
struments Law  contains  no  provision  with  respect  to  contracts  il- 
legal by  reason  of  statutory  denunciation,  but  the  general  rule  is 
that  the  Negotiable  Instruments  Law  does  not  require  any  in- 
terpretation different  from  that  theretofore  adopted  with  respect 
to  such  statutes. 

SABINE  V.  PAINE. 

(Court  of  Appeals  of  New  York,  1918.     223  N.  Y.  401,  119  N.  E.  849,  . 
5   A.  L.  R.  1444.) 

Action  by  C.  Olivia  Sabine' against  Maggie  S.  Paine.  From  a  judg- 
ment for  defendant,  plaintiff  appeals. 

CoLiviN,  J.  The  action  is  upon  a  promissory  note  in  the  sum  of 
$2,100,  made  by  the  defendant  and  owned  by  the  plaintiff.  The  note 
was  payable,  four  months  after  its  date,  to  the  order  of  Eugene  F. 
Vacheron.  It  was  delivered  to  him  as  the  agent  of  the  defendant 
for  the  purpose  of  having  it  discounted  for  her.  He,  after  indorsing 
it,  transferred  it  to  the  plaintiff  for  the  sum  of  $1,850.  Under  the 
evidence  and  the  decision  of  the  Appellate  Division,  this  appeal  pre- 
sents the  single  question.  Is  a  usurious  promissory  note  enforceable 
by  a  holder  in  due  course?     *     *     * 

When  the  Negotiable  Instruments  Law  was  enacted,  it  was  an  es- 
tablished rule  of  law  in  this  state  and  many  other  jurisdictions  that  a 


838  NEGOTIABLE   INSTRUMENTS  (Part  3 

holder  of  a  note  void  by  virtue  o£  a  statutory  declaration  because  of 
usury,  who  became  such  before  the  maturity  of  the  note  for  value 
and  without  notice  of  the  usury,  could  not  enforce  the  note.  The  rule 
is  an  exception  to  the  general  principle  that  a  negotiable  instrument, 
in  the  hands  of  an  innocent  holder,  who  had  received  it  in  good  faith 
in  the  ordinary  course  of  business,  for  value,  and  without  notice  of  a 
defense,  is  not  invaUd  and  is  enforceable  by  the  holder.  The  general 
principle  has  been  stated :  "The  bona  fide  holder  for  value  who  has 
received  the  paper  in  the  usual  course  of  business  is  unaffected  by  the 
fact  that  it  originated  in  an  illegal  consideration,  without  any  distmc- 
tion  between  cases  of  illegality  founded  in  moral  crime  or  turpitude, 
which  are  termed  mala  in  se  and  those  founded  in  positive  statutory 
prohibition  which  are  termed  mala  prohibita.  The  lavv  extends  this 
peculiar  protection  to  negotiable  instruments,  because  it  would  seri- 
ously embarrass  mercantile  transactions  to  expose  the  trader  to  the 
consequences  of  having  the  bill  or  notq  passed  to  him  impeached  for 
some  covert  defect."     1  Daniel  on  Negotiable  Instruments  (6th  Ed.) 

§  197.  ,     .  1    • 

The  rule,  constituting  an  exception  to  it,  rests  upon  the  legislative 
intention  and  enactment.  An  instrument  which  a  statute,  expressly 
or  through  necessary  implication,  declares  void,  strictly  speaking,  is  a 
simulacrum  only.  It  is  without  legal  efficacy.  It  cannot  obligate  a 
party  or  support  a  right.  In  Claflin  v,  Boorum,  122  N.  Y.  385,  388, 
25  N.  E.  360,  361,  we  said:  "A  note  void  in  its  inception  for  usury 
continues  void  forever,  whatever  its  subsequent  history  may  be.  It 
is  as  void  in  the  hands  of  an  innocent  holder  for  value  as  it  was  in 
the  hands  of  those  who  made  the  usurious  contract.  No  vitality  can 
be  given  to  it  by  sale  or  exchange,  because  that  which  the  statute  has 
declared  void  cannot  be  made  valid  by  passing  through  the  channels  of 

trade."  .      *     *     nM 

The  rule  has  general  recognition  in  judicial  opinion.  ^  *  *  The 
fact  that  the  holder  when  he  took  the  paper  did  not  know^  that  it  had 
had  no  inception — that  no  prior  party  could  sue  upon  it,  and  that 
he  was  loaning  money  upon  it — does  not  affeci  the  rule.  He  is  bound 
to  know  the  character  of  the  paper  he  is  dealing  in.  *  *  *  The 
statute  is  peremptory  and  unequivocal  in  enacting  that  a  usurious  ob- 
ligation is  absolutely  void. 

The  Legislature  did  not  by  enacting  *  *  *  the  Negotiable  In- 
struments Law  intend  to  abrogate  the  rule  we  have  stated.  The  stat- 
ute declaring  the  usurious  instrument  void  is  not  repealed  expressly 
or  through  implication.  *  *  *  Our  conclusion  is  in  harmony  with 
judicial  decisions  of  other  states.     *     *     * 

The  jucigment  should  be  affirmed,  with  costs.     *     *     * 


(e)     INCAPACITY 


MURRAY  V.  THOMPSON  et  al. 

(Supreme  Court  of  Tennessee,  1916.    136  Tenn.  11«.  1«S  S.  W.  ."78, 
L.   R.  A.  1917B,  1172.) 

Williams,  J.  This  is  a  suit  by  complainant,  a  minor,  to  disaffirm 
a  contract  of  indorsement  of  a  note  of  which  he  was  payee,  and  to  re- 
cover the  note  from  Thompson,  indorsee. 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  839 

Complainant  while  in  the  employ  of  a  brick  company  received  per- 
sonal injuries,  and  the  company  executed  to  him  a  note  of  $1,750  in 
satisfaction  of  his  claim  to  damages.  The  note  was  made  payable 
June  1,  1915,  which  was  the  date  on  which  complainant  would  arrive 
of  age.  On  October  16,  1914,  W.  A.  Murray,  the  father  of  com- 
plainant, with  the  knowledge  and  authority  of  the  latter,  sold  the  note 
to  Thompson,  indorsing  the  name  of  the  son  without  apprising  Thomp- 
son of  the  fact  that  he  himself  was  not  the  payee.  The  proceeds  of 
the  note  were  deposited  to  complainant's  account  in  bank,  and  later 
were  invested  in  a  saloon  business  in  the  name  of  the  father  and  son, 
and  in  a  short  time  lost.  There  was  no  actual  fraud  on  the  part  of 
complainant  in  the  transaction  with  Thompson. 

The  chancellor  decreed  that  complainant  was  entitled  to  disaffirm 
and  recover ;  but  the  Court  of  Civil  Appeals  reversed  the  ruling.  The 
last-named  court  was  of  opinion  that  complainant  would  have  been 
entitled  to  the  relief  awarded  by  the  chancellor  under  the  rules  of  law 
in  force  before  the  passage  of  the  Negotiable  Instruments  Law ;  but 
that  said  act,  by  its  section  22,  so  changed  the  law  as  to  deny  com- 
plainant the  remedy  sought.  The  section  thus  relied  on  is  as  follows : 
"The  indorsement  or  assignment  of  the  instrument  by  a  corporation, 
or  by  an  infant,  passes  the  property  therein,  notwithstanding  that  from 
want  of  capacity  the  corporation  or  infant  may  incur  no  liability 
thereon." 

It  was  to  make  certain  and  uniform  the  law  on  this  point  that  sec- 
tion 22  was  embodied  in  the  Negotiable  Instruments  Act.  In  stipu- 
lating that  the  indorsement  of  the  instrument  by  an  infant  "passes 
property  therein,"  it  was  meant  to  provide  that  the  contract  of  in- 
dorsement is  not  void,  and  that  his  indorsee  has  the  right  to  enforce 
payment  from  all  parties  prior  to  the  infant  indorser.  The  incapacity 
of  the  minor  cannot  be  availed  of  by  prior  parties. 

It  was  not  intended  to  provide  that  the  indorsee  should  become  the 
owner  of  the  instrument  by  title  indefeasible  as  against  the  infant, 
or  to  make  the  act  of  indorsement  an  irrevocable  one. 

The  act  does  not  concern  the  right  of  such  an  indorser  to  disaffirm 
under  the  rules  of  the  law  of  infancy.  The  words  "passes  the  prop- 
erty therein,"  if  given  a  meaning  that  would  deny  that  right  in  respect 
of  a  contract  of  indorsement,  would  deprive  the  infant  of  the  right 
to  reinvest  in  himself  the  title  to  the  instrument  against  a  holder  who 
had  knowledge  of  the  indorser's  infancy.  The  quoted  words  are  not 
qualified  so  as  to  save  his  rights  in  such  assumed  case.  It  must  be 
admitted  that  the  Legislature  did  not  intend  any  such  radical  and 
grossly  inequitable  departure  from  a  settled  and  salutary  rule  of  law. 

The  common-law  rule  is  that  the  purchaser  and  indorsee  of  such 
a  note  is  not  a  bona  fide  holder  as  against  an  infant  indorser,  and 
that  the  latter  may  disaffirm  and  recover  the  note  from  the  posses- 
sion of  the  former,  who  takes  with  constructive  notice  of  the  incapac- 
ity.    *     *     * 

The  chancellor  made  a  proper  disposition  of  the  case  in  his  decree. 
The  decree  of  the  Court  of  Civil  Appeals  is  therefore  reversed,  and 
that  of  the  chancellor  affirmed. 


840  NEGOTIABLE   INSTRUMENTS  (Part  3 

(f)    NO   TITLE   TO   THE   INSTRUMENT 

If  the  party  suing  has  no  title  to  the  instrument  upon  which 
action  is  brought,  the  party  sued  may  successfully  defend.  In  such 
case  the  party  in  possession  of  the  instrument  is  not  even  a  holder. 
Clearly  the  party  in  possession  who  in  all  other  respects  is  a 
holder  in  due  course  cannot  recover  if  he  has  no  title  to  the  in- 
strument.^ 


SECTION  4.— RIGHT   OF  THE  DRAWEE   TO   RECOVER 

MONEY  PAID  TO  THE  HOLDER  UNDER 

MISTAKE 

The  preceding  sections  dealt  with  the  special  rights  of  the  hold- 
er in  due  course  against  parties  primarily  liable  on  the  instrument, 
free  from  personal  defenses  and  equities  of  ownership.  The  rights 
of  the  holder  in  due  course  against  parties  conditionally  liable  on 
the  instrument — the  drawer  of  a  bill  of  exchange  and  indorsers — 
is  the  subject  of  the  next  chapter.  The  following  sections,  just  as 
the  preceding  sections,  are  devoted  to  the  consideration  of  a  series 
of  special  problems  growing  out  of  the  relation  of  the  holder  in 
due  course,  and  the  acceptor,  and  the  drawee  after  payment  of  the 
bill.  Stated  broadly,  the  question  is :  Upon  whom  must  the  loss 
fall — the  holder,  or  the  acceptor,  or  drawee,  who  has  paid — of  an 
instrument  bearing  the  forged  name  of  the  drawer  or  the  forged 
name  of  a  special  indorsee? 

The  execution  and  delivery  of  a  bill  of  exchange  creates  no  legal 
rights  in  the  holder  against  the  drawee.  The  effect  of  the  transac- 
tion is  to  confer  a  legal  power  upon  the  holder,  either  to  create  a 
legal  duty  in  the  drawee  to  the  drawer  to  honor  the  instrument  or 
to  create  a  legal  right  of  reimbursement  in  the  drawee  against  the 
drawer,  if  the  bill  is  honored.  The  holder  possesses  no  rights  of 
his  own  against  the  drawee.  Before  the  adoption  of  the  Negotia- 
ble Instruments  Law  some  courts  held  that  the  delivery  of  a  bill  of 
exchange  operated  as  an  assignment  of  the  amount  specified  there- 
in, but  the  majority  of  courts  held  that  such  transaction  was  not 
to  be  interpreted  as  an  assignment.  The  majority  rule  was  adopt- 
ed in  the  Negotiable  Instruments  Law. 

N.  I.  L.,  Section  127.  A  bill  of  itself  does  not  operate  as  an 
assignment  of  the  funds  in  the  hands  of  the  drawee  available  for 
the  payment  thereof,  and  the  drawee  is  not  liable  on  the  biir  unless 
and  until  he  accepts  the  same. 

N.  I.  L.,  Section  189.  A  check  of  itself  does  not  operate  as  an 
assignment  of  any  part  of  the  funds  to  the  credit  of  the  drawer 
with  the  bank  and  the  bank  is  not  liable  to  the  holder  unless  and 
until  it  accepts  or  certifies  the  check. 

8  See  chapter  II,  section  3,  as  to  the  circumstances  under  which  a  party 
in  possession  will  be  deemed  not  to  possess  the  title. 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND    ACCEPTOR  841 

These  sections  merely  provide  that  the  drawing  and  delivery  of 
a  bill  or  check  does  not  "of  itself"  operate  as  an  assignment.  It  is 
still  possible  for  the  dravi^er  to  execute  an  assignment  of  his  right 
against  the  drawee,  but  appropriate  words,  in  addition  to  those 
which  usually  appear  on  the  bill,  must  be  employed  to  produce 
this  effect. 

If  the  name  of  the  drawer  has  been  forged,  and  the  instrument 
negotiated  to  a  holder  in  due  course,  we  have  already  seen  that  in 
a  suit  against  the  drawer  the  defense  of  forgery  is  available  against 
the  innocent  holder.  Moreover,  we  have  seen  that  if  the  instru- 
ment is  accepted  or  paid,  the  drawee,  in  the  absence  of  an  estoppel 
does  not  have  the  right  to  charge  the  drawer's  account.  While 
the  drawer  of  a  check,  in  certain  situations,  does  owe  a  greater 
duty  to  the  drawee  than  to  holders  of  the  instrument,  this  duty  is 
not  so  extensive  as  to  include  the  obligation  to  prevent  forgery. 
The  drawee  having  accepted  or  paid  an  instrument  bearing  the 
forged  signature  of  the  apparent  drawer  must  bear  the  loss  unless 
there  is  a  right  in  the  drawee  to  recover  the  money  paid  to  the 
innocent  holder,  or  to  successfully  defend  a  suit  brought  by  such 
holder  against  the  drawee  upon  its  acceptance.  May  the  drawee 
recover  the  money  so  paid,  and  may  an  acceptor  successfully  re- 
sist payment?  These  are  the  questions  raised  in  the  cases  pre- 
sented in  this  section. 

Certain  analogous  situations  are  also  to  be  considered:  First, 
where  the  check  or  other  bill  of  exchange  bears  the  genuine  signa- 
ture of  the  drawer,  but  is  accompanied  by  a  negotiable  document 
of  title  bearing  the  forged  signature  of  the  carrier  or  other  bailee ; 
second,  where  the  bill  of  exchange  bears  the  genuine  signature  of 
the  drawer,  but  the  face  of  the  bill  has  been  materially  altered,  as, 
for  example,  by  raising  the  amount;  third,  where  the  signature  of 
the  drawer  is  genuine,  but  the  drawer  accepted  or  paid  under  mis- 
take as  to  the  existence  of  funds  or  credit  of  the  drawer  with  the 
drawee.  As  far  as  the  right  of  the  drawee  to  charge  the  drawer's 
account  is  concerned,  that  depends  upon  whether  the  bill  bears 
the  genuine  signature  of  the  drawer.  If  the  signature  is  genuine, 
the  drawee  may  charge  the  drawer's  account;  and  this  would  be 
true,  even  though  the  drawer  had  no  credit  with  the  drawee  at  the 
time  of  the  payment.  If  a  genuine  bill  has  been  altered,  the  drawee 
may  charge  the  drawer,  as  a  rule,  only  for  the  amount  of  the  bill 
as  originally  issued.  *  *  *  The  question  involved  in  the  fol- 
lowing cases  narrows  down,  therefore,  to  the  inquiry:  May  the 
drawee  recover  money  paid  to  an  innocent  holder  of  a  bill  of  ex- 
change: (1)  When  the  drawer's  name  was  forged;  (2)  where 
the  drawer's  name  was  genuine  but  a  negotiable  document  of 
title  to  goods  accompanying  the  same  was  forged;  (3)  where 
the  drawer's  signature  was  genuine  but  the  face  of  the  bill  had 
been  altered  prior  to  acceptance  or  payment;  and  (4)  where  the 
drawer's  name  was  genuine,  but  at  the  time  of  the  acceptance  or 
payment  the  drawer  had  no  credit  with  the  drawee? 


842  NEGOTIABLE   INSTRUMENTS  (Part  3 

The  section  of  the  Negotiable  Instruments  Law,  which  is  in- 
volved is  as  follows  : 

Section  62,  The  acceptor  by  accepting  the  instrument  engages 
that  he  will  pay  it  according  to  the  tenor  of  his  acceptance;  and 
admits  (1)  the  existence  of  the  drawer,  the  genuineness  of  his  sig- 
nature, and  his  capacity  and  authority  to  draw  the  instrument, 
and  (2)  the  existence  of  the  payee  and  his  then  capacity  to  indorse. 


NATIONAL  BANK  OF  ROLLA  v.  FIRST  NAT.  BANK  OF  SALEM. 

(Springfield  Court  of  Appeals,  INIissouri,  1910.     141  Mo.  App.  719, 
125   S.   W.    513.) 

Action  by  the  National  Bank  of  RoUa  against  the  First  National 
Bank  of  Salem,    Defendant  had  judgment,  and  plaintiff  appeals. 

Gray,  j.  *  *  *  q^^e  plaintiff's  petition  alleges  that  both  parties, 
at  the  dates  mentioned  in  the  petition,  were  banking  corporations,  and 
on  the  26th  day  of  September,  1907,  defendant,  through  its  correspond- 
ent, presented  to  plaintiff  for  payment  a  check  for  the  sum  of  $42, 
purporting  to  be  drawn  on  the  plaintiff  by  one  H.  W.  Lenox,  in  favor 
of  one  J,  B.  Ragan,  and  purporting  to  be  indorsed  by  the  said  Ragan, 
and  which  said  check  had  been  duly  indorsed  by  the  defendant,  and 
previous  indorsements  thereon  in  writing,  guaranteed  by  the  defend- 
ant, and  relying  upon  the  indorsement  of  said  check  by  the  defendant 
and  defendant's  said  guaranty,  and  believing  that  by  reason  thereof 
it  was  genuine  cashed  said  check  and  paid  the  amount  thereof  to  the 
defendant;  that  after  it  had  cashed  said  check  and  paid  the  proceeds 
to  defendant  it  discovered  that  the  said  check  was  forged,  and  thereup- 
on it  caused  due  notice  to  be  given  to  defendant  in  writing,  and  de- 
manded of  it  the  payment  of  the  amount  of  said  check,  and  that  de- 
fendant refused  to  pay  the  same,  and  asked  for  judgment  for  the 
amount  of  $42.  It  will  be  noticed  that  no  allegation  of  negligence  on 
the  part  of  the  defendant  in  cashing  the  check  for  Ragan  is  made  in 
the  petition,  and  the  instruction  asked  by  the  plaintiff  and  refused  by 
the  court  presented  the  issue  as  alleged  in  the  petition.  In  other  words, 
the  question  of  the  negligence  of  the  defendant  in  cashing  the  check 
for  Ragan  was  not  submitted  either  in  the  petition  or  the  instruction. 
There  are  but  two  reasons  alleged  for  a  reversal  of  the  judgment,  and 
they  are :  Because  the  court  erred  in  refusing  an  instruction  asked  by 
the  plaintiff;  and,  because  under  all  the  evidence  in  the  case,  the  judg- 
ment should  have  been  for  the  plaintiff. 

The  question  presented  here  may  be  submitted  in  the  following  lan- 
guage: If  B.  representing  himself  to  be  A.  presents  to  C.'s  bank  a 
check  purporting  to  be  signed  by  D.,  payable  to  A.,  and  drawn  on  E.'s 
bank,  of  which  D.  is  a  customer,  and  C.'s  bank  cashes  the  check  and 
sends  it  for  collection  to  E.,  who,  when  it  is  presented,  pays  the  same 
and  charges  it  to  D.'s  account,  and  at  the  time  of  said  payment  E.  has 
reason  to  believe  that  the  signature  to  the  check  is  not  D.'s,  can  E.  sue 
C  for  the  amount  of  the  check,  upon  learning  that  D.'s  name  was 
forged  to  the  check,  and  showing  that  C,  had  sent  the  check  for  col- 
lection, and  that  the  money  paid  by  E.  at  the  time  it  cashed  the  check 


Ch.  4)         RIGHTS  OF  HOLDER  AGAINST   MAKER  AND   ACCEPTOR  843 

had  been  received  by  C.  ?  The  question  has  been  answered  in  the  neg- 
ative many  times  in  the  courts  of  this  country.  Since  the  case  of 
Price  V.  Neal,  3  Burrows,  1355,  decided  by  Lord  Mansfield  in  1762, 
the  general  rule  has  been  that  when  the  drawee  of  a  check  or  bill  pays 
the  same  to  a  bona  fide  holder,  such  drawee  cannot  recover  the  mon- 
ey back  upon  discovering  such  check  or  bill  to  be  a  forgery.  Many  of 
the  text-writers  on  negotiable  instruments  declare  that  when  a  bank, 
upon  which  a  check  is  drawn,  pays  it  upon  the  forged  signature  of  the 
drawer,  the  money  can  be  recovered  as  paid  under  mistake  of  fact. 
Story  on  Promissory  Notes,  §§  379-529 ;  2  Parsons  on  Notes  and  Bills, 
80.  Others,  while  recognizing  a  different  rule,  incline  to  the  opinion 
that  the  one  just  cited  is  the  most  equitable.  2  Daniel  on  Negotiable 
Instruments,  c.  48,  §  13.  Whatever  the  text-writers  may  think  and 
declare  the  law  to  be,  a  long  line  of  cases  sustain  the  proposition  that 
as  between  the  draw^ee  and  the  holder  of  a  check  the  drawee  bank  is 
to  be  deemed  the  place  of  final  settlement  where  all  prior  mistakes  and 
forgeries  can  be  corrected  and  settled  at  once,  henceforth  and  for- 
ever more;  and,  if  overlooked  and  payment  is  made,  the  chapter  is 
closed  and  there  can  be  no  recovery  over.  Price  v.  Neal,  3  B.urrows, 
1355     *    *    * 

Judge  Allen,  in  Bank.  v.  Bank,  46  N.  Y.  loc.  cit.  80,  7  Am.  Rep.  310, 
states  the  rule  in  the  following  clear  langviage:  "For  more  than  a 
century  it  has  been  held  and  decided,  without'  question,  that  it  is  in- 
cumbent upon  the  drawee  of  the  bill  to  be  satisfied  that  the  signature 
of  the  drawer  is  genuine ;  that  he  is  presumed  to  know  the  handwriting 
of  his  correspondent ;  and,  if  he  accepts  or  pays  a  bill  to  which  the 
drawer's  name  has  been  forged,  he  is  bound  by  the  act.  and  ckn  neither 
repudiate  the  acceptance  nor  recover  the  money  paid."  In  Price  v. 
Neal,  which  was  a  similar  action.  Lord  Mansfield  stopped  the  counsel 
for  the  defendant,  saying  that  it  was  one  of  those  cases  that  never 
could  be  made  plainer  by  argument ;  that  it  was  incumbent  upon  the 
plaintiff  to  be  satisfied  that  the  bill  drawn  upon  him  was  the  drawer's 
hand,  before  he  accepted  and  paid  it.  In  the  case  of  Ellis  v.  Trust  Co., 
supra,  4  Ohio  St.  628.  64  Am.  Dec.  610,  the  doctrine  as  announced  in 
Price  V.  Neal,  is  reviewed,  approved,  and  a  long  list  of  authorities 
cited  in  support  thereof,  and  among  these  authorities  will  be  found  the 
case  of  the  Northwestern  National  Bank  v.  Bank  of  Commerce,  107 
Mo.  402,  17  S.  W.  982,  15  L.  R.  A.  102.  This  doctrine  is  founded  by 
many  courts,  upon  the  thought  that  the  drawee  bank  is  conclusively 
presumed  to  know  the  signatures  of  its  depositors.  Upon  examina- 
tion of  the  authorities,  this,  however,  is  too  narrow  a  basis.  The 
courts  that  declare  the  rule  as  above  stated  put  it  upon  the  theory  that 
the  rule  is  demanded  by  the  necessities  of  business  in  these  times  when 
the  currency  of  the  commercial  world  is  composed  so  largely  of  checks 
and  drafts.  There  is  another  line  of  decisions  that  state  the  rule  as 
follows :  The  drawee  of  a  forged  check,  who  has  paid  the  same,  may. 
upon  discovery  of  the  forgery,  recover  the  money  paid  from  the  party 
who  received  the  money,  even  though  the  latter  was  a  good  faith  holder, 
provided  the  latter  has  not  been  misled  or  prejudiced  by  the  drawee's 
failure  to  detect  the  forgery,  and  the  burden  of  showing  that  he  has 
been  misled  or  prejudiced  by  the  drawee's  mistake  rests  upon  him  who 
claims  the  right  to  retain  the  money.  First  National  Bank  of  Lisbon 
v.  Bank  of  Wyndmere,  15  N.  D.  299,  108  N.  W.  546,  10  L.  R.  A.  (N. 
S.)  49,  125  Am.  St.  Rep.  588.    *    *    * 


844  NEGOTIABLE   INSTRUMENTS  (Part  3 

The  latter  doctrine  is  well  stated  in  Ford  v.  People's  Bank,  74  S. 
C.  180,  54  S.  E.  204,  10  L.  R.  A.  (N.  S.)  63,  114  Am.  St.  Rep.  986,  7 
Ann.  Cas.  744,  as  follows:  "We  think  the  true  rule  is  found  stated 
in  the  case  of  National  Bank  v.  Bangs,  106  Mass.  441,  8  Am.  Rep.  349, 
and  National  Bank  v.  Bank,  151  Mass.  280,  24  N.  E.  44  [21  Am.  St. 
Rep.  450].  The  language  of  the  court  in  the  last-cited  case,  after 
stating  that  the  presumption  is  that  the  drawee  bank  knows  the  signa- 
tures of  his  own  customers,  is  as  follows:  'This  presumption  is  con- 
clusive only  when  the  party  receiving  the  money  has  in  no  way  con- 
tributed to  the  success  of  the  fraud  or  the  mistake  of  fact  under  which 
the  payment  has  been  made.  In  the  absence  of  actual  fault  on  the  part 
of  the  drawee,  his  constructive  fault  in  not  knowing  the  signature  of 
the  drawer  and  detecting  the  forgery  will  not  preclude  his  recovery 
from  one  who  took  the  check  under  circumstances  of  suspicion  with- 
out proper  precaution,  or  whose  conduct  has  been  such  as  to  mislead 
the  drawee,  or  induce  him  to  pay  the  check  without  the  usual  inquiry 
against  fraud.  Where  a  loss  which  must  be  borne  by  one  of  two  par- 
ties alike  innocent  of  the  forgery  can  be  traced  to  the  neglect  or  fault 
of  eitlier,  it  is  reasonable  that  it  should  be  borne  by  him,  even  if  inno- 
cent of  any  intentional  fraud  through  whose  means  it  has  succeeded.'  " 

The  different  doctrines  are  well  stated  by  the  different  opinions  of 
the  judges  of  the  Supreme  Court  of  Minnesota,  in  the  case  of  Ger- 
mania  Bank  v.  Boutell,  60  Minn.  189,  62  N.  W.  327,  27  L.  R.  A.  635, 
51  Am.  St.  Rep.  519,  and  for  further  information  upon  these  points, 
reference  is  made  to  that  case.  In  nearly  all  of  the  authorities  where 
opinions  are  cited  to  sustain  the  different  theories,  the  case  of  the 
Northwestern  National  Bank  v.  Bank  of  Commerce,  107  Mo.  402,  17 
S.  W.  982,  15  L.  R.  A.  102,  is  cited  in  support  of  the  doctrine,  that  it 
is  the  absolute  duty  of  the  payee  to  ascertain  at  his  peril  when  a  check 
is  presented  for  payment,  purporting  to  be  drawn  by  a  customer  of  his 
bank,  whether  or  not  it  is  the  genuine  signature  of  the  customer,  and 
if  he  cashes  the  check  all  rights  against  any  person  except  the  forger 
are  forever  barred.  But  upon  reading  the  case  of  Bank  v.  Bank,  107 
Mo.  402,  17  S.  W.  982,  15  L.  R.  A.  102,  supra,  it  will  be  found  that 
the  question  of  negligence  on  the  part  of  the  purchaser  of  the  check 
is  made  a  material  issue  in  the  case,    *    *    * 

In  Bank  v.  Bank,  109  Mo.  App.  665,  83  S.  W.  537,  the  Kansas  City 
Court  of  Appeals,  in  an  opinion  by  Judge  Broaddus,  declares  the  rule 
to  be  that  when  the  drawee  pays  a  check  purporting  to  be  drawn  upon 
its  bank  by  one  of  its  customers  its  right  of  action  against  any  other 
parties  to  the  check  is  gone,  unless  it  can  be  shown  that  the  purchaser 
was  guilty  of  gross  negligence,  and  that  a  purchaser  is  not  guilty  of 
such  negligence  as  to  authorize  a  recovery  against  him  from  the  fact 
that  he  has  knowledge  of  circumstances  sufficient  to  put  a  prudent  man 
on  inquiry.  This  authority  goes  much  further  in  regard  to  the  notice 
necessary  to  make  the  purchaser  guilty  of  negligence  than  most  any 
other  case  recognizing  the  negligence  doctrine.     *     *     * 

In  addition  to  the  authorities,  the  Negotiable  Instrument  Act  of 
1905  contains  the  following  section:  "Sec.  62.  The  acceptor,  by  ac- 
cepting the  instrument  engages  that  he  will  pay  it  according  to  the 
tenor  of  its  acceptance ;  and  admits :  The  existence  of  the  drawer,  the 
genuineness  of  his  signature,  and  his  capacity  and  authority  to  draw 
the  instrument;  and  the  existence  of  the  payee  and  his  capacity  to 
endorse."     *     *     *    After  a  careful  examination  of  the  new  law,  we 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND    ACCEPTOR  845 

are  inclined  to  believe  that  it  was  intended  to  adopt  the  law  as  declared 
in  Price  v.  Neal,  supra.     *     *     * 

The  appellant,  however,  contends  that  because  the  check  was  in- 
dorsed, "Endorsement  guaranteed.  Pay  any  National  or  State  Bank 
or  Order.  The  First  National  Bank  of  Salem.  W.  J.  Bennett,  Cash- 
ier," that  it  had  the  right  to  rely  upon  this  guaranty,  and  that  its  suit 
is  maintained  thereon.  Such  an  indorsement  is  only  an  indorsement 
for  collection,  and  does  not  transfer  the  title  to  the  indorsee.  Bank 
V.  Bank,  109  Mo.  App.  673,  83  S,  W.  537.  And  the  guaranty  only 
applies  to  the  indorsers,  and  does  not  protect  the  payee  against  the  risk 
of  cashing  a  check  to  which  the  maker's  name  is  forged.  See  author- 
ities cited  on  other  points  in  this  opinion.     *    *    * 

After  a  thorough  examination  of  the  law  as  it  existed  prior  to  our 
negotiable  instrument  act,  and  as  changed  by  that  act,  we  are  satisfied 
that  the  court  committed  no  error  in  refusing  plaintiff's  instruction, 
and  that  upon  the  allegations  of  the  petition  the  plaintiff  was  not  enti- 
tled to  recover,  and  the  judgment  of  the  trial  court  will  be  affirmed. 
*    *    * 


SPRINGS  et  al.  v.  HANOVER  NAT.  BANK  OF  CITY  OF  NEW  YORK. 

(Court  of  Appeals  of  New  York,  1913.     209  N.  Y.  224,  103  N.  E.  156, 
52   L.  R.  A.   [N.   S.]    241.) 

HiscocK,  J.  This  case  directly  presents  to  this  court  for  the  first 
time  the  question  whether  the  drawee  of  a  draft  who  has  paid  the  same 
to  a  bona  fide  holder  for  value  relying  in  part  upon  purported  bills 
of  lading  attached  by  the  drawer  to  the  draft,  but  not  mentioned 
therein,  can,  on  discovery  that  the  bills  of  lading  are  forgeries,  recover 
back  the  moneys  so  paid  from  the  payee  or  indorsee  who  has  neither 
guaranteed  the  genuineness  of  said  instruments  nor  been  aware  of  their 
fraudulent  character. 

In  this  case  the  plaintiffs,  who  as  such  drawees  paid  the  defendant 
as  indorsee  from  another  bank  a  draft  for  $39,000  drawn  by  a  firm 
of  cotton  dealers  in  the  south  with  forged  bills  of  lading  attached,  urge 
four  theories  as  justifying  a  recovery  back.  They  say  that  defendant 
represented  that  the  bills  of  lading  were  genuine  and  truthful  both 
as  to  signatures  and  contents ;  that  the  draft  contained  such  reference 
to  the  bills  of  lading  as  to  make  it  conditional  on  the  genuineness  of 
the  bills  of  lading;  that  plaintiffs  relied  on  an  examination  of  signa- 
tures by  the  bank  and  its  transferror  which  had  not  in  fact  been  made, 
and  therefore  the  payment  was  made  under  a  mistake  of  fact ;  that  the 
defendant  or  its  transferror  departed  from  the  usual  course  of  business 
in  discounting  the  draft,  and  thereby  caused  a  mistake  of  fact;  and 
that  even  if  both  parties  were  equally  innocent  the  defendant  must 
suffer.    These  theories  are  not  sustained.    *    *    * 

We  think  there  was  no  evidence  which  showed  legal  fault  upon  the 
part  of  the  Decatur  bank  in  originally  discounting  the  draft,  and  cer- 
tainly there  is  no  evidence  which  affects  the  defendant  in  that  respect. 
The  contention  of  the  plaintiffs  is  that  defendant  became  the  owner 
and  holder  of  the  draft  and  was  not  a  mere  collecting  agent  for  the 
Decatur  bank.  Accepting  this  theory,  there  is  no  question  that  de- 
fendant became  the  owner  and  holder  of  the  draft  in  the  regular 
course  of  business  for  value  and  without  notice  of  any  fact  or  circum- 
stance which  made  it  chargeable  with  knowledge  or  of  responsibility 
for  the  forgery  of  the  bills  of  lading. 


846  NEGOTIABLE   INSTRUMENTS  (Part  3 

Therefore  in  the  end  plaintiffs  confront  the  general  question  as  first 
stated.  While,  as  I  have  said,  this  (luestion  has  not  been  directly 
decided  by  this  court,  it  has  been  a  subject  of  discussion  and  decision 
in  many  other  courts. 

In  these  cases  the  argument  had  been  made  on  which  plaintiffs  in 
this  case  must  finally  rely,  that  a  party  accepting  or  discounting  drafts 
accompanied  by  purported  bills  of  lading  upon  the  faith  and  security 
of  which  he  more  or  less  relies  and  which  prove  to  be  forgeries  has 
acted  imder  a  material  mistake  of  fact  which  entitles  him  to  be  re- 
lieved from  his  acceptance  of  payment.  To  this  argument,  however, 
the  answer  in  substance  has  been  made  by  the  courts  with  almost 
unvarying  uniformity,  that  the  mere  attachment  of  bills  of  lading  to  a 
draft  does  not  make  the  former  a  part  of  the  latter ;  that  one  who  ac- 
cepts or  pays  such  a  draft  must  be  assumed  in  the  absence  of  special 
circumstances  to  do  so  on  the  faith  of  the  draft  itself,  and  that  re- 
liance upon  the  bills  of  lading  is  not  a  fact  which  enters  into  the  sub- 
stance of  the  real  transaction  in  accepting  or  paying  the  draft,  but  is 
an  extrinsic  fact;  that,  if  the' rule  were  established  that  relief  should 
be  afforded  against  the  acceptance  or  payment  of  a  draft  because  of 
mistaken  belief  in  the  genuineness  of  attached  bills  of  lading,  such  rule 
logically  would  apply  to  other  cases,  as  that  the  drawee  had  enter- 
tained a  mistaken  notion  as  to  the  financial  standing  and  responsibility 
of  the  drawers  or  as  to  the  value  of  security  for  the  draft  and  thus 
lead  to  an  instabilit}'  and  confusion  in  transactions  involving  nego- 
tiable paper  which  would  be  intolerable;  that  as  between  the  innocent 
holder  for  value  of  a  draft  and  the  drawee  who  has  accepted  or  paid 
the  same  in  reliance  upon  forged  bills  of  lading  there  is  no  reason  why 
the  drawee  should  be  permitted  to  shift  the  burden  of  loss  to  the  holder. 

While,  as  stated,  none  of  these  decisions  are  by  this  court,  and  there- 
fore controlling,  nevertheless  they  have  such  weight  and  have  so  wide- 
ly established  a  rule  of  negotiable  paper  that  we  should  feel  reluctant 
to  disagree  v/ith  them  even  if  we  doubted  the  wisdom  of  the  principles 
upon  which  they  are  based.  We  do  not,  however,  have  any  such  dif- 
ference with  other  courts  in  respect  of  the  principles  which  are  in- 
volved, and  iiave  no  hesitation  in  adopting  the  rule  which  has  been 
established  bv  them.    *    *    * 

Hoffman  &  Co.  v.  Bank  of  Milwaukee,  79  U.  S.  (12  Wall.)  181,  at 
page  189  (20  L.  Ed.  366),  was  an  action  brought  by  plaintiffs  as 
drawees  to  recover  the  amount  of  three  drafts  paid  by  them  to  the 
defendant  on  the  ground  that  such  moneys  were  paid  under  a  mistake 
of  fact.  *  *  *  The  Supreme  Court  affirmed  the  action  of  the  lower 
courts  in  directing  judgment  for  the  defendant,  and  in  so  doing  wrote 
as  follows :  "Money  paid  under  a  mistake  of  facts,  it  is  said,  may  be 
recovered  back  as  having  been  paid  without  consideration;  but  the 
decisive  answer  to  that  suggestion,  as  applied  to  the  case  before  the 
court,  is  that  money  paid,  as  in  this  case,  by  the  acceptor  of  a  bill  of 
exchange,  to  the  payee  of  the  same,  or  to  a  subsequent  indorsee,  in  dis- 
charge of  his  legal  obligation  as  such,  is  not  a  payment  by  mistake  nor 
without  consideration,  unless  it  be  shown  that  the  instrument  was 
fraudulent  in  its  inception,  or  that  the  consideration  was  illegal,  or  that 
the  facts  and  circumstances  which  impeach  the  transaction,  as  between 
the  acceptor  and  the  drawer,  were  known  to  the  payee  or  subsequent 
indorsee  at  the  time  he  became  the  holder  of  the  instrument.     *     *     * 

Beyond  doubt  the  bills  of  lading  gave  some  credit  to  the  bills  of 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  847 

exchange  beyond  what  was  created  by  the  pecuniary  standing  of  the 
parties  to  the  same,  but  it  is  clear  that  they  are  not  a  part  of  those 
instruments,  nor  are  they  referred  to  either  in  the  body  of  the  bills  or 
in  the  acceptance,  and  they  cannot  be  regarded  in  any  more  favorable 
light  for  the  plaintiffs  than  as  collateral  security  accompanying  the 
bills  of  exchange.  *  *  *  Failure  of  consideration,  as  between  the 
drawer  and  acceptor  of  a  bill  of  exchange,  is  no  defense  to  an  action 
brought  by  the  payee  against  the  acceptor,  if  the  acceptance  was  uncon- 
ditional in  its  terms,  and  it  appears  that  the  plaintiff  paid  value  for  the 
bill,  even  though  the  acceptor  was  defrauded  by  the  drawer,  unless 
it  be  shown  that  the  payee  had  knowledge  of  the  fraudulent  acts  of  the 
drawer  before  he  paid  such  value  and  became  the  holder  of  the  in- 
strument. *  *  *  Forgery  of  the  bills  of  lading  would  be  a  good 
defense  to  an  action  on  the  bills  if  the  defendants  in  this  case  had  been 
the  drawers,  but  they  were  payees  and  holders  for  value  in  the  regular 
course  of  business,  and  the  case  last  referred  to,  which  was  decided  in 
the  Exchequer  Chamber,  shows  that  such  an  acceptance  binds  the 
acceptor  conclusively  as  between  them  and  every  bona  fide  holder  for 
value."    *    *    * 

Judgment  [for  defendants]  affirmed. 


The  following  case  applies  the  rule  as  it  existed  before  the  Ne- 
gotiable Instrument  Law  as  regards  the  right  of  the  drawee  to 
recover  money  paid  out  on  an  altered  instrument.  While  the  court 
quotes  certain  portions  of  section  62,  no  consideration  was  given 
to  the  effect  of  the  clause  in  section  62  which  provides  that  the 
"acceptor  by  accepting  the  instrument  engages  that  he  will  pay  it 
according  to  its  tenor."  There  is  considerable  force  to  the  argu- 
ment that  this  clause  changed  the  common-law  rule  and  would 
therefore  prevent  the  drawee  from  recovering  money  paid  out  on 
altered  instruments. 


McCLENDON  et  al.  v.  BANK  OF  ADVANCE. 

(St.  Louis  Court  of  Appeals,  Missouri,  1915.    188  Mo.  App.  417,  174  S.  W.  203.) 

NoRTONi,  J.  This  is  a  suit  for  a  balance  of  deposits  made  by  plain- 
tiffs with  defendant  bank.  Plaintiff's  recovered,  and  defendant  prose- 
cutes the  appeal. 

Plaintiffs,  Ella  McClendon  and  WilHam  McClendon,  are  copartners 
and  as  such  conduct  a  mercantile  business  or  store  under  the  firm 
name  of  Ella  McClendon  &  Co.  at  Sturdivant,  while  defendant  is  an 
incorporated  banking  institution  doing  business  in  Advance,  a  place 
not  far  distant  from  Sturdivant.  *  *  *  The  facts  relevant  to  the 
matter  for  present  consideration  are  substantially  as  follows : 

Plaintiffs  conducted  a  store  at  Sturdivant  and  maintain  a  check- 
ing account  with  defendant  bank  at  Advance,  with  which  they  made 
frequent  deposits,  while  James  Kinder  &  Son,  copartners,  conducted 
a  sawmill  near  by  at  Eaglette.  James  Kinder  &  Son  also  maintained 
a  checking  account  with  defendant  bank,  made  deposits  therein,  and 
drew  checks  thereon.  In  conducting  the  sawmill  business,  James  Kin- 
der &  Son  paid  their  workmen  by  issuing  checks  to  them  on  defend- 


848  NEGOTIABLE   INSTRUMENTS  (Part  3 

ant  bank,  and  such  checks  were  usually  presented  to  plaintiffs,  Ella 
McClendon  &  Co.,  at  their  store  at  Sturdivant  and  cashed  by  them. 
After  having  cashed  the  checks,  it  appears  plaintiffs  forwarded  them 
by  mail  to  defendant  bank  for  deposit.  Upon  receipt  of  the  checks 
thus  forwarded  by  plaintiffs,  the  bank  would  deposit  them  to  the  credit 
of  plaintiffs,  Ella  McClendon  &  Co.,  and  charge  the  account  .of  James 
Kinder  &  Son  with  the  amount  so  credited.  During  the  summer  of 
1910  James  Kinder  &  Son  were  informed  by  the  bank  that  their  account 
was  overdrawn,  and  went  about  investigating  the  matter,  for  it  is  said 
there  should  have  been  a  balance  to  their  credit  at  that  time.  The  in- 
vestigation revealed  that  some  five  checks,  issued  by  James  Kinder  & 
Son  to  as  many  different  men  in  their  employ,  had  been  altered  or 
raised  in  the  amount  after  issue,  and  were  cashed  by  plaintiffs  at  their 
store  and  deposited  in  defendant  bank  by  plaintiff's,  for  which  they 
received  credit.  Moreover,  two  checks  appeared  to  have  been  forged 
— that  is,  the  signature  of  James  Kinder  &  Son  forged  thereto — and 
those  checks  were  likewise  cashed  by  plaintiffs  at  their  store  and  for- 
warded to  the  bank  and  deposited  to  their  account.  All  of  those  checks 
either  raised  or  forged  were  charged  at  the  time  for  the  amounts  ap- 
pearing on  their  face  to  the  account  of  James  Kinder  &  Son  in  the 
bank.  *  *  *  Defendant  bank  continuing  in  its  refusal  to  pay 
plaintiffs  the  balance  represented  by  the  respective  amounts,  the  sev- 
eral checks  were  raised  and  those  of  the  forged  checks  as  well, 
*     *     *     plaintiffs  instituted  this  suit  to  recover  the  same. 

From  what  has  been  said,  it  appears  that  there  are  two  classes  of 
checks  to  be  considered  here:  First,  five  separate  checks  which  bore 
the  genuine  signature  of  the  drawer  and  the  genuine  indorsement  of 
the  payee,  but  were  altered  by  some  one  through  being  raised  in  amount 
after  they  were  issued;  and,  second,  two  separate  checks  which  are 
said  to  be  forgeries,  in  that  they  bore  a  spurious  signature.  Two  sep- 
arate and  distinct  rules  of  law  obtain  with  respect  to  the  different  sub- 
ject-matters, for  as  to  the  altered  and  raised  checks  defendant  bank  is 
not  concluded  by  the  mere  act  of  acceptance,  while  such  may  be  true, 
in  a  proper  case,  in  so  far  as  the  forged  signature  of  its  customer  is 
concerned,  for  the  bank  is  presumed  to  know  the  signature  of  its  de- 
positors. But  the  court  treated  both  subjects  on  the  same  plane — that 
is,  as  if  defendant  bank  was  concluded  by  its  acceptance  of  the  raised 
checks  from  a  holder  in  due  course  and  in  good  faith  precisely  as 
if  they  were  forgeries,  in  that  they  bore  the  forged  signature  of  its 
customer,  the  drawer,  and  such  is  not  the  law.  It  is  entirely  true  that 
the  acceptor,  by  accepting  the  instrument — and  a  bank  who  pays  the 
check  of  its  customer  is  such — admits  the  existence  of  the  drawer, 
the  genuineness  of  his  signature,  and  his  capacity  and  authority  to 
draw  the  instrument,  and  the  existence  of  the  payee  and  his  capacity 
to  indorse.  See  section  10032,  R.  S.  1909.  In  so  far  as  the  two  al- 
leged forged  checks  are  concerned — that  is,  those  which  bore  the  al- 
leged spurious  signature  of  James  Kinder  &  Son — the  bank  is  concluded 
by  its  acceptance  and  payment  of  them  from  disputing  the  signature  of 
its  customer,  provided,  of  course,  that  Ella  McClendon  &  Co.  received 
such  checks  in  due  course  and  good  faith.     *     *     * 

But  such  is  not  true  with  respect  to  the  five  checks,  above  de- 
scribed, which  bore  the  genuine  signature  of  James  Kinder  &  Son, 
the  drawer,  and  were  altered  or  raised  after  their  issue.  Touching 
these,  the  mere  acceptance  as  by  receiving  and  cashing  them — that 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  849 

is,  charging  tliem  to  the  account  of  Kinder  &  Son  and  passing  the 
amount  they  represented  to  the  account  of  plaintiffs — in  no  wise  con- 
cludes the  bank  if  it  was  without  fault,  for  such  a  matter  is  reck- 
oned with  in  the  law  on  the  ground  of  mistake,  where  it  appears  both 
the  bank  and  the  depositor  are  innocent;  that  is,  act  in  good  faith. 
In  such  circumstances,  both  the  Supreme  Court  of  the  United  States 
and  our  own  Supreme  Court  thus  state  the  law  on  the  subject:  "The 
principle  that  money  so  paid  under  a  mistake  of  the  facts  of  the  case 
can  be  recovered  back  is  well  settled,  and  in  the  case  of  raised  or  al- 
tered checks  so  paid  by  banks  on  which  they  were  drawn  there  are 
numerous  well-considered  cases,  where  the  right  to  recover  has  been 
established,  when  neither  the  party  receiving  nor  the  party  paying  has 
been  in  any  fault  or  blame  in  the  matter."     *     *     * 

The  instruction  authorizes  a  recovery  on  account  of  both  the  raised 
checks  and  the  forged  checks  as  if  they  were  under  the  rule  of  law 
which  obtains  with  respect  to  the  forgeries  of  the  signature  of  the 
depositor  and  is  erroneous  in  so  far  as  the  raised  checks  are  concerned. 
The  error  seems  to  run  throughout  the  case,  for  it  appears  in  other 
instructions  as  well  and  is  manifestly  prejudicial.     *     *     * 

The  judgment  should  be  reversed  and  the  cause  remanded.     *     *     * 


RIVERSIDE   BANK    v.'   FIRST   NAT.    BANK    OF    SHENANTDOAH. 
(United  States  Circuit  Court  of  Appeals,  1896,     74  Fed.  276,  20  C.  C.  A.  181.) 

Wallace,  Circuit  Judge.  We  are  unable  to  discover  any  ground 
upon  which  the  plaintiff"  was  entitled  to  recover.  The  certification  of 
the  note  by  the  plaintiff  was  an  agreement  to  pay  the  amount,  and  the 
contract  can  no  more  be  rescinded  than  could  any  other  contract  be- 
cause one  of  the  parties  in  making  it  was  under  a  misapprehension  of 
fact.  *  *  *  Money  paid  under  a  mistake  of  fact  is  recoverable  of 
the  party  receiving  it,  because  good  conscience  forbids  him  to  retain 
that  which  justly  belongs  to  the  other  party ;  but  the  principle  has  no 
application  to  the  case  where  the  recipient  has  a  right  to  retain  the  mon- 
ey because  it  has  been  paid  pursuant  to  a  contract  which  he  was  en- 
titled to  enforce.  Assuming  that  the  certification  of  the  note,  and  its 
payment  through  the  clearing  house,  was  equivalent  to  a  payment  by 
the  plaintiff  over  its  counter  to  the  defendant,  the  case  falls  within 
one  of  those  exceptions  to  the  general  right  to  recover  back  money 
paid  by  mistake  which  are  foimd  in  the  law  of  negotiable  paper. 
One  of  these  exceptions  is  that  the  drawee  of  a  bill  of  exchange  is 
presumed  to  know  the  signature  of  the  drawer,  and  payment  by  the 
drawee  of  the  bill  is  ordinarily  an  admission  of  the  genuineness  of 
the  signature,  which  he  is  not  afterwards,  in  a  controversy  between 
himself  and  the  holder,  at  liberty  to  dispute. 

Another  exception,  recognized  by  the  decided  weight  of  authority, 
is  that  the  payment  of  a  check  or  of  a  note  by  the  bank  at  which  it  is 
made  payable,  although  made  under  misapprehension  of  the  state  of  the 
maker's  account  with  the  bank,  concludes  the  bank  as  against  .the  hold- 
er of  the  paper.  *  *  *  Of  such  a  case  the  supreme  court  used  this 
language :  "When  a  check  on  itself  is  offered  to  a  bank  as  a  deposit, 
the  bank  has  the  option  to  accept  or  reject  it,  or  to  receive  it  upon 
such  conditions  as  may  be  agreed  upon.  If  it  be -rejected,  there  is  no 
B.&iB.Bus.Law— 54 


850  NEGOTIABLE   INSTRUMENTS  (Part  3 

room  for  any  doubt  or  question  between  the  parties.  If,  on  the  other 
hand,  the  check  is  offered  as  a  deposit,  and  received  as  a  deposit, 
there  being  no  fraud,  and  the  check  genuine,  the  parties  are  no  less 
bound  and  concluded  than  in  the  former  case.  Neither  can  disavow 
or  repudiate  what  has  been  done.  The  case  is  simply  one  of  an  ex- 
ecuted contract.  There  are  the  requisite  parties,  the  requisite  consid- 
eration, and  the  requisite  concurrence  and  assent  of  the  minds  of  those 
concerned."    Bank  v.  Burkhardt,  100  U.  S.  686,  25  L.  Ed.  766. 

To  permit  a  bank  which  has  paid  a  note  or  check  of  a  customer 
to  rescind  the  trans'action  because  it  discovers  that  it  was  mistaken 
in  the  state  of  the  customer's  account,  would,  as  is  pointed  out  by 
Judge  Cooley  in  Bank  v.  Burkham,  supra,  32  Mich.  328,  reverse  the 
rule  of  commercial  law,  and  transfer  from  the  acceptor  to  the  payee 
the  responsibility  which  the  former  assumes  by  the  acceptance  and  the 
loss,  which  should  be  left  where  it  fell.    *    *    * 

The  trial  judge  properly  directed  a  verdict  for  the  defendant,  and 
the  judgment  should  be  affirmed. 


The  following  case  contains  a  further  discussion  of  the  principle 
which  denies  to  the  drawee  the  right  to  recover  money  paid  out  on 
paper  bearing  the  forged  name  of  the  drawer,  and  shows  that  the 
rule  does  not  apply  where  the  drawee  is  seeking  to  recover  money 
paid  to  a  holder  under  a  forged  indorsement.  There  is  no  provi- 
sion in  the  Negotiable  Instruments  Law  which  confers  upon  the 
drawee  this  right,  so  that  the  general  rule  of  the  law  of  quasi  con- 
tract, that  money  paid  out  under  mistake  of  fact  may  be  recovered, 
applies  to  payments  to  holders  under  forged  indorsements. 


FARMERS'  NAT.  BANK  OF  AUGUSTA  v.  FARMERS'  &  TRADERS' 
BANK  OF  MAYSVILI.E. 

(Court  of  Appeals  of  Kentucky,  1914.     159  Ky.  141,  166  S.  W.  986, 
^  L.  R.  A.  1915A,  77.) 

Action  by  the  Farmers'  National  Bank  of  Augusta  against  the  Farm- 
ers' &  Traders'  Bank  of  Maysville.  From  a  judgment  on  demurrer  for 
defendant,  plaintiff  appeals. 

MiivLER,  J.  The  appellant  does  a  banking  busmess  at  Augusta,  Ky. ; 
the  appellee  does  a  like  business  at  Maysville,  Ky.  For  brevity,  they 
will  be  called  the  Augusta  Bank  and  the  Maysville  Bank,  respectively. 

On  February  5,  1913,  an  unknown  man,  representing  himself  to  be 
Fred.  Schatzman,  presented  to  the  Maysville  Bank,  at  its  place  of 
business  in  Maysville,  a  check  drawn  on  the  Augusta  Bank,  bearing  the 
signature  of  "James  Ware,"  as  drawer,  and  payable  to  the  order  of 
Fred.  Schatzman,  for  $375.  Without  inquiry  or  question,  and  without 
any  identification  of  the  holder,  the  Maysville  Bank  paid  the  check 
and  forwarded  it  to  its  collecting  bank,  the  Fifty-Third  National  Bank 
of  Cincinnati,  Ohio,  which,  in  turn,  forwarded  it  to  the  Augusta  Bank, 
where  it'  was  received  and  paid  on  February  lOth. 

James  Ware  was  a  regular  customer  and  depositor  of  the  Augusta 
Bank.  *  *  *  On  March  14th  when  Ware  went  over  his  checks,  he 
at  once  discovered  the  check  was  a  forgery;  and  it  afterwards  ap- 
peared that  the  indorsement  of  Fred.  Schatzman  was  likewise  a  forg- 
ery, and  that  the  man  who  received  the  money  was  not  Fred.  Schatz- 


Ch.  4)         KIGHTS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  851 

man.     These  facts  are  alleged  in  the  petition  and  are  conceded  to  be 
true. 

The  Maysville  Bank  having  refused  to  repay  to  the  Augusta  Bank 
the  money  thus  obtained  upon  the  forged  check,  the  Augusta  Bank 
brought  this  action  on  August  21,  1913,  to  recover  the  money  so  paid; 
and,  the  circuit  court  having  sustained  a  demurrer  to  the  petition  set- 
ting up  the  facts  as  above  stated,  the  Augusta  Bank  appeals.    *     *    * 

It  is  a  well-settled  rule  that  a  bank  is  bound  to  know  the  signature 
of  its  depositor ;  and  if  it  pays  the  check  of  a  depositor  it  thereby  ad- 
mits the  genuineness  of  his  signature,  and  is  estopped  to  afterwards 
deny  it  to  the  detriment  of  an  innocent  third  party.  The  reason  for 
the  rule  is  that  the  paying  bank  has  in  its  records  the  genuine  signa- 
ture of  its  customer,  or  knows  it,  while  the  collecting  bank  is  a  strang- 
er to  the  signature  of  the  drawer. 

Appellant  insists,  however,  that,  while  the  general  rule  is  as  above 
stated,  it  does  not  apply  to  the  acts  of  indorsers ;  and  furthermore 
that  the  holder  is  bound  to  know  that  all  previous  indorsements,  in- 
cluding that  of  the  payee,  are  the  genuine  handwriting  of  the  parties 
whose  names  appear  upon  the  check. 

The  rule  that  money  paid  under  a  mistake  of  fact  may  be  recovered 
is  too  well  established  to  need  any  discussion.  And  the  exception  to 
the  rule  that  money  paid  by  the  drawee  of  a  forged  check  cannot  be 
recovered  is  equally  well  settled.     *     *     * 

The  exceptional  rule  which  does  not  permit  the  drawee  to  recover 
money  which  it  has  paid  upon  the  forged  check  of  its  customer  *  *  * 
was  first  announced  by  Lord  Mansfield  in  1762,  in  Price  v.  Neal,  3 
Burr.  1357.  where  it  is  said:  "It  was  incumbent  upon  the  plaintiff 
to  be  satisfied,  'that  the  bill  drawn  upon  him  was  the  drawer's  hand,* 
before  he  accepted  or  paid  it ;  but  it  was  not  incumbent  upon  the  de- 
fendant to  inquire  into  it." 

In  the  opinion  in  Deposit  Bank  of  Georgetown  v.  Fayette  National 
Bank,  supra,  this  court,  speaking  through  Judge  Pryor,  recognized  the 
fact  that,  while  the  decided  weight  of  authority  is  with  Lord  Mans- 
field, it  nevertheless  criticised  the  rule  laid  down  by  him  in  Price  v. 
Neal  as  being  possibly  too  sweeping  in  its  character,  and  that  it  could 
not  be  said  that  the  rule  which  required  a  bank  to  know  the  signa- 
ture of  its  depositor  was  without  an  exception,  since  it  is  undoubtedly 
true  that  the  neglect  or  knowledge  of  intervening  parties,  who  come 
into  the  possession  of  the  check  and  receive  the  money  on  it  from  the 
bank  where  it  is  payable,  would  in  some  instances  be  of  such  a  char- 
acter as  to  enable  the  bank  to  recover  back  the  money.  In  support  of 
that  qualification  of  the  rule.  Judge  Pryor  quotes  from  Daniel  on  Ne- 
gotiable Instruments,  vol.  2,  p.  669,  where  it  is  said  "that  when  one 
knows  that  it  is  a  forgery  or  takes  it  under  circumstances  of  suspicion, 
without  proper  precaution,  or  whose  conduct  has  been  such  as  to 
mislead  the  bank,"  the  money  may  be  recovered  back.    *    *    * 

As  was  well  said  by  Judge  Pryor,  the  exceptional  rule  which  does 
not  permit  the  drawee  to  recover  money  paid  by  mistake  is  a  harsh 
rule  and  should  be  kept  strictly  within  its  bounds  and  not  extended. 
If  the  indorser  or  holder  has  been  guilty  of  the  first  negligence,  there 
is  no  good  reason  why  he  should  not  bear  the  loss,  under  the  general 
rule  which  permits  the  recovery  of  money  paid  under  a  mistake.  This 
view  is  supported  by  the  great  weight  of  authority,  although  there  are 
a  few  cases  to  the  contrary.    *    *    * 


852  NEGOTIABLE   INSTRUMENTS  (Part  3 

In  First  National  Bank  of  Lisbon  v.  Bank  of  Wyndmere,  15  N.  D. 
299,  108  N.  W.  546,  10  L.  R.  A.  (N.  S.)  49,  125  Am.  St.  Rep.  588, 
*  *  *  the  North  Dakota  Supreme  Court  repudiated  the  rule  an- 
nounced in  Price  v.  Neal,  and  held  that  the  drawee  of  a  forged  check, 
who  has  paid  the  same  without  detecting  the  forgery,  may,  upon  the 
discovery  of  the  forgery,  recover  the  money  from  the  party  who  re- 
ceived the  money,  even  though  the  latter  was  a  good-faith  holder,  pro- 
vided the  latter  had  not  been  misled  or  prejudiced  by  the  drawee's  fail- 
ure to  detect  the  forgery,  and  that  the  burden  of  showing  that  he  had 
been  misled  or  prejudiced  by  the  drawee's  mistake  rested  upon  him 
who  claims  the  right  to  retain  the  money,  for  that  reason.     *     *     * 

We  are  not,  however,  required  in  the  decision  of  this  case  to  dis- 
approve the  rule  of  Price  v.  Neal,  since  the  facts  here  bring  this  case 
within  the  scope  of  the  rule  in  cases  of  forged  indorsement.  Accord- 
ing to  the  weight  of  authority,  under  the  exceptional  rule  a  bank  which 
cashes  a  check  drawn  upon  another  bank,  without  requiring  proof  as 
to  the  identity  of  the  person  presenting  the  same,  or  making  inquiry  in 
regard  to  him,  the  am.ount  of  which  check  is  afterwards  paid  to  it  by 
the  drawee,  is  liable  to  the  drawee  for  the  amount  so  paid,  where  the 
check  proves  to  be  a  forgery ;  it  having  been  guilty  of  the  first  fault. 

The  case  at  bar  is  even  stronger  for  the  drawee  than  many  of  the 
cases  above  referred  to,  since  here  both  the  indorsement  and  the  niak- 
'  er's  name  are  forgeries.  In  this  case  the  Maysville  Bank  first  parted 
with  its  money  upon  the  forged  indorsement.  *  *  *  Clearly,  the 
Maysville  Bank  would  have  received  nothing  from  a  forged  indorse- 
ment, even  though  the  check  had  been  genuine.  In  such  a  case  it 
would  have  been  liable  to  the  real  holder.  When,  therefore  it  collected 
the  money  on  the  check  in  question  from  the  Augusta  Bank,  it  col- 
lected something  to  which  it  was  not  entitled  under  tlie  indorsement 
through  which  it  claimed.  Neither  can  it  be  said  that  the  Maysville 
Bank  will  be  put  in  a  worse  condition,  if  it  be  required  to  pay  this 
money  to  the  Augusta  Bank,  for  the  good  reason  that  the  Maysville 
Bank  was  never  entitled  to  the  money.  When  it  paid  the  check  upon 
the  forged  indorsement,  it  lost  its  money,  and,  by  subsequently  induc- 
ing the  Augusta  Bank  to  pay  it,  it  received  money  to  which  it  was  in 

no  way  entitled;   and,  that  being  true,  it  has  no  right  to  withhold  it. 
*    *    * 

In  an  unusually  interesting  and  instructive  article  in  4  Harvard  Law 
Review,  297,  entitled  "The  Doctrine  of  Price  v.  Neal,"  Prof.  Ames 
takes  the  ground  that  the  true  principle  upon  which  cases  like  Price 
y.  Neal  are  to  be  supported  is  that  far-reaching  principle  of  natural 
justice  that,  as  between  two  persons  having  equal  equities,  one  of  whom 
must  sufifer,  the  legal  title  must  prevail.  And  he  would  sustain  the  rule 
which  allows  the  drawee  to  recover  from  a  holder  under  a  forged  in- 
dorsement as  follows :  "Upon  whom  finally  should  the  loss  fall,  when 
a  party  to  a  bill  or  note  pays  it  to  a  holder,  who  could  maintain  no  ' 
action  against  the  payor,  because  one  of  the  indorsements  in  his  chain 
of  title  is  a  forgery?  Here,  too,  it  may  be  urged  the  equities  are  equal, 
and  the  holder,  having  obtained  the  money,  should  keep  it.  But  this 
case  differs  in  an  important  particular  from  all  the  cases  hitherto  con- 
sidered, and  another  principle  comes  into  play,  which  overrides  the 
rule  as  to  equal  equities.  In  all  the  other  cases  the  bill  or  note,  how- 
ever valueless  it  may  have  been,  belonged  to  the  holder.     In  the  case 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND    ACCEPTOR 


853 


of  the  forged  indorsement,  on  the  other  hand,  the  bill  or  note  belongs, 
not  to  the  holder,  but  to  him  whose  name  was  forged  as  indorser.  The 
holder,  who  bought  the  bill,  was  therefore  guilty  of  a  conversion,  how- 
ever honestly  he  may  have  acted.  When  he  collected  the  bill,  inas- 
much as  he  obtained  the  money  by  means  of  the  true  owner's  property, 
he  became  a  constructive  trustee  of  the  money  for  the  benefit  of  the 
latter.  The  true  owner  may  therefore  recover  the  money  as  money  had 
and  received  to  his  use.  If  he  recovers  in  his  action,  the  property  in  the 
bill  would  pass  to  the  holder ;  but  the  bill  would  be  of  no  value  to 
him,  for;  if  he  should  seek  to  collect  it,  he  would  be  met  with  the  de- 
fense that  it  had  been  paid  to  him  once  already.  If,  on  the  other  hand, 
the  true  owner  prefers  to  proceed  on  the  bill  against  the  maker  or 
acceptor,  he  may  do  so,  and  the  prior  payment  to  the  holder,  being 
made  to  one  without  title,  will  be  no  bar  to  the  action.  The  maker 
or  acceptor,  however,  who  pays  to  the  true  owner,  is  entitled  to  the 
bill,  and  should  be  subrogated  to  the  owner's  right  to  enforce  the  con- 
structive trust  against  the  holder,  and  could  thereby  make  himself 
whole.  Consequently,  whatever  course  the  true  owner  elects  to  pur- 
sue, the  loss  must  ultimately  fall  on  the  holder.  As  a  matter  of  posi- 
tive law,  the  maker  or  acceptor,  who  pays  the  holder  claiming_  under 
a  forged  indorsement,  is  allowed  to  proceed  against  the  latter  directly, 
without  first  paying  the  true  owner.  This,  as  a  matter  of  legal  rea- 
soning, is  believed  to  be  unwarranted.  But  as,  in  the  result,  the  loss 
comes  where  upon  the  legal  principle  of  subrogation  it  ought  to  come, 
it  is  not  worth  while  to  be  too  critical." 

Prof.  Keener,  in  his  work  on  Quasi  Contracts,  considers  the  mle 
announced  in  Price  v.  Neal,  as  wholly  anomalous,  and  treats  it  in  a 
note  on  page  154  to  the  chapter  upon  the  recovery  of  money  paid  under 
a  mistake  for  the  avowed  reason  that  it  is  impossible  to  reconcile  it 
with  many  of  the  legal  principles  announced  in  his  text.  After  saying 
it  is  impossible  to  reconcile  the  exceptional  rule  which  denies  a  re- 
covery of  money  paid  under  a  mistake  as  to  the  genuineness  of  nego- 
tiable instruments  with  the  principles  applicable  to  the  general  rule 
which  permits  a  recovery  of  money  paid  under  mistake,  Prof.  Keener 
points  out  that  the  exceptional  rule  cannot  logically  be  sustained  upon 
any  of  the  different  grounds  usually  relied  upon,  that  the  drawee  is 
guilty  of  negligence,  that  between  equal  equities  the  law  leaves  the  mon- 
ey where  it  finds  it,  or  of  subrogation  in  the  case  of  money  mistakenly 
paid  under  a  forged  indorsement,  thus  differing  radically  from  Prof. 
Ames,  who  maintains  the  later  view  in  his  article  theretofore  referred 
to.  In  criticising  the  theory  of  allowing  a  recovery  upon  the  principle 
of  subrogation.  Prof.  Keener  says:  "The  fact  that  the  action  is 
brought  at  law  in  the  name  of  the  party  who  made  the  payment  is 
fatal  to  allowing  a  recovery  on  the  theory  of  subrogation,  since  the 
result  is  to  be  regarded  as  anomalous  in  point  of  procedure.  Equally 
fatal  to  this  theory  is  the  fact  that  the  plaintiff  is  allowed  to  recover 
without  first  paying  the  true  owner.  The  theory  of  subrogation,  how- 
ever, is  open  to  the  further  objection  that  a  recovery  would  undoubt- 
edly be  allowed  in  cases  on  the  line  of  reasoning  adopted  by  the  courts, 
where  the  theory  of  subrogation  would  have  to  be  denied.  Subroga- 
tion of  course  implies  a  right  in  another  which  a  party  seeks  to  acquire 
against  the  defendant.  A  party  claiming  through  subrogation  claims 
by  virtue  of  a  derivative  right  necessarily  presupposes  an  original  right. 
If,  therefore,  for  any  reason,  the  true  owner  of  the  bill  could  not 


854  NEGOTIABLE   INSTRUMENTS  (Part  3 

maintain  an  action  against  the  holder  thereof  for  a  conversion  of  the 
bill,  or  could  not  sue  at  law  in  a  court  for  money  had  and  received  to 
recover  the  proceeds  received  in  payment  thereof,  then  a  drawee  de- 
pendent upon  the  doctrine  of  subrogation  could  not,  on  the  theory  of 
subrogation,  recover  the  money  paid  by  him  under  mistake  as  to  the 
genuineness  of  an  indorsement.  In  conclusion  it  is  submitted  that  on 
no  theory  of  quasi  contract  can  the  decisions  reached  in  the  cases  con- 
sidered in  this  note  be  reconciled,  or  the  results  reached  in  many  of  the 
cases  be  justified." 

These  two  articles  by  masters  of  the  subject  strongly  tend  to  sup- 
port the  contention  that  the  exceptional  rule  is  unsound.  But  if  it  be 
treated  as  sound,  both  under  the  great  weight  of  authority  and  the  rea- 
son for  it,  the  case  at  bar  does  not  come  within  it,  since  the  defendant 
claims  under  a  forged  indorsement.  We  are  of  opinion,  therefore,  that 
the  appellant  was  entitled  to  recover  under  the  general  rule  which  per- 
mits a  recovery  of  money  paid  under  a  mistake,  and  that  the  demurrer 
to  the  petition  should  have  been  overruled. 

Judgment  reversed  for  further  proceedings  consistent  with  this 
opinion. 

SECTION  5.— RIGHT  OF  THE  DRAWEE  WITH  RESPECT 

TO  INSTRUMENTS  PAYABLE  TO  THE  ORDER 

OF  A  FICTITIOUS  PAYEE 

Reference  was  made  to  the  subject  of  fictitious  payees  in  Chap- 
ter I,  where  we  were  considering  the  circumstances  under  which 
an  instrument  was  to  be  deemed  payable  to  bearer,  and  it  was  there 
stated  that  this  matter  could  be  taken  up  more  profitably  in  con- 
nection with  our  study  of  the  various  legal  aspects  of  forgery. 

In  order  to  pave  the  way  for  our  study  of  the  legal  efifect  of 
making  an  instrument  payable  to  the  order  of  a  fictitious  payee, 
let  us  take  the  following  illustrations : 

(1)  Suppose  that  F.  forges  M.'s  name  as  the  drawer  of  a  check 
drawn  upon  the  D.  bank  and  payable  to  bearer,  or  to  P.  or  bearer, 
and  negotiates  the  instrument  to  A.,  a  holder  in  due  course.  Upon 
presentment  to  the  drawee,  D.,  A.  obtains  payment.  What  is  the 
result?  D.  cannot  charge  M.'s  account,  because  M.  did  not  draw 
the  instrument.  If  the  instrument  were  drawn  payable  to  P.  or 
bearer,  and  either  F.  or  A.  indorsed  P.'s  name,  such  indorsement 
would  not  be  a  forged  indorsement  within  the  meaning  of  the 
rule  which  allows  a  drawee  having  paid  to  a  holder  under  a 
forged  indorsement  to  recover  the  money  so  paid,  for  the  reason 
that  the  genuine  indorsement  of  P.  is  not  necessary  to  pass  title  to 
the  instrument.  Therefore  the  drawee,  D.,  cannot  recover  the 
money  paid  to  A.  because  of  the  rule  discussed  in  section  4  of  this 
chapter. 

(2)  Suppose,  then,  that  F.  forged  M.'s  name  as  the  drawer  of 
a  check  drawn  upon  the  D.  bank  payable  to  P.  or  order  and  deliv- 
ers the  instrument  to  P.  Suppose  further  that  T.  steals  the  in- 
strument from  P.,  forges  P.'s  indorsement  and  negotiates  to  A., 
a  holder  in  due  course.    Notice  the  important  distinction  between 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND    ACCEPTOR  855 

this  case  and  that  put  in  the  first  ilkistration.  In  this  case  the 
check  is  payable  to  P.  or  order,  therefore  the  genuine  indorsement 
of  P.  is  necessary  to  pass  title;  while  in  the  first  case,  the  instru- 
ment being  payable  to  P.  or  bearer,  the  indorsement  of  P,  was  not 
necessary  to  pass  title.  Upon  payment  by  D.  to  A.,  what  are  the 
rights  of  D.?  M.'s  name  being  forged,  D.  cannot  charge  M.'s 
account  just  as  in  the  first  case.  But  D.  may  recover  from  A., 
in  spite  of  the  rule  developed  in  section  5  of  this  chapter,  because 
the  drawee  has  also  paid  to  a  holder  under  the  forged  indorsement 
of  P.,  whose  genuine  indorsement  was  necessary  to  pass  title  to 
the  paper.  Money  paid  under  a  forged  indorsement  may  be  re- 
covered. It  may  seem  somewhat  strange  to  be  speaking  of  hav- 
ing title  to  an  instrument  which  is  void  as  far  as  the  drawer  is 
concerned,  but  it  is  nevertheless  true.  A  person  may  own  some- 
thing that  has  little  or  no  value,  as  well  as  he  may  own  some- 
thing possessing  value. 

(3)  We  are  now  ready  for  the  case  of  the  fictitious  payee.  F. 
forges  M.'s  name  to  a  check  payable  to  P.  or  order,  drawn  upon  the 
D.  bank.  F.  indorses  P.'s  name  and  negotiates  to  A.,  and  A.  ob- 
tains payment  from  the  drawee,  D.  What  are  D.'s  rights?  Is 
case  (3)  in  legal  effect  like  case  (1)  or  case  (2)?  If  it  is  like  case 
(1),  then  D.  cannot  recover  from  A.  If  case  (3)  is  like  case  (2), 
then  D.  may  recover  from  A.  The  answer  depends  upon  the  legal 
effect  to  be  given  to  the  signature  by  F.  of  P.'s  name,  as  an  appar- 
ent indorser  of  the  check.  Apparently,  case  (3)  is  like  case  (2), 
because  both  instruments  were  payable  to  order  and  in  both  cases 
P.'s  name  was  placed  upon  the  instrument  as  an  indorser  by  some 
one  other  than  P.  If  the  appearance  of  things  governed,  D.  could 
recover  from  A.  But  as  a  matter  of  law  the  appearance  of  things 
does  not  govern,  for  the  law  is  that,  in  legal  effect,  case  (3)  is 
like  case  (1),  and  D.  accordingly  cannot  recover  from  A.  We 
have  the  rather  novel  situation  of  an  instrument  expressly  payable 
to  a  named  payee  or  order  being  treated  as  though  it  were  pay- 
able to  bearer.  The  words  "or  order"  have  the  same  meaning  as 
the  words  "bearer"  whenever  the  instrument  is  payable  to  a  ficti- 
tious payee  or  order,  and  case  (3)  is  a  case  where  P.  was  a  fictitious 
payee;  that  is,  P.  was  fictitious  in  the  sense  that  F.  intended  that 
P.  should  never  have  any  interest  in  the  check. 

What  reason  is  there  for  the  rule  that  an  instrument  payable 
to  the  order  of  a  fictitious  payee  is  deemed  payable  to  bearer? 
This  may  best  be  shown  by  a  case  involving  a  fictitious  payee 
where  no  fraud  is  intended.  Suppose  that  M.  draws  his  check  in 
the  D.  bank  payable  to  P.  or  order,  intending  then  to  deliver  the 
check  to  P.  in  payment  of  a  debt.  Suppose  further  that  M.  there- 
after changes  his  mind  about  delivering  the  instrument  to  P.  and 
decides  to  pay  a  debt  of  the  same  amount  which  he  owes  A.  Of 
course,  the  normal  thing  for  M.  to  do  would  be  to  destroy  the  first 
check  and  draw  a  new  one  payable  directly  to  A. ;  but  suppose 
M.  decides  to  make  use  of  the  check  which  he  has  drawn  payable 


85fi  NEGOTIABLE   INSTRUMENTS  (Part  3 

to  P.  or  order,  M.  then  indorses  P.'s  name  and  delivers  the  same 
to  A.,  or  authorizes  A.  to  indorse  P.'s  name.  Certainly  P.'s  name 
was  not  forged  either  in  the  criminal  law  sense  nor  in  any  other 
sense.  P.  sustained  no  damage  whatsoever  because  until  delivery 
P.  could  have  no  interest  in  the  check.  Is  it  not  perfectly  reason- 
able to  say,  therefore,  that  in  this  case  the  indorsement  of  P.  by 
M.  or  A.  shall  be  treated  as  a  genuine  indorsement  of  P.  and  as  a 
result  that  title  to  the  check  passed  to  A.?  This  result  is  not 
only  possible,  but  virtually  necessary,  because  M.  intended  that 
P.  should  not  have  any  interest  in  the  check,  but  that  A.  should 
obtain  title.  The  result  is  the  same  where  F.,  the  person  who 
physically  drew  the  instrument,  forged  the  name  of  the  apparent 
drawer,  for  he  likewise  intended  that  P.  should  have  no  interest  in 
the  check,  but  that  the  transferee.  A.,  should  have  the  interest  in 
the  instrument.  It  would  have  been  somewhat  more  logical  for  the 
law  to  have  said  that  where  the  instrument  is  made  payable  to 
the  order  of  a  fictitious  payee,  and  such  fictitious  payee's  name  is 
signed  as  an  indorser,  such  indorsement  should  have  the  same 
effect  as  though  in  all  respects  such  indorsement  were  genuine. 
The  law,  however,  did  not  say  quite  this,  but  instead  the  rule  be- 
came fixed  that  an  instrument  so  drawn  became  payable  to  bearer. 
In  the  majority  of  cases  the  same  result  is  reached,  but  the  way  in 
which  the  rule  is  phrased  makes  the  underlying  reason  for  its  ex- 
istence appear  less  distinct. 

From  a  practical  standpoint  the  typical  case  calling  for  the  ap- 
plication of  the  rule  relating  to  fictitious  payees  arises  where  a 
fraudulent  party,  commonly  an  agent  of  the  person  whose  name 
is  signed  as  drawer,  adopts  this  scheme  to  defraud  the  bank  in 
which  his  employer  maintains  an  account.  The  success  of  the 
scheme  to  defraud  is  made  more  certain  if  the  paper  is  made  pay- 
able to  the  order  of  some  one  with  whom  the  apparent  drawer  is 
known  to  have  business  dealings.  The  scheme  is  only  one  of  many 
forced  constantly  upon  the  attention  of  the  business  and  banking 
world,  where  the  negotiable  instrument  is  made  to  do  the  work 
of  the  crowbar  or  of  nitroglycerine. 

The  section  of  the  Negotiable  Instruments  Law  involved  is  as 
follows : 

Section  9,  subsection  3,  The  instrument  is  payable  to  bearer 
when  it  is  payable  to  the  order  of  a  fictitious  or  non-existing  per- 
son, and  such  fact  was  known  to  the  person  making  it  so  payable. 

The  case  following  illustrates  the  application  of  the  rule.  Then 
follow  a  few  cases  bearing  a  close  resemblance  to  the  fictitious 
payee  case  but  upon  closer  examination  are  found  to  be  governed 
by  other  rules.  (1)  Suppose  that  F.,  the  fraudulent  party,  induces 
M.  to  draw  the  instrument  payable  to  P.  or  order,  and  F.  indorses 
P.'s  name;  is  this  instrument  payable  to  bearer?  (2)  F.,  by  fraud, 
induces  M.  to  believe  that  he,  F.,  is  P.,  and  obtains  an  instrument 
payable  to  P.  or  order;  is  this  instrument  to  be  deemed  payable 
to  bearer? 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST  MAKER   AND   ACCEPTOR 


857 


TRUST  CO.  OF  AMERICA  v.   IIAMIT/rON  BANK  OF  NEW   YORK  CITY. 
(Supreme  Court  of  New  York,  Appellate  Division,  1908.     127  App.  Div.  515, 

112  N.  Y.  Supp.  84.) 

McLaughlin,  J,  This  is  a  controversy  submitted  to  the  court  upon 
an  agreed  statement  of  facts.  *  *  *  The  controversy  relates  to 
four  checks  for  $500  each,  drawn  upon  the  plaintiff,  a  trust  company 
doing  a  banking  business,  and  signed:  "Estate  of  Kate  M.  Wallace. 
Arthur  B.  Wallace,  Adm'r."  At  the  time  the  checks  were  presented 
to  the  plaintiff  for  payment,  the  estate  of  Kate  M.  Wallace  was  one 
of  its  depositors,  having  to  its  credit  an  amount  in  excess  of  all  the 
checks,  which  could  be  drawn  out  on  checks  signed  by  Arthur  B.  Wal- 
lace, administrator,  when  countersigned  by  the  United  States  Fidelity 
&  Guaranty  Company.  The  Wallace  estate  had  then  been  practically 
settled,  and  the  amount  on  deposit  was  ready  for  distribution  among 
the  next  of  kin  of  the  decedent.  The  four  checks  in  question  were 
drawn  without  the  knowledge  or  authority  of  the  administrator,  his 
signature  being  forged,  and  in  each  there  was  inserted  as  payee  the 
name  of  some  one  of  the  next  of  kin  whose  distributable  share  of 
the  amount  on  deposit  with  the  plaintiff'  was  greater  than  the  amount 
of  the  check  or  checks  thus  apparently  payable  to  such  person.  The 
first  check  was  dated  September  25,  1905,  and  was  presented  on  that 
day  to  the  United  States  Fidelity  &  Guaranty  Company  by  a  person 
unnamed,  without  the  knowledge  of  plaintiff'  or  defendant.  The  United 
States  Fidelity  &  Guaranty  Company,  relying  upon  the  apparent  genu- 
ineness of  the  check,  countersigned  the  same,  and  it  was  then,  by  some 
person  unknown,  presented  to  the  plaintiff'  for  acceptance  and  by  it 
accepted,  in  writing.  The  name  of  the  payee  was  then  forged  upon 
the  back  of  the  check  as  first  indorser,  and  it  was  subsequently  de- 
posited with  the  defendant,  by  one  M.  F.  Kerby,  one  of  its  depositors, 
who  was  given  credit  for  the  same.  It  then  bore  the  following  addi- 
tional indorsements:  "Harvey  J.  Conkey.  M.  F.  Kerby.  A.  Edward 
Fisher."  Thereafter,  the  defendant,  through  the  New  York  Clearing 
House,  presented  the  check  to  the  plaintiff  for  payment,  guaranteeing 
the  indorsements,  and  it,  relying  upon  the  genuineness  of  the  check, 
with  the  guarantee  of  the  defendant  thereon,  not  knowing  that  the 
indorsement  of  the  payee  was  forged,  paid  the  same  in  good  faith. 
Substantially  the  same  facts  are  true  in  regard  to  the  second  check, 
which  was  dated  in  November,  1905.  The  other  two  checks,  dated 
in  December,  1905,  and  January,  1906,  were  not  presented  to  plain- 
tiff for  acceptance  before  payment  and  were  deposited  with  defendant 
by  Harvey  J.  Conkey,  one  of  its  depositors,  to  the  credit  of  his  account ; 
otherwise,  the  same  course  was  pursued  with  regard  to  them.  They 
were  indorsed  "Harvey  J.  Conkey"  below  the  forged  indorsement  of 
the  payee. 

Upon  discovering  the  forgeries,  the  plaintiff  at  once  notified  the  de- 
fendant, tendered  back  the  checks,  and  demanded  repayment.  In  the 
meantime  both  Kerby  and  Conkey  had  withdrawn  the  proceeds  of  the 
checks,  and  the  defendant,  relying  on  plaintiff's  acceptance  and  pay- 
ment of  them,  had  paid  out  the  same  in  good  faith.  The  defendant 
has  refused  to  repay  plaintiff"  the  amount  of  the  checks,  or  any  of 
them,  and  the  question  presented  is  whether  plaintiff  is  entitled  thereto. 
The  general  rule  is  that  payments  made  under  a  mistake  of  fact 
may  be  recovered,  although  negligently  made ;  but  it  is  also  settled  that. 


858  NEGOTIABLE   INSTRUMENTS  (Part  3 

if  the  drawee  of  a  bill  of  exchange  to  which  the  drawer's  name  has  been 
forged  accepts  or  pays  the  same,  he  can  neither  repudiate  the  accept- 
ance nor  recover  the  money  paid,  since  he  is  bound  to  know  the  draw- 
er's signature.  *  *  *  It  is  also  settled  that,  where  the  indorsement 
of  the  payee  of  a  bill  of  exchange  has  been  forged,  subsequent  holders 
obtain  no  title  to  it,  and  payments  made  to  one  who  holds  under  such 
forged  indorsements  may  be  recovered.     *     *     * 

Therefore,  if  all  the  indorsements  on  the  checks  in  question  had 
been  genuine,  the  plaintiff  could  not  recover ;  but  if  the  maker's  signa- 
tures had  been  genuine,  and  only  the  indorsements  or  any  of  them 
forged,  it  could  recover.  *  *  *  A  leading  authority  on  the  subject 
is  Bank  of  England  v.  Vagliano  Bros.,  L.  R.  1891  App.  Cas.  107. 
*     *     * 

Under  the  negotiable  instruments  law  and  the  cases  cited,  I  am  of 
the  opinion  the  checks  in  question,  as  between  plaintiff  and  defendant, 
were  payable  to  bearer.  It  does  not  appear  who  forged  the  maker's 
signatures,  but  the  subsequent  history  of  the  checks  does  not  leave  it 
open  to  doubt  that  the  person  who  did  so  knew  that  the  parties  whose 
names  were  used  as  payees  would  never  have  any  interest  in  the  in- 
struments. Just  as  in  the  Bank  of  England  and  the  Phillips  Cases, 
140  N.  Y.  556,  35  N.  E.  982,  23  L.  R.  A.  584,  37  Am.  St.  Rep.  596, 
in  order  to  accomplish  the  fraud  more  easily,  the  names  inserted  as 
payees  were  those  of  persons  to  whom  checks  might  naturally  be  made. 
Whether  indorsing  the  names  of  the  payees  upon  the  checks  was  tech- 
nically forgery  or  not  it  is  unnecessary  to  consider.  It  has  been  con- 
venient to  thus  describe  them.  Despite  these  forged  indorsements, 
then,  the  defendant  acquired  good  title,  since  in  legal  effect  the  checks 
were  payable  to  bearer.  Plaintiff,  having  paid  them  to  a  holder  in 
due  course,  cannot  recover  upon  the  ground  that  the  payees'  signatures 
were  forged.     *     *     * 

[Quoting  from  Shipman  v.  Bank  of  State  of  New  York,  126  N.  Y. 
318,~27  N.  E.  371,  12  L.  R.  A.  791,  22  Am.  St.  Rep.  821,  the  court 
said:]  "The  maker's  intention  is  the  controlling  consideration  which 
determines  the  character  of  such  paper."     *     *     * 

I  am  of  the  opinion  that  the  plaintiff  has  no  legal  claim  against  the 
defendant,  and  for  that  reason  the  latter  is  entitled  to  judgment  upon 
the  merits,  with  costs. 

SEABOARD  NAT.  BANK  v.  BANK  OF  AMERICA. 

(Court  of  Appeals  of  New  York,  1908.     193  N.  Y.  26,  85  N.  E.  829, 
22  L.  R.  A.  [N.  S.]  499.) 

Action  by  the  Seaboard  National  Bank  against  the  Bank  of  America. 
From  a  judgment  of  the  Appellate  Division,  affirming  a  judgment  for 
plaintiff,  defendant  appeals. 

Three  persons  doing  business  under  the  firm  name  of  E.  V.  Babcock 
&  Co.,  at  Pittsburg,  Pa.,  were  depositors  in  the  Federal  National  Bank 
of  that  city.  One  Pennock  was  the  auditor  and  chief  bookkeeper,  and 
known  by  said  bank  to  be  in  the  employ  of  said  firm.  On  September 
17,  1904,  said  Pennock  went  to  said  bank,  and  presented  a  check  pur- 
porting to  be  signed  by  said  firm,  drawn  upon  said  bank,  payable  to  the 
order  of  "N.  Y.  Draft,"  for  $2,000,  and  requested  said  bank  to  give 
him  a  New  York  draft  for  $2,000,  payable  to  the  order  of  "Carroll 
Bros."     A  draft  was  drawn  by  said  bank  upon  the  plaintiff,  a  bank- 


Ch.  4)         RIGHTS   OF   UOLDER   AGAINST   MAKER   AND    ACCEPTOR  859 

ing  institution  in  the  city  of  New  York,  and  delivered  to  said  Pen- 
nock.  Said  Pennock  thereupon  went  to  the  Mellon  National  Bank 
of  Pittsburg,  Pa.,  in  which  bank  he  had  a  personal  account,  and  he 
thereupon  signed  the  name  of  "Carroll  Bros."  on  the  back  of  said 
draft,  and  deposited  the  same  to  his  account  in  said  Mellon  National 
Bank.  The  draft  was  indorsed  by  the  Mellon  National  Bank,  and  for- 
warded to  its  correspondent,  the  defendant,  in  the  city  of  New  York. 
The  defendant  collected  said  draft  of  the  plaintiff,  through  the  clear- 
ing house  in  the  city  of  New  York  in  the  usual  course  of  busmess. 
The  check  upon  the  Federal  National  Bank,  which  purported  to  be 
signed  by  E.  V.  Babcock  &  Co.,  was  a  forgery.  "Carroll  Bros."  is 
a  partnership,  composed  of  two  members,  doing  business  in  Pennsyl- 
vania, and  it  had  dealings,  from  time  to  time,  with  said  E.  V.  Bab- 
cock &  Co.,  but  in  the  dealings  with  said  E.  V.  Babcock  &  Co.,  Car- 
roll Bros,  were  always  indebted  to  E.  V.  Babcock  &  Co.  The  indorse- 
ment of  the  name  "Carroll  Bros."  upon  said  draft  was  without  the 
knowledge  or  authority  of  said  Carroll  Bros.,  said  E.  V.  Babcock  & 
Co.  or  of  said  Federal  National  Bank. 

This  action  was  brought  to  recover  the  amount  of  said  draft,  and 
judgment  was  entered  in  favor  of  the  plaintiff,  from  which  judgment 
an  appeal  was  taken  to,  the  Appellate  Division  of  the  Supreme  Court, 
where  the  judgment  was  unanimously  affirmed,  and  from  such  judg- 
ment of  affirmance  an  appeal  is  taken  to  this  court. 

Chase,  T.  The  Federal  National  Bank  was  a  depositor_  with  the 
plaintiff.  The  relation  existing  between  a  bank  and  a  depositor  bemg 
that  of  debtor  and  creditor,  the  bank  can  justify  a  payment  on  the 
depositor's  account  only  upon  the  actual  direction  of  the  depositor. 
*  *  *  It  is  provided  by  the  Negotiable  Instruments  Law  that: 
"Where  a  signature  is  forged  or  made  without  authority  of  the  per- 
son whose  signature  it  purports  to  be,  it  is  wholly  inoperative,  and 
no  right  to  retain  the  instrument,  or  to  give  a  discharge  therefor,  or 
to  enforce  payment  thereof  against  any  party  thereto,  can  be  acquired 
through  or  under  such  signature,  unless  the  party,  against  whom  it  is 
sought  to  enforce  such  right,  is  precluded  from  setting  up  the  forgery 
or  want  of  authority."  *  *  *  If  it  was  necessary  for  Carroll  Bros, 
to  indorse  the  draft  before  it  could  be  paid  by  the  plaintiff  to  the  ac- 
count of  the  Federal  National  Bank,  then  it  was  never  so  indorsed,  be- 
cause Pennock's  act  was  a  forgery,  and  wholly  inoperative.  The  de- 
fendant cannot  retain  the  money  paid  to  it  by  the  plaintiff  upon  such 
unindorsed  draft,  for  the  very  excellent  reason  that  it  had  no  title  to 
the  instrument  upon  which  the  money  was  paid.  It  is  further  provided 
by  the  Negotiable  Instruments  Law  (section  28)  as  follows:  "The 
instrument  is  payable  to  bearer ;  *  *  *  When  it  is  payable  to  the 
order  of  a  fictitious  or  nonexisting  person,  and  such  fact  was  known 
to  the  person  making  it  so  payable.     *     *     *" 

It  is  claimed  by  the  defendant  that  the  draft  was  payable  to  a  fic- 
titious or  nonexisting  person,  and  consequently  writing  the  signature 
of  Carroll  Bros,  on  the  back  of  the  draft  was  not  in  legal  effect  a  for- 
gery, and  not  necessary  to  protect  the  plaintiff  in  its  payment.  *  *  * 
^Yg  *  *  *  think  that  the  defendant  is  wrong  in  its  contention  that 
the  draft  was  payable  to  bearer  as  defined  in  the  Negotiable  Instru- 
ments Law.  It  is  only  when  a  person  making  an  instrument  knows 
that  he  is  making  it  payable  to  a  fictitious  or  nonexisting  person  that 
it  can  be  treated  as  payable  to  bearer. 


860  NEGOTIABLE   INSTRUMENTS  (Part  3 

The  appellant  asserts  that  a  person  to  whom  a  draft,  made  payable 
to  a  third  person,  is  issued  can,  while  he  remains  the  owner  thereof, 
divert  it  from  the  purpose  for  which  it  was  intended,  and  that,  for  the 
purpose  of  such  diversion,  or  of  returning  the  amount  of  the  draft 
to  his  account  in  the  bank,  he  can  indorse  the  payee's  name  thereon 
without  being  liable  for  the  crime  of  forgery.  Assuming  that,  m  cases 
where  the  draft  has  never  been  delivered  to  the  payee,  or  the  payee  has 
not  in  some  way  obtained  a  vested  interest  therein,  the  appellant  is  right 
in  its  claim,  the  assumed  authority  to  so  indorse  the  payee's  name 
thereon  does  not  arise  because  the  draft  is  payable  in  legal  effect  to 
bearer,  but  because  of  the  fact  that  such  an  act  of  the  owner  is  harm- 
less. Such  means  of  recalling  a  proposed  transaction,  or  of  changmg 
the  use  to  be  made  of  a  draft,  is  sustained  upon  the  right  that  a  per- 
son has  to  do  as  he  pleases  with  his  own,  and  for  that  reason,  until  the 
rights  of  others  in  the  draft  have  become  vested,  the  acts  of  the  owner 
therewith  are  innocent  and  colorless.  *  *  *  There  is  no  presump- 
tion arising  from  the  facts  proven  that  the  name  "Carroll  Bros."  was 
intended  as  a  fictitious  or  nonexisting  payee.  Such  intention,  to  be 
effective,  must  necessarily  arise  from  knowledge,  and  exist  as  an  af- 
firmative fact  in  the  mind  of  the  drawer  of  a  draft  at  the  time  of  its 
delivery.    *    *    * 

Selover  in  his  work  on  Negotiable  Instruments  Law  (page  70)  says: 
"The  doctrine  that  a  check  or  bill  made  payable  to  a  fictitious  person 
is  payable  to  bearer,  and  negotiable  without  indorsement  if  the  ficti- 
tious character  of  the  payee  was  known  to  the  parties,  originated  in 
England,  and  in  each  of  the  cases  holding  the  doctrine  the  decision 
was  based  on  the  fact  that  the  acceptor  knew,  at  the  time  of  his  ac- 
ceptance, that  the  instrument  was  payable  to  a  fictitious  person.  If  the 
drawer  or  maker  of  an  instrument  did  not  know  that  the  payee  was 
a  fictitious  or  nonexistent  person,  and  did  not  intend  to  make  the  paper 
payable  to  such  person,  paper  payable  to  the  order  of  such  person  can- 
not be  treated  as  payable  to  bearer,  for  the  intention  of  the  maker  or 
drawer  is  the  test."    *    *    * 

It  does  not  appear  that  the  Federal  National  Bank  knew  Carroll 
Bros,  was  a  fictitious  or  nonexisting  person,  or  intended  that  the  in- 
strument should  be  payable  to  bearer. 

The  judgment  should  be  affirmed,  with  costs.    *    *    * 


MERCANTILE   NAT.   BANK  OF   CITY   OF   NEW  YORK   v.    SILVERMAN. 

(Supreme  Court  of  New  York,  Appellate  Division,  1911.     148  App.  Div.  1, 

132  N.  Y.  Supp.  1017.) 

Action  by  the  Mercantile  National  Bank  of  New  York  against  Louis 
Silverman.     Judgment  for  plaintiff,  and  defendant  appeals. 

Laughlin,  J.  This  is  an  action  on  a  promissory  note,  upon  which 
the  defendant  admitted  his  liability,  but  pleaded  facts  on  which  he 
demanded  that  the  amount  of  two  checks  paid  by  the  plaintiff  and 
charged  to  his  account  be  set  off.    This  defense  was  overruled.    *    *    * 

The  appellant  was  a  private  banker,  conducting  business  in  the 
city  of  New  York,  and  for  a  long  time  he  had  been  accustomed  to 
purchase  claims  of  officers  of  the  United  States  army  for  their  sala- 
ries to  grow  due  in  the  future,  and  to  take  assignments  of  their  vouch- 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  861 

ers  therefor.  He  had  a  drawing  account  with  the  plaintiff,  and  the 
checks  which  were  charged  to  his  account  and  the  amount  of  which 
he  seeks  to  offset  herein  were  drawn  and  dated  on  the  16th  day  of  Sep- 
tember, 1907.  One  was  for  $900,  payable  to  the  order  of  "Lieut.  Col. 
Frederick  Marsh,"  and  the  other  was  for  $526.50,  payable  to  the  order 
of  "Capt.  J.  A.  Shipton."    *    *    * 

The  appellant  was  not  personally  acquainted  with  either  Lieut.  Col. 
Marsh  or  Capt.  Shipton,  and  had  had  no  business  transactions  with 
either  of  them ;  but  in  due  course  of  mail  he  received  a  letter  under 
date  of  September  11,  1907,  written  on  the  stationery  of  the  New  Wil- 
lard  Hotel  at  Washington,  D.  C,  purporting  to  be  signed  by  "Freder- 
ick Marsh,  Lieut.  Col.  Coast  Artillery  Corps,"  and  stating,  in  sub- 
stance, that  the  writer  observed  by  an  advertisement  in  the  Army  and 
Navy  Register  that  appellant  discounted  monthly  pay  vouchers  for 
army  officers,  and  stating  his  monthly  salary ;  that  he  desired  to  have 
appellant  cash  his  vouchers  for  October,  November,  and  December 
of  that  year.  *  *  *  Qn  the  receipt  of  these  letters  and  vouchers, 
appellant  inclosed  the  checks,  either  in  one  envelope  addressed  to 
Marsh  by  his  official  title,  or  in  separate  envelopes,  the  one  payable  to 
the  order  of  Marsh  addressed  to  him,  and  the  other  addressed  to  Ship- 
ton  by  his  official  title,  at  the  New  Willard  Hotel  at  Washington,  D. 
C,  but  as  to  which  the  testimony  of  the  appellant  is  uncertain.  The 
appellant  knew,  by  an  examination  of  the  Army  and  Navy  Register 
before  answering  the  first  letter,  that  there  were  such  officers,  and 
where  they  were  regularly  stationed,  which  corresponded  in  that  regard 
with  the  information  contained  in  the  letter ;  but  he  made  no  inquiry 
to  ascertain  whether  or  not  they  were  then  at  the  New  Willard  Hotel 
or  in  Washington,  or  to  ascertain  whether  or  not  the  writer  of  the  let- 
ter was  Lieut.  Col.  Marsh. 

The  primary  question  to  be  considered  is  whether  Lieut.  Col.  Marsh 
and  Capt.  Shipton  of  the  United  States  army  were  the  respective 
payees  of  the  checks,  or  whether  the  appellant  intended  to  make  the 
individual  with  whom  he  had  the  correspondence  the  payee  thereof. 
I  am  of  opinion  that  only  one  inference  may  be  drawn  from  these  un- 
controverted  facts,  and  that  is  that,  while  the  appellant  erroneously 
believed  that  his  correspondent  was  Lieut.  Col.  Marsh,  he  did  not  de- 
termine that  question,  and  reasonable  care  did  not  require  that  he  de- 
termine it.  *  *  *  The  appellant  did  not  personally  deliver  the 
checks,  and  thus  pass  on  the  identity  of  the  payee.  He  transmitted 
them  by  mail,  so  addressed  that  without  violating  the  law  they  could 
not  be  received  and  opened  by  any  one  other  than  the  army  officers, 
and  made  the  checks  out  in  such  form  that  they  could  not  be  collected 
by  any  one  other  than  the  army  officers,  without  the  commission  of  the 
crime  of  forgery,  and  failure  on  the  part  of  the  person  or  corporation 
cashing  them  in  the  first  instance  to  require  proper  identification.  In 
these  circumstances,  I  think  no  title  to  the  checks  passed  to  the  im- 
postor.    *    *    * 

With  respect  to  the  sale  and  delivery  of  property  to  an  impostor, 
where  the  vendor  passes  on  the  question  of  his  identity,  it  has  been 
held  that  the  title  passes,  although  the  transaction  may  be  rescinded 
for  fraud.  *  *  *  It  is  unnecessary  to  decide  whether  a  different 
result  would  be  required  if  the  appellant  had  delivered  the  checks  per- 
sonally, and  had  determined  for  himself  the  identity  of  the  payee  which 
would  present  the  question  as  to  who  was  intended  as  the  payee  in  a 


S62  NEGOTIABLE   INSTRUMENTS  (Part  3 

somewhat  different  aspect  and  might  give  rise  to  a  question  of  estop- 
pel.   *     *    * 

It  follows,  therefore,  that  the  judgment  and  order   should  be  re- 
versed.   *    *    *    and  the  complaint    *    *    *    dismissed,  with  costs. 


SECTION  6.— RELATION  OF  A  DRAWEE  BANK  TO  THE 

DRAWER 

While  a  bank  which  has  certified  or  paid  a  check  drawn  upon  it 
is  not  a  holder,  the  relation  of  the  bank  to  its  depositor  is  suffi- 
ciently analogous  to  the  situations  discussed  in  the  preceding  sec- 
tions as  to  warrant  a  special  inquiry  into  the  nature  of  this  con- 
tract. In  many  respects  this  is  no  part  of  the  law  of  negotiable  in- 
struments, but  is  part  of  the  law  of  contracts  generally.  The 
problem,  in  its  broad  outlines,  is :  What  are  the  terms  in  the  con- 
tract between  a  bank  and  its  depositors?  These  terms  are  usually 
not  expressly  agreed  upon,  but  are  implied  either  in  fact  or  law. 
No  attempt  is  here  made  to  present  a  complete  analysis  of  the 
-contract  of  deposit.  A  few  only  of  its  important  aspects  are  in- 
volved in  the  cases  following. 


BLAKE  V.  HAMILTON  DIME  SAVINGS  BANK  00. 

(Supreme  Court  of  Ohio.  1908.     79  Ohio  St.  189,  87  N.  E.  73.  20  L.  R.  A. 
[N.  S.]  290,  128  Aiu.  St.  Rep.  684,  16  Ann.  Gas.  210.) 

Summers,  J.  The  action  was  brought  by  the  defendant  in  error,  the 
Hamilton  Dime  Savings  Bank  Company,  of  Hamilton,  Ohio,  against 
the  Franklin  Bank  of  Cincinnati,  Ohio,  upon  a  check  drawn  by  C.  G. 
Blake  &  Co.  upon  the  Franklin  Bank  for  $275,  payable  to  the  order 
of  C.  G.  Blake,  and  certified  by  the  Franklin  Bank  to  be  good,  and 
indorsed  by  C.  G.  Blake  and  Charles  Werbel. 

On  Friday,  October  16,  1903,  Blake  bought  a  horse  from  Werbel  and 
indorsed  the  check  to  the  order  of  Werbel  and  delivered  it  to  him 
in  payment  for  the  horse.  The  indorsement  of  certification  was  as 
follows :  "Good  for  $275.00  when  properly  indorsed.  The  Franklin 
Bank,  H.  Sachteleben,  Teller."  Werbel  indorsed  the  check,  and  on 
the  following  Monday,  October  the  20th,  deposited  it  to  his  account 
with  the  Hamilton  Dime  Savings  Bank  Company,  and  was  given  credit 
■therefor  on  the  books  of  the  bank.  The  Hamilton  Dime  Savings 
Bank  Company  sent  the  check  to  the  Atlas  National  Bank,  of  Cin- 
cinnati, for  collection,  and  it  was  protested  for  nonpayment  for  the 
reason  "payment  stopped."  Thereupon,  on  November  19,  1903,  the 
defendant  in  error  sued  the  Franklin  Bank  on  the  check,  and  the 
Franklin  Bank  filed  a  motion  for  an  order  of  interpleader,  which  was 
granted,  the  amount  of  the  check  with  interest  was  paid  into  court, 
and  C.  G.  Blake  was  substituted  as  defendant.  Blake  filed  an  answer 
averring  that  he  had  been  induced  to  purchase  the  horse  and  to  de- 
liver the  check  in  payment  therefor  by  the  false  and  fraudulent  rep- 
resentations of  Werbel,  that  Werbel  is  the  owner  of  the  check,  that  the 
plaintiff.  The  Hamilton  Dime  Savings  Bank  Company,  received  the 
check  only  as  collecting  agent  for  Werbel  and  with  knowledge  that 
Werbel  had  been  notified  that  payment  on  the  check  would  be  stopped. 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  863^^ 

A  jury  was  waived,  and  the  court  stated  its  findings  of  fact  sepa-^ 
rately  from  its  conclusions  of  law.  Judgment  was  given  for  the  bank 
for  the  amount  paid  into  court,  less  costs  to  the  date  of  that  payment. 
The  court  found  that  the  Hamilton  Dime  Savings  Bank  Company 
was  the  purchaser  of  the  check  for  value  and  before  notice  and  with- 
out knowledge  of  Blake's  claim.     *     *     * 

In  this  state  a  bank  check  for  part  of  the  sum  due  the  drawer  does 
not,  before  acceptance  by  the  drawee,  constitute  an  equitable  assign- 
ment of  the  amount  for  which  it  is  drawn,  *  *  *  and  the  holder 
cannot  maintain  an  action  against  the  bank  for  the  amount  of  the 
check,  although  it  has  funds  to  the  credit  of  the  drawer  sufficient  to 
meet  it.  *  *  *  This  is  now  made  the  law  by  statute.  *  *  * 
[N.  I.  L.  §  189]  is  as  follows:  "A  check  of  itself  does  not  operate  as 
an  assignment  of  any  part  of  the  funds  to  the  credit  of  the  drawer 
with  the  bank,  and  the  bank  is  not  liable  to  the  holder  unless  and 
until  it  accepts  or  certifies  the  check." 

But  this  is  a  certified  check.  Mr.  Daniel  says  that  the  certification 
of  modern  commerce  is  quite  recent  in  its  origin,  but  now  of  daily  and 
extensive  occurrence.  And  in  Merchants'  National  Bank  of  Boston  v. 
State  National  Bank  of  Boston,  10  Wall.  604,  19  L.  Ed.  1008,  decided 
in  1871,  Mr.  Justice  Swayne  says  in  the  opinion  that  "it  is  computed 
by  a  competent  authority  that  the  average  daily  amount  of  such 
checks  in  use  in  the  city  of  New  York,  throughout  the  year,  is  not 
less  than  $100,000,000,"  and  that  "we  could  hardly  inflict  a  severer  blow 
upon  the  commerce  and  business  of  the  country  than  by  throwing  a 
doubt  upon  their  vaHdity."  And,  speaking  of  their  legal  effect,  he 
says:  "By  the  law  merchant  of  this  country,  the  certificate  of  the 
bank  that  a  check  is  good  is  equivalent  to  acceptance.  It  implies  that 
the  check  is  drawn  upon  sufficient  funds  in  the  hands  of  the  drawee, 
that  they  have  beeil  set  apart  for  its  satisfaction,  and  that  they  shall 
be  so  applied  whenever  the  check  is  presented  for  payment.  It  is  an 
undertaking  that  the  check  is  good  then  and  shall  continue  good ;  and 
this  agreement  is  as  binding  on  the  bank  as  its  notes  of  circulation, 
a  certificate  of  deposit  payable  to  the  order  of  the  depositor,  or  any 
other  obligation  it  can  assume.  The  object  of  certifying  a  check,  as  re- 
gards both  parties,  is  to  enable  the  holder  to  use  it  as  money.  The 
transferee  takes  it  with  the  same  readiness  and  sense  of  security  that 
he  would  take  the  notes  of  the  bank.  It  is  available  also  to  him  for 
all  the  purposes  of  money.  Thus  it  continues  to  perform  its  impor- 
tant functions  until  in  the  course  of  business  it  goes  back  to  the  bank 
for  redemption  and  is  extinguished  by  payment.  It  cannot  be  doubted 
that  the  certifying  bank  intended  these  consequences,  and  it  is  liable 
accordingly.  To  hold  otherwise  would  render  these  important  securi- 
ties only  a  snare  and  delusion.  A  bank  incurs  no  greater  risk  in  cer- 
tifying a  check  than  in  giving  a  certificate  of  deposit.  In  well-regulated 
banks  the  practice  is  at  once  to  charge  the  check  to  the  account  of 
the  drawer,  to  credit  it  in  'certified  check  account,'  and,  when  the  check 
is  paid,  to  debit  that  account  with  the  amount.  Nothing  can  be  simpler 
or  safer  than  this  process.  The  practice  of  certifying  checks  has  grown 
out  of  the  business  needs  of  the  country.  They  enable  the  holder 
to  keep  or  conVey  the  amount  specified  with  safety.  They  enable  per- 
sons not  well  acquainted  to  deal  promptly  with  each  other,  and  they 
avoid  the  delay  and  risks  of  receiving,  counting,  and  passing  from  hand 
to  hand  large  sums  of  money."    Daniel  (section  1603)  says  that,  when 


864  NEGOTIABLE   INSTRUMENTS  (Part  3 

the  check  Is  certified,  the  bank  becomes  at  once  the  principal  debtor,  and 
that,  when  the  holder  procures  the  bank  to  certify  the  check  "in  con- 
templation and  by  operation  of  law,  it  is  the  same  as  if  the  funds  had 
been  actually  paid  out  by  the  bank  to  the  holder,  by  him  redeposited 
to  his  own  credit,  and  a  certificate  of  deposit  issued  to -him  therefor. 
In  other  words,  a  certified  check  is  a  shorthand  certificate  of  deposit 
in  favor  of  the  holder,  and  payable  to  him,  or  to  him  or  order,  or  to 
bearer,  according  to  its  terms."  Again,  he  says :  "It  will  be  too  late 
after  the  bank  has  certified  the  check  for  the  drawer  to  revoke  it,  and 
the  bank  will  be  bound  to  pay  it  though  notified  by  the  drawer  not 
to  do  so."  And  again  he  says,  in  section  1605,  that  "the  check  when 
certified  circulates  as  the  representative  of  so  much  cash  in  bank,  pay- 
able, whenever  demanded,  to  the  holder.  It  is  then  like  cash,  but  still 
it  is  not  the  same  as  cash.     *     *     * 

The  drawer  by  delivery  of  a  certified  check  in  the  absence  of  spe- 
cial agreement,  is  not  discharged  from  hability,  the  only  effect  of  the 
certification  being  to  add  the  credit  of  the  bank  to  that  of  the  drawer. 

*  *  *  And  the  same  is  true  as  to  a  holder  who  procures  the  check 
to  be  certified  before  delivery.  He  is  a  new  drawer  and  will  be  held 
liable  as  will  the  bank.  If,  after  delivery,  the  holder  procures  a 
check  to  be  certified,  the  drawers  and  indorsers  are  thereby  discharged. 

*  *  *  In  this  case  the  payee,  Blake,  procured  the  certification  of 
the  check  after  delivery  to  him  and  before  delivery  by  him  to  Werbel, 
thereby  discharging  Blake  &  Co.,  the  drawers,  and  making  himself  as 
well  as  the  bank  liable  on  the  check.  *  .  *  *  The  certification  oper- 
ates as  an  assignment  of  the  funds  to  meet  the  check  and  makes  the 
bank  liable  to  the  holder. 

What,  then,  are  the  rights  of  the  parties?  If  Blake  had  given 
Werbel  money,  instead  of  the  check,  and  Werbel  had  deposited  the 
money  to  his  credit  in  the  Hamilton  Bank,  the  relation  of  debtor  and 
creditor  between  the  bank  and  Werbel  would  thereby  have  been  cre- 
ated. In  C,  H.  &  D.  R.  R.  Co.  v.  Bank,  54  Ohio  St.  60,  71,  42  N.  E. 
700,  702,  31  L.  R.  A.  653,  56  Am.  St.  Rep.  700,  it  is  said  by  Spear,  J.: 
"The  relation  of  bank  and  general  depositor  is  simply  the  ordinary 
Qne  of  debtor  and  creditor,  not  of  agent  and  principal,  or  trustee  and 
cestui  que  trust."  And  again:  "The  deposits  become  the  absolute 
property  of  the  bank,  impressed  with  no  trust,  and  the  bank's  right 
to  use  the  money  for  its  own  benefit  is  immediate  and  continuous." 
The  money  would  belong  to  the  bank,  and  Blake  could  not  acquire 
any  interest  in  it  or  impose  any  liability  on  the  bank  merely  by  notify- 
ing it  that  Werbel  had  obtained  the  money  from  him  by  defrauding 
him  in  a  horse  trade*.     *     *     *  ' 

Now,  while  it  is  true,  as  has  been  pointed  out,  that  the  delivery  of 
the  check  was  not  payment  for  the  horse,  and  that  Blake  was  liable  on 
the  check,  still,  if  certified  checks  are  to  circulate  as  money  and  to 
perform  the  useful  purpose  in  trade  they  have  heretofore,  the  deposit 
of  them  in  bank  to  the  credit  of  the  holder  must  be,  so  far  as  the 
rights  of  the  indorser  are  concerned,  treated  as  a  deposit  of  money. 
The  transaction  under  consideration  may  serve  in  some  slight  measure 
to  illustrate  their  use.  Blake  may  have  supposed  that  Werbel  would 
want  cash  for  the  horse  and  would  not  accept  his  check,  and,  not  wish- 
ing to  carry  the  money  from  Cincinnati  to  Hamilton,  he  procured  the 
certification  of  the  check,  and  Blake  accepted  it  as  readily  as  he 
would  have  accepted  cash;    but,  if  he  could  not  accept  it  with  the 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  8G5 

same  security  that  he  could  cash,  then,  under  such  circumstances,  a 
certified  check  could  not  be  used  at  all,  or  the  indorsee  of  such  a 
check,  if  he  wishes  to  avoid  embarrassment  and  delays,  such  as  have 
resulted  in  this  case,  must  at  once  present  the  check  for  payment  and 
deposit  the  money,  instead  of  the  check,  in  bank.  This  being  so,_  then 
tlie  obligation  of  the  Franklin  Bank  to  pay  the  check  was  not  affected 
by  the  notice  to  it  by  Blake  not  to  pay,  and  the  right  of  the  Hamilton 
Bank  to  enforce  payment  was  not  affected  by  notice  of  Blake's  claim. 
*     *     * 

The  judgment  is  affirmed. 


GDENNAN  V.   ROCHESTER  TRUST  &   SAFE   DEPOSIT  CO. 

(Court  of  Appeals  of  New  York,  1913.     209  N.  Y.  12,  102  N.  E.  537, 
52  L.  R.  A.  [N.  S.]  302,  Ann.  Cas.   1915A,  441.) 

Action  by  John  W.  Glennan  against  the  Rochester  Trust  &  Safe 
Deposit  Company.  From  a  judgment  of  the  Appellate  Division  in 
favor  of  the  defendant,  plaintiff  appeals. 

CuivLEN,  C.  J.  The  action  is  brought  by  the  plaintiff  as  administra- 
tor of  a  depositor  in  the  defendant  trust  company  to  recover  the 
amount  of  a  deposit  made  by  the  intestate.  The  defense  was  pay- 
ment and  an  assignment  of  the  deposit  by  the  intestate  to  a  third  par- 
ty. The  payment  proved  was  that  of  a  check  drawn  by  the  intestate, 
but  not  presented  to  or  paid  by  the  defendant  until  after  the  death 
of  the  former,  of  which  the  defendant  claimed  to  be  ignorant.  While 
the  case  was  submitted  to  the  jury  on  both  issues,  the  jury  was  di- 
rected to  answer  specific  questions  of  fact,  one  of  which  was:  "Did 
the  bank  pay  the  money  without  knowledge  of  the  death  of  John  Cal- 
lahan (plaintiff's  intestate)  and  in  the  due  course  of  business?"  This 
question  the  jury  answered  in  the  affirmative.  If  the  finding  required 
a  verdict  in  the  defendant's  favor,  as  the  trial  court  charged,  it  is  not 
necessary  to  consider  the  other  rulings  on  the  trial  of  which  the  ap- 
pellant complained,  as  they  do  not  affect  this  issue. 

It  is  singular  that  there  should  be  such  a  paucity  of  judicial  decisions 
on  this  question,  as  seems  to  be  the  case.  In  my  search  through  the 
reports  I  have  been  able  to  find  only  one  on  the  precise  point,  Roger- 
son,  Executor,  v.  Ladbroke,  decided  by  the  English  Common  Pleas  in 
1822  (1  Bing.  93),  in  which  it  was  held  that  the  payment  or  rather  the 
charge  of  a  check  to  a  depositor's  account  made  by  the  banker  after 
the  death  of  the  depositor,  but  before  the  bank  had  received  knowledge 
of  that  fact,  was  a  valid  payment,  and  that  the  banker  was  not  liable 
for  the  amount.  There  is  another  case  often  cited  to  the  same  eft'ect 
(Tate  V.  Hilbert,  2  Vesey,  Jun.  112)  where  the  Lord  Chancellor  ex- 
pressed the  opinion  that  if  the  holder  of  a  check  had  collected  the 
money  from  the  banker  after  the  death  of  the  drawer,  hut  before  the 
banker  had  knowledge  of  death,  no  court  would  take  the  money  away 
from  her.  This  was  purely  obiter,  simply  the  chancellor's  opinion, 
for,  as  a  matter  of  fact,  the  suit  in  which  the  opinion  was  expressed 
was  dismissed  and  the  complainant  remitted  to  her  action  at  law.  On 
the  other  hand,  none  of  the  cases  cited  by  the  learned  counsel  for  the 
appellant  is  authority  for  the  contrary  proposition. 

The  greatest  reliance  is  upon  Davis,  Adm'r,  v.  Windsor  Savings 
Bank,  46  Vt.  728.  There  a  woman  from  time  to  time  deposited  cer- 
B.&  B.Bus.Law— 55 


866  NEGOTIABLE   INSTRUMENTS  (Part  3 

tain  sums  of  money  in  a  savings  bank  to  the  credit  of  her  brother,  in 
whose  name  the  pass-book  was  issued.  The  jury  found  that  these 
moneys  were  the  property  of  the  brother  and  had  been  collected  by 
the  woman  on  his  account.  After  the  death  of  the  brother,  but  be- 
fore notice  of  that  death  had  reached  it,  the  defendant  paid  the  amount 
of  the  account  to  the  woman  who  presented  the  pass-book.  It  was 
held  that  death  revoked  the  agency  of  the  plaintiff,  and  that  the  pay- 
ment was  bad.  ISTo  question  of  the  payment  of  a  check  was  involved 
in  this  case,  for  there  was  none.  *  *  *  in  Pullen  v.  Placer  County 
Bank,  138  Cal.  169,  66  Pac.  740,  71  Pac.  83,  94  Am.  St.  Rep.  19,  the 
check  was  paid,  not.  only  after  the  death  of  the  drawer,  but  after  the 
defendant  had  been  informed  of  the  death,  as, is  stated  in  the  opinion 
of  the  court.  But,  while  there  is  this  paucity  of  judicial  decisions  on 
the  subject,  there  seems  to  be  absolute  unanimity  in  the  rule  as  declared 
by  the  leading  text-writers.  Chitty  on  Bills,  *429,  Byles  on  Bills 
(Sharswood  Ed.)  p.  22,  2  Parsons  on  Notes  and  Bills,  p.  81,  Story  on 
Promissory  Notes,  §  498a,  Edwards  on  Bills  and  Notes,  §  739,  Morse 
on  Banks  and  Banking,  §  400,  and  Daniels  on  Negotiable  Instruments, 
§  1618b,  all  declare  that,  while  a  bank  should  not  pay  a  check  after 
the  death  of  the  drawer,  still  a  payment  made  in  good  faith,  without 
knowledge  of  the  death,  or  of  facts  sufficient  to  cause  inquiry,  is  a 
valid  payment,  though  the  only  authority  usually  cited  is  that  of  Tate 
v.  Hilbert  (supra). 

For  the  appellant  it  is  argtied,  first,  that  a  check  of  itself  is  a  mere 
order  for  the  payment  of  money,  not  operating  as  an  assignment  of 
any  part  of  the  fund,  the  authority  of  the  drawee  or  the  banker  to 
pay  which  may  be  revoked  or  countermanded  by  the  drawer.  This  is 
the  rule  of  law  prevailing  in  England  and  in  this  country,  with  the 
exception  of  a  very  few  states  in  which  a  check  is  considered  as  an 
assignment  of  the  fund.  The  rule  stated  is  unquestionably  the  law  of 
-this  state  as  well  as  the  law  of  the  federal  courts.  *  *  *  That  the 
death  of  the  principal  revokes  the  authority  of  the  agent  to  collect 
the  check  in  those  jurisdictions  where  the  check  is  considered  a  mere 
order  must  also  be  conceded.  *  *  *  It  is  further  true  that  the  com- 
mon-law doctrine  that  death  revokes  an  agent's  power,  even  as  to  third 
parties  dealing  with  the  agent  in  good  faith  without  notice,  is  the  gen- 
eral rule  in  this  state.    *    *     * 

At  this  point  we  reach  tlie  very  crux  of  this  case,  and  the  question  is 
whether  payment  of  checks  by  banks  or  bankers  is  an  exception  to 
the  rule  stated.  I  think  it  is.  It  must  be  first  borne  in  mind  that  the 
rule  itself  is  an  exception  to  the  still  broader  rule  that  revocation  of 
the  power  of  an  agent  does  not  affect  third  parties  dealing  with  him  in 
good  faith  without  notice.  This  is  the  rule  of  the  civil  law  even  where  , 
the  agency  is  revoked  by  death.  The  common-law  rule  in  some  states 
has  been  changed  by  statute,  in  others  repudiated,  *  *  *  while  in 
still  others  greatly  limited.  *  *  *  There  are  differences  between 
the  liability  of  banks  to  their  depositors  and  that  of  ordinary  debtors 
to  their  creditors  which  justify  excepting  the  payment  of  checks  from 
the  rule.  If  an  ordinary  debtor  refuses  to  pay  his  debt  to  the  agent  of 
his  creditor,  his  liability  is  in  no  respect  increased.  It  is  not  so  with  a 
bank.  Its  contract  with  the  depositor  is  to  pay  his  checks  as  long  as 
his  deposit  is  sufficient  for  the  purpose,  and  for  a  failure  to  pay  the 
checks  the  bank  is  liable  for  any  injury  to  the  credit  of  the  drawer 
occasioned  thereby.     In  the  ordinary  conduct  of  a  bank  but  a  minute 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER   AND   ACCEPTOR  8G7 

fraction  of  its  payments  is  made  directly  to  its  depositors.  The  others 
are  made  on  checks  in  favor  of  third  parties,  usually,  at  least  in  large 
cities,  presented  through  other  banks  or  the  clearing  house.  The  num- 
ber of  depositors  is  often  very  great,  many  of  them  living  at  other 
places  than  where  the  bank  is  located.  Of  the  death  of  those  promi- 
nent, either  by  their  public  position,  their  business  activities  or  great 
wealth,  the  bank  might  be  apprised ;  but  of  the  great  mass  their  deaths 
would  pass  unknown  by  the  bank  unless  notice  of  the  fact  was  given. 
It  would  be  utterly  impracticable  for  business  to  be  done  if,  before 
the  bank  could  safely  pay  checks,  it  must  delay  to  find  out  whether  the 
drawer  is  still  living. 

r.ut  the  dominant  and  controlling  reason  for  holding  that  the  usual 
rule  that  a  debtor  is  not  protected  in  payment  to  an  agent  after  the 
death  of  his  principal,  though  without  knowledge  of  that  fact,  is  not 
appHcable  to  the  payment  of  checks  by  banks,  is  that  such  has  almost 
universally  been  accepted  as  the  law.  As  already  said,  all  the  text- 
books so  state  the  law  (in  England  it  has  been  so  settled  by  section  75 
of  the  Bills  of  Exchange  Act  of  1882),  and  apparently  the  whole  coun- 
try has  assumed  the  text-books  to  be  right.  The  rule  thus  adopted,  if 
not  stricdy  a  rule  of  property,  is  a  rule  of  conduct  affecting  property 
interests  that  very  closely  approximates  to  a  rule  of  property.  I  think 
the  fact  that  the  rule  has  been  adopted  by  the  community  is  reasonably 
clear.  The  use  of  banks  as  depositories  of  money  and  the  practice  of 
making  payment  by  checks  prevails  in  this  country  to  an  extent  far 
beyond  that  existing  in  any  other,  so  that  the  situation  presented  in 
this  case  must  have  frequently  arisen.  True,  where  the  estate  of  the 
depositor  is  solvent  and  the  check  is  given  for  value,  it  is  of  no  prac- 
tical moment  whether  the  bank  is  liable  for  the  payment  of  a  check 
after  the  death  of  the  drawer  or  not.  Very  many,  however,  must 
have  been  the  cases  where  either  the  estate  was  insolvent  or  the  check 
was  given  without  value  and  the  bank  has  paid  it  after  death,  in  ig- 
norance of  that  fact.  Yet,  in  my  research,  I  have  not  been  able  to  find 
in  the  reports  in  this  country  or  in  England  a  case  where  it  was  sought, 
under  such  circumstances,  to  hold  the  bank  liable  except  the  Rogerson 
Case,  supra,  in  which  the  attempt  failed. 

The  rule  that  denies  protection  to  persons  dealing  with  an  agent 
after  the  death  of  the  principal,  though  in  good  faith  and  without 
knowledge  of  that  fact,  is  an  inherited  one.  In  the  Wilson  Case,  139 
N.  Y.  284,  34  N.  E.  784,  36  Am.  St.  Rep.  696,  it  was  declared  by  this 
court  to  be  a  harsh  one,  but  the  court  felt  that  it  had  been  too  firmly 
established  in  this  state  to  be  disturbed  by  judicial  decision,  though  it 
recommended  a  change  by  the  Legislature,  to  place  the  law  in  har- 
mony with  the  more  enlightened  views  of  the  present  time  and  to  pro- 
mote the  interests  of  justice.  The  same  reason  which  there  constrain- 
ed the  court  to  give  effect  to  the  rule,  despite  its  disapproval  of  it, 
should  also  impel  us  to  hold  the  rule  inapplicable  to  bank  checks.  If 
there  it  appeared  that  the  doctrine  of  the  common  law  had  prevailed 
too  long  to  be  disregarded,  it  also  appears  almost  equally  clearly  that 
the  common-law  doctrine  has  never  prevailed  as  to  checks ;  for  a  legal 
proposition  may  be  nearly  as  well  established  by  its  general  acceptance 
and  the  failure  of  any  one  to  question  it  as  it  can  be  by  a  series  of 
judicial  decisions.  Even  if  it  should  be  assumed  that  the  distinction 
sought  to  be  drawn  between  the  relation  of  a  bank  to  its  depositors  and 
that  between  ordinary  debtors  and  their  creditors  would  not  justify  a 


868  NEGOTIABLE   INSTRUMENTS  (Part  3 

distinction  in  the  principle  of  law  applicable  to  the  respective  cases, 
nevertheless  a  rule  of  conduct  of  a  whole  people  long  prevailing  and 
acted  upon  should  not  be  subordinated  to  mere  consistency  of  legal 
principles.  The  law  presents  anomalies.  They  are  to  be  regretted; 
but  no  one  would  maintain  that  merely  to  avoid  inconsistency  courts 
would  be  justified  in  disregarding  rules  of  action  long  established  by 
judicial  decisions,  especially  when  the  exception  is  more  just  than  the 
general  rule. 

The  judgment  appealed  from  should  be  affirmed,  with  costs.  *   *   * 


THIRD  NAT.  BANK   OF  ST.  LOUIS  v.  OBER. 

(TJnrted  States  Circuit  Court  of  Appeals,  Eighth  Circuit,  1910.    178  Fed.  678, 

102  C.  C.  A.  178.) 

Hook,  Circuit  Judge.  This  was  an  action  by  William  A.  Ober  to 
recover  damages  of  the  Third  National  Bank  of  St.  Louis  for  its 
failure  to  pay  a  check  drawn  by  him  on  his  account.  He  obtained  a 
judgment,  and  this  writ  of  error  was  prosecuted. 

Ober,  who  lived  in  Natchez,  Miss.,  had  a  small  account  with  the 
defendant  bank  at  St.  Louis,  Mo.,  and,  wishing  to  transfej  a  part  of 
it  to  his  home  bank,  he  drew  a  check  in  its  favor  for  $50.  At  the 
time  his  account  with  defendant  had  a  credit  balance  of  $122.14. 
When  in  due  banking  course  the  check  was  presented,  defendant  re- 
fused payment  on  the  ground  that  Ober's  account  had  been  withdrawn. 
The  check  was  protested  for  nonpayment.  There  was  no  malice  or 
ill  will  in  the  action  of  defendant.  It  was  due  solely  to  a  clerical  er- 
ror of  a  bookkeeper.  Ober  wa^  not  a  merchant  or  trader.  He  sued 
for  protest  fees,  and  for  general  damages  to  his  honor,  truth,  and  busi- 
ness standing.  Aside  from  the  protest  fees,  no  special  damages  were 
alleged  in  his  petition,  and  the  evidence  at  the  trial  disclosed  none. 
He  received  a  verdict  and  judgment  for  S500. 

The  trial  court  refused  defendant's  request  that  the  jury  be  in- 
structed to  confine  their  verdict  to  the  protest  fees  and  interest.  It 
then  instructed  them  substantially  as  follows : 

There  is  no  evidence  that  defendant  acted  maliciously  in  refusing 
payment  of  the  check,  nor  that  plaintifif  sustained  special  damage.  If 
there  was  evidence  of  this  character,  you  would  be  justified  in  award- 
ing substantial  damages.  As  there  was  no  malice,  but  only  a  book- 
keeper's mistake,  and  as  special  damages  are  not  shown,  the  question 
is :  What  is  the  measure  of  damage  ?  The  plaintiff  is  entitled  to  re- 
cover the  protest  fees  "and  such  other  damages  as  under  all  the  evi- 
dence in  the  case  you  may  believe  he  is  entitled  to  .  *  *  *  You  are 
all  business  men,  and  I  am  disposed  to  leave  the  question  entirely  to 
your  decision  and  judgment,  without  any  special  comment,  only  saying 
to  you,  however,  that  you  ought  not  limit  your  verdict  to  nominal 
damages,  but  to  give  the  plaintiff  such  temperate  damages  as  you, 
in  your  judgment,  may  deem  to  be  reasonable  compensation  for  the 
injury  he  sustained  by  dishonoring  his  check.  As  to  this  you  are  the 
sole  and  exclusive  judges." 

The  jury  retired,  and  returned  into  court  for  further  explanation  of 
the  instructions,  saying :  "We  want  to  know  whether  we  are  required 
to  give  plaintiff  some  substantial  damages." 

The  court  responded  that  the  instructions  meant :  "There  should  be 
no  excessive  damages,  and  not  mere  nominal  damages;   that  the  jury 


Ch.  4)         RIGHTS   OF   HOLDER  AGAINST   MAKER  AND   ACCEPTOR  860 

should  award  such  damages  as  they  believe  from  all  the  circumstances 
plaintiff  is  entitled  to."  Appropriate  exceptions  were  taken  by  de- 
fendant.   As  already  observed,  there  was  verdict  for  $500. 

With  some  exceptions  the  underlying  principle  of  the  law  of  damages 
is  compensation  for  the  injury  done.  In  cases  of  malice,  willful  wrong- 
doing, a  conscious  disregard  of  the  rights  of  others,  and  the  like,  an 
additional  award  may  be  given  by  way  of  punishment.  Again,  every 
invasion  of  a  legal  right  is  presumed  in  law  to  cause  an  injury,  and, 
though  none  is  shown,  there  may  nevertheless  be  a  recovery  of  nominal 
damages,  with  costs  of  the  action.  Such  a  recovery  is  a  judicial  recog- 
nition of  the  right  and  an  admonition  that  it  cannot  be  invaded  with 
impunit3^  The  relation  between  banker  and  depositor  is  one  of  con- 
tract. The  right  of  the  latter  is  that,  to  the  extent  of  his  credit  bal- 
ance subject  thereto,  his  checks  drawn  and  presented  according  to  the 
customs  and  usages  of  the  business  shall  be  promptly  honored.  For 
a  breach  of  this  right  an  action  for  damages  will  lie.  If  the  depositor 
is  a  merchant  or  trader,  it  will  be  presumed,  without  further  proof,  that 
substantial  damages  have  been  sustained.     *     *     * 

This  rule  proceeds  upon  the  fact,  commonly  recognized,  that  the  cred- 
it^ of  a  person  engaged  in  such  a  calhng  is  essential  to  the  prosperity  of 
his  business,  and  the  dishonoring  of  his  checks  is  plainly  calculated  to 
impair  it  and  inflict  a  most  serious  injury.  In  common  opinion,  sub- 
stantial damage  is  the  natural  and  probable  consequence  of  the  act,  and 
therefore  a  substantial  recovery  may  be  had,  without  pleading  or  proof 
of  special  injury.  A  leading  case  upon  this  subject  is  Rolin  v.  Steward, 
14  C.  B.  595,  23  L.  J.  C.  P.  148.    *    *    * 

On  the  other  hand,  if  the  depositor  is  not  a  merchant  or  trader,  there 
is  no  such  presumption  of  substantial  injury,  and  this  recovery  should 
be  a  nominal  one,  unless  he  pleads  and  proves  some  special  damage. 
*  *  *  Upon  this  latter  proposition  there  is  confusion  and  conflict 
in  the  decisions  of  the  courts,  due  in  large  part  to  the  undiscriminat- 
ing  application  of  Rolin  v.  Steward  to  cases  wholly  unlike  it  in  the  im- 
portant particular  mentioned.  But  we  think  the  rule  stated  is  more 
in  accord  with  the  fundamental  principles  of  the  law  of  damages. 

Counsel  contend  that  the  presumption  arising  in  the  case  of  a  mer- 
chant or  trader  is  merely  that  he  possesses  credit,  and  that  when  the 
depositor  is  not  a  merchant  or  trader  the  fact  not  presumed  may  be  es- 
tablished by  proof,  and  same  right  to  substantial  damages  would  then 
follow.  The  character  of  the  presumption  is  misconceived.  It  is  not 
so  much  the  possession  of  credit,  as  it  is  that  substantial  injury  thereto 
has  been  inflicted  by  the  dishonoring  of  the  check.  The  very  reason 
for  allowing  general  substantial  damages  to  a  merchant  or  trader,  with- 
out a  showing  of  special  injury,  implies  a  contrary  rule,  generally,  as 
to  those  not  of  that  class.  A  mere  technical  violation  of  a  right  is  no 
just  basis  for  a  recovery  of  general  and  substantial  damages,  where  no 
actual  injury  is  shown,  and  none  appears  to  follow  as  the  natural  and 
probable  consequences  of  the  act.  In  the  case  before  us  there  was  no 
averment  of  particular  circumstances  or  special  injury,  aside  from  the 
protest  fees,  and  none  was  proved.  On  the  contrary,  witnesses  of 
plaintiff,  who  knew  of  the  dishonoring  of  his  check,  testified  that  his 
credit  was  not  injured.  We  think  the  court  erred  in  instructing  the 
jury  that  the  verdict  should  be  for  more  than  the  protest  fees  and 
nominal  damages. 

The  judgment  is  reversed,  and  the  cause  remanded  for  a  new  trial. 


870  NEGOTIABLE    IXSTRTMENTS  (Part  3 

CALIFORNIA    VEGETABLE    UNION    v.    CROCKER   NAT.    BANK. 

(District  (\nirt  of  Appeal,  First  District,  California,  1918.     37  Cal.  App.  743, 

174    Pac.    920.) 

Action  by  the  California  Vegetable  Union,  a  corporation,  against  the 
Crocker  National  Bank  of  San  Francisco,  a  national  banking  associa- 
tion. From  a  judgment  in  its  favor  granting  only  a  part  of  the  re- 
lief demanded,  plaintiff  appeals. 

Beasly,  Judge  pro  tem.  The  California  Vegetable  Union  is  a  Los 
Angeles  concern  having  a  branch  house  in  San  Francisco.  Of  this 
branch  house  during  the  period  in  which  we  are  interested  H.  F. 
Afdery  was  the  manager  and  Fred  B.  Weeks  the  cashier.  During  the 
years  1911  and  1912  and  until  the  end  of  the  year  1913  the  plaintiff's 
branch  house  in  San  Francisco  was  a  depositor  of  the  defendant 
bank.  The  bank  was  instructed  to  pay  checks  of  the  plaintiff  when 
signed  by  Fred  B.  Weeks,  its  cashier,  and  H.  F.  Ardery,  its  manager. 
Weeks  became  an  employe  of  the  plaintiff  about  the  1st  of  May,  1912, 
and  continued  in' that  employment  until  about  September  1,  1913,  when 
he  "departed  these  quarters  for  parts  unknown,  leaving  behind  him  a 
trail  of  forged  checks."  Between  September  18,  1912,  and  August  28, 
1913,  Weeks  forged  the  name  of  Ardery  to  136  separate  checks,  all 
drawn  upon  the  plaintiff's  account  in  the  defendant  bank,  and  ag- 
gregating $3,972.65.  The  bank  cashed  these  checks,  and  charged  their 
amount  to  plaintift"s  account.  The  checks  went  through  the  bank 
during  the  various  months  of  this  period,  and  at  the  end  of  each  month 
the  forged  checks  paid  during  that  month,  together  with  all  the  valid 
checks  of  the  plaintiff,  were  returned  to  it,  with  a  list  of  all  checks  paid 
by  the  bank  during  that  month.  *  *  *  These  returned  checks  and 
these  accounts  for  all  of  the  months  from  August,  1912,  to  August, 
1913,  although  regularly  received  in  the  course  of  business  at  the 
end  of  each  month  during  that  period,  were  never  examiried  by  the 
plaintiff,  nor  by  its  manager,  Ardery,  until  some  time  in  September, 
1913,  after  Weeks  had  absconded.     *     *     * 

The  principal  problem  in  this  case  may  be  stated  in  the  language  of 
the  Supreme  Court  in  the  case  of  Otis  Elevator  Co.  v.  First  National 
Bank,  163  Cal.  31,  124  Pac.  704,  41  L.  R.  A.  (N.  S.)  529,  and  is  as 
follows :  "The  claim  made  by  the"  appellant  "was  that  *  *  *  the 
evidence  presented  the  simple  case  of  a  forgery  *  *  *  to  which  is 
to  be  applied  the  well-settled  rule  that  as  between  the  bank  and  its 
customers  the  payment  of  forged  or  altered  checks  by  such  bank  is 
made  at  its  peril,  and  cannot  be  charged  against  the  depositor's  ac- 
count. This,  of  course,  is  the  general  rule,  and  it  is  applied  stringent- 
ly in  cases  of  simple  forgery  which  involve  no  other  elements  than  that 
the  purported  check  of  the  depositor  which  was  paid  was  a  forged  one. 
But  this  rule  is  not  applied  unqualifiedly.  It  has  its  limitations  and 
exceptions,  as  general  rules  usually  have,  and  is  modified  to  the  extent 
that  when  some  negligent  act  *  *  *  of  the  customer  has  contributed 
to  the  payment  by  the  bank,  or  the  facts  in  a  particular  case  surround- 
ing the  forgery  of  a  check  and  its  presentation  and  payment  are  of  such 
character  as  call  for  the  application  thereto  of  some  general  principle 
of  law  or  equity,  they  may  be  relied  on  by  the  bank  as  an  estoppel 
against  the  customer,  precluding  him  from  denying  the  correctness 
of  the  payment."     *     *     * 

The  principle  embodied  in  the  case  of  Otis  Elevator  Co.  v.  First  Nat. 
Bank,  supra,  and  the  general  rule  above  stated,  find  emphatic  approval 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST   MAKER  AND   ACCEPTOR  871 

and  application  in  the  leading  case  of  Leather  Manufacturers'  Bank 
V.  Morgan,  117  U.  S.  96,  6  Sup.  Ct.  657,  29  L.  Ed.  811,  in  which  the 
court,  treating  the  presentation  of  a  bank  book  written  up  accompanied 
by  the  canceled  checks  of  the  depositor  to  him  as  an  account  stated, 
says :  "Where  a  party  to  a  stated  account,  who  is  under  a  duty,  from 
the  usages  of  business  or  otherwise,  to  examine  it  within  a  reason- 
able time  after  having  an  opportunity  to  do  so,  and  give  timely  notice 
of  his  objections  thereto,  neglects  altogether  to  make  such  examination 
himself,  or  to  have  it  made,  in  good  faith,  by  another  for  him,  by 
reason  of  which  negligence  the  other  party,  relying  upon  the  account  as 
having  been  acquiesced  in  or  approved,  has  failed  to  take  steps  for  his 
protection  which  he  could  and  would  have  taken  had  such  notice  been 
given,"  the  depositor  is  estopped  by  his  conduct  to  question  the  con- 
clusiveness of  the  account  stated  which  arises  out  of  the  presentation 
to  him  of  the  account  and  his  failure  to  examine  it  and  detect  the 
frauds  contained  therein,  and  give  the  bank  notice  thereof  in  order 
that  it  may  protect  itself  against  future  frauds  of  a  similar  char- 
acter."   *    *    * 

Without  quoting  further,  it  may  be  said  that  the  great  weight  of 
authority  in  the  United  States  supports  the  conclusions  arrived  at  in 
the  cases  above  cited.  It  is  true  that  those  cases  were  based  upon 
bank  books  written  up,  but  there  is  no  distinction  in  principle  between 
the  old-fashioned  bank  book  and  the  modern  statements  furnished 
by  a  bank  to  its  depositors  from  time  to  time  upon  the  balancing  of 
their  accounts  and  the  return  of  the  canceled  checks  to  them.  Improv- 
ed methods  of  bookkeeping  in  banks  do  not  render  inapplicable  the  rule 
of  law  here  invoked  and  applied.  To  lay  down  any  other  rule  than 
that  hereinabove  stated  would  be  to  add  an  unjust  burden  to  the  du- 
ties of  paying  officers  of  banks.  The  greatly  increased  volume  of  busi- 
ness consequent  upon  the  development  of  modern  commerce,  and  the 
almost  universal  use  of  checks  in  settlement  of  every  conceivable  obli- 
gation, make  the  post  of  paying  teller  of  a  bank — compelled  as  he  is 
to  know  the  signature  of  every  depositor  of  a  bank — an  exceedingly 
difficult  one.  If  depositors  may  regularly  at  frequent  intervals  re- 
ceive their  vouchers  and  be  notified,  as  was  the  appellant  here,  of  re- 
duced balances  of  their  accounts  in  banks  consequent  upon  the  unfaith- 
fulness of  trusted  employes  during  a  period  of  nearly  a  year,  and  by 
neglecting  to  exercise  reasonable  supervision  over  their  own  business 
fail  to  discover  fraud  which  has  been  perpetrated  upon  them  and  the 
bank,  and  may  thus  leave  the  bank  in  ignorance  of  the  frauds  thus 
committed,  and  charge  the  bank  with  the  losses  thus  occasioned,  then 
banks  and  their  paying  tellers  face  hard  conditions  indeed.  We  do 
not  feel  justified  in  establishing  any  such  rule  in  this  state.    *    *    * 

For  the  foregoing  reasons,  the  judgment  is  affirrried. 


SECTION   7.— RIGHTS    AND    LIABILITIES    OF    PARTIES 

WITH  RESPECT  TO  ACCEPTANCES  AND 

PAYMENTS  FOR  HONOR 

(a)     WHEN    ACCEPTANCE    OR    PAYMENT    PERMITTED 
Section  161.     Where  a  bill  of  exchange  has  been  protested  for 
dishonor  by  non-acceptance,  or  protested  for  better  security,  and 
is  not  overdue,  any  person  not  being  a  party  already  liable  there- 


872  NEGOTIABLE   INSTRUMENTS  (Part  3 

on  may,  with  the  consent  of  the  holder,  intervene  and  accept  the 
bill  supra  protest  for  the  honor  of  any  party  liable  thereon,  or  for 
the  honor  of  the  person  for  whose  account  the  bill  is  drawn.  The 
acceptance  for  honor  may  be  for  part  only  of  the  sum  for  which 
the  bill  is  drawn;  and  where  there  has  been  an  acceptance  for 
honor  for  one  party,  there  may  be  a  further  acceptance  by  a  differ- 
ent person  for  the  honor  of  another  party. 

Section  171.  Where  a  bill  has  been  protested  for  non-payment, 
any  person  may  intervene  and  pay  it  supra  protest  for  the  honor  of 
any  person  liable  thereon  or  for  the  honor  of  the  person  for  whose 
account  it  was  drawn. 

Section  174.  Where  two  or  more  persons  offer  to  pay  a  bill 
for  the  honor  of  different  parties,  the  person  whose  payment  will 
discharge  most  parties  to  the  bill  is  to  be  given  the  preference. 

03)     WHAT  CONSTITUTES  ACCEPTANCE  AND  PAYMENT 
Section  162.     An  acceptance  for  honor  supra  protest  must  be 
in  writing,  and  indicate  that  it  is  an  acceptance  for  honor,  and 
must  be  signed  by  the  acceptor  for  honor. 

Section  172.  The  payment  for  honor  supra  protest  in  order  to 
operate  as  such  and  not  as  a  mere  voluntary  payment,  must  be  at- 
tested by  a  notarial  act  of  honor  which  may  be  appended  to  the 
protest  or  form  an  extension  to  it. 

Section  173.  The  notarial  act  of  honor  must  be  founded  on  a 
declaration  made  by  the  payer  for  honor  or  by  his  agent  in  that 
behalf  declaring  his  intention  to  pay  the  bill  for  honor  and  for 
whose  honor  he  pays. 

(c)  PRESENTMENT  FOR  ACCEPTANCE  TO  ACCEPTOR  FOR  HONOR, 

DISHONOR  BY  ACCEPTOR  FOR  HONOR,  AND  EXCUSES 

FOR  NON-PRESENTMENT 

Section  166.  Where  a  bill  payable  after  sight  is  accepted  for 
honor,  its  maturity  is  calculated  from  the  date  of  the  noting  for 
non-acceptance  and  not  from  the  date  of  the  acceptance  for  honor. 

Section  168.  Presentment  for  payment  to  the  acceptor  for  honor 
must  be  made  as  follows : 

1.  If  it  is  to  be  presented  in  the  place  where  the  protest  for  non- 
payment was  made,  it  must  be  presented  not  later  than  the  day 
following  its  maturity. 

2.  If  it  is  to  be  presented  in  some  other  place  than  the  place 
where  it  was  protested,  then  it  must  be  forwarded  within  the  tim.e 
specified  in  section  one  hundred  and  four. 

Section  170.  When  the  bill  is  dishonored  by  the  acceptor  for 
honor  it  must  be  protested  for  non-payment  by  him. 

Section  169.  The  provisions  of  section  eighty-one  apply  where 
there  is  delay  in  making  presentment  to  the  acceptor  for  honor  or 
referee  in  case  of  need. 

(d)     RIGHTS  A'ND  LIABILITIES   OF  THE  PARTIES 
Section   165.     The  acceptor  for  honor,  by  such  acceptance  en- 
gages that  he  will,  on  due  presentment,  pay  the  bill  according  to 


Ch.  4)         RIGHTS   OF   HOLDER   AGAINST  MAKER   AND   ACCEPTOR  873 

the  terms  of  his  acceptance,  provided  it  shall  not  have  been  paid 
by  the  drawee,  and  provided  also,  that  it  shall  have  been  duly  pre- 
sented for  payment  and  protested  for  non-payment  and  notice  of 
dishonor  given  to  him. 

Section  164.  The  acceptor  for  honor  is  liable  to  the  holder  and 
to  all  parties  to  the  bill  subsequent  to  the  party  for  whose  honor  he 
has  accepted. 

Section  175.  Where  a  bill  has  been  paid  for  honor,  all  parties 
subsequent  to  the  party  for  whose  honor  it  is  paid  are  discharged, 
but  the  payer  for  honor  is  subrogated  for,  and  succeeds  to,  both 
the  rights  and  duties  of  the  holder  as  regards  the  party  for  whose 
honor  he  pays  and  all  parties  liable  to  the  latter. 

Section  176.  Where  the  holder  of  a  bill  refuses  to  receive  pay- 
ment supra  protest,  he  loses  his  right  of  recourse  against  any  party 
who  would  have  been  discharged  by  such  payment. 

Section  177.  The  payer  for  honor,  on  paying  to  the  holder  the 
amount  of  the  bill  and  the  notarial  expenses  incidental  to  its  dis- 
honor, is  entitled  to  receive  both  the  bill  itself  and  the  protest. 


SECTION  8.— BILLS  IN  A  SET 

N.  I.  L.,  Section  178.  Where  a  bill  is  drawn  in  a  set,  each  part 
of  the  set  being  numbered  and  containing  a  reference  to  the  other 
parts,  the  whole  of  the  parts  constitutes  one  bill. 

N.  I.  L.,  Section  179.  Where  two  or  more  parts  of  a  set  are  ne- 
gotiated to  different  holders  in  due  course,  the  holder  whose  title 
first  accrues  is  as  between  such  holders  the  true  owner  of  the  bill. 
But  nothing  in  this  section  affects  the  rights  of  a  person  who  in 
due  course  accepts  or  pays  the  part  first  presented  to  him. 

N.  I.  L.,  Section  180.  Where  the  holder  of  a  set  indorses  two  or 
more  parts  to  different  persons  he  is  liable  on  every  such  part,  and 
every  indorser  subsequent  to  him  is  liable  on  the  part  he  has  him- 
self indorsed,  as  if  such  parts  were  separate  bills. 

N.  I.  L.,  Section  181.  The  acceptance  may  be  written  on  any 
part  and  it  must  be  written  on  one  part  only.  If  the  drawee  ac- 
cepts more  than  one  part,  and  such  accepted  parts  are  negotiated 
to  different  holders  in  due  course,  he  is  liable  on  every  such  part 
as  if  it  were  a  separate  bill. 

N.  I.  L.,  Section  182.  When  the  acceptor  of  a  bill  drawn  in  a  set, 
pays  it  without  requiring  the  part  bearing  his  acceptance  to  be 
delivered  up  to  him,  and  that  part  at  maturity  is  outstanding  in 
the  hands  of  a  holder  in  due  course,  he  is  liable  to  the  holder 
thereon. 

N.  I.  L.,  Section  183.  Except  as  herein  otherwise  provided 
where  any  one  part  of  a  bill  drawn  in  a  set  is  discharged  by  pay- 
ment or  otherwise  the  whole  bill  is  discharged. 


874  NEGOTIABLE   INSTRUMENTS  (Part  3 


CHAPTER  V 

RIGHTS  OF  THE  HOLDER  AGAINST  INDORSERS 
AND  THE  DRAWER 

Section 

1.  Introduction. 

2.  Rights  of  tlie  Holder  Against  the  Unqualified  Indorser. 

3.  Rights  of  the  Holder  Against  the  Qualified  Indorser  and  the  Transferor 

by  Delivery. 

4.  Rights  of  the  Holder  Against  the  Accommodation  Indorser. 

5.  Rights  of  the  Holder  Against  the  Restrictive  Indorser. 

6.  Rights  of  the  Holder  Against  the  Drawer. 


SECTION  1.— INTRODUCTION 

In  this  chapter  we  are  dealing  with  the  rights  of  the  holder,  both 
holders  in  due  course  and  holders  not  in  due  course,  against  par- 
ties secondarily  liable  on  the  instrument.  There  are  five  situa- 
tions to  be  taken  into  consideration:  (1)  What  are  the  rights  of 
the  holder  against  the  unqualified  indorser;  that  is,  one  who  has 
negotiated  either  by  special  or  blank  indorsement?  (2)  What 
are  the  rights  of  the  holder  against  the  qualified  indorser,  the 
transferor  by  delivery ;  that  is,  one  who  has  indorsed  "without  re- 
course," or  has  transferred  an  instrument  merely  by  delivery.  (3) 
What  are  the  rights  of  the  holder  against  the  accommodation  in- 
dorser; that  is,  one  who  is  a  surety  for  a  principal  debtor?  (4) 
What  are  the  rights  of  the  holder  against  the  restrictive  indorser? 
(5)  What  are  the  rights  of  the  holder  against  the  drawer? 

It  should  be  borne  in  mind  that  the  whole  matter  of  real  and 
personal  defenses  is  applicable  to  suits  between  the  holder  and 
secondary  parties  just  as  it  is  between  the  holder  and  parties 
primarily  liable;  that  is,  if  B.  induces  A.,  by  fraud,  to  indorse  an 
instrument  to  him,  or  if  it  is  negotiated  by  A.  to  B.  as  a  gift,  C,  a 
holder  below  B.  who  fulfills  all  the  requirements  of  a  holder  in 
due  course  as  regards  A.  may  hold  A.  free  from  all  personal  de- 
fenses which  A,  had  against  B.,  the  party  with  whom  he  dealt. 
On  the  other  hand,  all  real  defenses  which  A.  had  against  B.,  may 
be  set  up  against  C.  This  phase  of  the  liability  of  indorsers  is 
not  again  presented  in  this  chapter ;  that  is,  this  chapter,  except  in- 
cidentally, is  not  concerned  with  the  similarities  of  liability  be- 
tween primary  and  secondary  parties,  but  to  the  differences  in  the 
nature  and  extent  of  the  liability  between  these  two  sets  of  par- 
ties. 


Ch.  5)       RIGHTS   OF   HOLDER   AGAINST   INDORSERS   AND   DRAWEE  875 

SECTION  2.— RIGHTS  OF  THE  HOLDER  AGAINST  THE 
UNQUALIFIED  INDORSER 

The  liability  of  an  unqualified  indorser  is  a  double  liability — the 
one,  conditional ;  the  other,  unconditional.  The  conditional  liabil- 
ity is  to  pay  the  holder  if  the  instrument  be  dishonored  after  due 
presentment  and  due  notice  of  dishonor.  This  liability  is  on  the 
instrument  itself.  The  unconditional  liability  is  not  upon  the  in- 
strument, but  is  an  extrinsic  liability.  This  liability  arises  from 
the  fact  that  the  indorser,  in  addition  to  his  contract  of  indorse- 
ment, is  a  vendor  of  personal  property,  and  as  such  impliedly  war- 
rants the  truth  of  certain  facts.  The  following  section  of  the  act 
defines  the  conditional  liability  of  the  unqualified  indorser: 

N.  I.  L.  Section  66.  (2)  Every  indorser  who  indorses  without 
qualification  "•=  *  *  engages  that  on  due  presentment,  the  in- 
strument shall  be  accepted  or  paid  or  both  as  the  case  may  be, 
according  to  its  tenor,  and  that  if  it  be  dishonored  and  the  neces- 
sary proceedings  on  dishonor  be  duly  taken,  he  will  pay  the  amount 
thereof  to  the  holder,  or  to  any  subsequent  indorser  who  may  be 
compelled  to  pay  it. 

The  fact  of  indorsement,  either  in  blank  or  special,  is  an  ofifer  to 
each  subsequent  holder  of  the  instrument,  which  offer  is  auto-^ 
matically  accepted  by  each  successive  holder.  The  above  section 
prescribes  the  terms  and  legal  effect  of  this  contract.  The  parties 
may  enter  into  any  kind  of  contract  which  they  agree  upon,  but 
unless  they  manifest  their  intention  by  appropriate  words  on 
the  instrument  the  contract  of  indorsement  as  defined  in  the  above 
section  governs.  The  liability  of  the  indorser  is  a  contractual  lia- 
bility on  the  instrument.  While  the  indorser's  liability  is  on  the 
instrument,  his  obligation  may  be,  and  frequently  is,  much  broad- 
er than  the  obligation  of  the  party  primarily  liable  thereon,  for  the 
reason  that  the  indorser  contracts  to  pay  the  amount  called  for 
by  the  instrument  to  the  holder.  The  indorser  is  liable  to  subse- 
quent holders,  whatever  the  reason  may  be  for  non-payment  by  the 
party  primarily  liable  thereon.  Even  where  such  primary  party 
possesses  a  real  defense,  the  holder  has  a  right  to  demand  payment 
from  any  prior  unqualified  indorser.  The  liability  of  the  unquali- 
fied indorser  is,  however,  a  conditional  liability.  The  duty  of  the 
indorser  to  pay  does  not  arise  until  the  conditions  precedent  spec- 
ified in  the  above  section  occur.  His  duty  to  pay  arises  when  and 
only  when  the  holder  has  made  a  due  presentment  for  payment, 
and  has  given  due  notice  of  dishonor,  and  in  some  cases,  has  duly 
protested  the  instrument.  What  constitutes  a  due  presentment 
for  payment,  due  notice  of  dishonor  and  protest,  is  the  subject  of 
the  next  chapter.  The  principles  of  the  preceding  chapters  which 
determine  who  are  holders  in  due  course,  and  which  define  the 
defenses  which  are  and  which  are  not  available  against  holders  in 
due  course,  are  likewise  applicable  to  suits  between  an  indorser 
and  a  subsequent  indorsee.     The  immediate  indorsee  from  an  in- 


876  NEGOTIABLE   INSTRUMENTS  (Part  3 

dorser  may  or  may  not  be  a  holder  in  due  course  as  regards  his 
indorser.  Usually  an  indorsee  will  not  be  a  holder  in  due  course 
as  regards  his  indorser,  though  he  will  usually  be  a  holder  in  due 
course  as  regards  all  indorsers  prior  to  his  indorser,  as  regards  the 
drawer  and  the  parties  primarily  liable  on  the  instrument — the 
maker  or  acceptor.  An  indorser,  whose  liability  has  become  fixed 
by  due  presentment,  due  notice  of  dishonor,  and  due  protest,  may 
avail  himself  of  all  personal  defenses  as  against  any  subsequent 
holder  who  is  not  a  holder  in  due  course  as  regards  himself.  As 
regards  all  subsequent  holders,  who  are  holders  in  due  course  as 
regards  the  indorser,  such  indorser  may  defeat  liability  only  by 
establishing  a  real  defense  of  his  own.  To  be  available,  the  de- 
fense must  be  real  as  to  him.  The  indorser  cannot  set  up  defenses, 
either  real  or  personal,  which  belong  to  the  maker,  drawer,  ac- 
ceptor, or  to  any  other  party  prior  to  him. 

The  unconditional  liability  of  the  indorser,  which  arises,  not 
from  his  contract  of  indorsement,  but  from  the  fact  that  he  is  a 
seller  of  property,  is  defined  in  the  following  section : 

N.  I.  L.  Section  66.  Every  indorser,  who  indorses  without  qual- 
ification, warrants  to  all  subsequent  holders  in  due  course:  (1) 
That  the  instrument  is  genuine  and  in  all  respects  what  it  pur- 
ports to  be;  (2)  that  he  has  good  title  to  it;  (3)  that  all  prior 
parties  had  capacity  to  contract;  (4)  that  the  instrument  is  at 
the  time  of  his  indorsement  valid  and  subsisting. 

Subsection  (4)  probably  includes  everything  specified  in  sub- 
sections (1)  and  (3),  and,  re-phrased,  subsections  (1),  (3),  and  (4) 
mean  that  the  unqualified  indorser  warrants  to  subsequent  holders 
in  due  course  that  the  party  or  parties  primarily  liable  on  the  in- 
strument possess  no  defenses,  either  real  or  personal,  that  would 
be  available  as  against  such  holder.  Subsection  (2)  is  a  warranty 
that  the  chain  of  title  has  not  been  broken  by  the  forged  indorse- 
ment of  the  payee  or  any  special  indorsee.  The  indorser,  there- 
fore, is  not  promising  to  pay  the  amount  called  for  by  the  instru- 
ment, in  the  event  that  the  holder  is  unable  to  obtain  payment 
from  the  primary  party.  He  assumed  this  liability  by  his  condi- 
tional engagement.  The  indorser  as  a  vendor  is  merely  promis- 
ing that,  if  there  is  no  legal  liability  on  the  party  primarily  liable 
to  the  holder,  then  and  only  then  will  the  indorser  be  liable  on  his 
warranty ;  that  is,  the  indorser,  as  a  vendor  of  property,  warrants 
that  the  holder  is  legally  entitled  to  a  judgment  against  the  prima- 
ry party.  He  does  not  warrant  that  the  judgment  will  be  paid. 
It  is  important  to  notice  that  these  warranties  against  real  and 
personal  defenses  are  imposed  upon  the  indorser,  irrespective  of 
his  knowledge  as  to  their  existence. 

To  summarize:  The  unqualified  indorser  finds  himself  in  this 
position:  (1)  If  any  subsequent  holder  fails  to  obtain  payment 
because  of  the  insolvency  or  wrongful  refusal  of  the  primary  party 
to  discharge  his  legal  duty  to  the  holder,  the  indorser  will  be  un- 
der a  legal  duty  to  pay  the  holder,  if  there  has  been  a  due  pre- 


Ch.  5)       RIGHTS   OF   HOLDER   AGAINST   INDORSERS   AND   DRAWER  877 

sentment  for  payment,  and  if  due  notice  of  dishonor  were  given 
to  the  indorser.  (2)  If  the  holder  fails  to  obtain  payment  be- 
cause the  primary  party  possessed  a  defense,  either  real  or  per- 
sonal, which  under  the  circumstances,  was  available  as  against 
the  holder,  then  the  indorser  will  be  under  a  legal  duty  to  pay 
the  holder,  even  though  there  has  been  no  due  presentment  and 
due  notice  of  dishonor.  A  holder's  right  to  sue,  a  former  owner  of 
the  instrument  on  his  warranties  is  not  conditioned  upon  his  mak- 
ing a  due  presentment  for  payment  and  giving  due  notice  of  dis- 
honor, as  is  the  right  of  the  holder  against  an  indorser  upon  his 
contract  of  indorsement.  Neither  is  it  necessary  for  the  holder  to 
wait  until  maturity  of  the  instrument  in  order  to  sue  former  own- 
ers upon  warranties.  The  warranty,  if  broken  at  all,  is  broken  at 
the  time  of  delivery.  Suit  may  then  be  brought,  although  the  date 
of  maturity  of  the  instrument  has  not  yet  arrived. 


SECTION  3.— RIGHTS  OF  THE  HOLDER  AGAINST  THE 
QUALIFIED  INDORSER  AND  THE  TRANS- 
FEROR BY  DELIVERY 

Two  questions  are  here  presented:  (1)  What  is  the  form  of  a 
qualified  indorsement?  (2)  What  is  its  legal  effect?  The  quali- 
fied indorsement  is  defined  as  follows : 

N.  I.  L.  Section  38.-  A  qualified  indorsement  constitutes  the  in- 
dorser a  mere  assignor  of  the  title  to  the  instrument.  It  may  be 
made  by  adding  to  the  indorser's  signature  the  words  "without 
recourse,"  or  any  words  of  similar  import.  Such  an  indorsement 
does  not  impair  the  negotiable  character  of  the  instrument. 

In  form,  therefore,  the  qualified  indorsement  is  a  blank  or 
special  indorsement,  with  the  added  words  "without  recourse"  or 
words  of  similar  import.  The  legal  effect  of  the  indorsement  is 
stated  in  part  in  section  38,  by  the  declaration  that  such  an  indorser 
is  "a  mere  assignor  of  the  title  to  the  instrument" ;  that  is,  such  an 
indorser  is  not  liable  upon  any  contract  of  indorsement  because  he 
expressly  negatives  the  special  engagement  of  the  unqualified  in- 
dorser, by  the  use  of  the  words  "without  recourse."  He  is  but  a 
vendor  of  property,  or  rather  he  is  a  vendor  of  a  bundle  of  legal 
rights  which  he  possessed  against  prior  parties.  Section  38  im- 
poses no  liability  upon  the  qualified  indorser. 

The  qualified  indorser  is,  however,  under  some  liability,  just  as 
the  vendor  of  any  property  is  under  a  liability  to  his  vendee.  The 
following  cases  represent  the  state  of  the  common  law  with  refer- 
ence to  the  nature  and  extent  of  the  liability  of  the  indorser  "with- 
out recourse"  and  of  the  transferor  by  delivery. 


878  NEGOTIABLE   INSTRUMENTS  (Part  3 

CIIALLISS   V.   McCRUM. 

(Supreme  Court  of  Kansas,   1S79.     22  Kan.  157.  31  Ara.  Rep.  ISl.) 

Brewer,  J.  On  December  4,  1871,  plaintiff  in  error  loaned  one 
Edward  A.  Ege  $250,  and  took  his  note  therefor  in  the  sum  of  $265, 
payable  to  Richard  Probasco  or  bearer,  and  secured  by  mortgage. 
Long  after  its  maturity,  and  in  1876,  several  payments  having  been 
made  thereon  in  the  meantime,  plaintiff"  in  error  sold  the  note  for  its 
then  face  value  to  defendant  in  error.  At  the  time  of  such  sale  he 
indorsed  it:  "Without  recourse.  W.  L.  Chalhss."  McCrum  sued  on 
the  note.  Ege  plead  usury.  The  plea  was  sustained  and  McCrum 
recovered  $229.90,  less  than  the  face  value  of  the  note,  for  which 
sum  he  brought  this  action.  A  demurrer  to  the  petition  was  overruled, 
and  this  ruling  is  now  presented  for  review.  Can  the  action  be  sus- 
tained? Of  course  no  action  will  lie  on  the  indorsement,  for  by  his 
written  contract  Challiss  expressly  declines  to  assume  the  liabilities 
of  an  indorser.  If  sustainable  at 'all,  it  must  be  as  against  him  as  a 
vendor,  and  not  as  an  indorser,  and  upon  the  doctrine  of  an  implied 
warranty.  The  theory  of  the  defendant  in  error  is  that  every  vendor 
of  a  bill,  bond,  or  note  impliedly  warrants  that  it  is  what  it  purports 
on  its  face  to  be,  the  legal  obligation  of  tlie  parties  whose  names  ap- 
pear on  the  instrument,  and  that  the  character  of  the  indorsement,  or 
the  lack  of  an  indorsement,  in  no  manner  affects  this  implied  war- 
Tanty.  *  *  *  It  is  clear  that  the  character  of  the  indorsement  cuts 
no  figure  in  the  question ;  as  stated,  no  action  will  lie  on  it.  But,  fur- 
ther, the  restriction  is  only  as  to  his  liability  as  indorser,  and  in  no 
manner  affects  his  relation  to  the  paper  as  vendor.  An  unqualified 
indorsement  is  the  assumption  of  a  conditional  liability.  The  indorser 
becomes  a  new  drawer,  and  is  liable  on  the  default  of  the  drawee. 
"Without  recourse"  does  away  with  this  conditional  liability.  It  leaves 
the  indorsement  simply  as  a  transfer  of  title,  and  the  indorser  liable 
only  as  vendor ;  yet  it  leaves  him  a  vendor  and  divests  him  of  none  of 
tlie  liabilities  of  a  vendor.  It  makes  the  transaction  the  equivalent  of 
a  delivery  of  paper  payable  to  bearer,  and  transferable  by  delivery. 
*  *  *  Independent,  therefore,  of  any  matter  of  indorsement,  what 
implied  warranty  is  there  in  the  transfer  of  a  promissory  note?  Two 
things  are  clear  under  the  authorities:  First,  that  there  is  an  implied 
warranty  of  the  genuineness  of  the  signatures ;  and,  second,  that  there 
is  no  warranty  of  the  solvency  of  the  parties.  *  *  *  But  in  the 
case  at  bar  the  signature  of  the  maker  was  genuine.  The  objection  is 
that  it  was  never  his  legal  obligation  to  the  full  amount  for  which  it 
purported  to  be.  How  far  is  there  any  implied  warranty  in  this  re- 
spect? A  reference  to  some  of  the  leading  cases  will  throw  light 
upon  this  question.     *     *     * 

In  Lobdell  V.  Baker,  3  Mete.  (Mass.)  469,  it  appeared  that  the  owner 
of  a  note  procured  the  indorsement  of  a  minor  and  then  put  the  paper 
in  circulation.  _  He  was  held  liable  to  a  subsequent  holder.  Chief  Jus- 
tice Shaw,  delivering  the  opinion  of  the  court,  says :  "Whoever  takes 
a  negotiable  security  is  understood  to  ascertain  for  himself  the  ability 
of  the  contracting  parties,  but  he  has  a  right  to  believe  without  inquir- 
ing, that  he  has  the  legal  obligation  of  the  contracting  parties  appear- 
ing on  the  bill  or  note.  Unexplained,  the  purchaser  of  such  a  note 
has  a  right  to  believe,  upon  the   faith  of  the  security  itself,  that  it 


Ch.  5)       RIGHTS   OF   HOLDER   AGAINST   INDORSERS   AND   DRAWER  879 

is  indorsed  by  one  capable  of  binding  himself  by  the  contract  which 
an  indorsement  by  law  imports." 

In  Hannum  v.  Richardson,  48  Vt.  508,  21  Am.  Rep.  152,  a  note 
was  given  for  liquor  sold  in  violation  of  law,  and  was  by  statute  void. 
Defendant  knew  its  invalidity,  transferred  it  by  an  indorsement  with- 
out recourse,  and  he  was  held  liable  to  his  vendee. 

In  Delaware  Bank  v.  Jarvis,  20  N.  Y.  226,  a  usurious  note  was  sold, 
and  the  vendor  was  adjudged  liable,  not  merely  for  the  money  re- 
ceived by  him,  but  also  the  costs  paid  by  his  vendee  in  a  suit  against 
the  makers  of  the  note.  In  the  opinion  Mr.  Justice  Comstock  uses  this 
language:  "The  authorities  state  the  doctrine  in  general  terms  that 
the  vendor  of  a  chose  in  action  in  the  absence  of  express  stipulation, 
impliedly  warrants  its  legal  soundness  and  validity.  In  peculiar  cir- 
cumstances and  relations,  the  law  may  not  impute  to  him  an  engage- 
ment of  this  sort.  But  if  there  are  exceptions,  they  certainly  do  not 
exist  where  the  invalidity  of  the  debt  or  security  sold  arises  out  of 
the  vendor's  own  dealing  with  or  relation  to  it.  In  this  case,  the  de- 
fendant held  a  promissory  note  which  was  void,  because  he  had  him- 
self taken  it  in  violation  of  the  statutes  of  usury.  When  he  sold  the 
note  to  the  plaintiffs  and  received  the  cash  therefor,  by  that  very  act  he 
affirmed  in  judgment  of  law  that  the  instrument  was  unattainted  so 
far  at  least  as  he  had  been  connected  with  its  origin."     *     *     * 

In  Snyder  v.  Reno,  38  Iowa,  329,  it  was  held  that  there  is  an  implied 
warranty  that  there  has  been  no  material  alteration  in  the  paper  since 
its  execution.  The  court  says:  "We  have  no  doubt  that  there  is  an 
implied  warranty  of  the  transferrer  that  there  is  no  defect  in  the  in- 
strument, as  well  as  that  the  signature  of  the  maker  is  genuine." 
*  *  *  See,  also,  1  t)an.  on  Neg.  Inst.  670.  In  this  the  author  thus 
states  the  law :  "When  the  indorsement  is  without  recourse,  the  in- 
dorser  specially  declines  to  assume  any  responsibility  as  a  party  to  the 
bill  or  note;  but  by  the  very  act  of  transferring  it,  he  engages  that  it 
is  what  it  purports  to  be — the  valid  obligation  of  those  whose  names 
are  upon  it.  He  is  like  a  drawer  who  draws  without  recourse,  but 
who  is  nevertheless  liable  if  he  draws  upon  a  fictitious  party,  or  one 
without  funds.  And  therefore  the  holder  may  recover  against  the  in- 
dorser  without  recourse :  (1)  If  any  of  the  prior  signatures  were  not 
genuine ;  or  (2)  if  the  note  was  invalid  between  the  original  parties, 
because  of  the  want  or  illegality  of  the  consideration;  or  (3)  if  any 
prior  party  was  incompetent ;   or  (4)  the  indorser  was  witliout  title." 

These  authorities  fully  sustain  the  ruling  of  the  district  court.  The 
note  was  not  the  legal  obligation  of  the  maker  to  the  full  amount. 
As  to  the  usurious  portion,  it  was  as  if  it  were  no  note.  This  was  a  de- 
fect in  the  very  inception  of  the  note.  It  was  known  to  the  vendor 
and  arose  out  of  his  own  dealings  in  the  matter.  By  all  these  au-' 
thorities  there  is  an  implied  warranty  against  such  a  defect,  and  the 
vendor  is  liable  for  a  breach  thereof.     *     *     * 

The  judgment  will  be  affirmed. 


880  NEGOTIABLE   INSTRUMENTS  (Part  3 


LITTAUER  V.  GOLDIMAN. 

rCourt  of  Appeals  of  New  York,  1878.     72  N.  Y.  506,  28  Am.  Eep.  171.) 

Miller,  J.  The  right  of  the  plaintiff  to  maintain  this  action  rests 
upon  the  ground  that  the  note  in  question  which  was  sold  and  trans- 
ferred by  the  defendant  to  the  plaintiff  was  invalid  and  void,  by  rea- 
son of  its  original  usurious  consideration.  It  is  alleged  that,  being 
in  violation  of  the  statute  against  usury,  it  was  no  note,  and  by  im- 
plication of  law  the  defendant  did  warrant  and  undertake  that  the 
same  was  not  usurious  or  illegal,  but  a  valid  and  legal  note.  The  com- 
plaint does  not  allege  that  the  defendant  had  any  knowledge  of  the 
usury  or  was  a  party  to  the  same,  but  states  that  the  seller,  by  the  act 
of  transfer  for  a  valuable  consideration,  impliedly  warranted  that  the 
paper  was  genuine  and  all  that  it  purports  to  be  upon  its  face,  and 
incurred  an  obligation  by  the  sale  to  make  the  paper  good,  although 
he  did  not  indorse  or  guaranty  the  same.  The  question  whether  an 
action  will  lie  for  the  loss  sustained  by  the  plaintiff'  by  reason  of  the 
note  being  usurious,  and  the  recovery  of  the  amount  thereof  thereby 
defeated,  has  never  arisen  under  the  precise  circumstances  presented 
in  this  case,  and  demands  an  examination  of  the  principle  applicable 
to  the  contract  entered  into  upon  the  sale  of  paper  of  this  description, 
and  of  the  authorities  bearing  upon  the  subject. 

The  rule  is  well  settled  that  generally  one  who  transfers  paper  by 
delivery  only  incurs  none  of  the  liabilities  which  attach  to  an  indorser, 
for  the  reason  tliat  the  irresistible  inference  is  that  if  he  transfers  it, 
and  it  is  received  without  his  indorsement,  such  liabilities  did  not 
enter  into  the  bargain  or  the  intention  of  the  parties.  This  rule,  how- 
ever, is  not  without  exception,  and  the  transferor  of  notes  or  bills  by 
delivery  warrants  the  genuineness  of  the  signatures,  and  that  the  title 
is  what  it  purports  to  be.  If  the  paper  is  forged,  the  transferor  is 
liable  upon  the  original  consideration  which  has  never  been  extin- 
guished by  the  sale.  2  Parsons  on  Contracts,  Z7 ,  38.  So  also,  it  is 
laid  down  by  the  same  author  that  the  vendor  without  indorsement 
warrants  that  the  paper  is  of  the  kind  and  description  that  it  purports 
to  be,  and  there  is  an  implied  warranty  that  the  parties  to  the  paper 
are  under  no  incapacity  to  contract,  as  from  infancy  or  marriage  or 
other  disability,  and  the  assignment  of  a  bill  or  note  for  a  valuable 
consideration  raises  an  implied  warranty  that  the  assignor  has  done 
nothing,  and  will  do  nothing,  to  prevent  the  assignee  from  collecting 
it.  The  reason  given  as  to  forged  paper  is  that  it  is  nothing,  and  the 
one  who  has  transferred  it  has  transferred  nothing,  and  is  therefore 
liable.  Id.  39,  40.  The  question  whether  paper  tainted  with  usury, 
which  is  transferred  by  the  holder  without  knowledge  of  this  defect, 
can  be  regarded  as  within  the  principle  of  the  exceptions  stated,  is  not 
free  from  difficulty,  and  at  first  view  there  appears  to  be  some  ground 
for  claiming  that  a  note  made  in  violation  of  a  statute  which  declares 
usury  to  be  a  misdemeanor,  and  that  all  paper  of  this  kind  shall  be 
void,  should  stand  on  the  same  footing  as  forged  or  other  paper,  which 
is  excepted  from  the  general  rule.     *     *     * 

It  is  of  grave  importance  whether  a  scienter  is  material  for  the 
purpose  of  upholding  an  implied  warranty  in  a  case  of  this  kind.  In 
Hoe  V.  Sanborn,  21  N.  Y.  552,  78  Am.  Dec.  163,  Selden,  J.,  lays  down 
the  rule  "that  whenever  an  article  sold  has  some  latent  defect,  which 


Ch.  5)       RIGHTS   OF   HOLDER   AGAINST   INDORSERS   AND   DRAWER  881 

is  known  to  the  seller,  and  not  to  the  purchaser,  the  former  is  liable 
for  this  defect  if  he  fails  to  discover  his  knowledge  on  the  subject 
at  the  time  of  the  sale."  He  proceeds  to  state  that,  where  knowledge 
is  proved  by  direct  evidence,  the  responsibility  rests  upon  the  ground 
of  fraud;  but  where  the  probability  of  knowledge  is  so  strong  that 
courts  will  presume  its  existence  without  proof,  the  vendor  is  held  re- 
sponsible upon  an  implied  warranty;  and  the  difference  between  the 
two  cases  is  that  in  the  one  the  scienter  is  actually  proved;  in  the 
other,  it  is  presumed.  A  scienter  is,  therefore,  essential  to  estabhsh 
an  implied  warranty ;  and  as  we  have  seen,  the  cases  to  which  we  have 
referred  all  show  knowledge  on  the  part  of  the  vendor.  The  cases 
which  are  cited  to  sustain  the  doctrine  that  the  scienter  is  immaterial 
where  there  is  a  warranty,  either  express  or  implied,  do  not  go  to 
that  extent.     *     *     * 

There  is  no  reported  case  which  holds  that,  where  such  purchase  is 
made  w-ithout  actual  knowledge  by  the  defendant,  an  implied  war- 
ranty is  established.  It  is  true  that  some  of  the  cases  to  which  we 
have  referred  hold  that  express  representations  are  not  necessary  to 
establish  a  case  and  fix  a  liability,  but  in  all  of  those  where  the  notes 
were  affected  by  usury  the  evidence  showed  that  such  fact  was  known 
to  the  defendant.  The  case  of  a  forged  instrument,  as  we  have  seen, 
rests  upon  a  different  principle,  viz.:  That  the  note  is  no  note,  and 
hence  none  of  the  cases  cited  aid  the  plaintiff.     *     *     * 

In  Chitty  on  Bills,  p.  245,  it  is  laid  down  that  where  a  person  ob- 
tains money  on  a  note,  and  it  turns  out  to  be  forged,  he  is  liable  to 
refund  the  money  to  the  party  from  whom  he  received  it,  on  the  ground 
that  there  is,  in  general,  an  implied  warranty  that  the  instrument  is 
genuine.  Again,  at  page  247,  it  is  said:  "If  a  man  assign  a  bill  for 
any  sufficient  consideration,  knowing  it  to  be  of  no  value,  and  the  as- 
signee be  not  aware  of  the  fact,  the  former  would,  in  all  cases,  be 
compellable  to  repay  the  money  he  had  received."  It  is  knowledge  of 
the  defect  which  renders  the  party  liable  for  a  note  which  is  of  no  value, 
and  this  rule  applies  to  a  note  which  is  tainted  with  usury.     *     *     * 

The  examination  we  have  made  of  the  question  shows  that  the  law 
in  regard  to  the  transfer  of  negotiable  bills  of  exchange  and  promis- 
sory notes,  as  laid  down  for  a  centur\'  or  more,  only  excepts  two  cases 
as  coming  within  the  doctrine  of  an  implied  warranty,  viz.  a  warranty 
of  title,  and  that  the  instrument  is  genuine  and  not  forged.  There  is 
no  precedent  and  not  a  single  reported  case  in  the  books  in  favor  of 
the  doctrine  that  where  a  promissory  note  is  infected  v/ith  usury,  and 
that  fact  is  unknown  to  the  party  who  transferred  it,  that  is  an  i_m- 
pHed  warranty  of  the  validity  of  the  note.  To  uphold  such  a  doctrine 
would  be  an  innovation  upon  a  settled  principle  of  law,  and  the  es- 
tablishing of  a  new  and  different  rule  from  that  which  has  governed 
the  sale  and  transfer  of  this  species  of  property  for  a  long  period  of 
time.  *  *  *  The  doctrine  of  caveat  emptor  applies,  and  the  fault 
is  with  the  person  who  fails  to  exact  a  warranty,  if  it  turns  out  that 
he  has  been  mistaken,  or  has  unfortunately  made  an  unprofitable  or 
a  bad  bargain.     *     *     * 

The  result  is  that  the  judgment  was  wrong  and  must  be  reversed. 
*     *     * 

B.&  B.Bus.Law— 56 


-882  NEGOTIABLE   INSTRUMENTS  (Part  3 


MEYER  V.  RICHARDS. 

(Supreme  Court  of  the  United  States,  1S96.     163  U.  S.  385,  16  Sup.  Ct.  1148, 

41    L.   Ed.   199.) 

Plaintiffs  below  (plaintiffs  in  error  here)  commenced  their  action 
to  recover  the  sum  of  $8,283.75,  with  interest  from  judicial  demand; 
the  facts  averred  in  the  petition  being  substantially  as  follows :  In 
February,  1889,  the  defendant  sold  to  plaintiff's  thirteen  bonds  of  the 
state  of  Louisiana.  Petitioners  aver  that  the  said  Richard  delivered 
to  them  the  above  ^'.escribed  bonds  as  good  and  legal  bonds  of  the 
state  of  LfOuisiana.  The  petition  then  averred  that  after  the  sale  and 
delivery  of  the  bonds  in  September,  1889,  it  was  discovered  that  they 
were  not  valid,  that  they  had  never  been  lawfully  issued  by  the  state, 
and  were  at  the  time  of  the  sale  declared  by  the  Constitution  of  the 
state  of  Louisiana  to  be  null  and  void,  and  that  the  state  through  its 
officials  treated  them  as  wholly  invalid.  The  prayer  was,  as  already 
stated,  for  a  judgment  for  the  amount  which  had  been  paid  as  the 
purchase  price  of  the  bonds. 

The  answer  of  the  defendant  averred  that  on  the  day  of  the  sale, 
the  27th  of  February,  1889,  the  defendant  was  the  owner  of  the  bonds 
described  in  the  petition ;  that  they  were  payable  to  bearer,  and  were 
on  the  face  thereof  bonds  and  obligations  of  the  state  of  Louisiana, 
and  purporting  to  be  issued  under  valid  acts  of  the  Legislature.  The 
answer,  moreover,  averred  that  the  defendant  acquired  the  bonds  long 
prior  to  the  date  of  the  sale  to  the  plaintiffs,  "by  purchase  in  open 
market,  for  a  full  and  valuable  consideration  in  money,  before  the 
maturity  thereof,  in  full  and  exact  good  faith,  and  with  no  knowledge, 
suspicion  of  belief  of  any  defect  in  the  title  or  obligation  of  said  bonds. 

There  was  judgment  for  defendant,  *  *  *  and  the  present  writ 
of  error  was  prosecuted. 

White,  j.  *  *  *  it  is  obvious  from  the  facts  just  detailed  that 
the  thirteen  bonds  which  were  sold  by  the  defendant  in  error  to  the 
plaintiff  in  error  were  at  the  time  of  the  sale  absolutely  void.  The 
twelve  which  originally  belonged  to  the  two  college  funds  were  in 
express  terms  declared  by  the  constitution  of  the  state  to  be  "null  and 
void,"  and  the  general  assembly  was  forbidden  to  make  any  provision 
"for  their  payment,"  and  they  were  ordered  to  be  "destroyed  in  such 
manner  as  the  general  assembly  may  direct."  This  provision  of  the 
constitution  was  in  existence  while  the  bonds  were  in  the  hands  of  the 
state,  and  before  they  were  fraudulently  and  surreptitiously  sold. 
Indeed,  these  bonds  were  never  lawfully  put  into  circulation,  because, 
having  been  originally  issued  to  represent  trust  funds  belonging  to 
the  state,  they  were  held  by  officers  of  the  state  for  its  account.  The 
remaining  bond  was  also  void  under  the  Constitution  of  the  state,  since 
it  had  been,  under  the  express  terms  of  that  instrument,  surrendered 
to  the  state  treasurer  for  cancellation  and  another  bond  issued  in  its 
stead. 

The  bonds  were  undoubtedly  sold  by  the  defendant  in  error  as  law- 
ful obligations  of  the  state.  Both  parties  to  the  contract  of  sale  so 
■considered.  The  pleadings  and  the  statement  of  facts  leave  no  ques- 
tion on  this  subject.  The  controversy  here  presented  is  wholly  be- 
tween the  vendor  and  vendee  as  to  the  nature  and  extent  of  the  obli- 
:gation  of  warranty  resulting  from  the  sale.     *     *    * 

Both  in  England  and  in  the  United  States  the  doctrine  is  universal- 


Ch.  5)       RIGHTS   OF   HOLDER   AGAINST  INDORSERS   AND   DRAWER  883 

ly  recognized  that,  where  commercial  paper  is  sold  without  indorse- 
ment or  without  express  assumption  of  liability  on  the  paper  itself, 
the  contract  of  sale  and  the  obligations  which  arise  from  it,  as  be- 
tween vendor  and  vendee,  are  governed  by  the  common  law,  relating 
to  the  sale  of  goods  and  chattels.  So,  also,  the  undoubted  rule  is  that 
in  such  a  sale  the  obligation  of  the  vendor  is  not  restricted  to  the  mere 
question  of  forgery  vel  non,  but  depends  upon  whether  he  has  delivered 
that  which  he  contracted  to  sell,  this  rule  being  designated,  in  Eng- 
land, as  a  condition  of  the  principal  contract,  as  to. the  essence  and 
substance  of  the  thing  agreed  to  be  sold,  and  in  this  country  being 
generally  termed  an  implied  warranty  of  identity  of  the  thing  sold. 
*     *     * 

Many  of  the  controversies  covered  by  the  cases  arose  in  consequence 
of  the  sale  of  a  forged  note,  but  the  principles  upon  which  all  the 
authorities  proceed  do  not  confine  the  right  of  recovery  to  such  a  case, 
but  rest  upon  the  general  doctrine  to  which  we  have  already  referred. 
In  fact,  no  case  is  reported  wherein  the  obligation,  as  between  vendor 
and  vendee,  in  the  sale  of  negotiable  paper,  is  claimed  to  be  controlled 
other  than  by  the  general  principles  of  the  common  law,  though  in 
three  cases,  Baxter  v.  Duren,  29  Me.  434,  50  Am.  Dec.  602 ;  Fisher  v. 
Rieman,  12  Md.  497,  and  Ellis  v.  Wild,  6  Mass.  321,  the  deduction 
was  made  from  the  law  respecting  the  sale  of  goods  that  on  a  sale  of 
negotiable  paper  there  was  under  the  principle  of  caveat  emptor  no  im- 
plied warrantv  even  that  the  signatures  to  the  paper  were  not  forged. 
Ellis  V.  Wild' was,  however,  expressly  overruled  in  Merriam  v.  Wol- 
cott,  3  Allen  (Mass.)  258,  260,  80  Am.  Dec.  69;  and  from  the  allusions 
to  Baxter  v.  Duren,  contained  in  the  later  Maine  decisions  previously 
noted  in  the  margin,  it  is  doubtful  whether  the  early  ruling  in  Maine 
would  now  be  followed  there.  The  three  cases  referred  to,  it  is  need- 
less to  say,  are  practically  disregarded  by  the  entire  current  of  Ameri- 
can and  English  authority,  and  stand  alone.  They  are  disavowed  by 
the  defendant  in  error  here,  since  his  argument  admits  that  there  is  a 
warranty  of  the  genuineness  of  the  signatures,  to  an  apparent  negotia- 
ble instrument,  thereby  conceding  the  subsistence  of  the  obligation  to 
warrant  the  existence  or  identity  of  the  thing  sold,  and  yet_  seeking  to 
avoid  its  consequences  by  limiting  it  to  non-existence  resulting  from  a 
particular  nullity. 

There  is  an  exceptional  case,  Littauer  v.  Goldman,  72  N.  Y.  506, 
28  Am.  Rep.  171  (1878),  which  holds  that  the  common-law  obligation, 
as  to  the  implied  warranty  of  identity  in  the  thing  sold,  in  the  case  of 
commercial  paper,  extends  only  to  the  genuineness  of  the  instrument. 
The  case  was  one  involving  the  nullity  of  a  usurious  note,  and,  if  cor- 
rectly decided,  would  be  authority  for  the  proposition  that  there  was  a 
peculiar  species  of  warranty  in  the  sale  of  commercial  paper,  differing 
from  all  others ;  in  other  words,  that  there  was  a  law  merchant  of  war- 
ranty where  there  was  no  commercial  contract.  The  opinion  in 
this  case  illustrates  the  same  contradictory  position  presented  here  by 
the  argument  of  the  defendant  in  error,  to  which  we  have  just  called 
attention,  that  is,  that  it  admits  the  common  law  rule  and  then  denies 
its  essential  result  by  eliminating  conditions  of  non-existence  which- 
are  necessarily  embraced  by  it.  It  follows  that  this  New  York  deci- 
sion leads  logically  to  the  view  expressed  in  the  Maine  and  Maryland 
cases  just  referred  to,  for  either  the  principle  of  warranty  of  identity 
must  be  accepted  or  rejected;   it  cannot  be  accepted  and  its  legitimate 


884  NEGOTIABLE   INSTRUMENTS  (Part  3 

and  inevitable  results  be  denied.  The  rule  there  announced  was  in 
conflict  with  previous  decisions  in  New  York,  and  the  decision  is 
strongly  criticised  by  the  Court  of  Errors  and  Appeals  of  New  Jersey 
in  Wood  V.  Sheldon,  42  N.J.  Law,  421,425,  36  Am.  Rep.  523.  *  *  * 
It  follows  that  the  judgment  of  the  Circuit  Court  must  be  reversed, 
and  the  case  be  remanded  with  directions  to  enter  judgment  for  plain- 
tiffs for  $8,383.75,  with  interest  from  judicial  demand  and  costs. 


Under  the  Negotiable  Instruments  Law,  the  liability  of  the 
qualified  indorser  and  the  transferor  by  delivery  is  as  follows : 

N.  I.  L.  Section  65.  Every  person  negotiating  an  instrument 
by  delivery  or  by  qualified  indorsement,  warrants — (1)  that  the 
instrument  is  genuine  and  in  all  respects  what  it  purports  to  be; 
(2)  that  he  has  a  good  title  to  it;  (3)  that  all  prior  parties  had 
capacity  to  contract.  The  provisions  of  subdivision  three  of  this 
section  do  not  apply  to  persons  negotiating  public  or  corporations 
securities,  other  than  bills  and  notes;  (4)  that  he  has  no  knowl- 
edge of  any  fact  which  would  impair  the  validity  of  the  instrument 
or  render  it  valueless.  But  when  the  negotiation  is  by  delivery 
only,  the  warranty  extends  in  favor  of  no  holder  other  than  the 
immediate  transferee. 

There  would  seem  to  be  no  substantial  reason  why  the  uncon- 
ditional liability  on  warranties  of  the  transferor  by  delivery  and 
that  of  the  qualified  indorser  should  diflr'er  from  that  of  the  un- 
qualified indorser.  Both  are  vendors  of  negotiable  instruments. 
The  liability  arising  from  the  warranties  spoken  of  in  sections  65 
and  66  is  imposed  upon  the  parties  because  they  are  vendors. 
Nevertheless  the  vendor  who  has  indorsed  without  qualification 
under  section  66  is  under  a  broader  liability  than  is  a  vendor  by 
delivery  only  or  by  qualified  indorsement.  It  must  be  noticed 
that  the  warranty  of  genuineness  of  the  instrument,  that  the  ven- 
dor has  title  and  that  all  prior  parties  had  capacity  to  contract 
are  the  same  in  both  cases.  But  as  regards  the  remaining  war- 
ranty there  is  a  marked  dift'erence.  The  unqualified  indorser,  by 
section  66,  subsection  2,  warrants  "that  the  instrument  is  at  the 
time  of  his  indorsement  valid  and  subsisting."  The  qualified  in- 
dorser, and  the  transferor  by  delivery,  by  section  65,  subsection 
4,  warrants  "that  he  has  no  knowledge  of  any  fact  wdiich  would 
impair  the  validity  of  the  instrument  or  render  it  valueless."  The 
unqualified  indorser,  therefore,  warrants  that  there  are  no  real 
or  personal  defenses  which  may  be  successfully  interposed  against 
the  claim  of  the  holder  even  though  he  may  have  no  knowledge 
that  such  defenses  exist.  With  the  exception  of  the  warranty  of 
genuineness  of  title  and  that  all  prior  parties  had  capacity  to  con- 
tract, the  qualified  indorser  and  transferor  by  delivery  warrants 
merely,  he  has  no  knowledge  of  existing  defenses  possessed  by 
primary  parties.  The  Negotiable  Instruments  Law  has  therefore 
codified  the  principle  of  Littauer  v.  Goldman. 


Ch.  5)       RIGHTS  OF  HOLDER   AGAINST   INDORSERS   AND   DRAWER  885 

There  is  one  difference  between  the  liabiHty  of  a  transferor  by 
delivery  and  that  of  the  quahfied  indorser.  The  warranty  of  the 
transferor  by  delivery  extends  only  to  his  immediate  transferee, 
while  that  of  the  qualified  indorser,  by  implication,  extends  to  all 
subsequent  holders  in  due  course.  As  a  general  rule,  warranties 
which  accompany  sales  of  tangible  personal  property  do  not  run 
to  sub-vendees.  It  is,  therefore,  somewhat  difficult  to  explain  the 
theory  on  which  such  warranties  run  to  subsequent  holders  in  due 
course;  perhaps  this  result  follows 'from  the  notion  that  each 
successive  holder  under  the  qualified  indorsement,  by  his  trans- 
fer of  the  instrument,  assigns  his  right  on  the  warranties  to  his 
indorsee  and  that  indorsee  in  turn  assigns  to  his  indorsee  and  so 
on.  In  the  law  of  real  property  there  is  an  analogy  for  the  view 
that  warranties  should  run  to  subsequent  holders.  Some  of  the 
covenants  which  a  grantor  of  land  in  a  warranty  deed  enters  into 
with  his  grantee,  will  pass  to  the  subsequent  purchasers  of  the 
law.     Such  covenants  are  called  covenants  running  with  the  land. 

Where  a  holder  of  a  negotiable  instrument,  in  such  form  that 
it  may  be  negotiated  by  delivery,  does  in  fact  indorse  unqualifiedly, 
it  would  follow  that  his  liability  would  be  that  of  the  unqualified 
indorser  and  not  that  of  the  transferor  by  delivery.  This  result  is 
recognized  in  the  following  section : 

N.  I.  L.  Section  67.  Where  a  person  places  his  indorsement 
on  an  instrument  negotiable  by  delivery,  he  incurs  all  the  liabilities 
of  an  indorser. 

Where  the  transferor  by  delivery  is  an  agent  for  the  owner  on 
principles  of  the  law  of  agency,  he  will  incur  a  personal  liability 
unless  he  discloses  his  principal. 

N.^  I.  L,  Section  69.  Where  a  broker  or  other  agent  negotiates 
an  instrument  without  indorsement,  he  incurs  all  the  liabilities  pre- 
scribed by  section  sixty-five  of  this  act,  unless  he  discloses  the 
name  of  his  principal,  and  the  fact  that  he  is  acting  only  as  agent. 


SECTION  4.— RIGHTS  OF  THE  HOLDER  AGAINST  THE 
ACCOMMODATION  INDORSER 

We  have  already  discussed  some  features  of  the  liability  of  an 
accommodation  party.  Section  29  defines  an  accommodation 
party  as  one  who  has  signed  the  instrument  as  maker,  drawer, 
acceptor  or  indorser,  without  receiving  value  therefor,  and  for  the 
purpose  of  lending  his  name  to  some  other  person.  The  liability 
of  an  accommodation  party  is  then  declared  to  be  on  the  instru- 
ment to  a  holder  for  value,  notwithstanding  such  holder  at  the 
time  of  taking  the  instrument  knew  him  to  be  only  an  accommo- 
dation party.  An  accommodation  party  is  a  surety  for  some  prin- 
cipal debtor.  Either  party  may  occupy  any  position  on  the  instru- 
ment. The  present  section  deals  with  certain  special  aspects  of  the 
liability  of  one  kind  of  an  accommodation  party — i.  e.,  an  accommo- 


886  NEGOTIABLE   INSTRUMENTS  (Part  3 

dation  indorser.  Such  an  indorser  is  sometimes  called  an  irregular 
indorser  or  an  anomalous  indorser.  The  indorsement  is  said  to  be 
irregular  or  anomalous  because  the  indorser  was  never  in  the  chain 
of  title.  He  was  never  the  owner  of  the  instrument.  The  same 
indorsement  is  spoken  of  as  an  accommodation  indorsement  be- 
cause the  indorser  is  accommodating  a  debtor  by  loaning  his 
credit  to  the  debtor. 

The  sections  following,  in  the  main,  deal  with  two  features  of 
the  liability  of  an  accommodation  indorser:  (1)  The  nature  of  the 
liability ;  (2)  the  parties  to  whom  the  liability  runs.  The  nature 
of  the  rights  and  liabilities  of  the  contract  of  the  accommodation 
indorser,  in  their  broadest  aspect,  constitute  the  subject  matter  of 
that  branch  of  the  law  known  as  the  law  of  suretyship.  To  some 
of  the  more  important  principles  there  applied  some  reference  was 
made  in  Chapter  XI  of  Contracts.  Those  principles,  of  course, 
apply  to  accommodation  indorsers  the  same  as  to  all  other  sureties. 
In  determining  the  rights  and  liabilities  of  sureties  on  negotiable 
paper  several  sections  of  the  Negotiable  Instruments  Law  must  be 
taken  into  consideration.  In  the  chapter  on  Discharge  other  sec- 
tions will  be  referred  to.  Here  we  are  interested  in  the  four  sec- 
tions following: 

N.  I.  L.  Section  63.  A  person  placing  his  signature  upon  an 
instrument  otherwise  than  as  maker,  drawer  or  acceptor,  is  deemed 
to  be  an  indorser,  unless  he  clearly  indicates  by  appropriate  words 
his  intention  to  be  bound  in  some  other  capacity. 

N.  I.  L.  Section  64.  Where  a  person,  not  otherwise  a  party  to 
an  instrument,  places  thereon  his  signature  in  blank  before  deliv- 
ery, he  is  liable  as  indorser,  in  accordance  with  the  following  rules ; 
(1)  If  the  instrument  is  payable  to  the  order  of  a  third  person,  he 
is  liable  to  the  payee  and  to  all  subsequent  parties.  (2)  If  the  in- 
strument is  payable  to  the  order  of  the  maker  or  drawer,  or  is  pay- 
able to  bearer,  he  is  liable  to  all  parties  subsequent  to  the  maker 
or  drawer.  (3)  If  he  signs  for  the  accommodation  of  the  payee 
he  is  liable  to  all  parties  subsequent  to  the  payee. 

N,  I.  L.  Section  68.  As  respects  one  another,  indorsers  are 
liable  prima  facie  in  the  order  in  which  they  indorse ;  but  evidence 
is  admissible  to  show  that  as  between  or  among  themselves  they 
have  agreed  otherwise.  Joint  payees  or  joint  indorsees  who  in- 
dorse are  deemed  to  indorse  jointly  and  severally. 

N.  I.  L.  Section  66.  Every  indorser  who  indorses  without  qual- 
ification warrants  to  all  subsequent  holders  in  due  course  *  *  * 
and  engages  that  on  due  presentment,  it  shall  be  accepted  or 
paid.     *     *     * 

In  its  broadest  outline  the  problem  involved  in  the  interpreta- 
tion of  the  above  sections  is :  For  what  purposes  may  parol  testi- 
mony be  admitted  in  a  suit  against  a  person  whose  signature  ap- 
pears on  the  instrument  otherwise  than  as  maker,  drawer,  or  ac- 
ceptor. From  a  bare  inspection  of  the  instrument  it  may  be  de- 
termined whether  the  name  appears  on  the  instrument  as  maker. 


Ch.  5)       RIGHTS   OF   HOLDER   AGAINST   INDORSERS   AND   DRAWER  SS7 

drawer,  or  acceptor.  No  parol  testimony  is  necessary.  This  is 
simply  a  question  of  interpretation  of  the  words  on  the  instru- 
ment. Section  63  then  asserts  that  the  party  whose  name  ap- 
pears on  the  instrument  otherwise  than  as  maker,  drawer,  or  ac- 
ceptor is  deemed  to  be  an  indorser.  This  section  is,  therefore,  a 
sweeping  declaration,  apparently,  of  the  total  legal  effect  of  such 
signature — such  party  is  given  the  rights  of  an  indorser  and  is 
made  subject  to  the  liabilities  of  an  indorser.  In  the  absence  of 
this  section  it  is  not  conclusive  that  such  party  is  an  indorser.  A 
signature  on  an  instrument,  wherever  placed,  may  have  been  placed 
there  by  one  who  intended  to  sign  as  maker,  acceptor,  or  drawer, 
although  he  did  not  place  his  name  in  the  position  where  the  names 
of  such  parties  usually  appear.  Such  party  may  have  intended  to 
assume  the  position  of  a  guarantor  of  payment  or  of  collectibility. 

Before  the  Negotiable  Instruments  Law,  there  was  considerable 
conflict  of  authority  as  to  the  nature  of  the  liability  of  one  who 
had  never  had  title  to  the  instrument  and  signed  other  than  as 
maker,  drawer,  or  acceptor.  Many  courts  held  that  such  a  signer 
was  an  indorser  and  this  view  was  adopted  by  section  63.  _  This 
section  therefore,  would  seem  to  render  inadmissible  any  evidence 
tending  to  change  the  nature  of  the  liability  of  the  accommodation 
indorser  from  that  of  an  unqualified  indorser  to  that  of  a  joint 
maker,  a  guarantor,  or  other  party.  The  last  clause  of  the  section, 
permitting  the  accommodation  indorser  to  vary  the  nature  of  his 
liability  if  he  "clearly  indicates  by  appropriate  words  his  intention 
to  be  bound  in  some  other  capacity,"  should  be  interpreted  as 
though  it  read  "clearly  indicates  by  appropriate  words  on  the  in- 
strument his  intention  to  be  bound  in  some  other  capacity."  Sev- 
eral courts  have  held,  however,  that  parol  evidence  is  admissible 
to  change  the  liability  of  the  accommodation  indorser.  The  con- 
flict which  the  section  was  intended  to  silence  still  continues. 

Section  64  specifies  in  detail  the  parties  to  whom  the  liability, 
whatever  the  nature,  of  the  accommodation  indorser  runs.  The 
principle  behind  these  detailed  rules  is  that  the  accommodation  in- 
dorser is  liable  to  the  creditor  and  is  not  liable  to  the  debtor,  the 
party  accommodated.  The  section  is  phrased  in  language  which 
seems  to  exhaust  all  the  possibilities.  There  is  one  situation  not 
provided  for — where  the  indorser  signed  for  the  accommodation  of 
the  acceptor  on  a  bill  payable  to  the  order  of  the  drawer.  Since 
the  drawer  payee  is  the  creditor  the  accommodation  indorser 
should  be  liable  to  him,  but  the  section  does  not  provide  for  this 
liability,  for  subsection  2  provides  that  he  shall  be  liable  only  to 
parties  subsequent  to  the  drawer.  The  desire  to  bring  about  a  just 
result  has  led  the  New  York  Court  of  Appeals,  in  Haddock,  Blan- 
chard  &  Co.  v.  Haddock,  a  case  following,  to  allow  parol  testimony 
to  be  introduced  to  render  the  accommodation  indorser  liable  to 
the  drawer.  Here  again  we  have  the  difficulty  which  it  was 
thought  was  eliminated  by  the  act.  If  parol  testimony  may  freely 
be  admitted  to  establish  the  liability  of  the  accommodation  in- 


888  W-  NEGOTIABLE   INSTRUMENTS  (Part  3 

dorser,  uniformity  of  decision  as  regards  the  nature  of  his  liability 
is  improbable,  and  this  result  is  not  desirable.  Section  64  should 
permit  the  introduction  of  parol  testimony  for  the  one  purpose 
only :  That  the  person  whose  signature  appears  on  the  instrument 
did  in  fact  sign  the  same  in  blank  before  delivery. 

Section  68  applies  to  a  case  where  there  are  two  or  more  accom- 
modation indorsers  for  the  same  debtor,  and  expressly  permits 
parol  testimony  to  be  introduced  to  show  an  agreement  between 
them  as  to  the  proportion  in  which  they  should  bear  their  common 
liability.  Being  co-sureties,  they  would  share  the  loss  equally. 
In  the  absence  of  this  section  it  would  be  possible  that  the  surety 
whose  name  appeared  last  could  recover  from  his  co-surety  the 
full  amount  of  the  debt,  a  result  which,  obviously,  should  be 
avoided. 

Section  66,  dealing  with  the  liability  of  indorsers,  in  express 
terms,  applies  to  "every  indorser,  who  indorses  without  qualifica- 
tion." This  includes  the  accommodation  indorser.  The  accom- 
modation indorser  therefore  enters  into  the  same  special  engage- 
ment to  pay  upon  due  presentment  and  due  notice  of  dishonor 
that  is  imposed  by  the  unqualified  indorsement.  In  many  states, 
before  the  act,  the  accommodation  indorser,  not  being  regarded  as 
an  indorser,  was  not  entitled  to  due  presentment  and  due  notice 
of  dishonor. 

Section  66,  also,  it  would  seem,  imposes  upon  the  accommoda- 
tion indorser  the  liability  of  a  warrantor.  Since  the  accommoda- 
tion indorser  is  not  a  vendor,  it  is  difficult  to  see  upon  what  theory 
he  should  be  made  liable  as  a  warrantor. 

The  following  cases  illustrate  some  features  of  the  general 
problem  involved  in  the  application  of  the  above  sections :  For 
what  purposes  may  parol  testimony  be  admitted  in  actions  against 
accommodation  indorsers  ? 


ROCKFIELD  et  al.  v.  FIRST  NAT.  BANK  OF  SPRINGFIELD. 

(Supreme  Court  of  Ohio,  1907.     77  Ohio  St.  311,  83   N.  E.  392, 
14  L.  R.  A.  [N.  S.]  842.) 

SpEar,  J.  Whether  or  not  the  answer  avers  a  defense  to  the  cause 
of  action  set  up  in  the  petition  is  the  question  here.  The  theory  of  the 
defendants'  pleading  is  that  Rockfield  and  Snyder,  by  writing  their 
names  across  the  back  of  the  note,  became  indorsers  in  the  commer- 
cial sense,  and  therefore  entitled  to  notice  of  demand  at  maturity  of 
the  maker  and  of  nonpayment,  and,  failing  that,  no  liability  attached. 
The  theory  of  the  petition  is  that  these  defendants,  having  signed  the 
note  before  delivery,  must  be  held  to  have  signed  with  the  purpose 
of  giving  it  credit  and  of  aiding  negotiability,  and  therefore  stand  as 
maker,  and  although  their  names  appear  on  the  back  of  the  instrument, 
and  they  are  in  law  sureties,  yet  they  are  not  indorsers  in  the  commer- 
cial sense,  and  therefore  not  entitled  to  notice  of  demand  and  non- 
payment. This  view  is  the  one  adopted  by  the  trial  court,  which  in- 
corporated in  the  judgment  entry  a  finding  that  the  defendants  are  in- 


Ch.  5)       RIGHTS   OF   HOLDER   AGAINST   INDORSERS  AND   DRAWER  889 

deb  ted  as  joint  and  several  makers  of  the  note,  and  this  is  the  view 
taken  of  the  question  by  the  circuit  court  in  affirming  the  judgment 
of  the  common  pleas.  Which  is  the  correct  view  is  the  question  we 
have.    *    *    * 

That  the  conclusion  adopted  by  the  lower  courts  is  m  accord  with 
the  law  as  held  in  this  state  from  early  times,  and  with  all  decisions  of 
this  court  thus  far  made,  is  conceded.  The  latest  deliverance  on  the 
subject  is  the  case  of  Ewan  v.  Brooks- Waterfield  Co.,  55  Ohio  St.  596, 
45  N.  E.  1094,  35  L.  R.  A.  786,  60  Am.  St.  Rep.  719.  opinion  by  Wil- 
liams, C.  J.  It  is  here  held  that  where  the  name  of  a  third  party,  a 
stranger  to  the  note,  appears  in  blank  upon  the  back  of  the  note  at 
the  time  it  takes  effect,  his  undertaking  rests  upon  the  consideration 
which  supports  the  note,  and  the  presumption  is  that  he  intended  to 
be  liable  as  a  suretv.  and  he  will  be  held  accordingly,  unless  it  is  shown 
that  there  was  a  different  agreement  between  the  parties.  This  con- 
clusion is  reached  after  a  careful  and  somewhat  extended  review  of 
authorities,  many  of  them  decisions  of  this  court,  and  is  supported  by 
strong  and  convincing  argument.  While  a  contrary  doctrine,  holding 
such  party  to  be  an  indorser  in  the  commercial  sense,  had  been  held 
in  a  number  of  states,  notably  Alabama,  California,  Connecticut,  Indi- 
ana, Mississippi,  New  York,  Oregon,  Pennsylvania,  and  Wisconsin. 
the  Ohio  rule,  as  above  indicated,  had  been  the  settled  common-law  rule 
of  the  states  of  Arkansas,  Colorado,  Delaware,  Maine,  Maryland, 
Massachusetts,  Michigan,  Minnesota,  Missouri,  New  Hampshire, 
North  Carolina,  Rhode  Island,  South  Carolina,  Texas,  Utah,  and  Ver- 
mont. The  statute  referred  to  is  the  act  of  April  17,  1902,  known  as 
the  Negotiable  Instruments  Act.    *    *    * 

The  question  at  issue  very  largely  turns  upon  what  is  meant 
by  the  terms  of  section  64,  the  substance  of  which  we  here  repeat: 
"Where  a  person  not  otherwise  a  party  to  an  instrument  places  there- 
on his  signature  in  blank  before  delivery,  he  is  liable  as  indorser,''  etc. 
It  seems  to  have  been  the  view  of  the  learned  circuit  court  (see  opinion 
by  Dustin,  J.,  Rockfield  v.  First  Nat.  Bank,  8  Ohio  Cir.  Ct.  R.  [N.  S.] 
290)  that,  inasmuch  as  the  liability  defined  by  the  rules  followme  the 
above-quoted  portion  of  section  64  does  not  differ  essentially  from 
the  liability  attaching  to  such  party  under  the  decisions  of  this  court, 
no  change  in  the  law  can  be  presumed  to  have  been  intended  by  the 
General  Assembly  in  the  enactment  of  the  statute;  also,  that  the  sub- 
sequent provisions  of  the  sections  relating  to  indorsers  and  providing 
what  shall  be  done  to  fix  liability,  etc.,  are  inconsistent  with  this  con- 
clusion because  the  later  sections  apply  only  to  general  indorsers,  and  in 
those  sections  every  indorser  is  described  as  such — is  called  an  in- 
dorser— while  in  the  earlier  section  the  party  described  is  only  to  be 
deemed  an  indorser,  and  has  the  liability  of  an  indorser  only  to  a  lim- 
ited extent. 

The  contention,  further,  is  that  the  terms  of  section  63  forbid 
the  conclusion  that  such  party  is  to  be  deemed  an  indorser  in  the  com- 
mercial sense,  because  he  must,  in  order  to  have  that  effect,  place  his 
name  on  the  back  otherwise  than  as  maker,  and  the  rule  is,  and  was, 
that  the  person  so  placing  his  name  is  a  maker  unless  he  shows  a  dif- 
ferent agreement  between  the  parties.  There  is  much  plausibility  in 
these  contentions,  and  they  would  seem  to  be  sound  were  it  not  for 
the  incorporation  of  the  words  "as  indorser"  in  section  64.  Had 
these  words  been  left  out  of  the  section  the  construction  claimed  would 


S90  NEGOTIABLE    IXSTItUMENTS  (Part  3 

be  an  unnatural  one.  But  we  are  required,  by  the  inexorable  rule  of 
construction,  to  give  to  them  some  signification — some  meaning  con- 
sistent with  a  rational  purpose  in  placing  them  in  the  statute.  The  law- 
makers were  making  law.  They  cannot  be  presumed  to  have'  been 
simply  dealing  with  legal  terms  in  a  loose,  popular  sense.  The  word 
"indorser"  has  a  distinct,  clearly  defined  legal  meaning.  An  indorser 
is  one  who  undertakes  to  be  responsible  to  the  holder  of  the  paper  for 
the  amount  thereof,  if  the  latter  shall,  at  maturity,  make  legal  demand 
of  the  payer,  and,  in  default  of  payment,  give  proper  notice  thereof  to 
the  indorser.  The  language  of  the  section  is  plain  and  free  from  am- 
biguity. The  words  express  a  clear  meaning.  The  party  has  placed 
his  name  upon  the  instrument  where  general  indorsers  sign.  He  is 
not  a  party  to  the  note,  but  is  a  stranger. 

Section  63  says  he  shall  be  deemed  to  be  an  indorser  unless  he 
clearly  indicates  by  appropriate  words  his  intention  to  be  bound  in 
some  other  capacity.  He  has  used  no  word  appropriate  or  otherwise. 
His  status  on  the  paper  is,  therefore,  fixed  by  the  emphatic  words  of 
the  statute.  Then  follows  the  fixing  of  liability.  He  is  liable  "as  in- 
dorser." And  how  is  that  ?  Why,  he  must  pay  when,  and  only  when, 
proper  demand  has  been  made  of  the  maker  at  maturity  and  legal  no- 
tice given  him.  This  is  clearly  shown  by  what  follows.  Every  in- 
dorser who  indorses  without  qualification  engages  that  on  due  pre- 
sentment and  dishonor,  and  due  notice  to  him,  he  will  pay.  This  ex- 
presses the  extent  of  his  liability;  without  these  requisites  being 
complied  with  he  is  discharged.  And,  then,  as  though  to  cover  a  doubt- 
ful situation,  the  provision  is  (section  17 [6])  that,  where  the  lan- 
guage of  an  instrument  is  ambiguous,  because  of  the  signature  being 
so  placed  that  it  is  not  clear  in  what  capacity  the  person  intended  to 
sign,  he  is  deemed  to  be  an  indorser.  Of  the  rules  prescribed  by  sec- 
tion 64,  it  is  enough  to  say  that  they  are  not  inconsistent  with  the 
obligation  of  the  general  indorser.  He,  too,  is  liable  to  those  who 
come  after  him  as  indorsers  or  holder.  The  important  question  is, 
not  to  whom  is  such  party  liable,  but  in  what  capacity — in  what  relation 
— is  he  liable?    *    *    * 

But  another  purpose  seems  to  us  to  be  indicated  by  this  legislation. 
Not  only  were  the  courts  of  the  country  in  conflict  respecting  the 
attitude  and  liability  of  a  third  party — a  stranger — who  placed  his 
name  in  blank  on  the  back  of  commercial  paper,  but  the  situation  was 
in  itself  an  anomalous  one,  calculated  to  lead,  as  it  often  did  lead,  to 
confusion  respecting  the  duty  of  the  holder  of  such  paper  with  regard 
to  demand  and  notice.  Mistakes  in  this  respect  were  easy  and  were 
frequently  made,  often  resulting  in  litigation,  and,  not  infrequently, 
loss.  To  clear  this  situation  up,  and  to  establish  a  plain,  easily  under- 
stood rule,  and  one  of  universal  application,  was  surely  a  result  of  high 
importance  to  all  who  deal  in  commercial  paper,  and  it  seems  to  us  that 
the  desire  to  accomplish  this  purpose  had  much  to  do  with  inducing 
the  enactment  of  the  negotiable  instruments  act  by  our  General  As- 
sembly.   *    *    * 

It  follows  from  these  conclusions  that  *  *  *  ^  person  who,  be- 
ing a  stranger  to  a  promissory  note,  places  his  name  on  the  back  by 
blank  indorsement,  is  an  indorser  of  the  paper  and  cannot  be  held  in 
any  other  capacity.  As  such  he  is  entitled,  in  order  to  render  him 
liable,  to  notice  of  demand  upon  those  who  are  primarily  liable,  and, 
failing  such  demand  and  due  notice  to  him,  he  is  discharged.     The 


Ch.  5)       RIGHTS   OF   HOLDER   AGAINST   INDORSERS   AXD   DRAWER  891 

answer,  therefore,  stated  a  defense,  and  the  sustaining  of  the  demurrer 
and  rendering  judgment  for  the  bank  upon  the  note  was  error. 
Judgment  reversed,  and  cause  remanded.    *    *    * 


FAR  ROCKAWAY  BANK  v.  NORTON. 
(Court  of  Appeals  of  New  York,  1906.     186  N.  Y.  484,  79  N.  E.  700.) 

Action  by  the  Far  Rockaway  Bank  against  FrankUn  C.  Norton. 
From  a  judgment  of  the  Appellate  Division,  unanimously  affirming  a 
judgment  on  the  report  of  a  referee  in  favor  of  plaintiff,  defendant 
appeals. 

Cuu.EN,  C.  J.  The  action  is  brought  on  a  promissory  note  made  by 
one  Smith  to  the  plaintiff,  which  the  defendant  indorsed  prior  to  its 
delivery  to  the  payee.  *  *  *  The  note  was  given  in  renewal  and  to 
take  up  an  earlier  note,  also  indorsed  by  the  defendant.  To  establish 
the  fact  that  the  defendant  had  indorsed  the  note  with  the  purpose  of 
giving  the  maker  credit  with  the  payee,  proof  was  given  tending  to 
show  that,  default  having  been  made  in  the  payment  of  the  earlier  note, 
notice  of  protest  thereof  was  given  to  the  defendant.  It  is  urged  that 
the  evidence  as  to  the  protest  of  the  earlier  note  was  not  of  a  proper 
character.  It  is  unnecessary  to  consider  this  question,  for,  since,  the 
enactment  of  the  negotiable  instruments  law,  the  law  obtaining  in  the 
case  of  such  indorsement  as  that  made  by  the  defendant  has  been  rad- 
ically changed.  Prior  to  that  time  the  indorser  was  presumed  to  be 
a  second  indorser,  and  not  liable  to  the  payee,  though  it  was  competent 
for  the  payee  to  prove  aliunde  that  the  intention  of  the  indorser  was 
to  give  the  maker  credit  with  the  payee.  *  *  *  The  negotiable  in- 
struments law  prescribes  a  different  rule.     *     *     *    • 

The  judgment  appealed  from  should  be  affirmed,  with  costs. 


HADDOCK,  BLANCHARD  &  CO.,  Inc.,  V.  HADDOCK. 

(Court  of  Appeals  of  New  York,  1908.     192  N.  Y.  499,  85  N.  E.  682, 
39  L.  R.  A.   [N.   S.]   136.) 

Action  by  Haddock,  Blanchard  &  Co.,  Incorporated,  against  John 
C.  Haddock.  From  a  judgment  of  the  Appellate  Division,  affirming  a 
judgment  for  plaintiff,  defendant  appeals. 

Chase,  J.  The  plaintiff  is  a  foreign  corporation  authorized  to  do 
business  in  this  state  and  engaged  as  a  wholesale  dealer  in  coal  at 
Binghamton.  The  Plymouth  Coal  Company,  a  corporation,  was  en- 
gaged in  the  operation  of  coal  mines  in  Pennsylvania  prior  to  March, 
1902,  at  which  time  it  went  into  the  hands  of  a  receiver.  The  de- 
fendant was  the  president  and  manager  of  said  coal  company  and  the 
owner  of  substantially  all  of  its  stock.  The  defendant  was,  until  May, 
1902,  the  president  of  the  plaintiff,'  and  during  all  the  times  herein 
mentioned  had  charge  of  plaintiff's  New  York  office.  At  the  time 
when  the  note  and  bills  hereinafter  mentioned  were  given  the  plaintiff 
was  engaged  in  selling  on  commission  at  wholesale  the  coal  mined  by 
the  Plymouth  Company  or  its  receiver,  under  a  contract  made  with 
said  coal  company.  One  B.,  the  vice  president  of  the  plaintiff'  prior  to 
May,  1902,  and  its  president  thereafter,  passed  upon  the  financial  re- 
sponsibility of  persons  seeking  credit  with  the  plaintiff,  and  he  ar- 
ranged with  a  trust  company  at  Binghamton  to  discount  commercial 


S92  NEGOTIABLE   INSTRUMENTS  (Part  3 

paper  of  the  plaintiff's  customers.  The  Lenape  Coal  Company,  the 
Living  Stone  Coal  Company,  and  the  Montauk  Coal  Company  were 
severally  organized  as  corporations  and  engaged  in  the  business  of 
retailing  coal  in  or  near  the  city  of  New  York,  and  the  defendant  was 
the  owner  of  substantially  all  of  the  stock  of  each.  Soon  after  the 
organization  of  such  corporations  to  retail  coal,  they  sought  credit 
with  the  plaintiff,  and  their  financial  responsibility  was  investigated  by 
B.  The  responsibility  of  each  was  found  to  be  unsatisfactory,  and 
B.  so  reported  to  the  defendant,  and  the  defendant  replied  that  said 
companies  were  his  companies  and  he  would  guarantee  their  credit  by 
indorsing  their  paper. 

On  February  13,  1902,  said  Lenape  Coal  Company,  for  value  re- 
ceived, executed  and  delivered  to  the  plaintiff,  as  payee,  its  certain 
promissory  note  for  $880.96,  dated  on  that  day,  payable  four  months 
after  date  at  a  bank  in  the  city  of  New  York.  On  and  between  Jan- 
uary 27,  1902,  and  May  13,  1902,  the  plaintiff,  for  value  received,  made 
30  several  drafts  each  on  either  said  Lenape  Coal  Company,  said  Liv- 
ing Stone  Coal  Company,  or  said  Montauk  Coal  Company,  payable  to 
the  order  of  itself  as  payee,  which  drafts  aggregated  $26,833.15,  each 
of  which  drafts  was,  for  value  received,  accepted  by  the  coal  company 
on  w4iich  it  was  drawn,  payable  at  a  place  and  on  a  day  in  each  re- 
spectively specified.  The  drafts  or  bills  were  all  similar  in  form,  and 
the  following  is  a  copy  of  one  of  said  bills:  "1327.41.  Coal  Office  of 
Haddock,  Blanchard  &  Co.,  Incorporated,  New  York,  Apl.  28,  1902. 
Four  months  after  date  pay  to  the  order  of  ourselves  thirteen  hundred 
twenty-seven  and  ^'^/noo  dollars,  value  received,  and  charge  the  same 
to  account  of  Haddock,  Blanchard  &  Co.,  Incorporated.  C.  N.  Blanch- 
ard, Asst.  Treas.  To  Montauk  Co.,  Brooklyn,  N.  Y."  Indorsed 
across  the  face:  "Accepted.  Payable  at  the  Binghamton  Trust  Co., 
Binghamton,  N.  Y.  The  Montauk  Coal  Co.,  Chas..  B.  Smith,  Treas." 
Indorsed  on  the  back :  "Haddock,  Blanchard  &  Co.,  Incorporated.  C. 
N.  Blanchard,  Assistant  Treasurer.     John  C.  Haddock." 

Said  note  after  it  had  been  signed  by  said  Lenape  Coal  Company, 
and  each  of  said  bills  after  they  had  been  accepted  by  the  corporation 
on  which  they  were  severally  drawn,  were  indorsed  by  the  defendant 
before  delivery,  and  thereafter  each  of  them,  so  indorsed,  was  before 
maturity  delivered  to  the  plaintiff'  as  payee,  and  the  plaintiff  thereafter 
.and  prior  to  their  maturity  severally  indorsed  and  procured  them  to 
be  discounted  at  a  trust  company  at  Binghamton.  Said  note  and  each 
of  said  bills  were  given  and  delivered  to  the  plaintiff  for  the  purchase 
price  of  coal  sold  and  delivered  by  the  plaintiff  to  the  acceptors,  re- 
spectively, of  said  bills  and  the  maker  of  said  note,  or  in  renewal  in 
whole  or  in  part  of  prior  notes  or  bills  given  or  accepted  for  the  pur- 
chase price  of  coal  so  sold  and  delivered.  Said  note  and  each  of  said 
bills  were  so  indorsed  by  the  defendant  for  the  accommodation  of  the 
maker  of  said  note  and  the  acceptor  of  said  bills,  respectively,  and 
for  the  purpose  of  giving  such  maker  and  acceptors  credit  with  the 
plaintiff,  and  in  pursuance  of  an  agreement  between  the  defendant  and 
the  plaintiff'  by  which  the  plaintiff  agreed  to  sell  coal  on  credit  to  the 
acceptors  of  said  bills  and  to  the  maker  of  said  note  upon  the  defend- 
ant's guaranteeing  the  credit  of  said  companies  respectively,  and  the 
plaintiff  was  induced  to  take  said  accepted  bills  and  said  note,  and  each 
of  them  for  such  coal  by  reason  of  the  indorsement  of  the  said  de- 
fendant and  pursuant  to  said  agreement  that  the  defendant  would  be 


Ch.  5)       RIGHTS   or   HOLDER   AGAINST   IXDORSERS   AND   DRAWER  893 

liable  thereon  to  the  plaintiff  in  case  the  respective  corporations  pri- 
marily liable  thereon  should  make  default  in  payment  thereof.  The 
proceeds  of  said  bills  and  note  were  remitted  to  the  defendant  at  the 
New  York  office  of  the  plaintiff  to  provide  funds  to  pay  for  coal,  and 
other  current  expenses.  At  the  time  when  said  note  and  bills  respec- 
tively became  due  they  were  presented  for  payment  at  the  place  where 
they  were  respectively  made  payable,  and  payment  duly  demanded, 
which  was  refused,  and  thereupon  each  was  duly  protested  for  non- 
payment, and  notice  thereof  given  to  the  plaintiff  and  to  said  defend- 
ant. Thereafter  the  plaintiff  was  compelled  to  take  up  said  note  and 
drafts  and  pay  the  amount  due  thereon,  respectively,  and  became  the 
owner  and  holder  thereof  and  of  each  of  them. 

This  action  is  brought  to  compel  the  defendant  to  pay  to  the  plam- 
tiff  the  amount  of  said  note  and  bills  pursuant  to  his  said  agreement 
with  the  plaintiff  when  they  were  severally  indorsed  by  him,  and  the 
facts  upon  which  the  plaintiff's  claim  is  based  are  stated  in  the  com- 
plaint. The  defendant  denies  that  he  indorsed  the  note  and  bills  for 
the  accommodation  of  and  as  surety  for  the  retail  coal  companies,  re- 
spectively; but  the  evidence  is  sufficient  to  sustain  the  findings  of  the 
court  from  which  the  statements  of  fact  in  this  opinion  have  been 
taken.  As  the  facts  are  found,  if  the  intention  of  the  parties  is  to  pre- 
vail, the  defendant  should  be  required  to  pay  to  the  plaintiff  the  amount 
of  such  note  and  bills  as  established  by  the  judgment.  The  defendant 
contends  that  the  position  of  his  name  upon  the  note  and  bills  conclu- 
sively establishes  that  he  indorsed  the  several  instruments  without  ha- 
bilit>'  to  the  plaintiff,  and  that  parol  evidence  should  not  have  been  re- 
ceived to  affect  or  overcome  the  alleged  conclusive  presumption  arising 
from  his  indorsements  as  made. 

In  the  early  decisions  by  the  courts  in  this  state  there  was  some  con- 
fusion relating  to  the  liability  of  a  person  who  indorsed  a  note  or  bill 
prior  to  its  delivery.  *  *  *  This  court,  in  Moore  v.  Cross,  19  N.  Y. 
227,  IS  Am.  Dec.  326,  referring  to  a  case  of  a  person  who  for  the  ac- 
commodation of  a  maker  indorsed  a  note  payable  toa  third  person, 
say:  "Some  confusion  has  been  thrown  around  this  subject  from 
what  has  been  finally  settled  to  have  been  an  error,  treating  such  an 
indorsement  as  a  guaranty  and  charging  the  indorser  as  a  maker  or 
guarantor.  This  doctrine  was  advanced  in  Herrick  v.  Carman,  12 
Johns.  160,  and  was  adjudged  in  Nelson  v.  Du  Bois,  13  Johns.  175, 
and  Campbell  v.  Butler,  14  Johns.  349.  It  was  attacked  in  Dean  v. 
Hall,  17  Wend.  214,  and  in  Seabuiy  v.  Hunger  ford,  2  Hill,  80,  and 
was  finally  overthrown  in  Hall  v.  Newcomb.  3  Hill,  233,  and  the  same 
case  in  error,  7  Hill,  416,  42  Am.  Dec.  82.  The  Chancellor,  in  his 
opinion  in  the  latter  case,  says :  'If  the  object  of  the  second  indorser 
was  to  enable  the  drawer  to  obtain  money  from  the  payee  of  the  note 
upon  the  credit  of  the  accommodation  indorser,  he  may  indorse  it 
without  recourse,  and  by  such  indorsement  may  either  make  it  payable 
to  the  second  indorser  or  to  the  bearer ;  and  such  original  payee  may 
then,  as  legal  holder  and  owner  of  the  note,  recover  thereon  against 
such  second  indorser.  upon  a  declaration  stating  such  special  indorse- 
ment by  him  and  subsequent  indorsement  of  the  note  to  him  by  the 
second  indorser.'  "  The  court  further  say :  "If  a  note  be  made  and 
indorsed  for  the  accommodation  of  A.,  who  indorses  it  to  another  per- 
son, and  afterward  in  the  course  of  trade  again  becomes  the  holder,-  he 
could  maintain  no  action  against  the  maker  and  indorser  for  hisac- 


894  NEGOTIABLE   INSTRUMENTS  (Part  3 

commodation,  notwitlistanding  their  apparent  liability  to  him  on  the 
face  of  the  paper.  The  fact  of  the  accommodation  making  and  indors- 
ing might  be  proved  to  defeat  the  action,  and  it  would  establish  that 
the  agreement  of  the  parties,  contrary  to  the  legal  inference  from  the 
face  of  the  paper,  did  not  impose  a  liability  on  the  maker  and  indorser 
to  pay  the  party  suing." 

There  has  always  been  conflict  among  the  courts  of  the  several  states 
both  in  asserting  the  principles  upon  which  irregular  indorsers  upon 
commercial  paper  are  to  be  held  and  in  the  conclusion  arrived  at  in 
particular  cases  litigated.  The  number  of  cases  is  so  great,  and  the 
possibility  of  even  a  partial  reconciliation  of  them  so  remote,  that  we 
will  confine  our  citation  of  authorities  wholly  to  those  in  this  state. 
It  was  well  settled  in  this  state  for  many  years  prior  to  the  enactment 
of  the  Negotiable  Instruments  Law  that  a  person  who  puts  his  name  on 
the  back  of  a  bill  or  note  before  its  delivery  is  presumably  a  second 
indorser  and  not  liable  to  the  payee,  but  the  presumption  could  be  re- 
butted by  parol  evidence  to  show  that  the  intention  of  the  indorser  was 
to  become  surety  for  some  prior  party  to  the  instrument.     *     *     *    ^ 

The  Negotiable  Instruments  Law  was  first  enacted  in  this  state  in 
1897.  *  *  *  Section  64  provides:  [Court  quotes  section  64.]  By 
this  section  of  said  law  the  presumption  as  established  by  the  courts 
in  this  state  was  changed,  and  an  irregular  indorser  is  now  presumed 
to  be  liable  in  accordance  with  the  express  language  of  the  statute. 
Questions  relating  to  the  sufficiency  of  the  pleadings  are  settled,  by 
the  statute.  A  complaint  upon  a  note  or  bill,  without  alleging  a  col- 
lateral agreement  between  the  parties  whose  names  are  on_  the  instru- 
ment, seeking  to  recover  against  a  person  except  as  provided  by  the 
statute,  would  clearly  be  demurrable. 

The  note  of  the  Lenape  Coal  Company  was  payable  to  the  plaintiff, 
a  third  person,  and  the  defendant,  according  to  the  provisions  of  said 
section,  is  liable  to  the  plaintiff,  the  payee  therein.  No  serious  con- 
tention has  been  made  to  the  contrary.  The  serious  question  for  con- 
sideration arises  from  the  fact  that  the  bills  were  payable  to  the  mak- 
er and  drawer  thereof,  respectively,  and  the  defendant,  as  an  indorser 
thereon  before  delivery,  is  not  under  the  statute  prima  facie  liable 
thereon  to  the  plaintiff.  Should  parol  evidence  have  been  allowed  to 
show  the  intent  of  the  parties?  We  have  not  discovered  any  excep- 
tion to  the  i-ule  as  established  by  the  courts  of  this  state  allowing  pa- 
rol evidence  as  between  the  parties  whose  names  appear  on  the  bill  or 
note  to  determine  their  liability  as  between  themselves.  It  is  fre- 
quently stated  that  where  a  note  is  payable  to  a  person  other  than  the 
maker,  and  is  indorsed  by  a  third  person  before  deliveiy,  the  intention 
of  the  indorser  is  ambiguous  and  uncertain  on  the  face  of  the  paper, 
and  such  uncertainty  justifies  the  receipt  of  parol  evidence  to  deter- 
mine the  true  intention  of  the  parties.  We  do  not  see  that  any  greater 
certainty  exists  upon  the  face  of  a  bill  as  to  the  true  intention  of  the 
parties,  where  it  is  drawn  to  bearer  cr  to  the  order  of  the  maker,  and 
it  is  indorsed  by  a  third  person  after  acceptance  by  the  acceptor  and 
before  delivery  to  the  payee  and  maker.  There  is  a  certain  rule  of 
presumption  determined  by  common  law  or  by  statute,  but  the  alleged 
reason  for  the  rule  in  either  case  is  not  very  apparent.  The  long-es- 
tablished rule  to  allow  parol  evidence  that  the  intention  of  the  parties 
may  prevail  seems  to  have  met  with  somewhat  general  approval,  with- 


Ch.  5)       RIGHTS   OF   HOLDER   AGAINST   INDORSERS   AND   DRAWER  895 

out  discussing  specifically  the  principles  upon  which  such  evidence  is 
admitted.     *    *    * 

In  Good  V.  Martin,  95  U.  S.  90,  24  L.  Ed.  341,  the  court  say :  "Con- 
siderable diversity  of  decision,  it  must  be  admitted,  is  found  in  the  re- 
ported cases,  where  the  record  presents  the  case  of  a  blank  indorsement 
by  a  third  party,  made  before  the  instrument  is  indorsed  by  the  payee 
and  before  it  is  delivered  to  take  effect;  the  question  being  whether 
the  party  is  to  be  deemed  an  original  promisor,  guarantor,  or  indorser. 
Irreconcilable  conflict  exists  in  that  regard;  but  there  is  one  principle 
upon  the  subject  almost  universally  admitted  by  them  all,  and  that  is 
that  the  interpretation  of  the  contract  ought  in  every  case  to  be  such 
as  will  carry  into  effect  the  intention  of  the  parties,  and  in  most  cases 
it  is  admitted  that  proof  of  facts  and  circumstances  which  took  place 
at  the  time  of  the  transaction  are  admissible  to  aid  in  the  interpretation 
of  the  language  employed.     *     *     *  " 

It  must  constantly  be  borne  in  mind  that  the  acceptance  of  a  bill 
makes  the  acceptor  the  principal  debtor.  A  bill,  when  accepted,  be- 
comes similar  to  a  promissory  note;  the  acceptor  being  the  promisor, 
and  the  drawer  standing  in  the  relation  of  an  indorser.  *  *  *  There 
is  nothing  in  the  negotiable  instruments  law  to  indicate  an  intention 
on  the  part  of  the  Legislature  to  change  the  rule  as  established  in  this 
state  relating  to  the  receipt  of  parol  evidence  to  determine  tlie  primary 
liability  as  between  the  persons  whose  names  appear  upon  the  instru- 
ment or  as  between  those  secondarily  liable  thereon.  *  *  *  Parol 
evidence  is  necessary  to  determine  whether  a  party  to  an  instrument, 
including  an  indorser  thereon,  is  an  accommodation  party,  and  also  to 
determine  which  other  party  to  the  instrument  he  had  accommodated. 
The  plaintiff  was  the  holder  of  the  note  for  value,  and  the  evidence 
showed  that  the  defendant  was  an  accommodation  indorser  for  the 
benefit  of  the  acceptor.  The  last  subdivision  of  section  64,  as  we  have 
quoted,  makes  parol  evidence  necessary  to  establish  whether  the  in- 
dorser signed  the  instrument  for  the  accommodation  of  the  payee. 
It  is  true  that  this  section  does  not  expressly  state  that,  if  the  indors- 
er signed  for  the  accommodation  of  the  acceptor,  he  is  liable  to  all 
parties  subsequent  to  the  acceptor ;  but  the  fact  that  such  a  provision 
is  not  included  in  section  64  does  not  prevent  the  admission  of  parol 
evidence  to  determine  generally  the  questions  relating  to  an  accommo- 
dation party  as  provided  by  section  29. 

The  Negotiable  Instruments  Law  by  section  196  provides :  "In  any 
case  not  provided  for  in  this  act  the  rules  of  the  law  merchant  shall 
govern."  By  section  68  of  the  Negotiable  Instruments  Law  it  is  pro- 
vided: "As  respects  one  another,  indorsers  are  liable  prima  facie  in 
the  order  in  which  they  indorse ;  but  evidence  is  admissible  to  show 
that  as  between  or  among  themselves  they  have  agreed  otherwise."  As 
we  have  seen,  upon  the  acceptance  of  the  bill  the  acceptor  becomes  the 
principal  debtor  and  the  one  primarily  liable  to  pay  the  amount  of  the 
bill,  and  all  other  parties  to  the  instrument,  including  the  maker  and 
indorser,  are  secondarily  liable.  We  are  of  the  opinion  that  the  maker 
of  the  bill  is  in  legal  effect  and  within  the  intention  of  this  section  an 
indorser,  and  that  as  between  the  plaintiff  and  the  defendant  parol  evi- 
dence is  authorized  to  determine  the  liability  as  between  them. 

The  articles  of  the  Negotiable  Instruments  Law  relating  to  the  pres- 
entation of  bills  and  notes  for  payment  and  notice  of  dishonor  *  *  * 
further  show  an  intention  bv  the  Legislature  to  leave  the  order  of  lia- 


896  NEGOTIABLE   INSTRUMENTS  (Part  3 

bility  among  those  whose  names  are  on  the  instrument  subject  to  de- 
termination by  any  competent  evidence.     *    *     * 

There  is  no  reason  that  we  can  conceive  why  the  Legislature  should 
intend  to  change  the  rule  in  regard  to  the  admission  of  parol  evidence 
as  it  had  existed  in  this  state  for  many  years.  All  of  the  quotations 
that  we  have  made  from  the  negotiable  instruments  law  show  that  it 
has  enlarged  rather  than  restricted  the  rules  allowing  parol  evidence 
to  show  the  true  liability  and  relation  of  the  parties  whose  names 
appear  upon  the  bill  or  note  in  all  actions  between  themselves.  It.  is 
certainly  very  material  to  the  drawer  of  a  bill  whether  an  indorser 
signs  it  at  his  request  or  at  the  request  and  for  the  benefit  of  the 
acceptor.  We  do  not  think  it  was  the  intention  of  the  Legislature  by 
the  enactment  of  section  64  of  the  Negotiable  Instruments  Law  to 
establish  a  rule  as  to  the  liability  of  an  irregular  indorser  conclusive  on 
the  parties  to  the  instrument  as  between  themselves  in  an  action  where 
the  facts  showing  a  different  intention  are  fully  alleged.  All  of  the  de- 
cisions of  our  courts  since  the  enactment  of  the  negotiable  instruments 
law  tend  to  sustain  the  views  herein  expressed.     *     *     * 

In  Kohn  v.  Consolidated  Butter  &  Egg  Co.,  30  Misc.  Rep.  725,  63 
N.  Y.  Supp.  265,  McAdam,  J.,  said :  "That  this  is  the  proper  inter- 
pretation of  the  act  is  obvious.  The  true  intention  of  indorsers  as 
between  themselves  can  always  be  shown  by  oral  evidence.  *  *  * 
To  go  further,  and  decide  that  the  statute  intended  to  create  an  in- 
contestable liability  against  irregular  indorsers,  would  be  to  impute  to 
the  legislative  wisdom  a  design  repugnant  to  every  notion  of  judicial 
procedure,  especiallv  in  a  provision  enacted  in  the  interest  of  law  re- 
form." 

The  judgment  should  be  affirmed.     *     *     * 


COOPER  V.  SONK  et  al. 
(Supreme  Court  of  Michigan,  1918.     201  Mich.  65.',  167  N.  W.  S42.) 

Action  by  Arnold  B.  Cooper,  doing  business  as  A.  &  W.  Cooper, 
against  Michael  Sonk  and  others.  To  review  judgment  for  plain- 
tiff, defendants  bring  error. 

KuHN,  J.     This  action  was  brought  in  the  justice's  court  for  the 
city  of  Detroit  to  recover  from  the  defendants,  as  indorsers,  the  balance 
claimed  to  be  due  on  a  certain  promissory  note,  of  which  the  following 
is  a  copy : 
$600.00'  Detroit,  Michigan,  February  1,  1915. 

"Six  months  after  date  we  promise  to  pay  to  the  order  of  A.  and 
W.  Cooper  six  hundred  dollars  at  the  Wayne  County  &  Home  Sav- 
ings Bank,  Detroit,  Alichigan,  for  value  received,  with  interest  at  six 
per  cent,  per  annum. 

"[Signed] 

St.   Michael's  Archangel  Polish  National  Catholic  Church 

"M.  Sonk. 
"Victor  Gorniak. 
"A.  Citorski." 

On  the  back  of  the  note  appear  the  names  of  the  said  M.  Sonk, 
Victor  Gorniak,  and  A.  Citorski  and  also  of  the  twelve  other  defend- 
ants. The  note  was  not  paid  at  maturity  and  was  duly  protested. 
Judgment  for  $500  was  rendered  in  favor  of  plaintiff  by  the  justice 


Ch.  5)       RIGHTS   OF   HOLDER   AGAINST   INDORSERS   AND   DRAWER  897 

of  the  peace,  and  on  appeal  the  circuit  judge  directed  a  verdict  in 
plaintiff's  favor  for  the  same  amount. 

The  note  was  given  in  renewal  of  a  prior  note  which  had  been 
accepted  by  the  plaintiff  in  lieu  of  filing  a  lien  against  the  church  prop- 
erty for  materials  furnished  in  the  erection  of  said  church.  Mr.  Gage 
Cooper,  plaintiff's  manager,  testified  that  when  the  settlement  by  note 
was  proposed,  the  representatives  of  the  church  agreed  to  have  the 
note  indorsed  by  some  men  of  financial  responsibility ;  that  he  looked 
up  the  proposed  indorsers,  found  they  were  all  right,  and  took  the 
note  with  their  indorsement.  It  is  the  claim  of  the  defendants  that 
the  note  was  the  note  of  the  church  corporation  solely ;  that  the  names 
appearing  on  the  face  and  back  of  the  note  were  the  names  of  the 
committee  of  the  church  and  were  signed  by  those  persons  as  com- 
mitteemen and  not  in  their  individual  character;  and  that  the  plaintiff 
knew  and  understood  this  fact  at  the  time  the  note  was  taken.  Upon 
the  trial  the  defendants  attempted  to  introduce  testimony  to  show  these 
facts,  but  the  court,  upon  objection  by  plaintiff's  counsel,  refused  to 
admit  it,  on  the  ground  that  the  unqualified  signatures  on  the  note 
could  not  be  explained  or  varied  by  parol  evidence.  Whether  or  not 
the  court  erred  in  refusing  to  admit  this  testimony  is  the  question 
raised  by  the  appellants'  assignments  of  error. 

[Court  here  quotes  sections  63  and  64  of  the  Negotiable  Instruments 
Law.] 

Mr.  Bunker,  in  his  work  on  Negotiable  Instruments,  in  which  he  has 
annotated  this  act,  in  a  footnote  to  the  last  section  above  set  forth, 
in  reviewing  the  decisions  applicable  thereto,  says :  "The  statute  seems 
to  fix  absolutely  the  status  of  the  irregular  indorser  and  thus  excludes 
parol  testimony  to  vary  his  liability.  The  only  question  of  fact  would 
seem  to  be,  Did  the  person  'not  otherwise  a  party  to  the  instrument,' 
place  his  signature  thereon  'before  delivery'  ?" 

From  the  instrument  here  in  question  it  appears  that  the  indorse- 
ments on  the  back  of  the  note  were  unqualified,  and  in  accordance 
with  the  decisions  of  this  court  we  are  of  *the  opinion  that  parol  evi- 
dence is  not  admissible  to  vary  the  terms  of  this  negotiable  instrument. 
As  was  recently  said  by  Mr.  Justice  Steere  in  the  case  of  Holland  City 
State  Bank  v.  Meeuwsen,  192  Mich.  326,  158  N.  W.  1032:  "Under 
the  undisputed  facts  in  this  case,  defendants'  testimony  along  those 
lines,  as  the  trial  court  ultimately  held,  was  wholly  incompetent,  and  but 
an  attempt  to  reduce  this  written  instrument  from  an  absolute,  un- 
qualified undertaking  according  to  its  written  terms  to  a  conditional, 
defeasible  agreement,  by  proof  of  a  contemporaneous,  oral  contract. 
The  court  properly  rejected  such  evidence.     *     *     *  " 

The  court  ruled  properly  in  rejecting  the  testimony  in  controversy. 
The  judgment  is  affirmed. 


SHEA  V.  VAHEY  et  al. 
(Supreme  Judicial  Court  of  Massachusetts,  1913.    215  Mass.  80,  102  N.  E.  119.) 

Action  by  John  P.  Shea  against  James  H.  Vahey  and  others.  Judg- 
ment for  defendants,  and  plaintiff'  excepts. 

RuGG,  C.  J.  There  was  evidence  from  which  it  might  have  been 
found  that  the  plaintiff  was  simply  the  agent  of  one  of  the  indorsers 
B.&  R.Bus.Law— 57 


898  NEGOTIABLE   INSTRUMENTS  (Part  3 

of  the  note  in  taking  up  the  note  after  maturity  and  in  bringing  this 
action. 

The  defendant  was  the  first  of  the  four  indorsers  upon  the  note. 
The  true  relation  as  between  themselves  of  parties  Hable  on  a  note 
may  be  shown  by  oral  evidence  in  actions  between  them  to  determine 
their  respective  obligations.  It  is  only  in  the  absence  of  proof  to  the 
contrary  that  the  law  fixes  the  legal  effect  of  their  liability  on  the  in- 
strument in  accordance  with  the  order  of  the  signature.  *  *  * 
When  an  outside  agreement  is  proved  the  rights  of  the  parties  as  to 
each  other  are  fixed  in  accordance  with  its  terms  regardless  of  the 
order  in  which  the  signatures  appear  on  the  note.  *  *  *  There 
was  ample  evidence  to  support  a  finding  that  the  indorsers,  of  whom 
there  were  three  at  the  outset,  agreed  before  signing  the  original  note 
that  they  should  share  equally  whatever  they  might  be  required  to  pay 
on  it,  and  that  later  when  the  wife  of  one  of  the  three  signed  a  re- 
newal of  the  original  note  making  four  indorsers  it  was  agreed  that 
the  proportion  of  liability  of  the  defendant  should  remain  the  same. 
The  jury  as  shown  by  the  verdict  believed  that  this  agreement  was 
made.  The  plaintiff  technically  was  not  entitled  to  recover  on  the 
note.  The  action  should  have  been  by  the  indorser  who  has  paid 
for  contribution  upon  the  oral  agreement.  *  *  *  'p|-,g  rulings  were 
sufiiciently  favorable  to  the  plaintiff'. 

Exceptions  overruled. 


SECTION  5.— RIGHTS  OF  THE  HOLDER  AGAINST  THE 
RESTRICTIVE   INDORSER 

No  section  of  the  act  deals  expressly  with  the  liability  of  a  re- 
strictive indorser  to  subsequent  holders.  Section  66,  in  terms,  ap- 
plies to  "every  indorser  v^dio  indorses  without  qualification."  A 
restrictive  indorser  is  not  a  qualified  indorser,  therefore  it  would 
seem  that  the  liability  of  the  restrictive  indorser  is  to  be  ascer- 
tained from  this  section  unless  the  relations  existing  between  the 
restrictive  indorser  and  subsequent  holders  are  of  such  a  nature 
as  to  prevent,  by  implication,  the  application  of  this  section.  It 
will  be  recalled  that  section  36,  in  defining  what  shall  constitute 
a  restrictive  indorsement  provides  that  "an  indorsement  is  restric- 
tive, w^hich  either  (1)  prohibits  the  further  negotiation  of  the  in- 
strument; (2)  constitutes  the  indorsee  the  agent  of  the  indorser; 
or  (3)  vests  the  title  in  trust  for  or  to  the  use  of  some  third  per- 
son." Section  Z7  deals  with  the  rights  of  an  indorsee  under  a  re- 
strictive indorsement,  which  are:  (1)  "To  receive  payment;  (2j 
to  bring  any  action  thereon  that  the  indorser  could  bring;  (3) 
to  transfer  his  rights  as  such  indorsee,  w^here  the  form  of  the  in- 
dorsement authorizes  him  to  do  so."  It  appears,  therefore,  that 
section  Z7  does  not  impose  any  liability  on  the  instrument  upon  the 
restrictive  indorser  to  subsequent  indorsees.  Taking  these  two 
sections  together  it  appears  that  every  restrictive  indorsement  will 
either  (1)  pass  the  title  to  the  restrictive  indorsee  in  trust  for  the 
restrictive  indorser  or  in  trust  for  a  third  party.  Where  the  re- 
strictive indorsee  holds  the  title  in  trust  for  the  restrictive  indorser 


Ch.  5)       RIGHTS   OF   HOLDER    AOAIXST   INDORSKRS    AND   DRAWER  899 

there  is  no  reason  for  and  it  is  virtually  impossible  to  impose  a 
liability  upon  the  restrictive  indorser,  the  cestui  que  trust,  to  the 
restrictive  indorsee,  the  trustee.  A  contrary  holding  would,  in 
effect,  render  a  party  liable  to  himself.  In  such  a  situation  as  this 
the  restrictive  indorser  is  the  real  beneficial  owner,  the  indorsee 
under  the  restrictive  indorsement  being  invested  with  certain 
rights  and  duties  to  be  exercised  and  discharged  for  the  benefit 
of  the  restrictive  indorser. 

In  the  second  case,  where  the  restrictive  indorser  has  passed 
the  title  to  the  indorsee  under  the  restrictive  indorsement  in  trust 
for  a  third  person,  the  reason  for  not  imposing  a  liability  upon  the 
restrictive  indorser  disappears.  The  restrictive  indorser  has  parted 
with  his  entire  interest.  If  the  instrument  had  been  negotiated 
direct  to  the  cestui  que  trust,  clearly  the  indorser  would  have 
been  liable  to  him.  It  should  make  no  difference  that  the  indorser 
passed  the  title  to  a  trustee  for  such  beneficial  owner.  The  restric- 
tive indorsee  should,  therefore,  be  able  to  charge  the  restrictive 
indorser  under  section  66.  This  result  would  easily  be  reached 
were  it  not  for  the  language  of  section  2>7 .  Under  this  section  the 
indorsee  is  given  the  right  to  bring  any  action  which  the  indorser 
could  bring.  If  this  section  means  that  the  indorsee  may  bring 
only  those  actions  which  the  restrictive  indorser  could  bring,  then 
the  indorsee  under  the  restrictive  indorsement  cannot  hold  the  re- 
strictive indorser  liable.  This  would  be  unjust  to  the  cestui  where 
the  transfer  was  made  for  a  consideration.  While  the  section  ap- 
parently means  that  the  indorsee  cannot  sue  the  restrictive  in- 
dorser in  any  case,  the  courts  are  likely  to  avoid  this  result,  even 
though  it  involves  a  strained  interpretation  of  section  1)7  (2),  in  the 
case  where  the  negotiation  was  to  a  restrictive  indorsee  in  trust  for 
a  third  party.  In  all  other  cases  any  duty  which  the  restrictive 
indorser  might  owe  to  the  restrictive  indorsee  would  arise,  not 
from  the  law  of  negotiable  instruments,  but  from  the  law  of  trusts 
or  agency  or  both. 

SECTION  6.— RIGHTS  OF  THE  HOLDER  AGAINST  THE 

DRAWER 

The  liability  of  the  drawer  of  a  bill  of  exchange,  like  the  liability 
of  an  indorser  upon  his  indorsement,  is  both  a  conditional  and  an 
unconditional  liability.  The  conditional  does  not  arise  until  there 
has  been  a  due  presentment  upon  the  drawee,  dishonor  by  the 
drawer,  and  the  notice  of  dishonor  given  to  the  drawer.  Unlike 
that  of  the  indorser,  the  drawer  enters  into  no  warranties,  although 
he  is  estopped  to  deny  the  truth  of  certain  facts.  This  liability  is 
unconditional.  There  are  some  dift'erences  between  the  liability  of 
the  drawer  of  a  check  and  the  drawer  of  other  bills  of  exchange. 
The  sections  involved  are  as  follows : 

N.  I,  L.  Section  61.  The  drawer  by  drawing  the  instrument  ad- 
mits the  existence  of  the  payee  and  his  then  capacity  to  indorse, 


900  NEGOTIABLE   INSTRUMENTS  (Part  3 

and  engages  that  on  due  presentment  the  instrument  will  be  ac- 
cepted or  paid  or  both  according  to  its  tenor,  and  that  if  it  be  dis- 
honored, and  the  necessary  proceedings  on  dishonor  be  duly  taken, 
he  will  pay  the  amount  thereof  to  the  holder,  or  to  any  subsequent 
indorser  who  may  be  compelled  to  pay  it.  But  the  drawer  may 
insert  in  the  instrument  an  express  stipulation  negativing  or  lim- 
iting his  own  liability  to  the  holder. 

N.  I.  L.  Section  186.  A  check  must  be  presented  for  payment 
within  a  reasonable  time  after  its  issue  or  the  drawer  will  be  dis- 
charged from  liability  thereon  to  the  extent  of  the  loss  caused  by 
the  delay, 

N.  I.  L.  Section  70.  *  *  *  Presentment  for  payment  is  nec- 
essary in  order  to  charge  the  drawer  and  indorsers. 

N.  I.  L.  Section  89.  Except  as  herein  otherwise  provided,  when 
a  negotiable  instrument  has  been  dishonored  by  non-acceptance  or 
non-payment  notice  of  dishonor  must  be  given  to  the  drawer  and 
to  each  indorser  and  any  drawer  or  indorser  to  whom  such  notice 
is  not  given  is  discharged. 

N.  I.  L.  Section  188.  Where  the  holder  of  a  check  procures  it 
to  be  accepted  or  certified,  the  drawer  and  all  indorsers  are  dis- 
charged from  liability  thereon. 

The  questions  raised  by  the  foregoing  sections  involve  more  or 
less  the  further  questions  as  to  what  constitutes  a  due  presentment 
for  payment  and  a  due  notice  of  dishonor.  It  is  important  to  note 
here:  (1)  That  the  only  unconditional  liability  on  the  instrument 
assumed  b}^  the  drawer  of  a  bill  of  exchange,  including  checks,  is 
the  admission  of  the  existence  of  the  payee  and  his  capacity  to  in- 
dorse. (2)  The  drawer  of  a  bill  of  exchange,  other  than  a  check, 
is  absolutely  discharged — (a)  if  there  has  been  a  failure  to  make  a 
due  presentment  for  payment  upon  the  drawee;  (b)  or  if  after  due 
presentment  there  has  been  a  failure  to  give  due  notice  of  dishonor 
to  the  drawer.  (3)  The  drawer  of  a  check  is  not  absolutely  dis- 
charged by  failure  of  the  holder  to  make  a  due  presentment  for 
payment  but  is  discharged  only  to  the  extent  of  the  loss  caused 
by  the  delay.  (4)  But  the  drawer  of  a  check  is  absolutely  dis- 
charged by  a  failure  of  the  holder  to  give  him  due  notice  of  dis- 
honor. This  last  rule  is  unfortunate.  Section  89  should  be  lim- 
ited to  drawers  of  bills  of  exchange  other  than  checks,  and  section 
186  ought  to  be  amended  so  as  to  provide  that  a  failure  to  give  the 
drawer  of  a  check  due  notice  of  dishonor  should  discharge  such 
drawer  only  to  the  extent  of  the  loss  caused  by  the  delay. 

Cases  illustrating  the  above  sections  are  inserted  in  the  next 
chapter  where  the  further  question  is  involved :  What  constitutes 
a  due  presentment  for  payment  and  the  giving  of  due  notice  of 
dishonor?    Section  188  is  illustrated  by  the  case  following. 


Ch.  5)       RIGHTS   OF   HOLDER  AGAINST  INDORSERS  AND   DRAWER 


901 


TIMES  SQUARE  AUTOMOBILE  CO.  v.  RUTHERFORD   NAT.   BANK. 

(Court  of  Errors  and  Appeals  of  New  Jersey,  1909.     77  N.  J.  Law,  649, 
73  Atl.  479,  134  Am.  St.  Rep.  811.) 

GuMMERE,  C.  J.     One  Purdy,  being  desirous  of  purchasing  a  sec- 
ondhand automobile,  employed  Millard  Ashton,  an  automobile  sales- 
man, to  assist  him  in  making  a  proper  selection.    Ashton  took  him  to 
the  salesroom  of  the  Times  Square  Automobile  Company,  and,  after 
looking  over  its  stock,  Purdy,  with  Ashton's  approval,  selected  a  car, 
the  price  of  which  was  $600,  and  gave  his  check  on  the  Rutherford 
National  Bank  for  the  purchase  price.     The  check  was  drawn  to  the 
order  of  Ashton  who  indorsed  it  and  delivered  it  to  the  manager  of  the 
automobile  company.     Immediately  after  receiving  it,  the  automobile 
company  sent  it  by  special  messenger  to  the  banking  house  of  the  Ruth- 
erford National  Bank  with  a  request  that  it  be  certified.     This  request 
was  complied  with.     Afterward,  when  the  check  was  presented  for 
payment,  the  bank  refused  to  honor  it,  upon  the  ground  that  it  had 
received  instructions  from  Purdy  not  to  pay  it.    The  automobile  com- 
pany thereupon  brought  suit  against  the  bank  on  its  contract  of  cer- 
tification.   The  defendant  admitted  that  it  had  certified  the  check,  and 
that  it  did  so  at  the  request  of  the  plaintiff,  the  holder  thereof,  but 
sought  to  justify  its  refusal  to  pay  upon  the  ground  that  Purdy  had 
been  induced  to  purchase  the  car  by  false  representations  made  by  the 
manager  of  the  plaintiff  as  to  its  condition  and  value.    It  was  contended 
on  behalf  of  the  plaintiff  that  this  defense  was  not  open  to  the  de- 
fendant.    It  was,  however,  admitted  over  its  objection.     At  the  close 
of  the  case  plaintiff  asked  for  a  direction  of  a  verdict  in  his  favor. 
This  request  was  refused,  the  case  was  sent  to  the  jury,  and  a  verdict 
in  favor  of  the  defendant  was  rendered.     The  plaintiff  now  seeks  a 
reversal  of  the  judgment  entered  upon  that  verdict,  on  the  ground  that 
its  request  for  a  direction  in  its  favor  should  have  been  complied  with. 
The  effect  of  the  certification  of  a  check  by  the  bank  upon  which 
it  is  drawn  depends  upon  whether  it  is  done  at  the  request  of  the 
drawer  or  of  the  holder.     When  a  check  is  presented  bv  the  drawer  ' 
for  certification,  the  bank  knows  that  it  has  not  yet  been  negotiated, 
and  that  the  drawer  wishes  the  obligation  of  the  bank  to  pay  it  to 
the  holder,  when  it  is  negotiated,  in  addition  to  his  own  obligation.    A 
certification  under  such  circumstances  does  not  operate  to  discharge 
the  drawer  (Minot  v.  Russ,  156  Mass.  460,  31  N.  E.  489,  16  L.  R.  A. 
510,  32  Am.  St.  Rep.  472     *     *     *  );     and  so  long  as  the  drawer  re- 
mains undischarged,  such  a  defense  as  that  set  up  in  the  present  case 
is  open  both  to  him  and  to  the  bank.    But  when  the  certification  by  the 
bank  is  done  at  the  request  of  the  holder,  the  effect  is  radically  dif- 
ferent.   The  transaction,  then,  is  virtually  this  :    The  bank  says :    "That 
check  is  good;    we  have  the  money  of  the   drawer  here  ready  to 
pay  it ;   we  will  pay  it  now,  if  you  will  receive  it."    The  holder  says : 
"No,  I  will  not  take  the  money  now ;  you  may  retain  it  for  me  until  the 
check  is  presented  for  payment."     The  bank  replies :    "Very  well,  we 
will  do  so."     First  Nat.  Bank  of  Jersey  City  v.  Leach,  52  N.  Y.  353, 
11  Am.  Rep.  708.     The  result  is  to  discharge  the  draM-er  from  any 
further  liability  on  the  check  (Negotiable  Instrument  Act     *     *     *  ), 
and  to  substitute  a  new "  contract  between  the  holder  and  the  bank 
by  the  terms  of  which  the  money  called  for  by  the  check  is  transferred 


902  NKOOTiAni.]';  ins'ikimhxts  .       (Part  3 

from  the  account  of  the  drawer  to  the  account  of  the  holder.  In 
contemplation  of  law  the  obligation  of  the  bank  to  the  holder,  when 
the  certification  is  at  his  request,  is  the  same  as  if  the  funds  had  been 
actually  paid  out  by  the  bank  to  him,  by  him  redeposited  to  his  own 
credit,  and  a  certificate  of  deposit  issued  to  him  therefor.     *     *     * 

The  defendant,  in  refusing  payment  of  Purdy's  check,  apparently 
considered  that  its  obligation  to  the  holder  was  no  greater  than  if  its 
certification  had  been  made  at  Purdy's  request.  It  failed  to  realize  that 
its  act  operated  as  a  payment  of  the  check,  so  far  as  Purdy  was  con- 
cerned, and  transferred  the  moneys  which  it  called  for  to  the  account 
of  the  plaintifif.  The  situation  was  the  same,  so  far  as  the  defendant 
was  concerned,  as  if  Purdy  had  paid  cash  to  the  plaintifif  for  the  car 
which  he  had  purchased,  and  the  plaintifif  had  then  deposited  the  cash 
in  the  defendant's  bank.  Having  accepted  the  plaintifif's  money,  and 
issued  to  him  a  certificate  of  deposit  therefor,  it  did  not  concern  the 
defendant  from  whom,  or  how,  or  under  what  circumstances  the  money 
had  been  obtained.  Its  contract  required  it  to  pay  the  amount  of  the 
deposit  to  the  plaintifif  or  its  order,  and  it  could  not  avoid  its  obliga- 
tion to  do  so  by  showing  that  the  plaintifl:'  had  fraudulently  obtained 
the  money  which  it  had  deposited  with  the  defendant. 

The  defense  interposed  should  have  been"  overruled,  and  a  verdict 
directed  for  the  plaintifif.    The  judgment  under  review  will  be  reversed. 


Ch.  0)  I'UESENTMENT,  NOTICES   OF   DISHONOR,  AND    PROTEST 


9U3 


CHAPTER  VI 

PRESENTMENT.  NOTICES  OF  DISHONOPv, 
AND  PROTEST 

Section 

1.  Introduction. 

2.  Time  of  Presentment  for  Payment  of  Demand  Notes. 

3.  Time  of  Presentment    for   Payment    of   Demand    Bills    of   Exchanjie,    in 

Order  to   Charge  the  I»ra\ver  and    Indorsers,   Drawers  of   Checks    Ex- 
cepted. 

4.  Time  of  Presentment  of  Checks  in  Order  to  Charge  the  Drawer. 

5.  Time  of  Present))ient  of  Instruments  Bearing  a  Fixed  Maturity. 

6.  Other  Aspects  of  a   Due  Presentment   for   Payment. 

7.  Presentiment  for  Acceptance. 

8.  Notice  of  Dishonor. 

9.  Protest. 


SECTION  1.— INTRODUCTION 

It  appears  from  the  preceding  chapter  that  a  part  of  the  liability 
of  the  drawer  of  a  bill  of  exchange  and  the  indorsers  of  bills  of 
exchange  and  notes  is  a  conditional  liability.  Their  duty  to  pay 
the  holder  does  not  arise  until  the  fulfilhnent  of  certain  conditions 
precedent;  i.  e..  due  presentment  for  payment,  the  fact  of  dishonor, 
the  giving  of  due  notice  of  dishonor,  and,  in  the  case  of  foreign 
bills,  of  protest.  This  chapter  is  devoted  to  the  consideration  of 
the  ciuestion :  What  constitutes  a  fulfillment  of  these  conditions 
precedent  to  the  liability  of  secondary  parties  to  the  holder? 


SECTION  2.— TIME  OF  PRESENTMENT  FOR  PAYMENT 
OF  DEMAND  NOTES 

At  what  time  must  the  holder  of  a  demand  note  present  the 
same  to  the  maker  for  payment  in  order  to  be  able  to  hold  the  in- 
dorsers thereon  in  the  event  of  its  dishonor? 

N.  I.  L.  Section  71.  Where  the  instrument  is  not  payable  on 
demand  presentment  must  be  made  on  the  day  it  falls  due.  Where 
it  is  payable  on  demand  presentment  must  be  made  within  a  rea- 
sonable time  after  issue,  except  that  in  the  case  of  a  bill  of  ex- 
change, presentment  will  be  sufficient  if  made  within  a  reasonable 
time  after  the  last  negotiation  thereof. 

We  are  interested  here  only  in  the  first  clause  of  the  second  sen- 
tence. In  view  of  the  fact  that  the  last  clause  deals  with  bills  of 
exchange,  the  word  "it"  in  the  first  clause  refers  only  to  notes. 
Therefore,  a  demand  note  must  be  presented  within  a  reasonable 
time  after  issue.    What  is  a  reasonable  time? 

N.  I.  L.  Section  193.  provides  :  In  determining  what  is  a  "reason- 
able time"  or  an  "unreasonable  time"  regard  is  to  be  had  to  the  na- 
ture of  the  instrument,  the  usage  of  trade  or  business  (if  any)  with 


904  NEGOTIABLE   INSTRUMENTS  (Part  3 

respect  to  such  instruments,  and  the  facts  of  the  particular  case. 
We  have  already  made  use  of  this  section  in  another  connection. 
We  had  a  similar  problem  raised  in  regard  to  the  time  within  which 
a  holder  must  have  acquired  the  demand  note  in  order  to  be  a  holder 
in  due  course,  and  we  found  that  it  was  possible  for  him  to  purchase 
several  months  after  issue  and  be  a  holder  in  due  course ;  that  is, 
he  would  be  in  such  a  position  that  he  could  hold  the  maker  free 
from  all  personal  defenses.  But  that  question  must  not  be  con- 
fused with  the  present  question.  There  the  holder  was  seeking  to 
obtain  certain  rights  against  the  maker;  here  the  holder  has  al- 
ready abandoned  his  rights  against  the  maker  and  is  seeking  to 
hold  indorsers.  Is  the  period  of  time  any  different?  If  a  person 
bought  a  demand  note  six  months  after  issue  and  if  at  that  time  he 
made  due  presentment  and  gave  due  notice  of  dishonor,  would  he 
be  able  to  hold  indorsers  in  the  event  that  his  judgment  against 
the  maker  proved  fruitless?  Probably  so.  The  courts  seem  to  treat 
these  two  periods  of  time  in  the  same  way.  Generally  speaking, 
if  a  holder  acquired  title  of  a  demand  note  within  such  time  from 
date  of  issue  that  he  would  be  a  holder  in  due  course,  if  he  then 
makes  due  presentment  and  gives  due  notice  of  dishonor  he  would 
be  able  to  hold  indorsers.  However,  it  should  be  noted  that  the 
two  questions  are  essentially  different;  and  it  is  altogether  possi- 
ble that  the  usage  of  trade  or  the  facts  of  the  particular  case  or 
both  may  indicate  one  period  of  time  within  which  one  must  pur- 
chase in  order  to  be  a  holder  in  due  course,  and  a  different  period 
of  time  within  which  a  due  presentment  must  be  made  upon  the 
maker  in  order  to  preserve  the  liability  of  indorsers.  Important 
evidence  bearing  on  the  question  what  constitutes  "reasonable 
time"  will  be  the  banking  custom  in  the  community.  It  has  even 
been  held  that  evidence  that  the  banks  held  paper  for  more  than 
a  yea-r  before  presenting  was  admissible  on  the  issue  of  reasonable 
time. 


SECTION  3.— TIME  OF  PRESENTMENT  FOR  PAYMENT 
OF  DEMAND  BILLS  OF  EXCHANGE,  IN  ORDER  TO 
CHARGE  THE  DRAWER  AND  INDORSERS,  DRAWERS 
OF  CHECKS  EXCEPTED 

On  a  negotiable  note,  only  the  indorsers  are  under  a  conditional 
liability.  On  a  bill  of  exchange,  there  are  two  classes  of  secondary 
parties — the  drawer  and  the  general  indorsers.  Therefore,  in  this 
section,  our  question  is:  Within  what  period  of  time,  and  from 
what  fixed  event,  must  a  demand  bill  of  exchange  be  presented  to 
the  drawee,  or  acceptor,  in  order  to  preserve  the  liability  of  the 
drawer  and  the  indorsers  to  the  holder? 

N.  I.  L.  Section  71.  Where  the  instrument  is  not  payable  on 
demand,  presentment  must  be  made  on  the  day  it  falls  due.  Where 
it  is  payable  on  demand,  presentment  must  be  made  within  a  rea- 


Ch.  6)  PRESENTMENT,  NOTICES   OF   DISHONOR,  AND   PROTEST  903 

sonable  time  after  its  issue,  except  that  in  the  case  of  a  bill  of  ex- 
change, presentment  for  payment  will  be  sufficient  if  made  within 
a  reasonable  time  after  the  last  negotiation  thereof. 

It  appears,  therefore,  that,  in  order  for  the  holder  of  a  sight  bill 
of  exchange  to  preserve  the  liability  of  the  drawer  and  of  the  in- 
dorsers,  the  holder  must  present  the  instrument  for  payment  to 
the  drawee,  within  a  reasonable  time  from  the  last  negotiation. 
The  period  begins  to  run  from  the  act  of  the  last  negotiation  and 
not  from  the  date  of  issue,  as  is  the  case  of  demand  notes.  It 
makes  this  striking  difference :  That,  in  the  case  of  a  note,  the 
liability  of  indorsers  cannot  be  preserved  for  more  than  a  few 
months,  possibly  a  year,  but  usually  the  liability  of  indorsers  will 
cease  to  exist  unless  presentment  for  payment  has  been  made 
upon  the  maker  within  a  period  less  than  a  year  from  the  date  of 
issue  of  the  note.  But  in  case  of  a  bill  of  exchange  the  liability  of 
the  drawer  and  of  the  unqualified  indorsers  thereon  may  be  pre- 
served for  the  full  period  allowed  by  the  statute  of  limitations. 
The  statute  of  limitations  will  begin  to  run  from  the  date  on  which 
each  first  assumed  liability  on  the  instrument.  This  period  varies 
in  the  several  states.  We  have  yet  to  consider  how  many  days, 
weeks,  or  months  may  elapse  after  the  date  of  the  last  negotiation 
before  the  reasonable  time  expires ;  but,  assuming  that  the  present 
holder  presents  the  instrument  upon  the  drawee  within  a  reasona- 
ble time  after  the  last  negotiation,  it  is  possible  that  the  date  of 
this  last  negotiation  may  have  been  many  years  after  the  issue  of 
the  bill.  It  is  then  necessary  only  that  presentment  must  have 
been  made  within  such  time  that  actions  may  be  commenced 
against  the  drawer  and  indorsers  within  the  period  allowed  by  the 
statute  of  limitations. 

How  many  days,  weeks  or  months,  after  the  last  negotiation, 
may  elapse  before  the  reasonable  time  expires?  It  will  be  a  rela- 
tively short  period,  measured  in  days,  possibly  weeks,  in  some 
cases,  but  not  in  months.  The  period  will  be  shorter  than  is  al- 
lowed a  holder  of  a  demand  note  where  he  may  have  from  one 
month,  to  a  year  or  perhaps  a  few  months  in  addition.  A  reason- 
able time  from  the  last  negotiation  should  be  not  more  than  a 
few  weeks.  However,  from  a  practical  standpoint,  delay  will  not 
materially  affect  the  holder,  for,  so  long  as  he  is  within  the  period 
prescribed  by  the  statute  of  limitations,  he  may  negotiate  the 
instrument  to  another  party.  What  formerly  was  the  last  negotia- 
tion has  now  been  superseded  by  another  negotiation,  which  is 
now  the  last  one.  On  this  point  it  is  possible  for  the  courts  to  hold 
that  a  negotiation  made  for  the  sole  purpose  of  reviving  the  lia- 
bility of  the  drawer  and  indorsers  constitutes  fraud  and  that  there- 
fore the  negotiation  would  fail  to  have  the  effect  of  reviving  lia- 
bility of  the  drawer  and  indorsers.  This  point  has  not  been  de- 
cided. 

The  section  which  we  are  now  considering  changed  the  law  from 
what  it  was  before  the  act.     Before  the  act,  the  liability  of  the 


906  NEGOTIAP.LTO   INSTKUMEXTS  (Part  -> 

drawer  could  be  preserved  only  for  a  reasonable  time  after  he 
issued  the  bill.  Each  indorser  was  held  liable  for  an  equal,  but 
not  the  same,  period  of  time.  Each  indorser  would  be  liable  for  a 
"reasonable  time,  which  period  of  time  began  to  run  from  the  date 
on  which  his  liability  first  arose.  Accordingly  the  liability  of  the 
drawer  would  first  expire,  then  that  of  the  first  indorser  and  so  on. 
But  under  section  71  of  the  Negotiable  Instruments  Law,  the  lia- 
bility of  the  drawer  and  of  all  indorsers  may  be  continued  simul- 
taneously for  the  full  period  of  limitations.  Of  course,  this  change 
in  the  law  is  greatly  to  the  advantage  of  the  holder;  but,  as 
soon  as  the  holder  ceases  to  be  such  and  becomes  an  indorser,  it 
works  against  him.  He  then  has  outstanding  a  conditional  liabil- 
ity which  will  not  die  for  the  full  period  of  limitation,  five,  ten  or 
fifteen  years,  as  the  case  may  be.  It  has  been  vigorously  argued 
that  to  compel  an  indorser  to  keep  account  on  his  books  of  all  out- 
standing conditional  liabilities  on  bills  of  exchange  which  passed 
through  his  hands  for  so  long  a  time  is  unjust.  So  far,  the  sec- 
tion has  not  caused  wide  dissatisfaction,  for  the  reason  perhaps 
that  for  purely  business  reasons  demand  bills  of  exchange  are  forced 
through  to  an  early  presentment,  and  payment,  or  in  the  event 
of  dishonor,  to  an  early  suit  against  secondary  parties. 


COLUMBIAN   BANKING  CO.  v.   BOWEN. 

(Supreme  Court  of  Wisconsin,  190S.     134  Wis.  21S,  114  N.  W.  451.) 
Action  by  the  Columbian  Banking  Company  against  John  Bowen. 
From  a  judgment  for  plaintifi:,  defendant  appeals. 

June  10,  1903,  the  banking  firm  known  as  the  Farmers'  &  Mer- 
chants' Bank,  of  Bangor,  Wis.,  sold  to  the  defendant  a  $400  draft, 
drawn  in  the  usual  form,  dated  on  that  day,  payable  to  defendant's  or- 
der, and  drawn  by  such  firm  on  the  National  Bank  of  North  America, 
at  Chicago,  111.  The  draft  was  sent  to  the  defendant  at  Barron,  Wis., 
and  was  indorsed  by  him  to  A.  R.  Tabbert.  to  whom  it  was  forwarded 
by  mail,  at  Spokane,  Wash.,  June  16,  1903,  and  was  there  received  by 
him  June  20th  thereafter.  He  was  at  Spokane  temporarily  and  was  on 
his  way  to  the  city  of  San  Francisco,  Cal.  July  14,  1903,  he  indorsed 
the  draft  and  sold  the  same  to  the  plaintiflf  at  such  city,  receiving  $400 
therefor.  On  that  day,  in  due  course,  plaintiff  sent  the  draft  by  mail 
to  the  Bankers'  National  Bank,  of  Chicago,  111.,  by  which  it  was  re- 
ceived July  18th  thereafter,  and  was  then,  as  requested,  duly  pre- 
sented to  the  drawee  for  payment,  which  was  refused,  whereupon  it 
was  duly  protested  for  nonpayment  by  a  duly  authorized  notary  public, 
who  forwarded  a  manifest  thereof  with  notices  of  protest  for  A.  R. 
Tabbert,  the  plaintifif  and  the  defendant,  to  the  plaintifif  at  San  Fran- 
cisco. Cal.,  and  also  sent  due  notice  to  the  National  Bank  of  North 
America  at  Chicago,  111.,  and  to  the  drawer  at  Bangor,  Wis.,  July  19, 
1903.  Plaintifit'  upon  receipt  of  the  manifest  and  notices  duly  sent  the 
one  for  defendant  to  him  at  Barron,  Wis.,  by  whom  it  was  duly  re- 
ceived, and  sent  the  one  for  Tabbert  by  mail  to  his  post-office  address 
and  reputed  place  of  residence,  that  being  San  Francisco,  Cal.  There- 
after due  demand  was  made  on  defendant  for  payment  of  the  draft, 


Ch.  G)  PRESKXTMENT,  NOTICIOS    OF    DISI  lONOU,  AM)    I'KOTEST  007 

and  the  same  was  refused.  July  28,  1903.  the  property  of  the  drawer 
was  placed  in  the  possession  of  a  receiver,  who  duly  paid  upon  the 
draft  $144.  49,  January  6,  1904,  $61.  93,  May  20th  thereafter,  and  $30.- 
96,  June  5th  following.  Plaintifif  was  the  owner  of  the  draft  at  the  time 
of  the  commencement  of  the  action,  and  at  the  time  of  the  trial  thereof 
there  was  due  thereon  $210. 

The  pleadings  presented  issues  for  decision  involving  facts  as  above 
detailed.  The  case  was  tried  by  the  court  resulting  in  findings  of  fact 
in  accordance  with  the  statement,  and  a  conclusion  of  law  that  plain- 
tifif became  the  owner  of  the  draft  in  due  course,  and  was  entitled  to 
judgment  for  $210,  with  costs.     Judgment  was  accordingly  rendered. 

Marshall.  J.  (after  stating  the  facts  as  above).  Counsel  for  ap- 
pellant have  presented  quite  an  extended  argument,  referring  to  many 
authorities,  as  to  the  law  antedating  and  independently  of  the  negotiable 
instrument  statute  *  *  *  ^q  support  the  proposition,  that  appellant 
was  released  from  liability  on  the  instrument  in  question,  because  of 
the  period  intervening  between  his  parting  therewith  and  the  presenta- 
tion thereof  to  the  drawee  for  payment.  Such  statute  was  enacted 
for  the  purpose  of  furnishing,  in  itself,  a  certain  guide  for  the  de- 
termination of  all  questions  covered  thereby  relating  to  commercial 
paper,  and,  therefore,  so  far  as  it  speaks  without  ambiguity  as  to  any 
such  question,  reference  to  case  law  as  it  existed  prior  to  the  enactment 
is  unnecessary  and  is  liable  to  be  misleading. 

The  negotiable  instrument  law  is  not  merely  a  legislative  codification 
of  judicial  rules  previously  existing  in  this  state  making  that  written 
law,  which  was  before  unwritten.  It  is,  so  far  as  it  goes,  an  incorpo- 
ration into  written  law  of  the  common  law  of  the  state,  so  to  speak, 
the  law  merchant  generally  as  recognized  here,  with  such  changes  or 
modifications  and  additions  as  to  make  a  system  harmonizing,  so  far 
as  practicable,  with  that  prevailing  in  other  states.  That  it  contains 
some  quite  material  changes  in  previous  rules  governing  commercial 
paper  we  have  had  occasion  heretofore  to  point  out.    *    *    * 

The  primary  question  discussed  by  appellant's  counsel,  it  is  believed 
is  fully  covered  by  the  negotiable  instrument  law.  There  are  a  mul- 
titude of  decisions  regarding  the  character  of  a  bill  of  exchange  and 
that  of  a  check,  as  those  terms  are  used  in  business  transactions,  and  to 
what  extent  the  incidents  of  one  are  identical  with  those  of  the  other, 
which  decisions  are  so  variant  in  their  phrasing  of  the  matter  as  to 
produce  more  or  less  confusion  in  respect  thereto  with  many  apparent, 
and  some  real,  conflicts,  to  remedy  which  was  one  of  the  principal 
objects  of  the  law.  To  that  end  it  was  provided  *  *  *  in  section 
185,  "A  check  is  a  bill  of  exchange  drawn  on  a  bank,  payable  on 
demand." 

As  to  whether  the  incidents  of  the  species  of  bills  of  exchange  last 
mentioned  are  the  same  as  those  of  bills  of  exchange  generally,  it 
was  further  provided  in  the  section  last  referred  to,  "Except  as  here- 
in otherwise  provided,  the  provisions  of  this  act  applicable  to  a  bill  of 
exchange  payable  on  demand  apply  to  a  check."  The  only  exception 
referred  to  material  to  this  case  is  contained  in  section  186,  in  these 
wotds :  "A  check  must  be  presented  for  payment  within  a  reason- 
able time  after  its  issue  or  the  drawer  will  be  discharged  from  lia- 
bility thereon  to  the  extent  of  the  loss  caused  by  the  delay." 

Keeping  in  mind  that  the  discharge  from  liability  above  referred  to 
because  of  unreasonable  delay  after  the  issuance  of  a  check  in  pre.sent- 


908  NEGOTIABLE   INSTRUMENTS  (Part  3 

ing  it  for  payment,  is  of  the  drawer  only,  and  that  this  action  is  against 
the  payee  who  indorsed  the  instrument  in  question  without  qualifi- 
cation and  put  it  in  circulation,  we  turn  to  section  71,  which  pro- 
vides, as  to  a  bill  of  exchange  payable  on  demand,  which  from  the 
foregoing  obviously  includes  a  check  or  draft  on  a  bank  of  the  charac- 
ter of  the  one  in  question,  "presentment  for  payment  will  be  sufficient 
if  made  within  a  reasonable  time  after  the  last  negotiation  thereof." 
From  the  foregoing  it  seems  plain  that  as  regards  the  payee  of  such 
an  instrument  as  we  have  here,  who  puts  the  same  in  circulation  with 
his  unqualified  indorsement  thereon,  and  all  subsequent  parties  there- 
to so  indorsing  the  same,  presentment  for  payment  is  sufficient,  as 
regards  their  liability,  if  made  within  a  reasonable  time  after  the  last 
negotiation.  A  bill  of  exchange  payable  on  demand,  regardless  of  its 
character,  put  in  circulation,  so  long  as  its  circulating  character  is 
preserved  may  be  outstanding  without  impairing  the  liability  of  in- 
dorsers  thereof.  Formerly  the  length  of  time  within  which  a  bill  of 
exchange  might  circulate  without  impairing  such  liability  was  more 
or  less  uncertain,  rendering  it  very  difficult  to  determine  any  one  case 
by  the  decision  in  another.  That  difficulty  was  removed,  so  far  as 
practicable,  by  the  provision  that  only  the  time  need  be  considered  in- 
tervening between  the  last  negotiation  and  the  presentment.  That  is 
recognized  as  a  radical  change  in  the  law  as  it  formerly  existed. 
*    *    * 

As  to  an  ordinary  bill  of  exchange  put  in  circulation,  it  was  quite  an- 
ciently held  that  the  period  between  July  18th  of  one  year  and  January 
16th  of  the  next  year  was  not  necessarily  unreasonable.  *  *  *  Per- 
haps one  might  now  keep  a  bill  of  exchange  for  such  length  of  time  as 
to  destroy  its  circulating  character  notwithstanding  he  ultimately 
passed  it  along  to  another  person,  but  that  situation,  as  we  view  the 
case,  does  not  exist  here. 

Applying  the  law  as  aforesaid  to  the  facts  of  this  case  it  is  readily 
seen  that  the  delay  in  presenting  the  paper  for  payment  between  its 
date  and  the  negotiation  to  the  bank  at  San  Francisco  is  immaterial. 
Appellant  unqualifiedly  indorsed  the  paper  and  put  it  in  circulation  by 
sending  it  to  Tabbert  at  a  distant  part  of  the  country,  probably  knowing 
that  he  was  a  traveler.  Tabbert  received  the  paper  while  journeying 
with  the  intention  of  going  to  San  Francisco  and  held  it  till  he  arrived 
there  and  then  negotiated  it.  It  was  promptly  presented  for  payment 
thereafter  and  so  in  time,  as  regards  that  circumstance,  to  preserve 
the  liability  of  appellant. 

The  court  decided,  as  indicated,  that  Tabbert  was  a  traveler  with 
San  Francisco  as  his  destination  and  properly  held  that  such  circum- 
stance sufficiently  explained,  if  any  explanation  were  necessary,  the 
lapse  of  time  between  his  reception  of  the  paper  and  his  negotiation 
thereof,  preserving  its  circulating  character  and  warranting  the  finding 
that  the  respondent  came  thereby  in  due  course. 

The  point  is  made  that  the  instrument  was  not  presented  to  the 
drawee  for  payment  during  banking  hours.  The  negotiable  instrument 
law  at  section  72  provides  that  "Presentment  for  payment  to  be 
sufficient,  must  be  made:  *  *  *  at  a  reasonable  hour  on  a  busi- 
ness day.  *  *  *'*'  The  evidence  shows  that  the  paper,  after  taking 
its  course  through  the  clearing  house,  was  presented  to  the  drawee  for 
payment  on  the  afternoon  of  the  same  day  between  the  hours  of  3  and 
6  o'clock.     The  proof  is  to  the  effect  that  such  was  the  customary 


Ch.  6)  PRESENTMENT,  NOTICES   OF   DISHONOR,  AND    PROTEST  909 

way  of  doing  such  business  in  Chicago,  where  the  drawee  was  located. 
That  is,  as  we  understand  it,  that  the  business  day  of  the  bank  con- 
tinued after  the  closing  of  the  clearing  house  transactions  so  as  to 
enable  banks  holding  paper  for  collection,  refused  recognition  in  such 
transactions,  to  be  presented  for  payment  as  was  done  in  this  case. 
That  satisfies  the  statute.  What  constitutes  business  hours  of  a  bank, 
within  the  meaning  of  the  statute,  has  reference  to  the  general  cus- 
tom at  the  place  of  the  particular  transaction  in  question.  In  case  of 
a  transaction  occurring  in  a  foreign  jurisdiction,  as  in  the  instance 
in  question,  the  court  cannot  take  judicial  notice  of  what  constitutes 
reasonable  hours  on  a  business  day.  *  *  *  It  is  a  matter  of  proof, 
though  in  case  of  the  notarial  certificate  of  the  transaction,  as  here, 
being  regular  so  as  to  furnish  prima  facie  proof  that  the  paper  was 
duly  presented  for  payment,  that  raises  the  presumption  that  the  pre- 
sentment was  made  at  a  proper  time.  *  *  * 
Judgment  affirmed. 


AEBI  V.  BANK  OF  EVANSVILLE. 

(Supreme  Court  of  Wisconsin,  1005.    124  Wis.  73.  102  N.  W.  329, 
68  L.  R.  A.  964,  109  Am.  St.  Rep.  925.) 

Action  by  Albert  Aebi  against  the  Bank  of  Evansville.  From  a 
judgment  for  plaintiflF,  defendant  appeals. 

Plaintiff,  a  farmer,  residing  about  five  miles  from  Evansville,  kept 
account  in  defendant  bank.  It  was  accustomed  to  receive  checks  pay- 
able to  his  order  upon  the  faith  of  his  indorsement,  and  credit  them 
to  him  as  cash,  and  collect  them  without  charge,  and  in  a  case  of  dis- 
honor to  charge  the  checks  back  to  him  on  his  account.  On  Septem- 
ber 14,  1901,  plaintiff  received  a  check  dated  August  31,  1901,  from 
one  Speich,  a  cheese  dealer  at  Brodhead,  upon  the  bank  at  that  city,  17 
miles  distant  from  Evansville,  with  daily  mail  between  these  places. 
This  check,  on  September  21st,  he  indorsed  and  deposited  with  the 
bank,  and  was  given  credit  for  it  as  cash.  The  defendant  on  the 
same  day  mailed  it  to  the  Brodhead  Bank  for  payment  and  remittance ; 
heard  nothing  from  it,  and  gave  no  further  attention  to  it  for  about 
10  days,  when  a  card  of  inquiry  was  sent,  to  which  no  reply  was  re- 
ceived. After  waiting  several  days  longer,  defendant  cashier  tele- 
phoned to  the  Brodhead  Bank,  and  learned  that  no  such  check  had  been 
received,  and  waited  still  several  days,  and  telephoned  again,  receiv- 
ing the  same  information.  It  was  proposed  that  the  Brodhead  cashier 
ask  Speich  for  a  duplicate.  Not  until  October  19th  did  defendant  noti- 
fy the  plaintiff  that  the  check  was  not  paid.  Then  the  assistant  cashier 
asked  him  to  apply  to  Speich  for  a  duplicate,  which  he  consented  to  do 
when  opportunity  presented.  He  accordingly  saw  Speich  on  the  21st 
of  October,  who  wrote  out  a  duplicate  check,  payable  to  plaintiff,  dat- 
ed same  as  former,  marked  "Duplicate,"  and  with  notation,.  "Original 
not  payable,"  and  mailed  it  to  defendant.  On  the  following  day  the 
defendant  wrote  to  plaintiff  "to  call  and  sign  check  when  in  town."  On 
October  25th  he  called,  and,  at  the  request  of  the  defendant,  wrote  his 
name  on  the  back  of  the  duplicate  check.  The  check  was  then  sent  to 
the  Brodhead  Bank,  reaching  there  October  26th,  and  was  refused, 
Speich  having  about  that  time  absconded,  leaving  a  bank  balance  of 
about  $400,  which  was  absorbed  by  the  Brodhead  Bank  by  charging 
up  a  note  to  him.     During  the  time  from  September  21st  to  October 


910  NEGOTIABLE    INSTliUMlCNTS  (Part  3 

26th  Speich  persistently  had  a  balance  at  the  Brodhead  Bank,  except 
for  a  day  or  two,  when  there  was  a  few  dollars  overdraft,  and  seems 
to  have  been  in  good  credit  in  that  bank,  for  they  discounted  his  note 
on  one  or  more  occasions. 

Dodge,  J.  *  *  *  We  have  no  doubt  of  the  correctness  of  the 
court's  finding  of  fact  that  by  the  general  indorsement  of  the  check 
in  question  its  acceptance  by  the  bank,  and  the  credit  of  the  amount 
as  cash  to  the  plaintiff  in  his  general  account  to  be  checked  against  as 
he  saw  fit.  Avith  nothing  to  (|ualify  the  effect  of  such  acts,  the  bank 
became  the  owner  of  the  check,  as  distinguished  from  a  mere  agent  to 
collect  the  same  on  behalf  of  the  plaintiff.  All  of  the  acts  above  recit- 
ed prima  facie  indicate  the  discount  and  completed  transfer  of  the 
check.  *  *  *  Only  by  clear  evidence  could  a  contrary  significance 
be  accorded  them.  There  is  no  such  evidence  sufficient  to  constitute  a 
clear  preponderance  such  as  would  be  necessary  to  warrant  us  in  dis- 
agreeing with  this  finding.  Such  being  the  transaction,  the  right  of 
the  defendant  to  charge  back  the- amount  of  this  check  or  to  collect 
from  the  plaintiff,  is  only  that  resulting  from  the  relation  of  indorsee 
and  indorser.  The  rules  governing  that  relation  are  familiar,  and 
largely  now  codified  in  our  Negotiable  Instrument  Law  of  1899,  p. 
681,  c.  356.  In  order  to  charge  indorser  upon  a  check  or  inland  bill 
of  exchange  payable  on  demand,  presentment  must  be  made  by  the 
holder  within  a  reasonable  time  after  it  comes  to  his  possession.  *  *  * 
Such  reasonable  time  is  not  fixed  by  statute,  but  by  consensus  of  au- 
thority, in  absence  of  special  circumstances  of  excuse,  is  limited  to  the 
next  business  day,  or,  if  the  bank  upon  which  the  check  is  drawn  is  at 
another  place,  the  check  must  be  forwarded  to  the  place  of  payment 
on  the  next  business  day,  and  presented  at  latest  upon  the  day  follow- 
ing its  receipt  at  the  place  of  payment.  *  *  *  The  check  in  ques- 
tion never  was  presented  for  payment  until  October  25th  or  26th,  and 
clearly,  by  such  delay,  the  indorser  was  discharged,  unless  such  delay 
was  excused.  The  only  excuse  suggested  is  the  loss  of  the  check.  If 
it  be  conceded  that  the  defendant  was  guilty  of  no  negligence  in  adopt- 
ing the  United  States  mails  as  a  method  of  transmission,  nor  in  sending 
the  check  direct  to  the  bank  upon  which  it  was  drawn,  thus  taking 
chances  of  acquiring  prompt  knowledge  whether  it  was  honored  or  dis- 
honored when  it  reached  the  payee,  nevertheless  it  is  excused  from 
making  presentment  and  demand  only  so  long  as,  consistently  with 
reasonable  diligence,  it  was  prevented  by  the  loss  of  the  check.  *  *  * 
It  would  seem  extremely  doubtful  whether  defendant  could  claim,  in 
the  exercise  of  due  care,  to  have  been  so  prevented  even  during  the 
10  days  which  it  waited  after  mailing  the  check  before  making  any 
inquiry  about  it  and  before  learning  of  its  loss.  By  ordinary  course 
of  mail  the  check  should  have  reached  the  Brodhead  Bank  as  early  as 
the  23d.  and,  unless  there  was  some  difficulty,  plaintiff  should  have 
been  notified  of  its  payment  or  refusal  at  least  as  early  as  the  24th 
of  September.  We  shall  not  deem  it  necessary  to  decide  whether  it 
was  not  the  duty  of  the  defendant  to  make  inquiry  immediately  upon 
failure  to  receive  such  notification  in  such  ordinary  course  of  mail. 
Even  if  that  were  not  so,  it  did  receive  notice  of  the  failure  of  the 
check  to  reach  its ,  destination  some  time  about  the  1st  of  October. 
Upon  learning  that  its  attempted  presentment  by  mail  had  failed,  and 
that  the  check  was  lost,  at  least  for  the  purposes  of  immediate  pre- 
sentment, and  demand  by  means  of  a  copy  or  sufficient  description  of 


Ch.  6)  PRESKXTMEXT,  XOTICE.S   OF    DISHONOR,  AND   PROTEST  911 

the  check,  and  in  case  of  nonpayment  to  give  notice  to  the  indorser. 

*  *  *  Surely  reasonable  diligence  would  have  enabled  presentation 
long  before  October  19th.  While  the  effect  of  the  failure  to  present 
for  payment  and  to  give  notice  of  dishonor  within  a  reasonable  time 
absolutely  discharges  the  indorser  without  proof  of  damage  or  injury 
to  him,  it  may  be  pointed  out  that  in  this  case  damage  is  quite  obvious. 

♦  *    * 

Judgment  affirmed. 


PLOAER    SAVINGS    BANK    v.    MOODIE. 
(Supreme  Court  of  Iowa,  1906.     135  Iowa,  685,  110  N.  W.  29.) 

Weaver,  J.  On  March  8,  1903,  one  C.  F.  Scholer,  who  was  a  de-  • 
positor  in  the  Greenville  Bank,  doing  a  banking  business  at  Greenville, 
Clay  county,  Iowa,  made  and  delivered  to  one  Claude  Heathman  his 
check  on  said  bank  payable  to  the  order  of  said  Heathman  for  the  sum 
of  $50;  and  thereafter  on  March  12.  1903,  said  Scholer  made  and  de- 
livered to  said  Heathman  another  similar  check  on  the  same  bank  for 
the  further  sum  of  $50.  On  or  about  the  last-mentioned  date  Heath- 
man indorsed  and  delivered  both  checks  to  the  appellant.  On  Friday, 
March  13,  1903,  near  the  close  of  business  hours,  the  appellant  indors- 
ed and  delivered  the  checks  to  the  appellee  bank  which  was  doing 
business  at  Plover,  in  Pocahontas  county,  Iowa,  and  received  in  ex- 
change therefor  a  certificate  of  deposit  for  $100  which  was  afterward 
paid.  While  the  towns  of  Plover  and  Greenville  are  but  45  miles  apart 
they  are  on  different  lines  of  railway,  and  the  course  of  the  mails  be- 
tween them  is  quite  indirect,  and  had  the  appellee  forwarded  the  checks 
by  letter  to  the  Greenville  Bank  on  Saturday  they  would  probably  not 
have  reached  their  destination  until  after  banking  hours  on  Monday, 
March  16th.  Instead  of  sending  them  direct  to  Greenville,  the  appel- 
lee, following  its  customary  method  in  such  matters,  sent  the  checks 
to  'its  correspondent,  the  Des  Moines  Savings  Bank  at  Des  Moines, 
Iowa,  by  the  first  mail  in  that  direction  on  Saturday,  March  14th. 
On  Monday,  March  16th,  the  Des  Moines  Savings  Bank  forwarded  the 
checks  to  their  correspondent  the  Citizens'  State  Bank  at  Spencer,  Clay 
county,  Iowa,  where  they  were  received  on  March  17th.  On  the  same 
day  the  Citizens'  State  Bank  turned  the  checks  over  to  the  Citizens' 
National  Bank  of  Spencer,  which  was  the  local  correspondent  of  the 
Greenville  Bank.  On  the  following  day,  March  18th,  the  Citizens'  Na- 
tional Bank  forwarded  them  direct  to  the  Greenville  Bank.  The  daily 
mail  from  Spencer  to  Greenville  does  not  leave  until  some  time  in  the 
afternoon,  and  if  the  checks  reached  Greenville  on  March  18th,  as 
they  doubtless  did,  it  was  after  banking  hours,  and  were  not  received 
by  the  bank  until  the  morning  of  March  19th.  Prior  to  this  date,  prob- 
ably about  March  16th  or  17th,  the  drawer  had  stopped  payment  on 
the  checks  claiming  that  they  had  been  procured  from  him  by  fraud, 
and  acting  upon  this  notice  the  Greenville  Bank  on  March  19th  declin- 
ed to  honor  them,  and  caused  them  to  be  duly  protested. 

Thereupon,  the  appellee  instituted  this  action  at  law  to  recover  up- 
on the  appellant's  indorsement  of  the  checks.  The  appellant  answered 
denying  liability  upon  said  indorsement  because  of  appellee's  alleged 
negligence  in  presenting  the  checks  for  payment.  Other  defenses 
pleaded  are  not  urged  in  argument,  and  we  need  not  consider  them. 
In  addition  to  these  matters  it  was  also  shown  in  evidence,  without 


912  NEGOTIABLE   INSTRUMENTS  (Part  3 

substantial  dispute,  that  the  method  adopted  by  appellee  and  by  th^ 
several  correspondents  mentioned  in  forwarding  the  paper  for  presen- 
tation and  demand  of  payment  was  in  accordance  with  the  general  cus- 
tom prevailing  among  banks  in  dealing  with  checks  drawn  on  other 
banks  not  doing  business  in  the  same  city  or  town,  and  cashed  by  the 
receiving  bank.  No  evidence  was  offered  tending  to  show  that  either 
of  the  banks,  receiving  these  checks  after  their  indorsement  by  ap- 
pellant, failed  to  forward  them  on  their  way  on  the  day  of  the  receipt 
or  on  the  following  day,  except  possibly  in  the  case  of  the  Des  Moines 
Savings  Bank,  and  the  day  there  intervening,  if  any,  was  Sunday. 
At  the  close  of  the  testimony  offered  on  the  trial,  the  court  sustained 
a  motion  to  direct  a  verdict  for  the  plaintiff  for  the  amount  of  the 
checks  with  interest,  and  from  the  judgment  entered  on  such  directed 
verdict  the  defendant  appeals. 

The  single  question  to  be  determined  is  whether  this  record  pre- 
sents a  case  in  which  a  verdict  f-^^  the  defendant,  if  one  had  been  re- 
turned, could  properly  be  permitred  to  stand.  Counsel's  contention  in 
support  of  the  appellant's  position  is  based  upon  two  propositions. 

It  is  said  that  in  failing  to  forward  the  checks  by  the  most  direct 
route  from  Plover  to  Greenville,  and  by  electing  to  send  them  by  a 
more  circuitous  route  through  the  hands  of  correspondent  banks,  ap- 
pellee occasioned  an  unreasonable  delay  in  the  presentation  of  the 
checks  to  the  drawee  for  payment,  and  thereby  discharged  the  appel- 
lant from  liability  as  an  indorser  thereon.  By  the  terms  of  the  nego- 
tiable instrument  statute  a  bank  check,  in  the  ordinary  form,  is  classed 
as  a  bill  of  exchange  payable  on  demand.  *  *  *  By  the  same  stat- 
ute it  is  provided  that  to  charge  the  indorser  of  a  bill  of  exchange  pay- 
able on  demand,  presentation  to  the  drawee  and  demand  of  payment 
shall  be  deemed  sufficient  if  made  within  a  reasonable  time  after  its 
issue,  or  after  the  last  negotiation  of  such  bill.  *  *  *  It  is  also  fur- 
ther provided  that,  in  determining  what  is  a  "reasonable  time"  within 
the  meaning  of  this  act,  regard  must  be  had  to  the  nature  of  the  instru- 
ment, the  usage  of  the  trade  or  business,  if  any,  with  respect  to  such 
instruments,  and  the  facts  of  the  particular  case.  *  *  *  Contrary 
to  the  requirement  for  notice  to  the  indorser  of  the  dishonor  of  a  check 
or  bill  upon  presentation  for  payment  *  *  *  t^g  holder  of  the  in- 
dorsed paper  is  not  held  to  any  fixed  or  invariable  limit  of  time  in 
which  to  make  such  presentment  and  demand.  He  is  required  to  act 
with  reasonable  diligence  and  promptitude  taking  into  consideration  the 
nature  of  the  instrument,  the  usages  of  the  business  world  and  the 
peculiar  facts,  if  any,  attending  the  particular  transaction  in  hand. 

With  this  rule  as  our  standard,  we  are  clearly  of  the  ooinion  that 
the  record  presents  nothing  to  support  a  finding  that  the  delay,  if  any, 
in  presenting  the  checks  for  payment  was  chargeable  to  negligence  on 
part  of  the  appellee.  It  was  shown  by  the  evidence  without  contro- 
versy— indeed,  it  is  a  matter  oF  common  knowledge — that,  by  the  sys- 
tem to  which  the  handling  of  such  business  has  been  reduced,  the  in- 
numerable checks  and  bills  received  by  the  banks  scattered  all  over  the 
country  flow  in  concentrating  currents  to  distributing  banks,  whence 
they  go  out  to  correspondent  banks  at  or  near  the  city  or  town  where 
the  drawee  banks  are  located,  for  collection.  To  hold  that  the  time 
between  the  issue  of  a  check  upon  a  distant  bank  and  its  presentation 
for  payment  by  this  method  is  unreasonable,  and  serves  to  discharge 
the  indorser,  would  not  only  tend  to  create  disastrous  confusion  in  this 


Ch.  6)  PRESENTMENT,  NOTICES   OF   DISHONOR,  AND   PROTEST  913 

most  important  branch  of  business,  but  to  a  disregard  of  the  statute 
which  makes  the  usage  in  such  business  one  of  the  standards  by  which 
the  reasonableness  of  the  time  of  presentation  for  payment  is  to  be 
determined.  Again,  as  disclosed  by  the  testimony,  the  transaction 
under  consideration  was  not  a  simple  matter  of  collecting  checks  de- 
posited with  the  appellee  for  that  purpose.  The  checks  were  negotiated 
by  the  appellant  to  the  appellee  who  paid  full  value  therefor.  The 
appellee  indorsed  the  checks  to  the  Des  Moines  Savings  Bank,  receiv- 
ing credit  upon  its  deposit  account  with  the  latter  for  the  full  amount 
as  for  a  deposit  of  so  much  cash.  In  other  words,  the  checks  were 
neo-otiated  by  the  appellee  to  the  Des  Moines  Savings  Bank,  and  under 
the  statute  already  quoted  *  *  *  reasonable  time  for  presentation 
and  demand  is  to  be  reckoned  from  the  last  negotiation  of  the  paper. 
Checks  are  an  almost  universal  substitute  for  money.  They  pass  from 
hand  to  hand,  bank  to  bank,  and  city  to  city,  and,  within  reasonable 
limits,  it  may  be  said  that  no  matter  how  long  they  remain  outstand- 
ing, so  long  as  one  negotiation  promptly  follows  another  and  the 
checks  are  in  fact  in  circulation  the  statute  requires  us  to  hold  that  the 
indorser  is  not  legally  prejudiced  by  the  consequent  delay  in  their  pres- 
entation for  pavment.  Indeed,  while  at  common  law  it  is  generally 
held  that  when  one  receives  a  check  payable  at  a  distant  bank  reason- 
able diligence  requires  him  to  forward  it  for  presentation  not  later 
than  the  next  business  day  thereafter,  yet  it  is  equally  well  settled 
that  this  rule  is  not  always  one  of  imperative  obligation,  but  is  at  times 
made  to  give  way  by  reason  of  circumstances  which  sufficiently  rebut 
any  presumption  or  inference  of  negligence  on  part  of  the  holder. 
*  *  *  And,  among  other  circumstances  having  a  bearing  upon  this 
question,  the  general  course  of  business  has  always  been  recognized 
as  important.  *  *  *  Thus,  even  without  the  statute  it  would  be  ex- 
tremely doubtful  whether  a  verdict  for  the  appellant  upon  the  ground 
here  contended  for  could  be  upheld ;  and  with  it,  we  think,  the  cor- 
rectness of  the  ruling  of  the  trial  court  thereon  is  not  open  to  serious 
question. 

It  is  next  insisted  that  the  act  of  the  Citizens'  National  Bank  o£ 
Spencer  in  sending  the  checks  direct  to  the  bank  on  which  they  were 
drawn  instead  of  some  suitable  third  person  to  present  the  same  at  the 
counter  of  the  bank,  and  demand  payment  thereon,  was  negligent  as  a 
matter  of  law,  and  discharged  the  indorser.  In  support  of  this  con- 
tention we  are  cited  to  Sash  &  Door  Co.  v.  Bank.  76  Minn.  136,  78  N. 
W.  980,  44  L.  R.  A.  504,  17  Am.  St.  Rep.  609 ;  Scraper  Co.  v.  Sadilek. 
50  Neb.  105,  69  N.  W.  765,  61  Am.  St.  Rep.  55,  and  other  cases  of 
like  import.  We  have  no  doubt  of  the  correctness  of  the  precedents 
referred  to,  and  we  shall  not  hesitate  to  follow  them  in  a  proper  case. 
The  substance  of  the  rule  of  these  cases  is  that  where  the  holder  of  a 
check  or  bill  upon  a  distant  bank  places  it  in  the  hands  of  another  bank 
for  collection,  and  the  latter  sends  the  check  direct  to  the  hands  of  the 
bank  which  is  under  the  duty  of  paying  it,  and  thereby  the  claim  is 
lost,  the  bank  receiving  it  for  collection  will  be  held  chargeable  with 
negligence.  In  each  of  the  cited  cases  and  in  all  others  of  that  class 
which  have  come  under  our  observation  the  drawee  bank  to  which 
the  paper  has  been  sent  for  collection  and  remittance  has  closed  its 
doors  after  receiving  it  and  without  remitting  the  amount  due,  or  by 
some  other  act  of  neghgence  or  fraud  occasioned  a  loss  to  the  real 
B.&  B.Btjs.Law— 58 


914  NEGOTIABLE    INSTRUMENTS  (Part  3 

party  in  interest  which  would  not  have  occurred  or  might  possibly 
have  been  avoided  had  presentation  awd  demand  of  payment  been  duly 
made  by  the  collecting  bank  or  by  some  suitable  agent  selected  by  it 
for  that  purpose.  No  such  circumstances  appear  in  this  case.  So  far 
as  appears  from  the  record,  the  drawee  bank  was  and  is  entirely  sol- 
vent, the  draw^er  had  funds  on  deposit  sufficient  to  pay  the  checks  and 
the  only  reason  why  they  were  not  honored  was  the  notice  received 
from  the  drawer  to  stop  payment.  The  bank  acted  promptly,  protest- 
ed the  notes  at  once,  and  gave  due  notice  thereof  to  the  payee  and  the 
several  indorsers.  The  parties  stand  precisely  in  the  same  position 
which  they  would  have  occupied  had  some  third  person  presented  the 
checks  over  the  bank's  counter,  and  been  met  with  the  same  refusal 
to  pay.  The  notary  who  made  the  demand  and  protest  was  for  the 
time  being  the  agent  of  the  transmitting  bank,  and  we  cannot  see  how 
such  presentation  and  demand  by  him  was  any  less  efficient  to  protect 
such  bank  and  all  prior  indorsers  than  would  be  the  case  had  they  been 
made  by  some  other  person  who  had  been  expressly  authorized  and 
employed  to  perform  that  service.     *     *     * 

Error  is  assigned  upon  the  ruling  of  the  trial  court  refusing  to  per- 
mit the  appellant  to  testify  to  his  want  of  knowledge  of  the  custom  of 
banks  with  respect  to  the  manner  of  transmitting,  checks  for  payment. 
To  this  exception  we  think  it  a  sufficient  answer  that  want  of  knowl- 
edge by  one  who  negotiates  and  indorses  a  check,  as  to  the  usage  of 
banks  relating  to  its  presentation  for  payment,  cannot  prevent  the  ap- 
plication of  the  statute  which  makes  such  usage  a  factor  in  determining 
whether  due  diligence  has  been  shown.  So,  also,  it  may  be  said  that 
the  usage  or  custom  here  relied  upon  is  not  one  of  mere  private  or  lo- 
cal character,  but  one  of  general  observance  in  the  banking  business 
and  as  such  will  be  presumed  to  be  known  by  all  persons  dealing  with 
such  institutions.  *  *  *  Appellant  knew  that  the  checks  were  ne- 
gotiable in  character  and  as  such  were  liable  to  pass  from  one  indorser 
to  another  in  their  transmission  to  the  bank  of  payment,  and  when  he 
negotiated  them  he  must  be  held  to  have  done  so  with  reference  to 
the  usual  and  ordinary  manner  in  which  such  business  is  transacted, 
and  to  have  consented  to  presentation,  demand  of  payment  being  made 
in  the  manner  which  generally  prevails  among  prudent,  well-conducted 
banks.  Had  he  negotiated  them  to  a  merchant  or  farmer  or  other  in- 
dividual who  in  turn  negotiated  them  to  the  appellee  bank,  appellant 
being  sued  upon  his  indorsement  would  not  be  heard  to  deny  knowl- 
edge of  the  usage  of  banks  with  respect  to  such  business,  and  we  can- 
not see  that  such  want  of  knowledge  would  be  of  any  more  avail  in  a 
case  like  the  present  one  where  he  indorses  the  paper  direct  to  the 
bank.  His  contract,  implied  from  his  indorsement,  was  that  if,  upon 
presentation  and  demand  within  a  reasonable  time,  the  checks  were 
dishonored,  and  due  notice  given  thereof,  he  would  make  them  good 
to  his  indorsee,  and  it  can  make  no  difterence  whether  he  did  or  did  not 
understand  what  in  law  would  be  held  a  reasonable  time  for  such  pre- 
sentment. Other  questions  argued  are  ruled  by  those  already  dis- 
cussed, and  we  need  not  further  consider  them.  Of  course,  we  are  not 
to  be  understood  as  holding  that  banks  are  at  liberty  to  adopt  any 
usage  or  manner  of  business  they  see  fit,  and  escape  all  imputation  of 
negligence  for  resulting  losses  to  those  with  whom  they  may  deal. 
It  is  reasonable  to  hold  that  checks  must  go  forward  for  presentation 
with  due  regard  to  the  interest  of  the  drawers  and  indorsers,  and  if 


Ch.  6)  rUESENTMENT,  NOTICES    OF    DISIIOXOU,  AND    PROTEST  915 

banks  adopt  unreasonably  circuitous  routes  and  methods  whereby  loss 
results  they  should  bear  the  burden,  but,  ordinarily,  the  natural  caution 
which  is  engendered  by  self-interest  will  be  sufficient  to  insure  prompt- 
ness and  dispatch  in  the  discharge  of  duties  of  this  nature.  Where, 
however,  there  is  reasonable  ground  upon  which  to  base  the  charge  of 
negligence,  the  case  should  go  to  the  jury  under  proper  instructions. 

In  "the  instant  case  we  find  nothing  to  support  a  finding  of  this  na- 
ture, and  the  judgment  of  the  district  court  is  affirmed. 


SECTION  4.— TIME  OF  PRESENTMENT  OF  CHECKS  IN 
ORDER  TO  CHARGE  THE  DRAWER 

The  preceding  section  shows  that  the  time  within  which  a  de- 
riiand  bill  of  exchange  must  be  presented  to  the  drawee  for  pay- 
ment in  order  to  charge  the  drawer  of  a  bill  of  exchange  other  than 
a  check  and  the  indorsers  upon  all  forms  of  bills  of  exchange, 
including  checks,  is  the  same — a  reasonable  time  after  the  last  ne- 
gotiation. A  special  rule  exists  as  regards  the  time  within  which 
a  check  must  be  presented  for  payment  in  order  to  charge  the 
drawer.  This  result  is  brought  about  by  the  following  sections: 
N.  I.  L.  Section  70.  *  *  *  Except  as  herein  otherwise  pro- 
vided, presentment  for  payment  is  necessary  in  order  to  charge  the 
drawer  and  indorsers. 

N.  I.  L.  Section  71.  *  *  *  in  the  case  of  a  bill  of  exchange, 
presentment  for  payment  will  be  sufficient  if  made  within  a  rea- 
sonable time  after  the  last  negotiation  thereof. 

N.  I.  L.  Section  185.  A  check  is  a  bill  of  exchange  drawn  on  a 
bank  payable  on  demand.  Except  as  herein  otherwise  provided, 
the  provisions  of  this  act  applicable  to  a  bill  of  exchange  payable 
on  demand  apply  to  a  check. 

Sections  70  and  71  apply  to  drawers  of  bills  of  exchange  other 
than  checks,  indorsers  of  bills  of  exchange  including  indorsers  of 
checks. 

Section  186  contains  a  special  rule  applicable  only  to  drawers  of 
checks.     It  is  as  follows : 

A  check  must  be  presented  for  payment  within  a  reasonable 
time  after  its  issue,  or  the  drawer  will  be  discharged  from  all  lia- 
bility thereon  to  the  extent  of  the  loss  caused  by  delay. 

The  nature  of  the  liability  of  the  drawer  of  a  check  is  substantial- 
ly dififerent  from  that  of  the  drawer  of  other  forms  of  bills  of  ex- 
change. A  failure  to  make  a  due  presentment  to  the  drawee  of 
a  bill  of  exchange  other  than  a  check  works  an  absolute  discharge 
of  all  liability  of  the  drawer  upon  the  instrument.  In  the  case  of 
a  check,  failure  to  make  a  due  presentment  upon  the  drawee  bank 
does  not  work  an  absolute  discharge  of  the  liability  of  the  drawer, 
for  in  no  case  will  a  drawer  of  a  check  be  discharged  to  an  extent 
greater  than  the  loss  caused  by  the  holder's  delay  in  making  pre- 
sentment ;   that  is,  the  drawer  of  a  check,  when  sued  by  the  holder,. 


916  NEGOTIABLE   INSTRUMENTS  (Part  3 

who  has  failed  to  make  a  due  presentment,  will  be  liable  for  the 
full  amount  in  spite  of  such  failure  of  the  holder  to  make  a  due 
presentment.  The  only  way  for  the  drawer  of  a  check  to  avoid 
or  cut  down  his  liability  to  the  holder  of  his  check  is  to  show  that 
he  (the  drawer)  lost  by  reason  of  the  holder's  failure  to  present  to 
the  drawee.  In  the  case  of  the  drawer  of  any  other  form  of  a 
bill  of  exchange,  the  drawer  avoids  all  liability  on  the  instrument 
by  merely  showing  failure  of  the  holder  to  make  due  presentment. 
He  is  not  required  to  show  affirmatively  that  he  actually  sustained 
a  loss  because  of  the  delay.  The  effect,  therefore,  is  virtually  to 
make  the  liability  of  this  drawer  of  the  check  an  absolute  liability, 
instead  of  a  conditional  liability ;  at  least  this  should  be  so,  and 
would  be  so,  were  it  not  for  the  unfortunate  wording  of  section  89, 
which  provides  that  a  failure  to  give  due  notice  of  dishonor  abso- 
lutely discharges  the  drawer  of  all  bills  of  exchange,  and  this  sec- 
tion includes  drawers  of  checks. 

Under  what  circumstances  will  the  drawer  of  a  check  be  able 
to  show  that  he  sustained  a  loss  arising  from  the  holder's  failure 
to  present?  Suppose  the  drawer  delivers  his  check  to  the  payee, 
and  the  payee  or  some  indorsee  holds  the  check  for  several  weeks, 
months,  or  even  years,  just  so  long  that  the  statute  of  limitations 
has  not  run,  and  at  this  late  date  the  holder  presents,  and  he  finds 
that  the  drawer  now  has  no  funds  in  the  drawee  bank.  In  the 
meantime  the  drawer  has  either  drawn  out  his  deposit  or  checked 
it  out  to  creditors.  The  holder  sues  the  drawer.  May  the  drawer 
defeat  liability  by  claiming  that,  if  the  check  had  been  presented 
within  a  reasonable  time  after  issue  and  while  he  still  had  funds  in 
the  bank,  the  check  would  have  been  paid?  Most  certainly  not. 
The  drawer  here  cannot  show  any  loss  to  him  caused  by  the  hold- 
er's delay,  for  the  simple  reason  that  the  drawer  himself  used  all 
the  funds  then  standing  to  his  credit  in  the  drawee  bank. 

About  the  only  case  where  the  drawer  is  able  to  show  an  actual 
loss  arising  from  the  failure  of  the  holder  to  present  the  check  to 
the  drawee  bank  for  payment  within  a  reasonable  time  after  its 
issue  is  to  show  that  the  drawee  bank  became  insolvent.  This  is 
a  real  loss  to  the  drawer.  If  the  check  was  delivered  before  the 
bank  closed,  upon  presentment,  the  check  would  have  been  paid. 
If  the  holder  waited  an  unreasonable  time  after  issue  before  pre- 
senting, and  if  in  the  meantime  the  drawee  became  insolvent,  the 
drawer  will  be  discharged  to  the  extent  of  his  loss.  Note  that  the 
"reasonable  time"  begins  to  run  from  the  date  of  issue  of  the  check, 
not  from  the  date  of  the  last  negotiation. 

To  illustrate:  The  drawer  delivers  his  check  to  the  payee  at  9 
o'clock  Monday  morning.  The  drawer  then  has  funds  in  the  bank 
sufficient  to  cover  the  check.  The  payee  or  any  indorsee  has  a 
reasonable  time  from  9  o'clock  Monday  within  which  to  present. 
During  the  running  of  this  reasonable  time  the  holder  runs  no 
risk;  that  is,  if  the  bank  closed  its  doors  at  10  o'clock  Monday,  the 
holder  could  still  recover  from  the  drawer  the  full  amount  of  the 


Ch.  6)  PRESENTMENT,  NOTICES   OF   DISHONOR,  AND   PROTEST  917 

check.  Let  X  equal  the  period  of  time  which  is  here  called  reason- 
able. If,  during  the  period  X,  the  drawee  becomes  insolvent,  and 
passes  into  the  hands  of  a  receiver,  and  the  holder  has  not  pre- 
sented, the  holder  may  recover  the  full  amount  from  the  drawer. 
But,  if  the  doors  of  the  bank  were  closed  in  accordance  with  the 
law  at  just  one  minute  after  period  X  expired  and  the  holder  had 
not  yet  presented,  then  the  holder  cannot  recover  the  full  amount 
from  the  drawer,  because  the  drawer  has  sustained  a  loss  arising 
from  the  delay  of  the  holder  to  present  while  period  X  was  running. 
How  much  will  the  holder  recover  from  the  drawer?  The  holder 
will  recover  that  proportion  of  the  face  of  the  check  which  the 
total  dividends  paid  by  the  receiver  of  the  insolvent  bank  to  the 
drawer  bore  to  the  drawer's  deposit  as  the  deposit  stood  at  the 
moment  period  X  expired.  For  example,  suppose  at  the  moment 
the  drawer  had  on  deposit  $1,000,  and  that  the  check  was  drawn 
for  $100,  and  suppose,  further,  that  the  receiver  of  the  insolvent 
bank  paid  a  total  dividend  to  the  drawer  of  $500,  then  the  holder 
of  this  check  would  recover  from  the  drawer  just  $50.  The  loss 
caused  by  the  delay  was  $50.  The  next  case  illustrates  this  rule 
and  lays  down  the  test  for  determining  how  many  hours  or  days 
are  to  be  included  in  the  period  allowed  to  the  holder  to  present. 


GORDON  V.  LEVINE. 

(Supreme  Judicial  Court  of  Massachusetts,  1907.    194  Mass.  418.  80  N.  E.  505, 
10  L.  R.  A.  [N.  S.]  1153,  120  Am.  St.  Rep.  565,  10  Ann.  Cas.  1119.) 

Action  by  Samuel  R.  Gordon  against  Max  Levine.  Judgment  in 
favor  of  plaintiff,  and  defendant  brings  exceptions. 

Morton,  J.  This  is  an  action  upon  a  check  by  the  plaintiff  as  payee 
against  the  defendant  as  drawer.  The  check  was  dated  December  30. 
1905,  though  there  was  some  question  whether  it  was  actually  drawn 
and  delivered  on  that  day,  or  the  31st.  The  plaintiff'  is  described  in 
the  writ  as  of  Chelsea  and  the  defendant  as  of  Boston.  The  bank  on 
which  the  check  was  drawn  was  in  Boston  and  the  check  was  drawn 
and  delivered  there.  The  plaintiff'  testified  that  the  defendant  asked 
him  not  to  present  the  check  for  a  couple  of  days  as  he  did  not  have 
sufficient  funds  to  meet  it,  but  that  he  presented  it  Monday  morning 
and  was  told  there  were  no  funds,  and  that  he  went  to  see  the  de- 
fendant at  his  place  of  business  but  did  not  see  him.  The  plaintiff' 
also  testified  that  in  the  afternoon  of  the  same  day  he  passed  the  check 
to  one  Saievitz  in  payment  of  a  bill  which  he  owed  him  receiving  the 
balance  in  cash.  And  there  was  testimony  tending  to  show  that  on  the 
next  day  Saievitz  indorsed  it  to  one  Rootstein  who  deposited  it  on 
January  4th,  in  the  Faneuil  Hall  National  Bank,  Boston,  for  collection, 
and  that  that;  bank's  messenger  went  with  it  on  the  afternoon  of  the 
following  day,  Friday,  January  5th,  to  the  bank  on  which  it  was  drawn, 
the  Provident  Securities  &  Banking  Company,  and  found  its  doors 
closed.  The  plaintiff'  also  testified  that  he  told  the  defendant  the  bank 
had  failed  and  that  the  defendant  promised  to  make  the  check  good. 
The  defendant  denied  this  and  also  the  plaintiff''s  statement  that  he  had 
asked  the  plaintiff  not  to  present  the  check  for  a  couple  of  days,  and 


918  NEGOTIABLE   INSTRUMENTS  (Part  3 

introduced  testimony  tending  to  show  that  at  the  time  when  the  check 
was  drawn  he  had  sufficient  funds  on  deposit  at  the  tank  to  meet  it, 
and  continued  to  have  down  to  the  failure  of  the  bank.  It  was  ad- 
mitted that  the  bank  failed  Friday,  January  5th,  and  the  defendant  in- 
troduced evidence  tending  to  show  that  he  had  received  no  payment 
or  dividend  on  account  of  his  deposit.  There  was  a  verdict  for  the 
plaintiff  and  the  case  is  here  on  exceptions  by  the  defendant  to  the 
refusal  of  the  court  to  give  certain  instructions  that  were  requested 
and  to  the  admission  of  certain  testimony. 

The  defendant,  in  substance,  asked  the  court  to  instruct  the  jury  that 
a  check  must  be  presented  for  payment  in  a  reasonable  time  and  that 
in  order  to  have  been  presented  wnthin  a  reasonable  time  the  check  in 
suit  should  have  been  presented  before  the  close  of  banking  hours  on 
Monday;  that  its  transfer  to  successive  holders  would  not  extend  the 
time  for  presentment  and  a  presentment  on  January  5th  would  not  be 
within  a  reasonable  time  and  if  the  bank  failed  in  the  meantime  and  the 
defendant  sustained  a  loss  in  consequence  of  delay  in  presenting  the 
check,  he  would  be  discharged  from  liability  to  that  extent.  The  court 
gave  in  part  the  instruction  thus  requested,  and  refused  it  in  part.  It 
instructed  the  jury  that  the  check  must  have  been  presented  for  pay- 
ment within  a  reasonable  time,  and  that  if  it  was  presented  on  Mon- 
day that  would  be  within  a  reasonable  time.  But  it  refused  to  in- 
struct the  jury  that  the  transfer  to  successive  holders  would  not  ex- 
tend the  time,  or  that  a  presentment  on  Friday  was  not  within  a  rea- 
sonable time.  On  the  contrary,  it  instructed  them  that  "the  court  had 
occasion  to  consider  that  in  one  case  in  this  commonwealth  (referring, 
we  assume  to  Taylor  v.  Wilson,  11  Mete.  44,  45  Am.  Dec.  180),  and 
it  is  there  stated  that  a  check  may  also  be  passed  from  hand  to  hand 
and  a  reasonable  time  is  allowed  to  each  party  receiving  the  same  to 
present  it  for  payment."  And  after  calling  their  attention  to  the  pro- 
visions of  the  statute  ''^  *  "  that  in  considering  what  a  reasonable 
time  is  "regard  is  to  be  had  to  the  nature  of  the  instrument,  the  usage 
of  trade  or  business,  if  any,  with  respect  to  such  instruments,  and  the 
facts  of  each  particular  case."  left  it  to  them  to  determine  whether 
the  check  was  presented  on  Monday,  or,  if  they  were  not  satisfied  that 
it  was.  then  to  determine  whether  if  it  passed  from  hand  to  hand  and 
each  one  had  a  reasonable  time  to  present  it  the  presentment  on  Friday 
was  within  a  reasonable  time.  For  aught  that  appears  the  jury  may 
not  have  been  satisfied  that  the  check  was  presented  on  Monday  and 
may  have  found  for  the  plaintifi:  on  the  ground  that  the  presentment 
on  Friday  was  within  a  reasonable  time.  The  question  is  therefore 
distinctly  raised  whether  a  presentment  on  Friday  could  have  been 
fovtnd  to  be  within  a  reasonable  time. 

The  general  rule  is  as  was  stated  by  the  court  and  as  is  provided  in 
the  Negotiable  Instruments  Act  *  *  *  that  a  check  must  be  pre- 
sented for  payment  within  a  reasonable  time  after  it  is  issued.  If  it  is 
not  so  presented  and  the  drawer  sustains  a  loss  by  reason  of  the  failure 
of  the  drawee  he  will  be  discharged  from  liability  to  the  extent  of 
such  loss,  continuing  liable  otherwise.  This  results  from  the  nature 
of  the  instrument,  which,  though  defined  in  the  Negotiable  Instru- 
ments Act  *  '■'  *  as  "a  bill  of  exchange  drawn  on  a  bank  payable 
on  demand,"  is  intended  for  immediate  use  *  *  *  and  not  to  cir- 
culate as  a  promissory  note,  and  it  consequently  would  be  unjust  to 
subject  the  drawer  to  the  loss,  if  any.  resulting  from  failure  to  pre- 


'Ch.  6)  PRESENTMENT,  NOTICES   OF   DISHONOR,  AND    PROTEST  919 

sent  it  for  payment  within  a  reasonable  time.  What  is  a  reasonable 
time,  however,  still  remains  for  consideration.  The  Negotiable  In- 
struments Act  provides  generally  *  *  *  as  the  court  said  that  "in 
determining  what  is  a  'reasonable  time'  or  an  'unreasonable  time'  re- 
gard is  to  be  had  to  the  nature  of  the  instrument,  the  usage  of  trade 
or  business,  if  any,  with  respect  to  such  instruments  and  the  facts  of 
the  particular  case."  This,  however,  would  not  seem  to  lay  down  or 
to  establish  any  new  rule.  The  nature  of  the  instrument  and  the  facts 
of  the  particular  case  have  always  been  considered  in  the  passing  upon 
the  question  of  reasonable  or  unreasonable  time.  In  deciding,  there- 
fore, whether  this  check  was  presented  within  a  reasonable  time,  if 
presented  on  Friday,  resort  must  be  had  to  the  rules  which  have  been 
hitherto  established  in  similar  cases.  And  one  of  the  rules  which 
have  been  established  is  that  where  the  drawer  and  drawee  and  the  pay- 
er are  all  in  the  same  city  or  town  a  check  to  be  presented  within  a  rea- 
sonable time  should  be  presented  at  some  time  before  the  close  of 
banking  hours  on  the  day  after  it  is  issued  and  that  its  circulation 
from  hand  to  hand  will  not  extend  the  time  of  presentment  to  the 
detriment  of  the  drawer.  If  it  is  presented  and  paid  afterwjirds  the 
drawer  suffers  no  harm.  But  if  not  presented  within  the  time  thus 
fixed,  and  there  is  a  loss  it  falls  not  on  him  but  on  the  holder.  *  *  * 
The  case  of  Taylor  v.  Wilson,  supra,  relied  on  by  the  plaintiff,  was  a 
case  where  a  check  was  drawn  by  one  doing  business  in  Charlestown 
and  living  in  Roxbury  on  a  bank  in  Charlestown  in  favor  of  a  resi- 
dent of  Newport.  The  check  was  dated  September  30,  1842,  which 
was  Friday,  and  was  received  by  the  payee  Saturday  evening,  Oc- 
tober 1st.  On  Tuesday,  October  4th,  having  been  previously  cashed 
for  the  payee  by  a  local  bank,  it  was  given  by  the  cashier  of  that  bank 
to  a  messenger  to  be  carried  to  the  Merchants'  Bank  at  Providence  in 
the  usual  course  of  remitting  its  funds  and  securities  and  was  received 
by  that  bank  on  Wednesday  and  sent  by  its  cashier  to  the  Suffolk 
Bank  at  Boston.  That  bank  received  it  on  the  next  day  (October  6th) 
and  presented  it  on  the  same  day  to  the  bank  on  which  it  was  drawn 
and  payment  was  refused ;  the  bank  having  closed  its  doors  on  Mon- 
day morning,  October  3d,  and  being  insolvent.  The  case  was  sub- 
mitted to  the  court  on  agreed  facts  with  power  to  draw  inferences 
and  the  court  found  in  favor  of  the  payee  and  against  the  drawer. 
The  court  held  in  effect  that  under  the  circumstances  there  had  been 
no  laches  and  that  the  check  had  been  presented  within  a  reasonable 
time.  There  is  a  sentence  in  the  opinion  to  the  effect  that  a  check  may 
pass  from  hand  to  hand  and  that  a  reasonable  time  is  allowed  to  each 
party  receiving  it  to  present  it  for  payment  and  the  case  has  been 
cited  to  that  point  with  approval  in  Veazie  Bank  v.  Winn,  40  Me.  60. 
But  we  do  not  think  that  the  court  meant  to  lay  down  the  rule  that 
under  any  and  all  circumstances  each  party  receiving  a  check  from  a 
previous  holder  was  entitled  to  a  reasonable  time  to  present  it  for 
payment,  or  that  the  case  required  that  it  should  lay  down  such  a 
rule.  On  the  contrary  the  court  expressly  said  that  a  party  receiving  a 
check  was  not  guilty  of  laches  if  he  did  not  present  it  on  the  same  day 
on  which  it  was  drawn,  but  was  allowed  a  reasonable  time  for  that 
purpose,  and  that  the  next  day  was  held  to  be  such  reasonable  time. 
The  decision  should  be  limited  to  the  case  before  the  court  which  was 
that  of  a  check  drawn  on  a  bank  in  one  place  and  sent  to  a  payee  in  an- 
other place  at  considerable  distance  and  forwarded  for  presentment 


920  NEGOTIABLE   INSTRUMENTS  (Part  3 

in  the  usual  course  of  business  and  so  understood  and  applied  was 
correct. 

It  follows  from  what  has  been  said  that  the  exceptions  must  be  sus- 
tained. The  conclusion  to  which  we  have  come  on  the  principal  ques- 
tion renders  it  unnecessary  to  consider  the  questions  of  evidence, 
though  we  may  observe  that  we  see  no  error  in  regard  to  them. 

Exceptions  sustained. 


SWIFT  &  CO.   V.  MILLER. 
(Appellate  Court  of  Indiana,  1916.     62  Ind.  App.  312,  11.3  N.  E.  447.) 

Felt,  J,  *  *  *  Under  the  rules  of  the  law  merchant,  a  check 
must  be  presented  within  reasonable  time  after  it  is  received.  Under 
ordinary  conditions  when  the  holder  resides  at  the  place  the  check  is 
made  payable,  such  reasonable  time  for  presentment  includes  all  of 
the  banking  hours  of  the  day  immediately  following  the  day  on  which 
the  check  is  received.  If  the  bank  upon  which  the  check  is  drawn  is 
at  another  place,  the  check  must  be  forwarded  to  the  place  of  pay- 
ment on  the  next  business  day,  and  be  presented  not  later  than  the  day 

immediately  following  the  day  of  its  receipt  at  the  place  of  payment. 

*     *     * 

As  between  the  holder  and  drawer  of  a  check,  delay  in  presentment 
will  not  ordinarily  discharge  the  drawer  from  liability,  but  if  loss  re- 
sults from  the  delay  for  which  the  drawer  is  not  responsible,  the  de- 
lay is  at  the  peril  of  the  holder.  As  between  the  holder  of  a  check 
and  an  indorser,  unreasonable  delay  in  presentment  for  payment,  or 
in  giving  notice  of  dishonor,  will  discharge  the  indorser  from  his  lia- 
bility without  regard  to  whether  such  delay  did  or  did  not  occasion 
loss  to  the  holder.    *    *    * 


SECTION  5.— TIME  OF  PRESENTMENT  OF  INSTRU- 
MENTS BEARING  A  FIXED  MATURITY 

We  have  yet  to  consider  the  rules  prescribing  the  time  for  pre- 
sentment of  instruments  payable  at  a  fixed  date.  This  is  relatively 
simple.    These  rules  are  alike  for  all  kinds  of  negotiable  time  paper. 

N.  I.  L.  Section  71.  Where  the  instrument  is  not  payable  on 
demand  presentment  must  be  made  on  the  day  it  falls  due. 

N.  I.  L.  Section  85.  Every  negotiable  instrument  is  payable  at 
the  time  fixed  therein  without  grace.  When  the  day  of  maturity 
falls  on  Sunday,  or  a  holiday,  the  instrument  is  payable  on  the 
next  succeeding  business  day.  Instruments  falling  due  on  Satur- 
day are  to  be  presented  for  payment  on  the  next  succeeding  busi- 
ness day,  except  that  instruments  payable  on  demand  may,  at  the 
option  of  the  holder  be  presented  for  payment  before  twelve 
o'clock  noon  on  Saturday  when  that  entire  day  is  not  a  holiday, 

N.  I.  L.  Section  85  abolishes  days  of  grace,  which,  before  the 
Act,  were  commonly  allowed.  A  few  states  expressly  allow  three 
days  of  grace  on  sight  hills. 

N.  I.  L.  Section  86,  Where  the  instrument  is  payable  at  a  fixed 
period  after  date,  after  sight,  or  after  the  happening  of  a  specified 


Ch.  6)  PRESENTMENT,  NOTICES   OF   DISHONOR,  AND    PROTEST  921 

event,  the  time  of  payment  is  determined  by  excluding  the  day 
from  which  the  time  is  to  begin  to  run  and  by  including  the  date 
of  payment. 

N.  I.  L.  Section  72.  Presentment  for  payment  must  be  made 
at  a  reasonable  hour  on  a  business  day. 

Where  the  instrument  bears  a  fixed  date  of  maturity  but  is  sub- 
ject to  an  earlier  payment  upon  the  happening  of  some  event  or 
upon  the  exercise  of  an  option  by  the  holder,  it  is  not  certain  at 
what  time  presentment  must  be  made.  We  have  already  been 
concerned  with  this  situation  (1)  as  regards  the  negotiability  of 
such  an  instrument;  and  (2)  as  to  whether  a  bona  fide  purchaser 
before  the  fixed  date  arrives  but  subsequent  to  the  actual  maturity 
under  the  acceleration  clause,  could  be  a  holder  in  due  course. 
We  noted  that  there  is  a  conflict  of  authority  on  the  question 
whether  such  an  instrument  is  negotiable.  On  the  analogy  of  the 
rule  recognized  in  section  52  (2)  that  one  may  be  a  holder  in  due 
course  of  a  time  bill  of  exchange  purchased  after  dishonor  by  non- 
acceptance,  but  before  the  arrival  of  the  fixed  date,  it  would  seem 
that  in  all  other  cases  a  holder  who  acquired  title  before  the  fixed 
date,  but  after  an  act  or  event  which  under  an  acceleration  clause 
operated  to  mature  the  instrument,  would  be  a  holder  in  due 
course.  So,  also,  with  respect  to  the  time  of  presentment  of  such 
an  instrument,  presentment  should  be  effective  if  made  before  the 
fixed  date,  if  the  holder  had  no  knowledge  of  the  occurrence  of  the 
event  which  matured  the  instrument  earlier. 

N.  I.  L,  Section  75.  Where  the  instrument  is  payable  at  a  bank, 
presentment  for  payment  must  be  made  during  banking  hours,  un- 
less the  person  to  make  payment  has  no  funds  there  to  meet  it 
at  any  time,  during  the  day,  in  which  case  presentment  at  any  hour 
before  the  bank  closed  on  that  day  is  sufficient. 

It  should  be  noted,  however,  that  the  person  to  make  payment 
has  until  the  close  of  business  hours  to  deposit  money  in  the  bank 
to  meet  the  instrument.  If  presentment  is  made  and  the  same  is 
not  then  paid  and  the  debtor  deposits  money  subsequent  to  the 
presentment,  the  instrument  is  not  dishonored. 


SECTION  6.— OTHER  ASPECTS  OF  A  DUE  PRESENT- 
MENT FOR  PAYMENT 

fa)     WHEN   PRESENTMENT   FOR   PAYMENT   IS   NECESSARY 

N.  I.  L.  Section  70.  Presentment  for  payment  is  not  necessary 
in  order  to  charge  the  person  primarily  liable  on  the  instrument; 
but  if  the  instrument  is,  by  its  terms,  payable  at  a  special  place, 
and  he  is  able  and  willing  to  pay  it  there  at  maturity,  such  ability 
and  willingness  are  equivalent  to  a  tender  of  payment  upon  his 
part.  But  except  as  herein  otherwise  provided,  presentment  for 
payment  is  necessary  in  order  to  charge  the  drawer  and  indorsers. 


922  NEGOTIABLE   INSTRUMENTS  (Part  3 

(li)     WHAT   CONSTITITES   A   DUE   PRESENTMENT 
N.  I.  L.  Section  74.     The  instrument  must  be  exhibited  to  the 
person  from  whom  payment  is  demanded,  and  when  it  is  paid  must 
be  deHvered  up  to  the  party  paying  it. 

((•)      ri.ACE  WHEUE  I'KESENTMENT  :MT'ST  RE  MADE 

N.  I.  L.  Section  73.  Presentment  for  payment  is  made  at  the 
proper  place — 

1.  Where  a  place  of  payment  is  specified  in  the  instrument  and 
it  is  there  presented; 

2.  Where  no  place  of  payment  is  specified,  but  the  address  of 
the  person  to  make  payment  is  given  in  the  instrument  and  it  is 
there  presented; 

3.  Where  no  place  of  payment  is  specified  and  no  address  is 
given  and  the  instrument  is  presented  at  the  usual  place  of  business 
or  residence  of  the  person  to  make  payment; 

4.  In  any  other  case  if  presented  to  the  person  to  make  payment 
wherever  he  can  be  found,  or  if  presented  at  his  last  known  place 
of  business  or  residence. 

((})     BY  WHOM  PRESENTMENT  MUST  BE  MADE 

N.  I.  L.  Section  72  (1).  Presentment  for  payment,  to  be  suffi- 
cient, must  be  made  by  the  holder,  or  by  some  person  authorized  to 
receive  payment  on  his  behalf. 

(e)  TO  WHOM  PRESENTMENT  MUST  BE  MADE 

N.  I.  L.  Section  72  (4).  Presentment  for  payment,  to  be  suffi- 
cient, must  be  made  to  the  person  primarily  liable  on  the  instru- 
ment, or  if  he  is  absent  or  inaccessible,  to  any  person  found  at  the 
place  where  the  presentment  is  made. 

N.  I.  L.  Section  76.  Where  the  person  primarily  liable  on  the 
instrument  is  dead,  and  no  place  of  payment  is  specified,  present- 
ment for  payment  must  be  made  to  his  personal  representative,  if 
such  there  be,  and  if,  with  the  exercise  of  reasonable  diligence,  he 
can  be  found. 

N.  I.  L.  Section  77.  Where  the  persons  primarily  liable  on  the 
instrument  are  liable  as  partners,  and  no  place  of  payment  is 
specified,  presentment  for  payment  may  be  made  to  any  one  of 
them,  even  though  there  has  been  a  dissolution  of  the  firm. 

N.  I.  L.  Section  78.  Where  there  are  several  persons,  not  part- 
ners, primarily  liable  on  the  instrument,  and  no  place  of  payment 
is  specified,  presentment  must  be  made  to  them  all. 

(f)     WHAT   CONSTITUTES   DISHONOR   BY   NON-PAYMENT 
N.  I.  L.  Section  83.     The  instrument  is  dishonored  by  non-pay- 
ment when — 

1.  It  is  duly  presented  for  payment  and  payment  is  refused  or 
cannot  be  obtained ;   or 

2.  Presentment  is  excused  and  the  instrument  is  overdue  and  un- 
paid. 


Ch.  0)  rUKSIONTMEXT,  NOTICES   OF    DISHONOR,  AND    PROTEST  923 

(S)     LE(JAL   EFFE(^T   OF    DISHONOR    BY    NOX-PAY.MFNT 
N.  I.  L.  Section  84.     Subject  to  the  provisions  of  this  act,  when 
the  instrument  is  dishonored  by  non-payment,  an  immediate  right 
of  recourse  to  all  parties  secondarily  liable  thereon  accrues  to  the 
holder. 

(h)     LEGAL  EFFECT  OF  FAILT  RE  TO  MAKE  DUE  PRESENT.MENT 

FOR    TAYMEXT 

N.  I.  L.  Section  70.  *  *  *  But  except  as  herein  otherwise 
provided,  presentment  for  payment  is  necessary  in  order  to  charge 
the  drawer  and  indorsers. 

N.  I.  L.  Section  186.  A  check  must  be  presented  for  payment 
within  a  reasonable  time  after  its  issue,  or  the  drawer  will  be  dis- 
charged from  liability  thereon  to  the  extent  of  the  loss  caused  by 
the  delay. 

(i)     EXCUSES   FOR   FAILURE  TO   PRESENT  FOR   PAYMENT 

N.  I.  L.  Section  82.  Presentment  for  payment  is  dispensed 
with : 

1,  Where  after  the  exercise  of  reasonable  diligence  presentment 
as  required  by  this  act  cannot  be  made ; 

2,  Where  the  drawee  is  a  fictitious  person; 

3,  By  waiver  of  presentment,  express  or  implied. 

N.  I.  L.  Section  81.  Delay  in  making  presentment  for  payment 
is  excused  when  the  delay  is  caused  by  circumstances  beyond  the 
control  of  the  holder,  and  not  imputable  to  his  default,  misconduct, 
or  negligence.  When  the  cause  of  delay  ceases  to  operate,  pre- 
sentment must  be  made  with  reasonable  diligence. 


SECTION  7.— PRESENTMENT  FOR  ACCEPTANCE 

(a)  WHEN    PRESENTMENT    FOR    ACCEPTANCE    IS    NECESSARY 
N,  I.  L.  Section  143.     Presentment  for  acceptance  must  be  made: 

1.  Where  the  bill  is  payable  after  sight,  or  in  any  other  case, 
where  presentment  for  acceptance  is  necessary  in  order  to  fix  the 
maturity  of  the  instrument ;   or 

2.  Where  the  bill  expressly  stipulates  that  it  shall  be  presented 
for  acceptance ;   or 

3.  Where  the  bill  is  drawn  payable  elsewhere  than  at  the  resi- 
dence or  place  of  business  of  the  drawee. 

In  no  other  case  is  presentment  for  acceptance  necessary  in 
order  to  render  any  party  to  the  bill  liable. 

(b)  WHAT    CONSTITUTES    PRESENTMENT    FOR    ACCEPTANCE 
N.    I.    L.  Section    145.     Presentment    for    acceptance    must   be 

made  by  or  on  behalf  of  the  holder  at  a  reasonable  hour,  on  a 
business  day  and  before  the  bill  is  overdue,  to  the  drawee  or  some 
person  authorized  to  accept  or  refuse  acceptance  on  his  behalf; 
and: 


924  NEGOTIABLE   INSTRUMENTS  (Part  3 

1.  Where  a  bill  is  addressed  to  two  or  more  drawees  who  are 
not  partners,  presentment  must  be  made  to  them  all,  unless  one 
has  authority  to  accept  or  refuse  acceptance  for  all,  in  which  case 
presentment  may  be  made  to  him  only; 

2.  Where  the  drawee  is  dead,  presentment  may  be  made  to  his 
personal  representative ; 

3.  Where  the  drawee  has  been  adjudged  a  bankrupt  or  an  in- 
solvent or  has  made  an  assignment  for  the  benefit  of  creditors,  pre- 
sentment may  be  made  to  him  or  to  his  trustee  or  assignee. 

N.  I.  L.  Section  146.  A  bill  may  be  presented  for  acceptance  on 
any  day  on  which  negotiable  instruments  may  be  presented  for 
payment  under  the  provisions  of  sections  seventy-two  and  eighty- 
five  of  this  act.  When  Saturday  is  not  otherwise  a  holiday,  pre- 
sentment for  acceptance  may  be  made  before  twelve  o'clock,  noon, 
on  that  day. 

N.  I.  L.  Section  72.  Presentment  for  payment,  to  be  sufficient, 
must  be  made — 

1.  By  the  holder,  or  by  some  person  authorized  to  receive  pay- 
ment on  his  behalf; 

2.  At  a  reasonable  hour  on  a  business  day; 

3.  At  a  proper  place  as  herein  defined; 

4.  To  the  person  primarily  liable  on  the  instrument,  or  if  he  is 
absent  or  inaccessible,  to  any  person  found  at  the  place  where  the 
presentment  is  made. 

N.  I.  L.  Section  85.  Every  negotiable  instrument  is  payable  at 
the  time  fixed  therein  without  grace.  When  the  day  of  maturity 
falls  upon  Sunday,  or  a  holiday,  the  instrument  is  payable  on  the 
next  succeeding  business  day.  Instruments  falling  due  on  Satur- 
day are  to  be  presented  for  payment  on  the  next  succeeding  busi- 
ness day,  except  that  instruments  payable  on  demand  may,  at  the 
option  of  the  holder,  be  presented  for  payment  before  twelve 
o'clock  noon  on  Saturday  when  that  entire  day  is  not  a  holiday. 

N.  I.  L.  Section  194.  Where  the  day,  or  the  last  day,  for  doing 
any  act  herein  required  or  permitted  to  be  done,  falls  on  Sunday 
or  on  a  holiday,  the  act  may  be  done  on  the  next  succeeding  secular 
or  business  day. 

(c)     LEGAL  EFFECT  OF  FAILURE  TO  PRESENT  FOR  ACCEPTANCE 

N.  I,  L.  Section  144.  Except  as  herein  otherwise  provided,  the 
holder  of  a  bill  which  is  required  by  the  next  preceding  section  to 
be  presented  for  acceptance  must  either  present  it  for  acceptance 
or  negotiate  it  within  a  reasonable  time.  If  he  fail  to  do  so,  the 
drawer  and  all  indorsers  are  discharged. 

N.  I.  L.  Section  147.  Where  the  holder  of  a  bill,  drawn  pay- 
able elsewhere  than  at  the  place  of  business  or  the  residence  of 
the  drawee,  has  not  time  with  the  exercise  of  reasonable  diligence, 
to  present  the  bill  for  acceptance  before  presenting  it  for  pay- 
ment on  the  day  that  it  falls  due,  the  delay  caused  by  presenting 


Ch.  6)  PRESENTMENT,  NOTICES   OF   DISHONOR,  AND   PROTEST  925 

the  bill  for  acceptance  before  presenting   it  for  payment  is  ex- 
cused, and  does  not  discharge  the  drawers  and  indorsers. 

(d)     WHAT    CONSTITUTES    DISHONOR    BY    NON-ACCEPTANCE    AND 

ITS  LEGAL  EFFECT 

N.  I,  L.  Section  149.     A  bill  is  dishonored  by  non-acceptance : 

1.  When  it  is  duly  presented  for  acceptance,  and  such  an  accept- 
ance as  is  prescribed  by  this  act  is  refused  or  cannot  be  obtain- 
ed ;   or 

2,  When  presentment  for  acceptance  is  excused,  and  the  bill  is 
not  accepted. 

N.  I,  L.  Section  150.  Where  a  bill  is  duly  presented  for  accept- 
ance and  is  not  accepted  within  the  prescribed  time,  the  person 
presenting  it  must  treat  the  bill  as  dishonored  by  non-acceptance 
or  he  loses  the  right  of  recourse  against  the  drawer  and  indorsers, 

N.  I.  L.  Section  151.  When  a  bill  is  dishonored  by  non-accept- 
ance, an  immediate  right  of  recourse  against  the  drawers  and 
indorsers  accrues  to  the  holder  and  no  presentment  for  payment 
is  necessary. 

N.  I.  L.  Section  142.  The  holder  may  refuse  to  take  a  qualified 
acceptance,  and  if  he  does  not  obtain  an  unqualified  acceptance,  he 
may  treat  the  bill  as  dishonored  by  non-acceptance.  Where  a 
qualified  acceptance  is  taken,  the  drawer  and  indorsers  are  dis- 
charged from  liability  on  the  bill,  unless  they  have  expressly  or 
impliedly  authorized  the  holder  to  take  a  qualified  acceptance,  or 
subsequently  assent  thereto.  When  the  drawer  or  an  indorser  re- 
ceives notice  of  a  qualified  acceptance,  he  must,  within  a  reason- 
able time,  express  his  dissent  to  the  holder,  or  he  will  be  deemed 
to  have  assented  thereto. 

N,  I.  L.  Section  52.  A  holder  in  due  course  is  a  holder  who  has 
taken  the  instrument  under  the  following  conditions:  *  *  * 
(2)  that  he  became  the  holder  of  it  before  it  was  overdue,  and 
without  notice  that  it  had  been  previously  dishonored,  if  such  was 
the  fact;     *     *     * 

(ei  EXCUSES  FOR  NON-PRESENTMENT  FOR  ACCEPTANCE 

N.  I.  L.  Section  148.  Presentment  for  acceptance  is  excused,  and 
a  bill  may  be  treated  as  dishonored  by  non-acceptance,  in  either 
of  the  following  cases: 

1.  Where  the  drawee  is  dead,  or  has  absconded,  or  is  a  fictitious 
person  or  a  person  not  having  capacity  to  contract  by  bill. 

2.  Where,  after  the  exercise  of  reasonable  diligence,  present- 
ment cannot  be  made. 

3.  Where,  although  presentment  has  been  irregular,  acceptance 
has  been  refused  on  some  other  ground. 


926  NEGOTIABLE   INSTRUMENTS  (Part   3 

SECTION   8.— NOTICE    OF   DISHONOR 

(ai  WITRX  NOTICE  OF  DISHONOR  IS  NECESSARY 
N.  I.  L.  Section  89.  Except  as  herein  otherwise  provided,  when 
a  negotiable  instrument  has  been  dishonored  by  non-acceptance  or 
non-payment,  notice  of  dishonor  must  be  given  to  the  drawer  and 
to  each  indorser  and  any  drawer  or  indorser  to  whom  such  notice 
is  not  given  is  discharged. 

n.)  WHAT  CONSTITCTES  NOTICE 
N.  I.  L.  Section  96.  The  notice  may  be  in  writing  or  merely 
oral  and  may  be  given  in  any  terms  which  sufficiently  identify  the 
instrument,  and  indicate  that  it  has  been  dishonored  by  non- 
acceptance  or  non-payment.  It  may  in  all  cases  be  given  by  de-. 
livering   it  personally   or   through   the   mails. 

N.  I.  L.  Section  95.  A  written  notice  need  not  be  signed,  and 
an  insufficient  written  notice  may  be  supplemented  and  validated 
by  verbal  communication.  A  misdescription  of  the  instrument 
does  not  vitiate  the  notice  unless  the  party  to  whom  the  notice 
is  given  is  in  fact  misled  thereby. 

((■)     TIME  WITHIN  WHICH  NOTICE  MUST  BE  GIVEN 
N.  I.  L.  Section  102.     Notice  may  be  given  as  soon  as  the  in- 
strument is  dishonored ;   and  unless  delay  is  excused  as  hereinafter 
provided,  must  be  given  within  the  times  fixed  by  this  act. 

N.  I.  L.  Section  103.  Where  the  person  giving  and  the  person 
to  receive  notice  reside  in  the  same  place,  notice  must  be  given 
within  the  following  times: 

1.  If  given  at  the  place  of  business  of  the  person  to  receive  no- 
tice, it  must  be  given  before  the  close  of  business  hours  on  the  day 
following. 

2.  If  given  at  his  residence,  it  must  be  given  before  the  usual 
hours  of  rest  on  the  day  following. 

3.  If  sent  by  mail,  it  must  be  deposited  in  the  post  office  in  time 
to  reach  him  in  usual  course  on  the  day  following. 

N.  I.  L.  Section  104.  Where  the  person  giving  and  the  person 
to  receive  notice  reside  in  different  places,  the  notice  must  be 
given  within  the  following  times: 

1.  If  sent  by  mail,  it  must  be  deposited  in  the  post  office  in  time 
to  go  by  mail  the  day  following  the  day  of  dishonor,  or  if  there  be 
no  mail  at  a  convenient  hour  on  that  day,  by  the  next  mail  there- 
after. 

2.  If  given  otherwise  than  through  the  post  office,  then  within 
the  time  that  notice  would  have  been  received  in  due  course  of 
mail,  if  it  had  been  deposited  in  the  post  office  within  the  time 
specified  in  the  last  subdivision. 

N.  I.  L.  Section  105.  Where  notice  of  dishonor  is  duly  ad- 
dressed and  deposited  in  the  post  office,  the  sender  is  deemed  to 


Ch.  0)  PRESKXTMENT,  NOTICES   OF   DISHONOR,  AND    PROTEST 


927 


have  given   due   notice,   notwithstanding   any   miscarriage   in   the 
mails. 

N.  I.  L.  Section  106.  Notice  is  deemed  to  have  been  deposited 
in  the  post  office  when  deposited  in  any  branch  post  office  or  in  any 
letter  box  under  the  control  of  the  post  office  department. 

N.  I.  L.  Section  107.  Where  a  party  receives  notice  of  dis- 
honor, he  has,  after  the  receipt  of  such  notice,  the  same  time  for 
giving  notice  to  antecedent  parties  that  the  holder  has  after  the 
dishonor. 

(d)     rivACE  WHERE   NOTICE   MUST  BE   GIVEN 

N.  I.  L.  Section  108.  Where  a  party  has  added  an  address  to 
his  signature,  notice  of  dishonor  must  be  sent  to  that  address; 
but  if  he  has  not  given  such  address,  then  the  notice  must  be  sent 
as  follows: 

1.  Either  to  the  post  office  nearest  to  his  place  of  residence,  or 
to  the  post  office  where  he  is  accustomed  to  receive  his  letters ;  or 

2.  If  he  live  in  one  place,  and  have  his  place  of  business  in  an- 
other, notice  may  be  sent  to  either  place ;   or 

3.  If  he  is  sojourning  in  another  place,  notice  may  be  sent  to  the 
place  where  he  is  so  sojourning. 

But  where  the  notice  is  actually  received  by  the  party  within  the 
time  specified  in  this  act,  it  will  be  sufficient,  though  not  sent  in 
accordance  with  the  requirements  of  this  section. 

(e)     BY  WH0:M  notice  MAY  BE  GIVEN 

N.  I.  L.  Section  90.  The  notice  may  be  given  by  or  on  behalf 
of  the  holder,  or  by  or  on  behalf  of  any  party  to  the  instrument 
who  might  be  compelled  to  pay  it  to  the  holder,  and  who,  upon 
taking  it  up,  would  have  a  right  to  reimbursement  from  the  party 
to  whom  the  notice  is  given. 

N.  I.  L.  Section  91.  Notice  of  dishonor  may  be  given  by  an 
agent  either  in  his  own  name  or  in  the  name  of  any  party  entitled 
to  give  notice,  whether  that  party  be  his  principal  or  not. 

N.  I.  L.  Section  94.  Where  the  instrument  has  been  dishon- 
ored in  the  hands  of  an  agent,  he  may  either  himself  give  notice 
to  the  parties  liable  thereon,,  or  he  may  give  notice  to  his  principal. 
If  he  give  notice  to  his  principal,  he  must  do  so  within  the  same 
time  as  if  he  were  the  holder,  and  the  principal  upon  the  re- 
ceipt of  such  notice  has  himself  the  same  time  for  giving  notice  as 
if  the  agent  had  been  an  independent  holder. 

(f)     TO   WHOM    NOTICE    MUST   BE    GIVEN 

N.  I.  L.  Section  97.  Notice  of  dishonor  may  be  given  either  to 
the  party  himself  or  to  his  agent  in  that  behalf. 

N.  I.  L.  Section  98.  When  any  party  is  dead,  and  his  death  is 
known  to  the  party  giving  notice,  the  notice  must  be  given  to  a 
personal  representative,  if  there  be  one,  and  if  with  reasonable  dil- 
igence he  can  be  found.     If  there  be  no  personal  representative, 


928  NEGOTIABLE    INSTRUMENTS  (Part  3 

notice  may  be  sent  to  the  last  residence  or  last  place  of  business  of 
the  deceased. 

N.  I.  L.  Section  99.  Where  the  parties  to  be  notified  are  part- 
ners, notice  to  any  one  partner  is  notice  to  the  firm  even  though 
there  has  been  a  dissolution. 

N.  I.  L.  Section  100.  Notice  to  joint  parties  who  are  not  part- 
ners must  be  given  to  each  of  them,  unless  one  of  them  has  au- 
thority to  receive  such  notice  for  the  others. 

N.  I.  L.  Section  101.  Where  a  party  has  been  adjudged  a  bank- 
rupt or  an  insolvent,  or  has  made  an  assignment  for  the  benefit  of 
creditors,  notice  may  be  given  either  to  the  party  himself  or  to 
his  trustee  or  assignee. 

(g)     IN  WHOSE  FAVOR  NOTICE  OPERATES 

N.  I.  L.  Section  92.  Where  notice  is  given  by  or  on  behalf  of 
the  holder,  it  enures  for  the  benefit  of  all  subsequent  holders  and 
all  prior  parties  who  have  a  right  of  recourse  against  the  party 
to  whom  it  is  given. 

N.  I.  L.  Section  93.  Where  notice  is  given  by  or  on  behalf  of 
a  party  entitled  to  give  notice,  it  enures  for  the  benefit  of  the 
holder  and  all  parties  subsequent  to  the  party  to  whom  notice  is 
given. 

(h)     LEGAL  EFFECT  OF  FAILURE  TO  GIVE   NOTICE 

N.  I.  L.  Section  89.  Except  as  herein  otherwise  provided,  when 
a  negotiable  instrument  has  been  dishonored  by  non-acceptance  or 
non-payment,  notice  of  dishonor  must  be  given  to  the  drawer  and 
to  each  indorser  and  any  drawer  or  indorser  to  whom  such  no- 
tice is  not  given  is  discharged. 

N.  I.  L.  Section  117.  An  omission  to  give  notice  of  dishonor  by 
non-acceptance  does  not  prejudice  the  rights  of  a  holder  in  due 
course  subsequent  to  the  omission. 


BACIGALUPO  V.  PARRILLI. 
(Supreme  Court  of  New  York,  Appellate  Term,  1908.     112  N.  T.  Supp.  1040.) 

Seabury,  J.  This  action  is  upon  a  check  drawn  by  the  defendant 
and  by  him  delivered  to  the  plaintiff.  The  check  was  drawn  upon 
"Banca  P.  Caponigri,"  and  was  delivered  to  the  plaintiff  on  January 
10,  1908.  On  Saturday,  January  11,  1908,  the  plaintiff  presented  the 
check  at  the  bank  of  Caponigri  and  was  told  by  the  cashier  of  the 
bank  that  Caponigri  was  not  in,  that  "he  made  a  kind  of  deposit  this 
morning,  and  we  are  kind  of  short  of  funds."  The  cashier  further 
told  the  plaintiff  that  "You  can  come  here  Monday  morning,  and  we 
>vill  cash  the  check."  To  this  information  the  plaintiff  replied  "All 
right,"  and  returned  on  Monday,  January  13th,  and  demanded  the  pay- 
ment of  the  check,  and  w^as  informed  that  Caponigri  had  no  money  and 
could  not  pay  the  check.  Jt  is  undisputed  that  at  the  time  the  check 
was  given  to  the  plaintiff  the  defendant  had  on  deposit  with  Caponigri 
a  sufficient  sum  to  pay  the  check,  and  that  he  did  not  withdraw  this 


Ch.  6)  PRESENTMENT,  NOTICES   OP   DISHONOR,  AND    PROTEST  929 

sum.  It  is  also  admitted  that  Caponigri  is  insolvent.  Under  the  cir- 
cumstances disclosed,  the  loss  for  the  amount  of  the  check  must  fall 
upon  the  plaintiff,  and  not  upon  the  defendant.  After  the  plaintiff 
presented  the  check  on  January  11th,  and  payment  was  refused,  and 
he  was  told  that  the  banker  was  "kind  of  short  of  funds,"  it  was  his 
duty  to  notify  the  defendant  that  payment  had  been  refused,  if  he 
wished  to  hold  the  latter  upon  the  check.  Upon  the  nonpayment  of 
the  check,  the  drawer  was  entitled  to  notice  of  that  fact,  and,  in  the 
absence  of  such  notice,  was  discharged  from  liability,  section  160  of 
the  Negotiable  Instrument  Law.  *  *  *  If  the  drawer  had  been 
promptfy  notified  of  the  refusal  of  the  banker  to  pay  the  check,  he 
might  have  been  able  to  have  taken  action  to  secure  the  amount  de- 
posited with  the  banker. 

The  judgment  appealed  from  is  reversed,  and  the  complaint  dis- 
missed.    *     *     * 


(i)     EXCUSES  FOR  FAILURE  TO  GIVE  NOTICE 

N.  I.  L.  Section  109.  Notice  of  dishonor  may  be  waived,  either 
before  the  time  of  giving  notice  has  arrived,  or  after  the  omission 
to  give  due  notice,  and  the  waiver  may  be  express  or  implied, 

N.  I,  L.  Section  110.  Where  the  waiver  is  embodied  in  the 
instrument  itself,  it  is  binding  upon  all  parties;  but  where  it  is 
written  above  the  signature  of  an  indorser,  it  binds  him  only. 

N.  I.  L.  Section  HI.  A  waiver  of  protest,  whether  in  the  case 
of  a  foreign  bill  of  exchange  or  other  negotiable  instrument,  is 
deemed  to  be  a  waiver  not  only  of  a  formal  protest  but  also  of  pre- 
sentment and  notice  of  dishonor. 

N.  I.  L.  Section  112,  Notice  of  dishonor  is  dispensed  with 
when,  after  the  exercise  of  reasonable  diligence,  it  cannot  be  given 
to  or  does  not  reach  the  parties  sought  to  be  charged. 

N,  I,  L.  Section  113,  Delay  in  giving  notice  of  dishonor  is  ex- 
cused when  the  delay  is  caused  by  circumstances  beyond  the  con- 
trol of  the  holder,  and  not  imputable  to  his  default,  misconduct, 
or  negligence.  When  the  cause  of  delay  ceases  to  operate,  notice 
must  be  given  with  reasonable  diligence, 

N,  I.  L,  Section  114,  Notice  of  dishonor  is  not  required  to  be 
given  to  the  drawer  in  either  of  the  following  cases : 

1.  Where  the  drawer  and  drawee  are  the  same  person; 

2.  Where  the  drawee  is  a  fictitious  person  or  a  person  not  having 
capacity  to  contract; 

3.  When  the  drawer  is  the  person  to  whom  the  instrument  is 
presented  for  payment; 

4.  Where  the  drawer  has  no  right  to  expect  or  require  that  the 
drawee  or  acceptor  will  honor  the  instrument; 

5.  Where  the  drawer  has  countermanded  payment. 

N,  I,  L,  Section  115,     Notice  of  dishonor  is  not  required  to  be 
given  to  an  indorser  in  either  of  the  following  cases: 
B.&  b,Bus.Law— 59 


930  NEGOTIABLE   INSTRUMENTS  (Part  3 

1.  Where  the  drawee  is  a  fictitious  person  or  a  person  not  having 
capacity  to  contract,  and  the  indorser  was  aware  of  the  fact  at 
the  time  he  indorsed  the  instrument ; 

2.  Where  the  indorser  is  the  person  to  whom  the  instrument  is 
presented  for  payment; 

3.  Where  the  instrument  was  made  or  accepted  for  his  accom- 
modation. 

N.  I.  L.  Section  116.  Where  due  notice  of  dishonor  by  non- 
acceptance  has  been  given,  notice  of  a  subsequent  dishonor  by  non- 
payment is  not  necessary,  unless  in  the  meantime  the  instrument 
has  been  accepted. 

N.  I.  L.  Section  118.  Where  any  negotiable  instrument  has 
been  dishonored,  it  may  be  protested  for  non-acceptance  or  non- 
payment, as  the  case  may  be;  but  protest  is  not  required  except 
in  the  case  of  foreign  bills  of  exchange. 


SECTION  9.— PROTEST 

(a)     WHEN   PROTEST    IS   NECESSARY    OR    PERMITTED 

N.  I.  L.  Section  152.  Where  a  foreign  bill  appearing  on  its 
face  to  be  such  is  dishonored  by  non-acceptance,  it  must  be  duly 
protested  for  non-acceptance,  and  where  such  a  bill  which  has  not 
previously  been  dishonored  by  non-acceptance  is  dishonored  by 
non-payment,  it  must  be  duly  protested  for  non-payment.  If  it  is 
not  so  protested,  the  drawer  and  indorsers  are  discharged.  Where 
a  bill  does  not  appear  on  its  face  to  be  a  foreign  bill,  protest  there- 
of in  case  of  dishonor  is  unnecessary. 

N.  I.  L.  Section  129.  An  inland  bill  of  exchange  is  a  bill  which 
is,  or  on  its  face  purports  to  be,  both  drawn  and  payable  within  this 
state.  Any  other  bill  is  a  foreign  bill.  Unless  the  contrary  ap- 
pears on  the  face  of  the  bill,  the  holder  may  treat  it  as  an  inland 
bill. 

N.  I.  L.  Section  118.  Where  any  negotiable  instrument  has 
been  dishonored  it  may  be  protested  for  non-acceptance  or  non- 
payment, as  the  case  may  be ;  but  protest  is  not  required  except  in 
the  case  of  foreign  bills  of  exchange. 

N.  I.  L.  Section  157.  A  bill  which  has  been  protested  for  non- 
acceptance  may  be  subsequently  protested  for  non-payment. 

N.  I.  L.  Section  158.  Where  the  acceptor  has  been  adjudged  a 
bankrupt  or  an  insolvent,  or  has  made  an  assignment  for  the  benefit 
of  creditors,  before  the  bill  matures,  the  holder  may  cause  the 
bill  to  be  protested  for  better  security  against  the  drawer  and  in- 
dorsers. 

N.  I.  L.  Section  167.  Where  a  dishonored  bill  has  been  accept- 
ed for  honor  supra  protest,  or  contains  a  reference  in  case  of  need, 
it  must  be  protested  for  non-payment  before  it  is  presented  for 
payment  to  the  acceptor  for  honor  or  referee  in  case  of  need. 


Ch.  6)  PIIESENTMEXT,  NOTICES   OF   DISHONOR,  AND   PROTEST  931 

(1i)     WHAT  CONSTITUTES   PROTEST 

N.  I.  L.  Section  153.  The  protest  must  be  annexed  to  the  bill, 
or  must  contain  a  copy  thereof,  and  must  be  under  the  hand  and 
seal  of  the  notary  making  it,  and  must  specify: 

1.  The  time  and  place  of  presentment; 

2.  The  fact  that  presentment  was  made  and  the  manner  thereof ; 

3.  The  cause  or  reason  for  protesting  the  bill; 

4.  The  demand  made  and  the  answer  given,  if  any,  or  the  fact 
that  the  drawee  or  acceptor  could  not  be  found. 

N.  I.  L.  Section  160.  When  a  bill  is  lost  or  destroyed  or  is 
wrongly  detained  from  the  person  entitled  to  hold  it,  protest  may 
be  made  on  a  copy  or  written  particulars  thereof. 

(c)     TIME   WITHIN  WHICH   PROTEST   MUST   BE    MADE 

N.  I.  L.  Section   155.     When  a  bill  is  protested,  such  protest 
must  be  made  on  the  day  of  its  dishonor,  unless  delay  is  excused 
as  herein  provided.    When  a  bill  has  been  duly  noted,  the  protest 
may  be  subsequently  extended  as  of  the  date  of  the  noting. 
(d)     PLACE  WHERE  PROTEST  MUST  BE  MADE 

N.  I.  L.  Section  156.  A  bill  must  be  protested  at  the  place 
where  it  is  dishonored,  except  that  when  a  bill  drawn  payable  at 
the  place  of  business,  or  residence  of  some  person  other  than  the 
drawee,  has  been  dishonored  by  non-acceptance,  it  must  be  pro- 
tested for  non-payment  at  the  place  where  it  is  expressed  to  be 
payable,  and  no  further  presentment  for  payment  to,  or  demand 
on,  the  drawee  is  necessary. 

(e)     BY  WHOM  PROTEST  MUST  BE   MADE 

N.  I.  L.  Section  154.     Protest  may  be  made  by — 

1.  A  notary  public;    or 

2,  By  any  respectable  resident  of  the  place  where  the  bill  is  dis- 
honored, in  the  presence  of  two  or  more  credible  witnesses. 

(f)     LEGAL  EFFECT  OF  FAILURE  TO  PROTEST 

N.  I.  L.  Section  152.  *  *  *  If  it  is  not  so  protested,  the 
drawer  and  indorsers  are  discharged.     *     *     * 

(8)     EXCUSES  FOR  FAILURE  TO   PROTEST 

N.  I.  L.  Section  159.  Protest  is  dispensed  with  by  any  circum- 
stances which  would  dispense  with  notice  of  dishonor.  Delay  in 
noting  or  protesting  is  excused  when  delay  is  caused  by  circum- 
stances beyond  the  control  of  the  holder  and  not  imputable  to  his 
default,  misconduct  or  negligence.  When  the  cause  of  delay  ceases 
to  operate,  the  bill  must  be  noted  or  protested  with  reasonable  dili- 
gence. 


932  NEGOTIABLE  INSTRUMENTS  (Pail  3 

CHAPTER  VII 
DISCHARGE 

Section 

1.  Introduction. 

2.  Discharge  of  the  INIaker  and  Acceptor. 

3.  Discharge  of  the  Regular  Indorsers. 

4.  Discharge  of  a  Suretj% 


SECTION  1.— INTRODUCTION 
This  chapter  is  devoted  to  the  consideration  of  the  circum- 
stances that  will  operate  to  discharge  the  various  parties  to  a  ne- 
gotiable instrument  as  against  persons  other  than  holders  in  due 
course.  There  are  three  classes  of  parties,  which  must  be  consid- 
ered separately:  (1)  Parties  primarily  liable  on  the  instrument 
—the  maker  and  the  acceptor;  (2)  parties  secondarily  liable — in- 
dorsers ;  and  (3)  sureties,  whether  primarily  or  secondarily  liable. 
A  negotiable  instrument,  being  a  special  kind  of  contract,  is  sub- 
ject to  discharge  by  facts  which  will  not  discharge  a  simple  con- 
tract. This  fact,  taken  in  connection  with  the  fact  that  we  must 
deal  with  the  matter  of  the  discharge  of  sureties,  makes  it  impos- 
sible to  lay  down  the  broad  proposition  that  parties  to  negotiable 
instruments  will  be  discharged  when,  and  only  when,  facts  exist 
which  would  discharge  a  simple  contract  for  the  payment  of 
money. 


SECTION  2.— DISCHARGE  OF  THE  MAKER  AND 
ACCEPTOR 

The  Negotiable  Instruments  Law  specifies  the  following  meth- 
ods of  discharge:  (1)  Payment;  (2)  cancellation;  (3)  material 
alteration;  (4)  renunciation;  (5)  any  act  which  discharges  a 
simple  contract  for  the  payment  of  money;  (6)  by  the  debtor's 
acquisition  of  the  instrument  as  a  holder  at.  or  after  maturity. 
These' methods  will  be  taken  up  in  order.  The  following  sections 
of  the  act  will  be  considered  first,  only  in  so  far  as  they  discharge 
the  parties,  other  than  sureties,  who  are  primarily  liable  on  the 
instrument.     These  parties  are  the  maker  and  the  acceptor. 

N.  I.  L.  Section  119.  A  negotiable  instrument  is  discharged: 
(1)  By  payment  in  due  course  by  or  on  behalf  of  the  principal 
debtor;  (2)  by  payment  in  due  course  by  the  party  accommodat- 
ed, where  the  instrument  is  made  or  accepted  for  accommodation. 

N.  I.  L.  Section  88.  Payment  is  made  in  due  course  when  it  is 
made  at  or  after  the  maturity  of  the  instrument  to  the  holder 
thereof  in  good  faith  and  without  notice  that  his  title  is  defective. 


Ch.  7)  DISCHARGE 

(a)     DISCHARGE  BY  PAYMENT— WHAT  CONSTITUTES  PAYMENT 


933 


FIRST  NAT.  BANK  OF  PHILADELPHIA  v.  NATIONAL  PARK  BANK 

OF  NEW  YORK. 

(Supreme  Court  of  New  York,  Trial  Term,  1917.     100  Misc.  Rep.  31, 

165  N.  Y.  Supp.  15.) 

Newburger,  J.  On  July  21,  1916,  the  Mutual  Trust  Company  of 
Orange,  N.  J.,  being  indebted  to  the  plaintiff,  sent  its  check  for  the 
sum  of  $18,231.66,  which  plaintiff  forwarded  to  the  Hanover  Na- 
tional Bank,  its  correspondent  in  this  city.  On  Monday  morning,  July 
24.  1916,  the  Hanover  National  Bank  sent  the  check,  with  other  ex- 
changes,'to  the  New  York  Clearing  House,  where  it  was  presented  to 
the  representative  of  the  defendant  bank ;  that,  according  to  the  cus- 
tom in  said  clearing  house,  a  balance  was  struck  between  the  repre- 
sentatives of  the  Hanover  Bank  and  the  defendant,  whereby  it  ap- 
peared that  a  large  sum  was  due  to  the  Hanover  Bank,  and  that  the 
check  sued  upon  was  included  in  the  aggregate  credited  to  the  Han- 
over National  Bank,  and  thereafter  the  packages  containing  the  checks 
received  by  the  defendant  drawn  upon  it  were  opened  and  sorted  and 
examined  by  clerks  whose  business  it  is  to  ascertain  whether  such 
checks  are  properly  drawn  and  are  in  all  respects  items  which  the 
drawee  bank  is  prepared  to  pay,  and  the  drawee  bank  then  had  the 
privilege,  under  the  provisions  of  the  constitution  of  the  clearing  house, 
of  returning  any  checks  before  3  p.  m.  to  the  bank  which  had  present- 
ed them  through  the  clearing  house.  The  credit  balance  due  to  the 
Hanover  National  Bank  on  the  24th  day  of  July,  1916,  was  paid  by  the 
defendant  in  accordance  with  the  rules  of  the  clearing  house.  A  list 
was  prepared  of  the  items  and  totals  of  checks  of  each  depositor, 
and  this  check,  drawn  by  the  Mutual  Trust  Company  to  the  plaintiff, 
was  included  and  then  entered  on  a  separate  sheet  under  the  name  of 
the  trust  company  and  sent  to  the  ledger  bookkeeper,  who  entered  this 
total  on  the  debit  side  of  the  account  of  the  trust  company.  At  the 
time  of  the  entry  on  the  ledger  there  was  a  sufficient  credit  balance  to 
meet  the  check  of  $18,231.66. 

It  appears  that  the  Mutual  Trust  Company,  which  opened  for  busi- 
ness on  July  24,  1916,  was  closed  shortly  after  11  a.  m.  of  that  day  by 
the  Banking  Department  of  New  Jersey.  A  telephone  message  to  that 
effect  was  received  by  the  defendant  about  half  past  1,  and  at  half 
past  2  the  same  was  confirmed  by  letter,  whereupon  the  cashier  of 
the  defendant  directed  the  return  of  the  check  in  suit  to  the  Hanover 
National  Bank,  and  subsequently  the  bookkeeper  erased  the  entry  on 
the  ledger  and  made  a  new  entry  of  the  check  in  suit  as  part  of  the 
credit  balance  of  the  trust  company  and  not  as  a  debit  against  it.  It 
appears  that  while  such  erasure  was  made  on  the  ledger,  on  the  slip 
containing  the  itemized  list  of  checks  received  by  the  defendant  from 
the  Hanover  National  Bank  through  the  clearing  house  the  item  of 
$18,231.66  was  not  erased.  See  plaintiff's  Exhibit  1.  The  check  in 
suit  was  returned  to  the  Hanover  National  Bank  and  repayment  claimed 
under  the  rules  of  the  clearing  house,  which  was  made  by  said  bank. 
The  same  afternoon  plaintiff  telegraphed  a  protest  to  the  defendant, 
and  later  made  a  tender  of  the  check  and  demanded  payment  of  $18,- 
231.66,  with  interest,  but  payment  was  refused.     It  is  true  that  it  has 


934  NEGOTIABLE   INSTRUMENTS  'Part  3 

been  repeatedly  held  that,  under  the  rules  of  the  Clearing-  House  As- 
sociation, the  payment  of  balances  by  it  is  merely  a  tentative  payment 
of  items  debited  against  any  individual  bank,  and  is  not  to  be  deemed 
complete  until  the  debtor  bank  has  had  an  opportunity  to  examine  the 
items  debited  against  it  and  has,  either  by  silence  or  affirmative  act, 
approved  of  the  debit,  and  until  a  drawee  bank  has  actually  accepted  a 
check  it  may  render  such  check  not  good  by  refusing  to  honor  it  and 
by  returning  it  to  the  bank  presenting  it.  See  Columbia  Knickerbocker 
Trust  Co.  V.  Miller,  215  N.  Y.  191,  109  N.  E.  179,  Ann.  Cas.  1917A, 
348,     *    *     * 

It  will  be  noticed,  however,  that  in  these  cases  cited  the  courts,  while 
holding  that  the  drawee  banks  under  the  rules  of  the  clearing  house 
had  the  right  to  return  the  checks  at  any  time  before  3  o'clock,  it 
could  only  do  so  where  the  bank  had  at  no  time  debited  the  amount 
of  the  check  against  the  account  of  the  drawer.  In  this  case  the  ac- 
count of  the  Mutual  Trust  Company  was  charged  with  the  check  of 
$18,231.66,  and  in  doing  so  it  constituted  a  payment  of  the  check,  and 
the  mere  physical  act  of  the  bookkeeper,  after  notice  of  the  suspension 
of  the  trust  company,  of  striking  out  the  charge  and  transferring  it 
to  the  credit  column,  did  not  deprive  the  plaintiff  of  the  right  that  had 
accrued  by  reason  of  the  charge  that  had  been  made  against  the  debit 
account.  By  charging  the  account  of  the  trust  company  with  this 
check,  the  same  has  been  paid,  nothing  more  was  left  to  be  done,  and 
the  plaintiff  was  entitled  to  receive  the  proceeds  of  the  check.     *     *     * 

As  was  said  by  Mr.  justice  Miller  in  Baldwins  Bank  v.  Smith,  215 
N.  Y.  at  page  83,  109  N.  E.  at  page  140,  L.  R.  A.  1918F,  1089,  Ann. 
Cas.  1917A,  500:  "All  that  is  necessary  to  constitute  payment  is  the 
intention  to  make  the  application,  which  may  be  evidenced  in  a  variety 
of  ways,  e.  g.,  by  bookeeping  entries,  by  canceHng  the  note  and  sur- 
rendering it  to  the  makers,  by  the  drawing  of  a  check  by  the  makers 
and  its  acceptance  in  payment  by  the  bank."     *     *     * 

I  am  therefore  of  the  opinion  that  the  defendant  recognized  the  va- 
lidity of  the  check  when  it  debited  the  check  against  the  account  of 
the  drawer,  the  JMutual  Trust  Company  of  Orange,  and  plaintiff  is  en- 
titled to  a  judgment  for  $18,231.66  and  $832.38  interest.     *     *     * 


HUNT  V.  SECURITY  STATE  BANK. 
(Supreme  Court  of  Oregon,  1919.     91  Or.  362,  179  Pac.  248.) 

Action  by  John  P.  Hunt  against  the  Security  State  Bank,  Judg- 
ment for  plaintiff,  and  defendant  appeals. 

The  defendant,  the  Security  State  Bank,  is  a  corporation  engaged  in 
the  banking  business  in  Woodburn,  Or.  The  plaintiff,  John  P.  Hunt, 
opened  a  general  deposit  account  in  the  bank;  and  afterwards,  on 
January  24,  1917,  he  drew  a  check  directing  the  bank  to  pay  $90 
to  the  order  of  E.  Burdick,  and  delivered  the  check  to  the  payee  in 
Salem.  On  January  27,  1917,  at  about  8:30  a.  m.,  the  defendant  re- 
ceived, through  the  mail,  from  the  United  States  National  Bank  of 
Portland,  a  "cash  letter"  and  ten  checks  drawn  on  the  Woodburn  bank. 
The  "cash  letter"  is  dated  January  26,  1917.  It  contains  an  itemized 
statement  of  the  amounts  of  the  accompanying  checks,  shows  that  the 
total  amount  of  the  checks  is  $671.95,  and  directs  the  Security  State 


Ch.  7)  DISCHARGE  935 

Bank  to  remit  to  the  United  States  National  Bank  "in  Portland  ex- 
change." The  Burdick  check  was  among  the  10  checks  received  with 
the  "cash  letter."  When  the  Burdick  check  reached  the  plaintiff  it 
bore  on  its  back  the  indorsements  of  E.  Burdick,  Ashley  &  Rumelin, 
Bankers,  and  the  United  States  National  Bank.  Immediately  upon 
receipt  of  the  "cash  letter"  and  the  10  checks  E.  H.  Hoff,  the  president 
of  the  Security  State  Bank,  "footed  the  checks  on  the  adding  machine 
to  see  if  they  would  total  right  with  the  cash  letter,  then  examined 
the  checks  as  to  their  signatures,  and  as  to  whether  each  account  had 
sufficient  funds  to  meet  it,"  and  then  each  check,  including  the  Burdick 
check,  was  marked  "Paid,  Security  State  Bank  Jan.  27,  1917,"  with 
the  bank's  "Paid"  stamp,  and  finally  each  check  was  "placed  upon  a 
three-cornered  spindle  that  has  a  three-cornered  cutting  edge,  and  are 
there  mutilated."  Whenever  the  Woodburn  bank  received  a  check 
through  the  mail,  and  ascertained  that  there  were  not  sufficient  funds 
to  pay  it,  or  if  the  signature  was  not  regular,  the  bank  never  marked  the 
paper  "Paid,"  but  the  check  was  always  returned  to  the  forwarding 
bank.  The  steps  taken  by  the  defendant  with  reference  to  the  "cash 
letter"  and  checks  received  from  the  Portland  bank  followed  the  same 
course  which  the  bank  had  always  taken  when  it  received  checks 
through  the  mail  from  outside  banks. 

At  about  9:15  on  the  morning  of  January  27,  1917,  but  after  the 
Burdick  check  had  been  stamped  "Paid"  and  placed  upon  the  spindle. 
Hunt  appeared  at  the  bank,  and  asked  for  a  statement  of  his  account 
"up  to  date."  The  statement  was  at  once  prepared  and  delivered  to 
Hunt.  *  *  *  Upon  receiving  the  statement  of  this  account,  Hunt 
proceeded  to  examine  it,  and  he  says  that,  when  he  "saw  that  the  E. 
Burdick  check  wasn't  charged"  to  his  account,  he  told  Hoff  that  he 
"had  a  check  out  for  ninety  dollars  in  favor  of  E.  Burdick,"  and  that  he 
"desired  to  stop  payment  on  the  check."  Hunt  testified  that  Hoff" 
then  said,  "The  E.  Burdick  check  has  just  arrived;  I  have  it  here 
right  in  my  hand ;"  and,  according  to  Hunt's  testimony,  Hoff  "reached 
to  his  left  and  picked  oft'  the  spindle  the  check  and  handed  me,  which 
was  the  E.  Burdick  check." 

We  shall  assume  that  the  verdict  of  the  jury  necessarily  implies  a 
finding  that  Plunt  directed  the  bank  not  to  pay  the  check.  At  about  3 
o'clock  in  the  afternoon  of  January  27,  1917,  the  defendant  drew  a 
draft  directing  the  Scandinavian  American  Bank  of  Portland  to  pay 
to  the  United  States  National  Bank  of  that  city  the  sum  of  $671.95, 
the  amount  of  the  10  checks,  including  the  Burdick  check,  which  had 
been  received  with  the  "cash  letter."  This  draft  was  mailed  that  after- 
noon to  the  United  States  National  Bank,  and  was  subsequently  paid  by 
the  drawee  bank. 

In  March,  1917,  the  plaintiff  received  from  the  defendant  a  state- 
ment, together  with  canceled  checks  mentioned  in  the  statement,  show- 
ing the  condition  of  this  account  to  March  2,  1917.  The  statement 
contained  a  charge  of  $90  under  date  of  "Jan.  27,"  and  the  Burdick 
check  was  among  the  canceled  checks.  In  the  language  of  Hunt,  "I 
didn't  acknowledge  the  correctness  of  this  statement,  and  I  returned 
him  [Hoff]  the  ninety-dollar  check  then  and  there."  Subsequently,  on 
April  21,  1917,  the  plaintiff  drew  a  check  on  the  defendant  for  $90 
payable  to  "self,"  but  the  bank  refused  to  pay  the  check,  and  wrote 
on  it  the  words  "Account  closed."  The  plaintiff'  then  commenced  this 
action  to  recover  the  sum  of  $90,  which  he  claims  the  bank  wrongfully 


936  NEGOTIABLE   INSTRUMENTS  (Part  3 

charged  against  his  account.  A  trial  resulted  in  a  verdict  and  judgment 
for  the  plaintiff  for  $90.    The  defendant  appealed. 

Harris,  J.  The  defendant  vigorously  contends  that  it  was  entitled 
to  a  directed  verdict.  This  contention  proceeds  upon  the  theory  that 
the  act  of  placing  it  upon  the  spindle,  where  all  "paid"  checks  were  kept 
until  entries  were  made  upon  the  books,  after  having  first  ascertained 
that  there  were  sufficient  funds  to  the  credit  of  the  drawer,  and  that 
the  signature  was  genuine,  operated  as  a  charge  against  the  drawer, 
and  as  a  credit  to  the  holder  of  the  check,  and  amounted  to  payment. 
The  plaintiff  insists  that  the  acts  of  the  defendant  did  not  effect  a  trans- 
fer of  credit  from  Hunt  to  the  United  States  National  Bank  of  Port- 
land, the  holder. 

The  relation  existing  between  a  bank  and  its  depositor  is  that  of 
debtor  and  creditor ;  a  check  is  simply  an  order  signed  by  the  creditor 
(depositor)  directing  the  debtor  (bank)  to  pay  money  to  named  per- 
son ;  an  uncertified  check  of  itself  does  not  operate  as  a  legal  or  as  an 
equitable  assignment  of  any  part  of  the  funds  in  the  bank,  and,  unless 
it  accepts  the  check,  the  bank  is  not  liable  to  the  holder ;  and  conse- 
quently the  drawer  of  the  check  can,  if  he  chooses,  countermand  the 
check  or  first  order,  and  the  bank  will  be  obliged  to  obey  the  second  or 
countermanding  order,  unless  the  bank  has  paid,  or  has  become  obli- 
gated to  pay,  the  check.  *  *  *  If  what  the  bank  did  prior  to  Hunt's 
conversation  with  Hoff  amounted  to  pavment,  then  Hunt  had  lost  the 
right  to  countermand  payment  of  the  check. 

During  the  investigation  we  must  not  lose  sight  of  the  fact  that  pay- 
ment and  acceptance  are  essentially  different.  Payment  is  the  natural, 
expected,  and  intended  end  of  a  check.  Acceptance  strengthens  the 
vitality  of  a  check,  and  serves  to  prolong,  rather  than  to  terminate, 
the  life  of  it.  *  *  *  We  must  remember,  too,  that  the  case  now 
under  consideration  is  not  like  those  where  the  holder  enters  a  bank 
with  a  check,  presents  it,  and  is  given  credit  for  the  amount  as  a  de- 
posit ;  nor  is  this  case  like  those  where  the  holder  mails  a  check  to  the 
drawee  bank,  and  the  latter,  in  obedience  to  instructions,  charges  the 
account  of  the  drawer,  and  credits  the  account  of  the  holder,  with  the 
amount  of  the  check,  for  in  all  those  cases  payment  is  made  just  as 
completely  as  it  is  when  the  bank  actually  pays  the  money  over  the 
counter  to  the  holder  and  he  at  once  returns  it  to  and  deposits  it  with 
the  bank.  *  *  *  Xhe  instructions  to  the  defendant  were  to  "remit 
in  Portland  exchange."  The  Woodburn  bank  did  not  draw  or  mail 
its  draft  for  the  purpose  of  remitting  to  the  United  States  National 
Bank  of  Portland  until  after  Hunt  countermanded  payment  of  the 
Burdick  check,  and  therefore  we  need  not  decide  whether  payment 
was  completed  when  the  draft  was  deposited  in  the  post  ofiice  or  when 
received  by  the  Portland  bank. 

When  Hunt  ordered  the  defendant  not  to  pay  the  check,  the  bank 
had  done  nothing  more  than  to  satisfy  itself  that  the  check  was  genu- 
ine, and  that  there  was  sufficient  funds  to  pay  it,  and  to  stamp  it 
"Paid,"  and  to  place  it  upon  the  spindle.  All  this  was  merely  preparing 
to  pay;  it  was  simply  a  step  towards  payment;  it  was  not  payment. 
No  entry  was  made  on  the  books.  The  drawer  was  not  charged ;  the 
holder  was  not  credited.  It  may  be  assumed  that  the  bank  intended 
to  make  appropriate  entries  on  its  books  and  to  remit;  but  we  are 
confronted  with  a  situation  where  the  bank  had  not  yet  executed  its 
intentions.     An  intention  to  pay  is  not  payment.     What  the  bank  did 


Ch.  7)  DISCHARGE  937 

was  done  in  contemplation  of  payment ;  but  payment  was  not  complet- 
ed.    *     *     * 

The  plaintiff  cannot  recover,  if  what  was  done  by  the  defendant 
resulted  in  an  acceptance  of  the  check.  *  *  *  f^^  word  "Paid" 
was  stamped  upon  the  check  by  the  defendant.  When  determining 
whether  this  constituted  an  acceptance  within  the  meaning  of  the  law, 
we  must  not  forget  the  essential  difference  between  payment  and  accept- 
ance. Payment  ends  the  life  of  a  check.  Acceptance  reinvigorates 
it.  The  word  "Paid"  tends  to  indicate,  if  it  evidences  anything,  extinc- 
tion rather  than  rejuvenation  of  the  check.  To  the  extent  that  it  speaks 
at  all,  the  word  ."Paid"  tells  of  what  has  been  done  rather  than  of  what 
will  be  done.  In  Guthrie  National  Bank  v.  Gill,  6  Okl.  560,  565,  54 
Pac.  434,  436,  it  was  decided  that  the  word  "Paid,"  stamped  upon  a 
draft,  "had  no  tendency  to  establish  an  acceptance,"  because  it  did  not 
evidence  "an  agreement  or  promise' to  do  something."  *  *  *  Stamp- 
ing the  word  "Paid"  did  not  of  itself  produce  an  acceptance  of  the 
check.    *    *    * 

Hunt  countermanded  payment  of  the  check  before  the  bank  had 
either  paid  or  accepted  it,  and  the  judgment  appealed  from  must  there- 
fore be  affirmed. 

In  re  WEGMAN  PIANO  CO, 

(United  States  District  Court,  N.  D,  New  York,  1915.    221  Fed.  128.) 

Ray,  District  Judge.  *  *  *  It  is  well  settled  in  the  state  of  New 
York  and  in  the  courts  of  the  United  States  that,  where  a  debt  is  ow- 
ing by  one  person  to  another,  the  giving  of  a  note  by  the  debtor  to  the 
creditor  and  the  receipt  of  such  note  by  the  creditor  will  not  pay  or 
extinguish  the  original  claim  or  debt,  in  the  absence  of  an  agreement 
between  the  parties  that  the  note  is  to  be  received  as  payment.  This 
is  the  common-law  rule,  which  prevails  in  England  and  has  been  adopt- 
ed in  nearly  all  of  the  states  in  this  country.  In  Indiana,  Maine,  Mas- 
sachusetts, and  Vermont  the  rule  is  dift'erent.  In  those  states  it  has 
been  held  that  the  note  extinguishes  the  existing  debt,  unless  it  is 
agreed  to  the  contrary.  However,  the  rule  applicable  to  this  contro- 
versy is  the  one  first  stated,     *     *     * 

It  is,  of  course,  competent  for  the  parties  to  the  transaction  to  ex- 
pressly agree  that  the  note  will  be  and  is  accepted  in  full  payment 
and  extinguishment  of  the  original  debt ;  but  to  establish  this  as  a  fact 
the  evidence  should  be  clear  and  satisfactory.  There  is  no  presump- 
tion that  the  note  is  accepted  or  received  as  payment.    *    *    * 


(b)     DISCHARGE  BY  CANCELLATION 

N.  I.  L.  Section  119  (3).  A  negotiable  instrument  is  discharged 
by  the  intentional  cancellation  thereof  by  the  holder. 

N,  I.  L.  Section  123,  A  cancellation  made  unintentionally,  or 
under  a  mistake  or  without  authority  of  the  holder,  is  inoperative; 
but  where  an  instrument  or  any  signature  thereon  appears  to  have 
been  cancelled,  the  burden  of  proof  lies  on  the  party  who  alleges 
that  the  cancellation  was  made  unintentionally,  or  under  mistake  or 
without  authority. 


938  NEGOTIABLE   INSTRUMENTS  (Part  3 

(c)     DISCHARGE   BY   MATERIAL  ALTERATION 

N.  I.  L.  Section  124.  Where  a  negotiable  instrument  is  materi- 
ally altered  without  the  assent  of  all  parties  liable  thereon,  it  is 
avoided,  except  as  against  a  party  who  has  himself  made,  au- 
thorized, or  assented  to  the  alteration,  and  subsequent  indorsers. 
But  when  an  instrument  has  been  materially  altered  and  is  in  the 
hands  of  a  holder  in  due  course,  not  a  party  to  the  alteration,  he 
may  enforce  payment  thereof  according  to  its  original  tenor. 


COLUMBIA   GROCERY    CO.   v.    MARSHALL. 
(Supreme  Court  of  Tennessee,  1915.    131  Tenn.  270,  174  S.  W.  1108.) 

Bill  by  the  Columbia  Grocery  Company  against  O.  M.  Marshall. 
Bill  dismissed,  and  complainant  appeals. 

Fancher,  J.  The  case  was  brought  to  collect  on  an  open  account. 
Notes  had  been  executed  by  defendant  covering  the  account  but  ma- 
terially altered  by  complainants.  The  case  involves  the  question  as 
to  whether  suit  can  be  maintained  on  the  original  account. 

The  Columbia  Grocery  Company  is  a  partnership  composed  of  Mose 
and  Ben  Lazarous,  doing  a  wholesale  grocery  business  at  Columbia, 
Tenn.  Defendant  O.  M.  Marshall  was  a  retail  merchant  at  Campbell's 
Station,  in  Maury  county,  and  for  several  years  had  purchased  goods 
of  the  complainants,  and  a  running  account  had  existed  for  considera- 
ble time.  Complainants  sold  this  business  and  desired  to  close  out 
their  accounts.  They  urged  defendant  to  pay  his  indebtedness,  and  he 
disputed  a  large  part  of  the  account.  After  some  considerable  dispute 
about  this,  he  finally  agreed  to  give  his  interest-bearing  notes,  which 
he  did,  covering  the  account  of  $1,073.78  and  $45  of  interest.  The 
notes  were  11  in  number,  bearing  date  February  2,  1914 — 9  for  $75 
each,  and  one  for  $200,  and  another  for  $242.88.  One  note  fell  due 
each  two  months  during  the  years  1914  and  1915. 

The  notes  were  prepared  by  complainants  some  days  before  execu- 
tion and  handed  to  defendant.  They  were  actually  executed  February 
21st  and  delivered  to  complainants.  That  evening  Ben  Lazarous  dis- 
covered that  the  bookkeeper  had  left  out  a  clause  they  usually  inserted 
in  serial  notes  of  this  character,  and  they  had  it  filled  in  with  a  type- 
writer on  each  note ;  the  first  being  as  follows :  "This  is  note  1  of  a 
series  of  11,  default  in  payment  of  any  note  of  this  series  all  notes 
become  due  and  payable." 

Defendant's  attention  was  not  called  to  this  alteration.  The  notes 
were  then  put  in  a  box  with  other  notes  and  papers  and  placed  in  the 
vault  in  the  bank  for  safe-keeping.  *  *  *  Defendant  *  *  * 
called  to  pay  the  first  note,  and,  when  the  note  was  produced,  he  noticed 
the  typewritten  alteration,  and  thereupon  refused  to  pay.     *     *     * 

It  was  customary  for  the  bookkeeper  to  write  this  clause  into  notes 
of  this  character,  and  some  notes  had  been  so  fixed  after  their  execu- 
tion, in  other  instances. 

This  suit  was  brought  to  recover  on  the  original  account.  The  de- 
fendant resists  a  recovery  on  the  grounds : 

First.  That  the  notes  were  intended  and  did  extinguish  the  original 


Ch.  7)  DISCHARGE  930 

indebtedness,  being  taken  in  settlement  and  closing  out  of  the  account ; 
and  that,  the  notes  being  void  because  of  the  alteration,  no  recovery 
can  be  had. 

Second.  That,  the  alteration  being  fraudulently  made,  no  recovery 
can  be  had,  regardless  of  whether  the  original  account  was  extin- 
guished. 

From  a  review  of  the  authorities,  we  are  of  opinion  that  tlie  weight 
of  authority  is  as  follows : 

That  the  taking  of  a  promissory  note  of  a  debtor  does  not  extinguish 
the  original  debt,  nor  operate  as  a  payment,  unless  so  intended  or  agreed 
between  the  parties,  though  it  may  extend  the  time  of  payment,  and  if 
for  any  reason  without  fraud  the  creditor  loses  his  right  to  sue  on  the 
note,  he  is  at  liberty  to  sue  on  the  original  indebtedness.     *     *     * 

The  early  doctrine  on  this  subject  applied  to  deeds,  because  an- 
ciently most  transactions  which  were  reduced  to  writing  were  evidenced 
by  instruments  under   seal,  and  an  immaterial  change  made  by  the 

obligee,   or   in   a  material  point   if   made  by  a   stranger,  avoided  it. 

*     *     * 

But  now  this  early  doctrine  is  nowhere  adhered  to,  and  is  superseded 
by  a  more  reasonable  doctrine  that  an  immaterial  change,  by  whom- 
soever made,  at  least  when  unaccompanied  by  fraudulent  design,  will 
not  invalidate  the  instrument,  and  that  a  material  change  by  a  stranger 
will  not  avoid  jt.     *     *     * 

It  does  not  clearly  appear  in  the  present  case  that  there  was  an  in- 
tention, at  the  time  these  nptes  were  executed,  that  they  were  to  set- 
tle and  extinguish  the  original  demand  for  goods,  wares,  and  mer- 
chandise sold  and  delivered.  And  the  modern  rule  being  that  this  in- 
tention must  appeaii  or  else  the  creditor  can  sue  upon  the  original 
debt  when  he  loses  his  right  innocently  or  without  fraud,  we  reach 
the  conclusion  that  the  case  must  turn  alone  on  whether  the  complain- 
ants have  lost  that  right  on  account  of  their  own  wrongs.     *     *     * 

The  question  in  the  case  then  is :  What  is  the  degree  of  the  wrong 
or  the  effect  of  the  material  alteration  made  in  each  "of  these  notes? 

Very  able  and  exhaustive  briefs  have  been  furnished  on  the  ques- 
tions involved,  and  we  find  no  material  difference  in  the  position  of 
counsel  either  as  to  the  facts  or  the  law.  It  is  the  conclusion  from  the 
facts  upon  w^hich  counsel  differ.  The  complainants  maintain  that  these 
insertions  in  the  notes  were  made  innocently  and  in  accordance  with 
complainants'  custom,  and  do  not  affect  the  right  to  sue  on  the  orig- 
inal debt. 

The  defendant  says  that  though  he  did  not  owe  the  complainants  as 
much  as  they  claimed,  in  order  to  get  time,  and  prevent  them  from 
closing  him  out  in  business,  he  gave  these  notes ;  that  the  insertion  of  a 
stipulation  after  delivery,  without  his  assent  or  knowledge,  that  default 
in  the  payment  of  any  one  note  would  cause  all  the  notes  to  become 
due  and  payable,  was  a  material  change  in  the  contract;  that  such  a 
change,  which  the  chancellor  mildly  termed  constructive  fraud,  w^as 
in  reality  an  intentional  and  subtle  fraud  and  deception,  for  which 
the  punishment  will  be  inflicted  to  the  extent  that  they  will  lose  their 
right  to  sue  on  the  original  contract. 

The  modern  rule,  as  expressed  in  many  authorities  touching  this 
whole  question,  may  be  stated  as  follows:  The  intent  with  which  an 
alteration  of  an  instrument  is  made  is  not  of  material  consequence  in 
determining  the  effect  upon  the  immediate  instrument,  but  the  intent 


940  NEGOTIABLE   INSTRUMENTS  (Part  3 

or  motive  is  of  great  importance  in  determining  whether  a  recovery 
can  be  had  upon  the  original  debt  or  consideration. 

If  the  alteration  of  a  written  instrument  is  made  by  the  holder  with 
a  design  and  intent  to  defraud  the  maker,  it  extinguishes  the  debt. 
This  rule  is  founded  on  public  policy,  and  in  order  to  preserve  the  in- 
tegrity of  valid  legal  instruments,  by  providing  a  punishment  for  the 
wrong,  and  to  deter  the  holder  from  tampering  with  it.  If,  however, 
the  alteration  is  without  fraudulent  intent,  while  it  will  destroy  the 
instrument,  it  will  not  destroy  the  right  to  recover  on  the  original  con- 
sideration, of  which  the  instrument  is  a  mere  evidence.^  Thus,  if_  a 
holder  of  a  promissory  note  makes  a  material  aJteration  in  it  after  its 
execution  but  without  any  design  to  defraud,  and  in  the  belief  that  he 
had  a  right  to  alter  it  in  order  to  make  it  conform  to  the  original  agree- 
ment of  the  parties,  such  alteration  does  not  deprive  the  holder  of 
the  right  to  elect  to  disregard  the  note  and  to  sue  on  the  original  ob- 
ligation, provided  the  note  was  not  accepted  as  payment  thereof. 
*     *     * 

There  is  some  authority  that  although  the  alteration  be  material  and 
fraudulent,  since  a  bill  or  note  suspends  and  is  not  absolute  payment 
of  the  debt  for  which  it  was  given,  such  alteration  only  extinguishes 
the  security,  and  the  original  consideration  remains,  but  this  is  not 
sound  doctrine.  The  correct  rule  undoubtedly  is  that,  when  a  party 
to  a  bill  or  note  fraudulently  alters  its  legal  effect,  he  not  only  destroys 
the  instrument,  but  he  also  extinguishes  the  debt  for  which  it  was 
given.     *     *     * 

We  think  the  chancellor  very  mildly  termed  this  act  of  the  com- 
plainants a  constructive  fraud.  It  was  more  than  that.  It  was  not 
made  in  an  innocent  effort  to  conform  the  instrujiient  to  the  true  in- 
tention and  agreement  of  the  parties  or  through  ignorance,  or  any 
other  simple,  guileless  motive.  It  was  a  secret  and  stealthy  attempt  to 
gain  an  advantage.  The  defendant  says  that  he  would  not  have  ex- 
ecuted the  papers  with  stipulations  that,  in  the  event  of  default  of  one, 
all  would  become  due  and  payable,  and  it  is  reasonable  to  believe  he 
would  not.  He  was  attempting  to  get  a  breathing  spell  between  pay- 
ments so  he  could  meet  them,  one  by  one,  through  a  period  of  two 
years.  His  wife  had  been  sick  in  the  hospital,  and  he  was  embarrassed 
financially.  His  debts  were  pressing  him.  These  insertions  in  the 
notes  destroyed  the  whole  advantage  he  had  gained  by  closing  the  ac- 
count and  substituting  time  notes,  if  he  should  be  so  unfortunate  as 
to  fail  in  one  small  payment.  He  went  to  make  a  payment  before  it 
was  due  and  discovered  the  change,  and  thereupon  promptly  refused 
to  pay. 

The  law  on  the  subject  is  founded  on  wise  public  policy,  and  we  are 
not  at  liberty  to  disregard  it. 
Affirmed. 


(d)     DISCHARGE  BY  RENUNCIATION 

N.  I.  L.  Section  122.  The  holder  may  expressly  renounce  his 
rights  against  any  party  to  the  instrument,  before,  at  or  after  ma- 
turity. An  absolute  and  unconditional  renunciation  of  his  rights 
against  the  principal  debtor  made  at  or  after  the  maturity  of  the 
instrument  discharges  the  instrument.     But  a  renunciation  does 


Ch.  7)  DISCHARGE  941 

not  affect  the  rights  of  a  holder  in  due  course  without  notice.  A 
renunciation  must  be  in  writing,  unless  the  instrument  is  delivered 
up  to  the  person  primarily  liable  thereon. 

(e)     DISCHARGE   BY   AN   ACT    WHICH    WILL  DISCHARGE   A   SIMPLE 

CONTRACT 

N.  I.  L.  Section  119  (4).  A  negotiable  instrument  is  discharg- 
ed by  any  other  act  which  will  discharge  a  simple  contract  for  the 
payment  of  money. 

This  general  provision  incorporates  the  various  methods  of  dis- 
charge of  simple  contracts  which  were  taken  up  in  Chapter  5  of 
Contracts:  novation,  accord  and  satisfaction,  discharge  by  bank- 
ruptcy, by  statutes  of  limitations,  etc. 

(f)     DISCHARGE    BY   ACQUISITION   OF   TITLE    FROM   A   HOLDER 

N.  I.  L.  Section  119  (5).  A  negotiable  instruhient  is  discharged 
when  the  principal  debtor  becomes  the  holder  of  the  instrument  at 
or  after  maturity  in  his  own  right. 

It  is  possible  for  a  maker  to  acquire  title  to  the  note  as  agent  for 
another,  in  which  case  he  becomes  a  holder  not  in  his  own  right. 
The  instrument  in  such  case  would  not  be  discharged.  Nor  would 
the  instrument  be  discharged  upon  its  surrender  to  the  maker, 
upon  the  execution  and  delivery  by  the  maker  to  the  holder  of  a 
new  note  which,  for  any  reason,  was  invalid.  But  a  surrender  of 
the  note,  upon  part  payment  and  an  oral  promise  of  the  maker  to 
pay  the  balance,  would  discharge  the  maker  on  the  note.  In 
various  ways  the  question  may  be  presented :  Did  the  party  pri- 
marily liable  acquire  title  in  his  own  right?  The  fact  that  such 
party  has  regained  physical  possession  of  the  instrument  is  not  con- 
clusive that  the  instrument  is  discharged. 


SECTION  3.— DISCHARGE  OF  REGULAR  INDORSERS 

N.  I.  L.  Section  192.  The  person  "primarily"  liable  on  an  in- 
strument is  the  person  who  by  the  terms  of  the  instrument  is 
absolutely  required  to  pay  the  same.  All  other  parties  are  "sec- 
ondarily" liable. 

N.  I.  L.  Section  120,  A  person  secondarily  liable  on  the  in- 
strument is  discharged:  (1)  By  any  act  which  discharges  the  in- 
strument; (2)  by  the  intentional  cancellation  of  his  signature  by 
the  holder;  (3)  by  the  discharge  of  a  prior  party;  (4)  by  a  valid 
tender  of  payment  made  by  a  prior  party;  (5)  by  the  release  of 
the  principal  debtor,  unless  the  holder's  right  of  recourse  against 
the  party  secondarily  liable  is  expressly  reserved;  (6)  by  any 
agreement  binding  upon  the  holder  to  extend  time  of  payment,  or 
to  postpone  the  holder's  right  to  enforce  the  instrument,  unless 
made  with  the  assent  of  the  party  secondarily  liable,  or  unless  the 
right  of  recourse  against  such  party  is  expressly  reserved. 


942  NEGOTIABLE   INSTRUMENTS  (Part  3 

SECTION  4.— DISCHARGE  OF  A  SURETY 

There  is  no  provision  in  the  Negotiable  Instruments  Law  ex- 
pressly dealing  with  the  subject  of  discharge  of  sureties.  A  surety 
may  occupy  any  position  on  the  instrument:  Acceptor,  maker,  or 
indorser.  Consequently  the  circumstances  under  which  a  surety 
will  be  discharged  must  be  sought  in  section  119,  dealing  with  the 
discharge  of  the  instrument,  and  section  120,  dealing  with  the  dis- 
charge of  parties  secondarily  liable. 

It  will  be  recalled  from  the  cases  in  Contracts  dealing  with  the 
rights  of  a  surety,  that  certain  facts  will  operate  to  discharge  a 
surety  which  will  not  operate  to  discharge  a  principal  debtor.  The 
surety,  in  other  words,  will  be  discharged  by  any  act  which  will 
not  operate  to  discharge  a  debtor  and  in  addition  he  will  be  dis- 
charged whenever  the  creditor  does  any  act  which  in  general 
tends  to  prejudice  the  rights  of  the  surety.  The  Negotiable  In- 
struments Law  does  not  recognize  that  a  surety  on  a  negotiable 
instrument  may  be  discharged  by  the  special  circumstances  which, 
in  the  law  of  suretyship,  have  always  operated  to  discharge  the 
surety.  The  question  is :  Does  the  Negotiable  Instruments  Law, 
by  implication,  take  away  from  the  surety  these  special  defenses. 
Where  the  surety  has  signed  as  an  accornmodation  indorser,  the 
circumstances  that  will  discharge  him  are  specified  in  section  120, 
dealing  with  the  discharge  of  parties  secondarily  liable.  By  sub- 
sections 5  and  6  of  section  120,  the  Negotiable  Instruments  Law 
expressly  recognizes  two  of  these  special  defenses  of  the  suretv 
but  recognizes  no  other.  It  is  possible  to  argue  that,  having  dealt 
with  some  aspects  of  the  law  of  suretyship,  the  surety  is  deprived 
of  all  other  special  surety  defenses.  But  where  the  surety  is  not  an 
accommodation  indorser  but  is  an  acceptor  or  maker,  the  surety's 
right  of  discharge  is  governed  by  section  119.  Here  the  surety's 
position  is  worse  than  it  is  when  he  is  an  accommodation  indorser, 
for  section  119  does  not  confer  upon  such  a  surety  any  of  these 
special  defenses.  The  fact  that  some  special  rights  of  the  surety 
were  dealt  with  in  section  120,  and  not  dealt  with  in  section  119 
leads  to  the  inference  that  the  framers  of  the  act  intended  to 
take  away  from  all  sureties  who  were  primarily  liable  on  the 
instrument  as  maker  or  acceptor  all  of  the  special  defenses  of  the 
surety.  This  inference  is  possible  unless  the  phrase  "a.  person 
secondarily  liable,"  as  used  in  section  120,  may  be  interpreted  to 
mean  not  only  all  regular  and  accommodation  indorsers — which  it 
unquestionably  does  include — but  also  all  sureties  who  were  mak- 
ers or  acceptors.  If  a  surety  maker  or  acceptor  may  be  called  "a 
party  secondarily  liable"  then  such  party  may  at  least  avail  him- 
self of  the  two  special  defenses  recognized  by  subsections  5  and  6 
of  section  120,  dealing  with  the  matter  of  release  of  or  granting 
an  extension  of  time  of  payment,  to  the  principal  debtor,  by  the 
liolder.  If  a  surety  maker  or  acceptor  may  not  be  regarded  as  a 
party  secondarily  liable  then  such  party  is  thrown  back  on  sec- 


Ch.  7)  DISCHARGE  943 

tion  119.  This  section  either  takes  away  all  special  defenses  of 
the  surety  or  leaves  the  whole  matter  of  a  surety's  defenses  un- 
touched. Sectiori  196  provides  that:  In  any  case  not  provided 
for  in  this  act  the  rules  of  the  law  merchant  shall  govern.  If 
this  section  is  applicable  here  then  the  surety's  special  rights  as 
developed  in  the  law  of  suretyship  are  preserved.  The  cases  fol- 
lowing indicate  the  state  of  the  authorities  on  these  questions. 


UNION  TRUST  CO.  v.  McGINTY. 

(Supreme  Judicial  Court  of  Massachusetts,  1912.    212  Mass.  205,  98  N.  E.  679, 

Ann.  Cas.  19130,  525.) 

Action  by  the  Union  Trust  Company  against  William  H.  McGinty. 
Verdict  for  $365  was  directed  for  plaintiff,  and  defendant  excepted, 

RuGG,  C.  J.  The  single  question  presented  in  this  case  is  whether 
the  accommodation  maker  of  a  promissory  note  is  discharged,  if  the 
holder,  knowing  that  the  note  was  made  for  the  accommodation  of 
the  payee  and  indorser,  by  agreement  with  the  indorser  upon  a  valuable 
consideration,  without  the  maker's  consent,  extends  the  time  of  pay- 
ment. 

Before  the  enactment  of  the  Negotiable  Instruments  Act  (St.  1898, 
c.  533;  R.  L.  c.  73,  §§  18-212)  one  who  made  a  promissory  note  for 
the  accommodation  of  another  was  as  between  the  parties  a  surety. 
The  holder,  who  had  knowledge  of  the  true  relation  of  the  parties,  was 
bound  to  act  toward  such  accommodation  maker  as  toward  a  surety 
in  order  to  preserve  his  rights  against  him.  Under  such  circumstances 
an  extension  of  time  to  the  person  ultimately  liable,  without  the  consent 
of  the  surety,  that  is  the  accommodation  maker,  released  the  latter. 
*  *  *  The  precise  point  is  whether  this  rule  of  law  has  been  changed 
by  the  Negotiable  Instruments  Act. 

It  is  matter  of  common  knowledge  that  the  Negotiable  Instruments 
Act  was  drafted  for  the  purpose  of  codifying  the  law  upon  the  subject 
of  negotiable  instruments  and  making  it  uniform  throughout  the  coun- 
try through  adoption  by  the  Legislatures  of  the  several  states  and  by 
the  Congress  of  the  United  States.  The  design  was  to  obliterate  state 
lines  as  to  the  law  governing  instrumentalities  so  vital  to  the  conduct 
of  interstate  commerce  as  promissory  notes  and  billsof  exchange,  to 
remove  the  confusion  or  uncertainty  which  might  arise  from  conflict 
of  statutes  or  judicial  decisions  amongst  the  several  states,  and  to  make 
plain,  certain  and  general  the  controlling  rules  of  law.  Diversity  was 
to  be  moulded  in  uniformity.  This  act  in  substance  has  been  adopted 
by  many  states.  While  it  does  not  cover  the  whole  field  of  negotiable 
instrument  law,  it  is  decisive  as  to  all  matters  comprehended  within 
its  terms.  It  ought  to  be  interpreted  in  such  a  way  as  to  give  effect 
to  the  beneficient  design  of  the  Legislature  in  passing  an  act  for  the 
promotion  of  harmony  upon  an  important  branch  of  the  law.  Sim- 
plicity and  clearness  are  ends  especially  to  be  sought.  The  language 
of  the  act  is  to  be  construed  with  reference  to  the  object  to  be  attained. 
Its  words  are  to  be  given  their  natural  and  common  meaning,  and  the 
prevailing  principles  of  statutory  interpretation  are  to  be  employed. 
Care  should  be  taken  to  adhere  as  closely  as  possible  to  the  obvious 
meaning  of  the  act,  without  resort  to  that  which  had  theretofore  been 
the  law  ot  this  commonwealth,  unless  necessary  to  dissolve  obscurity 


944  NEGOTIABLE   INSTRUMENTS  (Part  3 

or  doubt,  especially  in  instances  where  there  was  a  difference  in  the  law 
in  the  different  states. 

Approaching  the  act  from  this  point  of  view,  it  is  apparent  that  no 
relation  of  principal  and  surety  is  established  or  contemplated  by  any 
of  its  sections.  It  determines  the  liability  of  the  various  parties  to  the 
negotiable  instrument  on  the  basis  of  that  which  is  written  on  the  paper. 
The  obligation  of  all  makers,  whether  for  accommodation  or  otherwise 
is  to  pay  to  the  holder  for  value  according  to  the  terms  of  the  bill  or 
note.  Their  obligation  is  primary  and  absolute.  *  *  *  'phg  act 
makes  no  provision  for  the  proof  of  another  and  different  relation  than 
that  expressly  undertaken  and  defined  by  the  tenor  of  the  instrument 
signed.  The  fact  that  one  is  an  accommodation  maker  gives  rise  to  a 
duty  no  less  or  greater  or  different  to  the  holder  for  value  than  that 
imposed  upon  a  maker  who  received  value.  This  is  expressly  provided 
by  the  act,  even  though  such  holder  knew  at  the  time  of  making  that 
the  maker  was  an  accommodation  maker.  *  *  *  q^j^g  ^ct  further 
provides  in  definite  terms  that  the  instrument  and  hence  one  primarily 
liable  is  discharged  in  one  of  five  different  ways,  *  *  *  that  is,  by 
payment  by  the  principal  debtor,  or  by  the  party  accommodated,  by 
cancellation,  by  any  other  act  which  would  discharge  a  simple  contract, 
and  by  the  principal  debtor  becoming  the  owner  at  or  after  maturity. 
There  is  no  mention  here  of  a  discharge  of  an  accommodation  party 
by  extension  of  time.  But  among  the  ways  in  which  a  party  secon- 
darily liable  may  be  discharged  is  *  *  *  an  agreement  by  the  holder 
to  extend  the  time  of  payment  or  to  postpone  his  right  to  enforce  the 
instrument  "unless  made  with  the  assent  of  the  party  secondarily  liable 
or  unless  the  right  of  recourse  against  such  party  is  expressly  re- 
served." 

Whatever  force  might  attach  to  the  enumeration  of  ways  in  which 
the  instrument  and  consequently  parties  primarily  liable  might  be  dis- 
charged, if  this  provision  stood  alone,  the  inference  arising  from  the 
omission  of  extension  of  time  from  such  enumeration  and  its  inclu- 
sion among  the  ways  in  which  persons  secondarily  liable  may  be  dis- 
charged is  almost  irresistible  that  the  Legislature  did  not  intend  that 
persons  primarily  liable  should  be  discharged  in  that  manner.  These 
tv/o  sections  standing  side  by  side,  both  dealing  with  the  subject  of 
discharge  of  liabilities  of  parties,  the  one  mentioning,  the  other  not 
mentioning,  extension  of  time  by  the  holder  as  a  means  of  working 
discharge  of  liabihty,  cannot  be  treated  as  accidental  or  without  signifi- 
cance. It  is  strong  proof  of  a  legislative  purpose  to  change  the  pre- 
existing law  of  the  commonwealth.  These  considerations  outweigh  the 
argument  adduced  from  the  fact  that  the  "instrument"  rather  than 
"parties  primarily  liable"  is  the  language  used  in  section  119  and  from 
the  phrase  of  clause  4  to  the  effect  that  the  instrument  may  be  dis- 
charged "by  any  other  act  which  will  discharge  a  simple  contract." 
The  act  establishes  a  liability  on  the  part  of  an  accommodation  maker, 
which  is  not  affected  by  an  extension  of  time  given  by  the  holder  to 
any  other  party  to  the  note,  even  though  as  between  such  party  and 
the  accommodation  maker  a  dift'erent  relation  may  subsist  in  fact  from 
that  appearing  on  the  face  of  the  paper.  The  result  is  to  render  some- 
what more  rigid  the  rights  of  the  parties  as  set  forth  in  the  written 
instrument,  and  so  far  as  the  holder  is  concerned  to  establish  liability 
to  him  upon  a  firm  basis,  not  easily  shaken  by  parol  evidence.     *    *    * 

This  appears  to  be  the  view  taken  without  exception  by  the  courts 


Ch.  7)  DISCHARGE  945 

of  other  jurisdictions  which  have  considered  the  point.  In  the  inter- 
pretation of  a  statute  widely  adopted  by  the  states  to  the  end  of  se- 
curing uniformity  in  a  department  of  commercial  law,  we  should  be 
inclined  to  give  great  weight  to  harmonious  decisions  of  courts  of 
other  states,  even  if  we  were  less  clear  than  we  are  in  this  instance  as  to 
the  soundness  of  our  own  conclusion.  Vanderford  v.  Farmers'  Bank, 
105  Md.  164,  66  Atl.  47,  10  L.  R.  A.  (N.  S.)  129;  Cellers  v.  Meachem, 
49  Or  186.  89  Pac.  426,  10  h.  R.  A.  (N.  S.)  133,  13  Ann.  Cas.  997; 
Wolstenholme  v.  Smith.  34  Utah,  300,  97  Pac.  329;  Bradley  Engi- 
neering &  Mfg.  Co.  V.  Heyburn,  56  Wash.  628,  106  Pac.  170,  134  Am. 
St  Rep.  1127;  *  *  *  Richards  v.  Market  Exchange  Bank,  81 
Ohio  St.  348,  90  N.  E.  1000,  26  E.  R.  A.  (N.  S.)  99;  Fritts  v.  Kirch- 
dorfer,  136  Ky.  643-650,  124  S.  W.  882. 
Exceptions  overruled. 


SCANDINAVIAN-AMERICAN  BANK  OF  FARGO  v.  WESTBY. 
(Supreme  Court  of  North  Dakota,  191S.    41  N.  D.  276,  172  N.  W.  665.) 

Action  by  the  Scandinavian-American  Bank  of  Fargo,  N.  D.,  against 
Simon  Westby,  with  counterclaim  by  defendant.  Judgment  for  plain- 
tiff, and  defendant  appeals. 

Grace;,  J.  The  complaint  states  an  action  to  recover  upon  a  prom- 
issory note  executed  by  defendant  to  plaintiff  for  $2,320.64.  The 
answer  admits  the  execution  and  delivery  of  the  note,  but  denies  it 
was  executed  for  valuable  consideration.  The  defendant,  in  a  very 
extensive  answer,  sets  out  other  defenses.  To  the  answer_  there  is  a 
reply  interposed.  It  is  not  necessary  to  set  out  the  answer  in  full,  but 
the  substance  of  the  answer  is  that  on  August  8,  1911,  J.  A.  Stafne 
executed  and  delivered  to  plaintiff  a  promissory  note  for  $1,745.90 
with  interest  at  12  per  cent.,  payable  November  1,  1912.  At  the  time 
the  note  was  executed,  there  was  pledged  to  plaintiff  as  collateral  se- 
curity to  said  note,  certain  stock  certificates  of  the  Citizens'  State  Bank 
of  Alexander  of  the  par  value  of  $100  per  share.  The  answer  fur- 
ther states  that  in  the  year  1913,  A.  J.  Stafne  was  the  owner  of  25 
shares  of  the  corporate  stock  of  the  Williston  State  Bank  of  the  par 
value  of  $100  per  share.  It  is  claimed  by  the  defendant  that  about 
the  1st  day  of  August,  1913,  A.  J.  Stafne  gave  defendant  an  option 
to  purchase  the  25  shares  of  the  corporate  stock  of  the  Williston  State 
Bank  with  the  understanding  that  if  the  same  were  purchased  by  the 
defendant  the  purchase  price  thereof  should  be  applied  upon  indebted- 
ness of  A.  J.  Stafne  to  the  Williston  State  Bank  of  which  the  defend- 
ant was  president,  director,  and  stockholder.     *     *     * 

The  plaintiff,  in  its  reply,  alleges  the  delivery  of  the  note  to  it  on 
August  8,  1911,  by  A.  J.  Stafne,  and  the  pledging  therewith  at  that 
time,  as  collateral  securitv  thereto,  the  20  shares  of  stock  of  the  Citi- 
zens' State  Bank  of  Alexander.  The  reply  further  alleges,  in  sub- 
stance, that  the  consideration  of  the  delivery  to  the  defendant  by  the 
plaintiff  of  25  shares  in  the  Williston  State  Bank  was  the  guaranty 
of  the  payment  at  maturity  of  the  note  sued  upon ;  that  said  guaranty 
was  indorsed  upon  said  note  and  was  in  the  following  Avords:  "For 
value  received,  I  hereby  guaranty  the  payment  of  the  within  note  at 
maturity  or  any  time  thereafter  with  interest  at  the  rate  of  twelve  per 
B.&  B.Btjs.Law— 60 


046  NEGOTIABLE   INSTRUMENTS  (Part  3 

cent,  per  annum  until  paid,  waiving  demand,  notice  of  payment  and 
protest" — which  guaranty  was  signed  by  the  defendant.     *     *     * 

The  $1,745.90  note  was  not  paid  at  maturity,  and  it  was  renewed 
three  different  times.  The  first  time  was  on  November  28,  1913,  when 
Simon  Westby  and  Albert  J.  Stafne  executed  a  renewal  note  for  $2,- 
148.25.  The  second  note  was  March  25,  1914,  for  $2,205,  signed  by  the 
same  parties.  The  third  renewal,  signed  by  the  defendant  only,  was 
for  $2,320.64,  dated  November  20,  1914,  and  is  the  note  upon  which 
suit  is  brought. 

The  first  point  which  we  consider  is  whether  or  not  the  defendant, 
by  the  giving  of  the  renewal  notes  from  time  to  time,  is  estopped  to 
urge  the  enforcement  and  collection  of  the  original  note,  to  renew 
which  renewal  notes  were  executed.  In  other  words,  if  there  existed 
any  infirmity  in  the  original  note,  after  the  defendant  has  executed 
renewals  of  the  original  note  is  he  estopped  to  set  forth  and  rely 
upon  the  original  infirmity  or  defense  which  he  had,  if  any,  to  the  orig- 
inal note?  We  are  of  the  opinion  that,  as  between  the  original  par- 
ties to  the  obligation,  where  the  holder  of  such  note  or  obligation  has 
not  parted  with  anything  of  value,  or  assumed  a  more  detrimental 
position  by  reason  of  the  taking  of  a  renewal  note  or  obligation,  any 
defense  or  infirmity  defendant  might  have  taken  the  advantage  and 
benefit  of  if  he  had  been  sued  upon  the  original  obligation  is  equally 
open  and  retained  to  him  where  he  has  executed  renewal  note  or  notes 
and  suit  is  brought  upon  the  renewal  note  and  there  is  no  good  reason 
why  this  should  not  be  so.  The  renewal  note  or  obligation  is  but  the 
old  note  or  obligation  which  is  extended  in  the  form  of  the  renewal 
note.  The  renewal  of  notes  may  be  said  to  be  of  as  much  benefit  to 
the  holder  as  to  the  maker  thereof ;  while  the  renewal,  in  almost  all 
cases,  operates  to  extend  the  time  of  payment  to  the  maker,  the  holder 
is  benefited  by  having  live  paper  which  is  of  more  use  in  the  business 
world  than  past-due  paper,  and  with  these  and  a  few  other  minor 
differences,  the  renewal  note  is  the  same  obligation  as  the  original 
note.     *     *     * 

The  third  and  last  point  relates  to  the  conversion  by  the  plaintiff  of 
the  collateral,  to  wit,  the  bank  stock  in  the  Citizens'  State  Bank  of 
Alexander.  This  is  the  most  important  point  of  the  case,  and  involves 
an  important  point  of  the  case,  and  involves  an  examination  and  con- 
struction of  that  part  of  the  Uniform  Negotiable  Instruments  Law,  in 
its  relation  to  the  subject  we  are  examining.  It  must  be  conceded  that 
the  relation  of  Westby  to  the  plaintiff,  the  holder  of  the  note,  was  that 
of  surety.  *  *  '''  [Court  quotes  sections  119  and  120  of  the  Ne- 
gotiable Instruments  Law.] 

The  claim  of  the  plaintiff,  in  short,  is  that  Westby,  being  a  surety, 
his  liability  is  a  primary  one,  and  nothing  the  plaintiff  might  do,  by 
way  of  surrender  of  collateral  or  the  extension  of  time  without  the 
knowledge  or  consent  of  the  surety  would,  in  any  manner,  cause  the 
plaintiff  any  liability  to  the  defendant.  In  other  words,  the  plaintiff's 
claim  amounts  to  this:  That  the  holder  of  the  note,  to  secure  the 
payment  of  which  there  was  admittedly  abundant  collateral  security 
and,  at  the  same  time,  having  a  surety  on  the  note  and  knowing  him 
to  be  such,  may  act  with  a  free  rein.  He  may  turn  the  collateral  back 
to  the  original  debtor,  or  may  otherwise  dispose  of  it;  may  extend 
the  time  of  payment,  and,  in  fact,  act  with  entire  disregard  as  to  the 
rights   of  the   surety,  and   with  total  disregard  to  his  liability  as  a 


Ch.  7)  DISCHARGE  947 

trustee,  withotit  incurring  any  liability  on  his  part,  all  on  the  theory 
that  primary  liability  of  the  surety  relieves  the  holder  of  the  note  from 
all  liability  and  responsibility  to  the  surety  arising  out  of  any  collat- 
eral security  to  the  original  note,  or  arising  out  of  the  extension  of  the 
time  of  payment  of  the  original  note,  or  in  any  other  manner.  If  the 
Uniform  Negotiable  Instruments  Act,  as  applied  to  this  situation,  means 
that"  the  holder  of  the  note,  although  he  has  abundant  collateral  se- 
curity for  his  note,  other  than  that  of  the  surety,  can  deliberately  dis- 
pose of  the  collateral  or  return  it  to  the  original  debtor,  or  otherwise 
disposing^  of  it,  and  can  extend  the  time  of  payment  without  knowledge 
or  conselit  of  the  surety,  all  without  incurring  any  liability  on  his 
part  to  the  surety,  it  appeals  to  our  sense  of  fairness  and  justice  in 
just  about  the  same  proportion  as  a  strangle  hold,  where,  in  a  contest 
of  strength  and  science,  one  wrestler  secures  this  deadly  hold,  and, 
slowly  but  surely,  chokes  his  opponent  into  insensibility.  We  do  not 
believe  that  primary  liability  of  a  surety  means  what  several  of  the 
courts  have  said  it  means. 

As  a  general  rule,  the  surety  signs  the  original  note  or  instrument, 
and  is  thus  an  original  promisor,  and  if  the  original  instrument  has  con- 
sideration, that  is,  if  the  consideration  of  the  original  instrument  is 
sufficient  to  uphold  the  contract  of  surety,  in  such  case,  the  surety  is 
an  original  promisor,  and  may  be  sued  upon  default  occurring  in  the 
note  or  instrument  which  he  signed.  His  liability  may  thus  be-  consid- 
ered a  primary  one.  In  the  consideration  of  this  case,  we  will  assume 
and  consider  the  liability  of  the  defendant  a  primary  one. 

Having  in  this  case  arrived  at  the  conclusion  that  the  defendant  is 
a  surety  and  assuming  that  his  liability  is  a  primary  one,  the  next 
point  to  analyze  is  whether  section  7004  of  the  Compiled  Laws  of  1913 
repeals  all  our  laws  relative  to  suretyship,  either  directly  or  otherwise. 
The  merest  inspection  of  such  section  determines  that  it  does  not  di- 
rectly attempt  to  repeal  any  of  our  statutory  law  relative  to  the  rights, 
duties,  and  remedies  of  surety.  The  law  does  not  favor  the  repeal 
of  existing  law  by  mere  implication,  and,  even  if  it  did,  we  find  no 
basis,  in  said  section,  from  which  it  might  be  inferred  that  the  repeal 
of  the  laws  concerning  suretyship  was  implied.  A  careful  examina- 
tion of  section  7004  supra,  discloses  that  the  five  ways  therein  specified 
in  which  a  negotiable  instrument  may  be  discharged  do  not  applv 
exclusively  to  the  maker  of  the  note,  but  some  of  the  subdivisions  of 
said  section  apply  also  to  the  holder.  The  first  subdivision  implies  that 
a  negotiable  instrument  is  discharged  by  payment  in  due  course,  by  or 
on  behalf  of  the  principal.  The  second  subdivision  is  by  payment  in 
due  course  by  the  party  accommodated.  The  third  is  by  intentional  can- 
cellation by  the  holder.  The  fifth,  when  the  principal  debtor  becomes 
the  holder  of  the  instrument  in  his  own  right.  It  is  self-evident  that 
the  negotiable  instrument  would  be  discharged  under  such  circum- 
stances. That  would  be  true  if  there  were  never  any  law  enacted  upon 
the  subject.  The  fourth  subdivision  of  said  section,  however,  is  not 
so  easily  understood  or  so  simple  of  construction.    It  is  as  follows : 

"By  any  other  act  which  will  discharge  a  simple  contract  for  the  pay- 
ment of  money." 

Keeping  in  mind  the  other  subdivisions  of  said  section,  that  the 
negotiable  instrument  may  be  discharged  by  certain  acts  not  only 
of  the  maker  but  by  the  holder,  we  believe  the  language  of  subdivi- 
sion 4  applies  to  both  the  maker  and  the  holder.    There  may  be  other 


948  NEGOTIABLE   INSTRUMENTS  (Part  3 

ways  than  those  set  forth,  whereby  the  maker  may  show  that  the  ne- 
gotiable instrument  is  discharged.  For  instance,  thatthe  contract  was 
fraudulent  or  obtained  under  duress.  The  surety  being  primarily  lia- 
ble and  an  original  promisor,  the  holder  of  the  note  might  do  certain 
acts  which  would  operate  to  discharge  the  liability  of  the  surety  on 
such  note,  and  thus  discharge  the  mstrument  so  far  as  the  surety  is 
concerned.  If  the  law  of  suretyship  has  not  been  repealed,  and  we 
hold  that  it  has  not,  if  the  holder  of  the  note  should,  without  the 
knowledge  or  consent  of  the  surety,  extend  the  time  of  the  payment 
to  a  time  certain,  so  far  as  the  surety  is  concerned,  the  contract  and 
instrument,  being  a  simple  one  for  the  payment  of  money,  is  dis- 
charged. Again,  if  the  holder  of  the  note,  at  the  time  of  the  signing 
thereof  by  the  surety,  had  taken  collateral  security  from  the  principal 
debtor,  it'  must  be  held  that  he  holds  such  collateral  in  trust,  and  if 
the  surety  pays  the  obligation,  he  is  entitled  to  stand  in  the  shoes  of  the 
creditor  and  reimburse  himself  by  having  such  collateral  applied  in 
reduction  of  the  amount  of  money  which  the  surety  has  paid  the  holder. 

The  holder  of  the  note  is  under  no  obligation  to  first  realize  on  the 
collateral  before  suing  the  surety.  The  holder  may  proceed  against  the 
surety  without  having  first  realized  upon  the  collateral  security,  for 
the  reason  that  the  surety's  liability  is  a  primary  one,  but  the  holder 
must,  nevertheless,  be  faithful  to  his  trust  in  preserving  the  collateral, 
and  must  use  ordinary'  care  and  vigilance  to  preserve  it,  and  must  not 
dispose  or  convert  it,  and  if  the  collateral  is  realized  upon,  the  value 
thereof  must  be  indorsed  upon  the  note.     *     *     * 

Subdivision  2  of  section  6681  of  the  Compiled  Laws  of  1913  is  as 
follows : 

"How  Exonerated.    A  surety  is  exonerated : 

"1.  In  like  manner  with  a  guarantor; 

"2.  To  the  extent  to  which  he  is  prejudiced  by  any  act  of  the  cred- 
itor which  would  naturally  prove  injurious  to  the  remedies  of  the 
surety  or  inconsistent  with  his  rights  or  which  lessens  his  security ;  or, 

"3.  To  the  extent  to  which  he  is  prejudiced  by  an  omission  of  the 
creditor  to  do  anything  when  required  by  the  surety  which  it  is  his 
duty  to  do." 

Section  6683  provides  that  the  surety  may  require  his  creditor  to 
proceed  against  the  principal,  and  if  the  creditor  neglects  to  do  so 
the  surety  is  exonerated. 

Section  6686  provides  that,  when  a  surety  has  satisfied  the  obligation 
of  the  principal,  he  is  entitled  to  enforce  every  remedy  which  the  cred- 
itor then  had  against  the  principal,  until  he  is  reimbursed  for  what  he 
has  expended.     He  can  also  require  a  contribution  from  cosureties. 

Section.  6687  provides :  "A  surety  is  entitled  to  the  benefit  of  every 
security  for  the  performance  of  the  principal  obligation  held  by  the 
creditor  or  by  a  cosurety  at  the  time  of  entering  into  the  contract  of 
suretyship  or  acquired  by  him  afterwards,  whether  the  surety  was 
aware  of  the  security  or  not." 

Section  6688  provides :  "Whenever  a  property  of  a  surety  is  hypothe- 
cated with  a  property  of  the  principal,  the  surety  is  entitled  to  have 
the  property  of  the  principal  first  applied  to  the  discharge  of  the  ob- 
ligation." 

Have  all  these  various  provisions  been  abrogated  by  the  Uniform 
Negotiable  Instruments  Act?  We  are  certain  they  have  not,  and  that 
they  still  stand  as  the  law  of  this  state  with  reference  to  suretyship, 


Ch.  7)  DISCHARGE  949 

and  were  never  intended  to  be  repealed,  and  were  protected  under  sub- 
division 4  of  section  119. 

In  the  case  at  bar  at  the  time  of  the  signing  of  the  original  note,  the 
plaintiff  knew  that  the  defendant  was  a  surety.  He  had  like  knowl- 
edge at  the  time  of  the  signing  of  each  renewal  note,  including  the 
note  sued  upon.  The  relation  of  the  defendant  was,  at  all  times,  one 
of  surety.     *     *     * 

The  defendant  entered  into  the  contract  to  pay  the  original  obliga- 
tion or  discharge  the  original  instrument  with  all  these  considerations 
in  mind,  all  of  which  were  well  known  to  the  plaintiff.  The  collateral 
security  was  held  by  the  plaintiff  in  trust  for  the  payment  of  the 
original  obligation,  or,  if  the  original  obligation  were  paid  by  defend- 
ant, the  collateral  was  held  in  trust  to  be  turned  over  to  him,  if  the 
defendant  were  compelled  to  pay  the  original  obligation.  If  the  plain- 
tiff" converts  such  collateral  security  to  his  own  use,  the  instrument 
is  discharged  to  the  extent  the  collateral  security  has  been  decreased 
in  value  by  failure  of  the  creditor  to  exercise  ordinary  diligence  in 
preserving  the  security,  or  if,  after  notice  by  the  surety  to  proceed 
against  the  principal,  and  the  principal  fails  to  do  so,  the  instrument  is 
discharged  to  the  extent  of  the  damages  which  the  defendant  may 
show  by  reason  of  the  creditor's  failure  to  proceed.  In  other  words, 
the  contract  which  the  defendant  entered  into  is  discharged  to  the  ex- 
tent herein  indicated;  and,  where  action  is  brought  on  the  original  in- 
strument, or  where  an  action  is  brought  against  the  surety  by  the  orig- 
inal holder,  it  is  proper  to  set  up  and  plead  such  damages,  if  any,  by 
way  of  counterclaim,  as  a  cause  of  action  against  the  plaintiff. 

If  the  creditor  extends  the  time  of  payment  to  a  time  certain,  with- 
out the  knowledge  or  consent  of  the  surety,  such  extension  operates 
to  discharge  the  instrument  so  far  as  the  surety  is  concerned.  It  is 
simply  another  way  in  which,  under  subdivision  4  of  section  7004,  a 
simple  contract  for  the  payment  of  money  may  be  discharged,  and  there 
is  no  reason  why  this  should  not  be  so,  for  to  hold  that  the  surety 
can  be  held  on  a  note  which  has  been  extended  to  a  time  certain  with- 
out his  knowledge  or  consent  is  to  hold  that  he  can  be  held  on  a  con- 
tract which  he  never  made.  To  illustrate:  Supposing  A.  executes  a 
note  to  B.  for  $1,000  which  A.  owes  B.  The  note  is  due  one  year 
from  the  date  of  its  execution.  C.  signs  the  same  as  surety.  At  the 
time  A.  executes  the  note  he  is  worth  $20,000.  At  the  maturity  of  the 
note,  A.  and  B.,  without  the  knowledge  or  consent  of  C,  extends  the 
time  of  the  payment  of  the  note  for  five  years  to  a  time  certain.  Dur- 
ing such  five  years  B.  cannot  maintain  an  action  against  A.  for  the 
recovery  of  the  debt.  During  the  five  years  A.  becomes  bankrupt. 
Should  C.  be  held  to  pay  the  debt?  It  is  evident  that  if  the  suit  had 
been  brought  at  the  end  of  the  year  when  default  was  made  in  the  first 
note  B.  would  have  gotten  his  money  and  C.  would  not  have  suffered, 
but  by  the  extension  of  time  a  new  contract  between  A.  and  B.  was 
made  in  which  C.  was  not  a  party,  and  C.'s  loss  is  also  by  reason  of 
the  new  contract  to  which  he  is  not  a  party.  What  sensible  or  just 
reason  is  there,  if  any,  why  C.  should  not  be  discharged  from  his  con- 
tract on  such  instrument?  There  can  be  none,  and  there  is  none,  for 
the  circumstances  and  conditions  which  compel  C.'s  loss  are  not  the 
conditions  to  which  he  contracted.  The  contract  has  been,  in  fact, 
changed  without  his  consent  and  he  is  discharged  from  the  instrument 
and  from  liability,  and  we  hold  that  such  a  condition  was  contemplated 


950  NEGOTIABLE   INSTRUMENTS  (Part  5 

under  subdivision  4  of  section  119  to  discharge  one  from  a  simple 
contract  for  the  payment  of  money  where  the  circumstances  we  have 
above  illustrated  exist. 

We  hold  that  all  the  rights  of  suretyship,  the  right  of  subrogation,  are 
all  brought  under  subdivision  4  of  section  7004.  This  is  the  only  rea- 
sonable construction  to  be  placed  upon  such  section.  In  this  connec- 
tion, it  must  not  be  lost  sight  of  that  section  6943  of  the  Compiled 
Laws  of  1913  provides  as  follows :  "In  the  hands  of  any  holder  other 
than  a  holder  in  due  course,  a  negotiable  instrument  is  subject  to  the 
same  defenses  as  if  it  were  nonnegotiable." 

If  a  negotiable  instrument  is  taken  in  due  course _of  business  in  the 
belief  that  all  the  signers  of  such  note  are  makers,  and  with  no  knowl- 
edge by  the  one  who  takes  said  note  that  any  of  the  signers  thereon 
are  sureties,  the  surety  could  claim  no  benefit  by  reason  of  his  rela- 
tion as  a  surety  instead  of  maker,  until  knowledge  of  the  suretyship 
is  brought  home  to  the  holder  of  the  note.  If,  how^ever,  a  holder  in  due 
course  has  knowledge  of  the  suretyship  and  has  collateral  security  for 
the  payment  of  the  debt  from  the  time  he  acquired  such  knowledge 
he  is  in  no  different  position  than  any  other  holder  of  the  note,  and 
must  have  due  regard  to  the  rights  of  the  surety  and  exercise  ordi- 
nary diligence  to  preserve  the  collateral  security.  He  must  bear  in 
mind  that  a  surety  cannot  be  held  beyond  the  express  terms  of  this 
contract.     *     *     * 

It  is  clear  the  defendant  did  not  authorize  or  consent  to  the  con- 
version of  the  collateral  by  any  person,  and  if  the  defendant  did  have 
knowledge  that  the  plaintiff'  was  turning  the  stock  over  to  Eric  Stafne 
for  the  purpose  of  having  it  reissued  in  the  form  of  new  stock,  this 
knowledge  would,  in  no  manner,  relieve  the  plaintiff  from  the  neces- 
sity of  accounting  to  the  defendant  for  the  value  of  said  stock  if 
plaintiff'  should  pay  the  obligation  to  which  such  stock  was  collateral. 

The  defendant  did  not  consent  to  the  conversion  of  the  stock  by 
Eric  Stafne  or  any  one  else.  The  defendant  admits  his  liability  upon 
the  note  sued  upon  and  counterclaims  for  the  value  of  20  shares  of 
the  Citizens'  State  Bank  of  Alexander,  which  have  a  par  value  of 
$100  per  share;  there  being  no  evidence  to  controvert  the  presump- 
tion that  the  stock  is  worth  par. 

We  are  of  the  opinion  that  such  counterclaim  is  a  proper  one,  and 
under  the  evidence  as  it  now  stands,  the  defendant  should  have  judg- 
ment for  the  value  of  the  20  shares  of  stock  of  the  Citizens'  State 
Bank  of  Alexander  at  par,  with  interest  thereon  at  the  legal  rate  since 
the  date  of  the  conversion  of  said  stock. 

We  are  of  the  opinion  that  the  matters  disputed  as  a  counterclaim 
were  available  by  way  of  defense.  From  this  view  of  the  case,  the 
only  judgment  plaintiff  is  entitled  to  is  the  excess  of  the  note  and  in- 
terest over  and  above  par  value  of  the  stock,  with  interest  at  the  legal 
rate  since  the  conversion. 

Though  the  surety  is  primarily  liable,  that  does  not  relieve  the  cred- 
itor or  the  holder  of  the  note  from  liability  if  he  does  not  use  ordi- 
nary diligence  in  preserving  the  security  which  has  been  hypothecated 
to  secure  the  payment  of  the  note,  nor  (in  the  opinion  of  the  writer)  can 
the  creditor  and  the  principal  debtor,  by  agreement  between  themselves 
without  the  knowledge  or  consent  of  the  surety,  extend  the  time  of 
payment  to  a  time  certain,  thus,  in  effect,  making  a  new  contract,  and 
if   such  is  done  the  liability  of  the   surety,   in  my  opinion,   ceases. 


PART  IV 

SALES 


Chapter 

Introduction 
I.     Transfer  of  Title  In  Contracts  of  Sale  of  Ascertained  Goods. 
II.     Transfer  of  Title  in  Contracts  to  Sell  Unascertained  Goods. 
III.     Powers  of  Persons  Not  Owners  of  Goods  to  Transfer  Title  to  Innocent 

Purchasers. 
IV.     Nesotinble  Documents  of  Title. 
V.     Remedies  of  the  Seller. 
VI.     Warranties. 
VII.    Eights  and  Remedies  of  the  Buyer. 


INTRODUCTION 

The  law  of  sales  of  personal  property,  in  the  main,  is  a  branch 
of  the  general  law  of  contracts.  To  some  extent  the  law  of  prop- 
erty is  involved.  Contracts  to  sell  land  and  transfers  of  interests 
therein  by  deed  are  not  here  taken  up.  The  general  law  of  con- 
tracts is,  of  course,  applicable  to  contracts  for  the  sale  of  real 
estate ;  but  the  law  with  reference  to  the  transfer  of  legal  interests 
in  real  estate  by  deed  or  by  will  constitutes  a  branch  of  law  sepa- 
rate from  that  which  governs  the  transfers  of  interests  in  personal 
property.  These  topics  of  the  law  of  real  property  are  not  de- 
veloped in  this  volume. 

The  following  problems  of  the  general  law  of  contracts — offer  and 
acceptance,  consideration,  rights  of  third  parties  in  the  contract,  effect 
of  mistake,  fraud,  duress,  undue  influence,  illegality,  and  capacity,  and 
of  the  statute  of  frauds — in  their  application  to  contracts  to  sell  and 
of  sales  of  personal  property,  are  not  reopened  here,  for  the  reason  that 
the  treatment  of  these  matters  in  Part  I  is  deemed  adequate.  There  is 
no  special  reason  for  redeveloping  these  principles  here.  The  special 
problems  of  the  law  of  sales  of  personal  property  concern  questions  (1) 
of  the  nature  and  extent  of  the  obligations  of  the  parties ;  (2)  perform- 
ance ;  (3)  discharge ;  and  (4)  remedies  for-  breach.  To  put  the  matter 
more  concretely  it  is  evident  that  a  contract  to  sell  or  of  a  sale  is 
intended,  ultimately,  to  result  in  the  substitution  of  the  buyer  in 
the  position  occupied  by  the  seller  with  respect  to  certain  identified 
property  or  property  specified  by  description.  All  the  legal  re- 
lations which  the  seller  has  with  respect  to  his  property  are  to 
be  transferred  to  the  buyer.  This  substitution  is  referred  to  com- 
monly by  the  phrase  "transfer  of  title,"  or  "transfer  of  the  prop- 
erty in  goods."  What  are  the  circumstances  under  which  title  to 
personal  property  will  pass  to  the  buyer,  is  a  most  important 
question  in  the  law  of  sales.  It  becomes  important  to  ascertain 
the  moment  at  which  title  passes,  in  order  to  be  able  to  determine 
the  extent  of  the  rights  and  liabilities  of  the  buyer  and  seller  when 
certain  unexpected  events  occur.  Risk  of  loss  usually  follows 
B.&B.Bus.Law-  (951) 


952  SALES  (Part  4 

title ;  the  right  to  sue  for  the  purchase  price,  as  distinguished  from 
the  right  to  sue  for  damages  for  breach  of  an  executory  contract  to 
buy,  is  dependent  upon  a  showing,  as  a  rule,  that  title  has  passed  to 
the  buyer.  Rights  of  creditors  of  the  buyer  and  of  the  seller  with 
respect  to  the  subject  of  a  sale  are  affected  according  as  the  title 
is  in  the  buyer  or  seller.  The  first  four  chapters  following  deal 
with  various  manifestations  of  this  broad  inquiry.  The  remaining 
problems  are  three:  (1)  What  is  the  nature  and  extent  of  the 
seller's  obligations?  (2)  What  are  the  remedies  of  the  seller? 
and  (3)  What  are  the  remedies  of  the  buyer?  The  first  leads  us 
into  the  study  of  express  and  implied  warranties,  a  topic  devel- 
oped in  Chapter  VI.  The  special  remedies  of  the  seller,  taken  up 
in  Chapter  V,  and  the  special  remedies  of  the  buyer,  taken  up  in 
Chapter  VII,  duplicate  some  aspects  of  legal  remedies  which  were 
noted  in  Chapter  X  of  Contracts;  but,  in  several  particulars,  new 
aspects  are  presented.  To  some  extent  matters  adverted  to  in 
Chapters  V  and  VII  define  the  substantive  rights  of  the  parties, 
rather  than  prescribe  the  nature  and  extent  of  legal  remedies. 
For  convenience  these  matters  have  been  grouped  together. 

The  law  of  sales,  like  the  law  of  negotiable  instruments,  has  been 
codified  in  many  states.  In  1906  the  final  draft  of  the  Sales  Act 
was  approved  at  the  National  Conference  of  Commissioners  on 
Uniform  State  Laws  and  recommended  to  the  several  states.  The 
Sales  Act  has  been  adopted  in  Arizona,  Connecticut,  Idaho,  Illi- 
nois, Iowa,  Maryland,  Massachusetts,  Michigan,  Minnesota,  Missis- 
sippi, Nebraska,  Nevada,  New  Jersey,  New  York,  North  Dakota, 
Ohio,  Oregon,  Pennsylvania,  Rhode  Island,  South  Dakota,  Ten- 
nessee, Utah,  Vermont,  Wisconsin,  Wyoming,  and  Alaska. 


Ch.  1)  TRANSFER  OF  TITLE   WHERE   GOODS   ASCERTAINED 


953 


CHAPTER  I 

TRANSFER  OF  TITLE  IN  CONTRACTS  OF  SALE 
OF  ASCERTAINED  GOODS 

Section 

1.     Introduction. 

'>     Title  Passes  When  tlie  Parties  Intend  It  to  Pass. 

3.     In  Contracts  to  Sell  Ascertained  Goods  in  a  Deliverable  State,  Presump- 
tively Title  Passes  at  tlie  Time  the  Contract  is  Made. 
4      Further  Illustrations  of  the  Application  of  the  Presumption. 

5.  Application  of  the  Presumption  Where  Acts  of  Weighing  or  Measuring 

Must  Alone  be  Done  to  Ascertain  the  Amount  of  the  Purchase  Price. 

6.  Presumption  That  Title  Passes  at  the  Date  of  the  Contract  is  Applicable 

Where  the  Sale  is  a  Sale  on  Credit. 

7.  Presumption  That  Title  Passes  at  the  Date  of  the  Contract  Overcome  by 

Proof  That  the  Parties  Intended  a  Cash  Sale. 

8.  Contracts  on  Sale  or  Return  and  Contracts  to  Sell  on  Approval. 

9.  Conditional  Sales. 


SECTION  1.— INTRODUCTION 

As  has  been  noted  in  the  introduction,  one  of  the  most  important 
problems,  if  not  the  most  important,  in  the  law  of  sales,  is  the 
determination  of  the  time  when  title  to  the  property  passes  from 
the  seller  to  the  buyer.  For  the  solution  of  this  series  of  problems 
it  is  necessary  to  classify  all  contracts  to  sell  into  two  groups: 
(1)  Contracts  to  sell  ascertained  goods;  and  (2)  contracts  to  sell 
unascertained  goods.  Some  of  the  rules  of  law  applicable  to  con- 
tracts in  the  one  group  also  apply  to  contracts  in  the  other  group, 
but  there  are  some  rules  which  apply  exclusively  to  contracts  in 
but  one  of  these  groups.  For  these  reasons,  these  two  divisions 
must  be  considered  separately.  Each  group,  of  course,  must  be 
further  subdivided  into  several  smaller  groups;-  the  contracts  so 
classified  in  each  having  some  features  not  common  to  the  other 
groups. 

The  ir-iportance  of  determining  the  precise  time  at  which  title 
passes  arises  from  the  fact:  (1)  That,  generally,  the  risk  of  loss 
follows  the  title.  (2)  If  title  has  passed  to  the  buyer  he  is  liable 
for  the  purchase  price,  as  distinguished  from  damages  for  breach 
of  contract  to  buy,  even  though  he  has  not  received  the  goods  or 
has  refused  to  accept  them.  (3)  The  power  to  transfer  the  title 
to  a  third  party  vests  in  the  person  who  holds  the  title,  and  this  is 
true,  even  though  by  such  resale  the  party  selling  breaks  his  con- 
tract with  the  other  party.  When  the  purchase  price  has  not  been 
paid,  and  the  buyer  has  the  title  and  is  insolvent,  the  result  will  be 
a  loss  to  the  seller.  Or,  if  the  purchase  price  has  been  paid,  and 
the  seller,  still  holding  the  title,  resells  to  a  third  party  and  is  in- 
solvent, the  buyer  will  lose.  (4)  Creditors  of  the  buyer  and  cred- 
itors of  the  seller,  who  are  forced  to  sue  for  debts  due  them,  pos- 
sess the  right  to  have  the  property  which  belongs  to  their  debtors 
sold  to  satisfy  their  judgments.     Since  the  possession  of  property 


954  SALES  (Part  4 

may  be  in  one  of  the  parties  and  title  in  the  other,  it  will  often- 
times be  puzzling  to  the  creditors  of  buyer  and  seller  to  know 
whether  it  is  safe  to  levy  on  certain  property.  The  levy  will  be 
effective,  and  the  sale  thereunder  binding,  only  when  the  title  to 
the  property  levied  upon  was  in  the  judgment  debtor. 

Another,  but  more  extended,  aspect  of  this  same  problem  arises, 
when  either  the  buyer  or  seller  are  adjudicated  bankrupts.  The 
trustee  in  bankruptcy  takes  title  to  all  the  property  owned  by  the 
bankrupt  for  the  benefit  of  the  bankrupt's  creditors.  Complicated 
situations  develop  in  such  instances  as  these :  When  a  large  busi- 
ness enterprise  is  suddenly  stopped  by  bankruptcy,  the  bankrupt 
will  have  any  number  of  uncompleted  contracts  of  sale  outstand- 
ing. In  some  he  will  be  the  buyer,  in  others  the  seller,  and  the 
property  may  be  scattered  over  many  states.  Each  of  such  con- 
tracts of  sale  must  be  looked  at  with  the  view  of  determining, 
when  the  bankrupt  was  the  seller,  whether  the  title  had  yet  passed 
to  the  buyer,  or,  if  he  were  buyer,  whether  the  title  had  yet 
reached  him,  for  the  trustee  in  bankruptcy,  with  but  a  few  excep- 
tions, will  take  only  the  property  to  which  the  bankrupt  had  title. 

There  are  other  types  of  problems  where  the  controversy  may 
only  be  decided  after  finding  where  the  title  was;  but  enough 
has  been  said  to  indicate  the  importance  of  this  question,  and  also 
to  point  out  the  kinds  of  situations  out  of  which  they  arise. 


SECTION  2.— TITLE  PASSES  WHEN  THE  PARTIES 
INTEND  IT  TO  PASS 

Proceeding,  now,  to  the  question,  when  will  title  pass  in  a  con- 
tract to  sell  ascertained  goods,  the  Sales  Act  provides : 

Section  18,  Subsec.  1.  Where  there  is  a  contract  to  sell  specific 
or  ascertained  goods,  the  property  in  them  is  transferred  to  the 
buyer  at  such  time  as  the  parties  to  the  contract  intend  it  to  be 
transferred. 

There  are  three  independent  questions  raised  by  this  section: 
(1)  What  are  specific  or  ascertained  goods?  (2)  What  is  meant 
by  transferring  property  in  goods?  (3)  How  is  the  intent  of  the 
parties  to  be  determined? 

(1)  The  section  deals  with  contracts  to  sell  goods;  that  is,  con- 
tracts to  sell  tangible  personal  property,  such  as  a  book,  a  horse, 
or  a  carload  of  wheat.  The  section  does  not  apply  to  intangible 
claims,  nor  to  negotiable  instruments.  The  section  does  not  deal 
with  all  kinds  of  contracts  to  sell  goods.  It  applies  only  to  con- 
tracts to  sell  specific  or  ascertained  goods.  All  goods  are  either 
ascertained  or  unascertained.  When  will  goods  be  ascertained? 
This  question  rarely  presents  difficulty.  Goods  are  ascertained 
when  the  parties  understand  what  property,  as  distinguished  from 
all  other  property,  is  meant.  If  the  subject  of  the  sale  is  physically 
present,  so  that  buyer  and  seller  may  each  see  it,  and  language  is 


Ch.  1)  TRANSFER    OF   TITLE   WHERE   GOODS   ASCERTAINED  955 

used  in  the  neg-otiations,  or  in  the  contract,  which  shows  that  the 
object  before  them  is  the  thing  sold,  the  goods  are  said  to  be  as- 
certained. But  the  subject  of  the  sale  need  not  be  physically  pres- 
ent, in  order  for  the  goods  to  be  ascertained.  The  goods  may  be 
in  another  place.  If  the  parties  use  language  during  the  course  of 
the  negotiations  which  refers  to  the  goods  with  sufficient  definite- 
ness  as  to  their  appearance  and  present  location,  so  that  the  parties 
may  find  them,  the  goods  are  said  to  be  ascertaintd  or  specified. 
They  are  capable  of  being  identified.  But  the  goods  must  ndt  be  so 
mixed  up  with  other  goods  that  they  are  not  distinguishable. 
The  sale  of  a  machine  bearing  a  certain  number,  not  borne  by  other 
machines  of  the  same  kind,  and  described  as  to  kind  and  location, 
would  be  a  sale  of  ascertained  goods.  But  the  sale  of  a  machine  of 
specified  description,  stated  to  be  located  at  a  certain  place,  where 
there  were  other  machines  of  the  same  kind,  would  not  be  a  sale 
of  ascertained  goods. 

(2)  We  have  already  discussed  what  is  meant  by  transferring 
property  or  title  in  goods.  Another  way  of  stating  the  general  legal 
effect  of  the  passing  of  title  to  property  to  the  buyer  is  to  say  that 
the  buyer  becomes  the  owner  of  it.  The  buyer  may  use  the  prop- 
erty, recover  damages  from  one  who  injures  the  property,  and 
the  risk  of  loss  or  damage  is  on  the  buyer.  The  buyer  may  sell 
and  pass  a  good  title  thereto,  even  though  he  may  not  have  paid 
the  seller. 

(3)  The  most  difficult  question  raised  by  this  section  is  to  deter- 
mine what  the  parties  did  in  fact  intend.  There  has  been  and  still 
is  a  good  deal  of  litigation  over  this  question.  It  is  very  important 
to  keep  in  mind  in  the  study  of  the  following  cases  that  the  court's 
principal  problem  is  to  ascertain  what  the  parties  intended  with 
respect  to  the  time  at  which  title  to  the  goods  was  to  pass.  The 
law  might  have  taken  the  view  that  title  to  goods  contracted  to 
be  sold  positively  could  not  pass  to  the  buyer,  no  matter  what  the 
parties  intended,  until  (1)  actual  delivery  to  the  buyer;  or  (2) 
until  the  price  were  paid;  or  (3)  unless  credit  were  expressly 
given.  At  one  time  this  was  the  law,  but  to-day,  if  the  contract 
concerns  ascertained  goods,  the  sole  test  as  to  when  title  shall  pass 
is  the  intention  of  the  parties. 

If  seller  and  buyer  always  expressed  their  intention  in  such 
forms  that  there  could  be  no  mistake  concerning  the  matter,  the 
problem  of  ascertaining  intention  would  almost  disappear.  As  a 
matter  of  fact,  however,  buyer  and  seller  very  rarely  express 
their  intention  as  to  the  time  when  title  is  to  pass.  At  the  time 
of  a  sale  the  attention  of  the  parties  is  so  firmly  fixed  upon  the 
purely  business  aspects  of  the  transaction  that  there  is  nothing  to 
cause  the  parties  to  reflect  upon  this  matter.  They  know  and 
intend  that  finally  title  is  to  pass  to  the  buyer,  t)ut  they  do  not  ex- 
pressly agree  as  to  the  precise  moment  when  this  is  to  happen.  In 
the  great  majority  of  transactions  it  will  make  very  little,  if  any, 
difference  as  to  the  time  when  title  passes.     But  there  comes  a 


956  SALES  (Part  4 

time  when  this  question  becomes  of  supreme  importance.  If 
during  the  negotiations,  or  subsequent  thereto,  and  before  pay- 
ment of  the  price,  the  goods  are  destroyed  by  fire,  or  sink  while 
on  board  a  vessel,  must  the  buyer  pay  for  the  goods?  Or  suppose 
the  buyer,  B.,  before  payment  to  the  seller,  A.,  sells  the  goods  to 
a  third  party,  C,  and  C.  pays  B.,  and  B.  goes  into  bankruptcy, 
may  A.  keep  the  goods,  or  recover  them  from  C,  or  must  A.  con- 
tent himself  with  the  dividends  which  will  be  paid  from  the  bank- 
rupt estate  of  B.?  Again,  suppose  B.  enters  A.'s  jewelry  store  to 
buy  a  watch.  A,  shows  B.  a  watch,  priced  $100.  B.  says,  "I  will 
take  it ;  show  me  a  chain."  The  watch  is  left  on  the  counter.  A. 
and  B.  step  to  the  case  containing  the  chains,  and  B.  finally  selects 
one.  On  returning  they  find  that  the  watch  has  been  stolen. 
Must  B.  pay  for  the  watch? 

In  all  these  and  in  many  other  similar  situations  the  question 
raised  can  be  answered  only  by  finding  out  where  the  title  was 
when  the  unexpected  event,  such  as  the  loss  or  damage  to  the 
goods,  the  sale  to  a  third  party,  or  the  bankruptcy  of  one  of  the 
parties,  occurred.  Usually  the  parties  have  not  made  known  what 
their  intention  was  as  to  the  time  when  title  should  pass.  There- 
fore the  intention  of  the  parties  must  be  found  in  the  circumstances 
of  the  case ;  that  is,  the  courts  will,  in  the  light  of  all  the  evidence 
surrounding  the  negotiations,  determine  what  the  parties  must 
have  intended,  having  conducted  themselves  in  such  a  manner. 
Quite  likely  the  parties  actually  had  no  intention  at  all  about  the 
matter;  therefore  the  search  for  something  which  had  no  exist- 
ence may  impress  one  as  rather  odd.  This  anomaly  is  explained 
in  this  way:  Title  had  to  pass  at  some  time;  having  entered  into 
a  contract  to  sell,  certainly  the  seller  and  buyer  did  in  fact  intend 
that  title  should  pass  at  some  time,  although  they  may  have  had  no 
intention  as  to  the  time  when  this  event  should  occur.  Therefore 
the  search  for  the  intention  as  to  the  time  when  title  passed  is  in 
reality  a  search  for  some  particular  instant  of  time  which,  in  the 
light  of  all  the  circumstances,  is  the  most  reasonable  to  suppose 
that  the  parties  would  have  intended  title  to  pass,  had  their  atten- 
tion been  called  to  this  feature  of  the  sale. 

The  courts  have  recognized  the  great  difficulty  in  ascertaining 
the  intention  of  parties  who  had  no  intention,  or,  if  they  had, 
failed  to  express  it,  and  as  a  result  several  rules  have  been  devel- 
oped which  are  a  great  aid,  at  least,  in  settling  the  controversy. 
These  rules  are  of  two  kinds:  (1)  There  is  a  rule  which  directs 
the  court  to  examine  with  particular  care  into  certain  kinds  of 
evidence,  which  experience  has  shown  is  the  best  evidence  from 
which  to  infer  what  the  intention  of  the  parties  was.  (2)  There 
are  several  rules,  called  rules  of  presumption,  which  assert  that, 
if  the  parties  have  conducted  themselves  in  a  particular  manner, 
and  the  goods  are  in  such  and  such  a  condition,  the  presumption 
is  that  title  passed  at  a  time  which  the  rule  proceeds  to  indi- 
cate.    A  presumption  is  the  equivalent  of  proof,  or,  rather,  it  is 


Ch.  1)  TRANSFER   OF  TITLE  WHERE   GOODS   ASCERTAINED  957 

taken  to  be  the  equivalent  of  proof  until  other  evidence  makes  it 
appear  that  the  conclusion  thus  presumed  is  not  justifiable  in  the 
particular  case,  and  therefore  the  presumption  will  not  govern. 

The  first  rule,  discussed  above,  is  expressed  in  the  Sales  Act  as 
follows : 

Section  18,  Subsec.  2.  For  the  purpose  of  ascertaining  the  in- 
tention of  the  parties,  regard  shall  be  had  to  the  terms  of  the  con- 
tract, the  conduct  of  the  parties,  usages  of  trade  and  the  circum- 
stances of  the  case. 

Something  has  been  said  above  in  explanation  of  this  section. 
Its  purpose  is  to  focus  the  attention  of  the  courts  upon  four  kinds 
of  evidence  which  must  be  taken  into  consideration  in  ascertaining 
intention : 

(1)  The  court  must  note  the  terms  of  the  contract.  Obviously, 
this  is  the  first  and  best  evidence.  If  the  parties  have  definitely- 
expressed  their  intention,  that  expressed  intent  must  govern,  no 
matter  what  contrary  intention  would  be  indicated  by  the  other 
three  kinds  of  evidence  viewed  alone. 

(2)  The  court  must  take  into  consideration  the  conduct  of  the 
parties.  This  direction  is  very  similar  to  the  fourth  kind  of  evi- 
dence which  must  be  carefully  considered ;  i.  e.,  the  circumstances 
of  the  case.  Taken  together,  these  two  rules  direct  the  court  to 
look:  (a)  At  the  acts  of  the  parties  done  with  respect  to  the 
goods,  or  with  respect  to  the  payment  of  the' price;  (b)  the  nature 
of  the  goods  and  where  located  at  the  time  of  the  transaction; 
(c)  all  the  language  employed  by  the  parties  during  the  course  of 
the  negotiations;  and  (d)  perhaps  many  other  matters,  which, 
while  difficult  to  conceive  of  and  to  express  generally,  would  prop- 
erly be  called  "the  circumstances  of  the  case,"  if  we  had  before  us 
a  concrete  situation. 

(3)  Usages  of  trade  must  be  considered.  The  rule  requiring  the 
investigation  of  the  usages  of  trade  is  most  important.  Practically 
all  business  is  conducted  according  to  certain  established  usages. 
Time  and  time  again  the  most  complicated  of  business  transactions 
are  entered  into,  where  the  acts  of  the  parties  are  very  few,  cover 
but  a  short  space  of  time  and  where  practically  nothing  is  said 
in  explanation  of  the  conduct  of  the  parties.  These  apparently 
simple  acts  have  the  most  far-reaching  consequences ;  yet  they  are 
left  by  the  parties  unexplained.  Perhaps  it  would  not  be  incorrect 
to  say  that  the  great  majority  of  business- transactions  finally  gen- 
erate into  the  observance  of  certain  specified  formalities  the  mean- 
ing and  consequence  of  which  can  be  learned  only  from  a  careful 
consideration  of  the  usages  established  in  that  particular  type  of 
transaction. 

We  shall  find,  with  respect  to  the  narrower  question  of  the 
effect  of  custom  upon  the  passing  of  title,  that  this  question  is  of 
great  importance  in  ascertaining  what  the  parties  intended.  It  is 
incumbent  upon  a  business  man  to  know  with  considerable  com- 
pleteness   and    accuracy    all    of    the    established    customs   of    the 


958  SALES  (Part  4 

trade,  if  he  desires  to  avoid  unforeseen  and  sometimes  unfortunate 
consequences. 

The  second  class  of  rules  which  have  been  estabhshed  to  aid  in 
the  discovery  of  the  intention  of  the  parties  as  to  when  title  to 
goods  contracted  to  be  sold  shall  pass,  as  has  been  indicated,  are 
rules  of  presumption.  When  the  law  raises  a  presumption  that  a 
certain  conclusion  is  true,  as,  for  example,  that  title  to  goods 
passed  at  a  certain  moment,  the  meaning  is :  First,  that  certain 
evidence  then  before  the  court  justifies  the  legal  conclusion  as- 
serted in  the  presumption.  Were  it  not  for  the  rule  of  presump- 
tion  the  probabilities  are  that  the  court  would  not  be  justified  in 
reaching  any  conclusion  at  all  until  further  evidence  appeared. 
The  rule  of  presumption,  therefore,  enables  a  court  to  decide  a  con- 
troversy upon  evidence  which  might  be  insufficient  to  warrant  any 
determination  of  the  case.  This  should  not  be  taken  to  mean  that 
a  decision  so  arrived  at  is  unjust.  On  the  contrary,  the  case  very 
probably  will  be  decided  fairly  for  both  parties.  We  should  bear  in 
mind  that  a  particular  rule  of  presumption  was  never  formulated 
until  the  courts  had  been  confronted  with  a  great  many  cases. 
Upon  such  experience  it  was  found  that  certain  acts  or  words  in 
the  great  majority  of  cases  indicated  what  the  intention  of  the 
parties  was,  and  thereupon  the  courts  decided  that,  for  the  future, 
when  these  selected  kinds  of  evidence,  found  to  be  exceptionally 
cogent  appeared  the  necessity  of  further  proof  would  be  dispensed 
with. 

At  this  point  the  most  important  aspect  of  a  legal  presumption 
arises,  a  feature  which  is  sometimes  lost  sight  of.  That  feature  is 
this:  The  presumption  will  be  rendered  inapplicable  to  the  case 
upon  further  evidence  that  the  parties  intended  the  contrary.  The 
presumption  is  not,  in  the  strict  sense,  a  rule  of  positive  law.  To 
illustrate  the  distinction :  Simple  contracts  must  be  founded  upon 
consideration.  This  is  not  a  rule  of  presumption.  It  is  a  positive 
requisite  to  the  existence  of  the  contract.  No  matter  how  conclu- 
sively the  parties  have  indicated  that  they  intended  to  bind  them- 
selves without  consideration,  the  law  will  not  hold  them  to  their 
intention.  Contrast  this  situation  with  the  following:  A.  is  in- 
dicted for  the  murder  of  B.  Suppose  the  evidence  shows  the  fact 
that  A.  killed  B.,  that  he  intended  to  kill  B.,  and  that  there  was  no 
evidence  of  justification  or  excuse.  The  presumption  arises  that 
A.  was  sane,  and  was  accountable  for  his  conduct ;  but  it  is  only  a 
presumption,  for  evidence  will  be  admitted  to  show  that  the  de- 
fendant, by  reason  of  mental  deficiency  or  mental  disease,  was  not 
capable  of  possessing  the  requisite  criminal  intent.  The  mistake 
which  is  often  made  is  to  regard  a  rule,  which  in  reality  is  but  a 
rule  of  presumption,  capable  of  being  rebutted  and  made  inapplica- 
ble to  the  case  by  evidence  showing  that  the  parties  intended  some- 
thing different,  as  an  inflexible  rule  of  law,  which  cannot  be  made 
inapplicable  merely  because  the  parties  intended  that  such  rule 
should  not  govern  the  transaction.     Practically  all  the  problems 


Ch.  1)  TRANSFER   OF   TITLE   WHERE   GOODS   ASCERTAINED  059 

where  the  question  of  the  passing  of  title  is  raised  we  must  con- 
sider one  or  more  rules  of  presumption.  The  same  is  true  with 
respect  to  many  other  sections  of  the  law  of  sales.  In  every  case 
we  must  know  with  certainty  whether  \^e  are  dealing-  with  a  pre- 
sumption or  a  binding  rule  of  law.  If  the  rules  applied  and  dis- 
cussed in  the  cases  are  conceived  of  as  binding  rules  of  law,  many 
of  the  cases  will  not  be  understood,  and  many  will  appear  to  be  in 
conflict,  when  in  reality  they  are  not  so.  Perhaps  the  greatest  val- 
ue to  the  business  man  in  studying  this  most  important  topic  of 
the  law  is  to  call  attention  sharply  to  the  sources  of  controversies 
out  of  sales  contracts  and  to  the  methods  by  which  these  contro- 
versies are  decided,  to  the  end  that  attention  be  focused  upon  the 
necessity  for  providing  expressly  for  these  contingencies,  at  least 
where  the  risk  is  heavy. 

With  this  preliminary  discussion  of  the  nature  and  importance 
of  rules  of  presumption,  we  pass  to  the  statement  of  the  rules 
themselves,  and  to  the  consideration  of  their  application  to  specific 
facts. 


SECTION  3.— IN  CONTRACTS  TO  SELL  ASCERTAINED 
GOODS  IN  A  DELIVERABLE  STATE,  PRESUMPTIVELY 
TITLE  PASSES  AT  THE  TIME  THE  CONTRACT  IS 
MADE 

Sales  Act,  Section  19.  Rules  for  Ascertaining  Intention. — Un- 
less a  different  intention  appears,  the  following  are  rules  for 
ascertaining  the  intention  of  the  parties  as  to  the  time  at  which  the 
property  in  the  goods  is  to  pass  to  the  buyer: 

Rule  1. — Where  there  is  an  unconditional  contract  to  sell  spe- 
cific goods,  in  a  deliverable  state,  the  property  in  the  goods  passes 
to  the  buyer  when  the  contract  is  made,  and  it  is  immaterial  wheth- 
er the  time  of  payment,  or  the  time  of  delivery  or  both,  be  post- 
poned. 

The  most  important  matter  presented  by  rule  1  is  to  note  that  it 
applies  only  to  those  contracts  to  sell  ascertained  or  specified 
goods  which  goods  are  also  in  a  deliverable  state.  Contracts  to 
sell  ascertained  goods  are  divided  into  two  classes:  (1)  Those 
goods  which,  though  ascertained,  are  not  in  a  deliverable  state ; 
(2)  those  goods  which  are  ascertained  and  also  are  in  a  deliverable 
state.  It  would  follow  from  rule  1  that,  if  goods  were  not  in  a  de- 
liverable state,  the  title— or  the  property,  as  the  Sales  Act  here 
terms  it — would  not  pass  until  they  were  put  in  a  deliverable  con- 
dition. But,  if  the  Sales  Act  had  nothing  more  to  say  about  the 
time  when  title  would  pass  in  contracts  to  sell  ascertained  goods 
not  in  a  deliverable  condition,  that  would  mean  that  title  would 
not  pass  at  the  date  of  the  contract  in  two  classes  of  cases:  (1) 
Where  the  seller,  by  the  terms  of  the  contract,  was  bound  to  put 
the  goods  into  a  deliverable  state;    (2)  where  the  buyer  was  to 


9(50  SALES  (Part  4 

put  the  goods  into  a  deliverable  state.  Accordingly  the  following 
rule  was  added : 

Section  19,  Rule  2.  Where  there  is  a  contract  to  sell  specific 
goods  and  the  seller  is  bou^nd  to  do  something  to  the  goods,  for  the 
purpose  of  putting  them  into  a  deliverable  state,  the  property  does 
not  pass  until  such  thing  be  done. 

It  appears,  therefore,  that  when  we  are  dealing  with  a  contract 
to  sell  ascertained  goods  there  are  two  situations  where  the  pre- 
sumption is  that  title  passes  to  the  buyer  at  the  date  of  the  con- 
tract: (1)  Where' the  goods  are  in  a  deliverable  state  at  the  time 
when  the  contract  is  entered  into ;  (2)  when  the  goods  are  not  in 
a  deliverable  state  at  the  time  the  contract  is  made,  but  where  the 
buyer  by  the  contract  is  bound  to  put  the  goods  in  a  deliverable 
state.  The  important  question  is :  When  are  goods  in  a  delivera- 
ble state?    The  following  cases  discuss  this  question. 


CARROLL  V.  HASKINS. 

(Supreme  Judicial  Court  of  Massachusetts,  1912.    212  Mass.  593,  99  N.  E.  477.) 

Action  by  Arnold  L.  Carroll  against  Emmett  F.  Raskins.  Verdict 
for  plaintiff,  and  defendant  excepts. 

Brali^y,  J.  While  as  between  the  parties  to  the  sale  the  title  passed 
to  the  plaintiff  if  the  jury  believed  the  evidence  yet  the  defendant  who 
as  a  deputy  sherifif  subsequently  attached  the  property  on  a  writ  against 
the  seller  is  not  liable  for  conversion  unless  there  also  was  proof  of 
actual  or  constructive  delivery.  *  *  *  The  evidence  showed  a  bar- 
gain for  the  purchase  in  satisfaction  of  a  debt  due  from  the  seller 
to  the  buyer  of  41/2  tons  of  hay,  stored  in  two  "bents"  distinguished 
from  each  other  by  a  post,  and  containing  some  6  or  7  tons.  Upon  the 
day  following  the  agreement  the  parties  went  to  the  barn  where  in  their 
presence  the  "bent"  in  the  northeast  corner  was  measured,  and  the  con- 
tents having  lacked  less  than  a  ton  of  the  amount  purchased,  the  ven- 
dor, although  he  declined  to  sell  the  hay  in  the  adjoining  "bent," 
agreed,  that  the  plaintiff  could  take  therefrom  enough  to  supply  the  de- 
ficiency, and  gave  a  bill  of  parcels  for  the  full  quantity.  It  is  not  con- 
tended that  the  sale  was  made  to  defraud  creditors,  even  if  the  plain- 
tiff was  given  permission  to  remove  the  hay  at  his  own  convenience, 
and  from  the  language  and  conduct  of  the  parties  the  jury  could  find, 
that  the  seller  for  a  valuable  consideration,  and  in  good  faith,  actually 
intended  to  part  with  possession,  and  the  plaintiff  intended  to  accept 
the  transfer.     *     *     * 

By  the  act  of  measurement  the  line  of  demarcation  could  be  ascer- 
tained, and  the  subject  of  the  controversy  could  have  been  identified 
even  if  not  physically  separated  from  the  other  hay,  as  having  been 
covered  by  the  contract  of  sale.  The  bulky  nature^  of  the  property 
having  precluded  manual  possession  unless  the  plaintiff  had  immediate- 
ly taken  the  hay  away,  constructive  delivery  under  the  circumstances 
was  sufficient,  and  the  transaction  resulted  in  the  sale  of  specific  goods 
where  nothing  further  remained  to  be  done.     *     *     * 

The  defendant's  request  was  rightly  denied,  and  the  exceptions  must 
be  overruled. 


Ch.  1)  TRANSFER   OF   TITLE   WHERE   GOODS   ASCERTAINED  961 

In  re  COPE'S  ESTATE. 

Appeal  of  COATES  et  al. 

(Supreme  Court  of  Peunsylvaiiia,  1899.     191  Pa.  589,  43  Atl.  473.) 

SterrETT,  C.  J.  This  appeal  is  from  the  decree  of  the  court  below 
disallowing  appellant's  claim  of  $8,037.55  for  books  and  engravings 
sold  by  him  to  said  decedent,  except  to  the  extent  of  $880,  which  rep- 
resents the  value  of  goods  delivered  at  his  home.  Mr.  Cope,  the  dece- 
dent, was  a  gentleman  of  independent  fortune,  and  of  literary  and  ar- 
tistic tastes.  For  many  years  he  had  been  an  extensive  purchaser  of 
books  and  engravings  from  appellant.  During  the  last  three  years  of 
his  life  his  payments  to  him  aggregated  over  $11,000. 

The  nature  of  appellant's  present  claim  for  balance  disallowed  by  the 
orphans'  court  will  perhaps  be  best  understood  by  referring  to  the  tes- 
timony of  witnesses  examined  in  support  thereof.  Col.  J.  E.  Barr, 
their  salesman,  testified,  inter  alia,  as  follows :  "Mr.  Cope  came  to 
the  store  every  time,  I  think,  that  he  came  to  town ;  made  it  a  place 
where  he  always  stayed,  and  when  any  new  invoices  of  prints  came  in, 
I  would  always  tell  him,  and  he  would  come  in  and  go  over  them, — 
look  at  them, — and  if  there  was  anything  he  liked  he  would  say:  Tut 
them  away  for  me,'  T  will  take  this,'  or  'I  will  take  that,'  and  I  put 
them  away  in  the  drawers.  Q.  Were  they  put  in  general  drawers  or 
special  drawers?  A.  Special  drawers  set  apart  for  him,  with  nothing 
else  in.  O.  And  drawers  to  which  he  had  access  A.  He  and  I ;  nobody 
else  touched  them.  *  *  *  Q.  Would  the  prices  be  named?  A.  He 
would  ask  the  price,  and  I  would  give  it  to  him, — mark  it  on  the  prints. 
■*  *  *  Q.  These  prints,  after  he  bought  them  and  the  price  agreed 
upon  marked  and  put  away  in  his  drawers,  and  did  he  get  them  from 
time  to  time?  A.  If  you  will  allow  me  to  tell  you,  Mr.  Cope  was  in  the 
habit  of  making  mats  for  his  own  prints,  and  making  little  biographical 
sketches  on  the  back  of  each,  and  then  put  them  away  into  portfolios, 
and  catalogue  them,  and  in  that  way  he  would  take  them  home  as  fast 
as  he  could  do  that,  and  put  them  away  in  proper  portfolios,  and  in 
that  way  the  prints  in  the  store  would  accumulate  faster  than  he  could 
take  them  home.  He  did  not  want  them  at  home,  lying  about,  be- 
cause they  were  fine  prints,  and  he  just  took  enough  home  from  time 
to  time  to  catalogue  and  mat  them,  and  put  them  away  in  the  portfo- 
lios, and  in  the  meantime  invoices  came  from  all  parts  of  the  world,  and 
he  would  see  them  all,  and  select  what  he  wanted,  and  they  were  put 
away  in  these  drawers.  O.  And  then,  as  he  finally  took  them  away, 
you  sent  a  bill  for  them?  A.  Yes,  sir  O.  You  did  not  send  a  bill 
tmtil  he  took  them  away?  A.  Oh,  no.  O.  He  was  a  peculiar  man, 
was  he  not  ?  A.  Yes,  sir ;  he  would  make  his  own  list  when  he  would 
take  them  home.  He  would  bring  the  list,  which  he  would  hand  to  me. 
and  tell  me  to  charge  them  up.  O.  Were  those  put  aside  in  those 
drawers  for  approval  or  actually  sold?  A.  No;  absolutely  sold,  I 
would  not  dare  to  take  them  out.  O.  They  were  his?  A.  Yes,  sir." 
Appellant's  bookkeeper  testified  that  charges  were  made  and  bills 
rendered  in  the  manner  sworn  to  by  Col.  Barr,  their  salesman.  He 
further  testified:  "O.  When  you  took  account  of  stock  each  year, 
including  these  drawers,  did  you  put  that  in  your  general  stock,  or 
how  did  you  charge  the  amount  in  these  drawers  ?  A.  It  was  charged 
B.&  B.Bus.Law— 61 


962  SALES  (Part  4 

up  to'  Mr.  Cope,  so  that  we  would  not  take  it  into  stock  each  year.  O. 
On  your  book  it  would  appear  as  charged  each  year?  A.  Yes,  sir.  Q. 
By  Mr.  Thompson:  It  was  a  memoranduqa  merely  for  the  purpose  , 
(^  showing  where  the  goods  were  in  your  account  of  stock.  Of  course 
it  was  that.  A.  Showing  where  they  were.  Q.  That  is  all?  A.  They 
were  not  belonging  to  us  at  all.  They  were  not  included  in  our  stock. 
O.  But  you  never  rendered  any  bill  for  them,  of  course?    A.  No." 

On  behalf  of  the  appellee  evidence  was  offered  to  show  that  the  de- 
cedent always  paid  his  bills  promptly,  and  at  the  time  of  his  death 
left  no  other  outstanding  accotmts,  except  for  medicine  and  medical 
attendance.  It  was  also  attempted  to  be  shown  by  a  salesman  of  the 
publishing  house  of  J.  S.  Lippincott  &  Co.  that  decedent  was  in  the 
habit  of  having  books  laid  aside  for  inspection.  This  testimony  was 
as  follows:  "5.  Was  it  not  at  times  a  habit  of  his  to  have  set  aside 
the  books,  that  he  would  come  back  and  confirm  or  disaffirm?  A.  No, 
sir,  Q.  He  was  always  prompt  in  his  payment?  A.  If  he  wanted  a 
book,  he  would  say,  'I  will  take  it.'  If  I  said  to  him,  'Perhaps  you 
would  like  to  look  at  it  a  different  time,'  he  would  say,  'No,'  he  did  not 
want  it.  He  was  a  man  that  would  make  up  his  mind  in  a  very  little 
time  if  he  wanted  an  article."  This  testimony  on  behalf  of  the  ap- 
pellee, so  far  as  it  has  any  bearing  on  the  case,  is  corroborative  of  ap- 
pellant's witnesses,  and  tends  to  support  his  contention. 

The  learned  auditing  judge,  who  was  sustained  by  the  court  in  bank, 
held  that  there  was  no  contract  of  sale,  "because  the  minds  of  the 
parties  did  not  come  together  in  a  common  intention."  In  this  we 
think  he  was  mistaken.  The  evidence  to  support  the  auditing  judge's 
conclusion  is  far  from  being  satisfactory.  In  examination  in  chief  of 
appellant's  salesman,  Mr  Barr,  he  was  emphatic  in  his  assertion  of  an  ' 
unconditional  sale,  and  this  was  reiterated  by  him  on  cross-examina- 
tion. In  endeavoring  to  strengthen  appellee's  line  of  defense,  he  was 
asked  on  cross-examination :  "O.  Was  it  not  your  habit  of  showing 
him  prints,  and  was  it  not  his  habit  to  look  at  them,  and  then  come 
back,  and,  having  concluded  to  take  them,  to  order  them  ?  A.  I  never 
put  these  away  until  he  told  me  to  do  so.  Q.  Did  he  not  tell  you  to 
lay  these  aside?  A.  No.  sir;  I  never  laid  any  prints  aside  for  Mr. 
Cope."  The  language  employed  by  decedent  is  entirely  consistent 
with  a  consummated  contract  of  sale.  The  conduct  of  appellant  was 
uniform  in  treating  the  transaction  as  a  sale.  In  every  case  the  select- 
ed engravings  were  marked  with  their  respective  prices,  separated 
from  the  common  stock,  and  made  accessible  to  the  decedent  and  Mr. 
Barr  alone,  then  charged  to  him,  and  never  thereafter  carried  into 
the  general  stock.  The  learned  auditing  judge  attached  too  much  im- 
portance to  the  fact  that  the  bills  were  not  rendered  until  the  goods 
were  taken  away.  There  is  nothing  in  that  circumstance  that  is  in- 
consistent with  an  absolute  sale,  especially  when  we  consider  the 
uniform  course  of  dealing  which  the  decided  weight  of  the  evidence 
shows  the  parties  themselves  adopted.  The  appellant  was  under  no 
obligation  to  notify  Mr.  Cope  of  the  charge.  It  would  not  have  been 
in  accord  with  their  mutually  recognized  mode  of  dealings,  and  might 
have  resulted  in  the  loss  of  a  valuable  customer.  If  it  had  been  sought 
to  establish  the  contract  of  sale  by  the  dealings  of  the  parties  alone, 
without  regard  to  the  evidence  of  their  mutual  understanding  in  re- 
lation thereto,  there  might  be  some  force  in  the  position  contended 
for  by  the  appellee ;  but  the  direct  evidence  of  a  sale  and  mutually  un- 


Ch.  1)         TRAxsFi:n  of  title  where  goods  ascertained  9fin 

derstood  mode  of  delivery,  in  drawers  specially  designated  as  re- 
ceptacles for  decedent's  purchases,  is  positive  and  uncontradicted, 
except  by  the  circumstances  relied  on  by  the  appellee.  Unfortunately 
for  him,  none  of  those  circumstances  are  inconsistent  with  a  sale. 

It  follows  from  what  has  been  said  that  the  assignments  of  error 
must  be  sustained.  Decree  reversed,  at  appellee's  costs,  and  ordered 
that  the  record  be  remitted  to  the  court  below,  with  instructions  to  al- 
low the  residue  of  appellant's  claim. 


J.  B.  BRADFORD  PIANO  CO.  v.  HACKER. 

(Supreme  Court  of  Wisconsin,  1916.     162  Wis.  385,  156  N.  W.  140.) 

Action  by  the  J.  B.  Bradford  Piano  Company  against  Bertha  Hack- 
er.   From  a  judgment  for  defendant,  plaintiff  appeals. 

This  is  an  action  to  recover  the  purchase  price  of  a  Conover  inner 
player  piano  sold  by  the  plaintiff  to  the  defendant.  *  *  *  At  the 
time  the  contract  was  entered  into  defendant  finally  showed  a  prefer- 
ence for  one  and  agreed  to  take  it  provided  the  case  would  be  stained  a 
certain  darker  color  and  the  tone  made  more  brilliant,  which  was  agreed 

^Q  *  *  * 

An  order  was  duly  sent,  confirming  the  verbal  order,  dated  April 
4,  1914.  On  April  7,  1914,  the  defendant  sent  a  letter  to  the  Bradford 
Piano  Company  repudiating  the  contract.  The  Bradford  Company 
on  May  2,  1914,  made  a  tender  of  delivery  of  the  piano  as  refinished. 
At  the  time  of  the  trial  the  piano  was  in  the  warerooms  of  the  Bradford 
Company.  *  *  *  The  trial  court  directed  a  verdict  for  the  defend- 
ant. 

SiEBKCKER,  J.  The  trial  court  held  that  the  facts  and  circumstances 
show,  as  matter  of  law,  that  the  property  in  the  piano  was  not  trans- 
ferred to  Miss  Hacker  at  the  time  the  written  order  for  the  purchase 
was  given  nor  prior  to  the  time  Miss  Hacker  repudiated  this  contract 
on  April  7,  1914.  The  plaintiff  assails  this  holding  of  the  trial  court 
upon  the  ground  that,  on  the  evidence,  it  was  a  question  for  the  jury  to 
determine  whether  or  not  the  parties  to  the  contract  intended  that 
the  property  in  the  piano  was  transferred  prior  to  the  time  defendant 
repudiated  the  sale.  The  evidence  shows  that  defendant  and  plaintiff's 
agent  negotiated  for  the  sale  on  April  2,  1914,  at  the  factory  of  the 
Cable  Company  in  the  city  of  Chicago,  where  the  defendant  selected 
the  piano  in  question.  It  appears  that  she  was  not  satisfied  with  the 
color  of  the  case  of  the  instrument  she  selected,  and  insisted  on  having 
the  color  altered  and  made  darker.  The  manufacturer  agreed  with 
plaintiff  and  defendant  to  alter  the  color  so  as  to  comply  with  the  un- 
derstanding of  the  parties,  to  regulate  the  tone  of  the  instrument  as 
defendant  desired  it,  and  to  insert  the  player  action  and  test  it,  as  is 
usually  done  before  sending  instruments  from  the  factory  to  custom- 
ers. The  sale  price  and  the  shipment  of  the  instrument  by  railroad  to 
Hartford,  Wis.,  by  the  plaintiff  were  agreed  upon  by  plaintift"'s  agent 
and  defendant,  as  specified  in  the  written  memorandum  of  sale  set 
out  in  the  above  statement.  The  defendant  signed  this  memorandum 
at  the  depot  in  Chicago.  The  evidence  shows  that  the  piano  was  re- 
turned to  the  varnishing  department  of  the  factory,  and  a  color  coat  of 
varnish  applied  to  bring  the  color  to  the  shade  desired  by  the  defend- 
ant.    After  this  coat  had  dried  two  more  coats  of  regular  varnish 


964  55ALES  (Part  4 

were  put  on.  which,  when  properly  dried,  completed  the  piano  so  that 
it  was  ready  for  shipment.  This  process  took  from  two  to  three  weeks, 
when  the  instrument  was  boxed  and  shipped.  Defendant  repudiated 
the  contract  on  the  fifth  day  from  the  date  of  sale. 

The  facts  and  circumstances  show  that  the  piano  was  not  in  a  de- 
liverable condition  at  any  time  up  to  the  date  of  the  repudiation  on 
April  7,  1914.  The  contract  also  required  the  shipment  of  the  in- 
strument from  Chicago  to  Hartford,  Wis.,  which  could  not  be  done, 
and  in  fact  was  not  attempted  to  be  done,  within  two  weeks  or  more 
after  the  sale.  The  conduct  of  the  parties  at  the  factory  and  in  nego- 
tiating the  sale,  when  taken  in  connection  with  the  terms  of  the  con- 
tract and  the  circumstances  of  the  case,  fail  to  show  that  it  was  mu- 
tually understood  and  intended  that  the  property  in  the  instrument 
should  pass  to  defendant  at  this  time.  It  is  plain  that  the  defendant 
had  no  control  of  nor  any  dominion  over  the  instrument  while  in  the 
factory,  and  that  the  Cable  Company  retained  full  control  and  posses- 
sion to  deal  with  the  property  as  its  own.  The  evidence,  showing  the 
entire  transaction,  does  not  permit  of  the  inference  that  the  parties 
mutually  intended  that  the  property  passed  to  defendant  under  the 
agreement  of  sale  of  the  instrument,  as  contemplated  by  the  provisions 
of  section  19,  rule  2,  of  the  Sales  Act.    *    *    * 

It  is  obvious  that  the  piano  was  not  in  a  deliverable  state  until  the 
coloring  of  the  case  had  been  altered  to  comply  with  the  conditions 
of  the  sale  within  the  contemplation  of  this  statute,  and  hence  the 
property  had  not  passed  when  defendant  repudiated  the  sale.  *  *  * 
Under  the  circumstances  and  conditions  of  the  sale,  defendant's  breach 
of  the  contract  on  April  7,  1914,  renders  her  liable  to  the  plaintiff  for 
the  damages  it  suffered  from  such  breach.  *  *  *  It  was  held  in 
Badger  State  Lumber  Co.  v.  Jones  Lumber  Co.,  140  Wis.  73,  121  N. 
W.  933,  that,  where  specific  performance  cannot  be  enforced,  either 
party  may  stop  performance  and  subject  himself  to  the  payment  of 
compensatory  damages.  'Tn  such  cases  it  is  held  that  an  action  can- 
not be  maintained  to  recover  the  contract  price,  but  may  be  maintained 
to  recover  damages  for  the  breach  of  the  contract" — citing  cases  in  this 
court.  The  complaint  is  framed  for  recovery  of  the  purchase  price, 
and  no  evidence  was  offered  to  show  damages  resulting  from  the 
breach'of  contract. 

Appellant  makes  no  claim  upon  the  record  for  recovery  of  damages. 
The  most  liberal  rule  of  practice,  *  *  *  in  the  light  of  the  record, 
would  entitle  plaintiff  to  no  more  than  nominal  damages,  and  requires 
affirmance  of  the  judgment.     *     *     * 

The  judgment  appealed  from  is  affirmed. 


AUTOMATIC  Ti:\IE-TABLE  ADVERTISING  CO.  v.  AUTOMATIC 
TIME-TABLE  CO. 

(Supreme  Judicial  Court  of  Maf^saohusctts,  1911.    208  Mass.  252,  94  N.  E.  462.) 

Action  by  the  Automatic  Time-Table  Advertising  Company  against 
the  Automatic  Time-Table  Company.  There  was  a  verdict  for  plain- 
tiff, and  defendant  brings  exceptions. 

This  was  an  action  of  contract  for  damages  for  defendant's  failure 
to  comply  with  its  terms.  The  contract  recited  that  defendant  sold 
plaintiff'  the  following  goods:     Twelve  automatic  time-table  machines 


Ch.  1)  TRANSFER   OF   TITLE   WHERE   GOODS   ASCERTAINED  9G5 

complete,  together  with  all  printed  matter,  time-tables,  electro-plates, 
printed  goods  and  advertising  matter,  and  advertising  contracts,  re- 
lating to  said  machines,  which  were  sold,  assigned  and  transferred 
to  the  said  Automatic  Time-Table  Company  by  the  said  Automatic 
Time-Table  Advertising  Company  under  agreement,  dated  July  13, 
1909.  Said  machines  are  described  and  located  as  follows :  One  ma- 
chine located  at  Merrimack  Square,  in  Lowell,  Mass.,  one  machine 
located  in  Lawrence,  Mass.,  one  machine  located  in  Haverhill,  Mass., 
one  machine  located  in  Salem,  Mass.,  one  machine  located  in  Lynn, 
Mass.,  one  machine  located  in  Chelsea,  Mass.,  six  machines  now  stand- 
ing in  the  shop  of  the  Automatic  Time-Table  Company,  58  Middle 
street,  Lowell,  Massachusetts,  and  numbered  on  door  on  battery  side 
of  case  resoectively  as  follows:    8,  9,  10,  11,  12  and  13. 

LoRiNG,'j.  The  contract  of  July  16th  was  a  contract  for  the  sale 
of  12  specific  machines  and  not  a  contract  for  the  sale  of  12  machines 
of  a  particular  description.  By  its  terms  it  purports  to  be  a  present 
sale,  but  it  was  a  sale  of  "twelve  automatic  time-table  machines  com- 
plete," and  there  was  evidence  that  no  one  of  the  "six  machines  now 
standing  ir  the  shop  of  the  Automatic  Time-Table  Company"  was 
complete. 

The  bill  of  exceptions  is  somewhat  obscure  on  this  point.  But  as 
we  interpret  it  there  was  evidence  that  apart  from  the  Gordon  batter- 
ies no  one  of  these  six  machines  was  complete.  We  speak  of  the  parts 
of  the  machine  other  than  the  Gordon  batteries  because  it  seems  to  have 
been  the  undisputed  fact  that  as  matter  of  practice  these  batteries 
were  not  put  into  the  machines  until  they  were  set  up  for  use  on  the 
premises  of  the  purchaser  or  licensee,  and  setting  up  these  machines 
on  the  premises  of  the  plaintiff  was  not  part  of  the  obligation  of  the 
vendor  under  the  contract  here  in  question.  It  appeared  that  that 
was  to  be  paid  for  by  the  vendee  in  addition  to  the  purchase  price 
named  in  the  written  contract. 

The  contract  does  not  say  that  the  "twelve  automatic  time-table  nia- 
chines"  were  complete,  but  it  says  that  the  defendant  sells  to  the  plain- 
tiff "twelve  automatic  time-table  machines  complete."  Evidence  that 
the  six  here  in  question  were  in  fact  incomplete  was  admissible  as 
one  of  the  circumstances  under  which  the  contract  was  made  and  so 
one  of  the  circumstances  in  the  light  of  which  it  was  to  be  construed. 

Since  something  had  to  be  done  to  the  machines  to  put  them  in  a  de- 
liverable state  and  a  different  intention  did  not  appear,  the  property 
in  the  6  machines  here  in  question  did  not  pass  on  the  execution  of 
the  contract.  The  transaction  was  governed  by  the  sales  act  (St.  1908, 
c.  237)  and  it  is  there  so  provided  in  section  19,  rule  2.  The  rule 
was  the  same  at  common  law.    *     *    * 

The  defendant  contends  that  the  cases  of  Glover  v.  Austin,  6  Pick. 
209,  Glover  v.  Hunnewell,  6  Pick.  222,  Sumner  v.  Hamlet,  12  Pick.  76, 
Thorndike  v.  Bath,  114  Mass.  116,  19  Am.  Rep.  318,  Mauger  v.  Crosby, 
117  Mass.  330,  and  Whittle  v.  Phelps,  181  Mass.  317,  63  N.  E.  907, 
are  decisions  to  the  contrary.  Those  are  cases  where  it  appeared  that 
it  was  the  intention  of  the  parties  to  sell  the  chattel  in  its  unfinished 
condition  with  an  agreement  by  the  seller  to  complete  it;  or  in  the 
language  of  St.  1908,  c.  237,  §  19,  those  were  cases  where  a  different 
intention  did  appear. 

The  contract  of  July  16th,  therefore,  was  not  a  contract  of  present 
sale  of  six  unfinished  machines  with  an  agreement  on  the  part  of  the 


966  SALES  (Part  4 

defendant  to  complete  them,  but  it  was  a  contract  to  complete  the  six 
unfinished  machines  which  on  completion  were  to  become  the  propert} 
of  the  plaintiff.  *  *  *  The  bill  of  exceptions  went  no  further  than 
to  state  that  the  "fire  greatly  damaged  the  6  machines  standing  in  the 
defendant's  premises."    *    *    * 

The  learned  counsel  for  the  defendant  misconceives  the  character 
of  the  action  now  before  us  when  he  contends  that  the  plaintiff  has  not 
put  himself  in  a  position  to  sue  on  the  footing  that  the  contract  is 
rescinded.  This  is  not  an  action  founded  on  the  decision  of  the  con- 
tract of  July  16th,  but  it  is  an  action  on  that  contract  to  recover  dam- 
ages for  the  defendant's  failure  to  complete  the  6  machines  which  at 
the  date  of  the  contract  were  standng  in  its  shop,  and  on  completion 
of  them  to  pass  the  title  to  the  plahitiff.    *    *    * 


SECTION  4.— FURTHER  ILLUSTRATIONS  OF  THE 
APPLICATION  OF  THE  PRESUMPTION 

An  owner  of  hogs  is  fattening  them  for  market.  There  is  a  con- 
tract to  sell  them  when  they  are  fattened.  Does  title  pass  at  the 
date  of  the  contract,  if  there  is  no  other  evidence  of  the  intention 
of  the  parties?  No;  because  the  hogs  are  not  in  the  condition 
which, the  parties  intend  that  they  shall  be  in,  at  the  time  when 
the  buyer  is  to  take  them.  But  suppose  the  buyer  says,  "What 
will  you  take  for  those  hogs?"  The  seller  names  a  price.  The 
buyer  adds,  "They  are  not  fat  enough  to  take  to  market,  but  I  will 
buy  them  anyway."  They  so  agree.  The  hogs  are  stolen  that 
night.  The  buyer  has  not  paid  the  price.  Must  he  pay?  Yes; 
because  the  subject  of  the  contract  here  is  not  "fattened  hogs,"  but, 
on  the  contrary,  the  sale  is  of  "unfattened  hogs." 

Where  the  contract  is  to  sell  logs  to  be  cut,  cotton  to  be  ginned, 
wheat  to  be  threshed,  etc.,  in  all  these  cases  the  parties  have  shown 
that  they  have  in  mind  as  the  subject  of  the  sale  certain  goods, 
then  identified,  but  which  are  to  be  put  in  a  different  condition  be- 
fore the  buyer  is  under  any  obligation.  But  the  greatest  of  care 
must  be  exercised  in  examining  the  evidence,  the  circumstances  of 
the  case,  custom,  etc.,  to  determine  whether  or  not  the  parties,  aft- 
er all,  intended  to  sell  these  identified  goods  in  their  present  un- 
finished or  incomplete  condition.  For  certainly  parties  may  buy 
and  sell  cotton  which  has  not  been  ginned,  or  wheat  not  yet  thresh- 
ed or  logs  which  have  not  yet  been  cut  or  sawed  into  lumber.  Pay- 
ment of  the  price  is  strong  evidence  that  the  parties  intended  title 
to  pass  to  the  goods  in  their  incomplete  condition.  Other  evi- 
dence may  be  equally  strong,  but  neither  will  be  conclusive.  An- 
other variation  arises  when  the  parties  have  agreed  upon  a  sale  of 
goods  in  an  incomplete  state,  with  the  superadded  obligation  upon 
the  seller  to  complete  them.  It  is  possible  here  that  the  obligation 
of  the  seller  to  complete  the  goods  is  a  new  obligation,  based  upon 
an  entirely  different  contract — i.  e.,  a  contract  by  which  the  buyer 
employs  the  seller  to  do  some  work  upon  the  buyer's  own  goods. 


Ch.  1)  TRANSFER   OF   TITLE   WHERE   GOODS   ASCERTAINED  907 

The  opportunity  for  variation  is  indefinite,  a  fact  which  empha- 
sizes the  impossibility  of  isolating  all  conceivable  situations  in 
selling  transactions  and  in  laying  down  beforehand  a  rule  of 
thumb  by  which  all  such  cases  may  be  decided.  This  cannot  be 
done.  The  intention  of  the  parties  is  the  test  and  the  parties  may 
intend  anything. 


SECTION  5.— APPLICATION  OF  THE  PRESUMPTION 
WHERE  ACTS  OF  WEIGHING  OR  MEASURING  MUST 
ALONE  BE  DONE  TO  ASCERTAIN  THE  AMOUNT  OF 
THE  PURCHASE  PRICE 

Suppose  we  are  confronted  with  a  contract  to  sell  a  stack  of 
hay,  or  a  pile  of  wood  or  coal,  where  the  mass  is  identified  and  is 
in  a  deliverable  state;  that  is,  the  parties  have  agreed  to  buy  and 
sell  that  particular  mass  in  its  present  state,  not  in  some  other 
condition,  as  would  be  the  case  if  the  contract  called  for  baled 
hay,  or  wood  sawed  into  specified  lengths,  or  the  coal  screened. 
We  have  a  case,  therefore,  where  the  presumption  which  we  have 
been  discussing  should  apply,  and  title  would  pass  at  the  time  the 
contract  was  made,  unless  the  parties  expressly  agree  that  title 
shall  pass  at  some  later  time.  But  suppose  the  parties  do  not  know 
what  quantity,  measured  in  tons,  cords,  etc.,  is  sold.  They  have 
agreed  upon  a  sale  of  an  identified  mass,  and  they  have  agreed 
upon  the  price  per  unit  of  weight  or  measure,  but  they  do  not 
know  what  the  total  price  will  be.  Query :  Is  the  presumption 
that  title  passes  at  the  time  of  the  contract  made  inapplicable, 
simply  because  the  amount  of  the  purchase  price  has  not  been  as- 
certained? The  courts  have  not  agreed  upon  this  question.  Most 
courts  have  held  that  title  does  not  pass  in  such  a  case,  provided 
the  act  of  weighing  or  measuring  was  to  be  done  by  the  seller. 
Where  the  act  of  weighing  or  measuring  to  ascertain  the  price  was 
by  the  contract,  to  be  done  by  the  buyer,  the  general  rule  was  that 
the  title  passed  at  the  time  the  contract  was  made.  When  the 
courts  held  that  the  title  did  not  pass,  if  the  seller  was  bound  to 
weigh  or  measure  the  goods,  they  were  not  holding  that  the  fact 
that  the  price  was  unascertained  meant  that  the  goods  were  not 
in  a  deliverable  state,  but  they  did  say  that  it  was  just  as  sensible 
to  suppose  that  the  parties  intended  title  not  to  pass  until  the 
goods  were  weighed  or  measured  and  the  price  fixed  as  it  was  to 
assume  that,  when  goods  at  the  time  of  the  contract  were  not  in 
the  physical  condition  contemplated  by  the  contract,  the  parties  in- 
tended title  not  to  pass  until  the  goods  were  put  in  a  deliverable 
condition ;  that  is,  there  were  two  rules,  similar,  but  not  identical. 
Is  it,  after  all,  a  fair  assumption  that  the  parties  intend  title  not 
to  pass  until  the  price  has  been  ascertained,  the  goods  in  all  other 
respects  being  ascertained  and  in  a  deliverable  state?  The  Sales 
Act  has  left  out  all  mention  of  this  question,  the  intention  being 


968  SALES  (Part  4 

thus  to  change  the  rule  of  presumption.  Probably,  therefore,  in 
all  those  states  which  have  enacted  the  Sales  Act,  the  former  rule, 
that  title  did  not  pass  when  the  goods  were  yet  to  be  weighed  or 
measured  either  by  the  seller  or  buyer,  to  ascertain  price,  has  been 
changed,  so  that  the  special  presumption  that  title  passes  upon 
execution  of  the  contract  to  sell  goods  in  a  deliverable  state  ap- 
plies. 

SECTION  6.— PRESUMPTION  THAT  TITLE  PASSES  AT 

THE  DATE  OF  THE  CONTRACT  IS  APPLICABLE 

WHERE  THE  SALE  IS  A  SALE  ON  CREDIT 

The  sale  on  credit  is  well  understood.  The  legal  effect  of  the 
transaction  is  that  the  seller  intends  to  part  with  his  ownership  in 
the  goods.  Usually  possession  of  the  goods  passes  to  the  buyer, 
or  the  goods  may  in  part  be  delivered  to  him.  It  is  possible  for 
the  seller  to  remain  in  possession,  title  having  passed.  In  such 
case  the  seller  simply  has  possession  of  the  buyer's  goods.  The 
seller  is  in  very  much  the  same  situation  that  any  bailor  is  in  with 
respect  to  property  in  his  possession.  There  is  this  difference :  A 
seller  in  possession  of  goods  already  sold  does  have  the  power  to 
sell  to  a  third  party,  and  thus  to  cut  off  the  claim  of  the  first  pur- 
chaser, while  a  bailor  does  not  have  such  power.  This  point  will 
be  taken  up  later. 

The  Sales  Act  expressly  contemplates  that  the  presumption  that 
title  passes  at  the  date  of  the  contract  is  applicable  to  sales  on 
credit,  because  section  19,  rule  1,  provides  that  the  presumption  is 
applicable,  "whether  the  time  of  payment,  or  the  tinre  of  delivery, 
or  both,  be  postponed."  The  sale  on  credit  therefore,  is  a  sale 
where  the  seller  has  intended  to  part  with  ownership.  How  is 
such  intention  manifested?  This  intention  may  be  expressly  or 
impliedly  shown.  A  sale  is  never  presumed  to  be  on  credit. 
Where  wholesalers  sell  to  retailers,  it  is  very  common  for  the  in- 
voice to  state  that  the  goods  are  sold  on  ten,  thirty,  or  sixty  days' 
time,  etc.  In  such  a  case,  of  course,  the  intention  that  the  goods 
are  sold  on  credit  is  clearly  shown.  Frequently  resort  must  be 
had  to  the  course  of  dealing  between  the  parties.  This  is  another 
illustration  of  the  importance  of  custom  in  business  transactions. 
People  do  not  always  put  into  language  everything  that  goes  on 
in  their  minds  with  respect  to  a  particular  transaction.  Each  as- 
sumes that  the  other  knows  what  he  is  thinking  about.  Time  does 
not  permit  extended  discussion.  Where  parties  have  had  business 
relationships  extending  over  considerable  periods  of  time,  their 
dealings  have  repeated  themselves  so  often  that  it  is  not  necessary 
to  put  all  of  their  understandings  into  writing.  Perhaps  the  ma- 
jority of  the  obligations  of  the  parties  are  not  adverted  to  in  the 
course  of  each  new  transaction.  When  controversy  arises,  their 
meaning  can  be  discovered  only  by  resort  to  the  course  of  dealing. 


Cll.  1)  TRANSFER   OF   TITLE   WHERE   GOODS   ASCERTAINED  909 

These   propositions  are   true,   no   matter   what   particular   type   of 
controversy  has  arisen. 

The  question  as  to  whether  the  course  of  dealing  in  a  particular 
case  shows  a  sale  on  credit  is  only  illustrative.  If  A.  has,  for 
some  substantial  period  of  time,  had  a  charge  account  at  a  store, 
and  on  a  particular  occasion  asks  for — let  us  say — a  hat ;  he  finally 
says,  "I  will  take  this,"  and  the  buyer  thereupon  wraps  it  up  and 
places  the  hat  on  the  counter  and  in  front  of  A. ;  A.  picks  it  up 
and  says,  "Charge  it  to  me" — would  the  seller  have  the  right  to 
demand  possession  of  the  hat  on  the  theory  that  a  sale  was  in- 
tended for  cash?  Probably  not.  The  course  of  dealing  shows  a 
sale  on  credit.  It  is  A.'s  hat,  although  he  has  not  yet  paid  for  it. 
A.  would  not  be  guilty  of  converting  the  shop-keeper's  hat,  nor  of 
stealing  the  hat.  The  shopkeeper  might  feel  aggrieved  if  in  his 
own  mind  he  had  actually  intended  a  cash  sale  and  had  intended  to 
refuse  further  credit  to  A. ;  but,  since  he  had  not  made  known 
what  was  actually  going  on  in  his  mind,  this  unexpressed  inten- 
tion would  not  control.  On  the  other  hand,  had  the  hat  blown 
off  the  counter  into  the  street,  where  it  was  run  over  by  a  passing 
automobile,  the  shopkeeper  would  have  no  regrets  that  he  had  not 
made  his  secret  intention  known,  for  in  this  case,  the  sale  being  a 
sale  on  credit,  title  passing,  the  buyer  was  under  an  obligation  to 
pay  for  the  hat.  It  was  A.'s  hat  which  blew  away,  and  not  the 
shopkeeper's  hat. 

Resort  to  custom  is  but  one  way  of  ascertaining  the  intention 
of  the  parties  as  to  whether  the  sale  was  a  sale  on  credit.  Every- 
thing said  and  done  by  the  parties  during  negotiations  is  equally 
important.  Sometimes  we  shall  find  conclusive  evidence  as  to 
intention  in  one  group  of  circumstances ;  sometimes  in  another. 
The  parties  should  not  leave  such  matters  unprovided  for.  Uncer- 
tainty as  to  the  nature  and  extent  of  contract  obligations  fosters 
controversy  and  unnecessary  litigation.  These  things  are  within 
the  control  of  the  parties  while  the  contract  is  being  made.  After 
that,  it  is  a  closed  book,  not  subject  to  alteration,  except  upon  mu- 
tual agreement.  Of  course,  the  necessity  for  speed  in  the  con- 
duct of  modern  business  renders  impossible  the  exercise  of  the 
highest  degree  of  care.  It  is  better  to  take  the  risk  sometimes 
than  to  slow  up  the  process  of  exchange.  But  the  risk  is  there, 
and  the  parties  should  realize  the  source  and  the  nature  of  that  risk. 


ABRAHAM   v.   KARGER. 

(Supreme  Court  of  Wisconsin,  1898.     100  Wis.  387,  76  N.  W.  330.) 

Per  Curiam.  This  was  an  action^  for  the  recovery  of  a  lot  of  mer- 
chandise stored  by  the  defendant,  Kafger,  at  No.  559  East  Water  street, 
Milwaukee,  and  was  in  charge  of  one  Bing,  a  relative  of  Karger,  to 
sell  for  him  on  commission.  The  plaintiff,  Clara  Abraham,  was  at 
this  time  conducting  a  business  under  the  name  of  the  "Milwaukee 


970  SALES  (Part  4 

Knitting  Works."  This  business  was  managed  for  her  by  her  father, 
Louis  Abraham,  as  her  agent,  who  a  few  days  prior  to  August  26, 
1896,  began  negotiations  with  Bing  for  the  purchase  of  the  merchan- 
dise belonging  to  the  defendant,  Karger.  These  negotiations  were  in 
part  conducted,  according  to  the  evidence  of  the  plaintiff,  Abraham, 
in  the  presence  of,  and  with  the  sanction  of,  the  defendant,  Karger. 
There  was  a  dispute  between  the  witnesses  for  the  plaintiff,  on  the  one 
side,  and  the  defendant  and  his  witnesses,  on  the  other,  as  to  the  terms 
of  sale  finally  agreed  on  between  the  plaintiff  and  defendant. 

On  the  part  of  the  plaintiff,  Louis  Abraham  testified  that  the  agree- 
ment as  finally  made  was  that  the  plaintiff  was  to  pay  the  defendant, 
Karger,  for  this  stock  $2,000  in  cash,  and  to  deliver  to  him  the  note 
of  one  W.  A.  Meyer  for  $500;  and  this  was  corroborated  by  the 
evidence  of  James  L.  Gates,  a  witness  on  the  part  of  the  plaintiff,  who 
testified  that  the  defendant,  Karger,  stated  to  him  that  such  was  the 
case.  The  testimony  of  Karger  and  his  witnesses  was  that  the  plain- 
tiff was  to  pay  to  the  defendant  $2,500  in  cash,  and  that  I'Carger  did 
not  agree  or  consent  in  any  way  to  accept  the  note  of  Meyer  in  pay- 
ment of  part  of  the  consideration ;  and  it  appeared  that  this  dispute  as 
to  the  terms  of  the  sale  was  the  only  matter  upon  which  there  was 
any  conflict  of  testimony.  On  all  other  points  the  witnesses  substan- 
tially agreed.  At  the  time  when  the  bargain  was  made,  Louis  Abra- 
ham paid  Bing  $25  to  bind  the  bargain.  The  next  day,  the  plaintiff, 
Abraham,  paid  to  Bing  $1,500,  and  at  the  time  Bing  gave  to  Abraham 
an  invoice  or  statement,  drawn  up  in  Bing's  handwriting,  which  recites 
the  value  of  the  merchandise  at  $4,100,  the  payment  by  cash  and  mer- 
chandise in  exchange  of  $3,100;  the  balance  of  $1,000  to  be  paid,  $500 
in  cash,  and  $500  in  W.  A.  Meyer's  note.  Both  Bing  and  Abraham 
admit  that  the  purchase  price  was  $2,500,  and  that  no  merchandise 
was  given  in  exchange ;  that  the  bill  or  invoice  was  made  out  this  way  as 
a  matter  of  convenience  between  the  parties.  And  Bing  further  claims 
that  the  statement  that  the  balance  was  to  be  $500  in  cash  and  $500 
in  notes  did  not  express  the  true  understanding  between  them.  August 
24th,  the  plaintiff,  through  Louis  Abraham,  paid  $500  more  on  the 
purchase;  and,  on  the  26th  of  August,  Louis  Abraham  tendered  to 
the  defendant,  Karger,  Meyer's  note  for  $500,  payable  to  the  Milwau- 
kee Knitting  Works,  and  indorsed,  "C.  Abraham,  Proprietor."  This 
tender  was  refused,  and  Karger  said  to  Abraham,  "If  you  don't  have 
the  money  before  noon,  I  am  going  to  store  the  goods,  and  you  will 
have  to  pay  the  costs ;"  whereupon  the  plaintiff,  Clara  Abraham, 
brought  replevin,  charging  the  unlawful  and  wrongful  detention  of  the 
property. 

The  court,  in  its  charge  to  the  jury,  in  effect  told  them  that  the  ques- 
tion at  issue  was  whether  the  sale  was  to  be  for  cash  and  notes,  as 
testified  to  by  the  plaintiff's  witnesses,  or  for  cash  solely,  as  testified 
to  by  the  defendant  and  his  witnesses ;  that,  if  they  found  the  claim  of 
the  plaintiff  to  be  correct,  then  the  verdict  should  be  in  favor  of  the 
plaintiff;  if  they  found  the  facts  as  to  the  sale  or  agreement  to  be  as 
claimed  by  the  defendant,  then  they  should  find  for  the  defendant. 
The  jury  found  for  the  plaintiff,  and  that  she  was  the  owner  of,  and 
entitled  to  the  possession  of,  the  goods  seized  under  the  writ ;  that  the 
same  were  unlawfully  detained  from  her  by  the  defendant;  that  the 
value  of  the  property  was  $3,500;    and  the  plaintiff  had  judgment 


Ch.  1)  TRANSFER   OF   TITLE   WHERE    GOODS   ASCEUTAIXED  971 

against  the  defendant  for  the  possession  of  the  property,  and  ^f or  the 
recovery  of  the  costs,  together  with  the  damages  of  6  cents.     *     *     * 

There  was  evidence  on  the  part  of  the  plaintiff  to  maintain  these 
contentions.  It  is  estabUshed  by  the  verdict  as  a  verity  that  payment 
of  the  $2,000  in  money,  and  tender  of  the  note  of  Meyer  for  $500, 
were  made.  Such  payment  and  tender  of  payment  prior  to  the  time 
of  the  commencement  of  the  action  had  the  same  effect  as  actual  pay- 
ment upon  the  rights  of  the  parties.  There  is  nothing  to  show  that 
the  contract  was  executory,  so  far  as  anything  remaining  to  be  done  to 
the  goods  was  concerned.  The  evidence  shows  that  they  were  ready 
for  delivery,  and  set  apart,  and  the  price  agreed  upon,  and  a  partial 
delivery  made  before  the  tender  of  the  $500  note.  The  goods  were  in 
the  sight  of  the  parties,  and  were  pointed  out  in  the  presence  of  Karger, 
the  defendant,  when  it  was  agreed  that  he  was  to  get  $2,000  in  cash 
and  W.  A.  Meyer's  note  for  $500  for  them.  There  can  be  no  doubt 
but  that,  under  the  circumstances  stated,  the  title  to  the  goods,  and  the 
right  of  possession  as  well,  passed  to  the  plaintiff,  and,  if  afterwards 
they  were  wrongfully  detained,  she  might  maintain  replevin  for  them. 
"When  the  terms  of  sale  are  agreed  on,  and  the  bargain  is  struck,  and 
everything  the  seller  is  to  do  with  the  goods  is  complete,  the  contract 
of  sale  becomes  absolute  as  between  the  parties,  without  actual  pay- 
ment or  deHvery,  and  the  property  and  the  risk  of  accident  to  the  goods 
vests  in  the  buyer.  He  is  entitled  to  the  goods  on  payment  or  tender 
of  the  price,  and  not  otherwise,  when  nothing  is  said  at  the  sale  as 
to  the  time  of  delivery  or  time  of  payment.  But  if  the  goods  are  sold 
upon  credit,  and  nothing  is  agreed  upon  as  to  the  time  of  delivery  of 
the  goods,  the  vendee  is  immediately  entitled  to  the  possession,  and  the 
right  of  property  vests  at  once  in  him."  2  Kent,  Comm.  (9th  Ed.)  671. 
*  *  *  The  evidence  as  to  what  actually  did  occur,  or  what  was 
agreed  on  between  the  parties,  is  in  some  respects  conflicting  and  con- 
tradictory. The  case  was  rightly  submitted  to  the  jury  to  find  upon 
the  vital  point  in  dispute,  and  thus  determine  whether  the  property 
and  right  of  possession  passed  to  the  plaintiff.  The  evidence  was  clearly 
sufficient  to  sustain  the  finding  of  the  jury,  and  the  court  could  not  have 
properly  directed  a  verdict  for  the  defendant.     *     *     * 

A  discussion  of  the  evidence  contained  in  the  printed  case  would 
serve  no  useful  purpose.  For  these  reasons,  the  judgment  of  the 
superior  court  of  Milwaukee  county  must  be  affirmed.  Judgment  is 
ordered  accordingly.  

SECTION  7.— PRESUMPTION  THAT  TITLE  PASSES  AT 
THE  DATE  OF  THE  CONTRACT  OVERCOME  BY 
PROOF  THAT  THE  PARTIES  INTENDED  A  CASH 
SALE 

We  are  still  discussing  the  application  of  the  rule  of  presump- 
tion stated  in  section  19,  rule  1,  that  where  there  is  an  uncondi- 
tional contract  to  sell  specific  goods  in  a  deliverable  state,  the 
property  in  the  goods  passes  when  the  contract  is  made.  We 
see  that  in  a  sale  on  credit  title  passes  to  the  buyer  when  the  con- 
tract is  made.  It  will  usually  not  be  difficult  to  decide  whether  a 
particular  contract  was  a  sale  on  credit  or  a  cash  sale.  Suppose 
the  evidence,  the  character  of  which  was  commented  upon  in  the 


972  SALES  (Part  4 

preceding  section,  shows  that  the  parties  did  not  intend  a  sale  on 
credit,  but  on  the  contrary  the  evidence  shows  that  the  passing  of 
the  title  to  the  goods  was  in  some  way  tied  up  with  the  obliga- 
tion to  pay  the  purchase  price.  If  we  had  only  two  kinds  of  sales, 
sales  on  credit  and  cash  sales,  it  would  be  easy  to  determine  the 
circumstances  under  which  we  would  have  a  cash  sale.  But  the 
trouble  is  that  there  are  several  types  of  transactions  which  are 
not  sales  on  credit.  One  of  them  is  the  cash  sale,  another  is  the 
conditional  sale — and  there  are  at  least  three  varieties  of  the  con- 
ditional sale — and  finally  there  is  a  sale  for  which  we  have  no 
single  descriptive  word,  which  may  be  called  a  sale  with  the  reser- 
vation of  a  lien.     How  are  we  to  identify  the  cash  sale? 

So  far  we  have  discussed  but  one  of  these — the  sale  on  credit. 
After  deciding  that  a  particular  sale  is  not  a  sale  on  credit,  the 
question  narrows  down  to  the  ascertainment  of  the  features  which 
distinguish  a  cash  sale  from  a  sale  with  a  reservation  of  a  lien, 
on  the  one  hand,  and  from  the  three  types  of  conditional  sales,  on 
the  other.  To  distinguish  the  cash  sale  from  the  sale  with  a 
reservation  of  a  lien  is  the  more  difficult  problem.  We  shall  dis- 
cuss this  problem  in  this  section.  The  analysis  of  the  three  kinds 
of  conditional  sales  will  be  taken  up  in  the  succeeding  sections, 
wherein  the  difference  between  them  and  the  cash  sale  will  appear. 

In  order  to  get  the  proper  perspective  here,  we  should  recall  the 
cases  and  the  discussion  in  sections  3  and  4.  We  were  there 
dealing  with  contracts  to  sell  ascertained  goods,  in  some  of  which 
the  goods  were  in  a  deliverable  condition ;  in  others  the  goods 
were  not  in  a  deliverable  condition.  We  found  that  title  passed  at 
the  time  the  contract  was  made,  when  the  goods  were  in  a  deliv- 
erable condition ;  but,  if  they  were  not,  title  did  not  pass  until  they 
were  put  in  a  deliverable  condition.  Notice  that,  in  such  cases,  we 
were  concerned  only  with  one  type  of  evidence ;  i.  e.,  the  evi- 
dence as  to  the  physical  condition  of  the  goods.  For  the  time 
being  we  did  not  recognize  the  possibility  that  evidence  of  a 
wholly  different  nature,  not  dealing  with  the  physical  condition 
of  the  goods,  might  completely  change  the  result.  In  this  section 
we  must  open  the  doors  to  such  possibilities  and  see  what  effect 
they  have  upon  our  former  determinations. 

All  contracts  of  sale,  which  are  not  sales  on  credit  nor  condition- 
al sales,  break  up  into  two  groups.  These  two  groups  possess  the 
common  element  that  the  buyer  cannot  gain  actual  possession  of 
the  goods  until  he  pays  the  purchase  price.  The  two  groups  differ 
in  the  nature  of  the  right  reserved  by  the  seller  for  the  purpose  of 
securing  his  actual  possession  of  the  goods  until  the  price  is  paid. 
In  the  first  group,  the  nature  of  this  security  is  a  lien  upon  the 
goods ;  in  the  second  group,  the  nature  of  the  seller's  security  is 
title  itself.  The  first  may  be  called  a  sale  with  the  reservation  of  a 
lien ;  the  second  is  called  the  cash  sale.  The  cases  which  we  dis- 
cussed in  sections  3  and  4  might  have  been  either  sales  with  the 
reservation  of  a  lien  or  cash  sales.     The  cases  did  not  call  for  a 


Ch.  1)  TRANSFER   OF   TITLE   WHERE    GOODS   ASCERTAINED  973 

determination  of  this  question.  But  the  question  is  frequently 
presented :  How  are  sales  of  the  one  class  to  be  distinguished 
from   sales  of  the  other? 

Before  taking  up  this  matter  a  word  should  be  added  concern- 
ing the  nature  of  a  lien.  A  lien  may  be  defined  as  a  mere  personal 
right  to  retain  the  possession  or  physical  control  over  the  goods 
until  the  other  party  to  the"  contract  has  performed  his  obliga- 
tions. The  lien  gives  its  holder  no  remedies  of  compelling  pay- 
ment in  addition  to  that  which  the  lienholder  has  independent  of 
his  lien.  The  lien  does  bring  about  an  additional  pressure  upon 
the  debtor  to  pay.  The  ownership  in  the  property  is  in  the  debtor. 
There  has  simply  been  subtracted  from  the  total  rights  of  owner- 
ship the  right  to  retain  possession  until  a  certain  thing  is  done. 
To  illustrate  the  rather  delicate  nature  of  the  right  of  the  lien- 
holder,  we  find  that  the  act  of  a  voluntary  surrender  of  the  pos- 
session of  the  goods  to  their  owner  causes  the  lien  to  disappear. 
Even  if  the  former  lienholder  regained  possession  the  lien  would 
not  thereby  be  re-created.  Common  carriers  have  liens  on  goods 
shipped  to  secure  payment  of  freight ;  pledgees  of  property  also 
hold  liens  on  the  property  pledged.  Similarly  an  unpaid  seller 
has  a  lien  on  the  goods  to  secure  payment  of  the  price. 

We  are  now  prepared  to  consider  the  circumstances  .under 
which  the  seller  has  merely  a  lien  on  the  goods  still  in  his  pos- 
session, or  whether  title  is  retained.  The  parties  may  do  either. 
If  they  use  language  which  expressly  reserves  a  lien  or  title,  such 
case,  of  course,  furnishes  no  difficulty.  But  in  the  majority  of 
transactions  the  parties  do  not  think  about  this  matter,  and  they 
have  no  understanding  regarding  it.  Again,  we  are  forced  to  ex- 
plore the  circumstances  of  the  case,  the  course  of  dealing,  custom, 
etc.,  in  search  of  evidence  which  may  indicate  what  the  parties 
probably  would  have  intended,  had  their  attention  been  called  to 
this  aspect  of  their  dealings.  The  most  important  evidence  in  de- 
termining this  question  is  as  to  the  time  when  the  parties  contem- 
plated the  exchange  of  the  goods  for  the  price,  with  respect  to  the 
time  when  the  contract  was  made ;  that  is,  we  are  dealing  with 
three  acts:  (1)  The  execution  of  the  contract;  (2)  the  delivery 
of  the  goods ;  (3)  the  payment  of  the  price.  In  both  cases — i.  e., 
a  sale  with  a  reservation  of  a  lien,  or  a  contract  to  sell,  title  being 
retained — we  know  that  act  (2),  the  delivery  of  the  goods,  and 
act  (3),  the  payment  of  the  price,  must  be  concurrent  acts;  they 
are  to  be  done  at  the  same  time.  So  the  solution  of  the  problem 
turns  on  whether  the  parties  intend  that  acts  (2)  and  (3)  are  to  be 
done  at  the  same  time  that  act  (1)  is  done.  If  the  parties  contem- 
plate that  all  three  acts  are  to  be  done  at  the  same  time,  we  have 
a  cash  sale.  If  any  fairly  substantial  period  of  time  is  intended  to 
elapse  after  act  (1),  before  acts  (2)  and  (3)  are  performed,  we 
have  a  sale  with  a  reservation  of  a  lien.  In  cases  of  doubt,  the 
sale  should  be  regarded  as  a  sale  with  a  reservation  of  a  lien,  rather 
than  a  cash  sale.     The  learned  author  of  the  Sales  Act  and  of  a 


974  SALES  (Part  4 

treatise  on  the  law  of  sales,  Professor  Williston,  thus  states  the 
rule:  "It  is  submitted  that  the  true  test  is  this:  If  the  parties 
when  they  make  their  bargain  contemplate  an  exchange  of  the 
goods  for  the  price  immediately  on  making  the  bargain,  the  sale 
is  to  be  regarded  as  a  cash  sale.  There  is  no  occasion  to  invoke 
the  doctrine  of  a  sale  subject  to  a  lien.  On  the  other  hand,  if  the 
parties  do  not  contemplate  an  immediate  exchange  of  the  money 
for  the  goods,  even  though  they  do  contemplate  that  possession 
of  the  goods  shall  not  be  delivered  until  the  price  is  paid,  it  is 
presumptively  an  absolute  sale  as  soon  as  the  parties  agree  on 
the  terms  of  the  bargain  and  the  goods  are  in  a  deliverable  state 
in  accordance  with  the  rules  previously  given.  In  case  of  doubt 
it  seems  better  to  assume  that  the  latter  kind  of  bargain  was  in- 
tended." ^ 

In  the  early  law  every  sale  was  presumed  to  be  a  cash  sale — 
that  is,  where  title  was  reserved  until  the  price  was  paid — but  to- 
day the  presumption  is  that  every  sale  of  goods  in  a  deliverable 
state  is  presumed  to  be  a  sale  with  the  reservation  of  a  lien  only, 
until  circumstances  or  other  evidence  show  it  to  be  a  cash  sale,  con- 
ditional sale,  or  a  sale  on  credit. 

There  are  two  well-known  transactions  of  daily  occurrence, 
wherein  the  circumstances  show  that  the  delivery  of  the  goods  and 
the  payment  of  the  price  are  to  occur  at  the  time  the  contract  is 
made  and  hence  a  cash  sale  results.  These  cases  are:  (1)  Ordi- 
nary retail  sales  over  the  counter ;  and  (2)  where  the  buyer  is  to 
execute  and  deliver  some  negotiable  instrument  at  the  time  of  the- 
delivery  of  the  goods  to  him.  If  A.  walks  into  a  store  and  asks  for 
a  certain  article,  the  price  being  given,  and  A.  indicates  that  he  will 
buy  the  article,  all  the  circumstances  go  to  show  that  the  merchant 
expects  payment  before  delivery  of  the  goods,  and  also  that  pay- 
ment and  delivery  are  to  be  then  made.  This  is  a  cash  sale.  Title 
remains  in  the  seller  until  he  is  paid.  If,  as  frequently  happens,  the 
goods  are  actually  placed  in  the  hands  of  the  buyer  before  he 
pays  the  price,  this  is  not  a  case  where  possession  has  been  volun- 
tarily parted  with.  The  merchant  has  simply  allowed  his  cus- 
tomer to  pick  them  up  for  the  temporary  purpose  of  examining 
them.  Legal  possession  has  not  passed.  If  A.  were  to  leave  the 
store  with  the  goods  without  paying  the  price,  this  act  probably 
would  be  larceny.  So,  also,  where  the  goods  are  shipped  to  the 
buyer  under  a  negotiable  document  of  title  running  to  the  order 
of  the  seller,  and  such  bill  of  lading  is  accompanied  by  a  bill  of 
exchange  or  trade  acceptance,  as  it  is  frequenth'  called,  and  both 
the  bill  of  lading  and  the  bill  of  exchange  are  sent  to  some  third 
party,  usually  a  bank,  for  presentment  for  payment  or  acceptance, 
title  remains  in  the  holder  of  the  bill  of  lading  until  the  bill  of 
exchange  is  actually  paid  or  accepted,  accordingly  as  the  bill  of 
exchange  demanded  pa3mient  or  acceptance.     Cases  involving  ne- 

1  Willistou  on  Sales,  p.  549. 


Ch.  1)         TrvANsnoK  of  title  wiikre  goods  ascertained  975 

gotiable  bills  of  lading  will  be  discussed  more  completely  in  a  later 
chapter. 

Confining  cash  sales  to  these  types  of  trj^nsactions,  there  is  left  a 
great  many  sales  where  the  delivery  of  the  goods  and  the  payment 
of  the  price  are  to  occur  at  some  subsequent  date.  Here  the  pre- 
sumption is  that  title  passes  when  the  contract  was  entered  into, 
the  seller  reserving  a  lien  only  to  secure  payment  of  the  price. 

In  determining  whether  a  particular  transaction  is  a  cash  sale, 
as  that  term  has  been  used  in  this  discussion,  too  much  importance 
must  not  be  attached  to  the  use  of  the  words  "terms  cash,"  or 
"cash  sale,"  as  these  words  are  used  in  the  contract.  Business  men 
sometimes  call  a  sale  a  cash  sale  when  in  reality  they  contem- 
plate that  credit  be  given  for  a  short  space  of  time.  If  such  be 
the  case,  the  parties  have  not  entered  into  a  cash  sale,  as  that  bar- 
gain is  regarded  in  the  law,  but  they  have  entered  into  a  different 
kind  of  contract.  A  contract  will  not  derive  its  legal  characteristics 
from  the  use  of  any  particular  words.  Words  are,  after  all,  only  in- 
dications as  to  what  the  parties  meant.  Their  conduct  and  other 
circumstances  are  equally  important.  A  man  may  say  that  he  can 
run  one  hundred  yards  in  nine  and  two-fifths,  but  his  statement  of 
his  ability  and  intention  to  do  so  does  not  break  any  records.  So 
the  parties  may  say,  "We  will  enter  into  a  cash  sale,"  but  the 
fact  that  they  formed  this  decision  is  not  conclusive  that  this 
sort  of  contract  was  the  legal  result  of  their  conduct.  One  cannot 
but  be  impressed  with  the  fact  that  in  the  study  of  the  law,  that 
legal  relationships  and  legal  effects  cannot  be  permanently  linked 
to  any  one  word,  series  of  words,  or  phrases.  Language  is  too 
unstable  to  bring  about  this  much  desired,  but  wholly  impossible, 
result.  The  notion  that  the  law  is  all  carefully  and  neatly  arranged 
in  books,  readily  accessible  and  definite  in  meaning,  is  sadly  un- 
true. The  knowledge  of  the  law's  real  nature,  and  of  the  inherent 
difficulties  involved  in  its  construction  and  in  its  application,  is 
perhaps  of  more  value,  ultimately,  than  a  certain  degree  of  ac- 
quaintance with  specific  rules  and  doctrines. 

The  "cash  sale"  may  also  be  described  as  a  "contract  to  sell." 
In  fact,  the  latter  expression  more  accurately  indicates  the  legal 
effect  of  the  transaction  heretofore  called  a  cash  sale.  A  sale  and 
a  contract  to  sell  are  not  the  same  thing.  As  defined  in  the  Sales 
Act: 

Section  1,  Subsec.  1.  A  contract  to  sell  goods  is  a  contract 
whereby  the  seller  agrees  to  transfer  the  property  in  goods  to  the 
buyer  for  a  consideration  called  the  price. 

A  sale  is  defined : 

Section  1,  Subsec.  2.  A  sale  of  goods  is  an  agreement  whereby 
the  seller  transfers  the  property  in  goods  to  the  buyer  for  a  con- 
sideration called  the  price. 

The  distinction  between  a  sale  and  a  contract  to  sell  is,  there- 
fore, that  in  a  sale  title  to  the  property  passes  to  the  buyer  at  the 
time  the  contract  is  entered  into.     It  is  executed  to  this  extent. 


976  SALES  (Part  4 

The  seller  has  partly  performed.  Title  has  passed.  It  may  be  a 
sale  on  credit,  or  a  sale  with  the  reservation  of  a  lien,  or  that  type 
of  a  conditional  sale  wherein  title  passes  to  the  buyer,  but  subject 
to  a  condition  that  title  may  be  revested  in  the  seller  upon  the  elec- 
tion of  the  buyer  not  to  keep  the  goods — a  type  of  transaction  yet 
to  be  discussed.  In  all  these  cases  the  bargain  is  a  real  sale,  be- 
cause title  has  passed.  But,  as  we  have  seen,  buyer  and  seller  may 
be  bargaining  concerning  ascertained  goods  in  a  deliverable  con- 
dition, under  circumstances  where  the  intention  shown  is  that  title 
shall  not  pass  until  the  price  is  paid.  This  has  been  called  a  cash 
sale,  but  it  is  also  one  kind  of  contract  to  sell. 

There  are  types  of  contracts  to  sell  other  than  cash  sales.  For 
example:  (1)  The  parties  may  agree,  irrespective  of  the  time 
Avhen  the  price  is  to  be  paid,  that  the  title  to  the  goods  shall  pass 
at  some  specified  future  date ;  or  (2)  they  may  agree  that  title 
shall  pass  at  such  time  in  the  future  as  the  buyer  may  elect  to 
take  the  goods ;  or  (3)  where  the  bargain  relates  to  goods  not  in 
a  deliverable  condition,  the  presumption  is  that  a  contract  to  sell 
results.  As  we  have  noted,  however,  if  at  the  time  the  contract  is 
made  the  goods  are  ascertained  and  in  a  deliverable  condition,  the 
presumption  will  be  that  a  sale  and  not  a  contract  to  sell,  was  in- 
tended. Before  the  transaction  will  be  construed  as  an  executory 
contract  to  sell,  strong  evidence  must  appear  that  the  parties  in- 
tended to  postpone  the  passage  of  title  until  some  future  time,  or 
until  some  event  occurred.  Notice  that  in  the  above  cases  the 
transaction  is  construed  as  a  contract  to  sell,  solely  because  the 
parties  intended  it  to  be  such.  The  law  would  permit  them  under 
the  circumstances  to  enter  into  a  sale.  There  is  one  kind  of  trans- 
action which  will  always  be  construed  as  a  contract  to  sell,  as  dis- 
tinguished from  a  sale,  even  though  the  parties  have  unequivocally 
manifested  their  intention  to  make  a  sale.  A  seller  cannot  pass 
title  to  goods  which  at  the  time  the  contract  was  made  were  not 
ascertained.  A  rule  of  law  forbids  it.  This  type  of  case  will  be 
taken  up  in  the  next  chapter. 


SECTION  8.— CONTRACTS  ON  SALE  OR  RETURN  AND 
CONTRACTS  TO  SELL  ON  APPROVAL 

Sales  Act,  Section  19,  Rule  3  (1).  When  goods  are  delivered  to 
the  buyer  "on  sale  or  return,"  or  on  other  terms  indicating  an  in- 
tention to  make  a  present  sale,  but  to  give  the  buyer  an  option  to 
return  the  goods  instead  of  paying  the  price,  the  property  passes 
to  the  buyer  on  delivery,  but  he  may  revest  the  property  in  the  sell- 
er by  returning  or  tendering  the  goods  within  the  time  fixed  in  the 
contract,  or,  if  no  time  was  fixed,  within  a  reasonable  time. 

Sales  Act,  Section  19,  Rule  3  (2).  When  goods  are  delivered 
to  the  buyer  on  approval  or  on  trial  or  on  satisfaction,  or  other 
similar  terms,  the  property  therein  passes  to  the  buyer :     (a)  When 


Ch.  1)  TUANSFEU    OF    TITLE    WHEItE    GOODS    ASCERTAINED  977 

he  signifies  his  approval  or  acceptance  to  the  seller  or  does  any 
other  act  adopting  the  transaction,  (b)  If  he  does  not  signify  his 
approval  or  acceptance  to  the  seller,  but  retains  the  goods  without 
giving  notice  of  rejection,  then,  if  a  time  has  been  fixed  for  the  re- 
turn of  the  goods,  on  the  expiration  of  such  time,  and,  if  no  time 
has  been  fixed,  on  the  expiration  of  a  reasonable  time.  What  is  a 
reasonable  time  is  a  question  of  fact. 

A  great  deal  of  business  is  done  on  the  basis  of  contracts  on  sale 
or  return  and  contracts  to  sell  on  approval.  A  manufacturer  or 
wholesaler  may  find  it  difficult  to  put  his  product  on  the  market. 
In  order  to  induce  the  trade  to  display  and  attempt  to  sell  his 
goods  he  may  be  willing  to  ship  them  to  a  retailer  upon  the  under- 
standing that  he  is  not  to  pay  for  them  until  he  elects  to  keep  them. 
Likewise,  between  individuals,  the  seller,  in  a  last  attempt  to  make 
a  sale,  will  agree  and  insist  upon  the  buyer  taking  the  goods  home 
with  him  for  further  examination  or  trial;  the  buyer  not  being 
bound  to  pay  for  them  until  he  elects  to  take  or  keep  them,  or 
unless  he  keeps  them  beyond  the  time  fixed  by  the  seller.  Some- 
times such  sales  are  called  sales  on  consignment.  But  too  much 
importance  must  not  be  attached  to  the  use  of  any  particular  words 
or  phrases  as  indicating  the  character  of  the  transaction.  From 
the  business  standpoint  both  these  contracts  look  alike.  In  each 
the  seller  has  surrendered  actual  possession  to  the  buyer,  and  in 
each  the  buyer  is  not.  at  the  time  he  takes  possession,  under  any 
obligation  to  pay  for  them.  In  the  law  these  transactions  are  very 
different,  and  an  examination  into  the  distinctions  will  throw  some 
light  upon  the  business  problems  as  to  which  type  of  contract  it  is 
desirable  to  enter  into. 

The  difTerence  all  turns  on  the  fact  that  in  the  sale  on  return 
title  passes  to  the  buyer,  while  in  the  contract  to  sell  on  approval 
title  remains  in  the  seller.  The  buyer  in  both  cases  has  possession. 
In  the  sale  on  return  the  title  is  in  the  buyer,  but  attached  to  it  is  a 
condition  that  the  title  may  by  the  voluntary  act  of  the  buyer  be 
revested  in  the  seller.  In  contracts  we  called  this  kind  of  condition 
a  condition  subsequent.  In  the  contract  to  sell  on  approval  the 
buyer,  while  he  does  no"t  have  title,  may  by  his  own  voluntary  act 
take  title  to  the  goods ;  that  is,  he  will  obtain  title  when  he  elects 
to  take  them.  This  is  a  transfer  of  possession,  and  the  condition 
which  must  happen  before  title  vests  in  the  buyer  is  the  act  of 
his  making  an  election  to  keep  the  goods.  Such  a  condition  is  a 
condition  precedent  to  the  passing  of  title.  What  are  the  conse- 
quences? In  the  sale  on  return,  title  being  in  the  buyer,  the 
risk  of  loss  and  other  incidents  of  title  are  in  the  buyer.  If  the 
goods  are  lost  or  damaged  without  his  fault,  the  buyer  will  be 
held  liable  for  such  loss,  even  though  he  elects  not  to  take  the 
goods.  If  the  sale  is  on  approval,  the  buyer  is  a  mere  bailee  until 
he  elects  to  take  the  goods.  Risk  of  loss  is  not  in  the  buyer.  The 
incidents, of  title  remain  in  the  seller. 
B..&;  B.Bus.Law— 62 


978  SALES  (Part  4 

D.   M.  FERRY  &  OO.  v.  HALL,  Tax  Collector. 

(Supreme  Court  of  Alabama,  1014.    188  Ala.  178,  66  South.  104,  L.  R.  A. 

lOlTB,    620.) 

GardnKr,  J.  *  *  *  The  appellant  brought  suit  against  the  ap- 
pellee for  the  recovery  of  $203  paid  by  appellant  to  appellee,  as  tax 
collector  for  Houston  county,  under  protest ;  suit  having  been  brought 
by  said  tax  collector  for  said  sum  due  as  taxes  and  garnishment  is- 
sued in  aid  thereof. 

The  cause  was  submitted  in  the  court  below  upon  an  agre'ed  state- 
ment of  acts,  in  which  it  was  agreed  that  the  facts  in  said  cause  were 
as  set  out  in  said  agreement,  and  that  the  "cause  be  submitted  to  the 
jury  upon  said  statement  of  facts,  and  that  the  liability,  if  any,  of  the 
defendant  arises  out  of  said  facts."  The  agreement  further  stipulates : 
"It  is  further  agreed  by  and  between  the  parties  hereto  that  the  only 
question  presented  for  the  court  for  its  decision,  in  this  case  is  whether 
or  not  the  assessment  for  the  collection  of  the  taxes,  due  on  said  seed, 
should  have  been  made  against  the  said  D.  M.  Ferry  &  Co.,  or  against 
the  merchants  to  whom  said  D.  M.  Ferry  &  Co.  had  shipped  the  seed, 
and  in  whose  possession  said  seed  were  at  the  time  the  assessments  were 
made,  under  the  facts  hereinafter  set  forth ;  and  if  the  assessments  for 
the  collection  of  said  taxes  should  have  been  made  against  said  D. 
M.  Ferry  &  Co.,  then  the  defendant  is  entitled  to  judgment;  but  if 
said  assessments  for  the  collection  of  said  taxes  should  not  have  been 
made  against  D.  M.  Ferry  &  Co.,  then  the  plaintifif  is  entitled  to  re-  . 
cover." 

The  sole  question,  therefore,  for  determination  is:  In  whom,  for 
the  purposes  of  taxation,  vested  the  title  or  property  to  the  seed  in 
possession  of  the  retail  merchants?  If  the  seeds  were  the  property  of 
the  appellant,  then  it  is  conceded  and  agreed  the  defendant  is  entitled 
to  judgment,  and,  on  the  other  hand,  it  is  likewise  conceded  and  agreed 
that,  if  the  seeds  were  the  property  of  the  retail  merchants,  then  appel- 
lant is  entitled  to  judgment. 

The  order  of  the  retail  merchant,  the  letter  of  acceptance  accom- 
panied by  the  invoice,  and  the  placing  of  the  paster  marked  in  the  rec- 
ord "D"  on  the  box  when  shipped,  together  with  the  method  or  course 
of  dealing  with  reference  to  said  transactions  between  the  wholesaler 
and  the  retailer,  as  disclosed  by  said  agreed  statement  of  facts,  are 
the  matters  upon  wliich,  according  to  said  agreement,  we  are  to  con- 
clude the  title  to  said  seed. 

The  order  has  on  it  the  word  "consignment,"  and  that  which  is 
signed  by  the  retailer  has  the  words  "to  sell  on  commission,"  showing 
the  terms  as  40  per  cent,  commission  on  the  papers  sold,  and  25  per 
cent,  on  the  packages  sold,  from  the  invoice  prices ;  the  unsold  seed, 
with  boxes,  to  be  returned  in  good  order  when  called  for,  and  amount 
due  for  all  seeds  not  so  returned  to  be  paid  at  the  same  time. 

The  invoice  which  accompanied  the  memorandum  of  shipment  had 
thereon,  among  other  things,  the  following:  "Terms:  To  be  settled 
for  when  traveler  calls.  Sold  to  Mr.  John  Doe,  etc.  We  agree  to 
buy  back  all  unsold  seeds  with  boxes  at  prices  billed,  less  discounts, 
when  our  traveler  calls."     *     *     * 

The  following  extract  from  the  agreed  statement  of  facts  explains 
the  method  or  course  of  dealing  as  between  the  wholesale  and  retail 


Cll.  1)  TRANSFER   OF   TITLE   AVIIKRK    OOOKS   ASCERTAINED  ^      1>79 

merchants,  as  to  such  transactions:  "At  the  close  of  each  season  in 
which  said  seed  was  so  sold,  the  traveling  salesman  representing  D. 
M.  Ferry  &  Co.,  would  call  upon  the  retail  merchant  and  adjust  the 
local  dealer's  account  with  D.  M.  Ferry  &  Co.,  taking  back  the  unsold 
seeds  in  said  box  or  boxes,  allowing  credit  for  the  seed  at  invoice 
prices,  and  collecting  cash  for  the  balance  of  the  seed  at  irivoice  prices, 
less  the  commission  provided  for  in  the  original  contract.  The  re- 
tailer, in  selling  the  foregoing  seed  to  his  customers,  would  fix  the 
price  at  which  he  would  sell  them,  and  would  also  have  entire  con- 
trol of  the  seed,  while  the  seed  was  in  his  possession  and  control,  and 
would  also  sell  the  seed  and  collect  for  the  seed  from  his  customers 
in  his  own  name.  D.  M.  Ferry  &  Co.  were  in  no  way  interested  in 
the  price  which  the  retailer  obtained  for  the  said  seed,  but  merely  took 
back  the  unsold  seed,  allowing  credit  therefor  at  invoice  prices  and 
collecting,  for  the  seed  not  returned,  the  invoice  prices,  less  commis- 
sions. The  said  seed  were  in  packages  and  papers.  D.  M.  Ferry  & 
Co.  printed  a  price  upon  said  packages,  but  printed  no  price  upon  the 
papers ;  but,  for  the  seed  not  returned  by  the  retailer  to  D.  M.  Ferry 
&  Co.,  the  retailer  accounted  to  D.  M.  Ferry  &  Co.  for  each  package, 
not  returned,  at  the  price  printed  on  said  package,  and  at  the  price 
of  five  cents  for  each  paper,  less  the  commission.  The  retailer  renders 
no  account  to  D.  M.  Ferry  &  Co.  of  any  sales  made  by  him,  and  gives 
no  information  in  regard  thereto,  but  the  representative  of  D.  M.  Ferry 
&  Co.  goes  annually  to  each  retailer,  makes  his  own  investigation  from 
the  seed  that  the  retailer  has  on  hand,  and  states  the  account  between 
the  retailer  and  D.  M.  Ferry  &  Co.     *     *     *  " 

Mr.  Mechem,  in  his  work  on  Sales,  in  volume  1,  §  46,  has  this  to 
say:  "The  distinction  between  sale  and  an  agency  to  sell  is  ordinarily 
clear  and  simple,  but,  unfortimately,  many  cases  are  presented  in 
which  the  parties,  for  the  purpose  of  evading  the  operation  of  some 
local  statute,  of  defeating  the  claims  of  creditors,  or  otherwise,  have 
made  contracts  involving  such  a  confused  jumble  of  the  elements  of 
both  sale  and  agency  that  it  is  exceedingly  difficult  to  determine  their 
true  character.  Certain  of  these  contracts  have  evidently  been  framed 
for  the  purpose  of  concealing  a  sale  under  the  guise  of  an  agency,  while 
others  have  been  drawn  with  a  view  to  having  them  construed  as  con- 
tracts of  sale  or  agency,  as  might  best  suit  the  convenience  or  sub- 
serve the  purposes  of  their  framers.  In  construing  these  anomalous 
instruments,  courts  look  chiefly  at  the  essential  nature  and  preponderat- 
ing features  of  the  whole  instrument,  and  not  at  the  peculiar  form  of 
isolated  parts  of  it.  It  matters  very  little  what  the  parties  have  chosen 
to  call  their  contract.  *  *  *  If  the  parties  have  made  a  contract 
which  really  operates  to  transfer  the  title,  it  is  a  sale,  notwithstanding 
they  may  have  labeled  it  a  'special  selling  factor  appointment,'  or  have 
expressly  stipulated  that  the  alleged  factor  'shall  never  purchase  such 
goods  for  his  own  account.'  So  with  regard  to  the  use  of  the  term 
'consign.'  It  may  express  the  true  state  of  the  case,  and,  if  so,  it 
will  be  given  effect;  or  it  may  be  a  mere  subterfuge,  and,  if  it  be  the 
latter,  'there  is  no  magic  in  that  word  which  can  take  from  the  trans- 
action its  real  character.'  " 

This  is  peculiarly  illustrated  by  the  cases  of  Arbuckle  Bros.,  whose 
contracts  have  been  the  subject  of  review  in  some  of  the  courts  of  last 
resort,  notably  those  of  Georgia,  Tennessee,  and  Virginia,  wherein  it 


980  SALES  (Part  4 

was  held  that  notwithstanding  the  contract  was  called,  and  purports 
on  its  face  to  be,  a  "special  selling  factor  appointment,"  stipulates  for 
a  retention  of  title,  and  that  the  goods  shall  be  consigned  and  held  by 
the  party,  merely  as  a  factor,  and  that  such  factor  shall  never  pur- 
chase such  goods  on  his  own  account,  and  the  same  to  be  sold  in  name 
of  the  factor,  but  only  as  the  factor  of  Arbuckle  Bros.,  and  only  at 
such  prices  and  on  such  terms  as  said  Arbuckle  Bros,  may  give  from 
time  to  time.  The  contract  provided  also  for  certain  "allowances  and 
commissions."  There  were  other  provisions  as  to  payments,  etc.,  and 
these  courts  held  that  the  entire  contract  disclosed  a  sale  and  not 
an  agency,  notwithstanding  the  many  such  expressions  to  be  found 
therein.  Arbuckle  Bros.  v.  Gates  &  Brown,  95. Va.  802,  30  S.  E.  496; 
Arbuckle  Bros.  v.  Kirkpatrick,  98  Tenn.  221.  39  S.  W.  3,  36  L.  R. 
A.  285,  60  Am.  St.  Rep.  854;  Snelling  v.  Arbuckle  Bros.,  104  Ga.  362, 
30  S.  E.  863. 

Speaking  of  this  contract,  the  court  m  the  latter  case  says :  it  ap- 
pears to  have  been  drawn  for  the  purpose  of  enabling  Arbuckle  Bros, 
to  'run  with  the  hare  or  hold  with  the  hounds,'  according  as,  in  the 
exigencies  of  a  given  case,  their  interest  might  dictate." 

In  reference  to  the  same  contract,  the  Supreme  Court  of  Virginia,  in 
above  case  of  Arbuckle  Bros.  v.  Gates  &  Brown,  said :  "The  agreement 
was  an  attempt  to  accomplish  that  which  cannot  be  done — to  make  a 
sale  of  personal  property  and  at  the  same  time  constitute  the  buyer 
simply  an  agent  of  the  seller  to  hold  the  property  until  it  is  paid  for. 
The  two  things  are  incompatible  and  cannot  co-exist.  The  agreement 
had  in  it  every  element  of  sale.     *     *     *  " 

While,  in  the  instant  case,  a  portion  of  the  contract  has  the  words 
"sell  on  commission"  and  the  word  "consignment"  written  thereon, 
yet  other  portions  (memorandum  of  shipment  and  invoice,  etc.)  make 
use  of  the  words  "sold  to"  and  agreement  to  "buy  back,"  and  nothing 
is  said  as  to  the  title  to  the  seeds  or  that  the  retail  merchant  is  in  fact 
the  agent  of  the  wholesaler,  and,  from  what  is  therein  contained,  it  is 
difficult  to  determine  the  real  intention  of  the  parties.  The  agreed 
statement  of  facts,  however,  contains  the  method  of  business,  the 
course  of  dealing  in  reference  to  such  transactions,  and  from  such 
agreement  it  is  disclosed  that  the  retail  merchant  acquires  complete 
dominion  and  control  of  the  seeds,  makes  sales  to  whom  he  pleases  at 
his  own  prices  and  on  whatever  terms  he  pleases,  and  makes  no  ac- 
counting whatever  to  the  wholesaler.  Indeed,  from  the  agreed  statement 
of  facts  it  appears  the  retailer  deals  with  the  seed  as  his  own.  He 
need  not  sell  at  all,  but  may  give  away  the  seed  or  use  them  himself. 
He  is  to  account  to  the  wholesaler  for  the  seed  not  returned  at  the  in- 
voice price,  less  the  commission,  when  the  traveling  man  calls  and  ad- 
justs the  accounts,  giving  the  retailer  credit  for  the  unsold  seed  at  in- 
voice price.  This  settlement  is  not  to  be  made  as  the  seeds  are  sold, 
but  the  settlement  is  to  be  made  when  the  "traveler  calls";  that  is, 
on  demand,  as  it  were.  The  retailer  sold  to  his  customer  in  his  own 
name,  and  the  wholesaler  was  in  no  manner  interested  in  the  price 
obtained,  but  merely  took  back  the  unsold  seeds,  allowing  credit  there- 
for at  invoice  prices.  When  sold  by  the  retailer,  the  proceeds  of  the 
sale  were  his  own,  and  no  duty  rested  on  him  to  account  therefor  to 
the  wholesale  dealer. 

Under  the  agreed  statement  of  facts  as  shown  by  the  record,  guided 
by  the  rules  of  law  as  found  .in  the  foregoing  authorities,  we  think  it 


Ch.  1)  TRANSFER   OF   TITLE   WHERE    GOODS   ASCERTAINED  981 

quite  clear  that  the  retailer  was  not  a  mere  agent  but  was  in  fact  a  pur- 
chaser of  seeds.  It  is  shown  that  the  retailer  had  the  right  to  return 
the  unsold  seeds,  and  that  the  wholesaler  agreed  to  buy  them  back 

at  invoice  prices.  What,  then,  is  the  relation  between  the  parties? 
*     *     * 

We  are  of  the  opinion  that  the  real  transaction  between  D.  M. 
Ferry  &  Co.  and  the  retail  merchants,  under  the  agreed  statements  of 
facts,  was  that  of  "sale  or  return,"  as  disclosed  by  these  authorities 
and  definitions.  The  retailer  was  to  pay  for  the  seeds  not  returned 
at  a  certain  price  previously  fixed  by  the  parties,  and  at  a  certain  time 
(that  is,  when  the  "traveler  calls"),  and  he  had  the  option  of  return- 
ing seeds  not  sold.  We  deem  a  further  discussion  unnecessary,  and 
indeed  recognize  that  this  opinion  is  doubtless  of  undue  length,  but  we 
trust  pardonable  on  account  of  the  importance  of  the  principles  in- 
volved.    *     *     * 

We  therefore  conclude  that  the  transactions  disclosed  by  this  record, 
as  appears  from  the  agreed  statement  of  facts,  are  not  consignments, 
creating  the  relation  of  principal  and  agent,  but  are  what  are  known 
as  "sale  or  return,"  and  that  therefore  the  property  vested  in  the  re- 
tailer upon  delivery,  subject  to  be  defeated  by  the  condition  subse- 
quent. For  the  purpose  of  taxation,  therefore,  the  seeds  under  the 
agreed  statement  of  facts  were  the  property  of  the  retailer,  and  the 
appellant  was  not  liable  for  such  taxes. 

The  court  below  erred  in  giving  the  affirmative  charge  for  the  de- 
fendant and  in  refusing  that  asked  by  the  plaintiff.  The  judgment  of 
the  circuit  court  is  therefore  reversed,  and,  as  the  cause  was  tried  upon 
an  agreed  statement  of  facts,  one  will  be  here  rendered  in  favor  of 
the  plaintiff,  for  the  sum  sued  for. 

Reversed  and  rendered. 


NEAL,  CLARK  &  NEAL  CO.  v.  TARBY. 

(Supreme  Court  of  New   York,    Special  Term.   1917.     99  Misc.  Rep.  380, 
16.3  N.   Y.   Supp.  675.) 

Action  by  the  Neal,  Clark  &  Neal  Company  against  Michael  J. 
Tarby.     From  a  judgment  dismissing  the  complaint,  plaintiff  appeals. 

Wheeler,  J.  The  facts  in  this  case  are  undisputed,  and  briefly 
stated  are :  That  the  plaintiff",  among  other  things,  deals  in  Victrolas. 
One  Fertig  was  the  solicitor  of  advertising,  and  in  that  capacity  was 
accustomed  to  visit  the  plaintiff's  store.  On  the  occasion  of  one  of 
his  visits  the  subject  of  the  purchase  of  a  Victrola  was  brought  up  by 
one  of  plaintiff's  salesmen.  Fertig  was  asked  if  he  had  decided  to 
purchase  a  Victrola,  to  which  he  replied:  "No,  we  haven't  reached  a 
point  where  we  will  decide  on  it."  The  salesman  suggested  sending 
one  out  on  approval,  to  which  Fertig  replied :  "If  you  want  to  take 
a  chance,  and  send  it  out  on  approval,  with  the  understanding  I  don't 
have  to  purchase  it  unless  I  want  it,  all  right."  To  this  the  salesman 
replied :  "All  right,  I  will  send  it  out  with  a  selection  of  records,  and 
see  if  we  can't  later  sell  you  the  machine." 

They  then  selected  a  Victrola  of  the  price  of  $150.  which  seems  to 
have  been  fully  understood,  and  the  machine  was  delivered  to  Fertig. 
The  salesman  testified  that  some  time  later  he  asked  Fertig  if  he  had 
decided  to  purchase,  to  which  Fertig  replied :     "We  haven't  quite  de- 


982  SALES  (Part  4 

cided  to  purchase  the  machine."  To  which  the  salesman  replied :  "All 
right;  let  us  know  when  you  are  ready."  It  further  appears  that 
Fertig  moved  the  machine  to  the  Lenox  Hotel,  where  he  went  to  live, 
and  while  there  sold  and  delivered  the  Victrola  to  the  defendant  in 
this  action,  who  paid  Fertig  $75  therefor.  Fertig  then  left,  and  has 
not  since  been  seen. 

The  plaintiff,  learning  the  facts,  and  claiming  to  own  tlie  machine, 
demanded  it  of  the  defendant,  who  refused  to  deliver  it  up.  The 
plaintiff  then  brought  this  action  in  the  City  Court  to  recover  posses- 
sion. The  City  Court  dismissed  its  complaint,  and  the  case  now  comes 
before  this  court  on  appeal. 

The  plaintiff,  in  substance,  contends  there  never  was  any  consum- 
mated sale ;  that  the  title  of  the  property  never  passed  to  Fertig,  and 
he  could  give  none  to  the  defendant;  that  Fertig  stole  or  converted 
the  Victrola  to  his  own  use,  and  the  plaintiff  should  have  recovered. 
The  defendant  contends  he  is  protected  as  a  bona  fide  purchaser  for 
value  under  the  provisions  of  the  Personal  Property  Law.  and  that 
the  court  below  did  not  err  in  dismissing  the  plaintiff's  complaint. 

The  defendant  stands  on  the  provisions  of  section  129  of  that  act, 
as  added  by  Laws  1911,  c.  571,  providing;  "The  buyer  is  deemed  to 
have  acce])ted  the  goods  when  he  intimates  to  the  seller  that  he  has 
accepted  them,  or  when  the  goods  have  been  delivered  to  him  and  he 
does  any  act  in  relation  to  them  which  is  inconsistent  with  the  owner- 
ship of  the  seller,  or  when,  after  the  lapse  of  a  reasonable  time,  he  re- 
tains, tlYe  goods  without  intimating  to  the  seller  that  he  has  rejected 
them." 

It  seems  to  us  that  this  section  governs  the  case  here  presented  for 
review.  If  we  correctly  interpret  the  transaction  between  the  plaintiff 
and  Fertig,  it  amounted  to  this :  The  plaintiff  delivered  to  Fertig  the 
Victrola  in  question  for  trial,  with  the  option  to  purchase  it  at  the 
price  of  $150.  This  offer  was  at  no  time  canceled  or  recalled  by  the 
plaintiff".  There  was  evidently,  under  this  arrangement,  no  actual 
sale,  and  no  transfer  of  title  to  Fertig,  until  he  had  accepted  the  offer, 
or  until  he  did  some  act  in  relation  thereto  "inconsistent  with  the  own- 
ership of  the  seller."  The  instant  Fertig  undertook  to  sell  the  machine 
as  his  own,  he  did  an  act  inconsistent  with  the  ownership  of  the  plain- 
tiff. It  was  evident  that  he  had,  in  fact,  acted  upon  the  plaintiff's  op- 
tion to  sell,  and,  in  the  absence  of  fraud,  it  became  a  consummated 
sale  between  the  parties  to  it.  Under  such  circumstances,  I  think 
there  can  be  no  question  but  what  the  plaintiff'  would  have  had  a  per- 
fect right  to  have  sued  and  recovered  from  Fertig  the  agreed  pur- 
chase price  of  the  machine. 

Section  100  of  the  Personal  Property  Law  also  provides:  "When 
goods  are  delivered  to  the  buyer  on  approval  or  on  trial  or  on  satisfac- 
tion, or  other  similar  terms,  the  property  therein  passes  to  the  buyer — 
(a)  When  he  signifies  his  approval  or  acceptance  to  the  seller  or  does 
any  other  act  adopting  the  transaction."     *     *     * 

It  is  urged,  and  with  force,  that  the  act  of  Fertig  in  selling  the 
Victrola  to  the  defendant  was  not,  after  all,  an  act  affirming  or  accept- 
ing the  right  to  purchase  at  an  agreed  price,  but  really  a  conversion 
or  larceny  of  the  property  delivered  to  him,  and  therefore  ought  not 
to  defeat  the  right  of  the  plaintiff  to  follow  the  property  into  whose- 
soever hands  it  may  be  found. 


Ch.  1)  TRANSFER   OF   TITLE   WHERE   GOODS   ASCERTAINED  98'i 

We  think,  however,  the  provisions  of  the  Personal  Property  Law 
above  quoted  were  designed,  not  only  to  define  the  rights  of  parties 
to  such  transactions  as  between  themselves,  but  also  to  afford  protec- 
tion to  third  persons  who  may  deal  with  the  buyer  on  the  strength  of 
his  apparent  ownership  of  the  property  possessed,  so  that  any  one  in- 
trusting another  with  the  possession  of  property  under  circunistances 
such  as  in  this  case  does  so  largely  at  his  own  risk,  while  an  innocent 
purchaser  dealing  with  one  in  possession  will  be  fully  protected.   "'   *   * 

I  am  of  the  opinion  that  the  judgment  appealed  from  should  be  af- 
firmed. 


DINSMOKE  V.  RICE. 

(Court  of  Appeals  of  Maryland,  1916.     128  Md.  209,  97  Atl.  .537.) 

Action  by  Marion  G.  Dinsmore  against  Nathaniel  A.  Rice,  in  which 
the  defendant  brings  a  counterclaim.  Judgment  for  the  defendant, 
and  plaintiff  appeals.  . 

Constable,  J.  *  *  *  The  appellant  brought  suit  for  the  re- 
covery of  an  'amount  claimed  to  be  due  him  for  feed  furnished  the 
appellee.  The  appellee  admitted  the  correctness  of  the  account  filed 
with  the  narr,  but  claimed  by  way  of  set-off  that  the  appellant  was 
indebted  to  him  in  a  sum  less  than  the  amount  sued  for,  the  same  be- 
ing the  purchase  price  of  a  horse  alleged  to  have  been  purchased  by 
the  appellant  from  him,  and  paid  the  appellant  the  difference  between 
the  account  and  the  purchase  price  of  the  horse.  The  only  question 
involved  in  the  trial  was  whether  or  not  the  appellee  was  entitled  to 
an  allowance  for  the  purchase  price  of  the  horse.     *     *     * 

The  appellant's  contention  was  that  the  horse  died  in  his  possession 
under  such  a  set  of  circumstances  that  he  was  under  no  obligation  to 
pay  for  it.  Those  circumstances  were,  according  to  the  appellant's 
testimony,  that  the  appellant,  Dinsmore,  went  to  the  stables  of  the  ap- 
pellee and  looked  at  a  horse  that  Dr.  Nolan,  a  veterinary  surgeon,  had 
recommended  to  him.  The  horse,  apparently,  being  suited  for  the 
purpose  for  which  it  was  wanted  and  the  price  agreed  upon,  was  or- 
dered by  Dinsmore  to  be  sent  to  his  place,  on  trial,  but  no  definite  time 
was  fixed  for  its  acceptance  or  rejection.  The  horse  was  delivered  on 
Thursday.  The  follov/ing  Friday  and  Saturday  were  stormy  days, 
and  the  horse  was  worked  for  about  five  hours  on  the  latter  day.  On 
the  afternoon  of  that  day,  Dinsmore  called  Rice  over  the  telephone  and 
told  him  he  had  not  been  able  to  report  as  to  the  horse,  and  said  to 
him:  "I  have  been  detained  downtown  and  I  will  either  accept  or 
reject  the  horse  by  Monday,  12  o'clock." 

The  next  day,  Sunday,  the  horse  was  slightly  ill  with  a  cold,  and 
Dinsmore  again  called  Rice  and  told  him  that  the  horse  was  ill,  but 
that  Dr.  Nolan  had  reported  it  as  not  anything  serious,  and  that  Rice 
had  answered:  "That  is  all  right.  Marion;  he  can  do  as  much  for 
him  as  I  can."  On  Wednesday,  it  for  the  first  time  was  apparent 
that  the  horse  was  very  ill,  and  shortly  afterwards  on  the  same  day  it 
died  from  congestion  of  the  lungs. 

The  contention  of  the  appellee  was  that  it  was  not  a  sale  on  trial, 
but  that  the  horse  had  been  purchased  outright  on  the  day  it  was  de- 
livered ;  and  he  denied  that  he  had  had  the  conversation  testified  to  by 
Dinsmore  as  to  reporting  on  Monday  whether  or  not  he  would  take 


984  SALES  (Part  4 

the  horse.  The  appellant  offered  no  prayers,  but  the  appellee  offered 
several,  two  of  which  were  granted  by  the  court,  and  it  is  the  first  of 
these  which  the  appellant  urges  is  erroneous  and  should  be  the  basis 
of  a  reversal.  The  prayer  is  as  follows:  "Even  though  the  jury 
find  that  the  horse  mentioned  in  the  evidence  was  delivered  by  the  de- 
fendant. Rice,  to  the  plaintiff,  Dinsmore,  on  trial,  yet,  nevertheless, 
their  verdict  should  be  for  the  defendant,  if  they  further  find  that 
under  all  the  circumstances  of  the  case,  the  plaintiff  retained  the  horse 
for  an  unreasonable  time  without  giving  notice  of  his  rejection  of 
said  horse  to  the  defendant."     *     *     * 

Assuming  the  truth  of  the  testimony  of  the  appellant  that  the  ap- 
pellee agreed  to  allow  him  until  Monday  at  12  o'clock,  to  either  ac- 
cept or  reject  the  horse,  although  this  testimony  may  be  said  to  be  ma- 
terially different  from  the  testimony  at  the  former  trial,  we  neverthe- 
less are  of  the  opinion  that  the  above  referred  to  provisions  of  the 
Uniform  Sales  Act  are  still  applicable  to  this  case.     *     *     * 

Assuming  the  appellant's  testimony  to  mean  that,  although  in  the 
beginning  of  the  transaction  no  time  had  been  fixed  for  a  return  of 
the  horse,  yet  by  the  Saturday  conversation  the  time  for  the  return 
was  fixed  as  of  Monday  at  12  o'clock,  still  in  order  to  escape  liability, 
it  was  incumbent  upon  him  to  show  at  or  before  that  time  he  had 
given  notice  of  rejection.  And  as  to  this,  there  is  not  a  word  in  the 
record  that  there  was  a  communication  of  any  character  between  the 
parties  after  Saturday's  conversation,  except  the  notice  on  Sunday, 
that  the  horse  was  suffering  from  a  cold  until  some  little  time  after  the 
death  of  the  horse.  That  he  merely  communicated  to  the  seller  the 
fact  that  the  horse  was  slightly  ill  and  was  being  attended  by  the  buy- 
er's veterinarian  could  not  be  considered'  by  the  jury  as  operating  as 
a  performance  of  his  agreement  to  notify  bim  of  his  acceptance  or 
rejection.  The  appellant  clearly  explained  that  it  was  his  under- 
standing that  if  he  did  not  notify  the  seller  by  Monday  at  12  o'clock, 
the  horse  was  to  belong  to  him. 

Admitting  all  of  the  testimony  of  the  appellant  as  to  the  Sunday 
notice,  we  are  of  the  opinion  that  there  is  nothing  in  it  that  could  be 
construed  to  relieve  him  of  his  obligation  to  give  notice  of  his  rejec- 
tion. The  prayer,  therefore,  instead  of  requiring  the  jury  to  find 
whether  or  not  the  horse  was  retained  an  unreasonable  time  without 
notice  of  rejection,  should  have  directed  a  verdict  for  the  defendant  if 
the  jury  found  that  the  buyer  retained  it  withovit  notice  of  rejection 
after  Monday  at  12  o'clock.  In  the  absolute  absence  of  any  such  no- 
tice, the  jury  could  not  have  found  any  other  verdict,  so,  therefore,  no 
injury  was  done  the  appellant  by  the  granting  of  the  prayer  in  the 
form  offered.     *     *     * 

Finding  no  reversible  error,  the  judgment  will  be  affirmed.    *    ♦    * 


Ch.  1)  TRANSFRR   OF   TITLE   WHERE   GOODS   ASCERTAINED 


985 


SECTION  9.— CONDITIONAL  SALES 

The  transactions  which  we  have  just  been  considering — sales  on 
return  and  contracts  to  sell  on  approval — are  conditional  sales. 
In  the  former,  the  title  in  the  buyer  is  coupled  with  a  condition 
subsequent;  in  the  latter,  there  is  a  condition  precedent  to  the 
vesting  of  title.  These  contracts  are  rarely,  if  ever  called  condi- 
tional sales.  On  the  other  hand,  the  contract  which  is  the  subject 
of  this  section,  a  very  common  one  in  business,  is  not  strictly  a  con- 
ditional sale,  but  everywhere,  in  business  and  in  the  law,  is  always 
called  a  conditional  sale. 

In  short  the  transaction  is  this :  The  seller,  being  willing  to 
sell  the  goods  on  credit,  but  desiring  to  retain  some  hold  on  the 
goods,  enters  into  a  contract  with  the  buyer,  by  the  terms  of 
which  the  buyer  is  allowed  to  take  possession  of  the  goods,  but 
the  title  thereto  is  expressly  retained  by  the  seller  until  the  buyer 
pays  the  price.  It  is  necessary  for  the  seller,  if  he  desires  to  retain 
title  in  a  contract  wherein  he  has  surrendered  possession,  and  con- 
tracted also  to  pass  title  upon  the  payment  of  the  price,  expressly 
to  reserve  it,  because  the  law  would  not  give  him  any  lien  or  title 
under  such  circumstances.  The  situation  here  is  different  from  the 
case  where  the  seller  is  in  possession  of  goods  sold  in  a  deliverable 
condition.  In  such  a  case  the  law  attaches  a  lien  on  the  goods,  giving 
the  right  to  retain  possession  until  the  price  is  paid — except,  of  course, 
where  the  bargain  shows  a  cash  sale  or  other  executory  contract  to  sell. 
Liens  do  not  survive  voluntary  surrender  of  the  possession  of  the  goods. 

The  buyer,  then,  having  expressly  retained  title  to  secure  pay- 
ment of  the  price,  what  are  the  rights  and  liabilities  of  the  parties? 

(1)  The  general  rule  is  that  the  risk  of  loss  or  damage  is  on  the 
buyer.  Generally  the  risk  of  loss  accompanies  title,  but  there  are 
some  exceptions,  and  this  is  one  of  them.  The  reason  for  the  ex- 
ception is  that,  while  the  seller  does  in  a  sense  retain  title,  his  re- 
tention of  the  same  is  for  a  special  purpose  only,  to  secure  pay- 
ment of  the  price.  The  buyer  has  possession.  In  the  natural 
course  of  events  he  will  become  the  owner.  Therefore  it  is  emi^ 
nently  just  to  allow  the  risk  of  loss  to  rest  upon  the  person  who 
is  chiefly  interested  in  the  goods.  Therefore,  if  before  the  price  is 
paid  the  goods  conditionally  sold  are  destroyed  or  damaged,  even 
without  the  fault  of  the  buyer,  he  is  still  bound  to  pay  the  price. 
This  result  is  reached  under  the  Sales  Act,  Section  22  (a)  : 

"Where  delivery  of  the  goods  has  been  made  to  the  buyer,  or  to 
a  bailee  for  the  buyer,  in  pursuance  of  the  contract,  and  the  prop- 
erty in  the  goods  has  been  retained  by  the  seller  merely  to  secure 
performance  by  the  buyer  of  his  obligation  under  the  contract,  the 
goods  are  at  the  buyer's  risk  from  the  time  of  such  delivery." 

(2)  If  the  buyer  makes  default  in  his  obligation  to  pay  the  price, 


1)86  SALES  (Part  4 

the  seller  may  recover  possession  of  the  goods.  The  possibility  of 
just  such  a  contingency  is  the  sole  reason  for  the  seller's  having 
sold  the  goods  on  contract  of  conditional  sale.  Had  he  merely  sold 
them  on  credit,  the  seller  would  have  had  no  greater  rights  against 
the  goods  sold  by  him  than  any  other  creditor  of  the  conditional 
vendee.  In  the  event  of  the  buyer's  insolvency  or  bankruptcy,  the 
seller  would  likely  lose  some,  or  perhaps  a  large  proportion,  of  the 
price  remaining  unpaid;  but  he  is  protected  if  he  retains  a  security 
title.  If  the  buyer  refuses  to  allow  the  seller  to  reclaim  the  goods, 
the  seller  may  recover  possession  in  a  proceeding  usually  known 
as  an  action  of  replevin. 

By  way  of  comparison,  it  might  be  mentioned  in  this  connection, 
that  the  seller  could  protect  himself  to  the  same  extent  by  selling 
the  goods  on  credit  absolutely  to  the  buyer,  and  requiring  the 
buyer  to  execute  and  deliver  a  chattel  mortgage.  For  practical 
purposes  the  protection  of  the  seller  is  the  same,  whether  he 
adopts  the  conditional  sale  plan  or  sells  the  goods  without  reser- 
vation of  title  and  takes  back  a  mortgage.  In  some  states,  where 
chattel  mortgages  are  required  to  be  recorded,  and  where  con- 
tracts of  conditional  sale  are  not  required  to  be  recorded,  there  is  a 
difference  in  the  rights  of  the  seller  as  against  the  purchasers  and 
creditors  of  the  conditional  vendee,  a  point  now  to  be  noticed. 

(3)  It  was  stated  above  that  the  conditional  vendor  might  re- 
claim possession  of  the  goods  upon  the  buyer's  default.  Suppose, 
however,  that  the  conditional  vendee  sold  the  goods  to  a  third 
party,  who  had  no  knowledge  that  the  goods  were  held  by  his  ven- 
dor on  a  contract  of  conditional  sale.  Suppose,  further,  that  the 
conditional  vendee  is  now  insolvent,  so  that  the  seller's  right  to 
sue  him  for  the  price  is  worth  nothing.  May  the  seller  recover  the 
goods  from  the  innocent  purchaser?  Or  if,  instead  of  an  inno- 
cent purchaser,  it  may  be  that  some  creditor  of  the  conditional 
vendee  has  obtained  a  judgment  against  his  debtor,  and  has  levied 
on  the  goods  so  sold,  and  that  the  same  were  sold  by  the  sheriff  to 
satisfy  this  judgment;  may  the  conditional  vendor  recover  the 
goods  from  the  purchaser  at  the  sheriff's  sale?  The  two  questions 
are  the  same.  First,  let  it  be  supposed  that  these  questions  are 
asked  with  respect  to  a  conditional  sale  in  a  state  which  does  not 
require  recording  of  conditional  sales  contracts  to  make  them  effec- 
tive against  subsequent  purchasers  and  creditors  of  the  conditional 
vendee.  There  are  two  views  on  this  question.  The  great  ma- 
jority of  courts  have  held  that  the  conditional  vendor  may  recover 
his  goods  from  the  innocent  purchaser  or  from  the  purchaser  at  the 
sherift''s  sale.  This  rule  is  expressed  by  saying  that  the  reservation 
of  title  in  a  contract  of  conditional  sale  is  good  against  purchasers 
and  creditors  of  the  conditional  vendee.  A  few  states,  among  them 
Illinois,  Pennsylvania,  and  Colorado,  have  held  that  the  condi- 
tional vendor  is  not  protected.  Under  this  rule  parties  dealing  with 
a  conditional  vendee  have  the  right  to  assume  that  he  is  the  ex- 


Ch.  1)  TRANSFER   OF   TITLE   WHERE   OOODS   ASCERTAINED  987 

elusive  owner  of  goods  held  on  contract  of  conditional  sale.  Of 
course  if  such  persons  had  notice  of  the  interest  of  the  seller,  they 
would  not  be  protected. 


WIIITLOCK  V.  AUBURN  LUMBER  CO. 

(Supreme  Court  of  North  Carolina,  1907.    145  N.  C.  120.  58  S.  E.  0Q{), 
12  D.  R.  A.  [N.  S.l   1214,  122  Am.  St.  Rep.  44G.) 

Action  by  Charles  M.  Whitlock,  as  a  creditor  of  the  Auburn  Lumber 
Company,  for  the  purpose  of  winding  up  its  affairs,  on  an  allegation 
of  insolvency.  Cameron  F.  MacRae  was  appointed  receiver  in  the 
proceeding,  and,  from  a  judgment  refusing  to  allow  a  certain  credit 
on  notes  of  the  Auburn  Lumber  Company,  MacRae,  as  receiver,  ap- 
peals. 

The  Acme  Machine  Works  sold  to  the  Auburn  Lumber  Company 
certain  machinery  and  personal  property  for  $2,770,  of  which  sum 
$1,000  was  paid  in  cash  and  the  balance  of  the.  purchase  money  was 
secured  by  two  notes,  due,  respectively,  February  23  and  April  24, 
1903.  On  these  notes  payments  were  made,  which  reduced  the  balance 
due  on  December  15,  1906,  including  interest,  to  $973.36.  In  the  con- 
tract of  sale  it  was  stipulated  that  if  the  Auburn  Lumber  Company 
should  fail  to  pay  the  notes,  or  either  of  them,  at  maturity,  the  entire 
debt  should  become  due,  and  the  Acme  Machine  Works  might  take 
possession  of  the  property,  but,  if  the  notes  were  paid  at  maturity,  then 
the  title,  which,  until  the  payment  should  remain  in  the  Acme  Machine 
Works,  should  vest  in  the  Auburn  Lumber  Company,    *    *    * 

Walker,  J.  It  cannot  be  well  denied  that,  under  the  prior  decisions 
of  this  court,  the  transaction  between  the  Acme  Machine  Works  and 
the  Auburn  Lumber  Company  constitutes  a  conditional  sale  of  the 
property  described  in  their  contract.  The  agreement  was  that  the 
former  should  sell,  and  the  latter  should  buy,  the  machinery  and  other 
property,  to  be  delivered  at  once  for  the  stipulated  price.  A  part  of 
the  purchase  money  was  paid  in  cash,  and  for  the  remainder  the  lum- 
ber company  executed  its  notes,  by  which  it  absolutely  and  uncondi- 
tionally promised  to  pay  the  sums  therein  specified.  All  of  the  prop- 
erty named  would  have  been  delivered  immediately  to  the  lumber 
company  but  for  the  request  that  the  dry  kiln  be  retained  by  the  Acme 
Company  until  the  lumber  company  should  be  ready  to  receive  it. 
The  receiver  of  the  latter  company  contends,  upon  the  facts  found 
by  the  referee,  that  he  is  entitled  to  a  credit  of  $750,  which  was  the 
value  of  the  dry  kiln,  upon  the  notes  given  for  the  purchase  money 
of  the  property  bought  by  the  lumber  company  from  the  Acme  Com- 
pany, and  which  are  now  owned  and  held  by  the  Bank  of  Wayne. 

We  do  not  perceive  upon  what  ground,  legal  or  equitable,  any  such 
claim  can  be  successfully  maintained.  The  lumber  company  has  made 
an  absolute  promise  to  pay  a  certain  sum  of  money,  the  consideration 
of  which  was  the  purchase  of  the  property  described  in  the  contract. 
■Why,  then,  should  it  not  be  compelled  to  perform  its  promise?  It  is 
a  mistake  to  suppose  that  its  liability  depends  upon  whether  the  title 
did  or  did  not  pass  unconditionally  to  it  from  the  Acme  Company.  Its 
obligation  arises  out  of  the  fact  that  it  has  promised  to  pay  the  money 
upon  a  sufficient  consideration,  and  the  said  obligation  is  in  no  way 


088  SALES  (Part  4 

affected  by  the  state  of  the  title  to  the  property,  as  between  the  parties ; 
that  is.  whether  vested  conditionally  or  unconditionally.     *     *     * 

It  was  not  necessary  to  effectuate  the  intention  and  purpose  of  the 
parties,  in  making  the  contract,  that  there  should  have  been  an  actual 
deliverv  of  the  dry  kiln,  as  there  was  of  the  other  property.  The 
kiln  was  held  by  the  Acme  Company,  subject  to  the  order  of  the  lum- 
ber company,  and  was  therefore  constructively  in  its  possession. 
*  *  .*  Here  it  appears  that  the  lumber  company,  by  its  own  request, 
prevented  the  delivery  of  the  kiln.  Will  it  now  be  heard  to  say  that  the 
resulting  loss  should  fall  upon  the  Acme  Company,  who  was  ready  and 
willing,  at  all  times,  even  up  to  the  very  moment  of  the  fire,  to  deliver 
it.  when,  if  the  delivery  had  been  made  as  originally  contemplated  and 
agreed,  no  loss  would  have  occurred?  Such  a  proposition  cannot  be 
entertained  for  a  moment.    *    *    * 

The  real  and  substantial  nature  of  the  transaction,  for  the  purpose 
of  determining  who  should  bear  the  loss,  is  that  of  mortgagor  and  mort- 
gagee, or  lienor  and  lienee.  The  contract,  it  is  true,  creates  technically 
a  conditional  sale,  but  the  vendor,  in  fact,  only  retains  the  legal  title 
as  a  security  in  equity,  and  the  title  otherwise  passes  to  the  vendee 
with  a  lien  for  the  purpose  named.    *    *    * 

We  find  no  error  in  the  record.    Affirmed. 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED 


989 


CHAPTER  II 

TRANSFER  OF  TITLE  IN  CONTRACTS  TO  SELL 
UNASCERTAINED  GOODS 

Section 

1.     Introduction. 

2      Acts  of  Unfonditional  Appropriation. 

3.  Acts  of  Unconditional  Appropriation  with  Respect  to   Only  a  Portion  of 

the  Goods.  .     „  ,         ^  -.^        -vi^ 

4.  Acts  of  Unconditional  Appropriation  Not  Necessary  in  Sales  of  1  ungiDie 

Goods.  ^.  ^  . 

5.  Pa«sinf;-  of  Title  to  Goods  Which  at  the  Date  of  the  Contract  are  Not  in 

Existence. 

6.  Passing  of  Title  to  Property  Contracted  to  be  Sold  upon  Its  Delivery  to  a 

Carrier  or  Other  P.ailee. 

7.  Effect  of  the  Form  of  the  Bill  of  Lading  upon  the  Passing  of  Title. 


SECTION  1.— INTRODUCTION 

The  great  majority  of  transactions  in  modern  business  which 
ultimately  result  in  transfers  of  title  to  personal  property  have 
their  origin  in  executory  contracts  to  sell  goods  which  at  the 
date  of  the  execution  of  the  contract  were  unascertained.  The 
farmer  may  contract  to  sell  his  cattle  and  his  grain  before  the 
subject  of  the  contract  can  be  identified.  The  manufacturer  and 
wholesaler  send  out  their  salesmen,  who  enter  into  contracts  with 
the  dealer  or  consumer  under  circumstances  where  the  subject  of 
the  sale  is  not  capable  of  actual  identification  at  the  time.  The 
contracts  will  simply  call  for  goods  of  a  specified  description  or  of 
an  agreed  quality,  but  until  some  act  be  done,  either  by  the  seller 
or  by  the  buyer,  the  efifect  of  which  w'ill  be  to  segregate  the  goods 
corresponding  to  the  description  and  quality,  the  goods  cannot  be 
said  to  be  ascertained.  In  the  natural  course  of  events,  and  upon 
the  performance  of  certain  specified  acts,  the  goods  will  become 
ascertained,  and  title  will  pass.  The  problem  in  this  chapter  is  to 
discover  the  circumstances  under  which  title  will  pass  to  the  buyer 
in  contracts  of  this  character.  Of  course,  in  the  great  majority  of 
cases,  it  is  unimportant  to  know  at  what  moment  title  passed  to  the 
buyer,  because  the  entire  transaction  will  be  closed  just  as  the 
parties  intended.  But  accidents  occur.  The  goods  are  lost  or 
damaged.  Some  of  the  numerous  parties  through  whose  hands  the 
goods  pass  on  their  journey  to  the  purchaser  may  find  themselves 
plunged  into  bankruptcy.  Dishonesty  still  finds  an  occasional 
fertile  field  in  which  to  involve  the  parties  in  difficulties.  Speed 
invites  opportunity  for  misunderstanding;  misunderstanding 
breeds  controversy.  Before  the  era  of  the  industrial  revolution, 
buyer  and  seller  more  frequently  dealt  face  to  face.  The  trans- 
action was  simple,  and  quickly  terminated.  The  most  casual  ob- 
servation upon  the  elaborate  mechanism  of  modern  exchange  re- 
veals countless  chances  for  the  unforeseen  to  occur.    When  it  does 


090  SALES  (Part  4 

occur,  some  of  the  eddies  from  the  stream  of  husiness  pour  into 
the  lawyer's  offices  and  the  courtrooms.  The  balance  sheets  regis- 
ter a  loss,  even  for  the  successful  litigant. 

When  will  goods  be  unascertained?  (1)  When  they  are  not  in 
existence  at  the  date  of  the  contract ;  (2)  when  they  are  to  be 
manufactured;  (3)  when  the  goods  are  in  existence,  but  are  so 
mixed  up  with  other  goods  that  it  is  not  certain  what  particular 
goods  will  finally  be  delivered  to  the  buyer — when  will  title  pass 
under  such  a  contract? 

Sales  Act,  Section  19,  Rule  4  (1).  Where  there  is  a  contract  to 
sell  unascertained  or  future  goods  by  description,  and  goods  of 
that  description  and  in  a  deliverable  state  are  unconditionally  ap- 
propriated to  the  contract,  either  by  the  seller  with  the  assent  of 
the  buyer,  or  by  the  buyer  with  the  assent  of  the  seller,  the  prop- 
erty in  the  goods  thereupon  passes  to  the  buyer.  Such  assent  may 
be  expressed  or  implied,  and  may  be  given  either  before  or  after 
the  appropriation  is  made. 

There  are  several  matters  here  which  require  separate  considera- 
tion, (1)  This  rule  is  but  a  rule  of  presumption,  for  the  first  sen- 
tence of  section  19  qualifies  rule  4,  just  as  it  qualifies  rules  1,  2, 
and  3,  by  declaring  that  unless  a  different  intention  appears,  the 
following  rules  for  ascertaining  the  intention  of  the  parties  as  to 
the  time  at  v/hich  the  property  in  the  goods  is  to  pass  to  the  buyer. 
(2)  The  section  applies  to  unascertained  and  future  goods.  Fu- 
ture goods  are  also  unascertained  goods ;  but,  for  reasons  ap- 
pearing in  section  4.  it  is  apparent  that  title  will  not  pass  at  the 
moment  when  the  goods  are  put  in  a  deliverable  state,  but  that,  in 
addition  to  the  act  of  putting  the  goods  in  a  deliverable  state,  the 
goods  must  be  unconditionally  appropriated  to  the  contract.  It  is 
of  great  importance  to  note  that  title  will  not  pass  at  so  early  a 
moment  under  contracts  to  sell  unascertained  goods.  When 
goods  are  ascertained,  we  found  that  title  presumptively  passes 
just  as  soon  as  they  are  put  in  a  deliverable  state.  But  we  note  here 
that,  while  presumptively  title  will  not  pass  until  the  goods  are  put 
in  a  deliverable  state,  we  observe  that  presumptively  title  will  not 
pass,  even  at  the  time  the  goods  are  put  in  a  deliverable  state, 
because  the  act  requires  something  else  before  title  is  deemed  to 
pass;  that  is,  the  goods  must  be  unconditionally  appropriated  to 
the  contract.  When  are  goods  unconditionally  appropriated  to  the 
contract?  The  determination  of  this  question  is  the  most  impor- 
tant part  of  this  chapter.  The  law  might  just  as  well  have  pro- 
vided— i.  e.,  it  would  not  be  illogical  to  so  provide — that  title 
would  pass  presumptively  just  as  soon  as  the  goods  were  put  in  a 
deliverable  state.  But  the  law  did  not  take  this  turn,  for  the  addi- 
tional act  of  unconditionally  appropriating  the  goods  to  the  con- 
tract is  required  before  title  presumptivel}^  passes.  It  is  possible 
for  the  parties  by  express  agreement  to  make  title  pass  just  as 
soon  as  the  goods  are  in  a  deliverable  condition  and  without  any 
:act  of  unconditional  appropriation,   but   it   requires   exceptionally 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED  991 

Strong  evidence  to  overcome  the  presumption  that  an  act  of  un- 
conditional appropriation  is  necessary.  There  are  very  few  such 
cases.  (3)  There  is  one  situation  where  the  circumstances  of  the 
case  uniformly  are  construed  as  doing  away  with  an  act  of  uncon- 
ditional appropriation — i.  e.,  sale  of  a  specified  quantity  of  goods 
called  fungible  goods,  such  as  grain  or  oil.  In  all  other  cases 
goods  must  be  unconditionally  appropriated  before  title  passes. 
Quite  frequently  the  courts  employ  the  expression  "an  act  of  sub- 
sequent appropriation."  Where  this  term  is  used,  it  has  the  same 
meaning  as  the  phrase  found  in  the  Sales  Act.  (4)  It  must  be  no- 
ticed that  the  act  of  unconditional  appropriation  must  be  assented 
to  by  both  seller  and  buyer. 

On  final  analysis,  therefore,  there  are  two  main  problems  pre- 
sented in  the  next  section:  (1)  What  kinds  of  acts  constitute  acts 
of  unconditional  appropriation?  (2)  What  circumstances  will 
show  assent  by  both  parties  to  this  act  of  unconditional  appro- 
priation? 


SECTION  2.— ACTS  OF  UNCONDITIONAL  APPRO- 
PRIATION 


PROCTOR  &  GAMBLE  CO.  v.  PETERS,  WHITE  &  CO. 

(Supreme  Court  of  New  York,  Appellate  Division,   1919.     187  App.  Div.  376, 

176  N.  Y.  Siipp.  169.) 

Action  by  the  Proctor  &  Gamble  Company  against  Peters,  White  & 
Co.  On  motion  by  plaintiff  for  a  new  trial  on  a  direction  of  a  ver- 
dict in  favor  of  defendant. 

Smith,  J.  (dissenting  in  part).  In  January,  1914,  the  plaintiff  made 
a  contract  with  the  Atlantic  Phosphate  &  Oil  Corporation,  a  manu- 
facturer of  fish  oil,  for  its  entire  product  for  the  year  1914,  with  the 
exception  of  6,000  barrels,  or  as  much  thereof  as  might  be  demanded, 
which  the  said  oil  corporation  had  agreed  to  give  to  Harden,  Orth  & 
Hastings  Company.  The  contract  provided  that  the  purchaser  should 
receive  the  oil  in  the  purchaser's  tank  cars,  to  be  supplied  by  the  pur- 
chaser at  the  seller's  said  factory  at  Promised  Land,  or,  at  the  pur- 
chaser's option,  from  time  to  time,  in  purchaser's  barrels  to  be  fur- 
nished by  the  purchaser  at  the  said  factory  at  Promised  Land.  It  was 
further  provided  that  the  purchaser  should  provide  enough  tank  cars 
or  barrels  at  the  factory  as  aforesaid  to  take  and  receive  all  said  oil 
as  and  when  produced  by  the  seller,  except  as  thereinafter  provided. 
It  was  thereinafter  provided  that  when  the  said  oil  is  produced  by  the 
seller  at  its  factory  it  shall  be  invoiced  to  the  purchaser  by  Marden, 
Orth  &  Hastings  Company,  the  agent  of  the  seller,  and  provision  is 
made  for  the  drawing  of  drafts  as  against  the  purchase  price. 

Later  the  contract  provides:  "If  at  any  time  there  shall  not  be  at 
the  factory  sufficient  tank  cars  or  barrels  furnished  by  the  purchaser 
to  receive  all  the  oil  as  fast  as  produced,  the  seller  shall  store  the  said 
oil  in  its  own  tanks  at  its  factory,  and  Alarden,  Orth  &  Hastings  Com- 
pany shall  invoice  it  so  soon  as  stored  in  said  tanks  to  the  purchaser, 
and  shall  be  entitled  to  draw  on  the  purchaser  at  the  same  rate  of  25 


992  SALES  (Part  4 

cents  a  gallon  for  the  said  oil  so  stored  in  storage  tanks,  as  well  as  for 
oil  placed  in  said  tank  cars  or  barrels :  Provided,  however,  that  if 
at  any  time  the  oil  so  stored  in  the  seller's  storage  tanks  shall  reach 
the  amount  of  15,000  barrels,  and  there  shall  not  be  enough  tank  cars 
or  barrels  provided  by  the  purchaser  to  take  care  of  all  excess  as  fast 
as  produced,  the  seller  may  ship  such  excess  oil  to  the  purchaser  or 
store  the  same  in  any  way  that  may  be  possible,  and  the  purchaser  in 
that  event  shall  pay  to  the  seller  any  extra  expenses  thus  incurred  by 
the  seller." 

The  defendant  was  the  factor  under  an  agreement  for  the  sale  of 
this  oil  of  the  Atlantic  Phosphate  &  Oil  Corporation.  The  defendant 
had  advanced  substantial  sums  of  money  to  that  corporation,  and  in 
order  to  protect  the  defendant  for  its  commissions  and  for  the  ad- 
vances, the  drafts  drawn  on  the  plaintiff  for  the  oil  shipped  were  de- 
livered to  and  collected  by  the  defendant.  Thereafter,  by  the  direc- 
tion of  the  defendant,  the  Atlantic  Phosphate  &  Oil  Corporation  ship- 
ped six  carloads  of  the  oil  to  Swift  &  Co.,  and  it  is  for  the  conversion 
of  these  six  carloads  of  oil  by  the  defendant  that  this  action  is  brought. 

Of  these  six  carloads,  four  were  taken  direct  from  the  tanks  of  the 
Atlantic  Phosphate  &  Oil  Corporation  and  put  upon  the  cars  of  Swift 
&  Co.,  and  thus  forwarded  to  Swift  &  Co.  The  other  two  carloads 
had  been  taken  from  the  tanks  by  the  Atlantic  Phosphate  &  Oil  Cor- 
poration and  put  upon  the  cars  belonging  to  the  plaintiff,  and  the  oil  in 
these  cars  belonging  to  the  plaintiff"  was  shipped  to  Swift  &  Co.  As 
to  the  oil  taken  directly  from  the  tanks  of  the  Atlantic  Phosphate  & 
Oil  Corporation  and  put  upon  the  cars  of  Swift  &  Co.,  I  do  not  think 
the  defendant  can  be  held  for  conversion,  although  it  participated  in 
a  diversion  of  this  oil.  The  defendant  can  only  be  held  for  conversion 
provided  title  had  passed  from  the  Atlantic  Phosphate  &  Oil  Corpora- 
tion to  the  plaintiff. 

In  the  manufacture  of  this  oil,  the  evidence  shows  that  the  method 
of  manufacture  was  to  cook  the  fish  which  were  not  otherwise  fit  for 
eating,  and  then  through  presses  the  oil  was  pressed  out  and  turned 
into  tanks,  where  the  oil  was  further  cooked ;  that  thereafter  the  oil 
is  turned  into  settling  tanks  and  given  a  chance  to  clear,  and  that  after 
it  is  cleared  the  oil  is  finally  pumped  into  the  storage  tanks,  where  it 
stays  until  it  is  loaded  upon  the  car,  so  that  the  placing  of  this  oil  in 
the  storage  tanks  was  only  the  last  step  in  the  process  of  manufacture. 
It  would,  of  necessity,  have  been  run  into  these  storage  tanks,  wheth- 
er or  not  it  was  sold  to  the  plaintiff",  or  whether  or  not  it  was  sold  to 
any  one.  All  of  tjie  oil  was  run  into  these  storage  tanks  from  the 
settling  tanks,  in  order  that  the  settling  tanks  might  be  used  for  fur- 
ther oil  that  was  in  process  of  manufacture.     *     *     * 

Section  19  of  the  Uniform  Sales  Act  purports  to  give  the  rules  for 
ascertaining  intention,  and  by  rule  4  it  is  provided:  "1.  Where  there 
is  a  contract  to  sell  unascertained  or  future  goods  by  description,  and 
goods  of  that  description  and  in  a  deliverable  state  are  uncondition- 
ally appropriated  to  the  contract,  either  by  the  seller  with  the  assent 
of  the  buyer,  or  by  the  buyer  with  the  assent  of  the  seller,  the  prop- 
erty in  the  goods  thereupon  passes  to  the  buyer.  Such  assent  may  be 
expressed  or  implied,  and  may  be  given  either  before  or  after  the 
appropriation  is  made."     *     *     * 

In  Williston  on  Sales  at  Common  Law  and  under  the  Uniform 
Sales  Act,  Professor  Williston,  in  speaking  of  rule  4,  says,  at  page 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED  993 

380:  "As  an  original  question  it  might  be  well  urged  that,  when  a 
contract  is  made  for  the  sale  of  unspecified  goods,  the  property  should 
pass,  unless  a  contrary  intention  is  manifested,  as  soon  as  the  goods 
become  specified  and  put  in  a  deliverable  condition  by  the  seller.  It  is 
well  settled,  however,  that  the  property  does  not  pass  at  so  early  a 
moment.  vSome  subsequent  act  in  regard  to  the  goods  is  necessary 
as  a  manifestation  of  the  intent  to  transfer  it.  The  intention  alone 
is  not  enough,  and  certainly,  unless  clearly  so  agreed,  the  completion 
of  the  goods  is  not  a  sufficient  manifestation  of  intention  by  outward 
act.  There  is  not  much  authority  upon  the  question  whether  the 
parties,  if  they  expressly  so  agree,  may  vary  the  rule  that  the  property 
does  not  pass  on  the  mere  completion  of  the  goods.  In  other  words,  it 
is  not  clear  whether  the  rule  that  the  property  does  not  pass  until  some 
subsequent  act  of  appropriation  is  one  of  presumption,  based  perhaps 
on  supposed  intention,  or  whether  it  is  an  absolute  rule  of  law.  In 
theory  there  seems  no  reason  why  the  intention  of  the  parties  should 
not  prevail,  if  it  is  clearly  manifested,  and  some  authority  supports 
this  view.  The  completion  of  the  goods  itself  is  an  outward  act,  which 
it  would  seem  might  be  agreed  upon  as  the  appropriation.  As  a  gen- 
eral rule,  however,  some  act  of  appropriation  of  the  goods  to  the  buy- 
er, other  than  mere  completion  or  preparation,  is  essential  for  the 
transfer  of  the  property,  and  it  is  necessary  that  the  act  of  appropria- 
tion should  be  assented  to  by  both  parties.  But  as  to  the  formation  of 
contractual  agreements  generally  it  is  immaterial  that  the  parties  ex- 
press their  assent  at  dififerent  times,  nor  is  it  material  which  party 
makes  the  proposition."     *    *    * 

At  page  161  of  his  work,  Professor  Williston,  in  speaking  of  the 
sale  of  future  goods,  says:  "But  the  mere  acquisition  of  the  goods 
by  the  seller  does  not,  it  seems,  in  our  law  operate  as  a  transfer  of  tit- 
tle to  the  buyer  even  though  the  parties  intend  that  it  should  be  so." 
*    *    * 

In  Andrews  v.  Durant,  11  N.  Y.  35,  62  Am.  Dec.  55,  Judge  Denio 
says:  "In  general  a  contract  for  the  building  of  a  vessel  or  other 
thing  not  yet  in  esse,  does  not  vest  any  property  in  the  party  for  whom 
it  is  agreed  to  be  constructed  during  the  progress  of  the  work,  nor 
until  it  is  finished  and  delivered,  or  at  least  ready  for  delivery  and 
approved  by  such  party.  All  the  authorities  agree  in  this  [citing  au- 
thorities], and  the  law  is  the  same,  though  it  be  agreed  that  payment 
shall  be  made  to  the  builder  during  the  progress  of  the  work,  and  such 
payments  are  made  accordingly.  In  Mucklow  v.  Mangles,  which 
arose  out  of  a  contract  for  building  a  barge,  the  whole  price  was  paid 
in  advance,  the  vessel  was  built  and  the  name  of  the  person  who  con- 
tracted for  it  was  painted  on  the  stern,  yet  it  was  held  that  the  title  re- 
mained in  the  builder." 

In  Comfort  v.  Kiersted,  26  Barb.  472,  it  was  held :  "Where  an  ar- 
ticle agreed  to  be  sold  is  yet  to  be  manufactured,  the  title  does  not  pass 
until  there  has  been  some  act  on  the  part  of  the  vendor  which  amounts 
to  a  delivery,  and  some  act  on  the  part  of  the  vendee  which  amounts 
to  an  acceptance." 

In  writing  for  a  unanimous  court.  Judge  Harris  there  says :     "In 

this  case  tlje  parties  to  the  contract  had  agreed  that  the  shingles  should 

be  the  property  of  the  defendants  as  fast  as  they  were  made.     Still 

the  contract  was  executory.    To  make  a  sale  complete,  so  as  to  vest 

B.&  B.Bus.Law— 63 


994  SALES  (Part  4 

the  title  in  the  vendee,  the  thing  sold  must  not  only  be  in  existence, 
but  it  must  be  identified.  The  contract  itself  conveyed  no  present  right 
of  property  to  the  defendants.  Though  Davis  agreed  that  the  shingles 
he  was  about  to  make  should,  as  fast  as  made,  become  the  property  of 
the  defendants,  still,  as  it  was  an  agreement  to  be  executed  in  future, 
his  right  was,  not  to  the  shingles,  but  in  action  for  not  executing  the 
agreement.  Before  the  title  would  vest,  even  after  the  shingles  had 
been  made,  something  must  have  been  done  which  would  amount  at 
least  to  a  constructive  delivery.  The  shingles  must  have  been  in  some 
way  designated  and  set  apart,  so  as  to  be  capable  of  being  identified 
as  the  property  of  the  purchasers  [citing  cases]." 

Under  these  authorities,  I  am  unable  to  find  any  act  of  the  vendor 
which  constitutes  an  unconditional  appropriation  of  this  oil  to  the  plain- 
tifif's  contract.  Nothing  was  done  with  the  oil  except  what  was  nec- 
essary to  do  in  the  completion  of  the  process  of  manufacture.  The  oil 
that  was  in  these  tanks  belonged  in  part  to  Harden,  Orth  &  Hastings 
Company,  if  they  chose  to  exercise  their  option  to  purchase  the  same. 
It  is  stipulated  'in  the  case  that  they  did  exercise  their  option,  but  by 
the  stipulation  it  is  stated  that  that  option  was  exercised  during  "that 
period."  That  period  is  the  period  provided  in  their  contract  with  the 
American  Phosphate  &  Oil  Corporation,  which  was  one  year  from  the 
15th  day  of  December,  1913,  so  that  in  August,  1914,  it  does  not  ap- 
pear that  Marden,  Orth  &  Hastings  Company  had  exercised  their  op- 
tion to  take  any  part  of  that  oil.  For  aught  that  appears,  their  6,000 
barrels  provided  for  in  their  contract  may  all  have  been  in  those  tanks 
at  the  time  of  the  alleged  conversion,  and  thereafter  taken. 

It  is  argued,  because  by  plaintift''s  contract  a  draft  might  be  drawn 
upon  the  plaintiff  for  25 'cents  a  gallon,  while  the  oil  was  still  in  the 
storage  tanks,  that  this  provision  indicates  an  intention  that  title  shall 
pass  at  once  when  the  property  gets  into  the  storage  tanks.  It  will  be 
noticed,  however,  that  these  drafts  are  to  be  drawn  by  Marden,  Orth  & 
Hastings  Company,  which  firm  had  its  option  to  withdraw  6,000 
barrels  of  oil  at  any  time  from  those  tanks,  so  that  this  clause  of  the 
contract  is  not  sufficient  to  indicate  the  intention  of  the  parties  that 
title  shall  pass  at  once  upon  production  and  storage  in  these  storage 
tanks.  In  Comfort  v.  Kiersted,  supra,  the  opinion  discusses  this  very 
situation  and  Judge  Harris  writes:  "Suppose  Davis  had  made,  with 
another  person,  another  contract,  in  all  respects  like  that  under  con- 
sideration, whereby  he  had  agreed  to  deliver  the  same  quantity  of  shin- 
gles as  fast  as  made ;  could  it  be  pretended  that  the  defendants  would, 
by  the  mere  operation  of  their  contract,  become  the  owner  of  all  the 
shingles  made  by  Davis,  as  soon  as  manufactured?  It  would  then 
need,  as  now,  that  in  some  way  the  shingles  should  be  designated  as 
delivered  in  execution  of  the  contract,  in  order  to  change  the  right  of 
property ;  and  they  would  then  have  become  the  property  of  the  one  or 
the  other  of  the  parties  to  whom  he  had  agreed  to  sell  them,  according 
to  their  designation." 

So,  under  the  contract  here  to  sell  to  Marden,  Orth  &  Hastings  Com- 
pany 6,000  barrels  of  the  oil  at  their  option,  the  placing  of  the  oil  in 
these  storage  tanks  could  not  in  any  way  be  deemed  an  appropriation 
to  the  plaintift''s  contract,  and  much  less,  with  the  right  of  Marden, 
Orth  &  Hastings  Company  to  take  therefrom  6,000  barrels  of  oil,  could 
it  be  deemed  to  be  an  unconditional  appropriation  to  the  plaintiff's  con- 
tract, which  unconditional  appropriation  is  made  by  the  Personal  Prop- 


Ch.  2)         TRANSFKn   OF   TITLE   WHERE    GOODS   UNASCERTAINED  995 

erty  Law  a  requisite  to  the  passinj^  of  title  of  future  goods.  If  placing 
this  oil  in  these  storage  tanks  could  in  any  event  be  deemed  a  delivery, 
it  was  a  conditional  delivery,  conditioned  upon  the  election  of  Marden, 
Orth  &  Hastings  Company  to  take  6,000  barrels  thereof  for  their  own 
purposes. 

As  to  the  oil  which  had  been  placed  in  the  cars  of  the  plaintiff,  it 
seems  to  me  clear  that  the  Atlantic  Phosphate  &  Oil  Corporation  had 
so  far  made  an  unconditional  appropriation  of  that  oil  to  the  plain- 
tiff's contract  as  to  vest  title  in  the  plaintff.  That  the  defendant  had 
full  knowledge  of  that  contract  I  have  no  doubt  whatever.  It  had  loan- 
ed to  the  Atlantic  Phosphate  &  Oil  Corporation  a  large  amount  of 
money.  Confessedly,  the  contract  was  shown  to  one  of  the  officers  of 
the  defendant,  with  every  presumption  that  it  was  read,  as  it  was  to 
their  interest  to  read  the  contract  and  become  acquainted  with  its  con- 
ditions. Moreover,  the  defendant  discounted  drafts  drawn  by  the  At- 
lantic Phosphate  &  Oil  Corporation  upon  the  plaintiff  for  oil  delivered 
under  this  contract,  and  discounted  the  drafts  for  the  $25,000  advanced 
by  the  plaintiff  to  the  Atlantic  Phosphate  &  Oil  Corporation,  and  it  is 
against  all  probability  that  this  was  done  without  a  substantial  knowl- 
edge of  the  plaintiff's  rights  in  this  oil.  In  fact,  the  course  of  busi- 
ness of  the  Atlantic  Phosphate  &  Oil  Corporation  seems,  during  all 
this  time,  to  have  been  dictated  by  the  defendant,  which  had  so  large 
an  interest  in  the  company  by  reason  of  moneys  advanced. 

Inasmuch  as  the  title  to  this  oil  in  these  cars  had  passed  to  the  plain- 
tiff', the  defendant  was  guilty  of  conversion  in  directing  a  diversion  of 
this  oil  from  the  plaintiff  to  Swift  &  Co. ;  and  as  to  this  oil,  the  excep- 
tions must  be  sustained,  and  a  new  trial  ordered,  with  costs  to  plaintiff" 
to  abide  the  event. 

Laughlin,  J.,  delivered  the  opinion  of  the  majority  of  the  court. 
At  the  conclusion  the  court  used  the  following  language :  "By  virtue 
of  the  precise  terms  of  this  contract  and  the  uncontroverted  facts,  the 
case  is,  I  think,  brought  clearly  within  the  provisions  of  the  Personal 
Property  Law  quoted,  and  the  intention  of  the  parties,  which  governs 
as  to  when  title  was  to  pass  plainly  was,  I  think,  that  the  title  was  to 
pass  when  the  oil  was  pumped  into  the  storage  tanks." 


BRISTOL  MFG.  CO.  v.  ARKWRIGHT  MILLS. 

(Supreme   Judicial   Court   of   Massaclmsetts,   19J2.     213    Mass.    172, 

100  N.  E.  55.) 

Action  by  the  Bristol  Manufacturing  Company  against  the  Ark- 
wright  Mills.  There  was  a  verdict  for  plaintiff,  and  defendant  brings 
exceptions. 

RuGG,  C.  J.  This  is  an  action  of  contract  to  recover  for  goods  sold 
and  delivered  and  for  damages  for  breach  of  contract  for  the  sale  of 
goods.  There  was  evidence  tending  to  show  that  the  plaintiff  agreed, 
by  a  broker's  "sale  note,"  to  make  and  deliver  to  the  defendant  L500,- 
000  yards  of  cotton  cloth.  The  quality,  weight,  price,  terms  and  rate 
of  delivery  were  fixed,  and  the  note  further  contained  these  provisions : 
"No  marks  of  any  kind  on  bales  except  bale  numbers.  Arkwright 
will  let  you  know  what  bale  number  to  begin  with."  The  defendant 
gave  to  the  plaintiff'  the  bale  number  with  which  to  begin  numbering 
the  bales.  After  about  500,000  yards  were  delivered  according  to  the 
contract,  which  the  defendant  resold  without  examination,  it  began 


996  SALES  (Part  4 

selling  to  the  Merrimac  Manufacturing  Company.  The  cloth  was  re- 
jected by  it  as  not  being  of  the  required  quality.  Thereafter  exam- 
inations were  made,  and  negotiations  were  carried  on  between  the  de- 
fendant, the  plaintiff  and  the  Merrimac  Manufacturing  Company,  to 
the  end  that  the  goods  might  be  accepted  under  the  contract  between 
the  defendant  and  the  Merrimac  Manufacturing  Company,  which  con- 
tinued for  about  six  weeks,  beginning  with  March  16th.  These  efforts 
failed,  and  on  or  about  the  1st  of  May  the  Merrimac  Manufacturing 
Company  canceled  its  contract  with  the  defendant,  and  the  defendant 
in  turn  its  contract  with  the  plaintiff,  on  the  ground  that  the  goods 
were  not  of  the  required  quality. 

While  these  negotiations  were  pending  and  while  it  was  in  doubt 
whether  the  Merrimac  Manufacturing  Company  would  continue  to 
accept  the  goods,  the  defendant  wrote  to  the  plaintiff  on  April  1st 
the  following:  "Please  hold  shipments  of  28"  goods,  covered  by  in- 
surance, subject  to  our  order.  Will  let  you  know  the  result  of  our 
examination  as  soon  as  completed ;"  and  on  April  28th :  "Please  ship 
at  once  1,200  pieces  billed  April  7  held  for  our  account.  They  are 
going  over  the  goods  at  the  Merrimac  Mfg.  Co.'s  and  expect  to  let 
you  know  the  result  in  a  day  or  two."  After  April  1st  the  plaintiff 
continued  its  manufacture  of  the  goods  according  to  its  contract, 
baled  them  and  numbered  the  bales  according  to  the  previous  directions 
of  the  defendant,  stored  them  in  its  storehouse,  insured  them,  and  held 
them  according  to  the  instructions  contained  in  the  defendant's  letter 
of  April  1st,  notifying  the  defendant  in  each  instance  and  submitting 
an  invoice.  There  was  no  difference  in  the  insurance  on  these  goods 
and  other  goods  in  the  plaintiff's  storehouse.  The  case  was  sent  to 
an  auditor.  His  report  and  the  verdict  of  the  jury  were  for  the 
plaintiff. 

The  inquiry  is  whether  this  evidence  was  sufficient  to  show  a  delivery 
of  the  goods  between  April  1st  and  the  time  when  the  defendant  can- 
celed the  contract.  *  *  *  The  sale  note  required  a  delivery  by  the 
plaintiff  to  a  common  carrier  for  shipment  to  the  defendant.  It  is  ad- 
mitted that  no  such  delivery  was  made.  The  first  question  is  whether 
the  defendant's  letter  of  April  1st,  which  was  received  and  accepted 
by  the  plaintiff,  constituted  a  modification  of  the  contract  as  to  delivery. 
The  contract  between  the  plaintiff  and  the  defendant  was  in  no  wise 
dependent  upon  the  relations  between  the  defendant  and  the  Merri- 
mac Manufacturing  Company.  A  breach  by  the  latter  of  its  contract 
with  the  defendant  affords  no  justification  for  a  cancellation  by  the 
defendant  of  its  contract  with  the  plaintiff.  The  letter  of  April  1st 
should  be  read  in  the  light  of  all  the  conditions  then  known  to  the 
plaintiff  and  defendant.  The  defendant  contends  that  so  read  it 
should  be  construed  to  mean  a  request  to  withhold  or  to  hold  back 
shipments  pending  the  negotiations  with  the  Merrimac  Manufactur- 
ing Company  and  that  the  contract  should  remain  in  abeyance  mean- 
while. 

But  the  letter  is  something  more  than  a  mere  request  to  suspend 
shipments.  It  is  a  direction  that  the  goods  be  covered  by  insurance. 
This  was  an  act  of  proprietorship  under  all  the  circumstances.  If 
title  remained  in  the  plaintiff,  there  was  no  occasion  for  the  defend- 
ant to  be  concerned  about  the  insurance.  It  is  only  on  the  theory  that 
the  defendant  expected  title  to  vest  in  it  that  its  reference  to  insurance 
becomes  reasonable.     *     *     *     The  defendant's  further  request  that 


Ch.  2)         TRANSFER  OF  TITLE  WHERE   GOODS   UNASCERTAINED  997 

the  goods  be  held  subject  to  its  order  looks  in  the  same  direction.  Its 
letter  of  April  28th  directing  shipment  of  certain  goods-  previously 
billed  "held  for  our  [its]  account"  tends  to  indicate  a  reference  to 
goods  owned  by  it.  The  fair  meaning  of  the  letter  of  April  1st  is  a 
request  for  a  modification  of  the  original  contract  as  to  delivery  of  the 
goods  to  a  common  carrier  with  an  additional  stipulation  as  to  insur- 
ance. When  accepted  by  the  plaintiff,  the  contract  was  changed  to 
that  extent.  The  precise  form  in  which  the  insurance  was  carried 
by  the  plaintiff  does  not  appear,  but  no  exception  is  taken  on  this 
point,  and  after  verdict  it  must  be  assumed  that  it  conformed  to  the 
letter  of  April  1st. 

The  question  remains  whether  there  was  sufficient  evidence  of  a 
separation  and  an  appropriation  by  the  plaintiff  of  the  goods  to  con- 
stitute a  constructive  delivery.  The  cloth  seems  to  have  been  a  com- 
mon grade  well  known  in  the  general  market,  and  such  as  the  de- 
fendant also  manufactured.  It  was  not  a  unusual  kind  made  upon 
special  order.  The  manufacture  was  completed,  and  nothing  remained 
in  order  to  execute  the  contract  on  both  sides,  except  for  the  buyer 
to  take  the  goods  and  pay  for  them.  A  definite  quantity  of  goods  was 
to  be  shipped  or  ready  for  shipment  each  week.  Under  these  circum- 
stances as  between  the  immediate  parties  nothing  was  necessary  in 
order  to  pass  tide  to  the  buyer  beyond  a  setting  apart  of  the  goods  for 
the  buyer.  It  might  have  been  found  that  the  seller  was  impliedly 
authorized  to  make  such  appropriation  by  the  buyer.  Title  may  pass 
although  the  goods  remain  in  the  actual  possession  of  the  vendor. 
*  *  *  The  evidence  was  that  the  plaintiff  placed  numbers  upon  the 
bales  in  accordance  with  the  requirement  of  the  sale  note  and  put 
them  in  .its  storehouse.  Any  visible  marks  which  are  sufficient  for 
identification  are  enough  to  show  an  appropriation.  Each  bale  was  a 
physical  entity.  When  it  was  stamped  or  marked  with  a  serial  number 
conforming  to  an  initial  number  furnished  by  the  defendant,  it  could 
be  identified  readily  in  a  storehouse  where  there  were  other  bales.  It 
was  not  necessary  that  all  the  bales  should  be  set  apart  in  a  group  by 
themselves.    The  appropriation  was  complete  without  it.    *    *    * 

It  follows  that  the  defendant's  requests  for  rulings  were  refused 
rightly,  and  that  there  was  no  error  in  the  charge. 

Exceptions  overrued. 


SECTION   3,— ACTS   OF  UNCONDITIONAL  APPROPRIA- 
TION WITH  RESPECT  TO  ONLY  A  PORTION 
OF  THE  GOODS 

A,  goes  into  B.'s  grocery  store  and  calls  for  a  dozen  oranges. 
B.  takes  a  paper  sack  and  places  one  orange  in  the  sack.  Who 
owns  that  orange  at  that  instant  of  time?  To  present  a  real  situ- 
ation, suppose  at  that  moment  a  dog  seized  the  sack  containing  the 
orange  and  ran  away  with  it.  B.  takes  another  sack,  puts  in  eleven 
oranges,  and  tenders  them  to  A.,  and  demands  the  price  of  a  dozen 
oranges.  A.  claims  he  is  entitled  to  twelve  oranges.  Let  us  see : 
In  the  beginning  there  was  a  contract  to  sell  one  dozen  oranges. 
The  oranges  were  unascertained  at  the  moment  the  agreement 
was  made.    It  would  be  possible  for  the  rule  as  to  fungible  goods 


998  SALES  (Part  4 

to  apply  here,  but  it  is  decidedly  unlikely  that  the  parties  intend 
to  become  tenants  in  common  of  all  the  oranges  owned  by  B. ; 
therefore  an  act  of  unconditional  appropriation  assented  to  by  A. 
and  B.  would  be  necessary  to  pass  the  title.  The  act  of  putting  one 
orange  in  the  sack,  so  far  as  the  physical  character  of  the  act  is  con- 
cerned, is  an  act  of  unconditional  appropriation,  and  since  it  is 
done  by  the  seller,  the  seller  very  likely  assents  to  the  act,  and 
expects  the  normal  legal  effect  to  follow,  and  expects  that  title 
should  pass  to  this  one  orange.  But  where  is  the  assent  b>  the 
buyer?  There  is  clearly  no  express  assent  to  take  title,  nor  is  it 
at  all  reasonable  to  suppose  that  A.  is  impliedly  consenting  to  take 
title  to  that  orange.  A.  wants  one  dozen  oranges.  If,  at  that  in- 
stant, something  should  cause  the  complete  loss  to  all  of  B.'s 
oranges,  except  the  one  in  the  sack,  it  could  not  be  contended  that 
A.  is  under  any  duty  to  take  and  pay  for  one  orange.  Therefore 
A.  does  not  assent  impliedly  to  this  act  as  an  act  having  the  legal 
effect  of  passing  title  to  him.  Partial  appropriations,  or,  rather, 
appropriations  as  to  a  portion  only  of  all  the  goods  contracted  to 
be  sold,  do  not  pass  title. 

Notice,  however,  that  if  there  is  evidence  showing  an  assent  by 
the  buyer  title  will  pass.  Suppose  that,  just  as  B.  put  the  orange  in 
the  sack,  B.  said:  "It  is  understood  that  this  is  your  orange." 
A.  replies :  "I  agree  to  that."  Then,  of  course,  title  to  that  orange 
has  passed.  To  avoid  the  difffculty  of  forcing  A.  to  pay  for  this 
one  orange,  if  something  should  then  prevent  B.  from  placing 
eleven  more  oranges  in  the  sack,  we  need  but  say  that  the  title 
which  then  passed  to  A.  was  a  defeasible  title;  that  is,  the  title 
was  accompanied  by  a  condition  subsequent,  that,  in  the  event  that 
the  contract  was  not  completely  performed  by  B.,  the  title  to  the 
one  orange  would,  upon  B.'s  default,  revert  to  B. 

Would  this  result  ever  be  reached  where  the  evidence  of  B.'s 
assent  to  take  title  lay  solely  in  the  circumstances  of  the  case? 
There  are  such  cases,  and  sometimes  they  are  of  considerable  busi- 
ness importance.  Suppose  that,  in  the  above  case,  instead  of  B. 
placing  the  orange  in  the  sack,  B.  had  handed  the  orange  to  A., 
and  A.  took  it  in  his  hand.  Would  title  pass  then?  Probably  so, 
because  the  act  of  appropriation  by  B.  has  been  assented  to  by  A., 
evidenced  by  A.'s  willingness  to  take  it  in  his  hand.  Of  course,  if 
A.  does  not  receive  the  other  eleven  oranges,  A.  is  under  no  obli- 
gation to  pay  for  the  one  orange,  and  he  must,  upon  B.'s  default, 
return  the  orange.  But  while  he  has  it  in  his  hands  it  is  A.'s 
orange,  and  the  risk  of  loss  is  on  A.,  and  if  at  that  instant  A. 
were  adjudicated  a  bankrupt  title  to  the  orange  would  pass  to 
A.'s  trustee  in  bankruptcy.  B.  could  not  recover  possession  of  the 
orange,  but,  on  the  contrary,  would  be  required  to  file  his  claim  in 
the  bankruptcy  proceedings,  where  he  would  get  less,  as  a  general 
rule,  than  the  price  of  the  orange. 

As  commonly  expressed,  an  act  of  unconditional  appropriation 
of  part  of  the  goods  will  not  pass  title,  unless  the  act  is  of  such 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED  999 

a  character  as  to  amount  to  an  actual  delivery  to  the  buyer.  It  re- 
quires evidence  sufficient  to  show  a  delivery  before  one  may  legiti- 
mately infer  the  requisite  assent  by  the  buyer  to  the  act  of  appro- 
priation.    The  next  case  illustrates  an  application  of  the  rule. 


ROCHESTER  &  OLEOPOLIS  OIL  CO.  v.  HUGHEY. 

(Supieme  Court  of  Pennsylvania,  1867.     50  Pa.  322.) 

In  the  court  below  the  Rochester  &  Oleopolis  Oil  Company  brought 
an  action  of  assumpsit  in  September,  1866,  against  J.  M.  Hughey,  to 
recover  the  price  of  a  quantity  of  oil  alleged  to  have  been  sold  and 
delivered  by  the  plaintiffs  to  the  defendant.  The  oil  having  been 
burned,  the  question  was  whether  the  delivery  was  complete  before  the 
burning. 

The  plaintiff's  gave  evidence,  by  the  deposition  of  A.  L.  Burnett,  their 
agent,  that  he  sold  to  Owsten,  the  agent  of  the  defendant,  four  barge 
loads  of  oil,  about  2,200  barrels,  at  $4.50  per  barrel,  deliverable  at 
Oleopolis,  to  be  measured  in  the  iron  tanks  of  the  Pennsylvania  Tube 
Company.  The  Tube  Company  receives  the  oil  at  the  oil  regions  in 
their  tubes;  it  is  transported  through  the  tubes  and  received  into  the 
tanl<:s  of  the  company  at  the  several  shipping  points  on  the  Allegheny 
river.  The  oil  of  the  respective  owners  is  not  kept  separate,  but  is 
measured  when  received  by  the  tube  company,  and  is  delivered  to  the 
order  of  the  owner  by  measurement  at  the  tanks. 

The  evidence  of  plaintiffs,  further,  was  that  495  gallons  had  been 
run  on  the  afternoon  of  June  19,  1866,  into  a  barge  furnished  by  Ows- 
ten ;  another  barge  was  placed  under  the  tanks,  and  about  450  barrels 
had  passed  into  it,  when  the  oil  took  fire,  and  both  barges  and  the 
oil  were  burned. 

The  court  (Stowe,  A.  J.)  charged : 

"The  first  point  is  as  to  what  the  contract  was :  If  it  was  to  be  de- 
livered in  boat  loads,  and  the  purchaser  had  the  right  to  say  when 
the  boat  was  loaded,  and  you  should  find  that  this  boat  was  not  ac- 
cepted by  defendant's  agent,  and  that  he  was  not  bound  to  accept  it 
because  it  was  not  a  boat  load,  that  is,  not  filled  so  that  he  was  bound 
to  take  it  from  the  vendor,  then  there  was  no  delivery  in  law,  and  plain- 
tiff cannot  recover.  If  you  should  find,  however,  that  the  first  boat 
was  reasonably  loaded,  so  that  purchaser  was  bound  to  accept,  or 
that  the  boat  was  actually  taken  into  his  charge,  so  as  to  waive  the 
right  to  have  more  oil  put  into  it,  then  plaintiff  can  recover  for  that. 

"As  to  the  oil  running  into  the  boats  at  the  time,  there  was  no  de- 
livery of  that  in  law,  because,  if  the  contract  was  for  delivery  in  boat 
loads,  about  2,000  gallons,  as  stated  by  the  witnesses  on  both  sides,  the 
boat  was  not  filled,  so  that  plaintiff'  was  bound  to  take  it  from  the 
vendor.  As  to  this  latter  it  is  clear  under  all  the  evidence  that,  if  the 
plaintiff  had  shut  oft'  the  oil  and  requested  defendant  to  pay  for  wliat 
was  in  the  boat,  he  could  not  have  compelled  defendant  to  receive  it, 
nor  to  pay  for  it. 

"In  reference  to  the  first  boat,  was  there  anything  further  to  be 
done  before  the  plaintiff  had  a  right  to  require  the  defendant  to  take 
and  pay  for  it?  That  depends  upon  whether  the  barge  was  sufficiently 
full,  or  not  being  full,  whether  Owsten,  defendant's  agent,  had  already 
taken   possession   of   it,   under  such   circumstances  as  to  indicate  he 


1000  SALES  (Part  4 

was  satisfied  to  take  it  as  it  was.  As  to  the  latter  the  plaintiff  cannot 
recover  in  this  action,  because  it  is  not  pretended  that  the  boat  was 
in  a  condition  to  deliver." 

The  plaintiff's  took  a  writ  of  error,  and  assigned  *  *  *  that  "the 
court  erred  in  the  whole  charge  and  in  each  part  thereof,  and  especially 
in  the  assumption  that  the  plaintiff  was  not  entitled  to  recover  unless 
the  boats  were  so  loaded  that  the  defendants  were  bound  to  accept 
them." 

Thompson,  C.  J.  The  question  was  submitted  to  the  jury  on  the 
trial  below,  and  they  found  that  the  contract  between  the  plaintiff  and 
defendant  was  for  the  sale  and  delivery  of  four  barge  loads  of  oil, 
and  not  a  sale  of  oil  by  the  barrel.  Of  course  until  delivery  no  spe- 
cific oil  passed  to  the  defendant.  Until  this  took  place,  he  had  only  a 
right  of  action  to  recover  for  a  breach  of  contract. 

It  is  unnecessary  to  say  whether  the  defendant  was  bound  to  take, 
and  pay  for  the  number  of  barrels  in  each  completely  laden  barge; 
if  there  be  a  question  about  that,  it  is  not  here — ^but  whether  the  con- 
tents of  partially  laden  barges  in  progress  of  being  filled  passed  as 
fast  as  it  entered  the  barge.  The  court  thought  not,  and  so  decidedly 
think  we.  The  defendant  could  not  be  compelled  to  take  a  partly  filled 
barge  when  he  had  contracted  for  full  ones,  any  more  than  if  he  had 
contracted  for  a  barrel  of  oil  could  he  have  been  compelled  to  accept 
one  half  or  quarter  full.  This  would  hardly  be  contended  for,  yet 
the  principle  is  the  same.  Under  the  finding  of  the  jury  there  is  little 
room  for  argument  against  the  ruling  complained  of.  Nor  do  we  see 
any  error  in  rejecting  the  off'ers  of  testimony.  Not  one  of  the  assign- 
ments of  error  was  according  to  rule  and  we  might  have  dismissed 
them  all  without  notice,  but  did  not,  hoping  for  more  accuracy  in  the 
future. 

Judgment  affirmed. 


SECTION   4.— ACTS   OF   UNCONDITIONAL   APPROPRIA- 
TION NOT  NECESSARY  IN  SALES  OF 
FUNGIBLE  GOODS 

Sales  Act,  Section  6.  (1)  There  may  be  a  contract  to  sell  or  a 
sale  of  an  undivided  share  of  goods.  If  the  parties  intend  to  effect 
a  present  sale,  the  buyer  by  force  of  the  agreement,  becomes  an 
owner  in  common  with  the  owner  or  owners  of  the  remaining 
shares. 

(2)  In  the  case  of  fungible  goods,  there  may  be  a  sale  of  an  un- 
divided share  of  a  specific  mass,  though  the  seller  purports  to  sell 
and  the  buyer  to  buy  a  definite  number,  weight  or  measure  of  the 
goods  in  the  mass,  and  though  the  number,  weight  or  measure  of 
the  goods  in  the  mass  is  undetermined.  By  such  a  sale  the  buyer 
becomes  owner  in  common  of  such  a  share  of  the  mass  as  the  num- 
ber, weight  or  measure  bought  bears  to  the  number,  weight  or 
measure  of  the  mass.  If  the  mass  contains  less  than  the  number, 
weight  or  measure  bought,  the  buyer  becomes  the  owner  of  the 
whole  mass  and  the  seller  is  bound  to  make  good  the  deficiency 
from  similar  goods  unless  a  contrary  intent  appears. 

Section  76,  Clause  8.     "Fungible  goods"  means  goods  of  which 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UXASCERTAINED  1001 

any  unit  is  from  its  nature  or  by  mercantile  usage  treated  as  the 
equivalent  of  any  other  unit. 

Subsection  2  lays  down  an  apparent  exception  to  the  rule  that 
some  act  of  unconditional  appropriation  is  necessary  to  pass  title 
to  goods.  But  it  is  apparent  only,  not  actual,  because  there  is  no 
unbending  rule  of  law  which  absolutely  requires  an  act  of  uncondi- 
tional appropriation.  The  law  only  presumptively  requires  such 
an  act.  In  sales  of  fungible  goods  the  presumption  is  simply  over- 
come by  an  intention  actually  expressed  by  the  parties,  or  implied- 
ly expressed  because  of  an  established  business  custom  that  in 
certain  sorts  of  sales  the  parties  do  intend  to  dispense  with  the 
act  of  unconditional  appropriation. 

The  rule  is  not  confined  to  any  particular  kinds  of  goods.  It 
is  true  that  in  practice  a  case  seldom  arises  where  the  rule  is  ap- 
plied except  in  sales  of  grain,  oil,  wine,  cotton,  and  similar  com- 
modities. If  the  parties  definitely  express  their  intention  to  do 
so,  the  rule  can  be  made  to  apply  to  sales  of  any  kind  of  goods, 
where  each  entity  of  the  mass  is  deemed  by  the  parties  to  be  like 
all  other  entities  in  the  same  mass.  Thus  the  rule  could  be  ex- 
tended to  include  sales  of  a  certain  number  of  cattle,  of  automo- 
biles, cases  of  canned  goods,  etc.,  out  of  a  mass  containing  a  larger 
quantity.  Stronger  evidence  will  be  required  in  such  cases  to  show 
that  the  parties  intended  this  result  to  follow  than  is  required  in 
the  cases  of  common  occurrence. 


GOURD  V.  HEALT. 

(Court  of  Appeals  of  New  York,  1912.    206  N.  Y.  423,  99  N.  E.  1099.) 

Action  by  Henry  E.  Gourd  against  Thomas  Healy.  From  a  judg- 
ment of  the  Appellate  Division,  affirming  a  judgment  of  the  Trial  Term, 
dismissing  the  complaint,  plaintiff  appeals. 

Werner,  J.  This  action,  which  has  been  twice  tried,  was  brought 
to  recover  the  purchase  price  of  50  cases  of  wine.  The  original  com- 
plaint contained  the  usual  averments  where  there  has  been  a  bargain 
and  sale,  but  no  delivery,  and  the  answer  was,  in  substance,  a  eeneral 
denial.     *     *     * 

There  is  no  dispute  over  the  fact  that  on  the  26th  day  of  May,  1906, 
the  pkintiff  sold  to  the  defendant  50  cases  of  wine  at  the  agreed  price 
of  $740',  which  was  to  be  billed  November  1,  1906,  at  four  months,  thus 
fixing  the  1st  day  of  March,  1907,  as  the  day  of  payment;  and  that 
meanwhile  the  plaintiff  was  to  hold  the  wine  subject  to  the  shipping 
instructions  of  the  defendant.     *     *     * 

It  is  contended,  however,  that  the  title  to  the  wine  never  passed  from 
the  plaintiff  to  the  defendant,  because  at  the  time  of  sale,  and  until 
the  close  of  the  correspondence  in  December,  1907,  the  wine  had  not 
been  segregated  from  the  larger  mass  of  which  it  formed  a  part  in  an 
unidentified  cellar  in  Bordeaux,  France;  and  that  is  the  position  taken 
by  the  Appellate  Division.  What  has  been  said  concerning  the  tender 
of  the  goods  seems  to  answer  this  contention.  Even  if  it  were  true  that 
the  title  to  merchandise  which  forms  part  of  a  larger  quantity  does 


1002  SALKS  (Part  4 

not  pass  to  the  purchaser  until  it  is  separated  from  the  mass,  the  deal- 
ings between  these  parties  were  such  as  to  relieve  the  plaintiff  from  the 
duty  of  segregation.  But  this  property  was  of  a  species  in  which  there 
may  be  a  transfer  of  title,  even  when  it  remains  an  integral  part  of  a 
larger  bulk.  Ordinarily  articles  of  personal  property  must,  if  not 
delivered,  be  so  designated  that  possession  can  be  taken  by  the  pur- 
chaser without  any  further  act  on  the  part  of  the  seller.  That  is  the 
rule  in  the  sale  of  a  horse,  a  table,  or  any  other  article  having  a  distinct 
and  separate  identity  as  the  particular  thing  sold.  It  is  different,  how- 
ever, when  the  thing  sold  is  coal,  wine,  oil,  or  wheat,  which  is  to  be  taken 
in  a  specified  quantity  or  bulk  from  a  larger  mass. 

Property  may  be  acquired  and  held  in  many  things  which  are  in- 
capable of  more  specific  designation  than  a  reference  to  their  kind,  qual- 
ity, or  other  general  description.  "Articles  of  this  nature  are  sold,  not 
by  a  description  which  refers  to  and  distinguishes  the  particular  thing, 
but  in  quantities,  which  are  ascertained  by  weight,  measure,  or  count ; 
the  constituent  parts  which  make  up  the  mass  being  undistinguishable 
from  each  other  by  any  physical  difference  in  size,  shape,  texture,  or 
quality."  Kimberly  v.  Patchin,  19  N.  Y.  330,  333  (75  Am.  Dec.  334). 
Here  the  thing  sold  was  wine  described  as  Chateau  Yquem  of  the  vin- 
tage of  1901,  and  the  quantity  was  to  be  35  cases  of  quarts  and  15 
cases  of  pints.  Any  50  cases  of  this  kind  of  wine  in  the  specified  num- 
ber of  quarts  and  pints  would  have  answered  the  description  in  this 
contract.  Upon  the  last  trial  it  appeared  that  this  wine  was  in  the 
cellars  of  Schroeder  and  Schyler,  Bordeaux,  when  the  contract  was 
made,  and  that  it  remained  there  until  it  was  shipped  to  the  plaintiff 
in  April,  1910;  and,  in  view  of  the  nature  of  the  property  and  the  deal- 
ings between  the  parties,  we  think  that  is  precisely  the  same  as  though 

the  wine  had  been  in  the  cellar  of  the  plaintiff  from  the  beginning. 
*     *     * 

The  judgment  should  be  reversed  and  a  new  trial  ordered. 


SECTION  5.— PASSING  OF  TITLE  TO  GOODS  WHICH  AT 

THE  DATE  OF  THE  CONTRACT  ARE  NOT 

IN  EXISTENCE 

Suppose  A.  intends  to  plant  a  certain  number  of  acres  of  corn 
next  spring,  or  suppose  he  has  already  planted  his  corn;  may  he 
sell  it?  That  is,  may  A.  then  pass  title  to  a  crop  yet  to  be  grown? 
Obviously,  A.  cannot,  in  the  ordinary  sense,  sell  something  which 
he  does  not  have,  and  which  may  never  come  into  existence.  But 
will  the  law  enable  A.  to  create  in  B.  rights  and  powers  which  will 
take  precedence  over  the  rights  and  powers  of  all  other  purchasers 
and  creditors  of  A.?  If  the  law  will  permit  this  to  be  done,  we 
may,  for  convenience  sake,  call  the  transaction  a  sale  of  future 
goods,  because  it  is  something  more  than  an  executory  contract 
to  sell  future  goods. 

Before  the  Sales  Act,  and  in  states  which  have  not  yet  adopted 
this  act,  there  is  a  rule  of  law  stated  somewhat  as  follows :  There 
may  be  a  present  sale  of  goods  not  in  existence  at  the  date  of 
the  contract,  provided  such  goods  were  at  the  date  of  the  con- 
tract potentially   possessed,   but  not   in  any  other  kind  of  case. 


Ch.  2)         TRAXSFKR   OF   TITLE   WHEUE   COODS   UXASCEUTAIXED  1003 

When  are  goods  said  to  be  potentially  possessed?     This  question 
is  discussed  in  the  followinc:  case. 


DICKEY  et  al.  v.  WALDO. 

(Supreme  Court  of  Micliifinn,  189^.     97  Midi.  25o,  5G  N.  W.  608, 
23   L.   R.   A.   449.) 

Action  by  John  W.  Dickey  and  Addison  Luivey  against  George  W. 
Waldo  for  the  conversion  of  peaches  grown  on  defendant's  land,  and 
of  which  plaintili's  claimed  to  be  the  owners  under  a  contract  with 
defendant's  grantor.  Waldo  obtained  the  land  by  deed  from  Schultz 
with  notice  of  this  contract.  There  was  a  judgment  for  plaintiffs,  and 
defendant  brings  error. 

A  written  contract  provided  that  Dickey  and  Lurvey  should  furnish 
Schultz  a  certain  number  of  peach  trees,  which  the  latter  agreed  to 
plant  and  cultivate  for  10  years  on  a  portion  of  his  homestead,  con- 
sisting of  40  acres  of  land,  occupied  by  himself  and  wife,  and  that,  in 
consideration  for  the  trees,  Dickey  and  Lurvey  should  be  entitled  to 
one-half  the  peaches  grown  thereon  during  any  two  of  such  years  that 
they  might  select. 

Grant,  J.  The  contract  and  the  finding  of  facts  in  this  case  are 
found  in  the  margin.  This  contract  and  the  judgment  should  be  sus- 
tained, unless  there  are  some  inexorable  rules  of  law  which  stand  in 
the  way.  Two  rules  are  invoked  to  defeat  the  plaintiffs'  action:  (1) 
That  the  land  upon  which  the  peach  trees  were  planted  is  a  home- 
stead ;  that  Schultz's  wife  did  not  sign  the  contract ;  that  it  inter- 
feres with  the  homstead  right,  and  the  contract  is  therefore  void.  (2) 
That  the  crop  which  the  plaintififs  agreed  to  take  in  payment  for  the 
trees  was  not  in  esse  at  the  time,  and  therefore  not  the  subject  of  sale. 

We  think  there  is  no  force  in  the  first  proposition.  *  *  *  Such 
contracts  are  reasonable,  and  beneficial  to  both  the  vendor  and  the 
vendee.  They  are  especially  beneficial  to  the  vendee.  He  avoids  all 
expense  except  his  labor,  runs  no  risk,  and,  if  in  indigent  circum- 
stances, he  may  obtain  gains  which  would  otherwise  be  beyond  his 
reach.  Such  contracts  are  of  common  occurrence,  and,  if  the  rigid 
rules  of  law  are  against  their  validity,  there  is  a  necessity  of  legisla- 
tive action  to  render  them  valid.  The  rule  of  law  is  well  established 
that  things  having  no  potential  existence  cannot  be  the  subject  of  mort- 
gage and  sale.  There  are,  however,  exceptions  to  this  rule,  as  where 
a  merchant  mortgages  his  stock  of  goods,  and  all  future  additions 
thereto.  It  is  unnecessary  to  cite  authorities  to  this  proposition.  The 
difficulty  seems  to  arise  in  determining  what  comes  within  the  defini- 
tion of  the  term  "potential  existence."  The  definition  of  the  word  "po- 
tential" is:  "Having  latent  power;  endowed  with  energy  adequate 
to  a  result ;  efiicacious ;  existing  in  possibility,  not  in  act."  Sir  W. 
Hamilton  said :  "Potential  existence  means  merely  that  the  thing 
may  be  at  some  time ;   actual  existence,  that  it  now  is." 

In  the  legal  sense,  things  are  said  to  have  a  potential  existence  when 
they  are  the  natural  product  or  expected  increase  of  something  al- 
ready belonging  to  the  vendor.  When  one  possesses  a  thing  from 
which  a  certain  product,  in  the  very  nature  of  things,  may  be  ex- 
pected, such  product,  we  think,  has  a  potential  existence.  The  follow- 
ing rule  appears  to  be  well  established  both  by  reason  and  authority, 
viz. :    That,  while  one  owns  property  from  which  such  product  natu- 


1004  SALES  (Part  4 

rally  arises,  such  product  may  be  the  subject  of  sale  and  mortgage. 
The  authorities  which  thus  hold  also  recognize  the  other  rule  above 
stated.  The  authorities  are  by  no  means  uniform,  but  we  think  the 
conflict  in  them  has  arisen  from  a  failure  to  make  a  proper  distinc- 
tion. In  Grantham  v.  Hawley,  Hob.  132,  it  was  held  that  a  grant  of 
that  which  the  grantor  has  potentially,  though  not  actually,  is  good,  as 
a  grant  by  the  lessee  of  all  the  corn  that  shall  be  growing  on  the  land 
at  the  end  of  the  term.  It  was  there  said:  "Though  the  lessor  had 
it  [the  corn]  not  actually  in  him,  nor  certain,  yet  he  had  it  potentially, 
for  the  land  is  the  mother  and  root  of  all  fruits.  Therefore,  he  that 
hath  it  may  grant  all  fruits  that  may  arise  upon  it  after,  and  the 
property  shall  pass  as  soon  as  the  fruits  are  extant.  A  person  may 
grant  all  the  tithe  wool  that  he  shall  have  in  such  a  year  yet  perhaps 
he  shall  have  none ;  but  a  man  cannot  grant  all  the  wool  that  shall 
grow  upon  his  sheep  that  he  shall  buy  hereafter,  for  there  he  hath  it 
neither  actually  nor  potentially."     *     *    * 

Justice  Redfield,  in  delivering  the  opinion  in  Smith  v.  Atkins,  18 
Vt  461,  said:  "It  is,  without  doubt,  true  that  the  sale  of  a  thing  not 
in  existence  is,  upon  general  principles,  inoperative,  being  merely  ex- 
ecutory; that  is,  it  confers  no  title  in  the  thing  bargained.  But  when 
the  thing  thereafter  to  be  produced  is  the  produce  of  land,  or  other 
thing,  the  owner  of  the  principal  thing  may  retain  the  general  property 
of  the  thing  produced,  unless  there  be  fraud  in  the  contract,  and  it  be 
entered  into  merely  to  defeat  creditors."  *  *  *  j^  McCaffrey  v. 
Woodin,  65  N.  Y.  464,  it  is  said:  "It  is  well  settled  that  a  grant  of 
the  future  produce  of  land  actually  in  possession  of  the  grantor  at 
the  time  of  the  grant  passes  an  interest  in  such  future  crop  as  soon  as 
it  comes  into  existence."    *     *     * 

In  the  present  case  the  trees  were  in  existence  at  the  time  of  the 
contract,  were  transferred  to  and  became  the  property  of  Schultz,  the 
vendee,  subject  to  a  share  of  the  crops  for  the  years  specified;  the 
contract  was  executed  by  the  plaintiffs,  and  operated  to  the  great  ben- 
efit of  Schultz  and  his  grantee,  the  defendant.  This  contract  is  one 
that  the  law  ought  to  delight  in  sustaining.  If  it  cannot  be  sustained, 
then  no  executed  contract  can  be,  where  a  party  furnishes  seed,  and 
puts  in  the  crop  upon  shares.  The  same  reason  that  would  defeat  the 
right  to  recovery  for  the  crop  of  peaches  in  this  case  would  defeat  the 
right  to  recover  a  crop  of  corn,  wheat,  or  other  grain,  or  strawberries 
and  other  fruits  of  like  character.  The  defendant  purchased  with  no- 
tice, and  the  purchase  price  was  reduced  on  account  of  the  plaintiffs' 
rights  in  the  crop.  We  think  that  under  the  authorities  above  cited,  as 
well  as  in  reason  and  justice,  plaintiffs  and  Schultz  became  tenants  in 
common  of  the  peaches  for  the  years  which  they  should  select,  and 
that  defendant,  having  purchased  with  notice,  stood  in  the  same  rela- 
tion to  plaintiffs  that  did  his  grantor.  Defendant's  counsel  cite  Bates 
V.  Smith,  83  Mich.  347,  47  N.  W.  249,  and  insist  that  it  controls  this 
case  in  their  favor.  The  language  of  that  case  is  broad,  and,  if  strict- 
ly followed,  would  seem  to  include  the  present  one ;  but  we  think  the 
authorities  above  cited  make  a  clear  distinction  between  the  natural 
products  of  the  soil,  wool  from  sheep,  milk  from  cows,  and  the  like, 
from  the  case  that  was  then  under  consideration,  and  we  are  disposed 
to  follow  them.  The  language  of  that  case  must  be  construed  in  con- 
nection with  its  facts. 

Judgment  affirmed.     The  other  justices  concurred. 


Ch.  2)         TRANSFER   OP   TITLE   WHERE   GOODS   UNASCERTAINED  1005 

What  effect  has  the  Sales  Act  had  upon  this  rule?  Section  5, 
subsec.  3,  provides : 

Where  the  parties  purport  to  effect  a  present  sale  of  future 
goods,  the  agreement  operates  as  a  contract  to  sell  the  goods. 

We  are  already  aware  of  the  marked  distinction  between  con- 
tracts of  sale  and  contracts  to  sell.  The  section  lays  down  a  posi- 
tive rule  of  law,  not  a  rule  of  presumption,  that,  even  if  the  parties 
do  intend  to  enter  into  a  contract  of  sale,  their  intention  will  not 
be  given  effect,  because  the  section  says  present  sales  of  future 
goods  shall  operate  as  contracts  to  sell.  The  intention  of  the  par- 
ties is  highly  important.  As  has  already  been  said,  the  question  of 
ascertaining  intention  is  the  most  important  single  problem  in  the 
law  of  sales.  The  emphasis  thus  thrown  upon  the  intention  of  the 
parties,  and  the  very  great  effort  manifested  by  the  courts  in  at- 
tempting to  carry  out  this  intention,  must  not  blind  us  to  the  pos- 
sibility of  the  law's  overriding  intention.  It  does  so  very  fre- 
quently. Individuals  cannot  be  allowed  to  do  everything  they 
choose  to  do,  because  the  rights  of  other  people  suffer  to  too 
great  an  extent.  So  in  this  case  the  rule  of  policy  adopted  in  the 
Sales  Act  defeats  intention. 

But  does  the  phrase  "future  goods"  include  sales  of  goods  poten- 
tially possessed?  Could  it  be  urged  that  the  section  is  meant  to  ap- 
ply in  all  cases  where  it  did  apply  at  common  law,  but  that  the  ex- 
ception in  favor  of  sales  of  goods  potentially  possessed  were  to  be 
treated  as  exceptions  under  the  Act?  Probably  not.  Section  76, 
clause  9,  provides: 

"Future  goods  means  goods  to  be  manufactured  or  acquired  by 
the  seller  after  the  making  of  the  contract  of  sale." 

The  natural  meaning  of  these  words  includes  goods  potentially 
possessed  and  it  would  seem  clear,  therefore,  that  the  common- 
law  doctrine  of  potential  possession  as  applied  to  sales  of  goods 
has  been  abolished  by  the  Sales  Act. 

This  section  of  the  Sales  Act  does  not  apply  to  mortgages  of 
future  goods.     Section  75  provides : 

The  provisions  of  this  act  relating  to  contracts  to  sell  and  to 
sales  do  not  apply,  unless  so  stated,  to  any  transaction  in  the  form 
of  a  contract  to  sell  or  a  sale  which  is  intended  to  operate  by  way 
of  mortgage,  pledge,  charge,  or  other  security. 

It  is  possible,  therefore,  to  mortgage  after-acquired  property, 
but  the  extent  to  which  this  may  be  done — that  is,  the  fixing  of 
the  precise  nature  of  the  rights  acquired  by  the  mortgagee  prior 
and  subsequent  to  the  acquisition  of  the  property  as  against  judg- 
ment creditors  and  subsequent  purchasers  of  the  mortgagor — is  a 
matter  upon  which  the  courts  are  not  entirely  agreed.^  It  may 
be  mentioned  that,  when  after-acquired  property  may  be  mort- 
gaged at  all,  the  rule  is  not  confined  to  the  mortgaging  of  property 

1  See  the  article  by  Professor  Williston  in  19  Harvard  Law  Review,  557, 
for  a  full  discussion  of  these  questions. 


1006  SALES  (Part  4 

potentially  possessed.     The  rule  applies  to  all  property,  whether 
potentially  possessed  or  not. 


SECTION  6.— PASSING  OF  TITLE  TO   PROPERTY  CON- 
TRACTED TO  BE  SOLD  UPON  ITS  DELIVERY 
TO  A  CARRIER  OR  OTHER  BAILEE 

The  most  common  transaction  which  calls  for  an  application  of 
the  presumption  that  title  passes  when  there  has  been  an  uncon- 
ditional appropriation  assented  to  by  both  parties  arises  where 
goods  are  delivered  to  a  railroad,  express,  or  shipping  company, 
or  other  carrier,  for  shipment  to  the  buyer.  In  the  light  of  pre- 
vious cases  let  us  examine  into  the  situation  with  a  view  of  ascer- 
taining what  the  law  ought  to  be.  Let  us  suppose  a  contract  to 
sell  goods  of  a  certain  description.  Buyer  and  seller  have  their 
respective  places  of  business  in  different  cities.  (1)  The  contract 
may  result  either  from  negotiations  carried  on  by  mail  or  tele- 
graph or  through  salesmen  sent  out  by  the  seller.  The  con- 
tract is  one  for  unascertained  goods.  The  goods  are  to  be  sent  by 
freight  to  the  buyer.  (2)  Upon  receiving  the  order,  the  seller  will 
have  his  clerks  select  the  goods.  (3)  They  will  be  sent  to  the 
packing  room,  boxed,  and  the*  name  of  the  buyer  will  be  written 
on  the  packages.  (4)  The  goods  will  then  be  taken  to  the  loading 
platform,  and  orders  will  be  issued  to  the  truck  drivers  to  take  the 
goods  to  a  designated  freight  office  and  to  procure  bills  of  lading. 
(5)  The  goods  will  then  be  loaded  on  the  seller's-  trucks,  taken 
to  the  freight  shed,  and  unloaded  on  the  railroad  company's  plat- 
form. (6)  The  driver  reports  the  delivery  to  the  freight  agent, 
and  bills  of  lading  are  made  out,  running  to  the  buyer  as  consignee. 
(7)  The  goods  are  loaded  into  a  car.  (8)  The  car  is  sealed  and 
taken  to  the  switchyards.  (9)  The  train  is  made  up  and  leaves  the 
terminal.  (10)  The  goods  arrive  at  destination  and  are  unloaded 
on  the  company's  platform.  The  consignee  is  notified  of  the  ar- 
rival of  the  shipment. 

At  what  moment  did  title  pass?  This  is  by  no  means  an  idle  or 
an  easy  question.  When  goods  are'  lost  or  damaged,  the  event 
occurs  at  a  particular  moment.  The  holder  of  the  title  at  that 
moment  sustains  the  loss.  If  the  buyer  or  seller  be  adjudicated 
bankrupt,  the  order  of  adjudication  is  entered  at  a  particular  mo- 
ment, and  the  trustee's  title  to  the  bankrupt's  property  for  the  bene- 
fit of  his  creditors  is  acquired  at  a  particular  moment.  Property 
which  at  that  moment  belonged  to  the  bankrupt  goes  to  the  trustee. 
If  in  the  normal  course  of  events  title  would  have  passed  to  the 
bankrupt  five  minutes  later,  the  trustee  gets  no  title  to  the  goods. 
Again,  if  either  buyer  or  seller  undertakes  to  resell  the  goods,  that 
sale  is  consummated  at  a  particular  instant  of  time.  If  the  seller 
then  had  title,  it  passed  on  to  his  purchaser.  If  he  did  not  have 
title,  the  purchaser  will  not  obtain  the  goods. 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED  1007 

Let  US  return  to  the  illustration.  When  did  title  presumptively- 
pass?  Notice  that  when  act  (3)  was  done — i.  e.,  the  goods  packed 
and  marked  with  the  buyer's  name — we  have  an  act  which,  under 
other  circumstances,  unquestionably  would  be  an  act  of  uncondi- 
tional appropriation,  and  title  would  then  pass,  if  there  was  the 
requisite  assent  by  both  parties.  But  in  this  case  is  it  reasonable  to 
suppose  that  the  parties  intended  to  pass  and  receive  title  at  so 
early  a  moment?  Hardly.  It  is  much  more  reasonable  to  suppose 
that  the  parties  intended  that  title  should  not  pass  until  the  seller 
had  performed  the  last  act  with  respect  to  the  goods  which,  under 
the  contract,  it  was  his  duty  to  perform.  This  act  consisted  in 
(1)  the  actual  delivery  and  unloading  on  the  company's  platform, 
coupled  with  (2)  the  act  of  obtaining  from  the  freight  agent  a 
recognition  that  from  that  instant  the  railroad  company  regarded 
itself  as  having  the  possession  of  the  goods  and  the  responsibility 
for  their  safe  keeping.  And  so  the  law  is,  as  now  codified  in  the 
Sales  Act: 

Section  19,  Rule  4.  (2)  Where,  in  pursuance  of  a  contract  to 
sell,  the  seller  delivers  the  goods  to  the  buyer,  or  to  a  carrier  or 
other  bailee  (whether  named  by  the  buyer  or  not)  for  the  purpose 
of  transmission  to  or  holding  for  the  buyer,  he  is  presumed  to  have 
unconditionally  appropriated  the  goods  to  the  contract,  except  in 
the  cases  provided  for  in  the  next  rule  and  in  section  20.  This 
presumption  is  applicable,  although  by  the  terms  of  the  contract 
the  buyer  is  to  pay  the  price  before  receiving  delivery  of  the  goods, 
and  the  goods  are  marked  with  the  words  "Collect  on  Delivery" 
or  their  equivalents. 

It  may  not  be  out  of  place  again  to  call  attention  to  the  fact 
that  we  are  dealing  only  with  a  rule  of  presumption,  not  an  un- 
bending rule  of  law.  Title  may  pass  at  an  earlier  date,  and  it  may 
pass  at  a  later  time.  The  above  rule  merely  provides  that,  in  the 
absence  of  other  evidence  manifesting  a  contrary  intention,  title 
will  pass  at  the  moment  the  goods  are  delivered  to  and  accepted 
by  the  carrier's  agents. 

No  cases  have  been  inserted  where  title  did  pass  at  a  time  earlier 
than  that  at  which  the  goods  were  delivered  to  the  carrier,  but 
these  cases  are  not  uncommon.  Suppose  that  a  buyer  goes  to  a 
distant  city  to  purchase  an  automobile.  He  finally  selects  one, 
tries  it  out,  and  buys  it,  let  us  suppose,  in  this  case,  on  credit.  The 
car  is  to  be  shipped  to  him.  That  night,  and  before  the  car  is 
taken  out  of  the  seller's  sales  room,  the  car  is  stolen  or  destroyed 
by  fire.  The  buyer  will  be  obliged  to  pay  the  price.  It  was  his 
car  that  was  lost.  Even  this  result  could  be  changed  by  evidence 
showing  that,  in  spite  of  the  fact  that  this  was  a  sale  of  ascertained 
goods,  the  title /was  not  presumed  to  pass  until  the  seller  delivered 
the  car  to  the  carrier. 

Quite  a  number  of  cases  follow  where  title  was  held  to  pass  at 
a  time  subsequent  to  delivery  to  the  carrier.    This  kind  of  case  is 


1008  SALES  (Part  4 

the  more  common  situation,  where  the  general  presumption  that 
title  passes  on  delivery  to  the  carrier  is  overcome. 

No  case  has  been  inserted  for  the  purpose  of  establishing  the 
general  rule  which  we  have  been  discussing.  We  shall  presume 
that  that  is  fairly  well  understood  at  this  point.  But  we  do  want 
to  find  out,  especially,  the  circumstances  where  the  presumption 
is  deemed  to  be  inapplicable.  Perhaps  the  idea  has  already  been 
grasped  that  in  the  study  of  law,  and  the  study  of  its  application 
to  varied  states  of  fact,  the  real  understanding  of  the  rules  results 
from  the  discovery  of  the  outer  limits  of  the  rule ;  that  is,  we  want 
to  discuss  these  cases  which  are  just  barely  within  the  rule  and 
those  cases  which  are  just  slightly  outside  of  the  rule,  for  it  is  just 
this  sort  of  study  that  enables  us — to  employ  a  mathematical  term 
— to  plot  the  curve  made  by  the  principle.  One  of  the  most  im- 
portant things  to  learn  about  the  law  is  the  uncertainty  which  in- 
variably attends  its  application  to  the  infinite  variety  of  the  facts 
of  business.  Business  transactions  change  in  character,  and  so 
does  the  law,  because  the  legislatures  and  the  courts  change  it.  It 
is  conceivable  that  a  legislature  could,  by  sweeping  changes  in 
the  law,  wipe  out  in  an  instant  all  the  law  that  one  knew ;  but  no 
series  of  new  statutes  or  repealing  acts  caii  take  away  from  one 
who  has  struggled  with  a  substantial  number  of  actual  cases  the 
deep  appreciation  of  the  nature  of  legal  relationships,  the  source 
of  controversy,  and  of  the  knowledge  of  some  things'  that  may  be 
done  to  avoid  the  losses  consequent  upon  the  failure  to  note  the 
legal  aspects  of  business.  The  first  case,  therefore,  simply  pre- 
sents a  border  line  case. 


GEHL  V.  PETCKE  BROS.  COMMISSION  CO. 
(Supreme  Court  of  Wisconsin,  1914.     158  Wis.  494,  149  N.  W.  275.) 

Action  by  N.  V.  Gehl,  sole  trader  as  N.  V.  Gehl  &  Co.,  against  the 
Peycke  Bros.  Commission  Company,  to  recover  the  purchase  price 
of  a  shipment  of  two  car  loads  of  cabbage  from  Milwaukee  to  Kansas 
City.  The  suit  was  begun  in  the  civil  court  for  Milwaukee  county,  and 
resulted  in  a  judgment  in  favor  of  the  plaintiff.  An  appeal  was  taken 
to  the  circuit  court,  and  an  order  was  therein  entered  reversing  the 
judgment  of  the  civil  court  and  awarding  a  new  trial  in  the  circuit 
court.     Plaintiff  appealed  from  such  order. 

The  questions  raised  by  the  appeal  on  the  merits  involve  the  deter- 
mination of  where,  under  the  agreement  between  the  parties,  the  de- 
livery of  the  cabbage  took  place.  It  was  damaged  by  frost  in  transit. 
Plaintiff  claims,  and  the  civil  court  found,  that  the  place  of  delivery 
was  Milwaukee.  The  defendant  contends,  and  the  circuit  court  held, 
the  place  of  delivery  was  Kansas  City.  The  following  facts  determine 
the  solution  of  the  question  involved: 

On  January  2,  1912,  the  defendant,  a  commission  company  located 
at  Kansas  City,  Mo.,  telegraphed  the  plaintiff,  a  dealer  in  Milwaukee, 
as  follows:  "Wire  lowest  strictly  first  class  Holland  free  from  frost, 
prompt  shipment,"  To  which  plaintiff  on  the  3d  replied  by  telegraph : 
"Offer  U.  R.  T.  five  forty  two,  shipment  to-morrow  weather  permit- 


Ch.  2)         TRANSFER  OF  TITLE   WHERE   GOODS  UNASCERTAINED  1009 

ting.  Twenty  four  ton  here."  The  same  day  defendant  wired  plain- 
tiff :  "Ship  car  offered,  wire  routing,  prefer  routing  Dogwood" — "Dog- 
wood" meaning  Chicago,  Milwaukee  &  St.  Paul  Railway  Company 
and  "U.  R.  T."  meaning  Union  Refrigerator  Transit  Company's  car. 
On  the  5th  plaintiff  wired  the  defendant:  "Below  zero  yesterday  and 
to-day ;  offer  another  car  at  same  price,  empty  car  on  hand  both  ship- 
ment iirst  weather  permitting  loading."  To  which  on  the  same  day  the 
defendant  answered  by  wire :  "Book  another  car  first  quality.  Ship 
both  earliest  possible."  January  9th  plaintiff  wired  defendant:  "Car 
five  forty  two  leaves  to-day  fast  train  other  possibly  to-morrow."  And 
on  the  10th  he  sent  this  message,  "Car  U.  R.  T.  still  here  under  shel- 
ter. Can  ship  both  to-morrow.  Will  furnish  stoves,  fuel  and  a  man 
in  charge  if  you  pay  two  dollars  a  ton  extra.  Railroad  will  not  accept 
billing  or  forward  otherwise.  Must  advise  early  to  complete  arrange- 
ments." Defendant's  reply  by  wire  was :  "Start  cars  to-day  with  man 
and  heat.  Will  pay  extra" — and  by  letter  dated  the  11th:  "We  wired 
you  in  answer  to  yours  of  yesterday  to  ship  two  cars  of  cabbage  in 
charge  of  a  man  with  stoves  and  we  hope  he  will  reach  us  with  same 
by  Monday  morning  at  the  latest.  It  seems  to  us,  however,  as  if  the 
expenses  should  not  quite  reach  $2  per  ton  when  shipping  two  cars  at 
the  same  time.  Thus,  if  after  the  deal  has  been  closed  the  expenses 
should  be  less  we  hope  you  will  give  us  the  benefit  of  the  same." 

The  cabbage  was  free  from  frost  and  in  good  merchantable  condi- 
tion when  it  left  Milwaukee,  and  plaintiff  furnished  an  experienced 
man,  who  exercised  ordinary  care  in  looking  after  the  shipment  en 
route.  Union  Refrigerator  Transit  cars  do  not  have  openings  for  stove 
pipes,  and  plaintiff  furnished  salamanders,  which  are  the  practical  equiv- 
alent of  stoves.  Defendant  knew  that  stoves  could  not  be  used  in 
Union  Refrigerator  Transit  Cars.  The  cars  arrived  at  Kansas  City 
January  14th,  after  having  been  in  transit  about  60  hours,  the  usual 
time  required  for  such  shipments.  The  weather  during  that  time  was 
extremely  and  unusually  cold ;  the  thermometer  at  Kansas  City  regis- 
tered 13°  below  zero  on  the  11th,  20°  below  on  the  12th,  and  12°  be- 
low on  the  13th  of  January,  during  the  most  of  which  time  the  cabbage 
was  en  route. 

Vinje;,  j,  *  *  *  Were  it  not  for  the  arrangement  with  refer- 
ence to  furnishing  a  man  and  stoves,  no  serious  question  could  arise 
as  to  where  delivery  was  made.  The  offer  by  plaintiff  was  to  sell 
cabbage  for  $24  per  ton  here,  meaning  Milwaukee,  and  that  offer  was 
accepted.  It  is  the  settled  law  of  this  state  that,  in  the  absence  of  con- 
tract provisions  or  circumstances  showing  a  different  intent,  where 
there  is  a  contract  for  the  sale  of  chattels  to  be  placed  on  cars  by  the 
vendor  at  a  particular  place,  the  title  passes  to  the  vendee  when  they 
are  so  placed.     *     *     * 

The  defendant  contends  that  the  vendor's  agreement  to  furnish  man 
and  stoves  for  $2  per  ton  extra  takes  the  case  out  of  the  general  rule, 
and  that  the  contract  as  finally  concluded  was  that  for  $26  per  ton 
the  vendor  agreed  to  deliver  the  cabbage  at  Kansas  City.  We  have 
been  unable  to  so  construe  the  transactions.  When  the  agreement  to 
furnish  man  was  made  the  first  car  had  already  been  delivered  to  the 
railway  company  and  title  had  passed  to  the  vendee  under  the  rule 
above  stated.  Owing  to  the  severity  of  the  weather  the  railway  com- 
pany refused  to  forward  the  shipment  except  upon  conditions  stated  by 
B.&  B.Btts.Law— 64 


1010  SALES  (Part  4 

it.  The  contract  of  the  plaintiff  was  to  deliver  at  Milwaukee.  This  he 
had  done  as  to  one  car  and  was  ready  to  do  as  to  the  other.  Under 
the  contract  it  was  the  vendee's  duty  to  comply  with  the  requirements 
of  the  railway  company.  The  fact  that  the  vendor  agreed  to  do  so 
at  an  additional  cost  per  ton  to  the  vendee  did  not  change  the  original 
contract  as  to  place  of  delivery.  That  it  was  understood  by  the  vendee 
not  to  change  it  is  evident  from  its  letter  wherein  it  says  that,  should 
the  expense  of  sending  man  with  both  cars  be  less  than  $2  per  ton, 
it  expected  to  have  the  expense  adjusted  at  actual  cost.  When  a  defi- 
nite contract  is  made  as  to  the  chattels  sold,  the  price,  and  place  of 
delivery,  such  contract  is  not  necessarily  changed  as  to  the  place  of 
delivery  or  the  time  of  the  passing  of  title  by  the  fact  that  the  vendor 
for  extra  compensation  or  gratuitously  agrees  to  perform  services  rel- 
ative to  them  after  they  have  been  delivered  or  have  left  the  place 
of  delivery,  or  that  the  contract  in  some  other  respect  has  been  modi- 
fied.    *     *     * 

There  is  nothing  inconsistent  with  the  original  contract  in  the  later 
agreement,  and  it  does  not  purport  to  modify  such  contract  in  any  re- 
spect, except  as  to  the  cost  of  the  cabbage  to  the  defendant,  which 
increased  cost  was  rendered  necessary  by  the  severity  of  the  weather — 
surely  not  the  fault  of  the  plaintiff.  He  stood  ready  to  deliver  and  did 
deliver  according  to  his  agreement.     *     *     * 

Order  reversed,  and  cause  remanded,  with  directions  to  affirm  the 
judgment  of  the  civil  court. 


Section  19,  Rule  4  (2),  expressly  provides  that  the  presumption 
is  that  title  passes  upon  delivery  to  the  carrier,  even  though  the 
goods  are  sent  "collect  on  delivery."  The  rule  which  represented 
the  weight  of  authority  was  here  adopted  by  the  act.  The  effect  of 
the  words  "collect  on  delivery"  is  merely  to  reserve  possession  of 
the  goods  as  a  means  of  obtaining  payment  of  the  price  before 
actual  delivery  to  the  buyer.  We  have  seen,  in  other  types  of 
cases,  that  the  seller  may  pass  title  and  reserve  possession.  There 
is  nothing  inconsistent  in  such  reservation.  The  next  case  shows 
some  of  the  consequences  of  the  rule. 


UNITED  STATES  v.  ADAMS   EXP.  CO. 
{United  States  District  Court,  S.  D.   Iowa,  E.  D.,  1902.     119  Fed.  240.) 

McPherson,  District  Judge.  This  case  is  by  indictment,  charging 
the  defendant  as  *  *  *  within  this  district  "carrying  on  the  busi- 
ness of  a  retail  liquor  dealer  without  having  paid  the  special  tax  as 
required  by  law."  *  *  *  /^|-  ^he  dates  covered  by  the  indictment 
the  Dallas  Company  delivered  at  Dallas,  111.,  to  the  defendant,  for  car- 
riage and  delivery  at  Birmingham,  Iowa,  jugs  containing  each  less  than 
five  wine  gallons  of  such  liquors,  addressed  and  consigned  to  certain 
and  divers  parties  at  said  Iowa  town,  orders  therefor  for  said  liquors 
having  been  received  by  and  for  said  Dallas  Company  from  its  agent, 
who  took  said  orders  from  the  consignees.  All  of  said  consignments 
were  shipped  C.  O.  D. ;  that  is,  the  defendant  carried  said  liquors 
from  Dallas,  111.,  to  Birmingham,  Iowa,  and  was  to  and  did  collect  from 


Ch.  2)         TKAXSFER   OF   TITLE   WHERE   GOODS   UXASCEKTAIXED  1011 

the  consignee  the  carrying  charges  and  the  selUng  price  or  value  of  the 
Hquors,  and,  after  collecting  the  two  sums,  was  to  and  did  deliver  the 
liquors  to  the  consignee.  Neither  the  Dallas  Com^)any  nor  the  de- 
fendant has  paid  the  special  tax  as  a  retail  liquor  dealer  at  Birming- 
ham, Iowa.     *     *     * 

The  only  question,  in  my  judgment,  is,  where  and  by  whom  were 
the  liquors  sold?  If  in  Illinois,  this  court  is  without  jurisdiction. 
-i=  *  *  ]3j(j  |-j^g  Adams  Express  Company  carry  on  the  business  of 
a  liquor  dealer  in  Iowa?  *  -^-^  *  The  title  to  the  liquors  did  not 
pass  from  the  Dallas  Company  when  the  orders  were  taken  by  the 
agent.  The  company  could  ignore  the  orders,  and  refuse  to  ratify  the 
act  of  the  agent,  for  any  reason,  good  or  otherwise.  Did  the  title  pass 
from  the  Dallas  Company  to  the  consignees  when  the  liquors,  prop- 
erly addressed,  were  deposited  in  the  office  of  the  defendant  at  Dallas, 
111.,  with  directions  to  defendant  to  carry  them  to  Iowa,  and  deliver 
them  to  the  consignees,  after  first  collecting  the  selling  price?  I  be- 
lieve, and  so  hold,  that  the  title  did  then  and  there  pass ;  and  also 
hold  that,  the  title  thus  passing,  that  it  is  decisive  of  this  case  against 
the  government.  That  the  authorities  are  in  irreconcilable  conflict  is 
beyond  question.  But  that  the  great  weight  of  authority  sustains  the 
above  holding  is  equally  true.     '•'     *     * 

The  weight  of  authority,  both  state  and  federal,  is  to  the  effect  that 
the  title  passes  to  the  consignee  when  the  goods  are  delivered  to  the 
carrier,  I  have  no  doubt.  And  that  the  fact  that  the  goods  are  carried 
C.  O.  D.  does  not  change  the  rule  I  am  equally  clear.  And,  this  being 
so,  the  liquors  in  question  were  sold  in  Dallas,  111. ;  and,  the  sales  hav- 
ing been  made  there,  there  is  no  pretense  that  the  liqviors  in  question 
were  again  sold  by  any  one. 

The  express  company  was  the  agent  of  the  vendees  in  carrying  the 
liquors,  and  the  agent  of  the  vendors  in  collecting  and  returning  the 
money ;  and,  as  the  express  company  did  not  sell  the  liquors,  it  was 
not  engaged  in  the  business  of  a  liquor  dealer. 


Suppose  a  dealer  in  southern  Florida  should  order  a  carload 
of  fresh  meat  from  one  of  the  Chicago  packers,  and  that  the  ship- 
ment is  delivered  to  a  carrier  under  a  contract  of  shipment  w^hich 
freed  the  carrier  from  all  obligation  of  iceing  the  car.  The  meat 
is  in  perfect  condition  when  accepted  by  the  railroad  compan}' 
but  spoils  during  transit.  If  the  usual  presumption  applies  here 
the  buyer  loses.    Does  it  apply? 

Sales  Act,  Section  46.  (1)  Where,  in  pursuance  of  a  contract  to 
sell  or  a  sale,  the  seller  is  authorized  or  required  to  send  the 
goods  to  the  buyer,  delivery  of  the  goods  to  a  carrier,  whether 
named  by  the  buyer  or  not,  for  the  purpose  of  transmission  to  the 
buyer  is  deemed  to  be  a  delivery  of  the  goods  to  the  buyer,  except 
in  the  cases  provided  for  in  Section  19,  Rule  5,  or  unless  a  con- 
trary intent  appears.  (2)  Unless  otherwise  authorized  by  the 
buyer,  the  seller  must  make  such  contract  with  the  carrier  on  be- 
half of  the  buyer  as  may  be  reasonable,  having  regard  to  the  nature 
of  the  goods  and  the  other  circumstances  of  the  case.  If  the  seller 
omits  so  to  do,  and  the  goods  are  lost  or  damaged  in  course  of 


1012  SALES  (Part  4 

transit,  the  buyer  may  decline  to  treat  the  delivery  to  the  carrier 
as  a  delivery  to  himself,  or  may  hold  the  seller  responsible  in 
damages.  (3)  Unless  otherwise  agreed,  where  goods  are  sent  by 
the  seller  to  the  buyer  under  circumstances  in  which  the  seller 
knows  or  ought  to  know  that  it  is  usual  to  insure,  the  seller  must 
give  such  notice  to  the  buyer  as  may  enable  him  to  insure  them 
during  their  transit,  and,  if  the  seller  fails  to  do  so,  the  goods  shall 
be  deemed  to  be  at  his  risk  during  such  transit. 

Before  taking  up  the  cases  which  directly  concern  our  general 
inquiry  as  to  the  circumstances  under  which  title  passes  upon  de- 
livery to  a  carrier,  we  should  note  here  a  matter  which  is  some- 
what outside  the  general  theme.  (1)  A  seller  is  always  under  a 
contract  obligation  to  pass  title  to  the  buyer.  (2)  The  seller  may 
be  under  an  additional  contract  obligation  to  deliver  the  goods 
to  the  buyer.  This  is  an  independent  obligation.  The  purpose  of 
the  subsection  is  to  declare  what  shall  constitute  a  delivery  to  the 
buyer  in  all  those  cases  not  covered  by  Section  19,  Rule  5.  Sec- 
tion 46  (1)  applies  (1)  to  contracts  to  sell,  and  (2)  to  sales;  while 
Section  19,  Rule  5,  applies  only  to  contracts  to  sell. 

Passing,  then,  to  the  question  in  which  we  are  primarily  inter- 
ested here,  we  note  the  very  important  qualification  that  title  is  not 
presumed  to  pass  upon  delivery  to  the  carrier,  when  the  seller  has 
made  a  contract  of  shipment  with  the  carrier  which,  under  the  cir- 
cumstances of  the  case,  is  not  a  reasonable  one.  When  will  such  a 
contract  be  unreasonable?  There  are  probably  a  great  variety  of 
such  instances.  The  following  case  presents  one  instance  of  con- 
siderable practical  importance. 


MILLER  V.  HARVEY. 

(Court  of  Appeals  of  New  York,  1917.    221  N.  Y.  54,  116  N.  B.  781, 
L.  R.  A.  1917F,  559.) 

Action  by  Charles  E.  Miller  against  George  Harvey.  From  a  judg- 
ment of  the  Appellate  Division,  affirming  a  judgment  for  defendant, 
plaintiff  appeals. 

Cardozo,  J.  The  plaintiff  sold  to  the  defendant  in  the  city  of  New 
York  automobile  tires  which  were  to  be  sent  by  express  to  Allenhurst, 
N.  J.  _  The  price,  $95.43,  was  paid  by  the  defendant  in  advance.  The 
seller  intrusted  the  tires  to  an  express  company  without  declaring  their 
value.  The  waybill  states  that  the  value  was  asked  and  not  given.  Bv 
the  contract  of  carriage  the  liability  of  the  carrier  was  limited  to  $50, 
unless  a  greater  value  was  "declared  and  paid  for  or  agreed  to  be  paid 
for  at  the  time  of  shipment."  The  tires  were  lost  in  transit.  The  de- 
fendant notified  the  plaintiff  of  the  loss  and' requested  a  duplicate  ship- 
ment, which  was  made.  The  question  to  be  determined  is  whether 
payment  must  be  made  again. 

The  general  rule  is  that  delivery  to  a  carrier  is  delivery  to  the  buyer. 
Sales  of  Goods  Act,  §  127,  subd.  1.  *  *  *  But  the  rule  has  its  ex- 
ception. *  *  *  By  section  127,  subd.  2,  of  the  Sales  of  Goods  Act, 
it  is  provided :  "Unless  otherwise  authorized  by  the  buyer,  the  seller 
must  make  such  contract  with  the  carrier  on  behalf  of  the  buver  as 


Ch.  2)         TRANSFER  OF  TITLE   WHERE   GOODS   UNASCERTAINED  1013 

may  be  reasonable,  having  regard  to  the  nature  of  the  goods  and  the 
other  circumstances  of  the  case.  If  the  seller  omit  so  to  do,  and  the 
goods  are  lost  or  damaged  in  course  of  transit,  the  buyer  may  decline 
to  treat  the  delivery  to  the  carrier  as  a  delivery  to  himself,  or  may 
hold  the  seller  responsible  in  damages."  The  statute  is  declaratory  of 
the  rule  at  common  law.  The  seller  must  not  sacrifice  the  buyer's 
right  to  claim  indemnity  from  the  carrier.  That  rule  was  declared  more 
than  a  century  ago  in  Clarke  v.  Hutchins,  14  East,  475.    *    *    * 

Tested  by  these  principles,  the  plaintifif's  case  must  fail.  He  limited 
the  carrier's  liability  to  $50.  He  sacrificed  the  defendant's  right  of 
indemnity  to  the  extent  of  almost  one-half  of  the  value  of  the  shipment. 
He  did  this  when  full  indemnity  could  have  been  procured  by  an  ad- 
ditional payment  of  ten  cents.  That  was  not  a  reasonable  protection 
of  the  interests  of  his  principal.  The  plaintiff's  argument,  if  sound, 
would  require  us  to  hold  that  the  acceptance  of  a  like  limitation  would 
be  reasonable  if  the  value  had  been  $1,000.  Precedent  and  reason 
forbid  that  conclusion.  The  seller  who  puts  the  buyer  at  the  mercy  of 
the  carrier  must  procure  the  buyer's  approval  or  assume  the  risk  him- 

C^l  T  5jC  ^  3(C 

The  judgment  should  be  affirmed. 


The  preceding  case  stands  for  the  important  general  proposition 
that  if  the  seller,  at  the  time  he  delivers  the  goods  to  the  carrier, 
is  then  guilty  of  a  breach  of  contract  that  title  to  the  goods  will  not 
pass  to  the  buyer.  It  would  be  possible  for  the  law  to  provide  that 
title  did  pass,  thus  imposing  upon  the  buyer  the  burden  of  suing 
the  seller  for  the  damages,  but  the  law  has  taken  the  other  view  of 
the  matter.  The  particular  obligation  of  the  seller  in  that  case  was 
implied  in  the  contract  and  the  difficulty  always  will  be  in  ascer- 
taining what  obligations  are  to  be  implied  in  the  contract. 

The  next  case  illustrates  the  same  general  rule:  That  a  breach 
of  contract  by  the  seller  prevents  title  from  passing  to  the  buyer 
upon  delivery  to  the  carrier.  One  should  keep  in  mind,  however, 
that  any  breach  of  contract  of  a  material  character  will  have  the 
same  effect.  It  so  happens  that  in  the  following  case  we  may 
make  use  of  an  additional  section  of  the  act.  This  section,  it  should 
be  noticed,  will  be  involved  in  cases  where  there  is  no  shipment 
of  goods  by  carrier  to  the  buyer. 

Sales  Act,  Section  44.  (1)  Where  the  seller  delivers  to  the  buy- 
er a  quantity  of  goods  less  than  he  contracted  to  sell,  the  buyer 
may  reject  them,  but  if  the  buyer  accepts  or  retains  the  goods  so 
delivered,  knowing  that  the  seller  is  not  going  to  perform  the  con- 
tract in  full,  he  must  pay  for  them  at  the  contract  rate.  If,  how- 
ever, the  buyer  has  used  or  disposed  of  the  goods  delivered  before 
he  knows  that  the  seller  is  not  going  to  perform  his  contract  in 
full,  the  buyer  shall  not  be  liable  for  more  than  the  fair  value  to 
him  of  the  goods  so  received. 

(2)  Where  the  seller  delivers  to  the  buyer  a  quantity  of  goods 
larger  than  he  contracted  to  sell,  the  buyer  may  accept  the  goods 
included  in  the  contract  and  reject  the  rest,  or  he  may  reject  the 


1014  SALES  (Part  4 

whole.    If  the  buyer  accepts  the  whole  of  the  goods  so  delivered  he 
must  pay  for  them  at  the  contract  rate. 

(3)  When  the  seller  delivers  to  the  buyer  the  goods  he  con- 
tracted to  sell  mixed  with  goods  of  a  different  description  not  in- 
cluded in  the  contract,  the  buyer  may  accept  the  goods  which  are 
in  accordance  with  the  contract  and  reject  the  rest,  or  he  may  re- 
ject the  whole. 

(4)  The  provisions  of  this  section  are  subject  to  any  usage 
of  trade,  special  agreement,  or  course  of  dealing  between  the 
parties. 

The  case  following  involves  the  application  of  subsection  3. 


ROCK  GLEN  SALT  CO.   v.   SEGAL. 

(Supreme  Judicial  Court  of  Massachusetts,  1918.     229  Mass.  115, 
118   N.  E.  2.39.) 

Action  by  the  Rock  Glen  Salt  Company  against  Jacob  N.  Segal. 
There  was  a  finding  for  plaintiff,  and  defendant  claimed  report  to  the 
appellate  division  of  the  municipal  court  of  the  city  of  Boston,  which 
ordered  judgment  for  defendant,  and  plaintiff"  appeals. 

PiERCi;,  J.  "This  is  an  action  of  contract  to  recover  the  purchase 
price  of  300  burlaps  of  table  salt  *  *  *  amounting  in  all  to  $403 
less  freight,  $80.44,  net  amount  $322.56."  A  "memorandum  of  agree- 
ment" for  the  purchase  and  sale  of  "a  supply  of  salt  numbering  five 
to  ten  cars"  *  *  *  f.  o.  b.  Boston,  Mass.  The  shipment  in  ques- 
tion was  the  last  to  be  made  under  this  contract.  *  *  *  The  de- 
fendant had  previously  *  *  *  received  *  *  *  ^[^q  carloads 
of  salt.    *     *     * 

February  8,  1913,  the  plaintiff  purchased  of  the  Watkins  Salt  Co., 
Watkins,  N.  Y.,  the  salt  in  bags  ordered  by  the  defendant.  Two  days 
later  it  purchased  15  barrels  of  salt  ordered  by  another  customer  of 
the  plaintiff.  The  salt  in  bags  and  barrels  was  placed  in  a  car  and 
shipped  at  plaintiff''s  request  from  Watkins,  N.  Y.,  to  the  Rock  Glen 
Salt  Co.,  Boston,  Mass.  The  plaintiff  took  from  the  carrier  a  non- 
negotiable  bill  of  lading.  The  salt  was  not  consigned  to  the  defendant, 
but  on  the  contrary  was  consigned  to  the  plaintiff  itself,  and  was  de- 
scribed in  the  bill  of  lading  as  15  Bbls.  400  Sax.  Weight  64600#." 
*  *  *  This  bill  of  lading  was  indorsed  "Deliver  to  order  of  Segal 
Bros.  Rock  Glen  Salt  Co.  F.  W.  Relyea.  Tres."  It  was  then  sent  to 
and  received  by  the  Boston  &  Maine  Railroad  at  Boston,  Mass.,  but  it 
was  never  delivered  to  or  accepted  by  the  defendant.  *  *  *  On 
February  19,  1913,  the  Boston  &  Maine  Railroad  notified  the  defend- 
ant in  writing  of  the  arrival  of  freight  consigned  to  the  Rock  Glen 
Salt  Co.  and  stated  that  it  was  ready  for  delivery.  *  *  *  Neither 
the  bill  of  lading  nor  the  notice  stated  the  different  kinds  of  salt  that 
made  up  the  400  bags  nor  the  quantity  of  each  kind.  Nor  did  the 
defendant  know  that  the  15  barrels  of  salt  had  been  put  into  the  car 
with  the  400  bags  to  fill  an  order  of  another  customer  of  the  plain- 
tiff. ^ 

Defendant  *  *  *  compared  the  notice  with  the  memorandum 
of  his  order,  found  that  the  salt  stated  in  the  notice  did  not  correspond 
to  the  order  given  by  him  to  the  plaintiff,  noticed  that  the   freight 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED  1015 

charges  were  excessive  for  the  quantity  of  salt  ordered  by  him,  and 
that  they  covered  the  whole  quantity  of  salt  contained  in  the  car.  He 
thereupon  returned  tlie  notice  to  the  "railroad's  messenger."  Without 
contradiction,  so  far  as  the  record  discloses,  he  testified  "that  there 
was  no  way  in  which  the  freight  charges  could  have  been  apportioned 
or  separated  and  if  [he]  the  defendant  had  accepted  any  part  of  this 
car  of  salt  he  would  have  been  obliged  to  pay  the  full  amount  of  the 
freight  charges  on  said  car."  *  *  *  February  26,  1913,  the  car  of 
salt  was  damaged  by  fire  at  the  Boston  &  Maine  freight  house  and  the 
defendant  refused  to  receive  the  salt.     *     *     * 

We  think  the  forwarding  of  the  salt  to  Boston  at  the  seller's  expense, 
the  taking  of  a  bill  of  lading  running  to  itself  as  consignee,  and  the  pro- 
vision in  the  contract  "sells  *  *  *  at  the  following  prices  f.  o.  b. 
cars,  Boston,"  indicate  an  intent  of  the  seller  to  reserve  to  itself  the  jus 
disponendi  of  the  salt  until  the  railroad  company  in  Boston  on  behalf 
of  the  plaintiff,  and  in  the  exercise  of  the  authority  conferred  by  the 
indorsement  upon  the  bill  of  lading,  should  appropriate  and  deliver  to 
the  defendant  from  the  mass  the  quantities  and  kinds  ordered  by  ihe 
defendant.    *    *     * 

In  this  regard  it  is  to  be  noticed  that  the  railroad  company  was  not 
instructed  by  the  bill  of  lading  or  otherwise  of  the  kind  or  quantity 
of  salt  required  to  fill  the  defendant's  order.  ]S[or,  so  far  as  appears, 
was  there  anything  about  the  bags  or  barrels  to  indicate  the  quality  of 
their  contents.  What  the  railroad  did  was  to  tender  the  contents  of 
a  car — a  quantity  of  goods  larger  than  the  defendant  agreed  to  pur- 
chase and  on  which  the  defendant  would  have  been  obliged  to  advance 
freight  charges  in  excess  of  the  amount  he  agreed  to  advance.  [Court 
quotes  section  44  of  Sales  Act.]  These  sections  express  the  eft'ect  of 
Rommel  v.  Wingate,  103  Mass.  327.     *     *     * 

In  the  case  at  bar  the  defendant,  upon  receiving  the  notice  and  in- 
voice, could  have  assumed  properly  that  the  15  barrels  of  salt  had 
been  sent  by  the  seller  to  be  delivered  by  the  railroad  to  him ;  the  bill 
of  lading  in  terms  directed  the  railroad  to  do  so.  Upon  this  assump- 
tion, if  he  did  not  intend  to  pay  for  the  whole  car,  he  must  have  de- 
termined whether  to  take  a  part  and  reject  a  part,  or  reject  the  whole. 
If  he  desired  to  have  the  part  only  which  he  had  ordered,  it  remained 
to  determine  whether  he  would  become  responsible  for  the  enfire 
freight  charges  and  look  to  the  purchaser  of  the  15  barrels  or  to  the 
seller  for  his  repayment.  If  it  were  a  fact  that  the  defendant  could 
have  paid  the  proportionate  charges,  that  fact  does  not  appear  in  the 
report  and  cannot  be  assumed.  We  are  of  opinion  that  the  severance 
of  the  400  bags  from  the  15  barrels  involved  pecuniary  "trouble  or 
risk"  to  the  defendant.    *    *    * 

It  follows  that  the  title  never  passed  to  the  defendant. 

Judgment  for  defendant  affirmed. 


Many  important  classes  of  situations  where  the  presumption 
that  title  passes  upon  delivery  to  the  carrier  are  provided  for  in 
Section  19,  Rule  5,  as  follows: 

If  a  contract  to  sell  requires  the  seller  to  deliver  the  goods  to 
the  buyer,  or  at  a  particular  place,  or  to  pay  the  freight  or  cost  of 
transportation  to  the  buyer,  or  to  a  particular  place,  the  property 


1016  SALES  (Part  4 

does  not  pass  until  the  goods  have  been  delivered  to  the  buyer  or 
reached  the  place  agreed  upon. 

This  section  calls  for  careful  examination.  The  section  dis- 
closes that  the  presumption  that  title  passes  on  delivery  to  the 
carrier  does  not  govern  in  four  kinds  of  cases.  (1)  Where  the 
seller  agrees  to  deliver  the  goods  to  the  buyer.  (2)  Where  the 
seller  agrees  to  deliver  the  goods  at  a  particular  place.  (3)  Where 
the  seller  agrees  to  pay  the  freight  or  cost  of  transportation  to  the 
buyer.  (4)  Where  the  seller  agrees  to  pay  the  freight  to  a  par- 
ticular place.  The  section  not  only  states  that  title  does  not  pass 
on  delivery  to  carrier,  but  proceeds  to  designate  the  particular 
time,  in  these  four  cases,  when  the  title  will  pass. 

Every  case  will  call  for  the  solution  of  four  problems:  (1) 
What  words  will  have  the  legal  effect  of  imposing  upon  the  seller 
the  obligation  (a)  to  deliver;  or  (b)  to  pay  freight.  (2)  What 
physical  acts  will  amount  to  a  performance  of  the  obligation  to 
deliver  or  to  pay  the  freight?  That  is,  after  we  have  definitely  de- 
cided that  a  particular  contract  does  impose  an  obligation  to  deliv- 
er, or  to  pay  the  freight,  we  then  must  turn  our  attention  to  the 
physical  acts  done  by  the  seller,  to  see  whether  or  not  he  has 
performed  this  duty.  (3)  The  third  question  is  usually  a  simple 
question  of  fact:  What  particular  geographical  point  on  the 
surface  of  the  earth  is  the  point  at  which  there  must  be  a  delivery 
or  to  which  the  freight  must  be  paid?  (4)  The  last  question,  also 
a  question  of  fact:  At  what  geographical  point  were  the  goods 
actually  situated  when  the  event — such  as  damage,  loss,  or  resale 
by,  or  bankruptcy  of,  one  of  the  parties — occurred  which  had  the 
effect  of  projecting  the  parties  into  litigation. 

The  first  two  questions  are  sometimes  difficult  of  solution.  Lan- 
guage is  so  indefinite  that  there  may  often  exist  considerable 
doubt  whether  it  does  impose  upon  the  seller  the  duty  of  deliver- 
ing or  of  paying  the  freight.  Even  in  those  cases  where  the  par- 
ties actually  employ  the  words  "the  seller  hereby  agrees  to  de- 
liver," etc.,  or,  "the  seller  hereby  agrees  to  pay  the  freight  to," 
etc.,  we  cannot  always  be  certain  that  these  words  mean  the  same 
thing  that  is  contemplated  in  the  statute.  This  is  so,  for  one  rea- 
son, because  the  conduct  of  the  parties  in  this,  and  in  their  former 
dealings,  may  have  the  effect  of  putting  an  entirely  different  mean- 
ing upon  these  words  than  is  usually  conveyed  by  them,  or  even  of 
depriving  them  of  all  legal  effect.  Again,  the  usual  meaning  of 
the  words  "I  agree  to  deliver,"  or  "I  agree  to  pay  freight,"  when 
used  in  a  contract  by  way  of  specifying  the  duties  of  the  seller, 
may  be  deprived  of  this  usual  meaning  because  there  appears  in 
the  same  contract  other  language  which  destroys  the  effect  of  the 
former  words.  This  situation  has  analogies  in  the  field  of  chem- 
istry. A  compound  will  have  certain  properties.  Introduce  a  new 
element  or  compound,  and  the  properties  of  the  first  may  disappear. 
In  the  cases  following  we  have  a  few  situations  where  the  apparent 
meaning  of  the  language  is  not  applicable  to  the  facts,  because  of 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED  1017 

Other  elements.  Stated  in  other  words,  the  question  in  a  few  of 
the  cases  is :  Which  of  two  inconsistent  presumptions,  as  to  the 
time  when  title  passed,  is  applicable  to  the  case?  Not  all  the 
questions  which  have  been  suggested  above  are  touched  upon  in 
the  cases  here  collected,  but  they  illustrate  some  of  the  more  im- 
portant ones. 

WESTMORELAND  COAL  CMD.  v.  SYRACUSE  LIGHTING  CO. 

(Supreme  Court  of  New  Tork,  Appellate  Division,  1913.     159  App.  Div.  32.3, 

145  N.  Y.  Supp.  420.) 

Action  by  the  Westmoreland  Coal  Company  against  the  Syracuse 
Lighting  Company.    From  a  judgment  for  defendant,  plaintiff  appeals. 

Plaintiff  sought  to  recover  in  this  action  the  purchase  price  of  two 
canal-boat  loads  of  coal  shipped  by  it  to  the  defendant.    *    *    * 

RoBSON,  J.  The  parties  to  the  contract  *  *  *  contemplated  that 
plaintiff  in  fulfillment  of  the  contract  would  ship  the  coal  therein  men- 
tioned by  rail  from  plaintiff's  mines  to  Watkins,  N.  Y.  It  was  to  be 
there  loaded  on  canal  boats,  and  thence  taken  by  boat  to  Syracuse,  N. 
Y. ;  and  there  delivered  alongside  defendant's  dock  as  theretofore, 
plaintiff  having  furnished  defendant  with  coal  under  prior  contracts 
between  the  parties.  The  two  boats  with  their  loads  of  coal,  which  are 
the  subject  of  this  action,  reached  Syracuse  and  approached  to  within 
300  or  400  feet  of  defendant's  dock,  which  was  on  the  north,  or  tow- 
path,  side  of  the  canal.  They  could  not  at  once  be  docked  and  un- 
loaded because  two  other  boats  then  occupied  the  dock.  These  latter 
boats  contained  coal  theretofore  delivered  by  plaintiff'  under  its  con- 
tract; and  their  cargoes  were  then  being  unloaded  by  defendant. 
For  this  reason  and  also  (as  the  evidence  shows  and  the  trial  justice 
finds)  "because  the  rules  governing  traffic  upon  the  canal  required  it, 
the  two  boats  in  question  were  moved  over  to  the  south  side  of  the 
canal,  nearly  opposite  the  defendant's  dock  to  await  their  turn  for  be- 
ing unloaded,  until  the  unloading  of  the  boats  already  at  the  dock  was 
completed." 

Notice  of  the  arrival  of  the  boats  was  given  to  defendant,  the  cir- 
cumstances of  which  and  of  the  casualty,  which  thereafter  ensued 
causing  the  total  loss  of  the  coal,  are  succinctly  stated  in  the  findings, 
as  follows :  "That  upon  the  arrival  of  the  said  two  boats  carrying  the 
coal  in  question  in  this  action  at  said  point,  300  or  400  feet  west  of 
the  defendant's  dock,  as  above  stated,  the  captain  and  man  in  charge 
of  the  boats  notified  the  defendant  of  their  arrival,  and  the  defendant 
entered  said  boats  as  having  arrived  at  the  dock  at  12  o'clock  noon 
on  July  30,  1907,  in  its  books  kept  for  that  purpose.  That  at  about 
2  o'clock  on  the  same  day,  a  break  occurred  in  the  banks  of  the  Erie 
Canal  a  short  distance  west  of  the  defendant's  dock,  and,  without  any 
fault  on  the  part  of  the  plaintiff,  the  boats  with  the  cargoes  of  coal 
in  question  were  drawn  into  said  break  and  lost."    *     *    * 

If  the  coal  in  question  had  not  been  in  fact  delivered  to  the  defend- 
ant before  it  was  lost,  then  the  carrier  still  remained  the  agent  of 
plaintiff  for  the  purpose  of  making  delivery  of  it  under  the  contract. 
It  is  clear  that  the  carrier's  duty  in  making  the  delivery  had  not  at 
that  time  ended.  He  still  had  to  place  the  boats  alongside  defendant's 
dock.  This  he  had  not  in  fact  done,  though  the  boats  at  one  time  had 
approached  within  a  few  hundred  feet  of  the  dock.    It  is  true  that  had 


1018  SALES  (Part  4 

the  dock,  at  the  tune,  not  been  completely  occupied  with  other  boats, 
which  were  then  unloading,  he  would  have  done  so.  But  defendant 
was  not  responsible  for  this  delay  in  laying  the  boats  alongside  the 
dock.  The  boats  already  at  the  dock  were  discharging  their  cargoes 
of  coal,  which  plaintiff,  by  its  carrier  in  control  of  those  boats,  had 
previously  delivered  to  defendant  under  the  contract.  Plaintiff  was 
fully  advised  before  the  contract  was  made  that  the  capacity  of  the 
dock  was  limited,  so  that  only  two  boats  could  be  there  unloaded  at 
the  same  time.  There  is  no  question  that  defendant  was  diligent  in 
unloading  the  boats  then  at  its  dock.  The  arrival  of  the  two  boats, 
concerning  which  this  controversy  has  arisen,  before  the  dock  was 
cleared  for  their  reception,  was  due  only  to  the  carrier's  management 
of  their  transportation.  The  carrier  for  this  purpose  was  plaintiff's, 
not  defendant's  agent.  Taking  them  to  the  side  of  the  canal  opposite 
defendant's  dock  and  tying  them  up  where  they  were  afterwards  lost 
was  the  carrier's  act.  Defendant  gave  no  direction  as  to  their  manage- 
ment, or  what  should  be  done  with  them. 

The  entry  on  defendant's  books  of  arrival  of  the  boats  did  not  in 
fact  indicate  actual  delivery  to  nor  receipt  by  the  defendant;  but 
was,  as  the  evidence  shows,  simply  a  concession  to  plaintiff's  interest 
for  the  sole  purpose  of  fixing  a  time  from  which  subsequent  possible 
claims  of  boat  captains  against  plaintiff  for  demurrage  could  be  cor- 
rected and  verified. 

It  is  suggested  that  when  plaintiff"  placed  the  coal  on  these  boats 
there  was  an  appropriation  of  it  in  fulfillment  pro  tanto  of  the  execu- 
tory contract  for  delivery  of  coal.  While  this  may  have  been  an  actual 
appropriation  by  plaintiff  to  that  end,  yet  it  did  not  complete  what  it 
had  agreed  to  do  before  title  passed  to  the  defendant.  Delivery  of 
the  coal  was  as  much  a  part  of  its  duty  as  actual  selection  and  appro- 
priation of  it.  Delivery  of  the  coal  at  the  place  specified  in  the  con- 
tract was  required  to  be  made,  and  then  only  would  the  defendant's 
assent  to  such  appropriation  in  part  fulfillment  of  the  contract  be 
established.  Delivery  was  not  made.  Therefore  title  had  not  passed 
to  defendant.    *     *    * 

By  subdivision  5  of  section  100  of  the  Personal  Property  Law  (Con- 
sol.  Laws,  c.  41),  added  by  chapter  571,  Laws  1911,  the  effect  of  a  pro- 
vision in  a  contract  of  sale  requiring  the  seller  to  deliver  to  the  buyer 
the  goods  sold  is  declared  to  be,  presumptively  at  least,  that  the  prop- 
erty therein  does  not  pass  to  the  latter  until  the  goods  have  been  de- 
livered to  him,  or  reached  the  place  agreed  upon. 

The  judgment  should  be  affirmed,  with  costs.  All  concur,  except 
KrusE,  p.  J.  (dissenting).  The  practical  question  here  is  which  of 
the  parties  shall  bear  the  loss  of  the  two  boat  loads  of  coal,  which  were 
lost  owing  to  a  break  in  the  canal  occurring  while  the  boats  were 
waiting  to  be  unloaded,  the  plaintiff,  the  seller,  or  the  defendant,  the 
buyer.  The  solution  of  that  question  does  not  depend  so  much  upon 
whether  the  plaintiff  had  delivered  the  coal  alongside  the  dock,  with- 
in the  meaning  of  the  contract.  That  is  a  mere  circumstance  to  be 
taken  into  account  in  determining  the  controlling  question  as  to  wheth- 
er the  title  to  the  coal  had  passed  to  the  defendant  before  it  was  lost, 
or  still  remained  in  the  plaintiff.  If  there  was  an  appropriation  of 
the  specific  coal  to  the  contract,  assented  to  by  the  defendant  after 
the  coal  reached  Syracuse,  as  I  think  should  be  found  as  a  fact  from 
the  evidence,  the  title  passed  to  the  defendant,  and  the  loss  must  fall 


Ch.  2)v        TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED  1019 

upon  it.  Even  if  the  evidence  is  sufficient  to  make  that  question  one  of 
fact,  I  think  it  should  be  found  in  favor  of  the  plaintiff. 

It  may  be,  as  defendant's  counsel  contends,  that  the  record  of  ar- 
rival of  boats  was  kept  by  the  defendant  to  protect  the  plaintiff  against 
unfounded  claims  for  demurrage;  but  the  record  and  surrounding 
circumstances  also  establish  that  the  defendant  knew  that  this  partic- 
ular coal  had  been  set  apart  to  it  under  the  terms  of  the  contract  and 
was  clearly  identified  by  both  the  buyer  and  the  seller.  Not  only  did 
the  defendant  know  the  precise  time  and  place  of  arrival  of  the 
coal,  but  a  record  of  the  quantity,  as  well,  was  made  by  it.  The  identi- 
fication of  the  coal  as  the  subject  of  the  sale  was  complete. 

Although  the  contract  was  originally  executory,  it  was  as  to  the  coal 
in  question  so  far  executed  before  it  was  lost  as  to  pass  the  title.  As 
regards  the  passing  of  the  title,  it  was  in  eft'ect  the  same  as  though  the 
coal  had  been  set  apart  and  identified  as  the  subject  of  the  sale  at  the 
time  of  the  making  of  the  contract.  The  subsequent  appropriation  of 
the  coal  to  the  contract  was  sufficient  to  pass  the  title  to  the  defendant. 
*  *  *  Although  the  coal  may  not  have  been  delivered  alongside 
the  dock  within  the  meaning  of  the  contract,  that  was  made  impossible 
by  a  cause  for  which  the  plaintiff  was  not  responsible,  and  if  the  title 
thereto  had  passed  before  the  break  in  the  canal,  as  I  think  it  had, 
the  loss  of  the  coal  should  fall  upon  the  defendant.    *    *     * 


?,ITIIRAY  V.   MORRIS. 
(Supreme  Court  of  Vermont,  1917.    91  A^t.  541,  102  Atl.  99.) 

Replevin  by  C.  W.  Murray  against  G.  L.  Morris.  There  was  ver- 
dict directed  for  plaintiff,  and  defendant  excepts. 

Miles,  J.  Only  two  questions  are  raised  in  this  case,  viz. :  First, 
Had  Townsend,  Townsend  &  Co.  any  attachable  interest  in  the  die  of 
the  monument  in  question,  which  was  attached  in  the  suit  of  Parry  & 
Jones  Company  on  the  26th  day  of  September,  1914,  at  the  time  the 
attachment  was  made?  And,  second,  was  there  anything  in  the  case 
to  submit  to  the  jury?    *    *     * 

The  plaintiff'  ordered  from  Townsend,  Townsend  &  Co.  a  monu- 
ment, consisting  of  a  die  and  some  other  parts,  and  also  a  marker, 
all  to  be  thereafter  delivered  f .  o.  b.  Barre,  Vt.,  to  be  shipped  to  Brazil, 
Ind.  On  June  19,  1914,  Townsend.  Townsend  &  Co.  ordered  the  same 
monument  and  marker  from  the  Central  Granite  Company  of  Barre, 
Vt.,  to  be  "delivered  f.  o.  b.  cars  at  your  station"  to  be  shipped  car- 
load later,  no  place  of  shipment  nor  consignee  being  stated  in  the  or- 
der. Subsequently  and  on  September  23,  1914,  the  Central  Granite 
Company  loaded  the  monument  at  their  yard  onto  a  car  of  the  Cen- 
tral Vermont  Railroad  Company,  set  by  that  company  on  the  22d  day 
of  September,  1914,  in  the  yard  of  the  Central  Granite  Company  upon 
the  order  of  the  local  agent  of  Townsend,  Townsend  &  Co.,  and  short- 
ly after  the  monument  was  loaded  upon  the  car,  the  car  with  the  mon- 
ument and  marker  was  taken  by  the  railroad  company  to  a  siding  in 
their  yard,  about  half  a  mile  from  the  Central  Granite  Company's 
yard,  where  other  granite  material  was  to  be  loaded  upon  the  car  to 
complete  the  carload  and  while  the  car,  with  the  monument  upon  it, 
was  there  standing,  the  defendant,  a  deputy  sheriff,  attached  the  die 
upon  a  writ  in  favor  of  Parry  &  Jones  Company  against  Townsend, 
Townsend  &  Co.  as  their  property.     Before  the  die  was  attached,  the 


1020  SALES  (Part  4 

local  agent  of  Townsend,  Townsend  &  Co.  delivered  to  the  billing 
agent  of  the  Central  Vermont  Railroad  Company  at  Barre,  Vt.,  a  bill 
of  lading  of  the  monument  and  marker  to  be  shipped  to  the  plaintiff 
at  Brazil,  Ind.,  in  which  Townsend,  Townsend  &  Co.  were  designated 
as  the  shippers  and  the  plaintiff  as  consignee.    *    *    * 

"Ordinarily  a  delivery  of  goods  by  the  seller  to  the  carrier  designat- 
ed by  the  purchaser,  or  to  one  usually  employed  in  the  transportation  of 
goods  from  the  place  of  the  seller  to  that  of  the  purchaser,  is  a  de- 
livery to  the  purchaser."  *  *  *  Nq  question  is  raised  but  that  the 
Central  Granite  Company  had  title  to  the  monument  before  it  was 
loaded  upon  the  car,  and  that  it  parted  with  its  title  when  the  monu- 
ment was  thus  loaded,  and  that  then  title  passed  to  either  the  plaintiff 
or  Townsend,  Townsend  &  Co.  The  plaintiff  claims  that  the  title 
passed  to  him,  and  the  defendant  claims  that  it  passed  to  Townsend, 
Townsend  &  Co.  at  that  time. 

Under  the  general  rule  above  stated  when  the  monument  was  loaded 
upon  the  car  and  the  bill  of  lading  delivered  by  the  local  agent  of 
Townsend,  Townsend  &  Co.  to  the  billing  clerk  of  the  railroad  com- 
pany, the  title  to  the  monument  passed  to  the  plaintiff  subject  only  to 
stoppage  in  transitu  and  the  right  of  rescission  by  the  plaintiff  if  the 
monument  failed  to  be  in  accordance  with  the  order,  neither  of  which 
rights  were  exercised  in  this  case,  unless  something  more  appears  in 
the  case  showing  the  contrary. 

The  defendant  argues  that  the  fact  that  the  box  inclosing  the  die 
was  marked  "T.  T.  &  Co."  shows  that  the  delivery  was  to  that  com- 
pany; but  we  think  that  this  does  not  have  the  tendency  claimed  for 
it,  in  the  light  of  the  other  facts  in  the  case.  It  M^as  quite  proper  to 
mark  the  box  with  something  identifying  it  as  the  property  sent  by 
Townsend,  Townsend  &  Co.,  the  shipper,  to  the  plaintiff,  in  view  of 
the  fact  that  it  was  sent  with  other  granite  material  furnished  by  oth- 
er parties.     *     *    * 

The  plaintiff  ordered  the  monument  in  question  from  Townsend, 
Townsend  &  Co.  to  be  delivered  f.  o.  b.  on  the  cars,  Barre,  Vt.,  and 
Townsend,  Townsend  &  Co.  procured  the  Central  Granite  Company  to 
fill  that  order,  which  that  company  did  on  the  23d  day  of  September, 
1914.  When  the  Central  Granite  Company  loaded  the  monument  up- 
on the  cars  nothing  further  remained  for  Townsend,  Townsend  &  Co. 
to  do  under  their  contract  with  the  plaintiff,  and  the  contract  on  their 
part  was  then  fully  performed,  and  so  far  as  anything  appears  in  the 
case  Townsend,  Townsend  &  Co.  then  became  entitled  to  payment  for 
the  monument.  We  think  and  so  hold  that  when  the  monument  was 
loaded  upon  the  cars  by  the  Central  Granite  Company  and  the  bill  of 
lading  delivered  to  the  carrier's  billing  agent,  the  title  to  the  monu- 
ment passed  to  the  plaintiff,  and  that  at  the  time  of  the  attachment  by 
the  defendant  Townsend,  Townsend  &  Co.  had  no  attachable  intere'^t 
in  it.    *    *    * 

Judgment  affirmed. 

PITTSBURGH  PROVISION  &  PACKING  CO.  v.  CUDAHT  PACKING  CO. 
(Supreme  Court  of  Pennsylvania,  1.918.  260  Pa.  135,  103  Atl.  548.) 
Assumpsit  by  the  Pittsburgh  Provision  &  Packing  Company  against 
the  Cudahy  Packing  Company  to  recover  the  price  paid  for  merchan- 
dise. Verdict  for  plaintiff  for  $4,036.70,  and  judgment  thereon,  and 
defendant  appeals. 


Ch.  2)         TRANSFER   OF  TITLE   WHERE   GOODS  UNASCERTAINED  1021 

FrazEr,  J.  Plaintiff  and  defendant  are  both  engaged  in  the  whole- 
sale meat  and  provision  business  in  the  city  of  Pittsburgh  and  on 
June  21,  1913.  plaintiff  sent  to  defendant's  office  in  that  city  an  order 
as  follows:  "Please  ship  the  following  articles  and  send  invoice  and 
shipping  receipt  or  bill  of  lading  to  above  address,  stating  how  ship- 
ped, route,  etc.,  and  giving  car  numbers  and  initials:  16,000  pounds 
fresh  boneless  beef  chucks,  I21/2C  c.  a.  f.  Pittsburgh;  5,000  lbs.  fresh 
beef  trimmings,  12c  c.  a.  f.  Pittsburgh,  packed  in  sugar  barrels,  light- 
ly salted.  Guaranteed  fresh.  *  *  *  Ship  to  Pittsburgh  Provision 
&  Packing  Co.,  Union  Stockyards,  Pittsburgh,  Pa." 

In  compliance  with  this  order  defendant  shipped  the  meat  mention- 
ed from  its  packing  house  in  Kansas  City,  Kan.,  in  refrigerator  cars 
by  way  of  the  Wabash  Railroad,  under  bill  of  lading  consigned  to  its 
own  order  at  Pittsburgh,  with  direction  to  notify  plaintiff  company 
at  that  city.  The  bill  of  lading  with  draft  attached  to  invoice  was  for- 
warded to  a  Pittsburgh  bank,  and,  upon  presentation  to  plaintiff,  the 
draft,  calling  for  the  cash  price  less  freight  charges,  was  paid  by 
plaintiff  without  awaiting  arrival  of  the  meat.  The  car  was  delivered 
at  defendant's  siding  at  Pittsburgh  on  Saturday,  June  28,  1913,  and 
on  the  following  INIonday  defendant  gave  the  Wabash  Railroad  di- 
rections to  reconsign  the  car  to  plaintiff's  siding  at  the  Union  Stock- 
yards. Upon  reaching  this  latter  point  plaintiff's  examination  of  the 
meat  found  it  unfit  for  food,  and  its  representative  at  once  notified 
defendant  by  telephone  of  the  condition.  The  following  day  plaintiff 
advised  defendant  by  letter  that  the  meat  was  not  as  guaranteed,  and 
requested  defendant  to  have  the  car  removed  promptly.  Upon  failure 
of  the  latter  to  do  so  the  railroad  company  subsequently  disposed  of 
the  contents.  This  action  was  then  brought  to  recover  the  purchase 
price,  together  with  an  item  of  expense  for  re-icing  the  car  at  de- 
fendant's request.  The  trial  resulted  in  a  verdict  for  plaintiff  for  the 
full  amount  of  its  claim. 

The  single  question  submitted  to  the  jury  was  whether  the  meat  was 
in  the  condition  required  by  the  guaranty  at  the  time  of  its  (5^1ivery 
at  its  destination,  where  plaintiff'  had  an  opportunity  to  make  inspec- 
tion. That  the  meat  was  not  in  proper  condition  for  use  was  practi- 
cally conceded,  the  principal  dispute  being  whether  under  the  terms  of 
the  order,  the  title  of  the  goods  passed  upon  delivery  to  the  carrier  at 
Kansas  City,  or  whether  the  sale  was  not  consummated  until  delivery 
on  plaintiff's  siding  at  Pittsburgh.  In  the  former  case  proof  of  de- 
livery to  the  carrier  at  Kansas  City  in  good  condition  and  properly 
packed  Avould  entitle  defendant  to  the  purchase  price,  and  if  the  ship- 
ment was  lost  through  delay  or  improper  care  in  transit,  the  loss 
would  be  a  matter  of  adjustment  between  the  purchaser  and  the  car- 
rier. 

The  general  rule  is  that  a  delivery  of  goods  to  a  carrier,  pursuant 
to  a  contract  of  sale,  is  a  delivery  to  the  vendee  sufficient  to  pass  title 
to  the  goods,  and  the  carrier  at  once  becomes  the  agent  of  the  vendee, 
*  *  *  to  whom  the  latter  must  look  for  resulting  damages  while  the 
goods  are  in  transit.  *  *  *  Consequently,  in  absence  of  circum- 
stances indicating  a  contrary  intent,  if  defendant  in  the  present  case 
delivered  the  meat  K)  the  carrier  in  good  condition,  properly  packed 
and  refrigerated,  in  view  of  the  distance  it  must  travel,  and  gave 
proper  instructions  as  to  re-refrigeration  if  needed  in  the  course  of 
transit,  defendant's  duty  was  fully  performed,  and  its  responsibility 


3  022  SALES  (Part  4 

ended  on  such  delivery,  and  it  was  no  longer  concerned  in  the  question 
of  delay  or  damage  on  delivery.  *  *  *  Where,  however,  the  con- 
tract requires  delivery  at  the  place  of  destination,  title  remains  in 
the  vendor  until  that  point  is  reached  and  the  risks  of  transportation 
are  assumed  by  him.     *     *     * 

The  facts  here  are  not  in  dispute ;  hence  the  question  as  to  the 
place  of  deliveiy  and  when  title  passed  is  for  the  court.  Both  par- 
ties conducted  places  of  business  in  Pittsburgh.  The  order  was  to 
ship  to  "Union  Stock  Yards,  Pittsburgh,  Pa.,"  that  being  the  business 
address  of  plaintiff,  and  the  designation  as  to  price  "c.  a.  f.  [cash  and 
freight]  Pittsburgh,"  meant  in  this  case  that  the  price  quoted  included 
the  freight  to  destination,  the  abbreviation  apparently  having  substan- 
tially the  same  significance  as  "f.  o.  b.  Pittsburgh."    *    *    * 

The  judgment  of  the  lower  court  is  affirmed. 


TWITCHELL-CHAMPLIN    CO.    v.    RADOVSKY. 
(Supreme  Judicial  Court  of  Massachusetts,  1910.    207  Mass.  72,  92  N.  E.  1038.) 

Action  on  contract  for  goods  sold  and  delivered  by  the  Twitchell- 
Champlin  Company  against  Joseph  S.  Radovsky.  A  finding  was  re- 
turned for  plaintiff,  and  defendant  brings  exceptions. 

Bralky,  J.  The  defendant  contends  that,  as  the  goods  when  packed 
were  to  be  shipped  to  him  by  rail  at  a  price  from  which  the  cost  of 
transportation  was  to  be  deducted,  title  did  not  pass  until  their  arrival 
at  his  place  of  business.  But  there  was  no  express  clause  in  the  agree- 
ment that  this  expense  was  to  be  borne  by  the  seller,  and  while  the 
amount  undoubtedly  measured  what  the  bliyer  would  have  to  pay  for 
carriage,  the  stipulation  could  be  found  to  have  been  intended  by  the 
parties  as  a  discount  from  the  seller's  regular  prices,  and  not  as  a  pre- 
payment of  the  freight.  The  question  was  one  of  fact,  and  the  find- 
ing for  the  plaintiff,  having  been  warranted  by  the  evidence,  cannot  be 
revised.  *  *  *  i^  being  settled  that,  unless  there  is  an  agreement 
or  usage  of  the  trade  to  the  contrary,  dehvery  to  the  carrier  is  a  deliv- 
ery to  the  buyer,  when  the  sale  becomes  complete,  the  case  at  bar  falls 
within  the  familiar  rule,  and  the  title  having  passed,  the  refusal  of 
the  defendant  to  accept  the  clams  was  unjustifiable,  and  furnishes  no 
defense  to  the  suit  for  the  price.     *     *     * 

The  requests  were  rightly  refused,  and  the  exceptions  must  be  over- 
ruled. 


SMITH  CO.,  Limited,  v.  MARANO. 

(Supreme  Court  of  Pennsylvania.  1920.     267  Pa.  107,  110  Atl.  94, 
10  A.   L.    R.    697.) 

Action  by  Smith  Company,  Limited,  against  Antonio  Marano.  Judg- 
ment for  plaintiff',  and  defendant  appeals. 

Brown,  C.  J.  The  facts  in  this  controversy  are  agreed  upon  in  a 
case  stated.  Smith  Company,  Limited,  is  a  corporation,  with  its  place 
of  business  in  the  city  of  St.  Johns,  Newfoundland.  The  defendant 
is  a  resident  of  the  city  of  Philadelphia,  this  state,  and  is  engaged  in 
business  there.  In  September,  1916,  the  plaintiff'  and  defendant,  by  let- 
ters and  telegrams,  endeavored  to  complete  a  contract  for  the  sale  of 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED  1023 

codfish  to  the  latter.  As  a  resuU  of  preHminary  negotiations,  on  Sep- 
tember 26,  1916,  plaintiff  made  the  following  offer  to  the  defendant, 
by  telegram :  "Wih  give  you  first  quality  at  nine  dollars,  second  qual- 
ity at  eight  dollars  per  drum  of  one  hundred  pounds  c.  i.  f.  Philadel- 
phia." 

On  the  following  day  the  defendant  wired  his  acceptance  of  1,000 
drums  of  the  fish,  first  quality,  and  by  letter  of  the  same  date  directed 
the  plaintiff  to  send  with  the  first  shipment  of  that  quality  25  drums 
of  the  second  quality.  On  or  about  October  4,  1916,  the  plaintiff 
shipped  300  drums  of  the  fish  of  first  quality  and  25  of  second  quality, 
in  accordance  with  the  terms  of  the  contract.  The  goods  were  shipped 
by  a  steamer  from  the  city  of  St.  Johns,  consigned  to  the  plaintiff's 
agent  at  New  York,  for  transshipment  to  Philadelphia,  to  be  deliv- 
ered to  the  order  of  plaintiff",  the  bill  of  lading  being  indorsed  by  the 
plaintiff. in  blank.  Under  the  terms  of  the  contract,  the  plaintiff  paid 
for  the  customary  marine  insurance  on  the  goods  shipped  and  the 
freight  charges  on  them  to  Philadelphia.  It  immediately  forwarded 
to  the  Girard  National  Bank  of  Philadephia,  through  a  bank  in  New 
York,  the  insurance  policy,  indorsed  in  blank,  the  invoice  and  a  through 
bill  of  lading,  also  indorsed  in  blank,  all  attached  to  a  sight  draft  on 
the  defendant,  in  accordance  with  the  contract  between  them,  the  draft 
being  for  $2,900,  covering  the  value  of  the  fish  shipped.  About  two 
days  later  the  ship  carrying  the  fish  shipped  by  the  plaintiff  to  the 
defendant  was  sunk  by  a  submarine  of  the  Imperial  German  govern- 
ment, on  the  high  seas,  while  en  route  to  the  port  of  destination,  and 
the  goods  in  question  were  totally  destroyed.  The  bill  of  lading  and 
the  sight  draft  were  duly  tendered  to  the  defendant  after  the  cargo 
had  been  destroyed.  He  refused  to  accept  the  draft,  and  subsequently 
refused  to  pay  any  part  thereof.  The  parties  agree  that  the  expression 
"c.  i.  f."  means  that  the  price  quoted  by  the  plaintiff  to  the  defendant, 
and  accepted  by  him,  included  the  cost  of  the  goods,  the  cost  of  obtain- 
ing customary  insurance  thereon,  and  the  freight  charges  to  the  city 
of  Philadelphia.  On  the  foregoing  state  of  facts  the  court  below  en- 
tered judgment  in  favor  of  the  plaintiff'  for  the  full  amount  of  its  claim. 

The  letters  "c.  i.  f."  are  abbreviations  of  the  wt»rds  "cost,  insurance, 
and  freight,"  and  when  used  in  connection  with  commercial  quotations 
signify  that  the  price  to  be  paid  for  goods  will  include  all  charges  to 
the  port  of  destination.  *  *  *  The  case  now  under  consideration 
calls  upon  us  for  the  first  time  to  construe  what  may  be  termed  a  "c. 
i.  f."  contract  for  the  purchase  of  goods,  and  to  determine  when,  under 
such  contract,  there  is  delivery  to  the  buyer.  As  just  stated,  plaintiff 
and  defendant  agree  that  the  term  "c.  i.  f."  means  that  the  price  quoted 
to  the  latter  and  accepted  by  him  included  "the  cost  of  said  goods,  the 
cost  of  obtaining  the  customary  insurance  thereon,  and  freight  charges 
to  the  city  of  Philadelphia."  In  recognizing  that  such  is  the  true  mean- 
ing of  the  abbreviations,  the  English  courts  hold  that  property  pur- 
chased under  a  contract  in  which  they  are  used  passes  to  the  buyer 
upon  the  seller's  delivery  of  it  to  a  carrier.     *     *     * 

A  concise  statement  of  the  rule  is  thus  made  by  Mr.  Justice  Hughes 
in  Thames  &  Mersey  Marine  Insurance  Co.,  Limited,  v.  U.  S.,  237  U. 
S.  19,  35  Sup.  Ct.  496,  59  L.  Ed.  821,  Ann.  Gas.  1915D,  1087:  ^"The 
requirements  of  exportation  are  reflected  in  the  familiar  'c.  i.  f.'  con- 
tract (that  is,  at  a  price  to  cover  cost,  insurance,  and  freight),  ^yhich 
has  'its  recognized  legal  incidents,  one  of  which  is  that  the  shipper 


1024  SALES  (Part  4 

fulfills  his  obligation  when  he  has  put  the  cargo  on  board  and  for- 
warded to  the  purchaser  a  bill  of  lading  and  a  policy  of  insurance  with  a 
credit  note  for  the  freight,  as  explained  by  Lord  Blackburn  in  Ireland 
V.  Livingston.'    L.  R.  5  H.  L.  395^06.     *     *     *  " 

Counsel  for  appellant  admit  that  the  judgment  of  the  court  below  is 
in  accord  with  the  English  decisions,  followed  in  this  country  by  the 
two  cases  cited,  but  their  contention  is  that,  under  the  Pennsylvania 
Sales  Act  of  May  19,  1915  (P.  L.  543),  the  property  purchased  by  the 
defendant  was  never  delivered  to  him,  and  the  plaintiff  is  therefore 
not  entitled  to  recover.  The  pertinent  parts  of  that  act  are  as  fol- 
lows :     *     *     * 

"Sec.  19.  Unless  a  different  intention  appears,  the  following  are  the 
rules  for  ascertaining  the  intention  of  the  parties  as  to  the  time  at 
which  the  property  in  the  goods  is  to  pass  to  the  buyer ;  *  *  *  Rule 
5.  If  the  contract  to  sell  requires  the  seller  to  deliver  the  goods  to 
the  buyer,  or  at  a  particular  place,  or  to  pay  the  freight  or  cost  of 
transportation  to  the  buyer,  or  to  a  particular  place,  the  property  does 
not  pass  until  the  goods  have  been  delivered  to  the  buyer  or  reached 
the  place  agreed  upon." 

The  appellant  agreed  to  pay  to  the  appellee  a  fixed  price  for  the 
goods  to  be  shipped  to  him.  The  price  quoted  to  him,  and  which  he 
agreed  to  pay,  included  not  only  the  actual  value  of  the  fish  to  the 
seller,  but  insurance  and  freight  charges  to  Philadelphia.  If  the 
price  had  not  included  insurance,  it  might  be  well  urged  that,  under 
rule  5  of  section  19  of  our  Sales  Act,  the  goods  were  never  delivered 
to  the  appellant ;  but,  reading  the  contract  as  a  whole — as  it  must  be 
read — with  the  item  for  insurance  included  in  it,  "a.  different  intention" 
on  the  part  of  the  buyer  is  disclosed,  *  *  *  and  that  he  must  now 
be  held  to  have  understood  that  the  delivery  of  the  goods  to  the  com- 
mon carrier  was  a  delivery  to  him,  are  clearly  demonstrated  by  the 
court  below  in  the  following  from  its  opinion  directing  judgment  to 
be  entered  against  him:  *  *  *  "No  matter  what  is  to  be  inferred 
from  the  reference  to  freight,  the  inference  from  that  to  insurance 
must  also  have  weight.  The  contract  must  be  interpreted  as  a  whole. 
Both  provisions  must  be  explained,  interpreted,  and  given  their  due 
force.  A  provision  for  the  payment  of  freight  by  the  seller  or  its 
inclusion  in  the  price  might  indicate  an  intention  to  deliver  at  the 
end  of  the  voyage,  or  it  might  be  a  consideration  affecting  the  price 
merely,  and  the  cost  and  uncertainty  of  the  freight  charge  might  be  a 
burden  accepted  by  the  seller  to  expedite  the  sale.  On  the  other  hand, 
the  provision  with  regard  to  insurance  was  either  fully  intended,  and 
reasonable  because  of  the  risk  the  buyer  intended  to  assume,  or,  if  he 

did  not  so  intend,  it  was  entirely  meaningless  and  mere  surplusage." 
*     *     * 

The  bill  of  lading,  made  out  to  the  appellee  or  its  order,  was  indorsed 
immediately  by  it  in  blank,  and  attached  to  the  draft  drawn  upon  the 
appellant.  This  merely  meant  that  the  appellee  intended  to  retain  prop- 
erty in  the  goods  to  secure  performance  by  the  defendant  of  his  prom- 
ise to  pay  for  them,  and  did  not,  by  the  express  words  of  the  Sales 
Act,  relieve  him  from  the  risk  that  was  upon  hii-i  from  the  time  the 
goods  were  delivered  to  the  carrier. 

Judgment  affirmed. 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED  1025 

The  next  case  presents  a  situation  where  there  are  a  number 
of  conflicting  presumptions,  each  of  which  is  fairly  involved  by  the 
facts.  Many  difficulties  in  the  law  are  of  just  this  kind — the  ques- 
tion being  which  rule  of  law,  out  of  several  rules  involved,  really 
controls  the  issue.  In  the  following  case  we  have:  (1)  The  pre- 
sumption that  title  passed  on  delivery  to  the  carrier.  (2)  Evi- 
dence to  show  that  this  presumption  is  overcome,  and  that  title 
was  to  vest  on  delivery.  (3)  Circumstances  then  show  that  this 
second  presumption  has  been  overcome.  The  recognition  of  the 
legal  effect  of  the  third  presumption  puts  us  back  exactly  where 
we  were  at  the  point  of  delivery  to  the  carrier.  (4)  Finally,  we 
find  an  additional  term  in  the  contract,  which  has'  the  effect  of 
destroying  the  third  presumption,  and  it  is  this  presumption  which 
the  court  adopts  as  determining. 

The  particular  facts  of  the  case  are  not  so  important  as  is  the 
opportunity  of  noting  the  complexity  inherent  in  the  application 
of  legal  principles  to  the  ever  varying  facts  of  business. 


AGRI  MFG.  CO.  v.  ATLANTIC  FERTILIZER  CO. 

(Court  of  Appeals  of  Maryland.  1916.     129  Md.  42,  98  Atl.  365.  Ann.  Cas. 

191SD,  396.) 

Action  by  the  Agri  Manufacturing  Company  against  the  Atlantic 
Fertilizer  Company.     Judgment  for  defendant,  and  plaintiff  appeals. 

Urner,  J.  A  carload  of  ground  tankage,  for  use  in  the  manufacture 
of  fertilizer,  was  sold  and  shipped  by  the  appellant,  the  Agri  Manu- 
facturing Company,  to  the  appellee,  the  Atlantic  Fertilizer  Company, 
and  was  destroyed  by  lire  before  being  removed  from  the  car  and 
while  awaiting  official  analysis  and  weighing  at  the  appellee's  works. 
The  question  raised  by  this  suit  is  whether  the  loss  thus  occasioned 
should  be  borne  by  the  vendor  or  by  the  vendee,  neither  of  whom  was 
at  fault  in  regard  to  the  destruction  of  the  property. 

The  terms  of  the  agreement  l*elating  to  the  sale  are  set  forth  in  a 
letter  from  the  appellant  to  the  appellee  under  date  of  October  21, 
1913,  as  follows:  "Gentlemen:  This  will  serve  to  confirm  sale  to 
you  of  about  four  hundred  (400)  tons  of  our  regular  production  of 
ground  tankage  for  approximate  equal  monthly  shipments  for  months 
of  January,  February,  March,  and  April,  1914,  at  $2,671/2  per  unit 
of  ammonia  per  ton  of  2,000  lbs.  cif.  your  works,  Curtis  Bay,  Md. 
Delivered  weights  and  sampling  by  Stallings,  analysis  by  Wiley  &  Co. 
at  seller's  expense.  Bags  to  be  furnished  by  buyer  as  far  as  possible ; 
if  furnished  by  sellers  they  are  to  be  returned  promptly  at  buyer's  ex- 
pense. Terms,  three-fourths  cash  upon  presentation  of  pro  forma  in- 
voice and  B/L,  balance  upon  completion  of  weights  and  analysis. 
"These  goods  are  sold  upon  the  representation  by  sellers  that  the 
availability  of  the  nitrogen  they  contain  will  show  at  least  70  per  cent. 
by  a  permanganate  method.  In  the  event  buyers  should  have  any 
goods  analyzed  for  available  nitrogen,  an  official  sample  to  be  used, 
and  they  should  prove  to  contain  less  than  the  70  per  cent,  availability 
above  mentioned,  the  expenses  .of  said  analysis  shall  be  paid  by  sellers, 
B.&  B.Bcs.Law— 65 


1026  SALES  (Part  4 

and  buyers  shall  have  the  privilege  of  refusing  said  goods.  In  all  dis- 
putes, tlie  sampling  and  weighing  of  Stallings  and  the  analysis  of 
Wiley  &  Co.  to  govern." 

In  the  course  of  the  deliveries  under  this  contract,  a  carload  of 
ground  tankage,  estimated  to  contain  about  30  tons,  was  shipped  on 
April  20,  1914,  over  the  line  of  the  Baltimore  &  Ohio  Railroad,  from 
Mt.  Claire,  Baltimore,  to  the  appellee's  factory  at  Curtis  Bay.  The 
car  reached  the  siding  of  the  Atlantic  Fertilizer  Company  on  the  aft- 
ernoon of  Friday,  April  24,  and  upon  an  order  issued  by  the  superin- 
tendent of  the  company  it  was  placed  in  position  the  following  day 
for  unloading.  Notice  was  sent  by  the  company  to  Air.  Stallings  and 
to  Wiley  &  Co.  to  be  at  its  works  on  Monday  morning,  April  27,  to 
weigh  and  analyze  the  contents  of  the  car  as  provided  by  the  agree- 
ment. On  the  intervening  Sunday,  a  fire  occurred  at  the  appellee's 
plant  and  the  fiames  consumed  the  carload  of  fertilizer  in  question  as 
it  stood  on  the  siding  adjacent  to  the  factory.  The  bill  of  lading  for 
the  shipment,  in  which  the  Atlantic  Fertilizer  Company  was  named  as 
consignee,  had  been  previously  delivered  to  it  by  the  sales  manager 
of  the  vendor  company,  together  with  a  pro  forma  invoice,  upon  which 
he  received  a  payment  of  $661,  representing  three-fourths  of  the  es- 
timated value  of  the  material  on  the  basis  of  the  ammonia  content 
assumed  by  the  contract  of  sale.  In  this  suit  the  vendor  seeks  to  re- 
cover from  the  "vendee  a  balance  of  $240.86  for  the  shipment  referred 
to,  and  the  sum  of  $203.88  on  account  of  a  carload  which  was  deliv- 
ered after  the  fire  and  upon  which  also  a  three-fourths  payment  was 
made  on  presentation  of  the  bill  of  lading  and  pro  forma  invoice. 
*  *  *  [Court  quotes  Section  19,  Rules  4  and  5,  of  the  Uniform 
Sales  Act.] 

In  the  case  before  us  the  seller  contracted  to  deliver  400  tons  of 
fertilizer,  of  the  kind  and  quality  described,  at  the  buyer's  works. 
The  term  "cif.  your  works,"  as  used  in  the  agreement,  is  shown  by 
the  testimony  to  mean  that  the  seller  should  pay  the  cost,  including 
freight,  incurred  in  the  transportation.  The  material  shipped  and  de- 
stroyed by  the  fire  was  appropriated  by  the  seller  to  the  contract,  but 
as  it  was  the  duty  of  the  seller,  under  the  terms  of  the  sale,  to  make 
delivery,  at  the  buyer's  factory,  and,  to  pay  the  freight  on  the  ship- 
ment, the  rule  last  quoted  precludes  any  question  as  to  the  transfer  of 
the  title  before  the  delivery  at  the  designated  place  was  accomplished. 
It  is  therefore  unnecessary  to  consider  what,  in  the  absence  of  such  a 
stipulation,  is  the  ordinary  effect  upon  the  title  of  delivering  goods  to 
a  common  carrier  and  of  consigning  them  to  the  buyer  upon  a  bill  of 
lading  issued  in  his  name,  and  of  the  payment  of  part  of  the  purchase 
money.  Whether  the  title  to  the  specific  carload  of  fertilizer  under 
inquiry  passed  to  the  buyer  as  soon  as  it  reached  the  place  of  destina- 
tion depends  upon  the  question  as  to  whether  the  parties  to  the  sale 
intended  the  transfer  of  the  title  to  occur  at  that  point  of  time  or  to  be 
deferred  to  a  later  period.  The  intention  of  the  parties  is  the  control- 
ling factor  in  the  determination  of  such  an  issue.  This  is  the  plain  im- 
port of  the  provisions  we  have  reproduced  from  the  Uniform  Sales 
Act,  which  simply  declare  in  this  respect  the  settled  rule  of  the  com- 
mon law.    *    *    * 

Upon  the  question  of  intention  in  regard  to  the  time  when  the  title 
should  pass,  we  have  nothing  in  the  record  of  any  special  significance 
beyond  the  written  terms  of  the  sale.    There  were  no  acts  of  the  par- 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED  1027 

ties  reflecting  upon  this  subject,  except  such  as  the  agreement  evident- 
ly contemphited.  The  issue  to  be  decided  is  therefore  one  of  law 
and  involves  the  inquiry  as  to  whether  there  are  any  conditions  of  the 
contract  which  had  the  effect  of  postponing  the  transfer  of  the  title 
to  the  defendant  beyond  the  time  of  the  arrival  of  the  shipment  at  its 
plant.  It  is  clear  that  this  effect  would  not  necessarily  be  produced  by 
the  provision  for  weighing  and  analysis  to  ascertain  the  quantity  of 
the  m.aterial  and  the  units  of  ammonia  it  contained  for  the  purpose 
of  correctly  determining  the  amount  of  the  price.     *     *     * 

The  sale  was  made,  however,  upon  the  representation  that  *  *  * 
the  buyer  should  have  "the  privilege  of  refusing  said  goods."  *  *  * 
Consequently,  the  fact  that  a  particular  carload  had  arrived  on  the 
buyer's  siding,  and  had  been  placed  by  its  order  in  a  position  to  have 
the  cargo  discharged,  can  have  no  important  bearing  upon  the  question 
as  to  the  effect  upon  the  title  of  the  provision  in  reference  to  testing 
and  rejection.  The  decisive  inquiry  is  whether  the  right  to  refuse  the 
shipment,  if  a  stipulated  analysis  at  the  time  of  delivery  demonstrates 
that  It  does  not  conform  to  the  contract,  is  consistent  with  the  theory 
that  the  title  has  already  passed  to  the  purchaser.    *    *    * 

A  sale  on  terms  permitting  rejection  of  the  goods  if  they  do  not  pass 
a  prescribed  test  of  quality  is  somewhat  analogous  to  a  sale  on  trial,  in 
reference  to  which  the  Uniform  Sales  Act  provides,  in  section  19, 
rule  3  (2) :  "When  goods  are  delivered  to  the  buyer  on  approval,  or 
on  trial,  or  on  satisfaction,  or  other  similar  terms,  the  property  there- 
in passes  to  the  buyer :  (a)  When  he  signifies  his  approval  or  accept- 
ance to  the  seller,  or  does  any  other  act  adopting  the  transaction ;  (b) 
if  he  does  not  signify  his  approval  or  acceptance  to  the  seller,  but  re- 
tains the  goods  without  giving  notice  of  rejection,  then,  if  a  time  has 
been  fixed  for  the  return  of  the  goods,  on  the  expiration  of  such  time, 
and,  if  no  time  has  been  fixed,  on  the  expiration  of  a  reasonable  time." 

This  provision  was  applied  in  Rice  v.  Dinsmore,  124  Md.  276,  92 
Atl.  847.  In  Farmers'  Phosphate  Co.  v.  Gill,  69  Md.  537,  16  Atl.  214, 
1  L.  R.  A.  767,  9  Am.  St.  Rep.  443,  where  an  agreement  that  a  ship- 
ment of  rock  phosphate  should  be  weighed  and  its  quality  tested  upon 
arrival  at  the  buyers'  works  was  held  not  to  defer  the  passing  of  the 
title  until  these  acts  were  performed,  it  was  pointed  out  that  the  buy- 
ers v^eve  given  by  the  contract  "no  right  to  reject  the  rock  if  it  did  not 
come  up  to  the  prescribed  standard,"  but  were  simply  allowed  in 
that  event  a  proportionate  abatement  of  the  price.  The  absolute  right 
conferred  upon  the  buyer  in  this  instance  to  refuse  the  material  deliv- 
ered if  it  did  not  meet  the  test  agreed  upon  is  a  conclusive  indication 
that  the  title  was  not  intended  to  pass  to  the  buyer  tmtil  the  custom- 
ary opportunity  for  making  the  test  was  aff'orded.  There  is  nothing  in 
the  evidence  tending  to  show  that  there  was  any  undue  delay  on  the 
part  of  the  buyer  in  arranging  for  the  weighing  and  analyzing  of  the 
contents  of  the  car  on  the  occasion  in  question,  and  as  the  property 
was  destroyed  without  fault  of  either  party,  before  the  buyer's  un- 
qualified right  to  test,  and  his  conditional  right  to  refuse  the  shipment, 
could  be  exercised,  we  must  hold  that  the  instruction  of  the  trial  court 
placing  the  loss  on  the  seller  was  properly  granted.  *  *  ♦ 
Judgment  affiirmed. 


1028  SALES  (Part  4 

SECTION  7.— EFFECT  OF  THE  FORM  OF  THE  BILE  OF 
LADING  UPON  THE  PASSING  OF  TITLE 

The  presumption  that  title  passes  upon  delivery  of  the  goods  to 
the  carrier  for  shipment  to  the  buyer  may  also  be  controlled  by  the 
form  of  the  bill  of  lading.  There  are  two  kinds  of  bills  of  lading, 
called,  respectively,  straight  bills  of  lading  and  negotiable  bills  of 
lading.  A  negotiable  bill  of  lading  is  one  which  provides  for  the 
delivery  of  the  goods  to  the  order  of  some  person  therein  desig- 
nated, or  to  bearer.  A  straight  bill  of  lading  provides  for  the 
delivery  of  the  goods  to  a  named  consignee  only ;  words  of  nego- 
tiability being  omitted.  The  various  aspects  of  negotiable  docu- 
ments of  title  are  taken  up  in  Chapter  IV ;  but,  in  connection  with 
the  present  section,  the  Introduction  to  Chapter  IV  should  be 
read  in  further  explanation  of  the  distinctions  between  negotiable 
and  non-negotiable  documents  of  title.  It  will  there  appear  that  a 
negotiable  bill  of  lading  may  be  used  to  prevent  an  act  which 
would  normally  constitute  an  act  of  unconditional  appropriation 
from  operating  as  such.  The  provisions  of  the  Sales  Act  bearing 
on  these  matters  are  as  follows : 

Sales  Act,  Section  20.  (1)  Where  there  is  a  contract  to  sell 
specific  goods,  or  where  goods  are  subsequently  appropriated  to 
the  contract,  the  seller  may,  by  the  terms  of  the  contract  or  ap- 
propriation, reserve  the  right  of  possession  or  property  in  the 
goods  until  certain  conditions  have  been  fulfilled.  The  right  of 
possession  or  property  may  be  thus  reserved  notwithstanding  the 
delivery  of  the  goods  to  the  buyer,  to  a  carrier  or  other  bailee  for 
the  purpose  of  transmission  to  the  buyer. 

(2)  Where  goods  are  shipped,  and  by  the  bill  of  lading  the  goods 
are  deliverable  to  the  seller  or  his  agent,  or  to  the  order  of  the 
seller  or  of  his  agent,  the  seller  thereby  reserves  the  property  m 
the  goods.  But  if,  except  for  the  form  of  the  bill  of  lading,  the 
property  would  have  passed  to  the  buyer  on  shipment  of  the  goods, 
the  seller's  property  in  the  goods  shall  be  deemed  to  be  only  for 
the  purpose  of  securing  performance  by  the  buyer  of  his  obliga- 
tions under  the  contract. 

(3)  Where  goods  are  shipped,  and  by  the  bill  of  lading,  the 
goods  are  deliverable  to  the  order  of  the  buyer  or  of  his  agent,  but 
possession  of  the  bill  of  lading  is  retained  by  the  seller  or  his 
agent,  the  seller  thereby  reserves  a  right  to  the  possession  of  the 
goods  as  against  the  buyer. 

(4)  Where  the  seller  of  goods  draws  on  the  buyer  for  the  price 
and  transmits  the  bill  of  exchange  and  bill  of  lading  together  to  the 
buyer  to  secure  acceptance  or  payment  of  the  bill  of  exchange,  the 
buyer  is  bound  to  return  the  bill  of  lading  if  he  does  not  honor 
the  bill  of  exchange,  and  if  he  wrongfully  retains  the  bill  of  lading 
he  acquires  no  added  right  thereby.  If,  however,  the  bill  of  lading 
provides  that  the  goods  are  deliverable  to  the  buyer  or  to  the  or- 


Ch.  2)         TRANSFER   OF  TITLE   WHERE   GOODS  UNASCERTAINED  1029 

der  of  the  buyer,  or  is  indorsed  in  blank,  or  to  the  buyer  by  the 
consignee  named  therein,  one  who  purchases  in  good  faith,  for 
value,  the  bill  of  lading,  or  goods  from  the  buyer  will  obtain  the 
property  in  the  goods,  although  the  bill  of  exchange  has  not  been 
honored,  provided  that  such  purchaser  has  received  delivery  of 
the  bill  of  lading  indorsed  by  the  consignee  named  therein,  or  of 
the  goods,  without  notice  of  the  facts  making  the  transfer  wrong- 
ful. 

What  is  the  effect  of  these  sections?  As  regards  subsection  (1) 
this  language  asserts,  what  we  already  have  found  to  be  true,  that 
goods  may  be  delivered  to  the  buyer  under  circumstances  where 
the  title  may  remain  in  the  seller.  The  conditional  sale,  the  sale  on 
approval  and  the  contract  on  sale  or  return  furnish  instances  of 
this  right.  These  are  instances  of  a  reservation  of  title  in  the 
contract  between  buyer  and  seller.  This  section  provides  that  a 
similar  result  may  be  accomplished  by  a  shipment  of  the  goods 
under  a  negotiable  bill  of  lading.  Subsections  (2),  (3),  and  (4) 
present  various  detailed  aspects  of  this  right. 

Subsection  (2)  deals  with  two  distinct  situations,  though  each 
includes  two  subordinate  situations:  (1)  The  clause  reading, 
"Where  goods  are  shipped,  and  by  the  bill  of  lading  the  goods  are 
deliverable  (a)  to  the  seller,  or  (b)  his  agent,"  refers  to  a  case 
where,  although  there  was  a  contract  for  the  sale  of  the  goods,  the 
seller  chooses  to  ship  them  under  a  straight  bill  of  lading  to  him- 
self or  to  his  agent.  (2)  The  clause  reading:  "Where  goods  are 
shipped  and  by  the  bill  of  lading  the  goods  are  deliverable  (a)  to 
the  order  of  the  seller,  (b)  or  to  the  order  of  the  agent  of  the 
seller,"  refers  to  a  shipment  of  goods  under  a  negotiable  bill  of 
lading. 

The  remaining  portion  of  the  subsection  deals  with  the  legal 
effect  of  these  two  situations,  and  we  note  that  the  legal  effect  is 
stated  to  be  that  the  seller  thereby — thaitiis,  in  either  of  the  above- 
mentioned  situations — reserves  the  property  in  the  goods;  that 
is,  title  to  the  goods.  We  know,  however,  that  the  words  "title" 
or  "the  property"  are  used  to  describe  more  than  one  kind  of 
interest  in  the  thing  said  to  be  owned ;  hence  the  section  proceeds 
to  declare  what  kind  of  title  is  thus  reserved.  This  it  accomplishes 
by  asserting  that  the  property  thus  reserved  by  the  seller  shall  be 
deemed  to  be  only  for  the  purpose  of  securing  performance  by  the 
buyer  of  his  obligations  under  the  contract. 

The  further  detailed  effects  of  the  reservation  of  title  may  be 
stated  as  follows:  (1)  The  buyer  cannot  obtain  possession  of  the 
goods,  until,  in  the  case  of  the  straight  bill,  the  seller  voluntarily 
consents  to  a  delivery  to  him,  and,  in  the  case  of  the  order  bill,  the 
buyer  cannot  obtain  possession  until  the  bill  of  lading  has  been  in- 
dorsed to  him.  (2)  The  buyer  has  no  power  to  sell  the  goods  to 
other  parties  until  he  obtains  possession  of  the  goods.  (3)  Cred- 
itors of  the  buyer  cannot  seize  the  goods  in  satisfaction  of  their 
claims  against  the  buyer.     (4)  The  seller  may  sell  the  goods  to 


1030  SALES  (Part  4 

other  persons,  in  the  case  of  the  straij^ht  bill,  without  dealing  with 
the  bill  at  all,  and  in  the  case  of  the  order  bill,  by  indorsing  it  to 
the  new  purchaser.  Such  purchaser  gets  a  good  title  to  the  goods. 
Of  course,  the  seller,  in  reselling  to  the  new  purchaser,  will  prob- 
ably be  liable  for  a  breach  of  contract  with  the  first  buyer;  but 
that  fact  does  not  prevent  him  from  dealing  with  the  goods  as  his 
own.  (5)  As  regards  the  risk  of  loss,  we  might  expect,  perhaps, 
since  so  much  of  the  beneficial  interest  in  the  property  is  thus  re- 
served to  the  seller,  that  the  risk  of  loss  would  also  fall  upon  the 
seller;  but  this  is  not  true.  After  all,  the  title  reserved  is  but  a 
security  title,  as  in  C.  O.  D.  shipments  and  in  conditional  sale  con- 
tracts, where  the  risk  of  loss  is  upon  the  buyer.  And  so  here  this 
analogy  is  carried  out,  and  the  risk  of  loss  or  damage  while  the 
goods  are  in  transit  is  upon  the  buyer.  This  effect  is  brought  about 
by  Section  22   (a),  which  provides: 

Where  delivery  of  the  goods  has  been  made  to  the  buyer,  or  to  a 
bailee  for  the  buyer,  in  pursuance  of  the  contract  and  the  property 
in  the  goods  has  been  retained  by  the  seller  merely  to  secure  per- 
formance by  the  buyer  of  his  obligations  under  the  contract,  the 
goods  are  at  the  buyer's  risk  from  the  time  of  such  delivery. 

This  section  casts  the  risk  of  loss  upon  the  buyer  "when  the 
title  has  been  reserved  "merely  to  secure  performance  by  the  buyer 
of  his  obligations  under  the  contract."  And  we  have  just  seen  that 
under  Section  20  (2)  the  buyer,  by  sending  the  goods  to  himself  or 
agent  by  a  straight  bill  of  lading,  or  by  sending  the  goods  under  a 
negotiable  bill  running  to  the  seller's  order,  or  to  the  order  of  the 
agent  of  the  seller,  does  reserve  just  this  kind  of  title;  therefore 
there  can  be  no  question  but  what  the  risk  of  loss  in  such  case  is 
transferred  to  the  buyer  at  the  time  of  delivery  to  the  carrier. 

The  form  of  the  negotiable  bill  of  lading  referred  to  in  subsec- 
tion 3  differs  from  the  form  of  the  negotiable  bill  referred  to  in 
subsection  2,  in  that  in  subsection  3  the  bill  runs  to  the  order  of 
the  buyer  or  to  the  order  of  the  buyer's  agent,  instead  of  to  the  or- 
der of  the  seller  or  the  seller's  agent.  The  legal  effect  differs  from 
that  produced  by  subsection  2,  in  that  under  subsection  3  the  re- 
tention of  the  bill  running  to  the  order  of  the  buyer  reserves  a 
right  of  possession  of  the  goods,  whereas  under  subsection  2  a 
security  title  was  reserved.  If  the  right  of  possession  alone  is  re- 
served, the  title  obviously  must  be  in  the  buyer.  The  further 
effect  of  the  section  is  very  similar  to  that  where  the  bill  runs  to 
the  order  of  the  seller:  (1)  The  buyer  cannot  obtain  possession 
until  he  acquires  possession  of  the  bill  of  lading,  just  as  was  the 
case  under  subsection  2.  (2)  The  buyer  could  not  effectively 
transfer  the  title  to  a  third  party,  unless  he  first  obtained  the  bill 
of  lading.  If  the  carriers  should  deliver  the  goods  to  the  buyer,  an 
event  not  likely  to  occur,  no  doubt  the  buyer  could  transfer  a  good 
title  to  his  purchaser,  and  the  seller  could  not  recover  the  goods, 
though  the  holder  of  the  bill  of  lading  could  hold  the  carrier 
liable  for  thus  wrongfully  surrendering  the  goods  without  requir- 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED  1031 

ing  the  surrender  of  the  bill  of  lading.  (3)  The  rights  of  credi- 
tors of  the  buyer  and  of  the  seller  are  about  the  same  as  they  are 
under  subsection  2,  but  this  matter  will  be  adverted  to  later.  (4) 
The  seller  cannot  transfer  a  title  to  a  third  party  which  would  de- 
feat the  right  of  the  buyer.  In  fact,  since  the  bill  runs  to  the 
order  of  the  buyer,  it  is  possible  to  say  that  the  indorsement  by 
the  seller  of  the  buyer's  name  would  not  be  effective  to  pass  title ; 
but  it  might  be  argued  that  the  act  of  the  seller  in  indorsing  the 
buyer's  name  has  the  same  kind  of  effect  as  the  indorsement  of 
the  name  of  a  fictitious  consignee  would  have ;  that  is,  perhaps,  the 
indorsement  of  the  buyer's  name  would  convert  the  bill  into  a 
bearer  bill.  Looking  at  it  in  this  way,  and  this  seems  a  reasonable 
view,  the  seller  would  be  liable  for  a  breach  of  contract  to  the 
buyer,  but  the  innocent  purchaser  would  get  a  title  good  against 
the  first  buyer.  It  would  also  seem  that  the  seller  could  surrender 
the  bill  of  lading  to  the  carrier  and  obtain  a  bill  running  to  his 
own  order,  and  could  thereby  obtain  the  power  to  transfer  a  good 
title  to  a  third  party.  Risk  of  loss  is  clearly  on  the  buyer  from  the 
time  of  delivery  to  the  carrier,  under  the  general  rule  that  risk  of 
loss  follows  title. 

It  thus  appears  that  the  outstanding  effect  produced  by  nego- 
tiable bills  of  lading,  whether  the  bill  runs  to  the  order  of  the 
seller  or  to  the  order  of  the  buyer,  is  that  it  enables  the  seller  to 
retain  an  effective  hold  upon  the  goods  during  the  period  of  the 
transit.  This  power  in  the  seller  pre-supposes  that  title  had  not 
passed  before  the  delivery  to  the  carrier.  If  title  has  passed  to  the 
bu3^er  before  such  delivery,  then,  of  course,  the  buyer  may  ob- 
tain his  goods  without  production  of  the  bill  of  lading.  This  mat- 
ter will  be  further  adverted  to  in  Chapter  IV. 


ALDERMAN  BROS.  CO.  v.   WESTINGHOUSE  AIR  BRAKE   CO. 

(Supreme  Court  of  Errors  of  Connecticut,  1918.     92  Conn.  419,  10.3  Atl.  267.) 

Beach,  j_  *  *  *  Section  20  deals  with  the  reservation  of  the 
right  of  possession  of,  or  the  property  in,  goods  shipped  to  the  buyer. 
It  makes  the  distinction  that  if  the  bill  of  lading  is  drawn  to  the  order 
of  the  buyer  or  his  agent,  and  is  retained  by  the  seller  or  his  agent  to 
secure  payment  of  the  price,  the  seller  reserves  only  the  right  of  pos- 
session of  the  goods ;  but  if  the  bill  of  lading  is  drawn  to  the  order  of 
the  seller  or  his  agent  "the  seller  reserves  the  property  in  the  goods." 
This  last  statement  is,  however,  qualified  by  the  next  succeeding 
words  "but  if,  except  for  the  form  of  the  bill  of  lading,  the  property 
would  have  passed  to  the  buyer  on  the  shipment  of  the  goods,  the  seller's 
property  in  the  goods  shall  be  deemed  to  be  only  for  the  purpose  of 
securing  performance  by  the  buyer  of  his  obligations  under  the  con- 
tract "  Manifestly,  the  intention  is  to  make  some  kind  of  a  distinction 
between  a  reservation  of  title  with  intent  to  remain  the  owner  of  the 
goods  for  all  purpo.ses,  and  a  reservation  of  title  for  the  sole  purpose  of 
securing  payment  of  the  price.  The  legal  effect  of  this  distinction  is 
pointed  out  in  section  22.     *     *     * 


1032  SALES  (Part  4 

It  makes  no  difference  to  a  buyer  who  has  agreed  to  pay  the  freight 
whether  a  sight  draft  is  presented  to  him  attached  to  a  bill  of  lading 
drawn  to  his  own  order,  or,  to  a  bill  of  lading  drawn  to  the  order  of 
the  seller  and  indorsed  in  blank.  In  either  case  he  must  pay  his  draft 
in  order  to  get  possession  of  the  goods,  and  in  either  case  his  rights 
on  paying  the  draft  are  the  same.  The  risk  of  loss  unquestionably 
passes  to  the  buyer  in  the  former  case  as  soon  as  the  goods  are  de- 
livered to  the  carrier,  and  section  22  of  the  Sales  Act  provides  that 
it  shall  pass  to  the  buyer  at  the  same  time  in  the  latter  case,  provided 
the  seller's  purpose  in  drawing  the  bill  of  lading  to  his  own  order 
was  merely  to  secure  payment  of  the  draft.  This  resolves  for  us 
any  conflict  of  opinion  on  the  point,  and  gives  to  the  maxim  res  periit 
domino  an  interpretation  which  makes  the  risk  follow  the  beneficial  in- 
terest according  to  the  intent  of  the  parties  and  not  the  legal  title  held 
merely  as  security  for  the  payment  of  the  price.     *     *     * 


COLLIN   COUNTY    NAT.    BANK    v.   HARRIS    &    JAGGERS. 
(Supreme  Court  of  Arkansas,  1909.    90  Ark.  439,  119  S.  W.  662.) 

Action  by  Harris  &  Jaggers  against  the  Browne  Grain  Company; 
Collin  County  National  Bank,  interpleader.  From  a  judgment  for 
plaintiffs,  the  interpleader  appeals. 

McCuLrLOCH,  C.  J.  *  *  *  The  facts  concerning  the  attached 
property  are  as  follows :  On  July  7,  1908,  the  Browne  Grain  Com- 
pany entered  into  a  written  executory  contract  with  appellees  to  sell 
and  deliver  to  them  two  car  loads  of  oats  at  a  stipulated  price.  On 
the  same  day  the  grain  company  caused  to  be  shipped  from  Belleview, 
Tex.,  the  car  load  of  oats  in  controversy,  and  the  same  was  billed 
to  the  shipper's  order.  The  car  arrived  at  Monticello  on  July  20th, 
but  was  not  received  by  the  appellees,  a  controversy  having  arisen  be- 
tween the  parties  concerning  the  inspection  of  the  oats,  and  later  con- 
cerning a  charge  made  by  the  railroad  company  for  demurrage  on 
account  of  delay  in  unloading.  On  August  12,  1908,  the  grain  com- 
pany entered  into  a  contract  with  H.  M.  Wilson,  of  Monticello,  for 
the  sale  of  this  car,  and  on  the  same  day  drew  a  draft  on  Wilson  for 
the  agreed  price,  which  was  delivered  to  appellant  bank  at  McKinney, 
Tex.,  with  bill  of  lading  indorsed  in  blank,  attached.  The  bank  placed 
to  the  credit  of  the  grain  company  on  its  books  the  amount  of  the 
draft,  less  a  small  discount,  and  the  amount  was  immediately  checked 
out  by  the  grain  company.  One  of  the  partners  composing  the  grain 
company,  and  also  the  cashier  of  the  appellant  bank,  testified  that  the 
draft,  with  bill  of  lading  attached,  was  delivered  to  the  bank  as  an 
actual  cash  sale  for  the  full  amovmt  thereof,  less  discount,  and  this 
is  the  only  testimony  on  that  subject.  The  day  following  the  delivery 
of  the  draft  to  appellant  bank  the  car  of  oats  in  this  action  was  attached 
at  Monticello,     *     *     * 

The  contract  of  sale  between  the  grain  company  and  appellees  was 
executory,  and  title  had  not  passed.  There  had  been  no  delivery  of 
the  oats,  and  the  contract  was  for  the  sale  of  no  particular  car  load 
of  oats.  The  particular  subject-matter  of  the  sale  was  not  specified 
and  identified,  and  the  contract,  therefore,  up  to  the  time  of  delivery, 
was  purely  executory.  *  *  *  'pj-jg  -j-j^jg  ^q  ^j-^g  specified  property 
remained  in  the  grain  cohipany  until  appropriated  to  the  performance 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASCERTAINED  1033 

of  the  contract  and  delivered  in  completion  of  the  sale.  The  assign- 
ment of  the  bill  of  lading  attached  to  the  draft  passed  the  title  as  col- 
lateral security  to  the  bank,  where  the  title  remained  until  the  payment 
of  the  draft  and  delivery  of  the  bill  of  lading.     *     *     * 

At  the  time  of  the  delivery  of  the  draft  and  bill  of  lading  the  title 
to  the  property  remained  in  the  grain  company ;  and,  according  to  the 
uncontradicted  evidence,  the  draft  was  delivered  to  the  bank  as  an  ab- 
solute sale,  and  the  proceeds  thereof  were  immediately  checked  out 
by  the  grain  company.  There  is  no  evidence  whatever  of  any  fraud  or 
collusion  between  the  appellant  bank  and  the  grain  company,  nor  of 
insolvency  or  inability  on  the  part  of  the  latter  to  meet  its  obligations. 
There  is  nothing  in  the  evidence  to  indicate  or  to  warrant  a  conclu- 
sion otherwise  than  that  this  was  a  transaction  in  the  ordinary  course 
of  business,  whereby  products  of  this  kind  are  sold  and  the  sales  there- 
of consummated.     *     *     * 

Reversed  and  remanded  for  new  trial. 


Some  few  aspects  of  a  very  common  and  most  important  com- 
mercial transaction  are  made  the  subject  of  subsection  (4).  For 
the  moment  this  subsection  may  be  viewed  from  a  standpoint  of 
its  business  importance.  Occasionally,  perhaps,  a  seller  will  find 
it  convenient  to  ship  goods  under  a  negotiable  bill  of  lading,  with- 
out accompanying  the  bill  of  lading  with  a  bill  of  exchange  drawn 
upon  the  buyer  for  the  purchase  price ;  but  the  more  common 
situation,  calling  for  the  use  of  the  negotiable  bill,  arises  where  the 
seller's  chief  desire  is  to  make  a  delivery  of  goods  sold  to  a  buyer 
at  a  distant  point  under  circumstances  where  the  seller  will  be 
assured  that  the  price  will  be  paid  before  delivery. 

Of  course,  the  seller  could  require  the  buyer  to  pay  for  the  goods 
before  shipment;  but  the  plan  from  a  business  standpoint  is  often 
not  desirable.  On  the  other  hand,  if. the  seller  sends  the  goods 
to  the  buyer  under  no  restriction  whatever,  except  that  imposed 
by  a  contractual  duty  of  the  buyer  to  remit  the  price  upon  receipt, 
the  seller  thereby  assumes  considerable  risk.  The  buyer  may 
refuse  to  pay  for  the  goods.  The  seller  may  accordingly  be  forced 
to  exert  considerable  efifort  to  make  collection,  or  the  seller  may 
even  find  it  necessary  to  sue  the  buyer.  Again,  the  risk  of  insol- 
vency or  of  actual  bankruptcy  of  the  buyer  is  borne  entirely  by 
the  seller.  Once  the  goods  become  a  part  of  the  general  assets 
of  the  buyer,  the  seller  possesses  no  longer  any  interest  in  them, 
even  though  he  has  not  been  paid  the  price.  In  a  bankruptcy 
proceeding  the  seller  would  be  a  general  creditor.  Of  course, 
where  the  relations  between  the  buyer  and  seller  are  of  such  a 
nature  that  the  seller  feels  perfectly  safe  in  selling  goods  on  cred- 
it, there  is  no  occasion  for  the  use  of  the  negotiable  bill  with  the 
bill  of  exchange.  But  in  those  cases,  and  they  are  quite  frequent, 
where  the  seller  desires  to  make  the  sale  and  yet  desires  to  pro- 
tect, himself  adequately,  the  instrumentality  afforded  by  the  use 
of  the  negotiable  bill  and  the  bill  of  exchange  cannot  be  over- 


1034  SALES  (Part  4 

emphasized.    In  addition  to  the  security  thus  afforded  to  the  seller 
there  are  other  collateral  advantages. 

The  normal  procedure  is  for  the  seller  to  draw  a  bill  of  ex- 
change upon  the  buyer  for  the  price.  Sometimes  this  document 
is  called  a  "trade  acceptance."  The  negotiable  bill  of  lading,  usu- 
ally drawn  to  the  order  of  the  seller  and  then  indorsed,  either 
specially  or  in  blank,  will  be  attached  to  the  bill  of  exchange,  and 
both  instruments  transferred  to  a  bank  at  the  seller's  place  of 
business.  The  bank  may  merely  agree  to  collect  the  amount  called 
for  by  the  bill  of  exchange,  or  it  may  be  that  the  bank  will  dis- 
count the  bill;  that  is,  the  bank  will  credit  the  seller  with  the 
amount  of  the  bill  of  exchange,  and  will  allow  the  seller  to  check 
against  the  credit  during  the  time  required  to  make  presentment 
of  the  bill  to  the  buyer  at  the  point  of  destination.  Of  course,  if 
the  bill  be  dishonored,  the  credit  will  be  withdrawn.  But  in  the 
meantime  the  seller  has  a  bank  credit  subject  to  check,  and  in 
the  usual  case  no  occasion  will  arrise  for  its  withdrawal.  The 
capital  represented  by  the  value  of  the  goods  is  accordingly  con- 
verted into  actual  working  capital  from  the  moment  of  discount  by 
the  bank.  The  bank  feels  safe  in  extending  the  credit,  because  it 
holds  the  goods  as  security  for  the  amount  credited  to  the  seller. 
Were  it  not  for  the  doctrine  that  the  bill  of  lading  represents  the 
goods,  there  would  be  no  satisfactory  procedure  for  a  seller  safely 
to  carry  out  transactions  like  these,  nor  would  it  be  possible  for 
him  to  keep  in  his  working  capital  the  amount  represented  by  the 
value  of  the  goods  during  the  time  they  were  in  transit  or  until 
the  period  of  credit  expired. 

It  should  also  be  noted  that  the  practice  of  sending  goods  under 
a  negotiable  bill  of  lading  accompanied  by  a  bill  of  exchange  is 
perfectly  proper,  and  often  highly  desirable,  even  where  the  seller 
is  willing  to  sell  the  goods  on  a  prescribed  period  of  credit.  In 
such  a  case  the  bill  of  exchange  would  not  be  drawn  so  as  to  be 
payable  on  demand,  but  would  be  drawn  payable  in  thirty,  sixty, 
or  ninety  days,  as  the  parties  might  agree.  But  the  bill  would  be 
drawn  so  as  to  require  an  immediate  acceptance,  and  the  right  of 
the  buyer  to  obtain  the  bill  of  lading,  without  which  he  could  not 
get  the  goods,  would  be  conditional  upon  the  buyer's  actually  ac- 
cepting the  bill  of  exchange.  Here  the  buyer  does  lose  all  hold  on 
the  goods  after  acceptance  and  delivery  of  the  bill  of  lading,  but 
the  hold  given  the  seller  upon  the  goods  by  reason  of  the  bill  of 
lading  insured  his  actually  obtaining  the  buyer's  acceptance.  Had 
the  goods  been  sent  direct  to  the  buyer,  and  the  seller  had  simply 
written  to  the  buyer,  inclosing  a  bill  of  exchange  drawn  upon  him, 
and  required  the  buyer  to  accept  and  return  the  bill,  it  would  not 
be  certain  in  many  cases  that  the  buyer  would  comply  with  the 
seller's  request.  When  the  seller  obtains  the  acceptance  of  the 
buyer,  he  is  then  in  possession  of  a  commercial  instrument  which 
is  of  considerable  value.  Such  a  bill  may  be  discounted  at  the 
Federal   Reserve   Banks.     It   is   prime   commercial   paper.     Since 


Ch.  2)         TRANSFER   OF   TITLE   WHERE   GOODS   UNASrERTAIXED  1035 

the  establishment  of  the  Federal  Reserve  System,  such  instru- 
ments as  have  just  been  described  are  commonly  called  "trade 
acceptances." 

There  can  be  no  question  but  what  the  rules  which  we  are  now 
considering,  which  fix  the  rights  and  liabilities  of  parties  to  ne- 
gotiable documents  of  title,  including  bills  of  lading  and  warehouse 
receipts,  taken  in  connection  with  the  rules  governing  the  rights 
and  liabilities  of  parties  to  negotiable  instruments  payable  in 
money,  operate  as  a  powerful  stimulus  to  trade  and  commerce,  and 
a  degree  of  safety  to  the  parties  concerned  is  thereby  attained,  not 
possible  without  such  instruments.  Especially  is  this  true  as  re- 
gards the  export  and  import  business. 

In  our  further  discussion  of  the  detailed  rules  which  govern  ne- 
gotiable documents  of  title  in  Chapter  IV,  and  in  our  study  of 
the  cases,  we  shall  feel  more  or  less  drawn  away  from  our  obser- 
vation of  the  normal  business  transaction,  because  our  attitude  will 
be  directed  to  the  accidents  which  now  and  then  occur — the  de- 
struction of  the  goods,  the  bankruptcy  or  fraud  of  some  of  the 
parties ;  but  these  risks,  however  rare  they  may  be,  must  always 
be  taken  into  account.  It  is  never  certain  that  a  particular  cargo 
will  be  lost,  or  that  a  particular  business  enterprise  will  be  forced 
into  bankruptcy,  or  that  a  certain  individual  will  commit  a  fraudu- 
lent act;  but  it  is  absolutely  certain  that  all  of  these  things  will 
happen  at  some  time.  The  important  point  is  that  the  manner  in 
which  the  law  extracts  the  parties  who  unfortunately  find  them- 
selves in  these  situations  has  a  great  deal  to  do  with  the  buying 
and  selling  policies  of  commercial  establishments. 

Returning  to  the  more  detailed  examination  of  subsection  4,  it  is 
to  be  noticed  that  the  first  sentence  states  that,  if  the  bill  of  lading 
and  the  bill  of  exchange  are  sent  direct  to  the  buyer,  with  the  di- 
rection to  the  buyer  to  return  the  bill  of  exchange  accepted,  or,  if 
drawn  for  immediate  payment,  the  buyer  does  not  comply  with  this 
demand,  such  buyer  acquires  no  right  to  the  bill  of  lading  or  to  the 
goods,  as  regards  the  seller ;  that  is,  the  seller  could  recover  pos- 
session of  the  bill  or  of  the  goods  by  appropriate  proceedings,  but 
this  right  to  the  seller  is  of  no  great  value,  because  the  next  sen- 
tence provides  that  the  buyer  thus  wrongfully  in  possession  of  the 
bill  of  lading  does  have  the  legal  power  to  pass  a  good  title  to  an 
indorsee  innocent  of  the  buyer's  breach  of  contract.  If  a  buyer  is 
so  deaf  to  business  ethics  as  to  refuse  to  return  the  accepted  bill  or 
the  draft  for  the  price  as  directed,  the  probabilities  are  that  he  will 
negotiate  the  document  to  an  innocent  party.  It  is  therefore  ap- 
parent that  the  practice  of  sending  the  bill  of  lading  and  the  bill  of 
exchange  direct  to  the  buyer,  instead  of  sending  them  through 
customary  banking  channels,  is  dangerous.  Doubtless  in  many 
cases  the  seller  may  safely  do  so,  but  he  should  be  aware  of  the 
risk  therein  involved.  The  detailed  legal  aspects  of  negotiable 
documents  of  title  is  more  completely  presented  in  Chapter  IV. 


1036  SALES  (Part  4 


CHAPTER  III 

POWERS  OF  PERSONS  NOT  OWNERS  OF  GOODS  TO 

TRANSFER  TITLE  TO  INNOCENT 

PURCHASERS 

Section 

1.  Introduction. 

2.  Estoppel  of  the  Owner  to  Deny  Custodian's  Power  to  Transfer  Title. 

3.  Sale  by  One  Having  a  Voidable  Title. 

4.  Sale  by  a  Seller  in  Possession  of  Goods  Already  Sold. 

5.  Rights  of  Creditors  Against   Goods   Sold  in   Seller's  Possession. 

6.  Rights  of  Creditors  Against  Goods  Sold  in  Violation  of  Bulk  Sales  Acts. 


SECTION  1.— INTRODUCTION 

If  every  one  were  absolutely  honest,  and  if  every  one  always 
knew  the  exact  scope  and  nature  of  his  legal  rights,  the  subject- 
matter  of  the  more  important  parts  of  this  chapter  would  disap- 
pear from  the  law.  As  it  is,  people  are  sometimes  dishonest,  but 
much  more  often  they  are  merely  mistaken  as  to  the  scope  of  their 
legal  rights,  with  the  result  that  they  attempt  to  do  things  which 
prove  unfortunate  for  themselves  and  for  others.  In  the  study  of 
negotiable  instruments  it  appeared  that  the  most  difficult  case  to 
decide,  both  as  regards  matters  of  legal  policy  and  as  regards  the 
application  of  established  policy  to  specific  facts,  was  the  case 
where  a  loss  had  to  be  thrown  upon  one  of  two  or  more  innocent 
parties.  And  so  we  discover  the  same  situation  in  connection  with 
sales  of  property.  Of  course,  as  long  as  the  machinery  of  ex- 
change is  functioning  smoothly,  we  are  not  troubled  by  such  ques- 
tions. But  sooner  or  later  some  fraudulent  party,  some  one  in 
financial  distress,  or  some  careless  workman  on  the  road  traveled 
by  the  goods  from  producer  to  consumer,  throws  the  machinery 
out  of  gear,  and  the  tremors  are  heard  and  felt  all  along  the  line. 
The  individual  who  was  thus  responsible  for  the  accident  should 
sustain  the  loss,  and  in  the  majority  of  cases  no  doubt  the  law  im- 
poses legal  liability  upon  him ;  that  is,  ultimately  it  will  be  upon 
him.  But  this  party  may  be  in  New  York,  and  the  two  innocent 
parties  in  Portland.  A  lawsuit  is  very  likely  to  develop  between 
the  two  innocent  parties,  and  it  must  be  decided.  And,  again,  it 
so  often  happens  that  the  person  who  was  the  cause  of  the  loss  is 
now  insolvent,  so  that,  even  if  it  were  convenient  to  compel  him  to 
repair  the  damage,  the  legal  right  to  do  so  is  valueless. 

The  problem  of  discovering  which  of  two  innocent  persons  must 
bear  a  loss  is  one  which  ramifies  all  through  the  law.  In  the  law 
of  negotiable  instruments  we  studied  a  series  of  rules  which  ex- 
perience has  shown  bring  about  a  result  which  is  about  as  fair  for 
all  concerned  as  we  may  expect.  So,  also,  in  the  law  of  real  prop- 
erty, though  this  is  a  branch  into  which  we  shall  not  enter  here. 


Ch.  8)      INNOCENT   PURCHASERS   FROM   PERSONS   WITHOUT   TITLE  1037 

The  specific  rules  are  not  the  same,  but  they  are  grounded  upon 
the  same  fundamental  conception  of  justice.  In  transactions  con- 
cerning tangible  personal  property  we  have  another  series  of 
rules,  forged  from  the  mills  of  business  experience,  which,  though 
differing  in  many  respects  from  the  analogous  doctrines  of  the  law 
of  real  property  and  of  commercial  paper,  leads  to  a  fair  average 
of  just  results. 

The  problem  in  this  chapter  therefore  is :  Under  what  circum- 
stances will  a  person  who  is  not  the  owner  of  goods  have  the  pow- 
er, although  not  the  legal  privilege,  to  transfer  title  to  an  inno- 
cent purchaser?  The  following  case  contains  a  discussion  of  the 
general  principles  involved,  after  considering  which  we  may  di- 
rect our  attention  to  the  provisions  of  the  Sales  Act,  to  note  how 
these  general  principles  have  there  been  carried  into  effect. 


SALTUS  V.  EVERETT. 

(Court  for  the  Correction  of  Errors  of  New  York,  18.38.     20  Wend.  267, 

32  Am.  Dec.  541.) 

Senator  Verplanck.  *  *  *  i^j^g  main  question  depends  upon 
and  involves  the  general  rule  that  ought  to  govern  between  the  con- 
flicting rights  of  bona  fide  purchasers  of  personal  property,  bought 
without  notice  of  any  opposing  claim,  and  those  of  the  original  owner, 
divested  of  the  possession  or  control  of  his  property  by  accident,  mis- 
take, fraud,  or  misplaced  confidence.  The  original  owner  now  claims 
his  lead  against  purchasers  who  bought  for  a  fair  price,  in  the  usual 
course  of  trade,  from  persons  holding  the  usual  evidence  of  such 
property  (a  bill  of  lading  indorsed  to  them),  and  in  actual  possession 
of  the  goods.  Of  these  two  innocent  parties,  which  of  the  two  is  to 
bear  the  loss  arising  from  the  wrongdoing  of  the  third? 

The  universal  and  fundamental  principle  of  our  law  of  personal 
propert}^  is  that  no  man  can  be  divested  of  his  property  without  his 
own  consent,  and  consequently  that  even  the  honest  purchaser  un- 
der a  defective  title  cannot  hold  against  the  true  proprietor.  That 
"no  one  can  transfer  to  another  a  better  title  than  he  has  himself" 
is  a  maxim,  says  Chancellor  Kent,  "alike  of  the  common  and  the  civil 
law,  and  a  sale,  ex  vi  termini,  imports  nothing  more  than  that  the 
bona  fide  purchaser  succeeds  to  the  rights  of  the  vendor."  The  only 
exception  to  this  rule  in  the  ancient  English  jurisprudence  was  that 
of  sales  in  markets  overt,  a  custom  which  has  not  been  introduced 
among  us.  "It  has  been  frequently  held  in  this  country  that  the  Eng- 
lish law  of  markets  overt  had  not  been  adopted,  and  consequently,  as 
a  general  rule,  the  title  of  the  true  owner  cannot  be  lost  without  his 
consent."    2  Kent's  Comm.  324,  and  cases  there  cited. 

To  whatever  and  however  numerous  exceptions  this  rule  of  our 
law  may  be  subject,  it  is  unquestionably  the  general  and  regulating 
principle,  modified  only  by  the  absolute  necessity  or  the  obvious  poli- 
cy of  human  affairs.  The  chief  justice  of  the  superior  court  has  said, 
in  his  opinion  on  this  case,  that  "it  must  be  conceded  that  a  purchaser 
for  a  fair  and  valuable  consideration,  in  the  usual  course  of  trade, 
without  notice  of  any  conflicting  claim  or  any  suspicious  circumstanc- 


1038  SALES  (Part  4 

es  to  awaken  inquiry,  or  to  put  him  on  his  guard,  will,  as  a  general 
rule,  be  protected  in  his  purchase,  and  unaffected  by  any  latent  claim. 
But  there  are  exceptions  to  this  rule."  Now,  I  cannot  agree  with  the 
learned  justice  that  this  is  the  general  rule.  On  the  contrary,  I  think 
it  obvious  that  it  is  but  the  broad  statement  of  a  large  class  of  ex- 
ceptions to  the  operation  of  a  much  more  general  principle,  and  that 
statement  of  exceptions  is  subject  again  to  many  limitations.  I  have 
stated  the  general  and  governing  law ;  let  us  now  see  what  are  pre- 
cisely the  exceptions  to  it.  . 

The  first  and  most  remarkable  class  of  these  exceptions  relates  to 
money,  cash,  bank  bills,  checks,  and  notes  payable  to  the  bearer  or 
transferable  by  delivery,  and  in  short  whatever  comes  under  the  gen- 
eral notion  of  currency.  It  was  decided  by  Lord  Chief  Justice  Holt, 
at  an  early  period  of  our  commercial  law,  that  money  and  bills  payable 
to  bearer,  though  stolen,  could  not  be  recovered  after  they  had  passed 
into  currency;  and  this  "by  reason  of  the  course  of  trade  which  cre- 
ates a  property  in  the  holder."  "They  pass  by  delivery  only,  and  are 
considered  as  cash,  and  the  possession  always  carries  with  it  the 
property."  Anon.,  1  Salk.  126.  A  long  series  of  decisions,  beginning 
with  Miller  v.  Race,  1  Burr.  452,  has  now  settled  the  law  that  posses- 
sion of  such  paper  is  presumptive  proof  of  property,  and  that  he  who 
received  it  in  the  course  of  trade,  for  a  fair  consideration,  without 
any  reason  for  just  suspicion,  can  hold  it  against  the  true  owner,  and 
recover  on  it  against  the  drawer,  maker,  and  other  parties,  even  if 
the  paper  had  been  stolen  from  or  lost  by  the  former  holder ;  such 
former  holder  retaining  all  his  original  rights  only  against  the  thief 
or  the  finder,  or  whoever  received  the  paper  from  them  under  suspi- 
cious circumstances.  These  decisions  have  been  argued  upon  as  au- 
thorities (at  least  in  the  way  of  analogy)  both  at  bar  and  in  opinions 
of  the  courts,  in  cases  involving  the  same  question  as  to  goods  or 
other  movable  property.  Hence  it  was  inferred  that  goods  bought  or 
received  "in  the  course  of  trade  stand  on  the  same  footing  with  bank 
notes  or  checks  so  received."  But  an  examination  of  the  cases  will 
show  that  ^  this  part  of  the  law  of  negotiable  paper  rests  on  grounds 
quite  peculiar  to  itself,  for  the  following  reasons : 

1.  The  protection  of  the  bona  fide  holder  of  paper,  transferable  by 
delivery,  extends  even  to  cases  where  the  paper  has  been  lost  or 
stolen.  But  it  has  been  often  decided  that  loss  by  accident,  theft,  or 
robbery  does  not  divest  the  title  of  the  owner  of  goods,  nor  give  a 
title  in  them  to  a  fair  after  purchaser. 

2.  The  rule  is  put  by  all  the  authorities  on  the  express  and  sepa- 
rate ground  of  the  necessity  of  sustaining  the  credit  and  circulation 
of  the  currency.  Thus  Lord  Chief  Justice  Hardwicke:  "No  dispute 
ought  to  be  made  with  the  holder  of  a  cash  note,  who  came  fairly  by 
it,  for  the  sake  of  currency,  to  which  discrediting  such  notes  would  be 
a  great  disturbance."  See,  too,  the  reasoning  of  Lord  Mansfield,  in 
all  cases  on  this  head  decided  before  him.  Thus,  he  says,  in  the 
case  of  a  stolen  note.  Peacock  v.  Rhodes,  2  Doub.  636:  "An  assignee 
must  take  the  thing  assigned,  subject  to  all  the  equity  to  which  the 
original  party  was  subject.  If  this  rule  was  applied  to  bills,  it  would 
stop  their  currency."  Similar  reasons  are  assigned  for  the  same  de- 
cision by  American  judges. 

3.  The  analog}'  between  notes  and  movables,  or  goods,  is  expressly 
denied  in  the  leading  cases  on  this  head.     Thus,  in  reply  to  an  argu- 


Ch.  3)     INNOCENT   PURCHASERS  FROM  PERSONS  WITHOUT  TITLE        1039 

ment  founded  on  that  similarity,  Lord  Mansfield  answers  (Miller  v. 
Race,  1  Burr.  457) :  "The  whole  fallacy  of  the  argument  rests  upon 
comparing  bank  notes  to  what  they  do  not  resemble,  and  what  they 
ought  not  to  be  compared  to,  viz.,  goods,  or  securities,  or  documents  for 
debts.  Now,  they  are  not  goods,  nor  securities,  nor  similar  to  them ; 
they  are  treated  as  cash  to  all  purposes,"  etc. 

Setting  wholly  aside,  then,  this  part  of  the  law  as  to  cash,  bank 
notes,  and  bills  to  bearer,  as  founded  on  the  peculiar  necessities  of 
currency  and  trade,  and  regulated  by  decisions  and  usages  peculiar 
to  itself,  what  rules  do  we  find  to  obtain  in  other  instances  of  con- 
flict between  the  rights  of  original  owners  and  those  of  fair  purchasers? 
After  a  careful  examination  of  all  the  English  cases  and  those  of  this 
state,  that  have  been  cited  or  referred  to,  I  come  to  this  general  con- 
clusion :  That  the  title  of  property  in  things  movable  can  pass  from  the 
owner  only  by  his  ov/n  consent  and  voluntary  act,  or  by  operation  of 
law,  but  that  the  honest  purchaser,  who  buys  for  a  valuable  considera- 
tion, in  the  course  of  trade,  without  notice  of  any  adverse  claim,  or  any 
circumstances  which  might  lead  a  prudent  man  to  suspect  such  adverse 
claim,  will  be  protected  in  his  title  against  the  original  owner  in  those 
cases,  and  in  those  only,  where  such  owner  has  by  his  own  direct  vol- 
untary act  conferred  upon  the  person  from  whom  the  bona  fide  vendee 
derives  title,  the  apparent  right  of  property  as  owner,  or  of  disposal  as 
an  agent.  I  find  two  distinct  classes  of  cases  under  this  head,  and  no 
more. 

I.  The  first  is,  when  the  owner,  with  the  intention  of  sale,  has  in 
any  way  parted  with  the  actual  property  of  his  goods,  with  his  own 
consent,  though  under  such  circumstances  of  fraud  or  error  as  would 
make  that  consent  revocable,  rescind  the  sale,  and  authorize  the  re- 
covery of  the  goods  as  against  such  vendee.  But,  if  the  property 
passes  into  the  hands  of  honest  purchasers,  the  first  owner  must  bear 
the  loss.  Thus,  to  take  an  instance  from  our  own  reports,  where  goods 
were  obtained  by  a  sale  on  credit  under  a  forged  recommendation 
and  guaranty-,  and  then  sold  to  a  bona  fide  purchaser  in  the  customary 
course  of  trade,  the  second  buyer  was  protected  in  his  possession 
against  the  defrauded  original  owner.  Mowrey  v.  Walsh,  8  Cow.  243. 
So,  again,  where  the  owner  gave  possession  and  the  apparent  title  of 
property  to  a  purchaser,  who  gave  his  worthless  note,  in  fraudulent 
contemplation  of  immediate  bankruptcy,  a  fair  purchase  from  the 
fraudulent  vendee  was  held  to  be  good  against  the  first  owner.  Root 
V.  French,  13  Wend.  572,  28  Am.  Dec.  482.  See,  also,  McCarty  v. 
Vickery,  12  Johns.  348.  In  all  such  cases,'  to  protect  the  new  pur- 
chaser, there  must  be  a  full  consent  of  the  owner  to  the  transfer  of 
property,  though  such  consent  might  be  temporary  only,  obtained  by 
fraud  or  mistake,  and  there  revocable  against  such  unfair  first  pur- 
chaser. 

II.  The  other  class  of  cases  in  which  the  owner  loses  the  right  of 
following  and  reclaiming  his  property  is  where  he  has,  by  his  own 
voluntary  act  or  consent,  given  to  another  such  evidence  of  the  right 
of  selling  his  goods  as,  according  to  the  custom  of  trade,  or  the  com- 
mon understanding  of  the  world,  usually  accompanies  the  authority 
of  disposal,  or,  to  use  the  language  of  Lord  Ellenborough,  when  the 
owner  "has  given  the  external  indicia  of  the  right  of  disposing  of  his 
property."  Here  it  is  well  settled  that,  however  the  possessor  of  such 
external  indicia  may  abuse  the  confidence  of  his  principal,  a  sale  to  a 


1040  SALES  (Part  4 

fair  purchaser  divests  the  first  title,  and  the  authority  to  sell,  so  con- 
ferred, whether  real  or  apparent,  is  good  against  him  who  gave  it. 

Thus  the  consignee,  in  a  bill  of  lading,  is  furnished  by  his  consign- 
or with  such  evidence  of  right  of  disposal,  according  to  the  custom 
and  law  of  trade,  so  that  the  bona  fide  holder  of  the  bill  indorsed  by 
the  consignee  is  entitled  to  all  the  rights  of  property  of  the  consignor 
in  those  goods,  if  bought  fairly  in  the  course  of  business,  although 
the  actual  consignee,  under  whose  indorsement  he  holds,  has  no  right 
to  the  goods  as  against  the  former  owner.  If  such  goods  were  not 
paid  for,  they  might  be  stopped  in  transitu  by  the  owner,  unless  his 
consignee  has  already  assigned  his  bill  of  lading;  but  that  assignment 
divests  the  owner  of  his  right  of  stoppage  against  such  assignee. 

The  famous  series  of  decisions  in  the  various  courts  in  the  case  of 
Lickbarrow  v.  Mason  (2  T.  R.  63 ;  2  H.  Black.  211;  5  T.  R.  367), 
which  led  to  the  establishment  of  the  doctrine  of  this  qualified  nego- 
tiability of  bills  of  lading,  memorable  alike  in  legal  and  commercial 
history,  strongly  illustrates  the  whole  question  before  us.  There,  Bul- 
ler  and  his  associate  judges,  trained  up  at  the  feet  of  the  great  father 
of  English  commercial  jurisprudence,  maintained  and  established  the 
law  as  we  now  hold  it,  under  the  influence  of  Mansfield's  genius,  upon 
his  reasoning  and  on  his  authority,  against  those  of  Lord  Lough- 
borough and  others,  the  most  learned  lawyers  of  their  times.  All  the 
arguments  and  admissions  of  both  sides  show  how  deeply  the  general 
principle  is  rooted  in  the  law  of  England  that  (to  use  Lord  Loughbor- 
ough's words)  ''mere  possession,  without  a  just  title,  gives  no  property, 
and  the  person  to  whom  such  possession  is  transferred  by  delivery 
must  take  the  hazard  of  the  title  of  its  author." 

It  is  only  as  an  express  exception  to  this  rule  that  it  was  maintained, 
and  finally  established,  that  the  custom  of  merchants,  evidenced  and 
sanctioned  by  legal  decisions,  and  founded  on  those  conveniences  of 
trade,  so  admirably  stated  by  Buller.  had  compelled  the  courts  to 
consider  the  owner  as  giving  his  consignee  evidence  of  the  power  of 
disposal,  which  it  was  not  for  him  to  dispute  when  the  goods  had 
fairly  passed  into  other  hands,  on  the  faith  of  that  evidence.  But 
there  is  no  case  to  be  found,  or  any  reason  or  analogy  anywhere  sug- 
gested in  the  books,  which  would  go  to  show  that  the  real  owner  could 
be  concluded  by  a  bill  of  lading  not  given  by  himself,  but  by  some 
third  person,  erroneously  or  fraudulently,  as  in  this  present  case.  The 
assignment  of  the  bill  of  lading  conveys,  not  an  absolute  right  to  goods, 
but  the  right  and  title  merely  of  the  actual  consignor,  who  alone  is 
bound  by  it.  * 

Again:  The  owner  may  lose  the  right  of  recovering  his  goods 
against  purchasers,  by  exhibiting  them  to  the  world,  a  third  person,  as 
having  power  to  sell  and  dispose  of  them ;  and  this,  not  only  by  giving 
a  direct  authority  to  him,  but  by  conferring  an  implied  authority. 
Such  an  authority  may  be  implied  by  the  assent  to  and  ratification  of 
prior  similar^  dealings,  so  as  to  hold  such  person  out  to  those  with 
whom  he  is  in  the  habit  of  trading  as  authorized  to  buy  or  sell.  It 
may  be  inferred  from  the  nature  of  the  business  of  the  agent,  with 
fit  accompanying  circumstances.  "If  a  man."  says  Bayley,  J.,  in 
Pickering  v.  Busk,  15  East,  44,  "puts  goods  into  another's  custody, 
whose  common  business  it  is  to  sell,  he  confers  an  impHed  authority 
to  sell,"  and  the  cause  was  decided  on  that  ground.  But  this  implied 
authority  must  arise  from  the  natural  and  obvious  interpretation  of 


Ch.  3)      INNOCENT   PURCHASERS   FROM   PERSONS   WITHOUT   TITLE         1041 

facts,  according  to  the  habits  and  usages  of  business ;  and  it  never 
appHes  where  the  character  and  business  of  the  person  in  possession 
do  not  warrant  the  reasonable  presumption  of  his  being  empowered  to 
sell  property  of  that  kind.  If,  therefore,  to  use  an  illustration  of  Lord 
Chief  Justice  EHenborough,  in  the  case  just  cited,  a  person  intrusts 
his  watch  to  a  watchmaker  to  be  repaired,  the  watchmaker  is  not  ex- 
hibited to  the  world  as  an  owner  or  agent,  and  credit  is  not  given  as 
such ;  because  he  has  possession  of  the  watch,  the  owner,  therefore, 
would  not  be  bound  by  his  sale.  When  these  exceptions  cease,  the  gen- 
eral rule  resumes  its  sway ;  and  the  law  is  therefore  clear  that  an 
agent,  for  a  particular  purpose,  and  under  a  limited  power,  cannot 
bind  his  principal  if  he  exceed  his  power.  "Whoever  deals  with  an 
agent  constituted  for  a  special  purpose  deals  at  his  peril,  when  the 
agent  passes  the  precise  limits  of  his  power.  2  Kent's  Comm.  621, 
and  the  authorities  there  cited. 

Beyond  the  precise  exceptions  I  have  above  stated,  I  think  our  law 
has  not  carried  the  protection  of  the  fair  vendee  against  the  defrauded 
or  unfortunate  owner.  It  protects  him  when  the  owner's  misplaced 
confidence  has  voluntarily  given  to  another  the  apparent  right  of  prop- 
erty or  of  sale.  But  if  the  owner  loses  his  property,  or  is  robbed  of  it, 
or  it  is  sold  or  pledged  without  his  consent  by  one  who  has  only  a  tem- 
porary right  to  its  use  by  hiring,  or  otherwise,  or  a  qualified  possession 
of  it  for  a  specific  purpose,  as  for  transportation,  or  for  work  to  be 
performed  on  it,  the  owner  can  follow  and  reclaim  it  in  the  hands  of 
any  person,  however  innocent. 

Let  us  apply  these  conclusions  to  the  present  case.  Collins,  the 
person  whose  sale  it  is  asserted  must  divest  the  original  owner  of  his 
rights  in  favor  of  the  bona  fide  purchaser,  stands,  it  is  said  by  the 
superior  court,  in  a  double  relation  of  a  "master,  who  is  at  the  same 
time  the  consignee  of  the  goods,  and  who  himself  filled  the  character  of 
shipper,  and  has  therefore  an  undoubted  power  to  sell,  and  his  bona 
fide  transfer  will  be  effectual  to  purchasers  against  any  secret  trust 
for  others  with  which  Ks  apparent  title  might  be  affected."  Had  the 
lead  been  consigned  to  Collins  from  the  intermediate  port,  by  the  own- 
er or  his  agent,  this  would  be  true.  But  it  is  shipped  by  Myers,  of 
whom  neither  the  owner,  nor  any  one  with  full  power  to  represent  him 
in  this  matter,  had  any  knowledge  as  an  agent,  and  under  whose  care 
the  vessel  and  cargo  were  placed  by  Collins,  so  that  he  appeared  only 
as  his  representative,  and  thus  he  styles  himself  in  the  bill  of  lading. 

The  plaintiff'  below  comes  in  no  wise  within  the  rule  I  have  stated. 
He  has  neither  given  to  Collins  documentary  and  mercantile  evidence 
of  property  in  a  bill  of  lading  from  himself  or  his  own  agent  with 
competent  power,  nor  the  evidence  customary  in  business,  such  as  to 
hold  him  out  as  an  agent  authorized  to  change  the  title  of  his  prop- 
erty in  his  goods.  The  assumed  authority  of  shipping  goods  in  his 
own  name  and  to  his  own  order,  at  Norfolk,  and  the  documentary  evi- 
dence of  it  in  the  bill  of  lading,  can  have  no  more  effect  as  to  the  title 
of  the  property,  than  if  he  had  forged  such  a  bill  of  lading  at  New 
Orleans. 

i-' 2ither  does  the  selection  of  a  ship  and  its  master  vest  in  the  master 

any  iiTipfied  authority  to  sell  the  ship,  or  any  part  of  her  cargo.     His 

business  is  to  carry  the  goods,  and  nothing  more,  with  some  other 

clearly  defined  and  very  limited  powers,  to  be  exercised   only  in  cases 

B.&  B.Bus.T'WV— 66 


1042  SALES  (Part  4 

of  absolute  necessity.  He  stands  in  the  same  legal  relation  to  his  cargo 
with  the  watchmaker,  in  the  case  supposed  by  Lord  EUenborough, 
who  has  in  his  hands  a  watch  to  be  repaired.  He  is  not  exhibited  to 
the  world  as  the  owner,  or  agent  for  selling;  and  if  he  does  sell  it, 
the  sale  is  void  against  the  true  proprietor. 

Such,  then,  being  the  well-settled  and  generally  known  law,  the  se- 
lection of  a  master  or  any  other  carrier,  by  sea  or  land,  does  nothing 
to  exhibit  such  a  carirer  to  the  world  as  having  the  power  of  disposing 
of  the  goods  he  carried.  The  owner  does  nothing  to  enable  him  to 
commit  a  fraud  on  third  persons.  He  gives  merely  a  qualified  pos- 
session, and  if  that  is  turned  into  an  assumed  right  of  ownership,  it  is 
tortious  conversion,  and  will  not  divest  the  owner's  title. 

It  is  true  that  the  rule  will  sometimes,  as  was  urged  by  Chief  Justice 
Jones,  "involve  purchasers  in  great  perils" ;  but  that  peril  can  scarce- 
ly be  called  "unreasonable,"  since  there  is  a  reason  of  public  poHcy 
of  at  least  equal  weight  to  counterbalance  this  inconvenience.  It  is 
the  same  which  is  the  ground  of  the  absolute  prohibition  to  a  master 
or  carrier  to  sell  the  goods  he  transports,  except  under  insurmountable 
necessity;  it  is  to  prevent,  in  the  language  of  the  court  in  the  case 
just  quoted  (5  Barn.  &  Aid.  623),  "fraudulent  sales  of  ships  and 
cargoes  in  foreign  ports."  Now  the  fraudulent  consignments  or  change 
of  the  apparent  evidence  of  property,  for  the  purpose  of  selling  else- 
where, is  but  another  form  of  the  same  evil.  I  may  add  that  this  same 
rule,  however  rigid  and  occasionally  hard  in  its  operations,  is  no 
small  safeguard  to  the  protection  of  the  owner's  rights  in  goods  and 
other  property,  in  active  commerce  necessarily  placed  under  the  tem- 
porary control,  and  in  the  legal,  though  qualified,  possession  of  agents, 
sailors,  carriers,  boatmen,  servants,  and  clerks,  as  well  as  of  those 
who  may  have  them  stored  for  safe-keeping,  and  their  clerks,  porters, 
and  servants. 

Judgment  unanimously  affirmed. 


SECTION  2.— ESTOPPEL  OF  THE  OWNER  TO  DENY 
CUSTODIAN'S  POWER  TO  TRANSFER  TITLE 

The  Sales  Act  contains  three  sections  which  deal  with  the  rights 
of  innocent  purchasers  from  persons  who  are  not  the  owners  of 
the  goods : 

Sales  Act,  Section  23,  Subsec.  (1).  Subject  to  the  provisions 
of  this  act,  where  goods  are  sold  by  a  person  w^ho  is  not  the  owner 
thereof,  and  who  does  not  sell  them  under  the  authority  or  with 
the  consent  of  the  owner,  the  buyer  acquires  no  better  title  to  the 
goods  than  the  seller  had,  unless  the  owner  of  the  goods  is  by  his 
conduct  precluded  from  denying  the  seller's  a'^thority  to  sell. 

This  section  does  three  things:  (1)  It  declares,  as  the  general 
rule,  that  a  person  who  attempts  to  buy  property  from  one  who  is 
not  the  owner  will  obtain  no  right  to  keep  the  goods.  In  such  a 
case  we  know  that  such  person  will  be  under  a  legal  duty  of  per- 
mitting the  owner  to  take  them  back  into  his  possession,  and  will 
be  liable  to  him  for  any  damage  done  to  the  goods  even  though  in- 
nocently inflicted. 


Ch.  8)      INNOCENT   PURCIIASKUS   FROM   PEKSONS   WITHOUT  TITLE         104.j 

(2)  The  section  recognizes  the  apparent  exception,  which  we 
already  know  from  our  study  of  the  principles  of  agency,  that  an 
agent  to  whom  has  been  given  by  his  principal  the  possession  of 
goods  and  the  authority  to  sell  them,  may  transfer  a  good  title,  if 
he  acts  within  the  scope  of  express  or  implied  authority.  Indeed, 
most  sales  are  made  through  agents.  This  is  not  an  exception  to 
the  general  rule  at  all,  for  the  owner  is  really  selling  the  goods,  but 
through  the  medium  of  another  person. 

(3)  The  section  lays  down  one  real  exception  to  the  general 
rule.  The  last  clause  asserts  that  the  general  rule  does  not  apply 
where  the  owner  of  the  goods  is  by  his  conduct  precluded  ir<fifn\ 
denying  the  seller's  authority  to  sell.  To  state  the  exception  af- 
firmatively: A  person  who  is  not  the  owner  of  goods  will  have  the 
power  to  transfer  a  title  to  another  person  if  the  true  owner  by 
his  conduct  is  precluded  from  denying  the  seller's  authority  to  sell. 

The  prominent  word  in  the  exception  is  the  word  "conduct,"  and 
it  is  only  that  kind  of  conduct  which  precludes  the  seller  from 
denying  the  seller's  authority  to  sell,  \\hat  kinds  of  conduct  fall 
within  the  meaning  of  this  rule? 


CANALES   V.   EARL. 

(Municipal. Court  of  City  of  New  York,  1918.  IGS  N.  Y.  Supp.  72G.) 
QppENHEiMER,  J.  The  plaintiff  claims  he  is  the  owner  of  an  auto- 
mobile, which  he  alleges  was  converted  by  the  defendant.  On  Septem- 
ber 30,  1916,  he  gave  the  machine  to  his  chautifeur,  Arturo  Carona, 
to  be  sent  to  him  at  Havana,  Cuba.  Instead  of  shipping  the  automo- 
bile, the  chauffeur  sold  it  to  the  Broadway  Used  Car  Company  for 
$225  and  pocketed  the  proceeds.  On  the  same  day  this  company  sold 
the  machine  to  one  Martin  Beikert,  who  sold  it  to  George  Jones,  and 
the  latter  sold  the  car  to  the  defendant  for  the  sum  of  $412.50.  At  the 
time  of  the  sale  the  chauffeur  had  in  his  possession  duplicate  receipts 
from  the  plaintift"s  vendors  and  also  a  consular  invoice. 

The  plaintiff'  claims  that  no  title  passed  to  the  Broadway  Used  Car 
Company  and  consequently  none  to  the  defendant.  The  defendant  al- 
leges that  he  is  now  the  owner  of  the  machine,  because  the  plaintiff' 
furnished  to  Carona  the  indicia  of  ownership  and  is  estopped  from 
asserting  his  title  as  against  an  innocent  purchaser. 

Section  104,  c.  571,  of  the  Laws  of  1911,  known  as  the  "Sales  of 
Goods  Act,"  states  that:  "Where  goods  are  sold  by  a  person  who 
is  not  the  owner  thereof,  and  who  does  not  sell  them  under  the  author- 
ity or  with  the  consent  of  the  owner,  the  buyer  acquires  no  better 
title  to  the  goods  than  the  seller  had,  unless  the  owner  of  the  goods  is 
by  his  conduct  precluded  from  denying  the  seller's  authority  to  sell." 
*     *     * 

The  relation  between  the  plaintiff'  and  the  defendant  was  merely  that 
of  owner  of  a  car  and  a  chauffeur.  He  who  deals  with  an  agent  does 
so  at  his  peril.  The  defendant  contends  that  the  plaintiff  must  suf- 
fer the  loss  sustained  by  him  because  he  placed  Carona  in  a  position  to 
perpetrate  the  w^ong.  I  do  not  think  that  the  plaintiff"  did  anything 
inconsistent  with  his  ownership  of  the  machine.     *     *     * 


1044  SALES  (Part  4 

A  little  investigation  on  the  part  of  the  Broadway  Company  or 
any  subsequent  purchaser  would  have  revealed  the  fact  that  the  cer- 
tificate of  registration  issued  by  the  secretary  of  state,  attached  to  the 
deposition  offered  in  evidence,  was  in  the  name  of  the  plaintiff.  The 
receipts  for  the  payment  of  storage  of  the  car  must  also  be  taken  into 
account.    They  were  also  in  the  name  of  the  plaintiff'. 

These  considerations,  I  believe,  dispose  of  the  doctrine  of  "equitable 
estoppel,"  invoked  by  the  defendant's  attorney.  The  conclusions  seem 
to  me  to  be  irresistible  that  Carona  was  guilty  of  larceny,  that  the  plain- 
tiff still  has  a  -proprietary  right  to  the  automobile  (which  is  not  now 
in  the  state  of  New  York),  and  that  there  be  judgment  for  the  plain- 
tiff, on  the  merits,  for  the  value  of  the  car,  viz.  $500.     *     *     * 


O'CONNOR'S  ADMX  v.  CLARK. 

(Supreme  Court  of  Pennsylvania,  1S95.     170  Pa.  318.  .32  Atl.  1029 ; 
29  L.  R.  A.  607.) 

Replevin  by  John  O'Connor's  administratrix  against  John  Clark. 
Judgment  for  plaintiff,  and  defendant  appeals. 

StkrrETT,  C.  J.  If  there  is  nothing  more  in  this  case  than  the  facts 
recited  by  the  learned  trial  judge  in  the  excerpt  from  his  charge  quoted 
in  the  first  specification  of  error,  the  instructions  therein  given  to  the 
jury  to  find  for  the  plaintiff  if  they  believed  the  testimony  would  be 
substantially  correct.  The  only  facts  of  which  this  instruction  is  pred- 
icated are  (1)  that  the  w^agon  in  question  was  the  property  of  John 
O'Connor,  the  original  plaintiff;  and  (2)  that  Tracy,  without  his  per- 
mission, took  it,  and  sold  it,  or  attempted  to  sell  it,  to  the  defendant 
as  his  own.  But  these  are  not  the  only  facts  of  which  there  was  evi- 
dence before  the  jury.  On  defendant's  behalf,  it  is  contended  that  the 
testimony  tended  to  prove,  and  the  jury,  if  they  had  been  permitted, 
would  have  been  w^arranted  in  finding,  that  defendant  purchased  the 
property  in  question  from  Tracy  in  the  honest  belief  that  he  was  in  fact 
the  owner  thereof ;  that  the  name  and  occupation  of  Tracy — viz, 
"George  Tracy,  Piano  Mover" — were  on  the  wagon  when  he  offered  it 
for  sale,  and  that  fact  was  referred  to  as  indicating  his  ownership  of  tlie 
property,  etc. ;  that,  Tracy  being  a  stranger,  defendant  was  specially 
careful  to  inquire  and  inform  himself  that  the  person  who  was  in 
possession  of  and  offering  to  sell  the  wagon  was  the  George  Tracy 
whose  name  and  occupation  were  painted  thereon ;  that  Tracy's  name 
and  occupation  were  put  upon  the  wagon  with  the  knowledge  of  O'Con- 
nor, the  original  plaintiff,  and  himself,  and  by  direction  of  the  former, 
for  the  purpose  of  creating  the  impression  and  inducing  the  public  to 
believe  that  the  property  belonged  to  Tracy,  and  was  being  used  by 
him  in  his  business  as  a  piano  mover,  in  which  he  had  theretofore  been 
engaged.  Without  attempting  to  summarize  the  testimony  relied  on  by 
the  defendant,  it  is  sufficient  to  say  that  it  tends  to  prove  substanially 
the  state  of  facts  above  outlined,  and  especially  that  the  original  plain- 
tiff, for  his  own  gain  and  benefit,  was  a  party  to  the  arrangement  where- 
by Tracy's  name  was  put  on  the  wagon  for  the  purpose  of  misleading 
the  public  into  the  belief  that  the  property  was  his,  and  that  defend- 
ant, acting  with  due  caution  and  in  good  faith,  was  thus  misled  as  to 
the  ownership  of  the  property,  and  purchased  the  same  from  Tracy. 

While  the  soundness  of  the  general  rule  of  law  that  a  vendee  of  per- 


Ch.  3)     INNOCENT  PURCHASERS   FROM  PERSONS   WITHOUT  TITLE         1045 

sonal  property  takes  only  such  title  or  interest  as  his  vendor  has  and 
is  authorized  to  transfer  cannot  for  a  moment  be  doubted,  it  is  not 
without  its  recognized  exceptions.  One  of  these  is  where  the  owner 
has  so  acted  with  reference  to  his  property  as  to  invest  another  with 
such  evidence  of  ownership,  or  apparent  authority  to  deal  with  and 
dispose  of  it,  as  is  calculated  to  mislead,  and  does  mislead,  a  good- 
faith  purchaser  for  value.  In  such  cases  the  principle  of  estoppel 
applies,  and  declares  that  the  apparent  title  or  authority,  for  the  ex- 
istence of  which  the  actual  owner  was  responsible,  shall  be  regarded 
as  the  real  title  or  authority,  at  least  so  far  as  persons  acting  on  the 
apparent  title  or  authority,  and  parting  with  value,  are  concerned. 
Strictly  speaking,  this  is  merely  a  special  application  of  the  broad 
equitable  rule  that,  where  one  of  two  innocent  persons  must  suffer  loss 
by  reason  of  the  fraud  or  deceit  of  another,  the  loss  should  fall  upon 
him  by  whose  act  or  omission  the  wrongdoer  has  been  enabled  to  com- 
mit the  fraud. 

Assuming,  in  this  case,  that  a  jury,  under  the  evidence,  should  find 
— as  we  think  they  would  be  warranted  in  doing — that  such  marks 
of  ownership  were  placed  on  the  property  by  direction  of  O'Connor, 
the  real  owner,  as  were  not  only  calculated  to  deceive,  but  actually  in- 
tended to  deceive,  the  public,  and  that  by  reason  thereof,  and  without 
any  fraud  or  negligence  on  his  part,  the  defendant  was  misled  into 
the  belief  that  Tracy  was  the  real  owner,  and  he  accordingly  bought 
and  paid  him  for  the  property,  can  there  be  any  doubt,  as  between  the 
real  owner  and  the  innocent  purchaser,  that  the  loss  should  fall  upon 
the  former,  by  whose  act  Tracy  was  enabled  to  thus  fraudulently  sell 
and  receive  the  price  of  the  property  ?  We  think  not.  In  Barnard  v. 
Campbell,  55  N.  Y.  456,  14  Am.  Rep.  289;  Id.,  58  N.  Y.  73,  17  Am. 
Rep.  208 — a  well-considered  case,  involving  substantially  the  same  prm- 
ciple — it  was  held  that  to  create  an  estoppel  by  which  an  owner  is  pre- 
vented from  asserting  title  to  and  is  deprived  of  his  property  by  the 
act  of  a  third  person,  without  his  assent,  two  things  must  concur: 
"(1)  The  owner  must  have  clothed  the  person  assuming  to  dispose  of 
the  property  with  the  apparent  title  to  or  authority  to  dispose  of  it. 
(2)  The  person  alleging  the  estoppel  must  have  acted  and  parted  with 
value  upon  the  faith  of  such  apparent  ownership  or  authority,  so  that 
he  will  be  the  loser  if  the  appearances  to  which  he  trusted  are  not 
real." 

Judgment  reversed,  and  a  venire  facias  de  novo  awarded. 


Section  23  of  the  Sales  Act  above  quoted  is  qualified  by  the  fol- 
lowing subsections. 

Section  23,  Subsec.  (2).  Nothing  in  this  act,  hov^^ever,  shall  af- 
fect (a)  the  provisions  of  any  factors'  acts,  recording  acts,  or  any 
enactment  enabling  the  apparent  owner  of  goods  to  dispose  of  them 
as  if  he  were  the  true  owner  thereof,  (b)  The  validity  of  any  con- 
tract to  sell  or  sale  under  any  special  common  law  or  statutory 
power  of  sale,  or  under  the  order  of  a  court  of  competent  juris- 
diction. 


1046  SALES  (Part  4 

SECTION  3.— SALE  BY  ONE   HAVING  A  VOIDABLE 

TITLE 

Sales  Act,  Section  24.  Where  the  seller  of  goods  has  a  void- 
able title  thereto,  but  his  title  has  not  been  avoided  at  the  time  of 
the  sale,  the  buyer  acquires  a  good  title  to  the  goods  provided  he 
buys  them  in  good  faith,  for  value  and  without  notice  of  the 
seller's  defect  of  title. 

In  the  preceding  cases  the  innocent  purchaser  was  protected  not 
because  his  vendor  had  any  title  or  authority  to  sell  the  goods, 
but  solely  because  it  was  unjust  to  permit  the  owner  to  deny  that 
the  seller  had  authority  to  sell  or  to  deny  that  the  seller  was  the 
owner. 

Under  section  24  we  are  dealing  with  a  case  where  the  vendor 
did  in  law  and  fact  have  the  title  but  the  circumstances  under 
which  he  obtained  and  held  that  title  were  such  that  his  vendor 
had  a  legal  right  to  get  that  title  back.  In  the  law  such  a  title  is 
called  a  voidable  title.  So  the  question  is:  When  will  a  person 
have  a  voidable  title? 


In  re  ALLEN. 
(United  States  District  Court.  E.  D.  Arlcai'sas,  W.  D.  1910.     183   Fed.  172.) 

In  the  matter  of  John  O.  Allen,  bankrupt.  On  review  of  order  of 
referee  sustaining  the  petition  of  the  Heini  Brewery  Company  to  re- 
claim property. 

The  Heim  Brewery  Company  filed  its  intervention  for  a  number  of 
casks  and  cases  containing  empty  beer  bottles  in  the  possession  of 
the  trustee  of  the  estate  of  the  bankrupt,  claiming  to  be  the  owner 
thereof  and  entitled  to  the  immediate  possession.  The  trustee  denied 
that  the  intervener  was  the  owner  of  the  property,  but  insists  that  the 
property  claimed  belongs  to  the  bankrupt's  estate. 

The  cause  was  submitted  upon  an  agreed  statement  of  facts,  which 
shows  that  under  that  contract  the  bankrupt  bought  large  quantities 
of  beer  from  the  intervener ;  that  the  beer  was  delivered  in  cases  con- 
taining bottles  and  in  casks  containing  bottles  bearing  the  individual 
brand  and  registered  copyright  of  the  intei-vener ;  that  a  part  of  said 
casks,  cases,  and  bottles  have  been  returned ;  but  that  the  trustee  is 
now  in  possession  of  a  number  claimed  by  the  intervener.  Upon  a 
hearing  before  the  referee,  he  found  in  favor  of  the  intervener.  The 
cause  now  comes  before  the  court  on  petition  for  review  by  the 
trustee. 

TriKbKR,  District  Judge.  On  behalf  of  the  intervener  it  is  claimed 
that,  until  the  articles  claimed  are  paid  for  by  the  vendee,  it  is  merely 
a  bailment,  and  he  is  entitled  to  a  return  of  them,  or,  at  most,  that  it 
was  an  option  to  purchase.  On  the  other  hand,  it  is  claimed  on  the 
part  of  the  trustee  that  it  was  a  contract  of  "sale  and  return." 

A  "bailment"  is  properly  defined  as  being  a  delivery  of  goods  in 
trust  upon  a  contract,  express  or  implied,  that  the  trust  shall  be  duly 
executed  and  the  goods  restored  by  the  bailee  as  soon  as  the  purpose 
of  the  bailment  shall  be  served. 


Ch.  3)      INNOCENT   PURCHASERS   FROM   PERSONS   WITHOUT   TITLE         1047 

On  the  other  hand,  a  "contract  of  sale"  is  when  there  is  an  agreed 
price,  a  vendor,  a  vendee,  an  agreement  of  the  former  to  sell  for  the 
agreed  price,  and  an  agreement  of  the  latter  to  buy  and  pay  the  agreed 
price.  An  "option  to  purchase"  is  merely  an  agreement  whereby  the 
vendee  may,  upon  compliance  with  certain  terms  and  conditions,  be- 
come the  owner  of  the  property ;   the  vendor  giving  him  that  option. 

The  leading  case  upon  which  the  intervener  relies  is  Wescott  v. 
Thompson,  18  N.  Y.  363.  In  that  case  the  contract  was  for  the  sale  of 
beer  and  provided  for  the  sale  of  the  beer  to  the  vendee  at  a  certain 
price.  The  beer  was  to  be  shipped  in  barrels  and  the  barrels  to  be 
returned  to  the  plaintiff  when  emptied  of  the  beer,  and  if  not  returned 
the  vendee  was  to  pay  for  every  barrel  not  returned  the  sum  of  $2, 
and  thereupon  became  the  owner  thereof.  On  the  other  hand,  in  the 
case  at  bar,  the  contract  provides  that  the  vendee  is  to  be  charged  and 
pay  for  the  cases  and  bottles,  but  in  case  he  wishes  to  return  any  of 
the  cases  and  empty  bottles  he  is  to  be  allowed  a  rebate  on  his  bill  of 
$1.50  for  each  case  of  empty  bottles  returned  to  the  intervener. 

Is  this  an  option  to  purchase  or  a  contract  of  sale  and  return  ?  The 
distinction  between  these  two  forms  of  agreement  has  been  aptly 
pointed  out  in  Hunt  v.  Wyman,  100  Mass.  198,  as  follows :  "An  op- 
tion to  purchase  if  he  liked  is  essentially  different  from  an  option  to 
return  a  purchase  if  he  should  not  like.  In  one  case  the  title  would 
not  pass  until  the  option  is  determined;  on  the  other  hand,  the  prop- 
erty passes  at  once,  subject  to  the  right  to  rescind  and  return." 

Applying  this  rule  to  the  contract  between  the  intervener  and  the 
bankrupt,  it  clearly  appears  that  it  was  not  an  option  to  purchase,  but 
a  contract  of  sale  and  return,  while,  on  the  other  hand,  the  contract 
in  Wescott  v.  Thompson  was  merely  an  option  to  purchase.  In  the 
latter  case  it  was  optionary  with  the  vendee  to  keep  the  empty  bar- 
rels and  pay  the  sum  of  $2  for  each  barrel  kept  by  him  or  to  return 
them.  In  the  case  at  bar  the  bankrupt  was  charged  and  promised 
to  pay  for  the  cases  and  bottles  unless  he  desired  to  return  the  same, 
and  if  he  did  he  was  to  be  paid  or  given  credit  on  his  account  therefor 
the  sum  of  $1.50  for  each  case  and  bottles  therein. 

Great  stress  is  laid  upon  the  fact  that  under  the  contract  the  bank- 
rupt was  to  pay  the  net  price  only  on  the  bottled  beer,  still  the  charge 
was  made  against  him,  and  until  he  returned  them  he  was  liable  to 
the  intervener  who  had  a  cause  of  action  against  him.  In  Heryford 
V.  Davis.  102  U.  S.  235,  26  L.  Ed.  160,  the  contract  between  the  par- 
ties spoke  of  the  cars  sold  as  being  leased  until  paid  for,  but  notes 
were  executed  by  the  vendee  for  the  full  purchase  money.  The  cars, 
before  they  were  paid  for,  having  been  seized  under  execution,  the 
vendor  claimed  them  as  his  property,  but  the  court  held  that  calling 
it  a  lease  did  not  make  it  so,  nor  was  it  a  conditional  sale,  but  merely 
an  attempt  to  retain  a  lien  for  the  purchase  money,  and,  the  same  not 
having  been  recorded  as  required  by  the  laws  of  the  State  of  Missouri,. 
it  was  void  as  against  creditors. 

In  Re  Rahilly  v.  Wilson,  3  Dill.  420,  Fed.  Cas.  No.  11,532,  grain 
was  stored  in  a  warehouse  with  the  understanding  that  it  should  be 
sold  by  the  warehouseman,  and  when  the  depositor  would  surrender 
the  receipt  therefor  the  warehouseman  had  the  right  to  return  an 
equal  amount  of  grain  of  equal  quality  or  pay  the  then  market  price 
of  the  grain.  Upon  these  facts  it  was  held  by  Judge  Dillon  that  it 
was  a  sale  and  not  a  bailment.    The  distinction  between  bailments  and 


1048  SALES  (Part  4 

sales  is  clearly  shown  by  the  opinion  of  that  eminent  jurist,  who  care- 
fully reviews  the  authorities  on  that  subject. 

In  Sturm  v.  Boker,  150  U.  S.  312,  14  Sup.  Ct.  99,  37  L.  Ed.  1093, 
the  court  held  that  "a  transaction  is  a  'sale,'  as  distinguished  from  a 
'bailment,'  when  there  is  no  obligation  to  return  the  specified  article." 
In  this  case  there  was  no  obligation  on  the  part  of  the  bankrupt  to 
return  the  property  claimed  by  the  intervener;  but,  if  he  saw  proper, 
he  had  the  right  to  do  so  and  receive  a  credit  for  the  amount  speci- 
fied in  the  agreement.  If  the  property  had  been  destroyed  by  fire 
or  by  any  other  cause,  even  if  without  any  fault  or  negligence  on  the 
part  of  the  bankrupt,  the  loss  or  destruction  would  still  have  fallen 
on  him.    This  is  the  rule  applicable  to  contracts  of  sale  and  return. 

As  this  was  a  contract  of  sale  and  return  and  not  a  mere  option  to 
purchase,  nor  a  bailment  in  any  sense,  the  title  passed  to  the  bank- 
rupt, and  the  trustee  is  entitled  to  the  possession  of  the  property. 

The  finding  of  the  referee  will  be  set  aside,  and  judgment  entered 
dismissing  the  intervention,  with  costs. 


PHELPS  et  al.  v.  McQUADE. 

(Court  of  Appeals  of  New  York,  1917.     220  N.  Y.  232,  115  N.  E.  440, 
L.  R.  A.  1918B,  973.) 

Action  by  WiUiam  R.  Phelps  and  another  against  Dennis  Charles 
McOuade.  From  a  judgment  of  the  Appellate  Division,  directing 
judgment  for  defendant,  plaintiffs  appeal. 

[The  statement  of  facts  is  taken  from  the  opinion  in  the  same  case 
in  the  Appellate  Division  of  the  Supreme  Court.  158  App.  Div.  528, 
143  N.  Y.  Supp.  822.] 

Clarkk,  J.  The  plaintiffs  were  jewelers.  On  February  15,  1911, 
one  Walter  C.  Gwynne  falsely  represented  himself  to  the  plaintififs 
to  be  Baldwin  J,  Gwynne,  a  resident  of  the  Lincoln  Hotel  in  Colum- 
bus, Ohio,  with  a  satisfactory  rating  in  the  reports  of  the  Dun  and 
Bradstreet  Mercantile  Agencies,  and  later  on  the  same  day,  the  man- 
ager of  Jules  S.  Bache  &  Co.,  bankers,  identified  the  said  Walter  C. 
Gwynne  to  plaintiffs'  manager  as  being  Baldwin  J.  Gwynne  of  Colum- 
bus, Ohio.  That  was  brought  about  in  this  way :  Gwynne  had  be- 
come acquainted  with  one  of  Bache's  customers  in  an  uptown  hotel 
and  had  told  this  customer  that  he  had  had  a  falling  out  with  his 
sweetheart,  that  he  had  some  jewelry  he  wished  to  dispose  of,  and 
asked  this  gentleman  if  he  would  be  willing  to  purchase  any  of  these 
goods.  He  said  he  could  not  take  them  back  to  the  parties  that  he 
had  purchased  them  from.  After  some  conversation,  the  gentleman 
decided  to  purchase  one  of  these  pieces  and  asked  him  what  the  name 
was.  He  told  him  Baldwin  J.  Gwynne,  and  so  this  customer  of 
.Bache's  wrote  out  a  check  for  the  amount  agreed  upon.  After  this 
the  supposed  Baldwin  J.  Gwynne  went  down  to  Bache's  office  to  cash 
the  check  and  was  told  that  as  he  vv^as  not  known  he  would  have  to 
identify  himself.  He  replied  that  would  be  very  easy;  he  would  call 
the  maker  of  the  check.  This  was  satisfactory  to  Bache  &  Co.  The 
maker  did  call  and  told  the  bankers  that  ihiS  was  the  person  the  mon- 
ey was  intended  for. 

The  plaintiffs,  relying  upon  the  representations  of  Gwynne  and 
said  identification,  sold  him  a  ring,  a  gold  mesh  purse,  and  a  diamond 


Ch.  3)      INNOCENT   PURCHASERS   FROM   PERSONS   WITHOUT  TITLE         1049 

and  pearl  scarf  pin  of  the  aggregate  value  of  $838,  and  delivered  the 
articles  to  him  under  the  belief  that  they  were  delivering  the  same 
under  the  terms  of  a  sale  on  credits  to  Baldwin  J.  Gwynne  of  the  Lin- 
coln Hotel  of  Columbus,  Ohio,  and  whom  they  found  to  be  satisfac- 
torily rated  in  the  said  Mercantile  Agencies'  reports.  Thereafter 
Gwynne  sold  the  jewelry  to  the  defendant,  McQuade,  for  a  valuable 
consideration.  It  is  admitted  that  McQuade  was  a  bona  fide  purchaser 
for  value,  without  any  notice  of  any  defect  in  the  title.  Due  demand 
was  made  and  refused.  *  *  *  The  question  is  presented  as  to 
which  of  the  two  innocent  parties,  the  original  owners,  or  the  bona  fide 
purchaser,  will  have  to  stand  the  loss.    *    *    * 

Andrews,  J.  *  *  *  The  learned  Appellate  Division  rested  their 
decision  upon  the  definition  of  common-law  larceny,  holding  that 
where  such  larceny  had  been  committed  the  thief  acquired  no  title  by 
his  crime ;  where  it  had  not,  at  least  a  voidable  title  passed.  We 
agree  with  that  statement  of  the  law.  But  we  should  prefer  to  define 
the  rule  in  another  form.  Where  the  vendor  of  personal  property  in- 
tends to  sell  his  goods  to  the  person  with  whom  he  deals,  then  title 
passes,  even  though  he  be  deceived  as  to  that  person's  identity  or  re- 
sponsibility. Otherwise  it  does  not.  It  is  purely  a  question  of  the 
vendor's  intention. 

The  fact  that  the  vendor  deals  with  the  person  personally  rather 
than  by  letter  is  immaterial,  except  in  so  far  as  it  bears  upon  the 
question  of  intent.  Where  the  transaction  is  a  personal  one,  the  sell- 
er intends  to  transfer  title  to  a  person  of  credit,  and  he  supposes  the 
one  standing  before  him  to  be  that  person.  He  is  deceived.  But  in 
spite  of  that  fact  his  primai-y  intention  is  to  sell  his  goods  to  the  per- 
son with  whom  he  negotiates.  Where  the  transaction  is  by  letter  the 
vendor  intends  to  deal  with  the  person  whose  name  is  signed  to  the 
letter.  He  knows  no  one  else.  He  supposes  he  is  dealing  with  no  one 
else.  And  while  in  both  cases  other  facts  may  be  shown  that  would 
alter  the  rule,  yet  in  their  absence,  in  the  first,  title  passes;  in  the 
second,  it  does  not.     *     *     * 

In  Cundy  v.  Lindsay,  3  App.  Cas.  463,  one  Blenkarn,  signing  him- 
self Blenkiron  &  Co.,  bought  goods  by  letter  of  Lindsay  &  Co.  The 
latter  shipped  the  goods  to  Blenkiron  &  Co.  They  knew  of  the  firm 
of  Blenkiron  &  Son ;  believed  the  letter  came  from  that  firm  and 
that  the  goods  were  shipped  to  it.  Blenkiron  &  Son  were  the  persons 
with  whom  Lindsay  &  Co.  intended  to  deal  and  supposed  they  were 
dealing.  Under  those  circumstances  it  was  held  that,  although  Blen- 
karn obtained  possession  of  the  goods,  he  never  acquired  title  thereto. 
*    *    * 

Another  class  of  cases  such  as  Hentz  v.  Miller,  94  N.  Y.  64,  and 
Consumers'  Ice  Company  of  Buffalo  v.  Webster,  Son  &  Co.,  32  App. 
Div.  592,  53  N.  Y.  Supp.  56,  illustrate  the  rule  under  different  cir- 
cumstances. In  them,  persons  falsely  stating-  that  they  are  the 
agents  or  representatives  of  others  fraudulently  obtained  possession 
of  goods  under  a  pretense  of  sale  to  such  others.  There  is  no  inten- 
tion on  the  part  of  the  vendor  to  sell  to  the  pretended  agent  or  rep- 
resentative and  no  title  passes.     *     *     * 

The  judgment  of  the  Appellate  Division  must  be  affirmed,  with 
costs.    *    *    * 


1050  SALES  (Part  4 

SECTION  4.— SALE  BY  A  SELLER  IN  POSSESSION  OF 
GOODS  ALREADY  SOLD 

Sales  Act,  Section  25.  Where  a  person  having  sold  goods  con- 
tinues in  possession  of  the  goods,  or  of  negotiable  documents  of 
title  to  the  goods,  the  delivery  or  transfer  by  that  person,  or  by 
an  agent  acting  for  him,  of  the  goods  or  documents  of  title  under 
any  sale,  pledge,  or  other  disposition  thereof,  to  any  person  receiv- 
ing and  paying  value  for  the  same  in  good  faith  and  without  notice 
of  the  previous  sale,  shall  have  the  same  effect  as  if  the  person 
making  the  delivery  or  transfer  were  expressly  authorized  by  the 
owner  of  the  goods  to  make  the  same. 

If  A.  sells  goods  to  B.,  and  B.  leaves  the  goods  in  A.'s  possession, 
and  subsequently  A.  sells  the  same  goods  to.C,  who  had  no  notice 
of  the  prior  sale  to  B.,  under  this  section  C.  will  be  protected  in 
his  claim  of  ownership  as  against  the  claims  of  B.  The  rule  that 
one  who  merely  has  possession  of  goods  does  not  thereby  gain  a 
power  to  transfer  a  title  to  the  goods  to  an  innocent  third  person 
has  already  been  adverted  to.  For  example,  an  agent  who  has  been 
intrusted  with  property  belonging  to  his  principal,  or  a  bailee,  such 
as  a  warehouseman,  does  not,  by  reason  of  his  lawful  possession, 
acquire  power  to  cut  off  the  rights  of  the  owner  by  an  unauthor- 
ized sale  to  a  bona  fide  purchaser.  There  must  be  something  in 
addition  to  the  fact  of  lawful  possession  to  give  the  possessor  the 
power  to  pass  title  to  a  third  party.  The  situation  referred  to  in 
Section  25  is  one  where  the  party  in  possession  is  given  the  power 
to  extinguish  the  claims  of  the  first  purchaser,  not  solely  because 
he  is  in  lawful  possession  of  the  goods,  but  because  of  this  fact 
plus  the  fact  that  he  was  a  former  owner  of  them  and  because  he 
has  never  done  any  overt  act  with  respect  to  the  goods  which  would 
indicate  that  a  change  of  ownership  had  occurred. 

Three  facts  must  concur  before  the  legal  effect  of  the  section 
is  applicable:  (1)  There  must  have  been  a  contract,  the  result  of 
which  passed  the  title  to  the  buyer.  (2)  The  seller  must  have  re- 
mained in  possession  of  the  goods.  A  reacquisition  of  possession 
after  delivery  to  the  first  purchaser  would  prevent  the  application 
of  the  rule.  (3)  The  second  sale  must  have  been  made  to  one  who 
had  no  notice  of  the  prior  sale.  Another  way  of  putting  the  rule 
would  be  to  say  that  the  law  requires  delivery  of  goods  to  perfect  a 
sale  as  against  the  claims  of  subsequent  purchasers.  This  is 
probably  the  original  rule,  although  in  a  great  many  cases  under 
the  common  law  the  result  is  worked  out  b}^  regarding  the  act  of 
retention  of  possession  after  sale  as  a  fraud  on  subsequent  pur- 
chasers. The  difficulty  in  working  out  the  result  in  this  way  is 
that  it  involves  the  holding  that  retention  of  possession  is  always 
fraudulent  as  against  claims  of  subsequent  purchasers.  As  a  mat- 
ter of  fact  retention  of  possession  may  or  not  be  fraudulent  in 
fact.     The  acts  do  not  necessarily  involve  affirmative  misconduct. 


Ch.  3)      INNOCENT   rURCHASKnS   FROM    PERSONS   WnilOT'T   TITLE         1051 

Perhaps  in  a  great  majority  of  cases  no  fraud  is  intended.  Of 
course  there  are  many  illustrations  in  the  law  where  a  particular 
group  of  facts  is  given  the  same  legal  effect  as  though  they  were 
fraudulent;  as,  for  example,  a  voluntary  conveyance  of  property 
by  an  insolvent,  although  accompanied  by  delivery  to  the  donee 
is  held  to  be  fraudulent  as  against  the  creditors  of  the  donor. 
To  call  a  particular  group  of  facts  fraudulent,  when  they  are  not 
such  in  fact,  tends  to  confusion,  however  beneficent  the  result. 
The  rule  asserted  in  the  above  section  represents  the  conviction 
that  it  is  better  policy  to  protect  the  purchaser  who  has  obtained 
actual  possession  than  to  protect  the  purchaser  who  has  allowed 
possession  to  remain  in  the  vendor;  but  it  is  not  based  upon  the 
assumption  that  the  act  of  retaining  possession  is  fraudulent. 


WILSON  V.  WALRATII. 

(Supreme  Court  of  Minnesota,  190S.     103  Minn.  412,  115  N.  W.  203, 
24  L.  R.  A.  IN.  S.]  1127.) 

Action  by  Mark  E.  Wilson  against  A.  Parker  Walrath.  Judgment 
for  defendant,  and  plaintiff  appeals. 

Elliott,  J.  This  was  an  action  in  replevin,  in  which  the  plaintiff 
sought  to  recover  possession  of  an  automobile.  *  *  "^  *  One  Spargo 
sold  the  automobile  in  question  to  the  appellant.  Wilson,  who  paid 
full  consideration  therefor,  but  agreed  to  allow  Spargo  to  retain  pos- 
session of  the  property  for  certain  purposes  and  under  certain  condi- 
tions for  a  specified  time.  While  in  possession,  Spargo  mortgaged  the 
machine  to  Walrath,  who  had  no  knowledge  of  the  sale  to  Wilson. 
The  court  found  as  a  fact  that  the  evidence  does  not  prove  that  the 
sale  to  Wilson  "was  made  in  good  faith  and  without  intent  to  injure, 
delay,  or  defraud  creditors  and  subsequent  purchasers  in  good  faith 
from  Spargo."  If  the  evidence  sustains  this  finding  of  fact,  the  re- 
spondent must  prevail  in  this  court. 

There  is  a  line  of  cases  which  holds  that,  while  delivery  is  not  es- 
sential to  pass  title  as  between  the  vendor  and  vendee  of  personal 
property,  it  is  necessary  for  such  purpose  as  against  every  one  but 
the  vendor.  Under  this  rule,  when  the  same  goods  are  sold  to  differ- 
ent persons  by  conveyances  equally  valid,  he  who  first  lawfully  ac- 
quires the  possession  will  hold  them  as  against  the  other.  The  mo- 
tives and  intentions  of  the  parties  are  immaterial,  as  the  doctrine  rests 
upon  the  general  principle  that,  where  one  of  two  innocent  persons 
must  suffer,  the  loss  should  fall  on  him  whose  acts  or  omissions  have 
made  or  contributed  to  make  the  loss  possible.  *  *  *  Closely  con- 
nected with  this  doctrine,  but  resting  on  other  principles,  is  the  rule 
which  makes  the  retention  of  possession  by  the  vendor  conclusive  evi- 
dence of  fraud.  This  doctrine  also  rests  upon  grounds  of  assumed 
public  policy.  It  prevails  by  virtue  of  statutes  or  decisfons  based  on 
the  common  law  in  a  number  of  states.  *  *  *  In  the  greater  num- 
her  of  states,  however,  the  rule  is  established  that  the  mere  retention 
of  possession  by  the  vendor  is  presumptive  evidence  only  of  a  fraud- 
ulent and  colorable  sale,  and  the  vendee  is  permitted  to  overthrow 


1052  SALES  (Part  4 

this  presumption  by  evidence  which  establishes  his  good  faith  and 

want  of  knowledge  of  any  fraudulent  intent  on  the  part  of  the  vendor. 

*  *    * 

In  the  thirteenth  year  of  Elizabeth  there  was  enacted  the  famous 
statute  which  made  all  conveyances  not  made  bona  fide  and  for  value, 
with  intent  to  injure  and  delay  or  defraud  the  creditors,  void  as  to 
such  creditors.  St.  13  Eliz.  c.  5.  A  later  statute  extended  this  pro- 
tection to  subsequent  purchasers  as  well  as  creditors.  St.  27  Eliz. 
c.  4.  These  statutes  did  not  in  terms  apply  to  personal  property,  but 
from  the  time  of  Sir  Edward  Coke's  decision  in  Twyne's  Case,  3 
Co.  Rep.  80b,  5  Eng.  Rul.  Cas.  2,  sales  of  personal  property  made  with 
intent  to  delay  and  defraud  creditors  or  subsequent  purchasers  have 
been  regarded  as  within  the  provisions  of  the  statutes.  The  question 
soon  arose  whether,  under  these  statutes,  possession  by  the  vendor 
was  fraudulent  per  se,  and  therefore  conclusive,  or  merely  presump- 
tively fraudulent.  In  Twyne's  Case,  in  speaking  of  the  indicia  of 
fraud,  it  was  said  that  "continuance  of  the  possession  in  the  donor 
is  the  sign  of  trust  for  himself."  In  Edwards  v.  Harben,  2  T.  R. 
587,  it  was  held  that,  "if  there  be  nothing  but  the  absolute  conveyance 
without  the  possession,  that  in  point  of  law  is  fraudulent."  For  some 
time  thereafter  this  was  the  established  rule  in  the  English  courts, 
but  it  was  finally  held  that  the  proper  construction  of  the  statute 
made  such  a  conveyance  presumptively  fraudulent  onlv.  Hale  v. 
Metropolitan  Co.,  30  L.  J.  Ch.  777;  Gregg  v.  Holland,  fl902]  2  Ch. 
360.  To  clear  up  the  difficulty  which  arose  under  the  statute,  Parlia- 
ment enacted  the  various  bills  of  sale  acts,  which  are  fully  discussed 
and  explained  by  Lord  Blackburn  in  Cookson  v.  Swire,  9  A.  C. 
653-670  (1884).  *  *  *  in  the  United  States  Edwards  v.  Harben 
was  followed  by  Chancellor  Kent  in  Sturtevant  v.  Ballard,  9  Johns. 
(N.  Y.)  ZZ7,  6  Am.  Dec.  281,  and  by  the  Supreme  Court  of  the  United 
States  in  Hamilton  v.  Russell,  1  Cranch  (U.  S.)  309,  2  L.  Ed.  118. 
But  in  Warner  v.  Norton,  20  How.  (U.  S.)  448,  15  L.  Ed.  950,  Mr. 
Justice  McLean  stated  that  "for  many  years  past  the  tendency  has 
been  in  England  and  the  United  States  to  consider  the  question  of 
fraud  as  a  fact  for  the  jury  under  the  instruction  of  the  court."  This 
is  now  the  established  doctrine  of  the  court.     *     *     * 

Section  3496,  Rev.  Laws  1905,  and  the  previous  statutes  which  are 
embodied  therein,  were  enacted  for  the  purpose  of  removing  any 
doubts  as  to  whether  the  retention  of  possession  by  the  vendor  is  con- 
clusive or  only  presumptive  evidence  of  fraud.  It  provides  in  ex- 
press terms  that  such  possession  shall  be  presumed  to  be  fraudulent 
and  void  as  against  subsequent  purchasers  in  good  faith,  unless  those 
claiming  under  such  sale  make  it  appear  that  the  sale  was  made  in 
good  faith  and  without  any  intent  to  defraud  such  purchasers.  The 
effect  is  to  cast  uponjhe  vendee  the  burden  of  rebutting  the  statutory 
presumption  of  fraudulent  intent  by  proving  his  own  good  faith  and 
want  of  knowledge  of  fraudulent  intent  on  the  part  of  the  vendor. 

*  *  *  'phe  statute  controls  this  case.  If  Wilson  proved  that  he 
purchased  the  machine  in  good  faith  without  knowledge  of  any  in- 
tent on  the  part  of  Spargo  to  defraud  his  creditors  or  subsequent  pur- 
chasers, he  was  entitled  to  the  possession  of  the  property.  It  is  con- 
ceded that  on  April  5,  1906,  Spargo  owed  Wilson  $250,  the  proceeds 
of  an  old  machine  which  had  been  sold  by  Spargo  for  Wilson.  The 
money  had  been  retained  for  some  time  with  the  consent  of  Wilson. 


Ch.  3)      IXXOCENT   PURCHASERS   FROM   PERSONS   WITHOUT   TITLE         1053 

Sparge  then  owned  a  Jackson  machine,  which  he  used  for  demonstrat- 
ing purposes.  Wilson  wished  to  purchase  a  new  machine,  and  after 
various  negotiations  he  purchased  the  Jackson  machine  for  $1,000, 
which  was  substantially  its  actual  value.  In  payment  he  at  the  time 
gave  Spargo  $700  in  cash  and  satisfied  the  debt  for  $250  and  accumu- 
lated interest.  Wilson  was  interested  in  country  banks,  and  his  busi- 
ness called  him  away  from  home  a  great  deal  of  the  time.  It  was 
necessary  that  the  machine  should  be  stored  in  some  garage.  Spargo, 
being  agent  for  the  Jackson  automobile,  and  having  no  other  machine 
of  that  make  on  hand,  wished  to  retain  possession  of  this  machine  for 
a  time  and  use  it  for  demonstrating  purposes.  It  was  therefore  agreed 
and  stated  in  the  bill  of  sale  that  Spargo  might  retain  possession  of 
the  machine  for  30  days  and  in  the  meantime  use  it  for  demonstrative 
purposes,  in  consideration  of  which  he  was  to  store  the  machine  and 
keep  it  in  repair.  Spargo's  business  and  personal  standing  was  good, 
and  W^ilson  had  no  reason  to  suspect,  and  did  not  suspect,  that  Spargo 
was  insolvent.  It  appears  from  all  the  evidence  that  if  he  had  made 
special  investigations  he  would  have  found  that  Spargo's  standing  was 
good.  Spargo  kept  the  machine  in  his  garage  after  the  expiration  of 
the  30  days  and  continued  to  use  it  in  his  business.  During  this  time 
he  mortgaged  it  to  the  respondent,  Walrath,  who  had  no  knowledge 
of  the  previous  sale  to  W^ilson  and  acquired  his  lien  in  good  faith  for 
value.  Neither  W^ilson's  bill  of  sale  nor  W^alrath's  mortgage  was  re- 
corded. W^alrath  finally  took  possession  of  the  machine,  and  in  this 
action  Wilson  sought  to  recover  possession  from  him. 

A  careful  examination  of  the  evidence  compels  the  conclusion  that 
Wilson  was  entitled  to  a  finding  of  fact  to  the  effect  that  he  purchased 
the  automobile  in  good  faith  and  without  any  intent  to  hinder,  delay, 
or  defraud  Spargo's  creditors,  or  subsequent  purchasers  from  Spargo. 
Wilson  certainly  acted  in  good  faith  in  the  matter,  if  such  a  thing  is 
possible  when  the  vendor  is  allowed  to  retain  possession  of  the  chat- 
tel. He  paid  full  value  for  the  property,  and  this  in  itself  is  persuasive 
evidence  of  his  good  faith.  *  *  *  It  is  not  contended  that  there 
was  any  actual  bad  faith  on  the  part  of  Wilson.  In  his  brief  the 
respondent  thus  states  his  position.  The  sale  was  not  accompanied 
with  immediate  delivery  and  followed  by  an  open  and  continuous 
change  of  possession,  within  the  meaning  of  section  3496,  Rev.  Laws 
1905 ;  and  hence,  '"while  it  may  be  true  that  on  April  5,  1906,  appel- 
lant in  the  utmost  good  faith  purchased  the  automobile,  yet  from  that 
time  on  the  action  of  the  appellant  in  permitting  and  allowing  Spargo, 
the  vendor,  to  keep  and  use  that  machine  in  exactly  the  same  manner 
as  before,  was  a  fraud  per  se  upon  any  person  who  might  either  pur- 
chase or  take  the  same  as  security  without  notice  of  the  rights  of  a 
prior  purchaser."  This  is  the  doctrine  of  Lanfear  v.  Sumner,  17 
Mass.  110,  9  Am.  Dec.  119,  and  the  other  cases  of  the  group  to  which 
reference  has  been  made.  As  an  abstract  principle  of  law,  that  doc- 
trine is  sound  and  controlling  when  applied  to  appropriate  facts  and 
conditions.  But  the  effect  which  shall  be  given  to  possession  under 
the  particular  circumstances  disclosed  in  this  record  is  declared  by  the 
statute,  and  the  statute  should  not  be  disregarded  and  annulled  by 
the  application  of  the  doctrine  of  equitable  estoppel.  Upon  the  evi- 
dence Wilson  sustained  the  burden  which  the  statute  imposes  upon 
him,  and  the  finding  of  the  trial  court  was  thus  erroneous.     *     *     * 

The  judgment  is  therefore  reversed,  and  a  new  trial  granted. 


1054  SALES  (Part  4 

SECTION  5.— RIGHTS  OF  CREDITORS  AGAINST  GOODS 
SOLD  IN  SELLER'S  POSSESSION 

Sales  Act,  Section  26.  Where  a  person  having  sold  goods  con- 
tinues in  possession  of  the  goods,  or  of  negotiable  documents  of 
title  to  the  goods,  and  such  retention  of  possession  is  fraudulent  in 
fact  or  is  deemed  fraudulent  under  any  rule  of  law,  a  creditor  or 
creditors  of  the  seller  may  treat  the  sale  as  void. 

This  section  is  an  incorporation,  by  reference,  of  the  re-enact- 
ments in  this  country  of  the  English  statute  on  fraudulent  convey- 
ances. Under  these  statutes,  as  appears  from  the  preceding  case, 
there  is  a  good  deal  of  conflict  on  the  question  as  to  whether  re- 
tention of  possession  is  conclusive  proof  of  fraud,  or  whether  it  is 
but  prima  facie  evidence  of  fraud.  The  above  section  does  not 
attempt,  therefore,  to  adopt  either  view,  but  is  so  phrased  as  to 
permit  a  state  which  enacts  the  Sales  Act  to  continue  the  local 
rule  on  this  matter.  It  appears,  therefore,  that  the  Sales  Act  does 
not  place  rights  of  creditors  on  the  same  basis  as  those  of  subse- 
quent purchasers  of  a  vendor  in  possession  of  goods  already  sold. 


SECTION  6.— RIGHTS  OF  CREDITORS  AGAINST  GOODS 
SOLD  IN  VIOLATION  OF  BULK  SALES  ACTS 


GLANTZ  V.   GARDINER. 

(Supreme  Court  of  Rhode  Island.  1917.     40  R.  I.  297,   100  Atl.  913, 
Ia   R.  a.  1917F,  226.) 

Action  by  Max  Glantz  against  Samuel  E.  Gardiner,  Deputy  Sheriff. 
Certified  from  the  superior  court  on  an  agreed  statement  of  facts. 

Baker,  J.  This  is  an  action  of  replevin,  brought  by  the  plaintiff 
*  *  *  to  recover  possession  of  certain  goods  attached  by  the  de- 
fendant as  deputy  sheriff  of  said  county,  *  *  *  and  held  in  cus- 
tody by  the  said  defendant  under  and  by  virtue'  of  a  writ  of  attach- 
ment issued  out  of  the  superior  court"  in  said  county  "at  the  suit  of 
Alphonso  Brickett  against  said  Frank  S.  Lockhart  alias."     *     *     * 

The  agreed  statement  of  facts  shows  that  on  the  19th  day  of  De- 
cember, 1916,  the  plaintiff,  Max  Glantz,  paid  to  said  Frank  S.  Lock- 
hart  the  sum  of  $100  and  received  from  Lockhart  the  following  writ- 
ten instrument: 

"Received  of  M.  Glantz  one  hundred  ($100.00)  dollars,  deposited  on 
sale  of  all  household  furniture  contained  in  stores  Nos.  605-613  West- 
minster street ;  also  in  storehouse  in  rear ;  also  Columbia  truck.  Bal- 
ance due,  thirty-nine  hundred  dollars  ($3,900.00),  to  be  paid  in  full 
December  22,  1916.  [Signed]      Frank  S.  Lockhart. 

"In  presence  of  William  A.  Reiner."     *     -■"     * 

On  the  said  20th  day  of  December,  1916,  the  plaintiff'  demanded 
from  the  said  Lockhart  a  written  list  of  the  names  and  addresses  of 
his  creditors,  and  on  the  same  day  received  from  him  a  written  list, 
giving  names,  addresses,  and  amounts,  signed  and  sworn  to  by  said 


Ch.  3)      INNOCENT   PURCHASERS   FROM   PERSONS   WITHOUT   TITLE         1055 

Lockhart  as  "a  true,  full,  accurate,  and  complete  list"  of  his  creditors 
"and  the  amounts  due  each  of  them,"  "to  the  best  of  his  knowledge 
and  belief."  The  list  included  six  names  and  addresses,  and  amounts 
of  indebtedness  aggregating  $796.21.  *  *  *  On  said  December 
20th  the  plaintiff  sent  by  registered  mail  a  letter  to  each  of  said  cred- 
itors named  in  said  list,  giving  notice  that  said  Frank  S.  Lockhart 
had  entered  into  an  agreement  with  said  jNIax  Glantz  for  the  sale  of 
all  his  stock  of  furniture  and  house  furnishings,  that  the  transfer  of 
title  would  take  place  on  December  27,  1916,  at  9  o'clock  a.  m.  *  *  * 
Said  Alphonso  Brickett  was  a  creditor  of  said  Lockhart  prior  to  and 
at  the  time  of  said  transfer,  but  his  claim  was  not  included  in  the  list 
delivered  by  Lockhart,  and  was  not  filed  with  said  Glantz  or  his  at- 
torneys prior  to  said  transfer,  and  neither  of  them  had  any  knowledge 
of  such  claim  until  several  days  after  December  27th. 

Chapter  387  of  the  Public  Laws  was  passed  April  14,  1909,  and  is 
entitled  "An  act  to  prohibit  sales  of  merchandise  in  bulk  in  fraud  of 
creditors."     *     *     * 

The  precise  question  presented  by  the  agreed  statement  and  as  ar- 
gued by  the  counsel  of  both  parties  in  their  briefs  is  whether  the  trans- 
fer of  said  goods  and  chattels  by  said  Loclthart  to  the  plaintiff  on  De- 
cember 27,  1916,  was  under  the  provisions  of  section  1  of  said  chap- 
ter 387  of  the  Public  Laws  fraudulent  and  void  as  to  said  Alphonso 
Brickett. 

Within  the  last  20  years  nearly  all,  if  not  all,  of  the  states  have 
enacted  statutes  regulating  the  sale  of  merchandise  in  bulk.  This  Avide- 
spread  legislation  at  least  implies  a  general  belief  in  the  existence  of  a 
widespread  evil  requiring  legislative  control.  While  these  statutes  are 
similar  in  general  purpose,  they  differ  in  phraseology,  both  in  their 
requirements  of  the  parties  to  such  sales  and  particularly  in  the  lan- 
guage which  declares  the  effect  of  noncompliance  with  the  provisions 
of  these  acts.  "That  evil  is  the  tendency  and  practice  of  merchants 
who  are  heavily  in  debt  to  make  secret  sales  of  their  merchandise  in 
bulk  for  the  purpose  of  defrauding  creditors."  W^right  v.  Hart,  182 
N.  Y.  330,  346,  75  N.  E.  404,  410,  2  L.  R.  A.  (N.S.)  338,  3  Ann. 
Cas.  263.  A  convenient  classification  of  these  laws  into  five  groups, 
based  upon  the  different  requirements  imposed  upon  the  parties  to  such 
sales,  may  be  found  in  Kidd-Dater  Co.  v.  Musselman  Grocer  Co., 
217  U.  S.  461,  467-469,  30  Sup.  Ct.  606,  54  L.  Ed.  839.  These  re- 
quirements vary  from  the  simple  one  by  which  a  prospective  vendor 
is  compelled  to  have  recorded  from  five  to  ten  days  previous  to  the 
actual  sale  in  the  town  clerk's  office  of  the  town  in  which  he  con- 
ducts his  business  a  notice  of  his  intention  to  make  such  sale,  describ- 
ing the  property  to  be  sold,  the  condition  of  such  sale,  and  the  par- 
ties thereto,  to  the  more  onerous  ones  of  the  preparing  by  the  vendor 
and  vendee  together  of  an  inventory  of  the  property  and  its  cost,  and 
of  requiring  the  vendee  to  demand  and  receive  sworn  lists  of  the  ven- 
dor's creditors,  with  their  addresses  and  the  respective  amounts  due 
them,  and  to  notify  these  creditors  of  his  intended  purchase,  and  in  a 
few  instances  to  see  that  the  purchase  price  is  applied,  so  far  as  neces- 
sary, to  the  payment  of  the  vendor's  creditors. 

As  to  the  effect  of  a  failure  to  comply  with  the  requirements  of 
these  statutes,  they  fall  into  two  classes:  First,  those  acts  in  which 
the  sale  is  declared  fraudulent  and  void;  second,  those  acts  in  which 
the  sale  is  declared  presumptively  fraudulent  and  void.    It  is  reasona- 


1056  SALES  (Part  4 

ble  to  infer  that  these  different  acts  vary  much  as  effective  instru- 
mentalities in  checking  actual  fraud.  The  courts  differ  in  their  con- 
struction of  the  acts  in  the  second  class,  some  holding  that  they  simply 
prescribe  a  rule  of  evidence,  throwing  the  burden  of  showing  good 
faith  on  the  purchaser  with  the  right  to  introduce  any  evidence  perti- 
nent to  this  question  as  in  Thorpe  v.  Pennock  Mercantile  Co.,  99 
Minn.  22,  108  N.  W.  940,  9  Ann.  Cas.  229,  and  Fisher  v.  Herrmann, 
118  Wis.  428,  95  N.  W.  392,  while  others  restrict  the  evidence  to  the 
showing  of  a  compliance  with  the  requirements  of  the  statute.  Moore 
Dry  Goods  Co.  v.  Rowe  &  Carithers,  99  Miss.  30,  54  South.  659,  Ann. 
Cas.  1913C,  1213 ;  Cantrell  v.  Ring,  125  Tenn.  472,  145  S.  W.  166. 
The  statute  of  this  state  belongs  to  the  first  class.  It  provides  in  ef- 
fect that  the  transfer  of  "the  whole  of  a  stock  of  merchandise  and 
fixtures"  in  bulk  in  one  transaction  "shall  be  fraudulent  and  void 
as  against  all  persons  who  are  creditors  of  the  transferor  at  the  time 
of  such  transfer  unless  the  transferee"  does  certain  things ;  that  is  to 
say,  without  any  regard  to  the  solvency  of  the  vendor,  or  the  fairness 
of  the  purchase  price  to  be  paid,  or  the  good  faith  of  the  vendor  and 
vendee,  and  although  the  transaction  may  not  be  fraudulent  in  fact,  it 
will  be  fraudulent  and  void*  in  law  so  far  as  the  vendor's  creditors  are 
concerned  unless  the  vendee  or  transferee  does  the  things  required 
of  him  by  the  provisions  of  the  statute.  In  other  words,  in  order  to 
guard  against  the  commission  of  actual  fraud  in  the  class  of  sales 
with  which  it  deals,  the  law  regulates  them  by  requiring  the  perform- 
ance of  certain  acts  in  the  carrying  out  of  such  a  sale  and  declares 
that  the  failure  to  perform  these  acts  will  render  the  transaction  fraud- 
ulent in  law.  It  is  obvious  that  this  is  not  the  enactment  merely  of  a 
rule  of  evidence  but  a  declaration  bf  substantive  law  that  the  nonob- 

servance   of    certain    statutory    provisions    constitutes    fraud    in    law. 
*     *    * 

Such  laws  have  generally  been  upheld  as  a  justifiable  use  of  the 
police  power.  As  such  statutes  declare  sales  in  bulk  fraudulent  and 
void  if  the  regulations  governing  such  sales  are  not  complied  with, 
it  is  clearly  implied  and  must  inevitably  follow  that,  if  these  regulations 
are  complied  with,  the  sale  or  transfer  is  not  fraudulent  and  void  under 
these  statutes.  As  already  appears,  said  chapter  387  inakes  a  transfer 
or  sale  of  a  stock  of  merchandise  in  bulk  fraudulent  and  void  as  to 
the  transferor's  creditors  unless  the  transferee  or  purchaser  "demands 
and  receives  from  the  transferor  a  written  list  of  the  names  and  ad- 
dresses of  the  creditors  of  the  transferor  and  certified  by  him,  under 
oath,  to  be,  to  the  best  of  his  knowledge  and  belief,  a  full,  accurate, 
and  complete  Hst  of  his  creditors;  and  unless  the  transferee  shall, 
at  least  five  days  before  such  transfer,  notify  personally,  or  by  regis- 
tered mail,  every  creditor  whose  name  and  address  are  stated  in  said 
hst  of  the  proposed  transfer."  Did  the  plaintiff"  in  this  case  demand 
and  receive  from  Lockhart  a  written  list  of  the  names  and  addresses 
of  the  latter's  creditors,  certified  by  Lockhart  under  oath,  to  be,  to 
the  best  of  his  knowledge  and  belief,  a  full,  accurate,  and  complete 
list  of  his  creditors,  and  did  the  plaintiff  at  least  five  days  before  the 
transfer  notify  in  the  manner  required  by  the  statute  every  creditor 
whose  name  and  address  were  stated  in  said  list  of  the  proposed  trans- 
fer? The  agreed  statement  of  facts  clearly  shows  that  he  did  all 
of  these  things,  and  apparently  satisfied  the  requirements  of  the  statute. 

It  is  urged,  however,  that  inasmuch  as  the  list  of  Lockhart's  creditors 


Ch.  3)      INNOCENT   PURCHASERS   FROM   PERSONS   WITHOUT   TITLE  1057 

received  by  the  plaintiff  was  not  in  fact  "a  full,  accurate,  and  com- 
plete list  of  his  creditors,"  and  as  the  plaintiff  afterwards  learned  this, 
but  before  the  transfer  was  made,  the  sale,  in  consequence,  was  void. 
So  far  as  chapter  387  is  concerned,  we  do  not  think  this  fact  affects 
the  situation.  The  statute  declares  the  sale  void  only  on  the  failure 
of  the  purchaser  to  do  what  is  required  of  him.  It  does  not  declare 
the  sale  void  if  the  list  of  creditors  furnished  by  a  vendor  under  oath 
is  not  in  fact  "full,  accurate  and  complete."  It  does  not  in  any  way 
make  the  purchaser  responsible  for  any  incorrectness  in  the  list.  We 
think  it  would  be  unreasonable  to  so  construe  it.     *     *     * 

In  Coach  v.  Gage,  supra,  70  Or.  on  page  188,  138  Pac.  on  page  849, 
the  court  in  interpreting  these  last  provisions  said :  "The  act  in  ques- 
tion, in  our  judgment,  imposes  upon  the  purchaser  (1)  the  duty  to  de- 
mand a  written  statement,  under  oath,  of  the  vendor  of  the  names  and 
addresses  of  his  creditors,  and  (2)  upon  the  receipt  of  such  list  to 
notify  the  persons  named  therein  of  the  proposed  purchase.  For  an 
intentional  breach  of  either  of  these  duties,  it  was  entirely  competent 
for  the  Legislature,  by  way  of  penalty  for  such  breach,  and  to  secure 
the  faithful  performance  of  such  duty,  to  declare  that  their  nonper- 
formance should  constitute  conclusive  evidence  of  fraud,  and  render 
the  sale  void  as  to  creditors ;  but  it  is  not  in  the  power  of  the  Legis- 
lature to  make  a  breach  of  duty  by  the  vendor  evidence  of  fraud  in  the 
vendee.  To  hold  the  law  means  that  an  omission  of  the  name  of  a 
creditor  by  the  vendor  without  the  knowledge  of  the  vendee  renders 
the  transaction  void  as  to  him  would  be  to  hold  that  it  was  the  intent 
of  the  Legislature  to  ordain  that  a  fraud  committed  by  the  vendor  upon 
the  vendee  by  falsifying  the  list  of  creditors  should  be  conclusively 
presumed  to  be  the  fraud  of  the  person  so  defrauded  and  deceived. 
Such  a  construction  would  be  so  contrary  to  every  principle  of  law  and 

good   morals   that   it  is   inconceivable   that   the   Legislature   intended 
j^ »     *     *     * 

It  may  be  urged  that  under  the  statute  as  thus  interpreted  oppor- 
tunity is  afforded  a  vendor  to  successfully  practice  fraud.  That  is 
entirely  possible.  We  think  the  remedy  for  this  situation  lies  with  the 
lawmaking  body  and  not  with  the  courts.  It  is  noteworthy  that,  while 
common  observation  shows  that  it  is  the  dealer  in  merchandise  who 
for  one  reason  or  another  attempts  to  defraud  his  creditors  by  the 
sale  of  his  stock,  our  statute,  like  some  others,  declares  such  a  sale 
fraudulent  and  void  only  on  a  failure  of  the  purchaser  to  do  certain 
things.  Chapter  387  is  in  effect  an  addition  to  section  1  of  chapter 
253  of  the  General  Laws  relating  to  conveyances  in  fraud  of  creditors. 
Of  course  this  transaction,  like  others,  is  open  to  inquiry  as  to  the  ex- 
istence of  fraud  in  fact.  There  is  opportunity  for  collusion  in  mak- 
ing up  the  list  of  creditors,  and  apart  from  any  active  participation  in 
actual  fraud  the  purchaser  might  have  knowledge  of  a  fraudulent  in- 
tent of  the  vendor,  so  that  the  question  of  the  purchaser's  good  faith 
might  be  material.  We  think  the  words  "good  faith,"  as  used  in  some 
opinions  in  cases  under  acts  regulating  the  sale  of  merchandise  in  bulk, 
have  reference  to  this  aspect  of  the  case,  namely,  the  existence  of  fraud 
in  fact.     *     *     * 

In  these  circumstances,  it  is  our  judgment  that  the  sale  by  Lockhart 
to  the  plaintiff  should  not  be  held  to  be  in  fact  fraudulent  and  void  as 
to  said  Alphonso  Brickett  as  a  creditor  of  Lockhart.  Our  decision 
B.&  B.Bus.Law— 67 


1058  SALES  (Part  4 

accordingly  is  that  the  plaintiff  acquired  a  good  title  to  the  goods  and 
chattels  transferred  to  him  by  Frank  S.  Lockhart  on  December  27, 
1916,  and  that  he  is  entitled  to  the  entry  of  judgment  for  their  pos- 
session.    *     *     * 

LIIVN  COUNTY  BANK  v.  DAVIS  et  al. 

(Supreme  Court  of  Kansas,   1918.     108  Kan.  672,  175  Pac.  972, 
9  A.   L.    R.   4G8.J 

Action  by  the  Linn  County  Bank  against  O.  L.  Davis,  with  garnish- 
ment against  R.  L.  Glascock.  Judgment  for  the  garnishee,  and  plaintiff' 
appeals. 

Mason,  J.  On  March  20,  1917,  O.  L.  Davis,  a  merchant,  executed 
a  bill  of  sale  on  his  stock  to  R.  L.  Glascock,  who  took  possession  there- 
of. On  March  24,  1917,  the  Linn  County  Bank,  a  creditor  of  Davis, 
brought  an  action  against  him  upon  its  claims,  and  caused  a  garnishee 
summons  to  be  served  upon  Glascock,  who  filed  an  answer  denying 
any  liability  to  Davis.  The  plaintiff  took  issue  on  this  answer  on  the 
ground  that  the  transaction  between  Davis  and  Glascock  involved  a 
violation  of  the  Bulk  Sales  Law,  inasmuch  as  it  had  been  given  no  notice 
thereof.  A  trial  resulted  in  a  judgment  in  favor  of  the  garnishee,  and 
the  plaintiff  appeals. 

At  the  time  of  the  execution  of  the  bill  of  sale,  the  seller  gave  to  the 
buyer  a  list  of  his  creditors,  complete  except  for  the  omission  of  the 
plaintiff.  The  buyer  (the  garnishee),  having  no  knowledge  of  the  exist- 
ence of  the  plaintiff's  claim,  paid  off  all  the  other  creditors.  He  con- 
tends that  these  facts  protect  him  from  liability,  assuming  that  the 
Bulk  Sales  Law  is  applicable  to  the  transaction. 

There  is  some  conflict  of  judicial  opinion  as  to  the  effect  of  the 
omission  of  one  or  more  creditors  from  a  list  otherwise  properly  fur- 
nished in  accordance  with  the  Bulk  Sales  Law,  at  the  time  of  a  sale 
of  a  stock  of  goods.  In  some  jurisdictions  it  is  held  that  in  such  a  case 
the  omitted  creditors  have  no  remedy  against  the  buyer  ( Coach  v.  Gage, 
70  Or.  182,  138  Pac.  847;  International  Silver  Co.  v.  Hull,  140  Ga. 
10,  78  S.  E.  609.  45  L.  R.  A.  [N.  S.]  492),  even  if  he  learns  of  their 
claims  before  making  payment  (Glantz  v.  Gardiner,  40  R.  I.  297,  100 
Atl.  913,  L.  R.  A.  1917F,  226).  A  view  more  in  keeping  with  the 
spirit  and  purpose  of  the  statute  is  that  the  buyer  is  bound  to  hold  any 
part  of  the  price  Still  under  his  control  when  he  is  advised  of  the  exist- 
ence of  a  creditor  not  mentioned  in  the  list.  In  re  Thompson  (D.  C.) 
242  Fed.  602.  See,  also,  Rabalsky  v.  Levenson,  221  Mass.  289.  108 
N.  E.  1050. 

Here  the  transfer  of  stock  was  made  in  consideration  of  a  pre- 
existing debt,  and  it  seems  that  (inasmuch  as  a  release  procured  by 
the  debtor's  furnishing  an  incomplete  list  of  creditors,  in  violation  of 
the  law,  would  be  ineffective)  the  buyer  would  have  parted  with  noth- 
ing in  the  transaction,  and  would  therefore  be  answerable  to  the  omitted 
creditor.  That,  however,  need  not  be  determined,  for  the  same  re- 
sult follows  from  another  circumstance.  The  statute  requires  the  list 
of  creditors  given  to  the  buyer  to  be  certified  by  the  seller  under  oath 
to  be  complete.  *  *  *  No  such  verification  was  made  in  this  case. 
If  the  buyer  had  insisted  upon  the  law  being  followed  in  this  regard,  it 
is  conceivable  that  the  seller  would  have  used  more  diligence  in  assur- 
ing himself  of  the  completeness  of  the  list.  At  all  events,  the  buyer, 
having  closed  the  deal  without  requiring  a  compliance  with  the  statute. 


Ch.  3)    INNOCENT  runrriASERS  from  persons  without  title      1059 

acted  at  his  peril,  and  the  title  he  received  is  subject  to  the  claims  of 
the  omitted  creditor.     *     *     * 

So  far,  it  has  been  assumed  that  the  Bulk  Sales  Law  applies  to  the 
transaction  involved.  A  doubt  on  this  question  arises  from  evidence 
that  the  bill  of  sale  referred  to  was  given  as  security,  and  from  the 
circumstance  that  at  the  time  of  its  execution  the  buyer  agreed  in  writ- 
ing to  reconvey  the  property  upon  the  repayment  of  the  purchase  price 
within  a  fixed  time.  If,  however,  the  bill  of  sale  is  deemed  to  have  been 
in  legal  contemplation  a  chattel  mortgage,  we  still  regard  it  as  con- 
stituting a  "sale  or  disposal"  of  the  stock  within  the  meaning  of  the 
statute.  If  the  owner  of  a  stock  of  merchandise,  while  allowed  to  sell 
it  only  upon  notice  to  his  creditors,  could  mortgage  it  effectively  with- 
out such  notice,  the  evasion  of  the  statute  would  be  so  easy  as  to 
deprive  it  of  all  practical  force.  In  this  state  the  title  to  chattels  passes 
by  the  execution  of  a  mortgage,  *  *  *  which  therefore  amounts  to 
a  sale,  or  at  least  to  a  disposal.  This  view  finds  support  in  decisions 
elsewhere.  Baker  v.  Nipper  (Tex.  Civ.  App.)  198  S.  W.  596;  Sem- 
mes  v.  Stecher  Brewing  Co.,  195  Mo.  App.  621,  187  S.  W.  604.  In 
some  jurisdictions  what  might  seem  to  be  a  contrary  conclusion  is 
reached,  but  this  is  by  reason  of  local  statutes  under  which  the  mort- 
gagor of  chattels  continues  to  be  their  owner.    *     *    * 

It  results  from  these  considerations  that  error  was  committed  in 
denying  the  plaintiff  all  relief.  The  extent  of  his  recovery,  however 
remains  to  be  determined.  The  goods  in  a  sense  constituted  a  trust 
fund  for  the  benefit  of  all  creditors  alike,  and  as  the  purchaser  was  free 
from  intentional  wrong,  he  may  justly  be  subrogated  to  the  rights  of 
the  creditors  whose  claims  he  has  paid  off.  *  *  *  Nor  is  any  reason 
apparent  why  his  own  claim  should  not  be  as  favorably  treated  as  those 
of  others.  We  conclude  therefore  that  the  plaintiff  should  recover  the 
proportion  of  the  value  of  the  stock  that  the  amount  of  his  claim  bears 
to  the  total  sum  owed  by  the  vendor  at  the  time  of  the  sale,  including 

the  debts  paid  off  by  the  buyer  and  that  originally  owing  to  him. 

^    ^    ^ 

The  judgment  is  reversed,  and  the  cause  remanded  for  further  pro- 
ceedings in  accordance  herewith.     *     *    * 


COONEY,  ECKSTEIN  &  CO.  v.   SWEAT  et  al. 

(Supreme  Court  of  Georgia,  1909.     133  Ga.  511,  66  S.  E.  257,  25  L.  R.   A. 

[N.  S.]  758.) 

Action  by  Cooney,  Eckstein  &  Co.,  against  F.  B.  Sweat  and  others. 
Judgment  for  defendants,  and  plaintiff  iDrings  error. 

Evans,  P.  J.  Cooney,  Eckstein  &  Co.,  sued  out  an  attachment  in 
the  superior  court  of  Wayne  county  against  Sweat,  alleging  that  he 
was  indebted  to  them  in  the  sum  of  $219.17  for  money  advanced: 
that  for  some  time  prior  thereto  he  was  the  lessee  of  a  sawmill,  at 
which  trees  were  manufactured  into  lumber  and  sold  to  various  pur- 
chasers ;  and  that  a  few  days  prior  to  filing  the  suit  he  had  sold  to 
the  Waynesville  Trading  Company  substantially  all  the  lumber  he  had 
on  hand.  *  *  *  It  was  further  alleged  that  the  notice  referred  to 
in  the  Bulk  Sales  Act  of  1903  had  not  been  given.  The  attachment 
was  issued,  and  the  lumber  levied  upon.  *  *  *  Subsequently  the 
judge  of  the  superior  court  dismissed  the  attachment,  on  the  ground 
that  the  Bulk  Sales  Act  of  1903  does  not  apply  to  a  transaction  of  the 


1060  SALES  (Part  4 

kind  set  forth  in  the  petition.  The  correctness  of  this  judgment  is 
the  sole  question  presented  by  the  writ  of  error. 

The  act  of  1903  is  appHcable  to  a  sale  of  "any  stock  of  goods,  wares 
and  merchandise  in  bulk."  The  object  of  the  Legislature  in  pass- 
ing the  statute  was  the  protection  of  persons  who  had  been  extending 
credit  to  merchants  on  the  faith  of  apparent  prosperity,  indicated  bv 
a  stock  of  goods,  wares,  and  merchandise,  which  would  not  be  sold 
in  bulk  to  one  person,  but  which  would  be  sold  out  gradually,  and  re- 
plenished from  time  to  time.  When  merchants  sell  their  entire  stock 
of  goods  to  one  person,  without  notice  of  any  kind  to  their  creditors, 
a  fraud  is  frequently  perpetrated  upon  the  creditors ;  and  it  was  the 
intention  of  the  Legislature  to  afford  a  remedy  to  the  victim  of  these 
fraudulent  sales.  The  act  is  in  derogation  of  the  common  law,  and  of 
a  person's  right  to  alienate  his  property  without  restriction,  and  is 
therefore  to  be  strictly  construed.  *  *  *  j^  the  construction  of 
statutes  of  this  kind,  it  is  always  well  to  consider  the  evil  intended  to 
be  reached.  That  evil,  says  Vann,  J.,  in  his  dissenting  opinion,  in  the 
case  of  Wright  v.  Hart,  182  N.  Y.  330,  75  N.  E.  404,  2  L.  R.  A.  (N.  S.) 
338,  3  Ann.  Cas.  263,  "is  the  tendency  and  practice  of  merchants  who 
are  heavily  in  debt  to  make  secret  sales  of  their  merchandise  in  bulk 
for  the  purpose  of  defrauding  creditors.  Common  observation  shows 
that,  when  a  dealer  has  reached  a  point  in  his  business  career  where 
he  cannot  go  on,  owing  to  the  claim  of  creditors,  the  temptation  is 
strong  and  the  practice  common  of  m.aking  fraudulent  sales." 

The  act  of  1903  bears  internal  evidence  of  a  legislative  intent  to 
confine  its  operation  to  merchants  or  dealers  in  merchandise.  The  first 
section  thereof,  in  prescribing  the  preliminary  acts  necessary  for  the 
validity  of  a  sale  authorized  by  the  act  and  the  duty  of  the  vendor, 
declares  that  "it  shall  further  be  the  duty  of  said  vendor  to  give  the 
vendee  a  statement  of  his  assets  and  liabilities,  and  the  cost  price  of 
the  merchandise  to  be  sold,  said  cost  price  to  be  arrived  at  by  an  in- 
ventory taken  at  the  time  by  the  seller  and  purchaser."  And  the  same 
section  makes  it  the  duty  of  the  purchaser,  in  giving  notice  of  the  sale 
to  the  vendor's  creditors,  to  also  send  "a  copy  of  the  statement  of  the 
assets  and  liabilities  as  furnished  him  by  the  vendor."  The  word 
"merchandise"  is,  however,  not  to  be  taken  in  such  a  restricted  sense 
as  to  exclude  the  usual  and  customary  accessories  of  a  mercantile  or 
trading  establishment,  when  a  sale  in  bulk  is  made  of  the  whole.  Thus, 
bar  fixtures,  safes,  desks,  cash  registers,  cigar  cases,  pool  tables,  re- 
frigerators, and  the  like,  used  in  connection  with  a  business  in  which 
they  are  appropriate  in  facilitating  the  operation  of  such  business  and 
the  sale  of  the  goods  connected  therewith,  have  been  held  to  be  included 
in  the  sale  of  the  business,  within  the  meaning  of  the  Sales  in  Bulk 
Act.    *    *    * 

Though  in  many  of  the  states  statutes  of  a  similar  character  have 
been  enacted  within  the  last  10  years,  there  are  to  be  found  only  a 
few  cases  defining  the  meaning  of  the  phrase  "goods,  wares,  and  mer- 
chandise." In  the  state  of  Washington  it  was  held,  in  Plass  v.  Morgan, 
26  Wash.  160,  78  Pac.  784,  that  a  sale  of  all  goods,  wares,  and 
merchandise  in  a  restaurant  was  a  sale  within  the  contemplation 
of  the  statute ;  but  later  in  the  same  state  it  was  held,  in  Everett  Prod- 
uce Co.  V.  Smith,  40  Wash.  566,  82  Pac.  905,  2  L.  R.  A.  (N.  S.)  331, 
111  Am.  St.  Rep.  979,  5  Ann.  Cas.  798,  that  a  sale  of  the  horses,  wag- 
ons, and  harness  comprising  the  stock  in  a  livery  stable  was  not  a 


Ch.  3)      INNOCENT   PURCnASERS   FROM   PERSONS   WITHOUT   TITLE         1061 

Stock  of  goods,  wares,  or  merchandise  within  the  meaning  o£  the  stat- 
ute. In  Massachusetts  it  was  held  that  biscuits  and  crackers  put  up  in 
boxes  or  barrels  by  a  wholesale  biscuit  company  for  the  wholesale 
market  was  within  a  statute  regulating  the  sale  of  goods,  wares,  or 
merchandise  in  bulk.  Hart  v.  Brierly,  189  Mass.  598,  76  N.  E.  286. 
And  in  a  later  case  it  was  there  held  that  the  sale  in  bulk  statute  was 
intended  to  prevent  a  trader  from  disposing  of  his  stock  of  merchandise 
in  a  manner  outside  of  his  usual  course  of  business.  Gallus  v.  Elmer, 
193  Mass.  106,  78  N.  E.  772,  8  Am.  &  Eng.  Ann.  Cas.  1067.  A  person 
operating  a  sawmill,  at  which  trees  are  manufactured  into  lumber  and 
then  sold,  is  not  within  the  purview  of  the  act,  though  he  sells  sub- 
stantially all  the  lumber  he  has  on  hand  at  a  particular  time  to  one 
person.    *    *    * 

Judgment  affirmed.    *    *    * 


OWOSSO  CARRIAGE  &  SLEIGH  CO.  v.  McINTOSH  &  WARREN. 

(Supreme  Court  of  Texas,  1915.     107  Tex.  307,  179  S.  W.  257, 
K  R.  A.   1916B,  970.) 

Action  by  the  Owosso  Carriage  &  Sleigh  Company  against  C.  K. 
Sweet,  with  Mcintosh  &  Warren,  garnishee.  A  judgment  in  part  for 
plaintiff  against  the  defendant  garnishee  was  reversed  and  remanded 
by  the  Court  of  Civil  Appeals  and  plaintiff  brings  error. 

Yantis,  J.  This  case  involves  *  *  *  what  is  commonly  known 
as  the  "Bulk  Sales  Law,"  *  *  *  and  the  effect  of  the  service  of 
the  writ  of  garnishment  upon  the  proceeds  of  the  sale  of  merchandise 
which  was  purchased  by  Mcintosh  &  Warren,  defendants  in  error,  at 
private  sale,  and  not  in  the  ordinary  course  of  trade,  but  in  bulk,  and 
in  violation  of  all  the  provisions  of  said  bulk  sales  statute,  and  after- 
wards resold  by  them  and  converted  into  cash  prior  to  the  service  of 
the  writ  of  garnishment  upon  them,  which  was  issued  at  the  instance 
of  the  Owosso  Carriage  &  Sleigh  Company,  plaintiff  in  error.    *    *    * 

One  C.  K.  Sweet  was  engaged  in  the  implement,  vehicle  and  hard- 
ware business  in  the  town  of  Brownwood,  The  evidence  strongly 
indicates  that  on  the   10th  day  of  August,   1909,  he  was  insolvent. 

*  *  *  He  was  indebted  to  the  plaintiff  in  error  *  *  *  ^^  the 
sum  of  $1,700.  *  *  *  He  owed  various  other  creditors  in  the  ag- 
gregate sum  of  $3,000.  On  said  10th  day  of  August,  1909,  he  sold  his 
stock  of  goods  in  bulk  to  Mcintosh  &  Warren,  defendants  in  error,  for 
the  consideration  of  $6,005.97.     *     *     * 

On  October  19,  1910,  plaintiff  in  error  filed  suit  against  the  said 
Sweet  *  *  *  and  at  the  same  time  caused  a  writ  of  garnishment 
to  be  issued,  which  was  served  upon  the  defendants  in  error  on  the. 
20th  day  of  October,  1910.  On  the  20th  day  of  December,  1910. 
plaintiff  in  error  recovered  in  said  suit  its  judgment  against  said 
Sweet  in  the  sum  of  $1,883.60,  with  costs  of  suit  and  interest  at  the 
rate  of  8  per  cent. 

The  evidence  indicates  that  there  was  no  intentional  fraud  upon  the 
part  of  the  defendants  in  error  in  purchasing  said  merchandise,  or  on 
the  part  of  said  Sweet  in  making  the  sale.  *  *  *  The  bulk  sales 
statute  of  1909  was  not  complied  with  in  any  form  in  making  said  sale. 

*  *    * 

We  will  now  consider  the  important  question  as  to  the  effect  of 
the  service  of  the  writ  of  garnishment  upon  the  defendants  in  error 


1062  SALES  (Part  4 

subsequent  to  the  sale  of  the  merchandise  by  them,  which  they  had 
purchased  from  Sweet.  It  is  contended  that  the  garnishment  did  not 
fasten  upon  either  the  property  belonging  to  Sweet,  or  upon  its  pro- 
ceeds after  sale,  for  the  reason,  as  asserted,  that  the  property  belong- 
ing to  Sweet,  which  passed  into  the  hands  of  the  defendants  in  er- 
ror, had  been  sold  by  them,  and  that  the  proceeds  of  the  sale  could 
not  be  reached  by  the  writ  of  garnishment,  and  that  the  writ  of  gar- 
nishment would  not  be  effective  unless  served  before  such  sale.  Up- 
on the  other  hand,  the  contention  is  made  that  the  writ  of  garnishment 
took  effect  and  became  a  lien  upon  the  proceeds  of  the  sale  of  said 
merchandise. 

In  considering  this  question  it  should  be  remembered  that  the  pur- 
chase by  defendants  in  error  from  Sweet,  however  innocently  intend- 
ed, was  in  open  violation  of  the  bulk  sales  law,  and,  under  section  1 
thereof,  "void  as  against  creditors  of  the  seller."  There  was,  then, 
no  real  sale,  in  law,  but  merely  a  change  of  possession.  The  parties 
could  not  accomplish  that  which  was  prohibited  by  law.  The  posses- 
sion was  transferred  from  Sweet  to  the  defendants  in  error,  which 
left  them  holding  it  in  trust  for  the  benefit  of  Sweet's  creditors,  with 
the  title  still  in  Sweet.  This  necessarily  follows  as  the  result  of  the 
attempted  sale  being  rendered  void  by  the  statute.  A  contract  be- 
tween citizens,  however  honestly  made,  cannot  prevail  as  against  a 
statute  which  prohibits  the  making  of  the  contract.     *    *     * 

When  the  defendants  in  error  sold  the  merchandise,  the  title  to 
which  remained  by  law  in  Sweet,  they  became  indebted  to  Sweet  for 
its  value.  Having  sold  and  converted  property  which,  in  law,  belong- 
ed to  Sweet,  it  obviously  follows  that  they  owed  him  for  its  value. 
It  is  true,  the  law  would  not  aid  Sweet  in  recovering  its  value  from 
the  defendants  in  error ;  for,  having  acted  in  the  sale  in  open  vio- 
lation and  defiance  of  a  statute,  public  policy  would  deny  him  a  rem- 
edy, and  leave  the  parties  to  the  legal  wrong  where  it  found  them. 
Especially  would  this  be  true  since  the  statute  in  question,  under  the 
circumstances  of  this  sale,  holds  the  property  for  the  benefit  of 
Sweet's  creditors,  and  the  courts  would  not  aid  Sweet  to  withdraw 
it  beyond  their  reach.  But  the  plaintiff  in  error  is  not  in  the  same 
attitude  as  Sweet.  Not  having  participated  in  the  wrongdoing,  the 
law  would  aid  it  to  recover  the  fund  set  apart  by  statute  for  creditors. 
Now  the  evidence  shows  that  the  defendants  in  error  sold  the  mer- 
chandise for  at  least  as  much  as  they  agreed  to  pay  for  it.  In  other 
words,  the  evidence  shows  that  the  defendants  in  error  sold  Sweet's 
property  for  at  least  as  much  as  $6,005.97,  and  at  the  time  the  writ 
of  garnishment  was  served  they  still  were  indebted  to  Sweet  in  said 
sum,  and  the  garnishment  fastened  upon  said  fund. 

The  identical  question  presented  here  has  not  been  adjudicated  by 
this  court  in  connection  with  the  bulk  sales  statute.  In  other  jurisdic- 
tions the  authorities  appear  to  be  somewhat  in  conflict,  but  the  weight 
of  authority  is  to  the  eft'ect  that,  when  one  purchases  merchandise  in 
violation  of  the  bulk  sales  law,  he  holds  the  property,  not  for  himself, 
but  as  trustee  for  the  seller's  creditors,  who  may  reach  the  trust  fund 
by  writ  of  garnishment,  even  though  the  purchaser  has  paid  full  value 
for  the  merchandise  and  has  resold  it.    *    *    * 

For  the  reasons  indicated,  the  judgment  of  the  Court  of  Civil  Ap- 
peals should  be  reversed,  and  the  judgment  of  the  trial  court  should 
be  affirmed.     *     *     * 


Ch.  4)  NEGOTIABLE   DOCUMENTS   OF   TITLE  10G3 

CHAPTER  IV 
NEGOTIABLE  DOCUMENTS  OF  TITLE 

Section 

1.  Introduction. 

2.  Definition  of  a  Negotiable  Document  of  Title. 

3.  Negotiation  of  Negotiable  Documents  of  Title. 

4.  Rights  of  an  Indorsee  of  a  Negotiable  Document  of  Title. 

5.  Rights  of  the  Indorsee  Against  Indorsers. 

6.  Rights  of  Creditors  Against  Goods  Represented  by  Negotiable  Documents 

of  Title. 

7.  Rights  of  Transferees  of  a  Non-Negotiable  Document  of  Title. 


SECTION  1.— INTRODUCTION 

It  is  highly  advantageous,  even  necessary,  for  the  business  com- 
munity to  be  able  effectively  to  deal  with  goods  during  the  time 
they  are  in  transit  or  while  stored  in  warehouses.  We  have  al- 
ready seen  that,  in  order  that  a  sale  of  goods  shall  in  all  respects 
be  binding  as  against  creditors  and  subsequent  purchasers  of  the 
seller,  there  must  be  a  delivery.  Obviously,  delivery  of  goods 
while  in  transit  or  while  stored  cannot  be  made  in  any  real  sense 
without  incurring  a  good  deal  of  eft'ort.  To  meet  this  difficulty  the 
commercial  world  has  found  it  necessary  to  use  some  more  or  less 
formal  document  as  a  representative  of  the  goods.  This  document 
contains  the  evidence  of  a  contract  executed  by  the  person  who 
has  possession  of  the  goods  and  by  the  persons  who  owned  them. 
The  document  discloses  the  name  of  the  owner  of  the  goods,  the 
bailor,  the  name  of  the  party  in  possession,  the  bailee,  and  the 
terms  of  the  contract  of  bailment.  It  is  this  document  which  may 
thereafter  be  made  use  of  with  the  same  legal  effect  that  would 
follow  a  dealing  with  the  actual  goods  themselves.  There  are 
some  important  differences,  of  course,  and  these  variations  will  be 
duly  noted  in  the  ensuing  sections.  A  document  which  may  ef- 
fectively transfer  a  title  to  goods  is  therefore  properly  spoken  of 
as  a  document  of  title.  Bills  of  lading,  issued  by  carriers,  and 
warehouse  receipts,  are  the  well-known  illustrations  of  documents 
of  title. 

It  is  to  be  noticed,  however,  that  our  topic  here  is  "negotiable 
documents  of  title."  It  is  possible  to  create  a  document  of  title 
which  is  not  negotiable.  But  it  is  not  surprising  that  the  business 
world,  thoroughly  familiar  with  advantages  resulting  from  the  use 
of  negotiable  instruments,  should  greatly  desire  that  documents  of 
title  should  likewise  possess  the  attributes  of  negotiability.  We 
are  already  familiar  with  the  formal  requisites  of  negotiable  in- 
struments payable  in  money,  and  of  the  rights  and  liabilities  of 
the  parties  thereto,  and  we  know  that  all  of  these  numerous  rules 
develop  out  of  the  desire  to  protect  purchasers  of  them  to  the 
greatest  extent  compatible  with  justice  to  all  other  parties.     In 


1064  SALES  (Part  4 

our  study  of  the  law  of  sales  thus  far,  particularly  Chapter  III,  it 
appears  that  a  purchaser  of  goods  assumes  a  much  greater  risk  in 
buying  goods  than  he  does  in  buying  a  note,  check,  or  bill  of  ex- 
change. The  desire  was,  therefore,  to  draw  upon  the  principles 
of  the  law  governing  negotiable  instruments  payable  in  money, 
and,  in  so  far  as  it  was  possible,  to  incorporate  these  rules  into 
the  law  of  sales  of  goods  represented  by  a  document  of  title,  and 
so  we  have  to-day  negotiable  documents  of  title. 

The  analogy  between  negotiable  instruments  payable  in  money 
and  negotiable  documents  of  title  is  not  perfect.  A  note  or  bill  of 
exchange  does  not  transfer  title  to  any  specific  piece  of  money.  It 
merely  transfers  a  right  to  demand  money ;  whereas  a  bill  of  lad- 
ing or  warehouse  receipt  exists  primarily  for  the  purpose  of  trans- 
ferring title  to  specific,  ascertained  goods.  While  not  perfect,  the 
analogy  is  surprisingly  similar.  A  comparison  of  the  relation  of 
the  parties  to  bills  and  notes  with  those  to  bills  of  lading  and  ware- 
house receipts  may  be  of  value.  The  bailee  is  the  primary  obligor; 
therefore  the  bailee  occupies  a  position  similar  to  that  of  the  maker 
of  a  note  or  the  acceptor  of  a  bill  of  exchange.  As  between  these 
two,  the  bailee  perhaps  more  nearly  occupies  the  position  of  the 
acceptor  of  a  bill  of  exchange — but  not  that  of  a  drawee,  before 
acceptance.  The  bailor  occupies  a  position  similar  to  that  of  the 
drawer  of  a  bill  of  exchange  payable  to  the  drawer's  own  order, 
with  this  exception — that  the  bailor's  liability,  he  being  the  seller, 
is  a  primary,  and  not  a  secondary  or  conditional,  Hability,  such  as 
that  of  the  drawer  of  a  bill  of  exchange.  Indorsers  and  indorsees 
of  both  kinds  of  instruments  occupy  the  same  relative  positions, 
although  their  rights  and  liabilities  are  not  quite  the  same. 

In  the  study  of  this  chapter,  therefore,  it  should  be  realized  at 
all  times  that  the  various  rules  of  law  here  discussed  represent  at- 
tempts to  introduce  the  law  of  negotiable  instruments  payable  in 
money  into  this  branch  of  the  law  of  sales. 


SECTION  2.— DEFINITION  OF  A  NEGOTIABLE  DOCU- 
MENT OF  TITLE 

Sales  Act,  Section  27.  A  document  of  title  in  which  it  is  stated 
that  the  goods  referred  to  therein  will  be  delivered  to  the  bearer, 
or  to  the  order  of  any  person  named  in  such  document  is  a  nego- 
tiable document  of  title. 

This  section  would  make  negotiable  bills  of  lading  and  ware- 
house receipts,  though  the  Uniform  Bills  of  Lading  Act  and  the 
Uniform  Warehouse  Receipts  Act  contain  sections  of  like  import. 
The  distinctive  characteristics  of  negotiable  documents  of  title  is, 
therefore,  that  it  must  provide  that  the  goods  shall  be  deliverable 
to  the  order  of  a  specified  person  or  to  bearer.  If  these  words  are 
omitted  from  a  bill  of  lading,  we  have  what  is  then  known  as  a 
non-negotiable  or  straight  bill  of  lading  which  cannot  be  used  as 


Ch.  4)  NEGOTIABLE   DOCUMENTS   OF  TITLE  1005 

a  symbol  of  the  goods.  A  warehouse  receipt  which  omitted  these 
words  would  not  be  effective  to  transfer  title  to  the  goods.  Fur- 
ther comment  on  this  section  is  not  necessary,  except  to  note  some 
similarities  and  differences  between  negotiable  documents  of  title 
and  negotiable  instruments  payable  in  money.  As  regards  the  ne- 
cessity for  using  the  words  "or  order,"  or  "bearer,"  we  note  that 
the  same  rule  applies. 

The  words  "or  order,"  "or  bearer,"  or  words  of  similar  meaning, 
must  appear  on  the  document.  Frequently  the  color  of  paper  used 
for  negotiable  bills  of  lading  will  differ  from  that  on  which  the 
same  carrier  prints  straight  bills  of  lading;  but  it  is  the  presence 
of  these  words  which  produces  the  great  variation  in  legal  effect 
between  the  two  kinds  of  documents. 

One  variation  is  to  be  noted.  If  an  instrument  payable  in  money 
contained  all  of  the  formal  requisites  of  negotiability,  but  there 
appeared  on  the  instrument  the  words  "non-negotiable,"  courts 
would  generally  hold  that  these  words  would  control,  and  the  in- 
strument would  be  non-negotiable.  But  if  the  words  "non-nego- 
tiable" appear  on  a  negotiable  document  of  title,  the  words  "non- 
negotiable"  are  deemed  not  to  control.  Section  30  of  the  Sales 
Act  provides : 

"If  a  document  of  title  which  contains  an  undertaking  by  a  car- 
rier, warehouseman,  or  other  bailee  to  deliver  the  goods  to  the 
bearer,  to  a  specified  person  or  order,  or  to  the  order  of  a  specified 
person,  or  which  contains  words  of  like  import,  has  placed  upon 
it  the  words  "not  negotiable,"  "non-negotiable"  or  the  like,  such  a 
document  may  nevertheless  be  negotiated  by  the  holder  and  is  a 
negotiable  document  of  title  within  the  meaning  of  this  act.  But 
nothing  in  this  act  contained  shall  be  construed  as  limiting  or  de- 
fining the  effect  upon  the  obligations  of  the  carrier,  warehouse- 
man or  other  bailee  issuing  a  document  of  title  of  placing  thereon 
the  words  "not  negotiable,"  "non-negotiable"  or  the  like. 

We  have  no  rule  which  expressly  provides  that  the  document 
must  direct  an  unconditional  delivery  to  the  consignee,  but  pre- 
sumably the  courts  would  follow  the  analogous  rule  in  the  law  of 
negotiable  instruments — that  the  promise  or  order  must  be  uncon- 
ditional. Such  a  case  as  this  is  not  likely  to  arise,  because  the 
forms  of  bills  of  lading  and  warehouse  receipts  are  well  standard- 
ized. A  negotiable  instrument  must  be  payable  in  money;  but 
here,  obviously,  the  very  purpose  of  the  bill  of  lading  or  ware- 
house receipt  is  to  transfer  title  to  specified  property  then  in  the 
possession  of  the  issuer  of  the  document,  and  not  to  create  a  right 
to  demand  money.  No  rule  expressly  requires  that  the  negotiable 
document  of  title  shall  make  the  goods  deliverable  within  a  fixed 
or  determinable  future  time,  as  we  find  in  the  law  of  negotiable  in- 
struments, but  as  a  matter  of  fact  negotiable  documents  of  title 
rarely  provide  that  the  goods  shall  be  deliverable  at  any  specified 
time.  No  provision  as  to  time  of  delivery  is  inserted.  A  nego- 
tiable instrument,  in  which  no  time  of  payment  is  expressed,  is 


1066  SALES  (Part  4 

deemed  payable  on  demand,  and  hence  at  a  determinable  future 
time.  This  rule  by  implication  governs  negotiable  documents  of 
title.  The  rule  in  the  law  of  negotiable  instruments  that  renders 
non-negotiable  an  instrument  which  contains  a  promise  to  do  an 
act  in  addition  to  the  payment  of  money  would  not  be  followed  in 
the  law  of  negotiable  documents  of  title.  The  carrier  often  ex- 
pressly assumes  obligations  other  than  to  deliver  the  goods,  for 
example,  to  ice  perishable  goods  traveling  in  refrigerator  cars, 
and  to  give  additional  service  to  live  stock.  For  the  most  part  it 
is  seen  that  the  formal  requirements  of  a  negotiable  document  of 
title  are  the  same  as  for  negotiable  instruments  payable  in  money. 


SECTION  3.— NEGOTIATION  OF  NEGOTIABLE  DOCU- 
MENTS OF  TITLE 

Sales  Act,  Section  28.  A  negotiable  document  of  title  may  be 
negotiated  by  delivery: 

(a)  Where  by  the  terms  of  the  document  the  carrier,  ware- 
houseman or  other  bailee  issuing  the  same  undertakes  to  deliver 
the  goods  to  the  bearer;    or 

(b)  Where  by  the  terms  of  the  document  the  carrier,  ware- 
houseman or  other  bailee  issuing  the  same  undertakes  to  deliver 
the  goods  to  the  order  of  a  specified  person,  and  such  person  or  a 
subsequent  indorsee  of  the  document  has  indorsed  it  in  blank  or 
to  bearer. 

Where  by  the  terms  of  a  negotiable  document  of  title  the  goods 
are  deliverable  to  bearer  or  where  a  negotiable  document  of  title 
has  been  indorsed  in  blank  or  to  bearer,  any  holder  may  indorse 
the  same  to  himself  or  to  any  other  specified  person,  and  in  such 
case  the  document  shall  thereafter  be  negotiated  only  by  the  in- 
dorsement of  such  indorsee. 

Sales  Act,  Section  29.  A  negotiable  document  of  title  may  be 
negotiated  by  the  indorsement  of  the  person  to  whose  order  the 
goods  are  by  the  terms  of  the  document  deliverable.  Such  indorse- 
ment may  be  in  blank,  to  bearer  or  to  a  specified  person.  If  in- 
dorsed  to  a  specified  person,  it  may  be  again  negotiated  by  the  in- 
dorsement of  such  person  in  blank,  to  bearer  or  to  another  specified 
person.    Subsequent  negotiation  may  be  made  in  like  manner. 

Sales  Act,  Section  32.  A  negotiable  document  of  title  may  be 
negotiated — 

(a)  By  the  owner  thereof;    or 

(b)  By  any  person  to  whom  the  possession  or  custody  of  the 
document  has  been  intrusted  by  the  owner,  if,  by  the  terms  of  the 
document  the  bailee  issuing  the  document  undertakes  to  deliver 
the  goods  to  the  order  of  the  person  to  whom  the  possession  or 
custody  of  the  documents  has  been  intrusted,  or  if  at  the  time  of 
such  intrusting  the  document  is  in  such  form  that  it  may  be  ne- 
gotiated by  delivery. 


Ch.  4)  NEGOTIABLE   DOCUMENTS   OF  TITLE  1067 

There  are  three  questions  here:  (1)  As  regards  the  form  of 
indorsement  necessary  for  negotiation;  (2)  as  regards  the  legal 
effect  of  each  kind  of  indorsement ;  and  (3)  as  regards  the  per- 
sons who  have  power  to  negotiate.  The  same  kinds  of  indorse- 
ments used  to  transfer  title  to  negotiable  instruments  payable  in 
money  are  used  to  transfer  title  to  negotiable  bills  of  lading  and 
warehouse  receipts;  i.  e.,  the  special  indorsement,  "Deliver  to  A.," 
signed  by  the  then  holder  of  the  document,  and  the  blank  indorse- 
ment, consisting  only  in  the  signature  of  the  holder.  Either  of 
these  indorsements,  accompanied  by  delivery,  transfers  title  to  the 
instrument  and  to  the  goods,  just  as  the  same  indorsements,  cou- 
pled with  delivery,  transfer  title  to  the  instruments  and  to  the  le- 
gal right  to  recover  money  from  the  party  primarily  liable  there- 
on. Apparently  there  is  no  occasion  for  the  use  of  the  restrictive 
indorsement,  or  the  conditional  indorsement,  for  the  established 
custom  is  to  transfer  the  title  to  the  document  to  banks  which  are 
employed  to  present  and  collect  the  amount  called  for  by  a  bill  of 
exchange  drawn  upon  the  buyer  for  the  purchase  price  and  sent 
along  with  the  bill  of  lading.  The  legal  effect  of  the  special  and 
blank  indorsements,  when  accompanied  by  delivery,  is  the  same  as 
in  the  law  of  negotiable  instruments ;  i.  e.,  the  title  to  the  instru- 
ment passes.  There  is  one  possible  exception.  A  negotiable  docu- 
ment of  title,  which,  on  the  face  of  the  document,  makes  the  goods 
deliverable  to  bearer,  will,  by  virtue  of  section  28b,  be  controlled 
by  a  subsequent  special  indorsement ;  that  is,  that  in  any  case 
where  a  negotiable  document  of  title  is  transferable  by  delivery — 
i.  e.,  when  it  is  made  out  to  bearer,  or  originally  made  out  to  order 
and  became  deliverable  to  bearer  by  virtue  of  an  indorsement  in 
blank,  in  both  of  these  cases  the  subsequent  special  indorsements 
changes  the  character  of  the  bill  from  a  bearer  bill  to  an  order  bill. 
In  the  law  of  negotiable  instruments  it  seems  that  an  instrument 
payable  to  bearer  on  its  face  cannot  be  controlled  by  subsequent 
special  indorsement. 

As  regards  the  persons  who  have  power  to  negotiate  documents 
of  title,  it  is  to  be  noted  that  section  32  differs  essentially  from  the 
corresponding  sections  in  the  Negotiable  Instruments  Law.  It 
will  be  recalled  that  the  effect  of  several  sections  of  this  law  give 
to  a  thief  or  finder  of  a  negotiable  instrument  payable  to  bearer 
the  legal  power  to  pass  a  good  title  to  holders  in  due  course.  These 
sections  codified  a  well-established  rule  of  the  common  law.  Sec- 
tion 32  of  the  Sales  Act,  however,  provides  that  the  only  persons 
who  may  negotiate  a  document  are  (1)  the  owner;  or  (2)  a  per- 
son to  whom  the  possession  or  custody  of  the  document  has  been 
intrusted  by  the  owner.  A  thief  or  finder  of  a  negotiable  docu- 
ment in  form  transferable  by  delivery  certainly  is  not  a  person  in- 
trusted by  the  owner  with  the  possession  or  custody  of  the  instru- 
ment. Therefore  it  would  seem  quite  clear  that  an  innocent  pur- 
chaser of  a  negotiable  document  of  title  running  to  bearer,  under 
the  Sales  Act,  would  get  no  title  to  the  instrument  nor  to  the 


10G8  SALES  (Part  4 

goods.  Section  40  of  the  Uniform  Warehouse  Receipts  Act  con- 
tains  the  same  language  as  that  which  is  used  in  section  32  of  the 
Sales  Act.  Therefore  a  thief  or  finder  of  a  negotiable  warehouse 
receipt  would  have  no  power  to  transfer  a  title  to  an  innocent  pur- 
chaser. The  Uniform  Bills  of  Lading  Act,  however,  follows  out 
the  analogy  of  the  rule  in  the  Negotiable  Instruments  Law,  for  sec- 
tion 31  of  the  Uniform  Bills  of  Lading  Act  provides  that  "a  nego- 
tiable bill  may  be  negotiated  by  any  person  in  possession  of  the 
same,  however  such  possession  may  have  been  acquired,  if,  by  the 
terms  of  the  bill,  the  carrier  undertakes  to  deliver  the  goods  to  the 
order  of  such  person,  or  if  at  the  time  of  negotiation  the  bill  is  in 
such  form  that  it  may  be  negotiated  by  delivery."  While  the  theft 
of  negotiable  documents  of  title  is  not  so  common  as  the  theft  of 
other  negotiable  instruments,  it  is  important  to  bear  these  distinc- 
tions in  mind.  A  purchaser  of  a  negotiable  warehouse  receipt 
should  realize  that  he  is  taking  a  chance  that  at  some  place  in  the 
chain  of  title  the  instrument,  if  at  any  time  running  to  bearer, 
might  have  been  stolen.  Of  course,  he  will  always  have  his  rem- 
edy back  against  his  indorser;  but  in  some  cases  this  may  not  be 
as  great  a  degree  of  protection  as  he  may  desire. 

There  are  no  provisions  in  the  Sales  Act,  Warehouse  Receipts 
Act,  or  Bills  of  Lading  Act  which  deal  with  the  effect  of  forgery 
of  negotiable  documents  of  title,  and  of  the  names  of  holders  there- 
of, as  directly  as  these  matters  are  dealt  with  in  the  Negotiable 
Instruments  Law.  Instances  of  forgery,  either  of  the  carrier's 
name  or  holders  of  genuine  bills,  are  not  common.  The  analogies 
in  the  law  of  negotiable  instruments  in  most  instances  would  be 
carried  out.  The  forgery  of  the  name  of  the  person  to  whose  or- 
der goods  are  deliverable,  or  of  a  special  indorsee's  name,  clearly 
would  pass  no  title  to  the  innocent  transferee. 


SECTION  4.— RIGHTS  OF  AN  INDORSEE  OF  A  NEGO- 
TIABLE DOCUMENT  OF  TITLE 

Sales  Act,  Section  33.  A  person  to  whom  a  negotiable  docu- 
ment of  title  has  been  duly  negotiated  acquires  thereby :  (a)  Such 
title  to  the  goods  as  the  person  negotiating  the  document  to  him 
had  or  had  ability  to  convey  to  a  purchaser  in  good  faith  for  value 
and  also  such  title  to  the  goods  as  the  person  to  whose  order  the 
goods  were  to  be  delivered  by  the  terms  of  the  document  had  or 
had  ability  to  convey  to  a  purchaser  in  good  faith  and  for  value; 
and  (b)  the  direct  obligation  of  the  bailee  issuing  the  document  to 
hold  possession  of  the  goods  for  him  according  to  the  terms  of  the 
document  as  fully  as  if  such  bailee  had  contracted  directly  with 
him. 

Sales  Act,  Section  38.  The  validity  of  the  negotiation  of  a  ne- 
gotiable document  of  title  is  not  impaired  by  the  fact  that  the  ne- 
gotiation was  a  breach  of  duty  on  the  part  of  the  person  making 


Ch.  4)  NEGOTIABLE  DOCUMENTS  OF  TITLE  1069 

the  negotiation,  or  by  the  fact  that  the  owner  of  the  document  was 
induced  by  fraud,  mistake  or  duress  to  entrust  the  possession  or 
custody  thereof  to  such  person,  if  the  person  to  whom  the  docu- 
ment was  negotiated  or  a  person  to  whom  the  document  was  sub- 
sequently negotiated  paid  value  therefor,  without  notice  of  the 
breach  of  duty,  or  fraud,  mistake  or  duress. 

In  the  present  section  our  problem  is  to  ascertain  the  rights  of 
an  indorsee  of  a  negotiable  document  of  title  arising  out  of  his 
ownership  of  such  document.  We  have  already  noted  the  circum- 
stances under  which  a  party  in  possession  of  a  document  of  title 
will  be  deemed  to  be  the  owner  of  the  same.  The  instrument  must 
have  been  negotiated  to  him  in  one  of  the  ways  allowed  by  law. 
Granted,  then,  that  a  person  is  owner  of  the  document ;  what  rights 
against  all  other  people  does  he  acquire  thereby?  This  general 
problem  involyes  three  subordinate  inquiries:  (1)  Under  what 
circumstances  will  an  indorsee  be  an  innocent  purchaser  for  value? 
(2)  Under  what  circumstances  will  claims  of  ownership  and  all 
other  kinds  of  claims  with  respect  to  the  goods,  asserted  by  other 
persons,  be  cut  off  by  the  negotiation  of  the  document  to  an  inno- 
cent purchaser?  (3)  What  rights  does  an  innocent  indorsee  ac- 
quire against  the  carrier  or  warehouseman  who  issued  the  docu- 
ment? 

The  first  question,  as  to  the  circumstances  under  which  an  in- 
dorsee will  be  deemed  to  be  an  innocent  purchaser,  need  engage 
our  attention  but  briefly,  because  such  a  person  must  be  substan- 
tially in  the  same  position  that  a  person  must  occupy  in  order  to  be 
a  holder  in  due  course  of  a  negotiable  instrument  payable  in  mon- 
ey, (a)  That  is,  he  must  take  in  good  faith  and  without  notice  of 
the  claim  of  the  third  party.  The  element  of  good  faith,  or  con- 
versely, what  constitutes  bad  faith,  was  sufficiently  treated  in  the 
law  of  negotiable  instruments,  (b)  He  must  be  a  purchaser,  not 
a  donee.  But  just  as  we  found  to  be  true  in  negotiable  instru- 
ments, a  person  will  be  a  purchaser  when  he  has  parted  with  value, 
and  value  is  defined  in  section  76  of  the  Sales  Act  as  "any  consid- 
eration sufficient  to  support  a  simple  contract.  An  antecedent  or 
pre-existing  claim,  whether  for  money  or  not,  constitutes  value 
where  goods  or  documents  of  title  are  taken  either  in  satisfaction 
thereof  or  as  security  therefore."  A  donee,  or  a  transferee  with 
notice  from  an  innocent  purchaser,  would  be  an  innocent  purchaser 
unless  he  participated  in  the  fraud. 

The  second  question,  as  to  the  circumstances  under  which  the 
claims  of  others  with  respect  to  the  goods  will  be  cut  off,  opens 
up  a  broad  field  of  possibilities.  At  the  start,  one  matter  should 
be  noted  by  way  of  comparison  with  the  rights  of  a  holder  in  due 
course  of  negotiable  instruments  payable  in  money.  We  there 
found  that  in  the  hands  of  a  holder  in  due  course  two  very  differ- 
ent kinds  of  rights  possessed  by  third  parties  were  cut  off;  i.  e., 
equities  of  defense  and  equities  of  ownership.  Equities  of  defense 
were,  from  a  practical  standpoint,  more  important  than  equities 


1070  SALES  (Part  4: 

of  ownership.  That  is,  we  found  that  usuall}-,  when  the  holder  in 
due  course  was  suing  the  maker  or  acceptor,  the  defendant  was 
attempting  to  set  up  a  defense  which  undoubtedly  would  have  been 
available  to  him,  had  he  been  sued  by  the  party  with  whom  he 
dealt,  but  that  such  defenses,  usually  lack  of  consideration,  fraud 
in  the  inducement,  payment  or  breach  of  contract,  etc.,  were  shut 
out  when  he  was  sued  by  a  holder  in  due  course.  Occasionally 
some  person  wall  assert  against  the  holder  in  due  course  an  equity 
of  ownership,  and  we  found  that  these  equities  were  likewise  shut 
out  in  the  hands  of  the  holder  in  due  course.  The  point  worthy 
of  observation  here  is  that  equities  of  defense  more  commonly 
arise  in  connection  with  negotiable  instruments  payable  in  money 
than  do  claims  of  ownership.  Just  the  converse  is  true  in  connec- 
tion with  negotiable  documents  of  title.  Equities  of  defense  are 
seldom  asserted,  but  claims  of  ownership  continually  arise.  So  in 
looking  at  our  second  question  we  are  concerned  largely  with 
claims  of  ownership  in  the  goods  asserted  by  other  parties.  When 
will  these  claims  be  cut  ofif? 

When  the  bailor  actually  obtained  a  negotiable  document,  and 
did  not  deposit  any  goods,  obviously  the  innocent  indorsee  will 
obtain  no  goods.  This  situation  arises  in  this  way :  A  person  may 
intend  to  deliver  the  goods  to  a  carrier,  and  upon  making  this  rep- 
resentation will  induce  the  agent  to  issue  the  bill  of  lading.  Later 
events  may  make  it  impossible  to  deliver,  or  the  bailor  may  have 
acted  fraudulently.  It  is  clear  that  the  indorsee  of  the  document 
can  acquire  no  title  to  the  goods.  But  may  he  hold  the  carrier 
liable?  May  the  defense  which  the  carrier  clearly  has  against  the 
procurer  of  the  document  be  asserted  against  the  innocent  in- 
dorsee? Generally  not.  The  carrier  will  be  liable  to  the  holder 
of  the  bill.  This  defense  is  not  available  as  against  the  innocent 
holder — it  being  a  personal  defense.  At  common  law  there  was  a 
conflict  of  authority  on  this  point.  Those  courts  which  held  that 
the  carrier  could  set  up  the  defense  of  non-receipt  of  the  goods 
against  the  innocent  holder  allowed  it  upon  the  theory  that  the  de- 
fense was  a  real  defense ;  the  execution  and  delivery  of  the  docu- 
ment by  the  carrier's  agent  being  regarded  as  entirely  an  unau- 
thorized act,  tantamount  to  a  forgery  of  the  carrier's  name.  The 
Uniform  Bills  of  Lading  Act  now  throws  the  loss  upon  the  car- 
rier.   This  section  is  as  follows : 

Section  23.  If  a  bill  of  lading  has  been  issued  by  a  carrier  or 
on  his  behalf  by  an  agent  or  employee  the  scope  of  whose  actual 
or  apparent  authority  includes  the  issuing  of  bills  of  lading,  the 
carrier  shall  be  liable  to  the  consignee  found  in  a  non-negotiable 
bill  or  the  holder  of  a  negotiable  bill. 

Notice  that  this  section  is  limited  to  cases  where  the  bill  was 
issued  by  an  agent  whose  actual  or  apparent  authority  included 
the  issuance  of  bills  of  lading.  If  the  bill  were  issued  by  a  switch- 
man, the  indorsee  would  acquire  no  rights  against  the  carrier.  A 
warehouseman  would  be  under  a  liability  of  similar  scope.     This 


Ch.  4)  NEGOTIABLE   DOCUMENTS   OF   TITLE  1071 

section  would  throw  the  liability  on  the  carrier  in  a  case  where 
some  of  the  goods  were  received,  but  not  as  many  as  were  called 
for  by  this  bill  of  lading.  This  situation  may  easily  arise.  A  ship- 
per of  grain  may  declare  that  there  were  500  bushels,  when  in 
reality  there  were  but  400.  The  carriers  may,  however,  avoid  this 
liability  by  inserting  in  the  bill  of  lading  the  words  "shipper's  load 
and  count."  This  statement  relieves  the  carrier  from  liability  for 
damages  caused  by  improper  loading  or  by  non-receipt  of  the 
goods.  Section  23  of  the  Uniform  Bills  of  Lading  Act  authorizes 
this  stipulation  to  be  made  and  prescribes  its  effect. 

Assuming,  now,  that  goods  were  in  fact  delivered  over  to  the 
carrier  or  warehouseman,  and  a  negotiable  document  issued  for 
them ;  are  there  any  circumstances  under  which  the  holder  of  the 
document  will  have  a  claim  inferior  to  that  of  third  parties?  Ob- 
viously there  are  such  cases.  If  the  bailor  had  stolen  the  goods, 
he  could  not  by  the  simple  device  of  depositing  them  and  procur- 
ing a  negotiable  receipt  obtain  the  power  to  cut  off  the  claims  of 
the  true  owner.  The  indorsee  will  lose  in  this  case.  The  case  of 
theft  will  not  be  common,  but  we  know  that  there  are  a  gre^t  many 
situations  where  a  person  may  have  possession  of  goods,  but  will 
not  have  the  power  to  transfer  a  good  title  to  a  purchaser.  In  this 
connection  we  should  recall  the  subject-matter  of  Chapter  III. 
We  there  found  that  in  some  cases  a  person,  although  not  the 
owner  of  goods,  did  possess  the  power  to  transfer  title  to  an  inno- 
cent purchaser.  This  power  is  not  nearly  so  extensive  as  is  the 
power  to  transfer  title  to  money  and  negotiable  instruments  pay- 
able to  bearer.  In  fact,  the  presumption  is  all  against  the  exist- 
ence of  such  power.  Still,  if  the  seller  had  a  voidable  title,  or  was 
in  possession  of  goods  already  sold,  or  where  there  was  some  ele- 
ment of  estoppel  against  the  true  owner,  a  party,  though  not  the 
owner,  will  have  power  to  pass  title  to  an  innocent  person.  It  is 
then  to  be  noticed  that  the  introduction  of  the  negotiable  docu- 
ment of  title  does  not  change  this  general  situation  in  the  slightest 
degree.  Section  33,  above  quoted,  states  that  the  title  acquired  by 
the  indorsee  will  be  (1)  the  title  which  the  person  negotiating  the 
document  had  or  (2)  had  ability  to  convey.  A  person  will  have 
ability  to  convey  title  in  cases  where  he  is  not  owner,  only  in  those 
situations  which  were  discussed  in  Chapter  III. 

Complications  of  great  difficulty  arise  at  this  point.  The  prob- 
lem of  ascertaining  the  respective  rights  of  the  holder  of  the  docu- 
ment and  of  some  other  claimant  is  not  always  easy  of  solution. 
In  the  first  case  presented,  Commercial  Bank  v.  J.  K.  Armsby  Co., 
a  pledgee  bank  was  protected.  In  the  two  cases  following  Com- 
mercial Bank  v.  J.  K.  Armsby  Co.  a  type  of  business  transaction 
is  presented  which  is  of  considerable  importance,  particularly  in 
connection  with  the  import  and  export  trade.  All  manner  of  dif- 
ficulty may  arise  therefrom,  depending  upon  the  nature  of  the 
"accident"  which  has  plunged  the  parties  into  litigation.  These 
two  cases  by  no  means  exhaust  the  possibilities,  but  they  are  in- 


1072  SALES  (Part  4 

serted  here,  first,  because  of  the  commercial  importance  of  the 
transaction  involved ;  and,  second,  because  they  vividly  reveal  the 
inherent  difficulty  in  balancing  the  rights  of  the  various  parties 
who  may  become  concerned  therein. 

The  situation  may  be  called  generally  "the  trust  receipt  trans- 
action." An  importer  desires  to  import  a  cargo  of  goods.  His 
capital  is  limited.  He  does  have  credit.  He  arranges  with  a  bank 
either  to  accept  bills  of  exchange  drawn  by  the  foreign  exporter, 
and  the  bank  will  issue  a  letter  of  credit,  or  in  some  way  will  bind 
itself  to  pay  the  price  to  the  foreign  exporter.  The  cargo  is  ship- 
ped, usually  under  negotiable  documents  of  title,  and  finally  the 
bill  of  lading,  accompanied  by  the  bill  of  exchange,  will  be  pre- 
sented to  the  bank  which  has  undertaken  to  finance  the  transac- 
tion for  the  importer.  The  bank  pays  the  exporter,  and  the  banks 
which  represented  him  drop  out.  The  other  bank  holds  the  impor- 
ter's note  and  the  bill  of  lading.  So  far  this  bank  is  the  only 
party  who  has  parted  with  any  money  in  connection  with  the 
transaction.  The  bank  does  not  expect  to  sell  these  imported 
goods,  but  eventually  it  expe.cts  to  transfer  the  possession  to  the 
importer,  who  is  chiefly  interested  in  the  shipment.  The  bank  is 
interested  in  the  deal  only  to  the  extent  that  it  desires  reimburse- 
ment of  the  funds  advanced  and  a  legitimate  profit.  But  the  im- 
porter has  no  funds,  and  cannot  pay  until  he  sells  the  goods  which 
were  imported.  So  the  business  problem  which  confronts  the 
bank  is  how  to  enable  the  importer  to  dispose  of  the  goods,  and 
at  the  same  time  retain  a  sufficient  hold  upon  the  goods,  and  upon 
the  proceeds  arising  therefrom,  to  protect  the  loan  to  the  importer. 

There  are  various  possibilities  open.  The  bank  may  surrender 
the  bill  of  lading  unconditionally,  trusting  to  the  importer's  gen- 
eral credit.  Here,  of  course,  there  is  no  special  protection  what- 
ever, except  that  which  any  general  creditor  has.  Second,  the 
bank  could  transfer  the  bill  of  lading  and  require  a  mortgage  back. 
But  this  solution  may  be  hedged  with  difficulty.  Obviously  the 
mortgage  must  carry  a  power  of  sale  to  the  importer;  otherwise 
he  could  not  sell  the  goods.  The  mortgage  would  be  of  no  value 
to  the  bank  as  soon  as  the  goods  were  sold,  unless  the  mortgage 
covered  the  proceeds  arising  from  the  sale.  Furthermore,  many 
banks  will  not  have  power  to  take  a  chattel  mortgage,  and,  even 
if  tEey  did,  the  mortgage  would  not  create  an  effective  hold  upon 
the  money  derived  from  the  sale,  for  money  may  be  disposed  of  to 
other  creditors  of  the  importer,  in  which  case  the  bank's  protec- 
tion is  gone,  except  in  so  far  as  such  payments  operate  as  recov- 
erable preferences  in  bankruptcy. 

Perhaps  there  are  other  possibilities,  but  the  policy  usually 
adopted  by  the  bank  is  to  deliver  the  bill  of  lading  to  the  importer 
in  exchange  for  what  is  known  as  a  "trust  receipt"  executed  by 
the  importer.  This  trust  receipt  may  be  executed  for  various  pur- 
poses. In  the  first  place  the  importer  may  desire  to  obtain  the 
bill  of  lading  merely  for  a  temporary  purpose,  such  as  getting  the 


Ch.  4)  NEGOTIABLE  DOCUMENTS  OF  TITLE  1073 

goods  through  the  custom  house,  leaving  for  a  later  transaction 
the  arrangements  under  which  a  final  sale  by  the  importer  may  be 
made.  Or  the  trust  receipt  may  permit  a  sale  only  to  a  particular 
person.  Whatever  the  reason  for  the  delivery  of  the  bill  of  lading 
to  the  importer  may  be,  if  there  be  restrictions  imposed  upon  the 
importer's  use  of  the  bill  of  lading,  we  have  a  case  where  the 
holder  of  the  bill  has  intrusted  the  possession  of  the  same  to  a  per- 
son who  has  but  a  limited  legal  right  thereto ;  but  he  has  a  legal 
power  to  dispose  of  the  bill  which  is  considerably  broader  than 
his  legal  right  so  to  do. 

OOMMBECIAL  BANK  v.  J.  K.  ARMSBY  CO. 
(Supreme  Court  of  Georgia,  1VA)4.     120  Ga.  74,  47  S.  E.  589,  65  L.  R.  A.  443.) 

Action  by  the  J.  K.  Armsby  Company  against  the  Commercial  Bank. 
Judgment  for  plaintiff,  and  defendant  brings  error. 

Candi<KR,  J.  The  J.  K.  Armsby  Company,  an  Illinois  corporation, 
shipped  to  Walton  &  Carr,  their  brokers  in  Augusta,  a  quantity  of 
salmon  for  distribution  to  different  parties  to  whom  the  goods  had 
been  sold.  Walton  &  Carr  were  merely  agents  of  the  Armsby  Com- 
pany, and  had  no  right  or  title  to  the  salmon.  The  goods  were  ship- 
ped from  a  point  in  Oregon,  by  parties  from  whom  they  had  been  or- 
dered by  the  Armsby  Company,  on  a  through  bill  of  lading  to  Augusta, 
and  were  consigned  to  the  order  of  the  consignor,  with  directions  to 
notify  Walton  &  Carr.  The  Armsby  Company  sent  Walton  &  Carr  a 
check  for  the  amount  of  the  freight,  which  was  paid,  and  it  also  mailed 
them  the  original  bill  of  lading,  which  was  indorsed  blank.  Carr,  a 
member  of  the  firm  of  Walton  &  Carr,  took  the  bill  of  lading  to  the 
Commercial  Bank  of  Augusta,  and  hypothecated  it  for  a  loan  of  money. 
Shortly  thereafter  Walton  &  Carr  failed,  and  the  bank  converted  the 
salmon  for  the  payment  of  its  debt,  whereupon  the  Armsby  Company 
brought  against  it  the  present  suit,  which  was  an  action  of  trover. 
The  case  was  tried  before  the  judge  of  the  city  court  of  Richmond 
county,  without  a  jury.  *  *  *  j^  ^y^g  admitted  that  neither  the 
bank  nor  any  of  its  officials  knew  or  had  reason  to  suspect  that  Carr 
had  no  right  to  convey  the  salmon,  and  that,  in  the .  event  the  bank 
should  be  held  hable,  the  proper  amount  to  be  recovered  was  $700. 
The  judge  found  in  favor  of  the  plaintiff,  and  rendered  judgment  in  its 
favor  for  the  amount  mentioned.     The  defendant  excepted.     *     *     * 

The  sole  question  for  our  determination,  then,  is,  does  a  bill  of  lad- 
ing of  the  character  of  the  one  involved  in  this  suit  constitute  such 
an  external  indicium  of  the  right  of  disposing  of  the  property  for 
which  it  was  issued  as  to  bring  the  case  within  the  operation  of  the 
rule  laid  down  in  the  Code.  As  a  general  rule,  the  transferee  of  a 
bill  of  lading  can  obtain  no  better  title  to  the  goods  which  it  covers 
than  that  which  was  in  the  person  by  whom  it  was  transferred.  In- 
deed, it  is  a  self-evident  proposition  that  no  man  can  convey  that  which 
he  does  not  possess.  But  the  true  owner  of  property  may,  by  placing 
it  in  the  power  of  another  to  defraud  innocent  purchasers  by  an  ap- 
parently valid  transfer  of  the  property,  cut  himself  off  from  claiming 
it,  and  thereby  divest  the  title  from  himself.  In  4  Am.  &  Eng.  Enc.  L. 
(2d  Ed.)  551,  it  is  said  that  an  important  exception  to  the  general  rule 
B.&  B.Bub.Law— 68 


1074  SALES  (Part  4 

which  has  already  been  stated  "arises  in  the  case  of  the  transfer  of  a 

bill  of  lading  to  a  bona  fide  purchaser  for  value  by  a  consignee  to  whom 

the  goods  are  by  the  terms  of  the  instrument  made  deliverable,  or  to 

whom  the  consignor  and  original  owner  of  the  goods  has  indorsed 

and  delivered  the  bill.     It  seems  to  be  established  that  in  this  case  the 

transfer  defeats  the  vendor's  right  of  stoppage  in  transitu,  and  passes 

the  title  to  the  goods  to  the  bona  fide  transferee."     *     *     *     While  a 

bill  of  lading  is  not  in  the  full  sense  a  negotiable  instrument,  it  is 

treated  by  universal  commercial  usage  as  a  symbol  of  the  goods  for 

which  it  is  issued,  and  consequently  it  is  in  a  measure  negotiable. 
*     *     * 

The  following  language  from  the  opinion  of  Mr.  Justice  Miller  in 
the  case  of  McNeal  v.  Hill,  Woolw.  96,  Fed.  Cas.  No.  8,914,  is  there 
quoted  with  approval :  "As  civilization  has  advanced  and  commerce 
extended,  new  and  artificial  modes  of  doing  business  have  superseded 
the  exchanges  by  barter  and  otherwise  which  prevail  while  society  is 
in  its  earlier  and  simpler  stages.  The  invention  of  the  bill  of  exchange 
is  a  familiar  illustration  of  this  fact.  A  more  modern,  but  still  not 
recent,  invention  of  like  character,  for  the  transfer,  without  the  cum- 
bersome and  often  impossible  operations  of  actual  delivery,  of  articles 
of  personal  property,  is  the  indorsement  or  assignment  of  bills  of 
lading  and  warehouse  receipts.  Instruments  of  this  kind  are  sui  gen- 
eris. From  long  use  and  trade  they  have  come  to  have  among  com- 
mercial men  a  well-understood  meaning,  and  the  indorsement  or  as- 
signment of  them  as  absolutely  transfers  the  general  property  of  the 
goods  and  chattels  therein  named  as  would  a  bill  of  sale." 

In  this  case  there  was  no  dispute  as  to  the  general  custom  of  trade 
in  regard  to  bills  of  lading  of  the  character  of  the  one  negotiated  by 
Carr  with  the  Commercial  Bank.  It  was  the  daily  practice  of  banks 
in  Augusta  and  elsewhere  to  advance  money  on  such  security,  for 
possession  of  the  bill  of  lading  was  regarded  as  prima  facie  evidence 
of  the  title  of  the  holder  to  the  goods  of  which  the  bill  was  the  sym- 
bol. Ordinarily  bills  of  lading  of  this  kipd  are  attached  to  drafts  for 
the  purchase  price  of  the  goods,  and  can  only  be  obtained  by  payment 
of  the  drafts.  Carr's  possession  of  the  bill  of  lading  was  therefore 
prima  facie  evidence  that  he  had  paid  a  draft  drawn  by  the  consignor, 
and  was  entitled  to  the  property.     *     *     * 

Judgment  reversed.     *     *     * 


ROLAND  M.   BAKER   GO.   v.   BROWW  et  al. 

(Supreme  Judicial  Court  of  Massachusetts,  1913.    214  Mass.  196, 
100  N.  E.  1025.) 

Action  by  the  Roland  M.  Baker  Company  against  Waldron  P.  Brown 
and  others.  There  were  findings  for  defendants,  and  plaintifif  brings 
exceptions. 

Tort  to  recover  for  the  alleged  conversion  of  120  bales  of  hides  which 
plaintiff  claimed  to  own  by  reason  of  a  bill  of  lading  which  it  had  re- 
ceived from  the  Columbia  Leather  Co. 

Sheldon,  J.  This  case  seems  to  have  been  dealt  with,  both  at  the 
trial  and  at  the  argument  in  this  court,  largely  as  if  the  plaintiff's 
rights  depended  upon  the  title  which  it  acquired  when  the  bill  of  lad- 
ing for  the  goods  in  question,  with  the  indorsements  thereon,  was  de- 


Ch.  4)  NEGOTIABLE   DOCUMENTS   OF   TITLE  1075 

livered  to  it.  If  that  were  so,  it  might  be  found,  as  was  found  at 
the  trial,  that  the  plaintift'  took  the  bill  of  lading  with  notice  of  the  de- 
fendants' claim  to  the  goods  represented  thereby  and  of  the  trust 
receipt  which  the  defendants  had  taken  from  the  Massachusetts  Hide 
Company,  and  so  was  not  a  purchaser  in  good  faith  and  without  no- 
tice of  the  breach  of  duty  of  the  Hide  Company  in  violating  the  terms 
of  that  trust  receipt.  But  that  point  is  not  decisive  of  the  case.  The 
plaintiff  had,  or  there  was  evidence  that  it  had,  purchased  the  hides 
of  the  Columbia  Leather  Company;  and  if  so,  the  plaintiff,  whatever 
notice  or  knowledge  it  may  have  had  of  the  defendants'  rights,  yet  ac- 
quired all  the  rights  of  its  vendor.     *     *     * 

The  testimony  was  that  the  Columbia  Company  took  these  hides  from 
the  Massachusetts  Hide  Company  in  payment  of  a  debt  due  to  it  from 
the  Hide  Company.  The  defendants  had  held  this  bill  of  lading,  and 
the  goods  mentioned  therein  were  to  be  delivered  to  their  order,  in 
consequence  of  their  having  issued  to  the  Hide  Company  a  letter  of 
credit,  upon  wljich  the  hides  had  been  purchased  in  Russia,  and  shipped 
to  Boston.  The  defendants  had  paid  or  caused  to  be  paid  the  drafts 
drawn  under  their  letter  of  credit  for  the  price  of  the  hides,  and  bills 
of  lading  for  the  hides  had  been  issued  in  triplicate,  all  of  which  were 
originals  and  "one  of  which  being  .accomplished,  the  others  [were] 
to  stand  void."  The  defendants  were  accordingly  the  absolute  owners 
of  the  hides.     *     *     * 

The  defendants  then,  before  the  arrival  of  the  hides,  but  after  they 
had  received  the  bills  of  lading,  wrote  upon  the  back  of  the  first  of 
the  triplicate  bills  the  indorsement  signed  by  them.  "Deliver  to  Massa- 
chusetts Hide  Corporation,"  and  on  August  11th  delivered  it  to  a  clerk 
of  that  company.  This  they  did  upon  the  representation  of  that  com- 
pany that  it  wished  to  arrange  for  the  custom-house  entry  in  advance 
of  the  arrival  of  the  ship,  with  the  understanding  and  intention  of  both 
parties  that  the  Hide  Company  should  take  the  bill  merely  as  the  agent 
of  the  defendants,  and  without  any  design  to  pass  to  the  Hide  Company 
the  title  either  to  the  bill  of  lading  or  to  the  goods  which  it  represented', 
but  with  authority  to  sell  the  same  to  one  Baker  whom  the  Hide  Comr- 
pany  falsely  represented  that  it  had  obtained  as  a  purchaser  thereof. 
At  the  same  time  with  the  bill  of  lading,  tlie  defendants  handed  to  the 
Hide  Company  a  "trust  receipt,"  to  be  properly  filled  in  and  signed  and 
returned  to  the  defendants.  This  was  done,  and  the  trust  receipt  was 
returned  to  the  defendants  a  few  days  later  signed  by  the  Hide  Com- 
pany and  by  its  treasurer.  By  this  receipt,  the  signers  acknowledged 
that  they  had  received  from  the  defendants  the  hides  "in  trust  to  de- 
liver the  same  to  R.  M.  Baker,  who  have  [sic]  purchased  the  same 
and  to  obtain  form  the  purchaser  the  proceeds  of  the  sale  of  the  same," 
and  to  deliver  immediately  such  proceeds  to  the  defendants.  This  trust 
receipt  provided  also  that  the  defendants  might  at  any  time  cancel  the 
trust  and  take  possession  of  the  goods  or  the  proceeds  thereof. 

By  this  transaction,  under  the  common  law  as  declared  by  our  de- 
cisions, the  title  to  the  hides  remained  in  the  defendants ;  the  Hide 
Company  had  no  power  to  dispose  of  them  in  any  other  way  than  by 
a  sale  to  Baker ;  and  no  one  else  could  by  a  purchase  from  the  Hide 
Company  or  by  any  dealings  with  it  acquire  a  title  to  the  hides  which' 
would  be  good  against  the  defendants.  The  bill  of  lading  merely  repre- 
sented the  goods  themselves ;  the  Hide  Company  had  no  greater  right, 
and  could  pass  to  any  purchaser  other  than  Baker  no  greater  right,. 


1076  SALES  (Part  4 

than  if  its  possession  with  this  limited  authority  had  been  of  the  goods 
themselves  instead  of  the  bill  of  lading  which  was  their  representa- 

But  before  any  of  these  transactions  took  place  our  Uniform  Bills 
of  Lading  Act  (St.  1910,  c.  214)  had  been  passed.  Section  5  of  that 
act  provides  that  "a  bill  in  which  it  is  stated  that  the  goods  are  con- 
signed or  destined  to  the  order  of  any  person  named  in  such  bill,  is 
a  negotiable  or  order  bill."  By  section  29,  "a  negotiable  bill  may  be 
negotiated  by  the  indorsement  of  the  person  to  whose  order  the  goods 
are  deliverable  by  the  tenor  of  the  bill.  Such  indorsement  may  be  in 
blank  or  to  a  specified  person.  If  indorsed  to  a  specified  person,  it 
may  be  negotiated  again  by  the  indorsement  of  such  person  in  blank 
or  to  another  specified  person."  By  section  32,  any  one  to  whom  a 
negotiable  bill  has  duly  been  negotiated  acquires  thereby  "such  title 
to  the  goods  as  the  person  negotiating  the  bill  to  him  had,  or  had  abil- 
ity to  convey  to  a  purchaser  in  good  faith  for  value,  and  also  such  ti- 
tle to  the  goods  as  the  consignee  and  consignor  had,  or  had  power  to 
convey  to  a  purchaser  in  good  faith  for  value."  By  section  38,  "the 
validity  of  the  negotiation  of  a  bill  is  not  impaired  by  the  fact  that 
such  negotiation  was  a  breach  of  duty  on  the  part  of  the  person  mak- 
ing the  negotiation,  or  by  the  fact  that  the  owner  of  the  bill  was  de- 
prived of  the  possession  of  the  same  by  fraud,  accident,  mistake,  du- 
ress or  conversion,  if  the  person  to  whom  the  bill  was  negotiated,  or 
a  person  to  whom  the  bill  was  subsequently  negotiated,  gave  value 
therefor,  in  good  faith,  without  notice  of  the  breach  of  duty,  or  fraud, 
accident,  mistake,  duress  or  conversion."  And  section  39  further 
adds  that  "where  a  person  having  sold,  mortgaged  or  pledged  goods 
which  are  in  a  carrier's  possession  and  for  which  a  negotiable  bill  has 
been  issued,  or  having  sold,  mortgaged  or  pledged  the  negotiable  bill 
representing  such  goods,  continues  in  possession  of  the  negotiable  bill, 
the  subsequent  negotiation  thereof  by  that  person  under  any  sale, 
pledge  or  other  disposition  thereof  to  any  person  receiving  the  same 
in  good  faith,  for  value  and  without  notice  of  the  previous  sale,  shall 
have  the  same  effect  as  if  the  first  purchaser  of  the  goods  or  bill  had 
expressly  authorized  the  subsequent  negotiation." 
^  The  effect  of  the  statute  has  been  to  change  fundamentally  the 
rights  of  parties  to  transactions  within  its  purview.  In  the  present 
case  if  the  statute  applies  to  it,  when  the  defendants  delivered  their 
bill  of  lading  to  the  Hide  Company,  with  their  unconditional  and  un- 
limited indorsement  thereon,  they  intrusted  their  property  to  the  hon- 
esty of  that  company  and  relinquished  their  right  to  set  up  their 
title  against  any  one  who  might  in  good  faith,  for  value,  and  with- 
out notice  of  the  duty  which  rested  upon  the  Hide  Company,  purchase 
from  that  company  the  goods  described  in  the  bill  and  take  from  that 
company  a  delivery  of  the  bill  itself  duly  indorsed  by  it.  The  previous 
decisions  of  this  court,  by  which  the  defendants  were  protected  against 
the  consequences  of  their  agent's  breach  of  dutv,  have  been  abrogated 
and  nullified  by  the  statute.  As  is  said  in  Williston  on  Sales,  §  437, 
the  statute  "renders  unsafe  what  has  doubtless  been  a  common  prac- 
tice of  bankers — the  intrusting  of  the  documents  for  a  special  purpose 
to  the  pledgor  of  them  or  the  proposed  buyer  of  the  goods."  The 
Columbia  Company  seems  from  the  findings  of  the  judge  to  have 
made,  or  at  any  rate  it  could  be  found  to  have  made  and  there  is  no 
finding  that  it  did  not  make,  its  purchase  from  the  Hide  Company  in 


Ch.  4)  NEGOTIABLE   DOCUMENTS  OF  TITLE  1077 

good  faith  and  without  notice  of  any  hmitation  upon  the  authority 
or  any  breach  of  duty  of  the  Hide  Company.  It  gave  value  for  its 
purchase.  The  statute  provides  (section  53)  that  "an  antecedent  or 
pre-existing  obhgation,  whether  for  money  or  not,  constitutes  vahie 
where  a  bill  is  taken  either  in  satisfaction  thereof  or  as  security 
therefor."  If  the  statute  applies  to  this  case,  the  plaintiff's  exceptions 
must  be  sustained.  The  case  then,  must  be  governed  by  the  decisions 
which  either  were  made  upon  statutes  resembling  more  or  less  closely 
the  one  which  we  are  considering,  or  independently  of  statutes  have 
adopted  the  rule  thereof  instead  of  the  one  laid  down  in  our  former 
decisions.     *     *       * 

It  follows  from  what  has  been  said  that  the  Columbia  Company 
by  its  purchase  from  the  Hide  Company  and  the  indorsement  and 
delivery  of  the  bill  of  lading  acquired  as  against  the  defendants  a 
good  title  to  the  hides,  and  that  title  passed  to  the  plaintiff  by  its  pur- 
chase from  the  Columbia  Company.  The  act  of  the  defendants  in  ob- 
taining the  hides  from  the  carrier  by  means  of  the  second  bill  of  lad- 
ing was,  as  to  the  plaintiff,  wrongful  and  having  been  done  under  a 
claim  of  right,  constituted  a  conversion,  for  which  they  became  liable 
to  the  plaintiff;  and  no  demand  was  necessary  before  bringing  the 
action.    *    *    * 

Nor  can  the  defendants  be  heard  to  claim  that  the  first  bill  of  lad- 
ing had  become  a  spent  document,  upon  the  ground  that  before  the 
plaintiff  received  that  bill  the  carrier  had  delivered  the  hides  to  the 
defendants  upon  the  second  original  bill  of  lading,  which  had  re- 
mained in  their  possession.  It  may  be  that  the  carrier  was  justified 
in  making  this  delivery,  and  that  the  plaintiff  could  not  have  maintain- 
ed any  action  against  the  carrier  therefor.  *  *  *  -q^^  j|-  .^^g  ^one 
the  less,  as  to  all  parties  claiming  under  the  first  bill,  which  the  de- 
fendants had  indorsed  and  allowed  to  be  put  into  circulation,  a  de- 
livery wrongfully  obtained  by  the  defendants.     *     *     * 

Exceptions  sustained. 


Suppose,  in  the  preceding  case,  that  the  person  to  whom  was  in- 
trusted the  negotiable  document  of  title,  instead  of  negotiating  it, 
had  surrendered  the  bill  to  the  carrier,  obtained  actual  possession 
of  the  goods,  and  had  then  sold  the  goods ;  would  the  purchaser 
be  protected  against  the  claim  of  the  holder  of  the  trust  receipt? 
Is  the  possession  of  the  goods  themselves  to  be  deemed  a  rep- 
resentation by  the  owner — in  this  case  the  holder  of  the  trust  re- 
ceipt— that  the  party  in  possession  of  the  goods  has  power  to  dis- 
pose of  them.  It  is  possible  to  say  that  such  person  is  now  in  the 
position  of  an  ordinary  bailee,  and  therefore  has  no  such  power. 
It  is  possible  to  reach  a  contrary  result  by  saying  that  the  trust 
receipt  evidences  a  conditional  sale.  In  some  states  the 
holder  of  the  trust  receipt,  the  conditional  vendor,  M^ould  be  pro- 
tected ;  in  others  he  would  not  be,  for  there  is  a  conflict  in  the  au- 
thorities as  to  whether  the  conditional  vendor  or  the  purchaser 
from  the  conditional  vendee  shall  be  protected.  Many  states  have 
statutes  requiring  the  recording  of  conditional  sales  contracts  to 
render  them  effective  against  creditors  and  purchasers  of  the  con- 


1078  SALES  (Part  4 

ditional  vendee.  In  such  states  the  holder  of  the  trust  receipt 
would  be  protected  if  the  instrument  were  recorded,  but  he  would 
not  be  protected  if  it  were  not  recorded.  A  slight  variation  in  the 
facts  would  also  change  the  result. 

Suppose  that,  after  obtaining  possession  of  the  goods,  the  goods 
are  stored  in  a  warehouse,  and  negotiable  warehouse  receipts  pro- 
cured, all  without  authority  from  the  holder  of  the  trust  receipt, 
and  then  suppose  the  warehouse  receipt  is  negotiated  to  an  inno- 
cent holder;  would  this  purchaser  obtain  title  good  against  the 
holder  of  the  trust  receipt?.  This  would  depend  entirely  upon 
whether  the  depositor  of  the  goods  in  the  warehouse  had  power  to 
sell  the  goods.  A  person  who,  being  intrusted  with  a  negotiable 
document  of  title,  while  he  has  power  to  pass  a  good  title  to  the 
document  to  an  innocent  purchaser  will  not  necessarily  have  such 
a  corresponding  power  to  sell  the  goods,  if  in  breach  of  his  duty 
he  attempts  to  sell  them.  In  this  connection  would  section  20(4) 
add  to  the  power  of  the  bailee  in  possession  of  the  goods.  A  clause 
therein  provides  that,  where  the  seller  sends  the  negotiable  bill  of 
lading,  accompanied  by  a  draft,  directly  to  the  buyer,  he  acquires 
no  added  right  if  he  wrongfully  dishonors  the  bill.  The  section 
then  adds:  "If,  however,  *  *  *  one  who  purchases  in  good 
faith,  for  value,  the  bill  of  lading  or  goods  from  the  buyer  will  ob- 
tain the  property  in  the  goods." 

The  next  case  presents  a  situation  involving  a  re-deposit  of  the 
goods  and  a  negotiation  of  the  document  to  an  innocent  holder. 


COMMERCIAL  NAT.  BANK  OF   NEW  ORLEANS  v.  OANAl^-LOUISIANA 
BANK  &  TRUST  CO.  et  al. 

(Supreme  Court  of  the  United  States,  1916.     239  U.  S.  520,  36  Sup.  Ct.  194, 
60  L.  Ed.  417,  Ann.  Cas.  1917E,  25.) 

Hughes,  J.  This  is  a  controversy  arising  in  a  bankruptcy  proceed- 
ing. The  Commercial  National  Bank  of  New  Orleans  petitioned  the 
district  court  for  the  recovery  from  the  trustee  in  bankruptcy  of  certain 
bales  of  cotton  alleged  to  have  been  held  by  the  bankrupts,  Dreuil  & 
Company,  for  the  account  of  the  petitioner  under  trust  receipts.  The 
Canal-Louisiana  Bank  &  Trust  Company  defended,  presenting  its  re- 
conventional  demand  based  upon  a  claim  of  superior  title.  The  district 
court  entered  a  decree  in  favor  of  the  Canal-Louisiana  Bank  &  Trust 
Company,  which  was  affirmed  by  the  Circuit  Court  of  Appeals. 

The  controversy  arises  from  the  following  transactions  which  were 
had  prior  to  the  bankruptcy.  On  December  9,  1912,  Dreuil  &  Co., 
holding  inland  bills  of  lading  for  two  lots  of  cotton  (40  bales  and  60 
bales  respectively),  pledged  the  bills  of  lading  with  the  Canal-Louisi- 
ana Bank  to  secure  certain  promissory  notes  for  moneys  advanced. 
On  December  13,  1912,  the  bills  of  lading  were  withdrawn  from  the 
Canal-Louisiana  Bank  on  trust  receipts,  as  follows: 

"Received  of  Canal  Bank  &  Trust  Company  the  bills  of  lading  or 
other  documents  or  securities  as  enumerated  below,  held  by  the  said 
bank  as  collateral  pledged  to  secure  advances  made  to  the  undersigned^ 


Ch.  4)  NEGOTIABLE  DOCUMENTS   OF  TITLE  1079 

and  in  consideration  thereof,  the  undcrsigried  hereby  agrees  to  pay- 
over  to  the  said  bank  or  its  assigns,  and  to  specifically  apply  against 
the  very  same  advances  the  proceeds  of  the  sale  of  the  property  men- 
tioned in  the  said  documents ;  or  to  deliver  to  the  said  bank  or  its  as- 
signees the  shipping  documents  or  warehouse  receipts  representing 
the  undermentioned  goods  within  one  day  from  the  receipt  thereof, 
this  delivery  being  temporarily  made  the  undersigned  for  convenience 
only,  without  novation  of  the  original  debt,  or  giving  the  undersigned 
any  title  thereto,  except  as  trustee  for  the  said  bank,  and  except  to  re- 
ceive the  avails  thereof  or  the  documents  therefor  for  account  of  the 
said  bank." 

Dreuil  &  Co.,  surrendering  the  bills  of  lading  to  the  railroad  com- 
pany, obtained  delivery  of  the  cotton  and  sent  it  to  a  "pickery,"  where 
the  lot  of  40  bales  was  remade  into  60,  and  the  lot  of  60  bales  into  90. 
Dreuil  &  Co.  then  stored  the  cotton  with  a  warehouseman,  the  Planters' 
Press,  receiving  two  negotiable  warehouse  receipts  which,  on  Decem- 
ber 17,  1912,  they  pledged  to  the  Commercial  Bank  as  security  for  their 
notes.  On  December  20,  1912,  and  December  28,  1912,  these  ware- 
house receipts,  respectively  were  withdrawn  by  Dreuil  &  Co.  from  the 
Commercial  Bank  on  trust  receipts  similar  in  tenor  to  those  which 
had  been  given  as  above  stated,  to  the  Canal-Louisiana  Bank.  Dreuil 
&  Company  then  obtained  a  delivery  of  the  cotton  from  the  Planters' 
Press;  on  December  31,  1912,  they  were  adjudicated  bankrupts  and 
temporary  receivers  were  appointed.  It  appears  that  60  of  the  bales  had 
been  disposed  of,  but  the  remainder  of  the  cotton,  which  had  been  sent 
by  Dreuil  &  Co.  to  a  steamer  for  shipment,  was  recovered  by  the  re- 
ceivers and  placed  by  them  in  the  Planters'  Press,  warehouse  receipts 
being  issued  therefor  which  passed  into  the  possession  of  the  trustee. 
Despite  the  changes  mentioned,  and  re-markings  (which  we  need  not 
consider),  the  District  Court  found  the  identity  of  the  cotton  to  be  es- 
tablished, and  there  is  no  further  controversy  upon  that  point.  Nor  is 
it  controverted  that  the  Commercial  Bank  was  a  purchaser  in  good 
faith  for  value  of  the  warehouse  receipts  negotiated  to  it. 

We  assume  that  under  the  jurisprudence  of  Louisiana  the  transac- 
tion between  Dreuil  &  Co.  and  the  Canal-Louisiana  Bank  (described  by 
the  bank  as  a  pledge)  created  rights  in  the  bank  in  the  nature  of  own- 
ership for  the  purpose  of  securing  its  advances  *  *  *  (Uniform 
Bills  of  Lading  Act,  §  32),  and  that  when  the  Canal-Louisiana  Bank 
intrusted  the  bills  of  lading  to  Dreuil  &  Co.  for  the  purposes  described 
in  the  trust  receipts,  given  to  that  bank,  it  could  still  assert  its  title  as 
against  Dreuil  &  Co.  and  their  trustees  in  bankruptcy.  *  *  *  The 
bills  of  lading  were  not  negotiated;  they  served  their  purpose,  being 
surrendered  to  the  railroad  company  on  the  delivery  of  the  goods  to 
Dreuil  &  Co.  The  transactions  with  the  "pickery"  are  not  material 
to  the  question  to  be  decided.  Dreuil  &  Co.  having  obtained  possession 
of  the  cotton,  as  was  contemplated,  placed  it  in  store  and  the  question 
is  as  to  the  effect  of  the  negotiation  of  the  warehouse  receipts  to  the 
Commercial  Bank. 

It  is  a  familiar  rule  that  one  who  has  no  title  to  chattels  cannot  trans- 
fer title  unless  he  has  the  owner's  authority  or  the  owner  is  estopped. 
*  *  *  j^  follows  that,  in  the  absence  of  circumstances  creating  an 
estoppel,  one  without  title  cannot  transfer  it  by  the  simple  device  of 
warehousing  the  goods  and  indorsing  the  receipts.  But  if  the  owner 
of  the  goods  has  permitted  anotlier  to  be  clothed  with  the  apparent 


1080  SALES  (Part  4 

ownership  through  the  possession  of  warehouse  receipts,  negotiable  in 
form,  there  is  abundant  ground  for  protecting  a  bona  fide  purchaser 
for  vakie  to  whom  the  receipts  have  been  negotiated.    *    *    * 

It  will  be  observed  that  "one  who  takes  by  trespass  or  a  finder  is 
not  included  within  the  description  of  those  who  may  negotiate."  Re- 
port of  Commissioners  on  Uniform  State  Laws,  January  1,  1910,  p. 
204.  Aside  from  this,  the  intention  is  plain  to  facilitate  the  use  of 
warehouse  receipts  as  documents  of  title.  Under  section  40,  the  person 
who  may  negotiate  the  receipt  is  either  the  "owner  thereof,"  or  a  "per- 
son to  whom  the  possession  or  custody  of  the  receipt  has  been  intrusted 
by  the  owner"  if  the  receipt  is  in  the  form  described.  The  warehouse 
receipt  represents  the  goods,  but  the  intrusting  of  the  receipt,  as  stated, 
is  more  than  the  mere  delivery  of  the  goods ;  it  is  a  representation 
that  the  one  to  whom  the  possession  of  the  receipt  has  been  so  intrust- 
ed has  the  title  to  the  goods.  By  section  47,  the  negotiation  of  the  re- 
ceipt to  a  purchaser  for  value  without  notice  is  not  impaired  by  the 
fact  that  it  is  a  breach  of  duty,  or  that  the  owner  of  the  receipt  was 
induced  "by  fraud,  mistake,  or  duress"  to  intrust  the  receipt  to  the 
person  who  negotiated  it.  And,  under  section  41,  one  to  whom  the 
negotiable  receipt  has  been  duly  negotiated  acquires  such  title  to  the 
goods  as  the  person  negotiating  the  receipt  to  him,  or  the  depositor 
or  person  to  whose  order  the  goods  were  deliverable  by  the  terms  of 
the  receipt,  either  had  or  "had  ability  to  convey  to  a  purchaser  in  good 
faith  for  value."  The  clear  import  of  these  provisions  is  that  if  the 
owner  of  the  goods  permits  another  to  have  the  possession  or  custody 
of  negotiable  warehouse  receipts  running  to  the  order  of  the  latter,  or 
to  bearer,  it  is  a  representation  of  title  upon  which  bona  fide  pur- 
chasers for  value  are  entitled  to  rely,  despite  breaches  of  trust  or  vio- 
lations of  agreement  on  the  part  of  the  apparent  owner. 

It  cannot  be  doubted  that  if  Dreuil  &  Co.  had  pledged  to  the  Com- 
mercial Bank  the  bills  of  lading  which  they  withdrew  from  the  Canal- 
Louisiana  Bank  under  the  trust  receipts,  the  former,  paying  value  in 
good  faith,  would  have  had  the  superior  right.  This  would  have  been 
directly  within  the  terms  of  the  Uniform  Bills  of  Lading  Act.  *  *  * 
It  seems  to  be  contended  that  the  case  is  different  with  the  warehouse 
receipts.  But  it  cannot  be  said  that  it  was  not  within  the  contempla- 
tion of  the  parties  that  Dreuil  &  Company,  on  obtaining  the  goods  from 
the  railroad  company,  should  put  them  in  warehouse  and  take  the  usu- 
al receipts.  As  we  have  stated,  we  are  not  concerned  with  what  hap- 
pened at  the  "pickery,"  as  the  case  is  precisely  the  same,  so  far  as  the 
Commercial  Bank  is  concerned,  as  if  the  original  bales  had  been  ware- 
housed (without  remarking)  as  soon  as  received.  It  was  not  the  plac- 
ing of  the  cotton  in  warehouse  in  the  usual  course  of  business,  but  the 
negotiation  of  the  receipts,  that  constituted  the  violation  of  Dreuil  & 
Co.'s  agreement  with  the  Canal-Louisiana  Bank.  By  the  very  terms 
of  that  agreement  Dreuil  &  Co.  were  to  take  the  position  of  "trustee" 
for  the  bank,  with  authority  to  receive  "the  avails"  of  the  goods  or 
"the  documents"  therefor  for  account  of  the  bank,  and  being  bound 
to  apply  the  proceeds  of  sale  to  the  bank's  advances.  And  in  taking 
documents  of  title,  in  ordinary  course,  pursuant  to  the  agreement, 
which  was  intended  to  facilitate  the  disposition  of  the  cotton  through 
Dreuil  &  Co.,  the  latter  were  manifestly  permitted  to  take  such  docu- 
ments to  their  own  order,  as  they  took  the  bills  of  lading  with  which 
they  were  intrusted.    To  repeat,  it  was  the  negotiation  of  the  receipts 


Ch.  4)  NEGOTIABLE  DOCUMENTS   OF  TITLE  1081 

that  constituted  the  breach  of  trust.  But  after  the  Canal-Iyouisiana 
Bank  had  allowed  Dreuil  &  Co.  to  be  clothed  with  apparent  ownership 
through  possession  of  the  receipts,  it  cannot  be  heard  to  question  the 
title  of  a  bona  fide  purchaser  for  value  to  whom  they  had  been  nego- 
tiated.   *    *    * 

It  is  said  that  under  the  law  of  Louisiana,  as  it  stood  prior  to  the 
enactment  of  the  Uniform  Warehouse  Receipts  Act,  the  Commercial 
Bank  would  not  have  taken  title  as  against  the  Canal-Louisiana  Bank. 
*  *  *  and  it  is  urged  that  the  new  statute  is  but  a  step  in  the  devel- 
opment of  the  law,  and  that  decisions  under  the  former  state  statutes 
are  safe  guides  to  its  construction.  We  do  not  find  it  necessary  to  re- 
view these  decisions.  It  is  apparent  that  if  these  uniform  acts  are 
construed  in  the  several  states  adopting  them  according  to  former  local 
views  upon  analogous  subjects,  we  shall  miss  the  desired  uniformity, 
and  we  shall  erect  upon  the  foundation  of  uniform  language  separate 
legal  structures  as  distinct  as  were  the  former  varying  laws.  It  was 
to  prevent  this  result  that  the  Uniform  Warehouse  Receipts  Act  ex- 
pressly provides  (section  57)  :  "This  act  shall  be  so  interpreted  and 
construed  as  to  effectuate  its  general  purpose  to  make  uniform  the 
law  of  those  states  which  enact  it."  This  rule  of  construction  requires 
that  in  order  to  accomplish  the  beneficent  object  of  unifying,  so  far 
as  this  is  possible  under  our  dual  system,  the  commercial  law  of  the 
country,  there  should  be  taken  into  consideration  the  fundamental  pur- 
pose of  the  uniform  act,  and  that  it  should  not  be  regarded  merely  as 
an  off-shoot  of  local  law.  The  cardinal  principle  of  the  act — 
which  has  been  adopted  in  many  states — is  to  give  effect,  within  the 
limits  stated,  to  the  m.ercantile  view  of  documents  of  title.  There  had 
been  statutes  in  some  of  the  states  dealing  with  such  documents,  but 
there  still  remained  diversity  of  legal  rights  under  similar  commercial 
transactions.  We  think  that  the  principle  of  the  uniform  act  should 
have  recognition  to  the  exclusion  of  any  inconsistent  doctrine  which 
may  have  previously  obtained  in  any  of  the  states  enacting  it ;  and,  in 
this  view,  we  deem  it  to  be  clear  that,  in  the  circumstances  disclosed, 
the  Commercial  Bank  took  title  to  the  warehouse  receipts  and  to  the 
cotton  in  question. 

Finally,  it  is  insisted  that  whatever  right  the  Commercial  Bank 
might  have  had,  if  it  had  retained  the  warehouse  receipts,  it  lost  as 
against  the  Canal-Louisiana  Bank  by  permitting  Dreuil  &  Co.  to  with- 
draw the  documents  under  the  trust  receipts  which  they  gave  to  the 
Commercial  Bank ;  that  is,  that  as  the  cotton  came  into  the  possession 
of  Dreuil  &  Co.,  the  equities  of  the  two  banks  are  equal,  and  the  earlier 
equity  should  prevail.  We  think  that  this  contention  begs  the  question. 
The  Commercial  Bank  did  not  lose  its  rights  by  permitting  the  with- 
drawal of  its  warehouse  receipts  under  the  agreement  to  hold  for  its 
account,  any  more  than  the  Canal-Louisiana  Bank  lost  its  rights  merely 
by  the  withdrawal  of  the  bills  of  lading  under  its  trust  receipts.  It 
was  because  the  Canal-Louisiana  Bank  clothed  Dreuil  &  Co,  with  the 
indicia  of  ownership  that  a  bona  fide  purchaser  for  value  was  enabled 
to  take  title ;  and  a  similar  result  would  have  followed  if,  after  the 
withdrawal  of  the  warehouse  receipts  from  the  Commercial  Bank, 
there  had  been  a  like  negotiation  by  Dreuil  &  Co.  But  there  was  no 
subsequent  negotiation,  and  the  Commercial  Bank,  in  the  absence  of 
the  intervention  of  a  purchaser  in  good  faith  for  value,  did  not  lose 
its  rights  by  the  agreement  under  which  the  cotton  which  it  had  duly 


1082  SALES  ^Part  4 

acquired  was  to  be  held  for  its  account.  There  is  no  equahty  of  equi- 
ties, for  it  was  through  the  action  of  the  Canal-Louisiana  Bank  and 
the  apparent  ownership  it  created  in  Dreuil  &  Co.  that  the  Commer- 
cial Bank  was  led  to  advance  its  money  upon  the  faith  of  the  docu- 
ments of  title. 

The  decree  is  reversed  and  the  cause  is  remanded,  with  direction  to 
enter  a  decree  in  favor  of  the  appellant. 


Before  leaving  the  subject  of  trust  receipts,  let  us  examine  brief- 
ly one  further  situation.  The  holder  of  the  trust  receipt  has  deliv- 
ered the  bill  of  lading,  and  authorized  the  holder  of  the  bill,  the 
buyer,  to  obtain  possession  of  the  goods,  and  has  authorized  him 
to  sell  the  goods  in  the  regular  course  of  trade.  But  the  trust  re- 
ceipt provides  that  the  proceeds  arising  from  the  sale  of  the  goods 
shall  be  held  in  trust  for  the  holder  of  the  trust  receipt.  Suppose 
the  buyer  becomes  bankrupt ;  may  the  holder  of  the  trust  receipt 
claim  the  whole  of  this  fund,  or  must  such  holder  share  with  all 
other  creditors?  The  bankruptcy  of  the  buyer  is  the  very  contin- 
gency which  the  bank  desired  to  protect  itself  against,  and  to  bring 
about  this  result  attempted  to  create  a  trust.  It  will  be  recalled 
that  property  held  in  trust  by  a  bankrupt  does  not  constitute  a  part 
of  his  assets.  The  beneficiary  may  claim  it,  and  is  not  forced  to 
share  with  general  creditors.  The  parties  have  called  this  a  trust, 
and  it  would  seem,  therefore,  that  the  holder  of  the  trust  receipt 
would  be  protected,  and  many  courts  so  hold.  But  calling  a  thing 
a  trust  will  not  make  it  so.  The  term  "trust"  is  descriptive  of 
certain  legal  relations  existing  between  a  person  called  a  trustee 
and  a  person  called  a  beneficiary  or  cestui  que  trust.  A  horse  may 
be  called  a  race  horse,  but  calling  him  such  gives  him  no  capacity 
to  run  fast.  So  it  is  possible  that  the  trust  receipt  does  not  evi- 
dence a  real  trust.  Some  courts  take  this  view.  Which  view  was 
stated  by  the  Supreme  Court  of  the  United  States  in  its  opinion 
in  the  Canal  Bank  case  to  be  correct? 

Enough  has  been  said  to  show  the  general  nature  of  these  prob- 
lems, although  there  are  many  situations  which  have  not  been  ad- 
verted to.  Where  a  person  is  financing  transactions  involving  con- 
siderable risk,  the  plan  of  handling  them  should  not  be  adopted 
without  obtaining  the  judgment  of  able  counsel,  who  have  had  the 
opportunity  of  making  a  searching  investigation  into  the  matter, 
from  the  standpoint  of  the  local  law. 

This  closes  the  discussion  as  to  question  2,  heretofore  raised,  as 
to  the  circumstances  under  which  the  negotiation  of  a  negotiable 
document  of  title  cuts  off  claims  of  third  parties,  and  we  have  seen 
that  the  indorsee  does  take  some  risk.  In  some  cases  he  will  ac- 
quire no  title,  although  the  rules  go  quite  far  in  protecting  him. 

The  third  question  concerns  the  rights  of  the  indorsee  against 
the  carrier.  We  have  already  noted  the  circumstances  under  which 
a  carrier  will  be  liable  to  the  indorsee  where  the  carrier  received 


Ch.  4)  NEGOTIABLE   DOCUMENTS   OF  TITLE  1083 

no  goods.  Will  the  carrier  or  warehouseman  be  liable  to  the  in- 
dorsee in  the  event  that  goods  were  received,  but  not  owned  by 
the  bailor?  Obviously,  it  would  seem,  the  bailee  should  not  be 
liable;  and  this  is  the  law.  This  defense  of  the  carrier  may  be  re- 
garded as  a  real  defense.  So,  also,  as  regards  the  kind  or  quality 
•  of  the  goods  shipped.  The  carrier  will  not  be  liable  to  the  indorsee 
for  the  seller's  breach  of  contract,  except  where  the  bill  of  lading 
misdescribed  the  goods  under  circumstances  where  the  carrier 
should  have  known  that  the  statement  was  not  true.  If  the  goods 
are  lost  or  damaged  in  transit,  generally  the  carrier  will  be  liable, 
but  not  always.  The  liability  of  a  carrier  for  loss  or  damage  to 
goods  opens  up  a  broad  subject,  which  we  adverted  to  briefly  in 
Chapter  XI  of  Contracts.  If  the  carrier  delivers  the  goods  to  the 
buyer  without  requiring  the  surrender  of  the  bill  of  lading,  and  if 
at  the  time  the  negotiable  bill  is  held  by  another  party,  may  the 
holder  of  the  bill  recover  from  the  carrier  for  its  wrongful  deliv- 
ery? 

Before  taking  up  the  next  case,  it  may  be  mentioned  that,  where 
goods  are  sent  under  negotiable  bills  of  lading,  the  usual  practice 
is  to  take  out  a  bill  running  to  the  order  of  the  seller.  It  is  very 
desirable  that  the  buyer  be  assured  of  prompt  notice  of  the  arrival 
of  the  goods,  so  that  he  may  go  to  the  bank,  pay  the  bill  of  ex- 
change, and  procure  the  bill  of  lading.  The  only  w-ay  to  insure 
the  giving  of  such  notice  is  for  the  buyer's  name  to  appear  on  the 
bill  of  lading  to  the  carrier  and  to  notify  such  party.  The  practice, 
therefore,  is  to  insert  in  the  bill  of  lading  the  words  "Notify  A.** — 
A.  being  the  buyer.  Is  a  carrier  justified  in  delivering  the  goods 
to  the  "notify  party"  without  obtaining  the  bill  of  lading? 


CANANDAIGUA   NAT.    BANK   v.   CLEVELAND,    C,   C.    &   ST.    L.   RY.    CO. 

(Supreme  Court  of  New  York,  Appellate  Division,  1913.     155  App.  Div.  5.3, 

139  N.  Y.  Supp.  561.) 

Action  by  the  Canandai^ua  National  Bank  against  the  Cleveland, 
Cincinnati,  Chicago  &  St.  Louis  Railway  Company,  Judgment  for 
plaintiff,  and  defendant  appeals. 

LambKrt,  J.  This  action  involves  the  value  of  a  car  load  of  apples, 
shipped  from  Farmington,  N.  Y.,  to  Terre  Haute,  Ind.  The  shipment 
originated  upon  the  Lehigh  Railroad,  and  the  defendant  was  the 
delivering  carrier.  The  apples  were  loaded  by  the  Manchester  Prod- 
uce Company,  which  concern  owned  the  fruit,  having  collected  and 
purchased  same  in  the  vicinity  of  Farmington. 

Through  a  pre-existing  arrangement,  this  fruit  was  to  be  shipped 
to  John  W.  Neumann  &  Co.,  a  copartnership,  which  was  to  market 
the  apples,  first  remitting  to  the  Produce  Company  the  cost  price 
thereof,  and  ultimately  the  Produce  Company  and  Neumann  &  Co. 
were  to  share  equally  in  any  profits  of  the  venture.  Similar  practices 
had  been  engaged  in  by  these  two  business  concerns  prior  to  this  par- 
ticular shipment.  At  the  request  of  Neumann  &  Co.  and  in  pursuance 
of  prior  arrangements,  and  for  the  purpose  of  facilitating  the  market- 


1084  SALES  (Part  4 

ing  of  these  apples,  this  car  was  billed  out  as  though  Neumann  &  Co. 
were  the  shippers.  They  were  named  in  the  bill  of  lading  as  consign- 
ors. As  between  these  two  concerns,  at  least,  this  manner  of  ship- 
ment was  not  intended  to  evidence  any  change  of  title  to  the  properly, 
but  was  merely  adopted  for  convenience.  The  actual  title  to  the  ap- 
ples still  remained  in  the  Produce  Company. 

In  the  bill  of  lading,  the  consignees  were  named  as  follows:  "Or- 
der John  W.  Neumann  &  Co.     Notify  Dan  Case."     *     *    * 

After  initiating  this  shipment  and  receiving  this  bill  of  lading,  the 
Manchester  Produce  Company  attached  to  the  bill  of  lading  a  draft, 
drawn  upon  Neumann  &  Co.  for  the  cost  price  of  these  apples,  and 
then  sold  the  draft  and  bill  of  lading  to  the  plaintiff.  The  draft  and 
bill  of  lading  were  in  the  due  course  of  business  presented  for  payment 
to  Neumann  &  Co.,  and  such  payment  was  refused,  upon  the  claim 
made  that  the  Produce  Company  was  then  largely  indebted  to  Neu- 
mann &  Co. 

Upon  the  arrival  of  this  car  at  destination,  the  defendant,  upon  the 
written  order  of  Neumann  &  Co.,  delivered  same  to  "Dan  Case,"  who 
was  named  therein  to  be  notified  of  its  arrival  without  requiring  the 
production,  indorsement,  or  surrender  of  the  bill  of  lading.  Upon  this 
state  of  fact  plaintiff  brings  this  action  for  conversion.  It  must  be 
conceded  that  the  defendant  breached  the  contract  of  carriage  by  not 
complying  with  its  provisions,  and,  further,  that  conversion  is  the 
proper  remedy,  if  any  exists  in  plaintiff.  The  sole  question  presented, 
of  consequence,  is  whether  plaintiff  is  in  a  position  to  assert  the  con- 
tract obligation  of  the  bill  of  lading  as  against  the  defendant. 

This  manner  of  shipping  property  has  the  sanction  of  usage,  and, 
based  upon  the  carrier's  agreement  to  require  the  surrender  of  the 
original  bill  of  lading,  a  commercial  practice  has  become  established, 
whereby  the  shipper  is  enabled,  through  banking  institutions,  to  se- 
cure the  value  of  the  property  consigned,  in  advance  of  its  delivery 
at  destination  by  the  sale  or  pledge  of  the  bill  of  lading.  Such  sale  or 
pledge,  in  effect,  secures  the  value  advanced  by  pledging  the  property 
represented  thereby.  Such  a  course  of  commercial  dealing  has  long 
had  the  sanction  of  our  courts.  It  has  been  uniformly  held  that  the 
transfer  of  the  bill  of  lading  transfers  the  title  to  the  property  repre- 
sented thereby,  and  that  such  transfer  of  the  bill  of  lading  may  be  by 
mere  delivery  thereof  when  such  is  the  indention.  *  *  *  It  is  also 
well  settled  that  the  bill  of  lading  is  valid  and  enforceable  in  the  hands 
of  a  bona  fide  transferee  in  all  its  terms  and  provisions.     *     *     * 

The  only  question  remaining  is  whether  the  sale  by  the  Manchester 
Produce  Company  to  plaintiff  transferred  any  title.  We  can  discover 
no  reason  why  it  did  not.  The  Produce  Company  was  concededly  the 
owner  of  the  apples.  It  had  bought  and  paid  for  them.  It  had  not 
transferred  the  title  to  any  other  person,  and  its  right  to  eft'ect  a  sale 
thereof  was  unlimited  except  that  such  sale  was  required  to  be  subject 
to  its  contract  for  the  transfer  of  such  title  to  Neumann  &  Company, 
upon  payment  of  the  draft.  The  title  of  the  Produce  Company  be- 
ing complete,  there  was  no  restriction  upon  its  right  to  sell  the  same, 
and  that  object  was  accomplished  by  the  transfer  of  the  bill  of  lading. 
The  bank  was  then  in  a  position  to  insist  upon  all  the  carrier's  obliga- 
tions, as  expressed  in  the  bill  of  lading. 

Nor  does  the  fact  that  the  Produce  Company  named  Neumann  & 
Co.  as  consignors  have  any  effect  upon  the  status  of  the  parties.    Such 


Ch.  4)  NEGOTIABLE   DOCUMENTS   OF  TITLE  1085 

fact  did  not  work  to  the  detriment  of  the  carrier  in  any  manner,  and 
hence  no  estoppel  could  arise.  The  bill  of  lading  makes  no  restriction 
upon  the  shipment  in  the  name  of  the  consignee  instead  of  the  con- 
signor. Under  its  plain  provisions,  even  if  Neumann  &  Co.  had  ac- 
tually initiated  the  shipment,  its  obligation  to  require  the  surrender 
of  the  bill  of  lading  remained  unchanged.  Under  such  circumstances, 
the  rights  of  third  parties  were  just  as  likely  to  intervene  shipment 
and  delivery.  In  fact,  it  is  not  an  infrequent  practice  for  the  con- 
signor of  goods  to  ship  them  to  his  own  order,  with  an  accompanying 
direction  to  notify  third  parties,  and  then  to  dispose  of  the  bill  of  lad- 
ing to  banking  institutions,  as  was  done  in  this  case,  thus  securing 
his  money  for  the  shipment  in  advance  of  its  delivery.  *  *  *  It 
will  thus  be  seen  that  the  naming  of  Neumann  &  Co.  as  consignors 
did  not  affect  the  contract  obligation  of  the  carrier.  The  only  safe 
course  for  the  carrier  was  to  observe  its  contract.  By  so  doing  it 
could  sustain  no  loss,  whilQ  by  its  violation  it  would  necessarily  de- 
feat the  intervening  property  rights  of  third  persons,  who  might  deal 
with  the  bill  of  ladmg,  tipon  the  faith  of  the  agreement  of  the  carrier 
to  require  its  production  before  making  delivery.  This  is  equally  true, 
whether  the  railroad  supposed  Neumann  &  Co.  to  be  the  consignors 
or  not.  It  cannot  be  said  that  the  delivery  in  this  instance  was  induc- 
ed, in  any  way,  by  the  manner  in  which  this  shipment  was  made. 
The  carrier  chose  to  violate  the  plain  obligation  it  had  assumed  and 
with  entire  disregard  to  the  rights  of  the  plaintiff.  Because  of  such 
delivery  the  defendant  was  unable  to  surrender  the  property  to  the 
plaintiff  and  a  conversion  thereby  arose,  for  which  the  defendant 
should  be  held  liable. 

The  judgment  appealed  from  should  be  affirmed. 


In  the  above  case,  such  delivery  was  wrongful.  The  holder  of 
the  bill  of  lading  could  have  recovered  possession  of  the  goods 
from  the  person  to  whom  the  carrier  made  delivery.  If  the  goods 
are  delivered  to  a  person,  who  at  the  time  was  lawfully  in  posses- 
sion of  the  bill  of  lading  and  entitled  to  delivery,  but  without  re- 
quiring surrender  of  the  bill  of  lading,  such  person  would  thereby 
obtain  power  to  transfer  title  to  the  goods ;  that  is,  if  the  goods 
were  sold  to  one  person  and  the  bill  of  lading  subsequently  nego- 
tiated to  another  person,  in  this  case,  the  indorsee  of  the  bill  would 
get  no'  title  to  the  goods,  but  such  holder  could  hold  the  carrier  lia- 
ble for  making  delivery  without  requiring  surrender  of  the  bill  of 
lading.  This  rule  is  recognized  in  section  14  of  the  Uniform  Bills 
of  Lading  Act. 

One  additional  class  of  rights  against  a  carrier  should  here  be 
mentioned.  The  contractual  obligations  of  the  carrier,  as  provided 
for  in  the  bill  of  lading,  are  due  to  the  holder  of  the  bill  of  lading. 
The  indorsement  of  the  document  also  operates  as  an  assignment 
of  all  the  contract  rights  which  the  bailor  had  against  the  bailee. 
Generally,  perhaps,  the  holder  of  the  bill,  being  the  owner,  pos- 
sesses all  the  remedies  necessary,  solely  because  he  is  owner  of  the 
goods;    but  sometimes  it  will  be  to  his  advantage  to  sue,  not  as 


1086  SALES  (Part  4 

owner  of  the  goods,  but  as  assignee  of  the  rights  which  the  bailor 
had  against  the  bailee.  The  converse  is  not  true.  The  carrier  can- 
not' sue  the  holder  of  the  bill  of  lading  for  freight  charge.  The 
contractual  obligations  of  the  bailor  do  not  pass  by  the  assignment 
of  the  bill.  The  carrier,  however,  cannot  be  compelled  to  surren- 
der the  goods  until  the  freight  is  paid;  hence  the  carrier  is  in  just 
about  as  safe  a  position  as  though  it  were  allowed  to  sue  the  holder 
for  the  freight.  The  carrier  would  not  have  this  right  against  the 
owner  of  goods  wrongfully  shipped. 


SECTION  5.— RIGHTS  OF  THE  INDORSEE  AGAINST 

INDORSERS 

Sales  Act,  Section  36.  A  person  who  for  value  negotiates  or 
transfers  a  document  of  title  by  indorsement  or  delivery,  including 
one  who  assigns  for  value  a  claim  secured  by  a  document  of  title, 
unless  a  contrary  intention  appears  warrants: 

(a)  That  the  document  is  genuine. 

(b)  That  he  has  a  legal  right  to  negotiate  or  transfer  it. 

(c)  That  he  has  knowledge  of  no  fact  which  would  impair  the 
validity  or  worth  of  the  document,  and 

(d)  That  he  has  a  right  to  transfer  title  to  the  goods  and  that 
the  goods  are  merchantable  or  lit  for  a  particular  purpose,  when- 
ever such  warranties  would  have  been  implied  if  the  contract  of  the 
parties  had  been  to  transfer  without  a  document  of  title  the  goods 
represented  thereby. 

Sales  Act,  Section  37,  The  indorsement  of  a  document  of  title 
shall  not  make  the  indorser  liable  for  any  failure  on  the  part  of  the 
bailee  who  issued  the  document  or  previous  indorsers  thereof  to 
fulfill  their  respective  obligations. 

Sales  Act,  Section  35.  Where  a  negotiable  document  of  title  is 
transferred  for  value  by  delivery,  and  the  indorsement  of  the  trans- 
feror is  essential  for  negotiation,  the  transferee  acquires  a  right 
against  the  transferor  to  compel  him  to  indorse  the  document  unless 
a  contrary  intention  appears.  The  negotiation  shall  take  effect 
as  of  the  time  when  the  indorsement  is  actually  made. 

The  liability  of  an  indorser  of  a  document  of  title  is  very  different 
from  the  liability  of  the  unqualified  indorser  of  a  negotiable  instru- 
ment payable  in  money,  but  is  very  much  like  the  liability  of  the 
indorser  without  recourse.  The  unqualified  indorser  of  a  nego- 
tiable instrument  enters  into  two  kinds  of  obligations:  (1)  A  se- 
ries of  warranties ;  and  (2)  a  special  engagement  to  pay  the 
amount  called  for  by  the  instrument,  if  it  be  not  paid  at  maturity, 
conditioned  upon  there  having  been  a  due  presentment  for  pay- 
ment upon  the  person  primarily  liable  and  due  notices  of  dishonor, 
and,  in  case  of  a  foreign  bill,  due  notice  of  protest  sent  out  to  the 
indorser.  It  is  clear  from  sections  36  and  Ci7  that  the  indorser  or 
transferor  of  a  negotiable  document  of  title  does  not  enter  into 


Ch.  4)  NEGOTIABLE  DOCUMENTS   OF  TITLE  1087 

any  such  "special  engagement."  Therefore,  with  respect  to  nego- 
tiable documents  of  title,  there  is  no  corresponding  practice  or  ne- 
cessity for  making  any  due  presentment  upon  the  bailee  and  for 
the  giving  of  notices  of  dishonor  to  indorsers.  The  indorsers  of 
the  negotiable  document  of  title  does  enter  into  the  same  warran- 
ties which  attach  to  the  indorser  "without  recourse."  It  is  true 
that  the  act  does  not  mention  that  such  indorser  warrants  that 
prior  parties  had  capacity  to  contract,  but  the  probabilities  are  that 
such  an  obligation  would  be  construed  to  be  involved  in  the  gen- 
eral warranty  that  he  has  a  legal  right  to  negotiate  it.  The  special 
warranty  expressed  in  36  (d)  has  no  analogy  in  the  law  of  bills 
and  notes.  From  a  practical  standpoint  the  warranties  pertaining 
to  the  kind  and  quality  of  the  goods  are  the  most  important.  It 
is  to  be  noticed  that,  if  certain  warranties  would  have  been  implied, 
had  the  parties  been  dealing  with  the  goods  directly,  instead  of  by 
means  of  a  document  of  title,  such  warranties  are  still  regarded  as 
attaching  to  the  sale.  All  sellers  of  goods  impliedly  warrant  cer- 
tain things.  A  seller  of  a  negotiable  document  of  title  is  a  seller 
of  goods ;  therefore  he  incurs  the  liability  which  arises  out  of  the 
several  implied  warranties.  There  are  six  implied  warranties:  (1) 
Of  title ;  (2)  in  sale  by  description,  that  the  goods  shall  corre- 
spond to  the  description;  (3)  of  merchantability,  in  certain  cases; 
(4)  in  sales  by  sample,  that  the  goods  shall  correspond  to  the 
sample;  (5)  of  reasonable  fitness  for  a  particular  purpose,  in  cer- 
tain cases ;  and  (6)  any  additional  warranty  arising  out  of  estab- 
lished usage.  The  Sales  Act  mentions  but  three  of  these  warran- 
ties, though  it  is  not  likely  that  section  36  (d)  would  be  construed 
as  confining  the  liability  of  indorsers  of  negotiable  documents  of 
title  to  these  three  types  of  implied  warranties. 

Do  these  warranties  run  to  all  successive  holders,  or  do  they 
run  only  to  the  immediate  indorsee?  The  Sales  Act  makes  no  pro- 
vision, and  the  point  seems  not  to  have  been  decided.  In  nego- 
tiable instruments  we  found  that  the  indorser  without  recourse 
warranted  to  all  successive  holders,  but  that  the  transferor  by  de- 
livery warranted  only  to  his  immediate  indorsee.  In  sales  of  per- 
sonal property,  not  involving  negotiable  documents  of  title,  the 
warranty  extends  only  to  the  immediate  buyer,  except,  perhaps,  in 
sales  of  food.  Logically,  we  should  say,  therefore,  that  the  war- 
ranties specified  in  36  (a),  (b),  and  (c)  would  run  to  successive 
holders,  but  not  where  the  negotiation  was  by  delivery,  thus  fol- 
lowing out  the  analogy  in  negotiable  instruments.  But  as  re- 
gards the  warranties  in  36  (d)  the  analogy  in  sales  of  personal 
property  generally  should  be  followed,  and  these  warranties,  there- 
fore, would  not  as  a  rule  extend  beyond  the  immediate  indorsee. 

What  is  the  position  of  a  bank  which  has  taken  for  purpose  of 
collection  a  bill  of  exchange  drawn  by  the  seller  upon  the  buyer 
for  the  amount  of  the  purchase  price,  which  bill  was  attached  to 
a  negotiable  document  of  title?  The  negotiable  document  of  title 
will  nearly  always  be  indorsed,  either  specially  to  the  bank  or  in 


1088  SALES  (Part  4 

blank,  so  that  the  bank  has  apparent  ownership.  If  the  bank  has 
already  discounted  the  bill  of  exchange,  then  the  bank  has  an  ac- 
tual interest  in  the  bill  of  lading  and  in  the  goods,  but  the  bank's 
interest  is  essentially  a  pledgee's  or  mortgagee's  interest.  When 
the  bank  indorses  or  delivers  the  bill  to  a  sub-agent  bank,  does  the 
bank  incur  liability  on  the  bill  of  lading?  Generally  not,  because 
this  transaction  is  not  a  sale.  The  bill  of  exchange  will  usually  be 
indorsed  restrictively  to  the  sub-agent  bank,  and  such  an  indorse- 
ment carries  no  liabilities  upon  the  indorser,  for  it  is  merely  a 
transfer  of  title  to  the  bill  for  the  purpose  of  making  a  collection. 
There  has  been  no  sale  of  the  bill.  The  same  would  be  true  as  re- 
gards the  transfer  by  the  bank  of  the  negotiable  document  of  title. 
The  transaction  is  not  a  sale;  therefore  no  liability  would  attach 
to  the  bank.  If  the  bills  should  get  out  of  banking  circles  and  be 
sold  to  innocent  parties,  there  is  reason  to  think  that  the  bank 
would  be  liable. 

Does  the  transfer  of  the  bill  of  lading  to  the  buyer,  at  the  time 
of  the  buyer's  payment  or  acceptance  of  the  bill  of  exchange,  im- 
pose upon  the  bank  making  such  delivery  any  liability  to  the  buyer 
because  of  the  seller's  breach  of  contract?  This  question  is  raised 
in  the  following  case.  The  liability  of  the  transferor  by  delivery 
merely  of  a  negotiable  document  of  title,  which  is  in  such  form  as 
to  require  indorsement  to  pass  title,  by  section  35  is  made  the 
same  as  that  imposed  upon  the  transferor  of  unindorsed  negotiable 
instruments  payable  in  money,  and  the  rights  of  such  a  transferee 
are  likewise  the  same. 


TOLERTON  &  STETSON  CO.  v.  ANGLO-CALIFORNIA  BANK,  Limited. 
(Supreme  Court  of  Iowa,  1901.    112  Iowa,  706,  84  N.  W.  930,  50  L.  R.  A.  777.) 

The  petition  originally  filed  in  this  case  asked,  briefly,  for  damages 
on  account  of  a  breach  of  warranty  in  the  sale  of  merchandise. 
Plaintiff  is  a  corporation  engaged  in  the  wholesale  grocery  business 
at  Sioux  City,  Iowa.  Defendant  is  a  banking  corporation.  During 
the  summer  of  1897  plaintiff  purchased  a  car  of  canned  goods  from 
the  California  Canneries  Company,  of  San  Francisco,  under  a  warranty 
that  the  goods  should  be  equal  in  quality  to  certain  samples  shown.  The 
Canneries  Company  delivered  said  goods  to  a  railway  company  at  San 
Francisco,  taking  a  bill  of  lading  therefor,  in  which  defendant  bank 
was  named  as  consignee  at  Sioux  City.  This  bill  of  lading  was  by 
defendant  bank  attached  to  a  draft  in  its  favor  drawn  by  the  Can- 
neries Company  on  plaintiff'  for  the  price  of  said  goods.  The  car  of 
goods  came  in  the  course  of  transit  into  possession  of  the  Sioux  City 
&  Pacific  Railroad  Company,  and  was  by  it  delivered  to  plaintiff,  who 
paid  to  said  railroad  company  the  price  of  said  merchandise,  which  sum 
was  paid  over  by  the  latter  to  defendant  bank.  Plaintiff  relied  on  the 
warranty  in  receiving  the  goods,  and  thereafter  found  such  goods  in- 
ferior in  quality  to  the  samples.  Plaintiff  notified  the  Canneries  Com- 
pany of  the  breach  of  warranty,  but  nothing  was  done  by  the  latter 
to  rectify  matters.  It  is  further  alleged  that  defendant  is  the  assignee 
of  the  order  for  the  purchase  of  said  goods,  and  as  such  is  bound  by 


Ch.  4)  NEGOTIABLE   DOCUMENTS   OF   TITLE  1089 

the  warranty  of  the  Canneries  Company,  and  asks  judgment  against 
it  for  the  damages  caused  by  such  breach. 

Waterman,  j.  *  *  *  There  was  a  sale  of  these  goods  with  a 
warranty,  which  was  broken.  Defendant  was  the  payee  of  the  draft 
drawn  by  the  Canneries  Company  on  plaintiff  for  the  price,  with  the 
bill  of  lading  attached,  and  as  such  received  payment  of  the  full  pur- 
chase price.  The  question  to  be  determined  is  whether  defendant  is 
now  liable  in  damages  for  the  breach  of  the  Canneries  Company's 
warranty.  It  must  be  confessed  that  this  theory  of  its  liability  is  fully 
supported  by  the  case  of  Landa  v.  Lattin,  19  Tex.  Civ.  App.  246,  46  S. 
W.  48,  and  that  the  doctrine  of  that  case  has  been  adopted  and  fol- 
lowed by  the  supreme  court  of  North  Carolina  in  Finch  v.  Gregg, 
126  N.  C.  176,  35  S.  E.  251,  49  L.  R.  A.  679,  decided  since  the  trial 
below.  If  we  were  prepared  to  yield  our  assent  to  the  line  of  reason- 
ing pursued  in  these  cases,  we  should  have  to  affirm  this  judgment. 
These  decisions  proceed  upon  the  theory  that  the  assignee  stands  in 
all  respects  in  the  shoes  of  his  assignor,  and  to  this  broad  doctrine  we 
cannot  agree.  While  the  rights  of  such  an  assignee  are  to  be  measured 
by  those  of  his  assignor,  his  liability  is  not  necessarily  the  same. 

Defendant  bank  could  not  have  compelled  payment  by  plaintiff  of 
any  greater  sum  than  could  have  been  collected  by  the  Canneries  Com- 
pany, but  on  what  theory  can  we  say  it  is  liable  on  a  contract  of  war- 
ranty which  it  never  made?  The  rule  of  the  Landa  Case  is  founded 
on  the  thought  that  the  transfer  of  the  draft  and  bill  of  lading  to  the 
bank  amounted  to  a  sale  of  the  goods,  and  that  the  bank  as  a  purchaser 
undertook  to  deliver  the  goods  and  carry  out  the  Canneries  Company's 
contract  with  plaintiff",  and  because  of  these  facts  it  necessarily  assumed 
the  contract  of  warranty,  although  it  may  have  been  in  fact  ignorant 
that  any  warranty  was  made.  We  do  not  think,  even  as  the  proposition 
is  thus  stated,  the  premises  justify  the  conclusion.  But  the  premises 
are  not  correct.  The  transaction  between  the  Canneries  Company  and 
defendant  was  not  and  could  not  be  a  sale  of  the  goods,  for  they  had 
already  been  sold  to  plaintiff,  and  it  was  the  intention  of  all  parties 
that  such  sale  to  plaintiff"  should  be  consummated  by  delivery.  What 
was  in  fact  done  by  the  assignment  of  the  draft  and  bill  of  lading  was 
to  transfer  to  the  bank  the  Canneries  Company's  right  to  the  price,  and 
to  give  it  the  possession  of  the  goods  as  security.  Manifestly,  while  the 
bank  could  collect  no  more  than  its  assignor  would  have  been  entitled 
to,  the  character  of  its  engagement  was  not  such  as  to  impose  upon  it 
any  liability  to  the  buyer  which  it  did  not  expressly  assume.  One  who 
purchases  an  account  against  another  takes  it  subject  to  defenses,  but 
not  to  affirmative  claims  of  the  debtor  on  some  collateral  agreement 
with  the  original  creditor.  The  two  cases  cited  stand  alone  in  holding 
the  purchaser  of  a  draft  with  the  bill  of  lading  attached  liable  on  a 
warranty  made  by  the  assignor,  and  the  line  of  reasoning  pursued  to 
reach  this  conclusion  is  so  at  variance  with  well-established  elementary 

principles  of  law  that  we  decline  to  accept  the  rule  they  announce 
*     *     * 

Plaintiff's  remedy  is  against  the  Canneries  Company.     It  has  now 
no  enforceable  claim  against  the  bank.     Reversed. 
B.&B.Bxjs.Law— G9 


1U90  SALES  (Part  4 

SECTION  6.— RIGHTS  OF  CREDITORS  AGAINST  GOODS 
REPRESENTED  BY  NEGOTIABLE  DOCU- 
MENTS OF  TITLE 

Sales  Act,  Section  39.  If  goods  are  delivered  to  a  bailee  by  the 
owner  or  by  a  person  whose  act  in  conveying  the  title  to  them  to  a 
purchaser  in  good  faith  for  value  would  bind  the  owner  and  a  ne- 
gotiable document  of  title  is  issued  for  them  they  cannot  there- 
after, while  in  the  possession  of  such  bailee,  be  attached  by  gar- 
nishment or  otherwise  or  be  levied  upon  under  an  execution  un- 
less the  document  be  first  surrendered  to  the  bailee  or  its  negotia- 
tion enjoined.  The  bailee  in  no  case  can  be  compelled  to  deliver  up 
the  actual  possession  of  the  goods  until  the  document  is  surren- 
dered to  him  or  impounded  by  the  court. 

Sales  Act,  Section  40.  A  creditor  whose  debtor  is  the  owner  of 
a  negotiable  document  of  title  shall  be  entitled  to  such  aid  from 
courts  of  appropriate  jurisdiction  by  injunction  and  otherwise  in 
attaching  such  document  or  in  satisfying  the  claim  by  means  there- 
of as  is  allowed  at  law  or  in  equity  in  regard  to  property  which 
cannot  readily  be  attached  or  levied  upon  by  ordinary  legal  pro- 
cess. 

These  sections  carry  out  the  underlying  theory  of  negotiable 
documents  of  title  by  giving  to  indorsees  of  such  documents  rights 
superior  to  those  of  other  persons.  A  creditor  who  seeks  to  levy 
on  the  goods  of  his  debtor,  who  then  holds  a  document  of  title  for 
them,  must  act  with  considerable  promptness,  because  the  negotia- 
tion of  the  document  will  cut  off  the  right  to  levy  on  the  goods.  A 
creditor  is  virtually  barred  from  levying  oh  the  goods,  and  his 
rights  are  confined  to  proceeding  against  the  document.  This  re- 
sult is  brought  about  indirectly  by  the  requirement  that  the  credi- 
tor must  first  obtain  the  document,  or  obtain  a  decree  from  a  court 
enjoining  its  negotiation. 


SECTION  7.— RIGHTS  OF  TRANSFEREES  OF  A  NON- 
NEGOTIABLE  DOCUMENT  OF  TITLE 

Sales  Act,  Section  31.  A  document  of  title  which  is  not  in  such 
form  that  it  can  be  negotiated  by  delivery  may  be  transferred  by 
the  holder  by  delivery  tp  a  purchaser  or  a  donee.  A  non-negotiable 
document  cannot  be  negotiated  and  the  indorsement  of  such  docu- 
ment gives  the  transferee  no  additional  right. 

Sales  Act,  Section  34.  A  person  to  whom  a  document  of  title 
has  been  transferred,  but  not  negotiated,  acquires  thereby,  as 
against  the  transferor,  the  title  to  the  goods,  subject  to  the  terms 
of  any  agreement  with  the  transferor. 

If  this  document  is  non-negotiable  such  person  also  acquires  the 
right  to  notify  the  bailee  who  issued  the  docimient  of  the  transfer 
thereof,  and  thereby  to  acquire  the  direct  obligation  of  such  bailee 


Ch.  4)  NEGOTIABLE   DOCUAIENTS   OF   TITLE  1091 

to  hold  possession  of  the  goods  for  him  according  to  the  terms  of 
the  document. 

Prior  to  the  notification  of  such  bailee  by  the  transferor  or  trans- 
feree of  a  non-negotiable  document  of  title,  the  title  of  the  trans- 
feree to  the  goods  and  the  right  to  acquire  the  obligation  of  such 
bailee  may  be  defeated  by  the  levy  of  an  attachment  or  execution 
upon  the  goods  by  a  creditor  of  the  transferor,  or  by  a  notification 
to  such  bailee  by  the  transferor  or  a  subsequent  purchaser  from 
the  transferor  of  a  subsequent  sale  of  the  goods  by  the  transferor. 

The  purpose  of  this  section  is  to  make  it  clear  that  a  straight 
bill  of  lading  cannot  safely  be  used  as  a  document  of  title.  The 
transferee  never  acquires  a  better  right  than  his  transferor  had, 
and  even  after  receiving  the  document  his  right  to  the  goods  may 
be  defeated  by  a  subsequent  sale  by  his  transferor,  or  by  an  exe- 
cution against  the  goods  levied  by  a  creditor  of  the  transferor. 

Occasionally,  even  yet,  persons  overlook  the  important  distinc- 
tion between  straight  bills  of  lading  and  negotiable  bills  of  lading 
as  the  next  case  shows. 


C.  E.  WHITE  &  OO.  V.  CENTURY  SAVINGS  BANK  OF 
DES  MOINES,  IOWA. 

(United  States  Circuit  Court  of  Appeals,  Seventh  Circuit,  1916.    229  Fed.  975, 

144  C.   C.  A.  257.) 

Action  by  the  Century  Savings  Bank  of  Des  Moines,  Iowa,  against 
C.  E.  White  &  Co.,  a  corporation.  Judgment  for  plaintiff,  and  defend- 
ant brings  error. 

Baker,  Circuit  Judge.  This  is  an  action  in  trover,  instituted  by  de- 
fendant in  error,  a  bank  at  Des  Moines,  Iowa,  against  White  &  Co., 
a  commission  house  at  East  St.  Louis,  111.  Judgment  for  the  bank 
was  entered  upon  a  directed  verdict. 

To  sustain  the  charge  of  a  tortious  appropriation  of  the  bank's  chat- 
tels, the  following  proofs  were  made :  On  June  22,  1908,  Hough  was 
a  stock  buyer  at  Des  Moines  and  was  the  owner  and  in  possession  of 
319  hogs.  He  took  them  that  day  to  the  Wabash  Railroad,  which  load- 
ed them  into  cars  and  issued  to  him  a  bill  of  lading  for  their  trans- 
portation from  "Shipper  L.  R.  Hough,"  at  Des  Moines  to  "Consignee 
C.  E.  White  &  Co.,"  at  East  St.  Louis.  Hough  on  the  same  day  took 
the  bill  of  lading  to  the  bank,  indorsed  it  in  blank,  and  signed  a  demand 
draft  on  White  &  Co.  in  favor  of  the  bank  for  $3,900.  On  delivery  of 
this  draft  and  bill  of  lading  the  bank  paid  Hough  the  face  value  less 
lawful  discount.  *  *  *  In  the  evening  of  the  same  day  the  bank 
deposited  the  draft  with  the  bill  of  lading  attached  in  the  mail.  *  *  * 
The  draft  and  bill  of  lading  did  not  reach  East  St.  Louis  and  were 
not  presented  to  White  &  Co.  until  June  25th.  In  the  meantime,  on 
the  morning  of  June  23d,  the  hogs  arrived  in  East  St.  Louis  and  were 
delivered  by  the  railroad  to  White  &  Co.  Prior  to  this  time  White  & 
Co.  had  continuing  authority  and  instructions  from  Hough  to  receive 
his  hogs  and  sell  them  promptly  on  commission.  During  the  day  of 
June  23d  White  &  Co.  sold  the  hogs.  Hough  never  directly  revoked 
his  instructions.    If  his  transfer  of  the  bill  of  lading  to  the  bank  was 


1092  SALES  (Part  4 

an  indirect  revocation,  White  &  Co.  had  no  knowledge  thereof  until 
two  days  after  they  had  parted  with  possession  of  the  hogs. 

Do  these  facts  sustain  the  judgment  in  tort?  *  *  *  Jn  Q^r  judg- 
ment the  difficulties  in  the  present  case  arising  from  an  apparent  con- 
flict between  principles  concerning  factors  and  principles  concerning 
the  rights  of  indorsees  or  holders  of  bills  of  lading  are  solvable  by 
reference  to  the  dififerent  aspects  in  which  a  transference  of  a  bill  of 
lading  may  be  considered. 

These  are  three:  1.  As  evidence  of  an  intended  sale,  pledge,  or 
mortgage  of  the  chattels  described  in  the  bill  of  lading,  the  same  as 
a  separate  document  would  be  evidence.  2.  As  an  assignment  of  the 
shipper's  rights  against  the  carrier,  3.  As  a  symbohc  delivery  of  the 
chattels,  equivalent  in  law  to  manual  delivery.  It  would  seem  that 
there  could  be  no  doubt  that  all  these  elements  characterize  the  trans- 
ference of  an  "order"  bill  of  lading. 

But  is  the  third  element  present  as  against  the  factor  consignee  of 
a  "straight"  bill  of  lading?  In  our  judgment.  No.  We  believe  that^a 
'''straight"  bill  of  lading  is  not  a  true  document  of  title,  possession  of 
which  is  symbolic  of  actual  possession,  and  that  the  carrier's  posses- 
sion, though  not  for  all  purposes  the  actual  possession  of  the  consignee, 
nevertheless  is  on  his  behalf.  *  *  *  jf  ^hg  consignor  be  in  truth 
the  owner  and  the  consignee  merely  his  factor,  the  consignor  may  trans- 
fer his  interest  as  owner  to  a  third  person.  But  for  that  purpose  his 
assignment  on  and  delivery  of  the  bill  of  lading  are  of  no  greater  force 
than  would  be  a  separate  bill  of  sale  while  the  chattels  were  in  the 
actual  possession  of  the  carrier  for  the  factor  consignee.  For,  "strictly 
speaking,  no  person  but  such  consignee  can,  by  an  indorsement  of  the 
bill  of  lading,  pass  the  legal  title  to  the  goods."  '■■  *  '■•'  In  other 
w^ords,  though  the  owner  consignor  may  deal  with  his  interest  as  own- 
er by  separate  documents  (and  they  are  separate  even  if  written  upon 
the  bill  of  lading),  he  is  powerless  to  disturb  the  effect  of  the  "straight" 
bill  of  lading  as  against  the  carrier  or  the  factor  consignee  without 
notice.  And  this  we  believe  is  just,  because  the  owner  is  the  one  who 
creates  the  bill  and  selects  its  form.  Necessarily  the  transferee  of  such 
a  bill  is  bound  to  take  notice  of  its  form  and  acquires  no  greater  rights 
than  the  transferrer  had.  And  so  the  bank,  succeeding  only  to  Hough's 
interest  as  owner  of  the  consigned  hogs,  and  failing  to  prove  notice  to 
White  &  Co.  of  its  interest  before  sale  by  Wliite  &  Co.,  has  not  sus- 
tained its  declaration  in  trover.     *     *     * 

The  judgment  is  reversed,  with  the  direction  to  grant  a  new  trial. 


Ch.  5)  REMEDIES   OF  THE   SELLER  1093 

CHAPTER  V 
REMEDIES  OF  THE  SELLER 

Section 

1.  Introduction. 

2.  Action  for  the  Purchase  Price. 

3.  Seller's  Rights  Against  the  Goods  in  General. 

4.  Unpaid  Seller's  Lien. 

5.  Right  of  Resale. 

6.  Right  of  Rescission. 

7.  Right  to  Damages  for  Breach   of  Contract  to  Sell. 


SECTION  1.— INTRODUCTION 

In  this  chapter  we  are  to  look  at  the  contract  after  it  has  been 
broken  by  the  buyer,  and  the  question  is :  What  remedies  does 
the  seller  now  have  against  the  buyer?  May  he  recover  money 
damages?  If  so,  how  much?  Does  the  seller  have  any  right  to 
keep  or  take  back  the  goods  sold  or  contracted  to  be  sold?  We 
shall  have  to  deal  both  with  contracts  of  sale  and  contracts  to  sell. 
We  shall  find  that  the  seller  in  some  cases  may  recover  the  amount 
of  the  purchase  price ;  in  others,  the  seller  will  not  be  allowed  to 
recover  as  much  as  the  purchase  price,  but  is  allowed  only  the  dif- 
ference between  the  contract  price  and  the  market  price.  We  shall 
also  find  that  the  seller  has  a  right  against  the  goods  themselves 
in  some  cases ;  that  is,  he  may  keep  them  without  being  guilty  of 
any  breach  of  contract,  and  in  some  cases  he  may  even  get  them 
back,  although  he  has  parted  with  their  possession,  and  may  keep 
them  as  his  own  or  resell  them. 


SECTION  2.— ACTION  FOR  THE  PURCHASE  PRICE 

There  are  three  situations  where  the  seller  is  allowed  by  the  law 
to  recover  from  the  buyer,  who  has  broken  the  contract,  the  actual 
amount  pf  the  purchase  price  agreed  upon : 

(a)  Where  the  title  has  passed  to  the  buyer;  (b)  where,  al- 
though title  has  not  passed,  the  buyer  has  agreed  to  pay  the  pur- 
chase price  on  a  day  certain;  (c)  where,  although  title  has  not 
passed  to  the  buyer,  and  although  the  buyer  has  not  agreed  to  pay 
the  price  on  a  day  certain,  the  property  contracted  to  be  sold  was 
of  such  a  nature  that  it  could  not  readily  be  resold  for  a  reasonable 
price. 

The  provisions  of  the  Sales  Act  dealing  with  these  three  situa- 
tions will  be  taken  up  in  this  order. 

(a)     ACTION  FOR  PURCHASE   PRICE.   WHERE  TITLE  HAS   ALREADY 

PASSED  TO  BUYER 

Sales  Act,  Section  63.  Where,  under  a  contract  to  sell  or  a  sale, 
the  property  in  the  goods  has  passed  to  the  buyer,  and  the  buyer 


1094  SALES  (Part  4 

wrongfully  neglects  or  refuses  to  pay  for  the  goods  according  to 
the  terms  of  the  contract  or  the  sale,  the  seller  may  maintain  an 
action  against  him  for  the  price  of  the  goods. 

This  section  recognizes  the  rule,  which  we  have  all  along  as- 
sumed to  be  true,  that  the  seller  could  recover  the  price,  if  title,  or, 
as  the  Sales  Act  here  calls  it,  "the  property,"  had  passed  to  the 
buyer.  The  main  question  in  all  such  cases  is  to  determine  wheth- 
er or  not  title  had  actually  passed.  We  do  not  need  to  retrace  this 
ground  which  was  covered  in  Chapters  I,  II,  and  IV.  If  the  buyer 
broke  his  contract  one  minute  before  title  would  have  passed  to 
him,  if  something  had  not  happened  to  prevent,  this  section  is  not 
applicable.  When  invoking  this  section,  the  seller  must  prove  that 
title  is  in  the  buyer.  One  should  have  in  mind  here  particularly 
sections  17,  18,  19,  and  20  of  the  Sales  Act,  and  also  the  sections 
dealing  with  negotiable  documents  of  title,  and  the  cases  which 
we  have  taken  up  construing  and  applying  these  sections.  With 
that  statement  it  is  believed  that  it  is  not  necessary  to  go  further 
into  the  section  quoted  above. 

(b)  ACTION  FOR  PURCHASE  PRICE,  WHERE  TITLE  HAS  NOT 

PASSED  TO  THE  BUYER,  BUT  THE  BUYER  HAS  AGREED 

TO  PAY  THE  PRICE  ON  A  DAY  CERTAIN 

Sales  Act,  Section  63,  Subsection  2.  Where,  under  a  contract 
to  sell  or  a  sale,  the  price  is  payable  on  a  day  certain,  irrespective 
of  delivery  or  of  transfer  of  title,  and  the  buyer  wrongfully  neg- 
lects or  refuses  to  pay  such  price,  the  seller  may  maintain  an  action 
for  the  price,  although  the  property  in  the  goods  has  not  passed, 
and  the  goods  have  not  been  appropriated  to  the  contract.  But 
it  shall  be  a  defense  to  such  an  action  that  the  seller  at  any  time 
before  judgment  in  such  action  has  manifested  an  inability  to  per- 
form the  contract  or  the  sale  on  his  part  or  an  intention  not  to 
perform  it. 

This  section  states  a  general  principle  of  contract  law.  If  A. 
agrees  to  sell  his  horse  to  B.,  and  to  transfer  title  and  possession 
to  B.  on  February  1st  next,  and  B.  agrees  to  pay  for  the  horse  on 
January  1st  preceding  the  date  fixed  for  transfer  of  title  to  him,  it 
is  clear  that  B.,  having  made  a  promise  to  perform  on  January  1st, 
will  at  the  close  of  that  day  be  guilty  of  a  breach  of  contract,  and 
A.  may  on  January  2d  sue  B.  for  the  price.  By  the  express  terms 
of  the  contract  the  obligation  of  A.  to  deliver  possession  and  to 
transfer  title  to  the  horse  were  not  conditions  precedent  to  B.'s 
obligation  to  perform.  This  situation  is  common  in  connection 
with  contracts  of  conditional  sale,  as  is  illustrated  in  the  next  case. 


Ch.  5)  REMEDIES   OP  THE   SELLER  1095 


R.  C.  BARTLET  CO.  v.  LEE. 
(Supreme  Court  of  New  Jersey,  1915.    87  N.  J.  Law,  19,  93  Atl.  78.) 

Action  by  the  R.  C.  Hartley  Company  against  Edwin  Lee.  There 
was  judgment  for  plaintiff,  and  defendant  brings  certiorari. 

SwAYZE,  J.  The  Bartley  Company  contracted  with  Lee  to  put  a 
heating  apparatus  in  his  house,  reserving  title  until  he  had  paid  for 
the  same.  He  paid  a  portion  of  the  purchase  price  but  refused  to 
pay  the  balance  and  when  suit  was  brought  claimed  to  recoup  dam- 
ages. The  trial  judge  decided  the  facts  in  favor  of  the  plaintiff,  and 
awarded  judgment  for  the  balance  of  the  purchase  price.  The  only 
question  presented  by  the  appeal  is  whether  it  is  proper  to  allow  the 
Bartley  Company  to  recover  the  balance  of  the  purchase  price  or 
whether  they  should  have  been  restricted  to  a  recovery  of  the  dam- 
ages for  breach  of  an  executory  contract  of  sale.  The  theory  of  the 
defendant  is  that  as  the  title  did  not  pass,  although  the  heating  appara- 
tus was  in  his  house,  the  only  remedy  of  the  plaintiff  was  for  breach 
of  an  executory  contract.  Whether  this  is  to  be  regarded  as  a  work- 
ing contract  or  a  contract  of  sale  strictly  so  called  is  of  no  importance. 
Assuming,  in  the  defendant's  favor,  that  it  was  a  contract  of  sale,  the 
law  is  settled  adversely  to  his  contention. 

It  is  dealt  with  by  Williston  at  section  579  of  his  treatise  on  Sales, 
and  is  within  the  rule  of  section  63  of  Sales  Act,  C.  S.  4662.  It  is 
also  the  logical  result  of  our  decision  in  American  Soda  Fountain  Co. 
V.  Vaughn,  69  N.  J.  Law,  582,  55  Atl.  54.  As  Prof.  Williston  says: 
"No  satisfactory  solution  of  the  rights  of  the  parties  in  such  a  trans- 
action can  be  found  without  observing  that  the  essential  character  of 
the  transaction  is  the  same  as  that  of  an  absolute  sale  with  a  mortgage 
back." 

The  judgment  of  the  Morris  common  pleas  must  therefore  be  affirm- 
ed, with  costs. 


(c)     ACTION  FOR  THE  PRICE,  WHERE  TITLE  HAS  NOT  PASSED, 

AND  THE    GOODS   CANNOT  READILY   BE   RESOLD   FOR 

A  REASONABLE  PRICE 

Before  the  adoption  of  the  Sales  Act,  there  were  many  states — 
a  majority  of  them,  in  fact — held  that,  in  any  case  where  the  buyer 
wrongfully  refused  to  take  the  title  when  it  was  tendered  to  him, 
the  seller  could  recover  the  purchase  price,  even  though  title  had 
not  passed.  This  rule  has  been  criticized,  because  it  gives  to  the 
seller  a  remedy  which  is  higher  than  the  corresponding  remedy  of 
the  buyer,  if  the  buyer  were  suing  for  the  seller's  breach  of  con- 
tract. In  the  latter  action,  the  buyer,  as  plaintiff,  would  be  limited 
in  his  recovery  to  the  amount  vvhich  he  had  actually  suffered — i.  e., 
the  difference  between  the  contract  price  and  the  market  or  current 
price  of  the  goods  at  the  time  when  the  goods  should  have  been 
delivered;  or,  to  put  the  matter  in  another  way,  the  rule  really 
gave  the  seller  the  remedy  of  specific  performance,  when  the  buyer 
would  not  be  entitled  to  this  remedy.  The  Sales  Act  did  not  adopt 
the  wdiole  of  this  rule,  but  did. adopt  it  to  a  certain  extent: 

Sales  Acts,  Section  63  (3).     Although  the  property  in  the  goods 


1096  SALES  (Part  4 

has  not  passed,  if  they  cannot  readily  be  resold  for  a  reasonable 
price,  and  if  the  provisions  of  section  64  (4)  are  not  applicable, 
the  seller  may  offer  to  deliver  the  goods  to  the  buyer,  and,  if  the 
buyer  refuses  to  receive  them,  may  notify  the  buyer  that  the  goods 
are  thereafter  held  by  the  seller  as  bailee  for  the  buyer.  There- 
after the  seller  may  treat  the  goods  as  the  buyer's,  and  may  main- 
tain an  action  for  the  price. 

The  principal  question  which  presents  itself  is,  therefore:  Un- 
der what  circumstances  will  one  be  justified  in  assuming  that  the 
goods  contracted  to  be  sold  cannot  readily  be  resold  at  a  reason- 
able price?  This  is  a  question  of  fact,  not  a  question  of  law.  To 
answer  it  one  must  inquire  into  the  facts  largely  from  the  business 
point  of  view.  Certainly  the  rule  would  not  apply  to  contracts  to 
sell  goods  which  the  seller  always  kept  in  stock  and  was  actually 
selling  to  the  trade.  A  majority  of  contracts  to  sell  would  not, 
therefore,  come  within  this  rule.  Accordingly  in  such  case  the 
seller  would  be  limited  to  his  action  to  recover  the  actual  damage 
suffered.  In  the  end,  the  seller,  theoretically,  would  recover  the 
purchase  price,  even  under  the  latter  rule,  for,  after  having  search- 
ed the  country  over  for  a  buyer,  doubtless  he  would  find  some  one 
who  would  take  them,  though  probably  at  one-half,  or  even  a  less 
percentage,  of  the  purchase  price.  The  seller  could  then  sue  the 
buyer  for  the  actual  damages  suffered,  and  recover  the  dift'erence 
between  the  relatively  small  amount  which  he  obtained  from  the 
buyer  at  the  greatly  sacrificed  price  and  the  price  agreed  upon. 
If  the  seller  could  not  sell  them  at  any  price,  it  would  be  for  the 
court  or  jury  to  determine  the  amount  which  they  should  bring. 
While  theoretically  the  seller  is  thus  in  the  same  position,  actually, 
it  makes  a  great  deal  of  difference  to  him.  If  it  were  not  for  the 
exception  stated  in  this  subsection  the  buyer  must  go  to  all  the 
trouble  and  expense  of  finding  some  one  who  will  take  his  goods 
even  at  greatly  reduced  prices.  In  the  second  place,  the  court 
might  find  that  the  seller  was  not  justified  in  the  particular  case 
in  selling  at  such  a  heavy  discount  from  the  agreed  price.  To  al- 
low the  seller  to  recover  the  actual  price,  as  this  subsection  per- 
mits, without  the  necessity  of  taking  all  these  risks,  is  of  consid- 
erable value  to  him. 

The  usual  case  where  the  exception  is  applicable  will  be  where 
goods  were  manufactured  specially  by  the  seller  for  the  buyer. 
The  following  cases  illustrate  the  application  of  the  rule. 


ILLUSTRATED  POSTAL  CARD  &  NOVELTY  CO.  v.   HOLT. 

(Supreme  Court  of  Errors  of  Connecticut,  1912.     85  Conn.  140,  81  Atl.  1061.) 

Action  by  the  Illustrated  Postal  Card  &  Novelty  Company  against 
Clarence  D.  Holt.     Judgment  for  plaintiff,  and  defendant  appeals. 

Wheeler,  J.  The  plaintiff  is  a  manufacturer  of  post  cards  in  New 
York  City.  The  defendant  is  a  wholesale  dealer  in  post  cards  in 
New  Haven.     A  salesman  of  plaintiff  procured  from  defendant  in 


Ch.  5)  REMEDIES   OF  THE   SELLER  1097 

New  Haven  a  verbal  order  for  Christmas  post  cards,  subject  to 
change.  Subsequently,  the  defendant  called  at  plaintiff's  place  of  busi- 
ness in  New  York,  and,  after  examining  plaintiff's  catalogue,  gave  it 
a  written  order  for  100,000  Christmas  post  cards  No.  438,  for  the 
price  of  $275,  and  for  other  Christmas  cards,  the  price  for  the  whole 
order  amounting  to  $321,  the  same  to  be  shipped,  by  what  method  did 
not  appear,  on  August  1st,  and  paid  for  December  1,  1910.  The  plain- 
tiff in  its  business  manufactured  post  cards  of  this  character  on  spe- 
cial order  and  did  not  keep  them  in  stock.  On  July  16,  1910,  defend- 
ant wrote  plaintiff  that  he  was  obliged  to  cancel  the  order  for  the 
100,000  post  cards.  After  securing  this  order,  the  plaintiff  began  the 
manufacture  of  the  cards,  and  all  of  the  cards  so  ordered  were  fin- 
ished and  packed  for  shipment  at  the  date  of  receipt  of  this  letter. 
The  plaintiff  replied  that  it  could  not  accept  the  attempted  cancella- 
tion as  the  cards  would  be  left  on  its  hands.  Wholesale  dealers  in 
Christmas  post  cards  place  their  orders  by  April  1st,  the  retail  trade 
continues  usually  until  the  fall,  and  after  July  1st  there  was  no  avail- 
able market  for  these  cards  with  jobbers  and  wholesale  dealers.  The 
defendant  twice  again  requested  plaintiff  to  cancel  the  order  for 
card  No.  438,  which  plaintiff  declined  to  do,  replying  to  defendant's 
last  letter  of  July  29th,  on  July  30th,  and  on  August  4th  shipped  de- 
fendant's entire  order  by  common  carrier,  not  separating  cards  438 
from  the  rest  of  the  order.  Upon  arrival  of  the  goods  in  New  Haven, 
defendant  refused  to  receive  them  and  notified  plaintiff  he  would  re- 
ceive balance  of  order  exclusive  of  No.  438.  Thereupon  plaintiff 
notified  him  the  goods  were  in  the  hands  of  the  New  England  Naviga- 
tion Company  subject  to  his  order,  where  they  have  since  remained. 
*     *     * 

This  action  was  begun  to  recover  for  the  price  of  goods  sold  and 
delivered.  Prior  to  the  passage  of  the  Sales  Act  (P.  A.  1907,  c.  212), 
our  law  permitted  an  action  for  damages  by  the  seller  against  the  buy- 
er for  breach  of  his  contract  to  buy  goods  to  be  manufactured  for 
him,  and  it  sought  in  such  action  to  put  the  injured  party  in  the  place 
the  contract  would  have  placed  him  in  had  it  been  performed.  The 
actual  damage  suffered  was  the  recovery  upheld.  That  was,  as  a  rule, 
measured  by  the  difference  between  the  price  of  the  contract  of  sale 
and  the  value  of  the  goods  made.  When  there  was  no  market,  or 
they  were  worthless,  the  actual  damages  might  even  be  the  entire  val- 
ue of  the  goods.  *  *  *  So  far  as  we  are  aware,  no  case  has  ever 
reached  this  court  where  upon  breach  of  contract  for  the  sale  of  goods 
an  action  for  the  price  of  the  goods  was  begun. 

The  English  law  denied  such  a  remedy,  and  many  of  our  state 
courts  have  followed  the  English  law,  while  a  number  under  the  lead 
of  the  New  York  court  have  given  the  seller,  upon  breach  of  a  con- 
tract of  sale,  a  remedy  permitting  him  to  store  or  retain  the  goods  for 
the  buyer  and  sue  the  buyer  for  the  entire  purchase  price.  The  the- 
ory of  this  law  is  that  when  the  seller  deposits  the  goods  with  a  third 
person  for  the  buyer,  or  segregates  the  goods  and  notifies  the  buyer 
that  he  holds  them  for  him,  the  title  passes,  or  the  rights  of  the  parties 
will  subsequently  be  adjusted  as  if  it  had  passed  at  that  time.  Willis- 
ton  on  Sales,  p.  945,  §  56.  Our  law  was  in  this  condition  when  the 
Sales  Act  was  passed. 

The  remedies  provided  by  the  Sales  Act  for  the  recovery  of  dam- 
ages for  nonacceptance  of  goods  (section  64),  and  for  the  recovery  of 


1098  SALES  (Part  4 

the  price  (section  63,  1,  2),  when  the  property  in  the  goods  has  passed, 
do  not  substantially  differ  from  the  remedies  provided  by  our  law  at 
the  time  of  its  enactment. 

The  remedy  (section  63,  3)  is  an  addition  to  the  remedies  up  to  that 
time  known  to  our  law.  *  *  *  Prof.  Williston  who  wrote  the  Sales 
Act,  says  in  a  note  (42  Am.  Law  Rev.  900) :  "The  rights  of  the  seller 
are  also  enlarged  as  compared  with  his  rights  under  the  English  act 
both  by  the  greater  freedom  in  rescission  allowed  an  unpaid  seller 
with  a  lien  (section  61),  and  by  the  allowance  of  an  action  for  the  full 
price,  even  though  the  property  in  the  goods  has  not  passed,  if  they 
cannot  readily  be  resold  for  a  reasonable  price  (section  63,  3)." 

The  elements  of  an  action  under  this  section  are:  (1)  A  breach  of 
the  contract  to  sell  goods ;  (2)  that  the  property  in  the  goods  at  the 
time  of  the  breach  has  not  passed ;  (3)  that  they  cannot  be  sold  for  a 
reasonable  price ;  (4)  that  the  seller  has  offered  to  deliver  them  to 
the  buyer ;  (5)  that  he  has  refused  to  receive  them ;  (6)  that  the  seller 
has  notified  the  buyer  that  he  thereafter  holds  the  goods  as  bailee  for 
the  buyer. 

The  notification  of  cancellation  by  this  defendant  and  his  persist- 
ence in  this  course  constituted  a  breach  of  the  contract  of  sale.  At 
this  time  the  goods  had  not  been  segregated,  nor  marked  for  the  buy- 
er, nor  delivered  to  a  carrier  for  the  buyer,  and,  in  the  absence  of 
provision  in  the  contract  to  the  contrary,  the  property  had  not  passed 
to  the  buyer.     *     *    * 

The  finding  that  there  was  no  available  market  for  the  goods  after 
the  breach,  and  that  jobbers  and  wholesalers  place  no  orders  after 
April  for  such  goods,  and  that  these  goods  are  not  goods  kept  in  stock, 
but  are  manufactured  on  special  order,  fully  shows  that  the  goods 
could  not  be  sold  for  a  reasonable  price.  There  was  no  obligation 
upon  the  manufacturer  to  sell  these  cards  at  retail  or  to  the  retail 
trade — that  would  have  involved  the  undertaking  on  its  part  of  a  new 
business.     *     *     * 

The  plaintiff  was  under  no  obligation  to  separate  the  order,  nor  to 
attempt  to  sell  goods  for  which  it  knew  it  could  not  obtain  a  reason- 
able price.     *     *    * 

There  is  no  error. 


SECTION  3.— SELLER'S  RIGHTS  AGAINST  THE  GOODS 

IN  GENERAL 

INTRODUCTION 

Let  us  suppose  that  title  to  the  goods  has  passed  to  the  buyer, 
under  some  one  of  the  numerous  rules  which  heretofore  have  been 
studied,  and  that  the  seller  has  not  been  paid.  What  are  the  rights 
of  the  unpaid  seller  against  the  goods?  It  is  very  easy  to  think 
that  an  unpaid  seller  of  goods,  w^ho  is  still  in  possession  of  them, 
really  owns  them,  but  under  our  assumption  here  this  is  not  true. 
We  are  assuming  a  case  where  title  has  passed.  It  has  already 
been  shown  that  this  is  the  usual  case.  If  the  bargain  relates  to 
ascertained  goods  in  a  deliverable  condition,  title  is  presumed  to 
pass  at  the  time  the  contract  was  made  ;  and,  if  they  are  to  be  put 
into  a  deliverable  condition  by  the  seller,  title  will  pass  at  the  in- 


Ch.  5)  REMEDIES   OF   THE   SELLER  1099 

stant  that  they  are  put  in  a  deliverable  state.  Also,  where  the 
contract  relates  to  unascertained  goods,  title  presumptively  will 
pass  at  the  moment  when,  in  addition  to  the  act  of  putting-  them  in- 
to a  deliverable  state,  there  has  been  some  act  of  unconditional 
appropriation  assented  to  by  buyer  and  seller.  In  any  of  the  very 
numerous  cases  which  fall  within  these  rules  under  which  title 
has  passed  to  the  buyer,  our  general  inquiry  is:  What  rights  does 
the  law  give  to  an  unpaid  seller  against  the  buyer's  goods,  which 
are  the  subject  of  the  sale? 

This  general  inquiry  divides  itself  into  three  subordinate  in- 
quiries : 

(1)  Who  are  unpaid  sellers?  That  is,  what  legal  relations  must 
be  found  to  exist  between  buyer  and  seller,  before  the  seller  may 
be  deemed  unpaid,  within  the  meaning-  of  the  law? 

(2)  How  must  the  unpaid  seller  be  situated  with  respect  to  the 
goods,  before  he  may  exercise  any  rights  against  them  which  are 
accorded  to  him  by  the  law? 

(3)  What  rights  does  an  unpaid  seller  have?  That  is,  of  what 
natur?f  are  such  rights?  Of  what  value  are  they  to  the  unpaid 
seller?  How  may  the  unpaid  seller  exercise  these  rights  so  as  to 
prevent  financial  loss  to  him? 

(a)     WHO  ARE  UNPAID  SELLERS? 

Sales  Act,  Section  52.  (1)  The  seller  of  goods  is  deemed  to  be 
an  unpaid  seller  within  the  meaning  of  this  act — (a)  When  the 
whole  of  the  price  has  not  been  paid  or  tendered,  (b)  When  a 
bill  of  exchange  or  other  negotiable  instrument  has  been  received 
as  conditional  payment,  and  the  condition  on  which  it  was  re- 
ceived has  been  broken  by  reason  of  the  dishonor  of  the  instru- 
ment, the  insolvency  of  the  buyer,  or  otherwise.. 

(2)  In  this  part  of  this  act,  the  term,  "seller"  includes  an  agent 
of  the  sailer  to  whom  the  bill  of  lading  has  been  indorsed,  or  a 
consignor  or  agent  who  has  himself  paid,  or  is  directly  responsible 
for,  the  price,  or  any  other  person  who  is  in  the  position  of  a  seller. 

Section  54.  (1)  Subject  to  the  provisions  of  this  act,  the  un- 
paid seller  of  goods  who  is  in  possession  of  them  is  entitled  to  re- 
tain possession  of  them  until  payment  or  tender  of  the  price  in  the 
following  cases,  namely :  (a)  Where  the  goods  have  been  sold 
without  any  stipulation  as  to  credit,  (b)  Where  the  goods  have 
been  sold  on  credit,  but  the  term  of  credit  has  expired,  (c)  Where 
the  buyer  becomes  insolvent. 

(2)  The  seller  may  exercise  his  right  of  lien  notwithstanding 
that  he  is  in  possession  of  the  goods  as  agent  or  bailee  for  the 
buyer. 

To  observe  merely  the  important  features  of  these  two  sections, 
we  find  that  we  must  consider  two  features  of  the  contract:  (1) 
We  must  look  at  the  nature  of  the  contract.  (2)  We  must  note 
whether  or  not  the  buyer  has  performed  his  obligations  there- 
under. 


1100  SALES  (Part  4 

(1)  As  to  the  nature  of  the  contract,  section  54  declares  that 
a  seller  is  unpaid  (a)  Where  the  goods  have  been  sold  without 
any  stipulation  as  to  credit.  Let  us  see  what  kinds  of  contracts 
are  here  contemplated:  (1)  We  know  that,  in  a  contract  to  sell 
ascertained  goods  in  a  deliverable  state,  title  presumptively  passes 
to  the  buyer  at  the  date  of  the  contract.  There  being  no  express 
agreement  as  to  credit,  possession  remaining  in  the  seller,  this 
would  be  one  case  where  the  seller  would  have  his  special  reme- 
dies against  the  goods.  (2)  We  may  also  include  the  case  where 
there  has  been  a  contract  to  sell  unascertained  goods,  followed  by 
an  act  of  unconditional  appropriation,  assented  to  by  buyer  &nd 
seller.  This  act  passes  title  to  the  buyer;  but,  if  possession  is  re- 
tained by  the  seller,  the  seller,  in  such  case,  has  his  special  reme- 
dies against  the  goods.  (3)  We  may  also  include  the  case  where 
the  goods  have  been  shipped  under  a  negotiable  bill  of  lading  run- 
ning to  the  order  of  the  consignee,  the  bill  being  retained  by  the 
seller  or  his  agent.  Most,  if  not  all,  of  the  possible  cases  will  fall 
under  the  classes  of  contracts  just  enumerated.  These  are  the 
kinds  of  contracts  to  which  section  54  refers  when  it  mentions 
cases  "where  the  goods  have  been  sold  without  any  stipulation  as 
to  credit." 

By  way  of  contrast,  it  should  be  noticed  that  contracts  under 
which  title  has  not  passed  do  not  come  within  this  section.  These 
cases  are:  (1)  Cash  sales;  (2)  conditional  sales;  (3)  sales  on 
approval ;  (4)  sales  of  goods  shipped  to  the  buyer  under  a  nego- 
tiable bill  of  lading  running  to  the  order  of  the  seller,  the  bill 
being  retained  by  him;  (5)  sales  of  goods  shipped  under  a  straight 
bill  of  lading  to  the  seller  or  to  the  seller's  agent;  (6)  all  execu- 
tory contracts  to  sell.  In  all  these  cases  title  has  been  reserved 
by  the  seller;  at  least,  a  security  title.  Having  title,  he  is  not  an 
unpaid  seller  within  the  meaning  of  these  sections.  This  does  not 
mean  that  such  a  seller — one  from  whom  the  title  has  not  passed 
— will  have  no  remedies  against  the  goods.  Having  title,  he  may 
protect  himself  more  easily  than  the  seller  from  whom  title  has 
passed.  By  virtue  of  his  having  title  he  is  entitled  to  all  the  ben- 
efits to  which  the  unpaid  seller  is  entitled  under  the  sections  now 
being  considered,  and  even  more.  These  sections  are  necessary 
only  for  the  seller  who  has  theretofore  transferred  his  title,  and 
this  general  object  is  to  assist  such  an  unpaid  seller  in  getting 
back  that  title,  with  which  he  has  already  parted.  Section  54  (1) 
(a)  is  perfectly  clear  in  its  meaning  when  it  declares  that  the 
rights  of  the  unpaid  seller  exist  when  there  has  been  a  sale  other 
than  a  sale  on  credit,  title  having  passed,  possession  remaining 
witli  the  seller. 

But  there  are  two  cases  where  the  rights  of  the  unpaid  seller 
arise,  even  where  there  has  been  a  sale  on  credit  and  the  posses- 
sion still  remains  with  the  seller.  These  cases  are:  (1)  Where 
the  buyer  becomes  insolvent  before  the  period  of  credit  expires. 
This  is  eminently  just.    If  A.  sells  B.  goods  on  credit,  and  for  any 


Ch.  5)  REMEDIES   OF  THE  SELLER  1101 

reason  B.  sees  fit  not  to  exercise  his  legal  right  of  then  taking  pos- 
session of  the  goods,  and  before  the  date  arrives  at  which  he 
agreed  to  pay  for  them  he  becomes  insolvent  it  is  altogether  prop- 
er to  provide  that  the  act  of  becoming  insolvent  constitutes  a  ma- 
terial breach  of  his  contract,  which  has  the  effect  of  creating  in  the 
seller  a  lien  for  the  purchase  price.  Of  course,  no  lien  will  arise 
if  tTie  seller  has  already  given  up  possession  to  the  buyer;  but,  if 
he  has  the  goods,  then  the  law  allows  him  to  take  advantage  of  his 
position.  The  second  case  where  there  is  a  lien  growing  out  of 
a  sale,  on  credit  arises  where  the  seller  is  in  possession,  after  the 
period  of  credit  has  expired.  Insolvency  of  the  buyer  is  not  nec- 
essary. The  buyer  had  the  right  to  take  the  goods  at  any  time 
up  until  the  arrival  of  the  date  on  which  he  had  promised  to  pay 
for  the  goods.  This  date  having  passed  without  payment  from 
the  buyef,  it  is  just  for  the  law  at  that  time  to  create  in  the  seller 
a  lien  on  the  goods ;  and  this  is  so,  whether  the  buyer  is  insolvent 
or  not.  Any  other  result  would  in  effect  be  an  extension  of  the 
period  of  credit  without  the  consent  of  the  seller,  which  clearly 
would  be  unjust. 

(2)  Assuming,  then,  that  we  have  before  us  the  kind  of  contract 
of  sale  in  which  there  is  an  unpaid  seller  within  the  meaning  of 
the  sections  just  discussed,  the  next  question  which  arises  is: 
What  kinds  of  acts  done  by  the  buyer  will  have  the  effect  of  put- 
ting an  end  to  the  unpaid  seller's  rights?  The  answer  made  by  sec- 
tion 52  (1)  is  that  payment  by  the  buyer  will  destroy  the  seller's 
rights.  This,  obviously,  would  be  true.  But  what  constitutes  a 
payment?  Is  the  acceptance  of  the  buyer's  negotiable  note,  or  a 
note  or  bill  of  exchange  of  a  third  party  indorsed  by  the  buyer,  a 
payment?  It  is  possible  to  accept  a  negotiable  instrument  in  ab- 
solute payment,  but  the  presumption  is  that  the  instrument  is 
accepted  only  in  conditional  payment.  During  the  time  from  the 
date  of  the  acceptance  of  the  negotiable  instrument  until  its  ma-» 
turity,  the  seller  is  not  an  unpaid  seller;  but  at  the  moment  the 
instrument  is  dishonored,  or  if  before  dishonor  the  buyer  becomes 
insolvent,  the  seller  then  becomes  an  unpaid  seller.  The  situation 
then  is  the  same  as  though  no  instrument  had  ever  been  accepted 
by  the  buyer. 

The  second  act  which  takes  from  the  seller  the  rights  which  he 
has  against  the  goods  as  an  unpaid  seller  is  a  tender.  Very  sel- 
dom will  a  seller  find  it  to  his  advantage  to  refuse  money  when  it 
is  offered  to  him,  but  occasionally  a  seller  will  find  it  to  his  interest 
to  refuse  money  offered  him  by  the  buyer.  It  may  be  that  the  rea- 
son for  refusing  the  money  tender  is  that  he  thinks  the  proper 
amount  has  not  been  offered.  Of  course,  an  offer  of  an  incorrect 
sum  is  not  a  tender;  but,  if  it  should  turn  out  that  the  buyer  was 
mistaken,  and  that  the  seller  tendered  the  correct  amount  of  mon- 
ey, then  there  has  been  a  valid  tender,  the  effect  of  which  is  to 
deprive  the  seller  of  his  rights  against  the  goods. 

It  is  thus  seen  that  an  unpaid  seller  is  (1)  a  seller  of  goods  who 


1102  SALES  (Part  4 

does  not  have  title,  and   (2)   who  has  not  been  paid  or  tendered 
the  whole  of  the  purchase  price. 

(b)     HOW  MUST  THE  UNPAID  SELLER  BE  SITUATED  WITH  RESPECT 

TO   THE    GOODS   BEFORE    HE    MAY    EXERCISE    HIS    RIGHTS 

AGAINST  THEM? 

In  addition  to  the  preceding  requirements,  to  be  an  unpaid  seller, 
the  seller  must  either  be  in  possession  of  the  goods,  or,  he  must 
be  in  such  a  position  that  although  no  longer  in  possession,  he 
may  exercise  the  right  of  stoppage  in  transitu.  Section  53  pro- 
vides :  Subject  to  the  provisions  of  this  act,  notwithstanding  that 
the  property  in  the  goods  may  have  passed  to  the  buyer,  the  un- 
paid seller  of  goods,  as  such,  has — (a)  a  lien  on  the  goods  or  right 
to  retain  them  for  the  price  while  he  is  in  possession  of  them, 
(b)  In  case  of  the  insolvency  of  the  buyer,  a  right  of  stoppage  in 
transitu  after  he  has  parted  with  possession  of  them;  Section  60 
(1)  in  part  provides  that  an  unpaid  seller  having  a  right  of  lien 
or  having  stopped  the  goods  in  transitu  may  resell  the  goods. 
Section  61  provides  that  an  unpaid  seller  having  a  right  of  lien 
or  having  stopped  the  goods  in  transitu,  may  rescind  the  transfer 
of  title  and  resume  the  property  in  the  goods. 

From  these  three  extracts  from  sections  53,  60,  and  61  we  ob- 
tain our  first  intimation  of  the  nature  of  the  seller's  rights  against 
the  goods — i.  e.,  the  (1)  lien  on  the  goods;  (2)  the  right  to  resell; 
and  (3)  the  right  to  rescind  the  contract.  But,  at  this  point  of  the 
subject,  att-ention  is  not  directed  to  the  study  of  the  nature  of  the 
lien,  the  right  of  resale,  and  the  right  of  rescission,  but  rather  to 
the  physical  condition  of  things  upon  which  the  existence  of  the 
lien,  the  right  of  resale,  and  the  right  of  rescission  turn. 

It  is  to  be  noticed  that  all  of  these  rights,  the  lien,  the  right  of 
resale,  and  the  right  of  rescission,  all  turn  on  the  question  whether 
the  unpaid  seller  was  in  possession  of  the  goods,  or  had  the  right 
to  stop  in  transitu.  Section  53  states  that  the  unpaid  seller  has  a 
lien  while  he  is  in  possession,  or  upon  exercising  the  right  of  stop- 
page in  transitu  after  he  has  parted  with  possession  of  them. 

Section  60,  while  it  does  not  directly  say  that  the  right  of  resale 
depends  upon  the  seller's  having  possession  of  the  goods,  or  upon 
his  having  stopped  the  goods  in  transitu,  reaches  precisely  the 
same  result,  because  the  section  discloses  that  the  right  of  resale 
is  dependent  upon  the  "unpaid  seller  having  a  right  of  lien  or 
having  stopped  the  goods  in  transitu,"  and  we  know  from  sec- 
tion 53  that  the  right  of  lien  exists  only  when  the  seller  has  pos- 
session, or  has  the  right  to  stop  the  goods  in  transitu.  Likewise 
section  61  does  not  directly  make  the  right  of  rescission  depend 
upon  the  unpaid  seller's  having  possession,  or  having  stopped  the 
goods  in  transitu,  but  does  declare  that  the  right  of  rescission 
arises  only  when  the  unpaid  seller  has  a  lien,  or  has  the  right  to 
stop  the  goods  in  transitu,  and  section  53  makes  the  lien  turn  upon 
possession,  or  upon  the  right  to  regain  possession,  by  exercising 


Ch.  5)  REMEDIES   OF   THE   SELLER  1103 

the  right  of  stoppage  in  transitu.  The  unpaid  seller's  remedies 
against  the  goods — i.  e.,  that  of  a  lien,  or  resale,  and  of  rescission 
■ — may  be  exercised  when,  and  only  when  the  seller  has  possession 
of  the  goods,  or,  if  he  does  not  have  possession,  then  these  reme- 
dies exist  only  when  the  seller  has  the  right  to  recover  possession 
by  exercising  the  right  of  stoppage  in  transitu.  (1)  Under  what 
circumstances  may  it  be  said  that  an  unpaid  seller  has  possession? 
(2)  Under  what  circumstances  may  the  unpaid  seller  regain  pos- 
session by  exercising  the  right  of  stoppage  in  transitu? 

(1)  The  question  as  to  what  constitutes  possession  is  not  strict- 
ly a  part  of  the  law  of  sales.  At  least,  the  Sales  Act  does  not  at- 
tempt to  define  possession.  Volumes  have  been  written  on  the 
subject  of  possession.  There  is  a  real  difficulty  in  the  subject, 
which  we  may  point  out  here,  but  shall  not  undertake  to  develop. 
The  difficulty  is  this :  The  word  "possession"  has  a  double  mean- 
ing. In  the  first  place,  the  word  "possession"  may  be  used  to  de- 
scribe the  physical  relation  existing  between  an  individual  and 
some  physical  object,  as,  for  example,  if  A.  has  a  book  in  his  hand, 
A.  may  be  said  to  have  possession  of  it.  A.  has  physical  control 
over  the  book.  In  the  second  place,  the  term  "possession"  is  used 
in  a  legal  sense,  as  descriptive  of  an  individual's  legal  relation  with 
all  other  people  in  the  world  with  respect  to  an  object.  Thus  A., 
being  in  the  state  of  Maine,  might  in  this  sense  have  "possession" 
of  a  book  which  for  the  time  being  was  physically  in  the  hands  of 
B.,  who  was  in  the  state  of  California.  The  word  "possession,"  as 
it  is  used  in  the  Sales  Act,  must  be  given  the  meaning  which  it  has 
in  the  law,  as  a  word  descriptive  of  the  legal  relations  existing  be- 
tween the  person  said  to  have  possession  and  all  other  persons. 
It  is  apparent,  therefore,  that  one  may  have  actual  physical  con- 
trol over  an  object,  and  not  have  possession  in  law;  conversely, 
that  one  may  have  possession  in  law,  and  not  have  actual  physical 
control  over  the  object.  In  the  majority  of  cases,  no  doubt,  pos- 
session in  fact  is  possession  in  law,  and  possession  in  law  is  pos- 
session in  fact;  but  there  are  a  great  many  exceptions  to  this  rule. 
If  a  merchant  is  negotiating  a  cash  sale  with  a  customer,  and  hands 
him  the  object  which  the  customer  is  considering,  the  merchant 
still  has  possession ;  the  customer  has  something  less  than  pos- 
session. If  goods  are  placed  in  storage,  the  warehouseman  has 
possession.  Possession  in  law  is  in  the  employer,  when  in  fact  the 
property  may  be  in  the  hands  of  his  employee.  For  our  purposes 
the  more  or  less  popular  notion  of  possession,  as  meaning  substan- 
tially physical  control,  in  fact  is  sufficiently  accurate;  but  we 
should  be  aware  of  the  existence  of  difficult  problems  which  can 
arise  involving  the  interpretation  of  the  meaning  of  this  word. 

There  is  one  special  case,  which  should  be  mentioned  in  this 
connection.  When  the  seller  ships  goods  to  the  buyer  bv  carrier, 
under  a  negotiable  bill  of  lading  which  runs  to  the  order  of  the 
buyer,  section  20  of  the  Sales  Act  provides  that,  while  the  seller 


1104  SALES  (Part  4 

is  in  possession  of  the  bill  of  lading,  the  seller  reserves  the  right 
to  possession.  Is  such  a  seller  an  unpaid  seller?  Probably  not, 
technically,  because  the  right  to  possession  is  not  quite  the  same 
as  possession.  But,  the  seller  having  the  right  to  possession  until 
payment,  the  buyer  cannot  get  the  goods  until  he  obtains  the  bill 
of  lading.  The  seller  needs  but  to  direct  his  agent  to  obtain  pos- 
session, by^means  of  the  bill  of  lading,  and  certainly  from  that  mo- 
ment on  the  seller,  assuming  that  he  fulfills  all  the  other  require- 
ments, does  have  the  necessary  possession  to  give  him  the  rights 
of  an  unpaid  seller. 

Two  sections  of  the  act  have  been  inserted  for  the  purpose  of 
making  clear  the  circumstances  under  which  the  unpaid  seller's 
rights  against  the  goods  once  possessed  will  be  lost.  Necessarily 
these  conditions  must  relate  to  the  giving  up  of  possession,  ex- 
pressly or  by  implication.    They  are  as  follows : 

Section  56.  (1)  The  unpaid  seller  of  goods  loses  his  lien  there- 
on: (a)  When  he  delivers  the  goods  to  a  carrier  or  other  bailee 
for  the  purpose  of  transmission  to  the  buyer  without  reserving  the 
property  in  the  goods  or  the  right  to  the  possession  thereof. 

Another  way  of  stating  the  meaning  of  this  subsection  is  to  say 
that,  when  the  seller  delivers  the  goods  to  a  carrier  for  shipment 
to  the  buyer  under  a  straight  bill  of  lading,  running  to  the  buyer 
as  consignee,  the  rights  against  the  goods  are  lost,  but  that  a  de- 
livery to  a  carrier  under  negotiable  bills  of  lading  running  either 
to  the  order  of  the  shipper  or  to  the  order  of  the  buyer,  the  bill  of 
lading  retained  by  the  seller  or  by  his  agents,  does  not  destroy  any 
rights  which  the  seller,  at  the  time  of  delivery  to  the  carrier,  had 
in  or  against  the  goods. 

Section  56.  1  (b)  The  unpaid  seller  loses  his  lien  thereon  when 
the  buyer  or  his  agent  lawfully  obtains  possession  of  the  goods. 

The  usual  case  here  would  be  that  of  a  voluntary  surrender  by 
the  seller  to  the  buyer.  From  the  business  standpoint  this  is  quite 
important.  The  seller  cannot  expect  to  have  any  of  his  rights 
against  the  goods,  and  at  the  same  time  permit  them  to  get  into 
the  hands  of  the  buyer.  If  the  business  situation  confronting  him 
is  such  that  he  deems  it  necessary  to  deliver  possession  to  the 
buyer,  and  the  seller  desires  to  retain  a  hold  on  the  goods  them- 
selves, the  safest  way  to  do  so  is  to  enter  into  a  contract  of  condi- 
tional sale,  or  to  require  the  buyer  to  execute  a  chattel  mortgage, 
and  then  to  record  the  instrument. 

Section  56  (1)  (c)  provides  that  the  unpaid  seller  of  goods  loses 
his  lien  thereon,  by  a  waiver  thereof.  A  waiver  may  be  express 
or  implied.  If  the  seller  desires  to  retain  his  rights  against  the 
goods,  he  should  exercise  considerable  care,  in  his  dealings  with 
the  buyer,  not  to  assume  any  position  inconsistent  with  that  which 
he  must  assume  as  the  holder  of  rights  against  the  goods.  The 
seller  might,  for  example,  convert  the  transaction  into  a  sale  on 
credit.  Clearly,  in  such  a  case,  the  rights  against  the  goods  will 
be  lost. 


Ch.  5)  REMEDIES  OF  THE  SELLER  1105 

Section  56.  (2)  The  unpaid  seller  of  goods  having  a  lien  there- 
on, does  not  lose  his  lien  by  reason  only  that  he  has  obtained  judg- 
ment or  decree  for  the  price  of  the  goods. 

If  the  seller  has  made  a  good  bargain,  no  doubt,  he  would  prefer 
to  have  the  amount  of  the  purchase  price  than  to  have  his  goods, 
and  so  he  may  even  sue  the  buyer  for  the  price.  This  section  pro- 
vides that  the  obtaining  of  a  judgment  against  the  buyer  does  not 
cause  a  loss  of  the  lien.  Nothing  but  actual  satisfaction — i.  e.,  pay- 
ment of  the  judgment — would  destroy  the  seller's  rights. 

Section  55.  Where  an  unpaid  seller  has  made  a  part  delivery 
of  the  goods,  he  may  exercise  his  right  of  lien  on  the  remainder, 
unless  such  part  delivery  has  been  made  under  such  circumstances 
as  to  show  an  intent  to  waive  the  lien  or  right  of  retention. 

(2)  Stoppage  in  Transitu.  There  is  one  exception  to  the  rule 
that  an  unpaid  seller's  lien  is  lost  by  a  surrender  of  possession. 
Where  goods  have  been  shipped  to  the  buyer  under  such  circum- 
stances that  title  has  passed,  the  seller  may  regain  possession  upon 
the  insolvency  of  the  buyer.    The  Sales  Act  provides: 

Section  57.  Subject  to  the  provisions  of  this  act,  when  the  buy- 
er of  goods  is  or  becomes  insolvent,  the  unpaid  seller  who  has 
parted  with  the  possession  of  the  goods  has  the  right  of  stopping 
them  in  transitu,  that  is  to  say,  he  may  resume  possession  of  the 
goods  at  any  time  while  they  are  in  transit,  and  he  will  then  be- 
come entitled  to  the  same  rights  in  regard  to  the  goods  as  he  would 
have  had  if  he  had  never  parted  with  the  possession. 

This  section  declares  the  existence  of  the  right.  Note  the  cir- 
cumstances under  which  it  may  be  exercised:  (1)  Title  must  be 
in  the  buyer  and  the  possession  must  have  passed  from  the  seller 
to  the  carrier.  (2)  The  goods  will  be  traveling  under  a  straight 
bill  of  lading,  or  under  a  negotiable  bill  of  lading,  which  bill  has 
been  delivered  to  the  buyer  and  is  still  in  the  buyer's  possession — 
i.  e.,  not  negotiated  to  ah  innocent  purchaser.  (3)  The  buyer 
must  be  insolvent.  (4)  The  goods  must  be  in  transitu.  (5)  The 
seller  must  be  unpaid. 

Points  (1)  and  (2)  here  enumerated  have  been  sufficiently  com- 
mented upon.  The  third  requisite,  the  insolvency  of  the  buyer, 
requires  a  brief  explanatory  statement.  When  is  one  insolvent? 
Various  definitions  might  be  found.  There  are  two  well-estab- 
lished general  rules  as  to  what  constitutes  insolvency  which  dififer 
very  materially.  One  of  them  is  adopted  in  the  law  of  sales ;  the 
other,  in  bankruptcy  proceedings.  The  Sales  Act,  in  section  76, 
clause  23,  defines  insolvency  as  follows:  A  person  is  deemed  in- 
solvent within  the  meaning  of  this  act  who  has  ceased  to  pay  his 
debts  in  the  ordinary  course  of  business  or  cannot  pay  his  debts 
as  they  become  due,  whether  he  has  committed  an  act  of  bank- 
ruptcy or  not,  and  whether  he  is  solvent  within  the  meaning  of  the 
federal  bankruptcy  law  or  not.  Note  the  very  marked  difference 
between  the  above  definition  and  the  definition  of  insolvency  found 
B.&  B.Bus.Law— 70  > 


1106  SALES  (Part  4 

in  section  1,  clause  (15),  of  the  Federal  Bankruptcy  Law  (U.  S. 
Comp.  St.  §  9585),  which  we  have  heretofore  considered:  A  per- 
son shall  be  deemed  insolvent  within  the  provisions  of  this  act 
whenever  the  aggregate  of  his  property,  exclusive  of  any  property 
which  he  may  have  [fraudulently]  conveyed,  transferred,  con- 
cealed or  removed,  with  intent  to  defraud,  hinder  or  delay  his 
credition,  shall  not,  at  a  fair  valuation,  be  sufficient  in  amount  to 
pay  his  debts. 

It  is  quite  apparent  that  one  may  be  "insolvent,"  to  the  extent 
that  his  creditor  will  be  justified  in  stopping  goods  in  transit,  when 
such  person  would  not  be  insolvent  within  the  meaning  of  the 
Bankruptcy  Act,  The  rule  permitting  a  creditor  to  stop  goods  in 
transit  when  his  debtor  is  insolvent  virtually  means  that  when 
the  debtor  has  ceased  to  meet  his  obligations  as  they  mature  he  is 
to  be  deemed  insolvent,  even  though  the  fair  valuation  of  his  as- 
sets exceeds  liabilities.  The  rule  is  very  easily  applied,  because  the 
right  to  make  it  rests  upon  external  circumstances  readily  discov- 
ered. The  determination  of  the  fact  of  insolvency  under  the  Bank- 
ruptcy Act  calls  for  a  careful  valuation  of  assets,  and  a  comparison 
•of  this  item  with  liabilities.  A  great  many  difficulties  present 
themselves  in  determining  whether  liabilities  exceed  assets.  The 
law,  in  adopting  different  notions  of  insolvency  in  sales  and  in 
bankruptcy,  merely  goes  to  show  that  it  is  deemed  good  policy  to 
allow  creditors  to  regain  possession  of  goods  by  stopping  them 
while  in  transit,  under  circumstances  when  it  would  not  be  good 
policy  to  permit  a  creditor  to  have  his  debtor  declared  a  bankrupt. 

The  fourth  requisite  to  the  right  to  stop  goods  is  that  they  must 
be  in  transit.  When  are  goods  in  transit?  Of  course,  one  can 
tell,  under  ordinary  circumstances,  when  goods  are  in  transit ;  but 
now  and  again  that  troublesome  case  in  the  law  arises  which  is 
near  the  line.  This  type  of  problem  calls  for  considerable  ingenu- 
ity and  sound  judgment  in  the  field  of  legal  definition  and  in  the 
application  thereof  to  varied  facts.  In  fact,  a  great  deal  of  the 
study  of  the  law  consists  of  an  effort  to  discover,  and  to  draw 
boundary  lines  of,  legal  doctrines  which  in  their  general  aspect 
are  reasonably  clear  to  any  one  who  has  no  technical  knowledge 
of  the  law. 

When  does  a  transit  begin?  When  does  it  end?  We  have  pre- 
viously decided  that  a  transit  begins  at  the  moment  that  goods  are 
placed  under  the  physical  control  of  the  carrier's  agents,  and  such 
agents  have  manifested  their  willingness  to  assume  responsibility 
for  the  safe  keeping  of  the  goods,  and  so  the  Sales  Act,  Section 
58  (1)  (a),  provides:  Goods  are  in  transit  wdthin  the  meaning  of 
section  57  from  the  time  when  they  are  delivered  to  a  carrier  by 
land  or  water,  or  other  bailee  for  the  purpose  of  transmission  to 
the  buyer.  No  further  comment  on  this  section  is  here  necessary, 
for  the  question  as  to  what  constitutes  a  delivery  has  been  suffi- 
ciently adverted  to  in  earlier  chapters. 

\yhen  does  transit  end?    Upon  delivery,  certainly ;  but  what  con- 


Ch.  5)  REMEDIES   OF  THE   SELLER  HOT 

stitutes  a  delivery?  If  the  buyer,  consignee,  sends  his  trucks  for 
the  goods,  pays  freight  charges,  and  the  freight  agent  allows  the 
goods  to  be  taken  away,  there  is  a  delivery ;  but  is  it  necessary  that 
the  goods  actually  be  taken  from  the  possession  of  the  carrier? 
Or,  suppose  the  consignee  took  the  goods  from  the  railroad  com- 
pany's platform  without  paying  the  freight,  and  without  consent 
from  the  carrier,  would  this  be  an  ending  of  the  transit?  The  fol- 
lowing sections  of  the  act  attempt  to  make  clear  what  constitutes 
an  ending  of  a  transit.  In  the  main  these  sections  undertake  to 
declare  what  constitutes  a  delivery. 

Sales  Act,  Section  58,  Subsection  1.  (a)  Goods  are  in  transit 
within  the  meaning  of  section  57  *  *  *  until  the  buyer,  or  his 
agent  in  that  behalf,  takes  delivery  of  them  from  such  carrier  or 
other  bailee,  (b)  If  the  goods  are  rejected  by  the  buyer,  and  the 
carrier  or  other  bailee  continues  in  possession  of  them,  even  if  the 
seller  has  refused  to  receive  them  back. 

Section  58.  (2)  Goods  are  no  longer  in  transit  within  the  mean- 
ing of  section  57:  (a)  If  the  buyer,  or  his  agent  in  that  behalf, 
obtains  delivery  of  the  goods  before  their  arrival  at  the  appointed 
destination,  (b)  If,  after  the  arrival  of  the  goods  at  the  appointed 
destination,  the  carrier  or  other  bailee  acknowledges  to  the  buyer 
or  his  agent,  that  he  holds  the  goods  on  his  behalf  and  continues 
in  possession  of  them  as  bailee  for  the  buyer,  or  his  agent;  and 
it  is  immaterial  that  a  further  destination  for  the  goods  may  have 
been  indicated  by  the  buyer,  (c)  If  the  carrier  or  other  bailee 
wrongfully  refuses  to  deliver  the  goods  to  the  buyer,  or  his  agent 
in  that  behalf. 

(3)  If  goods  are  delivered  to  a  ship  chartered  by  the  buyer,  it 
is  a  question  depending  on  the  circumstances  of  the  particular 
case,  whether  they  are  in  the  possession  of  the  master  as  a  carrier, 
or  as  agent  for  the  buyer. 

(4)  If  part  delivery  of  the  goods  has  been  made  to  the  buyer, 
or  his  agent  in  that  behalf,  the  remainder  of  the  goods  may  be 
stopped  in  transitu,  unless  such  part  delivery  has  been  made  un- 
der such  circumstances  as  to  show  an  agreement  with  the  buyer 
to  give  up  possession  of  the  whole  goods. 

It  will  not  be  possible  to  go  into  a  detailed  discussion  of  the 
problems  that  involve  the  application  of  this  section,  but  special 
mention  should  be  made  of  two  situations  which  are  of  consid- 
erable importance.  Notice  that  subsection  2  (a)  provides  that  a 
delivery  may  be  made  to  the  buyer  or  to  his  agent  before  the 
goods  reach  their  destination.  A  buyer  may  purchase  a  carload 
of  merchandise  and  order  it  shipped  to  a  designated  place.  At  the 
time  the  shipment  is  started,  the  buyer  intends  to  sell  the  car  dur- 
ing transit  and  upon  effecting  the  resale  will  direct  the  carrier  to 
reconsign  the  shipment  to  the  purchaser.  Again,  the  buyer  may 
direct  the  carrier  to  deliver  the  shipment  to  the  buyer's  agent  at 
some  intermediate  point.  In  either  event,  as  soon  as  the  order 
from  the  consignee  is  received  by  the  carrier,  the  original  transit  is 


1108  SALES  (Part  4 

at  an  end.  This  situation  illustrates  the  necessity  for  prompt  ac- 
tion by  a  seller,  if  he  expects  to  make  effectual  his  right  of  stop- 
page in  transitu. 

The  other  point  that  may  be  specially  mentioned  is  that  there 
may  be  a  delivery  in  law,  although  the  goods  are  still  in  the  car 
or  freight  sheds  of  the  carrier  at  the  point  of  destination.  As  sec- 
tion 58  (2)  (b)  provides,  this  result  occurs  when  the  carrier  has 
acknowledged  to  the  buyer  or  his  agent  that  he  holds  the  goods 
on  his  behalf. 

Another  difficult  situation  arises  when  the  goods  are  consigned 
to  some  forwarding  agent  acting  for  the  buyer,  and  such  agent, 
upon  delivery  of  the  shipment  to  him,  reships  them  to  a  third 
party.  The  rule  which  governs  here,  as  laid  down  in  Cabeen  v. 
Campbell,^  is :  "When  an  intermediate  delivery  occurs  before  the 
goods  reach  their  ultimate  destination,  if  the  party  to  whom  they 
are  delivered  has  authority  to  receive  them  and  gives  to  them  a 
new  destination,  not  originally  intended,  the  transitu  is  at  an  end. 
They  have  reached  the  ultimate  destination  intended  by  both 
buyer  and  seller.  But  if  the  middleman  be  a  mere  agent  to  trans- 
mit the  goods  in  accordance  with  original  directions,  the  vendor's 
right  continues.  The  rule  may  be  stated  as  follows :  If  in  the 
hands  of  the  middleman  they  require  new  orders  to  put  them 
again  in  motion,  and  give  them  another  substantive  destination — 
if  without  such  new  orders  they  must  continue  stationary — then 
the  delivery  is  complete  and  the  lien  of  the  vendor  has  expired." 

Sales  Act,  Section  59.  (1)  The  unpaid  seller  may  exercise  his 
right  of  stoppage  in  transitu  either  by  obtaining  actual  posses- 
sion of  the  goods  or  by  giving  notice  of  his  claim  to  the  carrier  or 
other  bailee  in  whose  possession  the  goods  are.  Such  notice  may 
be  given  either  to  the  person  in  actual  possession  of  the  goods  or 
to  his  principal.  In  the  latter  case  the  notice,  to  be  effectual,  must 
be  given  at  such  time  and  under  such  circumstances  that  the  prin- 
cipal, by  the  exercise  of  reasonable  diligence,  may  prevent  a  deliv- 
ery to  the  buyer. 

(2)  When  notice  of  stoppage  in  transitu  is  given  by  the  seller 
to  the  carrier,  or  other  bailee  in  possession  of  the  goods,  he  must 
redeliver  the  goods  to,  or  according  to  the  directions  of,  the  seller. 
The  expenses  of  such  redelivery  must  be  borne  by  the  seller.  If 
however,  a  negotiable  document  of  title  representing  the  goods  has 
been  issued  by  the  carrier  or  other  bailee  he  shall  not  be  obliged 
to  deliver  or  justified  in  delivering  the  goods  to  the  seller  unless 
such  document  is  first  surrendered  for  cancellation. 

1  30  Pa.  254  (1S58)  quoted  in  Willistoii  on  Sales,  §  530. 


Ch.  5)  REMEDIES  OP  THE  SELLER  1109 

PRATT  V.  S.  FREEMAN  &  SO'NS  MFG.  CO. 
(Supreme  Court  of  Wisconsin,  1902.     115  Wis.  648,  92  N.  W.  368.) 

Marshall,  J.  *  *  *  If  a  person  contracts  to  sell  and  deliver 
property  to  another  on  credit,  not  retaining  any  lien  thereon,  specific- 
ally, to  secure  the  purchase  money,  the  presumption  is  that  he  acts  upon 
the  belief  that  the  latter  is  solvent,  and  on  condition  that  he  will  so  re- 
main. If  there  is  a  breach  in  that  regard  before  control  of  the  prop- 
erty passes  to  the  buyer,  the  seller  may  withdraw  from  the  contract 
the'  element  of  credit  and  insist  that  it  shall  stand  only  as  an  agreetpent 
to  sell  for  cash  upon  delivery  of  the  property,  and  that  the  contract 
as  so  modified  shall  be  executed;  and  upon  the  buyer's  neglect  or  re- 
fusal to  perform,  the  seller  may  have  a  choice  of  several  remedies  for 
the  wrong : 

"The  seller  may  store  the  property  for  the  buyer  and  sue  for  the 
purchase  price ;  or  may  sell  the  property  as  agent  for  the  vendee  and 
recover  anv  deficiency  resulting ;  or  may  keep  the  property  as  his  own 
and  recover  the  difiference  between  the  contract  price  and  the  market 
price  at  the  time  and  place  of  delivery."  Van  Brocklen  v.  Smeallie, 
140  N.  Y.  70,  75,  35  N.  E.  415. 

In  case  he  elects  to  take  the  second  remedy  mentioned,  the  sale  of 
the  property  is  but  a  mere  means  of  determining  the  precise  amount  of 
the  damages  caused  by  the  breach,  while  the  incidental  effect  is  to 
satisfy  the  loss  suffered  by  the  vendor  so  far  as  the  proceeds  of  the  sale 
will  accomplish  that  result.  *  *  *  Immediately  upon  the  vendee's 
refusing  or  neglecting,  when  required  to  do  so,  to  comply  with  the 
sale  contract  by  paying  for  the  property  and  accepting  delivery  there- 
of, the  cause  of  action  of  the  vendor  becomes  complete  and  his  right 
to  enforce  the  same  by  such  appropriate  remedies  as  he  may  elect  to 
pursue  perfect.  If  he  chooses  to  liquidate  his  damages  by  a  sale  of  the 
property  and  incidentally  to  recover  his  loss  so  far  as  the  proceeds  of 
the  sale  will  effect  that  result,  *  *  *  failure  to  do  that  which  is 
reasonably  necessary  to  secure  the  best  pric'e  obtainable  therefor,  does 
not  give  the  vendee  any  right  to  rescind  his  contract,  but  renders  the 
result  of  the  sale  not  binding  on  him  as  to  the  amount  of  the  vendor's 
loss  by  the  former's  breach,  and  he  will  remain  liable  to  the  latter'  for 
the  full  market  value  of  the  property  less  his  actual  damages,  inde- 
pendently of  the  sale.  The  sale  in  such  circumstances  is  but  a  method, 
as  before  indicated,  of  enforcing  a  right  to  damages  for  breach  of 
contract,  and  of  making  evidence  of  the  precise  amount  of  such  dam- 
ages. The  sale,  when  properly  conducted,  the  executory  vendee  having 
been  so  notified  of  the  intention  to  make  it  as  to  give  him  reasonable 
opportunity  to  prevent  it  by  paying  his  debt,  constitutes  a  basis,  bind- 
ing on  him,  for  computing  the  damages  for  which  he  is  liable.  The 
rule  governing  the  subject  was  laid  down  in  T.  B.  Scott  Lumber  Co. 
V.  Hafner-Lothman  Mfg.  Co.,  91  Wis.  667,  65  N.  W.  5U,  in  these 
words : 

"If  a  resale  is  made  and  the  evidence  shows  that  all  reasonable  ef- 
forts were  made  to  secure  the  best  price  obtainable,  or  that  the  price 
obtained  was  a  fair  one,  it  settles  the  question  of  the  market  value,  so 
that  the  damages  become  liquidated," 

The  idea  is  that  when  the  executory  vendee  of  property  breaks  his 
agreement  to  take  and  pay  for  the  property,  the  measure  of  damages 


1110  SALES  (Part  4 

is  the  difference  between  the  market  value  thereof  and  the  contract 
price ;  but  the  vendor  must  necessarily  establish  that  as  a  basis  for  his 
claim.  If  he  sues  for  his  damages  without  selling  the  property,  or 
without  selling  the  same  with  proper  regard  to  the  rights  of  the  execu- 
tory vendee,  he  takes  upon  himself  the  burden  of  establishing  the  fair 
market  value  of  the  goods  at  the  time  of  the  breach.     *     *     * 


DIEM  V.  KOBLITZ  et  al. 

(Supreme  Court  of  Ohio,  1892.     49  Ohio  St.  41,  29  N.  E.  1124, 
34  Am.  St.  Rep.  531.) 

WiLiJAMS,  C.  J.  *  *  *  The  right  of  stoppage  in  transitu  is  the 
right  of  the  vendor  to  resume  possession  of  the  goods  sold,  while  they 
are  in  transit  to  the  vendee,  who  is  insolvent  or  in  embarrassed  circum- 
stances. Actual  insolvency  of  the  vendee  is  not  essential.  It  is  suffi- 
cient if,  before  the  stoppage  in  transitu,  he  was  either  in  fact  insolvent, 
or  had,  by  his  conduct  in  business,  afforded  the  ordinary,  apparent  evi- 
dences of  insolvency.  Nor  is  the  vendor's  right  abridged  or  in  any 
way  affected  by  the  fact  that  he  has  received  the  vendee's  bills  of  ex- 
change or  other  negotiable  securities  for  the  whole  price,  even  though 
they  have  been  negotiated,  and  are  still  outstanding.  It  seems  to  be 
well  settled  that  when  the  right  of  stoppage  in  transitu  is  properly  ex- 
ercised the  effect  is  to  restore  the  vendor  to  precisely  the  same  position 
as  if  the  goods  had  never  left  his  possession.  He  has  the  same  rights 
with  respect  to  the  property,  and  they  may  be  enforced  in  the  same 
w^ay.  His  right  to  intercept  the  goods  before  they  reach  the  hands  of 
the  vendee,  and  his  right  to  withhold  those  still  in  his  possession,  rest 
upon  the  same  just  principle,  that  the  insolvent  vendee  cannot  require 
the  vendor  to  deliver  the  goods  or  perform  the  contract  when  he  him- 
self is  unable  to  pay  for  them  or  perform  the  contract  on  his  part. 
To  require  the  goods  to  be  delivered  to  such  vendee  would  simply  be 
applying  the  property  of  .one  man  to  the  payment  of  another  man's 
debts. 

The  right  of  the  unpaid  vendor  with  respect  to  the  goods  is  some- 
times called  a  "lien" ;  and  it  is  a  lien,  in  the  sense  that  the  vendee,  upon 
payment  or  tender  of  the  price,  but  not  otherwise,  may  recover  them. 
But  it  is  something  more  than  a  mere  common-law  lien,  which  is  only 
a  naked  right  of  possession.  -With  the  goods  in  his  possession,  the  ven- 
dor has  a  special  property  in  them,  which  is  parcel  of  his  original 
ownership.  Whether  the  effect  of  the  stoppage  in  transitu,  or  the  re- 
tention of  the  goods  by  the  vendor,  on  the  discovery  of  the  vendee's 
insolvency,  is  to  rescind  the  contract,  or  not,  has  been  the  subject  of 
much  discussion ;  and  some  authors  say  the  question  is  not  yet  defi- 
nitely settled.  But  the  prevailing  opinion  now  is,  we  believe,  that 
the  contrgict  is  not  necessarily  rescinded,  unless  the  parties  by  their  con- 
duct so  treat  it,  which  conclusion  is  most  favorable  to  the  vendor,  for 
whose  protection  the  doctrine  of  stoppage  in  transitu  was  first  estab- 
lished.    *     *     * 

The  observations  of  Gholson,  J.,  in  Benedict  v.  Schaettle,  12  Ohio 
St.  520,  521,  are  in  point,  and  *  *  *  he  says:  "If  the  true  prin- 
ciple of  the  right  of  stoppage  in  transitu  be  found  in  that  certainly  just 
rule  of  mutual  contract  by  which  either  party  may  withold  perform- 
ance on  the  other  becoming  unable  to  perform  on  his  part;    if  the 


Ch.  5)  REMEDIES  OF  THE  SELLER  1111 

foundation  of  the  rule  be  a  just  lien  on  the  goods  for  the  price  until 
delivered — an  equitable  lien  adopted  for  the  purposes  of  substantial 
justice — then  it  is  the  ability  to  perform  the  contract,  to  pay  the  price, 
which  is  the  material  consideration.  If  there  be  a  want  of  ability, 
it  can  make  no  difference,  in  justice  or  good  sense,  whether  it  was 
produced  by  causes  or  shown  by  acts  at  a  period  before  or  after  the 
contract  of  sale.  Substantially  to  the  vendor  who  is  about  to  complete 
delivery,  and  abandon  or  lose  his  proprietary  lien,  the  question  is,  can 
the  vendee  perform  the  contract  on  his  part?  has  he,  from  insolvency, 
become  unable  to  pay  the  price?"  And  in  another  part  of  the  opinion 
he  further  says :  "The  rights  of  a  fair  vendee  will  be  sufficiently  pro- 
tected by  giving  him  an  indemnity  when  the  right  of  stoppage  in  transi- 
tu is  exercised  upon  rumor  or  suspicion  without  any  foundation  in  fact, 
and  by  depriving  the  vendor,  in  all  cases,  of  any  chance  of  speculating 
upon  the  goods,  by  requiring  them  to  be  delivered  or  accounted  for  to 
the  vendee  or  his  assignee  on  the  payment  or  tender  of  the  agreed 
price."     *     *     * 


GASS  V.  SOUTHERN  PAC.  CO. 

(Supreme  Court,  of  New  York,  Appellate  Division,  1912.     152  App.  Div.  412, 

137  N.  Y.  Supp.  261.) 

Action  by  John  H.  Gass  against  the  Southern  Pacific  Company. 
From  a  judgment  of  the  Supreme  Court,  in  favor  of  the  plaintiff,  for 
the  sum  of  $752.62,  defendant  appeals, 

HiRSCHBERG,  J-  The  defendant,  a  common  carrier,  appeals  from  a 
judgment  awarding  the  plaintiff  damages  for  the  alleged  conversion 
of  certain  lumber.  The  material  facts  vvere  not  disputed.  It  appeared 
that  about  February  1,  1905,  the  International  Mahogany  Company 
agreed  to  sell  and  to  deliver  to  the  plaintiff,  free  on  board  defend- 
ant's dock  in  the  city  of  New  York,  certain  lumber  for  the  sum  of 
$27  per  1,000  feet,  including  freight  charges  to  that  city,  which  were 
to  be  paid  by  plaintiff  in  cash.  March  2,  1905,  the  International  Ma- 
hogany Company,  in  order  to  comply  with  its  contract,  made  a  con- 
tract with  the  Gibson  Cypress  Lumber  Company,  a  foreign  corpora- 
tion, whereby  the  latter  company  agreed  to  ship  the  lumber  to  the 
former  company,  free  on  board  defendant's  dock  in  the  city, of  New 
York,  for  $385.83 ;  the  former  company  agreeing  to  pay  the  freight 
charges  in  cash  at  the  time  of  delivery.  On  March  4,  1905,  the  Gibson 
Cypress  Lumber  Company  delivered  the  lumber  to  the  defendant  at 
Gibson,  in  the  state  of  Louisiana,  for  transportation  to  defendant's 
dock  in  New  York  City,,  and  received  a  bill  of  lading  therefor, 
marked  "Not  Negotiable,"  and  containing  the  name  of  the  Interna- 
tional Mahogany  Company  as  consignee.  On  March  20,  1905,  the 
International  Mahogany  Company  assigned  its  bill  against  'the  plain- 
tiff for  the  purchase  price  of  said  lumber  to  the  Astoria  Veneer  Mills. 
About  the  same  day  the  plaintiff  was  notified  of  the  assignment 
and  asked  to  pay  the  purchase  price  of  the  lumber  to  said  Astoria 
Veneer  Mills.  The  bill  of  lading,  properly  indorsed,  was  delivered 
to  the  plaintiff  on  April  1,  1905.  On  March  30,  1905,  the  lumber 
arrived  at  the  defendant's  dock  in  New  York  City  and  was  com- 
pletely discharged  thereon  at  3  o'clock  of  the  afternoon  of  the  fol- 
lowing day.  On  the  30th  of  March,  1905,  the  defendant  sent  a  writ- 
ten notice  to  the  consignee,  the  International  Mahogany  Company, 


1112  SALES  (Part  4 

informing  it  of  the  arrival  of  the  himber,  and  stating  that  the  freight 
charges  were  $214.50.  The  International  Mahogany  Company  in- 
dorsed this  notice  with  a  direction  to  deliver  the  lumber  to  the  plain- 
tiff, and  delivered  the  notice  so  indorsed  to  the  Astoria  Veneer  Mills. 
The  latter  company  on  April  3,  1905,  loaned  the  plaintiff,  at  his  re- 
quest, the  amount  of  the  freight  charges,  and  gave  him  the  indorsed 
notice  of  the  arrival  of  the  lumber,  with  a  receipted  bill  for  the  pur- 
chase price  thereof,  and  the  plaintiff  gave  that  company  his  secured 
promissory  notes  therefor.  On  April  4,  1905,  the  plaintiff  demanded 
the  delivery  of  the  lumber  from  defendant  and  tendered  it  the  bill 
of  lading,  the  notice  of  arrival,  and  the  Astoria  Veneer  Mills'  check 
for  the  freight  charges.  The  defendant  refused  to  deliver  the  lumber 
unless  the  freight  charges  were  paid  in  cash.  The  parties  stipulated 
on  the  trial  that  the  defendant  had  the  right  to  demand  the  payment 
of  those  charges  in  cash.  On  the  same  day  and  before  the  payment 
of  the  freight  charges  in  cash,  and  while  the  lumber  was  in  defend- 
ant's possession,  the  consignor,  Gibson  Cypress  Lumber  Company, 
notified  the  defendant  not  to  deliver  the  lumber.  On  that  day  the 
consignee,  the  International  Mahogany  Company,  was  duly  adjudged 
a  bankrupt.  On  April  5,  1905,  the  plaintiff  again  demanded  delivery 
of  the  lumber,  and  again  presented  the  Astoria  Veneer  Mills'  check 
in  payment  of  the  freight  charges,  and  the  defendant  again  refused 
to  deliver  the  lumber.  On  the  following  day  the  plaintiff  tendered 
cash  to  the  defendant  in  payment  of  the  freight  charges,  and  the  de- 
fendant then  refused  to  deliver  the  lumber,  on  the  ground  that  its  de- 
livery had  been  prevented  by  the  order  of  the  consignor. 

The  unpaid  consignor's  right  of  stoppage  in  transitu  may  be  ex- 
ercised against  an  insolvent  consignee  at  any  time  prior  to  actual 
or  constructive  delivery  of  the  goods  or  the  assignment  of  the  bill  of 
lading  to  a  bona  fide  purchaser  for  value.  The  consignor  may  exer- 
cise this  right  while  the  goods  are  in  the  possession  of  the  carrier 
at  the  place  of  destination  and  are  held  for  unpaid  freight  charges, 
unless  the  bill  of  lading  has  been  so  assigned.  *  *  *  j^  the  case 
at  bar  there  was  no  delivery  of  the  goods  prior  to  the  defendant's 
receipt  of  the  stoppage  order  from  the  consignor,  and  the  indorsement 
and  transfer  of  the  bill  of  lading  was  ineffectual  under  the  circum- 
stances of  the  case  to  defeat  the  consignor's  right  of  stoppage  in 
transitu.  *  *  *  gy  neglecting  promptly  to  pay  the  freight  charges 
he  unreasonably  delayed  obtaining  possession  of  the  lumber  until 
the  consignee  had  failed  and  the  consignor  had  exercised  its  right  of 
stoppage  in  transitu.  Under  these  circumstances,  *  *  *  j  think 
the  defendant  was  warranted  in  obeying  the  stoppage  order  trans- 
mitted to  it  by  the  consignor.  Its  letters  to  the  consignee  do  not  con- 
tain any  waiver  of  its  right  to  hold  the  lumber,  those  communications 
expressly  making  the  proper  payment  of  the  freight  charges  a  condi- 
tion precedent  to  delivery. 

The  judgment  should  be  reversed. 


Ch.  5)  REMEDIES   OF  THE   SELLER  1113 


NORTHERN  GRAIN  CO.  v.  WIFFLER  et  al. 

(Court  of  Appeals  of  New  York,  191S.     223  N.  Y.  169,  119  N.  E.  393, 
7  A.   L.   R.   1370.) 

Action  by  the  Northern  Grain  Company  against  Joseph  J.  Wif- 
fler  and  others.  From  a  judgment  for  defendants,  plaintiff  appeals. 
HrscocK,  C.  J.  This  appeal  involves  a  consideration  of  the  right  of 
stoppage  in  transitu  of  goods  sold  on  credit  and  shipped  by  a  common 
carrier.  The  question  of  the  existence  of  the  right  is  to  be  determined 
upon  an  agreed  statement  of  facts. 

Plaintiff  sold  to  one  Wififler  on  credit  a  carload  of  oats  which  were 
shipped  to  the  latter  over  the  line  of  the  defendant  railroad  company. 
A  bill  of  lading  covering  the  shipment  was  forwarded  with  a  draft 
for  the  purchase  price  of  the  oats,  and  upon  acceptance  by  the  vendee 
of  the  draft  the  bill  of  lading  was  delivered  to  him.  He  presented  the 
same  at  the  office  of  the  defendant  railroad  company,  where  it  was 
received  and  marked,  "Canceled  by  deHvery."  "Thereupon"  the  ven- 
dee examined  and  was  dissatisfied  with  the  condition  of  the  oats  and 
"thereupon"  withdrew  the  bill  of  lading  from  the  railroad  company, 
caused  the  words  "Canceled  by  delivery,"  to  be  stricken  from  the 
face  of  the  bill  and  "thereupon"  returned  it  to  the  plaintiff  with  the 
statement  that  he  refused  to  accept  the  oats  or  take  delivery  thereof 
by  reason  of  their  condition  and  that  he  rejected  the  same. 

Nothing  more  was  done  by  which  there  is  claimed  to  have  been 
accomplished  a  delivery  to  or  acceptance  by  the  vendee  of  the  oats. 
These,  after  remaining  in  a  car  in  the  possession  of  the  railroad  com- 
pany for  six  months,  were  sold  at  public  auction  to  satisfy  its  lien  for 
transportation  charges  and  the  surplus  of  the  proceeds  over  such 
charges  was  held  by  the  railroad  company  and  is  the  subject  of  the 
present  controversy. 

The  draft  which  had  been  accepted  by  the  vendee  was  not  paid  at 
maturity,  and  an  action  was  commenced  against  him  thereon  by  the 
vendor  and  a  judgment  recovered  which  has  never  been  satisfied.  In 
such  action  the  vendee  alleged  that :  "The  draft  was  given  by  defend- 
ant in  payment  of  a  certain  carload  of  oats  which  plaintiff  sold  to  the 
defendant  and  that  the  same  were  good,  marketable,  and  useable  (thus 
written  in  the  agreed  statement),  and  that  when  defendant  received 
said  carload  the  same  were  old  and  musty,  and  could  not  be  sold  and 
used,  and  were  of  no  value  whatsoever,  and  for  that  reason  the  note 
was  given  without  consideration." 

Intermediate  the  commencement  of  this  action  and  entry  of  judg- 
ment the  vendee  made  an  assignment  for  the  benefit  of  creditors  to 
the  defendant  Dana,  and  thereafter  plaintiff  surrendered  to  the  defend- 
ant railroad  company  for  cancellation  the  bill  of  lading  before  men- 
tioned and  served  upon  it  notice  asserting  the  exercise  of  its  right  of 
stoppage  in  transitu  of  said  oats,  claiming  that  the  latter  had  never 
been  delivered  to  the  vendee.     *     *     * 

The  only  debatable  question  under  the  tests  thus  prescribed  is  the 
one  whether  the  goods  had  been  delivered  by  the  carrier  to  the  vendee. 
It  seems  to  us  that  they  had  not  been.  The  facts  determinative  of  that 
question  have  already  been  stated  and  need  not  be  repeated.  Referring 
back  to  them,  it  may  be  conceded  that  if  the  vendee  after  taking  his 
bill  of  lading  to  the  carrier  and  permitting  it  to  be  marked,  "Canceled 
by  delivery"  had  stopped,  there  would  have  been  a  constructive  de- 


1114  SALES  (Part  4 

livery.  Also,  if  he  had  allowed  the  mater  to  rest  in  that  situation  for 
a  substantial  time  before  doing  anything  to  recall  this  act,  it  might  be 
necessary  to  submit  to  the  jury  the  question  whether  a  delivery  had 
not  been  so  consummated  that  it  could  not  thereafter  be  avoided. 
But  he  pursued  neither  of  these  courses.  After  the  stamping  of  the 
bill  of  lading,  he  "thereupon," — that  is,  immediatel} — examined  the 
oats  and  made  what,  if  then  permissible,  was  a  clear  and  decisive  re- 
fusal of  acceptance  of  them  from  the  buyer  and  of  delivery  from  the 
carrier.  It  is  only  by  separating  these  steps  and  regarding  them  as 
divisible  and  distinct  transactions  that  a  delivery  can  be  made  out.  We 
do  not  think  they  ought  to  be  thus  separated,  but  that  they  were  so 
closely  connected  in  point  of  time  and  otherwise  that  they  should  be 
given  the  efifect  of  one  connected  transaction.  This  being  done,  it 
is  clear  that  there  was  no  delivery.     *     *     * 

In  accordance  with  these  views,  the  judgment  should  be  reversed 
and  judgment  directed  in  favor  of  plaintiff  against  the  defendant  New 
York  Central  &  Hudson  River  Railroad  Company,  for  the  sum  of 
$287.85,  with  any  interest.     *     *     * 


NORFOLK  HARDWOOD  CO.  v.  NEW  YORK  CENT.  &  H.  R.  R.  CO. 

(Supreme  Judicial  Court  of  Massaolui.setts,  1909.    2012  Mass.  100,  feS  >;.  E.  (j04.) 

Action  by  the  Norfolk  Hardwood  Company  against  the  New  York 
Central  &  Hudson  River  Railroad  Company.  Judgment  for  defend- 
ant, and  plaintiff  appeals. 

Plaintiff  shipped  certain  lumber  ordered  by  the  Cambridge  Lum- 
ber Company,  consigned  to  plaintift''s  order  at  East  Cambridge,  where 
it  arrived  August  3,  1904,  over  defendant's  road.  On  July  21st  plain- 
tiff wrote  the  lumber  company  inclosing  an  invoice.  On  July  27th  a 
waybill  of  defendant  road  was  sent  to  plaintiff,  showing  freight,  etc., 
and  on  October  4th  defendant's  agent  wrote  plaintiff  requiring  that 
the  car  be  promptly  unloaded,  to  which  plaintiff'  replied  that  the  car 
was  intended  for  the  Cambridge  Lumber  Company,  and  that  the  bill 
of  lading  called  for  Boston  &  Maine  delivery,  after  which  plaintiff  di- 
rected the  agent  to  deliver  the  lumber  to  the  lumber  company.  The 
lumber  company  immediately  directed  that  the  lumber  be  stored,  after 
which  plaintiff  received  the  lumber  company's  90-day  note'  therefor, 
and  the  lumber  company,  without  paying  the  freight,  had  defendant 
reship  the  lumber  for  it  to  another  town. 

Sheldon,  J.  This  action  has  been  argued  for  the  plaintiff  as  if  it 
presented  merely  a  question  of  the  right  of  stoppage  in  transitu,  but 
we  are  of  opinion  that  this  is  not  the  case.  The  plaintiff,  although  it 
accepted  the  order  of  the  Cambridge  Lumber  Company  for  the  lum- 
ber in  question,  and  undertook  to  forward  the  lumber  accordingly, 
yet  when  it  came  to  ship  the  goods  consigned  them  to  itself  and  took 
a  bill  of  lading  running  to  itself.  It  thus,  as  between  itself  and  the 
purchaser,  retained  the  possession  and  control  of  the  lumber,  and  re- 
tained also  its  vendor's  lien  for  the  agreed  price.  *  *  *  If  the 
plaintiff  has  not  lost  this  lien  by  parting  with  the  possession  of  the 
goods,  it  can  hold  them  in  spite  of  the  credit  agreed  to  be  given,  upon 
the  insolvency  of  the  purchaser.  *  *  *  gut  if  a  delivery  has  been 
made  to  the  purchaser  by  the  authority  of  the  plaintiff",  then  its  lien, 
depending  solely  upon  the  possession  of  the  property,  is  gone,  and  the 
plaintiff"  cannot  hold  the  goods.     *     *     * 


Ch.  5)  REMEDIES  OF   THE   SELLER  1115 

When  the  car  containing  this  lumber  arrived  at  East  Cambridge  on 
August  4,  1904,  the  defendant's  agent  notihed  the  plaintiff  thereof, 
and  the  plaintiff  on  August  6th  informed  the  agent  by  letter  that  the 
car  was  intended  for  the  Cambridge  Lumber  Company,  which  is  here- 
inafter called  the  purchaser;  and  on  August  12th,  the  plaintiff,  at  the 
request  of  the  defendant's  agent,  expressly  authorized  delivery  to  be 
made  to  the  purchaser.  In  the  meantime,  on  August  8th,  the  defend- 
ant, at  the  request  of  the  purchaser,  forwarded  the  car  containing  the 
lumber  from  East  Cambridge  to  the  defendant's  Huntington  avenue 
storehouse  in  Boston,  and  issued  to  the  purchaser  a  local  waybill  nam- 
ing the  purchaser  as  the  consignee.  On  August  10th  the  purchaser 
requested  the  defendant  to  store  these  and  some  other  goods ;  and 
the  defendant  did  accordingly  store  them  in  the  name  of  the  pur- 
chaser in  its  storehouse  aforesaid,  where  they  remained  until  taken 
by  the  plaintiff  on  this  writ  of  replevin. 

There  can  be  no  doubt  upon  these  facts  that  the  property,  subject 
to  the  defendant's  lien  for  its  proper  charges,  was  delivered  by  the 
defendant  to  the  purchaser  with  the  consent  and  authority  of  the 
plaintiff;  and  the  plaintift''s  lien  for  the  price  of  the  lumber  was  thus 
destroyed.  *  *  *  The  plaintiff"  voluntarily  gave  up  its  lien  upon 
the  property ;  it  does  not  rest  its  claim  upon  the  allegation  that  this 
was  procured  by  means  of  any  fraud  practiced  upon  it;  and  it  can- 
not now  reinstate  itself  in  its  original  position. 

If,  however,  it  were  necessary  to  pass  upon  that  question,  we  should 
be  obliged  to  hold  that  the  plaintiff  had  failed  to  show  any  right  to 
stop  these  goods  in  transitu.  The  goods  were  to  be  transported  to 
East  Cambridge,  and,  according  to  the  final  directions  of  the  plaintiff", 
to  be  there  delivered  to  the  purchaser.  The  right  of  stoppage  in 
transitu  would  continue  until  the  goods  were  delivered  to  the  purchas- 
er, or  until,  by  some  new  arrangement  between  the  carrier  and  the 
purchaser,  the  former  had  recognized  the  title  of  the  latter,  and  at- 
torned to  it,  and  agreed  to  hold  the  goods,  not  merely  as  carrier  or  as 
a  warehouseman  pending  a  complete  delivery  to  the  purchaser,  but  as 
agent  for  the  purchaser  under  a  new  contract  made  and  assented  to 
by  both  the  carrier  and  the  purchaser.  *  *  *  f  j^g  fg^^t  that  the 
carrier's  prior  charges  have  not  been  paid,  although  strong  evidence 
that  no  such  new  contract  has  been  made,  is  not  decisive.     *    *     * 

But  here,  although  the  defendant's  charges  remained  unpaid,  it  yet 
did  make  a  new  agreement  with  the  purchaser  for  the  further  trans- 
portation of  these  goods  to  a  neighboring  city ;  and  it  carried  out  that 
agreement.  There  was  more  than  a  mere  storage  of'ihe  goods  for 
the  convenience  of  the  purchaser,  which  would  not  have  terminated 
the  transit.  There  was  a  recognition  of  the  purchaser  as  owner,  and 
a  new  transit,  made  under  a  new  agreement  with  the  purchaser, 
to  a  new  destination,  for  the  expenses  of  which  the  plaintiff  personally 
could  not  have  been  held.  If  this  new  agreement  had  been  made  by 
the  purchaser  with  another  railroad  company,  which  had  paid  the  de- 
fendant's charges  and  made  the  new  transportation,  there  could  be 
no  question  that  the  original  transit  had  ended,  even  though  this  new 
carrier  held  the  goods  not  only  for  the  freight  due  to  itself,  but  also 
for  the  past  charges  of  the  former  carriers  which  it  would  have  satis- 
fied. The  original  transit  is  at  an  end  when  the  goods  have  reached 
their  original  destination;  and  when  after  this  they  are  actually  sent 
by  the  purchaser  to  a  new  destination,  the  right  of  stoppage  in  transitu 


1116  SALES  (Part  4 

is  as  effectually  destroyed  as  if  he  had  taken  manual  possession  of 
them  and  placed  them  in  his  own  warehouse.  This  has  been  clearly 
stated  by  Lord  Esher,  in  Bethell  v.  Clark,  20  O.  B.  D.  615,  617,  in 
which  it  was  held  that  the  original  transit  was  not  terminated: 
"There  has  been  a  difficulty  in  some  cases  where  the  question  was 
whether  the  original  transit  was  at  an  end  and  a  fresh  transit  had  be- 
gun. The  way  in  which  that  question  has  been  dealt  with  is  this: 
Where  the  transit  is  a  transit  which  has  been  caused  either  by  the 
terms  of  the  contract  or  by  the  directions  of  the  purchaser  to  the  ven- 
dor, the  right  of  stoppage  in  transitu  exists;  but  if  the  goods  are  not 
in  the  hands  of  the  carrier  by  reason  either  of  the  terms  of  the  con- 
tract or  of  the  directions  of  the  purchaser  to  the  vendor,  but  are  in 
transitu  afterwards  in  consequence  of  fresh  directions  given  by  the 
purchaser  for  a  new  transit,  then  such  transit  is  no  part  of  the  orig- 
inal transit,  and  the  right  to  stop  is  gone."  *  *  *  j^  ^an  make  no 
difference  in  principle  that  the  new  directions  were  given  by  the  pur- 
chaser to  the  original  carrier,  and  that  the  new  transit  was  made  over 
the  lines  of  the  original  carrier.     *     *     * 

Accordingly  the  plaintiff  bad  no  right  of  stoppage  in  transitu  when 
it  replevied  these  goods,  and  no  right  to  their  possession,  and  cannot 
maintain  this  action.     *     *     * 

The  judgment  for  the  defendant  must  be  affirmed. 


Would  a  sale  by  the  consignee,  prior  to  notice  from  the  seller 
to  the  carrier  to  stop  the  goods,  and  while  the  goods  were  still  in 
transit,  cut  oft"  the  right'  of  the  seller  to  regain  possession?  It 
would  follow,  from  the  general  rule  that  goods  may  be  stopped 
at  any  time  during  the  transit,  that  such  resale,  even  to  an  inno- 
cent purchaser,  would  not  affect  the  seller's  rights.  The  Sales  Act, 
however,  expressly  covers  this  point : 

Section  62.  Subject  to  the  provisions  of  this  act,  the  unpaid 
seller's  right  of  lien  or  stoppage  in  transitu  is  not  affected  by  any 
sale,  or  other  disposition  of  the  goods  which  the  buyer  may  have 
made,  unless  the  seller  has  assented  thereto. 

Where  there  is  a  negotiable  bill  of  lading  outstanding,  the  situ- 
ation is  quite  different.  As  long  as  the  seller  retains  possession 
of  the  bill  of  lading,  there  is  no  need  for  him  to  resort  to  this  right 
of  stoppage  ip  transitu ;  but,  if  he  should  deliver  the  bill  of  lading 
to  the  buyer,  then  his  only  remedy  would  be  to  exercise  the  right 
of  stoppage  in  transitu.  But  the  right  under  these  circumstances 
is  a  very  delicate  one.  It  is  available  only  so  long  as  the  bill  of 
lading  is  in  the  hands  of  the  buyer,  and  it  is  not  effective,  even 
then,  if,  subsequent  to  the  stoppage,  the  buyer  negotiates  the  bill 
of  lading  to  an  innocent  purchaser.  With  respect  to  these  matters 
the  Sales  Act  provides: 

Section  62.  If,  however,  a  negotiable  document  of  title  has  been 
issued  for  goods,  no  seller's  lien  or  right  of  stoppage  in  transitu 
shall  defeat  the  right  of  any  purchaser  for  value  in  good  faith  to 
whom  such  document  has  been  negotiated,  whether  such  negotia- 
tion be  prior  or  subsequent  to  the  notification  to  the  carrier,  or 


Ch.  5)  REMEDIES   OF  THE  SELLER  1117 

Other  bailee  who  issued  such  document,  of  the  seller's  claim  to  a 
lien  or  right  of  stoppage  in  transitu. 


RIIMMELL  et  al.  v.  BLANCHARD  et  al. 

(Supreme  Court  of  New  York,  Appellate  Division,  1915.     167  App.  Div.  654, 

153  N.   Y.   Supp.  159.) 

Action  by  Jacob  Rummell  and  another  against  Archibald  Blanchard 
and  another,  trustees  in  bankruptcy  of  Alden  &  Co.,  a  bankrupt,  and 
another.     From  a  judgment  for  defendant,  plaintiffs  appeal. 

Action  of  replevin.  In  fulfillment  of  a  contract  dated  January  27, 
1913,  for  the  sale  or  exchange  of  certain  cases  of  shellac  which  Alden 
&  Co.  were  to  return  at  a  later  date,  plaintiffs  indorsed  and  delivered 
to  Alden  &  Co.  a  negotiable  warehouse  receipt  for  the  cases  in  ques- 
tion. On  February  14th  Alden  &  Co.  tendered  the  receipt  to  the 
warehouseman  and  demanded  new  receipts  running  in  their  name. 
This  demand  was  refused  on  the  ground  that  the  warehouse  charges 
were  unpaid,  which  payment  Alden  &  Co.  failed  or  declined  to  make. 
On  their  appointment,  the  indorsed  receipt  came  into  the  possession 
of  the  defendants,  trustees  in  bankruptcy  of  Alden  &  Co.,  from  whom 
plaintiffs  sought  in  this  action  to  recover  the  goods. 

HoTCHKTSS,  J.  The  sole  question  is  whether  plaintiffs  lost  their  sell- 
ers' lien  by  indorsing  and  delivering  the  negotiable  receipt  to  Alden 
&  Co  Nearly  70  years  ago,  in  the  course  of  his  opinion  in  McEwan 
V.  Smith,  2  H.  L.  Cas.  309,  Lord  Campbell  said  (page  328) :  "There 
can  be  no  doubt  that,  after  sale  of  the  goods,  the  vendor  has  a  lien 
on  them  for  the  price,  so  long  as  they  remain  in  his  possession,  and 
this  is  a  doctrine  as  old  as  any  doctrine  connected  with  the  purchase 
and  sale  of  goods." 

It  is  scarcely  necessary  to  cite  authorities  to  show  that  this  ancient 
lien  existed  practically  unchanged  at  the  time  of  the  codification^  in 
this  state  of  the  law  of  personal  property,  including  bills  of  lading 
and  warehouse  receipts,  and  that  it  depended  upon  possession.  *  *  * 
If  the  buyer  once  gets  both  title  and  possession  from  the  seller,  at 
common  law  the  lien  of  the  latter  is  gone.     *     *     * 

Prior  to  the  legislation  to  which  I  have  referred,  it  was  uniformly 
held  that  bills  of  lading  were  in  and  of  themselves  muniments  of 
title  sufficient  to  vest  title  as  well  as  possession  and  absolute  control 
of  the  goods  in  him  to  whose  order  they  were  drawn.  *  *  *  These 
instruments,  when  indorsed  and  delivered  for  value,  also  vested  in  the 
indorsee  to  whom  they  were  delivered,  with  intent  to  pass  title,  the 
same  ownership  and  control  of  the  goods  as  that  held  by  him  to  whose 
order  they  originally  ran.  In  this  respect  warehouse  receipts  were 
the  same  as  bills  of  lading.    *    *    * 

The  presumption  is  that  Alden  &  Co.  accepted  the  bill  of  lading  in 
full  satisfaction  of  their  contract  to  sell  and  deliver.  *  *  *  These 
principles  have  been  incorporated  into  the  Personal  Property  Law  and 
the  Warehouse  Receipts  Act.  *  *  *  Section  137,  art.  5,  of  the 
Personal  Property  Law,  entitled  "Sales  of  Goods,"  provides  that  the 
unpaid  seller  of  goods  loses  his  lien  thereon  "when  the  buyer  or  his 
agent  lawfully  obtains  possession  of  the  goods."  Section  125  of  the 
General  Business  Law  provides  that  "a  person  to  whom  a  negotiable 
receipt  has  been  duly  negotiated  acquires  thereby,"  not  only  the  title 


1118  SALES  (Part  4 

the  one  negotiating  the  receipt  or  the  depositor  of  the  goods,  to  whose 
order  they  were  by  the  terms  of  the  receipt  to  be  dehvered,  had  or  could 
convey,  but  also  "the  direct  obligation  of  the  warehouseman  to  hold 
possession  of  the  goods  for  him  according  to  the  terms  of  the  receipt 
as  fully  as  if  the  warehouseman  had  contracted  directly  with  him.** 
*     *     * 

If  such  an  instrument  has  been  issued,  no  seller's  lien  or  right  of 
stoppage  in  transitu  shall  defeat  the  rights  of  any  purchaser  for  value 
in  good  faith  to  whom  such  document  has  been  negotiated,  etc.  As 
Williston  explains  in  his  treatise  on  sales  (page  921),  these  provisions 
were  intended  to  protect  a  purchaser  for  value  without  notice  after 
the  seller  had  stopped  the  goods  either  by  virtue  of  his  right  of  stop- 
page in  transitu  or  his  seller's  lien.  It  must  be  clear  that  they  could 
not  have  been  intended  to  work  such  a  radical  change  in  the  law  as 
would  be  the  result  if  we  accepted  the  appellants'  argtmient  that  they 
applied  to  sustain  a  lien  of  a  seller  in  the  situation  of  these  plaintiffs. 

The  order  should  be  afifirmed.    *     *     * 


SECTION  4.— UNPAID  SELLER'S  LIEN 

All  of  the  preceding  portion  of  this  chapter  was  devoted  to  the 
explanation  of  the  circumstances  under  which  an  unpaid  seller 
would  have  the  rights  of  lien,  of  resale,  and  of  rescission  of  the 
contract.  We  may  now  turn  our  attention  to  the  discussion  of  the 
nature  of  these  rights  and  as  to  the  manner  in  which  they  may  be 
exercised. 

The  prominent  feature  of  a  lien  is  that  the  seller  in  possession 
of  the  goods,  or  one  who  has  regained  possession  by  exercising  his 
right  of  stoppage  in  transitu,  has  a  right  to  continue  to  hold  the 
goods,  and  by  so  doing  is  not  guilty  of  any  breach  of  contract  with 
the  buyer.  The  following  cases  illustrate  the  effect  of  the  right  of 
lien,  and  also  one  way  in  which  the  lien  may  be  lost. 


CAPUANO  V.  ITALIAN  IMPORTING   CO.    OF  NEW   YORK. 

{Supreme  Court  of  New  York,  Appellate  Term,  1915.     89  Misc.  Rep.  449, 
151  N.  Y.  Supp.  994.) 

Replevin  by  Guiseppe  Capuano  against  the  Italian  Importing  Com- 
pany of  New  York.  From  judgment  for  defendant,  and  from  an  or- 
der denying  new  trial,  plaintiff  appeals. 

PendlKTOn,  J.  The  action  is  in  replevin.  The  answer  is  a  general 
denial,  and  sets  up  as  a  separate  affirmative  defense  an  alleged  ven- 
dor's lien  on  the  goods  and  the  right  to  possession  thereunder.  It 
was  apparently  conceded  at  the  trial,  and  nothing  to  the  contrary  is 
now  claimed,  that  defendant  bought  the  goods,  with  others,  from  one 
Andreis,  and  paid  for  them  under  an  agreement  that  any  not  sold 
by  the  end  of  the  season  Andreis  would  take  back  and  pay  defendant 
therefor  the  invoice  price,  plus  any  duty  paid.  At  the  end  of  the  sea- 
son the  goods  in  question  remained  unsold,  and  defendant  demanded 
of  Andreis  under  the  agreement  payment  therefor  of  the  invoice 
price,  plus  the  duty  paid.     Andreis  refused,  and  defendant  thereupon 


Ch.  5)  REMEDIES   OF   THE   SELLER  lllj^ 

brought  suit  against  Andreis  for  the  agreed  price,  and  recovered  judg- 
ment for  the  full  amount.  Plaintiff  claims  title  to  the  goods  un- 
der an  alleged  purchase  from  Andreis  subsequent  to  the  entry  of  the 
above  judgment. 

That  title  to  these  goods  passed  to  defendant  at  the  time  of  their 
delivery  to  it  under  the  original  agreement  with  Andreis  seems  clear. 
On  the  latter's  refusal  to  take  back  the  goods  and  pay  the  agreed  in- 
voice price  and  duty  paid,  defendant  could  rescind  and  sue  for  the 
difference  between  the  agreed  price  and  their  value  as  damages  (sec- 
tion 142,  Sales  Act ;  *  *  *  ),  or  treat  the  goods  as  belonging  to  An- 
dreis and  sue  to  recover  the  contract  price.  If  it  elected  to  pursue 
the  former  course,  title  remaining  in  it,  plaintiff  took  nothing  by  the 
assignment  from  Andreis  and  cannot  recover.  As  matter,  of  fact,  it 
chose  the  latter,  as  an  examination  of  the  judgment  roll  introduced  in 
evidence  shows.  In  thus  suing  it  treated  Andreis  as  a  vendee,  and 
was  entitled  to  a  vendor's  hen  until  the  purchase  price  was  paid, 

*  *  *  unless  it  had  lost  the  right  to  assert  the  lien,  either  (1)  by  an 
agreement  to  release  it,  which  must  have  been  a  valid  agreement  for 
a  consideration ;  or  (2)  by  representations  which  had  estopped  it  from 
asserting  a  lien;  or  (3)  by  acts  so  inconsistent  with  the  lien  as  to 
show  an  election  on  its  part  to  waive  the  lien  and  rely  on  another  and 
inconsistent  right  or  remedy. 

As  to  any  agreement,  the  only  possible  evidence  was  the  alleged 
statements  that  the  goods  were  at  Mr.  Andreis'  disposal.  These  were 
without  consideration,  and  could  not  constitute  a  valid  agreement. 
They  could  not  work  an  estoppel,  as  for  that  purpose  it  is  essential 
to  show  that  the  representations  were  made  to  the  person  asserting 
the  estoppel,  that  they  were  intended  to  be  relied  on,  and  were  in 
fact  relied  on,  and  a  change  of  position.  There  is  nothing  to  show 
here  that  they  were  made  to  plaintiff,  or  intended  for  him,  or  that  he 
ever  heard  of  or  relied  thereon. 

The  suit  brought  against  Andreis  was  not  a  waiver  of  the  lien. 

*  *  *  It  is  no  more  inconsistent  with,  or  a  waiver  of,  a  lien  than 
a  suit  on  a  note  secured  by  collateral,  or  on  a  bond  secured  by  a  mort- 
gage. There  was,  therefore,  no  evidence  of  waiver,  and  plaintiff's 
request  to  go  to  the  jury  on  that  question  was  properly  denied,  and 
the  direction  of  a  verdict  for  defendant  was  proper. 

Judgment  affirmed.     *     *     * 


WRIGHT  V.  FRANK  A.  ANDREWS  CO.,  Inc. 
(Supreme  Judicial  Court  of  :Masstichusetts,  1912.    212  Mass.  186,  98  N.  E.  79S.) 

Action  by  William  B.  Wright  against  the  Frank  A.  Andrews  Com- 
pany, Incorporated.  There  was  a  judgment  for  plaintiff',  and  defend- 
ant brings  excepticins. 

Sheldon,  J.  The  jury  could  find  that  the  plaintiff'  purchased  a  par- 
ticular diamond  of  the  defendant,  the  title  to  which  at  once  passed  to 
the  plaintiff,  but  that  he  left  it  with  the  defendant  to  be  set  in  a  ring. 
for  the  whole  price  of  $500,  of  which  he  paid  down  the  sum  of  $100. 
They  also  could  find  that  the  stone  was  set  in  the  ring  to  his  satisfac- 
tion and  acceptance,  and  that  the  defendant  then  retained  it  until  he 
should  make  full  payment  therefor.  The  plaintiff,  as  it  could  be 
found,  could  not  then  pay  the  residue  of  the  price,  and  after  a  con- 


1120  SALES  (Part  4 

siderable  delay  made  an  offer  to  the  defendant  to  rescind  the  purchase 
and  take  back  what  he  had  paid;  but  the  defendant  did  not  accept 
this  offer.  After  still  further  delay  he  tendered  the  balance  due  to 
the  defendant  and  demanded  the  ring,  and  the  defendant  merely  an- 
swered that  it  did  not  then  have  the  ring  but  could  get  it.  By  the  tender, 
any  lien  which  the  defendant  had  upon  the  ring  was  ended,  and  the 
plaintiff  was  entitled  to  immediate  possession  thereof,  as  could  be 
found,  but  the  defendant  refused  to  give  it  to  him.  If  so,  he  was  en- 
titled to  maintain  an  action  for  its  conversion.    *    *    * 

Nor  were  the  jury  bound  to  find  that  the  defendant  had  rescuided 
its  contract  with  the  plaintiff  for  his  delay  in  making  full  payment, 
even  if  it  could  have  done  so.  It  never  had  returned  or  offered  to  re- 
turn the  payment  which  the  plaintiff  had  made;  nor  as  could  have 
been  found,  had  it  availed  itself  of  any  one  of  the  remedies  which 
his  default  left  open  to  it.  *  *  *  it  may  be  assumed  that  it  had  a 
vendor's  lien  for  the  unpaid  purchase  money.  *  *  *  But  this  was 
perfectly  consistent  with,  and  indeed  presupposed,  a  general  right 
of  property  in  the  plaintiff,  and  would  be  ended  by  the  plaintiff's  ten- 
der. Nor  was  the  tender  invalid  because  it  did  not  include  interest 
which  was  not  shown  to  have  been  due. 

Accordingly  a  verdict  for  the  defendant  could  not  have  been  or- 
dered.    *     *     * 

Exceptions  overruled. 

SECTION  5.— RIGHT  OF  RESALE 

Obviously  the  bare  right  to  hold  the  goods  does  not  protect  the 
seller  sufficiently,  for,  if  the  buyer  is  intending  never  to  pay  for 
the  goods,  the  seller  will  either  desire  to  sell  them  to  other  persons 
or  to  use  them  himself.  If  all  the  seller  has  is  a  right  to  hold  the 
goods,  a  sale  by  him  to  a  third  party  or  the  use  of  them  would 
amount  to  a  conversion  of  the  buyer's  goods.  We  must  not  lose 
;sight  of  the  fact  that  title  is  really  in  the  buyer  in  all  of  these 
cases.  Clearly  the  law  would  not  stop  with  giving  the  unpaid 
seller  a  mere  right  to  continue  in  possession.  In  fact,  wherever 
we  find  a  lien,  whether  in  the  law  of  sales  or  other  branches  of  the 
law,  we  will  discover  that  the  law  prescribes  a  certain  procedure 
whereby  the  lienholder  may  convert  his  lien  into  money  or  into  an 
absolute  ownership  in  himself.  In  the  law  of  mortgages  of  land, 
every  one  is  more  or  less  familiar  with  the  foreclosure  suit.  The 
term  "foreclosure  suit"  merely  describes  the  procedure  by  which 
the  mortgagee,  w^ho  has,  by  virtue  of  his  mortgage,  a  lien  on  the 
land,  has  the  right  to  have  the  land  sold,  and  the  proceeds  aris- 
ing from  the  sale  paid  over  by  the  officer  of  the  court  who  made 
the  sale,  to  the  mortgagee.  So,  also,  where  a  pledgee  of  personal 
property  may,  by  following  out  certain  other,  but  similar,  rules, 
obtain  a  sale  of  the  goods  and  the  right  to  apply  the  proceeds  on 
the  debt  due  him.  Railroad  companies  have  liens  on  freight  to 
secure  freight  charges,  and  the  company  has  a  right,  upon  certain 
conditions  and  by  following  the  prescribed  procedure,  to  sell  the 
goods  and  to  apply  the  money  on  the  debt. 


Ch.  5)  REMEDIES   OF  THE   SELLER  1121 

Liens  arise  in  a  great  many  ways,  but  the  point  here  sought  to 
be  made  is  that  the  law  does  prescribe  some  method  by  which  the 
holder  of  the  lien  will  be  able  to  convert  that  right  into  money. 
The  steps  necessary  to  bring  about  this  result  vary  according  to 
the  circumstances  under  which  the  lien  arose.  Accordingly  in 
the  law  of  sales  we  find  special  rules  which  the  seller  must  fol- 
low, if  he  desires  to  sell  the  property  or  to  resume  his  ownership 
in  it.  The  most  distinctive  feature  is  that  the  buyer  need  not 
begin  any  action  in  court,  as  is  necessary  in  enforcing  a  mortgage 
lien  on  land.  The  lien,  given  to  the  unpaid  seller,  is  thus  seen  to 
be  the  real  basis  for  the  other  two  rights — of  resale  and  of  rescis- 
sion.   The  latter  two  are  derivative. 

Sales  Act,  Section  60.  (1)  Where  the  goods  are  of  a  perish- 
able nature,  or  where  the  seller  expressly  reserves  the  right  of  re- 
sale in  case  the  buyer  should  make  default,  or  where  the  buyer 
has  been  in  default  in  the  payment  of  the  price  an  unreasonable 
time,  an  unpaid  seller  having  a  right  of  lien  or  having  stopped  the 
goods  in  transitu  may  resell  the  goods.  He  shall  not  thereafter 
be  liable  to  the  original  buyer  upon  the  contract  to  sell  or  the  sale 
or  for  any  profit  made  by  such  resale,  but  may  recover  from  the 
buyer  damages  for  any  loss  occasioned  by  the  breach  of  the  con- 
tract or  the  sale. 

(2)  Where  a  resale  is  made,  as  authorized  in  this  section,  the 
buyer  acquires  a  good  title  as  against  the  original  buyer. 

(3)  It  is  not  essential  to  the  validity  of  a  resale  that  notice  of 
an  intention  to  resell  be  given  by  the  seller  to  the  original  buyer. 
But  where  the  right  of  resale  is  not  based  on  the  perishable  nature 
of  the  goods  or  upon  an  express  provision  of  the  contract  or  the 
sale,  the  giving  or  failure  to  give  such  notice  shall  be  relevant  in 
any  issue  involving  the  question  whether  the  buyer  has  been  in 
default  an  unreasonable  time  before  the  resale  was  made. 

(4)  It  is  not  essential  to  the  validity  of  a  resale  that  notice  of 
the  time  and  place  of  such  resale  should  be  given  by  the  seller  to 
the  original  buyer. 

(5)  The  seller  is  bound  to  exercise  reasonable  care  and  judg- 
ment in  making  a  resale,  and  subject  to  this  requirement  may  make 
a  resale  either  by  public  or  private  sale. 

The  first  point  that  should  be  noticed  in  connection  with  this 
section  is  that  the  unpaid  seller,  in  reselling  the  goods,  is  not  sell- 
ing his  own  goods.  He  is  selling  the  goods  of  the  buyer.  The 
above  section  does  not  say  that  the  unpaid  seller,  in  making  a  re- 
sale, is  doing  so  as  owner  of  the  goods.  These  sections  merely 
give  to  the  unpaid  seller  the  legal  power  and  legal  privilege  to  sell 
the  buyer's  own  goods  and  to  pass  a  title  to  the  buyer  at  the  re- 
sale, which  sale  will  be  effective  as  against  the  claims  of  the  origi- 
nal buyer.  The  distinction  between  selling  as  owner  and  selling, 
in  a  sense,  as  agent  for  the  buyer,  may  sometimes  afl:"ect  the  amount 
of  the  damages  which  the  seller  will  be  allowed  to  recover  from 
B.&  B.Bus.Law— 71 


1122  SALES  (Part  4 

the  buyer  after  the  resale.  We  should  recall  that  the  circum- 
stances arc  such,  title  being  in  the  buyer,  that  the  seller  has  the 
right  to  sue  the  seller  for  the  amount  of  the  purchase  price.  Let 
us  suppose,  in  a  particular  case,  that  this  amount  is  $1,000.  The 
unpaid  seller,  instead  of  suing  for  the  price,  resells  them  strictly 
in  accordance  with  this  section,  and  obtains  $900  for  the  goods  on 
the  resale.  Suppose,  also,  that  the  market  price  was  $950.  When 
the  seller  sued  the  buyer,  after  the  resale,  he  would  recover  the 
difiference  between  the  contract  price,  $1,000,  and  the  amount  ob- 
tained at  the  resale,  $900 — i.  e.,  he  would  recover  $100.  If  he  had 
resold  as  owner,  then  the  seller,  in  his  subsequent  suit  against  the 
buyer,  would  recover  the  difference  between  the  contract  price 
of  $1,000  and  the  market  price  of  $950,  or  $50.  The  resale  fixes 
the  amount  of  damage  which  may  be  recovered  from  the  buyer. 

There  is  this  further  difference  between  selling  as  owner  and 
selling  the  purchaser's  goods.  The  seller  may  add  to  his  damages 
the  expense  to  which  he  was  put  in  selling  the  goods,  and  may  also 
recover  the  cost  to  which  he  was  put  in  keeping  the  goods  from 
the  time  when  the  buyer  was  first  under  a  duty  of  paying  for  the 
goods  and  the  date  of  the  resale. 

From  the  business  point  of  view,  the  important  things  to  keep 
in  mind  are :  First,  that  the  right  to  resell  does  not  arise  until  the 
buyer  has  been  in  default  an  unreasonable  time.  If  a  seller  under- 
takes to  resell  on  the  first  day  after  the  buyer  was  under  an  obli- 
gation of  paying  the  price,  he  is  very  likely  to  find  that  the  law, 
instead  of  sanctioning  the  resale,  will  say  that  the  act  was  a  tor- 
tious conversion  of  the  buyer's  goods,  and  accordingly  the  seller 
will  be  liable  to  the  buyer  for  all  damages  sustained  thereby  by 
the  latter.  There  is  one  exception,  noted  in  the  section,  where 
the  seller  is  not  obliged  to  wait  until  the  buyer  is  in  default  an 
unreasonable  time;  i.  e.,  when  the  subject  of  the  sale  was  of  a 
perishable  nature.  The  reason  for  such  exception  is  apparent. 
On  the  general  question,  how  long  must  the  seller  wait?  no  sat- 
isfactory answer  can  be  laid  down  in  general  terms.  The  circum- 
stances of  the  case  will  in  general  indicate  what  constitutes  an  un- 
reasonable time.  In  this  connection  the.  seller  should  not  put  very 
much  reliance  upon  the  rule  stated  in  the  section,  which  relieves 
him  from  the  necessity  of  giving  the  buyer  notice  of  the  time  and 
place  of  sale.  That  clause  is  by  no  means  a  dead  letter,  but  at 
the  same  time  it  is  decidedly  to  the  interest  of  the  seller  to  give 
such  notice  to  the  buyer  of  the  time  and  place  of  sale.  This  gives 
an  opportunity,  and  a  fair  one,  to  the  buyer  to  protect  himself.  If 
notice  is  not  given  under  circumstances  where  it  could  have  been 
given,  this  carries  with  it  suggestions  that  the  seller  may  be  at- 
tempting to  take  an  unfair  advantage  of  the  buyer.  For  these 
reasons  notice  should  be  given.  Before  the  adoption  of  the  Sales 
Act,  and  in  some  of  the  states  where  it  has  not  been  enacted,  the 
law  requires  notice  to  be  sent  to  the  buyer. 

In  the  second  place,  the  seller  should  take  note  of  the  direction 


Ch,  5)  REMEDIES   OF  THE   SELLER  1123 

that  he  exercise  reasonable  care  and  judgment  in  making  a  resale. 
In  connection  with  the  circumstances  of  a  particular  transaction, 
this  requirement  may  mean  a  good  deal.  The  law  will  not  permit 
an  unpaid  seller  deliberately  to  resell  the  goods  at  a  great  sacrifice 
when  a  better  price  could  have  been  obtained.  If  it  proves  to  be 
an  unfair  sale,  the  seller  will  not  be  allowed  to  recover  from  the 
buyer  any  more  than  the  difference  between  the  contract  price 
and  the  market  price.  If  the  sale  is  a  fair  one,  he  will  recover  the 
difference  between  the  contract  price  and  the  amount  which  the 
goods  brought  at  the  resale. 


SECTION  6.— RIGHT  OF  RESCISSION 

The  third  and  last  right  which  the  unpaid  seller  has  against  the 
goods  is  the  right  of  rescission.  This  word  is  often  used  to  ex- 
press the  idea  that  a  party  to  a  contract  is  excused  from  perform- 
ing his  obligation  thereunder,  if  the  other  party  has  materially 
broken  his  promise.  The  term  should  not  be  used  in  this  sense. 
When  used  in  connection  with  a  contract,  rescission  means  some 
act  which  has  the  legal  effect  of  totally  destroying  the  legal  rela- 
tions between  the  parties  to  a  contract  or  to  some  part  thereof. 
What  is  the  relation  of  the  parties  after  destruction  of  these  rela- 
tions? As  was  shown  in  Chapter  X  of  Contracts,  the  parties  are 
in  the  same  position  that  they  were  in  before  they  entered  into 
the  contract.  Any  suit  between  the  parties  subsequent  to  a  re- 
scission of  the  entire  contract  is  for  the  sole  purpose  of  putting 
the  parties  in  the  same  financial  or  proprietary  position  which  they 
occupied  just  before  they  entered  into  contract  relations.  Such  a 
lawsuit  has  a  different  object  from  an  action  brought  on  the  con- 
tract to  recover  damages  for  its  breach.  An  action  to  recover  dam- 
ages for  the  breach  of  a  contract  seeks  to  put  the  plaintiff,  party 
not  in  default,  in  the  same  position  he  would  have  been  in  if  the 
contract  had  been  performed.  An  action  following  a  rescission 
of  a  contract  because  of  default,  or  for  any  other  reason,  seeks  to 
put  the  plaintiff,  not  where  he  would  have  been  if  the  contract 
had  been  performed,  but  to  put  him  in  the  same  position  which 
he  held  before  he  entered  into  the  contract  which  is  now  rescinded. 
One  cannot  sue  upon  a  contract  which  has  been  totally  rescinded. 
If  but  a  part  of  it  has  been  rescinded,  the  remaining  portion  is  suf- 
ficiently alive  to  support  an  action  upon  it. 

The  Sales  Act  gives  the  unpaid  seller  two  powers  of  rescission : 
(1)  Power  to  rescind  the  transfer  of  title;  and  (2)  power  to  re- 
scind the  entire  contract.    These  sections  are  as  follows : 

Section  61.  (1)  An  unpaid  seller  having  a  right  of  lien  or  hav-. 
ing  stopped  the  goods  in  transitu  may  rescind  the  transfer  of  title 
and  resume  the  property  in  the  goods,  v^rhere  he  expressly  reserved 
the  right  to  do  so  in  case  the  buyer  should  make  default,  or  where 


1124  SALES  (Part  4 

the  buyer  has  been  in  default  in  the  payment  of  the  price  an  un- 
reasonable time.  The  seller  shall  not  thereafter  be  liable  to  the 
buyer  upon  the  contract  to  sell  or  the  sale,  but  may  recover  from 
the  buyer  damages  for  any  loss  occasioned  by  the  breach  of  the 
contract  or  the  sale. 

(2)  The  transfer  of  title  shall  not  be  held  to  have  been  rescind- 
ed by  an  unpaid  seller  until  he  has  manifested  by  notice  to  the 
buyer  or  by  some  overt  act  an  intention  to  rescind.  It  is  not  nec- 
essary that  such  overt  act  should  be  communicated  to  the  buyer, 
but  the  giving  or  failure  to  give  notice  to  the  buyer  of  the  inten- 
tion to  rescind  shall  be  relevant  in  any  issue  involving  the  ques- 
tion whether  the  buyer  has  been  in  default  an  unreasonable  time 
before  the  right  of  rescission  was  asserted. 

The  important  point  to  notice  in  the  first  instance  is,  that  this 
section  authorizes  an  unpaid  seller,  upon  the  buyer's  default,  to 
rescind  the  transfer  of  title ;  that  is,  the  buyer's  failure  to  pay  gives 
to  the  seller  the  legal  power  to  treat  the  title  as  never  having  pass- 
ed to  the  buyer.  The  seller  may  exercise  this  right  only  in  the 
manner  prescribed  in  the  act;  i.  e.,  by  manifesting  by  notice  to  the 
buyer  or  by  some  overt  act  an  intention  to  rescind.  While  the 
next  sentence  provides  that  this  notice  need  not  be  communicated 
to  the  buyer,  it  is  always  wiser  to  do  so.  After  the  seller  manifests 
his  intention  to  rescind,  what  are  the  legal  relations  between  buyer 
and  seller?  Simply  this:  There  is  still  a  contract  between  buyer 
and  seller,  but  the  title  to  the  goods  has  now  returned  to  the  seller. 
The  situation  is  the  same  as  would  exist  in  any  contract  to  sell 
goods,  title  not  having  passed  to  the  buyer,  which  contract  had 
been  broken  by  the  buyer.  Consequently  the  seller  may  sue  the 
buyer  after  rescission  upon  the  contract  for  damages  to  recover  for 
the  breach.  Since  title  is  now  back  in  the  seller,  the  provisions  of 
section  64  are  applicable  to  all  actions  brought  by  the  seller  against 
the  buyer  for  the  latter's  breach  of  an  executory  contract  to  sell. 
Here  we  find  that  the  rule  of  damages  is:  "Where  there  is  an 
available  market  for  the  goods  in  question,  the  measure  of  dam- 
ages is,  in  the  absence  of  special  circumstances  showing  proximate 
damage  of  a  greater  amount,  the  difference  between  the  contract 
price  and  the  market  or  current  price  at  the  time  or  times  when 
the  goods  ought  to  have  been  accepted."  It  is  to  be  noticed  that,  if 
the  seller,  after  rescission  of  the  transfer  of  title,  sells  the  goods,  he 
does  so  as  any  owner  of  goods  may  do,  and  his  right  is  in  no  sense 
based  upon  the  section  heretofore  discussed,  giving  an  unpaid 
seller  the  right  of  resale. 

As  noted  above,  the  law  gives  the  unpaid  seller  the  power,  not 
only  to  rescind  the  transfer  of  title,  but  also  to  rescind  the  whole 
contract. 

Section  65.  Where  the  goods  have  not  been  delivered  to  the 
buyer,  and  the  buyer  has  repudiated  the  contract  to  sell  or  sale,  or 
has  manifested  his  inability  to  perform  his  obligations  thereunder 
or  has  committed  a  material  breach  thereof,  the  seller  may  totally 


Ch.  5)  REMEDIES   OP   THE   SELLER  1125 

rescind  the  contract  or  the  sale  by  giving  notice  of  his  election  so 
to  do  to  the  buyer. 

Very  seldom  will  it  be  to  the  advantage  of  the  seller  totally  to 
rescind  the  contract,  because,  if  he  does  so,  he  will  have  no  right 
of  action  on  the  contract  against  the  buyer  for  the  breach.  The 
unpaid  seller  may  sue  the  buyer,  not  on  the  contract,  but  upon  an 
implied  or  quasi  contract  to  recover  the  reasonable  value,  not  the 
contract  price,  of  what  he  parted  with.  The  plaintiff  in  such  a  case 
is  seeking  restitution.  He  is  not  suing  for  damages  to  compensate 
him  for  the  loss  of  the  contract.  It  would  seem  that  an  actual  no- 
tice must  needs  be  given  to  the  buyer  in  this  case,  whereas,  in  re- 
scinding the  transfer  of  title,  he  need  but  manifest  his  intentions  to 
rescind  by  some  overt  act.  The  remedy  of  rescission  was  taken 
up  in  Chapter  X  of  Contracts,  so  that  it  is  not  necessary  to  go 
further  into  this  matter  here. 


SECTION  7.— RIGHT  TO  DAMAGES  FOR  BREACH  OF 
CONTRACT  TO  SELL 

Where  title  has  not  passed  to  the  buyer,  and  the  buyer  has 
broken  his  contract,  it  is  perfectly  obvious  that  the  seller  ma3r  sue 
the  buyer  on  the  contract  and  recover  damages  for  the  breach. 
Assuming  that  the  seller  was  not  in  default,  and  that  the  buyer 
had  materially  broken  his  contract,  the  only  remaining  question 
concerns  the  measure  of  damages. 

Sales  Act,  Section  64.  (1)  Where  the  buyer  wrongfully  neg- 
lects or  refuses  to  accept  and  pay  for  the  goods,  the  seller  may 
maintain  an  action  against  him  for  damages  for  non-acceptance. 
(2)  The  measure  of  damages  is  the  estimated  loss  directly  and 
naturally  resulting,  in  the  ordinary  course  of  events,  from  the  buy- 
er's breach  of  contract.  (3)  Where  there  is  an  available  market 
for  the  goods  in  question,  the  measure  of  damages,  is  in  the  ab- 
sence of  special  circumstances,  showing  proximate  damages  of  a 
greater  amount,  the  difference  between  the  contract  price  and  the 
market  or  current  price  at  the  time  or  times  when  the  goods  ought 
to  have  been  accepted,  or,  if  no  time  was  fixed  for  acceptance,  then 
at  the  time  of  the  refusal  to  accept.  (4)  If,  while  labor  or  expense 
of  material  amount  are  necessary  on  the  part  of  the  seller  to  enable 
him  to  fulfill  his  obligations  under  the  contract  to  sell  or  the  sale, 
the  buyer  repudiates  the  contract  or  the  sale,  or  notifies  the  seller 
to  proceed  no  further  therewith,  the  buyer  shall  be  liable  to  the 
seller  for  no  greater  damages  than  the  seller  would  have  suffered 
if  he  did  nothing  toward  carrying  out  the  contract  or  the  sale  after 
receiving  notice  of  the  buyer's  repudiation  or  countermand.  The 
profit  the  seller  would  have  made  if  the  contract  or  the  sale  had 
been  fully  performed  shall  be  considered  in  estimating  such  dam- 
ages. 


1126  SALES  (Part  4 

Sales  Act,  Section  51.  When  the  seller  is  ready  and  willing  to 
deliver  the  goods,  and  requests  the  buyer  to  take  delivery,  and  the 
buyer  does  not  within  a  reasonable  time  after  such  request  take 
delivery  of  the  goods,  he  is  liable  to  the  seller  for  any  loss  occa- 
sioned by  his  neglect  or  refusal  to  take  delivery,  and  also  for  a  rea- 
sonable charge  for  the  care  and  custody  of  the  goods.  If  the  neg- 
lect or  refusal  of  the  buyer  to  take  delivery  amounts  to  a  repudia- 
tion or  breach  of  the  entire  contract,  the  seller  shall  have  the  rights 
against  the  goods  and  on  the  contract  hereinafter  provided  in 
favor  of  the  seller  when  the  buyer  is  in  default. 


TORKOMIAN  v.  RUSSELL  et  al. 
(Supreme  Court  of  Errors  of  Connecticut,  1910.     'M  Conn.  481,  97  Atl.  760.) 

Action  by  Baron  J.  Torkomian  against  William  E.  Russell  and  an- 
other.    From  a  judgment  for  plaintifif,. defendants  appeal. 

WhkelKr,  J.  The  finding  recites  that:  On  November  1,  1913,  the 
defendants  were  dealers  in  automobiles  in  Waterbury  and  agents  for 
the  sale  of  the  Lozier  make  of  automobile.  On  said  day  the  plaintiff 
and  the  defendants  entered  into  a  written  contract  by  the  terms  of 
which  the  defendants  agreed  to  sell  the  plaintiff  a  Lozier  Six  automo- 
bile, to  deliver  the  same  between  April  15  and  May  1,  1914,  and  to  ac- 
cept in  part  payment  a  used  Studebaker  car  at  the  agreed  price  of  $700, 
and  to  give  the  plaintiff  their  note  for  $700  payable  to  plaintiff  or  order 
on  demand  in  consideration  of  the  Studebaker  car.  The  plaintiff  in 
consideration  of  the  promises  of  the  defendants  agreed  to  pay  $3,250 
for  the  Lozier  car  and  not  to  demand  payment  of  the  $700  note  unless 
the  defendants  failed  to  deliver  the  Lozier  car.  From  about  the  be- 
ginning of  1914,  down  to  the  delivery  period,  the  plaintiff  repeatedly 
expressed  his  unwillingness  to  take  the  Lozier  Six,  and  desired  defend- 
ants to  substitute  another  car,  which  they  refused  to  do.  The  defend- 
ants were  ready  and  willing  to  deliver  the  Lozier  Six  at  the  delivery 
period ;  but,  by  reason  of  plaintiff's  expressed  unwillingness  to  accept 
a  car  if  delivered,  the  defendants  did  not  make  actual  physical  delivery. 

The  agreement  expressly  provides  that  the  note  is  not  to  be  demand- 
ed unless  the  defendants  failed  to  deliver  the  car  at  the  period  named. 
The  defendants  pleaded,  and  it  is  found,  that  the  plaintiff  had  notified 
the  defendants  for  upwards  of  five  months  and  down  to  the  period  of 
delivery  named  that  he  would  not  accept  the  Lozier  Six.  The  defend- 
ants were  entitled  to  act  upon  the  assumption  that  the  plaintiff  meant 
what  he  said,  and  they  were  not  required  to  go  through  the  idle  cere- 
mony of  making  a  physical  tender.  They  did  all  that  they  were  obliged 
to  do  when,  having  the  means  of  getting  the  car,  they  "were  ready 
and  willing  to  deliver  the  Lozier  Six  automobile  at  the  time  specified 
for  delivery  in  said  contract."  *  *  *  There  has  been  no  failure  on 
the  part  of  the  defendants  to  deliver  this  car,  and  the  judgment,  so  far 
as  the  action  upon  the  note  was  concerned,  should  have  been  for  the 
defendants. 

The  remaining  reasons  of  appeal  that  require  consideration  are  based 
upon  the  measure  of  damages  for  the  defendants  adopted  by  the  trial 
court.     In  count  1  of  the  complaint  the  plaintiff  seeks  to  recover  for 


Ch.  5)  REMEDIES  OF  THE  SELLER  1127 

the  defendants'  breach  of  their  contract,  and  in  count  2  upon  the  $700 
note.  The  defendants  alleged  under  their  special  defense  to  both 
counts  and  as  a  basis  of  recovery  on  their  counterclaim,  that  the  plain- 
tiff had  notified  them  that  he  would  not  accept  the  car  contracted  for, 
if  tendered,  and,  further,  that  they  had  lost  in  consequence  of  this 
breach  of  contract  by  the  plaintiff  seven  hundred  dollars.  The  de- 
fendants, if  entitled  to  recover  under  their  counterclaim,  v^ere  entitled 
to  recover  under  our  common  law  such  sum  as  would  put  them,  so  far 
as  it  can  be  done  by  money,  in  the  same  position  they  would  have  been 
in  if  the  contract  had  been  performed. 

In  the  absence  of  special  circumstances  requiring  a  different  rule, 
the  damages  recoverable  by  a  vendor  for  refusal  t-o  take  goods  con- 
tracted for  is  the  dift'erence  at  the  time  and  place  of  delivery,  between 
the  contract  price  and  the  market  price.  *  *  *  But  we  recognize 
that  this  rule  is  not  an  unbending  one,  that  the  circumstances  may  re- 
quire its  modification  in  order  to  effectuate  the  cardinal  purpose,  "just 
compensation  for  the  loss  incurred."  And  the  loss  must  be  such  as 
"may  reasonably  be  supposed  to  have  been  in  the  contemplation  of  the 
parties  at  the  time  they  made  the  contract."  *  *  *  Section  64  of 
the  Sales  Act  reaffirms  our  rule  for  measuring  damages  in  case  of 
breach  of  a  contract  of  sale  by  the  contractee  or  vendee. 

The  market  price  to  these  defendants  of  a  Lozier  Six  was  undoubt- 
edly less  than  its  selling  price,  since  they  were  selling  agents  who  pur- 
chased and  took  title  to  the  cars  they  disposed  of.  Section  64  provides 
as  a  measure  of  damages  the  difference  between  the  contract  price  and 
the  market  price  "in  the  absence  of  special  circumstances  showing 
proximate  damage  of  a  greater  amount."  The  circumstance  that  these 
defendants  were  selling  agents  and  purchased  cars  at  a  rate  lower 
than  the  market  price  of  the  cars  to  the  public  made  the  ordinary 
measure  of  damages  inadequate.  The  defendants  lost  by  the  plaintiff's 
breach  the  difference  between  the  contract  price  and  what  the  car 
ready  for  physical  delivery  to  the  plaintiff  would  have  cost  them, 
which  would  have  been  the  purchase  price  of  the  car  plus  the  expense, 
if  any,  of  delivery  and  of  making  it  ready  for  deliver3^  This  is  the 
application  to  the  facts  of  this  case  of  section  64.  It  requires  the  per- 
son who  has  failed  to  keep  his  contract  of  sale  to  pay  the  loss  caused 
to  the  contractor  who  has  kept  his  contract.  *  *  *  The  defendants, 
as  vendors  or  contractors,  were  entitled  to  show  what  a  Lozier  Six 
car  would  have  cost  them  in  the  same  way  a  manufacturer  might 
show  the  cost  of  an  article  manufactured  by  him.  The  defendants 
would  thus  recover  the  profits  they  would  have  made  had  the  plaintiff 
carried  out  his  contract.  In  such  a  case  profits  are  not  speculative,  but 
certain  and  ascertainable,  and  the  legitimate   fruits  of  the  contract. 

*  '■'•'  *  The  profit  of  the  defendants  might  also  have  been  ascertained 
by  finding  the  commission  made  by  them  in  the  sale  less  the  expenses 
incurred  by  them.    *    *    * 

Since  the  defendants  retained  the  Studebaker  car  and  the  agreed 
price  of  this  car  was  $700,  the  plaintiff  should  be  allowed  this  sum, 
and  the  defendants  should  be  allowed  their  profit  had  the  plaintiff 
fulfilled  his  contract.  The  judgment  should  have  been  for  the  differ- 
ence between  these  sums  and  for  the  plaintiff  if  the  $700  exceeded 
the  profit,  and  for  the  defendants  if  the  profit  exceeded  the  $700. 

There  is  error,  the  judgment  is  reversed,  and  a  new  trial  ordered. 

*  *    * 


1128  SALES  (Part  4 

CHAPTER  VI 
WARRANTIES 

Section 

1.  Introduction. 

2.  Express  Warranties. 

3.  Implied    Warranties  Considered   Generally. 

4.  Implied  Warranty  of  Title. 

5.  Implied  Warranty  That  the  Goods  Shall  Correspond  to  the  Description. 

6.  Implied   Warranty   That   the    Goods    Shall   Correspond    to    the   Sample. 

7.  Implied  Warranty  of  Merchantability. 

S.  Imj)lled  Warranty  of  Fitness  for  a  Particular  Purpose. 

9.  Implied  Warranties  May  Arise  from  the  Usage  of  Trade. 

10.  Implied  Warranties  May  be  Negatived  by  Agreement. 

11.  Rights  of  Sub- Vendees  Against  Former  Warrantors. 


SECTION  1.— INTRODUCTION 

From  the  business  standpoint,  the  subject  of  warranties  in  sales 
and  contracts  to  sell  is  of  great  importance.  The  legal  problem  in 
outline  is  simply  this:  To  ascertain  the  circumstances  under 
which  the  law  regards  a  seller  as  having  broken  his  promise  as  to 
the  kind  or  quality  of  goods  sold.  We  are  already  aware  of  the 
fact  that  the  law  recognizes  express  promises  and  implied  prom- 
ises. Similarly  we  find  two  classes  of  warranties:  Express  war- 
ranties and  implied  warranties.  The  representation  or  promise 
which  is  called  a  warranty  is  often  called  a  guaranty.  It  is  some- 
times said  that  a  seller  guarantees  his  product.  In  the  law  the 
word  "guaranty"  is  not  used  in  this  sense.  In  the  law  the  word 
"guaranty"  is  used  to  describe  a  contract  in  which  one  person 
promises  to  be  responsible  for  the  performance  of  another  person's 
obligation. 

Controversy  and  litigation  between  buyer  and  seller  over  war- 
ranties is  sometimes  unnecessary.  A  grocer,  who  sells  his  cus- 
tomer a  can  of  beef,  which  gives  his  customer  ptomaine  poisoning, 
could  not  very  easily  have  avoided  the  liability;  but  the  seller  of 
a  machine,  who  makes  extravagant  statements  of  fact  concerning 
the  article,  might  have  avoided  the  liability. 

Let  us  look  for  a  moment  at  the  subject  of  express  warranties 
through  the  eyes  of  the  seller,  who,  although  anxious  to  make  a 
sale,  does  not  intend  to  make  untrue  statements  about  his  goods. 
What  matters  of  legal  policy  should  he  be  aware  of  as  he  enters  the 
negotiations  leading  up  to  the  sale?  Why  does  one  make  untrue 
statements  about  the  goods  which  he  sells?  Now  and  then,  of 
course,  we  find  one  who  will  deliberately  and  intentionally  mis- 
represent his  goods.  This  is  fraud,  because  there  is  a  guilty  mind 
accompanying  the  act.  In  such  a  case,  wholly  outside  the  law  of 
contracts,  the  law  of  torts  gives  to  the  defrauded  buyer  a  right  to 
sue  the  fraudulent  seller  in  an  action  of  deceit.  We  may  eliminate 
that  kind  of  a  case  from  our  discussion,  for  we  are  here  concerned 


Ch,  6)  WARRANTIES  1129 

with  the  honest  seller.  He  very  often  makes  untrue  statements 
about  his  goods,  but  the  law  does  not  exempt  him  from  responsi- 
bility because  he  made  a  mistake  and  acted  honestly.  Intention 
is  not  an  element  of  a  warranty. 

There  are  perhaps  three  principal  reasons  for  the  innocent  or 
unintentional  making  of  untrue  statements  of  fact  with  respect  to 
goods  offered  for  sale: 

(1)  A  clerk  in  a  dry  goods  store,  if  asked  whether  a  certain  fabric 
will  fade,  may  answer,  "No,"  whether  he  has  affirmative  knowledge  of 
that  fact  or  not.  A  seller  of  a  second-hand'  automobile  may  be  led  to 
state  that  the  car  offered  for  sale  has  not  been  run  over  a  specified  num- 
ber of  miles.  Sometimes  he  knows  the  truth  of  the  fact  asserted,  but 
often  he  does  not  know.  The  seller  of  complicated  machinery 
may  undertake  to  make  all  manner  of  assertions  of  fact  concerning 
the  article,  without  possessing  the  requisite  knowledge.  But 
enough  has  been  said  to  call  to  mind  the  fact  that  there  is  consid- 
erable pressure  upon  a  seller  to  launch  into  a  vivid  description  of 
the  thing  offered  for  sale  without  possessing  accurate  information 
in  regard  to  the  facts  asserted.  The  remedy  for  this  is  an  obvious 
one,  however  difficult  it  may  be  to  apply. 

(2)  Assuming  that  the  seller  possesses  accurate  information  concern- 
ing the  various  features  of  the  goods,  it  is  still  possible  for  him  to  fail 
to  convey  the  truth  to  the  prospective  purchaser,  because  the  language 
which  he  employs  for  that  purpose  is  carelessly  selected.  Language  is 
sometimes  a  very  poor  vehicle  for  the  conveyance  of  thought  from  one 
mind  to  another.  It  is  altogether  possible  for  a  seller  to  know  the  truth, 
and  simply  fail  to  transfer  to  the  mind  of  the  buyer  the  exact  idea 
which  the  speaker  had.  The  seller  may  use  language  which  has  a 
broader  meaning  than  that  intended,  or  he  may  select  expressions 
which  have  too  narrow  a  meaning.  Oftentimes,  in  a  particular  line 
of  business,  custom  may  have  attached  fairly  accurate  notions  to 
certain  words  descriptive  of  quality,  which  in  common  usage  have 
a  slightly  different  meaning.  A  seller  may  carelessly  employ  the 
word  in  the  ordinary  sense,  under  circumstances  where  the  law 
would  give  it  the  technical  interpretation. 

The  third  cause  for  the  unintentional  making  of  untrue  state- 
ments about  the  goods  arises  from  the  natural  tendency  of  the 
seller  to  give  an  answer  pleasing  to  the  buyer  in  response  to  lead- 
ing questions  from  him.  The  buyer,  interested,  will  naturally 
make  numerous  inquiries  concerning  the  goods,  and  will  phrase  his 
questions  in  leading  form ;  that  is,  so  that  the  hoped-for  response 
is  suggested  in  the  question.  It  is  the  tendency  for  one  so  interro- 
gated to  give  the  suggested  answer,  without  thinking  whether  it 
represents  his  real  judgment.  It  is  for  this  reason  that  the  law 
of  evidence  forbids  the  asking  of  leading  questions  of  witnesses; 
the  answers  thereto,  as  a  general  rule,  not  being  trustworthy. 
The  dramatic  situation  which  may  develop  in  the  negotiations  may 
easily  lead  the  seller  into  the  making  of  warranties  which,  in  his 
sober  judgment,  he  would  not  have  made. 


1130  SALES  (Part  4 

The  law  makes  some  concession  to  this  trait  of  human  nature, 
and  provides,  accordingly,  that  a  statement  of  opinion  shall  not 
be  deemed  a  warranty.  But  still  the  question  is  always  raised: 
How  may  a  statement  of  fact  be  distinguished  from  a  statement  of 
opinion?  With  this  comment  we  may  now  take  note  of  the  purely 
legal  aspects  of  express  warranties. 


SECTION  2.— EXPRESS  WARRANTIES 

Sales  Act,  Section  12.  Any  affirmation  of  fact  or  any  promise 
by  the  seller  relating  to  the  goods  is  an  express  warranty,  if  the 
natural  tendency  of  such  affirmation  or  promise  is  to  induce  the 
buyer  to  purchase  the  goods,  and  if  the  buyer  purchases  the  goods 
relying  thereon.  No  affirmation  of  the  value  of  the  goods,  nor  any 
statement  purporting  to  be  a  statement  of  the  seller's  opinion  only, 
shall  be  construed  as  a  warranty. 

(1)  A  warranty  may  take  the  form  either  of  an  affirmation  or  of 
a  promise.  An  affirmation  relating  to  the  goods  differs  from  a 
promise  relating  to  the  goods,  in  that  an  affirmation  is  in  form  a 
statement  of  a  fact  then  existing,  while  a  promise  is  in  form  a 
statement  that  the  individual  so  promising  undertakes  to  do  what- 
ever may  be  necessary  to  bring  the  fact  into  existence.  The  affir- 
mation will  be  a  statement  descriptive  of  the  quality  or  of  other 
attributes  of  the  goods.  Where  the  affirmation  consists  in  a  de- 
scription of  the  goods  given  for  the  purpose  of  enabling  the  par- 
ties to  identify  them,  this  affirmation  also  is  a  warranty,  but  it  is 
regarded  as  an  implied  warranty  rather  than  an  express  warranty. 
If  A.  is  selling  B.  a  horse,  and  the  horse  is  present,  words  de- 
scribing the  horse  will  constitute  express  warranties.  But  if  A. 
is  selling  B.  a  horse,  which  at  the  time  is  in  a  field  with  many  other 
horses,  affirmations  which  describe  the  horse  in  such  a  way  that 
he  may,  by  means  of  the  description,  be  identified,  will  be  regard- 
ed as  implied  warranties.  There  is  no  difference  in  legal  effect  be- 
tween the  tv/o  except  this :  Where  the  contract  relates  to  goods 
not  identified,  the  affirmations  descriptive  of  the  identity  of  the 
goods  makes  the  contract  one  of  sale,  as  distinguished  from  a  con- 
tract to  sell,  and  therefore  would  affect  the  time  when  title  would 
pass.  If  the  description  did  identify  the  subject-matter  of  the 
contract,  title  would  then  pass.  If  the  descriptive  statement  did 
not  sufficiently  identify  the  goods,  title  would  not  pass  until  there 
was  an  act  of  unconditional  appropriation,  assented  to  by  both 
parties.  An  affirrhation  of  fact  relating  to  the  attributes  of  the 
subject  of  the  sale,  whether  it  be  with  respect  to  ascertained  goods 
or  unascertained  goods,  are  express  warranties. 

(2)  The  definition,  set  forth  in  the  section  above  quoted,  shows 
that  it  must  be  a  particular  kind  of  affirmation ;  i.  e.,  one  of  fact, 
as  distinguished  from  one  relating  to  value,  or  which  expresses 
some  other  opinion  of  the  seller. 


Ch.  6)  WARRANTIES  1131 

(3)  It  is  to  be  noticed  that  not  all  affirmations  of  fact  may  be 
treated  as  express  warranties.  Only  those  affirmations  of  fact 
which  have  "the  natural  tendency  to  induce  the  buyer  to  purchase 
goods"  may  be  so  treated. 

(4)  Finally,  the  affirmation  of  fact  which  has  a  natural  tendency 
to  induce  the  buyer  to  purchase  the  goods,  while  it  thus  satisfies  all 
of  the  formal  requirements  of  warranty,  will  not  be  so  regarded, 
unless,  in  the  particular  case,  the  buyer  did  in  fact  purchase  the 
goods  relying  upon  such  affirmation  of  fact. 

All  of  these  four  elements  must  be  present  before  a  seller  will  be 
held  liable  for  breach  of  an  express  warranty.  The  following  cases 
illustrate  the  application  of  these  rules. 


HOBART  V.  YOUNG. 
(Supreme  Court  of  Vermont,  1891.     63  Vt.  363,  21  Atl.  612.  12  L.  R.  A.  693.) 

The  evidence  of  the  plaintiff  tended  to  show  that  in  early  June, 
1888,  he  purchased  a  pair  of  horses,  of  which  the  horse  in  question 
was  one;  that  he  first  saw  these  horses  in  May;  that  about  the  1st 
of  June  he  rode  after  them  with  the  defendant ;  and  that  the  defendant 
then  warranted  them  to  be  sound.  The  bill  of  sale  which  the  plaintiff 
signed  was  as  follows :  "Alburgh,  June  5,  1888.  J.  W.  Hobart  bo't  of 
Sumner  Young,  Esq.,  one  pair  of  black  (Pilot)  geldings,  sound  and 
kind,  $487.50  to  be  delivered  on  the  cars  at  the  depot  with  good  halters, 
duties  paid,  and  certificates  of  the  same  attached  hereto.  Rec'd.  pay- 
ment.   S.  Young." 

RowELL,  J.  *  *  *  An  important  question  is  whether  the  words 
"sound  and  kind,"  contained  in  the  bill  of  sale,  constitute  an  express 
warranty  as  matter  of  law.  The  law  of  warranty  has  undergone  much 
change  since  Chandelor  v.  Lopus,  Cro.  Jac.  4,  decided  in  the  Ex- 
chequer Chamber  in  1803.  It  was  there  held  that  an  affirmation  that 
the  thing  sold  was  a  bezoar  stone  was  no  warranty ;  for,  it  was  said, 
everv  one,  in  selling  his  wares,  will  affirm  that  they  are  good,  or  that 
the  horse  he  sells  is  sound ;  yet,  if  he  does  not  warrant  them  to  be  so, 
it  is  no  cause  of  action.  But  latterly  courts  have  manifested  a  strong 
disposition  to  construe  liberally  in  favor  of  the  purchaser  what  the  sell- 
er affirms  about  the.  kind  and  quality  of  his  goods,  and  have  been 
disposed  to  treat  such  affirmations  as  warranties  when  the  language 
will  bear  that  construction,  and  it  is  fairly  inferable  that  the  purchaser 
so  understood  it.  *  *  *  And  now  any  affirmation  as  to  the  kind 
or  quality  of  the  thing  sold,  not  uttered  as  matter  of  communication, 
opinion,  nor  belief,  made  by  the  seller  pending  the  treaty  of  sale,  for 
the  purpose  of  assuring  the  purchaser  of  the  truth  of  the  affirmation 
and  of  inducing  him  to  make  the  purchase  if  so  received  and  relied 
upon  by  the  purchaser,  is  deemed  to  be  an  express  warranty.  And 
in  cases  of  oral  contracts  it  is  the  province  of  the  jury  to  decide,  in 
view  of  all  the  circumstances  attending  the  transaction,  whether  such 
a  warranty  exists  or  not.     *     *     * 

But  when  the  contract  is  in  writing  it  is  for  the  court  to  construe  it, 
and  to  decide  whether  it  contains  a  warranty  or  not ;  *  *  *  and 
by  the  great  weight  of  recent  authority  positive  statements  in  instru- 
ments evidencing  contracts  of  sale,  descriptive  of  the  kind,  or  as- 


1132  SALES  (Part  4 

sertive  of  the  quality  and  condition  of  the  thing  sold,  are  treated  as  a 
part  of  the  contract  and  regarded  as  warranties  if  the  language  is  rea- 
sonably susceptible  of  that  construction,  and  it  is  fairly  inferable  that 
the  purchaser  understood  and  relied  upon  It  as  such.  Thus,  In  Has- 
tings V.  Lovering,  2  Pick  (Mass.)  214,  13  Am.  Dec.  420,  the  sale  note 
described  the  article  as  "prime  quality  winter  sperm  oil."  The  plain- 
tifif  declared  in  assumpsit  on  a  warranty,  and  had  judgment.  In  Hen- 
shaw  V.  Robins,  9  Mete.  (Mass.)  83,  43  Am.  Dec.  367,  the  bill  of  par- 
ticulars affirmed  the  article  to  be  indigo.  The  court  said  that  that 
imported  an  express  warranty  If  it  was  so  Intended,  and  that  it  must 
be  taken  to  have  been  so  Intended,  as  there  was  no  evidence  to  the  con- 
trary. In  Brown  v.  BIgelow,  10  Allen  (Mass.)  242,  a  case  exactly  in 
point,  these  very  words,  "sound  and  kind,"  were  held  to  constitute 
a  general  warranty  of  soundness.  In  Gould  v.  Stein,  149  Mass.  570, 
22  N.  E.  47,  5  L.  R.  A.  213,  14  Am.  St.  Rep.  455,  a  bought  and  sold 
note  described  the  article  as  "Ceara  scrap  rubber  as  per  sample,  of 
second  quality."  The  court  said  that  it  did  not  admit  of  doubt  that 
the  note  was  Intended  to  express  the  terms  of  the  sale,  and  that  the 
contract  of  the  parties  was  to  be  found  in  what  was  thus  written,  read 
in  the  light  of  the  attendant  circumstances.  Held  a  warranty  that 
the  rubber  was  of  second  quality,  and  that  the  fact  that  the  plaintiff 
made  such  examination  of  it  as  he  pleased  did  not  necessarily  do  away 
with  the  warranty. 

Osgood  v.  Lewis,  2  Har.  &  G.  (Md.)  495,  18  Am.  Dec.  317,  is  a  lead- 
ing case  on  this  subject.  There  the  bill  of  particulars  contained  a  state- 
ment that  the  article  was  "winter-pressed  sperm  oil,"  and  the  question  . 
was  whether  those  words  were  per  se  a  warranty ;  and  It  was  held  that 
they  were,  for  It  was  said  they  could  not  be  regarded  as  mere  matter 
of  opinon  or  belief,  but  as  the  assertion  of  a  material  fact  that  the  de- 
fendant assumed  to  know  and  to  warrant  the  existence  of.  In  Kearly 
V.  Duncan,  1  Head  (Tenn.)  397,  73  Am.  Dec.  179,  the  words,  "said 
negroes,  sound  in  body  and  mind,"  contained  in  a  receipt  for  the  price 
paid  for  them,  were  held  clearly  to  constitute  a  warranty  of  soundness. 
The  words,  "being  of  sound  mind  and  limb,  and  free  from  all  disease," 
in  a  bill  of  sale  of  slaves,  were  held  a  warranty  In  Cramer  v.  Brad- 
shaw,  10  Johns.  (N.  Y.)  484.  This  case  is  criticised  by  Bennett,  J., 
in  Foster  v.  Caldwell's  Estate,  18  Vt.  181,  who  would  treat  the  words 
as  a  mere  representation,  descriptive  of  the  property  sold.  But  that 
case  seems  to  have  stood  the  test  In  New  York,  while  Seixas  v.  Woods, 
2  Caines,  48,  2  Am.  Dec.  215,  and  Swett  v.  Colgate,  20  Johns.  203,  11 
Am.  Dec.  266,  to  which  he  refers,  and  which  held  that  no  warranty 
arises  from  a  description  of  the  kind  of  property  sold,  have  been  ex- 
pressly overruled  by  Hawkins  v.  Pemberton,  51  N.  Y.  198,  10  Am. 
Rep.  595,  as  not  properly  applying  the  doctrine  that  they  correctly 
announce,  wherein  a  contrary  application  is  made,  and  wherein  it  is 
held  that  there  Is  no  distinction  In  principle  between  a  representation  as 
to  quality  and  condition  and  a  representation  as  to  kind  and  character. 
And  in  1  Smith,  Lead.  Cas.  (7th  Amer.  Ed.)  341,  it  is  said  that  such  a 
distinction  is  too  refined  to  be  practicable. 

In  Yates  v.  Pym,  6  Taunt.  446,  a  description  of  bacon  in  a  sale  note 
as  "prime  singed"  was  held  to  be  a  warranty  that  it  was  prime  singed. 
So  in  Bridge  v.  Wain,  1  Starkie,  504,  the  goods  sold  were  described  in 
the  invoice  as  "scarlet  cuttings."  Held  a  warranty  that  they  answered 
the  known  mercantile  description  of  scarlet  cuttings.    The  advertise- 


Ch.  6)  WARRANTIES  1133 

ment  of  the  sale  of  a  ship  described  her  as  a  "copper-fastened  vessel," 
whereas  she  was  only  partially  copper-fastened,  and  not  what  was 
called  in  the  trade  a  "copper-fastened  vessel."  Held  a  warranty  that 
she  was  copper-fastened.  Shepherd  v.  Kain,  5  Barn.  &  Aid.  240.  A 
sold  note  described  turnip  seed  as  "Skirvin^^'s  Swedes."  Coleridge,  J., 
said  that  there  was  no  doubt  that  the  statement  was  made  by  the  de- 
fendant a  part  of  the  contract,  and  it  was  held  to  be  a  warranty  that 
the  seed  was  Skirving's.  Allan  v.  Lake,  18  Q.  B.  560.  In  Wetherill  v. 
Neilson,  20  Pa.  448,  54  Am.  Dec.  741,  the  bill  of  sale  described  the 
soda  ash  as  being  of  a  certain  strength,  whereas  it  was  of  a  less 
strength,  and  unmerchantable.  Held  no  warranty.  It  is  said  in  1 
Smith,  Lead.  Cas.  (7th  Amer.  Ed.)  343,  that  this  case  stands  almost 
if  not  quite,  alone,  and  cannot  be  reconciled  with  the  general  course 
of  decisions  in  this  country  and  in  England.  In  Barrett  v.  Hall,  1 
Aik.  269,  the  note  was  payable  in  "good  cooking-stoves."  The  court 
said  that  no  definite  quaHty  could  be  intended  from  the  term  "good," 
and  that  it  imported  nothing  but  opinion,  and  was  no  warranty,  and 
referred  to  Chandelor  v.  Lopus,  Cro.  Jac.  4,  for  authority,  which  is  no 
longer  authority.  But  we  do  not  say  that  the  court  was  wrong  in  that 
case,  for  "good"  is  a  very  common  term  of  praise  in  trade,  and,  as 
used  in  the  note,  ascribed  no  particular  quality  to  the  stoves,  and  might 
well  be  regarded,  in  that  case,  as  mere  matter  of  opinion  or  commenda- 
tion, and  as  so  understood  by  the  parties.  In  Wason  v.  Rowe,  16  Vt. 
525,  the  bill  of  sale  said  the  horse  was  "considered  sound."  Held  no 
warranty ;  and  with  good  reason,  for  "considered"  was  no  assertion  of 
a  fact,  but  a  mere  expression  of  opinion. 

The  more  recent  cases  in  this  state  recognize  the  general  rule  that 
positive  statements  of  fact  by  the  seller  in  respect  of  the  kind  or  the 
quality  of  the  thing  sold  that  constitute  a  part  of  the  contract  or  form 
its  basis,  and  that  are  fairly  susceptible  of  such  a  construction,  are  to 
be  regarded  as  warranties.  Thus  in  Beals  v.  Olmstead,  24  Vt.  114,  58 
Am.  Dec.  150,  one  of  the  reasons  given  why  the  defendant's  state- 
ments ought  to  be  regarded  as  warranties  is  that  they  were  made  pos- 
itively, and  concerning  matters  as  to  which  he  was  supposed  and  pro- 
fessed to  have  knowledge.  Therefore,  it  is  said,  he  ought  to  expect  to 
be  bound  by  them.  See,  also.  Drew  v.  Edmunds,  60  Vt.  401,  15  Atl. 
100,  6  Am.  St.  Rep.  122 ;  Enger  v.  Dawley,  62  Vt.  164,  19  Atl.  478. 
It  is  sufficiently  certain,  as  matter  of  construction,  that  the  words, 
"sound  and  kind,"  found  in  the  bill  of  sale  before  us,  were  intended  by 
the  parties  to  be  a  part  of  the  contract  of  sale,  and  as  such  it  would  be 
unreasonable  to  construe  them  as  an  expression  of  mere  opinion  when 
they  positively  ascribe  to  the  horses  a  condition  and  a  quality  that 
the  defendant  assumed  to  know  they  possessed,  and  that  he  had  pecul- 
iar means  of  knowing,  whether  they  possessed  or  not,  while  the  plain-  ■^ 
tiff  had  no  such  means. 

We  think  the  words,  reading  the  instrument  in  the  Hght  of  the  at- 
tendant circumstances,  clearly  constitute  an  express  warranty  of 
soundness  and  that  the  chief  judge  was  right  in  so  holding.  Judgment 
affirmed. 


1134  SALES  (Part  4 


DBMING  v.  DARLING. 

(Supreme  Judicial  Court  of  Massaclnisetts,  1889.    148  Mass.  504,  20  N.  E.  107, 

2   L.   R.    A.   743.) 

Action  by  Vesta  A.  Deming  against  David  H.  Darling,  for  fraud- 
ulent representations,  whereby  plaintiff's  agent,  Dr.  Charles  Jordan, 
was  induced  to  purchase  a  certain  railroad  bond.  Verdict  for  plain- 
tiff, and  defendant  excepts. 

Holmes,  J.  This  is  an  action  for  fraudulent  representations,  alleged 
to  have  been  made  to  the  plaintift''s  agent  for  the  purpose  of  inducing 
the  plaintiff  to  purchase  a  railroad  bond  from  the  defendant.    *     *     * 

Among  the  representations  relied  on,  one  was  that  the  railroad 
mortgaged  was  good  security  for  the  bonds,  and  another  was  that  the 
bond  was  of  the  very  best  and  safest,  and  was  an  "A  No.  1"  bond. 
With  regard  to  these  and  the  like,  the  defendant  asked  the  court  to 
instruct  the  jury  "that  no  representations  which  the  defendant  might 
have  made  or  did  make  to  Dr.  Jordan,  in  relation  to  the  value  of  the 
bond  in  question,  or  of  the  railroad,  its  terminals,  or  other  property 
which  were  mortgaged  to  secure  it,  with  other  bonds,  even  though 
false,  were  representations  upon  which  Dr.  Jordan  ought  to  have  re- 
lied, and  are  not  sufficient  to  furnish  any  grounds  for  this  action ;" 
and  also  "that  each  of  the  expressions,  'and  that  the  same  [meaning 
said  rail,  and  all  the  property  covered  by  the  mortgage]  was  good  se- 
curity for  said  bonds,'  'that  said  bond  was  of  the  very  best  and  saf- 
est, and  was  an  "A  No.  1  bond,"  '  are  expressions  of  opinion  of  value, 
and  even  though  false  are  not  such  representations  as  Dr.  Jordan  had 
a  right  to  rely  upon,  and  are  not  enough  to  furnish  any  grounds  for 
this  action." 

The  court  declined  to  give  these  instructions,  and  instead  instructed 
the  jury  that  "an  expression  of  opinion,  judgment,  or  estimate,  or  a 
statement  of  a  promissory  nature,  relating  to  what  would  be  in  the 
future,  so  far  as  they  were  expressions  of  opinion,  if  made  in  good 
faith,  however  strong  as  expressions  of  belief,  would  not  support  an 
action  of  deceit." 

It  will  be  seen  that  the  fundamental  dift'erence  between  the  instruc- 
tions given  and  those  asked  is  that  the  former  require  good  faith. 
The  language  of  some  cases  certainly  seems  to  suggest  that  bad  faith 
might  make  a  seller  liable  for  what  are  known  as  "seller's  statements," 
apart  from  any  other  conduct  by  which  the  buyer  is  fraudulently  in- 
duced to  forbear  inquiries.  Pike  v.  Fay,  101  Mass.  134.  But  this  is 
a  mistake.  It  is  settled  that  the  law  does  not  exact  good  faith  from 
a  seller  in  those  vague  commendations  of  his  wares  which  manifestly 
are  open  to  difference  of  opinion — which  do  not  imply  untrue  asser- 
tions concerning  matters  of  direct  observation  (Teague  v.  Irwin,  127 
Mass.  217),  and  as  to  which  "it  always  has  been  understood,  the  world 
over,  that  such  statements  are  to  be  distrusted."  *  *  *  Moreover, 
in  this  case,  market  prices,  at  least,  were  easily  accessible  to  the 
plaintiff. 

The  defendant  was  known  by  the  plaintiff's  agent  to  stand  in  the 
position  of  a  seller.  If  he  went  no  further  than  to  say  that  the  bond 
was  an  "A  No.  1"  bond,  which  we  understand  to  mean  simply  that 
it  was  a  first  rate  bond,  or  that  the  railroad  was  good  security  for  the 
bonds,  we  are  constrained  to  hold  that  he  is  not  liable,  under  the  cir- 
cumstances of  this  case,  even  if  he  made  the  statement  in  bad  faith. 


Ch.  6)  WARRANTIES  1135 

*    *    *    The  rule  of  law  is  hardly  to  be  regretted,  when  it  is  consid- 
ered how  easily  and  insensibly  words  of  hope  or  expectation  are  con- 
verted by  an  interested  memory  into  statements  of  quality  and  value, 
when  the  expectation  has  been  disappointed.     *     *     * 
Exceptions  sustained. 


Mccormick  et  ai.  v.  kelly. 

(Supreme  Court  of  Minnesota,  1881.    28  Minn.  135,  9  N.  W.  675.) 

Dickinson,  J.  This  action  was  brought  to  recover  the  amount  of 
a  promissory  note  made  by  the  defendant  to  the  plaintiffs  for  part 
of  the  purchase  price  of  a  harvester  purchased  by  the  former  from 
the  latter.  The  making  of  the  note  is  not  in  issue;  the  only  defense 
asserted  being  in  the  nature  of  a  counter  claim  for  damages  from  an 
alleged  breach  of  warranty,  on  the  part  of  plaintiffs,  in  respect  to  the 
harvester. 

By  his  answer  the  defendant  avers  that  he  first  took  the  machine  on 
trial,  and  upon  the  trial  it  proved  to  be  unsatisfactory  and  would  not 
do  good  work,  and  that  he  notified  the  plaintiffs  to  take  the  machine 
away;  whereupon  the  plaintiffs  promised  and  agreed  with  the  defend- 
ant to  put  the  machine  in  good  order;  to  furnish  certain  parts  of 
the  machine  new,  and  warranted  the  machine  to  be  well  made,  of  good 
material,  durable,  and  not  liable  to  break  or  get  out  of  order;  that  it 
would  cut  and  elevate,  grain  as  well  as  any  other  machine,  and  was  in 
all  respects  a  first-class  machine,  and  capable  of  doing  first-class  and 
satisfactory  work  as  a  harvesting  machine ;  relying  upon  which  prom- 
ises, agreements,  and  warranties,  defendant  purchased  the  machine, 
giving  the  note  in  question.     *    *     * 

The  court  further  instructed  the  jury  in  the  following  language: 
"A  vendor  may  warrant  against  a  defect  that  is  patent  and  obvious. 
*  *  *  You  sell  me  a  horse,  and  you  warrant  that  horse  to  have 
four  legs,  and  he'  has  only  three.  I  will  take  your  word  for  it.  [The 
court  then  read  in  the  hearing  of  the  jury  the  following  from  Addison 
on  Contracts :  'When  a  general  warranty  is  given  on  a  sale,  defects 
which  were  apparent  at  the  time  of  the  making  of  the  bargain,  and 
were  known  to  the  purchaser,  cannot  be  relied  on  as  a  ground  of  ac- 
tion. If  one  sells  pui-ple  to  another,  and  saith  to  him,  "This  is  scar- 
let," the  warranty  is  to  no  purpose,  for  that  the  other  may  perceive 
this;  and  this  gives  no  cause  of  action  to  him.  To  warrant  a  thing 
that  may  be  perceived  at  sight  is  not  good.']  Gentlemen,  that  is  not 
the  law  of  this  state." 

The  court  erred  in  these  instructions  to  the  jury.  It  has  always 
been  held  that  a  general  warranty  should  not  be  considered  as  apply- 
ing to  or  giving  a  cause  of  action  for  defects  known  to  the  parties  at 
the  time  of  making  the  warranty,  and  both  the  weight  of  authority 
and  reason  authorize  this  proposition,  viz. :  that  for  representations 
in  the  terms  or  form  of  a  warranty  of  personal  property  no  action 
will  lie  on  account  of  defects  actually  known  and  understood  by  the 
purchaser  at  the  time  of  the  bargain.     *     *     * 

In  the  nature  of  things  one  cannot  rely  upon  the  truth  of  that  which 
he  knows  to  be  untrue ;  and  to  a  purchaser  fully  knowing  the  facts  in 
respect  to  the  property,  misrepresentation  cannot  have  been  an  in- 
ducement or  consideration  to  the  making  of  the  purchase,  and  hence 
could  have  been  no  part  of  the  contract. 


1136  SALES  (Part  4 

It  has  often  been  said  that  a  general  warranty  may  cover  patent 
defects,  and  it  has  led  to  some  misapprehension  of  the  law.  The 
proposition  is  strictly  true,  but,  as  was  said  by  the  court  in  Marshall 
V.  Drawhorn,  27  Ga.  275,  it  is  "confined  to  those  cases  of  doubt  and 
difficulty  where  the  purchaser  relies  on  his  warranty  and  not  on  his 
own  judgment."  It  has  no  application  to  the  case  of  a  purchaser  who 
knows  the  defects  in  the  property  and  the  untruthfulness  of  the  ven- 
dor's representations.  We  do  not,  however,  mean  to  say  there  may 
not  be  a  warranty  against  the  future  consequences  or  results  from 
even  known  defects.  The  fact  that  a  portion  of  the  charge  given  at 
the  request  of  the  plaintiffs  stated  correctly  the  legal  principle  under 
consideration,  cannot  affect  the  result.  In  fact,  that  the  instructions 
to  the  jury  were  thus  inconsistent,  and  calculated  to  mislead  or  con- 
fuse rather  than  inform  and  guide  the  jury,  is,  in  itself,  a  sufficient 
reason  why  the  verdict  should  not  stand.     *     *     * 

The  order  refusing  a  new  trial  is  reversed  and  a  new  trial  is 
awarded. 


^lEICKLEY  V.  PARSONS  et  al. 
(Supreme  Court  of  Iowa,  1885.    66  Iowa,  63,  23  X.  W.  265,  55  Am.  Rep.  261.) 

Adams,  J.  There  was  evidence  tending  to  show  that  the  plaintiff 
expressly  warranted  the  brick  "to  be  good  brick  and  all  right" ;  that 
they  in  fact  were  not  all  good ;  that  there  were  in  the  kiln  between 
45,000  and  50,000  brick,  and  that  about  10,000  were  worthless;  that 
the  purchaser  saw  the  exterior  of  the  kiln,  and  that  the  brick  upon  the 
outside  appeared  to  be  good,  but  upon  the  removal  of  a  portion  of 
them  there  was  revealed  what  the  witnesses  calla  "cold  spot,"  where 
the  brick  had  been  imperfectly  burned;  that  the  "cold  spot,"  or  de- 
fective part  of  the  kiln,  could  have  been  discovered  by  the  purchaser, 
but  not  without  going  upon  the  top  of  the  kiln,  and  the  kiln  was  cov- 
ered with  three  thicknesses  of  boards,  and  some  brick  and  other  things, 
and  the  purchaser  did  not  go  upon  the  top  of  the  kiln.  The  court  in- 
structed the  jury  that  "if,  by  the  exercise  of  ordinary  care  at  the  time 
of  the  purchase,  he  (the  purchaser)  might  have  discovered  and 
known  the  character,  quality,  and  number  of  brick  in  the  kiln,  and 
failed  to  do  so,  he  cannot  recover  because  of  a  breach  of  warranty." 
The  giving  of  this  instruction  is  assigned  as  error.  In  our  opinion  the 
instruction  cannot  be  sustained. 

In  Benj.  Sales,  §  616,  the  author  says:  "A  general  warranty  does 
not  usually  extend  to  defects  apparent  on  simple  inspection,  requiring 
no  skill  to  discover  them,  nor  to  defects  known  to  the  buyer." 
Some  of  the  authorities  speak  of  the  defects  which  are  not  covered 
by  a  warranty  as  those  which  are  patent  or  obvious.  The  doctrine 
seems  to  be  that  the  warranty  as  to  such  defects  is  waived.  The  court 
may  presume,  ordinarily,  that  that  was  the  understanding.  But  we 
cannot  think  that  the  purchaser  who  has  bought  with  a  warranty  is 
to  be  careful  in  order  to  avoid  a  waiver  of  it.  The  purpose  of  exact- 
ing a  warranty  may  be  to  exempt  the  purchaser  from  the  necessity  of 
diligence.  The  court  below  was  perhaps  misled  by  a  rule  which  ap- 
plies in  a  different  kind  of  a  case.  Where  the  qviestion  is  as  to  whether 
a  representation  was  understood  to  be  a  warranty  or  mere  expression 
of  opinion,  it  may  be  important  to  inquire  whether  the  purchaser  could, 
in  the  exercise  of  ordinary  diligence,  have  formed  his  own  opinion. 


Ch.  6)  WARRANTIES  1137 

Where  a  purchaser  forms  his  own  opinion,  or  might  be  expected  to  do 
so,  it  is  the  right  of  the  seller  to  insist  that  his  representation  was  a 
mere  expression  of  opinion.  But  the  case  before  us  is  not  one  of  rep- 
resentation, where  the  words  used  might  or  might  not  be  a  warranty, 
according  to  circumstances.  The  instruction  concedes  the  fact  of 
warranty.  Now,  tlie  brick  being  warranted,  the  purchaser,  we  think, 
might  feel  excused  from  exercising  the  care  to  discover  the  defect  in 
the  kiln  which  he,  or  a  prudent  purchaser,  would  probably  have  exer- 
cised if  buying  without  a  warranty.  *  *  * 
Reversed.  

POAVERS  V.  BRIGGS. 
(Supreme  Court  of  Micliigan,  1905.     139  Mich.  664,  103  N.  W.  194.) 

Action  by  Seroll  E.  Powers  against  Albert  Briggs.  There  was  a 
judgment  for  defendant,  and  plaintiff  brings  error. 

Montgomery,  J.  This  action  was  brought  to  recover  the  price  of 
a  hay  loader  sold  and  delivered  to  the  defendant.  The  defense  was 
that  the  loader  was  bought  under  an  express  warranty  that  it  would  do 
good  work  and  would  load  hay  from  windrows,  and  that,  if  it  failed  to 
do  so,  defendant  might  return  it ;  that  it  did  not  answer  the  terms  of  the 
warranty;  and  that  defendant  returned  it.  There  was  a  sharp  con- 
test on  the  trial.  *  *  *  The  evidence  shows  that,  after  the  conversa- 
tion referred  to  in  the  request,  the  subject  was  again  taken  up,  and 
the  loader  ordered.  In  the  view  most  favorable  to  plaintiff,  it  was  a 
question  for  the  jury  as  to  whether  the  subsequent  order  had  reference 
to,  and  was  understood  to  have  reference  to  the  preceding  conversa- 
tion, and  whether  both  parties  understood  that  the  loader  was  ordered 
under  the  warranty  which  was  a  part  of  the  offer  of  the  machine  in 
the  first  instance.  The  case  of  Childs  v.  O'Donnell,  84  Mich.  533,  47 
N.  W.  1108,  is  easily  distinguished.  It  was  there  held  that  a  warranty 
on  a  sale  of  one  bill  of  goods  did  not  attach  to  a  sale  of  another  bill 
at  a  later  time.  In  the  present  case  the  negotiations  all  related  to  the 
identical  machine  delivered  to  the  defendant,  and  the  question  is  wheth- 
er all  that  was  said  during  the  negotiations  was  understood  to  have  ref- 
erence to  these  machines,  and  whether,  in  the  understanding  of  the 
parties,  the  proposed  warranty  attached  when  the  sale  was  finally 
consummated.    *     *     * 

No  error  appears.    Judgment  affirmed. 


Sales  Act,  Section  11.  (1)  Where  the  obligation  of  either  party 
to  a  contract  to  sell  or  a  sale  is  subject  to  any  condition  which  is 
not  performed,  such  party  may  refuse  to  proceed  with  the  contract 
or  sale  or  he  may  waive  performance  of  the  condition.  If  the 
other  party  has  promised  that  the  condition  should  happen  or  be 
performed,  such  first-mentioned  party  may  also  treat  the  non- 
performance of  the  condition  as  a  breach  of  warranty. 

Sales  Act,  Section  7.  (1)  Where  the  parties  purport  to  sell 
specific  goods,  and  the  goods  without  the  knowledge  of  the  seller 
have  wholly  perished  at  the  time  when  the  agreement  is  made,  the 
agreement  is  void. 

B.&  B. Bus. Law— 72 


1138  SALES  (Part  4 

(2)  Where  the  parties  purport  to  sell  specific  goods,  and  the 
goods  without  the  knowledge  of  the  seller  have  perished  in  part  or 
have  wholly  or  in  a  material  part  so  deteriorated  in  quality  as  to 
be  substantially  changed  in  character,  the  buyer  may  at  his  op- 
tion treat  the  sale — (a)  as  avoided,  or  (b)  as  transferring  the  prop- 
erty in  all  the  existing  goods  or  in  so  much  thereof  as  have  not  de- 
teriorated, and  as  binding  the  buyer  to  pay  the  full  agreed  price  if 
the  sale  was  indivisible  or  to  pay  the  agreed  price  for  the  goods  in 
which  the  property  passes  if  the  sale  was  divisible. 

Section  8.  (1)  Where  there  is  a  contract  to  sell  specific  goods, 
and  subsequently,  but  before  the  risk  passes  to  the  buyer,  without 
any  fault  on  the  part  of  the  seller  or  the  buyer,  the  goods  wholly 
perish,  the  contract  is  thereby  avoided. 

(2)  Where  there  is  a  contract  to  sell  specific  goods,  and  sub- 
sequently, but  before  the  risk  passes  to  the  buyer,  without  any 
fault  of  the  seller  or  the  buyer,  part  of  the  goods  perish  or  the 
whole  or  a  material  part  of  the  goods  so  deteriorate  in  quality  as 
to  be  substantially  changed  in  character,  the  buyer  may  at  his  op- 
tion treat  the  contract — (a)  as  avoided,  or  (b)  as  binding  the  seller 
to  transfer  the  property  in  all  of  the  existing  goods  or  in  so  much 
thereof  as  have  not  deteriorated,  and  as  binding  the  buyer  to  pay 
the  full  agreed  price  if  the  contract  was  indivisible,  or  to  pay  the 
agreed  price  for  so  much  of  the  goods  as  the  seller,  by  the  buyer's 
option,  is  bound  to  transfer  if  the  contract  was  divisible. 


ABE   STEIN   CO.   v.   ROBERTSON. 
(Ck)urt  of  Appeals  of  New  York,  1901.    167  N.  Y.  101,  60  N.  E.  329.) 

Action  by  the  Abe  Stein  Company  against  Julius  Robertson.  From 
a  judgment  for  plaintiff,  defendant  appeals. 

Martin,  J,  The  action  was  to  recover  damages  for  the  breach  of  a 
contract  between  the  parties  for  the  purchase  and  sale  of  a  quantity 
of  goatskins.  The  agreement  was  made  through  brokers,  and  evi- 
denced by  a  bought  and  sold  note  dated  May  24,  1895,  modified  by  a 
letter  dated  the  31st  of  the  same  month.  The  note  was  as  follows: 
"New  York,  May  24,  1895.  Sold,  for  account  of  Messrs.  L.  F.  Rob- 
ertson &  Son,  to  the  Abe  Stein  Company,  about  85,000  Teinsin 
goatskins,  firsts,  1%  to  2  lbs.  avg.,  expected  to  arrive  from  China,  at 
22  cts.  per  lb.  Goods  to  be  shipped  immediately  by  steamer  or  steam- 
ers to  New  York.  About  %  of  lot  to  be  medium,  black-haired  skins, 
and  the  remainder  ^  white  or  gray-haired  skins,  of  which  40  per  cent, 
medium  hair,  60  per  cent,  medium  to  long  hair.  Skins  to  be  of  the 
usual  good  quality  of  this  province.  Any  question  of  quality  to  be 
decided  by  selling  brokers,  and  their  decision  to  be  final  and  binding 
on  both  parties.  Terms,  net  cash,  and  to  be  taken  from  the  wharf. 
John  Andresen  &  Son,  Brokers."  The  modification  by  letter  was  the 
addition  of  the  usual  condition  of  "no  arrival,  no  sale."  Subsequently 
the  defendant  notified  the  brokers  of  the  arrival  of  a  portion  of  the 
goods,  which  were  inspected  by  them  in  the  presence  of  both  parties, 
whereupon  they  determined  that  the  goods  tendered  were  not  of  the 


Ch.  6)  WARRANTIES  113f> 

kind  or  quality  described  in  the  contract.  As  subsequent  shipments 
were  received,  they  were  also  examined  in  the  same  way,  and  the 
same  conclusion  was  reached  in  regard  to  them.  Upon  such  deter- 
minations the  plaintiff  refused  to  receive  the  goods  shipped,  and 
brought  this  action  for  damages  sustained  by  the  failure  of  the  defend- 
ant to  deliver  the  goods  contracted  for.     *     *     * 

The  appellant  insists  that  the  contract  was  conditional,  not  only  as  to 
its  performance,  but  as  to  its  effect,  and  that  the  provisions,  "expected 
to  arrive  from  China,"  and  "no  arrival,  no  sale,"  were,  in  effect,  an 
agreement  that  if  the  goods  referred  to  in  the  contract,  when  they  ar- 
rived, were  not  of  the  quality  prescribed,  the  contract  was  at  an  end, 
and  the  plaintiff  could  recover  nothing  for  its  breach.  Doubtless  the 
effect  of  those  provisions  was  to  relieve  the  defendant  from  any  breach 
of  the  contract  occasioned  by  the  nonarrival  of  the  goods,  provided  it 
was  not  caused  by  fault  of  the  seller.  There  are  also  other  cases  relied 
upon  by  the  appellant  where  the  existence  of  a  right  of  recovery  is 
conditional  upon  the  arrival  of  goods  of  the  quality  specified  in  the 
agreement.  But  no  such  condition  existed  in  this  case,  as  there  was 
an  express  agreement  upon  the  part  of  the  seller  to  make  shipment 
of  the  goods  particularly  specified  in  the  contract.  This  contract  was 
clearly  executory,  and  the  title  was  not  intended  to  pass  until  the  goods 
arrived  and  were  delivered.  *  *  *  But  the  principle  that,  if  the 
goods  specified  and  described  in  the  contract  do  not  arrive,  a  condi- 
tion which  terminates  the  contract  exists,  and  the  seller  is  not  liable, 
has  no  application  where  the  contract  contains  either  a  warranty  that 
the  shipment  has  been  made,  or  an  express  agreement  upon  the  part  of 
the  seller  to  make  shipment  of  goods  described.  In  the  latter  case 
the  contract  is  an  existing  and  continuing  one,  and  its  provisions  as  to 
the  quality  of  the  goods  are  not  only  conditions  precedent  to  any  ob- 
ligation upon  the  part  of  the  buyer  to  accept  them,  but,  where  the 
seller  fails  to  ship  goods  of  the, quality  required,  the  buyer  is  also  en- 
titled to  such  damages  as  he  sustains  by  reason  of  such  failure.    *    *    * 

In  this  case,  as  the  contract  required  the  defendant  to  ship  the  goods 
described  therein  immediately  by  steamer  or  steamers  to  New  York, 
he  was  bound  not  only  to  ship  goods  at  the  time  and  in  the  manner 
directed,  but  was  likewise  bound  to  ship  goods  of  the  quality  required, 
and  upon  his  failure  to  do  so  he  was  liable  for  a  breach  of  the  con- 
tract. The  parties  expressly  agreed  that  the  question  of  quality  was 
to  be  conclusively  determined  by  the  brokers.  That  was  the  only 
question  about  which  there  was  any  controversy  in  this  case.  The 
undisputed  evidence  is  that  the  brokers  decided  that  the  goods  were 
not  of  the  quality  required  by  the  contract,  and,  as  there  was  no  fraud 
or  collusion  upon  their  part,  their  decision  concluded  the  parties  upon 
that  question. 

The  conclusion  we  have  reached  in  this  case  is  :  (1)  That  the  terms, 
"expected  to  arrive,"  and  "no  arrival,  no  sale,"  apply  only  to  the 
risks- or  perils  of  navigation  or  transportation.  (2)  That  the  goods 
which  the  defendant  intended  to  deliver,  and  which  he  tendered  to  the 
plaintiff'  in  performance  of  his  contract,  having  been  determined,  in 
the  manner  provided  therein,  not  to  be  of  the  quality  which  he  con- 
tracted to  sell,  the  plaintiff  was  not  bound  to  accept  them.  (3)  It 
having  been  proved  by  undisputed  evidence  that  the  goods  which  the 
defendant  shipped  in  pursuance  of  his  contract  arrived,  and  it  having 
been  conclusively  established  in  the  manner  pointed  out  in  the  con- 


1140  SALES  (Part  4 

tract  that  they  were  not  of  the  quality  required,  the  plaintiff  was  en- 
titled to  recover  such  damages  as  he  sustained  by  the  defendant's  fail- 
ure to  deliver  goods  of  the  quality  described  in  the  agreement.  (4) 
Under  these  circumstances,  with  the  additional  one  that  there  was 
no  dispute  as  to  the  amount  of  damages  sustained,  the  court  properlv 

directed  a  verdict,  and  the  judgment  should  be  affirmed,  with  costs. 
*    *    * 


J.  A.  KIRSCH  &  CO.,  Inc.,  v.  BENYUNES. 

(Supreme  Court,  Special  Term,  New  York  County,  1919.     105  Misc.  Rep.  648, 

174  N.  Y.  Supp.  794.) 

Action  by  J.  _A._  Kirsch  &  Co.,  Incorporated,  against  Joseph  De  A. 
Benyunes.  Plaintiff's  motion  for  judgment  sustaining  its  demurrers 
to  the  defenses  denied. 

Lehman,  J.  The  complaint  herein  alleges  that  the  plaintiff  and 
the  defendant  on  the  27th  day  of  November,  1916,  entered  into  a  writ- 
ten contract,  a  copy  of  which  is  annexed  to  the  complaint.  The  material 
parts  of  the  said  contract  are  as  follows : 

"Sold  to  Messrs.  J.  A.  Kirsch  &  Co.,  Inc.,  New  York,  for  account 
of  Mr.  J.  D.  A.  Benyunes,  New  York.  Quantity  (about)  twenty-eight 
hundred  (2,800)  baskets  of  about  110  ne?each,  crop  1916,  good  qual- 
ity Spanish  chestnuts  at  seven  cents  (7c)  per  pound  net,  ex  dock  New 
York.  Shipment  reported  by  cable  to  be  afloat  per  S.  S.  Elef  K.  Vene- 
zelos,  scheduled  to  be  due  here  to-day." 

The  complaint  further  alleges  that  the  said  2,800  baskets  of  chest- 
nuts duly  arrived  on  the  Elef  K.  Venezelos  in  the  city  of  New  York 
on  the  28th  day  of  November,  1916,  but  the  defendant  repeatedly  neg- 
lected and  refused  to  deliver  the  said  2,800  baskets  of  Spanish  chest- 
nuts purchased  by  the  plaintiff  from  him,  and  still  fails  and  refuses 
to  deliver  the  same.  The  defendant  claims  that  the  steamer  Venezelos 
sailed  from  the  port  of  Lisbon,  Portugal,  on  or  about  November  12, 
1916,  and  did  not  arrive  at  the  port  of  New  York  until  December  2, 
1916;  that  the  chestnuts  covered  by  the  agreement  of  November  27th 
between  the  parties  arrived  in  a  moldy  condition,  and  that  the  depart- 
ment of  agriculture  directed  that  the  entire  shipment  should  be  de- 
stroyed, except  approximately  228  baskets  of  the  said  chestnuts,  which 
had  not  deteriorated,  and  which  were  found  to  have  passed  the  stand- 
ards of  the  United  States  government.  The  defendant  has  pleaded 
this  claim,  in  various  forms,  in  five  separate  affirmative  defenses,  and 
the  plaintiff  has  demurred  to  the  sufficiency  thereof.  Upon  this  motion 
the  court  must  first  consider  whether  the  facts  claimed  by  the  defend- 
ant could  constitute  a  defense  to  an  action  for  nondelivery  of  the  chest- 
nuts.    *     *     * 

The  first  affirmative  defense  alleges  in  eft'ect  that  the  contract  of  sale 
was  for  a  specific  shipment  or  consignment  of  2,800  baskets  of  Span- 
ish chestnuts,  at  that  time  aboard  the  steamer  Venezelos,  on  its  way 
to  the  port  of  New  York ;  that  subsequent  to  the  making  of  the  afore- 
mentioned contract  of  sale  of  the  said  consignment  of  chestnuts,  and 
before  their  arrival  at  a  dock  in  the  port  of  New  York,  without  any 
fault  on  the  part  of  the  defendant,  part  of  the  consignment  of  chest- 
nuts perished,  or  the  whole  or  a  material  part  of  said  consignment  of 
chestnuts  so  deteriorated  in  quality  as  to  be  substantially  changed  in 
character.     *     *     * 


Ch.  6)  WARRANTIES  1141 

It  is  quite  evident  that  the  defendant  in  pleading  these  defenses 
intended  to  allege  facts  which  would  bring  this  case  within  the  rule 
announced  in  sections  7  and  8  of  the  Sales  Act.  The  plaintiff,  how- 
ever, urges  that  these  sections  have  no  application,  because  (1)  under 
the  agreement  between  the  parlies  the  defendant  did  not  sell  specific 
goods  on  the  steamship  Venezelos,  but  merely  agreed  to  deliver  2,800 
baskets  of  chestnuts,  complying  with  a  certain  description  or  warranty, 
and  was  absolutely  bound  to  ship  and  deliver  such  goods ;  and  that 
(2)  if  the  contract  was  for  the  sale  of  specific  goods  it  contained  an 
express  warranty  that  the  goods  were  of  good  quality,  and  that  the 
rule  announced  in  the  statute  has  no  application  to  a  sale  where  there 
is  an  express  warranty  of  quality.  It  seems  to  me  quite  clear  under 
the  terms  of  the  written  contract  that  the  defendant  agreed  to  sell  and 
deliver  certain  goods  described  in  the  contract  and  that  the  contract 
was  conditional  upon  the  arrival  of  the  steamship  with  the  goods  de- 
scribed in  the  contract  upon  it. 

In  the  case  of  Shields  v.  Pettie,  4  N.  Y.  122,  a  broker  negotiated  a 
contract  in  these  words :  "Sold  for  Messrs.  Geo.  W.  Shields  &  Co., 
to  Messrs.  Pettie  &  Mann,  150  tons  Gartshemi  pig  iron,  No.  1,  at  $29 
per  ton,  one-half  at  6  mos.,  one-half  cash,  less  4  pr.  ct.,  on  board 
Siddons."  It  was  understood  by  both  parties  that  the  ship  Siddons  was 
at  sea  when  the  contract  was  made,  and  she  arrived  at  the  port  of 
New  York  about  10  days  afterwards  with  the  quantity  of  iron  con- 
tracted for,  but  which  turned  out  not  to  be  the  quality  denominated  No. 
1.  The  court  there  held :  "There  was  no  warranty,  express  or  implied, 
either  that  any  iron  should  arrive,  or  that  arriving,  it  should  be  of  a 
particular  quality.  One  hundred  and  fifty  tons  of  Gartsherni  pig  iron 
of  the  quality  denominated  No.  1  was  expected  to  arrive  by  the  Sid- 
dons, and  the  contract  was  to  the  effect  that,  if  that  quantity  and  qual- 
ity of  iron  did  so  arrive,  one  party  should  sell  and  the  other  should  re- 
ceive it  at  a  certain  price  per  ton.  The  iron  called  for  by  the  contract 
did  not  arrive,  but  iron  of  a  different  quality,  and  I  think  the  contract 
was  at  an  end." 

It  seems  to  me  that  the  same  rule  of  law  applies  to  the  facts  in  the 
present  case  as  pleaded  by  the  defendant.  The  defendant  agreed  under 
that  contract  to  sell  to  the  plaintiff  certain  specific  goods  described 
therein,  which  both  parties  evidently  believed  to  be  upon  the  steamship 
Venezelos.  The  defendant  did  not  agree  to  deliver  and  the  plaintiff 
did  not  agree  to  accept  any  goods  of  similar  kind  which  might  arrive 
upon  another  steamship.  No  goods  of  that  description  arrived  on  the 
steamship  Venezelos,  and  the  contract  to  sell  was  therefore  at  an  end. 
The  authority  of  the  case  of  Shields  v.  Pettie,  supra,  has  apparently 
never  been  questioned  in  this  state,  although  there  are  decisions  which 
distinguish  and  perhaps  limit  the  application  of  that  decision.  In  the 
case  of  Abe  Stein  Co.  v.  Robertson,  167  N.  Y.  101,  60  N.  E.  329,  the 
defendant  agreed  to  sell  certain  goatskins  "expected  to  arrive  from 
China,  at  22  cents  per  pound.  Goods  to  be  shipped  immediately  by 
steamer  or  steamers  to  New  York."  Thereafter  the  defendant  did  ship 
goatskins  from  China,  but  when  they  arrived  they  were  not  of  the 
quality  prescribed.  In  that  case  the  court  held  that  the  right  of  recov- 
ery in  the  buyer  was  not  conditional  upon  the  arrival  of  the  goods  of 
the  quality  specified  in  the  agreement,  stating:  "The  principle  that,  if 
the  goods  specified  and  described  in  the  contract  do  not  arrive,  a  con- 
dition which  terminates  the  contract  exists  and  the  seller  is  not  liable. 


1142  SALES  (Part  4 

has  no  application  where  the  contract  contains  either  a  warranty  that 
the  shipment  has  been  made,  or  an  express  agreement  upon  the  part 
of  the  seller  to  make  shipment  of  goods  described." 

In  the  present  case  it  seems  to  me  quite  evident  that  the  written  con- 
tract contained  no  warranty  that  the  shipment  had  been  made  and  no 
express  agreement  upon  the  part  of  the  seller  to  make  a  shipment  of 
goods  described,  but  that,  on  the  contrary,  the  contract  was  made  in  re- 
liance upon  a  report  that  such  goods  had  been  shipped  on  the  steamer 
Venezelos,  and  was  conditioned  upon  the  arrival  of  that  steamer  with 
such  goods.  It  may,  however,  be  urged  that  the  words  "good  qual- 
ity" are  not  words  of  description,  but  constitute  a  warranty  by  the 
defendant,  and  that,  since  2,800  baskets  of  Spanish  chestnuts  as  de- 
scribed in  the  contract  arrived  on  the  steamship  Venezelos,  the  condi- 
tion upon  which  the  vendor's  liability  depends  was  fulfilled,  and  the 
vendor  was  obliged  to  deliver  the  goods  described  in  the  contract  of 
sale,  and  in  addition  to  comply  with  his  collateral  warranty  that  the 
goods  were  of  good  quality.     *     *     * 

In  my  opinion,  however,  these  words  do  not  constitute  a  collateral 
warranty,  but  constitute  merely  a  description  of  the  goods  covered  by 
the  contract  of  sale.  It  is  true  that  in  the  case  of  Egbert  v.  Hanford 
Produce  Co.,  92  App.  Div.  252,  86  N.  Y.  Supp.  1118,  the  court  stated: 
"The  rule  seems  to  be  well  settled  that  upon  a  sale  of  personal  prop- 
erty, where  inspection  of  it  is  not  possible  at  the  time,  and  the  seller 
knows  the  quality  and  the  buyer  does  not,  the  representations  made  by 
the  seller  as  to  quality  are  to  be  regarded  as  a  warranty."  In  the  pres- 
ent case,  however,  there  is  nothing  to  show  that  the  seller  knew  the 
quality.  On  the  contrary,  the  goods  had  at  that  time  been  upon  the 
ocean  more  than  15  days,  and  the  answer  specifically  alleges  that  they 
had  deteriorated  in  quality  without  the  knowledge  of  the  defendant. 

Moreover,  the  first  and  second  affirmative  defenses  a'lege  deterio- 
ration  after  the  making  of  the  contract,  and  the  defendant  could  cer- 
tainly not  have  had  any  knowledge  at  that  time  that  they  would  not 
deteriorate  thereafter.  I  have  not  overlooked  *  *  *  section  11  of 
the  Sales  Act.  Under  this  provision  the  distinction  between  an  im- 
plied warranty  of  condition  that  the  goods  sold  shall  comply  with  the 
description  and  an  express  warranty  that  the  goods  shall  be  of  the 
quality  named  is  for  most  purposes  destroyed. 

Before,  however,  a  party  may  treat  the  nonperformance  of  the  con- 
dition as  a  breach  of  warranty,  it  must  appear  that  the  other  party  has 
actually  promised  that  the  condition  should  happen  or  be  performed ; 
whereas,  in  the  present  case,  the  contract  is  certainly  susceptible  of  the 
interpretation  that  the  defendant  did  not  agree  that  the  goods  to  be 
delivered  under  the  contract  should  comply  with  the  description,  but 
merely  agreed  that  if  such  goods  arrived  it  would  deliver  them  for 
the  agreed  price  to  the  plaintiff.  If  these  views  are  correct,  then  the 
fact  that  2,800  baskets  of  good  quality  chestnuts  did  not  arrive  on 
the  steamship  as  contemplated  by  the  parties  would  in  itself  and  with- 
out regard  to  sections  7  and  8  of  the  Sales  Act  put  an  end  to  the 
contract  and  release  the  defendant  from  any  obligation  thereunder,  for 
the  defendant's  promise  to  sell  and  deliver  such  goods  was  based  upon 
a  condition  which  was  never  fulfilled.  On  the  other  hand,  if  the  con- 
tract be  regarded  as  a  contract  to  sell  specific  goods  which  actually 
arrived  in  New  York  upon  that  steamer,  and  the  description  was 
inserted  merely  for  the  purpose  of  identifying  the  goods,  then  sec- 


Ch.  6)  WARRANTIES  1143 

tions  7  and  8  of  the  Sales  Act  apply,  and  if  the  goods  had  perished  at 
the  time  when  the  agreement  was  made,  or  the  goods  without  the 
knowledge  of  the  seller  had  deteriorated  in  quality,  so  as  to  be  substan- 
tially changed,  or  if  after  the  contract  was  made  the  goods  perished  or 
so  deteriorated  in  quality,  the  defendant  could  not  be  held  liable  for 
the  loss  which  occurred  without  his  fault.  In  other  words,  the  de- 
fendant is  clearly  not  bound  under  this  contract  to  deliver  the  2,800 
baskets  of  Spanish  chestnuts  of  good  quality  and  in  good  condition, 
unless  he  has  expressly  and  unconditionally  agreed  to  sell  and  deliver 
such  chestnuts,  and  I  think  that,  if  the  allegations  of  the  answer  are 
true,  the  defendant  has  not  made  such  a  promise.     *     *     * 

For  these  reasons  the  plaintiff's  motion  for  judgment  sustaining  the 
demurrers  is  denied.     *     *     * 


section  3.— implied  warranties  considered 

Generally 

In  the  law  of  sales  of  personal  property  there  are  six  kinds  of 
implied  warranties:  (1)  The  warranty  of  title;  (2)  the  implied 
warranty  that  the  goods  sold  shall  correspond  to  the  description  ; 
(3)  the  implied  warranty  that  the  goods  sold  shall  correspond  to 
the  sample;  (4)  the  implied  warranty  of  merchantability;  (5) 
the  implied  warranty  of  reasonable  fitness  for  a  particular  pur- 
pose ;  and  (6)  any  implied  warranty  in  addition  to  those  enumer- 
ated, which  is  annexed  by  custom  or  usage  of  trade. 

An  implied  warranty  differs  from  an  express  warranty  chiefly  in 
the  character  of  the  evidence  necessary  to  prove  its  existence. 
Express  warranties  arise  out  of  the  express  language  employed  by 
the  seller.  Implied  warranties  are  not  to  be  found  expressed  in 
words  in  the  contract.  The  general  character  of  the  transaction 
gives  rise  to  the  inference  that  the  parties  intended  such  an  obliga- 
tion to  attach.  At  least,  some  implied  warranties  rest  upon  the 
assumed  intention  of  the  parties ;  others  are  not  founded  so  much 
upon  the  assumed  intention  of  the  parties  as  they  are  upon  a 
rule  of  law  which  imposes  the  obligation  irrespective  of  intention. 
However,  no  implied  warranty  is  so  essentially  a  part  of  a  con- 
tract of  sale  that  the  parties  cannot  provide  that  none  of  them 
shall  be  deemed  a  part  of  their  contract.  If  such  is  their  intention, 
the  parties  must  employ  language  which  clearly  shows  that  it 
was  their  intention  to  eliminate  all  implied  warranties;  otherwise, 
the  law  will  assume  that  they  are  still  present. 


SECTION  4.— IMPLIED  WARRANTY  OF  TITLE 

We  have  already  noticed  that  a  seller  of  a  negotiable  instrument 
warrants  that  he  has  title  thereto,  and  this  is  so  even  where  he 
indorses  "without  recourse"  or  transfers  bearer  paper  by  delivery, 
though  in  the  latter  case  his  warranty  runs  only  to  his  purchaser, 


1144  SALES  (Part  4 

and  not  to  any  other  subsequent  holder,  while  in  the  former  case 
the  warranty  extends  to  all  subsequent  holders. 

In  sales  of  tangible  personal  property  there  is  likewise  an  im- 
plied warranty  that  the  seller  has  title,  or  that  he  has  the  power 
to  transfer  a  title,  and  that  there  are  no  incumbrances  upon  the 
property.  A  seller  of  personal  property  will  therefore  be  liable  to 
the  buyer,  even  though  the  contract  of  sale  does  not  expressly  so 
provide,  if  the  buyer  is  forced  to  surrender  the  property  bought  to 
some  person  who  really  owned  the  property  or  held  a  mortgage 
on  it  at  the  time  of  the  sale.  The  provisions  of  the  Sales  Act  are  as 
follows : 

Section  13.  In  a  contract  to  sell  or  a  sale,  unless  a  contrary  in- 
tention appears,  there  is — (1)  An  implied  warranty  on  the  part  of 
the  seller  that  in  the  case  of  a  sale  he  has  a  right  to  sell  the  goods, 
and  in  the  case  of  a  contract  to  sell  he  will  have  a  right  to  sell 
the  goods  at  the  time  when  the  property  is  to  pass.  (2)  An  im- 
plied warranty  that  the  buyer  shall  have  and  enjoy  quiet  posses- 
sion of  the  goods  as  against  any  lawful  claims  existing  at  the  time 
of  the  sale.  (3)  An  implied  warranty  that  the  goods  shall  be 
free  at  the  time  of  the  sale  from  any  charge  or  encumbrance  in 
favor  of  any  third  person,  not  declared  or  known  to  the  buyer 
before  or  at  the  time  when  the  contract  or  sale  is  made.  (4) 
This  section  shall  not,  however,  be  held  to  render  liable  a  sheriff, 
auctioneer,  mortgagee,  or  other  person  professing  to  sell  by  virtue 
of  authority  in  fact  or  law  goods  in  which  a  third  person  has  a  legal 
or  equitable  interest. 

There  was  a  time,  fairly  recent,  when  the  doctrine  of  caveat 
emptor — let  the  buyer  beware — cast  upon  the  buyer  the  risk  that 
the  seller  had  title,  but  that  rule,  even  before  the  Sales  Act,  was 
changed.  In  Chapter  IV  we  discussed  the  various  situations  when 
a  seller  did  not  have  the  power  to  transfer  title  to  an  innocent 
buyer.  In  all  those  cases,  therefore,  where  the  seller  did  not  pos- 
sess either  the  legal  right  or  the  legal  power  to  transfer  a  title 
to  the  innocent  purchaser,  the  property  will  eventually  be  taken 
from  him  by  the  true  owner.  In  this  event  the  buyer  will  have 
his  remedy  back  against  his  vendor  for  the  breach  of  the  latter's 
implied  warranty  of  title.  Of  course,  it  is  possible  for  one  to  sell 
merely  his  interest  in  property,  or  it  is  even  possible  for  the  buyer 
to  assume  the  sole  risk  of  the  seller's  having  any  interest  in  the 
property,  but  before  a  court  will  so  construe  the  contract  there 
must  be  clear  evidence  that  the  parties  intended  to  negative  the 
implied  warranty  of  title. 


KIRKPATRICK  v.  KEPLER  et   al. 
(Supreme  Court  of  "Wisconsin,  1917.     1G4  Wis.  558,  160  N.  "W.  1047.) 

Action  by  John  Kirkpatrick  against  A.  L.  Kepler,  Frank  E.  Walker, 
and  others.  From  a  judgment  for  defendants  dismissing  the  com- 
plaint, plaintiff  appeals. 


Ch.  6)  WARRANTIES  1145 

The  plaintiff  is  a  dealer  in  cheese  in  Richland  Center,  and  on  Sep- 
tember 1,  1913,  paid  the  defendants  A.  L.  Kepler,  A.  II.  Ray,  C.  11. 
Babb,  L.  C.  Brown,  James  Draper,  Fred  McMillan,  E.  E.  Kepler,  S. 
Roudebush,  William  Wanless,  and  Joseph  E.  Davis,  $690.27  for  83 
boxes  of  cheese  at  the  then  market  price.  These  named  defendants 
had  been  patrons  of  a  cheese  factory  in  Richland  Center  owned  by  one 
Walker,  for  whose  estate  the  defendant  Christie  Walker  was  ad- 
ministratrix. These  83  boxes  of  cheese  had  been  delivered  on  June 
20,  1913,  to  one  H.  J.  Bamford  at  his  cold  storage  warehouse  in  Rich- 
land Center  under  an  arrangement  for  selling  the  same.  On  June 
23d  and  27th  Bamford  gave  two  warehouse  receipts  for  this  cheese 
to  the  First  National  Bank  of  Richland  Center  for  his  then  indebted- 
ness to  said  bank.  Shortly  thereafter  Bamford  was  adjudicated  a 
bankrupt,  and  appears  to  have  made  a  composition  with  his  creditors, 
in  which  composition  none  of  the  defendants  appear  to  have  partic- 
ipated. 

After  the  bankruptcy  of  Bamford  the  said  bank  which  owned  the 
storage  warehouse  occupied  by  Bamford  leased  the  same  to  plaintiff 
who,  on  August  8th,  gave  a  warehouse  receipt  to  the  bank  for  all  the 
cheese  he  found  in  said  warehouse  on  taking  possession,  which  in- 
cluded the  83  boxes  in  question  here.  This  warehoiise  receipt  was  not 
given  on  account  of  any  obligation  owing  to  the  bank  by  plaintiff. 

Shortly  before  the  plaintiff  paid  the  defendants  for  this  cheese  he 
talked  with  their  attorney  and  then  with  some  of  the  defendants  about 
the  purchase,  and  as  a  result  of  such  conversations  an  instrument 
[a  bond]  was  drawn  by  defendants'  attorney  and  submitted  by  the 
plaintiff  to  his  attorney,  and  which  was  signed  by  all  the  defendants 
other  than  Walker,  and  delivered  to  plaintiff. 

EscHWKiLER,  J.  The  plaintiff'  seeks  to  recover  the  amount  he  paid 
to  the  defendants  for  the  83  boxes  of  cheese  on  the  theory  that  there 
was  a   failure  of  consideration  and  a  breach  of   warranty  of   title. 

By  section  1684tl3,  subsec.  1,  it  is  provided  that  in  a  contract  of 
sale,  unless  a  contrary  intention  appears,  there  is  an  implied  warran- 
ty on  the  part  of  the  seller  that  he  has  a  right  to  sell  the  goods.  By 
the  third  subdivision  of  the  same  section  there  is  an  implied  warranty 
that  the  goods  shall  be  free  at  the  time  of  the  sale  from  any  charge 
or  incumbrance  in  favor  of  any  third  person  not  declared  or  known 
to  the  buyer  before  or  at  the  time  when  the  sale  is  made. 

The  general  rule  is  well  established  that  there  is  an  implied  war- 
ranty of  title  in  a  sale  of  chattels  in  possession  of  the  seller  for  a  fair 
price,  where  a  contrary  intention  is  not  shown  from  the  surrounding 
circumstances.     *     *     * 

The  question  in  this  case  really  is  whether  plaintiff",  when  he  paid 
the  defendants  full  market  price,  purchased  cheese  or  a  lawsuit.  If 
he  bought  the  cheese,  there  was  by  law  an  implied  warranty  of  right 
to  sell  in  the  vendors ;  if  it  was  intended  by  the  parties  that  he  was 
to  purchase  all  the  possibilities  of  a  lawsuit,  then  tlie  bond  was  incon- 
sistent with  such  purpose.  If  the  purpose  of  the  bond  was  to  limit 
the  form  of  the  lawsuit  which  defendants  undertook  to  assume  the 
care  and  expense  of,  then  such  limitation  in  no  wise  contradicts  the 
implied  warranty  of  title  under  the  statute,  and  questions  concerning 
the  same  could  only  come  up  if  suit  were  brought  upon  the  bond. 

The  uncontradicted  evidence  shows  that  the  warehouse  receipt  given 


1146  SALES  (Part  4 

by  plaintiff  to  the  bank  at  the  time  of  the  taking  possession  of  the 
wareliouse  was  without  consideration,  and  in  no  wise  altered  the  re- 
spective positions  of  the  parties  to  this  action,  except  as  it  might  affect 
the  right  to  bring  a  suit  on  the  bond ;  but,  that  not  being  before  us, 
the  giving  of  the  receipt  is  entirely  immaterial.     *     *     * 

Judgment  reversed,  and  cause  remanded,  with  directions  to  dismiss 
the  complaint  as  to  the  defendant  Christie  Walker,  and  to  enter  judg- 
ment in  favor  of  plaintiff  against  the  other  defendants  for  the  amount 
claimed. 

WiNSLOW,  C.  J.  (dissenting).  I  confess  that  I  cannot  understand 
the  reasoning  upon  which  the  decision  is  based.  To  me  the  evidence 
tells  a  very  plain  and  simple  story.  The  parties  on  both  sides  knew 
that  there  was  a  dispute  as  to  the  title  of  this  cheese,  and  that  the  bank 
claimed  to  own  it.  The  plaintiff  had  in  fact  gone  so  far  as  to  acknowl- 
edge the  bank's  title  by  giving  a  warehouse  receipt  therefor  to  the 
bank  when  he  took  possession  of  the  storehouse.  So  when  the  par- 
ties met  to  negotiate  for  the  sale,  there  was  no  misapprehension  about 
the  situation,  the  plaintiff*  knew  that  the  defendants  claimed  title  as 
the  original  manufacturers  of  the  cheese,  and  that  the  bank  claimed 
title  through  Bamford,  in  whose  hands  the  defendants  had  placed  it. 

The  subject  as  to  what  remedy  the  plaintiff  should  have  in  case 
the  defendants'  claim  of  title  proved  invalid  was  discussed,  and  it  was 
finally  agreed  that  the  defendants  should  give  the  bond  or  undertaking 
set  forth  in  the  statement  of  facts.  Had  this  bond  been  signed  by 
sureties,  there  would  be  logical  ground  for  the  conclusion  that  it  was 
given  to  increase  the  plaintiff's  security,  but  it  was  not.  It  was  signed 
only  by  the  parties  who  claimed  to  own  the  cheese.  These  parties 
would  all  be  liable  for  the  value  of  the  cheese  on  their  implied  war- 
ranty, had  nothing  been  said  about  security,  and  this  liability  would 
not  depend  on  the  successful  results  of  an  action  of  replevin  or  trover. 
The  liability  on  the  bond,  therefore,  is  a  limited  liability,  considerably 
more  restricted,  though  included  in  the  liability  resulting  from  implied 
warranty  of  title. 

It  is  a  familiar  legal  principle  that  the  giving  of  express  limited 
warranties  excludes  and  negatives  the  idea  that  more  comprehensive 
warranties  were  intended,  "and  repels  any  implication  of  law  to  that 
effect."  *  *  *  Hence  there  was  no  implied  warranty  here  because 
the  "contrary  intention  appears,"  and  in  such  cases  the  statute  in  ex- 
press terms  declares  that  there  is  no  implied  warranty.     *     *     * 


SECTION  5.— IMPLIED  WARRANTY  THAT  THE  GOODS 
SHALL  CORRESPOND  TO  THE  DESCRIPTION 

Sales  Act,  Section  14.  Where  there  is  a  contract  to  sell  or  a 
sale  of  goods  by  description,  there  is  an  implied  warranty  that  the 
goods  shall  correspond  with  the  description  and  if  the  contract  or 
sale  be  by  sample,  as  v/ell  as  by  description,  it  is  not  sufficient 
that  the  bulk  of  the  goods  corresponds  with  the  sample  if  the 
goods  do  not  also  correspond  with  the  description. 

The  word  "description,"  as  here  used,  means  some  statement 
concerning  the  goods  made  for  the  sole  purpose  of  enabling  the 


Ch.  6)  WARRANTIES  1147 

parties  to  identify  or  pick  out  the  goods.  The  term  as  here  used 
does  not  include  statements  concerning  the  quality  of  the  goods. 
To  illustrate:  If  A.  called  his  grocer  over  the  telephone  and  said, 
"Send  me  one  pound  of  creamery  butter,"  and  the  grocer  agreed 
to  do  so,  the  expression  "creamery  butter"  is  a  statement  descrip- 
tive of  the  goods,  as  the  term  "description"  is  used  in  this  sec- 
tion. The  grocer,  therefore,  impliedly  warrants  that  the  butter 
which  he  sends  is  "creamery  butter."  He  would  break  his  war- 
ranty if  he  sent  "home-made  butter"  or  "oleomargarine."  If  the 
grocer  sent  creamery  butter  which  was  unpalatable,  there  would 
be  no  breach  of  the  warranty  in  section  14;  that  is,  section  14  does 
not  attach  any  warranty  of  quality.  We  shall  discuss  the  implied 
warranty  of  quality  in  section  7. 

Notice  that  this  section  applies  only  when  there  is  either  a  con- 
tract to  sell  or  a  sale  of  goods  to  be  identified  by  the  description. 
If  the  goods  are  identified  by  looking  at  them,  or  by  touching  them, 
such  a  contract  to  sell,  or  sale,  is  not  by  description.  Hence,  in 
our  supposed  case,  if  A.,  instead  of  calling  her  grocer  over  the 
telephone,  had  gone  to  the  store,  and  upon  seeing  some  creamery 
butter  in  the  refrigerator  had  said,  "I  want  a  pound  of  that  cream- 
ery butter,"  this  would  not  be  a  sale  by  description.  Obviously 
there  is  no  necessity  for  applying  section  14  in  such  a  case.  When 
section  14  applies  at  all,  it  will  make  no  difference  whether  the 
seller  is  a  dealer  or  not.  The  section  includes  all  sellers — casual 
sellers,  as  well  as  dealers,  manufacturers,  etc. 


INTERSTATE  GROCEPw  CO.  v.  GEORGE  WM.  BENTLBY  CO. 

(Supreme  Judicial  Court  of  Massachusetts,  1913.     214  Mass.  227, 
101    N.   E.   147.) 

Action  by  the  Interstate  Grocer  Company  against  the  George  Wm. 
Bentley  Company.  Judgment  for  plaintiff,  and  defendant  brings  excep- 
tions. 

RuGG,  C.  T-  This  is  an  action  of  contract  to  recover  damages  for 
an  alleged  breach  of  an  implied  condition  or  warranty  that  certain 
canned  sardines  purchased  by  the  plaintiff  were  merchantable.  The 
plaintiff  was  a  wholesale  grocer  in  Missouri.  In  the  summer  of  1907 
it  placed  an  order  with  brokers  in  Missouri  for  five  hundred  cases  of 
"14  oil  sardines  and  200  cases  of  %  mustard  sardines."  The  broker 
sent  the  order  to  the  Maddocks  Packing  Company,  a  corporation  en- 
gaged in  the  business  of  packing  sardines  in  Maine.  That  company 
had  an  arrangement  with  the  defendant  whereby  it  placed  sardine's 
as  fast  as  packed  in  storage  in  a  Portland  warehouse,  taking  ware- 
house receipts  in  the  defendant's  name.  The  defendant  upon  delivery 
to  it  of  the  warehouse  receipts  advanced  to  the  packing  company  a  per- 
centage of  the  value  of  the  stored  goods  upon  which  advancements  the 
company  paid  interest.  Orders  received  by  the  packing  company  for 
sardines  were  referred  to  the  defendant  for  approval,  and  the  pro- 
ceeds of  goods  which  were  shipped  from  those  on  storage  were  paid 
to  the  defendant.    On  receipt  of  the  plaintift''s  order  the  packing  com- 


1148  SALES  (Part  4 

pany  wrote  to  the  defendant,  with  a  request  for  shipping  orders,  so  that 
the  goods  might  be  sent  the  following  week.  *  *  *  The  goods 
were  shipped  and  an  invoice  was  sent  in  the  name  of  the  defendant  to 
the  plaintiff,  and  payment  was  made  by  the  plaintiff  to  the  defendant, 
which  credited  it  on  its  account  against  the  packing  company.  There 
was  testimony  from  which  it  might  have  been  found  that  the  goods 
were  not  merchantable  when  delivered  to  the  plaintiff.     *     *     * 

Upon  the  sale  of  goods,  by  name  or  description,  in  the  absence  of 
some  other  controlling  stipulation  in  the  contract,  a  condition  is  im- 
plied that  the  goods  shall  be  merchantable  under  that  name.  They  must 
be  goods  known  in  the  market  and  among  those  familiar  with  that 
kind  of  trade  by  that  description,  and  of  such  quality  as  to  have  value. 
This  is  not  a  warranty  of  quality.  It  does  not  require  any  particular 
grade.  It  is  a  requirement  of  identity  between  the  thing  which  is  de- 
scribed as  the  subject  of  the  trade  and  the  thing  proffered  in  perform- 
ance of  it.  The  buyer  is  entitled  to  receive  goods  fairly  answerable 
to  the  description  contained  in  his  contract  of  sale.  It  does  not  mat- 
ter whether  the  deleterious  characteristic  is  latent  or  obvious,  provided 
it  goes  to  the  extent  of  changing  the  nature  of  the  goods,  so  that  they 
have  no  value  in  the  market  under  the  designation  contained  in  the 
contract  of  sale.  This  is  a  general  rule  applicable  alike  to  all,  whether 
they  be  manufacturers  or  dealers  or  merely  sellers.     It  was  declared 

early  in  this  commonwealth,  and  has  been  adhered  to  consistently. 

*  *     * 

This  being  the  governing  principle,  it  is  of  no  consequence  whether 
the  seller  is  a  manufacturer  or  not,  or  whether  the  defect  is  hidden  or 
discoverable  by  inspection.  Upon  a  sale  even  by  a  casual  owner  of 
sardines,  he  is  bound  to  deliver  something  which  answers  that  descrip- 
tion in  the  trade.     If  he  does  not,  he  does  not  perform  his  contract. 

*  *  *  This  rule  is  quite  apart  from  instances  where  the  sale  is  of 
specifically  defined  goods,  whether  open  to  the  inspection  of  the  parties 
or  not,  where  the  rule  of  caveat  emptor  governs.  *  *  *  It  is  dis- 
tinct also  from  a  sale  expressly  or  avowedly  to  the  knowledge  of  both 
parties  for  a  particular  purpose,  as  to  which  another  rule  prevails. 

*  *  *  All  these  rules  are  different  statements  of  the  principle  that 
a  buyer  has  a  right  to  get  that  which  he  had  bought.  They  deal  not 
with  a  warranty  of  quality  but  with  a  condition  of  the  contract.  They 
touch  the  identity  of  the  subject  with  that  tendered  in  performance  of 
it.  This  principle  also  is  quite  separate  from  that  frequently  applied 
in  purchases  from  manufacturers  and  sometimes  from  dealers,  where 
the  buyer  relies  upon  the  skill  or  knowledge  of  the  seller,  and  there 
arises  some  sort  of  implied  warranty  of  quality.  If  the  goods  in  the 
case  at  bar  were  not  salable  for  some  price  as  sardines  when  they  were 

delivered  to  the  plaintiff,  there  was  a  breach  of  contract  by  the  seller. 

*  *     * 

Exceptions  overruled. 


DIEBOLD  SAFE  &  LOCK  OO.  v.  HUSTON  et  al. 
(Supreme  Court  of  Kansas,  1S95.    55  Kan.  104,  39  Pac.  1035.  28  L.  R.  A.  53.) 

Action  by  Huston  &  Breeding  against  the  Diebold  Safe  &  Lock 
Company.    Plaintiffs  had  judgment,  and  defendant  brings  error. 

Allen,  J.  The  plaintiff  testified  to  an  oral  warranty  that  the  safe 
was  fireproof,  by  the  agent  of  the  defendant.    *     *     *     It  is  clear  that 


n 

Ch.  6)  WARRANTIES  1149 

the  safe  was  delivered  to  the  plaintiffs  in  compliance  with  the  terms 
of  the  written  order.  Does  this  order  contain  what  in  law  amounts 
to  a  warranty?  There  are  no  words  in  it  of  express  warranty.  Does 
an  order,  however,  for  a  fireproof  safe,  imply  a  warranty?     *     *     * 

There  is  nothing  in  this  case  indicating  that  the  safe  purchased  by 
the  plaintiffs  was  manufactured  specially  for  them,  but  the  fair  infer- 
ence is  that  it  was  one  of  a  kind  of  safes  which  the  defendants  manu- 
factured for  sale  to  whomsoever  would  buy.  It  is  designated  in  the 
order  as  a  "No.  4  fireproof  safe,"  -and  the  order  provides  that  it  shall  be 
one  of  the  defendant's  latest  styles  and  improvements ;  thus  clearly  in- 
dicating that  it  is  one  of  a  kind  of  safes  manufactured  by  the  safe  and 
lock  company.  "There  is  in  America  an  implied  warranty  of  iden- 
tity;  namely,  that  the  article  shall  be  of  the  kind  or  species  it  pur- 
ports to  be  or  is  described  to  be, — that  is,  that  the  article  delivered 
shall  be  the  same  thing  contracted  for."  Benj.  Sales  (6th  Ed.)  636. 
This  proposition  is  illustrated  in  the  following  cases :  , 

In  Henshaw  v.  Robins,  9  Mete.  (Mass.)  83,  43  Am.  Dec.  367,  a  sale 
and  bill  of  parcels  of  two  cases  of  indigo  was  made.  It  was  shown 
that  the  article  paid  for  and  delivered  was  not  indigo  at  all,  but  com- 
posed of  Prussian  blue,  chromate  of  iron,  and  potash,  and  worthless 
for  any  purpose.  It  was  held  that  the  description  of  the  article  inserted 
in  the  bill  of  parcels  amounted  to  a  warranty  that  the  article  was  such 
as  represented.  In  Hawkins  v.  Pemberton,  51  N.  Y.  198,  10  Am.  Rep. 
595,  it  was  held  that  the  sale  of  an  article  as  blue  vitriol  amounted 
to  a  warranty  that  it  was  such.  In  Wolcott  v.  Mount,  36  N.  J.  Law, 
262,  13  Am.  Rep.  438,  it  was  held  that  a  sale  of  seed  which  the  seller 
said  was  early  strap-leaf,  red-top  turnip  seed  was  equivalent  to  a  war- 
ranty that  it  was  such,  and  that  the  purchaser  might  recover  the  dif- 
ference between  the  market  value  of  the  crop  raised  and  the  same 
crop  from  such  seed  as  was  ordered.  In  White  v.  Miller,  71  N.  Y.  118, 
•  27  Am.  Rep.  13,  it  was  held  that,  on  a  sale  of  "large  Bristol  cabbage 
seed"  to  a  market  gardener,  there  was  an  implied  warranty  that  the 
seed  was  not  only  raised  from  such  stock,  but  free  from  any  latent 
defect  arising  from  the  mode  of  cultivation,  and  would  produce  that 
kind  of  cabbage.  In  Jones  v.  George,  61  Tex.  345,  48  Am.  Rep.  280,  it 
was  held  that  a  sale  by  a  druggist  to  a  planter  of  an  article  as  Paris 
green  implied  a  warranty  that  it  was  that  substance. 

There  is  no  doubt,  under  the  authorities,  that  the  article  sold  must 
answer  in  kind  to  the  description  under  which  it  is  sold,  and  that  there 
is  an  implied  warranty  that  the  article  delivered  is  such  an  article  as 
the  name  under,  w^hich  it  is  sold  indicates.  When,  however,  the 
question  arises  whether  an  article  is  of  a  particular  quality  or 
degree  of  excellence,  unless  it  is  designated  by  some  term  which  is 
descriptive  of  the  article  and  calls  for  a  particular  quality,  the  general 
rule  is  that  no  warranty  of  quality  will  be  implied.  In  Wolcott  v. 
Mount,  supra,  it  was  said :  "In  general,  the  only  contract  which  arises 
on  the  sale  of  an  article  by  a  description,  by  its  known  designation  in 
the  market  is  that  it  is  of  the  kind  specified."  In  Winsor  v.  Lom- 
bard, 18  Pick.  (Mass.)  57,  it  was  held  that,  where  a  large  number  of 
barrels  of  mackerel  branded  under  the  inspection  laws  as  No.  1  and 
No.  2  mackerel  were  sold  in  the  spring  with  that  description  of  them 
in  the  bill  of  parcels,  it  was  not  a  warranty  that  the  mackerel  were 
free  from  rust,  although  it  appeared  that  mackerel  affected  by  rust 
are  not  considered  as  No.  1  and  No.  2.     In  Gossler  v.  Refinery,  103 


1150  SALES  (Part  4 

Mass.  33,  it  was  held  that  "one  who  agreed  to  sell  'Manilla  sugar'  to 
refiners,  and  delivered  to  them  what  is  usually  called  in  commerce  by 
that  name,  can,  in  the  absence  of  fraud,  misrepresentation,  or  war- 
ranty, recover  the  agreed  price,  though  the  article  delivered  contained 
more  impurities  than  sugar  known  under  that  name  usually  does." 

The  case  of  Shisler  v.  Baxter,  109  Pa.  443,  58  Am.  Rep.  738,  seems 
to  be  opposed  to  White  v.  Miller,  supra,  holding  that  the  sale  of  seed 
as  Wakefield  cabbage  seed  did  not  amount  to  a  warranty  that  it  was 
such,  but  was  a  representation  as  to  quality.  In  Towell  v.  Gatewood, 
2  Scam.  111.  22,  33  Am.  Dec.  437,  a  bill  of  sale  of  good  first  and  sec- 
ond rate  tobacco  was  made.  The  court  refused  to  treat  this  as  a  war- 
ranty, but  rather  as  an  expression  of  opinion  as  to  the  quality  of  the 
article  sold,  concerning  which  the  buyer  should  have  relied  on  his 
own  judgment  or  obtained  an  express  warranty.  "The  mere  descrip- 
tion of  iron  sold  as  mill  iron  in  a  bill  rendered  to  the  purchaser  will 
not  amount  to  ,a  warranty  that  the  same  is  of  the  quality  or  grade 
described,  but  will  be  regarded  as  a  mere  statement  or  expression  of 
opinion  as  to  the  quality."  Iron  Works  v.  Moore,  78  111.  65.  See,  also, 
Ryan  v.  Ulmer,  108  Pa.  332,  56  Am.  Rep.  210;  Bounce  v.  Dow,  64 
N.  Y.  411. 

In  Fraley  v.  Bispham,  10  Pa.  320,  51  Am.  Rep.  486,  it  was  held  that 
a  sale  bill  of  superior  sweet-scented  Kentucky  leaf  tobacco  afifords 
no  evidence  from  which  the  jury  may  infer  a  warranty  that  it  is 
either  superior  or  sweet  scented.  The  case  of  Shaw  v.  Smith,  45  Kan. 
334,  25  Pac.  886,  was  on  a  contract  for  the  sale  of  flaxseed,  which 
the  buyer  agreed  tO'  sow,  and  sell  the  crop  to  the  seller  on  certain  terms 
stated  in  the  contract.  The  seed  proved  worthless,  and  did  not  grow. 
It  was  held  that  under  the  contract,  and  in  view  of  the  purposes  for 
which  it  was  purchased,  the  buyer  might  recover  as  upon  a  warranty. 
In  that  case  the  purposes  of  the  contract  did  not  end  with  the  deUvery 
of  the  seed  to  the  buyer,  for  he  was  obligated  to  sow  the  seed,  and 
to  sell  the  crop  which  it  might  produce  to  the  vendor.  Under  such 
a  contract,  it  was  held  that  a  warranty  of  the  fitness  of  the  seed  for 
the  purposes  specified  in  the  contract  would  be  implied. 

In  the  case  under  consideration  the  plaintiffs  ordered  a  fireproof 
safe.  There  is  no  proof,  nor  was  it  in  fact  claimed  at  the  trial,  that 
the  article  delivered  did  not  answer  the  description ;  that  is,  that 
it  was  not  such  an  article  as  is  generally  known  and  designated  as 
a  "fireproof  safe."  The  evidence  shows  that  it  was  manufactured 
and  placed  on  the  market  in  the  same  way  that  other  fireproof  safes 
were  made.  "Fireproof"  is  defined  by  Webster:  "Proof  against  fire; 
incombustible."  The  case  of  Hickey  v.  Morrell,  102  N.  Y,  454, 
7  N.  E.  321,  55  Am.  Rep.  824,  was  an  action  against  a  warehouse 
man  to  recover  for  goods  destroyed  by  fire  in  a  warehouse  repre- 
sented to  have  a  fireproof  exterior.  It  appeared  that  the  window 
frames  and  sash  were  wooden,  and  that  there  were  no  outside  shut- 
ters, and  it  was  held  that  the  building  could  not  be  deemed  fireproof. 
In  the  course  of  the  opinion  it  is  said :  "Here  the  allegation  is  that  the 
exterior  of  the  building  is  fireproof.  It  necessarily  refers  to  the  qual- 
ity of  the  material  out  of  which  it  is  constructed,  or  which  forms  its 
exposed  surface.  To  say  of  any  article  it  is  fireproof  conveys  no 
other  idea  than  that  the  material  out  of  which  it  is  formed  is  incom- 
bustible." In  the  case  of  Insurance  Co.  v.  Hird,  4  Tex.  Civ.  App.  82, 
23  S.  W.  393,  in  an  action  on  a  fire  insurance  policy  which  stipulated 


Ch.  6)  WARRANTIES  1151 

"that  the  assured  would  keep  his  books  in  a  fireproof  safe,  and  that  in 
case  of  loss  he  would  produce  the  books,  and  on  failure  to  so  produce 
them  the  policy  would  become  void.  The  books  were  in  good  faith 
kept  in  a  safe  of  the  kind  generally  known  and  reputed  as  fireproof,  but 
which  failed  to  preserve  them  from  destruction  by  fire.  Held,  that 
the  insured  had  not  warranted  the  safe  to  preserve  the  books,  and 
that  he  complied  with  the  condition." 

It  is  not  claimed  in  this  case  that  the  safe  itself  was  constructed  of 
combustible  materials,  nor  that  it  was  burned,  or  even  greatly  dam- 
aged by  fire.  The  plaintiffs  seek  to  recover  solely  for  damages  result- 
ing from  the  burning  of  articles  deposited  in  the  safe.  There  was  no 
contract  or  representation  with  reference  to  the  degree  of  heat,  or  the 
length  of  time  when  exposed  to  a  fire,  against  which  the  safe  would  af- 
ford protection.  Safes  denominated  as  "fireproof"  are  made  of  various 
sizes,  capacities,  and  styles.  If  the  outside  be  made  of  iron,  while 
that  metal  is  commonly  regarded  as  incombustible,  because  it  will  not 
burn,  it  yet  is  not  indestructible  by  fire.  It  is  a  matter  of  common 
knowledge  that  iron  will  melt  when  subjected  to  a  sufficient  degree  of 
heat.  To  imply  a  warranty  that  the  safe  would  protect  its  contents 
against  an}'  given  exposure  to  fire,  we  think,  would  be  to  imply  a  wai- 
ranty  of  quality,  and  that  altogether  indefinite  in  its  terms,  and  im- 
posing a  liability  which  might  be  immensely  disproportionate  to  the 
sum  received.  The  recovery  in  this  case  was  for  more  than  three  times 
the  price  of  the  safe. 

We  are  of  the  opinion  that  it  was  incumbent  on  the  plaintiffs  to  in- 
spect the  safe,  when  they  received  it,  for  the  purpose  of  ascertaining 
whether  it  was  of  the  kind  specified  in  the  order ;  that,  if  it  was  so,  no 
warranty  of  quality  was  implied,  and  no  recovery  can  be  had  for  the 
destruction  of  its  contents.    The  judgment  is  reversed. 


LISSBERGER  v.  KELLOGG  et  al. 
(Supreme  Court  of  New  Jersey,  1909.     78  X.  J.  Law,  85,  73  Atl.  67.) 

Action  by  Edmund  Lissberger  against  David  M.  Kellogg  and  oth- 
ers. Verdict  for  plaintiff,  and  defendants  obtained  a  rule  to  show 
cause  why  a  new  trial  should  not  be  granted. 

SwAYZS,  J.  The  action  is  for  damages  caused  by  the  failure  of  the 
defendants  to  deliver  wool  in  accordance  with  the  contract  between 
them  and  the  plaintiff.  The  plaintiff  is  a  wool  merchant  in  New  York. 
The  defendants  are  wool  brokers  and  dealers  at  Buenos  Ayres  in 
the  Argentine.  In  the  summer  of  1905  the  plaintiff  ordered  some  30 
bales  of  wool,  of  which  10  bales  were  to  be  Lincoln,  10  bales  14  blood, 
and  10  bales  %.  The  order  was  accepted,  but  35  bales  w^ere  shipped 
instead  of  30.  The  invoice  described  the  wool  as  composed  of  Lin- 
coln 14  blood,  %,  1/2,  and  %,  and  the  specifications  described  them  as 
10  bales  Lincoln,  11  bales  14  blood,  10  bales  %  Lincoln,  4  bales  i/o 
Lincoln.  This  wool  arrived  in  New  York  December  26,  1905.  Prior 
to  its  arrival,  and  on  December  5th,  the  plaintiff  ordered  defendants 
to  buy  200  bales,  one-half  of  which  was  to  be  %  and  half  of  which 
was  to  be  1^4  >  and  on  December  IStli  ordered  them  to  buy  100  bales, 
half  of  which  was  to  be  %  and  half  14.  These  orders  w^ere  duly 
accepted,  and  the  wool  shipped  in  January,  arriving  in  New  York 
in  February.    The  two  lots  of  200  and  100  bales  were  sold  in  advance 


1152  SALES  (Part  4 

of  their  arrival,  by  the  plaintiff,  to  the  Cleveland  Worsted  Mills  of 
Cleveland,  Ohio,  and  shipped  through  to  them  directly  from  the 
steamer,  in  bond.  The  wool  proved  to  be  inferior  in  quality  to  the 
description.     *     *     * 

The  defendant  next  contends :  That  the  sale  in  this  case  was  a  sale 
by  sample,  and,  so  far  as  the  300  bales  is  concerned,  that  they  were 
equal  to  the  sample  of  35  bales ;  that,  so  far  as  the  35  bales  was  con- 
cerned, they  were  a  mere  sample  shipment,  and  the  quality  was  im- 
material. We  think  the  defendant  is  wrong  in  both  contentions.  The 
letter  ordering  the  first  shipment  distinctly  said  that  the  wool  was  to 
be  one-third  Lincoln,  one-third  1^4  blood,  and  one-third  %,  and  this 
order  was  accepted.  It  was  clearly  a  sale  by  description.  So,  too, 
the  cables  did  not  order  the  wool  similar  to  the  sample  lot.  In  fact, 
it  would  have  been  impossible,  for  at  the  time  the  cables  were  sent  the 
first  shipment  had  not  arrived  in  New  York.  Both  the  cables  or- 
dered wool  half  %  and  half  14-  This  also  was  clearly  a  sale  by  de- 
scription, and  the  trial  judge  should  so  have  charged.  Instead  of  do- 
ing so,  he  charged  that  it  was  for  the  jury  to  say  whether  the  plain- 
tiff was  to  get  the  grades  generally  known  to  the  trade  by  the  descrip- 
tion, or  whether  he  was  to  get  the  same  kind  or  similar  kinds  that  he 
had  been  receiving  in  prior  years.  This  error,  however,  was  injuri- 
ous to  the  plaintiff',  and  not  to  the  defendants.  He  further  charged 
that  "the  rule  as  to  selling  by  sample  is  this :  That  what  is  sent  there- 
after must  substantially  comply  with  the  sample,  and,  if  it  does  not, 
the  purchaser  is  under  no  obligation  to  keep  it." 

As  applied  to  the  present  case,  this  charge  also  was  inaccurate.  The 
true  rule  prior  to  our  codification  of  the  law  relating  to  sales  is  thus 
stated  in  the  last  English  edition  of  Benjamin  on  Sales  (page  616) : 
"The  implied  condition  that  goods  bought  under  specified  commer- 
cial description  should  conform  therewith  is  not  excluded  by  the  fact 
that  the  sale  is  by  sample,  or  even  after  an  inspection  of  the  bulk. 
A  sample  is  looked  on  in  such  case  as  a  mere  expression  of  the  quality 
of  the  article,  and  not  of  its  essential  character,  and  notwithstanding 
the  bulk  be  fairly  shown,  or  agree  with  the  sample,  yet,  if  the  bulk 
does  not  reasonably  answer  to  the  description,  the  seller  is  Hable." 
*  *  *  The  same  rule  of  law  is  stated  in  Sales  Act  1907  (P.  L.  p. 
316)  §  14.  This  act  did  not  take  effect  until  after  the  transactions 
now  in  question,  but  it  was  a  mere  codification  of  the  then  existing 
law  in  this  respect.  The  charge  of  the  court,  while  erroneous,  was 
injurious  only  to  the  plaintiff,  and  the  defendant  is  not  injured  there- 
by,    *     *     * 

The  plaintiff  was  allowed  to  recover  the  following  items:  (1)  The 
difference  between  the  purchase  price  paid  by  him  and  the  amount 
received  on  the  sale;  (2)  the  loss  of  profits  on  the  sale  to  the  Cleveland 
Worsted  Company ;  (3)  damages  paid  that  company  to  settle  its  claim 
against  him;  (4)  freight  on  wool  shipped  from  Cleveland  to  Boston 
for  resale.  It  was  proper  to  include  all  of  these  items  in  the  plain- 
tiff's claim  for  damages.     *     *     * 

The  rule  is  discharged,  with  costs. 


Ch.  6)  ■     WARRANTIES  Hi 


SECTION  6.— IMPLIED  WARRANTY  THAT  THE  GOODS 
SHALL  CORRESPOND  TO  THE  SAMPLE 

Sales  Act,  Section  16.  In  the  casei  of  a  contract  to  sell  or  a  sale 
by  sample — (a)  there  is  an  implied  warranty  that  the  bulk  shall 
correspond  with  the  sample  in  quality,  (b)  There  is  an  implied 
warranty  that  the  buyer  shall  have  reasonable  opportunity  of  com- 
paring the  bulk  with  the  sample,  except  so  far  as  otherwise  pro- 
vided in  Section  47(3).  (c)  If  the  seller  is  a  dealer  in  goods  of 
that  kind,  there  is  an  implied  warranty  that  the  goods  shall  be  free 
from  any  defect  rendering  them  unmerchantable,  which  would  not 
be  apparent  on  reasonable  examination  of  the  sample. 

Where  a  sample  is  exhibited  by  a  seller  to  a  buyer  and  a  sale 
results  we  may  have  one  of  three  situations  which  are  distinguish- 
able : 

(1)  If  the  seller  has  said:  "I  warrant  the  goods  which  I  am 
offering  you  to  be  precisely  like  this  sample  both  as  to  kind  and 
quality,"  we  then  have  an  express  warranty,  where  the  sample  has 
merely  performed  the  same  function  that,  in  the  absence  of  a 
sample,  would  have  been  performed  by  words  descriptive  of  the 
kind  and  quality. 

(2)  If  the  seller,  although  exhibiting  a  sample,  does  not  employ 
language  during  the  negotiations  which  amounts  to  an  express 
warranty,  there  may  or  may  not  be  an  implied  warranty  that  the 
goods  wnll  all  be  like  the  sample.  As  a  general  rule,  no  doubt,  the 
exhibiting  of  the  sample  would  be  under  circumstances  where  it 
was  reasonable  to  infer  that  the  representation  thus  made  was 
that  the  goods -would  be  like  the  sample.  Whenever  we  may  in- 
terpret the  negotiations  in  this  manner  we  have  what  the  Sales 
Act  calls  "a.  contract  to  sell  or  a  sale  by  sample."  The  situation  is 
closely  analogous  to  the  warranty  that  the  goods  shall  correspond 
to  the  description,  in  contracts  to  sell  or  a  sale  by  description. 
By  "description"  here  was  meant  the  language  which  furnished 
other  means  of  identifying  the  goods.  If  there  were  statements 
added  regarding  quality  for  the  purpose  of  inducing  the  purchase 
these  statements  would  constitute  express  warranties.  So  in  con- 
tracts to  sell  or  sales  by  sample,  the  implied  warranty  that  at- 
taches is  not  one  of  quality,  but  of  identity — i.  e.,  that  the  bulk  of 
the  goods  will  be  like  the  sample.  True  subsection  (c)  of  Section 
16  does  add  a  warranty  of  quality  in  certain  cases ;  i.  e.,  where  the 
sale  was  by  a  dealer,  but  not  otherwise.  This  is  the  warranty  of 
merchantability,  but  it  owes  its  existence  solely  to  subsection  (c) 
and  not  to  subsection  (a),  just  as  there  is  added  the  warranty  of 
merchantability  in  sales  by  description  by  dealers  in  Section  15 
(2)  ;  Section  14  not  imposing  it. 

The  warranty  of  merchantability,  in  sales  by  description  and 
in  sales  by  sample,  is  the  subject  of  the  next  section.    The  analogy 
B.&iB.Bus.Law— 73 


1154  >  SALES  ■  ■  (Part  4 

between  sales  by  description  and  sales  by  sample  is  simply  that,  in 
the  former,  words  identify  the  kind  of  goods ;  in  the  latter,  a 
physical  specimen  identifies.  Presumably  the  same  mental  picture 
is  aroused  in  the  buyer,  whether  it  be  produced  by  words  or  by 
physical  objects. 

(3)  It  is  possible  for  the  seller  to  exhibit  a  sample,  and  a  sale  by 
sample,  such  as  described  above,  would  not  result.  If  it  did  not  so 
result,  it  would  be  because  the  seller  made  it  clear  that  he  was  not 
representing  all  of  the  goods  to  be  like  the  sample.  He  exhibits 
the  specimen  not  as  the  sole  means  of  describing  the  goods  for  he 
chooses  to  do  that  by  words.  The  sample  merely  aids  in  making 
the  description. 

Subsection  (b),  providing  that  the  buyer  shall  have  the  oppor- 
tunity of  comparing  the  goods  with  the  sample,  states  a  general 
rule  which  is  taken  up  in  detail  in  Chapter  VII.  Clause  (b)  mere- 
ly shows  that  the  duty  of  the  seller  to  afford  the  buyer  an  oppor- 
tunity for  inspection  is  not  dispensed  with  in  sales  by  sample. 

Subsection  (c)  adds  a  warranty  of  merchantability  in  sales  by 
sample,  when  the  sale  was  by  a  dealer.  This  is  the  subject  of  the 
next  section. 

BORDEN  V.  FINE  et  al. 

(Supreme  Judicial  Court    of  Massachusetts,   1912.     212   Mass.   425, 
9S  N.  E.  1073.) 

Action  by  Thomas  S.  Borden  against  Samuel  Fine  and  another. 
There  was  a  finding  for  plaintiff,  and  defendants  bring  exceptions. 

This  was  an  action  of  contract  to  recover  a  specified  sum  on  an 
alleged  special  promise  by  defendants  to  reimburse  plaintiff.  Plaintiff 
oft'ered  evidence  to  show  that  at  the  request  of  one  o£  the  defendants 
he  went  to  defendants'  place  of  business  and  was  shown  cotton  sweep- 
ings, that  plaintiff  was  then  taken  into  the  office  of  defendants  and 
there  shown  a  sample,  that  after  some  talk  as  to  price  it  was  mutually 
agreed  that  the  sample  would  be  a  fair  sample  of  the  sweepings  after 
they  were  sorted,  and  that  defendants  would  sell  all  of  the  cotton 
sweepings  until  further  notice  for  five  cents  a  pound,  and  that  the 
goods  would  be  shipped  from  time  to  time  in  accordance  with  plam- 
tiff's  directions. 

BraIvUy,  J.  The  contract  for  the  purchase  of  the  cotton  sweepings 
being  oral,  its  terms  are  to  be  ascertained  from  the  evidence,  which 
would  have  warranted  the  judge  before  whom  the  case  was  tried  with- 
out a  jury  in  finding  that  the  sale  had  been  consummated  upon  the 
representations  of  the  defendants  that  the  goods  in  bulk  to  be  deliv- 
ered in  the  future  should  be  like  the  sample  exhibited.  *  *  *  \.^^ 
there  would  be  a  breach  of  the  implied  warranty,  entitling  the  plain- 
tiff to  rescind  upon  reasonable  notice  to  the  defendants,  if  the  four 
shipments  in  question  fell  below  the  quality  bought,  or  he  might  re- 
tain the  cotton  and  recover  damages.  *  *  *  Xhe  sample  must  be 
deemed  as  having  been  one  of  the  essential  terms  of  sale,  and  although 
the  plaintiff  availed  himself  of  the  opportunity  for  inspection  before 
the  shipments  to  his  consignee,  the  cotton  had  been  bagged  by  the 
defendants,  and  he  testified,  that  during  the  customary  examination 
he  rejected  such  portions  as  he  observed  to  be  defective,  but  the  bags 


Ch.  6)  WARRANTIES  1155 

were  not  emptied,  and  the  remainder  was  expected  to  be  in  conform- 
ity with  the  sample.  It  was  a  question  of  fact,  independently  of  the 
place  of  delivery,  whether  the  plaintiff  waived  the  warranty,  and  ac- 
cepted the  contents  of  the  bags,  and  whether  after  arrival  at  the  place 
of  business  of  the  consignee  the  cotton  upon  assortment  proved  to  be 
of  inferior  quality.     *     *     * 

The  plaintiff's  evidence,  if  believed,  having  supported  his  contention 
that  there  had  been  a  breach,  and  that  he  had  not  relinquished  his 
right  to  insist  upon  performance  of  the  contract,  these  issues  of  fact, 
as  well  as  the  further  issue  whether  after  receiving  information  from 
the  consignee  he  seasonably  inspected  the  cotton,  and  gave  notice  to 
the  defendants  of  the  deficiency,  with  his  claim  for  reclamation,  are 
settled  conclusively  in  his  favor  by  the  judge's  finding.    *     *     * 

Exceptions  overruled. 


GASCOIGNE  et  al.  v.  CARY  BRICK  CO. 

(Supreme  Judicial  Court  of  Massachusetts,  1914.    217  Mass.  302,  104  N.  E.  734, 

Ann.  Cas.  1917C,  336.) 

Action  by  Joseph  Gascoigne  and  another  against  the  Gary  Brick 
Company.  There  was  a  verdict  for  plaintiffs,  and  both  parties  bring 
exceptions. 

Brale^y,  J.  It  is  unquestioned  that  delivery  was  free  on  board  at 
the  place  where  the  bricks  were  to  be  used,  and  that  after  its  erection, 
and  because  of  the  variation  in  color,  the  wall  proved  unacceptable  to 
the  supervising  architect,  and  the  plaintiffs  under  their  contract  with 
the  owner  were  obliged  to  demolish  and  rebuild  it.  The  defendant, 
although  promptly  notified  of  the  imperfections  upon  discovery,  con- 
tends that  the  sale  was  for  a  quality  of  bricks  known  to  the  trade  as 
"up  and  down  hard  brick,"  wherein  uniformity  of  color  is  not  con- 
templated, and  asked  the  presiding  judge  in  the  first,  second,  third  and 
sixth  requests  to  rule  that,  as  there  was  no  express  or  implied  af- 
firmation of  quality,  and  the  defendant  not  having  been  charged  with 
fraud,  the  plaintiffs  must  be  presumed  to  have  bought  on  their  own 
judgment.  *  *  *  But  these  requests  could  not  be  given.  The  con- 
tract was  not  confined  to  the  correspondence.  The  letters  as  the  jury 
properly  could  find  were  merely  preliminary  to  the  interview  between 
the  plaintiffs  and  the  defendant's  representative,  when  the  terms  of 
sale  were  settled,  and  the  order  for  the  bricks  given.  It  is  in  the  evi- 
dence of  what  then  took  place  that  the  contract  must  be  sought.  The 
testimony  is  irreconcilable,  and  the  jury  were  to  determine  whom  they 
would  believe.  If  they  accepted  the  plaintiffs'  statements,  the  defend- 
ant's agent  having  been  informed  that,  as  both  sides  of  the  wall  would 
have  to  be  faced,  the  facings  necessarily  would  have  to  be  of  a  uniform 
shade  or  appearance,  similar  to  the  brick  exhibited  which  the  architect 
had  accepted  as  of  the  required  color,  replied  that  he  knew  what  tlie 
requirements  were,  and  the  defendant  would  furnish  the  bricks  ac- 
cordingly. The  order  thereupon  given  and  accepted  the  jury  could  say 
constituted  a  sale,  where  the  plaintiff's  relied  on  the  statements  of  the 
seller,  and  the  defendant  impliedly  warranted  that  the  bricks  delivered 
in  bulk  should  correspond  with  the  sample.  *  *  *  St.  1908,  c.  237, 
§  16.  If  these  terms  were  found  to  constitute  the  contract,  the  evi- 
dence was  plenary  that  the  shipments  did  not  conform  to  the  sample 


1156  SALES  (Part  4 

in  quality:  the  plaintiffs  therefore  could  recover  damages,  and  the 
fourth  and  fifth  requests  were  inappropriate.     *     *     * 

The  plaintiffs,  although  they  prevailed,  are  dissatisfied  with  the  rul- 
ings as  to  the  measure  of  damages.  By  acceptance  of  title  the  plain- 
tiffs did  not  as  matter  of  law  release  the  defendant,  or  bar  their  claim 
for  damages,  St.  1908,  c.  237,  §  9.  It  was  a  question  of  fact  whether 
they  waived  the  warranty  and  took  the  bricks  as  they  found  them  on 
the   cars,  which  has  been   established  in  their   favor  by  the  verdict. 

*  *  *  But  if  they  knew  or  ought  to  have  known  of  the  defective 
coloring,  no  damages  caused  by  the  use  of  the  bricks  can  be  recovered. 

*  *  *  The  jury  were  to  determine  if  by  reason  of  moisture  caused 
by  the  weather  the  bricks  at  the  time  of  delivery,  and  when  placed 
in  the  wall  had  taken  on  and  retained  a  darker  appearance,  rendering 
it  difficult  to  ascertain  their  true  or  natural  color,  and  if  this  appeared, 
whether  the  plaintiffs,  who  might  rely  on  the  presumption  that  the  de- 
fendant would  perform  its  contract,  had  acted  with  reasonable  dili- 
gence in  using  the  bricks  without  further  inspection,  or  whether  the 
general  appearance  was  such  that  imperfections  would  not  have  been 
disclosed  by  an  extended  examination.  A  conclusion  that  no  negligence 
had  been  shown,  in  connection  with  the  uncontradicted  evidence,  that 
notice  was  promptly  given  to  the  defendant  who  declined  further  per- 
formance, would  warrant  the  assessment  of  damages  for  not  only 
the  difference  between  what  the  plaintiffs  bought,  and  what  they  re- 
ceived, but  also  the  expense  of  taking  down  and  rebuilding  the  wall. 

^        ^         ^ 

The  judge  whose  attention  had  been  directed  to  the  rule  to  be  applied 
by  the  plaintiff''s  request,  and  in  his  rulings  upon  the  exclusion  of 
evidence  should  have  so  instructed  the  jury.  *  *  *  g^^  instead  he 
charged  that  the  plaintiffs  could  recover  only  a  sum  equal  to  the  dif- 
ference between  the  value  of  bricks  the  color  of  the  sample,  and  the 
value  of  the  bricks  actually  delivered.  *  *  *  /^  majority  of  the 
court  are  accordingly  of  opinion  that  the  defendant's  exceptions 
should  be  overruled,  but  the  plaintiffs'  exceptions  must  be  sustained. 


E.  EISIXG  &  CO..  Inc.,  v.  AMERICAN  ALCOHOL  CO.,  Inc. 
(Supreme  Court  of  New  York,  Appellate  Tei-m,  1918.     168  N.  Y.  Supp.  682.) 

Action  by  E.  Eising  &  Co.,  Incorporated,  against  the  American  Al- 
cohol Company,  Incorporated.  From  a  judgment  dismissing  the  com- 
plaint, plaintiff  appeals. 

Lehman,  J.  The  plaintiff  has  brought  this  action  to  recover  dam- 
ages for  an  alleged  breach  of  contract  whereby  the  defendant  agreed 
to  sell  and  deliver  to  the  plaintiff  100  barrels  of  high  proof  grain  spirits 
at  the  price  of  67  cents  per  gallon.    *    *    * 

Plaintiff's  president  testified  that  the  defendant  offered  to  sell  him 
100  barrels  of  high  proof  grain  spirits  and  that  after  some  conversa- 
tion W'ith  the  defendant's  vice  president  he  agreed  to  buy  these  goods 
for  67  cents  in  bond,  the  goods  to  be  carted  to  the  freight  station  free 
of  charge:  He  testified  further:  "I  said,  'I  have  never  seen  your 
goods,  and  I  have  never  made  any  purchases  from  you,  and  have  never 
seen  any  kind  of  goods  you  serve.'  He  said,  'Our  goods  are  standard, 
but  I  can  divert  a  barrel  to  you  from  one  of  my  customers  who  is  get- 
ting a  shipment  to  New  York ;   I  will  divert  a  barrel  of  it  and  send  it 


Ch.  6)  WARRANTIES  1157 

to  you.'  And  I  said,  'Very  good ;'  and  I  said,  'Now  we  definitely  under- 
stand it  that  I  will  buy  those  100  barrels  from  you  at  67  cents  in  bond ; 
he  said,  'Yes ;'  and  I  said,  'Confirm  this  purchase  to  me  by  letter,  so 
that  we  shall  both  understand  the  terms  and  conditions  of  it.'  " 

Thereafter  the  defendant  wrote  to  the  plaintiff  the  following  letter: 
"*  *  *  Messrs.  E.  Eising  Co.,  51  Water  Street,  New  York  City 
— Gentlemen :  This  will  confirm  offer  made  to  you  on  100  barrels  of 
H.  P.  grain  spirits  at  67^  per  gallon  in  bond.  We  will  deliver  the 
goods  alongside  steamer  free  of  charge  after  you  pay  the  tax.  We 
understand  that  this  offer  is  accepted  by  you  subject  to  a  trial  sample 
of  one  barrel,  and  we  believe  we  can  have  this  barrel  for  you  some 
time  this  week.  Awaiting  in  anticipation,  we  remain,  *  *  *  Ameri- 
can Alcohol  Company,  Inc.,  A.  BaUnsky,  V.  P." 

The  plaintiff  did  not  answer  this  letter,  but  on  April  19th  wrote  de- 
fendant as  follows :  "The  American  Alcohol  Co.,  60  Wall.  St.,  Mr.  A. 
Balinsky,  V.  P.,  City — Dear  Sir :  We  have  not  as  yet  received  the  trial 
sample  of  one  barrel  of  high  proof  grain  spirits  as  per  your  letter 
of  April  10th,  and  wish  you  would  advise  us  when  delivery  will  be 
made.    We  remain,    *    *    *    ;g  Eising  &  Co.,  Inc.,  Per  Ebe." 

In  answer  to  this  letter  the  defendant  wrote :  "Messrs.  E.  Eising  & 
Co.,  51  Water  Street,  New  York  City — Gentlemen:  Yours  of  the  19th 
reached  me  this  morning  on  my  return  from  the  West.  I  was  some- 
what surprised  to  hear  from  you  at  this  late  date,  inasmuch  as  my 
letter  is  dated  the  10th.  In  view  of  the  fact  that  you  have  not  seen  fit 
to  answer  my  letter  before  the  19th,  the  company  has  not  booked  your 
order.    *    *    *    A.  Balinsky,  Vice  President." 

It  seems  to  me  that  these  facts  establish  a  complete  cause  of  action. 
The  parties  in  their  conversation  had  agreed  upon  a  complete  contract. 
The  plaintiff's  president  asked  the  defendant  to  send  him  a  trial  sample 
barrel  of  the  spirits,  not  in  order  to  enable  him  to  make  up  his  mind 
as  to  whether  he  would  agree  to  buy  the  spirits,  but  merely  to  enable 
him  to  determine  that  the  spirits  he  had  actually  agreed  to  buy  were 
standard  high  proof  grain  spirits.  Uinder  any  fair  construction  of  the 
conversation,  the  plaintiff  reserved  no  right  to  reject  the  goods,  if  the 
sample  consisted  of  standard  high  proof  spirits ;  but  it  did  reserve  the 
right  to  determine  by  means  of  this  sample  whether  the  goods  complied 
with  the  description  in  the  contract  without  being  obliged  to  examine 
the  goods  then  in  bond  in  New  Orleans,  or  to  pay  the  government  taxes 
to  release  them  from  bond  and  ship  them  to  New  York  before  having 
the  opportunity  to  examine  them.    *    *    * 

If  defendant  refused  to  furnish  the  goods  described,  he  broke  his 
contract  to  sell  and  deliver;  if  plaintiff  refused  to  proceed  with  his 
contract,  after  receipt  of  a  proper  sample,  he  broke  his  contract  to 
accept  and  pay  for  the  goods.  In  other  words,  the  term  "subject  to  a 
trial  sample  of  one  barrel"  does  not  mean  that  the  minds  of  the  parties 
have  not  fully  met  on  all  terms  of  the  agreement,  but  is  only  a  provi- 
sion of  the  agreement  fixing  the  rights  of  the  parties  thereunder. 

Judgment  should  therefore  be  reversed,  and  a  new  trial  ordered. 
*    *    * 


1158  SALES  (Part  4 

SECTION  7.— IMPLIED  WARRANTY  OF 
MERCHANTABILITY 

Sales  Act.  Section  16.  In  the  case  of  a  contract  to  sell  or  a 
sale  by  sample —  *  *  *  ((-•)  jf  ^^g  seller  is  a  dealer  in  goods 
of  that  kind,,  there  is  an  implied  warranty  that  the  goods  shall  be 
free  from  any  defect  rendering  them  unmerchantable,  which 
would  not  be  apparent  on  reasonable  examination  of  the  sample. 

Sales  Act,  Section  15.  (2)  Where  the  goods  are  bought  by  de- 
scription from  a  seller  who  deals  in  goods  of  that  description 
(whether  he  be  the  grower  or  manufacturer  or  not)  there  is  an 
implied  warranty  that  the  goods  shall  be  of  merchantable  quality. 

(3)  If  the  buyer  has  examined  the  goods,  there  is  no  implied 
warranty  as  regards  defects  which  such  examination  ought  to  have 
revealed. 


JAMES  DRUMMOND  &  SONS  v.  E.  H.  VAX  INGEN  &  CO. 
(House  of  Lords,  1887.     12  App.  Gas.  284.) 

The  respondents,  in  July,  1883,  ordered  from  the  appellants,  who  are 
worsted  cloth  manufacturers  at  Bradford,  certain  goods,  described  in 
the  contracts  as  "mixt  worsted  coatings,"  which  were  to  be,  in  "qual- 
ity and  weight,"  equal  to  certain  numbered  samples,  which  the  appel- 
lants had  previously  furnished  to  the  respondents.  The  goods  were 
of  a  class  well-known  in  the  trade  under  the  denomination  of  "cork- 
screw twills."  They  were  delivered  to  the  respondents,  whose  ob- 
ject (known  to  the  appellants)  was  to  sell  them  to  clothiers  or  tailors 
in  the  United  States  of  America.  All,  or  great  part  of  them,  were,  in 
fact,  disposed  of  to  various  customers  of  the  respondents  in  the  United 
States ;  but  they  were  returned  upon  the  respondents'  hands,  as  not 
suitable  for  the  purposes  of  that  trade.  They  were  afterwards  sold 
by  auction,  at  a  loss ;  and  an  action  (for  the  price  of  the  goods)  hav- 
ing been  brought  by  the  appellants  against  the  respondents,  a  counter- 
claim was  made  by  the  respondents  to  recover  damages  against  the  ap- 
pellants, on  the  ground  that  the  goods  were  not  merchantable,  as  they 
ought  to  have  been. 

The  goods  were,  in  point  of  fact,  made  exactly  in  the  same  manner 
as  the  samples ;  and  the  defect  alleged  to  exist  in  them,  viz.,  that  of 
"slipperiness"  (or  want  of  such  cohesion  in  the  texture  of  the  cloth,  be- 
tween the  warp  and  weft,  as  was  requisite  to  prevent  them  from  giv- 
ing way  under  the  strain  of  ordinary  wear  when  made  up  into  coats 
in  the  usual  manner)  existed  equally  in  those  samples.     *     *     * 

An  order  having  been  made  for  the  trial  of  certain  preliminary  is- 
sues in  fact  by  Day,  J.,  without  a  jury  before  any  of  the  other  ques- 
tions of  fact,  that  learned  judge  found  upon  the  issues  as  follows: 

1.  That  there  was  an  implied  warranty  on  the  sale  of  the  goods  that 
the  cloth  should  be  merchantable  generally  as  worsted  coatings,  and 
should  be  properly  manufactured,  and  should  be  suitable  to  be  made 
up  into  coats  in  the  ordinary  course  of  tailors'  work.  2.  That  the 
plaintiffs  did  sell  the  cloth  for  the  purpose  of  being  made  up  into 
coats  in   the   ordinarv   course  of   tailors'   work.     3.  That  it  was   an 


Ch.  G)  WARRANTIES  1159 

express  term  of  the  contract  of  sale  that  the  cloth  should  be  efficiently 
woaded  and  dyed  so  as  not  to  fade  unduly.  4.  That  the  cloth  was  not 
merchantable  as  worsted  coating,  and  was  not  properly  manufactured 
and  suitable  to  be  made  up  into  coats  in  the  ordinary  course  of  tailor- 
ing, and  was  not  efficiently  woaded  and  dyed  within  the  meaning  of 
the  contract.  5.  That  the  cloth  was  sold  by  sample  in  the  sense  that 
it  was  to  be  similar  to  a  sample  produced  in  respect  of  weight  and 
quality,  and  that  the  term  "quality"  covers  strength  as  distinguished 
from  rottenness  in  cloth,  but  the  judge  is  not  satisfied  that  the  term 
quality  has  been  ordinarily  applied  to  such  a  defect  as  is  alleged  to 
exist  in  the  cloth  delivered  under  the  contract,  that  is  to  say,  slipperiness 
of  weft  under  warp.  6.  That  the  cloth  did  correspond  with  the  sam- 
ple. 7.  That  the  sample  was  made  to  the  defendants'  order,  and  was 
seen  and  approved  of  by  them  as  to  pattern,  colour,  and  generally  as  to 
handle.  8  and  9.  That  the  defects  both  of  structure  and  colour  in 
the  cloth  and  in  the  sample  were  latent,  and  were  not  apparent  or 
discoverable  upon  such  inspection  as  was  ordinary  and  usual  upon  sales 
of  worsted  cloths  of  this  class. 

The  Court  of  Appeal  (Lord  Esher,  M.  R.,  and  Fry,  L.  J.)  affirmed 
the  findings  of  Day,  J.  *  *  *  p^om  this  decision  the  present  ap- 
peal was  brought.     *     *     * 

Earl  of  Sklborne.  *  *  *  As  to  so  much  of  this  defence  to 
the  counterclaim  as  turns  on  the  question  of  fact,  whether  the  alleged 
defect  in  the  cloth  existed  or  not  (by  which  I  mean  existed  as  a  de- 
fect, causing  coats  made  of  it  in  the  manner  usual  among  clothiers  and 
tailors  to  give  way  under  a  strain  which  goods  of  the  same  class,  such 
as  were  generally  known  and  used  in  the  trade,  ought  to  resist)  I  think 
your  Lordships  must,  on  the  principle  on  which  the  Court  of  Appeal 
acted,  take  the  existence  of  the  defect,  in  a  degree  sufficient  to  render 
the  cloth  unmerchantable  for  the  purposes  for  which  goods  of  the 
same  general  class  had  previously  been  used  in  the  trade,  to  have  been 
sufficiently  established.  That  question  depended  in  part  on  practical 
demonstration  by  skilled  witnesses  in  the  presence  of  the  Court,  fol- 
lowed up  and  further  verified  by  the  judge  himself.  Of  all  possible 
kinds  of  evidence,  this  appears  to  me  to  be  the  most  unfit  for  review 
by  a  Court  of  Appeal.  So  far,  therefore,  I  think  the  fact  must  be  as- 
sumed in  the  respondent's  favour,  on  whom  the  burden  of  proof,  upon 
that  point,  undoubtedly  lay. 

It  remains  to  be  considered,  whether  this  was  a  defect  of  quality 
against  which  there  was  an  implied  warranty  by  the  appellants,  under 
all  the  circumstances  of  the  case.  That  it  was  a  defect  of  quality  seems 
to  me  indisputable;  and,  if  it  was  known  to  the  respondents  when 
they  gave  the  order,  or  if  (as  between  themselves  and  the  appellants) 
they  ought  to  be  taken  as  having  discovered,  or  as  having  had  means 
which  they  ought  to  have  used  of  discovering  it  from  the  samples,  I 
should  hold,  that  it  was  covered  by  the  word  "quality,"  as  used  in  the 
contracts,  and  that  there  was  no  implied  warranty  against  it.  But,  if 
it  was  a  latent  defect,  of  which  knowledge,  or  means  of  knowledge 
which  ought  to  have  been  used,  could  not  properly,  under  the  circum- 
stances, be  imputed  to  the  respondents,  then  I  think  that  the  word 
"quality"  as  used  in  the  contracts,  ought  to  be  restricted  to  those  qual- 
ities which  were  patent,  or  discoverable  from  such  examination  and  in- 
spection of  the  samples  as,  under  the  circumstances,  the  respondents 
might  reasonably  be  expected  to  make ;  and  that  it  cannqt  be  extended 


1160  SALES  (Part  4 

to  defects  in  the  texture  of  the  samples,  renderhig  the  cloth  so  manu- 
factured unmerchantable  for  the  purposes  for  which  the  order  was 
given,  of  which  such  examination  and  inspection  would  give  the  mer- 
chants, practically,  no  notice.     *     *     * 

In  the  present  case  the  defect  arose  out  of  the  want  of  sufficient  con- 
nection or  cohesion  in  the  texture  of  the  cloth  between  the  warp  and 
the  weft.  In  all  goods  of  the  class  called  "corkscrew  twills,"  the  weft 
lies  hidden  inside,  the  surface  on  both  sides  being  warp.  *  *  * 
There  was,  in  point  of  fact,  nothing  to  put  the  respondents  on  their 
guard  against  any  such  defect;  and  they  had,  in  my  opinion,  a  right 
to  assume  that  the  appellants,  accepting  the  order,  could  and  would 
produce  and  deliver  a  good  article,  having  the  weight  and  all  the  other 
apparent  qualities  of  the  samples,  which  would  be  as  merchantable  for 
coatings  as  other  articles  of  the  same  class  previously  known  in  the 
trade.     *     *     * 

Lord  Herschell.  My  Lords,  I  think  that  the  general  principles 
of  law  which  have  to  be  applied  to  the  facts  of  this  case  are  well  set- 
tled and  beyond  question.  It  was  laid  down  in  Jones  v.  Bright  (1) 
that  where  goods  are  ordered  of  a  manufacturer  for  a  particular  pur- 
pose, he  impliedly  warrants  that  the  goods  he  supplies  are  fit  for  that 
purpose.  This  view  of  the  law  has  been  constantly  acted  upon  from 
the  time  of  that  decision,  and  was  not  impeached  by  the  learned  coun- 
sel for  the  appellants.  It  is  equally  well  settled  that  upon  a  sale  of 
goods  of  a  specified  description,  which  the  purchaser  has  no  oppor- 
tunity of  examining  before  the  sale,  the  goods  must  not  only  answer 
that  specific  description,  but  must  be  merchantable  under  that  descrip- 
tion. This  doctrine  was  laid  down  in  Jones  v.  Just,  L.  R.  3  Q.  B. 
197,  where  all  the  previous  authorities  on  the  point  were  reviewed. 
In  the  case  of  Mody  v.  Greyson,  L.  R.  4  Ex.  49,  in  the  Exchequer 
Chamber,  the  decision  in  Jones  v.  Just  was  approved  of  and  acted  upon, 
and  it  was  further  held  that  the  implied  warranty  that  the  goods  sup- 
plied are  merchantable  was  not  absolutely  excluded  by  the  fact  that  the 
goods  were  sold  by  sample,  and  that,  the  bulk  precisely  corresponded 
with  it,  but  was  only  excluded  as  regards  those  matters  which  the 
purchaser  might,  by  due  diligence  in  the  use  of  all  ordinary  and  usual 
means,  have  ascertained  from  an  examination  of  the  sample.  I  think 
that  the  law  enunciated  in  these  cases  is  sound  and  not  open  to  doubt. 

The  question  arises  whether,  in  these  circumstances,  the  plaintiffs 
have  complied  with  their  contract  by  delivering  coatings  precisely  cor- 
responding in  quality  and  weight  with  the  patterns,  or  whether  they  are 
liable  to  the  defendants.     *     *     * 

It  is  true  that  the  purpose  for  which  the  goods  were  required  was  not, 
as  in  Jones  v.  Bright,  5  Bing.  533,  stated  in  express  terms;  but  it  was 
indicated  by  the  very  designation  of  the  goods,  "coatings."  I  think 
that  upon  such  an  order  the  merchant  trusts  to  the  skill  of  the  manu- 
facturer, and  is  entitled  to  trust  to  it,  and  that  there  is  an  implied 
warranty  that  the  manufactured  article  shall  not  by  reason  of  the  mode 
of  manufacture  be  unfit  for  use  in  the  manner  in  which  goods  of  the 
same  quality  of  material,  and  the  same  general  character  and  designa- 
tion ordinarily  would  be  used.  I  think  too  that  where  the  article 
does  not  comply  with  such  a  warranty  it  may  properly  be  said  to  be 
unmerchantable  in  the  sense  in  which  that  word  is  used  in  relation  to 
transactions  of  this  nature.     *     *     * 


Ch.  G)  WARRANTIES  1161 

There  is  no  doubt  that  the  implied  warranty  will  be  excluded  as 
regards  any  defects  which  the  sample  would  disclose  to  a  buyer  of  ordi- 
nary diligence  and  experience.  The  inquiry,  therefore,  arises  whether 
the  defendants  by  "due  diligence  in  the  use  of  all  ordinary  and  usual 
means"  would  have  detected  in  the  patterns  the  defects  of  which  they 
now  complain.  I  think  not.  What  is  "due  diligence"  must  depend 
upon  the  circumstances.  Having  regard  to  the  order  given  in  the  previ- 
ous year,  and  the  mode  in  which  that  order  was  fulfilled,  I  think  that 
when  the  defendants  made  the  contract  there  was  nothing  which  could 
reasonably  lead  them  to  anticipate  that  the  patterns  represented  goods 
possessing  the  defect  which  was,  in  fact,  inherent  in  them.  And  I 
am  satisfied  upon  the  evidence  that  the  defendants  who,  undoubtedly, 
did  not  discern  the  defect,  did  not  fail  to  do  so  from  neglecting  to  use 
the  means  usually  adopted  by  buyers  under  like  circumstances. 

I  have  therefore  arrived  at  the  conclusion  that  the  learned  judge 
who  tried  the  case  took  a  correct  view  of  the  facts  on  this  part  of  it, 
and  that  his  decision  was  properly  affirmed  by  the  Court  of  Appeal. 


SECTION   8.— IMPLIED   AVARRANTY    OF    FITNESS    FOR 
A  PARTICULAR  PURPOSE 

Sales  Act,  Section  15.  (1)  Where  the  buyer,  expressly  or  by 
implication,  makes  known  to  the  seller  the  particular  purpose  for 
which  the  goods  are  required,  and  it  appears  that  the  buyer  relies 
on  the  seller's  skill  or  judgment  (whether  he  be  the  grower  or 
manufacturer  or  not),  there  is  an  implied  warranty  that  the  goods 
shall  be  reasonably  fit  for  such  purpose. 

Section  15.  (3)  If  the  buyer  has  examined  the  goods,  there 
is  no  implied  warranty  as  regards  defects  which  such  examination 
ought  to  have  revealed. 

Section  15.  (4)  In  the  case  of  a  contract  to  sell  or  a  sale  of  a 
specified  article  under  its  patent  or  other  trade  name,  there  is  no 
implied  warranty  as  to  its  fitness  for  any  particular  purpose. 

One  may  desire  to  purchase  some  article  to  be  used  in  the  accom- 
plishment of  a  certain  result.  He  may  not  know  what  article  is 
best  suited  to  his  purpose.  The  prospective  purchaser  may  explain 
this  situation  to  some  one  competent  to  select  the  particular  ar- 
ticle. During  the  negotiations  it  is  easily  conceivable  that  the 
seller  will  make  an  express  warranty  but  if  he  does  not  do  so  the 
law  implies  a  warranty  that  the  goods  sold  are  reasonably  fit  for 
the  particular  purpose. 

This  warranty  has  a  very  wide  application.  It  applies  to  all  sell- 
ers. The  question  whether  it  is  to  be  implied  in  a  particular  case 
is  essentially  a  question  of  fact.  It  is  easier  to  conclude  that  the 
buyer  relied  upon  the  seller's  skill  or  judgment  in  contracts  to 
sell  and  of  sale  of  goods  identified  by  description  than  it  is  when 
the  contract  to  sell  or  sale  concern  goods  identified  in  some  other 
way,  as  when  the  subject  of  the  bargain  is  physically  present  and 
open  to  actual  examination  by  the  buyer.    When  the  goods  are  to 


1162  SALES  (Part  4 

be  identified  by  description  and  the  seller  makes  known  the  par- 
ticular purpose  for  which  the  goods  are  required,  evidence  that  the 
buyer  asked  for  something  by  its  patent  or  trade  name  would  be 
almost  conclusive  evidence  that  the  buyer  relied  upon  his  own 
judgment.  Even  in  a  sale  of  goods,  physically  present,  it  is  still 
possible  for  the  buyer  to  rely  upon  the  seller's  skill  or  judgment. 
This  opportunity  for  inspection  or  actual  inspection  is  evidence 
that  the  buyer  relied  on  his  own  judgment,  but  it  is  not  conclusive. 
In  sales  of  machinery  and  mechanical  devices  the  warranty  of 
reasonable  fitness  for  a  particular  purpose  is  common.  This 
warranty  should  not  be  confused  with  that  of  merchantability. 
The  warranty  of  fitness  for  a  particular  purpose,  in  some  cases, 
will  be  the  equivalent  of  merchantability,  in  others,  it  may  be 
greater  or  less  than  that  of  merchantability.  If  a  buyer  desired  a 
machine  which  could  be  used  to  thrash  wheat,  oats,  barley  and  flax. 
and  the  machine  would  properly  thrash  the  grains  but  would  not 
thrash  flax,  there  would  be  a  breach  of  the  warranty  though  ob- 
viously the  machine  was  merchantable.  It  is  a  question  of  fact 
in  each  case.  For  what  purpose  were  these  goods  intended?  Did 
the  buyer  rely  upon  the  seller's  skill  or  judgment?  Were  the 
goods  reasonably  fit  for  the  purpose  made  known  to  the  seller? 


HOYT   V.   HAINSWORTH  MOTOR  CO. 
(Supreme  Court  of  Washington,  1920.     112  Wash.  440,  192  Pac.  918.) 

Main,  J.  This  is  an  action  for  damages  for  breach  of  an  alleged 
implied  warranty  in  the  sale  of  an  automobile.  The  case  was  tried  to 
the  court  and  a  jury,  and  resulted  in  a  verdict  for  the  plaintiff.  *  *  * 
The  defendant  appeals.    *     *    * 

The  appellant  is  *  *  *  engaged  in  the  business  of  selling  auto- 
mobiles at  Seattle,  Wash.  On  April  5  it  sold  to  the  respondent  a  new 
1918  model,  six-cylinder  Oldsmobile.  At  the  time  the  car  was  sold 
the  appellant  had  on  the  floor  of  its  showroom  this  particular  car.  It 
did  not,  however,  sell  this  car,  but  sold  a  car  of  the  model  described. 
The  respondent  saw  and  looked  at  the  car  that  was  in  the  showroom. 
A  few  days  after  the  respondent  had  agreed  to  purchase  a  car,  the 
appellant  delivered  to  him  the  car  which  he  looked  at  in  the  show- 
room, and  then  told  him  that  it  was  the  same  car.  The  respondent 
operated  the  car  after  it  was  delivered  to  him  for  a  period  of  ap- 
proximately 11  months.  The  car  was  defective,  in  that  the  pistons 
were  a  little  too  small  for  the  cylinders.  The  car  did  not  prove  to 
be  satisfactory,  and  after  having  operated  it  for  the  time  mentioned 
the  present  action  was  instituted,  for  the  purpose  of  recovering  dam- 
ages for  a  breach  of  implied  warranty.  It  should  be  noted  and  kept 
in  mind  that  the  appellant  was  not  the  manufacturer  of  the  automo- 
bile, but  simply  a  dealer.  The  theory  of  the  respondent  that  the  sale 
was  not  of  a  particular  car,  but  of  a  particular  model  will  be  adopted. 

The  appellant  claims  that,  since  it  was  a  dealer,  and  not  a  manu- 
facturer, in  selling  the  car  there  was  no  implied  warranty  against  la- 
tent defects.  The  respondent  claims  that,  since  he  purchased,  not  a 
specific  car,  but  a  car  of  a  particular  model,  even  though  the  appel- 


Ch.  6)  WARRANTIES  1163 

lant  were  a  dealer,  there  would  be  an  implied  warranty  against  latent 
defects,  such  as  ordinary  inspection  would  not  disclose.  The  defect 
in  this  car  was  latent,  and  one  that  ordinary  inspection  would  not 
disclose.  The  controlling  question  is  whether,  under  the  facts  stated, 
the  appellant  as  a  dealer  is  liable  upon  an  implied  warranty ;  there 
being  no  express  warranty.  Upon  the  ciuestion  as  to  whether  the  deal- 
er is  liable  upon  an  implied  warranty  for  a  latent  defect  in  an  article 
sold,  the  decisions  of  the  various  courts  that  have  passed  upon  the 
question  are  divided.  In  some  it  is  held  that  there  is  such  an  implied 
warranty.  The  majority  of  the  courts,  however,  in  this  country  hold 
that  in  the  case  of  the  dealer,  as  distinguished  from  the  manufacturer, 
there  is  no  such  implied  warranty.  Williston  on  Sales,  §  233.  This 
court,  in  Hurley-Mason  Co.  v.  Stebbins,  Walker  &  Spinning,  79  Wash. 
366,  140  Pac.  381,  L.  R.  A.  1915B,  1131,  Ann.  Cas.  1916A,  948,  has 
adopted  the  majority  rule;  that  is,  that  a  dealer  does  not  impliedly 
warrant  against  defects  not  discoverable  by  ordinary  inspection  and 
tests.     *     *     * 

Under  the  undisputed  facts  in  the  present  case,  there  was  a  sale  of 
an  automobile  of  known  manufacture.  There  is  a  rule  collateral  to 
that  above  referred  to  as  the  majority  rule,  to  the  effect  that  where  an 
article  of  known  manufacture  is  made  by  one  not  tlii^  vendor,  and  the 
vendee  knows  this  fact,  there  is  no  implied  warranty  by  the  dealer 
against  latent  defects.     *     *     * 

There  is  no  escaping  the  conclusion  that  the  appellant  in  this  case 
sold  to  the  respondent  an  article  of  known  manufacture,  of  which 
the  vendor  or  dealer  was  not  the  builder.  The  case  comes  squarely 
within  this  rule.  The  appellant  relies  upon  the  rule  that,  where  goods 
of  some  specific  kind  are  ordered  of  the  manufacturer  or  dealer, 
which  the  buyer  has  neither  inspected  nor  selected,  there  is  an  im- 
plied warranty  that  the  article  delivered  shall  be  of  fair  average 
quality  or  goodness  according  to  its  kind,  and  free  from  remarkable 
defects.  Mechem  on  Sales,  §  1340.  But  under  this  rule,  as  pointed 
out  by  the  same  author  in  section  1345,  before  a  dealer  can  be  held 
liable  on  an  implied  warranty,  the  conditions  stated  in  the  rule  must 
be  present,  "  ''''  *  *  namely,  an  executory  agreement  by  the  dealer 
to  supply  an  article  not  yet  ascertained,  but  left  to  be  determined  by 
him  according  to  his  own  judgment,  in  view  of  the  purpose  to  be  sub- 
served by  it  as  communicated  to  him  by  the  buyer."  This  case,  how- 
ever, does  not  come  within  this  rule.  Nothing  was  left  to  be  deter- 
mined according  to  the  judgment  of  the  appellant,  and  his  duty  was 
fulfilled  when  he  delivered  a  car  of  the  particular  model  contracted 
for. 

To  review  the  many  authorities  cited  in  the  respondent's  brief  and 
distinguish  them  seriatim  would  extend  this  opinion  to  an  unreasona- 
ble length  and  serve  no  useful  purpose.  Generally  speaking,  it  may  be 
said  that  the  cases  cited  fall  into  one  of  the  four  following  classes : 
First,  they  are  cases  that  have  adopted  what  is  called  the  minority 
rule,  and  not  the  rule  of  the  majority,  as  adopted  in  fhe  Hurley-Ma- 
son Case.  Such  cases  would  not  be  persuasive  in  this  jurisdiction, 
so  long  as  the  rule  of  the  case  referred  to  stands.  Second,  cases 
where  there  is  an  express  warranty.  Third,  cases  where  the  purchas- 
er desires  an  article  for  a  specific  purpose,  and  communicates  this 
purpose  to  the  dealer,  and  the  latter  undertakes  to  furnish  an  article 
suitable  for  the  purpose  specified.     *     *    *     Fourth,  where  goods  of 


1164  SALES  (Part  4 

some  specific  kind  are  ordered  of  the  manufacturer  or  dealer  which 
the  buyer  has  neither  inspected  nor  selected.  As  already  pointed  out 
the  present  case  does  not  fall  within  this  rule.     *    *     * 

The  judgment  will  be  reversed,  and  the  cause  remanded,  with  di- 
rections to  the  superior  court  to  dismiss  the  action. 


WARD  V.  GREAT  ATT^ANTIC  &  PACIFIC  TEA  CO. 

(Supreme  Judicial  Court  of  Massachusetts,  1918.    231  Mass.  90,  120  N.  E.  225, 

5  A.   L.   R.  242.) 

Action  by  Bliss  B.  Ward  against  the  Great  Atlantic  &  Pacific  Tea 
Company.  On  report,  on  an  agreed  statement  of  facts,  to  the  Su- 
preme Judicial  Court.    Judgment  ordered  for  plaintiff. 

Action  based  on  an  implied  warranty  as  to  the  proper  condition  of 
goods  sold.  Plaintiff  suffered  injuries  in  consequence  of  the  presence 
of  stones  in  a  can  of  baked  beans  sold  by  defendant  to  plaintiff.  In 
the  superior  court,  on  an  agreed  statement  of  facts,  the  case  was  re- 
ported to  the  Supreme  Judicial  Court. 

RuGG,  C.  J.  The  defendant  conducts  a  retail  grocery  store  at 
Ipswich.  It  had  for  sale  at  this  store  beans  in  sealed  all  tin  cans, 
bearing  this  label:  "Grandmother's  Brand  A  &  P  Beans  &  Pork  with 
Sauce,  contents  2  lbs.  1  oz."  "Remove  contents  of  this  can  as  soon 
as  opened  and  place  in  earthenware  dish."  "The  Great  Atlantic  & 
Pacific  Tea  Co.,  Incorporated,  Distributors,  Jersey  City,  N.  J.,  U. 

b.    A. 

These  cans  of  beans  were  purchased  by  the  defendant  from  the 
Thomas  Canning  Company,  of  Grand  Rapids,  Mich,  after  canning. 
It  furnished  the  labels  which  were  affixed  to  the  cans  by  the  manu- 
facturer. The  defendant  had  no  supervision  of  the  process  of  canning 
and  no  knowledge  or  means  of  knowledge  that  any  foreign  substance 
was  in  the  cans.  Such  cans  are  always  sold  to  the  public  in  a  sealed 
condition.  *  *  *  ^|-  j-jq  {[^yiq  after  the  sealing  of  the  can  until  it 
was  opened  by  the  plaintiff  was  there  visible  indication  that  the  con- 
tents were  in  any  way  defective  or  that  the  can  contained  any  foreign 
substance.  The  can  contained  baked  beans,  among  which  was  a  small 
pebble.  The  plaintiff  was  ignorant  of  its  presence  and,  while  eating 
the  beans,  broke  his  tooth  on  the  pebble  and  later,  on  account  of  this 
injury,  was  obliged  to  have  the  tooth  extracted.     *     *     * 

The  transaction  between  the  plaintiff  and  the  defendant  as  to  the 
can  of  beans  necessarily  involved  a  purchase  of  food  to  be  eaten. 
That  need  not  be  stated  in  precise  words.  It  was  an  underlying  and 
essential  condition  of  the  contract,  implied  without  expression.  It 
arose  from  the  nature  of  the  goods,  the  size  of  the  purchase  and  the 
terms  of  the  label.  It  is  provided  by  the  Sales  Act  (St.  1908,  c.  237) 
§  15  (1) :  "Where  the  buyer,  expressly  or  by  implication,  makes 
known  to  the  seller  the  particular  purpose  for  which  the  goods  are 
required,  and  it  appears  that  the  buyer  relies  on  the  seller's  skill  or 
judgment,  whether  he  be  the  grower  or  manufacturer  or  not,  there  is 
an  implied  warranty  that  the  goods  shall  be  reasonably  fit  for  such 
purpose." 

That  provision  governs  the  relations  of  the  parties  in  the  case  at  bar. 
In  this  respect  the  statute  is  in  substance,  so  far  as  concerns  a  dealer 
such  as  tlie  defendant,  simply  a  codification  of  the  common  law.  It 
was  said  in  Farrell  v.  Manhattan  Market  Co.,  198  Mass.  271,  279, 


Ch.  6)  WARRANTIES  1165 

280,  281,  84  N.  E.  481,  485  (15  L.  R.  A.  [N.  S.]  884,  126  Am.  St. 
Rep.  436,  15  Ann.  Cas.  1076)  a  case  arising  before  the  Sales  Act: 

"Finally,  provisions  may  be  ordered  by  the  purchaser  in  person  in 
the  dealer's  shop,  in  such  a  way  that  it  is  made  known  to  the  dealer 
that  his  knowledge  and  skill  are  relied  on  to  supply  a  wholesome  food, 
and,  if  they  are  so  ordered,  he  is  liable  if  they  are  not  fit  to  be  eaten. 
*  *  *  If  the  sale  is  by  a  dealer  and  the  selection  of  food  is  left  to 
him,  it  is  an  implied  term  or  condition  of  the  sale  that  the  provisions 
sold  shall  be  fit  for  food  whether  supplied  under  a  pre-existing  con- 
tract *  *  *  or  in  response  to  an  order  not  given  in  person  *  *  * 
or  even  when  the  order  is  given  in  person  in  the  dealer's  shop,  provid- 
ed *  *  *  that  the  selection  is  left  to  the  dealer.  *  *  *  But, 
even  when  the  sale  is  by  a  dealer,  if  the  provisions  are  selected  by  the 
buyer  and  the  selection  is  not  left  to  the  judgment  and  skill  of  the 
dealer,  the  general  rule  applies  and  the  dealer  is  not  liable  (in  the  ab- 
sence of  knowledge  by  the  dealer  that  the  provisions  are  unsound)  if 
provisions  are  not  fit  for  food."     *     *     * 

That  statement  of  the  law,  which  is  but  an  amplification  so  far  as 
relates  to  the  case  at  bar  of  the  terms  of  the  Sales  Act,  governs  the 
facts  here  presented.  The  defendant  was  a  dealer,  the  plaintiff  a 
buyer  at  retail.  There  arises  inevitably  the  implication  that  the  plain- 
tiff made  known  to  the  defendant  that  he  was  purchasing  the  beans 
for  consumption  as  food  and  that  he  was  relying,  because  from  the 
character  of  the  transaction  he  was  bound  to  rely,  upon  the  skill  of 
the  defendant  in  selecting  the  can  which  was  offered  to  him. 

It  is  not  expressly  stated  in  the  agreed  facts  that  the  defendant  se- 
lected the  can  for  delivery  to  the  plaintiff',  or  that  the  latter  relied  upon 
the  skill  and  judgment  of  the  defendant  in  selecting  the  can  for  de- 
livery. But  that  he  did  so  rely  seems  an  almost  irresistible  inference 
from  the  facts  stated.  The  cans  in  the  defendant's  stock  were  all 
alike  in  label,  and  in  general  appearance.  The  cans  were  sealed. 
Their  contents  could  not  in  the  nature  of  things  be  open  to  inspection 
before  the  sale.  There  could  be  no  intelligent  selection  based  upon 
any  observation  by  the  purchaser.  There  is  no  room  for  the  exercise 
of  individual  sagacity  in  picking  out  a  particular  can.  The  customer 
at  a  retail  store  is  ordinarily  bound  to  rely  upon  the  skill  and  experi- 
ence of  the  seller  in  determining  the  kind  of  canned  goods  which  he 
will  purchase,  unless  he  demands  goods  of  a  definite  brand  or  trade- 
name. The  situation  is  quite  different  from  the  choice  of  a  fowl  or 
a  piece  of  meat  from  a  larger  stock,  all  open  to  inspection,  where  there 
is  opportunity  for  the  exercise  of  an  independent  judgment  by  both 
the  buyer  and  the  seller,  and  where,  therefore,  the  fact  as  to  the  one 
who  makes  the  selection  is  of  significance,  as  in  the  Farrell  Case. 
The  case-  at  bar  must  be  treated  on  the  footing,  as  matter  of  neces- 
sary inference  arising  from  the  relation  of  the  parties,  so  far  as  that 
is  material  in  view  of  the  other  facts,  that  the  plaintiff  relied  upon  the 
knowledge  and  trade  wisdom  of  the  defendant  in  purchasing  the  can 
of  beans.  In  the  absence  of  an  express  statement  to  the  contrary, 
this  must  be  regarded  as  a  necessary  inference  from  the  relation  of 
parties. 

There  appears  to  us  to  be  no  sound  reason  for  ingrafting  an  ex- 
ception on  the  general  rule,  because  the  subject  of  the  sale  is  canned 
goods,  not  open  to  the  immediate  inspection  of  the  dealer,  who  is  not 
the  manufacturer,  any  more  than  of  the  buyer.    It  doubtless  still  re- 


1166  SALES  (Part  4 

mains  true  that  the  dealer  is  in  a  better  position  to  know  and  ascer- 
tain the  reHabiHty  and  responsibiHty  of  the  manufacturer  than  is  the 
retail  purchaser.  But  the  principle  stated  in  Farrell  v.  Manhattan 
Market  Co.,  198  Mass.  271,  84  N.  E.  481,  15  L.  R.  A.  (N.  S.)  884,  126 
Am.  St.  Rep.  436,  15  Ann.  Cas.  1076,  is  a  general  one.  It  has  long 
been  estabhshed.  Simply  because  it  may  work  apparent  hardship  in 
certain  instances  is  no  reason  for  changing  it  to  lit  particular  cases. 
It  is  a  salutary  principle.  It  has  become  wrought  into  the  fabric  of 
the  law  as  the  result  of  long  experience.  It  may  be  assumed  that  the 
affairs  of  mankind  have  become  adjusted  to  it.  It  has  recently  been 
adopted  by  the  Legislature  in  codifying  the  law  as  to  sales.  It  im- 
poses liability  in  the  absence  of  an  express  contract  between  the  par- 
ties governing  the  subject.  It  places  responsibility  upon  the  party  to 
the  contract  best  able  to  protect  himself  against  original  wrong  of 
this  kind,  and  to  recoup  himself  in  case  of  loss,  because  he  knows  or" 
comes  in  touch  with  the  manufacturer.  In  the  case  at  bar  the  plain- 
tiff had  no  means  of  ascertaining  the  manufacturer  from  inspection  of 
the  goods  bought.  The  retail  purchaser  in  cases  of  this  sort  ordinari- 
ly would  be  at  some  disadvantage  if  his  only  remedy  were  against  the 
manufacturer.    *     *     * 

No  discussion  is  required  to  demonstrate  that  canned  beans  and 
pork  are  not  fit  for  consmnption  if  they  contain  a  pebble  of  sufficient 
size  to  break  a  tooth.  It  is  matter  of  common  knowledge  that  pebbles 
often  are  found  in  raw  and  uncleaned  beans.  In  domestic  use,  care- 
ful sorting  is  required  to  free  them  from  such  substance.    *    *     * 

It  follows  that  the  plaintiff'  is  entitled  to  recover,  and  since  it  is 
agreed  that  his  damages  are  $350,  judgment  may  be  entered  in  his 
favor  for  that  sum.    *    *    * 


COMMEECIAL  REALTY  &  CONSTRUCTION  CO.   v.  DORSET. 
(Court  of  Appeals  of  Maryland,   1910.     114  Md.   172,   78  Atl.   1099.) 

Action  by  William  C.  Dorsey  against  the  Commercial  Realty  & 
Construction  Company.  From  a  judgment  for  plaintiff,  defendant  ap- 
peals. 

ScHMUCKER,  J.  The  appeal  in  this  case  was  taken  from  a  judgment 
of  the  superior  court  of  Baltimore  city  against  the  appellant  company 
in  a  suit  on  a  contract  for  the  supply  of  building  materials. 

The  company,  on  the  eve  of  the  erection  of  a  row  of  small  build- 
ings in  Baltimore  city,  entered  into  a  written  contract  with  the  appel- 
lee, William  C.  Dorsey,  on  December  9,  1908,  to  supply  it  with  the 
requisite  quantity  of  certain  kinds  of  lumber  and  millwork,  at  specified 
prices,  for  the  buildings.  The  negotiations  were  made,  and  the  con- 
tract was  signed  on  behalf  of  the  company  by  Abel  Rosenthal,  its  pres- 
ident, and  its  corporate  seal  was  afffxed  thereto.  It  was  also  signed,  but 
not  sealed,  by  Dorsey.     *     *     * 

There  is  evidence  in  the  record  on  behalf  of  the  plaintiff"  tending  to 
show  that  Rosenthal,  when  he  looked  at  the  lumber  in  Dorsey's  yard, 
for  the  purpose  of  purchasing  material  to  be  used  in  the  erection  of 
the  houses,  informed  Dorsey  that  the  company  wanted  cheap  lumber, 
and  that  he  was  then  shown  by  Dorsey  the  identical  lumber  which  was 
afterwards  delivered  under  the  contract,  and  that  he  agreed  to  buy  it, 
and  that  the  contract  prices  for  it  were  made  low  because  of  its  low 
quality.     *     »     f= 


Ch.  6)  WARRANTIES  1167 

The  fourth  paragraph  denied  the  defendant's  right  to  recoup  either 
the  item  of  $75  of  alleged  loss  from  the  defective  quality  of  certain 
joists  supplied  by  the  plaintiff.  *  *  *  The  law  upon  this  subject 
received  consideration  by  us  in  Queen  City  Glass  Co.  v.  Clay  Pot 
Co.,  97  Md.  429,  55  Atl.  447,  where  we,  quoting  with  approval  from  the 
cases  of  Jones  v.  Just,  L.  R.  3  O.  B.  197,  and  Rice  v.  Forsyth,  41  Md. 
403,  and  relying  upon  other  cases  there  cited,  said :  "Where  a  manu- 
facturer contracts  to  supply  an  article  which  he  manufactures  to  be  ap- 
plied to  a  particvtlar  purpose  so  that  the  buyer  necessarily  trusts  to  the 
judgment  or  skill  of  the  manufacturer,  there  is  in  that  case  an  im- 
plied term  or  warranty  that  it  shall  be  reasonably  fit  for  the  purpose 
to  which  it  is  to  be  applied.  In  such  a  case  the  buyer  trusts  to  the 
manufacturer  or  dealer  and  relies  upon  his  judgment  and  not  upon  his 
own."  We  have  held  with  equal  clearness  that,  where  the  seller  is 
not  the  manufacturer  of  the  article  sold  and  the  buyer  has  an  oppor- 
tunity of  examining  it,  there  is  no  implied  warranty,  in  the  absence  of 
fraud,  that  it  shall  be  fit  for  the  purpose  for  which  it  was  bought.  In 
such  cases,  if  there  be  no  express  warranty,  the  doctrine  of  caveat 
emptor  applies,  and  the  buyer,  not  having  seen  fit  to  exact  a  warranty, 
takes  upon  himself  the  risk  as  to  quality.  Horner  v.  Parkhurst,  71 
Md.  116,  17  Atl.  1027.     *    *    * 

In  the  case  now  before  us  Jt  is  not  contended  that  the  contract  sued 
on  contained  any  express  warranty,  and,  as  the  joists,  alleged  to  have 
been  defective,  were  merely  commercial  lumber,  and  not  goods  manu- 
factured by  the  seller,  and  the  buyer  had  ample  opportunity  to  inspect 
them  after  they  were  delivered  before  using  them,  there  was  no  im- 
plied warranty,  but  he  must  be  regarded  as  having  assumed  the  risk 
of  their  quality.     *     *     * 

For  the  reasons  mentioned  by  us,  we  will  affirm  the  judgment  ap- 
pealed from.     *     *     * 

AIMERICAN  SODA  FOUNTAIN  CO.  v.  SPRING  WATER 

CARBONATING  CO. 

(Supreme  Judicial  Court  of  Massachusetts,  1911.    207  Mass.  488,  93  N.  E.  801.) 

Action  by  the  American  Soda  Fountain  Company  against  the  Spring 
Water  Carbonating  Company.  Heard  on  exceptions  by  defendant  to 
ruling  on  offer  of  proof. 

LoRiNG,  J.  This  is  an  action  on  a  written  order  for  100  special 
draught  arms  to  be  manufactured  "as  per  drawing  submitted."  At 
the  trial  it  was  admitted  that  100  special  draught  arms  manufactured 
according  to  the  "drawing  submitted"  had  been  delivered  to  the  de- 
fendant, and  that  $272  of  the  purchase  price  had  been  paid  by  it  on 
account.  But  the  defendant  contended  that  the  contract  was  procured 
by  fraud  and  that  it  had  been  avoided  on  that  ground.  It  set  this  up 
in  defense  to  the  action  for  the  unpaid  balance  of  the  purchase  price, 
and  filed  a  declaration  in  set-off  to  recover  back  the  $272  paid  by  it 
to  the  plaintiff  on  account. 

In  support  of  the  contention  the  defendant  offered  to  prove :  "That 
during  preliminary  negotiations  and  at  the  time  this  order  or  contract 
was  signed  the  plaintiff  represented  to  the  defendant  that  it  would 
manufacture  special  draught  arms  to  be  used  for  the  purpose  of  draw- 
ing root  beer  from  wooden  kegs,  which  would  deliver,  automatically, 
two  streams  of  different  volume  and  at  different  degrees  of  velocity 


1168  SALES  (Part  4 

and  which  would  be  durable  and  practical  for  the  purpose  for  which 
they  were  designed,  and  submitted  to  the  defendant  a  drawing  or  plan 
of  a  draught  arm,  claimed  by  the  plaintiff  to  be  durable  and  practical 
for  the  purpose  aforesaid,  and  represented  that  it  would  manufacture 
for  the  defendant  special  draught  arms,  in  accordance  with  said  plan, 
which  would  accomplish  the  purposes  aforesaid;  that  the  defendant, 
relying  upon  said  representations  and  believing  them  to  be  true,  or- 
dered the  plaintiff  to  manufacture  for  it  one  hundred  (lOO"!  of  said 
special  draught  arms,  made  according  to  said  drawing  or  plan." 
The  judge  ruled  "that  the  offer  of  proof,  if  maintained,  did  not  con- 
stitute a  defense  to  the  action  and  did  not  entitle  the  defendant  to  re- 
cover on  its  declaration  in  set-off."  The  case  is  here  on  an  excep- 
tion to  that  ruling. 

It  is  stated  by  the  defendant  in  its  bill  of  exceptions  that  it  was 
induced  to  give  the  order  sued  on  "by  certain  false  representations, 
not  fraudulent  in  fact,  but  amounting  in  law  to  fraudulent  representa- 
tions" ;  and  its  sole  contention  is  that  the  representations  of  the  plain- 
tiff which  it  offered  to  prove  were  representations  of  fact  made  by  the 
plaintiff  as  of  its  own  knowledge  and  so  of  themselves  fraudulent  with- 
out proof  of  a  scienter.     *     *     * 

To  make  out  a  fraud  of  that  kind  the  defendant  had  to  prove  that 
the  plaintiff  had  in  fact  tested  the  special  draught  arms  made  ac- 
cording to  the  "drawing  submitted,"  or  represented  that  that  had  been 
done,  and  that  the  result  of  the  test  was  that  they  would  do  what  the 
defendant  wished  them  to  do.  Or  the  defendant  had  to  prove  some- 
thing equivalent  to  that.  What  he  offered  to  prove  manifestly  was 
short  of  that  if  it  had  stood  by  itself.  But  it  did  not  stand  by  itself 
in  the  case  at  bar.  Witnesses  called  by  the  plaintiff  had  testified  "that 
the  defendant  desired  to  procure  a  faucet  through  which  both 'still 
and  live  beer  could  be  drawn ;  that  the  draughtsman  of  the  plaintiff 
made  a  working  drawing  of  a  draught  arm  designed  to  draw  both 
still  and  live  beer,  and  submitted  it  to  Mr.  Flynn.  It  appeared  that 
Flynn,  the  defendant's  manager,  examined  this  sketch  and  signed 
and  delivered  to  the  plaintiff""  the  order  sued  on,  and  there  was  no 
offer  to  contradict  this.  On  this  bill  of  exceptions  it  must  be  taken 
that  the  plaintiff  caused  its  draughtsman  to  design  the  arm  shown  in 
the  "drawing  submitted"  for  the  purpose  of  accomplishing  what  the 
defendant  wished,  and  that  the  representations  which  the  defendant 
offered  to  prove  were  not  representations  by  the  plaintiff  as  of  its  own 
knowledge  as  to  what  these  special  draught  arms  had  done,  but  a  rep- 
resentation of  its  opinion  as  to  what  they  ought  to  do.  Such  misrep- 
resentations "not  fraudulent  in  fact"  are  not  ground  for  rescinding  a 
contract.     *     *     * 

Exceptions  overruled. 


SPENCER  HEATER  CO.  v.  ABBOTT. 

(Court  of  Errors  and  Appeals  of  New  Jersey,  1918.    91  N.  J.  Law,  594, 

104  Atl.  91.) 

Action  by  the  Spencer  Heater  Company  against  Randolph  Abbott, 
trading,  etc.,  as  the  Park  Floral  Company.  Judgment  for  defendant, 
and  plaintiff  appeals. 

Trenchard,  J.  This  action  was  brought  on  a  mechanics'  lien  claim 
to  recover  the  price  of  certain  Spencer  steam  heaters  furnished  to  the 


Ch.  6)  WARRANTIES  1169 

defendant,  to.s^etlier  with  some  smaller  items  of  labor  and  expense.  The 
defendant  is  a  florist.  He  admitted  that  the  claim  was  unpaid,  and, 
with  his  answer,  filed  a  counterclaim  for  loss  of  profits  on  plants,  and 
for  expenses,  caused  by  the  alleged  failure  of  the  plaintiff  to  perform 
its  contract  to  furnish  heaters  adequate  to  heat  the  defendant's  green- 
houses. The  jury  rendered  a  verdict  for  the  defendant,  and  the  plain- 
tiff appealed  from  the  consequent  judgment.     *     *     * 

The  evidence  tended  to  show  that  what  occurred  was  this  :  *  *  * 
The  plaintiff,  at  the  request  of  the  defendant,  sent  its  salesman  to  the 
defendant's  place  for  a  consultation  as  to  the  number  and  sizes  of 
heaters  required  for  the  defendant's  purposes.  The  salesman  went 
there,  examined  the  premises,  took  measurements,  and  told  the  de- 
fendant, who  disclaimed  any  knowledge  of  the  number  and  sizes  re- 
quired, that  a  No.  11  and  a  No.  12  would  supply  the  heat  required,  and 
agreed  to  furnish  them.  Now  the  question  whether  or  not  a  statement 
or  affirmation  accompanying  a  sale  is  a  warranty  depends  upon 
whether  the  conditions  were  such  that  the  vendee  had  a  right  to  un- 
derstand, and  did  understand,  that  what  was  said  by  the  vendor  was 
meant  as  a  warranty.  A  decisive  test  is  whether  the  vendor  assumes 
to  assert  a  fact  of  which  the  buyer  is  ignorant,  or  merely  states  an 
opinion  or  judgment  upon  a  matter  of  which  the  vendor  has  no  spe- 
cial knowledge,  and  on  which  the  buyer  may  be  expected  also  to  have 
an  opinion,  and  to  exercise  his  judgment.  In  the  former  case  there 
is  a  warranty ;  in  the  l-atter,  not.  *  *  *  Tested  by  that  rule,  it  was 
open  to  the  jury  to  find,  as  they  did,  that  the  plaintiff  warranted  the 
heaters  to  do  the  work  the  defendant  required.     *     *     * 

In  the  present  case  the  evidence  tends  to  show  that  after  the  heaters 
furnished  had  failed  to  do  the  work,  the  facts  and  circumstances  were 
brought  to  the  attention  of  the  manager  of  the  plaintiff.  *  *  * 
He  acknowledged  that  the  trouble  was  due  to  the  mistake  of  their 
agent,  offered  to  pay  the  expense  of  a  temporary  makeshift,  proceeded 
to  install  adequate  heaters,  and  all  without  any  repudiation  of  the  acts 
of  their  salesman.  We  think,  therefore,  that  the  motion  for  a  direc- 
tion was  properly  denied. 

But  we  think  the  learned  trial  judge  erred  in  his  charge  respecting 
the  measure  of  damages.  It  was  a  part  of  defendant's  business  to 
force  plants  into  bloom  to  make  them  ready  for  the  winter  and  early 
spring  markets,  and  for  that  purpose  he  required  heat  in  his  green- 
house of  a  certain  temperature.  It  was  open  to  the  jury  to  find  that 
the  plaintiff  knew  this,  and  contracted  to  furnish  heaters  for  that  pur- 
pose, and  failed  in  the  performance  of  that  contract.  The  trial  judge 
directed  the  jury  to  consider  the  retail  price  of  the  flowers,  what 
it  would  cost  to  replace  them,  and  all  the  surrounding  circumstances. 
But  we  think  that  was  an  inaccurate  and  misleading  statement  of  the 
measure  of  damages  in  a  case  of  the  retardation  in  the  development  of 
plants  for  a  particular  market.  The  true  measure  of  damage  was  the 
difference  between  the  market  value  of  such  plants  in  the  winter  and 
early  spring  markets  and  their  market  value  when  they  were  in  fact 
matured.     *     *     * 

The  judgment  will  be  reversed  and  a  venire  de  novo  awarded. 
B.&  B.Bus.Law— 74 


1170  SALES  (Part  4 


CENTURY    ELECTRIC   CO.    v.    DETROIT   COPPER    &   BRASS    ROLLING 

MILLS. 

(United  States  Circuit  Court  of  Appeals;,  Eighth  Circuit,  1920.     264  Fed.  49.) 

Sanborn,  Circuit  Judge.  This  is  an  action  by  the  vendee  in  a  writ- 
ten contract  of  sale,  at  prices  therein  stated,  of  400,000  pounds  of  brass 
rods,  of  sizes  and  other  quahties  therein  specified,  to  recover  back 
the  purchase  price,  $8,506.03,  of  27,504  pounds  thereof,  which  the 
vendee  returned,  becavise,  as  it  claims,  they  were  too  hard  to  be  cut 
and  made  into  brass  primers  by  automatic  screw  machines.  The  ven- 
dor defended  on  the  ground  that  it  was  under  no  obligation  to  make 
the  rods  of  such  a  degree  of  hardness  that  they  could  be  so  machined. 
The  written  agreement  contained  no  covenant  of  that  nature.  The 
vendee  offered  to  prove  that  in  the  negotiations  for  the  contract,  just 
before  it  was  made,  the  vendor  made  a  parol  agreement  to  that  efifect. 
The  court  ruled  out  this  evidence,  because  it  varied  the  written  con- 
tract, by  adding  a  new  covenant  to  it.  The  vendee  contended  that 
there  was  an  implied  warranty  to  that  effect,  but  the  court  held  oth- 
erwise, and  directed  a  verdict  for  the  vendor.  These  rulings  are  as- 
signed as  error.     *     *     * 

The  written  contract  clearly  describes  the  ingredients,  60  parts 
copper  and  40  parts  spelter,  of  the  mixture  from  which  the  brass 
rods  were  to  be  produced,  the  size  and  shape  of  the  rods,  and  the 
vendor  made  and  delivered  rods  which  filled  the  requirements  of  the 
writing.  When  the  parties  were  negotiating  for  the  contract,  the 
vendee  might  have  required,  and,  if  the  vendor  had  consented,  might 
have  obtained,  a  provision  in  the  written  agreement  that  the  vendor 
would  sell  and  deliver  brass  rods  that  could  be  readily  cut  and  made 
into  Russian  primers  by  the  use  of  automatic  screw  machines,  but  it 
did  not  do  so.     *     *     * 

Counsel,  however,  maintain  that,  out  of  the  rejected  testimony  that 
the  vendor,  before  it  made  the  contract,  knew  the  custom  of  cutting 
and  making  the  rods  into  Russian  primers  by  the  use  of  automatic 
screw  machines,  that  the  vendee  was  buying  the  rods  to  be  even- 
tually made  into  primers,  that  the  vendor  represented,  that  it  could 
produce  the  goods  to  make  such  primers,  that  the  rods  made  by  it 
could  be  machined  readily,  that  it  had  sold  brass  rods  for  this  pur- 
pose to  another  concern,  which  had  bought  brass  rods  from  another 
brass  company,  which  were  defective,  and  had  finally  come  to  it  tQ 
get  the  proper  kind  of  brass,  there  arose  an  implied  warranty  that  the 
brass  it  sold  to  the  Century  Company  would  be  of  such  a  degree  of 
hardness  that  the  rods  could  be  readily  machined.  If  the  vendee  had 
employed  the  vendor  to  manufacture  and  deliver  to  it  brass  rods  to 
be  cut  and  made  into  Russian  primers  by  automatic  screw  machines, 
and  had  intrusted  to  the  judgment  and  skill  of  the  vendor  the  in- 
gredients and  composition  of  the  mixture  from  which  the  rods  should 
be  made  and  the  percentage  of  lead  which  the  rods  should  contain, 
such  a  warranty  might  have  arisen.  It  did  not  do  so.  *  *  *  The 
vendor  made  and  delivered  rods  which  complied  with  all  require- 
ments of  the  contract,  and  this  case  falls  under  the  rule  that,  when 
a  known,  described,  and  definite  article  is  ordered  of  a  manufacturer, 
although  it  be  stated  by  the  purchaser  to  be  required  for  a  particular 
use,  yet  if  the  known,  described,  and  definite  thing  be  actually  supplied. 


Ch.  6)  WARRANTIES  1171 

there  is  no  implied  warranty  that  it  shall  answer  the  particular  purpose 
intended  by  the  buyer.     *     *     * 

The  judgment  below  must  be  affirmed. 


SECTION  9.— IMPLIED  WARRANTIES  MAY  ARISE  FROM 
THE  USAGE  OF  TRADE 

Sales  Act,  Section  15.  (5)  An  implied  warranty  or  condition 
as  to  quality  or  fitness  for  a  particular  purpose  may  be  annexed 
by  the  usage  of  trade. 


PROCTER  et  al.  v.  ATLANTIC  FISH  COS.,  Limited. 

(Supreme  Judicial  Court  of  Massachusetts,  1911.     208  Mass.  351, 
94  X.  E.  281.) 

Action  by  Joseph  O.  Procter  and  another  against  the  Atlantic  Fish 
Com.panies,  Limited.  Verdict  for  plaintiffs,  and  defendant  brings  ex- 
ceptions. 

LoRiNG,  J.  This  is  an  action  for  breach  of  warranty  in  the  sale  of 
350  barrels,  and  for  the  breach  of  an  executory  contract  for  the  sale 
by  description  of  41  barrels  of  salt  mackerel.  The  plaintiffs'  firm  did 
business  in  Gloucester  and  the  defendant  company  in  Lunenburg,  Nova 
Scotia.  One  of  the  plaintiffs'  employes,  McKinnon  by  name,  had  seen 
the  350  barrels  on  a  wharf  in  Lunenburg  in  the  first  week. of  November, 
1906.  By  an  interchange  of  telegrams  between  the  parties  on  Novem- 
ber 10,  1906,  the  plaintiff  bought  the  350  barrels,  agreeing  to  pay  $14  a 
barrel  for  large  mackerel  and  for  the  medium  and  small  "what  they 
are  worth."  It  is  stated  in  the  bill  of  exceptions  "that  several  small 
lots  of  salt  mackerel  came  to  the  defendant's  place  of  business  within 
a  few  days  after  McKinnon's  visit,  and  that  these  lots  were  sent  to 
Yarmouth  and  shipped  with  the  larger  lot."  All  the  mackerel  were 
shipped  from  Lunenburg  to  Yarmouth,  Nova  Scotia,  where  they  were 
put  on  the  Boston  steamboat.  The  invoice  of  both  lots  was  as  follows : 
Large  mackerel :  350  barrels  and  18  half  barrels,  at  $14  a  barrel, 
amounting  to  $5,026.  Mediiim  mackerel :  8  barrels  and  8  half  barrels, 
at  $10  a  barrel,  amounting  to  $120;  and  small  mackerel,  19  barrels 
and  2  half  barrels,  at  $7.50,  amounting  to  $150;  the  whole  price  being 
$5,296,  to  w^hich  was  added  $2.50  for  consular  papers,  making  a  total 
of  $5,298.50.  For  this  the  defendant  drew  two  drafts  on  the  plaintiff's 
which  were  paid. 

By  direction  of  the  plaintiffs  the  fish  were  shipped  to  a  Boston  firm 
who  were  instructed  to  sell  them  for  the  plaintiff's.  The  plaintiffs'  Bos- 
ton agents  sent  to  the  plaintiff's'  customers  half  a  dozen  samples  of  5 
barrels  each,  which  were  returned  as  rusty  mackerel.  Thereupon  one 
of  the  plaintiffs  "examined  the  lot  of  mackerel"  and  found  it  to  be  a 
fact  that  rusty  mackerel  were  packed  in  the  middle  of  all  of  the  bar- 
rels, with  clear  fish  at  each  end.  On  finding  this  the  plaintiffs  shipped 
the  fish  to  their  wharf  in  Gloucester  at  a  cost  of  $114.50,  and  there  un- 
packed, resorted  and  repacked  them  at  a  cost  of  $177.75.  One  of  the 
plaintiff's  testified  that  there  was  no  place  in  Boston  where  that  could 
be  done  economically.    The  same  plaintiff  also  testified  that,  "the  fi-sh 


1172  SALES  (Part  4 

were  not  salable  except  as  rusty  mackerel  until  they  were  repacked 
and  that  after  repacking,  the  clear  fish  were  salable  as  clear  mackerel 
and  the  discolored  ones  as  rusty  mackerel."    *    *     *    ^ 

At  the  trial  the  plaintiff  was  allowed  to  prove  that  in  the  fish  trade 
"the  custom  is  when  a  party  purchases  a  lot  of  mackerel  he  is  sup- 
posed to  receive  clear  fish.  If  he  finds  they  are  rusty  fish  he  is  entitled 
to  cull  out  the  rusty  fish  and  have  an  allowance  of  half  price  for  the 
rustics."  What  the  plaintiff  was  allowed  to  prove  by  the  first  part  of 
this  custom  was  that  the  word  mackerel  in  the  fish  trade  has  a  trade 
meaning,  namely,  clear  mackerel,  not  rusty  mackerel.  That  was  ad- 
missible. *  *  *  The  second  part  of  the  custom  is  to  supply  by  usage 
a  basis  of  settlement  in  case  of  breach  by  delivering  rusty  in  place  of 
clear  fish.  Such  an  arrangement  could  have  been  made  by  an  express 
agreement  and  the  existence  of  the  usage  dispensed  with  the  necessity 
of  making  it  expressly.  In  our  opinion  it  is  not  a  usage  which  is  con- 
trary to  the  rule  of  law  and  so  bad  within  Dickinson  v.  Gay,  7  Allen, 
29,  83  Am.  Dec.  656.  See  in  this  connection  Barrie  v.  Quinby,  206 
Mass.  259,  92  N.  E.  451. 

The  defendant  objected  to  the  evidence  on  the  ground  that  this  was 
a  sale  of  specific  barrels  which  McKinnon  saw  and  inspected,  and  that 
the  plaintiffs  received  those  barrels  and  consequently  that  is  an  end  of 
their  case.  In  any  event  this  reasoning  applies  to  the  350  barrels  only 
and  not  to  the  49  barrels.  But  that  is  of  no  consequence  because  it  is 
not  correct.  It  is  settled  in  this  commonwealth  that  in  the  sale  of 
specific  goods  as  goods  of  a  specified  description,  the  description 
amounts  to  a  warranty  that  they  are  as  described.  It  is  also  settled 
that  the  fact  that  the  specific  goods  were  open  to  inspection  and  were 
in  fact  inspected  by  the  buyer  does  not  deprive  him  of  his  right  to  rely 
on  such  a  description  as  a  warranty  if  the  dift'erence  between  the  specif- 
ic goods  and  the  description  of  them  would  not  have  been  and  was  not 
detected  on  the  inspection.    *    *    * 

The  sixth  ruling  asked  for  by  the  defendant  was  in  these  words : 
"A  warranty  as  to  quality  or  condition  of  the  mackerel  cannot  be  im- 
plied into  this  case  by  evidence  of  custom  or  usage."  This  was  not 
given  in  terms  but  the  judge  told  the  jury  that  if  they  found  the  cus- 
tom testified  to  they  could  allow  one  half  the  cost  price  for  the  rusty 
mackerel.  Under  the  custom  clear  mackerel  and  rusty  mackerel  are 
in  the  trade  different  grades  of  mackerel,  not  different  qualities  of  the 
same  grade  of  mackerel ;  and  so  this  case  does  not  come  within  Dickin- 
son v.  Gay,  7  Allen,  29,  83  Am.  Dec.  656.  The  rule  adopted  in  that 
case  never  was  law  in  many  jurisdictions  (see  Williston  on  Sales,  § 
246)  and  has  been  changed  by  the  sales  act.  St.  1908,  c.  237,  pt.  1,  § 
15  (5).    *    *    * 

The  result  is  that  there  must  be  a  new  trial  on  damages  unless  the 
plaintiffs  remit  $292.15  with  interest  from  the  date  of  the  writ.  The 
order  will  be  that  unless  that  sum  be  remitted  within  30  days  the  ex- 
ceptions shall  be  sustained,  the  new  trial  being  confined  to  damages 
only. 

So  ordered. 


Ch.  6)  "WARRANTIES  1173 

SECTION  10.— IMPLIED  WARRANTIES  MAY  BE  NEGA- 
TIVED BY  AGREEMENT 


ROSS  V.  NORTIIRUP,  KING  &  CO. 
(Supreme  Court  of  Wisconsin,  1914.     156  Wis.  327,  144  N.  W.  1124.) 

Action  by  Samuel  C.  Ross  against  Northrup,  King  &  Co.    From  a 

jud'jment  for  plaintiff,  defendant  appeals. 

The  defendant  is  a  wholesale  dealer  in  garden  and  field  seeds.  It 
advertised  its  seeds  quite  extensively ;  such  advertisements  suggesting 
to  prospective  purchasers  of  seeds  that  they  send  for  defendant's  cata- 
logue, and  also  advise  it  of  the  name  of  the  prospective  purchaser's 
local  dealer.  The  plaintiff  is  a  farmer  who,  in  the  spring  of  1911,  was 
intending  to  plant  about  20  acres  of  tobacco.  He  saw  one  of  defend- 
ant's catalogues  in  which  was  advertised  "Comstock  Spanish  Tobacco 
Seed."  He  desired  to  raise  the  variety  of  tobacco  produced  from  this 
seed,  and  called  on  three  local  dealers  in  Viroqua  in  the  spring  of  1911 
to  purchase  the  same.  None  of  these  dealers  had  any  of  this  seed  in 
stock,  so  he  called  on  a  fourth  dealer,  one  Morton,  who  also  advised 
him  that  he  did  not  have  any  of  this  seed  on  hand.  The  plaintiff  then 
stated  that  he  would  himself  order  the  seed  from  the  defendant.  Mor- 
ton then  informed  him  that  he  was  handling  some  seeds  of  the  defend- 
ant, and  would  send  and  get  the  tobacco  seed  for  him,  and  it  was  finally 
arranged  between  them  that  Morton  should  order  one  pound  of  this 
variety  of  tobacco  seed.  The  order  was  dated  on  March  27th.  When 
the  order  was  received,  the  defendant  did  not  have  any  of  this  par- 
ticular variety  of  seed  on  hand,  and  sent  to  Virginia  for  it.  This  order 
apparently  was  promptly  filled,  except  that  the  tobacco  seed  which 
was  sent  in  response  thereto  was  not  Comstock  Spanish  tobacco  seed. 
It  was  not  possible  to  tell  from  an  examination  of  the  seed  itself  that 
it  was  not  of  the  variety  ordered.  The  defendant  shipped  this  seed 
to  Morton  on  April  8,  1911,  who  thereafter  notified  the  plaintiff  of  its 
arrival.  The  seed  was  taken  by  the  plaintiff  and  planted  by  him,  and 
proved  to  be  an  inferior  variety  of  tobacco,  or  one  which  was  not 
adapted  to  the  soil  in  which  it  was  planted.  The  defendant  did  not 
know  of  the  circumstances  under  which  the  seed  was  ordered,  and  so 
sold  the  same  to  Morton  in  the  ordinary  course  of  business.  Plaintiff 
brought  action  against  the  defendant  to  recover  damages  for  breach 
of  warranty. 

Barnes,  J.  *  *  *  The  defendant  advertised  its  seeds  in  the 
Wisconsin  Agriculturist  and  other  papers.  Such  advertisements  re- 
quested prospective  purchasers  to  send  for  its  catalogue,  A  blank  cou- 
pon to  be  used  in  ordering  the  catalogue  was  included  in  the  adver- 
tisement. "In  the  coupon  there  was  a  blank  space  in  which  was  to  be 
inserted  the  "local  dealer's  name,"  and  in  the  advertisement  proper  this 
sentence  was  used :  "Use  the  coupon  or  write  us  a  postal,  giving  the 
name  of  your  dealer,  and  sign  at  the  bottom  of  the  card  with  your  own 
name."     *     *     * 

In  disposing  of  the  case  we  will  assume  that  the  evidence  was  suffi- 
cient to  warrant  a  court  or  jury  in  finding  that  the  relation  of  buyer 
and  seller  did  not  exist  between  the  plaintiff  and  Morton,  and  that  Mor- 
ton acted  as  the  agent  of  the  plaintiff,  an  undisclosed  principal,  in 


1174  SALES  '  (Part  4 

ordering  the  goods.    This  is  the  most  favorable  view  for  the  plaintiff 
that  the  evidence  will  warrant. 

It  is  apparent  that  the  material  question  in  the  case  is  whether  the 
tobacco  seed  was  sold  to  Morton  with  or  without  a  warranty  that  it 
was  true  to  description.  Defendant  knew  nothing  of  the  plaintifif  in  the 
transaction.  Plaintifif's  rights  against  the  defendant  are  no  greater 
than  Morton's  would  be  if  he  had  been  the  real  instead  of  the  ostensible 
principal.  This  is  frankly  conceded  by  respondent  in  the  brief  filed, 
and  advisedly  so. 

Leaving  any  question  of  custom  out  of  consideration,  where  a  cer- 
tain variety  of  seed  is  called  for,  and  seed  is  furnished  in  response  to 
such  call,  there  is  a  warranty  that  it  is  true  to  description,  unless  the 
seller  advises  the  purchaser  that  the  sale  is  made  without  warranty. 
*  *  *  Were  the  goods  so  sold  to  Morton  ?  He  had  the  defendant's 
catalogue  before  him  when  he  placed  the  order  and  ordered  from  it. 
He  so  testifies.  The  defendant  knew  that  he  ordered  from  the  cata- 
logue, because  one  of  the  two  items  called  for  was  ordered  by  the 
catalogue  number.  Between  the  cover  and  the  first  page  of  the  cata- 
logue there  was  a  blank  order  sheet  for  customers  to  detach  and  use 
in  ordering  seeds.  Immediately  above  the  blank  spaces  in  which  the 
order  was  to  be  written  was  a  printed  statement  to  the  effect  that  de- 
fendant gave  "no  warranty,  express  or  implied,  as  to  description,  qual- 
ity, productiveness,  or  any  other  matter  of  any  seeds  *  *  *  they 
send  out,  and  will  not  be  in  any  way  responsible  for  the  crop." 

On  the  first  page  of  the  catalogue  proper  there  was  printed  in  large 
type  the  words  "General  Suggestions  to  Customers."  There  were  a 
dozen  such  suggestions  made;  the  first  word  or  words  in  each  in- 
stance, indicating  the  nature  of  the  suggestion,  being  printed  in  large, 
heavy  type.  One  of  these  headings  consisted  of  the  word  "Disclaim- 
er" so  printed,  and  immediately  following  it  was  a  statement  substan- 
tially like  the  one  quoted  above. 

The  two  packages  ordered  from  the  defendant  were  wrapped  in  one 
bundle,  and  shipped  by  express.  One  side  of  the  shipping  tag  con- 
tained the  name  and  address  of  the  consignee.  On  the  reyerse  side 
there  was  printed  in  red  ink  and  in  conspicuous  type  the  following 
words,  which  were  underscored  as  indicated :  "Northrup,  King  &  Co. 
do  not  give,  and  their  agents  are  forbidden  to  give,  any  warranty,  ex- 
press or  implied,  as  to  description,  quality,  productiveness,  or  any 
other  matter  of  any  seeds,  bulbs,  or  plants  they  send  out,  and  will  not 
be  in  any  way  responsible  for  the  crop.  If  the  purchaser  does  not  ac- 
cept the  goods  on  these  terms,  they  are  at  once  to  be  returned,  and 
money  paid  for  same  will  be  promptly  refunded."  *  *  *  Morton 
testified  that  he  did  not  read  or  pay  any  attention  to  any  of  these  non- 
warranty  provisions.  If  Morton  had  observed  the  conditions  printed 
on  the  invoice,  it  would  certainly  have  been  his  duty  to  inform  his  prin- 
cipal of  them. 

The  defendant  having  the  right  to  sell  without  warranty,  it  seems 
clear  that  it  did  all  that  could  in  reason  be  required  of  it  to  advise  the 
purchaser  of  the  condition  upon  which  the  seed  was  sold.  Of  course 
it  is  easy  to  imagine  other  things  which  it  might  have  done  which 
would  be  better  calculated  to  give  notice ;  but,  if  those  things  had  been 
done,  and  had  proved  inefficacious,  still  other  things  might  be  sug- 
gested Avhich  would  surely  acquaint  Morton  with  the  conditions  of 
sale.     The  business  was  transacted  by  mail.     Where  the  book  from 


Ch.  6)  WARRANTIES 


1175 


which  the  order  was  given,  the  shipping  tag,  and  the  invoice,  all  stated 
these  conditions,  it  would  seem  to  be  unreasonable  to  hold  that  any 
blame  attached  to  the  defendant,  if  Morton  failed  to  observe  all  of 
these  things.  The  evidence  is  quite  convincing  to  show  that  there 
was  a  disclaimer  of  warranty  printed  on  the  bag  containing  the  tobacco 
seed  also ;  but  there  was  a  sufihcient  conflict  in  the  evidence  on  this 
point  to  make  the  question  one  for  the  jury,  and  it  found  that  there 
was  none. 

Mr.  Morton  could  not  close  his  eyes  to  the  information  that  was  lit- 
erallv  staring  him  In  the  face,  and  then  hold  the  defendant  liable  be- 
cause he  did  so.  In  matters  of  contract  one  must  observe  what  he  has 
reasonable  means  of  knowing.  The  law  for  the  protection  of  persons 
even  against  fraud  will  not  be  extended  to  those  who.  "having  the 
means  in  their  own  hands,  neglect  to  protect  themselves.  *  *  * 
The  law  requires  men,  in  their  dealings  with  each  other,  to  exercise 
proper  vigilance,  and  apply  their  attention  to  those  particulars  \yhich 
may  be  supposed  to  be  within  reach  of  their  observation  and  judg- 
ment, and  not  close  their  eyes  to  the  means  of  information  wdiich  are 
accessible  to  them."     *     *     * 

In  the  absence  of  fraud,  "a  man  cannot  relieve  himself  from  the  obli- 
gation of  a  written  agreement  by  saying  he  did  not  read  It  when  he 
signed  it,  or  did  not  know  what  it  contained."  Deering  v.  Hoeft,  111 
Wis.  339,  87  N.  W.  298.    *     *    * 

The  presumption  arises  from  the  delivers^  and  acceptance  of  a  bill 
of  lading  that  the  party  receiving  it  assented  to  its  terms.  Ignorance 
of  its  contents  "arising  from  failure  to  read  it,  or  to  make  some  reason- 
able effort  to  obtain  Information  in  that  regard,  in  the  absence  of  any 
evidence  of  fraud,  *  *  *  or  of  the  use  of  any  means  to  deter  the 
shipper  from  fullv  understanding  the  contract,  is  not  sufficient  to  over- 
come it.     "     *     *     * 

There  is  still  another  insurmountable  diflficulty  in  the  way  of  plain- 
tiff's recovery.  The  jury  found  that  at  the  time  of  the  sale  there  was  "a 
general  custom  in  the  Northwest,  including  Wisconsin,  among  seeds- 
men such  as  the  defendants,  to  refuse  to  warrant  seeds."  The  jury 
also  found  that  the  plaintiff  did  not  know  of  such  custom.  The  jury 
made  no  such  finding  in  reference  to  Morton.  There  is  no  evidence . 
to  show  whether  he  knew  of  such  custom  or  not.  He  did  testify  that  he 
had  no  notice  from  any  source  that  the  defendant  would  not  sell  its 
seeds  with  a  warranty.  This  might  all  be  true,  and  still  the  general 
custom  such  as  the  jury  found  might  not  only  exist,  but  Morton 
might  have  knowledge  of  it.  It  is  probable  that,  had  he  been  asked 
the  direct  question,  he  would  have  denied  all  knowledge  of  the  custom, 
and  we  will  assume  that  on  the  evidence  referred  to  the  court  might 
have  found  lack  of  knowledge,  and  that  it  actually  did  so  find. 

It  is  not  the  law  that  ignorance  of  a  general  trade  custom  relieves  a 
party  from  the  effect  of  it.  If  there  was  a  general  custom  among  seeds- 
men such  as  was  found,  Morton,  as  a  retail  dealer  in  seeds,  was  bound 
to  know  of  it.  "The  object  of  proving  a  general  custom  is  not  1;p_  con- 
tradict or  change  a  contract  made  bet^-een  the  parties,  but  to  inter- 
pret it  to  the  court  and  jury  as  it  was  understood  by  the  parties  at  the 
time  it  was  made ;  and  tlils'evldence  of  a  general  custom,  when  it  does 
not  contradict  or  change  the  express  terms  of  the  written  contract,  is 
admitted  for  the-  purpose  of  showing  what  the  real  contract  between 
the  parties  was.     *     *     *     And,  when  it  Is  clearly  proven,  the  parties 


1176  SALES  (Part  4 

are  supposed  to  have  contracted  with  reference  to  such  custom,  unless 
such  custom  changes  the  express  terms  of  the  written  contract." 
*  *  *  "A  uniform  trade  custom  is  readily  accepted  by  courts  to 
define  what  is  ambiguous  or  is  left  indeterminate  in  a  contract,  where 
both  parties  have  knowledge  of  the  custom,  or  are  so  situated  that  such 
knowledge  may  be  presumed,  for  the  reason  that  the  majority  of  such 
transactions  are  had  in  view  of  the  custom,  and  the  agreement  on  which 
the  minds  of  the  parties  actually  met  will  thereby  be  carried  into  effect. 
V  *  =1:  Where  the  custom  is  proved  to  be  known  to  both,  it  may 
even  add  terms  to  the  contract.  *  *  *  Where  the  custom  is  gen- 
eral, it  will  be  presumed  to  have  entered  into  the  contract,  and  one  may 
be  bound  thereby,  although  ignorant,  unless  the  other  party  be  shown 
to  have  knowledge  of  his  ignorance."     *     *     * 

Replying  to  the  argument  of  counsel  in  another  case,  that  a  cus- 
tom in  order  to  be  binding  must  be  known  to  both  parties  to  the  con- 
tract, or  it  must  have  existed  a  sufficient  length  of  time  to  raise  a  pre- 
sumption of  knowledge,  the  court  said:  "That  rule,  of  course,  pre- 
vails in  case  of  an  attempt  to  annex  to  a  contract  some  incident  not 
expressed  therein,  as  in  the  case  of  Hewitt  v.  John  Week  Lumber  Co., 
77  Wis.  548  [46  N.  W.  822],  where  the  question  was  whether  the  owner 
of  a  sawmill,  under  his  contract  to  saw  logs  by  the  thousand,  was  en- 
titled to  the  slabs.  There  is  a  difference  between  evidence  of  usage  to 
establish  a  custom  for  the  purpose  of  annexing  that  as  an  incident  to 
a  contract  and  the  same  kind  of  proof  to  show  the  meaning  of  some 
word  or  term  used  in  a  contract.  In  the  latter  situation  the  meaning 
of  the  term  as  understood  at  the  time  and  place  of  the  contract  gov- 
erns, whether  both  of  the  parties  knew  of  such  meaning  or  not.  They 
are  presumed  to  contract  with  reference  to  the  meaning  of  words  and 
terms  used  by  them,  as  such  words  and  terms  are  understood  at  the 
place  of  their  contract."  Shores  Lumber  Co.  v.  Stitt  et  al.,  102  Wis. 
450,  455,  78  N.  W.  562,.  564. 

The  case  at  bar  is  in  its  facts  very  much  like  one  recently  decided  by 
the  Supreme  Court  of  Iowa,  from  which  we  quote  the  following :  "The 
alleged  liability  of  the  Younkerman  Seed  Company  may  be  considered 
first.  The  evidence  that  a  general  custom,  such  as  pleaded,  prevails 
in  the  seed  trade  was  conclusive.  The  particular  package  had  the 
printed  matter  thereon,  and,  though  this  may  not  have  been  noticed, 
the  sale  is  presumed  to  have  been  negotiated  with  reference  to  the 
general  custom  of  the  trade.  *  *  *  This  being  so,  a  warranty  that 
the  seed  was  true  to  name  could  not  be  inferred,  and  the  court  rightly 
found  in  favor  of  the  Younkerman  Seed  Company."  Blizzard  Broth- 
ers V.  Growers'  Canning  Co.,  152  Iowa,  257,  259,  132  N.  W.  66, 
g7^    *    *    * 

Speaking  of  a  general  custom  pertaining  to  the  manner  in  which 
mines  were  operated,  the  Iowa  court  in  another  case  said :  "Again,  it 
is  said  there  is  no  showing  that  defendant  had  notice  or  knowledge 
of  the  custom.  This  is  not  necessary.  The  custom  or  usage  being 
showri  by  competent  evidence,  the  defendant  is  presumed  to  have  had 
knowledge  thereof.  This  is  fundamental."  Thayer  v.  Smoky  Hol- 
low Coal  Co.,  121  Iowa,  121,  127,  96  N.  W.  718,  719. 

The  rules  of  law  apphcable  to  a  general  custom  should  not  be  con- 
founded with  those  appHcable  to  a  local  custom.  *  *  *  It  is  ar- 
gued that  the  evidence  was  not  sufficient  to  warrant  the  finding  of  a 
general  custom.     We  think  it  was. 


Ch.  6)  WARRANTIES  1177 

The  conclusions  which  follow  from  the  foregoing-  discussion  may  be 
summarized  as  follows:  (1)  The  defendant  offered  the  tobacco  seed 
in  question  for  sale  without  a  warranty,  as  it  had  the  right  to  do,  and 
adopted  reasonable  and  adequate  means  of  advising  the  purchaser 
Morton  that  the  seed  was  so  ofifered,  and  in  so  doing  performed  its  full 
duty  to  the  purchaser,  there  being  no  evidence  of  fraud  or  bad  faith ; 
(2)  Morton  was  chargeable  with  knowledge  of  the  condition  upon 
which  the  sale  was  made  ;  and  (3)  Morton  was  chargeable  with  knowl- 
edge of  the  general  custom  which  the  jury  found  to  exist.  Under  these 
conditions  Morton  would  have  no  right  of  action  against  the  defend- 
ant, and  therefore  his  undisclosed  principal  would  have  no  such  right. 
These  conclusions  would,  we  think,  follow  if  IMorton  acted  as  the 
agent  of  both  parties,  because  it  would  be  his  duty  as  agent  of  the 
plaintiff  to  communicate  to  him  the  knowledge  with  which  he  was 
chargeable.     *     *     * 

In  the  present  case  the  pound  of  tobacco  seed  was  sold  to  Morton 
for  $2.25.  The  damages  recovered  were  $1,015.  It  may  seem  unjust 
that  the  purchaser  should  suffer  this  loss.  But  it  is  apparent  that,  if 
seedhouses  warranted  their  seeds,  they  would  have  to  sell  at  a  very 
much  higher  price  than  if  no  warranty  were  given.  If  the  defendant 
had  sold  100  pounds  of  this  seed  instead  of  one  pound,  it  would  re- 
ceive therefor  $225,  and  on  the  basis  of  plaintiff's  recovery  would  be 
liable  for  over  $100,000  damages.  It  purchased  the  seed  in  Virginia, 
and  admittedly  ordered  the  variety  which  the  plaintiff  desired.  The 
evidence  shows  that  there  was  no  way  in  which  the  substitution  could 
be  discovered  until  the  tobacco  plants  were  pretty  well  grown.  Large 
seedhouses  who  draw  their  supply  of  seeds  from  different  parts  of  this 
and  perhaps  other  countries  cannot  well  grow  all  the  seeds  which  they 
handle.  They  are  liable  to  be  imposed  on,  and  must  either  adopt  the 
practice  of  selling  without  warranty  or  of  selling  with  one,  and  im- 
posing on  the  consumer  an  added  price  sufficient  to  make  good  the 
losses  sustained  by  reason  of  the  failure  of  the  seed  sold  to  comply  with 
the  warranty.     *     *     * 

Judgment  reversed,  and  cause  remanded,  with  directions  to  dismiss 
the  complaint. 

Sales  Act,  Section  15.  (6)  An  express  warranty  or  condition 
does  not  negative  a  warranty  or  condition  implied  under  this  act 
unless  inconsistent  therewith. 


SECTION  11.— RIGHTS  OF  SUB-VENDEES  AGAINST 
FORMER  WARRANTORS 


WEI.SHAUSEN  v.   CHARLES   PAEKER   00. 
(Supreme  Court  of  Errors  of  Connecticut,  1910.     83  Conn.  231,  76  Atl.  271.) 

Action  by  William  Welshausen  against  the  Charles  Parker  Corn- 
pany.  From  a  judgment  refusing  to  vacate  a  judgment  of  nonsuit, 
plaintiff  appeals. 

Thayer,  J.  The  complaint  alleges  that  the  plaintiff  purchased  of 
the  defendants  a  gun  of  their  own  manufacture  with  an  express  war- 


1178  SALES  (Part  4 

ranty  by  their  agent  that  the  same  was  sound,  of  best  quaHty,  and  fit 
to  stand  the  strain  of  proper  and  ordinary  use,  and  that  the  barrels 
thereof  were  of  the  best  Damascus  steel.  It  also  alleges  negligence 
on  the  part  of  the  defendants  in  manufacturing  the  gun  and  putting 
it  on  the  market  and  allowing  it  to  go  into  the  hands  of  customers 
without  proper  supervision  and  inspection  in  the  manufacture  of  the 
same  and  during  and  after  its  manufacture  before  it  was  sold,  and 
that  the  gun  was  weak,  insufficient,  badly  constructed,  and  of  poor 
quality  of  steel,  and  that  because  of  such  defect  the  left  barrel  burst 
when  the  plaintiff  was  using  it  in  the  ordinary  manner  and  with  due 
care,  and  injured  him.  In  compliance  with  an  order  of  the  court,  the 
complaint  was  so  amended  as  to  show  wherein  the  gun  was  defective, 
weak,  and  badly  constructed.  There  is  no  allegation  expressly  stat- 
ing a  breach  of  the  warranty.  Upon  the  motion  to  set  aside  the  non- 
suit the  plaintiff  claimed  that  there  was  evidence  from  which  the  jury 
could  find  the  express  warranty  or  an  implied  warranty  that  the  gtm 
was  fit  for  the  purposes  for  which  it  was  sold,  and  the  breach  of  such 
warranty,  also  that  there  was  sufficient  evidence  that  the  gun  was  de- 
fective in  the  respects  alleged,  and  the  defendants'  negligence  in  put- 
ting it  upon  the  market  in  that  condition  to  warrant  a  verdict  upon 
that  ground. 

To  sustain  a  finding  that  there  was  a  breach  of  warranty  express 
or  implied,  there  must  have  been  evidence  of  a  contract  between  the 
parties,  for  without  a  contract  there  could  be  no  warranty.  There 
was  no  evidence  which  would  justify  the  jury  in  finding  any  contract 
between  the  parties.  The  evidence  did  not  show  that  the  plaintiff  pur- 
chased the  gun  from  the  defendants.  On  the  contrary,  it  showed 
that  they  sold  the  gun  to  the  Simmons  Hardware  Company,  by  whom 
it  was  sold  to  one  Koenig,  who  sold  it  to  the  plaintiff.  The  evidence 
of  this  was  so  clear  that,  had  the  jury  found  that  the  sale  was  made 
by  the  defendants  to  the  plaintiff,  the  finding  must  have  been  set 
aside.  The  warranty,  if  one  was  given,  was  to  the  hardware  com- 
pany, and  not  to  the  plaintiff.  And  he,  as  subvendee,  has  no  cause  of 
action  upon  the  warranty. 

Upon  the  other  branch  of  the  case,  there  was  no  evidence  to  justi- 
fy the  jury  in  finding  that  the  gun  was  defective  in  the  respects  set 
forth  in  the  amended  complaint.  The  gun  was  in  evidence,  and  there 
was  some  evidence  that  the  cartridges  fitted  the  left  barrel  somewhat 
loosely.  But  the  jury  would  not  be  permitted  from  these  facts  alone 
to  conjecture  that  the  gun  was  defective  or  unsafe.  Those  facts  laid 
the  foundation  for  the  introduction  of  further  evidence  by  experts 
to  show  that  the  thickness  of  the  barrels  as  shown  by  the  exhibit  was 
insufficient  for  safety,  or  that  the  quality  of  the  steel  was  poor,  or 
that  the  barrels  were  improperly  and  irregularly  bored,  and  that  the 
looseness  of  the  fit  of  the  cartridge  was  liable  to  cause  a  dismptive 
explosion.  If  such  were  the  fact,  it  was  easy  to  produce  witnesses 
having  knowledge  derived  from  experience  and  study  to  testify  to  it. 
The  jury  could  not  properly  be -allowed  to  guess  or  surmise  that  it 
was  so.  *  *  *  There  was  an  entire  failure  of  evidence  to  prove 
that  the  defendants  broke  any  warranty  or  negligently  placed  the  gun 
upon  the  market,  and  the  motion  to  open  the  nonsuit  was  properly  re- 
fused. 

There  is  no  error.    *     *    * 


Ch.  6)  WARRANTIES  .    1179 

ROBERTS  V.  ANHEUSER-BUSCH  BREWING  ASS'N. 
(Supreme  Judicial  Court  of  Massachusetts,  1912.    211  Mass.  449,  98  N.  E.  95.) 

Action  by  Joseph  E.  Roberts  against  Anheuser-Busch  Brewing  As- 
sociation. A  verdict  was  directed  for  defendant,  and  the  case  re- 
ported to  the  Supreme  Judicial  Court. 

The  action  was  for  ptomaine  poisoning  from  a  bottle  of  Malt  Nu- 
trine,  whereby  plaintiff's  wife  was  made  very  ill  and  his  young  son 
died.  The  druggist  from  whom  plaintiff  bought  the  bottle  testified 
that  it  had  not  been  in  his  place  more  than  eight  months. 

Sheldon,  J.  While  there  may  be  no  inherent  difficulty  in  main- 
taining an  action  of  tort  upon  a  false  warranty,  *  *  *  it  yet  re- 
mains true  that  there  cannot  be  a  warranty  where  there  is  no  privity 
of  contract.  It  cannot  be  found  that  there  was  a  particular  contract 
where  there  was  no  contract  wdiatever.  As  there  was  here  no  con- 
tractual relation  between  the  plaintiff  and  the  defendant,  the  action 
cannot  be  maintained  upon  the  ground  that  there  was  any  warranty 
by  the  defendant  of  the  good  qualities  of  its  mixture.  *  *  *  Nor 
did  the  plaintiff  state  such  a  cause  of  action.    His  declaration  is  in  tort. 

There  was  evidence  that  the  defendant  had  by  advertisements  rep- 
resented that  its  mixture  was  healthful,  free  from  all  injurious  sub- 
stances, beneficial  to  women  and  children  and  to  those  needing  strength 
and  nourishment,  and  that  it  was  compounded  with  great  care.  These 
representations  could  be  found  to  have  been  made  as  of  the  defend- 
ant's own  knowledge.  It  could  be  found  that  the  plaintiff  had  seen 
some  of  these  advertisements,  and  w-e  cannot  say  that  the  jury  might 
not  have  found  that  his  purchase  of  a  bottle  of  the  mixture  was  upon 
the  faith  of  and  in  reliance  upon  these  representations.  There  was 
also  evidence,  although  meager,  tending  to  show  that  this  bottle  had 
been  put  upon  the  market  by  the  defendant  and  had  come  from  it 
through  a  wholesale  dealer  to  the  druggist  who  sold  it  to  the  plaintiff. 
It  also  could  be  found  that  the  sickness  of  the  plaintift''s  wife  and 
child  was  due  to  ptomaine  poisoning,  caused  by  the  contents  of  this 
bottle,  though  as  to  the  last  point  it  is  true  that  the  evidence  was  but 
meager.  Still  it  was  for  the  jury  to  pass  upon.  If  this  sickness  was 
due  to  ptomaine  poisons  contained  in  a  bottle  which  had  come  from 
the  defendant,  there  was  evidence  of  the  falsity  of  its  representations. 

If  these  facts  were  found  in  accordance  with  the  plaintift''s  conten- 
tion, there  might  have  been  a  verdict  in  his  favor.  If  the  defendant 
made  such  representations  as  of  its  own  knowledge,  and  put  its  mix- 
ture upon  the  market  to  come  through  wholesale  and  retail  dealers 
to  the  ultimate  consumers,  who  in  reliance  upon  such  representations 
bought  and  drank  the  mixture  in  the  manner  intended  by  the  defend- 
ant, these  representations  must  be  regarded  as  continuous,  intended  to 
be  accepted  and  relied  on  by  all  who  finally  should  purchase  the  arti- 
cle for  their  own  consumption.     This  rule  often  has  been  declared. 

But  it  is  claimed  that  these  representations  should  not  be  given  an 
indefinite  continuance,  and  that  this  bottle  either  was  or  might  have 
been  so  long  out  of  the  possession  of  the  defendant  that  its  represen- 
tations ought  to  have  been  regarded  as  no  longer  in  force  when  the 
plaintiff  made  his  purchase.  There  may  be  a  lapse  of  time  after  which 
this  fairly  could  be  maintained ;  but  it  cannot  be  held  as  matter  of  law 
that  such  was  the  case  here.     The  bottle  was  corked  wath  a  stopple 


1180  SALES  (Part  4 

which  had  to  be  pulled  out  by  the  plaintiff  after  the  seal  over  it  had 
been  removed  by  his  wife.  This  would  indicate  that  any  outside 
contamination  had  been  guarded  against,  and  might  tend  to  relieve  a 
purchaser  from  any  fear  of  such  contamination.  This  contention  pre- 
sents only  a  question  of  fact. 

In  our  opinion  the  case  should  have  been  submitted  to  the  jury. 
*  *  *  As  the  case  stands,  we  are  of  opinion  that  there  should  be 
a  new  trial.    *    *    * 


DAVIS  V.  VAN  CAMP  PACKING  CO. 

(Supreme  Court  of  Iowa,  1920.     176  N.  W.  382.) 

Preston,  J.  The  original  petition  alleges  substantially  that  on  July 
24,  1916,  a  can  of  Van  Camp's  pork  and  beans  was  eaten  by  certain 
members  of  the  Davis  family,  of  whom  Alfred  Davis,  plaintiff,  was  a 
member ;  that  as  a  result  of  eating  said  beans,  plaintiff  sustained  dam- 
age by  reason  of  ptomaine  poisoning;  "that  the  said  defendant  was 
guilty  of  negligence,  false  representations,  and  breach  of  implied  and 
expressed  warranty,  in  placing  in  the  said  can  and  container  said  pork 
and  beans,  containing  poisonous,  deleterious,  noxious,  and  unwholesome 
substances  which  rendered  the  contents  of  said  can  unwholesome  and 
dangerous  to  human  life  and  health."    *    *    * 

At  the  close  of  plaintiff's  evidence,  defendant  moved  that  plaintiff 
be  required  to  elect  whether  he  would  proceed  upon  the  theory  of 
breach  of  warranty,  express  or  implied,  or  upon  the  grounds  of  negli- 
gence in  tort.  Plaintiff  was  required  to  elect,  and  at  first  elected  upon 
breach  of  implied  warranty  and  tort,  but  was  further  required  by 
the  court  to  elect,  and  he  then  elected  to  stand  on  a  tort  action.    *    *    * 

Appellee  contends  that  the  evidence  is  not  svifficient  to  show  that 
the  eating  of  the  pork  and  beans  caused,  or  was  the  proximate  cause 
of,  plaintiff's  sickness ;  that  under  the  law  there  is  no  warranty,  and 
that  the  evidence  shows  that  there  was  no  negligence. 

There  is  but  little  dispute  in  the  evidence.  Defendant  is  engaged  in 
the  manufacture  of  pork  and  beans.  *  *  *  Defendant,  in  July, 
1916,  was  jobbing  canned  pork  and  beans  to  the  Ft.  Dodge  Grocery 
Company,  for  distribution  to  retailers  and  consumers.  This  was 
known  to  defendant  company.  On  July  4,  1916,  the  can  of  beans  in 
question  was  received  by  said  grocery  company  in  a  consignment 
from  the  defendant  company.  July  12th,  the  grocery  company  sold 
to  Munn,  a  retail  grocer  at  Gypsum,  five  miles  east  of  Ft.  Dodge,  the 
can  of  beans  in  question,  with  others.  July  24,  1916,  this  can  of  beans 
was  sold  by  Mtmn  to  the  mother  of  plaintiff.  This  was  Monday.  The 
can  appeared  to  be  all  right.  The  beans  were  eaten  for  the  evening 
meal,  within  an  hour  after  they  were  brought  by  Mrs.  Davis  to  the 
home.  When  the  beans  were  opened  they  were  emptied  into  a  bowl. 
They  were  not  left  standing  in  the  can.  This  evening  meal  consisted 
of  crackers,  bread  and  butter,  potatoes  which  had  been  dug  that  morn- 
ing from  the  garden,  boiled  for  dinner,  and  fried  for  supper,  also  the 
can  of  beans  in  question,  and  nothing  else.  *  *  *  The  family  con- 
sisted of  the  father  and  mother,  and  seven  children.  Three  of  the 
children  were  not  at  home  for  the  meal  at  which  the  beans  were  eaten, 
and  did  not  partake  of  any  of  the  beans,  nor  did  the  father  and  mother. 
One  of  the  younger  children  ate  nothing  but  beans  for  that  meal. 


Ch.  6)  WARRANTIES  1181 

This  one  subsequently  died  from  ptomaine  poisoning,  and  the  other 
three  children  who  ate  of  the  beans  were  taken  sick  soon  after.  Some 
of  them  were  seriously  ill  for  several  weeks.  All  who  ate  of  the  beans 
were  sick  after  eating.  The  father  and  mother  and  the  three  other 
children  who  did  not  eat  of  the  beans  were  not  sick.    *    *    * 

Without  restating  the  evidence,  we  are  of  the  opinion  that  the  jury 
could  have  properly  found  therefrom  that  the  eating  of  the  beans  by 
plaintiff  was  the  proximate  cause  of  his  illness.  As  before  stated, 
the  medical  testimony  is  to  that  effect.     *     *    * 

Counsel  for  appellee  argues  at  considerable  length  that  there  was 
no  express  warranty.  They  argue,  that  there  can  be  no  warranty,  ex- 
press or  implied,  because  there  is  no  privity  of  contract  between  the 
defendant  and  plaintiff.  They  cite  authorities,  some  of  which  are  by 
this  court,  to  the  further  point,  holding,  as  appellee  claims,  that  there 
cannot  be  both  an  express  and  implied  warranty  involving  the  same 
subject-matter,  to  wit,  quality  or  character  of  goods  sold;  that  when 
the  express  warranty  does  not  provide  as  to  the  same  obligation  it  ex- 
cludes the  implied.  The  Iowa  cases  cited  on  this  point  were  not  cases 
involving  food  products.  One  was  the  sale  of  a  threshing  machine, 
another,  piling,  and  the  other,  the  sale  of  sheep,  and  the  warranty  had 
to  do  with  the  breeding,  health  of  the  sheep,  etc.  For  reasons,  ap- 
pearing later  we  do  not  determine  this  point.  The  cases  cited  by  ap- 
pellee, for  the  most  part  at  least,  hold  that  the  action  sounds  in  tort. 
We  understand  their  argument  to  be  that  it  is  a  tort  action,  but  they 
contend  that  under  the  record,  there  was  no  negligence  shown,  and  that 
their  evidence  shows  there  was  no  negligence.  Without  citing  the  cases 
on  the  question  as  to  express  warranty,  it  seems  to  us  that  the  language 
on  the  label  does  not  constitute  an  express  warranty  that  the  food 
is  wholesome  and  fit  for  use.  The  substance  of  it  is,  that  the  can  con- 
tains Van  Camp's  Pork  and  Beans,  prepared  with  tomato  sauce ;  that 
the  meat  has  been  inspected  and  passed  at  an  establishment  where 
federal  inspection  is  maintained;  the  contents  are  ready  for  the  table; 
directions  are  given  how  to  serve  hot ;  the  quantity ;  and  where  it  is 
prepared.  From  appellant's  argument,  we  think  they  do  not  seriously 
contend  that  there  is  an  express  warranty.  The  part  of  the  printing 
on  the  label  relied  upon  as  an  express  warranty  is,  "The  contents  of 
this  can  are  ready  for  the  table,  and  can  be  served  hot  or  cold."  This, 
we  think,  means  no  more  than  that  the  beans  may  be  used  without 
cooking.  Doubtless  it  should  be  construed  to  mean  that  it  is  for 
human  consumption.  But  it  is  shown  in  other  ways  that  it  was  so 
prepared,  and  that  defendant  knew  it  was  to  be  sold  for  that  purpose. 
We  think  we  should  spend  no  more  time  on  this  phase  of  the  case. 

It  must  be  admitted  that  there  is  much  confusion  in  the  authorities 
as  to  the  theory  of  the  liability  of  defendant,  if  any,  in  this  class  of 
cases.  Some  of  the  cases  hold  that  the  action  is  bottomed  upon  negli- 
gence alone ;  others  that  there  is  an  implied  warranty ;  and  still  others 
that  there  is  an  implied  warranty,  and  that,  if  in  addition  it  is  found 
that  the  seller  was  negligent  in  selling  food  products  that  were  danger- 
ous to  those  who  ate  them,  he  w'ould  be  liable  for  the  consequences  if, 
by  proper  care,  he  could  have  known  of  the  condition.  There  is  a  con- 
flict in  the  decisions.    *    *    * 

From  the  decisions,  and  particularly  the  later  decisions,  we  think 
there  is  an  implied  warranty  as  contended  by  plaintiff,  and  that  the 
question  as  to  privity  is  not  controlling.    The  case  should  have  gone  to 


1182  SALES  (Part  4 

the  jury  on  that  question.  We  are  of  opinion,  too,  that  on  the  whole 
case  there  was  sufficient  evidence  to  take  the  case  to  the  jury  on  the 
question  of  neghgence,  and  that  it  was  for  the  jury  to  say  whether 
plaintiff's  prima  facie  case  had  been  negatived  or  overcome  by  the  tes- 
timony introduced  on  behalf  of  the  defendant.  The  court  erred,  in  re- 
quiring plaintiff  to  elect  as  between  implied  warranty  and  negligence. 
Whileit  is  true  that  no  particular  act  of  negligence  is  shown  by  plain- 
tiff", in  the  very  nature  of  the  case  that  could  not  be  done.  It  is  also 
true  that,  according  to  the  defendant's  evidence,  its  plant  and  method 
of  manufacture  is  good,  probably  as  good  as  any,  still,  it  does  appear 
that  the  method  was  not  always  adhered  to  by  defendant's  employes. 
We  think,  from  all  the  circumstances  shown  by  the  evidence,  the  jury 
could  have  properly  inferred  and  found  that  the  can  of  beans  in  ques- 
tion, and  perhaps  a  batch,  as  one  of  defendant's  witnesses  calls  it,  were 
defective.     *     *     * 

If  we  call  it  a  duty  to  use  care  in  the  preparation  and  manufacture, 
then  in  that  sense  a  breach  of  that  duty  would  constitute  negligence. 
Or  it  may  be  treated  as  a  representation  or  a  warranty  that,  because 
of  the  sacredness  of  human  life,  food  products  so  put  out  are  whole- 
some. In  either  event,  a  failure  in  this  respect  is  a  breach  of  duty  and, 
a  breach  of  warranty,  and  the  plaintiff,  suing,  may  rely  on  either  or 
both,  and  when  he  makes  a  prima  facie  case  he  is  entitled  to  go  to  the 
jury  on  the  question  as  to  whether  defendant's  evidence  negatives 
plaintiff''s  prima  facie  case.  *  *  *  For  an  interesting  discussion  pi 
this  subject  and  the  citation  of  many  cases,  see  Iowa  Law  Bulletin, 
vol.  5,  p.  86.    *    *    * 

The  question  of  caveat  emptor  has  been  referred  to  in  some  of  the 
cases ;  in  the  earlier  cases,  and  perhaps  followed  by  some  of  the  later 
ones,  when  a  person  went  to  market  with  a  market  basket  on  his  arm, 
and  could  examine  the  food,  the  doctrine  was  held  to  apply,  in  the 
absence  of  a  warranty.  But  the  business  of  canning  food  products  of 
almost  every  kind  has  increased  enormously  in  recent  years.  The 
purchaser  has  no  opportunity  of  examination,  until  opened  for  use, 
and,  under  the  circumstances  of  this  case,  we  think  the  doctrine  does 
not 'apply.  It  is  possible  that  when  Mrs.  Davis  purchased  this  can, 
had  it  had  the  appearance  of  being  old,  and  the  label  soiled,  or  the 
ends  swollen,  or  something  of  that  kind,  the  doctrine  might  apply. 

For  the  reasons  given,  the  judgment  is  reversed  and  remanded  for  a 
new  trial. 


Ch.  T,  RIGHTS  AND   REMEDIES  OF  THE  BUYEB  II80 

CHAPTER  VII 
RIGHTS  AND  REMEDIES  OF  THE  BUYER 

Section 

1.  Introduction. 

2.  Buyer's  Right  to  Examine  tlie  Goods. 

3.  Nature  and  Consequences  of  an  Accc^ptance  of  the  Goods. 

4.  Buyer  under  No  Duty  to  Return  Goods  Not  Accepted  Because  of  Non- 

Compliance  with  the  Contract. 

5.  Remedies  of  the  Buyer  for  Breach  of  "Warranty. 

6.  Buyer's  Rigcht  to  Recover  Damages  for  Breach  of  the  Contract  to  Sell. 

7.  Right  of  the  Buyer  to  Sue  the  Seller  for  Conversion  of  the  Goods. 

8.  Buyer's  Right  of  Specific  Performance. 


SECTION  1.— INTRODUCTION 

In  Chapter  V  there  was  discussed  at  some  length  the  special 
rights  and  remedies  of  an  unpaid  seller.  It  was  there  noted  that, 
in  addition  to  the  ordinary  remedies  for  breach  of  contract,  the 
unpaid  seller  had  three  special  rights  against  the  goods.  In  one 
special  case  the  seller  is  allowed  to  recover  the  price,  even  though 
title  has  not  passed.  In  the  present  chapter  we  enter  upon  a  sim- 
ilar discussion  of  the  special  remedies  of  the  buyer.  The  remedies 
of  the  buyer  for  breach  of  warranty  are  of  particular  importance 
here.  Also  it  will  be  found  that  the  buyer  may,  in  a  special  case, 
recover  possession  of  the  goods,  even  though  title  has  not  passed 
to  him,  a  remedy  which  is  similar  in  nature  to  that  special  case  in 
which  is  accorded  to  the  seller  the  right  to  recover  the  price,  al- 
though title  has  not  passed. 


SECTION  2.— BUYER'S  RIGHT  TO  EXAMINE  THE  GOODS 

Sales  Act,  Section  47.  (2)  Unless  otherwise  agreed,  where  the 
seller  tenders  delivery  of  the  goods  to  the  buyer,  he  is  bound,  on 
request,  to  afford  the  buyer  a  reasonable  opportunity  of  examin- 
ing the  goods  for  the  purpose  of  ascertaining  whether  they  are  in 
conformity  with  the  contract. 

(3)  Where  goods  are  delivered  to  a  carrier  by  the  seller,  in  ac- 
cordance with  an  order  from  or  agreement  with  the  buyer,  upon 
the  terms  that  the  goods  shall  not  be  delivered  by  the  carrier  to  the 
buyer  until  he  has  paid  the  price,  whether  such  terms  are  indi- 
cated by  marking  the  goods  with  the  words  "collect  on  delivery'^ 
or  otherwise,  the  buyer  is  not  entitled  to  examine  the  goods  be- 
fore payment  of  the  price  in  the  absence  of  agreement  permitting 
such  examination. 

Subsection  2  imposes  upon  the  seller  of  goods  an  obligation  to 
afford  the  buyer  a  reasonable  opportunity  of  examining  the  goods, 
and  gives  to  the  buyer  the  correlative  right  to  examine  the  goods^ 
unless   the   parties   have,   by   express   or   implied   stipulation,   de- 


1184  SALES  (Part  4 

stroyed  such  right  to  examine  the  goods.  Subsection  3  presents 
one  situation  where  it  is  presiimed  that  the  parties  have  waived  the 
buyer's  right  of  examination. 

Of  what  value  is  this  right  to  the  buyer?  Where  is  the  examina- 
tion to  be  made?  In  studying  the  nature  of  the  buyer's  right  of 
examination,  or  of  inspection  as  it  is  sometimes  called,  it  is  desir- 
able to  keep  two  different  situations  in  mind.  The  general  prob- 
lem is  to  discover  the  effect  upon  the  rights  and  liabilities  of  the 
parties  as  they  are  affected  by  the  right  of  examination.  These 
two  situations  are:  (1)  A  case  where  the  goods  do  in  fact  comply 
with  the  terms  of  the  contract;  and  (2)  a  case  where  the  goods  in 
fact  do  not  comply  with  the  contract.  The  buyer's  right  of  exam- 
ination, obviously,  exists  in  each  case,  for  the  very  purpose  of  the 
right  is  to  enable  the  buyer  to  learn  whether  the  goods  do  conform 
to  the  contract. 

Let  us  take  as  an  illustration  the  case  of  a  shipment  of  a  carload 
of  goods  sent  under  a  straight  bill  of  lading  to  the  buyer.  Let  us 
suppose,  further,  that  these  goods  do  in  fact  comply  with  the 
terms  of  the  contract.  The  buyer  has  a  right  of  examination. 
Waiving,  for  the  time  being,  the  question  as  to  where  the  examina- 
tion should  take  place,  whether  at  the  point  of  origin  or  of  desti- 
nation, our  question  is :  Of  what  value  to  the  buyer  is  his  right  of 
examination?  The  law  is  that,  if  the  buyer  has  not  yet  paid  for 
the  goods,  he  is  under  no  duty  to  pay  for  them  until  he  has  had  a 
reasonable  opportunity  of  examining  them ;  that  is,  the  buyer  will 
not  break  his  contract  by  refusing  payment  until  he  has  had  this 
opportunity.  Stating  it  in  another  way,  the  seller  cannot  sue  the 
buyer  for  failure  to  pay  until  this  opportunity  has  been  given  the 
buyer.  The  act  of  affording  a  reasonable  opportunity  to  examine 
the  goods  is  a  condition  precedent  to  the  buyer's  duty  to  pay.  No- 
tice that  the  giving  of  such  an  opportunity  is  not  a  condition  pre- 
cedent to  the  passing  of  title.  From  a  rule  already  discussed  we 
know  title  passed  on  delivery  to  the  carrier.  The  buyer  owns  the 
goods;  the  risk  of  loss  has  passed  to  him.  He  simply  is  not  re- 
quired to  pay  for  them  until  he  has  had  an  opportunity  of  exam- 
ining them,  assuming  that  he  has  not  waived  this  right. 

Assume,  now,  that  an  opportunity  is  given  the  buyer  to  examine, 
but  that  he  does  not  avail  himself  of  it.  This  is  a  very  common 
case,  not  so  common  in  carload  shipments,  but  certainly  quite  com- 
mon where  the  goods  are  packed  in  boxes  or  otherwise  concealed. 
The  normal  thing  done  by  the  buyer  is  to  take  them  from  the 
freight  office  to  his  place  of  business  and  leave  them  there  until 
he  is  ready  to  use  or  display  them.  Having  had  an  opportunity  to 
examine,  it  is  evident  that,  just  as  soon  as  there  is  a  failure  to  take 
advantage  of  the  opportunity,  at  that  moment  the  buyer  is  under  a 
duty  to  pay  for  the  goods.  The  contract,  of  course,  may  provide 
otherwise  as  to  time  of  payment. 

Taking  up  the  second  situation,  where  we  are  assuming  that,  the 
goods,  at  the  time  of  delivery  to  the  carrier,  were  not  in  conformity 


Ch.  7)  RIGHTS   AND   REMEDIES   OF   THE   BUYER  1185 

with  the  contract.  This  is  the  more  important  case.  We  have  al- 
ready noted  that  the  delivery  to  the  carrier,  or  any  other  act  of 
unconditional  appropriation  of  goods  not  in  accordance  with  the 
contract,  does  not  pass  title  nor  risk  of  loss  to  the  buyer.  There- 
fore, in  this  case,  the  giving  of  an  opportunity  to  examine  the 
goods  is  not  only  a  condition  precedent  to  the  buyer's  obligation  to 
pay  the  price,  the  contract  not  providing  otherwise,  but  it  is  also 
a  condition  precedent  to  the  passing  of  title  to  the  buyer.  If  he 
examines  and  accepts,  title  passes  to  him,  and  his  duty  to  pay 
then  arises.  If  he  examines  and  rejects,  that  act  terminates  his 
duties  under  the  contract,  and  perfects  his  right  to  sue  the  seller 
for  his  breach.  The  scope  of  the  buyer's  duty  to  care  for  rejected 
goods  will  be  noted  in  section  4.  If  the  buyer  does  not  examine, 
having  the  opportunity  of  examining,  but  receives  the  goods,  per- 
haps taking  them  from  the  carrier  and  storing  them  in  his  own 
place  of  business,  title  to  the  goods  passes  at  that  moment,  carry- 
ing with  it  the  risk  of  loss,  in  spite  of  the  fact  that  they  are  not  in 
compliance  with  the  terms  of  the  contract.  It  is  only  fair  to  the 
seller  to  hold  that,  even  if  he  has  been  guilty  of  a  breach  of  con- 
tract, and  the  buyer  has  taken  the  goods  to  his  own  establishment, 
and  then  retained  them  for  a  time  without  examination,  the  title 
and  risk  of  loss  is  in  the  buyer.  But  the  buyer  will,  upon  opening 
up  the  boxes,  discover  that  the  goods  are  not  what  he  ordered. 
What  are  his  rights?  Has  he  lost  everything  by  failing  to  examine 
when  he  first  had  the  opportunity?  No;  because  he  has  not  yet 
accepted  the  goods.  The  buyer  may  then  reject  them.  The  act  of 
rejection  has  the  effect  of  casting  back  title  and  risk  of  loss  to 
the  seller.  The  buyer's  right  to  so  reject  is  founded  on  a  condi- 
tion subsequent,  very  similar  to  the  case  where  the  buyer  holds 
goods  under  a  contract  "on  sale  or  return." 

The  above  comment  explains  in  general  the  nature  of  the  right 
of  examination ;  but  this  right  does  not  always  exist,  because  the 
parties  have  contracted  it  away.  This  may  be  done  in  various 
ways,  but  the  situation  presented,  described  in  subsection  3,  is  of 
outstanding  importance  here.  It  is  illustrated  in  the  next  case. 
The  dissenting  opinion  in  this  case  was  inserted  because  it  con- 
tained a  more  complete  explanation  of  the  facts  and  of  the  general 
principle  of  law  involved.  The  majority  and  dissenting  opinions 
do  not  differ  in  their  explanation  of  the  rule.  It  will  be  noticed 
that  they  differed  only  as  to  whether  the  contract  called  for  ship- 
ment in  the  manner  adopted;  i.  e.,  the  majority  affirming  that 
"there  was  no  agreement  that  the  shipment  should  be  made  'col- 
lect on  delivery,'  "  while  the  dissenting  opinion  states  that  "it  was 
the  agreement  of  the  parties,  as  evidenced  by  the  written  contract, 
that  the  delivery  should  be  by  carrier,"  etc.,  and  that  "the  agree- 
ment was  a  cash  sale." 
B.&  B.Bus.Law— 75 


1186  SALES  (Part  4 


IMPERTAD  PRODUCTS  CO.,  Inc.,  v.    CAPITOL  CHEMICAL  00. 

(Supreme  Court  of  New  York.  Appellate  Division,  1919.     187  App.  Div.  599. 

176  N.  Y.  Supp.  49.) 

Action  by  the  Imperial  Products  Company,  Incorporated,  against 
the  Capitol  Chemical  Company.  From  a  determination  of  the  Appel- 
late Term,  reversing  a  judgment  of  the  City  Court,  plaintiff  appeals. 

Page,  J.  Four  conditions  must  exist  to  bring  a  case  within  sub- 
division 3  of  section  47  of  the  Sales  Act :  (1)  Goods  must  be  delivered 
to  a  carrier,  (2)  with  instructions  that  the  carrier  is  not  to  deliver 
the  goods  to  the  buyer  until  paid  for;  (3)  this  must  have  been  done 
pursuant  to  an  agreement  between  the  buyer  and  seller;  (4)  such  an 
arrangement  may  be  indicated  by  the  marking  of  the  goods  "collect  on 
delivery"  or  otherwise.  In  my  opinion,  this  subdivision  does  not  ap- 
ply to  every  shipment  by  a  carrier,  but  only  to  such  shipments  when 
the  terms  of  the  contract  of  sale  provide  that  the  carrier  shall  collect 
on  delivery.  The  controlling  element  is  the  agreement  of  the  parties, 
and  not  the  method  of  shipment  by  the  seller. 

In  this  case  there  was  no  agreement  that  the  shipment  should  be 
made  "collect  on  delivery,"  nor  was  there  any  agreement  that  the  buyer 
would  pay  the  purchase  price  by  sight  draft  to  be  attached  to  the 
bill  of  lading.  No  terms  of  payment  were  specified  in  the  agreement 
between  the  parties.  Under  such  a  contract,  delivery  and  payment  are 
concurrent  obligations.  *  *  *  This  is  very  different  from  payment 
of  the  purchase  price  by  sight  draft  with  bill  of  lading  attached.  In 
the  first,  the  buyer  has  the  right  of  inspection  to  ascertain  whether  the 
goods  are  in  conformity  with  the  contract,  when  the  seller  tenders  de- 
livery, before  he  is  required  to  accept  and  pay  for  the  goods.  In  the 
latter,  payment  is  a  condition  precedent  to  delivery,  and  hence  incon- 
sistent with  the  right  of  inspection.  *  *  *  Inasmuch  as  there  was 
no  provision  in  the  agreement  between  the  parties  inconsistent  with  the 
right  of  inspection  before  acceptance  and  payment,  the  seller  could 
not  deprive  the  buyer  of  that  right  by  adopting  a  method  of  collection 
not  provided  in  the  agreement.     *     *     * 

In  my  opinion  the  judgment  of  the  Citv  Court  was  right,  and  the 
determination  of  the  Appellate  Term  should  be  reversed.     *     *     * 

DowLiNG,  J.  (dissenting).  This  action  was  brought  to  recover  dam- 
ages for  the  breach  of  a  contract  whereby  plaintiff  agreed  to  purchase 
and  accept  from  the  defendant  one  car,  standard  quality,  white  naptha- 
lene  flakes,  in  barrels  or  in  paper-lined  boxes,  at  8  cents  per  pound,  f. 
o.  b.  West  Elizabeth,  N.  J.,  prompt  shipments  from  defendant's  plant 
at  Birmingham,  Ala.  The  contract  is  in  writing  and  is  not  disputed. 
The  question  involved  in  this  appeal  is  whether  the  purchaser,  the 
plaintiff,  had  the  right  to  inspect  the  goods  shipped  it  by  the  defendant 
pursuant  to  this  agreement  of  sale. 

The  bill  of  lading  issued  by  the  Pennsylvania  Railroad  Company  for 
the  goods  in  question,  covering  the  car  Rutland  filled  with  napthalene 
and  routed  to  the  plaintiff"  at  West  Elizabeth,  N.  J.,  the  invoice  for 
said  goods  covering  said  carload,  aggregating  33,127  pounds,  at  8 
cents  a  pound,  $2,650.16,  and  the  sight  draft  on  plaintiff  for  such  sum 
of  $2,650.16,  were  all  sent  to  the  Chase  National  Bank  for  presenta- 
tion and  collection,  and  were  regularly  presented  and  demand  for  the 
payment  of  the  draft  made  on  plaintiff  by  the  bank.  There  is  no  dis- 
pute as  to  these  facts,  and  upon  the  trial  plaintiff's  counsel  admitted 


Ch.  7)  RIGHTS   AND   HEMEDIES   OF   THE   BUYER  1187 

that  a  tender  of  the  goods  had  been  made.  Plaintiff,  however,  refused 
to  take  up  the  draft  unless  an  opportunity  was  given  it  to  inspect  the 
g'oods.  The  plaintiff's  counsel  asked  the  court  to  charge  the  jury  that, 
as  a  matter  of  law,  the  plaintiff  had  a  right  to  inspect  the  merchan- 
dise before  delivery.  The  court  charged  that  plaintiff  had  the  right 
to  ask  for  a  certificate  for  the  inspection  of  the  merchandise  before 
delivery,  to  which  exception  was  duly  taken.  The  sole  question  for 
determination  is  whether,  under  the  contract  between  the  parties  for 
the  purchase  and  sale  of  these  goods,  the  purchaser  had  a  right  of 
inspection  before  paying  therefor. 

No  terms  of  payment  were  specified  in  the  agreement  between  the 
parties ;  therefore  the  sale  was  a  cash  sale,  where  payment  for  goods 
must  be  made  upon  delivery.  The  shipment  was  by  carrier,  as  the 
agreement  contemplated,  and  the  payment  was  to  be  of  a  sight  draft 
against  the  bill  of  lading  and  invoice,  which  was  the  equivalent  of 
cash  on  delivery.  This  case  comes  within  subdivision  3,  section  47,  of 
the  Sales  Act.     *     *     * 

It  was  the  agreement  of  the  parties,  as  evidenced  by  the  written 
contract,  that  the  delivery  should  be  by  carrier.  The  law  treats  this 
sale  under  the  agreement  in  question  as  one  for  cash,  where  the  goods 
are  not  to  be  delivered  by  the  carrier  to  the  buyer  until  he  has  paid  the 
drafts,  and  these  terms  were  indicated  by  the  fact  that  the  buyer  was 
to  meet  the  sight  draft  before  it  became  entitled  to  the  invoice  and  bill 
of  lading,  which  were  its  sole  authority  to  take  possession  of  the  goods. 
There  was  no  special  agreement  permitting  an  examination  before  ac- 
ceptance. Under  these  conditions  the  provisions  of  the  subdivision  re- 
ferred to  are  literally  and  completely  applicable  to  this  case,  and  the 
plaintiff  had  no  right  to  an  inspection  of  the  goods  and  the  tender 
therefore  was  good.  In  Williston  on  Sales,  p.  840,  the  rule  is  recog- 
nized that  sending  goods  forward  with  a  draft  attached  to  a  bill  of  lad- 
ing is  the  equivalent  of  sending  them  forward  C.  O.  D.,  and  both  in- 
volve the  loss  of  the  buyer's  right  of  inspection.  No  great  hardship  is 
worked  by  the  rule  laid  down  by  the  statute  in  question,  as  it  is  always 
competent  for  the  parties  to  provide  for  an  inspection  by  special  agree- 
ment. 

It  follows,  therefore,  that  the  charge  of  the  learned  trial  court  was 
incorrect,  and  that,  plaintiff  not  having  the  right  of  inspection  which 
it  claimed,  the  tender  made  by  defendant  was  effective,  and  the  deter- 
mination of  the  Appellate  Term,  reversing  the  judgment  in  favor  of 
the  plaintiff,  was  correct.     *     *     * 

Clarke;,  P.  J.,  concurs.  » 


At  what  point  is  the  buyer  entitled  to  examine  the  goods?  Sub- 
section 2  states  that  the  buyer  is  to  afford  the  seller  a  reasonable 
opportunity  of  examining  the  goods  "when  the  seller  tenders  de- 
livery of  the  goods  to  the  buyer."  But  when  does  the  seller  "ten- 
der delivery"?  In  the  case  of  shipment  by  carrier,  section  46  of 
the  Sales  Act  provides  that  "delivery  of  the  goods  to  a  carrier 

*  *     *     is  deemed  to  be  a  delivery  of  the  goods  to  the  buyer 

*  *  *  unless  a  contrary  intent  appears."  The  duty  to  examine 
the  *goods  at  the  seller's  place  of  business,  or  at  the  office  of  the 
carrier  located  there,  would  be  a  right  of  little  value  to  the  buyer. 


1188  SALES  (Part  4 

Therefore,  in  the  very  circumstances  of  the  case,  delivery  to  a 
carrier,  for  purposes  of  affording  an  opportunity  to  the  buyer  to 
examine  the  goods,  is  not  a  delivery  to  the  buyer,  as  the  word 
"delivery"  is  used  in  section  47.  The  general  presumption  stated 
in  section  46  does  not  govern  here,  because  a  contrary  intent  does 
appear.  The  next  case  discusses  this  rule,  and  also  points  out  that 
tlie  parties  may  expressly  or  impliedly  designate  any  place  as  the 
place  for  making  an  examination. 


EATON  V.   BLACKBURN  et   al. 

(Supreme  Court  of  Oregon,  1908.    52  Or.  300,  96  Pac.  870,  20  L.  B.  A.  [N.  S.] 
53,  132  Am.  St.  Rep.  705,  16  Ann.  Cas.  1198.) 

Action  by  A.  E.  Eaton  against  Edward  Blackburn  and  another,  part- 
ners as  Blackburn  &  Breck.  From  a  judgment  for  defendants,  plain- 
tifif  appeals. 

This  is  an  action  to  recover  the  purchase  price  of  two  car  loads  of 
hay.  The  defense  is  that  the  hay,  which  plaintiff  agreed  to  sell  and 
deliver  to  defendants,  was  to  be  "good,  number  one,  merchantable  hay," 
and  that  furnished  was  not  of  this  quality,  for  which  reason  it  was 
rejected.  The  defendants  are  commission  merchants,  residing  and 
doing  business  in  Baker  City.  Plaintiff  resides  in  Union  county,  some 
miles  distant  from  Baker.  In  March,  1906,  he  contracted  and  agreed 
to  sell  to  defendants  five  car  loads  of  hay,  for  use  in  their  business, 
at  $11.50  per  ton,  f.  o.  b.  cars,  Nodine  Spur,  Union  county.  The  con- 
tract was  made  at  Baker  City,  and  defendants  were  to  pay  the  freight 
from  place  of  shipment  to  that  point,  but  nothing  was  said  about  the 
time  or  place  of  payment,  or  the  inspection  or  acceptance  of  the  hay. 
Shortly  after  making  the  contract,  plaintiff  loaded  two  cars  with  hay 
at  Nodine  Spur,  and  the  sam.e  were  carried  by  the  railroad  company 
to  Baker,  reaching  there  Sunday  morning,  March  25th.  On  the  morning 
of  the  27th,  in  company  with  Abercrombie — a  prospective  purchaser — 
Mr.  Breck,  one  of  defendants,  opened  the  cars,  in  which  the  hay  had 
been  shipped,  and  examined  it,  but  Abercrombie  was  unwilling  to  pur- 
chase. In  the  afternoon  of  the  same  day  they  made  a  further  and 
more  careful  examination,  and  Breck,  claiming  that  the  hay  was  not 
of  the  kind  and  quality  contracted  for,  refused  to  accept  it,  and  so  noti- 
fied plaintiff  and  the  railroad  company  on  the  following  morning. 

At  the  time  of  the  trial  it  was  contended  by  plaintiff  that,  under  the 
contract  between  him  and  defendants,  it  was  the  duty  of  defendants  to 
inspect  and  accept  or  reject  the  hay  at  Nodine  Spur,  where  it  was  to 
be  loaded  on  the  cars ;  and,  if  they  neglected  to  do  so,  they  were  bound 
to  receive  such  hay  as  was  actually  shipped,  and  rely  upon  a  claim 
of  damages  for  breach  of  contract,  if  it  was  of  inferior  kind  and  qual- 
ity, but,  if  this  was  not  so,  defendants'  conduct,  after  the  hay  reached 
Baker  City,  was  such  as  to  amount,  in  law,  to  an  acceptance  thereof. 
The  court  instructed  the  jury  that  if  the  hay,  delivered  on  the  cars 
by  plaintiff'  at  Nodine  Spur,  was  substantially  the  kind  and  quality 
called  for  by  the  contract,  it  would  amount  to  a  full  and  complete  per- 
formance, and  enable  him  to  recover  the  contract  price,  whether  the 
hay  was  subsequently  accepted  by  defendants  or  not;  and,  if  the  hay 
was  diff'erent  or  inferior  to  that  which  plaintiff  agreed  to  sell,  not- 


Ch.  7)  RIGHTS  AND   REMEDIES  OF  THE  BUYER  1189 

withstanding  which  the  defendants  accepted  it,  or  did  something 
amounting  to  an  acceptance,  they  could  not  thereafter  repudiate  their 
Habihty  by  returning  or  tendering  a  return  of  the  hay,  but  that  defend- 
ants had  a  reasonable  time  in  which  to  inspect  the  hay  after  it  reached 
Baker  City,  and  if  it  was,  in  fact,  of  an  inferior  quality,  and  not  ac- 
cording to  the  contract,  they  could  reject  it,  and  refuse  to  accept  or  pay 
for  it,  and  if  they  did  so,  plaintiff  could  not  recover  in  this  action. 

Bean,  C.  J.  The  principal  point  relied  upon  by  plaintiff  for  a  re- 
versal of  the  judgment  is  the  ruling  of  the  court  that,  under  the  con- 
tract for  the  sale  of  hay  in  question,  defendants  had  a  right  to  inspect 
it  after  it  reached  Baker  City,  and,  if  it  did  not  conform  to  the  con- 
tract, to  refuse  to  accept  or  pay  for  it.  The  argument  is  that  the 
place  of  inspection  and  acceptance  or  rejection  was  at  Nodine  Spur, 
where  the  hay  was  to  be  delivered  by  the  plaintiff,  f ,  o.  b.  cars ;  and, 
if  defendants  neglected  to  exercise  the  right  of  inspection  at  that 
time  and  place,  they  were  liable  for  the  value  of  the  hay  so  delivered. 
But  we  do  not  so  find  the  law.  No  place  or  time  of  payment  or  of 
inspection  or  acceptance  was  stipulated  in  the  contract.  All  parties 
concur  in  this  point.  The  contract  was  made  between  plaintiff  and  de- 
fendant Breck.  These  gentlemen  both  say  that  Breck  met  plaintiff  at 
the  depot  at  Baker  City,  and  inquired  of  him  if  he  had  any  hay  for 
sale,  and  that  he  (plaintiff)  said  he  had;  that  the  price  was  $11.50 
per  ton,  f .  o.  b.  cars  at  Nodine  Spur,  and  that  Breck  said  he  would  take 
five  car  loads  at  that  price,  and  under,  the  conditions  named,    *    *    * 

The  payment,  therefore,  became  due  and  payable  on  a  complete 
delivery,  and  there  could  be  no  such  delivery  without  an  opportunity 
for  inspection.  Under  an  executory  contract  for  the  future  sale 
and  delivery  of  goods  of  a  specified  quality,  the  quality  is  a  part  of 
the  description,  and  the  seller  is  bound  to  furnish  goods  actually  com- 
plying with  such  description.  If  he  tenders  articles  of  inferior  qual- 
ity, the  vendee  is  not  bound  to  accept  them ;  and,  unless  he  does  so, 
he  is  not  liable  therefor.  This  necessarily  gives  to  the  vendee  the 
right,  and  imposes  upon  him  the  duty,  of  inspection,  and  he  must 
therefore  be  given  an  opporttmity  to  make  such  inspection  before  be- 
coming liable  for  the  purchase  price,  unless  the  contract  otherwise  pro- 
vides ;  and  where  articles  are  to  be  delivered  to  a  common  carrier 
by  the  vendor,  to  be  forwarded  to  the  vendee  at  a  distant  point,  and 
no  provision  is  made  for  inspection  and  acceptance  before  or  at  the 
time  of  shipment,  the  vendee  is  entitled,  under  the  law,  to  a  reasonable 
time,  after  the  goods  arrive  at  their  destination,  in  which  to  exercise 
the  right  of  inspection,  and  to  accept  or  reject  them,  if  they  do  not 
comply  with  the  contract.     *     *     * 

In  Pierson  v.  Crooks,  115  N.  Y.  539,  22  N.  E.  349,  12  Am.  St.  Rep. 
831,  the  court  said:  "The  ordering  of  goods  of  a  specific  quality  by 
a  distant  purchaser  of  a  manufacturer  or  dealer,  with  directions  to 
ship  them  by  a  carrier,  is  one  of  the  most  frequent  commercial  trans- 
actions. It  would  be  a  most  embarrassing  and  inconvenient  rule — 
more  injurious  even  to  the  dealer  or  manufacturer  than  to  the  pur- 
chasers— if  delivery  to  the  carrier  was  held  to  conclude  the  party  giv- 
ing the  order  from  rejecting  the  goods  on  arrival,  if  found  not  to  be  of 
the  quality  ordered."     *     *     * 

We  are  of  the  opinion,  therefore,  that  no  error  was  committed  by 
the  court  below  in  its  ruling  on  this  phase  of  the  case.  In  Samuel 
M.  Lawder  &  Sons  Co.  v.  Albert  Mackie  Grocery  Co.,  97  Md.  1,  54 


1 1 90  SALES  (Part  4 

Atl.  634,  62  L.  R.  A.  795,  cited  by  plaintiff,  the  contract  required  pay- 
ment to  be  made  for  the  goods  at  the  place  of  shipment,  which  the 
court  held  was  necessarily  inconsistent  with  a  right  of  inspection  at 
another  place.  But  here,  as  we  have  seen,  no  time  or  place  of  pay- 
ment was  specified,  and  therefore  it  did  not  become  due  until  the 
goods  were  delivered.     *     *     * 

It  is  also  insisted  that  defendants  waived  the  right  to  reject  the 
hay  for  defective  quality,  by  their  action  and  conduct  in  relation 
thereto  after  it  reached  Baker  City.  But  this  question  was  for  the 
jury,  and,  we  think,  was  fairly  submitted  to  them.  The  defendants 
were  not  precluded  from  rejecting  the  hay  by  merely  receiving  it. 
They  still  had  a  reasonable  time  in  which  to  inspect  and  reject  it,  if 
not  according  to  the  contract.  Nor  did  their  offer  to  sell  and  dispose 
of  the  hay,  before  they  had  examined  it,  amount  to  an  acceptance. 
This  was  before  they  ascertained  that  it  was  of  an  inferior  quality, 
and  was  on  the  assumption  that  plaintiff  had  complied  with  his  con- 
tract, and  shipped  hay  of  the  kind  and  quality  agreed  upon.  It  was 
therefore  not  conclusive  in  law  of  an  intent  to  accept  the  hay,  in 
performance  of  the  contract.     *    *    * 

Finding  no  error  in  the  record,  the  judgment  is  affirmed. 


SECTION  3.— NATURE  AND  CONSEQUENCES  OF  AN 
ACCEPTANCE  OF  THE  GOODS 

There  are  two  principal  questions  here  raised:  (1)  What  con- 
stitutes an  acceptance?  (2)  What  is  the  legal  effect,  especially 
upon  the  rights  and  obligations  of  the  buyer,  of  an  acceptance? 

In  answer  to  the  first  question,  What  constitutes  an  acceptance? 
the  Sales  Act  makes  two  provisions.  Section  47,  subsection  1, 
provides : 

Where  goods  are  delivered  to  the  buyer,  which  he  has  not  pre- 
viously examined,  he  is  not  deemed  to  have  accepted  them  unless 
and  until  he  has  had  a  reasonable  opportunity  of  examining  them 
for  the  purpose  of  ascertaining  whether  they  are  in  conformity 
with  the  contract. 

The  effect  of  this  section  is  that  an  act  which  under  some  cir- 
cumstances might  be  deemed  an  acceptance  under  the  definition 
prescribed  in  Section  48,  next  to  be  noticed,  will  not  be  construed 
as  an  acceptance  unless  the  buyer  has  had  a  reasonable  opportu- 
nity of  examining  the  goods.  This  subsection  in  a  sense,  therefore, 
recognizes  an  exception  to  Section  48.  It  is  to  be  noticed  that 
it  is  the  reasonable  opportunity  of  examining  the  goods,  not  an 
actual  examination  which  section  declares  must  occur  before  the 
buyer  may  be  deemed  to  have  accepted.  Our  discussion,  in  the  pre- 
ceding section,  of  the  nature  and  legal  effect  of  the  buyer's  exam- 
ination and  of  his  failure  to  examine,  makes  it  unnecessary  to  dis- 
cuss this  subsection  further,  though  its  importance  should  not  be 
overlooked. 

In  direct  answer  to  the  first  question,  what  constitutes  an  ac- 
ceptance, the  Sales  Act,  Section  48,  provides : 


Ch.  7)  RIGHTS   AND   REMEDIES   OP   THE   BUYER  1191 

The  buyer  is  deemed  to  have  accepted  the  goods  when  he  inti- 
mates to  the  seller  that  he  has  accepted  them,  or  when  the  goods 
have  been  delivered  to  him,  and  he  does  any  act  in  relation  to  them 
which  is  inconsistent  with  the  ownership  of  the  seller,  or  when, 
after  the  lapse  of  reasonable  time,  he  retains  the  goods  without  in- 
timating to  the  seller  that  he  has  rejected  them. 

The  question  raised  is  essentially  one  of  fact.  It  is  to  be  no- 
ticed tiiat  two  ver}^  different  types  of  conduct  may  be  deemed  an 
acceptance:  (1)  An  affirmative  act,  done  intentionally  or  unin- 
tentionally, which  is  substantial  evidence  of  an  assertion  of  owner- 
ship in  the  goods,  is  an  acceptance.  This  is  well  illustrated  in  the 
next  case.  (2)  A  negative  act — i.  e.,  a  failure  to  reject  when  con- 
tinued an  unreasonable  time — is  construed  as  an  acceptance.  This 
rule  is  another  manifestation  of  a  very  broad  doctrine  of  the  law, 
that  a  person  who  fails  to  exercise  a  legal  right  promptly  will,  in 
one  way  or  another,  be  penalized  by  his  failure  to  act.  Generally 
the  right  is  taken  from  him.  Statutes  of  limitation  furnish  an 
important  and  very  common  illustration  of  this  broad  doctrine. 


WHITE  V.  SCHWEITZER  et  al. 
(Court  of  Appeals  of  New  York,  1917.     221  N.  Y.  461,  117  N.  E.  941.) 

Action  by  William  E.  White  against  Nathan  Schweitzer  and  oth- 
ers.    From  a  judgment  for  defendants,  plaintiff  appeals. 

McLaughlin,  J.  The  action  was  brought  to  recover  the  purchase 
price  of  a  carload  of  turkeys  shipped  by  plaintiff's  assignor,  the  Key- 
stone Commercial  Company,  from  Maysville,  Ky.,  to  the  defendants 
in  New  York  City.  They  were  shipped  on  November  17,  and  arrived 
November  23,  1908.  There  was  a  dispute  between  the  parties  as  to 
the  terms  of  sale ;  that  is,  whether  the  turkeys  were  to  be  "dry-picked" 
or  "scalded."  Those  shipped  were  scalded,  and  the  verdict  has  set- 
tled the  disputed  question  in  favor  of  the  defendants.  When  the  car 
arrived  in  which  the  shipment  was  made,  the  turkeys  were  examined 
by  defendants,  and  it  was  then  discovered  they  were  scalded,  instead 
of  dry-picked,  and  also  that  they  were  in  bad  condition.  About  half 
past  7  o'clock  in  the  morning  of  that  day  the  defendants  wired  plain- 
tiff's assignor  at  Maysville:  "Your  car  arrived  scalded,  instead  of 
dry-picked.     Stock  sticky  and  cannot  use  it.     Wire  instructions." 

About  two  hours  later  on, the  same  day,  not  having  received  an  an- 
swer to  the  first  telegram,  they  sent  another,  saying:  '''Having  rail- 
road inspector  examine  car.  Will  put  in  claim  for  you.  Have  turned 
car  over  to  house  that  can  sell  such  stuff." 

Both  telegrams  were  delivered  to  plaintiff's  assignor  at  the  same 
time,  and  neither  of  them  was  answered.  At  the  time  the  second  tele- 
gram was  sent  defendants  delivered  the  turkeys  to  commission  mer- 
chants for  sale,  and  the  same  were  on  that  day  sold  for  $729.69,  which 
sum  was  subsequently  tendered  to  the  plaintiff's  assignor,  and  by  it 
refused.  At  the  time  the  turkeys  were  delivered  to  the  commission 
merchants,  one  of  the  defendants  wrote  plaintiff's  assignor,  confirm- 
ing the  telegrams,  and  saying,  among  other  things:  "I  do  not  know 
just  how  I  will  make  out  with  the  sale  of  these  goods,  but  in  the 
event  of  any  deficiency  I  will  expect  you  to  make  good." 


1192  SALES  (Part  4 

The  principal  question  presented  upon  the  appeal  is  whether  the 
trial  court  erred  in  charging  the  jury,  to  which  an  exception  was  tak- 
en, that  there  was  no  evidence  upon  which  it  could  find  that  the  de- 
fendants accepted  the  turkeys.  I  am  of  the  opinion  the  exception  was 
well  taken.  *  *  *  It  is  not  at  all  times  easy  to  determine  whether 
a  purchaser's  retention,  sale,  or  disposition  of  property  constitutes  an 
acceptance,  but  as  a  general  rule  it  must  be  determined  as  a  question 
of  fact.  *  *  *  jt;  lYiay  be,  and  usually  is,  indicated  by  exercising 
acts  of  ownership;  e.  g.,  where  one  resells  the  goods,  as  such  action 
would  be  improper  except  on  the  assumption  that  the  buyer  had  ac- 
quired title.  That  necessarily  indicates  an  assent  on  the  part  of  the 
buyer  to  become  the  owner.  *  *  *  jf  ^j-^g  article  purchased  is  not 
in  accordance  with  the  contract,  then  the  purchaser  must,  upon  dis- 
covering that  fact,  do  nothing  inconsistent  with  the  vendor's  owner- 
ship. *  *  *  So  it  has  been  held  that  an  acceptance  is  made  out  by 
action  of  the  vendee  in  insuring  the  goods  or  offering  to  mortgage 
them  (Georgia  v.  Augusta.  74  Ga.  497),  or  by  loaning  them  (Hensen 
V.  Beebe,  111  Iowa,  534,  82  N.  W.  942),  or  by  directing  an  agent  to 
sell  them  (Brown  v.  Nelson,  66  Vt.  660,  30  Atl.  94),  or,  while  disclaim- 
ing a  purchase,  permitting  a  third  person  to  select  and  retain  a  portion 
of  the  goods  upon  his  promise  to  account  to  the  seller  for  them  (Bar- 
tholomae  v.  Paull,  18  W.  Va.  771).  Mere  complaint  by  the  vendee 
that  the  goods  do  not  come  up  to  the  contract  does  not  amount  to  a 
rejection.  Something  more  is  required.  If  the  goods  received  do  not 
conform  to  the  contract  as  to  quality  or  kind,  the  purchaser  must,  as, 
a  general  rule,  within  a  reasonable  time  after  such  facts  have  been 
ascertained,  return  or  offer  to  return  them.  Mason  v.  Smith,  130  N. 
Y.  474,  29  N.  E.  749.  In  case  the  goods  are  in  such  condition  that 
they  must  be  speedily  disposed  of,  or  else  there  will  be  a  total  loss, 
then  there  is  an  exception  to  the  general  rule  which  permits  the  pur- 
chaser to  dispose  of  them.  This  right  is  implied  from  the  necessity  of 
the  case  and  to  make  the  loss  as  small  as  possible.  But  the  exception 
only  applies  where  the  seller  cannot  be  communicated  with  and  in- 
structions from  him  quickly  obtained. 

Applying  the  rule  laid  down  in  the  authorities  cited  to  the  evidence 
adduced  at  the  trial,  it  at  once  becomes  apparent  that  the  question  of 
acceptance  was  at  least  one  of  fact.  It  might  well  be  doubted  wheth- 
er the  uncontradicted  facts  did  not  show  as  matter  of  law  an  accept- 
ance. *  *  *  That  question,  however,  is  not  presented  on  the  ap- 
peal, and  we  do  not  pass  upon  it.  The  defendants  ascertained,  about 
7  o'clock  on  the  morning  of  the  23d,  when  the  goods  were  received, 
that  the  quality  did  not  correspond  to  what  they  had  purchased.  They 
communicated  that  fact  by  a  telegram  to  the  seller,  but  did  not  state 
that  they  refused  to  receive  or  offer  to  return  them ;  on  the  contrary, 
without  waiting  until  an  answer  to  the  telegram  could  be  received 
from  the  seller  (at  most  three  or  four  hours),  they  proceeded  to  treat 
the  goods  as  their  own  by  delivering  them  to  commission  merchants 
for  sale,  and  so  informed  the  seller.  Respondents  suggest  that  the 
seller  did  not  answer  either  telegram.  There  was  no  necessity  for 
its  doing  so.  Both  telegrams  were  received  at  the  same  time,  and  the 
second  was  to  the  eft'ect  that  the  goods  had  then  been  disposed  of. 

For  the  reasons  stated,  it  follows  that  the  court  also  erred  in  in- 
structing the  jury  they  must  find  a  verdict  for  the  defendants  if  the 


Ch.  7)  RIGHTS   AND   REMEDIES   OP  THE   BUYER  1193 

contract  were  for  dry-picked  turkeys.     Such  instruction  also  withdrew 
from  the  jury  the  question  of  an  acceptance. 

It  follows  that  the  judgment  appealed  from  should  be  reversed,  and 
a  new  trial  ordered. 


SECTION  4.— BUYER  UNDER  NO  DUTY  TO  RETURN 
GOODS  NOT  ACCEPTED  BECAUSE  OF  NON- 
COMPLIANCE WITH  THE  CONTRACT 

Sales  Act,  Section  50.  Unless  otherwise  agreed,  where  goods 
are  delivered  to  the  buyer,  and  he  refuses  to  accept  them,  having 
the  right  so  to  do,  he  is  not  bound  to  return  them  to  the  seller, 
but  it  is  sufficient  if  he  notifies  the  seller  that  he  refuses  to  accept 
them. 

This  section,  in  connection  with  other  principles  of  law  produces 
these  effects:  (1)  The  failure  of  the  buyer  to  return  the  goods 
which  do  not  comply  with  the  contract,  after  notice  to  the  buyer 
of  his  rejection,  cannot  be  construed  as  an  acceptance;  (2)  nor 
does  such  failure  constitute  a  breach  of  contract.  (3)  The  buyer 
does  owe  the  same  duty  which  any  gratuitous  bailee  owes  to  the 
bailor;  that  is,  the  buyer  must  use  a  certain  degree  of  care  over 
the  goods.  (4)  In  some  cases  the  buyer  could  recover  from  the 
seller  the  damages  to  which  he  was  put  in  caring  for  the  property. 
(5)  In  some  cases,  the  buyer  would  have  the  legal  right  to  sell  the 
goods  for  the  seller's  account,  the  proceeds  being  thereafter  held  in 
trust  for  the  seller.  This  situation  would  arise  where  the  goods 
were  of  perishable  nature,  or  in  any  other  case  where  from  a 
business  standpoint  a  sale  would  be  for  the  best  interests  of  the 
seller. 

Some  phases  of  the  application  of  the  general  principle  here 
involved  are  presented  in  the  following  case. 


EHEINSTROM  et  al.  v.  STBINER  et  al. 

(Supreme  Court  of  Ohio,  1904.     69  Ohio  St.  452,  69  N.  E.  745, 
100  Am.  St.  Rep.  699.) 

Action  by  Wm.  Steiner  Sons  &  Co.  against  Rheinstrom  Bros.  Judg- 
ment for  plaintiffs,  and  defendants  bring  error. 

The  defendants  in  error  brought  action  against  plaintiffs  in  error, 
in  the  court  of  a  justice  of  the  peace  of  Hamilton  county,  to  recover 
$247.50,  the  agreed  price  of  certain  labels  claimed  to  have  been  sold 
and  delivered  to  Abraham  and  Isaac  Rheinstrom  at  their  request. 

Spear,  j.  *  *  *  j^jj  ^j^g  ^^.[^1  court  apply  the  wrong  rule  of  law 
to  the  evidence  respecting  the  acceptance  and  retention  of  the  goods? 
Without  question,  the  burden  was  upon  the  defendants  in  error  to 
establish  acceptance.  To  determine  this  with  fairness  to  them,  it  is 
proper  to  recite  the  evidence  adduced  by  them  to  support  that  con- 
tention— not  that  the  evidence  is  to  be  weighed,  but,  taken  all  to- 
gether, does  the  evidence  tend  to  show  such  acceptance,  or  does  it 
show  the  contrary? 


1194  SALES  (Part  4 

On  the  day  the  goods  were  received  by  defendants  below,  they  ac- 
knowledged receipt,  under  date  of  January  31,  1900,  by  the  following 
letter,  viz. :  "Dear  Sirs :  We  received  to-day  the  shipment  of  Jed 
Clayton  labels,  but  regret  to  find  that  the  work  is  not  properly  carried 
out.  Please  return  to  us  the  original  sketch  and  we  will  point  out  to 
you  in  detail  the  defects.    Yours  truly,  Rheinstrom  Bros." 

To  this  the  plaintiff  below  responded  as  follows:  "Gentlemen.  We 
beg  to  acknowledge  receipt  of  your  favor  of  the  31st  ult.  in  regards  to 
'Jed  Clayton'  labels,  that  same  have  reached  you,  but  that  the  work 
is  not  properly  carried  out.  We  are  again  very  sorry  to  hear  your 
complaint,  and  herein  enclose  the  sketch  which  was  submitted  to  you, 
with  one  of  the  labels,  and  no  doubt  our  Mr.  Steiner  will  be  in  your  city 
by  the  time  these  few  lines  reach  you,  and  you  can  explain  matters  to 
him  personally.    We  remain  yours  very  truly,  Wm.  Steiner  Sons  &  Co." 

Some  time  after  the  above  date,  Mr.  Isadore  Steiner,  one  of  the 
plaintiffs  below,  called  at  the  office  of  Rheinstrom  Bros. ;  and  his  ac- 
count of  the  conversation  then  had  is,  in  substance,  that  "Mr.  Rhein- 
strom then  told  me  that  he  received  our  labels,  but  will  not  use  them. 
I  asked  him  why,  and  he  said  they  were  too  far  away  in  color  from  his 
original  label.  *  *  *  j  pleaded  with  him,  saying,  'The  labels  are  no 
earthly  good  to  me.'  He  said  he  couldn't  help  that.  'The  best  thing 
you  can  do  is  to  put  them  in  the  fire  and  burn  them  up  while  you  wait 
here.'  I  said :  'You  cannot  burn  them.  They  are  my  property  until 
they  are  paid  for.'  Then  I  tried  to  get  him  to  accept  them.  He  said 
he  would  not  accept  them  labels  for  any  price — not  for  ten  cents  a 
thousand.  I  put  on  my  hat  and  coat  and  walked  out."  There  is  no 
other  evidence  by  plaintiffs  below  bearing  on  the  question  of  acceptance 
than  the  foregoing,  and  no  evidence  at  all  of  use  by  defendants  below 
of  any  of  the  labels.  Mr.  Abraham  Rheinstrom  testified,  in  substance, 
that  the  labels  were  defective  in  drawing,  color,  and  workmanship. 
"We  could  not  use  them  at  any  price.  We  never  accepted  these  labels, 
but  wrote  immediately  rejecting  them.    *    *    *  " 

The  burden  was  upon  plaintiffs  below  to  prove  a  compliance  with 
their  contract.  *  *  *  Their  own  evidence  shows  conclusively  that 
the  buyers  did  not  accept,  unless  a  failure  to  manually  return  the  re- 
jected goods  is,  in  law  an  acceptance.  Is  it?  From  the  standpoint  of 
ordinary  fairness,  how  is  it?  The  buyers  had  ordered  labels  of  a 
specified  kind.  The  sellers  had  delivered  labels  of  a  different  kind, 
not  conforming  to  the  agreement,  of  which  facts  the  sellers  were  at 
once,  by  letter,  fully  apprised,  to  which  they  responded  that,  by  the 
time  their  letter  should  reach  the  buyers,  one  of  their  firm  would  call, 
and  matters  could  be  explained.  He  did  call,  and  was  distinctly  notified 
that  the  labels  were  wholly  useless  to  the  buyers,  and  as  distinctly  in- 
formed that  they  were  rejected.  On  what  principle  of  commercial 
dealing  could  they  ask  the  buyers  to  take  further  trouble  in  the  mat- 
ter, at  the  peril  of  being  compelled  to  pay  for  a  wholly  useless  ar- 
ticle, and  one  which  they  had  not  purchased?  We  can  conceive  of  no 
rule  of  business  comity  which  would  justify  such  a  claim.  If  main- 
tainable at  all,  it  must  be  by  force  of  some  rigid  rule  of  law.     *    *    * 

Without  doubt,  the  rule  is  well  settled  that  the  buyer's  retention  of 
the  goods  beyond  a  reasonable  time  for  examination  and  communica- 
tion with  the  seller,  standing  alone,  will  be  regarded  as  warranting 
the  conclusion  that  he  has  accepted,  and  thus  become  liable,  especially 
if  the  delay  has  worked  prejudice  to  the  seller.     But  we  find  no  case, 


Ch.  7)  RIGHTS   AKD    RKMKDIES   OF   THE   BUYER  1195 

either  among  those  cited  or  elsewhere,  analogous  to  the  case  at  bar 
on  its  facts,  and  none  in  which  the  mere  failure  to  make  manual  re- 
turn of  the  goods  after  a  timely  and  explicit  rejection  of  them,  ana 
where  it  appears  that  no  prejudice  to  the  seller  has  been  caused  by 
the  delay,  is  held  to  make  the  buyer  liable  under  the  contract.  On 
the  contrary,  there  is  abundant  authority  for  the  proposition  that,  un- 
less otherwise  agreed,  where  goods  are  delivered  to  the  buyer,  and  he 
refuses  to  accept  them,  having  the  right  so  to  do,  he  is  not  bound  to 
return  them  to  the  seller,  but  it  is  sufficient  if  he  informs  the  seller 
that  he  refuses  to  accept  them.    *    *    * 

True,  it  does  not  appear  that  it  was  stated  to  him  in  words  that  the 
goods  were  held  subject  to  his  order,  but  any  intelligent  business  man 
could  not  fail  to  draw  the  conclusion  that  such  was  the  fact,  and  his 
own  declarations  show  that  he  regarded  the  labels  as  still  the  property 
of  his  firm.  And  such,  indeed,  was  the  law  of  the  situation ;  the  rule 
being  that  where  there  is  a  contract  for  sale  of  specific  goods,  and  the 
seller  is  bound  to  do  something  to  put  them  in  a  deliverable  state,  the 
property  does  not  pass  until  that  is  done,  and  the  buyer  has  notice. 
*  *  *  To  have  shipped  the  goods  to  the  Steiners,  without  direct 
orders  to  do  so,  would  have  made  the  Rheinstrom  Bros,  liable,  in  the 
first  instance,  for  drayage  and  freight;  and  this  burden  the  Steiners 
had  no  right,  either  in  morals  or  in  law,  to  place  upon  them.    *    *    * 

We  are  of  opinion  that  the  court  of  common  pleas  applied  the  cor- 
rect rule  of  law  to  the  evidence  on  the  question  of  acceptance  and 
retention  of  the  goods  and  that  the  reversal  of  its  judgment  by  the  cir- 
cuit court  was  erroneous.  Its  judgment  will  therefore  be  reversed, 
and  that  of  the  common  pleas  affirmed. 


SECTION  5.— REMEDIES  OF  THE  BUYER  FOR  BREACH 

OF  WARRANTY 

Assuming  that  there  has  been  a  breach  either  of  an  express  or 
of  an  implied  warranty,  what  are  the  remedies  of  the  buyer?  May 
he  refuse  to  take,  or  must  he  take  them  and  content  himself  with 
a  deduction  from  the  purchase  price  which  measures  the  extent  of 
his  loss?  The  law  confers  upon  the  buyer,  two  remedies:  A  right 
to  refuse  the  goods  and  thus  to  destroy  his  obligation  to  pay  the 
price,  and  also  the  right,  if  the  buyer  chooses  to  accept  the  goods, 
to  take  the  goods  at  a  reduced  price.  From  the  legal  standpoint  it 
is  necessary  to  regard  each  of  these  two  remedies  as  further  di- 
vided into  subordinate  groups.  It  is  commonly  said  that  the  buyer 
has  four  remedies  for  breach  of  warranty.  The  four  remedies 
are  provided  for  in  the  Sales  Act,  Section  69 : 

(1)  Where  there  is  a  breach  of  warranty  by  the  seller,  the  buyer 
may,  at  his  election  (c)  refuse  to  accept  the  goods,  if  the  property 
therein  has  not  passed,  and  maintain  an  action  against  the  seller 
for  damages  for  breach  of  warranty;  (d)  rescind  the  contract  to 
sell  or  the  sale  and  refuse  to  receive  the  goods,  or,  if  the  goods  have 
already  been  received,  return  them  or  offer  to  return  them  to  the 
seller  and  recover  the  price  or  any  part  thereof  which  has  been 


1196  '  SALES  (Part  4 

paid;  (a)  accept  or  keep  the  goods  and  set  up  against  the  seller 
the  breach  of  warranty  by  way  of  recoupment  in  diminution  or  ex- 
tinction of  the  price;  (b)  accept  or  keep  the  goods  and  maintain 
an  action  against  the  seller  for  damages  for  the  breach  of  war- 
ranty. 

These  four  subsections  show:  (1)  That  the  buyer  may  refuse 
to  take  the  goods,  or,  if  he  has  already  taken  them,  he  may  undo 
what  he  has  done  and  in  neither  case  will  he  be  liable  to  pay  for  the 
goods.  But  it  is  only  in  the  first  case,  where  he  has  refused  in  the 
first  instance  to  take  the  goods,  that  the  buyer  will  have  the  right 
to  sue  the  seller  for  the  damages  caused  by  the  seller's  breach  of 
contract.  If  he  has  already  taken  the  goods  and  then  rescinds, 
the  buyer  may  recover  no  damages  from  the  seller.  Of  course,  if 
the  buyer  has  paid  the  price,  or  part  of  it,  he  may  sue  the  seller 
and  get  that  money  back.  (2)  The  two  remaining  subsection^ 
show  that  the  buyer  may,  if  he  cares  to,  keep  the  goods,  and  then, 
if  he  cannot  agree  with  the  seller  as  to  the  amount  which  should 
be  deducted  from  the  price,  he  may  wait  until  the  seller  sues  him 
and  in  this  suit  set  up  in  a  cross-action  a  claim  for  the  damages 
sustained  by  the  breach.  The  judgment  against  the  buyer  will 
then  be  the  amount  of  the  purchase  price  less  the  amount  of  the  dam- 
ages. 

Having  now  sketched  the  remedies  of  the  buyer  in  outline  form, 
we  may  now  devote  some  attention  to  some  of  the  details  connect- 
ed with  these  four  remedies,  and  we  shall  take  them  up  in  the  fol- 
lowing order:  (1)  The  right  of  the  buyer  to  refuse  to  take  the 
goods  and  to  sue  the  seller  for  damages ;  (2)  the  right  of  the  buy- 
er to  rescind  the  contract;  (3)  the  right  of  the  buyer  to  accept 
the  goods  and  to  set  up  breach  of  warranty  by  way  of  recoupment ; 
(4)  the  right  of  buyer  to  accept  the  goods  and  to  sue  the  seller  for 
damages  for  breach  of  warranty. 

(a)  BUYER  MAY  REFUSP:  TO  ACX:3EPT  THE  GOODS 
It  is  to  be  noticed  that  subsection  (c)  authorizes  the  buyer  to 
refuse  to  accept  the  goods  if  the  title  has  not  passed.  If  the  title 
has  passed  to  the  buyer,  subsection  (c)  does  not  govern.  It  is  true 
that  title  to  goods,  which,  because  of  a  breach  of  warranty,  do  not 
comply  with  the  contract,  will  not  pass  to  the  buyer  merely  by  rea- 
son of  an  act  of  unconditional  appropriation,  or  because  the  sale 
was  of  ascertained  goods  in  a  deliverable  state,  because,  as  has 
already  been  seen,  these  presumptions  do  not  govern  where  there 
is  a  breach  of  warranty.  We  have  seen  that  a  buyer  has  the  right 
of  examination,  and  that  until  the  opportunity  to  examine  has  been 
given  him,  he  will  not  be  deemed  to  have  accepted  the  goods.  Ac- 
ceptance of  the  goods  is  an  acceptance  of  title.  The  reason  for 
recalling  this  matter  here  is  for  the  purpose  of  making  it  clear  that 
the  buyer's  right  to  refuse  the  goods  exists  when  and  only  when 
he  has  not  accepted. 

We  have  previously  discussed  what  constitutes  an  acceptance  as 
defined  in  section  48  of  the  Sales  Act,  and  it  there  appeared  that  a 


Ch.  7)  RIGHTS   AND   REMEDIES   OF  THE  BUYER  1197 

buyer  is  deemed  to  have  accepted  the  goods  (1)  when  he  inti- 
mates to  the  seller  that  he  has  accepted  them ;  or  (2)  when  the 
goods  have  been  delivered  to  him,  and  he  does  any  act  in  relation 
to  them  which  is  inconsistent  with  the  ownership  of  the  seller;  or 
(3)  when,  after  the  lapse  of  a  reasonable  time,  he  retains  the 
goods  without  intimating  to  the  seller  that  he  has  rejected  them. 
If  the  buyer  has  done  any  of  these  things  which  amount  to  an  ac- 
ceptance, he  no  longer  has  the  right  to  treat  the  breach  as  an  ex- 
cuse for  non-performance.  If  a  buyer  desires  to  avoid  payment  of 
the  price  and  also  to  recover  damages  for  the  breach  he  must  act 
promptly  and  should  manifest  unequivocally  that  he  refuses  to 
accept. 

It  should  also  be  noted  here,  merely  for  the  purpose  of  showing 
that  the  rule  laid  down  in  subsection  (c)  is  but  another  manifesta- 
tion of  another  rule  of  much  wider  scope  which  was  discussed  in 
Contracts.  That  rule  is  that,  where  a  party  to  a  contract  has  broken 
a  material  promise  made  by  him,  such  breach  gives  to  the  other 
party  two  rights:  (1)  The  right  to  refuse  to  go  on  with  his  part 
of  the  contract;  and  (2)  the  right  to  sue  the  party  in  default  for 
breach.  A  breach  of  warranty  is  therefore  a  material  breach  of 
contract. 

As  to  the  measure  of  damages  which  would  apply  in  a  suit 
brought  against  the  seller,  those  rules  will  be  discussed  in  con- 
nection with  subsections  (b)  and  (a).  The  same  measure  of  dam- 
ages is  applicable,  whether  the  buyer  is  proceeding  under  sub- 
sections (a),  (b),  or  (c). 

(b)     BUYER'S  RIGHT  OF  RESCISSION 

Several  subsections  of  Section  69  deal  with  various  aspects  of 
the  buyer's  right  of  rescission.    They  are  as  follows :     Subsection 

(d)  Where  there  is  a  breach  of  warranty  by  the  seller,  the  buyer 
may,  at  his  election  rescind  the  contract  to  sell  or  the  sale  and  re- 
fuse to  receive  the  goods,  or  if  the  goods  have  already  been  re- 
ceived, return  them  or  offer  to  return  them  to  the  seller  and  recover 
the  price  or  any  part  thereof  which  has  been  paid. 

(3)  Where  the  goods  have  been  delivered  to  the  buyer,  he  can- 
not rescind  the  sale  if  he  knew  of  the  breach  of  warranty  when  he 
accepted  the  goods,  or  if  he  fails  to  notify  the  seller  within  a  rea- 
sonable time  of  the  election  to  rescind,  or  if  he  fails  to  return  or  to 
offer  to  return  the  goods  to  the  seller  in  substantially  as  good 
condition  as  they  were  in  at  the  time  the  property  was  transferred 
to  the  buyer.  But  if  deterioration  or  injury  of  the  goods  is  due  to 
the  breach  of  warranty,  such  deterioration  or  injury  shall  not  pre- 
vent the  buyer  from  returning  or  offering  to  return  the  goods  to  the 
seller  and  rescinding  the  sale. 

(4)  Where  the  buyer  is  entitled  to  rescind  the  sale  and  elects  to 
do  so,  the  buyer  shall  cease  to  be  liable  for  the  price  upon  returning 
or  offering  to  return  the  goods.  If  the  price  or  any  part  thereof 
has  already  been  paid,  the  seller  shall  be  liable  to  repay  so  much 


1198  SALES  (Part  4 

thereof  as  has  been  paid,  concurrently  with  the  return  of  the 
goods,  or  immediately  after  an  offer  to  return  the  goods  in  ex- 
change for  repayment  of  the  price. 

(5)  Where  the  buyer  is  entitled  to  rescind  the  sale  and  elects 
to  do  so,  if  the  seller  refuses  to  accept  an  offer  of  the  buyer  to  re- 
turn the  goods,  the  buyer  shall  thereafter  be  deemed  to  hold  the 
goods  as  bailee  for  the  seller,  but  subject  to  a  lien  to  secure  the 
repayment  of  any  portion  of  the  price  which  has  been  paid,  and 
with  the  remedies  for  the  enforcement  of  such  lien  allowed  to  an 
unpaid  seller  by  section  53. 

It  appears  from  subsection  (d)  that  there  are  two  kinds  of  con- 
tractual obligations  which  may  be  rescinded  by  the  buyer  for 
breach  of  warranty:  (1)  Contracts  to  sell;  and  (2)  contracts  of 
sale.  As  regards  the  first  class,  in  many  instances  there  can  be  no 
breach  of  warranty  so  long  as  the  contract  is  a  mere  contract  to 
sell,  because  the  goods  have  not  as  yet  been  ascertained.  Even 
after  they  become  ascertained,  and  there  is  an  attempt  to  appro- 
priate them  to  the  contract,  title  will  not  pass  until  after  inspec- 
tion and  acceptance  by  the  buyer.  Up  to  this  point  it  is  not  neces- 
sary for  the  buyer  to  rescind  the  contract,  for  he  has  a  better  rem- 
edy by  proceeding  under  subsection  (c),  where  he  is  allowed  to 
refuse  to  accept  the  goods  and  sue  for  damages.  The  same  is 
true  with  respect  to  executory  contracts  to  sell  ascertained  goods ; 
there  is  no  necessity  for  rescinding,  for  the  title,  which,  if  there 
were  no  breach  by  the  seller,  would  pass  just  as  soon  as  the  goods 
were  in  a  deliverable  condition,  will  not  pass,  if  the  goods  are  not 
in  conformity  with  the  contract,  until  after  an  opportunity  to  ex- 
amine, followed  by  acceptance.  Still  it  is  worth  while  to  note  that 
the  buyer,  if  he  is  willing  to  give  up  his  right  to  sue  the  seller  for 
breach  of  warranty,  may  rescind.  If  he  does  rescind,  the  buyer 
gives  up  this  right  which  he  has  under  subsection  (c). 

In  the  second  case  we  are  dealing  with  the  right  of  rescission  of 
contracts  of  sale.  Title  is  now  in  the  buyer.  He  has  lost  his  right 
to  proceed  under  subsection  (c),  permitting  him  to  refuse  |:o  ac- 
cept. He  has,  by  hypothesis,  already  accepted,  and  the  title  to  the 
goods  is  in  the  buyer.  Under  section  48  a  buyer  accepts  if  he  (1) 
intimates  to  the  seller  that  he  has  accepted  them ;  or  (2)  if  he 
does  any  act  in  relation  to  the  goods  which  is  inconsistent  with  the 
ownership  of  the  seller;  or  (3)  when,  after  the  lapse  of  a  reason- 
able time,  he  retains  the  goods  without  intimating  to  the  seller 
that  he  has  rejected  them.  It  is  very  easy,  therefore,  for  a  buyer  to 
have  accepted  when  it  would  have  been  much  better  for  him  not 
to  have  accepted,  for  by  not  accepting  he  could  have  avoided  lia- 
bility for  the  price  and  also  have  sued  the  seller  for  damages. 
Still  the  law  gives  the  buyer  who  has  accepted  some  consideration, 
by  allowing  him  to  undo  his  act  of  accepting  the  goods,  and  allows 
him  to  get  his  monev  back,  if  he  has  paid  anv  part  of  it,  but  that  is 
all. 


Ch.  7)  Rir.IITS   AND   REMEDIES   OF   THE   BUYER  1199 

But  notice  the  series  of  very  important  qualifications.  It  is  not 
in  every  case  that  a  buyer  who  has  accepted  is  given  even  this 
much  consideration.  In  many  cases  the  buyer  who  has  accepted 
will  have  no  right  even  to  rescind.  He  must  keep  the  goods,  or 
at  least  he  cannot  get  his  money  back.  What  are  these  situations? 
Obviously  all  of  them  should  arise  out  of  those  kinds  of  accept- 
ances made  under  circumstances  which  make  it  reasonable  to  sup- 
pose that  the  goods  were  accepted  by  the  buyer  with  an  intention 
to  keep  and  use  them.  This  does  not  mean  that  thfe  buyer  has 
accepted  the  goods  in  full  satisfaction  of  the  contract.  He  may 
accept  with  an  intention  to  keep  and  use,  or  resell  the  goods  with- 
out accepting  in  full  satisfaction.  He  may  lose  his  right  of  rescis- 
sion, and  still  hold  the  seller  for  damages ;  but  this  is  another  ques- 
tion next  to  be  taken  up.  The  point  involved  here  is  that  the  buyer 
will  lose  the  right  to  rescind  an  executed  sale  in  three  cases,  all  of 
which  carry  evidence  of  the  buyer's  intention  to  keep  the  goods 
permanently.  As  provided  in  subsection  (3)  these  cases  where 
there  is  no  right  of  rescission  are:  (1)  Where  the  buj'^er,  at  the 
time  he  accepted  the  goods,  knew  of  the  breach  of  warranty;  (2) 
where  the  buyer  did  not  know  of  the  breach  of  the  warranty  at 
the  time  he  accepted  the  goods,  but  later  discovered  the  defect  in 
the  goods — the  breach  of  warranty — and  then  made  up  his  mind  to 
rescind,  but  failed  to  notify  the  seller  within  a  reasonable  time  of 
his  election  to  rescind;  and  (3)  where,  even  after  the  buyer  has, 
within  a  reasonable  time,  notified  the  seller  of  his  election  to  re- 
scind, has  failed  to  return  the  goods  or  to  oflfer  to  return  the  goods 
to  the  seller  in  substantially  as  good  condition  as  they  were  in  at 
the  time  the  property  was  transferred  to  the  buyer. 

Extended  comment  on  these  three  exceptions  to  the  rule  allow- 
ing rescission  for  breach  of  warranty  is  not  necessary,  except  to 
call  attention  in  (1)  to  the  fact  that  when  the  law  speaks  of  ac- 
cepting goods  with  knowledge  of  a  breach  of  warranty,  the  law 
does  not  mean  actual  knowledge  but  it  means  that  the  facts  con- 
stituting the  breach  of  warranty  must  have  been  so  apparent  that 
a  reasonably  careful  man  would  have  known  of  the  breach.  This 
shows  that  the  right  of  rescission  is  of  practical  importance  only  in 
the  case  where  the  breach  of  warranty  consisted  in  a  latent  defect 
not  discovered  until  after  acceptance. 

The  second  exception  calls  attention  to  a  general  doctrine  of  the 
law  that  some  rights  can  be  lost  by  delay  in  enforcing  them.  The 
seller  is  entitled  to  prompt  notice,  after  the  buyer  has  discovered 
the  latent  defect.  If  he  does  not  receive  the  notice,  the  buyer 
should  sustain  the  loss.  With  respect  to  the  third  exception,  the 
buyer  is  under  a  duty  of  (a)  retaining  the  goods;  or  (b)  ofifering 
to  return  the  goods.  In  this  connection  it  will  be  recalled  that 
section  50  provides  that,  "unless  otherwise  agreed,  where  goods 
are  delivered  to  the  buyer,  and  he  refuses  to  accept  them,  having 
the  right  so  to  do,  he  is  not  bound  to  return  them  to  the  seller, 
but  it,  is  sufficient  if  he  notifies  the  seller  that  he  refuses  to  accept 


1200  SALES  (Part  4 

them."  These  two  sections  are  not  in  conflict,  for  section  50  ap- 
plies only  when  the  goods  have  not  been  accepted.  Section  69  (3) 
applies  only  when  the  goods  have  been  accepted.  It  is  altogether 
just  to  say  that,  where  the  buyer  has  not  accepted  because  of 
breach  of  warranty,  he  should  be  under  no  duty  to  return  or  offer 
to  return  the  goods.  He  is  but  a  gratuitous  bailee.  His  only  duty 
in  addition  to  the  observance  of  that  degree  of  care  which  a  gra- 
tuitous bailee  owes  the  bailor  is  to  give  notice  that  he  refuses  to 
accept.  It  is  entirely  a  matter  for  the  seller  to  make  all  arrange- 
ments for  their  return,  and  if  the  seller  requested  the  buyer  to 
return  them,  and  the  buyer  did  so,  the  buyer  would  be  entitled  to 
compensation.  But  where  the  buyer  has  accepted  the  goods,  and 
later  discovered  the  defect  in  them,  there  is  more  reason  in  placing 
a  duty  on  the  buyer  to  return.  It  is  not  necessary  that  the  buyer 
box  them  up  and  send  them  immediately.  The  buyer  performs  his 
duty  in  the  first  instance  by  communicating  with  the  seller  and 
offering  to  return  the  goods.  The  seller  may  not  care  to  have 
them  returned.  He  may  prefer  to  employ  the  buyer  to  sell  them 
for  him  to  other  persons.  But  the  buyer  has  made  an  offer  to 
return.  If  the  seller  accepts  this  offer,  there  is  a  contract,  and 
then  there  is  a  duty  on  the  buyer  to  return,  so  that  it  is  correct  to 
say  that  where  a  buyer  has  rescinded  a  sale  he  must  return  if  the 
seller  wishes  the  goods  returned. 

Notice  one  further  detail  in  connection  with  the  duty  to  return : 
Subsection  (3)  provides  that  the  buyer  must  offer  to  return  the 
goods  in  substantially  as  good  condition  as  they  were  in  at  the 
time  the  property  was  transferred  to  the  buyer.  Suppose  that  a 
carload  of  meat  were  bought  under  an  express  warranty  that  the 
car  should  be  kept  iced  during  transit.  The  seller  failed  to  give 
icing  instructions  to  the  railroad  company.  The  meat  may  have 
been  in  good  condition  at  the  time  of  acceptance  by  the  buyer,  but 
the  meat  rapidly  deteriorates,  owing  to  heated  conditions.  It  is 
now  impossible  for  the  buyer  to  offer  to  return  the  meat  in  as  good 
condition  as  it  was  in  when  he  accepted  it.  The  last  sentence  in 
subsection  (3)  makes  provision  for  this  kind  of  situation  by  stat- 
ing that,  "if  deterioration  or  injury  of  the  goods  is  due  to  the 
breach  of  warranty,  such  deterioration  or  injury  shall  not  prevent 
the  buyer  from  returning  or  oft'ering  to  return  the  goods  and  re- 
scinding the  sale."  Of  course,  if  the  buyer  has  damaged  the  goods 
himself,  then  he  has  made  it  impossible  for  him  to  rescind. 

In  the  above  paragraphs  dealing  with  the  duty  of  the  buyer  to  re- 
turn, it  has  been  assumed  that  the  seller  was  willing  to  have  the 
goods  returned  to  him.  It  very  often  happens  that,  after  the  buyer 
has  notified  the  seller  that  he  will  return,  the  seller  will  refuse  to 
accept  them.  The  situation  usually  is  that  at  this  time  the  seller 
is  quite  convinced  that  there  has  been  no  breach  of  warranty,  and 
the  buyer  is  equally  convinced  that  there  is  a  breach  of  warranty. 
The  seller  does  not  want  them  returned,  for  fear  that  he  will  lose 
rights  against  the  buyer.     In  other  words,  the  seller  wants   to 


Ch.  7)  RIGHTS   AND   REMEDIES   OF  THE  BUYER  1201 

force  the  sale  through.  What  is  the  position  of  the  buyer  in  such 
a  case?  Subsection  5  covers  this  situation  and  expressly  provides 
that  the  buyer  is  a  bailee  for  the  seller.  The  goods  must  not  be 
handled  negligently.  The  section  also  gives  a  lien  to  the  buyer,  en- 
titling him  to  hold  the  goods  to  secure  repayment  of  the  price  if 
it  has  been  paid,  and,  as  an  incident  of  the  lien,  the  buyer  will  have 
the  remedy  of  resale  just  as  an  unpaid  seller  has. 

We  have  reserved  for  the  last  the  comment  on  the  more  detailed 
legal  effect  of  the  right  of  rescission,  although  in  all  the  preced- 
ing discussion  the  nature  of  the  right  appears,  and  also  we  have 
reserved  the  statement  concerning  the  state  of  the  law  on  the 
matter  of  rescission  before  the  adoption  of  the  Sales  Act.  By  a  re- 
scission of  a  contract  is  meant  the  doing  of  an  act  the  legal  effect 
of  which  is  the  restoration  of  the  condition  of  affairs  as  they  exist- 
ed before  the  sale  was  made.  Rescission  may  be  a  voluntary  act 
of  the  parties,  or  it  may  arise  as  a  result  of  the  act  of  one  of 
the  parties  alone,  the  justification  therefor  being  proved  on 
the  part  of  the  adverse  party,  or  some  kinds  of  mistake,  or  for 
material  breach.  Here  we  are  interested  in  rescission  by  the 
buyer  because  of  the  seller's  breach  of  warranty.  Any  lawsuit  be- 
tween buyer  and  seller  will  not  be  for  breach  of  the  contract,  be- 
cause after  rescission  there  is  no  contract,  but  the  suit  will  be 
brought  for  the  recovery  of  what  has  been  parted  with.  This  ex- 
plains why  subsections  1  (d)  and  (4)  refer  only  to  the  recovery  of 
the  price,  and  do  not  refer  to  an  independent  claim  for  damages. 
The  buyer,  who  has  accepted  the  goods  and  who  later  discovers 
that  they  are  not  in  conformity  with  the  contract,  has  but  one 
right ;  i.  e.,  to  recover  the  money  he  has  paid  upon  his  return  of 
the  goods.  It  is  to  be  noticed  here,  in  comparison  with  the  unpaid 
seller's  corresponding  right  of  rescission,  that  the  buyer's  right  of 
rescission  differs  from  the  seller's  right  of  rescission.  The  unpaid 
seller  may  rescind  either  (1)  the  transfer  of  title,  or  (2)  the  entire 
contract,  while  the  buyer  is  allowed  only  the  right  to  rescind  the 
entire  contract.  It  makes  this  difference :  That  an  unpaid  seller, 
who  rescinds  transfer  of  title,  may  still  sue  the  buyer  on  the  con- 
tract for  the  breach,  while  the  buyer,  who  rescinds,  rescinds  the 
entire  contract,  and  hence  cannot  sue  the  seller  for  damages. 

Before  the  Sales  Act  there  was  a  conflict  of  authority  as  to  the 
right  of  the  buyer  to  rescind.  About  half  of  the  states  in  this 
country  allowed  rescission,  just  as  is  allowed  under  the  Sales  Act, 
while  the  other  half,  and  also  the  English  courts,  held  that  the 
buyer,  who  had  accepted,  could  not  rescind.  The  following  case 
illustrates  the  exercise  of  the  right  of  rescission. 
B.&  B.Bus.Law— 76 


1202  SALES  (Part  4 


KELSEY  V.  J.   W.   RINGROSE  NET   CO. 

(Supreme  Court  of  Wisconsin,  1913.     152  Wis.  499,   140  N.  W.  66.) 

Action  by  George  W.  Kelsey,  Junior,  against  the  J.  W.  Ringrose 
Net  Company.  Judgment  for  defendant,  and  plaintiff  appeals.  Af- 
firmed. 

The  plaintiff  purchased  from  the  defendant  a  power-driven  tipping 
machine,  which  was  calculated  to  automatically  place  metal  tips  on 
the  ends  of  the  strands  of  horse  fly  nets,  which  plaintiff  was  engaged 
in  manufacturing.  The  purchase  price  of  the  machine  was  paid  in 
advance,  and  the  plaintiff'  endeavored  for  a  considerable  length  of  time 
to  operate  it,  and  finding  that  it  would  not  work  satisfactorily,  tendered 
the  machine  to  the  defendant,  and  gave  notice  that  he  elected  to  rescind 
the  contract  to  purchase.  This  action  was  brought  to  recover  the  pur- 
chase price.  The  court  directed  a  verdict  in  favor  of  the  defendant, 
and  from  the  judgment  entered  in  accordance  with  such  ruling  the 
plaintiff'  appeals. 

Barne:s,  J.  *  *  *  The  machine  involved  was  built  for  a  special 
purpose.  There  were  only  about  a  half  a  dozen  such  machines  in  use 
when  the  plaintiff  made  his  purchase.  It  was  not  sold  under  any  ex- 
press warranty.  It  is  settled  in  this  sj:ate  that  under  such  circumstances 
the  law  implies  a  warranty  that  the  machine  will  do  the  work  which  it 
was  intended  to  do.     *     *     * 

Where  such  an  article  is  sold  without  express  warranty,  the  pur- 
chaser has  a  reasonable  time  within  which  to  test  it,  for  the  purpose  of 
determining  whether  or  not  it  complies  with  the  warranty  which  the 
law  implies.  If  it  does  not,  he  has  an  election  of  remedies.  He  may 
affirm  the  contract  and  recover  the  legitimate  damage  occasioned  by 
the  breach  of  the  warranty,  or  he  may  rescind  the  contract  and  tender 
back  the  article  and  recover  the  purchase  price,  if  it  has  been  paid. 
If  it  has  not,  he  may  successfully  defend  an  action  to  recover  it. 

The  cases  last  cited  further  hold  that  what  is  a  reasonable  time 
within  which  to  make  a  test  is  usually  a  question  of  fact  for  a  jury 
to  decide,  but  that  the  time  may  be  so  long  that  a  court  can  and  should 
say,  as  a  matter  of  law,  that  it  was  not  made  within  a  reasonable  time. 

As  a  corollary  to  what  has  already  been  said,  it  is  held  that,  where 
the  defects  are  such  that  the  purchaser,  in  the  exercise  of  ordinary 
care,  should  have  discovered  them,  it  is  his  duty  to  do  so ;  and  that 
failure  to  observe  such  duty  and  to  rescind  with  reasonable  promptness 
will  defeat  the  right  of  rescission.     *     *     * 

Any  use  of  an  article  purchased  under  an  implied  warranty,  after  it 
has  been  ascertained  that  it  does  not  fulfill  such  warranty,  and  which  is 
not  made  for  the  purpose  of  testing,  is  an  acceptance  of  the  article  and ' 
a  waiver  of  the  right,  to  rescind.     *     *     * 

After  it  is  ascertained  that  the  article  does  not  comply  with  the 
warranty,  timely  notice  must  be  given  that  it  will  not  be  accepted  as 
a  compliance  with  the   contract,   or  the  right  to  rescind  is  waived. 

In  a  case  involving  a  sale  of  vanilla,  it  was  held  that  only  so  much 
of  it  should  be  used  for  testing  purposes  as  was  fairly  and  reasonably 
necessary ;  and  that  where  an  excessive  quantity  was  used  the  right 
of  rescission  was  lost.  Zipp  Mfg.  Co.  v.  Pastorino,  120  Wis.  176,  97 
N.  W.  904. 


Ch.  7)  RIGHTS   AND    REMEDIES   OF   THE   BUTER  1203 

The  concrete  question  before  us  is :  Did  the  court  err  in  not  allow- 
ing the  jury  to  say  whether  the  offer  to  rescind  was  made  within  a 
reasonable  time,  in  view  of  the  principles  of  law  above  referred  to? 

'J'he  plaintiff  used  the  machine  all,  or  nearly  all,  of  the  month  of 
December.  During  that  time  he  could  not  get  it  to  work  properly.  In- 
deed, he  says  he  did  not  succeed  in  putting  tips  on  a  single  fly  net  with 
it  that  he  would  place  on  the  market.  He  then  returned  it  to  the  maker, 
who  was  also  a  manufacturer  of  fly  nets.  It  showed  evidences  of  hard, 
though,  no  doubt,  well  meant,  usage.  It  also  showed  evidences  that  it 
had  been  'fexperimented  with,  even  to  the  extent  of  putting  a  set  screw 
in  an  oil  hole  in  the  loose  pulley.  Defendant  overhauled  and  adjusted 
it,  and  set  it  up  in  its  factory  and  ran  it  for  some  time  and  returned 
it,  according  to  the  evidence,  in  first-class  condition.  It  was  set  up  in 
plaintiff's  factory  as  early  as  February  6th,  and  was  thereafter  tested 
until  March  25th,  according  to  plaintiff's  evidence.  At  no  time  did  it 
do  any  satisfactory  work,  or  tip  a  single  fly  net  that  plaintiff  felt  he 
could  place  upon  the  market  for  sale.  The  attempted  rescission  was 
made  on  March  25th. 

In  behalf  of  the  appellant,  it  is  urged  that  the  plaintiff  was  attempt- 
ing, in  good  faith,  to  try  out  the  machine  and  get  it  to  work  properly ; 
that  it  was  somewhat  complicated;  and  that  it  was  for  the  jury  to  say 
whether  he  retained  it  an  unreasonable  length  of  time  for  the  purpose 
of  testing. 

On  the  other  hand,  the  plaintiff  had  used  the  machine  during  the 
month  of  December,  and  failed  to  get  it  to  work.  After  it  was  over- 
hauled and  put  in  what  the  manufacturer  claimed  was  perfect  running 
condition,  he  continued  to  experiment  for  about  six  weeks  without 
results.  The  trial  judge,  in  deciding  the  case,  said  that  it  was  obvious 
that  a  week's  trial  after  the  machine  was  returned  would  have  been 
ample ;  and  that  an  offer  to  return  after  six  weeks  of  alleged  trial  came 
too  late. 

The  case  is  a  reasonably  cloge  one.  Had  the  trial  judge  submitted 
the  case  to  the  jury,  we  might  not  be  disposed  to  hold  that  it  was  er- 
ror to  do  so ;  but  we  are  far  from  being  convinced  that  the  circuit 
judge  was  clearly  wrong  in  arriving  at  the  conclusion  which  he  did. 
A  period  of  2i/2  months  experimentation  would  seem  to  be  an  unrea- 
sonable length  of  time,  considering  the  character  of  the  machine  and 
the  further  fact  that  at  no  time  did  the  quality  of  the  work  turned  out 
show  any  material  improvement. 
Judgment  afiirmed. 

(c)     P.UYEK  MAY  ACCEPT  AND  SET  UP  ERE.\CH   OF  WARRANTY 
BY  WAY  OF  RECOUPMENT. 

The  two  preceding  remedies  of  the  buyer  were  alike  in  that, 
in  the  end,  the  buyer  did  not  keep  the  goods.  In  the  first  of  these, 
where  he  had  not  accepted,  he  was  entitled  to  damages ;  in  the 
second,  he  was  not  entitled  to  damages.  We  pass,  now.  to  the  two 
cases  where  the  buyer  elects  to  keep  the  goods  in  spite  of  the 
breach  of  warranty,  and  seeks  to  obtain  a  deduction  from  the  pur- 
chase price.  The  first  of  these  rights  is  known  as  recoupment. 
This  merely  means  that,  when  the  seller  sues  the  buyer,  the  buyer 
can  recover  an  amount  equal  to  the  reasonable  value  of  the  goods 


1204  SALES  (Part  4 

as  they  were  when  delivered  to  the  buyer.  The  right  is  not  identi- 
cal with  that  of  set-off,  where  the  buyer  prosecutes  a  cross-action ; 
but  the  buyer's  right  of  recoupment  is  a  right  to  discharge  his  debt 
to  the  seller  by  the  payment  of  the  reasonable  value  of  the  goods. 
If  it  be  viewed  as  the  prosecution  by  the  buyer  of  a  cross-action  for 
breach  of  warranty,  there  would  be  little  difference  in  the  amount 
of  money  which  the  buyer  would  be  required  to  pay,  in  most  cases ; 
but  in  some  cases,  doubtless,  there  v^ould  be  a  difference 

(d)  BUYER  MAY  ACCEPT  AND  MAINTAIN  AN  ACTION  FOR  BREACH 

OF  WARRANTY 

If  the  buyer  has  already  paid  the  price,  his  only  method  of  ob- 
taining reimbursement  for  breach  of  warranty  will  be  by  an  inde- 
pendent action  against  the  seller.  If  he  has  not  paid,  then  he 
may  wait  until  sued — that  is,  if  he  cannot  compromise  with  the 
seller,  a  procedure  which  from  a  financial  standpoint  is  a  great  deal 
better — and  in  this  suit  by  the  seller  against  him  he  may  put  in  his 
claim  for  damages  arising  from  the  breach.  Subsection  (b)  gives 
the  buyer  this  right.  In  this  connection  we  should  again  refer  to 
section  49  of  the  Sales  Act,  which  asserts  in  greater  detail  the 
same  right  as  that  provided  for  in  subsection  (b)  of  section  69. 
Section  49  provided  that: 

In  the  absence  of  express  or  implied  agreement  of  the  parties, 
acceptance  of  the  goods  by  the  buyer  shall  not  discharge  the  seller 
from  liability  in  damages  or  other  legal  remedy  for  breach  of  any 
promise  or  warranty  in  the  contract  to  sell  or  the  sale.  But,  if, 
after  acceptance  of  the  goods,  the  buyer  fail  to  give  notice  to  the 
seller  of  the  breach  of  any  promise  or  warranty  within  a  reasonable 
time  after  the  buyer  knows,  or  ought  to  know  of  such  breach,  the 
seller  shall  not  be  liable  therefor. 

Looking  at  these  sections  from  the  business  point  of  view,  the 
things  that  stand  out  distinctly  are:  (1)  The  right  of  the  buyer  to 
keep  the  goods  and  still  reserve  his  right  to  recover  damages  from 
the  seller;  but  (2)  in  order  to  preserve  this  right  to  recover  dam- 
ages the  buyer  must  give  notice  to  the  seller  of  the  breach  of  war- 
ranty. The  buyer  must  do  this  just  as  soon  as  he  learns  of  the 
breach.  Not  only  that,  but  the  buyer  must  take  some  care  to  find 
out  whether  there  is  a  breach  of  warranty,  for  the  section  states 
the  buyer  will  lose  his  right  to  sue  for  damages  if  he  waits  to  noti- 
fy the  buyer  beyond  a  reasonable  time. 

Before  the  Sales  Act,  just  as  in  the  case  of  rescission,  where  it 
was  found  that  some  courts  held  that  the  buyer  had  no  right  of  re- 
scission, others  that  there  was  such  a  right,  so  here  some  courts 
held  that,  if  a  buyer  accepted  the  goods,  he  must  be  deemed  to 
have  accepted  them  in  full  satisfaction  of  the  obligation  of  the  sell- 
er. The  states  which  adopted  this  rule  commonly  expressed  it  by 
saying  that  an  action  for  breach  of  warranty  did  not  survive  ac- 
ceptance, but  these  courts  worked  out  several  exceptions  to  this 
general  rule.     Other  states  held  that  the  mere  fact  that  the  buyer 


Ch.  7)  RIGHTS  AND   REMEDIES   OF  THE  BUYER  1205 

accepted  the  goods  was  not  in  itself  to  be  deemed  a  waiver  of  his 
right  to  sue  the  seller  for  damages.  This  rule  was  adopted  by  the 
Sales  Act. 

One  further  point  should  be  here  adverted  to  with  respect  to 
the  measure  of  damages  to  be  applied  when  the  buyer  sues  the  sell- 
er for  breach  of  warranty : 

Sales  Act,  Section  69.  (6)  The  measure  of  damages  for  breach 
of  warranty  is  the  loss  directly  and  naturally  resulting,  in  the 
ordinary  course  of  events,  from  the  breach  of  warranty. 

Section  69.  (7)  In  the  case  of  breach  of  warranty  of  quality, 
such  loss,  in  the  absence  of  special  circumstances  showing  proxi- 
mate damage  of  greater  amount,  is  the  difference  between  the 
value  of  the  goods  at  the  time  of  delivery  to  the  buyer  and  the 
value  they  would  have  had  if  they  had  answered  to  the  warranty. 

The  next  case  illustrates  how  the  right  of  the  buyer  may  easily 
be  lost  by  the  failure  to  give  notice.  The  case  following  it,  that 
of  Paul  Gerli  &  Co.  v.  Mistletoe  Silk  Mills,  contains  a  discussion 
of  the  various  remedies  of  the  buyer  for  breach  of  warranty. 


REGINA  CO.  V.   GATELY   FURNITURE   CO. 

(Supreme  Court  of  New  York,  Appellate  Division,  1916.     171  App.  Div.  817, 
'  157  N.  Y.  Supp.  746.) 

Action  by  the  Regina  Company  against  the  Gately  Furniture  Com- 
pany. From  a  judgment  sustaining  plaintiff's  demurrer  to  the  alleged 
defense  and  counterclaim,  defendant  appeals. 

Woodward,  J.  The  complaint  alleges  the  incorporation  of  the 
plaintifif  and  defendant,  and  then  sets  forth  that  the  defendant  ordered 
from  the  plaintiff,  on  several  dates,  vacuum  cleaners  of  different  types, 
and  that  the  said  cleaners  were  shipped  to  the  defendant,  and  were 
of  certain  agreed  values ;  that  these  cleaners  were  received  by  the 
defendant,  and  that  the  latter  agreed  to  pay  for  the  same,  but  that  no 
such  payments  had  been  made;  and  that  the  defendant  was  indebted 
for  the  aggregate  of  these  shipments,  amounting  to  $162.75.  The  an- 
swer admits  the  formal  averments.  *  *  *  'The  defendant  then  at- 
tempts to  set  up  a  counterclaim  for  breach  of  warranty.     *     *     * 

To  this  alleged  counterclaim  the  plaintiff  demurred,  *  *  *  and 
the  learned  court  *  *  *  sustained  the  demurrer.  There  is  no  al- 
legation of  any  express  warranty;  but,  as  the  plaintiff  was  a  dealer 
in  the  kind  of  goods  being  sold,  there  was,  of  course,  an  implied  war- 
ranty that  the  goods  should  be  free  from  any  defect,  rendering  them 
unmerchantable,  which  would  not  be  apparent  oU  reasonable  examina- 
tion of  the  sample.  *  *  *  At  common  law  an  express  warranty 
survives  acceptance,  but  an  implied  warranty  does  not.  Ferguson  v. 
Netter,  204  N.  Y.  505,  510,  98  N.  E.  16.  Section  130  of  the  Personal 
Property  Law  has,  however,  extended  the  rights  of  purchasers,  and 
it  is  there  provided  that :  In  "the  absence  of  express  or  implied  agree- 
ment of  the  parties,  acceptance  of  the  goods  by  the  buyer  shall  not  dis- 
charge the  seller  from  liability  in  damages  or  other  legal  remedy  for 
breach  of  any  promise  or  warranty  in  the  contract  to  sell  or  the  sale." 

This  places  the  warranty,  whether  expressed  or  implied,  upon  the 


1206  SALES  (Part  4 

same  foundation,  but  as  a  condition  of  this  change  it  is  provided,  in 
the  same  section,  that:  "If,  after  acceptance  of  the  goods,  the  buyer 
fails  to  give  notice  to  the  seller  of  the  breach  of  any  promise  or  war- 
ranty within  a  reasonable  time  after  the  buyer  knows,  or  ought  to  know, 
of  such  breach,  the  seller  shall  not  be  liable  therefor." 

Obviously  the  buyer  takes  this  additional  right  to  the  survival  of 
a  warranty,  expressed  or  implied,  upon  the  condition  that  he  shall  give 
notice  of  a  breach  of  the  warranty  within  a  reasonable  time.  Such 
notice  is  therefore  a  condition  precedent,  and  this  he  is  obliged  to 
plead.  There  is  nothing  said  in  the  alleged  counterclaim  of  any  notice 
having  been  given  to  the  seller  of  any  alleged  breach  of  warranty, 
and  in  the  absence  of  such  an  allegation  there  is  a  failure  to  state  the 
facts  necessary  to  constitute  a  counterclaim.     *     *     * 

The    interlocutory    judgment    appealed    from    should    be    affirmed. 


PAUL  GERLI  &  CO.  v.  MISTLETOE  SILK  MILLS. 
(Supreme  Court  of  New  Jersey,  1910..   80  N.  J.  Law,  128,  76  Atl.  335.) 

Action  by  Paul  Gerli  &  Co.  against  the  Mistletoe  Silk  Mills.  Ver- 
dict for  defendant. 

TrEnchard,  J,  This  is  an  action  for  the  purchase  price  of  a  bale 
of  raw  silk  delivered  by  the  plaintiff  to  the  defendant.  The  defense 
is  that  it  was  sold  as  "best  classical  Italian  silk  for  single  weaving," 
and  did  not  answer  that  description.  The  defendant  counterclaimed 
for  profits  lost  and  for  expenses  incurred  in  the  attempt  to  weave  the 
silk  and  recovered  a  verdict.  Thereupon  the  plaintiff  was  allowed  this 
rule  to  show  cause  why  the  verdict  should  not  be  set  aside.  At  the 
trial  at  the  Hudson  circuit  no  loss  of  profits  was  proved,  but  there 
was  evidence  that  the  defendant  had  incurred  expenses  to  the  amount 
of  $224.81.  The  purchase  price  of  the  silk  was  $872.22  and  it  was 
undisputed  that  it  was  worth  $721.30  as  waste.  The  defendant  claim- 
ed that  it  had  rescinded  the  contract  and  offered  to  return  the  goods 
and  held  them  subject  to  the  plaintiff's  order.  The  verdict  was  for 
$224.81,  the  exact  amount  of  the  expenses  incurred  by  the  defendant 
in  attempting  to  weave  the  silk.  It  is  clear,  therefore,  that  the  jury 
took  the  view  that  the  contract  had  been  rescinded. 

The  charge  of  the  learned  trial  judge  did  not  permit  the  jury  to 
allow  for  damages  for  breach  of  the  contract  in  case  they  found  it 
had  been  rescinded.  Such  a  charge  would  have  been  erroneous  in 
law.  Under  the  sales  act  (§  69[l]d),  in  case  of  a  rescission  of  a 
contract  to  sell  or  a  sale,  the  buyer  is  entitled  to  recover  the  price  or 
any  part  thereof  which  has  been  paid ;  and  this  remedy  is  made  ex- 
clusive by  paragraph  (2)  of  the  same  section.  It  is  a  logical  conse- 
quence that,  where  the  purchase  price  has  not  been  paid,  the  buyer's 
only  remedy  in  case  of  rescission  is  to  withhold  the  price.  Such  is  the 
view  of  the  learned  author  of  our  sales  act  (Williston  on  Sales,  § 
612),  and  the  rule  recently  expressed  in  one  of  our  sister  states. 
Houser  &  Haines  Mfg.  Co.  v.  McKay,  53  Wash.  337,  101  Pac.  894,  27 
L.  R.  A.  (N.  S.)  925.  *  *  *  The  verdict,  therefore,  cannot  be  sus- 
tained and  the  rule  must  be  made  absolute.  Since  the  case  must  be 
tried  again,  it  may  serve  a  useful  purpose  to  call  attention  to  the 
questions  which  seem  likely  to  arise. 

The  first  question  for  the  jury  will  of  course  be  whether  the  con- 


Ch.  7)  RIGHTS   AND   REMEDIES  OF  THE   BUYER  1207 

tract  was  for  "best  classical  Italian  silk  for  single  weaving."  If  it  was 
not,  there  seems  to  be  no  defense.  If  it  was,  the  question  is.  Did  the 
silk  delivered  comply  with  the  contract?  If  it  did,  the  plaintiff  is  en- 
titled to  recover.  If  it  did  not,  the  question  arises  whether  the  de- 
fendant accepted  it.  The  defendant  had  a  right  to  inspect  and  exam- 
ine (Sales  Act,  §  47),  and,  if  necessary,  to  test  the  goods  even  though 
the  test  involved  destruction  of  a  part.  Williston  on  Sales,  §  475. 
If,  however,  the  defendant  intimated  to  the  plaintiff  that  it  had  ac- 
cepted the  goods,  or  if  the  defendant  did  any  act  inconsistent  with 
the  ownership  of  the  plaintiff,  or  if,  after  the  lapse  of  a  reasonable 
time,  it  retained  the  goods  without  intimating  to  the  plaintiff  a  rejec- 
tion, then  the  defendant  must  be  deemed  to  have  accepted  the  goods 
and  the  right  of  rescission  is  gone.  Sales  Act,  §  48.  If  the  defend- 
ant had  the  right  to  rescind  and  had  not  lost  it  when  it  finally  notified 
the  plaintiff  that  it  had  rejected  the  goods,  and  has  actually  rescind- 
ed, the  verdict  should  be  for  the  defendant,  but  not  a  verdict  for  dam- 
ages. 

If,  however,  the  goods  were  not  in  accordance  with  the  contract, 
and  the  defendant  had  accepted  them,  there  would  still  be  open  the 
remedies  allowed  for  breach  of  contract.  The  defendant,  if  such  are 
found  to  be  the  facts  of  the  case,  had  the  option  to  recoup  in  diminu- 
tion or  extinction  of  the  purchase  price  or  to  maintain  a  distinct  action 
against  the  plaintiff  for  all  its  damages  including  loss  of  profits  and 
expenses  to  which  it  had  been  put.  Sales  Act,  §  69  (1)  (a)  and  (b). 
The  remedy  under  subdivision  (a)  is  recoupment  in  the  strict  sense  of 
that  word,  and  involved  merely  an  abatement  of  the  purchase  price 
which  can  amount  to  the  whole  purchase  price  only  where  the  goods 
are  worthless.  The  remedy  under  subdivision  (b)  is  that  which  for- 
merly was  the  subject  of  a  cross-action,  but  it  is  now  available  by 
way  of  counterclaim  under  section  105  of  the  practice  act.  *  *  * 
This  remedy  is  inconsistent  with  the  claim  of  a  rescission  of  the  con- 
tract, and  at  the  trial  it  will  be  necessary  for  the  defendant  to  elect 
whether  to  stand  upon  the  theory  of  a  rescission  and  abandon  its  claim 
to  damages  or  to  abandon  the  claim  of  rescission  and  rely  upon  the 
contract  as  subsisting  and  insist  on  damages  for  the  breach.  If  it 
adopts  the  latter  course,  the  plaintiff  will  be  entitled  to  recover  the 
value  of  the  silk,  which  will  be  the  full  purchase  price,  unless  the  de- 
fendant establishes  that  it  was  of  inferior  quality,  in  which  event  it 
will  be  the  actual  value  as  proved  (Sales  Act,  §  48;  Williston  on  Sales, 
§  488),  from  which  may  be  deducted  such  loss  as  the  defendant  may 
prove  it  has  sustained  directly  and  naturally  resulting  in  the  ordinary 
course  of  events  from  the  breach  of  warranty. 


SECTION  6.— BUYER'S  RIGHT  TO  RECOVER  DAMAGES 
FOR  BREACH  OF  THE  CONTRACT  TO  SELL 

Sales  Act,  Section  67.  (1)  Where  the  property  in  the  goods  has 
not  passed  to  the  buyer,  and  the  seller  wrongfully  neglects  or  re- 
fuses to  deliver  the  goods,  the  buyer  may  maintain  an  action 
against  the  seller  for  damages  for  non-delivery.  (2)  The  measure 
of  damages  is  the  loss  directly  and  naturally  resulting  in  the 
ordinary  course  of  events,  from  the  seller's  breach  of  contract. 


1208  SALES  (Part  4 

(3)  Where  there  is  an  available  market  for  the  goods  in  question, 
the  measure  of  damages,  in  the  absence  of  special  circumstances, 
showing  proximate  damages  of  a  greater  amount,  is  the  difference 
between  the  contract  price  and  the  market  or  current  price  of  the 
goods  at  the  time  or  times  when  they  ought  to  have  been  delivered, 
or  if  no  time  was  fixed,  then  at  the  time  of  the  refusal  to  deliver. 


N.  P.  SLOAN  CORP.  v.  LINTON  et  al. 

(Supreme  Court  of  Pennsvlvania,  1918.     260  Pa.  569,  103  Ail.  1011, 
6  A.  L.  R.  633.) 

Assumpsit  for  breach  of  contract  for  the  sale  of  personal  property 
by  the  N.  P.  Sloan  Corporation  against  Ross  B.  Linton  and  W.  Horace 
Linton,  copartners  trading  as  Josiah  Linton  &  Co.  Verdict  for  plain- 
tiff for  $2,300,  and  defendants  appeal. 

Potte;r,  J.  The  N.  P.  Sloan  Corporation  brought  this  action  of 
assumpsit  to  recover  damages  from  the  firm  of  Josiah  Linton  &  Co. 
for  the  breach  of  a  contract  for  the  sale  of  cotton  linters.  Plaintiff's 
claim  was  based  upon  a  letter  dated  October  25,  1916,  from  defendants 
to  plaintiff,  in  which  they  stated  that:  "We  have  sold  to  you  as  bro- 
kers per  contracts  turned  over  to  us,  cotton  linters  as  follows :  Quan- 
tity, 475  bales.  Quality,  clean  mill  run.  Price,  6.18  f.  o.  b.  cars 
mills."  It  was  further  stated  that  the  linters  sold  consisted  of  250 
bales  at  Columbia,  S.  C,  and  225  bales  at  Cheraw,  S.  C.  The  letter 
contained  the  following  clause :  "You  have  the  privilege  of  examin- 
ing stock  at  point  of  shipment,  but  shipping  instructions  to  be  given  to 
us  immediately." 

The  record  shows  that  shipping  instructions  were  promptly  given 
to  defendants,  and  plaintiff  sent  its  agent  to  Columbia  and  Cheraw, 
S.  C,  to  examine  the  goods  sold,  but  none  could  be  found  at  either 
place,  and  therefore  he  could  make  no  inspection.  On  November  1, 
1916,  defendants  notified  plaintiff  that  they  could  not  deliver  the  goods 
sold,  and  stated  that  they  had  sold  them  as  brokers  on  account  of  the 
Corey-Bickmore' Corporation  of  New  York,  and  that  their  interest  in 
the  matter  had  ceased.  In  plaintiff's  statement  damages  were  claimed 
on  the  basis  of  the  difference  between  the  contract  price  and  the  mar- 
ket value  of  cotton  linters  on  November  1st,  the  date  of  the  breach,  at 
New  York,  less  the  cost  of  transportation  from  Columbia  and  Cheraw, 
S.  C,  to  that  city.  At  the  trial,  defendants  contended ;  *  *  *  That 
the  measure  of  damages  set  up  in  the  statement  was  not  the  true 
measure  under  the  law.  There  was  a  verdict  for  plaintiff,  and  from 
the  judgment  entered  thereon  defendants  have  appealed.    *    *    * 

Upon  the  trial,  both  parties  agreed  that  the  damages  in  such  a  case 
are  to  be  measured  by  the  difference  between  the  contract  price  and 
the  market  value  at  the  date  of  the  breach.  But  they  differed  as  to 
the  method  of  ascertaining  that  value.  Plaintiff  proved  the  market 
value  at  the  place  of  delivery  by  showing  the  market  value  in  New 
York  City  and  deducting  therefrom  the  cost  of  transportation  from 
the  places  of  shipment.  Counsel  for  appellants  contend  that  this  meth- 
od was  erroneous. 

The  general  rule  is  stated  in  35  Cyc.  L.  &  Pr.  633,  as  follows : 
"Where  the  breach  consists  in  the  failure  of  the  seller  to  deliver  the 


Ch.  7)  RIGHTS  AND   REMEDIES   OF  THE  BUYER  1209 

goods,  the  measure  of  damages  is  ordinarily  the  difference  between 
uie  cuntracl  price  and  the  market  price  of  the  goods  at  the  time  and 
place  of  delivery,  provided  there  is  a  market  price  for  goods  of  the 
character  and  quality  contracted  for  by  the  buyer  at  such  time  and 
place,  and  interest  thereon  from  the  time  of  the  breach."  And  on 
page  638,  it  is  said:  "The  market  price  must  be  determined  as  of 
the  place  of  deHvery,  provided  the  goods  have  a  market  price  at  such 
place.  If  there  is  no  market  price  at  the  place  of  delivery,  the  true 
value  is  to  be  shown  by  the  best  evidence  possible,  and  in  such  capes 
the  market  value  at  other  places,  plus  the  expense  of  transportation 
to  the  place  of  delivery,  may  be  used  as  a  basis  for  computation ;  and 
if  the  market  price  in  the  vicinity  of  the  place  of  delivery  is  shown  to 
depend  on  the  market  price  at  a  large,  well-known  and  active  market, 
the  market  price  at  such  place  plus  transportation  charges  may  be 
considered.  If  the  place  of  delivery  and  place  of  destination  are  dif- 
ferent, the  market  price  at  the  destination  less  the  cost  of  transporta- 
tion may  be  resorted  to." 

Here  there  was  testimony  tending  to  show  that  the  market  price  of 
cotton  linters  throughout  the  country  is  based  on  New  York  prices, 
that  being  the  largest  and  most  active  market  for  that  class  of  goods. 
There  was  also  testimony  from  which  the  jury  were  justified  in  finding 
that  the  market  value  at  Columbia  and  Cheraw,  S.  C,  was  based  up- 
on the  market  price  in  New  York,  being  determined  by  the  cost  of 
transportation  to  that  point. 

Under  Sales  Act  May  19,  1915  (P.  L.  543)  §  67,  referring  to  the 
measure  of  damages  where  the  seller  has  wrongfully  refused  to  de- 
liver the  goods,  it  is  provided:  "Third.  Where  there  is  an  available 
market  for  the  goods  in  question,  the  measure  of  damages,  in  the 
absence  of  special  circumstances  showing  proximate  damages  of  a 
greater  amount,  is  the  difference  between  the  contract  price  and  the 
market  or  current  price  of  the  goods  at  the  time  or  times  when  they 
ought  to  have  been  delivered,  or,  if  no  time  was  fixed,  then  at  the  time 
of  the  refusal  to  deliver." 

It  will  be  noted  that  it  is  an  "available  market"  to  which  resort  is 
to  be  had  for  a  price,  and  no  mention  of  the  place  of  delivery  is  made 
in  that  connection  in  the  act. 

We  find  no  merit  in  any  of  the  assignments  of  error  in  which  com- 
plaint is  made  of  the  rulings  of  the  learned  trial  judge  upon  the  ad- 
mission of  testimony  as  to  the  market  value  of  the  goods.     *     *     * 

The  judgment  is  affirmed. 


BIRDSONG  &  CO.,  Inc.,  v.  MARTY. 
(Supreme  Court  of  Wisconsin,  1916.     163  Wis.  516,  158  N.  W.  289.) 

Action  by  Birdsong  &  Co.,  Incorporated,  against  Jacob  Marty,  doing 
business  as  Jacob  Marty  &  Co.  Judgment  for  plaintiff,  and  defendant 
appeals. 

Action  for  damages  for  breach  of  contract.  Plaintiff  is  a  corpora- 
tion engaged  principally  in  the  business  of  buying  and  selling  cheese 
and  other  edible  products,  with  its  principal  office  at  Philadelphia. 
The  defendant  is  a  maker  and  dealer  in  cheese,  doing  business  as 
Jacob  Marty  &  Co.  at  Brodhead,  Wis. 

The  case  was  tried  before  the  court  without  a  jury.  The  trial  court 
held  that  the  correspondence  constituted  an  unqualified  contract  of 


1210  SALES  (Part  4 

purchase  and  sale,  by  which  the  plaintiff  purchased  of  the  defendant 
25  tubs  of  No.  1  cheese  at  I6I/2  cents  a  pound,  and  a  sufficient  amount 
of  No.  2  at  13  cents  to  make  a  minimum  carload;  that  a  minimum 
east-bound  car  contains  20,000  pounds ;  that  the  average  weight  of  a 
tub  of  Swiss  cheese  in  August  is  approximately  775  pounds,  and  that 
the  contract  therefore  called  for  19,375  pounds  of  No.  1  and  625 
pounds  of  No.  2 ;  that  at  Brodhead  and  in  Southern  Wisconsin  gener- 
ally the  market  price  on  August  17th  was  17y2  cents  to  18  cents  for 
No.  1  and  I51/2  cents  for  No  2;  that  at  the  time  plaintiff  received  de- 
fendant's letter  canceling  the  contract  the  price  had  advanced  to  20 
cents  for  No.  1  and  161/2  cents  for  No.  2,  and  plaintiff  had  judgment 
accordingly  for  $700.    From  such  judgment,  defendant  appeals. 

RoSENBiiRRY,  J.  *  *  *  'J^l-^e  01-iiy  question  remaining  is  that  re- 
lating to  the  measure  of  damages.  The  defendant  having  refusedto 
deliver  the  goods,  and  the  title  thereto  not  having  passed  to  the  plain- 
tiff, the  measure  of  damages  in  harmony  with  the  decisions  of  this 
court  is  stated  by  Uniform  Sales  Act,  §  67.    *    *    * 

The  court  found  the  market  price  on  August  19th,  the  day  the  plain- 
tiff received  the  defendant's  letter  in  which  the  defendant  stated  that  he 
would  not  deliver  the  goods,  to  be  for  No.  1  cheese  20  cents  a  pound, 
and  for  No.  2  161/2  cents  a  pound,  and  found  that  the  amount  desig- 
nated in  the  telegram  was  25  tubs  of  No.  1  and  just  enough  No.  2  to 
make  20,000  pounds.    *    *    * 

Defendant's  proposition  was,  "Offer  you  good  sound  number  two  at 
thirteen  to  make  minimum  car,"  to  which  plaintiff  replied,  "Complete 
minimum  car  with  twos  per  your  wire."  The  term  "minimum  car" 
refers  to  the  smallest  amount  of  the  specified  article  which  will  take 
the  carload  rate,  and  is  shown  in  this  case  to  be  20,000  pounds  on 
cheese  east-botmd.  Under  the  terms  of  this  contract  we  think  that 
plaintiff  would  not  have  been  required  to  accept  more  than  the  amount 
stated.  Plaintiff  therefore  was  entitled  to  receive  19,375  pounds  of  No. 
1  and  one  tub  of  No.  2  to  make  out  a  carload  lot,  or  775  pounds  of 
No.  2. 

While  the  trial  court  found  the  market  price,  it  appears  from  all  the 
evidence  without  dispute  that  there  was,  in  fact,  no  market  for  cheese 
in  or  about  Brodhead,  the  place  of  delivery,  or  in  or  near  Southern 
Wisconsin,  in  the  latter  part  of  August,  1914.  The  defendant  himself 
testified :  "On  account  of  the  war  you  know  we  simply  had  no  market 
price  through  ovir  section  in  the  Swiss  cheese."  "The  farmers  got 
hold  of  theirs  and  they  would  not  sell  at  any  price,  and  some  that  had 
sold  it  backed  out  on  it."  "We  could  not  get  any  what  we  had  bought." 
"For  ten  days  or  two  weeks  you  could  not  get  it  at  any  price,  no  mat- 
ter what  you  offered." 

Another  witness  testified :  "There  wasn't  practically  any  market 
there.  It  was  in  such  a  fluctuating  state."  And  the  testimony  of  all 
of  the  other  witnesses  is  substantially  to  the  same  effect.  There  was 
some  evidence  as  to  deliveries  made  during  the  latter  part  of  the  month, 
mostly  on  orders  taken  earlier,  but  a  careful  examination  of  the  evi- 
dence shows  that  there  was  no  market  at  the  time,  and  hence  there 
could  be  no  market  price.  Market  price  is  not  an  imaginary  fictitious 
thing,  but  is  the  price  at  which  goods  are  actually  being  sold  in  the 
market  at  the  time  or  times  in  question. 

The  burden  was  upon  the  plaintiff"  to  establish  the  amount  of  its 
damages.     This  it  did  by  showing  that  there  was  no  available  market 


•Ch.  7)  RIGHTS   AND    REMEDIES   OF   THE   BUYER  1211 

in  which  the  cheese  could  be  purchased,  and  that  it  was  obhged  to  pay 
for  6,500  pounds  of  No.  1  cheese  20  cents  a  pound,  and  for  12,875 
pounds  of  No.  1  cheese  23  cents  a  pound,  in  order  to  fill  contracts 
which  it  had  made  with  its  customers.  This  made  a  prima  facie  case 
for  the  plaintiff.  If  the  damages  could  have  been  minimized  by  pur- 
chase of  the  cheese'  in  the  open  market,  the  burden  was  then  upon  the 
defendant  to  show  that  there  was  such  an  available  market  in  which 
the  goods  could  have  been  purchased.  As  has  been  said  by  this  court, 
the  idea  that  there  can  be  a  real  substantial  market  price  for  a  given 
commodity  when  there  is  no  such  commodity  for  sale  in  the  market  is 
absurd.  Cockburn  and  Another  v.  Ashland  Lumber  Company,  54 
Wis.  619,  12  N.  W.  49.  The  defendant  in  this  case  made  no  such 
showing,  and,  as  has  been  pointed  out,  it  was,  on  the  contrary,  estab- 
lished that  no  market  existed. 

The  trial  court  therefore  was  in  error  in  assessing  the  damages  at 
the  difference  between  the  contract  price  and  the  so-called  market 
price.  The  rule  stated  in  subdivision  3,  can  only  be  applied  under  the 
conditions  therein  prescribed.  In  other  cases,  where  the  property  in 
the  goods  has  not  passed  to  the  buyer,  and  the  seller  refuses  to  deliver 
the  goods,  the  rule  laid  down  in  subdivision  2  establishes  the  measure 
of  damages,  which  is  the  loss  directly  and  naturally  resulting  in  the 
ordinary  course  of  events  from  the  seller's  breach  of  the  contract. 
*     *     * 

The  evidence  in  this  case  shows  that  the  plaintiff  purchased  6,500 
pounds  of  No.  1  cheese  at  20  cents,  and  was  obliged  to  pay  for  the 
remainder,  12,875  pounds,  23  cents  a  pound,  and  that  the  lowest  price 
quoted  for  775  pounds  of  No.  2  was  17  cents  a  pound.  It  does  not 
clearly  appear  whether  plaintiff  purchased  the  775  pounds  at  that  price 
or  not,  but  he  might  have  done  so.  On  this  basis  the  plaintiff  was  en- 
titled to  judgment  for  the  sum  of  $1,095.37,  with  interest  from  Au- 
gust 19,  1914. 

The  judgment  appealed  from  should  be  modified  as  stated  in  the 
opinion,  and  as  so  modified  it  is  affirmed,  with  costs  to  the  respondent. 


SECTION  7.— RIGHT  OF  THE  BUYER  TO  SUE  THE 
SELLER  FOR  CONVERSION  OF  THE  GOODS 

Sales  Act,  Section  66.  Where  the  property  in  the  goods  has 
passed  to  the  buyer  and  the  seller  wrongfully  neglects  or  refuses  to 
deliver  the  goods,  the  buyer  may  maintain  any  action  allowed  by 
law  to  the  owner  of  goods  of  similar  kind  when  wrongfully  con- 
verted or  withheld. 

For  the  moment  we  leave  the  subject  of  the  law  of  contracts  and 
sales,  and  note  one  phase  of  the  law  of  torts.  The  nature  of  a  tort, 
and  the  scope  of  the  field  of  tort  liability  was  sketched  in  the  general 
introduction  and  in  the  chapters  on  Agency.  We  there  saw  that  the 
wrongful  interference  with  one's  property  is  a  tort.  When  the 
wrong  done  is  with  respect  to  tangible  personal  property,  or  even 
sometimes  to  the  written  evidence  of  intangible  claims,  the  injury 
done  is  known  as  a  conversion.  Conversion  is  a  wrong,  not  only 
to  the  owner  of  the  property,  but  also  to  the  one  who  has  legal 


1212  SALES  (Part  4 

possession.  Here  we  are  concerned  only  with  the  nature  of  the 
right  conferred  by  the  law  upon  the  owner  to  recover  damages 
from  a  person  who  has  committed  an  unauthorized  act  with  re- 
spect to  the  property.  We  know  that  there  are  cases  where  the 
buyer  is  the  owner  of  the  property,  but  where  the  possession  is 
still  in  the  seller.  The  opportunity  afforded  the  seller  for  commit- 
ting a  wrong  with  respect  to  the  goods  is  present.  He  may  refuse 
to  surrender  them  when  the  law  directs  him  to  do  so.  In  this  case 
the  buyer,  by  the  above  section,  is  entitled  to  enlist  the  aid  of  the 
court  to  recover  possession  of  them.  Such  an  action  is  often  called 
an  action  of  replevin.  The  seller  may  use  the  goods,  damage 
them,  or  dispose  of  them,  so  that  the  buyer  cannot  locate  them. 
In  these  cases  the  buyer  may  choose  to  recover  damages  to  re- 
imburse him  for  his  wrong.  The  above  section  recognizes  the 
existence  of  this  right.  Such  an  action  is  oftentimes  called  an  ac- 
tion of  trover,  or  of  conversion,  or  of  trover  for  conversion. 


SECTION  8.— BUYER'S  RIGHT  OF  SPECIFIC 
PERFORMANCE 

Sales  Act,  Section  68.  Where  the  seller  has  broken  a  contract 
to  deliver  specific  or  ascertained  goods,  a  court  having  the  powers 
of  a  court  of  equity  may,  if  it  thinks  fit,  on  the  application  of  the 
buyer,  by  its  judgment  or  decree  direct  that  the  contract  shall  be 
performed  specifically,  without  giving  the  seller  the  option  of  re- 
taining the  goods  on  payment  of  damages,  the  judgment  or  de- 
cree may  be  unconditional,  or  upon  such  terms  and  conditions  as 
to  damages,  payment  of  the  price  and  otherwise,  as  the  court  may 
think  just. 

SOUTHERN  IRON  &  EQUIPMENT  CO.  v.  VAUGHAN. 

(Supreme  Court  of  Alabama,  1918.    201  Ala.  356,  7S  South.  212,  D.  R.  A. 

1918E,  594.) 

Bill  in  equity  by  the  Southern  Iron  &  Equipment  Company  against 
W.  H.  Vaughan.    Pecree  for  defendant,  and  plaintiff  appeals. 

Thomas,  J.  The  suit,  which  was  by  appellant  as  complainant  below, 
was  to  restrain  appellee  (respondent)  from  making  disposition  to  others 
than  complainant  of  certain  railroad  material  alleged  to  have  been 
theretofore  purchased  by  complainant  from  respondent;  and  it  is 
prayed  in  the  bill  that,  upon  final  hearing,  a  decree  be  entered  directing 
specific  performance  of  the  contract  on  the  part  of  respondent.  The 
bill  does  not  aver  the  insolvency  of  the  respondent.  The  court  is 
sought  to  be  given  jurisdiction  of  such  matter  by  the  averment:  "That 
the  nature  of  the  contract  now  existing  between  it  and  the  respondent 
is  such  that  by  a  breach  thereof  by  the  respondent  your  orator  will 
have  no  complete  and  adequate  remedy  at  law,  and  if  such  a  breach 
thereof  is  permitted,  it  will  suffer  great  and  irreparable  injury  thereby. 
Your  orator  avers  that  the  kind  and  character  of  rails  sold  by  the  re- 
spondent to  your  orator  cannot  be  procured  by  your  orator  in  the  open 


Ch.  7)  RIGHTS   AND   REMEDIES  OP  THE  BUYER  1213 

market,  and,  despite  diligent  efforts,  your  orator  has  not  been  able  to 
procure  them  from  any  other  source;  that  the  market  value  of  said 
rails  cannot  be  ascertained;  that  if  a  breach  of  said  contract  is  per- 
mitted, there  will  be  no  way  to  ascertain  readily  and  completely  and  ade- 
quately the  amount  or  extent  to  which  your  orator  has  been  damaged. 
*    •*     * 

The  general  rules  obtaining,  for  specific  performance,  are  that :  "Eq- 
uity will  not,  in  general,  decree  the  specific  performance  of  contracts 
concerning  chattels,  because  their  money  value  recovered  as  damages 
will  enable  the  party  to  purchase  others  in  the  market  of  like  kind 
and  quality.  Where,  however,  particular  chattels  have  some  special 
value  to  the  owner,  over  and  above  any  pecuniary  estimate — pretium 
affectionis — and  where  they  are  unique,  rare,  and  incapable  of  being 
reproduced  by  money  damages,  equity  will  decree  a  specific  delivery 
of  them  to  their  owner,  and  the  specific  performance  of  contracts  con- 
cerning them." 

For  example,  paintings,  statuary,  an  ancient  horn  which  has  gone 
along  with  plaintiff's  estate  (Pusey  v.  Pusey,  1  Vem.  273),  an  old 
silver  patera  dug  up  on  plaintiff's  estate  (Duke  of  Somerset  v.  Cookson, 
3  P.  Wms.  389),  a  peculiar  tobacco  box  belonging  to  a  club  (Fells  v. 
Read,  3  Ves.  70),  the  dress  and  regalia  of  a  Lodge  of  Free  Masons 
(Loyd  v.  Loaring,  6  Ves.  373),  family  pictures  (Lady  Arundel  v. 
Phipps,  10  Ves.  139),  title  deeds  and  valuable  paintings  (Lowther  v. 
Lord  Lowther,  13  Ves,  95),  a  finely  carved  cherry  stone  (Pearne  v. 
Lisle,  Amb.  75,  17),  two  very  valuable  jars  (Falcke  v.  Gray,  4  Drew. 
651),  and  a  newspaper  business,  printing  plant,  and  material  used  in 
said  business  (Williams  v.  Carpenter,  14  Colo.  477,  24  Pac.  558;  Brady 
V.  Yost,  6  Idaho,  273,  55  Pac.  542).    *     *     * 

While  complainant  in  the  instant  case  does  not  aver  the  price  at  which 
it  had  resold  the  property  in  question  to  L.  B.  Foster  Company  of 
Pittsburgh,  Pa.,  yet  such  sale  is  specifically  averred,  and  the  price  there- 
of fixed  by  complainant  is  easy  of  ascertainment  for  submission  to  a 
jury  for  estimation  of  damages  for  a  breach  of  the  contract  under  the 
rules  of  law  obtaining  in  such  matters. 

The  further  averment  that  "said  Foster  Company  are  demanding" 
fulfillment  of  their  contract  with  complainant  for  said  rails,  and  that 
if  complainant  does  not  secure  said  rails  from  respondent  to  make  de- 
livery of  the  same  in  accordance  with  its  contract  with  said  Foster 
Company,  complainant  will  be  unable  to  cany  out  its  contract  with  that 
company,  and  will  be  "irreparably  damaged,"  does  not  make  a  case  of 
irreparable  damage,  that  may  not  be  fixed  by  a  jury  at  law.  *  *  * 
The  contract,  specific  performance  of  which  was  sought  in  Black  Dia- 
mond Co.  V.  Coal  Co.,  200  Ala.  276,  76  South.  42,  was  for  the  pur- 
chase and  sale  of  coal,  and  required  the  defendant  to  sell  to  the  plain- 
tiff all  of  its  output,  to  a  stated  daily  average,  for  which  the  plaintiff 
was  to  pay  monthly  a  stated  amount  per  ton,  etc.,  thus  contemplating 
a  continuous  daily  operation  of  the  mine,  requiring  special  skill,  knowl- 
edge, and  direction,  over  a  period  of  months,  and  stipulating  for  a  suc- 
cession of  acts  that  cannot  be  consummated  by  one  transaction.  The 
rehef  sought  was  denied. 

Under  the  averments  of  the  bill  the  act  of  delivery  of  the  railroad 
material  was  to  embrace  a  series  of  installments  extending  over  the 
period  from  October  2  to  November  2,  1917,  necessitating  the  removal 
of  such  material  from  its  present  location  along  a  right  of  way  of  14  or 


1214  SALES  (Part  4 

more  miles  in  length,  and  delivery  f.  o.  b.  the  cars  at  Perry's  Mills, 
Ala.  Thus  the  contract,  by  its  terms,  stipulated  a  succession  of  acts, 
to  be  continued  through  the  reasonable  period  required,  to  move  to  and 
deliver  at  point  of  destination  the  property  in  question.  If  specific 
performance  of  such  contract  be  required  by  the  court,  a  more  or  less 
protracted  supervision  and  direction  would  be  necessary  to  consumate 
such  removal  and  delivery  as  per  contract  stipulations.  And  it  may 
be  that  on  this  ground  the  decree  of  the  court  should  be  sustained,  but 
this  is  not  decided. 

However,  we  prefer  to  justify  the  ruling  of  the  court  in  dismissing 
plaintiff's  bill,  on  the  ground  that  the  insolvency  of  Vaughan  is  not  al- 
leged, and  that  compensation  for  the  breach  of  the  contract  will  give 
ful  and  complete  redress,  from  the  nature  of  the  contract  itself  and  the 
character  of  the  subject-matter  thereof.  That  is,  by  a  verdict  at  law 
the  complainant  will  obtain  all  that  it  was  the  object,  by  resale  of  the 
property  in  question,  to  obtain.     *     *     * 

The  result  is  unchanged  by  Lewman  &  Co.  v.  Ogden,  143  Ala.  351, 
42  South.  102,  5  Ann.  Cas.  265.  There  one  of  the  parties  had  a  con- 
tract with  the  United  States  for  the  erection  of  certain  locks  and  dams 
on  the  Warrior  and  Tombigbee  rivers,  and  sublet  the  contract  to  the 
other  party  under  the  written  agreement  to  do  the  work  by  a  designated 
time,  and  to  furnish  all  necessary  labor,  teams,  machinery,  and  appli- 
ances, etc. ;  and  it  was  averred  that  said  sublessee  had  ceased  to  work, 
and  was  attempting  to  remove  such  personal  property  necessary  to  the 
prosecution  of  the  work,  and  to  its  completion  "at  the  present  season 
of  the  year,  and  at  the  present  stage  of  the  water."  The  bill,  "in 
substance  and  in  spirit"  one  for  specific  performance,  was  held  to  be 
without  equity.  The  court  said  that  specific  performance  might  be 
decreed  of  a  contract  for  the  delivery  of  chattels,  which  no  one  but 
the  defendant  can  supply,  ?nd  which  are  necessary  to  enable  the  plain- 
tiff to  fulfill  an  engagement  with  a  third  party,  "but  not  where  the  de- 
livery of  the  chattels  by  the  defendant  was  a  mere  question  of  con- 
venience." It  may  be  that  where  goods  of  special  value  have  been 
sold,  and  there  are  no  other  similar  goods  in  the  market,  a  contract  for 
the  delivery  of  them  would  be  specifically  performed.     *     *     *      ^ 

The  bill  does  not  show  that  the  complainant  is  not  provided  with 
a  plain  and  adequate  remedy  at  law  for  the  breach  of  the  contract  by 
respondent  Vaughan,  but  that  a  breach  of  such  contract  is  fully  meas- 
urable by  a  money  standard.  The  present  temporary  economic  condi- 
tion, brought  about  by  the  pending  war,  does  not  bring  the  instant  case 
within  an  exception  to  the  general  rules  hereinabove  adverted  to. 

The  decree  of  the  Montgomery  circuit  court  in  equity  is  affirmed. 
*     *     * 


PART  V 
PARTNERSHIP 

Chapter 

Introduction. 
I.     What  Constitutes   a  Partnership. 
II.     Relations  of  the  Partners  Between  Themselves. 
III.    Relations  of  Partners  to  Third  Persons. 
IV.     Causes  of  Dissolution. 
V.     Effect   of  Dissolution   upon    the   Relations    of   the   Partners   Between 

Themselves. 
VI.     Effect   of  Dissolution   upon   the   Relations   of   the   Partners  to   Third 
Parties. 
VII.    Limited  Partnerships. 


INTRODUCTION 

The  preceding  portions  of  this  volume,  in  the  main,  have  dealt 
either  v/ith  the  general  law  of  contracts  or  with  the  rules  applica- 
ble to  particular  kinds  of  contracts.  This  is  particularly  true  of 
Parts  I,  III,  and  IV.  Part  II  dealt  with  the  law  of  agency.  To 
a  great  extent  this  topic  also  concerned  the  application  of  the 
principles  of  the  law  of  contracts  to  a  special  relationship.  The 
primary  object  of  study  was,  however,  this  relationship  and  its 
consequences.  It  was  necessary  to  draw  upon  the  principles  of 
the  law  of  contracts  to  determine  the  nature  and  consequences  of 
the  relationship,  but  other  departments  of  the  law  were  also  in- 
volved. And  so  with  respect  to  the  law  of  partnership.  The  object 
of  study  is  the  relationship. 

A  partnership  is  one  form  of  business  organization.  It  is  one 
method  by  which  two  or  more  persons  may  combine  their  services 
and  property  for  business  purposes  and  for  common  ends.  The 
relationship  is  usually  created  by  contract,  but  this  relationship  is 
something  separate  and  distinct  from  the  contract  which  created  it. 
A  contract  to  enter  into  a  partnership  and  an  actual  partnership 
are  two  different  things.  The  law  of  partnership  is  concerned  with 
the  solution  of  the  special  problems  which  arise  out  of  and  because 
of  the  form  of  organization  in  which  the  business  is  carried  on. 
As  in  other  branches  of  the  law,  the  first  question  to  arise  is: 
What  groups  or  combinations  of  facts  will  create  a  partnership? 
Persons  may  intend  to  enter  into  a  partnership,  but 'fail  to  do  so. 
Their  acts  may  have  created  a  different  relationship.  Conversely, 
persons  may  intend  not  to  enter  into  a  partnership,  but  actually 
form  one. 

After  determining  what  facts  are  sufficient  to  create  a  partner- 
ship, and  what  facts  may  or  may  not  be  present  without  affecting 
the  existence  of  the  relationship,  the  questions  then  arise  as  to 
the  nature  and  extent  of  the  legal  consequences  which  follow  the 
B.&  B.Bus.Law  (1215) 


1216  PARTNERSHIP  (Part  5 

formation  of  a  partnership.  There  are  a  great  number  of  general 
and  specific  problems  which  arise  naturally  out  of  the  situation. 
Prominent  among  them  is  the  series  of  problems  which,  either  di- 
rectly or  indirectly,  arise  out  of  the  fact  that  the  partners  have  com- 
bined their  individual  properties  to  be  employed  in  a  common  en- 
terprise. The  law  of  property  defines  with  considerable  particu- 
larity the  legal  relations  which  one  has  with  respect  to  property. 
But  when  two  or  more  persons  unite  their  properties,  employ  it 
for  business  purposes,  exchange  the  original  properties  for  other 
properties,  accumulate  surplus  and  sustain  losses,  a  situation  is 
created  which  makes  it  impracticable,  if  not  impossible,  to  re- 
gard the  original  relation  which  each  contributor  to  the  capital 
originally  possessed  as  still  continuing.  Each  partner  owns  the 
property  which  he  contributes  to  capital,  but  after  the  contribu- 
tions have  been  made  each  partner's  relations  with  respect  to  the 
property  which  he  contributed  necessarily  have  changed.  Much  of 
the  law  of  partnership  is  concerned  with  the  problem :  What  is  the 
relation  of  an  individual  partner  with  respect  to  the  property  em- 
ployed in  the  enterprise? 

The  ascertainment  of  the  interest  of  each  partner  with  respect 
to  partnership  property  has  a  double  aspect.  It  is  necessary  to  de- 
termine what  the  relation  is  as  between  the  partners  themselves 
and  as  between  the  partners  and  third  parties.  If  the  capital  of  a 
partnership  consists  of  land,  buildings,  machinery,  and  merchan- 
dise, is  any  particular  machine  owned  by  one  partner  just  as  it  was 
before  he  employed  it  in  the  business?  May  he  sell  it  otherwise 
than  in  the  course  of  the  partnership  business?  May  a  creditor 
of  one  of  the  partners,  with  respect  to  a  debt  not  contracted  in 
the  course  of  the  partnership  business,  seize  the  machine  which 
was  contributed  to  the  working  capital  of  the  business?  These 
are  some  of  the  detailed  questions  which  involve  the  determination 
of  the  nature  and  extent  of  the  interest  of  the  individual  partners 
in  the  partnership  property. 

Another  question  concerns  the  relations  of  firm,  creditors  with 
respect  to  the  individual  members  of  the  firm.  If  a  firm  creditor 
sues  all  the  members  of  the  firm,  it  logically  follows  that  firm 
property  is  liable  to  seizure  for  satisfaction  of  the  debt.  But  is  it 
necessary  that  the  firm  creditor  proceed  against  firm  property? 
May  the  creditor  sue  an  individual  partner  alone?  If  he  sues  all  of 
the  members  of  the  firm,  will  he  be  permitted  to  take  out  execution 
against  individual  property  of  the  partners?  The  relation  of  firm 
creditors  and  individual  creditors  with  respect  to  property  employ- 
ed in  the  business  and  to  the  individual  properties  of  each  mem- 
ber constitute  an  important  part  of  the  law  of  partnership. 

A  partnership  is  a  relation  voluntarily  entered  into  by  the  mem- 
bers. A  great  many  changes  in  their  relations,  among  themselves 
and  as  regards  third  parties,  arise  as  a  result  of  their  joint  under- 
taking. Whatever  changes  are  thus  worked,  it  is  apparent  that 
the  new  relations  will  not  continue  indefinitely.     These  new  re- 


INTRODUCTION  1217 

lations  may  be  destroyed.  Another  group  of  problems  concerns 
the  question :  What  acts  will  operate  as  a  dissolution  of  the 
partnership  relation?  The  term  "dissolution"  has  a  technical 
meaning-.  As  there  used,  it  indicates  that  something  has  occurred 
which  has  materially  changed  the  legal  relations  between  the  part- 
ners and  as  between  the  partners  and  third  parties.  This  ques- 
tion divides  into  two  parts :  What  facts  will  operate  as  a  dissolu- 
tion, and  to  what  extent  are  the  partnership  relations  changed? 
A  new  member  comes  into  the  firm;  an  old  member  withdraws; 
one  of  the  partners  dies;  what  effect  is  thereby  produced  upon 
the  partnership  relations? 

The  principal  problems  of  the  law  of  partnership  are  therefore: 
(1)  What  facts  will  create  a  partnership?  (2)  What  legal  rela- 
tions arise  therefrom  (a)  as  between  the  partners;  (b)  as  between 
the  partners  and  third  parties?  (3)  What  facts  will  cause  a  dissolu- 
tion? (4)  What  is  the  legal  effect  of  a  dissolution  (a)  as  between 
the  partners;    (b)   as  between  the  partners  and  third  parties? 

The  Uniform  Partnership  Act,  approved  by  the  National  Con- 
ference of  Commissioners  on  Uniform  State  Laws  in  1914,  has 
been  adopted  in  Idaho,  Illinois,  Maryland,  Michigan,  Minnesota, 
New  Jersey,  New  York,  Pennsylvania,  Tennessee,  Utah,  Wiscon- 
sin, Wyoming,  and  Alaska. 

The  Uniform  Limited  Partnership  Act,  approved  in  1916,  has 
been  adopted  in  Idaho,  Illinois,  Iowa,  Maryland,  Minnesota,  New 
Jersey,  Pennsylvania,  Tennessee,  Utah,  Wisconsin,  and  Alaska.^ 

1  The  uotes  appended  to  the  various  sections  of  the  acts  are  the  work  of 
Professor   William   Draper   Lewis,   the   able   draftsman   of  the   Partnership 
Acts.     See  texts  of  the  Acts  Issued  by  the  ^S'ational  Conference  of  Commis- 
sioners on  Uniform  State  Laws. 
B.&tB.Bus.LAW— 77 


1218  PARTNERSHIP  (Part  5 

CHAPTER  I 
WHAT  CONSTITUTES  A  PARTNERSHIP 

Section 

1.  Partnersliip  the  Result  of  Intention. 

2.  Partnersliip  by  P^stoppel. 

3.  Partnersliip  by  Oiieratiou  of  Law  as  to  Third  Persons. 

4.  Partnerships  Distinguished   from  Trusts  for   Business  Puriwses. 


SECTION  L— PARTNERSHIP  THE  RESULT  OF 
INTENTION 

Uniform  Partnership  Act,  Section  6.  (1)  A  partnership  is  an 
association  of  two  or  more  persons  to  carry  on  as  co-owners  a 
business  for  profit.^ 

2  Lewis'  Note  to  Section  6  (1). — The  first  inquiry  is,  Wliy  say  a  partnership 
is  "an  association  of  two  or  more  persons"?  In  view  of  the  fact  that  the 
word  "association"  itself  implies  the  acting  together  of  two  or  more  persons, 
why  not  merely  say  that  a  partnership  is  an  association  to  carry  on  business 
in  which  the  members  are  co-owners  of  the  business?  The  word  "pei-son" 
includes,  as  stated  in  section  2,  supra,  "individuals,  partnerships,  coi-pora- 
tions,  and  other  associations."  The  definition  as  worded  thus  asserts,  what 
would  be  doubtful  if  the  words  "of  two  or  more  persons"  were  omitted, 
namely,  that  any  one  of  these  associations  may  become  members  of  a  part- 
nership. It  is  true  that  if  two  or  more  corporations  attempt  to  form  a  part- 
nership the  contract  may  be  ultra  vires  as  to  both  (Boyd  v.  American  Carbon 
Black  Co.,  182  Pa.  200.  37  Atl.  937  [1S97]) ;  but  the  capacity  of  conwrations 
to  contract  is  a  question  of  corporation  law.  Under  the  present  huv  it  ap- 
pears that  a  partnership  can,  as  such,  be  a  member  of  another  partnership, 
if  that  was  the  intent  of  the  parties.  Raymond  v.  Putnam,  44  N.  H.  160 
(1862) ;  Cheap  v.  Cramond,  4  Barn.  &  Aid.  663  (1821) ;  In  re  Hamilton  (D.  C.) 
1  Fed.  800  (1880) ;  Riddle  v.  Whitehill,  135  U.  S.  021,  10  Sup.  Ct.  924,  34  L. 
Ed.  282  (1890). 

The  words  "to  carry  on  as  co-owners  a  business"  remove  any  doubt  In  the 
following  case:  A.  and  B.  sign  partnership  articles  and  make  their  agreed 
contributions  to  the  common  fund.  A.  refuses  to  carry  on  business  as  agreed. 
Is  there  a  partnership  to  be  wound  up  in  accordance  with  the  provisions  of 
Part  VI,  "Dissolution  and  Winding  up"?  The  words  quoted  require  an  af- 
firmative answer  to  this  question.  If  the  words  "carrying  on  business"  had 
been  used,  in  the  case  given,  no  partnership  would  exist,  and  Part  VI  would 
not  apply. 

The  definition  asserts  that  the  associates  are  "co-owners"  of  the  business. 
This  distinguishes  a  partnership  from  an  agency — an  association  of  principal 
and  agent.  A  business  is  a  series  of  acts  directed  toward  an  end.  Owner- 
ship involves  the  power  of  ultimate  control.  To  state  that  partners  are' 
co-owners  of  a  business  is  to  state  that  they  each  have  the  ix)wer  of  ultimate 
control. 

Lastly,  the  definition  asserts  that  the  business  is  for  profit.  Partnership 
is  a  branch  of  our  commercial  law ;  it  has  developed  in  connection  with  a 
particular  business  association,  and  it  is,  therefore,  essential  that  the  opera- 
tion of  the  act  should  be  confined  to  associations  organized  for  profit. 

In  view  of  the  many  definitions  of  a  partnership  which  have  been  pru- 
I)osed,  it  is  desirable  to  note  the  reasons  for  the  omission  of  certain  ideas 
expressed  in  some  of  the  definitions  citt:d  by  Lindley  in  his  work  on  Partner- 
ship, pp.  11,  12. 

It  is  not  indicated  that  the  association  must  be  a  voluntary  one.  In  the 
domain  of  private  law  the  term  association  necessarily  involves  the  idea 
that  the  association  is  voluntary. 

To  say  that  the  association  must  be  created  by  contract  is  not  only  unnec- 
essary, but  in  view  of  the  varied  use  of  the  word  "contract"  in  our  law,  if 
the  word  is  used  an  explanation  would  have  to  be  made  as  to  whether  the 


Ch.  1)  WHAT    rOX.STITTTTRS    A    PARTXKR.SHIP  1219 

(2)  But  any  association  formed  under  any  other  statute  of  this 
state,  or  any  statute  adopted  by  authority,  other  than  the  authority 
of  this  state,  is  not  a  partnership  under  this  act,  unless  such  asso- 
ciation would  have  been  a  partnership  in  this  state  prior  to  the 
adoption  of  this  act;  but  this  act  shall  apply  to  limited  partner- 
ships except  in  so  far  as  the  statutes  relating  to  such  partnerships 
are  inconsistent  herewith.^^ 

Section  7.  In  determining  whether  a  partnership  exists,  these 
rules  shall  apply: 

(2)  Joint  tenancy,  tenancy  in  common,  tenancy  by  the  entireties, 
joint  property,  common  property,  or  part  ownership  does  not  of 
itself  establish  a  partnership,  whether  such  co-owners  do  or  do 
not  share  any  profits  made  by  the  use  of  the  property. 

(3)  The  sharing  of  gross  returns  does  not  of  itself  establish  a 
partnership,  whether  or  not  the  persons  sharing  them  have  a  joint 
or  common  right  or  interest  in  any  property  from  which  the  re- 
turns are  derived. 

(4)  The  receipt  by  a  person  of  a  share  of  the  profits  of  a  busi- 
ness is  prima  facie  evidence  that  he  is  a  partner  in  the  business, 
but  no  such  inference  shall  be  drawn  if  such  profits  were  received 
in  payment: 

(a)  As  a  debt  by  installments  or  otherwise; 

(b)  As  wages  of  an  employee  or  rent  to  a  landlord; 

(c)  As  an  annuity  to  a  widow  or  representative  of  a  deceased 
partner; 

(d)  As  interest  on  a  loan,  though  the  amount  of  payment  vary 
with  the  profits  of  the  business; 

(e)  As  the  consideration  for  the  sale  of  the  good  will  of  a  busi- 
ness or  other  property  by  installments  or  otherwise. 

contract  could  be  implied,  and,  if  so,  whether  it  could  be  implied  in  law  or 
only  implied  as  a  fact.  By  merely  saying  that  it  is  an  association  these 
difficulties  are  avoided. 

Again,  it  is  not  said  that  the  business  must  be  a  lawful  business.  The 
effect  of  the  unlawfulness  of  the  business  is  dealt  with  under  Part  VI,  "Dis- 
solution and  Winding  Up."  Section  31  (3),  infra,  provides  that  dissolution  is 
produced  "by  any  event  which  makes  it  unlawful  for  the  business  of  the 
partnership  to  be  carried  on  or  for  the  members  to  carry  it  on  in  partnership.'' 
If  the  business  is  wholly  unlawful,  then  the  partnership  is  dissolved  the 
moment  it  is  created.  The  omission  of  the  word  "lawful"  in  the  definition 
does  not  prevent  this  result.  Very  often,  however,  a  business  may  be  in  part 
lawful  and  in  part  unlawful.  Hotel  keepers  may  run  a  "dive."  Placing  the 
word  "lawful"  before  the  word  "business"  in  the  definition  would  tend  to 
throw  a  doubt  on  the  propriety  of  the  orderly  winding  up  of  such  a  business 
as  a  partnership. 

3  Lewis'  Note  to  Section  6(2). — The  reason  for  not  following  the  English 
Act,  and  attempting  to  eninnerate  the  associations  which  are  excluded  be- 
cause formed  under  special  statutes,  is  because  such  an  enumeration  is  un- 
necessary, and  because  the  paragraph  would  have  to  be  differently  worded 
for  each  state.  The  paragraph  as  drawn  makes  any  association  formed  under 
a  statute  a  partnership,  if  it  would  have  been  a  partnership  in  the  state  if 
the  act  had  not  been  adopted.  If  the  association  would  not  have  been  a 
partnership  had  the  act  not  been  adopted,  the  adoption  of  the  act  does  not 
make  it  a  partnership.  In  short,  the  adoption  of  the  act  does  not  change 
the  legal  status  in  the  state  of  any  association  formed  under  a  statute. 


1220  PARTNERSHIP  (Part  5 


ASH  et  al.  v.  GUIE. 
(Supreme  Court  of  Ponnsylvania,  1881.    97  Pa.  49.^,  S9  Am.  Eep.  SIS.) 

The  members  of  a  Masonic  lodge,  an  unincorporated  body,  ap- 
pointed a  committee  to  erect  a  building  for  the  use  of  the  lodge, 
authorizing  them  to  borrow  money  for  this  purpose.  The  committee 
accordingly  borrowed  various  sums,  giving  to  the  lenders  certificates 
of  indebtedness  in  the  name  of  the  lodge,  signed  by  the  officers 
thereof,  and  sealed  with  a  seal,  usually  employed  by  the  secretary  for 
authenticating  communications  to  other  lodges,  and  which  had  never 
before  been  appended  to  'a  pecuniary  obligation.  In  a  suit  brought 
upon  one  of  said  certificates,  wherein  all  the  members  of  the  lodge 
were  joined  as  defendants  and  alleged  to  be  partners,  verdict  and 
judgment  in  the  trial  court  were  for  the  plaintiff.  Defendants  bring 
writ  of  error. 

Trunkey,  J.  One  of  the  defendants,  called  by  plaintiffs,  testified: 
"  *  *  *  The  purposes  of  our  lodge  are  charitable,  benevolent  and 
social."  This  is  the  evidence  as  to  the  objects  for  which  the  associa- 
tion was  formed,  and  without  proof  of  its  constitution  or  rules  re- 
specting admission  of  members  and  the  management  of  its  affairs  it 
was  held  to  be  a  common  partnership.  A  partnership  has  been  de- 
fined to  be  a  "combination  by  two  or  more  persons  of  capital,  or  labor, 
or  skill,  for  the  purpose  of  business  for  their  common  benefit."  It 
may  be  formed,  not  only  for  every  kind  of  commercial  business,  but 
for  manufacturing,  hunting,  and  the  like,  as  w^ell  as  for  carrying  on 
the  business  of  professional  men,  mechanics,  laborers,  and  almost  all 
other  employments.  It  would  seem  that  there  must  be  a  community 
of  interest  for  business  purposes.  Hence,  voluntary  associations  or 
clubs,  for  social  and  charitable  purposes,  and  the  like,  are  not  proper 
partnerships,  nor  have  their  members  the  powers  and  responsibilities 
of  partners.     *     *     * 

A  benevolent  and  social  society  has  rarely,  if  ever,  been  consid- 
ered a  partnership.  *  *  >i^  i^  Flemyng  v.  Hector,  2  M.  &  W.  172, 
Lord  Abinger  stated  the  difference  between  a  body  of  gentlemen 
forming  a  club  and  meeting  together  for  one  common  object,  and  a 
partnership  where  persons  engage  in  a  community  of  profit  and  loss, 
and  each  partner  has  the  right  of  property  for  the  whole,  and  in  any 
ordinary  transactions  may  bind  the  partnership  by  a  credit.  He  held 
that  a  club  and  its  committee  must  stand  on  the  ground  of  principal 
and  agent,  and  that  the  authority  of  the  committee  depends  on  the 
constitution  of  the  club,  which  is  to  be  found  in  its  own  rules.  After 
noting  the  rules  of  the  club,  in  the  case  before  him,  he  says:  "It 
therefore  appears  that  the  members  in  general  intended  to  provide 
a  fund  for  the  committee  to  call  upon.  I  cannot  infer  that  they  in- 
tended the  committee  to  deal  upon  credit,  and  unless  you  infer  that 
that  was  the  intention,  how  are  the  defendants  bound?"  A  mutual 
benefit  society  partakes  more  the  character  of  a  club  than  of  a  trading 
association.  Every  partner  is  agent  for  the  partnership,  and  as 
concerns  himself  he  is  a  principal,  and  he  may  bind  the  others  by 
contract,  though  it  be  against  an  agreement  between  himself  and  his 
partners.     *     *     * 

Here  there  is  no  evidence  to  warrant  an  inference  that  when  a 
person  joined  the  lodge  he  bound  himself  as  a  partner  in  the  business 
of  purchasing  real  estate  and  erecting  buildings,  or  as  a  partner,  so 


Ch.  1)  WHAT  CONSTITUTES  A   PARTNERSHIP  1221 

that  other  members  could  borrow  money  on  his  credit.  The  proof 
fails  to  show  that  the  officers  or  a  committee,  or  any  number  of  the 
members,  had  a  right  to  contract  debts  for  the  building  of  a  temple 
which  would  be  valid  against  every  member  from  the  mere  fact  that 
he  was  a  member  of  the  lodge.  But  those  who  engaged  in  the  enter- 
prise are  liable  for  the  debts  they  contracted,  and  all  are  included  in 
such  liability  who  assented  to  the  undertaking,  or  subsequently  rat- 
ified it.  Those  who  participated  in  the  erection  of  the  building,  by 
voting  for  and  advising  it,  are  bound  the  same  as  the  committee  who 
had  it  in  charge.  And  so  with  reference  to  borrowing  money.  A  mem- 
ber who  subsequently  approved  the  erection  or  borrowing  could  be 
held  on  the  ground  of  ratification  of  the  agent's  acts.  We  are  of 
opinion  that  it  was  error  to  rule  that  all  the  members  were  liable 
as  partners  in  their  relation  to  third  persons  in  the  same  man- 
ner as  individuals  associated  for  the  purpose  of  carrying  on  a 
trade.     *     *     * 

Judgment  reversed,     *     *     * 


PHILLIPS  V.  PHILLIPS. 
(Supreme  Court  of  Illinois,  1863.     49  111.  437.) 

John  Phillips  owned  a  business.  His  sons  were  not  expressly 
given  any  interest  in  the  business,  but  they  worked  with  him  in  mak- 
ing a  success  of  the  enterprise,  and  received  no  salaries.  The  father 
,  paid  them,  from  time  to  time,  out  of  the  profits  of  the  business,  such 
sums  as  they  needed.  One  of  the  sons  withdrew  his  services  from 
the  business,  and  filed  a  bill  for  an  accounting  as  a  partner. 

Caton,  C.  J.  The  only  question  in  this  case  is  one  of  fact.  Was 
there  a  copartnership  between  John  Phillips  and  his  four  sons,  or  was 
he  the  sole  proprietor  of  the  business  about  which  the  controversy 
has  arisen  ?  It  must  be  remembered  in  the  outset  that  this  is  a  con- 
troversy inter  sese,  and  is  not  between  third  parties  and  the  alleged 
members  of  the  firm.  Parties  may  so  conduct  themselves  as  to  be 
liable  to  third  persons  as  partners,  when  in  fact  no  partnership  ex- 
ists as  between  themselves.  The  public  are  authorized  to  judge 
from  appearances  and  professions,  and  are  not  absolutely  bound  to 
know  the  real  facts,  while  the  certain  truth  is  positively  known  to  the 
alleged  parties  of  a  firm.  A  partnership  can  only  exist  in  pursuance 
of  an  express  or  implied  agreement  to  which  the  minds  of  the  par- 
ties have  assented.  The  intention  or  even  belief  of  one  party  alone 
cannot  create  a  partnership  without  the  assent  of  the  others.  If  John 
S.  Phillips  designed  and  really  believed  that  there  was  a  partnership, 
but  to  which  his  father  and  brothers  never  assented,  and  in  the  exist- 
ence of  which  they  did  not  believe,  then  there  was  no  partnership,  un- 
less, indeed,  a  copartnership  could  be  formed  and  conducted  with- 
out their  knowledge  or  consent.  This  would  be  simply  absurd.  We 
cannot  in  this  way  surprise  them  into  a  partnership  of  which  they 
never  dreamed. 

Over  20  years  ago  John  Phillips  emigrated  from  Scotland  and  set- 
tled in  Chicago  with  his  family,  consisting  of  a  wife  and  four  sons 
and  two  daughters.  He  was  then  very  poor.  He  was  a  wood  turner 
by  trade,  and  commenced  that  business  in  a  very  small  way  with  a 
foot  lathe.    He  was  frugal,  industrious,  and  honest,  and  prospered  as 


1222  PARTNERSHIP  (Part  5 

but  few  men,  even  in  this  country,  prosper.  He  labored  hard  with 
his  own  hands,  and  as  his  sons  grew  up  they  joined  their  work  to  his, 
all  except  John  S.,  who  at  a  proper  age  was  put  as  an  apprentice  to 
learn  the  chair  maker's  trade ;  but,  his  health  proving  delicate,  his 
father  made  an  arrangement  with  his  master  by  which  his  time  was 
released  when  he  had  but  partially  learned  his  trade,  when  John  S. 
returned  home  and  took  a  more  or  less  active  part  in  the  business 
of  his  father.  His  health  was,  however,  for  many  years  very  del- 
icate, and  he  was  enabled  to  do  but  little  physical  labor.  He,  how- 
ever, mostly  took  charge  of  the  ofifice  and  books,  for  which  the 
testimony  shows  he  was  very  well  qualified,  and  where  he  rendered 
efficient  service.  In  the  meantime  the  business  had  grown  from  the 
smallest  beginning,  with  a  single  foot  lathe,  to  a  large  manufactory, 
with  extensive  machinery  propelled  by  steam;  and  chair  making, 
which  was  introduced  at  an  early  day,  had  become  the  principal  or 
largest  branch  of  the  business.  Thus  this  business  was  begun  and 
continued  and  prospered  till  1860,  when  the  complainant  left  his  fa- 
ther and  the  business,  and  filed  this  bill  for  an  account  as  among 
partners. 

The  business  had  always  been  conducted,  as  it  was  begun,  in  the 
name  of  John  Phillips,  the  father,  although  in  a  few  instances  bills 
were  made  out  to  John  Phillips  &  Sons  by  persons  with  but  a  su- 
perficial acquaintance  with  them,  which  were  paid  without  eliciting 
remark  or  particular  attention.  The  books  were  all  kept  in  the  name 
of  John  Phillips,  with  the  exception  of  a  few  entries  made  by  a  book- 
keeper in  the  name  of  John  PhilHps  &  Sons.  Indeed,  there  is,  and 
can  be,  no  question  that,  if  there  was  a  copartnership  embracing  the 
father  and  sons,  the  firm  name  adopted  was  John  Phillips. 

The  complainant,  to  show  a  copartnership,  proves  that  the  sons 
all  devoted  their  time  and  attention  to  the  business  after  they  at- 
tained their  majority,  without  regular  salaries  as  laborers  or  serv- 
ants ;  that  funds  which  they  drew  from  the  concern  for  their  support 
were  charged  to  each  one  separately,  while  neither  received  a  credit 
for  labor  or  services;  that  the  father,  upon  one  or  two  occasions, 
stated  to  third  persons  that  his  sons  were  interested  in  the  busi- 
ness ;  and  he  also  relies  upon  the  appearances  to  the  outside  public 
and  the  interest  which  all  took  in  the  success  of  the  business. 

For  the  defense  it  is  claimed  that,  following  the  habits  and  customs 
of  their  forefathers  in  Scotland,  the  sons  continued  to  serve  the  fa- 
ther in  the  same  relation  and  with  the  same  fidelity  after  attaining 
their  majority  as  before,  under  the  distinct  and  often  declared  un- 
derstanding that  all  should  belong  to  the  father  during  his  life,  and 
at  his  death  the  business  and  property  should  be  left  by  him  to  his 
children,  as  he  should  think  proper.  *  *  *  jf  such  was  the  un- 
derstanding and  purpose  of  the  parties,  then  there  was  no  partner- 
ship. Originally,  undoubtedly,  the  entire  concern  belonged  to  the 
father,  and  it  so  continued,  unless  by  the  agreement  of  the  father  the 
sons  were  admitted  into  the  concern  as  partners ;  for,  as  before  inti- 
mated, we  know  of  no  means  by  which  the  sons  could  become  part- 
ners with  the  father,  and  thus  acquire  a  title  to  his  property,  without 
his  knowledge  or  consent.  Did  the  father  ever  consent  that  his  sons, 
or  either  of  them,  should  be  admitted  as  partners  with  him?  Did 
he  ever  agree  that  they  should  be  part  owners  of  this  property?  On 
repeated    occasions   the   subject   of   a   copartnership   with    his   sons 


Ch.  1)  WHAT   COXSTITTITES   A   PAKTNKRSIIIP  1223 

was  presented  to  him,  both  in  the  presence  of  the  complainant  and 
his  brothers,  and  he  ever  repudiated  the  suggestion  in  the  most  em- 
phatic terms.  The  very  suggestion,  even  seemed  to  excite  his  in- 
dignation. Upon  one  occasion  he  expressed  himself  in  this  char- 
acteristic phrase:  "Na,  Na !  I  will  ha'  nae  sons  for  partners  as  long 
as  I  live.    Damn  them  !  they  w'ould  put  me  out  of  the  door." 

On  none  of  these  occasions  do  we  find  the  complainant  or  any  of 
his  brothers,  claiming  the  existence  of  a  copartnership ;  but,  on  the 
contrary,  they  silently  acquiesced  in  the  assertions  of  the  father. 
*  *  *  Had  there  been  ever  any  agreement,  express  or  implied, 
that  there  should  be  a  partnership,  they,  as  parties  to  it,  must  have 
been  aware  of  it.  If  not  expressed  in  words,  there  must  have  been 
at  least  the  mental  intentiort  and  tacit  understanding  on  the  part  of 
the  father  that  they  should  be  admitted  as  partners,  and  on  their  part 
to  assume  the  benefits  and  liabihties  of  partners,  and  this  could  not 
be  without  their  knowledge.  Others  might  be  deceived  by  appear- 
ances. Others,  ignorant  of  the  customs  and  traditions  of  their  fore- 
fathers, which  are  so  fondly  cherished  by  emigrants  from  the  old 
country,  and  particularly  from  Scotland,  might  draw  erroneous  con- 
clusions as  to  the  true  relation  existing  between  them  as  a  family, 
by  seeing  men  in  middle  life  zealously  bending  their  energies  under 
the  guidance  of  their  father  to  the  promotion  of  the  success  of  the 
business.  Whoever  should  apply  customs  prevalent  among  native 
Americans  to  this  state  of  facts  would  unhesitatingly  conclude  that 
all  were  in  partnership.  And  so,  no  doubt,  many  were  deceived; 
nor  was  it  deemed  necessary  by  any  of  the  parties,  on  all  occa- 
sions, to  undeceive  them  by  a  full  explanation  of  this  family  arrange- 
ment. 

But  the  question  here  is,  what  was  the  actual  fact?  and  not  what 
observers  supposed  was  the  fact  from  appearances.  It  is  the  internal 
truth  we  are  seeking,  and  these  external  appearances  are  only  impor- 
tant as  they  may  enable  us  to  arrive  at  this  truth ;  and  when  we  so  find 
the  truth  by  indubitable  proof  in  a  different  direction  than  that  indi- 
cated by  these  external  appearances,  then  these  must  go  for  naught. 
Here  we  have  the  positive  testimony  of  every  living  man  whp  has  ^he 
absolute  knowledge  of  the  facts,  including  the  complainant  himself, 
all  testifying  most  unqualifiedly  that  there  was  no  partnership. 

Decree  is  reversed,  and  the  bill  dismissed. 


MEEIIAN   V.   VALENTINE. 

(Supreme  Court  of  the  United  States.  1892.     145  U.  S.  Gil,  12  Sup.  Ct.  972, 

36   L.    Ed.   S35.) 

Statement  by  Mr.  Justice  Gray  : 

This  was  an  action  of  assumpsit  brought  by  Thomas  J.  Meelian.  a 
citizen  of  Marjdand,  against  John  K.  Valentine,  executor  of  William 
G.  Perry,  both  citizens  of  Pennsylvania,  alleging  Perry  to  have  been 
a  partner  with  Lawrence  W.  Counselman  and  Albert  L.  Scott,  under 
the  name  of  L.  W.  Counselman  &  Co.,  and  counting  on  promissory 
notes  of  various  dates  from  August  10,  1883,  to  November  25,  1884, 
signed  by  that  firm,  indorsed  to  the  plaintifif,  and  amountins:  in  all  to 
about  $10,000,  with  interest.  The  defendant  denied  that  Perry  was 
a  partner  in  the  tirm. 


1224  PARTNERSHIP  (Part  5 

At  the  trial,  the  plaintiff  put  in  evidence  the  following  agreement : 
'%.  W.  Counselman.  Albert  L.  Scott,  Office  of  L.  W.  Counselman  & 
Co.,  Oyster  and  Fruit  Packers,  corner  Philpot  and  Will  streets.  Bal- 
timore, Md.,  March  15,  1880.  For  and  in  consideration  of  loans 
made  and  to  be  made  to  us  by  Wm.  G.  Perry,  of  Philadelphia,  amount- 
ing in  all  to  the  sum  of  ten  thousand  dollars,  for  the  term  of  one  year 
from  the  date  of  said  loans,  we  agree  to  pay  to  said  Wm.  G.  Perry, 
in  addition  to  the  interest  thereon,  one  tenth  of  the  net  profits  over 
and  above  the  sum  of  ten  thousand  dollars  on  our  business  for  the 
year  commencing  May  1,  1880,  and  ending  May  1,  1881 — i.  e.,  if  our 
net  profits  for  said  year's  business  exceed  the  sum  of  ten  thousand 
dollars,  then  we  are  to  pay  to  said  W.  G.  Perry  one  tenth  of  said  ex- 
cess of  profits  over  and  above  the  said  sum  of  ten  thousand  dollars ; 
and  it  is  further  agreed  that  if  our  net  profits  do  not  exceed  the  sum 
of  ten  thousand  dollars,  then  he  is  not  to  be  paid  more  than  the  in- 
terest on  said  loan,  the  same  being  added  to  notes  at  the  time  they  are 
given,  which  are  to  date  from  the  time  of  said  loans,  and  payable  one 
year  from  date.    L.  W.  Counselman  &  Co."    *     *    * 

The  plaintiff  also  called  Scott  as  a  witness,  who  testified  that  the  firm 
was  composed  of  L.  W.  Counselman  and  himself ;  that  it  was  en- 
gaged in  "the  fruit  and  vegetable  packing  and  oyster  business"  in  Bal- 
timore ;  that  Perry  was  in  the  stationery  business  in  Philadelphia ; 
that  the  $10,000  mentioned  in  the  agreem.ent  was  paid  by  him  to  the 
firm,  receiving  their  notes  for  it,  and  remained  in  the  business  through- 
out, no  part  of  it  having  been  repaid;  that  from  time  to  time  he  lent 
other  sums  to  the  firm,  which  were  repaid ;  that  he  was  an  intimate 
friend  of  the  witness,  and  visited  him  every  few  weeks ;  that  these 
visits  were  not  specially  connected  with  the  business,  though  on  such 
occasions  Perry  "usually  went  down  to  the  place  of  business  and  talked 
business ;"  that  he  annually  asked  and  received  from  the  firm  ac- 
counts of  profit  and  loss ;  that  the  accounts  showed  an  annual  profit, 
which  varied  from  year  to  year,  amounting  for  the  second  year  to  $11,- 
000  or  $12,000;  that,  it  being  then  found  difficult  to  tell  at  the  end  of 
the  year  exactly  what  the  profits  would  be,  it  was  agreed  with  Perry 
that  he  should  thenceforth  receive  $1,000  each  year,  leaving  the  final 
settlement  until  the  whole  business  was  settled  up ;  and  that  he  re- 
ceived under  the  agreement  about  $1,500  the  first  year,  and  $1,000 
each  subsequent  year.  On  cross-examination,  the  witness  stated  that 
the  firm  made  an  assignment  to  the  plaintiff'  for  the  benefit  of  creditors 
on  April  30,  1885 ;  that  their  liabilities  were  from  $60,000  to  $70,000, 
about  half  of  which  was  with  collateral  security,  and  he  did  not  know 
whether  it  had  been  paid  out  of  such  security ;  that  the  assets  re- 
alized less  than  $2,000;  that  so  far  as  he  knew,  no  dividend  had  been 
paid ;  and,  in  regard  to  the  $10,000  received  from  Perry,  the  witness 
testified  as  follows :  "Question.  Mr.  Counselman  and  yourself  did  owe 
this  $10,000  to  the  estate  of  Mr.  Perry,  did  you?  Answer.  They  had 
my  notes  for  it.  Q.  Did  you  or  did  you  not  owe  it  ?  A.  It  was  capital 
he  had  in  the  business  the  same  as  ours.  We  owed  it  to  him.  Of 
course,  we  owed  it  to  him  if  we  did  not  lose  it." 

At  the  close  of  the  plaintiff's  evidence,  the  defendant  moved  for  a 
nonsuit,  on  the  ground  that  there  was  no  evidence  to  show  that  Perry 
was  liable  as  a  partner.  The  court  so  ruled,  and  ordered  a  nonsuit. 
*  *  *  The  plaintiff' duly  excepted  to  the  ruling,  and  sued  out  this  wri<- 
of  error. 


Ch.  1)  WHAT   CONSTITUTES  A   PARTXERSHIP  1225 

Gray,  J.  *  ■*  *  Some  of  the  principles  applicable  to  the  ques- 
tion of  the  liability  of  a  partner  to  third  persons  were  stated  by  Chief 
Justice  Marshall  in  a  general  way,  as  follows :  "The  power  of  an 
agent  is  limited  by  the  authority  given  him ;  and,  if  he  transcends 
that  autlxority,  the  act  cannot  affect  his  principal ;  he  acts  no  longer 
as  an  agent.  The  same  principle  applies  to  partners.  One  binds  the 
others  so  far  only  as  he  is  the  agent  of  the  others."  "A  man  who  shares 
in  the  profit,  although  his  name  may  not  be  in  the  firm,  is  responsible 
for  all  its  debts."  "Stipulations  [restricting  the  powers  of  partners] 
may  bind  the  partners,  but  ought  not  to  affect  those  to  whom  they  are 
vmknown,  and  who  trust  to  the  general  and  well-established  commer- 
cial law."    Winship  V.  Bank,  5  Pet.  529,  561,  562,  8  L.  Ed.  216.    *    *    * 

How  far  sharing  in  the  profits  of  a  partnership  shall  make  one  liable 
as  a  partner  has  been  a  subject  of  much  judicial  discussion,  and  the 
various  definitions  have  been  approximate  rather  than  exhaustive. 

The  rule  formerly  laid  down,  and  long  acted  on  iis  established,  was 
that  a  man  who  received  a  certain  share  of  the  profits  as  profits,  with 
a  lien  on  the  whole  profits  as  security  for  his  share,  was  liable  as  a 
partner  for  the  debts  of  the  partnership,  even  if  it  had  been  stipulated 
between  him  and  his  copartners  that  he  should  not  be  so  liable ;  but 
that  merely  receiving  compensation  for  labor  or  services,  estimated 
by  a  certain  proportion  of  the  profits,  did  not  render  one  liable  as  a 
partner.  Story,  Partn.  c.  4.  *  *  *  The  test  was  often  stated  to  be 
whether  the  person  sought  to  be  charged  as  a  partner  took  part  of  the 
profits  as  a  principal,  or  only  as  an  agent.    *    *    * 

Accordingly,  this  court,  at  December  term,  1860,  decided  that  a  per- 
son employed  to  sell  goods  under  an  agreement  that  he  should  re- 
ceive half  the  profits,  and  that  they  should  not  be  less  than  a  certain 
sum,  was  not  a  partner  with  his  employer.  "Actual  participation  in 
the  profits  as  principal,"  said  Mr.  Justice  Clifford  in  delivering  judg- 
ment, "creates  a  partnership  as  between  the  parties  and  third  persons, 
whatever  may  be  their  intentions  in  that  behalf,  and  notwithstanding 
the  dormant  partner  was  not  expected  to  participate  in  the  loss  be- 
yond the  amount  of  the  profits,"  or  "may  have  expressly  stipulated  with 
his  associates  against  all  the  usual  incidents  to  that  relation.  That  rule, 
however,  has  no  application  whatever  to  a  case  of  service  or  special 
agency,  where  the  employee  has  no  power  as  a  partner  in  the  firm  and  no 
interest  in  the  profits,  as  property,  but  is  simply  employed  as  a  servant 
or  special  agent,  and  is  to  receive  a  given  sum  out  of  the  profits,  or 
a  proportion  of  the  same,  as  a  compensation  for  his  services."  Bert- 
hold  v.  Goldsmith,  24  How.  536,  542,  543,  16  L.  Ed.  762.    *    *    * 

Mr.  Justice  Story,  at  the  beginning  of  his  Commentaries  on  Partner- 
ship, first  published  in  1841,  said:  "Every  partner  is  an  agent  of  the 
partnership ;  and  his  rights,  powers,  duties,  and  obligations  are  in 
many  respects  governed  by  the  same  rules  and  principles  as  those  of  an 
agent.  A  partner,  indeed,  virtually  embraces  the  character  both  of  a 
principal  and  of  an  agent.  So  far  as  he  acts  for  himself  and  his  own 
interest  in  the  common  concerns  of  the  partnership,  he  may  properly  be 
deemed  a  principal ;  and  so  far  as  he  acts  for  his  partners,  he  may 
as  properly  be  deemed  an  agent.  The  principal  distinction  between  him 
and  a  mere  agent  is  that  he  has  a  community  of  interest  with  the  other 
partners  in  the  whole  property  and  business  and  responsibilities  of  the 
partnership;    whereas   an  agent,  as  such,  has  no  interest  in  either. 

4c       *        ;):  )> 


1226  PARTNERSHIP  (Part  5 

Afterwards,  in  discussing  the  reasons  and  limits  of  the  rule  by  which 
one  may  be  charged  as  a  partner  by  reason  of  having  received  part  of 
the  profits  of  the  partnership,  Mr.  Justice  Story  observed  that  the 
rule  was  justified,  and  the  cases  in  which  it  had  been  applied  reconciled, 
by  considering  that  "a  participation  in  the  profits  will  ordinarily  estab- 
lish the  existence  of  a  partnership  between  the  parties  in  favor  of  third 
persons,  in  the  absence  of  all  other  opposing  circumstances,"  but  that 
it  is  not  "to  be  regarded  as  anything  niore  than  mere  presumptive  proof 
thereof,  and  therefore  liable  to  be  repelled  and  overcome  by  other 
circumstances,  and  not  as  of  itself  overcoming  or  controlling  them,' 
and  therefore  that,  "if  the  participation  in  the  profits  can  be  clearly 
shown  to  be  in  the  character  of  agent,  then  the  presumption  of  partner- 
ship is  repelled."  And  again :  "The  true  rule,  ex  aequo  et  bono,  would 
seem  to  be  that  the  agreement  and  intention  of  the  parties  themselves 
should  govern  all  the  cases.  If  they  intended  a  partnership  in  the 
capital  stock,  or  in  the  profits,  or  in  both,  then  that  the  same  rule  should 
apply  in  favor  of  third  persons,  even  if  the  agreement  were  unknown 
to  them.  And  on  the  other  hand,  if  no  such  partnership  were  intend- 
ed between  the  parties,  then  that  there  should  be  none  as  to  third  per- 
sons, unless  where  the  parties  had  held  themselves  out  as  partners  to 
the  public,  or  their  conduct  operated  as  a  fraud  or  deceit  upon  third 
persons."     Story,  Partn.  §§  1,  38,  49. 

Baron  Parke  (afterwards  Lord  Wensleydale)  appears  to  have  taken 
much  the  same  view  of  the  subject  as  Mr.  Justice  Story.  Both  in  the 
Court  of  Exchequer  and  in  the  House  of  Lords  he  was  wont  to  treat 
the  liability  of  one  sought  to  be  charged  as  a  dormant  partner  for  the 
acts  of  the  active  partners  as  depending  on  the  law  of  principal  and 
agent.    Beckham  v.  Drake  (1841)  9  Mees.  &  W.  79,  98.    *    *    * 

In  Cox  V.  Hickman,  8  H.  L.  Cas.  268,  two  merchants  and  copartners, 
becoming  embarrassed  in  their  circumstances,  assigned  all  their  prop- 
erty to  trustees,  empowering  them  to  carry  on  the  busmess,  and  to  di- 
vide the  net  income  ratably  among  their  creditors  (all  of  whom  be- 
came parties  to  the  deed)  and  to  pay  any  residue  to  the  debtors,  the 
majority  of  the  creditors  being  authorized  to  make  rules  for  conduct- 
ing the  business  or  to  put  an  end  to  it  altogether.  The  House  of  Lords, 
differing  from  the  majority  of  the  judges  who  delivered  opinions 
at  various  stages  of  the  case,  held  that  the  creditors  were  not  liable  as 
partners  for  debts  incurred  by  the  trustees  in  carrying  on  the  business 
under  the  assignment.  The  decision  was  put  upon  the  ground  that 
the  liability  of  one  partner  for  the  acts  of  his  copartner  is  in  truth 
the  Hability  of  a  principal  for  the  acts  of  his  agent;  that  a  right  to 
participate  in  the  profits,  though  cogent,  is  not  conclusive,  evidence 
that  the  business  is  carried  on  in  part  for  the  person  receiving  them ; 
and  that  the  test  of  his  liability  as  a  partner  is  whether  he  has  author- 
ized the  managers  of  the  business  to  carry  it  on  in  his  behalf.    *    *    * 

This  new  form  of  stating  the  general  rule  did  not  at  first  prove 
easier  of  application  than  the  old  one ;  for  in  the  first  case  which  arose 
afterwards  one  judge  of  three  dissented  (Kilshaw  v.  Jukes,  3  Best. 
&  S.  847),  and  in  the  next  case  the  unanimous  judgment  of  four  judges 
in  the  common  bench  was  reversed  by  four  judges  against  two  in  the 
Exchequer  Chamber,  Bullen  v.  Sharp,  18  C.  B.  (N.  S.)  614,  and  L. 
R.  1  C.  P.  86.  And,  as  has  been  pointed  out  in  later  English  cases, 
the  reference  to  agency  as  a  test  of  partnership  was  unfortunate  and 
inconclusive,  inasmuch  as  agency  results  from  partnership  rather  than 


Ch.  1)  WHAT   CONSTITUTES   A    rAUTXHUSIIIP  1227 

partnership  from  agency.  *  *  *  Such  a  test  seems  to  give  a  syno- 
nym, rather  than  a  definition ;  another  name  for  the  conclusion,  rather 
than  a  statement  of  the  premises  from  which  the  conclusion  is  to  be 
drawn.  To  say  that  a  person  is  liable  as  a  partner,  who  stands  in  the 
relation  of  principal  to  those  by  whom  the  business  is  actually  carried 
on,  adds  nothing  by  way  of  precision,  for  the  very  idea  of  partnership 
includes  the  relation  of  principal  and  agent.    *     *    * 

In  other  respects,  however,  the  rule  laid  down  in  Cox  v.  Hickman 
has  been  unhesitatingly  accepted  in  England,  as  explaining  and  modi- 
fying the  earlier  rule.    *    *    * 

In  the  present  state  of  the  law  upon  this  subject,  it  may  perhaps  be 
doubted  whether  any  more  precise  general  rule  can  be  laid  down  than, 
as  indicated  at  the  beginning  of  this  opinion,  that  those  persons  are 
partners  who  contribute  either  property  or  services  to  carry  on  a  joint 
business  for  their  common  benefit,  and  who  own  and  share  the  profits 
thereof  in  certain  proportions.  If  they  do  this,  the  incidents  or  conse- 
quences follow  that  the  acts  of  one  in  conducting  the  partnership 
business  are  the  acts  of  all ;  that  each  is  agent  for  the  -firm  and  for  the 
other  partners ;  that  each  receives  part  of  the  profits  as  profits,  and 
takes  part  of  the  fund  to  w^hich  the  creditors  of  the  partnership  have  a 
right  to  look  for  the  payment  of  their  debts ;  that  all  are  liable  as  part- 
ners upon  contracts  made  by  any  of  them  with  third  persons  within  the 
scope  of  the  partnership  business ;  and  that  even  an  express  stipula- 
tion between  them  that  one  shall  not  be  so  liable,  though  good  between 
themselves,  is  ineffectual  as  against  third  persons.  And  participating 
in  profits  is  presumptive,  but  not  conclusive,  evidence  of  pai-tnership. 

In  whatever  form  the  rule  is  expressed,  it  is  universally  held  that 
an  agent  or  servant,  whose  compensation  is  measured  by  a  certain 
proportion  of  the  profits  of  the  partnership  business,  is  not  thereby 
made  a  partner,  in  any  sense.  So  an  agreement  that  the  lessor  of  a 
hotel  shall  receive  a  certain  portion  of  the  profits  thereof  by  way  of 
rent  does  not  make  him  a  partner  with  the  lessee.  *  '^'  *  And  it  is 
now  equally  well  settled  that  the  receiving  of  part  of  the  profits  of  a 
commercial  partnership,  in  lieu  of  or  in  addition  to  interest,  by  way 
of  compensation  for  a  loan  of  money,  has  of  itself  no  greater  effect. 

:;;        *        ^ 

In  some  of  the  cases  most  relied  on  by  the  plaintiff,  the  person  held 
liable  as  a  partner  furnished  the  whole  capital  on  which  the  business 
was  carried  on  by  another,  or  else  contributed  part  of  the  capital  and 
took  an  active  part  in  the  management  of  the  business.  *  *  *  And 
in  Mollwo  v.  Court  of  Wards,  *  *  '  *  after  speaking  of  a  contract  ot 
loan  and  security,  in  which  no  partnership  was  intended,  it  was  justly 
observed:  "If  cases  should  occur  where  any  persons,  under  the  guise 
of  such  an  arrangement,  are  really  trading  as  principals,  and  putting 
forward,  as  ostensible  traders,  others  who  are  really  their  agents,  they 
m.ust  not  hope  by  such  devices  to  escape  liability ;  for  the  law,  in 
cases  of  this  kind,  will  look  at  the  body  and  substance  of  the  arrange- 
ments, and  fasten  responsibility  on  the  parties  according  to  their  true 
and  real  character."  L,.  R.  4  P.  C.  438.  But  in  the  case  at  bar  no  such 
element  is  found. 

Throughout  the  original  agreement,  and  the  renewals  thereof,  the 
sum  of  $10,000  paid  by  Perry  to  the  partnership,  and  for  which  they 
gave  him  their  promissory  notes,  is  spoken  of  as  a  loan,  for  which  the 
partnership  was  to  pay  him  legal  interest  at  all  events,  and  also  pay 


1228  PARTNERSHIP  (Part  5 

him  one  tenth  of  the  net  yearly  profits  of  the  partnership  business,  if 
those  profits  should  exceed  the  sum  of  $10,000.  The  manifest  inten- 
tion of  the  parties,  as  apparent  upon  the  face  of  the  agreements,  was 
to  create  the  relation  of  debtor  and  creditor,  and  not  that  of  partners. 
Perry's  demanding  and  receiving  accounts  and  payments  yearly  was 
in  accordance  with  his  right  as  a  creditor.  There  is  nothing  in  the 
agreement  itself,  or  in  the  conduct  of  the  parties,  to  show  that  he  as- 
sumed any  other  relation.  He  never  exercised  any  control  over  the 
business.  The  legal  effect  of  the  instrument  could  not  be  controlled 
by  the  testimony  of  one  of  the  partners  to  his  opinion  that  "it  was 
capital  he  had  in  the  business  the  same  as  ours ;  we  owed  it  to  him ;  of 
course,  we  owed  it  to  him  if  we  did  not  lose  it." 

Upon  the  whole  evidence,  a  jury  would  not  be  justified  in  inferring, 
on  the  part  of  Perry,  either  "actual  participation  in  the  profits  as 
principal,"  within  the  rule  as  laid  down  by  this  court  in  Berthold  v. 
Goldsmith,  or  that  he  authorized  the  business  to  be  carried  on  in  part 
for  him  or  on  his  behalf,  within  the  rule  as  stated  in  Cox  v.  Hickman 
and  the  later  English  cases.  There  being  no  partnership,  in  any  sense, 
and  Perry  never  having  held  himself  out  as  a  partner  to  the  plaintiff 
or  to  those  under  whom  he  claimed,  the  circuit  court  rightly  ruled  that 
the  action  could  not  be  maintained.     *     *     * 

Judgment  affirmed. 


SECTION  2.— PARTNERSHIP  BY  ESTOPPEL 

Uniform  Partnership  Act,  Section  16.  (1)  When  a  person,  by 
words  spoken  or  written  or  by  conduct,  represents  himself,  or 
consents  to  another  representing  him  to  any  one,  as  a  partner  in 
an  existing  partnership  or  with  one  or  more  persons  not  actual 
partners,  he  is  liable  to  any  such  person  to  whom  such  representa- 
tion has  been  made,  who  has,  on  the  faith  of  such  representation, 
given  credit  to  the  actual  or  apparent  partnership,  and  if  he  has 
made  such  representation  or  consented  to  its  being  made  in  a 
public  manner  he  is  liable  to  such  person,  whether  the  representa- 
tion has  or  has  not  been  made  or  communicated  to  such  person  so 
giving  credit  by  or  with  the  knowledge  of  the  apparent  partner 
making  the  representation  or  consenting  to  its  being  made,  (a) 
When  a  partnership  liability  results  he  is  liable  as  though  he  were 
an  actual  member  of  the  partnership,  (b)  When  no  partnership 
liability  results,  he  is  liable  jointly  with  the  other  persons,  if  any, 
so  consenting  to  the  contract  or  representation  as  to  incur  liability, 
otherwise  separately.* 

i  Lewis'  'Note  to  Section  16  (lb). — The  section  clears  several  doubts  and 
confusions  of  our  existing  case  law.  It  has  been  held  that  a  person  is  liable, 
if  he  has  been  held  out  as  a  partner  and  knows  that  he  is  being  held  out, 
unless  he  prevents  such  holding  out,  even  if  to  do  so  he  has  to  take  legal 
action.  Fletcher  v.  Pullen,  70  Md.  205,  16  Atl.  887,  14  Am.  St.  Rep.  .3.55  (1889) ; 
Tanner  &  De  Laney  Engine  Co.  v.  Hall,  86  Ala.  305,  5  South.  584  (1888) ; 
Rittenhouse  v.  Leigh,  57  Miss.  €97  (ISSO) ;  Speer  v.  Bishop,  24  Ohio  St.  598 
(1874) ;  Prof.  Burdick,  in  30  Cyc.  393.  On  the  other  hand,  the  weight  of 
authority  is  to  the  effect  that  to  be  held  as  a  partner  he  must  consent  to 
the  holding  and  that  consent  is  a  matter  of  fact.  The  act  as  drafted  follows 
this  weight  of  authority  and  better  reasoning.     Morgan  v.  Farrel,  58  Conn. 


Ch,  1)  WFIAT  CONSTITUTES   A  PARTNERSHIP  1229 

(2)  When  a  person  has  been  thus  represented  to  be  a  partner  in 
an  existing  partnership,  or  with  one  or  more  persons  not  actual 
partners,  he  is  an  agent  of  the  persons  consenting  to  such  represen- 
tation to  bind  them  to  the  same  extent  and  in  the  same  manner  as 
though  he  were  a  partner  in  fact,  with  respect  to  persons  who 
rely  upon  the  representation.  Where  all  the  members  of  the  ex- 
isting partnership  consent  to  the  representation,  a  partnership  act 
or  obligation  results;  but  in  all  other  cases  it  is  the  joint  act 
or  obligation  of  the  person  acting  and  the  persons  consenting  to 
the  representation. 

THOMPSON  V.  FIRST  NAT.   BANK  OF  TOLEDO. 

(Supreme  Court  of  the  United  States,  1884.    Ill  U.  S.  529,  4  Sup.  Ct.  689, 

28   L.   Ed.   507.) 

Gray,  J,  *  *  *  'j^j^g  remaining  and  the  principal  question  in 
the  case  is  whether  the  liability  of  Thompson,  by  reason  of  having 
held  himself  out  as  a  partner,  was  submitted  to  the  jury  under  proper 
instructions. 

The  court  was  requested  to  instruct  the  jury  that  if  Thompson  was 
not  in  fact  a  member  of  the  partnership,  the  plahitiff  could  not  recov- 
er against  him,  unless  it  appeared  from  the  testimony  that  he  had 
knowingly  permitted  himself  to  be  held  out  as  a  partner,  and  that  the 
plaintiff  had  knowledge  thereof  during  its  transaction  with  the  part- 
nership. The  court  declined  to  give  this  instruction,  and  instead 
thereof  instructed  the  jury,  in  substance,  that  if  Thompson  permitted 
himself  to  be  held  out  to  the  world  as  a  partner,  by  advertisements 
and  otherwise,  as  shown  by  the  evidence,  and  to  be  introduced  to  oth- 
er persons  as  a  partner,  the  plaintiff  was  entitled  to  the  benefit  of  the 
fact  that  he  was  so  held  out,  and  he  was  estopped  to  deny  his  liabiUty 
as  a  partner,  although  the  plaintiff'  did  not  know  that  he  was  so  held 
out,  and  did  not  rely  on  him  for  the  payment  of  the  plaintiff's  debt,  or 
give  credit  to  him,  in  whole  or  in  part.  This  court  is  of  opinion  that 
the  circuit  court  erred  in  the  instructions  to  the  jury,  and  in  the  re- 
fusal to  give  the  instruction  requested. 

A  person  who  is  not  in  fact  a  partner,  who  has  no  interest  in  the 
business  of  the  partnership  and  does  not  share  in  its  profits,  and  is 
sought  to  be  charged  for  its  debts  because  of  having  held  himself  out, 
or  permitted  himself  to  be  held  out,  as  a  partner,  cannot  be  made  lia- 
ble upon  contracts  of  the  partnership  except  with  those  who  have  con- 
tracted with  the  partnership  upon  the  faith  of  such  holding  out.  In 
such  a  case,  the  only  ground  of  charging  him  as  a  partner  is  that,  by 
his  conduct  in  holding  himself  out  as  a  partner,  he  has  induced  per- 
sons dealing  with  the  partnership  to  believe  him  to  be  a  partner,  and, 
by  reason  of  such  belief,  to  give  credit  to  the  partnership.  As  his  lia- 
bility rests  solely  upon  the  ground  that  he  cannot  be  permitted  to  deny 
a  participation  which,  though  not  existing  in  fact,  he  has  asserted,  or 
permitted  to  appear  to  exist,  there  is  no  reason  why  a  creditor  of  the 
partnership,  who  has  neither  known  of  nor  acted  upon  the  assertion 

413,  20  Atl.  614,  18  Am.  St.  Rep.  282  (1890) ;  Bishop  v.  Georgeson,  60  111.  484 
(1871);  Thompson  v.  First  Nat.  Bank,  111  U.  S.  529,  4  Sup.  Ct.  689,  28  L. 
Ed.  507  (1884) ;  Fisher  v.  A.  Y.  McDonald  Co..  85  111.  App.  653  (1899) ;  Ihmsen 
V.  Lathrop,  104  Pa.  365  (1883) ;    Wood's  Collver,  75,  note. 


1230  PARTNEHSiiiP  (Parts 

or  permission,  should  hold  as  a  partner  one  who  never  was  in  fact, 
and  whom  he  never  understood  or  supposed  to  be,  a  partner,  at  the 
time  of  dealing  with  and  giving  credit  to  the  partnership.  There  may 
be  cases  in  which  the  holding  out  has  been  so  public  and  so  long  con- 
tinued that  the  jury  may  infer  that  one  dealing  with  the  partnership 
knew  it  and  relied  upon  it,  without  direct  testimony  to  that  effect. 
But  the  question  whether  the  plaintiff  was  induced  to  change  his  po- 
sition by  acts  done  by  the  defendant  or  by  his  authority  is,  as  in  other 
cases  of  estoppel  in  pais,  a  question  of  fact  for  the  jury,  and  not  of 
law  for  the  court.  The  nature  and  amount  of  evidence  requisite  to 
satisfy  the  jury  may  vary  according  to  circumstances.  But  the  rule 
of  law  is  always  the  same:  that  one  who  had  no  knowledge  or  belief 
that  the  defendant  was  held  out  as  a  partner,  and  did  nothing  on  the 
faith  of  such  a  knowledge  or  belief,  cannot  charge  him  with  liability 
as  a  partner  if  he  was  not  a  partner  in  fact.     *     '•"'     * 

The  result  is  that  both,  upon  principle  and  upon  authority,  the  third 
and  fourth  assignments  of  error,  as  well  as  the  first,  must  be  sustained, 
the  judgment  of  the  circuit  court  reversed,  and  the  case  remanded 
to  that  court  with  directions  to  order  a  new  trial. 


SECTION  3.— PARTNERSHIP   BY   OPERATION   OF   LAW 
AS  TO  THIRD  PERSONS 

Uniform  Partnership  Act,  Section  7.  (1)  Except  as  provided 
by  section  16,  persons  who  are  not  partners  as  to  each  other  are 
not  partners  as  to  third  persons. 

As  appears  from  the  following  case,  the  English  courts  once 
held  that  the  fact  of  sharing  in  the  profits  of  a  business  established 
a  partnership  liability  upon  such  person  as  to  third  persons  by 
operation  of  law.  This  rule  was  not  based  upon  estoppel.  This 
rule  proceeds  upon  the  theory  that  the  fact  of  sharing  in  the  profits 
was  something  more  than  evidence  of  intention  to  create  a  partner- 
ship. It  was  conclusive  proof  of  a  pertnership  as  to  third  parties. 
This  rule  was  later  overthrown  by  the  English  courts.  Except  in 
a  few  cases,  the  earlier  English  rule  has  never  been  adopted  in  the 
United  States.  The  Uniform  Partnership  Act  adopts  the  majority 
rule.  Under  section  7  (1)  there  can  be  no  partnership  as  regards 
third  persons  except  as  the  result  of  the  application  of  the  doc- 
trine of  estoppel.  The  sharing  of  profits  is  made  but  prima  facie 
evidences  of  a  true  partnership.     Section  7   (4)   provides : 

The  receipt  by  a  person  of  a  share  of  the  profits  of  a  business 
is  prima  facie  evidence  that  he  is  a  partner  in  the  business,  but  no 
such  inference  shall  be  drawn  if  such  profits  were  received  in 
payment:  (a)  As  a  debt  by  installments  or  otherwise;  (b)  as 
wages  of  an  employee  or  rent  to  a  landlord;  (c)  as  an  annuity 
to  a  widow  or  representative  of  a  deceased  partner ;  (d)  as  interest 
on  a  loan ;  though  the  amount  of  payment  vary  with  the  profits 
of  the  business;  (e)  as  the  consideration  for  the  sale  of  the  good 
will  of  a  business  or  other  property  by  installments  or  otherwise. 


Ch.  1)  WHAT   CONSTITUTES  A  PARTNERSHIP  1231 

HARVEY  V.  CHILDS  et  al. 

fSuprciiie  rouit  of  Ohio,  1876.'    28  Ohio  St.  319,  22  Am.  Rep.  387.) 

Day,  J.  The  original  action  was  brought  by  Harvey  against  Childs 
and  Potter,  to  recover  $158.40,  for  seventeen  hogs  sold  by  Harvey 
to  Potter. 

Potter  is  in  default.  Childs  denies  his  liability.  His  liability  is 
claimed  solely  on  the  ground  that  he  was  a  partner  of  Potter  in  the 
adventure   for  which  the  hogs  were  purchased. 

The  partnership  claimed  rests  on  the  following  state  of  facts:  Pot- 
ter went  to  Childs,  and  told  him  that  he  had  contracted  for  about  two 
car  loads  of  hogs,  to  be  delivered  at  Loudonville  the  next  day,  and 
had  not  the  money  to  pay  for  them.  He  asked  Childs  to  advance  the 
money  and  take  an  interest  in  the  hogs.  Childs  refused.  Thereupon 
Potter  proposed  that  if  he  would  let  him  have  the  money  to  enable 
him  to  pay  for  the  hogs  he  had  bought,  and  others  he  might  have  to 
buy  to  make  the  two  car  loads,  he  (Childs)  should  take  possession  of 
the  hogs  when  carried  at  Loudonville,  as  security  for  the  money,  take 
them  to  Pittsburgh,  sell  them,  and  take  his  pay  from  the  proceeds  of 
the  sale;  that  he  might  have  one  half  the  net  profits  of  the  adventure 
and  that  in  no  event  should  Childs  sustain  any  loss,  but  the  money 
advanced  by  him  should  be  fully  paid  by  Potter  in  case  the  amount 
realized  from  the  sale  of  the  hogs  was  insufficient.  Childs  accepted 
the  proposition,  and,  it  being  agreed  that  $2,500  would  be  enough  to 
pay  for  the  two  car  loads,  he  advanced  that  sum  to  Potter.  After- 
ward, without  the  knowledge  of  Childs,  Potter  bought  the  hogs  in 
question  of  Harvey,  on  his  own  credit,  and  they  made  part  of  the  two 
car  loads  of  hogs  which  were  taken  possession  of  by  Childs,  sold  in 
Pittsburgh,  and  the  avails  of  the  sale  were  appropriated  in  payment 
of  the  money  advanced  by  him.  No  profits  were  made.  The  avails 
of  the  sale  were  insufficient  to  pay  the  amount  advanced  by  Childs, 
and  Potter  advanced  him  the  deficiency,  and  for  time  and  expenses 
in  the  transaction. 

The  question  to  be  considered,  then,  is.  Are  the  defendants,  by  con- 
stniction  of  law,  to  be  regarded  partners  as  to  the  plaintiff,  being  a 
third  person,  in  the  debt  incurred  to  him  by  Potter  in  his  own  name? 

What  shall  be  regarded,  as  to  third  persons,  a  test  of  partnership 
between  parties  who  do  not  consider  themselves  to  be  partners,  and 
who  have  done  nothing  to  estop  them  from  denying  that  they  are 
such,  has  been  much  discussed  by  courts  and  elementary  writers,  and 
the  problem  seems  to  be  one  of  difficult  solution.  It  is  needless  to 
review  here  the  numerous  cases  on  the  subject;  a  statement  of  re- 
sults is  sufficient. 

No  little  difficulty  has  been  experienced  in  determining  the  mean- 
ing and  limits  of  phrases  that  have  been  recognized  as  tests  of  a  part- 
nership in  such  cases,  and  in  their  application  to  the  various  cases 
that  arise. 

The  effort  has  been  to  draw  a  distinct  line  between  cases  where 
one  has  a  community  of  interest  in  the  profits  of  a  business,  as  dis- 
tinguished from  those  where  one  is  entitled  to  receive  a  sum  of  money 
out  of  the  profits  as  a  creditor,  or  a  sum  proportionate  to  a  quantum 
of  profits,  or  a  share  of  the  profits  as  a  compensation  for  services  or 
labor. 


1232  PARTNERSHIP  (Part  5 

Although  a  partnership  may  be  said  to  rest  upon  the  idea  of  a 
communion  of  profits,  nevertheless  the  foundation  of  the  liability  of 
one  partner  for  the  acts  of  another  is  the  relation  they  sustain  to 
each  other,  as  being  each  principal  and  agent.  That  relation,  it  would 
seem,  then,  constitutes  the  true  test  of  a  partnership  liability,  and 
rests  upon  the  just  foundation  that  the  joint  liability  was  incurred  on 
the  express  or  implied  authority  of  the  party  sought  to  be  charged. 

But  if  the  relation  of  principal  and  agent  be  regarded  as  the  test  of 
a  partnership  and  consequent  joint  liability,  the  question  still  remains, 
what  shall  be  deemed  sufficient  evidence  of  that  relation,  or  to  raise 
the  implication  of  authority  to  incur  the  liability  in  question? 

To  this  end  numerous  tests  have  been  supposed  to  exist;  but  the 
best  considered  and  least  objectionable  is  that  of  a  community  of  in- 
terest in  the  profits  of  a  business  or  transaction  as  a  principal  or  pro- 
prietor.    *    *     * 

But  this  test  is  valuable  as  a  rule  chiefly  because  it  evinces  a  re- 
lation between  the  parties,  where  each  may  reasonably  be  presumed 
to  act  for  himself  and  as  agent  for  the  others,  and  to  that  extent  es- 
tablishes the  fact  that  the  liabihty  was  incurred  on  the  authority  of 
all  so  participating  in  the  profits.  Participation  in  the  profits  of  a 
business,  however,  cannot  be  regarded  as  a  rule  so  universal  and 
unrelenting  as  to  be  unjustly  applied  in  a  case  where  a  debt  is  incur- 
red by  one  who  cannot  be  said  to  be  acting,  in  the  particular  transac- 
tion, as  the  agent  or  on  behalf  of  the  party  sought  to  be  charged. 
Therefore,  on  principle,  the  true  test  of  a  partnership,  at  last,  is  left 
to  be  that  of  the  relation  of  the  parties  as  principal  and  agent,  to  be 
proved  by  any  competent  evidence ;  for  when  they  sustained  that 
relation,  a  joint  liability  may  be  said  to  have  been  incurred  by  the  au- 
thority, or  on  behalf  of  each  of  the  parties  so  related.  The  tendency 
of  the  more  modern  authorities,  both  English  and  American  is  to  this 
conclusion. 

The  case  of  Cox  v.  Hickman,  decided  by  the  House  of  Lords  in 
1860.  has  become  a  leading  case  on  that  stibject.  8  House  of  Lords. 
268.  99  E.  C.  L.  47,  11  Eng.  Repr.  431,  19  Eng.  Rul.  Cas.  323.  It  is 
summarized  in  the  subsequent  case  of  Bullen  v.  Sharp,  1  Law  Re- 
porter, 112,  by  Blackburn,  J.,  as  follows:  "I  think  the  ratio  decidendi 
is  that  the  proposition  laid  down  in  Waugh  v.  Carver,  2  H.  Bl.  235, 
126  Eng.  Repr.  525,  viz.  that  a  participation  in  the  profits  of  a  busi- 
ness does  of  itself,  by  operation  of  law,  constitute  a  partnership,  is 
not  a  correct  statement  of  the  law  of  England ;  but  that  the  true 
question  is,  as  stated  by  Lord  Cranworth,  whether  the  trade  is  car- 
ried on  on  behalf  of  the  person  sought  to  be  charged  as  a  partner,  the 
participation  in  the  profits  being  a  most  important  element  in  deter- 
mining the  question,  but  not  being  of  itself  decisive;  the  test  being, 
in  the  language  of  Lord  Wensleydale,  whether  it  is  such  a  participa- 
tion in  the  profits  as  to  constitute  the  relation  of  principal  and  agent 
between  the  person  taking  the  profits  and  those  actually  carrying  on 
the  business."     Addison  on  Contracts,  163. 

These  cases  were  decided  before  the  passage  of  the  act  of  par- 
liament in  relation  to  partnerships.  But,  so  far  as  relates  to  this 
question  in  a  subsequent  case,  Bramwell,  J.,  declared,  in  efTect,  that 
the  act  was  only  declaratory  of  the  common  law,  as  held  in  Cox  v. 
Hickman.     Holme  v.   Hammond,  7  Law,  218-236. 

The  question  was  much  considered  in  Eastman  v.  Clark,  53  N.  H. 


Ch.  1)  WHAT   CONSTITUTES   A   PARTNERSHIP  1233 

276,  16  Am.  Rep.  192,  where  the  authorities  are  fully  collated  and 
ably  reviewed.  The  case  was  decided  in  1872.  The  conclusion  ar- 
rived at  is  stated  by  Smith,  J.,  as  follows :  "The  real  ultimate  ques- 
tion in  all  cases  like  the  present  is  one  of  agency.  Did  the  person 
sought  to  be  charged  stand  in  the  relation  of  principal  to  the  person 
contracting  the  debt?  Participation  in  the  profits  is  not  decisive  of 
the  question,  'except  so  far  as  it  is  evidence  of  the  relation  of  prin- 
cipal and  agent  between  the  persons  taking  the  profits  and  those  ac- 
tually carrying  on  the  business.'  Whether  such  relation  actually  ex- 
isted is  a  question  of  fact.  Upon  the  trial  of  that  question,  proof  of 
a  right  to  participate  in  the  profits  would  be  a  cogent  and  often  prac- 
tically conclusive  piece  of  evidence  to  establish  the  existence  of  that 
relation ;  but  there  is  no  sound  foundation  for  an  arbitrary  rule  of 
law  requiring  courts  or  jurors  to  regard  participation  in  the  profits  as 
a  decisive  test  which  will  in  all  instances  necessitate  the  conclusion 
that  the  participator  is  liable  for  the  debts." 

In  the  absence  of  any  known  stipulation  to  the  contrary,  every  part- 
ner of  a  trading  firm,  within  the  scope  of  the  joint  business,  in  con- 
templation of  law,  is  clothed  with  implied  authority  to  enter  into  sim- 
ple contracts  on  behalf  of  the  firm  in  furtherance  of  the  business  of 
the  partnership,  and  thereby  bind  each  member  of  the  firm.  Where, 
therefore,  as  in  the  case  of  Wood  v.  Vallette,  7  Ohio  St.  172,  and  in 
the  later  case  of  Leggett  v.  Hyde,  58  N.  Y.  272,  17  Am.  Rep.  244, 
money  is  advanced,  to  be  used  in  a  trading  business,  and  returned  in 
a  year  with  a  share  of  the  profits  made  during  that  time,  it  may  be 
implied  that  the  business  was  conducted  on  behalf  and  by  the  author- 
ity of  the  person  advancing  the  money  and  sharing  the  profits,  for 
it  is  to  the  continuing  trade,  in  the  ordinary  way,  that  he  looks  for 
his  profits. 

But  such  cases  are  plainly  distinguishable  from  one  where  monev 
is  advanced,  to  be  embarked  in  a  single  transaction,  where  no  credit  is 
contemplated.  In  such  cases  there  is  no  ground  for  the  implied  au- 
thority to  incur  debts,  such  as  exists  in  regard  to  a  general  trading 
business. 

In  the  case  before  us  it  is  obvious  that  it  was  not  contemplated  in 
the  arrangement  between  Childs  and  Potter  that  any  indebtedness 
should  be  incurred  in  the  purchase  of  hogs  for  the  contemplated  ad- 
venture, to  w^hich  the  whole  business  was  to  be  confined.  There  is, 
then,  no  ground  for  the  implication  of  authority  from  Childs  to  incur 
the  debt  in  question.  On  the  contrary,  such  implication  is  rebutted  by 
the  advancement  of  money  to  pay  for  all  the  hogs  that  were  to  come 
to  his  hands. 

Moreover,  Childs  had  no  legal  interest  in  any  of  the  hogs  until 
they  were  delivered  to  him  at  the  cars,  nor  had  he  any  equitable  in- 
terest in  hogs,  before  such  delivery,  that  were  bought  by  Potter  and 
not  paid  for  by  money  received  from  Childs.  He  had,  then,  no  in- 
terest whatever  in  the  hogs  bought  of  Harvey  on  credit,  when  the 
debt  to  him  was  incurred;  and  Potter,  before  delivery  to  Childs, 
might  have  sold  them  without  being  liable  to  account  to  Childs.  The 
fact  is  apparent  that  it  was  the  understanding  of  the  parties  that  Potter 
had  bought  for  himself,  and,  if  need  be,  was  in  like  manner  to  buy 
enough  more  hogs  to  make  two  carloads ;  and  it  cannot  be  doubted  that, 
until  their  delivery  at  least,  all  the  hogs  belonged  to  Potter  alone,  and 
B,&  B.Bus.Law— 78 


J  234  PARTNERSHIP  (Part  5 

at  most  were  only  regarded  as  his  contribution  to  the  enterprise.  If 
so  regarded,  the  case  is  hke  that  of  Wilson  v.  Whitehead,  10  M.  & 
W.  503,  where  it  was  agreed  between  three  parties  that  one  should 
edit,  another  print,  and  the  other  publish  a  paper,  and  share  equally 
in  the  net  profits.  The  printer  was  to  furnish  the  paper  and  charge 
the  firm  at  cost  prices.  It  was  held  that  the  printer  alone  was  liable 
to  the  person  of  whom  he  bought  the  paper.  Pai-ke,  B.,  said:  "The 
question  is.  Did  the  other  defendants  authorize  Whitehead  to  purchase 
the  paper  on  their  account  or  on  his  own?  It  appears  to  me,  on  the 
true  construction  of  the  contract,  that  the  latter  was  the  case.  When 
the  paper  was  in  his  possession  he  was  at  liberty  to  have  appropri- 
ated it  to  any  other  purpose." 

But  the  truth  is.  Potter  was  the  owner  of  the  hogs  until  they  were 
sold  by  Childs;  for  Childs  declined  to  take  any  interest  in  the  hogs 
other  than  as  security  for  the  money  advanced  by  him  to  Potter. 
Looking  to  the  whole  matter,  it  is  clear  that  the  transaction  was  a  loan 
of  money  by  one  party  to  the  other,  on  the  security  afforded  by  the 
possession  of  the  hogs.  Childs,  therefore,  was  the  mere  pledgee  of  the 
hogs,  with  a  power  of  sale  by  agreement  of  the  parties,  and,  as_  such, 
had  only  special  property  in  the  hogs.  The  general  property  in  the 
hogs,  from  first  to  last,  remained  in  Potter.  He  was  the  owner,  and 
if  they  had  died  on  the  way  to  market  without  the  fault  of  Childs, 
the  loss  would  have  fallen  upon  Potter,  both  by  the  positive  agree- 
ment of  the  parties,  and  the  legal  effect  of  the  transaction  between 
them  as  bailor  and  bailee.  There  was,  then,  strictly  speaking,  no 
mutuality  of  community  of  interest  between  them  in  the  hogs.  Childs 
had  no  interest  in  them  other  than  as  security  for  a  debt,  and  to 
find  in  half  the  profits  of  their  sale  the  measure  of  his  reward  for 
the  use  of  his  money,  to  be  paid  out  of  Potter's  property. 

The  relation  of  the  parties  was  that  of  debtor  and  creditor,  of  bailor 
and  bailee,  and  not  that  of  partners.  They  had  no  mutual  interest  in 
the  hogs  in  common  as  principals  or  proprietors,  nor  was  either  acting 
as  principal  for  himself  and  agent  for  the  other.  If,  however,  that 
relation  could  be  said  to  exist  after  the  hogs  were  delivered  to  Childs, 
there  is  no  ground  for  an  inference  that  the  debt  to  Harvey,  previously 
contracted  by  Potter,'  was  incurred  upon  the  authority  of  Childs.  On 
the  contrary,  the  facts  rebut  any  implication  of  such  authority,  and 
are  consistent  only  with  the  supposition  that  the  debt  was  incurred 
Avithout  authority  from  Childs,  who  was  doubtless  no  less  surprised 
to  learn  of  the  debt  than  Harvey  was,  after  the  failure  of  Potter, 
to  find  the  existence  of  a  rule  of  law  under  which  he  had  unwittingly 
given  credit  to  another  and  responsible  party.  We  may,  in  conclu- 
sion, therefore,  well  adopt  in  this  case  the  language  of  Judge  Story 
(Partnership,  §  36) :  "Now,  it  is  incumbent  upon  those  who  insist  that 
a  partnership  exists  between  the  parties,  as  to  third  persons,  by  mere 
operation  of  law,  in  opposition  to  their  own  intention,  to  establish  that 
in  the  given  case,  under  all  the  circumstances,  there  is  such  a  rule,  and 
that  it  is  strictly  applicable." 

This  disposes  of  the  material  question  made  by  the  record.  The 
court  of  common  pleas  gave  judgment  in  favor  of  the  plaintiff,  against 
both  Childs  and  Potter.  The  district  Court,  on  error  reversed  the 
judgment  as  to  Childs.  It  follows  that  the  judgment  of  the  district 
court  must  be  afifirmed. 
Judgment  accordingly. 


Ch.  1)  WHAT   CONSTITUTES   A   PARTNERSHIP  1235 

SECTION    4.— PARTNERSHIPS    DISTINGUISHED    FROM 
TRUSTS  FOR  BUSINESS  PURPOSES 


SIMSON  et  al.  V.  KLIPSTEIN. 
(United  States  District  Court,  1).  New  Jersey,  1920.     262  Fed.  823.) 

Action  by  Leslie  N.  Simson  and  George  W.  Hunter,  trustees,  against 
Ernest  C.  Klipstein.     On  motion  to  dismiss  for  want  of  jurisdiction. 

Davis,  District  Judge.  Defendant  in  the  above-stated  cause  moved 
to  dismiss  the  same  on  the  ground  that  this  court  is  without  jurisdic- 
tion because  one  of  the  necessary  parties  plaintiff  and  the  defendant 
are  both  citizens  of  the  state  of  New  Jersey.  The  defendant  further 
asks  permission  to  take  testimony  to  establish  the  citizenship  of  the 
said  necessary  party  and  for  an  order  adding  the  name  of  said  party 
plaintiff  to  the  complaint. 

On  March  15,  1916,  the  plaintiffs,  Simson  and  Hunter,  by  an  in- 
strument purporting  to  be  a  declaration  of  trust,  called  "Articles  of 
Association  of  Midvale  Chemical  Works,"  established  a  proposed  trust 
and  constituted  themselves  trustees  thereof.  Their  plan  contemplated 
that,  as  trustees  of  the  Alidvale  Chemical  Works,  the  name  of  the  pro- 
posed trust,  persons  would  give  to  them  money,  in  return  for  which 
they  would  issue  certificates  entitling  the  holders  thereof  to  share  in 
the  profits  resuffing  from  their  management  of  the  enterprise  upon 
which  they  were  to  embark  with  said  money.  The  certificate  holders 
were  the  beneficial  owners  of  the  money  contributed  by  them,  in  that 
they  were  to  share  in  the  profits  earned  and  in  the  final  distribution 
of  the  assets  of  the  association,  in  accordance  with  the  .terms  of  the 
articles  of  association.  According  to  said  terms,  however,  the  legal 
and  equitable  title  to  the  property  is  vested  in  the  said  trustees. 

The  trustees  purchased  at  Elizabeth,  N.  J.,  some  considerable  real 
estate  and  established  and  operated  a  factory  thereon,  wherein  aniline 
oil,  etc.,  was  manufactured.  On  May  31,  1917,  the  "Midvale  Chemical 
Works,  by  George  W.  Hunter.  Leslie  N.'Simson,  trustees,"  entered 
into  an  agreement  with  the  defendant  for  the  sale  to  him  of  said  real 
estate  and  factory  for  the  sum  of  $150,000,  and  also  for  the  personal 
property,  including  the  raw  materials  on  hand,  an  inventory  of  which, 
the  plaintiff's  allege,  showed  it  to  be  worth  about  $45,000  in  addition. 
The  defendant  entered  into  possession  of  the  property,  but  it  devel- 
oped that  the  said  trustees  could  not  give  a  clear  title  to  the  real  estate 
and  the  defendant  refused  to  accept  a  deed  for  the  same.  During  the 
time  title  to  said  real  estate  was  being  determined  by  litigation  in  the 
Court  of  Chancery  of  New  Jersey,  the  defendant'  continued  in  posses- 
sion of  the  property  and  operated  the  factory.  For  his  alleged  failure 
to  pay  for  the  personal  property  and  raw  materials,  for  his  refusal  to 
remove  from  the  premises  at  the  termination  of  the  litigation  in  ac- 
cordance with  the  terms  of  an  agreement  entered  into  while  litigation 
was  going  on,  and  for  damages  alleged  to  have  been  done  to  the  said 
property  while  in  possession  of  defendant,  plaintiffs  brought  this  ac- 
tion against  him  to  recover  the  sum  of  $141,870.78.  The  defendant  is 
before  this  court  on  motions  as  aforesaid. 

Whether  or  not  an  association  is  a  trust  or  partnership  depends  upon 
the  instrument  creating  it.     Real  estate  trusts,  such  as  this  claims  to 


1236  PARTNERSHIP  (Part  5 

be,  have  arisen  principally  in  Massachusetts  and  Missouri.  Upon  a 
careful  examination  of  the  articles  of  association  of  the  Midvale  Chem- 
ical Works  and  of  the  cases  bearing  upon  this  question,  I  am  of  the 
opinion  that  the  Midvale  Chemical  Works  is  a  partnership.  The^  test 
is  the  power  of  control  of  the  management  of  the  association.  If  the 
certificate  holders  have  the  power  of  control,  the  association  is  a  part- 
nership ;  if  they  have  not,  and  the  power  of  control  is  in  the  trustees, 
it  is  a  trust.  "The  distinction,"  said  Judge  Morton,  in  the  case  of 
In  re  Associated  Trust  (D.  C.)  222  Fed.  1012,  "between  the  two  turns 
upon  the  provisions  of  the  trust  agreement  or  declaration.  In  cases 
where  by  the  declaration  of  trust,  the  shareholders  are  given  substantial 
control  of  the  management  of  the  trust  property,  the  trust  is  held  to 
be  a  partnership  ;  in  cases  where  shareholders  have  no  such  control,  the 
trust  is  held,  for  the  purposes  of  taxation,  to  be  of  the  same  sort  as 
the  usual  testamentary  trust,  and  not  to  be  a  partnership."     *     *     * 

In  Williams  v.  Milton,  215  Mass.  1,  102  N.  E.  355,  Judge  Loring, 
in  distinguishing  the  cases,  said  the  difference  "lies  in  the  fact  that  in 
the  former  cases  the  certificate  holders  are  associated  together  by  the 
terms  of  the  'trust'  and  are  the  principals  whose  instructions  are  tobe 
obeyed  by  their  agent,  who  for  their  convenience  holds  the  legal  title 
to  their  property.  The  property  is  their  property.  They  are  the 
masters.  While  in  Mayo  v.  Moritz,  on  the  other  hand,  there  is  no 
association  between  the  certificate  holders.  The  property  is  the  prop- 
erty of  the  trustees,  and  the  trustees  are  the  masters.  All  that  the 
certificate  holders  in  Mayo  v.  Moritz  had  was  a  right  to  have  the 
property  managed  by  the  trustees  for  their  benefit.  They  had  no 
right  to  manage  it  themselves,  nor  to  instruct  the  trustees  how  to  man- 
age it  for  them.  As  was  said  by  C.  Allen,  J.,  in  Mayo  v.  Moritz, 
151  Mass.  481,  484  [24  N.  E.  1083]  :  'The  scrip  holders  are  cestuis 
que  trust,  and  are  entitled  to  their  share  of  the  avails  of  the  property 
when  the  same  is  sold,'  and  that  is  all  to  which  they  were  entitled.  In 
Mayo  V.  Moritz  the  scrip  holders  had  a  common  interest  in  the  trust 
fund  in  the  same  sense  that  the  members  of  a  class  of  life  tenants 
and  the  members  of  a  class  of  remaindermen  (among  whom  the  in- 
come of  a  trust  fund  and  the  corpus  are  to  be  distributed  respectively) 
have  a  common  interest.  But  in  Mayo  v.  Moritz  there  was  no  asso- 
ciation among  the  certificate  holders  just  as  there  is  no  association, 
although  a  common  interest  among  the  life  tenants  or  the  remainder- 
men in  an  ordinary  trust." 

It  was  held  in  New  Jersey  that  the  mere  sharing  in  profits  would 
make  persons  partners  as  to  third  parties,  even  though  there  was 
no  intention  to  become  partners.  *  *  *  Later  this  rule  seems  to 
have  been  modified,^  so  that  profit  sharers  must  have  the  power  of 
control,  in  order  to  constitute  them  partners.  *  *  *  It  is  not 
necessary  that  the  power  of  control  should  be  actually  exercised  for 
partnership  to  exist.  It  is  sufficient  if  the  power  is  given,  though  nev- 
er exercised.  *  *  *  This  would  follow  as  a  necessary  corollary 
from  the  statement  that  whether  or  not  a  partnership  exists,  rather 
than  a  trust,  depends  upon  the  terms  of  the  creative  instrument,  the 
trust  declaration,  for  it  could  not  be  determined  from  the  examination 
of  such  instrument  whether  or  riot  the  power  given  by  it  had  been 
exercised. 

Power  of  control  in  the  case  at  bar  is  given  to  the  certificate  hold- 
ers in  the  articles  of  association.     By  articles  X  and  XI  a  meeting 


Ch.  1)  WHAT  COXSTITUTES  A   PARTNERSHIP  1237 

may  be  called  at  any  time,  and  the  certificate  holders  may  amend  any 
and  all  of  the  articles  of  the  association,  except  in  three  particulars, 
not  essential  to  the  substantial  control  of  the  association  or  the  man- 
agement of  the  property  thereof.  In  article  II  it  is  provided  that : 
"The  trustees  shall  have  the  power  to  contract  and  carry  on  in  the 
name  of  and  for  the  association  any  business  which  could  be  lawfully 
conducted  or  carried  on  by  an  individual,  and,  in  the  conduct  of  such 
business,  may  use  and  invest  any  funds  of  the  association  and  shall 
have  full  general  power  and  authority  to  buy,  sell,  pledge,  mortgage, 
grant,  convey  and  exchange  property  of  every  description,  real,  per- 
sonal or  mixed,"  etc. 

Suppose  at  one  of  their  meetings  provided  for  in  article  XI,  the 
certificate  holders  should  pass  a  resolution  amending  article  II,  line  1, 
by  striking  out  the  word  "trustees"  and  substituting  in  lieu  thereof 
the  words  "certificate  holders,"  the  trustees  would  be  practically  strip- 
ped of  their  control  and  operation  of  the  enterprise. 

In  article  XXI  it  is  provided  that  "the  trust  here  created  shall  ter- 
minate at  the  expiration  of  21  years  after  the  death  of  the  last  survivor 
of  the  above  named  trustees,"  etc.  If  in  one  of  their  said  meetings 
the  certificate  holders  should  pass  a  resolution  amending  the  said 
article,  so  that  the  trust  should  terminate  forthwith,  the  trustees 
would  be  powerless  and  the  trust  would  come  to  an  end.  The  trus- 
tees have  no  vote  in  such  matters,  nor  have  they,  so  far  as  the  facts 
before  me  disclose,  any  capital  of  their  own  in  the  enterprise  to  pro- 
tect. It  is  evident  that  the  power  of  control  of  the  management  is 
in  the  certificate  holders,  and  may  at  any  time  be  exercised  by  them, 
notwithstanding  any  opposition  the  trustees  might  offer.  The  cer- 
tificate holders  are  associated  together  by  the  terms  of  the  creative 
instrument.  The  association  is  therefore  a  partnership,  and  not  a 
trust. 

Does  it  thereupon  follow,  as  contended  by  the  defendant,  that  the 
names  of  the  certificate  holders  should  be  added  as  parties  plaintiff, 
one  of  whom,  it  is  alleged,  is  a  citizen  of  New  Jersey,  which  fact  ousts 
this  court  of  jurisdiction?  It  should  be  noted  that  the  association 
is  a  partnership,  the  certificate  holders  themselves  being  the  part- 
ners, and  not,  as  defendant  seemed  to  think,  partners  with  the  trus- 
tees, who  are  not  certificate  holders.  There  is,  therefore,  no  trust 
here,  and  strictly  speaking  no  trustee.  The  so-called  trustees  repre- 
sent the  certificate  holders.  The  certificate  holders  are  principals, 
and  the  trustees,  the  plaintiffs,  are  their  mere  "managing  agents." 
By  whatever  name,  however,  they  are  designated,^  there  can  be  no 
doubt  that  they  have  full  authority  to  represent  the  certificate  hold- 
ers and  bind  them  in  all  transactions  touching  the  property.  It  will 
be  recalled  that  by  article  II  the  "trustees"  "have  full  general  power 
and  authority  to  buy,  sell,  pledge,  mortgage,  grant,  convey,  and  ex- 
change property  of  every  description,  *  *  *  and  do 'all  things 
necessary  to  the  conduct  of  the  business  which  they  may  undertake." 
It  is  further  provided  in  article  IV  that  "the  trustees  shall  be  deemed 
the  absolute  owners  of  all  the  property  of  the  association  and  both 
the  legal  and  equitable  title  to  all  such  property  shall  be  vested  abso- 
lutely in  them." 

The  defendant  in  all  his  dealing  with  the  plaintiffs,  has  regarded 
and  accepted  them  as  accredited  authoritative  agents  of  the  certificate 
holders,  with  full  power  to  deal  as  they  pleased  with  the  property  con- 


1238  PARTNERSHIP  (Part  5 

tributed  by  said  certificate  holders.  That  the  present  plaintiffs  are 
the  proper' parties  plaintiff  in  a  suit  in  equity  in  New  Jersey  touching 
said  property  was  decided  in  the  case  of  Simson  et  al.  v.  Klipstein, 
88  N.  J.  Eq^  229,  102  Atl.  242.  The  parties  plaintiff  and  defendant 
were  the  same  in  that  case  as  in  the  instant  case  and  the  same  ques- 
tions which  are  raised  here  as  to  proper  parties  were  raised  there, 
and  decided  against  the  defendant.  In  view  of  the  powers  conferred 
upon  the  so-called  trustees  or  "managing  agents"  by  the  articles  of 
the  association,  the  recognition  by  the  defendant  of  their  full  and  un- 
questioned authority  of  the  association, 'and  the  decision  of  the  Court 
of  Chancery  of  New  Jersey  holding  that  the  plaintiffs  are  the  proper 
parties  plaintiff  in  a  suit  touching  said  property,  I  am  of  the  opin- 
ion that  Simson  and  Hunter  are  proper  parties  plaintiff,  and  have 
full  power  and  authority  to  represent  the  certificate  holders  in  this  pro- 
ceeding.    *     *     * 

The  defendant  may  have  20  days,  after  the  entry  of  order,  within 
which  to  answer. 


WILLIAMS  et  al.  v.  IXKABITAXTS  OF  MILTON. 
(Supreme  Judicial  Court  of  Massachusetts,  1913.    215  Mass.  1,  102  N.  E.  355.) 

LoRiNG,  J.  These  are  four  petitions  for  the  abatement  of  taxes 
assessed  upon  the  plaintiffs  as  trustees  of  the  Boston  Personal  Prop- 
erty Trust.  The  Boston  taxes  were  assessed  on  the  theory  that  the 
property  held  by  the  plaintiffs  under  that  trust  was  partnership  prop- 
erty to  be  assessed  under  St.  1909,  c.  490,  pt.  1,  §  27,  in  Boston  where 
the  partnership  (if  there  was  a  partnership)  had  its  place  of  business. 
The  other  taxes  were  assessed  upon  the  theory  that  the  property  held 
by  the  plaintiffs  under  that  trust  was  held  by  them  as  trust  property 
the  income  of  which  was  pavable  to  another  person  and  was  to  be 
assessed  under  St.  1909,  c.  490,  pt.  1,  §  23,  cl.  5. 

It  has  been  contended  in  effect  if  not  in  terms  that  whatever  may 
be  its  true  character  the  trust  for  the  purposes  of  taxation  was  a 
partnership.  Doubtless  the  Legislature  might  provide  that  a_  trust 
which  was  not  a  partnership  should  be  treated  as  a  partnership  for 
the  purposes  of  taxation.  But  it  has  not  done  so.  What  the  Leg- 
islature has  done  is  to  provide  (1)  that  "personal  property  held  m 
trust  by  an  executor,  administrator  or  trustee,  the  income  of  which  is 
payable  to  another  person,  shall  be  assessed  to  the  executor,  admin- 
istrator or  trustee  in  the  city  or  town  in  which  such  other  person  re- 
sides, if  within  the  commonwealth,"  and  if  he  resides  out  of  the  com- 
monwealth, in  the  place  where  the  trustee  resides  (St.  1909,  c.  490, 
pt.  1,  §  23) ;  and  (2)  that  "partners,  whether  residing  in  the  same  or 
in  different  cities  or  towns,  may  be  jointly  taxed  under  their  firm 
name,  in  which  their  business  is  carried  on,  for  all  the  personal  prop- 
erty employed  in  such  business,  except  ships  or  vessels"  (St.  1909, 
c.  490,  pt.  1,  §  27).  That  is  to  say,  the  Legislature  has  provided 
that  the  right  to  tax  property  as  trust  or  as  partnership  property  de- 
pends upon  the  real  character  of  the  property  taxed.  Under  these 
enactments  of  the  Legislature  there  is  no  room  for  holding  that  prop- 
erty which  is  in  reality  not  partnership  property  can  be  taxed  aS  part- 
nership property.  The  right  to  tax  property  as  trust  or  as  partner- 
ship property  depends  upon  what  the  character  of  the  property  taxed 
really  is.     *     *     * 


Ch,  1)  WHAT   CONSTITUTES   A   PARTNERSHIP  1239 

This  brings  us  to  the  question  of  the  character  of  the  Boston  Per- 
sonal Property  Trust.  It  is  plain  that  it  is  a  trust  and  not  a  partner- 
ship. By  the  terms  of  the  indenture  of  trust  the  property  contributed 
by  the  certificate  holders,  or  that  bought  with  money  contributed  by 
them  (the  original  trust  property  could  be  acquired  in  both  ways  by 
the  terms  of  the  indenture  of  trust),  was  to  be  held  by  the  trustees 
in  trust  to  pay  the  income  to  the  holders  of  the  certificates,  and  on  the 
termination  of  the  trust  to  divide  the  trust  fund  or  the  proceeds  there- 
of among  them.  The  certificate  holders  are  throughout  called  "cestuis 
que  trustent."  The  certificate  holders,  or  "cestuis  que  trustent,"  are 
in  no  way  associated  together,  nor  is  there  any  provision  in  the  in- 
denture of  trust  for  any  meeting  to  be  held  by  them.  The  only  act 
which  (under  the  trust  indenture)  they  can  do  is  to  consent  to  an 
alteration  or  amendment  of  the  trust  created  by  the  indenture  or 
to  a  termination  of  it  before  the  time  fixed  in  the  deed.  But  they  can- 
not force  the  trustees  to  make  such  alteration,  amendment  or  termina- 
tion. It  is  for  the  trustees  to  decide  whether  they  will  do  any  one  of 
these  things.  All  that  the  certificate  holders  or  "cestuis  que  trustent'' 
can  do  is  to  give  or  withhold  their  consent  to  the  trustees  taking  such 
action.  And  the  giving  or  withholding  of  consent  by  the  cestuis  que 
trust  is  not  to  be  had  in  a  meeting,  but  is  to  be  given  by  them  indi- 
vidually. As  we  have  said,  no  meeting  of  the  cestuis  que  trust  for 
that  or  any  other  purpose  is  provided  for  in  the  trust  indenture.  The 
trustees  of  the  Boston  Personal  Property  Trust  have  a  right  to  sell 
the  trust  securities  and  reinvest  the  proceeds,  and  also  a  limited  pow- 
er to  borrow  on  the  security  of  the  trust  property.  The  certificate 
holders,  or  "cestuis  que  trustent,"  as  they  are  called  in  the  trust  deed, 
have  a  common  interest  in  precisely  the  same  sense  that  the  members 
of  a  class  of  life  tenants  (among  whom  the  income  of  a  trust  fund  is 
to  be  distributed)  have  a  common  interest,  but  they  are  not  socii,  and 
it  is  the  trustees,  not  the  certificate  holders,  who  are  the  masters  of 
the  trust  property.  The  sole  right  of  the  cestuis  que  trust  is  to  have 
the  property  administered  in  their  interest  by  the  trustees,  who  are 
the  masters,  to  receive  income  while  the  trust  lasts,  and  their  share  of 
the  corpus  when  the  trust  comes  to  an  end. 

It  has  been  urged  by  the  learned  counsel  for  the  city  of  Boston 
that  these  certificate  holders  or  "cestuis  que  trustent"  are  in  effect 
carrying  on  the  business  of  buying  and  selling  securities  through  the 
trustees  as  managing  agents  or  directors,  and  he  refers  to  two  facts 
which  (he  argues)  bear  him  out  in  that  contention,  namely:  (1)  That 
the  trustees  on  April  1,  1911,  had  on  hand  undivided  income  to  the 
amount  of  $51,516.93,  and  a  "surplus  capital"  amounting  to  $488,- 
566.35.  By  the  terms  of  the  trust  the  trustees  are  authorized  to  set 
aside  from  time  to  time  such  portion  of  the  net  income  as  shall  not 
be  required  for  dividends  for  a  "surplus  fund,"  which  surplus  fund 
may  be  subsequently  used  by  them  in  their  discretion  in  payment  of 
dividends.  It  appears  that  the  face  value  of  the  outstanding  certifi- 
cates is  $2,090,500.  The  surplus  fund  of  undivided  income  therefore 
amounts  to  about  21/2  per  cent,  of  the  corpus  of  the  fund.  The  sur- 
plus capital  of  $488,566.35  is  about  231/2  per  cent,  of  the  face  value  of 
the  outstanding  certificates.  That  is  not  an  extraordinary  increase  in 
the  value  of  the  corpus  of  the  trust  fund  during  a  period  of  18  years. 
But  this  contention  brings  out  a  fact  in  addition  to  those  already  re- 


1240  PARTNERSHIP  (Part  5 

ferred  to,  which  shows  that  the  Boston  Personal  Property  Trust  is 
not  a  partnership,  but  a  trust,  and  nothing  but  a  trust. 

When  persons  engage  as  partners  in  buying  and  seUing  stocks,  bonds 
and  other  securities  for  their  mutual  profit,  the  gains  made  by  pur- 
chases and  sales  are  profits  of  the  partnership,  divisible  as  such 
among  those  entitled  to  the  profits  of  the  partnership.  In  the  case  of 
a  trust,  on  the  other  hand,  any  gain  made  by  a  change  of  investments 
is  an  accretion  belonging  to  the  corpus  of  the  trust  fund  and  belongs 
to  those  who  own  the  coi-pus  of  the  fund.  Such  gains  become  part 
of  the  corpus  as  much  as  the  original  money  contribution  to  the  trust 
fund.  On  them  the  certificate  holders  or  "cestuis  que  trustent"  are 
entitled  to  income  while  the  trust  lasts,  and  to  their  share  of  them 
(because  they  are  included  in  the  corpus  of  the  trust  fund)  when  the 
trust  ends  and  there  is  a  distribution  of  the  corpus  among  the  cestuis 
que 'trust.  That  is  the  way  in  which  the  trustees  of  the  Boston  Per- 
sonal Property  Trust  have  dealt  with  gains  made  by  changes  of  in- 
vestment of  the  securities  of  that  trust.  That  is  to  say,  the  trustees 
have  treated  gains  from  sales  of  securities  not  as  profits  of  a  partner- 
ship organized  to  buy  and  sell  stock  for  a  profit,  but  as  gains  on  a 
change  made  in  the  investments  of  a  trust  fund.    *    *     * 

There  is  nothing  in  the  trust  deed  of  the  Boston  Personal  Property 
Trust  which  is  in  any  way  diflferent  from  a  trust  under  a  will,  except 
that  there  are  no  limitations  over  and  the  interests  of  the  cestuis  que 
trust  are  represented   by   transferable   and   transmissible   certificates. 

Up  to  this  time  we  have  not  alluded  to  the  declaration  in  the  in- 
denture of  trust  here  in  question  that  it  was  the  intention  of  the  par- 
ties to  it  to  create  a  trust  and  not  a  partnership.  It  is  what  the  par- 
ties did  that  is  decisive.  If  there  had  been  doubt  as  to  what  they  did, 
what  they  intended  to  do  would  have  been  a  matter  entitled  to  some 
consideration   in   determining   what   they    did.     *      *      * 

In  the  Boston  Personal  Property  Trust  the  property  is  the  property 
of  the  trustees,  to  be  managed  for  the  benefit  of  the  certificate  holders, 
but  to  be  managed  by  the  trustees  and  not  by  the  certificate  holders. 
There  is  no  association  of  or  among  the  certificate  holders.  The  rights 
of  the  certificate  holders  are  limited  to  each  receiving  his  share  of  the 
income  of  the  trust  investments  during  the  continuance  of  the  trust 
and  his  share  of  the  corpus  of  the  trust  when  the  trust  comes  to  an 
end.     It  is  in  every  respect  an  investment  trust  and  nothing  more. 

It  follows  (1)  that  the  property  held  by  the  plaintiff  as  trustees  of 
the  Boston  Personal  Property  Trust  was  not  taxable  as  partnership 
property,  and  that  in  the  petition  brought  by  them  against  the  city  of 
Boston  they  are  entitled  to  an  abatement;  and  (2)  that  their  property 
was  taxable  as  property  held  in  trust,  the  income  of  which  was  pay- 
able to  another,  and  the  taxes  assessed  by  the  assessors  of  the  city  of 
Waltham  and  by  the  assessors  of  the  inhabitants  of  Milton  and  of 
Brookline  were  properly  assessed,  and  that  the  petitions  against  tliose 
municipalities  should  be  dismissed. 

It  is  so  ordered. 


Ch.  2)       RELATIONS  OF  THE   PARTNERS  BETWEEN  THEMSELVES  1241 


CHAPTER  II 

RELATIONS  OF  THE  PARTNERS  BETWEEN 
THEMSELVES 

Section 

1.  Partner's  Interest  in  Specific  Partnership  Property. 

2.  What   Constitutes   Partnership    Property. 

3.  What  Constitutes  Partnership  Capital. 

4.  Acquisition  and  Transfer  of  Partnership  Realty. 

5.  Partnership  Name  and  Good  Will. 

6.  Partner's  Interest  in  the  Partnership. 

7.  Sharing  of  Profits  and  Losses. 

8.  Partner's  Kight  to  Repayment  of  Contributions. 

9.  Partner's  Right  of  Indemnity. 

10.  Partner's  Right  to  an  Accounting. 

11.  Fiduciary  Relation   of  Partners. 

12.  Partner's  Right  to  Participate  in  Management, 

13.  Partner's  Right  to  Information. 

14.  Partner's  Right  to  Remuneration  for  Services. 


SECTION  1.— PARTNER'S  INTEREST  IN  SPECIFIC 
PARTNERSHIP  PROPERTY 

Uniform  Partnership  Act,  Section  24.  The  property  rights  of 
a  partner  are  (1)  his  rights  in  specific  partnership  property,  (2) 
his  interest  in  the  partnership,  and  (3)  his  right  to  participate  in 
the  management. 

Uniform  Partnership  Act,  Section  25.  (1)  A  partner  is  co- 
owner  with  his  partners  of  specific  partnership  property  holding  as 
a  tenant  in  partnership.^ 

1  Leivis'  Note  to  Section  2o{l). — One  of  the  present  principal  difficulties  in 
the  administration  of  the  law  of  partnerships  arises  out  of  the  difficulty  of 
determining  the  exact  nature  of  the  rights  of  a  partner  in  specific  partnership 
property.  That  the  partners  are  co-owners  of  partnership  property  is  clear; 
but  tlie  legal  incidents  attached  to  the  right  of  each  partner  as  co-owner  are 
not  clear.  When  the  English  courts  in  the  seventeenth  century  first  began 
to  discuss  the  legal  incidents  of  this  co-ownership,  they  were  already  fanuiiar 
with  two  other  kinds  of  co-ownership  joint  tenancy  and  tenancy  in  common. 
In  joint  tenancy,  on  the  death  of  one  owner  his  right  in  the  property  passes 
to  the  other  co-owners.  This  is  known  as  the  right  of  survivorship.  The 
incident  of  survivorship  fits  in  with  the  the  necessities  of  partnership.  On  the 
death  of  a  partner,  the  other  partners,  and  not  the  executors  of  the  deceased 
partner,  should  have  a  right  to  wind  up  partnership  affairs.  See  clause 
(d),  infra.  The  early  courts,  therefore,  declared  that  partners  were  joint 
tenants  of  partnership  property ;  the  consequence  being  that  all  the  other  legal 
Incidents  of  joint  tenancy  were  applied  to  partnership  co-ownership.  Many 
of  these  incidents,  however,  do  not  apply  to  the  necessities  of  the  partnership 
relation  and  produce  most  inequitable  results.  This  is  not  to  be  wondered  at. 
because  the  legal  incidents  of  joint  tenancy  grew  out  of  a  co-ownership  of  land 
not  held  for  the  purposes  of  business.  The  attempt  of  our  courts  to  escape 
the  inequitable  results  of  applying  the  legal  incidents  of  joint  tenancy  to 
partnership  has  produced  very  great  confusion.  Practically  this  confusion 
has  had  more  unfortunate  effect  on  substantive  rights  when  the  separate 
creditors  of  a  partner  attempt  to  attach  and  sell  specific  partnersliip  prop- 
erty than  when  a  partner  attempts  to  assign  specific  partnership  prop- 
erty not  for  a  partnership  pui-pose,  but  for  his  own  purposes. 

The  Commissioners,  however,  believe  that  the  proper  way  to  end  the  con- 


1242  PARTNERSHIP  (Part  5 

(2)  The  incidents  of  this  tenancy  are  such  that: 

(a)  A  partner,  subject  to  the  provisions  of  this  act  and  to  any 
agreement  between  the  partners,  has  an  equal  right  with  his  part- 
ners to  possess  specific  partnership  property,  for  partnership  pur- 
poses; but  he  has  no  right  to  possess  such  property  for  any 
other  purpose  without  the  consent  of  his  partners. 

(b)  A  partner's  right  in  specific  partnership  property  is  not  as- 
signable except  in  connection  with  the  assignment  of  the  rights  of 
all  the  partners  in  the  same  property.^ 

fusiou,  which  has  arisen  out  of  the  attempt  to  treat  partners  as  joint  ten- 
ants, is  to  recocniize  the  fact  that  the  rights  of  a  partner  as  co-owner  with 
his  partners  of  specific  partnership  property  should  depend  on  the  necessities 
of  the  partnership  relation.  In  short,  that  the  legal  incidents  of  the  tenancy 
in  partnership  are  not  necessarily  those  of  any  other  co-ownership. 

In  the  clauses  of  this  section  these  incidents  of  tenancy  in  partnership  are 
stated  with  several  practical  results  of  value.  In  the  first  place,  the  law  is 
greatly  simplified  in  expression.  In  the  second  place,  the  danger  of  the 
courts  reaching  an  inequitable  conclusion  by  refusing  to  modify  the  results 
of  applying  the  legal  incidents  of  joint  tenancy  to  the  partnership  relation  is 
done  way  with.  Finally,  grovind  is  laid  for  the  simplification  of  a  procedure 
in  those  cases  where  the  separate  creditor  desires  to  secure  satisfaction  out 
of  his  debtor's  interest  in  the  partnership.    Compare  clause  (c)  with  section  (1). 

2  Letvis'  Note  to  Section  25  (21)). — Clause  (b)  asserts  that  the  right  of  a 
partner  as  co-owner  in  specific  partnership  property  is  not  separately  assign- 
able. This  peculiarity  of  tenancy  in  partnership  is  a  necessary  consequence 
of  the  partnership  relation.  If  A.  and  B.  are  partners,  and  A.  attempts  to  as- 
sign all  his  right  in  partnership  property,  say,  a  particular  chattel,  to  C, 
and  the  law  recognizes  the  possibility  of  such  a  transfer,  G.  would  pro  tanto 
become  a  partner  with  B. :  for  the  rights  of  A.  in  the  chattel  are  to  jiosse.-^s 
the  chattel  for  a  partnership  purpose.  But  partnership  is  a  voluntary  rela^ 
tion.  B.  cannot  have  a  partner  thrust  upon  him  by  A.,  without  his  (B.'s) 
consent.  A.  cannot  confer  on  C.  his  (A.'s)  right  to  possess  and  deal  with  the 
chattel  for  a  partnership  pui'pose.  Neither  can  he  confer  any  other  rights 
which  he  has  in  the  property.  A  partner  has  a  beneficial  interest  in  partner- 
ship property  considered  as  a  whole.  As  profits  accrue,  he  has  a  right  to  be 
paid  his  proportion,  and  on  the  winding  up  of  the  business,  after  the  obliga- 
tions due  third  persons  have  been  met,  be  has  a  right  to  be  paid  in  cash  liis 
share  of  what  remains  of  the  partnership  property.  These  rights,  considered 
as  a  whole,  are  bis  interest  in  tlie  partnership:  and  this  beneficial  interest 
he  may  assign,  in  whole  or  fractional  part,  as  is  indicated  in  section  27,  infra. 
In  a  sense,  each  partner,  having  thus  a  beneficial  interest  in  the  partnership 
property  considered  as  a  whole,  has  a  beneficial  interest  in  each  part,  and 
such  beneficial  interest  might  be  regarded  as  assignable,  if  it  were  not  iui- 
possible,  except  by  purely  arbitrary  and  artificial  rules,  to  measure  a  part- 
ner's beneficial  interest  in  a  specific  chattel  belonging  to  the  partnership,  or 
any  other  specific  portion  of  partnership  propeny. 

A  single  illustration  will  make  clear  the  impossibility  of  determining  a 
partner's  beneficial  interest  in  any  single  piece  of  partnership  property. 
Let  us  suppose  A.  and  B.  are  partners.  The  value  of  partnership  property  is 
$100,000;  the  liabilities  amount  to  .$50,000.  A.  has  contributed  $15,000,  "and 
has  a  three-fourths  interest  in  the  profits;-  B.,  $10,000,  and  has  a  one-fourth 
interest  in  the  profits.  A.  attempts  to  assign  his  interest  in  certain  definite 
chattels  belonging  to  the  partnership ;  the  value  of  these  chattels  being 
$5,000.  The  chattels  themselves  must  be  still  used  for  partnership  purposes. 
On  dissolution,  if  still  part  of  the  partnership  property,  they  must  be  sold. 
If  A.  conveyed  anything,  it  was  not  a  right  in  these  chattels,  but  in  a  frac- 
tional part  of  his  interest  in  the  partnership.  But  how  is  it  to  be  deter- 
mined what  fractional  part  of  his  interest  in  the  partnership  A.  intended 
to  assign?  Did  he  intend  to  give  B.  a  lien  for  $5,000  on  his  interest,  or  a 
lien  on  his  interest  for  three-fourths — his  share  of  the  profits — of  $5,000?  Or 
did  he  intend  to  give  him  a  lieu  on  his  interest  in  the  partnership,  which  in 
amount  should  bear  the  same  proportion  to  the  total  value  of  the  chattel, 
$5,000,  as   the   amount   which    he   would   receive  should    the   partnership   bs 


•Ch.  2)        RELATIONS   OF   THE   PARTNERS   BETWEEN   THEMSELVES  1243 

(c)  A  partner's  right  in  specific  partnership  property  is  not 
subject  to  attachment  or  execution,  except  on  a  claim  against  the 

liquidated,  bears  to  tlie  total  of  tlie  present  partnership  property?  It  is 
imix)ssible  to  answer  tliese  questions.  If  the  assigning  partner  did  not 
intend  to  dissolve  the  partnership,  it  is  even  impossible  to  analyze  the  possi- 
ble intentions.  Of  course,  in  practice,  a  partner  who  assigns  his  "interest  in 
particular  partnership  chattels"  has  only  tlie  vaguest  notion  of  what  he 
intends. 

Clause  (b)  not  only  states  a  principle  theoretically  sound,  it  expresses  al- 
most the  unbroken  current  of  authority,  if  we  confine  our  investigation  to 
cases  relating  to  attempted  voluntary  assignments,  as  distinguished  from  in- 
voluntary assignments,  the  result  of  adverse  proceedings  by  a  separate  cred- 
itor of  a  partner. 

Thus  in  Cayton  v.  Hardy,  27  Mo.  536  (1858),  two  were  partners  in  a  farm. 
One,  without  the  consent  of  the  other,- sold  two  yoke  of  oxen,  the  property 
of  the  partnership,  used  in  the  work  of  the  farm.  He  delivered  the  oxen  to 
the  purchaser.  The  co-partner  brought  an  action  against  the  purchaser  and 
recovered  possession.  In  Drake  v.  Thyng,  ,37  Ark.  228  (1881),  the  co-partners, 
after  an  assignment  by  one  of  his  interest  in  a  partnership  chattel,  recovered 
possession  by  proceedings  in  equity,  and  in  McNair  v.  Wilcox,  121  Pa.  437, 
15  Atl.  575,  6  Am.  St.  Rep.  799  (1888),  the  co-partners  recovered  in  an  action 
of  trover  and  conversion  against  a  purchaser  who  refused  to  return  the  prop- 
erty. In  l^eeraan  v.  Abramson,  30  Misc.  Rep.  101,  61  N.  Y.  Supp.  839  (1899). 
the  court  held  that  a  partner  who  had  "assigned  the  partnership  stock"  was 
a  necessary  party  in  a  suit  for  the  replevin  of  the  goods  brought  by  the  other 
pai'tners,  as  the  assignment  did  not  deprive  the  assigTiee  of  any  interest  in 
the  property.  These  cases  are  direct  authority  for  the  proposition  that  the 
attempted  assignment  of  a  partnership  chattel  hy  a  partner,  or  of  his  inter- 
est in  the  chattel,  does  not  make  the  purchaser  and  the  other  partners  joint 
tenants  or  tenants  in  common  of  the  chattel,  for  one  joint  tenant  or  one  ten- 
ant in  common  cannot  recover  possession  from  his  cotenant. 

An  assignment,  by  way  of  mortgage,  of  specific  partnership  property,  the 
assigiuuent  not  being  an  act  within  the  power  of  the  partner  creating  the 
mortgage,  confers  no  rights  of  possession  on  the  mortgagee.  Wilcox  v. 
Jackson,  7  Colo.  521,  4  Pac.  960  (18S4).  Nor  can  such  mortgagee  prevent  the 
property  from  being  applied  to  the  payment  of  partnership  debts,  though 
thereby  all  the  mortgagee's  rights,  if  anv,  are  destroyed.  McGrath  v.  Cow- 
en,  57  Ohio  St.  385,  49  N.  E.  338  (1898) ;  Osborne  v.  Barge,  29  Fed.  725  (C.  C. 
N.  D.  Iowa,  1887).  There  are.  indeed,  at  least  two  cases  which  have  regarded 
the  partner  assigning  by  way  of  mortgage,  his  interest  in  specific  partnership 
property  as  mortgaging  soinething.  Arnold  v  Steveson,  2  Nev.  234  (1866) ; 
Sutlive  v.  Jones.  61  Ga.  676  (1878).  But  in  neither  case  did  the  court  indicate 
how  the  value  of  the  interest  of  the  partner   could  be  determined. 

After  an  attempted  assignment  by  a  partner,  invalid  as  against  his  co- 
partner, of  all  the  partnership  property,  it  has  been  held  that  both  partners, 
as  partners,  have  an  insurable  interest  in  the  property.  Kimball  v.  Hamilton 
Fire  Ins.  Co.,  21  N.  Y.  Super.  Ct.  495  (1861). 

Of  course,  an  attempted  assignment  of  all  the  partnership  property,  void 
as  an  assignment  of  the  rights  of  either  of  the  partners  in  the  property,  or 
an  attempted  assignment  by  one  partner  of  his  rights  in  all  the  partnership 
property  may  be  regarded  as  a  valid  assignment  of  the  partner's  interest  in 
the  partnership.  For  instance,  in  Nicoll  v.  Mumford,  4  Johns.  Ch.  (N.  Y.)  522 
(1820),  the  entire  property  of  the  partnership  was  the  brig  Phoenix  and  her 
cargo.  One  partner  assigned  "all  his  estate  real  and  personal,"  according 
to  a  schedule  annexed  to  the  deed  of  assignment,  the  schedule  including  the 
brig  Phoenix  and  her  cargo.  Chancellor  Kent  regarded  the  deed  as  assigning 
the  partner's  interest  in  the  partnership.  Whatever  the  merits  of  this  deci- 
sion, it  is  not  authority  for  the  proposition  that  a  partner's  right  in  one  or 
more  of  the  chattels  of  the  partnership  may  be  separately  assigned.  It 
merely  stands  for  the  proposition  that  a  particular  act — the  attempted  as- 
signment of  the  partnership'  jn-operty — was,  under  the  circumstances  of  that 
case,  an  assignment,  not  of  the  chattels,  the  brig  and  her  cargo,  but  of  the 
interest  of  the  assignor  in  the  partnership.  Compare  Horton's  Appeal,  13 
Pa.  67  (1850).  In  INIillcr  v.  Brigham,  .50  Cal.  615  (1875),  A.  and  B.  were  part- 
ners.   A.  "sold  and  conveyed"  to  O.  "all  his  (A.'s)  one  undivided  one-half  inter- 


1244  PARTNERSHIP  (Part  5 

partnership.  When  partnership  property  is  attached  for  a  partner- 
ship debt  the  partners,  or  any  of  them,  or  the  representatives  of  a 

est  in  the  property."  The  court  was  of  the  opinion,  thougli  tlie  question  was 
not  directly  before  them,  that  A.  had  assigned  to  C.  his  interest  in  the  part- 
nership. The  case  does  decide  that  C.  had  no  right  to  possess  any  of  the 
partnersliip  property. 

Against  this  uniform  current  of  authority  we  know  of  only  one  case  where 
the  voluntary  assignment  by  a  partner  of  a  chattel  belonging  to  a  partnership, 
not  being  valid  as  a  collective  assignment  of  the  rights  of  all  the  partners  in 
the  propex'ty,  nevertheless  vested  rights  in  the  chattels  in  the  assignee.  The 
case  is  Blaker  v.  Sands,  29  Kan.  551  (1883).  A.  and  B.  were  partners ;  the 
business  being  the  improvement  of  a  flock  of  sheep.  In  the  temporary  absence 
of  B.,  A.  sold  and  delivered  all  the  sheep  to  C.  As  the  partnership  was  for 
the  improvement,  not  for  the  sale  of  the  sheep,  their  sale  was  beyond  the 
scope  of  A.  as  partner.  A.  died,  and  B.  brought  an  action  against  O.  for  the 
possession  of  the  sheep.  The  trial  court  refused  to  admit  C.'s  offer  of  the 
bill  of  sale  of  the  sheep,  and  a  verdict  in  favor  of  B.  was  given.  On  appeal 
a  new  trial  was  awarded  on  the  theory  that,  while  C.'s  assignment  did  not 
transfer  the  rights  of  B.  in  the  sheep,  it  made  B.  and  O.  tenants  in  common, 
and  therefore  the  bill  of  sale  was  a  defence  to  B.'s  action,  and  should  have 
been  admitted  in  evidence.  The  practical  result  of  the  decision  was  to  deny 
to  the  surviving  partner  the  right  to  obtain  possession  of  partnership  prop- 
erty, though,  of  course,  he  was  liable  for  all  the  partnership  debts.  The  adop- 
tion of  clause  (b)  as  drafted  would  make  such  a  decision  impossible. 

It  will  be  noted  that  this  clause  deals  with  what  may  be  called  the  quality 
of  assignability.  It  asserts  that  tlie  right  in  specific  partnership  prop- 
erty is  assignable  collectively  with  the  rights  of  the  other  partners ;  or, 
to  put  the  matter  in  another  way,  it  is  possible  to  assign  the  rights  of  all  the 
partners — the  rights  of  the  partnership — in  partnership  property,  but  it  is 
not  possible  to  assign  separately  the  right  of  an  individual  partner. 

It  is  important  to  note  that  the  clause  does  not  deal  with  the  person  or 
persons  who  may  make  an  assignment  of  partnership  property,  or  with  the 
acts  necessary  to  a  conveyance  of  title.  Indeed,  the  act  as  a  whole,  except 
in  the  case  of  a  conveyance  of  land  belonging  to  a  partnership  (see  section 
11,  paragraphs  2,  3,  4,  5,  6),  does  not  attempt  to  deal  with  any  question  per- 
taining to  the  transfer  of  title.  The  act,  however,  does  deal  in  section  9  (1) 
with  the  authority  of  a  partner  to  bind  the  partnership.  Clause  (b)  asserts 
that  partnership  property  is  assignable,  while  section  9  (1)  indicates  when 
a  partner  has  authority  to  make  an  assignment  of  partnership  property ; 
but  neither  tells  us  what  the  partner,  in  view  of  what  we  may  call  the  rules 
of  conveyancing,  must  do  in  order  to  transfer  the  title  to  a  stranger,  or  even 
whether,  in  view  of  those  rules,  it  is  possible  for  him,  acting  alone,  to  transfer 
title.  For  instance,  A.  and  B.  are  partners  in  the  retail  dry  goods  business. 
In  the  course  of  the  business  A.  sells  and  delivers  to  C.  part  of  the  stock  in 
trade.  Clause  (b)  indicates  that  the  rights  of  A.  and  B.  in  the  goods  are 
collectively  assignable;  section  11  (1)  that  A.  had  the  authority  to  make  the 
sale  and  deliver  the  goods.  But  whether  a  good  title  has,  by  the  sale  and 
delivery,  been  vested  in  C,  is  a  question  pertaining  to  the  transfer  of  title 
to  chattels.  Delivei-j'  passes  the  title  of  the  owner,  when  the  delivery  is  by  the 
owner  or  with  his  consent.  C,  therefore,  in  the  case  put,  obtains  a  good 
title.  It  is  no  part  of  the  business  of  a  Partnership  Act  however,  to  deal 
with  such  a  question,  miless,  as  in  tlie  case  of  land,  it  is  considered  desirable 
to  introduce  a  new  method  of  transfer  of  title,  or  to  make  clear  confusions  in 
the  law  which  confusions  exist  only  in  cases  connected  vrith  property  held  by 
a  partnership.  In  all  other  cases,  as  in  the  illustration  given,  the  requirements 
of  a  partnership  act  are  satisfied  if  the  co-ownership  of  partnership  property 
is  stated,  the  collective  assignability  of  the  rights  of  all  the  partners  em- 
phasized, and  the  extent  of  the  agency  of  the  partner  to  act  for  his  co-part- 
ners indicated. 

The  importance  of  seeing  clearly  the  exact  scope  of  clause  (b)  wan-ants 
two  additional  illustrations:  If  A.,  in  the  case  above  put,  instead  of  selling 
and  delivering  part  of  the  stock,  should  attempt  to  sell  and  should  deliver 
a  counter  or  table  on  which  the  goods  were  sold,  would  the  purchaser  obtain 
a  good  title?  Clause  (b)  does  yiot  answer  this  question.  It  merely  states  that, 
the  table  being  partnership  property,  the  rights  of  all  the  partners  in  it  are 


Ch.  2)       RELATION'S   OF   THE   TARTNEKS   BETWEEN   THEMSELVES  1245 

deceased  partner,  cannot  claim  any  right  under  the  homestead  or 
exemption  laws.^ 

(d)  On  the  death  of  a  partner  his  right  in  specific  partnership 
property  vests  in  the  surviving  partner  or  partners,  except  where 
the  deceased  was  the  last  surviving  partner,  when  his  right  in 
such  property  vests  in  his  legal  representative.  Such  surviving 
partner  or  partners,  or  the  legal  representative  of  the  last  surviving 
partner,  has  no  right  to  possess  the  partnership  property  for  any 
but  a  partnership  purpose. 

subject  to  collective  assignment.  Tliis  is  what  A.  has  attempted  to  do.  But 
the  clause  does  not  tell  us  whethei-  A.  had.  undei'  the  circumstances,  iwwer 
to  make  the  assiiniment,  or  whether,  having  the  ix>wer  he  has  done  so. 
Neither  does  section  11  (1)  answer  either  of  these  questions.  Section  11  (1) 
tells  us  that  A.  has,  under  the  circumstances,  no  autliority  to  bind  the  part- 
ners, as  the  act  is  not  an  act  for  apparently  carrying  on  in  the  usual  way 
the  business  of  the  partnership.  But  whether  A.  has  the  power  to  make  the 
conveyance  depends  on  the  law  of  transfer  of  title  to  chattels — a  subject 
beyond  the  scope  of  the  act.  Under  ordinary  circumstances,  C.  would  obtain 
no  title  to  B.'s  rights,  as  it  is  a  fundamental  rule  pertaining  to  the  transfer 
of  titles  to  chattels  that  the  right  of  the  true  owTier  is  not  transferred  by 
the  sale  and  delivery  of  an  agent  in  possession,  miless  the  owner  has  done 
something  to  clothe  the  agent  with  the  apparent  power  of  sale,  the  delivery 
of  the  chattel  by  the  owner  to  the  agent  or  bailee  not  being  considered  such 
an  act. 

Finally,  suppose  A.  and  B.  are  in  partnership,  the  business  of  the  partner- 
ship being  the  buying  and  selling  of  land.  The  title  to  a  particular  tract  is 
in  A.  and  B.  A.  sells  X  to  C,  giving  C.  a  deed  signed  by  A.,  but  not  by  B. 
The  land  being  partnei-ship  property,  the  rights  of  A.  and  B.  are  collectively 
assignable.  A.  has  attempted  to  make  such  an  assignment.  The  business  of 
the  partnership  being  "trading  in  land.''  the  sale  was  an  act  which  the  part- 
ner had  authority  to  do.  But  whether  the  deed  signed  by  one  partner  only 
In  his  own  name  cx)nveyed  to  B.  title  is  again  a  question  of  conveyancing, 
and  normally  outside  the  province  of  a  Partnership  Act.  In  this  case,  how- 
ever, section  11  (4)  does  deal  with  the  transfer  of  the  equitable  title,  declaring 
that  it,  under  the  circumstances,  vested  in  C. 

3  Leivis'  Note  to  Section  25  (c). — Compare  this  clause  with  section  28(1). 

The  first  sentence  in  this  clause  is  similar  to  section  2.3  d)  of  the  English 
act.  It  is  a  logical  consequence  of  clause  (b).  If  a  partner's  right  in  specific 
partnership  property  is  not  assignable  by  voluntary  assignment  for  a  separate 
purpose  of  the  assigning  partner,  his  separate  creditors  should  not  be  able 
to  force  an  involuntary  assignment.  The  beneficial  rights  of  the  separate 
creditors  of  a  partner  in  partnership  property  should  be  no  greater  than  the 
beneficial  rights  of  their  debtor.  The  confusion  of  the  subject  of  this  clause 
in  the  decisions  is  well  known  to  all  students  of  the  law  of  partnership.  For 
all  practical  purposes,  while  the  reasoning  of  the  courts  is  more  or  less  con- 
flicting, the  net  result  of  the  remedial  law,  as  worked  out  in  law  and  at 
equity,  is  that  a  judgment  creditor  of  a  separate  partner  may  attach  and  sell 
his  debtor's  interest  in  partnership  property  as  that  interest  is  defined  in 
section  26  (see  section  28) ;  but  he  cannot  sell,  so  as  to  affect  in  any  way  the 
rights  of  the  partnership,  specific  partnership  property.  See  Hevdon  v.  Hey- 
don,  1  Salk.  .392  (1693) ;  Eddie  v.  Davidson,  2  Douglas  6.50  (1781) ;  Tavlor  v. 
Fields,  4  Yes.  396  (1799) ;  Lord  v.  Baldwin,  23  Mass.  (6  Pick.)  848  (1828) ; 
Doner  v.  Stauffer,  1  Pen.  &  W.  (Pa.)  198,  21  Am.  Dec.  370  (1829)  Tappan  v. 
Blaisdell,  5  N.  H.  190  (1S30) ;  Phillips  v.  Cook,  24  Wend.  (N.  Y.)  389  (1840) ; 
Washburn  v.  Bank  of  Bellows  Falls,  19  Vt.  278  (1847) ;  Nixon  v.  Nash,  12 
Ohio  St.  647,  SO  Am.  Dec.  390  (1S61) ;  Cooper's  Appeal,  26  Pa.  262  (1856) ; 
Menagh  v.  Whitwell,  52  N.  Y.  146,  11  Am.  Rep.  683  (1873) ;  Case  v.  Beaure- 
gard, 99  U.  S.  119,  25  L.  Ed.  370  (1878). 

The  second  sentence  in  the  paragraph  apparently  expresses  the  weight  of 
authority.  See  Burdick,  111-113,  299.  A  partner  has  a  right  to  claim  ex- 
emption, if  his  interest  in  the  partnership  is  attached  for  his  separate  debts. 
See  section  28(3),  infra. 


1246  PARTNERSHIP  (Part  5 

(e)  A  partner's  right  in  specific  partnership  property  is  not 
subject  to  dower,  curtesy,  or  allowances  to  widows,  heirs,  or  next 
of  kin. 


R.  A.  MYLES  &  CO.  v.  A.  D.  DAVIS  PACKING  CO.  et  al. 
(Court  of  Appeals  of  Alabama,  1919.    17  Ala.  App.  8.5,  81  South.  863.) 

Action  by  R.  A.  Myles  &  Co,  against  the  A.  D.  Davis  Packing  Com- 
pany and  another.  Judgment  of  nonsuit,  and  plaintiffs  appeal.  Re- 
versed and  remanded. 

BrickUn,  J.  The  appellants,  R.  A.  Myles,  Mrs.  R.  A.  Myles,  and 
Erwin  S.  Myles,  conducted  a  meat  market  under  the  style  of  "R.  A. 
Myles  &  Co."  A  judgment  was  recovered  in  the  law  and  equity  court 
of  Mobile  county  by  the  A.  D.  Davis  Packing  Company  against  R.  A. 
Myles  individually.  An  execution  was  issued  upon  this  judgment  and 
placed  in  the  hands  of  the  sheriff  of  Mobile  county.  The  sheriff'  levied 
upon  ten  cows  as  the  property  of  the  defendant  in  execution,  took  pos- 
session of  the  same,  and  sold  them  in  satisfaction  of  the  execution. 
Prior  to  the  sale  of  this  property,  the  sheriff"  received  an  indemnifying 
bond,  executed  by  the  A.  D.  Davis  Packing  Company  as  principal  and 
the  Fidelity  &  Deposit  Company  of  Maryland  as  surety. 

The  defendants  in  this  suit  were  the  principal  and  surety  in  the  in- 
demnifying bond.  The  complaint  contained  six  counts.  Each  count 
is  based  upon  the  theory  that  the  property  levied  upon  was  partnership 
property,  and  that  the  action  of  the  sheriff  in  levying  upon,  taking 
possession  of,  and  selling  such  property  for  the  satisfaction  of  the 
individual  debt  of  one  of  the  partners  was  wrongful.  Demurrers  were 
interposed  to  the  complaint,  were  sustained  by  the  court,  and  appellants 
took  a  nonsuit. 

The  main  and  determining  question  raised  by  this  record  is  whether 
the  levy  upon  and  sale  of  this  property  by  the  sheriff  was  wrongful. 
Each  member  of  a  copartnership  is  the  owner  of  an  undivided  inter- 
est in  the  chattels  and  goods  of  such  partnership.  This  interest  under 
the  decision  in  this  state,  is  subject  to  seizure  and  sale  under  an  execu- 
tion in  the  hands  of  a  sheriff  upon  a  judgment  rendered  against  one 
of  the  individual  members  of  the  partnership.     *     *     * 

The  contention  of  appellants  that  this  rule  is  to  be  applied  only  when 
all  of  the  tangible  property  of  a  partnership  has  been  levied  upon  to  sat- 
isfy a  judgment  against  one  of  the  members  of  the  firm  is,  in  our  opin- 
ion, without  merit,  and  is  opposed  to  the  authorities  above  cited.  Sec- 
tion 4106  of  the  Code  of  1907  in  no  way  changes  this  rule  of  law,  and 
does  nothing  more  than  clothe  the  sheriff  with  the  right  of  taking  or 
not  taking  actual  possession  of  the  property  levied  upon,  as  he  may 
see  fit.     *     *     * 

The  action  of  the  court  in  sustaining  appellee's  demurrer  was  with- 
out error. 

On  Rehearing. 

SamFORD,  J.  The  original  opinion  in  this  case  expresses  the  view  of 
BrickEn,  J.,  who  still  adheres  to  the  principles  there  announced.  The 
Presiding  Judge  and  the  writer,  after  a  further  consideration  of  the 
case,  are  of  the  opinion  that  the  application  for  rehearing  should  be 
granted  and  the  judgment  reversed  and  the  cause  remanded  for  the 
f oUowins:  reasons : 


Ch.  2)        RELATIONS   OF   THE   PARTNERS   BETWEEN  THEMSELVES  1247 

It  is  undoubtedly  the  law  of  this  state  that  under  a  fieri  facias  against 
the  goods  of  one  member  of  a  partnership  his  interest  in  the  tangible 
assets  of  the  partnership  may  be  levied  on  and  sold,  but  only  such  in- 
terest as  he  has;  the  right  acquired  by  such  purchase  is  the  right  of 
the  partner  whose  interest  was  sold  and  only  his  right,  subject  to  all 
the  liens,  incumbrances,  or  infirmities  affecting  it  as  assets  of  the  part- 
nership. It  is  not  a  separate  and  exclusive  right  to  any  part  or  por- 
tion of  it,  or  any  right  of  any  kind  to  any  one  part  rather  than  to  any 
other  part,  or  any  other  right  or  interest  than  was  held  by  the  ex- 
ecution debtor  as  a  member  of  the  partnership.  The  ownership  of  each 
partner  is  subject  to  the  ownership  of  all  the  other  partners,  and 
all  the  partners  together  hold  the  property  subject  to  the  right  of  the 
partnership  to  apply  all  of  its  funds  to  the  payment  of  the  partnership 
debts.  The  real  ownership  of  all  the  chattels  is  vested  in  the  firm, 
and  the  interest  of  each  partner  is  merely  a  right  to  share  in  the  profits 
of  the  business  during  its  continuance,  or  in  a  division  of  the  propetty 
upon  dissolution  after  all  the  partnership  obligations  have  been  satis- 
fied. No  one  partner  has  a  separate  ownership  of  or  right  to  possess 
exclusively  any  part  of  the  partnership  assets,  and  a  successor  to  his 
interest  by  purchase  at  an  execution  sale  can  acquire  no  greater  inter- 
est than  he  has.     *     *     * 

And  while  the  interest  of  a  partner  in  the  partnership  may  be  levied 
upon  and  sold,  if  the  sheriff,  in  total  disregard  and  denial  of  the  rigTits 
of  the  partnership,  levies  upon  and  sells  the  partnership  property  as  the 
property  of  one  of  the  individual  partners  under  an  execution  against 
such  member,  the  sheriff  is  a  trespasser  as  to  the  partnership,  and  his 
act  is  a  conversion  of  the  partnership  property.  *  *  *  And  the 
partnership  can  maintain  an  action  against  him  to  recover  damages  re- 
sulting from  such  conversion.     *     *     * 

Such  a  sale  being  illegal  and  rendering  the  officer  a  trespasser  ab 
initio,  the  action  may  properly  be  brought  in  the  name  of  the  partners, 
and  they  will  be  entitled  to  recover  full  value  of  the  goods  sold. 
*  *  *  At  common  law  the  ownership  of  partnership  property,  as 
well  as  partnership  obligations,  were  joint  only,  each  partner  holding 
his  interest  for  the  joint  benefit  of  the  other  members  and  for  the  firm, 
the  firm  being  all  of  the  partners,  and  hence  the  process  and  pleadings 
in  every  action  require  the  disclosure  of  the  first  name  and  surname 
of  all  the  parties  thereto  for  the  purpose  of  rendering  judicial  pro- 
ceedings, certain  and  conclusive  as  between  the  parties  and  to  give  full 
force  and  effect  to  the  doctrine  of  res  judicata.     *     *     * 

^  The  rulings  of  the  trial  court  were  not  in  accord  with  the  foregoing 
views.  The  application  for  rehearing  is  granted,  the  judgment  of  af- 
firmance is  set  aside,  the  judgment  of  the  trial  court  is  reversed,  and 
the  cause  is  remanded.     *     *     * 


DARROW  et  al.  v.  CALKINS  et  al. 

(Court  of  Appeals  of  New  York,  1897.     154  N.  Y.  503,  49  N.   E    61, 
48  L.  E.  A.  299,  61  Am.  St.  Rep.  637.) 

Calkins  and  Darrow,  the  plaintiff's'  intestate,  were  partners,  owning 
certain  lands.  Darrow  executed  a  deed  of  his  interest  in  the  partnership 
real  estate,  conveying  it  to  Calkins  to  hold,  to  control,  and  manage  as 
part  of  the  partnership  property,  and  to  pay  over  to  the  grantor  what 
should  be  due  him.     Plaintiffs  seek  partition  of  the  lands.     The  con- 


1248  PARTNERSHIP  (Part  5 

tention  of  plaintiffs  is  that  their  property  is  realty;  the  defendant  ar- 
gues that  the  act  of  plaintiff's'  intestate  converted  the  land  of  Darrow 
into  personalty,  so  that  a  suit  for  partition  cannot  be  maintained.  An 
interlocutory  (temporary)  judgment  for  plaintiff's  in  the  trial  court  was 
vacated.     Plaintiffs  appealed. 

Andrews,  C.  J.  *  "^  *  The  legal  nature  and  incidents  of  land 
purchased  by  a  co-partnership  with  co-partnership  funds  is  a  subject 
upon  which  great  diversity  of  opinion  exists  in  different  jurisdictions. 
The  English  rule,  after  many  fluctuations,  has,  as  we  understand  the 
cases,  come  to  be  that  lands  so  purchased,  whether  purchased  for  or 
used  for  partnership  purposes  or  not,  provided  only  that  they  were 
intended  by  the  partners  to  constitute  a  part  of  the  partnership  prop- 
erty, become  ipso  facto,  in  the  view  of  a  court  of  equity,  converted 
into  personalty  for  all  purposes,  as  well  for  the  purpose  of  the  ad- 
justment of  the  partnership  debts  and  the  claims  of  the  partners  inter 
se  as  for  the  purpose  of  determining  the  succession  as  between  the  per- 
sonal  representatives   of    a   deceased   partner   and   the   heir   at   law. 

*  *  *  This  doctrine  had  its  origin  in  England,  and  is  said  to  have 
grown  out  of  the  peculiar  law  of  inheritance  there,  and  to  remedy 
the  hardship  of  the  rule  which  excludes  all  but  the  eldest  child  from 
the  inheritance,  and  of  the  other  rule  which  exempts  real  estate  in  the 
hands  of  the  heir  from  all  but  the  specialty  debts  of  the  ancestor. 

*  *  *  Lindley,  in  his  work  on  Partnership,  bases  the  rule  on  the 
nature  of  the  interest  of  each  partner  in  the  partnership  property.  He 
says  (page  687) :  "From  the  principle  that  a  share  of  a  partner  is 
nothing  more  than  his  proportion  of  the  partnership  assets  after  they 
have  been  turned  into  money  and  applied  in  liquidation  of  the  partner- 
ship debts,  it  necessarily  follows  that  in  equity  a  share  in  a  partner- 
ship, whether  its  property  consists  of  land  or  not,  must,  as  between 
the  real  and  personal  representatives  of  a  deceased  partner,  be  deemed 
to  be  personal,  and  not  real,  estate,  unless,  indeed,  such  conversion  is 
inconsistent  with  the  agreement  between  the  parties."  The  concluding 
words  of  the  paragraph  quoted  concede  that  the  intention  of  the  par- 
ties will  prevent  a  conversion  where  that  intention  is  manifested. 

The  general  doctrine  of  "out  and  out"  conversion  adopted  by  the 
English  courts  has  not  been  followed  to  its  full  extent  in  this  and  many 
other  American  states.  There  is  no  policy  growing  out  of  our  laws 
of  inheritance  or  the  exemption  of  lands  from  liability  for  simple  con- 
tract debts,  which  requires  the  application  of  such  a  doctrine  here. 
The  lands  of  the  ancestor  are  assets  for  the  payment  of  all  debts,  and 
the  persons  who  take  by  descent  and  under  the  statute  of  distribution 
are  substantially  the  same.  The  necessity  for  an  absolute  conversion, 
supposed  to  be  found  in  the  nature  of  a  partnership  interest,  seems 
hardly  sufficient  to  justify  a  fiction  which  should  deprive  real  estate  of 
a  partnership  of  its  descendible  quality,  when  it  is  admitted  on  all 
hands  that  partnership  real  estate,  if  the  necessity  arises,  is  first  subject 
to  be  appropriated  in  equity  to  the  discharge  of  partnership  obligations 
and  the  adjustment  of  the  equities  between  the  parties. 

The  clear  current  of  the  American  decisions  supports  the  rule  that, 
in  the  absence  of  any  agreement,  express  or  implied,  between  the  part- 
ners to  the  contrary,  partnership  real  estate  retains  its  character  as 
realty  with  all  the  incidents  of  that  species  of  property  between  the 
partners  themselves,  and  also  between  a  surviving  partner  and  the 
real  and  personal  representatives  of  a  deceased  partner,  except  that  each 


Ch.  2)       RELATIONS   OP  THE   PARTNERS   BETWEEN   THEMSELVES  1249 

share  is  impressed  with  a  trust  implied  by  law  in  favor  of  the  other 
partner  that,  so  far  as  is  necessary,  it  shall  be  first  applied  to  the  ad- 
justment of  partnership  obligations  and  the  payment  of  any  balance 
found  to  be  due  from  the  one  partner  to  the  other  on  winding  up  the 
partnership  affairs.  To  the  extent  necessary  for  these  purposes  the 
character  of  the  property  is,  in  equity,  deemed  to  be  changed  into 
personalty.  On  the  death  of  either  partner,  where  the  title  is  vested 
in  both,  the  share  of  the  land  standing  in  the  name  of  the  deceased 
partner  descends  as  real  estate  to  his  heirs,  subject  to  the  equity  of 
the  surviving  partner  to  have  it  appropriated  to  accomplish  the  trust 
to  which  it  was  primarily  subjected.  The  working  out  of  the  mutual 
rights  which  grew  out  of  the  partnership  relation  does  not  seem  to 
require  that  the  character  of  the  property  should  be  changed  until  the 
occasion  arises  for  a  conversion,  and  then  only  to  the  extent  required. 

The  American  rule  commends  itself  for  its  simplicity.  It  makes  the 
legal  title  subservient  in  equity  to  the  original  trust.  It  disturbs  it  no 
further  than  is  necessary  for  this  purpose.  The  portion  of  the  land 
not  required  for  partnership  equities  retains  its  character  as  realty,  and 
it  leaves  the  laws  of  inheritance  and  descent  to  their  ordinary  opera- 
tion. It  would  be  useless  to  review  in  detail  the  authorities  which  seem 
to  us  to  maintain  what  has  been  called  the  "American  rule."     *     *     * 

If,  as  sometimes  happens,  the  title  to  partnership  real  estate  is  in  the 
name  of  one  of  the  partners  only,  on  the  death  of  the  other  partner 
his  equitable  title  descends  to  his  heirs  or  goes  to  his  devisees,  but  sub- 
ject to  the  primary  claims  growing  out  of  the  partnership  relation. 
*  *  *  But  the  general  principles  to  which  we  have  adverted  are 
those  applied  by  courts  of  equity  in  determining  the  character  and  in- 
cidents of  partnership  real  estate,  in  the  absence  of  any  agreement, 
express  or  implied,  between  the  partners  on  the  subject.  It  is,  however, 
generally  conceded  that  the  question  whether  partnership  real  estate 
shall  be  deemed  absolutely  converted  into  personalty  for  all  purposes, 
or  only  converted  pro  tanto  for  the  purpose  of  partnership  equities, 
may  be  controlled  by  the  express  or  implied  agreement  of  the  part- 
ners themselves,  and  that  where,  by  such  agreement,  it  appears  that  it 
was  the  intention  of  the  partners  that  the  lands  should  be  treated  and 
administered  as  personalty  for  all  purposes,  effect  will  be  given  there- 
to. In  respect  to  real  estate  purchased  for  partnership  purposes  with 
partnership  funds,  and  used  in  the  prosecution  of  the  partnership  busi- 
ness, the  English  rule  of  "out  and  out"  conversion  may  be  regarded  as 
properly  applied  on  the  ground  of  intention,  even  in  jurisdictions  which 
have  not  adopted  that  rule  as  applied  to  partnership  real  estate  ac- 
quired under  different  circumstances,  and  where  no  specific  intention 
appeared.  The  investment  of  partnership  funds  in  lands  and  chattels 
for  the  purpose  of  a  partnership  business,  the  fact  that  the  two  species 
of  property  are  in  most  cases  of  this  kind  so  commingled  that  they 
cannot  be  separated  without  impairing  the  value  of  each,  has  been 
deemed  to  justify  the  inference  that  under  such  circumstances  the 
lands  as  well  as  the  chattels  were  intended  by  the  partners  to  consti- 
tute a  part  of  the  partnership  stock,  and  that  both  together  should  take 
the  character  of  personalty  for  all  purposes ;  and  Judge  Denio,  in  Col- 
lumb  V.  Read,  24  N.  Y.  505,  expressed  the  opinion  that  to  this  extent 
the  English  rule  of  conversion  prevailed  here.  That  paramount  con- 
B.&  B.Bus.Law— 79 


1250  PARTNERSHIP  (Part  5 

sideration  should  be  given  to  the  intention  of  the  partners  when  ascer- 
tained, is  conceded  by  most  of  the  cases.     *     *     * 

The  legal  title  to  the  real  estate  which  the  heirs  of  Edwin  J.  Dar- 
row  asked  to  have  partitioned  in  this  action  was  vested  in  Daniel  O. 
Calkins  at  the  time  of  the  death  of  Darrow,  in  November,  1864.  The 
plaintiffs,  on  the  death  of  their  father,  took  no  legal  estate  in  the  lands. 
The  legal  estate  which,  prior  to  the  25th  day  of  September,  1861,  Dar- 
row held  in  the  undivided  one-half  of  the  premises,  was  by  the  deed 
executed  by  him  on  that  day  conveyed  to  Calkins.  That  this  was  the 
effect  of  the  deed,  we  have  no  doubt.  The  deed  is  in  terms  full  and 
ample  to  convey  in  fee  the  interest  of  Darrow  to  his  grantee.  It  was 
coupled,  however,  with  the  declaration  on  the  face  of  the  deed  that  it 
was  to  be  held  by  Calkins  as  partnership  property,  and  the  deed  con- 
tained a  power  of  management  and  sale,  and  this  was  followed  by  the 
significant  clause,  "And  to  pay  over  to  the  said  Darrow,  his  heirs  and 
assigns,  or  other  legal  representatives,  such  portion  thereof  as  shall, 
at  the  closing  of  the  partnership  business  of  said  Calkins  and  Darrow, 
belong  to  or  be  due  or  coming  to  said  Darrow,  his  heirs,  executors, 
assigns,  or  other  legal  representatives." 

The  suggestion  that  the  deed  attempted  to  create  an  expresss  trust 
in  lands,  not  within  the  enumerated  trusts  permitted  by  section  55  of 
our  statute  of  "Uses  and  Trusts"  (1  Rev.  St.  728),  and  was,  therefore, 
void  as  a  conveyance,  is  not  well  founded.  It  recognized  a  pre-existing 
trust  imposed  upon  the  lands,  implied  by  law,  and  arising  out  of  the 
partnership  relation,  and  that  the  trust  was  to  continue  notwithstand- 
ing the  conveyance  of  the  legal  title.  This  was  not,  we  think,  in  con- 
travention of  the  statute  which  contemplated  the  creation  of  original 
trusts,  and  not  the  abrogation  of  existing  trusts  resulting  from  or  im- 
plied by  operation  of  law ;  nor  did  it  render  inoperative  the  subsequent 
recognition  of  such  an  existing  trust  in  connection  with  a  conveyance 
of  the  legal  title.  We  think  the  legal  title  to  the  one-half  part  of  the 
land  passed  by  Darrow's  deed,  subject  to  the  performance  by  Calkins 
of  the  trust  therein  declared.  The  important  question  is  whether  it 
operated  to  convert  the  partnership  lands  into  personalty,  and  to  change 
the  interest  of  Darrow,  or  his  representatives,  from  an  interest  in  the 
land  as  realty  into  an  interest  in  the  proceeds  of  the  lands,  after  a 
sale  thereof  by  Calkins  under  the  power  contained  in  the  deed. 

We  are  of  opinion  that  it  was  the  intention  of  the  partners,  disclosed 
on  the  face  of  the  deed  and  by  the  surrounding  circumstances,  to  sub- 
stitute in  place  of  Darrow's  prior  interest  in  the  lands,  as  such,  an 
interest  in  him  and  his  representatives  in  any  surplus  which  should  re- 
main after  a  sale  by  Calkins,  and  the  adjustment  of  the  partnership 
aft'airs.  It  is  not  necessary  to  decide  whether  the  surplus,  when  ascer- 
tained, would  go  to  the  real  or  personal  representatives  of  Darrow. 
As  between  Darrow  and  his  representatives  and  Calkins  and  his  repre- 
sentatives, the  deed  operated  as  a  conversion  of  the  lands  into  person- 
alty. The  personal  representatives  of  Darrow  were  entitled  to  enforce, 
in  an  action  for  an  accounting  and  an  adjustment  of  the  partnership 
affairs,  the  claims  of  Darrow's  estate.  This  was  the  purpose  of  the 
action  which  resulted  in  the  decree  of  October  31,  1867,  and  we  think- 
that  decree  was  binding  upon  the  plaintiffs,  not  on  the  ground  that  they 
were  parties,  but  for  the  reason  that,  no  controversy  existing  as  to  the 
original  character  of  the  property  as  partnership  property,  or  as  to 
the  subsequent  dealing  between  the  partners  in  respect  to  it,  the  heirs 


Ch.  2)        RELATIONS   OF   THE   PARTNERS   BETWEEN   THEMSELVES  12")! 

of  Darrow  were  not  necessary  parties  to  a  final  adjustment  of  the 
partnership  affairs,  inchiding  the  interest  of  the  Darrow  estate  growing 
out  of  his  relation  to  the  lands  under  the  deed  of  September  25,  1861. 
It  was  open  to  the  plaintiffs,  on  an  accounting  by  the  administratrix 
of  the  Darrow  estate,  to  claim  that  the  $14,000  received  by  her  under 
the  decree  in  the  action  for  an  accounting  should  be  regarded  as  real, 
and  not  personal,  assets,  and  that  they  were  entitled  to  it  in  their  char- 
acter as  heirs,  and  not  as  distributees. 

We  think  the  order  of  the  court  below  reversing  the  judgment  at 
special  term  was  correct,  and  it  should,  therefore,  be  affirmed,  and  judg- 
ment absolute  entered  for  the  defendants  on  the  stipulation,  with  costs. 
All  concur.    Order  affirmed. 

MENAGH  V.  WHITWELL. 
(Court  of  Appeals  of  New  York.  1873.     52  N.  Y.  146,  11  Am.  Rep.  683.) 

Appeal  from  a  judgment  in  favor  of  the  plaintiff  entered  upon  the 
report  of  a  referee.  This  was  an  action  for  converting  machinery, 
utensils,  lumber,  and  other  chattels  formerly  belonging  to  the  firm 
of  J.  C.  Smith  &  Co.  and  appertaining  to  a  yeast  factory  operated 
by  that  firm. 

From  the  17th  of  August  to  the  22d  day  of  December,  1866,  the 
firm  consisted  of  John  C.  Smith,  Hollister  E.  Goodwin,  John  Wride, 
Marietta  Huntington,  and  William  B.  Rubert,  each  being  inter- 
ested to  the  extent  of  one-fifth.  The  firm  as  thus  constituted  con- 
tracted debts  to  the  Geneva  National  Bank  upon  which  judgments 
were  afterward  recovered  against  the  above-named  parties,  viz.,  one 
judgment  for  $1,403.83,  and  one  for  $237.53,  both  recovered  May 
24,  1867.  The  larger  judgment  embraced  claims  to  the  amount  of 
$330  which  accrued  after  the  withdrawal  of  John  Wride  from  the  firm. 
Executions  were  issued  on  these  judgments  on  the  25th  day  of  May, 
1867,  and  placed  in  the  hands  of  the  defendant  Ringer,  who  was  dep- 
uty sheriff  of  Ontario  county,  and  by  virtue  of  those  executions  he 
levied  upon  the  property  on  the  19th  day  of  July,  1867,  and  sold  it  on 
the  29th  of  July,  1867.  The  defendant  Whitwell  was  sheriff,  and  this 
action  was  brought  against  him  and  his  deputy  for  that  levy  and  sale. 
The  plaintiff  recovered  four-fifths  of  the  value  of  the  property. 

The  plaintiff  makes  title  to  this  four-fifths  as  follows:  On  the 
22d  of  December,  1866,  John  Wride  assigned  all  his  interest  in  the 
property  and  business  of  the  firm  to  John  C.  Smith,  who  agreed  to  pay 
the  firm  debts,  and  on  the  4th  of  February,  1867,  Marietta  Hunting- 
ton assigned  all  her  interest  in  the  property  of  the  firm  to  said  John 
C.  Smith,  who  assumed  her  place  in  the  firm.  After  these  trans- 
fers the  same  business  was  carried  on  by  the  remaining  partners  un- 
der the  same  firm  name.  The  referee  finds  that  both  of  these  trans- 
fers were  made  with  the  consent  of  all  the  other  members  of  the  firm, 
and  in  good  faith,  without  intent  to  defraud  the  creditors  of  the  firm. 

On  the  28th  of  February,  1867,  the  firm  then  consisting  of  John 
C.  Smith,  William  B.  Rubert,  and  Hollister  E.  Goodwin,  and  Smith's 
interest  being  then  three-fifths,  he  gave  to  the  plaintiff  a  chattel 
mortgage  upon  his  undivided  three-fifths  interest  in  the  yeast  fac- 
tory, property,  accounts,  and  other  choses  in  action  of  the  firm  to 
secure  his  individual  debt  to  the  plaintiff  of  $2,400,  payable  in  in- 
stallments in  two,  five,  and  seven  months,  with  power  to  take  posses- 


1252  PARTNERSHIP  (Part  5 

sion  and  sell  in  case  of  default,  or  whenever  she  should  deem  herself 
unsafe  before  default.  The  referee  finds  that  this  amount  was  justly 
due  the  plaintiff  for  money  loaned  by  her  to  Smith,  which  he  had 
used  for  the  firm  and  for  which  it  was  indebted  to  him,  and  that  the 
mortgage  was  given  in  good  faith,  with  the  consent  of  all  the  persons 
composing  the  firm,  and  without  intent  to  defraud  creditors.  There 
is  no  express  finding  in  respect  to  the  solvency  of  the  firm  at  the  time 
of  the  giving  of  this  mortgage. 

On  the  2d  of  February,  1867,  William  B.  Rubert  had  given  a  hke 
chattel  mortgage  on  his  one-fifth  interest  to  Samuel  E.  Rubert  to 
secure  an  individual  debt  of  $500,  payable  in  five  days.  The  referee 
finds  that  this  was  a  just  debt  for  money  loaned,  and  that  the  mort- 
gage was  executed  in  good  faith  to  secure  the  debt,  and  without  any 
fraudulent  intent.  It  does  not  appear  that  any  of  the  other  partners 
consented  to  this  mortgage. 

On  the  10th  day  of  May,  1867,  the  plaintiff  and  Samuel  E.  Rubert 
took  possession  of  the  property  mentioned  in  their  respective  mort- 
gages, and  after  advertisement  it  was  sold  on  the  18th  day  of  May, 
1867 ;  the  three-fifths  interest  of  John  C.  Smith  being  purchased  by 
the  plaintiff  for  $1,000,  and  the  one-fifth  interest  of  William  B.  Ru- 
bert being  bought  in  by  Samuel  E.  Rubert  for  an  amount  less  than 
his  mortgage.  On  the  same  day  John  C.  Smith  sold  and  delivered  to 
the  plaintiff  all  his  interest  in  a  quantity  of  lumber,  boxes  and  other 
material  then  on  the  premises,  and  belonging  to  the  firm,  for  $200, 
which  was  applied  in  part  payment  of  the  plaintiff's  mortgage.  The 
referee  finds  that  this  sale  was  in  good  faith  and  without  any  fraud- 
ulent intent.  This  lumber,  etc.,  was  levied  upon  and  sold  by  the 
defendants  and  is  embraced  in  the  plaintiff's  recovery.  On  the  same 
day  on  which  the  plaintiff  and  Samuel  E.  Rubert  took  possession 
under  their  mortgages,  viz.,  the  10th  of  May,  1867,  Hollister  E.  Good- 
win, the  only  remaining  member  of  the  firm,  transferred  his  undi- 
vided one-fifth  interest  in  the  property  and  business  of  the  firm  to 
Mary  B.  Goodwin,  who  still  owns  the  same,  but  never  became  a  mem- 
ber of  the  firm.  The  referee  has  not  found  that  there  was  any  con- 
sideration for  this  transfer,  or  what  was  its  object,  or  that  it  was  made 
in  good  faith. 

The  only  findings  in  respect  to  the  solvency  of  the  firm  at  the 
times  of  these  several  transactions  are  that,  on  the  22d  of  Decem- 
ber, 1866,  when  John  Wride  withdrew  from  the  firm,  transferring 
his  interest  to  John  C.  Smith,  the  firm  w^as  somewhat  embarrassed, 
but  was  not  known  or  believed  to  be  insolvent  by  either  Wride  or 
Smith,  and  that  on  the  4th  of  February,  1867,  when  Marietta  Hunt- 
ington transferred  her  interest,  the  financial  affairs  of  the  firm  were 
about  the  same  as  they  were  on  the  22d  of  December,  1866;  that 
the  firm  was  largely  indebted  and  somewhat  embarrassed;  that  the 
value  of  its  property  and  assets  depended  in  part  upon  the  contin- 
uance of  its  business,  and,  in  case  such  business  was  continued  and 
properly  managed,  the  property  and  assets  of  the  firm  were  more  than 
sufficient  to  pay  its  debts.  The  referee  further  finds  that  at  the  time 
of  the  seizure  and  levy  by  the  defendants  the  property  was  in  the 
possession  of  the  plaintiff  and  Samuel  E.  Rubert,  and  was  of  the 
value  of  $2,150;  that  the  plaintiff  was  the  owner  of  an  undivided 
three-fifths,  and  Samuel  E.  Rubert  of  one  undivided  fifth  part  there- 
of;   that  Mary  B.  Goodwin  was  the  owner  of  the  other  undivided 


Ch.  2)        RELATIONS   OP   THE   PARTNERS   BETWEEN   THEMSELVES  1253 

fifth  part  thereof;  and  that,  on  the  15th  of  August,  1867,  and  before 
the  commencement  of  this  action,  the  said  Samuel  duly  assigned  to 
the  plaintiff  all  his  right  to  the  property  and  cause  of  action  against 
the  defendants  for  taking  possession  thereof. 

As  conclusion  of  law  he  finds  that  at  the  time  of  the  levy  neither 
of  the  defendants  in  the  execution  had  any  leviable  interest  in  the 
property,  but  that  it  belonged,  four-fifths  to  the  plaintiff,  and  one- 
fifth  to  Mary  B.  Goodwin ;  that  the  bank  had  no  lien  thereon ;  and 
that  the  plaintiff  was  entitled  to  recover  four-fifths  of  the  value, 
amounting  to  $1,720,  with  interest  from  the  time  of  the  conversion. 

Rafallo,  J.  The  mortgages  executed  by  John  C.  Smith  and  William 
P.  Rubert  appear  to  have  been  regarded  by  the  learned  referee  as 
transferring  an  undivided  four-fifths  of  the  corpus  of  the  partner- 
ship property  therein  described.  He  has  found,  as  to  the  mortgage 
from  Smith,  that  it  was  executed  and  delivered  with  the  assent  of 
the  other  members  of  the  firm.  This  mortgage,  if  such  be  its  true 
construction,  having  been  given  to  secure  the  individual  debt  of  the 
partner,  even  if  effectual  as  to  the  firm,  by  reason  of  the  concurrence 
of  all  the  partners  giving  it,  would  be  a  fraudulent  misapplication  of 
the  partnership  property,  and  void  as  to  the  creditors  of  the  firm, 
under  the  principle  of  the  cases  of  Ransom  v.  Vandeventer,  41  Barb, 
307,  and  Wilson  v.  Robertson,  21  N.  Y.  587,  unless  the  firm  were 
solvent  at  the  time  the  mortgage  was  given,  and  sufficient  property 
would  remain,  over  and  above  that  devoted  by  that  instrument  to 
the  payment  of  the  individual  debt,  to  pay  the  debts  of  the  firm.  The 
Supreme  Court  have  considered  that  the  findings  of  the  referee  fail 
to  disclose  any  insolvency,  but,  on  the  contrary,  establish  solvency 
of  the  firm  at  the  time  the  mortgages  were  given.  We  cannot  concur 
in  this  view  of  the  effect  of  the  findings,  but  think  that  the  facts 
found  show  that  the  firm  was  insolvent  when  the  mortgages  were 
given,  and,  if  there  were  any  doubt  upon  that  point,  they -clearly  es- 
tabhsh  that  the  diversion  of  four-fifths  of  its  properties  to  the  in- 
dividual debts  of  two  of  the  partners  would  make  it  insolvent. 

According  to  these  findings  the  firm  was,  in  February,  1867, 
and  had  been  from  December,  1866,  largely  indebted  and  embar- 
rassed and  the  value  of  its  property,  and  its  consequent  ability  to  pay 
its  debts,  depended  in  part  upon  the  continuance  and  proper  man- 
agement of  its  business.  The  mortgages  were  given  on  the  2d  and 
28th  of  February,  1867.  If  they  were  intended  to  be  liens  upon  the 
corpus  of  the  property,  as  they  have  been  treated  by  the  referee,  and 
not  merely  liens  upon  the  surplus  which  should  belong  to  the  part- 
ners, respectively,  after  the  payment  of  the  firm  debts,  it  is  evident, 
from  the  facts  stated  as  existing  at  the  time,  as  well  as  from  the 
result,  that  their  enforcement  would  prevent  the  firm  creditors  from 
collecting  their  demands  out  of  the  .firm  property,  and  that,  under 
the  principle  of  the  cases  cited,  they  were  fraudulent  and  void  as  to 
such  creditors.  If  so,  the  mortgagees,  by  purchasing  at  the  sale  under 
the  mortgages,  acquired  no  valid  title  as  against  such  creditors,  and 
the  plaintiff  was,  consequently,  net  entitled  to  recover. 

Assuming,  however,  that  the  mortgages  were  intended  to  pass 
merely  the  individual  interests  of  the  mortgaging  partners  in  the 
common  stock,  and  for  that  reason  were  not  fraudulent  as  to  the  firm 
creditors,  then  it  becomes  necessary  to  consider  their  legal  effect 
upon  the  rights  of  creditors  of  the  firm.     It  is  clear  that  the  re- 


1254  PARTNERSHIP  (Part  5 

maining  partner  was  entitled  to  the  control  of  the  firm  property  so 
long  as  he  retained  his  interest,  and  to  apply  it  to  the  firm  debts,  and 
that  the  mortgagees  acquired  only,  a  right  to  the  surplus,  if  any, 
which  would  be  found  to  belong  to  the  mortgagors  on  the  settle- 
ment of  the  accounts.  And  so  long  as  any  of  the  partners  had  this 
dominion  over  the  firm  property  it  can  hardly  be  questioned  that 
it  was  subject  to  'levy  on  execution  at  the  suit  of  a  firm  cred- 
itor.    *     *     * 

But  the  point  upon  which  the  judgment  was  sustained  in  the  Su- 
preme Court,  at  General  Term,  was  that  after  the  execution  of  the 
mortgages  H.  E.  Goodwin,  the  only  remaining  partner,  made  a  sep- 
arate transfer  to  a  third  party  of  his  individual  interest  in  the  part- 
nership properties,  and  on  this  ground  it  was  held  that  when  the  ex- 
ecution was  levied  none  of  the  defendants  in  the  execution  had  any 
leviable  interest  in  the  property  levied  upon,  and  it  was  further  held 
that  the  plaintifif,  who  had  purchased  the  interest  of  S.  E.  Rubert 
under  his  mortgage,  was  entitled,  by  virtue  of  the  two  mortgages 
and  of  the  purchase  at  the  sale  under  them,  to  recover  the  value 
of  four-fifths  of  the  corpus  of  the  partnership  property  levied  upon 
by  the  defendants,  without  regard  to  the  partnership  debts. 

This  position  is  not  without  authority  in  its  support.  It  is  founded 
upon  the  theory  that  the  separate  transfers  of  the  individual  inter- 
ests of  all  the  partners  divested  the  title  of  the  firm ;  that  firm 
creditors  have  no  lien  upon  the  partnership  effects,  and  no  direct 
right  to  compel  their  application  to  firm  debts  in  preference  to  in- 
dividual debts ;  that  the  right  to  compel  this  application  is  an  equity 
vested  in  the  partners  themselves,  and  exists  only  as  between  each 
other;  that  so  long  as  this  equity  exists  in  any  of  the  partners  the 
creditors  have  an  equity  to  compel  its  enforcement  between  the  part- 
ners, and  may  by  this  means  obtain  the  application  of  the  partnership 
properties  to  their  demands,  in  preference  to  the  individual  debts 
or  separate  dispositions  of  any  of  the  partners — in  other  words, 
"that  the  equities  of  the  creditors  can  only  be  worked  out  through 
the  equities  of  the  partners."  From  these  premises  the  conclusions 
have  been  drawn  that,  if  such  equities  are  waived  or  released  by  the 
partners  themselves,  the  creditors  lose  them,  and  that  a  transfer  of 
the  individual  interest  of  a  partner  in  the  firm  property  to  a  third 
person  extinguishes  the  equity  of  the  partner,  and  consequently 
that  of  the  creditors,  which  is  dependent  upon  it.  This  doctrine 
has  been  carried  to  the  extent  of  holding  that,  if  the  individual  in- 
terests of  each  of  the  members  of  a  firm  are  successively  sold  under 
executions  against  such  members,  respectively,  for  their  individual 
debts,  the  purchasers  acquire  the  corpus  of  the  property  free  from 
the  copartnership  debts,  and  the  equities  of  the  partners  and  partner- 
ship creditors  are  extinguished..  Coovcr's  Appeal,  29  Pa.  9,  70  Am. 
Dec.  149. 

The  injustice,  and  it  may  be  said,  the  absurdities  which  result  from 
such  a  view  lead  to  an  inquiry  into  its  correctness.  A  firm  may  be 
perfectly  solvent,  though  the  members  are  individually  insolvent, 
and  yet  in  such  a  case  the  doctrine  that  the  property  of  the  firm  is 
divested,  and  the  equities  of  the  partners  and  partnership  creditors 
are  extinguished,  by  separate  transfers  of  the  individual  interests  of 
all  the  partners,  might  result,  not  only  in  an  appropriation  of  all 
the  properties  of  the  ifirm  to  the  payment  of  the  individual  debts,  to  the 


Ch.  2)       RELATIONS   OF   THE   PARTNERS   BETWEEN   THEMSELVES  125.' 

entire  exclusion  of  the  firm  creditors,  but  to  a  most  unjustifiable  sac- 
rifice and  waste  of  such  properties.  For  instance,  suppose  a  firm 
to  consist  of  three  members,  each  having  an  equal  interest,  and  to 
be  possessed  of  assets  to  the  amount  of  $300,000,  and  to  owe  debts 
to  half  of  that  amount,  the  interest  of  each  partner,  supposing  their 
accounts  between  themselves  to  be  even,  is  $50,000.  The  members 
of  the  firm  are  individuallv  indebted.  One  of  them  sells  his  share, 
and  receives  for  it  $50,000,  which  is  its  actual  value.  The  share 
of  another  of  the  partners  is  sold  under  execution,  and  brings  its 
full  value,  $5,000.  Thus  far  one  partner  remains,  and  he  has  an 
equity  to  have  the  firm  debts  paid,  and  those  who  have  sold  out  are 
protected  against  those  debts.  The  purchasers  of  the  separate  in- 
.terests  are  entitled  to  the  surplus  only.  The  joint  creditors  still  have 
their  recourse  against  the  partnership  property,  and  the  right  to  levy 
on  such  of  it  as  is  subject  to  sale  on  execution ;  but  before  any 
levy  the  remaining  partner  sells  out  his  individual  interest,  or  it 
is  sold  on  execution.  According  to  the  doctrine  appHed  in  the  pres- 
ent case,  and  maintained  in  the  case  of  Coover's  Appeal,  supra,  the 
firm  property  is  by  this  last  sale  relieved  from  the  partnership  debts, 
the  two  shares  first  sold  are  at  once  changed  from  interests  in  the 
surplus  to  shares  in  the  corpus  of  the  property  free  from  the  debts, 
their  value  is  doubled,  and  the  fund  which  should  have  gone  to  pay 
the  joint  debts,  is,  without  any  consideration,  appropriated  by  the  trans- 
ferees of  the  individual  interests  of  the  partners. 

Such  is,  in  substance,  the  operation  performed  in  the  present  case. 
Assuming  that  the  mortgages  are  intended  to  convey  only  separate 
interests  of  the  mortgagors  (which,  as  has  been  shown,  is  the  only 
theory  upon  which  they  can  escape  being  regarded  as  fraudulent),  the 
mortgaged  property  was,  at  the  time  the  mortgages  were  given,  liable 
to  be  taken  for  the  partnership  debts.  The  mortgages  were  but  a 
slender  security,  and  their  value  dependent  upon  the  firm  debts  being 
paid.  This  state  of  aftirs  continued  so  long  as  Hollister  E.  .Good- 
win retained  his  one-fifth  interest  in  the  firm.  The  firm  property  was 
legally  under  his  dominion  for  the  payment  of  firm  debts;  and  the 
firm  creditors,  if  they  then  had  their  execution,  could  have  rightfully 
levied  upon  it,  or  availed  themselves  of  Goodwin's  equity  as  to  any 
property  which  must  be  reached  in  that  form.  But  on  the  10th  of 
May,  1867,  Hollister  E.  Goodwin  made  a  transfer  of  his  interest  in 
the  property  of  the  firm  to  one  Mary  B.  Goodwin;  and  on  the  same 
day  the  plaintiff  and  Samuel  E.  Rubert  took  possession^  under  their 
mortgages.  The  referee  has  not  found  what  was  the  consideration 
or  purpose  of  this  assignment  from  Hollister  E.  to  Mary  B.  Goodwin, 
nor  has  he  expressly  found  that  it  was  made  in  good  faith.  But  the 
effect  claimed  for  it  is  that,  HolHster  E.  Goodwin  being  the  only  re- 
maining partner,  the  transfer  of  his  interest  divested  him  of  his  do- 
minion over  the  partnership  property  and  of  his  equity  to  require  the 
application  of  the  partnership  property  to  the  payment  of  its  debts, 
and  that,  as  the  partnership  creditors  could  only  reach  the  property 
through  him,  he,  by  this  transfer  or  surrender  of  his  rights,  had  cut 
off  their  access  to  it,  and  thrown  it  into  the  hands  of  the  transferees 
of  the  individual  partners,  unincumbered  by  fii;m  debts. 

Waiving  any  question  as  to  the  bona  fides  of  this  transaction,  the 
referee  not  having  found  it  fraudulent,  and  treating  the  sale  of  Good- 
win's interest  as  if  it  had  been  made  under  an  execution  against  him, 


1256  PARTNERSHIP  (Part  5 

we  come  back  to  the  question  whether  the  consequences  claimed  do 
legally  follow  from  separate  sales  of  the  individual  interests  of  the 
several  partners.  It  would  be  a  superfluous  labor  to  trace  the  history  of 
the  changes  which  have,  from  time  to  time,  taken  place  in  the  views 
of  the  courts  respecting  the  nature  of  the  interests  of  individual  part- 
ners in  the  common  stock  of  a  firm,  and  the  respective  rights  of  sepa- 
rate and  joint  creditors;  but  it  is  sufficient  to  observe  that  they  have 
resulted  in  a  general  recognition  of  the  doctrine  that  as  between  a  firm 
and  its  creditors  the  property  is  vested  in  the  firm,  and  that  no  indi- 
vidual partner  has  an  exclusive  right  to  any  part  of  the  joint  stock 
until  the  firm  debts  are  paid  and  a  balance  of  account  is  struck  be-' 
tween  him  and  his  copartners,  and  the  amount  of  his  interest  accurately 
ascertained. 

The  corpus  of  the  eft'ects  is  joint  property,  and  neither  partner 
separately  has  anything  in  that  corpus ;  but  the  interest  of  each  is  only 
his  share  of  what  remains  after  the  partnership  debts  are  paid  and  ac- 
counts are  taken.    *    *    * 

Partnership  effects  cannot  be  taken  by  attachment  or  sold  on  execu- 
tion to  satisfy  a  creditor  of  one  of  the  partners,  except  to  the  extent 
of  the  interest  of  such  separate  partner  in  the  effects,  subject  to  the 
payment  of  the  firm  debts  and  settlement  of  all  accounts.  3  Kent, 
Com.  (11th  Ed.)  76. 

Purchasers  of  the  share  of  an  individual  partner  can  only  take  his 
interest.  That  interest,  and  not  a  share  of  the  partnership  effects, 
is  sold,  and  it  consists  merely  of  the  share  of  the  surplus  which  shall 
remain  after  the  pavment  of  the  debts  and  settlement  of  the  accounts 
of  the  firm.    3  Kent,  Com.  (11th  Ed.)  78,  note  "b." 

No  m-ore  property  can  be  carried  out  of  the  firm  by  the  assi"gnee 
of  one  partner  than  the  partner  himself  could  extract  after  all  the  ac- 
counts are  taken.    *    *    * 

No  person  deriving  under  a  partner  can  be  in  a  better  condition  than 
the  partner  himself.     *     *     * 

A  partner  has  no  right,  by  an  assignment  of  his  interest,  to  take 
from  the  creditors  or  other  partners  the  right  to  have  their  claims 
against  the  partnership  satisfied  out  of  its  property.  A  mortgage  made 
by  one  partner  of  his  undivided  interest  cannot  avail  against  the  cred- 
itors of  the  partnership  who  attach  partnership  property.    *    *    * 

These  principles  have  been  enunciated  in  a  great  number  of  cases, 
where  some  one  at  least  of  the  partners  retained  his  equity  to  have 
the  firm  debts  paid,  and  the  rights  of  the  creditors  to  assets  or  pro- 
ceeds, which  have  come  under  the  control  of  a  court  of  equity,  have 
been  worked  out  through  the  equity  of  that  partner.  But  I  find  no  case 
in  which  the  consequences  of  transfers  of  the  separate  interests  of  all 
the  partners  to  outside  parties  has  been  considered,  except  the  case  of 
Doner  v.  Staufter,  1  Pen.  &  W.  (Pa.)  198,  21  Am.  Dec.  370,  and 
Coover's  Appeal,  supra.  In  neither  of  these  cases  is  the  point  adju- 
dicated, for  in  both  cases  the  joint  creditors  intervened  before  the 
sale  of  the  interest  of  the  last  remaining  partner,  and  their  right  to 
priority  was  sustained,  though  the  opinion  of  the  court  was  expressed 
as  to  what  the  result  would  have  been  if  all  the  individual  interests 
had  been  first  sold. 

There  is  another  class  of  cases  in  which  the  partnership  effects  have 
been  held  to  be  liberated  from  liability  to  be  applied  to  partnership 
debts  in  preference  to  the  separate  debts  of  one  partner;  that  is,  where 


Ch.  2)        RELATIONS   OF   THE   PARTNERS   BETWEEN   THEMSELVES  1257 

a  bona  fide  sale  has  been  made  by  a  retiring  partner,  in  a  solvent  firm 
of  two  members,  to  his  copartner,  the  latter  assuming  the  debts.  In 
such  a  case  it  is  settled  that  the  property  formerly  of  the  partnership 
becomes  the  separate  property  of  the  purchasing  partner,  and  that 
the  partnership  creditors  are  not  entitled  to  any  preference  as  against 
his  individual  creditors  in  case  of  his  subsequent  insolvency.  Ex  parte 
Ruffin,  6  Ves.  119;  Dimon  v.  Hazard,  32  N.  Y.  65.  But  in  those  cases 
the  joint  property  was  converted  into  separate  property  by  the  joint 
act  of  all  the  members  of  the  firm.  They  had  power  to  dispose  of  the 
corpus  of  the  joint  property,  and  the  exercise  of  that  power,  when 
free  from  fraud,  divested  the  title  of  the  firm  as  effectually  as  if  they 
had  united  in  a  sale  to  a  stranger.  It  remained  subject  to  execution 
for  firm  debts  so  long  as  it  continued  in  the  hands  of  the  purchasing 
partner.  It  is  conceded  that  the  creditors  have  no  lien  which  would 
affect  the  title  of  a  purchaser  from  the  firm.  But  the  question  now 
is :  What  is  the  effect  upon  the  title  of  the  firm,  as  between  it  and  its 
creditors,  of  transfers  by  the  partners  severally  of  their  respective 
interests  to  third  persons  ?  Where  the  property  remains  in  specie,  and 
no  act  has  been  done  by  the  firm  to  divest  its  title,  but  the  partners 
have  made  separate  transfers  of  their  respective  individual  interests 
to  different  persons,  is  it  still  to  be  regarded,  as  to  the  firm  creditors, 
as  firm  property,  or  has  it  become  the  absolute  property  of  the  several 
transferees  of  the  interests  of  the  individual  partners? 

It  has  been  shown  that  no  share  in  the  corpus  of  the  property  passed 
by  either  of  these  transfers  separately,  but  merely  an  interest  iii  the 
surplus,  and  which  should  be  ascertained  on  an  accounting  after  pay- 
ment of  the  firm  debts.  But  it  is  claimed  that,  when  all  the  partners 
have  assigned,  their  interest  in  the  property  is  divested,  and  their  equity 
is  destroyed,  and  therefore  the  property  is  released  from  the  debts,  and 
what  was  at  the  time  of  the  assignment  a  share  of  a  contingent  surplus 
has  been  converted  into  a  share  of  the  corpus  of  the  property.  Is  this 
position  sound?  When  a  partner  sells  his  interest  in  a  firm  to  a  person 
other  than  his  copartner,  or  it  is  sold  on  execution  against  him,  does 
he  thereby  lose  all  equity  to  have  the  firm  debts  paid  out  of  the  assets  ? 

When  he  sells  to  his  copartner  he  relies  upon  his  assumption  of  the 
partnership  debts,  and  unless  he  stipulates  for  an  application  of  the  as- 
sets to  that  purpose  he  parts  with  all  lien  upon  them.  But  when  he 
sells  to  a  stranger  not  liable  for  the  debts,  or  his  interest  is  sold  on  exe- 
cution, is  not  the  right  to  have  the  debts  paid  out  of  the  property  a 
right  of  indemnity  personal  to  himself,  and  which  does  not  pass  by  the 
sale?  Could  it  be  tolerated  tliat  the  interest  of  a  partner  should  be 
sold  under  execution  against  him,  on  which  sale  only  the  value  of 
his  interest  in  the  surplus  could  be  realized,  and  that  the  purchaser 
should  be  allowed  to  take  the  corpus  of  the  property  and  leave  him 
liable  for  the  debts?  If  the  legal  effect  of  the  transfer  were  set  forth 
in  the  instrument,  it  would  be  seen  that  all  the  purchaser  acquired  was 
a  right  to  an  account  and  to  the  partner's  share  in  the  surplus  after 
payment  of  debts,  when  ascertained,  and  that  he  had  no  right  to  that 
part  of  the  property  which  was  required  for  the  payment  of  debts ; 
that  the  sale  was  subject  to  the  debts.  3  Kent,  Com.  76-78.  The  part- 
ner whose  share  was  sold  would  manifestly  have  an  interest  in  the 
protection  and  appropriation  of  that  part  of  the  property  in  discharge 
of  his  own  liability  to  the  firm  creditors. 

I  do  not  see  how  this  right  can  be  affected  by  the  question  whether 


1258  PARTNERSHIP  (Part  5 

the  separate  interests  of  all  or  only  one  of  the  partners  is  thus  sold. 
Each  of  the  purchasers  would  acquire  an  interest  merely  in  the  sur- 
plus, and  each  partner  whose  interest  was  sold  would  have  the  right 
to  indemnity  against  the  firm  debts  by  the  application  to  such  debts  of 
so  much  of  the  property  as  might  be  necessary  for  the  purpose.  These 
debts  must  have  been  taken  into  consideration  in  fixing  the  price  of  the 
interest  sold,  and  consequently  allowed  to  the  purchaser,  and  the 
partnership  assets  are  the  primary  fund  for  their  payment.  The  case 
differs  materially  from  a  sale  by  a  retiring  copartner  to  his  copartner, 
who  is  personally  liable  for  the  debts  directly  to  the  creditors;  but 
even  such  a  sale  is  valid  only  when  there  is  no  insolvency  at  the  time. 
To  sell  to  an  insolvent  partner  would  be  a  clear  fraud.  How  much 
more  clearly  apparent  would  be  the  injury  to  creditors  by  a  sale  to  a 
person  not  liable  for  the  debts,  if  such  sale  had  the  effect  to  relieve  the 
property  from  them. 

It  can  hardly  be  necessary,  when  the  firm  property  remains  ni  specie, 
and  is  tangible  and  capable  of  being  levied  upon,  to  resort  to  the  equi- 
ties of  the  partners  in  case  there  has  been  no  transfer  by  the  firm  and 
the  only  adverse  claimants  are  assignees  of  the  individual  interests 
of  the  several  partners  for  their  separate  debts.  The  right  of  the  firm 
creditor  to  levy  on  property  thus  situated  can  be  sustained  on  two 
grounds.  If  the  effect  of  any  of  the  transfers  is  to  divest  the  title  of 
the  firm,  then,  if  effected  by  the  acts  of  the  partner,  they  are  clearly 
fraufiulent  and  void  as  to  firm  creditors,  as  is  shown  in  the  cases  of 
Ransom  v.  Vandeventer,  41  Barb.  307,  and  Wilson  v.  Robertson,  21 
N.  Y.  587.  An  appropriation  to  the  individual  debt  of  one  partner 
of  any  part  of  the  firm  property,  even  with  the  assent  of  his  copartners, 
is  illegal  and  void,  provided  the  firm  is  not  left  with  sufficient  to  pay 
its  debts.  How  absurd  it  would  be  to  hold  that  all  of  the  partners, 
by  making  separate  assignments  of  their  respective  shares  in  the  firm 
property  to  their  individual  creditors,  could  eft'ectually  divest  the  firm 
of  all  its  property  and  apply  it  to  their  individual  debts,  leaving  noth- 
ing for  the  partnership  creditors.  But  the  simple  solution  of  the  ques- 
tion is  to  hold  that  the  title  of  the  firm,  as  between  it  and  its  creditors, 
to  the  corpus  of  its  property,  or  at  least  to  so  much  of  it  as  is  neces- 
sary for  the  debts,  is  not  divested  by  these  separate  transfers  to 
strangers. 

As  is  stated  by  Prof.  Parsons,  in  his  work  on  Partnership  (pages 
356  to  362  [2d  Ed.]  c.  10,  1),  a  partnership,  though  neither  a  tenancy 
in  common  nor  a  corporation,  has  some  of  the  attributes  of  both. 
The  well-established  rule  which  excludes  creditors  of  the  several  part- 
ners from  the  partnership  property  until  that  has  paid  the  debts  of 
the  partnership  is  derived  from  the  acknowledgment  that  a  partner- 
ship is  a  body  by  itself.  In  its  relation  to  its  creditors  it  is  placed  upon 
the  basis  of  having  its  own  creditors  and  possessing  its  own  property, 
which  it  applies  to  the  payment  of  its  debts,  and  after  this  work  is  done 
there  is  a  resolution  of  the  body  into  its  elements. 

Until  some  act  is  done  by  the  firm  to  transfer  the  joint  interest,  no 
separate  act  of  either  or  all  of  the  partners,  or  proceedings  against 
them  individually  with  reference  to  their  individual  interests,  should 
be  held  to  affect  the  title  of  the  firm,  so  as  to  preclude  a  creditor  of 
the  firm,  having  a  judgment  and  execution,  from  levying  upon  the  joint 
property.  To  hold  that  separate  transfers  of  their  individual  shares 
by  the  several  partners  can  convey  a  good  title  to  the  whole  pioperty 


Ch.  2)     RELATIONS  OF  Tiii;  i'autxi:ks  bktweex  themselves       1259 

free  from  joint  debts  would  be  to  return  to  the  doctrine,  long  since 
exploded,  that  partners  hold  by  moieties  as  tenants  in  common.  In 
the  present  advanced  stage  of  the  law  upon  this  subject,  no  established 
rule  is  violated  by  holding  that  the  title  of  the  firm,  as  between  it  and 
its  creditors,  cannot  be  divested  by  the  acts  of  the  partners  severally, 
not  in  the  business  of  the  firm,  nor  by  the  separate  creditors  of  mem- 
bers of  the  firm  (further  than  such  temporary  interruption  of  the 
possession  as  may  be  necessary  to  enable  the  officers  of  the  law  to 
make  an  effectual  sale  of  the  interest  of  the  debtor  partner).  This  view 
does  not  recognize  any  lien  of  partnership  creditors  upon  the  firm 
property.  The  firm  have  power  to  dispose  of  it  without  regard  to 
the  creditors,  provided  the  disposition  be  not  fraudulent.  But  the 
individual  members  or  their  creditors  ought  not  to  have  any  such  power, 
and  all  transfers  made  by  them  for  individual  purposes  should  be 
held  inoperative  upon  the  corpus  of  the  property,  so  long  as  there  are 
firm  debts  unpaid  for  which  the  property  is  required.  As  against 
firm  creditors,  no  greater  effect  should  be  given  to  such  transfers  when 
made  by  all  the  partners  separately  than  when  made  by  a  portion  of 
them,  but  the  property  should  be  deemed  to  continue  in  the  firm  until 
its  title  has  been  divested  by  some  act  of  the  firm. 

My  conclusion  is  that,  as  between  the  firm  of  J.  C.  Smith  &  Co. 
and  its  creditors,  the  property  levied  upon  by  the  defendants  remained 
the  property  of  the  firm,  and  subject  to  levy  on  execution  against  it, 
notwithstanding  the  transfers  by  the  several  partners  of  their  re- 
spective individual  interests.     *     *     * 


SECTION    2.— WHAT    CONSTITUTES    PARTNERSHIP 

PROPERTY 

Uniform  Partnership  Act,  Section  8.  (1)  All  property  original- 
ly brought  into  the  partnership  stock  or  subsequently  acquired,  by 
purchase  or  otherwise,  on  account  of  the  partnership  is  partnership 
property.  (2)  Unless  the  contrary  intention  appears,  property 
acquired  with  partnership  funds  is  partnership  property. 


ROBINSON  BANK  v.  MILLER  et  al. 

(Supreme  Court  of  Illinois,  1894.     153  HI.  244,  38  N.  E.  1078,  27  L.  R.  A.  44!), 

46  Am.  St.  Rep.  883.) 

Magrudhr.  J.  *  *  *  Whether  real  estate  upon  which  a  part- 
nership transacts  its  business  is  firm  property  or  the  property  of  the 
individual  members  of  the  firm  is  oftentimes  a  difficult  question  to 
determine,  and  one  upon  which  the  authorities  are  not  altogether  uni- 
form. The  mere  fact  of  the  use  of  land  by  a  firm  does  not  make  it 
partnership  property.  *  *  *  Nor  is  real  estate  necessarily  the  in- 
dividual property  of  the  members  of  a  firm  because  the  title  is  held 
by  one  member,  or  by  the  several  members  in  individual  interests. 
*  *  *  Whether  real  estate  is  partnership  or  individual  property  de- 
pends largely  upon  the  intention  of  the  partners.  That  intention  may 
be  expressed  in  the  deed  conveying  the  land,  or  in  the  articles  of  part- 
nership ;  but  when  it  is  not  so  expressed  the  circumstances  usually 
relied  upon  to  determine  the  question  are  the  ownership  of  the  funds 


1260  PARTNERSHIP  (Part  5 

paid  for  the  land,  the  uses  to  which  it  is  put,  and  the  manner  in  which 
it  is  entered  in  the  accounts  upon  the  books  of  the  firm.  *  *  * 
Where  real  estate  is  bought  with  partnership  funds  for  partnership 
purposes,  and  is  applied  to  partnership  uses,  or  entered  and  carried 
in  the  accounts  of  the  firm  as  a  partnership  asset,  it  is  deemed  to  be 
firm  property;  and  in  such  case  it  makes  no  difference,  in  a  court  of 
equity,  whether  the  title  is  vested  in  all  the  partners,  as  tenants  in 
common,  or  in  one  of  them,  or  in  a  stranger.  *  *  *  If  the  real  es- 
tate is  purchased  with  partnership  funds,  the  party  holding  the  legal 
title  will  be  regarded  as  holding  it  subject  to  a  resulting  trust  in  favor 
of  the  firm  furnishing  the  money.  In  such  case  no  agreement  is  nec- 
essary, and  the  statute  of  frauds  has  no  application.    *     *     * 

In  the  case  at  bar  the  land  was  not  purchased  with  partnership 
funds.  *  *  *  The  evidence,  however,  does  show  that  the  property 
was  bought  for  the  purpose  of  being  used  in  the  milling  business,  and 
that  after  its  purchase  it  was  used  for  firm  purposes,  and  that  the  firm 
gave  its  notes  to  pay  for  repairs,  and  for  placing  new  machinery  in 
the  mill  upon  the  premises.  Under  these  circumstances,  was  the  land 
partnership  property,  or  the  individual  property  of  the  partners,  hold- 
ing as  tenants  in  common?  It  cannot  be  said  that  the,  land  is  firm 
property,  upon  the  theory  of  a  resulting  trust,  because  the  money  of 
the  firm  was  not  used  to  buy  the  property.  Such  a  trust  might  ex- 
ist in  favor  of  the  firm,  regarding  it  as  a  person,  if  the  partners  had 
taken  the  legal  title,  and  the  firm  had  advanced  the  purchase  money. 
The  trust  must  arise  at  the  time  of  the  execution  of  the  conveyance, 
and  when  the  title  vests  in  the  grantee.  Such  could  not  have  been  the 
case  here,  under  the  facts  stated.  *  *  *  j^  view  of  the  fact  that 
the  land  was  bought  with  individual,  and  not  partnership,  funds,  and 
was  conveyed  in  undivided  interests  to  the  several  partners,  and  in 
the  absence  of  any  agreement  that  it  should  be  regarded  as  firm  prop- 
erty, does  the  conduct  of  the  parties  in  afterwards  forming  a  part- 
nership, and  using  the  property  for  partnership  purposes  and  re- 
pairing and  improving  the  mill  at  the  expense  of  the  firm,  make  the 
land  firm  property,  in  a  court  of  equity?  A  negative  answer  to  this 
question  is  found  in  many  of  the  authorities,  as  will  be  seen  by  refer- 
ence to  the  following :  Alexander  v.  Kimbro,  49  Miss.  529 ;  Theriot 
V.  Michel,  28  La.  Ann.  107;  Reynolds  v.  Ruckman,  35  Mich.  80; 
Parker  v.  Bowles,  57  N.  H.  491 ;  Thompson  v.  Bowman,  6  Wall. 
316,  18  L.  Ed.  736;   Frink  v.  Branch,  16  Conn.  260.    *    *    * 

The  general  doctrine  of  all  these  cases  is  that  a  purchase  of  the 
land  with  partnership  funds  is  necessaiy  to  make  it  firm  property. 
T.  Parsons,  in  his  work  on  Partnership  (4th  Ed.),  says:  "Although 
it  [real  estate]  be  held  in  the  joint  name  of  two  or  more  persons,  if 
there  be  no  proof  that  it  was  purchased  with  partnership  funds  for 
partnership  purposes,  it  will  be  considered  as  held  by  them  as  joint 
tenants  or  tenants  in  common.  *  *  *  So,  if  not  paid  for  by  part- 
nership funds,  then  it  is  probably  his  property  who  does  pay  for  it, 
whatever  use  he  permits  to  be  made  of  it."  *  *  *  There  are  cases 
which  hold  that,  even  though  the  land  was  originally  bought  by  the 
several  partners  with  their  individual  funds,  and  deeded  to  them  as 
tenants  in  common,  yet  it  will  be  regarded  in  equity  as  firm  property 
where  it  is  improved  out  of  partnership  funds  for  firm  purposes,  and 
actually  used  for  such  purposes,  or  where  the  firm  puts  valuable  and 
permanent  improvements  upon  it  for  firm  purposes,  and  which  are 


Ch.  2)       RELATIONS  OF  THE   PARTNERS  BETWEEN  THEMSELVES  126J 

essential  to  the  firm.  In  some  instances  the  land  is  held  to  be  the 
property  of  the  partners,  and  the  improvements  to  be  the  property  of 
the  firm.  *  *  *  The  use  of  the  property  is  not  conclusive  of  its 
character  as  real  estate  or  personalty,  but  is  only  evidence  of  the  in- 
tention of  the  parties.  When  the  intention  of  the  partners  to  convert 
the  land  into  firm  property  is  inferred  from  circumstances,  the  circum- 
stances must  be  such  as  do  not  admit  of  any  other  equally  reasonable 
and  satisfactory  explanation.  *  *  *  And,  where  it  is  sought  to 
show  a  conversion  of  the  land  into  personalty  by  agreement  of  the 
partners,  such  agreement  must  be  clear  and  explicit.     *     *     * 

The  weight  of  authority  seems  to  us  to  support  the  position  that 
where  persons  who  afterwards  become  partners  buy  land  in  their  in- 
dividual names  and  with  their  individual  funds,  before  the  making  of 
a  partnership  agreement,  the  land  will  be  regarded  as  the  individual 
property  of  the  partners,  in  the  absence  of  a  clear  and  explicit  agree- 
ment subsequently  entered  into  by  them  to  make  it  firm  property,  or  in 
the  absence  of  controlling  circumstances  which  indicate  an  intention 
to  convert  it  into  firm  assets.  We  do  not  think  that  an  application  of 
this  rule  to  the  facts  of  the  present  case  shows  the  real  estate  here  in 
controversy  to  be  firm  property.  The  testimony  proves  affirmatively 
that  there  was  no  agreement,  written  or  verbal,  to  put  the  land  into 
the  firm  as  a  firm  asset,  and  that  it  was  treated  by  the  parties  as  in- 
dividual property.    *    *    * 

The  judgment  of  the  appellate  court  and  the  decree  of  the  ci'rcuit 
court  are  affirmed.    *    *    * 


SECTION   3.— WHAT   CONSTITUTES    PARTNERSHIP 

CAPITAL 


DEAN  et  al.  v.  DEAN  et  al. 
(Supreme  Court  of  Wisconsin,  1882.    54  Wis.  23,  11  N.  W.  239.) 

Cole,  C.  J.  This  action  is  brought  by  the  plaintiffs,  as  executors,  to 
obtain  a  construction  of  the  codicil  to  the  will  of  N.  W.  Dean,  who 
died  February  28,  1880.  The  will  was  dated  February  29,  1876. 
and  makes  a  full  disposition  of  the  testator's  estate,  both  real  and 
personal.  After  the  payment  of  certain  legacies  named,  the  testator 
directed  his  executors  to  divide  the  rest  and  residue  of  his  estate  into 
six  equal  parts,  which  were  to  be  paid  to  the  persons  named  in  the 
proportions  specified.  *  *  *  There  is  no  controversy  as  to  the 
proper  construction  of  the  will,  and  we  need  not  further  give  its 
provisions.  The  codicil  bears  date  February  23,  1880.  On  May  1, 
1871,  the  decedent  and  his  brother,  Thaddeus  Dean,  entered  into  part- 
nership in  the  business  of  dealing  in  lumber  in  the  city  of  Chicago, 
which  partnership  was  continued  to  the  death  of  N.  W.  Dean. 

The  will  makes  no  express  reference  tO'  this  partnership  business. 
But  the  codicil,  after  reciting  that  this  partnership  business  had 
hitherto  been  profitable  to  the  testator,  which  was  largely  due  to  the 
business  capacity  and  integrity  of  his  brother  Thaddeus,  contains  this 
language:  "And  being  desirous  of  showing  my  appreciation  thereof, 
and  that  the  business  so  commenced  should  be  maintained  and  car- 
ried on,  I  hereby  direct  my  said  executors  to  allow  my  present  cap- 


1262  PARTNERSHIP  (Part  5 

ital  in  said  business  to  remain  for  the  period  of  two  years  after  my 
decease,  collecting  and  receiving  annually,  from  my  said  brother 
Thaddeus,  the  net  profits  arising  from  said  business,  under  my  agree- 
ment with  him,  belonging  to  me,  for  the  benefit  of  my  estate.  At 
the  expiration  of  two  years  it  is  my  will  and  I  direct  that  my  said  ex- 
ecutors have  a  full  settlement  and  accounting  with  my  said  brother 
Thaddeus  in  relation  to  said  business,  and  that  thereupon  they  col- 
lect and  receive  from  him  one-half  of  the  net  value  of  my  interest 
therein,  and  upon  the  payment  by  him  of  the  one-half  value  so  ascer- 
tained I  instruct  and  direct  my  said  executors  to  execute  and  deliver 
to  him  all  proper  and  necessary  assignments  and  conveyances  sO'  as 
to  vest  in  him  absolutely  all  my  right,  title,  and  interest  in  the  business 
aforesaid ;  it  being  my  intention,  in  addition  to  the  bequest  hereto- 
fore made  to  him  in  my  said  will,  to  bequeath  and  devise  to  him  one- 
half  of  my  entire  interest  in  said  business,  subject  to  the  limitations 
and  restrictions  aforesaid." 

The  articles  of  copartnership,  to  which  reference  is  made  in  the 
codicil,  are  quite  full  and  specific.  They  provide,  among  other  things, 
that  each  partner  should  contribute  $15,000  to  the  capital  of  the  firm, 
which  was  to  be  used  in  carrying  on  the  copartnership  business ;  that 
Thaddeus  Dean  was  to  have  the  management  of  the  business ;  that 
he  should  be  entitled  to  receive  two-thirds  of  the  profits,  and  N.  W. 
Dean  one-third  thereof.  The  losses  were  to  be  borne  in  the  same 
proportion.  Books  of  account  were  to  be  kept,  wherein  all  of  the 
iransactions  of  the  firm  should  be  entered,  and  which  books  should 
be  open  to  the  inspection  of  each  partner  at  all  times.  By  the  ninth 
clause  it  was  provided  that  N.  W.  Dean  was  to  take  out  of  the  cash 
of  the  company's  funds  $125  per  month  for  his  own  use,  and  Thad- 
deus Dean  $250  per  month,  providing  these  sums  could  be  sO'  drawn 
out  by  the  respective  parties  without  impairing  the  capital  of  the 
firm,  but  neither  partner  was  to  take  a  greater  sum  for  his  own  use 
during  any  month  without  the  written  consent  of  the  other.  The 
tenth  clause  provided  that  Thaddeus  Dean,  at  the  end  of  each  year, 
and  oftener,  if  need  be,  on  request,  should  make  and  render  to  N.  W. 
Dean  a  just  and  true  account  of  all  the  gains  and  profits,  as  well  as 
losses,  of  the  business,  and  of  all  things  done  on  behalf  of  the  part- 
nership, and  this  account  being  so  made  he  was  to  pay  N.  W.  Dean 
his  proportionate  share  of  the  profits,  and  take  to  himself  his  own 
share.  In  the  eleventh  clause  it  was  provided  that  during  the  contin- 
uance of  the  copartnership  none  of  the  capital  of  the  firm,  nor  any 
of  the  accrued  but  undivided  gains  and  profits  thereof,  should  be 
used  or  employed  by  the  parties  thereto  for  any  other  purpose  than 
carrying  on  said  business.  In  the  twelfth,  that  at  the  end  of  the 
copartnership  a  final  accounting  should  be  had,  and  all  the  debts  of 
the  firm  should  be  first  paid,  then  each  should  draw  out  the  amount 
of  capital  originally  contributed  by  him,  diminished  by  his  propor- 
tionate share  of  losses,  if  any  ;  the  balance,  if  any,  to  be  divided  as  pro- 
vided for  dividing  profits.  These  are  the  material  provisions  of  the 
copartnership  agreement. 

From  three  letters  which  were  introduced  on  the  hearing — one  writ- 
ten by  Thaddeus  Dean ;  the  other  two  by  N.  W.  Dean — it  appears 
that  each  party  agreed,  in  July,  1872,  to  increase  its  capital  to  $20,- 
000,  and  did  so.  And  it  further  appears,  from  the  annual  statement 
made  of  the  partnership  business,  that  at  the  end  of  each  partner- 


Ch.  2)       RELATIONS   OF   THE   PARTNERS   BETWEEN   THEMSELVES  1203 

ship  year  each  partner  was  credited  on  the  books  of  the  concern  with 
his  share  of  the  profits,  and  was  charged  with  the  amount  which  he 
had  drawn  out  during  the  year.  The  accumulated  but  undivided  prof- 
its of  the  business  consisted  almost  wholly  of  real  estate,  lumber, 
notes,  book  accounts,  and  other  personal  property  belonging-  to  the 
firm.  The  amount  standing  to  the  credit  of  N.  W.  Dean  at  the  time 
of  his  death,  including  his  capital  of  $20,000,  was  $43,478.16.  Or, 
to  speak  more  accurately,  that  sum  embraced  the  profits  standing 
to  the  credit  of  N.  W.  Dean  on  the  books  of  the  firm  at  the  time 
of  his  death,  and  also  the  unascertained  profits  which  had  accrued 
since  the  last  annual  statement  of  May  1,  1879,  down  to  that  time. 

The  question  arising  upon  the  codicil,  which  the  executors  request 
the  aid  of  the  court  in  determining,  is  what  amount  they  must  leave 
in  the  partnership  business  for  two  years,  and  which,  at  the  end  of 
that  period,  they  are  directed  to  assign  and  convey  to  Thaddeus  Dean 
upon  his  paying  one-half  of  its  ascertained  net  value;  the  annual 
profits  having  been  collected  by  them  in  the  meantime.  On  the  part 
of  the  residuarv  legatee  Thaddeus  Dean  it  is  claimed  that  it  was  the 
intention  of  the  testator  that  his  entire  interest  in  the  partnership 
business  should  remain  in  the  business,  including  both  his  capital  of 
$20,000  and  all  accumulated  but  undivided  profits  belonging  to  him 
under  the  partnership  agreement ;  while,  on  the  part  of  other  resid- 
uary legatees,  it  is  insisted  that  it  was  his  capital  only  which  was  to  be 
left  in  the  business.     *     *     * 

On  looking  at  the  language  of  the  codicil  itself,  the  first  thing  which 
will  be  noticed  is  that  the  testator,  in  the  introductory  part,  speaks 
of  his  "interest"  in  the  business,  which  has  been  profitable  to  him. 
Being  desirous  that  the  business  so  commenced  should  be  maintained 
and  carried  on,  he  directs  his  "executors  to  allow  my  present  capital 
in  said  business  to  remain  for  the  period  of  two  years  after  my  de- 
cease, collecting  and  receiving  annually  from  my  said  brother,  Thad- 
deus Dean,  the  net  profits  arising  from  said  business  under  my  agree- 
ment with  him,  belonging  to  me,  for  the  benefit  of  my  estate."  It  will 
be  seen  that  the  mind  of  the  testator  was  fixed  at  the  outset  upon  his 
entire  interest  in  that  business  as  distinguishable  from  his  capital  there- 
in. If  he  intended  that  his  entire  interest  should  remain,  it  is  singular 
that  he  changed  his  language,  using  words  which  convey  a  different 
meaning.  The  terms  "interest"  and  "present  capital"  are  not  equiv- 
alent expressions,  and  do  not  convey  the  same  idea  in  the  connection  in 
which  they  are  used.  If  the  testator  intended  that  his  entire  interest 
in  the  business  should  remain,  it  is  remarkable  that  he  changed  his 
phraseology.  But  this  is  not  all.  The  executors  are  directed  to 
collect  annually  from  his  brother  Thaddeus  the  het  profits  arising  from 
the  business  under  the  partnership  agreement  which  belonged  to  him 
for  the  benefit  of  his  estate.  If  the  codicil  is  construed,  as  it  must  be, 
in  connection  with  the  partnership  agreement,  there  is  no  difficulty 
in  getting  at  the  intention  of  the  testator,  for  the  agreement  makes 
a  ptain  and  broad  distinction  between  capital  and  profits.  The  for- 
mer is  devoted  to  the  use  of  the  partnership  business,  but  provision 
is  made  for  withdrawing  the  latter  from  time  to  time.  Therefore  we 
think  that  the  word  "capital,"  as  used  in  the  codicil,  must  be  under- 
stood as  meaning  the  same  thing  as  when  used  in  the  agreernent ;  it 
means  the  capital  as  opposed  to  profits,  and  the  word  "profits"  means 
the  gains  upon  the  capital  invested  in  the  business.     *     *     *     If  he 


12G4  PARTNERSHIP  (Part  5 

had  intended  to  direct  that  his  whole  interest  in  the  business  should 
remain  two  years,  or  if  he  regarded  his  entire  assets  therein  as  cap- 
ital, his  intention  or  understanding  would  have  been  made  manifest  by 
the  use  of  different  language  than  that  employed. 

But,  as  observed  by  counsel  who  argue  in  favor  of  the  view  we  have 
taken  of  the  meaning  of  the  codicil,  the  testator,  in  the  very  sentence 
in  which  the  words  "my  present  capital"  occur,  directs  what  shall  be 
done  with  the  "net  profits"  of  the  business,  and  pointedly  makes  a  dis- 
tinction between  capital  and  profits,  thus  showing  that  the  two  things 
were  separate  in  his  mind.  The  intention  of  the  testator  must  pre- 
vail if  it  is  possible  to  gather  it  from  the  language  of  the  entire  codicil. 
That  intention  was  to  allow  his  capital  to  remain  in  the  business  for 
two  years,  but  nothing  more.  This  construction  of  the  codicil  is 
vigorously  combated  by  the  learned  counsel  for  Thaddeus  Dean,  be- 
cause, as  he  says,  if  the  accumulated  profits  of  the  parties  were  with- 
drawn it  would  so  cripple  the  business  that  it  could  not  be  carried  on 
with  the  success  and  profit  which  had  theretofore  attended  it.  But 
this  argument,  under  the  circumstances,  is  entitled  to  but  little  weight ; 
for  if  there  had  been  no  provision  for  continuing  the  business  it  would 
have  to  be  closed  up  on  the  death  of  N.  W.  Dean.  Its  continuance, 
therefore,  was  a  favor,  and  could  not  have  been  claimed  as  a  right  by 
the  surviving  partner.     *     *     * 

It  results,  from  the  views  expressed,  that  the  judgment  of  the  circuit 
court,  placing  a  construction  upon  the  codicil,  and  giving  directions 
to  the  executors  in  regard  to  the  proper  execution  of  their  trust, 
is  erroneous.  The  judgment  must,  therefore,  be  reversed,  and  the 
cause  be  remanded,  with  directions  to  enter  a  judgment  in  accordance 
with  this  opinion. 


SECTION  4.— ACQUISITION  AND  TRANSFER  OF 
PARTNERSHIP  REALTY 

While  title  to  personal  property  may  be  taken,  held,  and  trans- 
ferred in  the  partnership  name,  it  is  generally  held  that  title  to 
realty  cannot  be  taken  in  the  partnership  name,  because  of  the 
uncertainty  as  to  the  grantee.  There  is  authority,  however,  for  the 
proposition  that  title  taken  in  the  firm  name  vests  in  all  of  the 
members  of  the  firm,  parol  evidence  being  admissible  to  identify 
the  grantees.  The  Uniform  Partnership  Act  adopts  the  latter 
rule. 

Section  8.  (3)  Any  estate  in  real  property  may  be  acquired  in 
the  partnership  name.  Title  so  acquired  can  be  conveyed  only  in 
the  partnership  name.  (4)  A  conveyance  to  a  partnership  in  the 
partnership  name,  though  without  words  of  inheritance,  passes  the 
entire  estate  of  the  grantor  unless  a  contrary  intent  appears.* 

Section  10.     (1)  Where  title  to  real  property  is  in  the  partner- 

4  Lewis'  Note  to  Section  S  (3,  Jf). — Paragraphs  (3),  (4),  in  connection  with 
section  10,  infra,  do  away  with  existing  confusions  where  there  has  been  a 
conveyance  to  a  partnership  in  the  partnership  name,  or  a  conveyance  by  a 
partner  in  the  partnership  name.  At  present  such  conveyance  may  convey 
an  equitable,  but  does  not  convey  a  legal  title.  To  this  extent  paragraph  (3) 
of  this  section  and  section  10  (1),  infra,  change  existing  law. 


Ch.  2)       RELATIONS  OF  THE  PARTNERS  BETWEEN  THEMSELVES  1263 

ship  name,  any  partner  may  convey  title  to  such  property  by  a 
conveyance  executed  in  the  partnership's  name.     *     *     * 

Of  these  sections  Professor  Lewis  has  said:  "In  permitting  a 
partnership  to  acquire  real  property  by  a  conveyance  executed  in 
the  partnership  name,  the  intent  of  the  Conference  was  to  avoid 
those  complications  now  arising  when  an  attempt  is  made  to  make 
such  a  conveyance.  Of  course  it  is  not  probable  that  the  practice 
of  holding  title  to  partnership  real  estate  in  the  partnership  name 
will  become  universal.  *  *  *  gtill  we  may  expect  that  a  con- 
trolling consideration  which  will  move  many  to  place  title  to  real 
property  in  the  partnership  name  will  be  the  convenience  of  being 
able  to  convey  good  title  in  case  of  the  death  of  a  partner  without 
having  to  secure  the  signature  of  persons  not  members  of  the  par- 
nership."  ^ 

WINTER  V.  STOCK. 
(Supreme  Court  of  California,  1S66.  29  Cal.  407,  89  Am.  Dec.  57.) 
CuRREiY,  C.  J.  This  action  was  brought  to  recover  the  sum  of  $800, 
paid  by  the  plaintiff  to  the  defendant  on  a  contract  for  the  purchase  of 
a  lot  of  land  in  the  city  of  San  Francisco.  The  contract  between  the 
parties  was  in  writing,  the  concluding  clause  of  which,  on  the  part  of 
the  defendant,  the  bargainor,  is  in  these  words:  "I  warrant  an  indis- 
putable and  satisfactory  title,  or  no  sale,  and  I  have  to  pay  the  ex- 
penses for  the  examination  of  the  title."  The  defendant's  title  was 
submitted  to  a  lawyer  for  examination,  who  pronounced  against  it. 

The  objection  made  to  the  title,  and  which  the  court  below  held 
well  founded,  was  that  the  conveyance  by  the  Racouillats  was  to  Louis 
Blanchard  &  Co.  and  John  Antoine  Couttolene  &  Co.,  and  that  the 
conveyance  of  the  8th  of  August,  1857,  was  by  John  Antoine  Cout- 
tolene and  Ernest  Paris  to  Louis  Blanchard  &  Co.,  and  that  the  con- 
veyance of  February,  1861,  was  by  Louis  Blanchard  and  Francois 
Porta  to  Edme  Ludovic  Racouillat. 

The  fact  that  these  several  conveyances  were  made  to  certain  per- 
sons whose  names  were  mentioned  with  the  words  "and  Company"  an- 
nexed thereto  seemed  to  have  been  regarded  as  passing  the  title,  not 
alone  to  the  grantees  named,  but  also  to  persons  not  named,  but  rep- 
resented by  the  word  "Company,"  and  that  the  deeds  of  the  persons 
thus  represented  were  necessary  to  transfer  the  entire  title  of  the 
property  to  a  subsequent  grantee,  and  that,  as  "Company"  was  a  word 
of  indefinite  and  uncertain  import,  it  could  not  be  known  to  the  pur- 
chaser that  Paris  and  Porta  were  respectively  members,  and  the  only 
members,  of  the  firms  of  Blanchard  &  Co.  and  Couttolene  &  Co. 

The  doctrine  on  this  subject  is  well  expounded  in  Arthur  v.  Weston 
and  Strode,  22  Mo.  378.  *  *  *  The  court  observed  that  the  ques- 
tion "is  not  merely  whether  the  grantor  intended  to  convey  to  the 
persons  composing  the  firm,  but  whether  the  partnership  style  is,  as 
a  matter  of  law,  a  good  name  of  purchase  in  a  conveyance  of  real 
property  sufficient  to  pass  the  legal  title  to  all  the  individuals  of  the 

6  The  Uniform  Partnership  Act,  24  Yale  Law  Joiirnal,  624. 
B.&  B.Bus.Law— 80 


1266  PARTNERSHIP  (Part  5 

firm.  *  *  *  A.  conveyance  of  real  property  being  required  by  the 
statute  to  be  put  in  writing,  the  party  who  is  to  take  as  grantee  must 
be  sufficiently  ascertained  by  the  written  instrument,  or  it  is  a  nullity, 
so  far  as  it  purports  to  effect  a  transfer  of  the  legal  title."  The  court, 
in  the  case  here  referred  to,  admit,  upon  authorities  cited,  that  parties 
to  a  deed  may  be  described  by  other  modes  than  by  their  proper  names 
— as  a  grant  to  the  wife  of  a  person  named,  or  to  the  first  son  or  sec- 
ond son,  or  to  all  the  children  of  a  particular  person  who  is  specified, 
or  to  a  person  who  can  answer  the  description.     *     *     » 

The  defendant's  title  to  the  lot  being  good  and  valid,  it  was,  in  the 
sense  of  the  defendant's  warranty,  an  indisputable  title,  and  the  plaintiff 
was  in  duty  bound  to  be  satisfied  with  it.     *     *     * 

The  judgment  must  be  and  is  hereby  reversed. 


SECTION   5.— PARTNERSHIP   NAME   AND   GOOD   WILL 


WILLIAMS  et  al.  v.  FARRAND  et  al. 

(Supreme  Court  of  IVIichigan,  1891.     88  Mich.  473,  50  N.  W.  446, 
14  L.  R.  A.  161.) 

Bill  in  equity  by  William  C.  Williams  et  al.  against  Jacob  S.  Far- 
rand  et  al.  Respondents  retired  from  a  partnership  composed  of 
themselves  and  complainants,  and  sold  the  latter  "all  their  right,  title, 
and  interest  in  the  firm."  Complainants  alleged  that  they  had  bought 
the  good  will  of  the  firm,  and  were  entitled  to  the  exclusive  use  of  its 
name,  and  prayed  that  respondents  be  restrained  from  so  using  their 
own  names  as  to  attract  the  firm's  old  customers,  etc.,  and  from  using 
its  trade-marks,  etc.  From  a  decree  for  respondents,  complainants 
appeal. 

McGrath,  J.  Complainants  and  defendants  had  been  for  some 
years  engaged  as  wholesale  druggists  on  Larned  street  east,  in  the  city 
of  Detroit,  as  copartners,  under  the  name  and  style  of  Farrand,  Wil- 
liams &  Co.  There  were  no  articles  of  copartnership,  and  no  term 
fixed  for  which  the  partnership  was  to  continue.  Prior  to  the  taking 
of  the  annual  inventory  in  January,  1890,  defendant  Jacob  S.  Farrand 
expressed  to  complainant  Sheley  a  desire  to  dissolve  the  copartnership. 
*  *  *  On  the  25th  of  January,  1890,  after  the  completion  of  the 
inventory,  defendants  made  a  proposition  in  writing  to  "pay  Messrs. 
Sheley  &  Brooks,  for  their  interest  in  the  firm  of  Farrand,  Williams 
&  Co.,  for  the  amount  of  their  interest,  being  fifty  thousand  dollars, 
($50,000),  the  sum  of  sixty  thousand  dollars,  ($60,000),  or  they  will 
take  for  their  interest,  the  amount  being  one  hundred  thousand  dollars, 
($1(X),000),  the  sum  of  one  hundred  and  twenty  thousand  dollars, 
($120,(X)0),  the  sum  to  be  paid  in  cash,  or  in  notes  acceptable  to  the 
parties  who  sell,  one  week  from  to-day,  Saturday,  the  first  day  of 
February  next.  The  store  to  be  leased  to  the  party  purchasing  for  a 
term  of  five  years,  at  a  rent  of  eight  thousand  dollars  ($8,000)  a  year, 
and  the  warehouse  to  be  rented  to  the  party  purchasing,  at  a  net  rental 
of  6%i  a  year  on  the  cost  of  their  interest  therein." 

On  the  following  Monday  Mr.  Sheley  accepted  defendants'  offer  to 
sell,  and  on  the  1st  day  of  February  following  a  bill  of  sale  was  pre- 


Ch.  2)        RELATIONS   OF   THE   PARTNERS   BETWEEN   THEMSELVES  126T 

pared,  reciting,  among  other  things,  that  defendants,  in  consideration  of 
the  sum  of  $120,000,  paid  to  them  by  Alanson  Sheley,  party  of  the 
second  part,  "have  bargained  and  sold  unto  the  said  party  of  the  sec- 
ond part  all  our  right,  title,  and  interest  to  the  within-mentioned  re- 
sources of  said  firm,  including  the  good  will  attendant  upon  the  busi- 
ness." This  bill  of  sale  was  not  executed,  objection  being  made  to  the 
clause,  "including  the  good  will  attendant  upon  the  btisiness,"  and  a 
new  instrument  was  prepared,  reciting  that  defendants,  parties  of 
the  first  part,  "for  and  in  consideration  of  the  sum  of  one  hundred 
and  twenty  thousand  dollars,  to  them  paid  by  Alanson  Sheley,  of  the 
second  part,  have  bargained  and  sold,  and  by  these  presents  do  grant 
and  convey,  unto  the  said  party  of  the  second  part,  his  executors,  ad- 
ministrators, or  assigns,  all  our  right,  title,  and  interest  in  the  firm  of 
Farrand,  Williams  &  Company."  This  instrument  was  executed,  the 
insurance  policies  were  assigned  by  Farrand,  Williams  &  Co.  to  Wil- 
liams, Sheley  &  Brooks,  and  an  agreement  to  assume  and  pay  all  the 
debts  of  the  old  firm  was  executed  by  Williams,  Sheley  &  Brooks,  and 
delivered  to  defendants.  Defendants  afterwards  formed  a  copartner- 
ship under  the  firm  name  of  Farrand,  Williams  &  Clark,  and  opened 
a  wholesale  drug  establishment  at  No.  32  Woodward  avenue. 

Complainants  adopted  the  name  and  style  of  Williams,  Sheley  & 
Brooks,  posted  their  firm  name,  as  successor  to  Farrand,  Williams 
&  Co.,  over  their  place  of  business,  had  the  words  "Williams,  Sheley 
&  Brooks,  Successors  to"  printed  in  red  ink  over  the  words  "Farrand, 
Williams  &  Co."  wherever  the  latter  appeared  upon  letter  heads,  bill 
heads,  labels,  and  on  other  stationery,  advertised  themselves  in  the 
newspapers  and  trade  journals  as  Williams,  Sheley  &  Brooks,  succes- 
sors to  Farrand,  Williams  &  Co.,  and  sent  out  circulars  to  the  trade 
containing  not  only  their  firm  name,  but  the  names  of  the  individual 
members  of  the  new  firm.  Defendants  also  extensively  advertised  the 
new  enterprise  through  the  same  mediums,  calling  special  attention  to 
the  names  of  the  members  of  the  new  firm,  their  long  connection  with 
the  drug  business,  and  the  dissolution  of  the  old  firm,  and  soliciting 
trade. 

The  complainants  contend  that  the  assignment  by  defendants  of  all 
interest  in  the  business  carried  with  it  the  good  will  of  the  business, 
and,  having  purchased  the  good  will  of  that  business,  they  are  entitled 
to  the  exclusive  use  of  the  old  firm  name;  that,  while  defendants  have 
the  right  to  engage  in  the  same  line  of  business,  they  have  not  the 
right  to  such  a  collocation  of  their  own  names  as  will  produce  confu- 
sion, attract  customers,  and  secure  orders,  letters,  and  goods  intended 
for  the  old  firm  ;  that  defendants  have  no  right  to  simulate  their  labels, 
to  solicit  their  customers,  or  entice  away  their  employes.  "Good  will'' 
has  been  defined  by  this  court  to  be  "the  favor  which  the  management 
of  a  business  wins  from  the  public,  and  the  probability  that  old  cus- 
tomers will  continue  their  patronage."  Chittenden  v.  Whitbeck,  50' 
Mich.  401,  15  N.  W.  526.  Lord  Eldon,  in  Cruttwell  v.  Lye,  17  Ves. 
335,  defined  it  as  simply  the  probability  that  old  customers  will  resort 
to  the  old  place. 

The  following  propositions  must  be  regarded  as  established  by  the 
clear  weight  of  authority: 

L  Though  a  retiring  partner  may  have  assigned  his  interest  in  the- 
partnership  business,  including  the  good  will  thereof,  to  his  copart- 
ner, he  may,  in  the  absence  of  an  express  agreement  to  the  contrary,. 


1268  PARTNERSHIP  (Part  5 

engage  in  the  same  line  of  business  in  the  same  locahty,  and  in  his 
own  name. 

2.  He  may,  by  newspaper  advertisements,  cards,  and  general  cir- 
culars, invite  the  general  public  to  trade  with  him,  and  through  the 
same  mediums  advertise  his  long  connection  with  the  old  business, 
and  his  retirement  therefrom. 

3.  He  will  not  be  allowed,  however,  to  use  his  own  name,  or  to  ad- 
vertise his  business,  in  such  a  way  as  to  lead  the  public  to  suppose 
that  he  is  continuing  the  old  business;  hence,  will  not  be  allowed  to 
advertise  himself  as  its  successor. 

4.  The  purchaser  will  not,  in  the  absence  of  an  express  agreement, 
be  allowed  to  continue  the  business  in  the  name  of  the  old  firm. 

5.  That  no  man  has  a  right  to  sell  or  advertise  his  own  business  or 
goods  as  those  of  another,  and  so  mislead  the  public,  and  injure  such 
other  person.     *     *     * 

6.  That  when  an  express  contract  has  been  made  to  remain  out  of 
business,  or  for  the  use  by  a  purchaser  of  a  fictitious  name,  or  a  trade- 
name, or  a  trade-mark,  the  courts  will  enjoin  the  continued  violation  of 
such  agreement.     *     *     * 

7.  That  an  assignment  of  all  the  stock,  property,  and  efirects  of  a 
business,  or  the  exclusive  right  to  manufacture  a  given  article,  car- 
ries with  it  the  exclusive  right  to  use  a  fictitious  name  in  which  such 
business  has  been  carried  on,  and  such  trade-marks  and  trade-names 
as  have  been  in  use  in  such  business.  These  incidents  attach  to  the 
business  or  right  of  manufacture,  and  pass  with  it.  Courts  have  uni- 
formly held  that  a  trade-mark  has  no  separate  existence;  that  there 
is  no  property  in  words,  as  detached  from  the  thing  to  which  they  are 
applied;  and  that  a  conveyance  of  the  thing  to  which  it  is  attached 
carries  with  it  the  name.     *     *     *' 

8.  A  corporate  name  is  regarded  as  in  the  nature  of  a  trade-mark, 
even  though  composed  of  individual  names,  and  its  simulation  may 
be  restrained.  After  adoption  it  follows  the  corporation.  Statutes 
providing  for  the  organization  of  corporations  usually  prohibit  the 
adoption  of  the  same  name  by  two  companies.     *     *     * 

These  propositions  are  sustained  by  a  long  line  of  authorities,  but 
in  none  of  the  cases  cited  does  the  question  hinge  upon  a  grant  of 
good  will.  Complainants  insist,  however,  that  a  grant  of  good  will 
may  be  implied,  and,  when  express  or  implied,  it  imposes  certain  re- 
straints upon  the  vendors,  viz. :  (1)  That  they  cannot  afterwards 
personally  solicit  customers  of  the  old  firm ;  and  (2)  that  they  are 
restricted  in  the  use  that  may  be  made  of  their  own  names. 

I.  The  doctrine  that  a  retiring  partner,  who  has  conveyed  his  in- 
terest in  an  established  business,  whether  the  good  will  be  included 
or  not,  cannot  personally  solicit  the  customers  of  the  old  firm,  has  no 
support  in  principle.  A  retiring  partner  conveys,  in  addition  to  his 
interest  in  the  tangible  effects,  simply  the  advantages  that  an  estab- 
lished business  possesses  over  a  new  enterprise.  The  old  business 
is  an  assured  success,  the  new  an  experiment.  The  old  business  is  a 
going  business,  and  produces  its  accustomed  profits  on  the  day  after 
the  transfer.  It  is  capital  already  invested,  and  earning  profits.  The 
continuing  partner  gets  these  advantages.  The  new  business  must 
be  built  up.  The  capital  taken  out  of  the  old  concern  will  earn  nothing 
for  months,  and  in  all  probability  the  first  year's  business  will  show 
loss  instead  of  profit.     For  a  time  at  least  it  is  capital  awaiting  in- 


Ch.  2)       RELATIONS  OF   THE   PARTNERS   BETWEEN   THEMSELVES  1269 

vestment,  or  invested,  but  earning  nothing.  The  retiring  partner 
takes  these  chances  or  disadvantages.  He  docs  not  agree  that  the 
benefit  derived  from  his  connection  with  that  business  shall  contin- 
ue. He  does  not  agree  that  the  old  business  shall  continue  to  have  the 
benefit  of  his  name,  reputation,  or  service;  nor  does  he  guaranty  the 
continuance  of  that  patronage  which  may  have  been  attracted  by  his 
name  or  reputation.  He  does  not  pledge  a  continuance  of  conditions. 
He  takes  out  of  the  business  an  element  that  has  contributed  to  the 
success  of  that  business.  He  sells  only  those  advantages  and  incidents 
which  attach  to  the  property  and  location,  rather  than  those  which  at- 
tach to  the  person  of  the  vendor.  *  *  *  He  sells  only  so  much  of 
the  custom  as  will  continue  in  spite  of  his  retirement  and  activity.  He 
sells  probabilities,  not  assurances. 

It  is  urged  that  by  the  solicitation  of  the  customers  of  the  old 
firm  he  is  endeavoring  to  impair  the  value  of  that  which  he  has  sold, 
but  every  act  of  his  in  the  direction  of  the  establishment  of  the  new 
business  tends  to  divert  the  customers  of  the  old  firm.  The  right  to 
enter  into  the  same  line  of  business  in  the  same  locality — next  door, 
if  you  please — to  advertise  his  former  connection  with  the  old  business, 
and  to  solicit  generally  the  patronage  of  the  public,  is  conceded  by 
the  clear  weight  of  authority.  The  exercise  of  these  rights  necessari- 
ly involves  the  diversion  of  custom  to  the  new  firm.  Does  not  the 
right  to  again  engage  in  the  same  line  of  business  include  all  of  the 
incidents  of  that  right?  Upon  what  principle  is  the  line  arbitrarily 
drawn  at  the  personal  solicitation  of  the  customers  of  the  old  firm? 
The  right  to  engage  in  business  in  his  own  name  attaches  to  the  re- 
tiring partner,  and,  unless  expressly  so  agreed,  there  is  no  restraint 
upon  that  right. 

In  the  present  case,  Jacob  S.  Farrand  had  been  at  the  head  of  the 
old  house  for  half  a  century.  His  name  could  not  be  subsequently 
used  in  the  same  line  of  business  without  attracting  the  attention  of 
the  entire  trade,  nor  without  affecting  the  probabilities  of  a  continu- 
ance of  the  patronage  of  the  old  house.  He  gave  no  hint  that  he  did 
not  intend  to  again  engage  in  business.  All  of  the  circumstances 
pointed  in  the  direction  of  a  new  business.  The  retirement  was  not 
of  Jacob  S.  Farrand  alone,  but  of  his  son-in-law  and  Mr.  Clark  also. 
The  proposition  made  to  complainants  was  not  only  to  sell,  but  to 
buy.  In  Ginesi  v.  Cooper,  14  Ch.  Div.  596,  the  court  went  so  far  as 
to  insist  that  a  retiring  partner  had  no  right  to  deal  with  the  custom- 
ers of  the  old  firm ;  but  that  rule  would  operate  as  a  restriction  upon 
the  public,  and  the  case  is  without  support  in  that  respect.  In  La- 
bouchere  v.  Dawson,  L.  R.  13  Eq.  322,  the  court  say  that  a  retiring 
partner  who  sells  the  good  Vv'ill  of  a  business  is  entitled  to  engage  in 
a  similar  business,  may  publish  any  advertisement  he  pleases  in  the 
papers,  stating  that  he  is  carrying  on  such  a  business;  he  may  pub- 
lish circulars  to  all  the  world,  and  say  that  he  is  carrying  on  such  a 
business;  but  he  is  not  entitled,  by  private  letter,  or  by  visit  by  him- 
self or  agent,  to  solicit  the  customers  of  the  old  firm. 

But  in  Pearson  v.  Pearson,  27  Ch.  Div.  145,  Labouchere  v.  Daw- 
son is  expressly  overruled.  The  court  say:  "The  case  of  the  plain- 
tiff is  founded  on  contract,  and  the  question  is,  what  are  his  rights 
under  the  contract?  There  is  no  express  covenant  not  to  solicit  the 
customers  of  the  old  business,  but  it  is  said  that  such  a  covenant  is 
to  be  implied.     I  have  a  great  objection  to  straining  words  so  as  to 


1270  PARTXEitsiiiP  (Part  5 

make  them  imply  a  contract  as  to  a  point  upon  which  the  parties  have 
said  nothing,  particularly  when  it  is  a  point  which  was  in  their  con- 
templation. It  is  said  that  there  was  a  sale  of  the  g^ood  will.  I  think 
that  there  was,  taking  good  will  as  defined  by  Lord  Eldon  in  Cruttwell 
V.  Lye,  17  Ves.  335.  The  purchaser  has  a  right  to  the  place  and  a 
right  to  get  in  the  old  bills ;  so  the  purchaser  gets  the  good  will,  as 
defined  by  Lord  Eldon.  But  the  term  'good  will'  is  not  used;  and 
when  a  contract  is  sought  to  be  implied  we  must  not  substitute  one 
word  for  another.  But  suppose  the  word  did  occur,  what  is  the  ef- 
fect of  the  sale  of  'good  will.'  It  does  not,  per  se,  prevent  the  vendor 
from  carrying  on  the  same  class  of  business." 

Vernon  v.  Hallam,  34  Ch.  Div.  752,  held  that  a  covenant  by  a  ven- 
dor of  a  business,  including  the  good  will  thereof,  that  he  would  not 
for  a  term  of  years  carry  on  the  business  of  a  manufacturer,  either 
by  himself  or  jointly  with  any  other  person,  under  the  name  or  style 
of  J.  H.  or  H.  Bros,  (the  name  of  the  business  which  he  had  sold), 
is  not  a  covenant  that  the  vendor  would  not  carry  on  business  as  a 
manufacturer,  but  against  using  a  particular  name  or  style  in  trade, 
and  the  injunction  was  granted  to  restrain  a  breach  of  that  covenant. 
The  court  say:  "When  a  vendor  sells  his  business,  and  commences  a 
similar  business  in  the  same  locality,  and  solicits  custom.ers  of  the 
old  house  to  deal  with  him,  the  court,  following  the  decision  in  Pear- 
son v.  Pearson,  and  being  of  opinion  that  the  case  of  Labouchere  v. 
Dawson  had  been  overruled  by  the  decision  in  that  case,  refused  to 
grant  an  injunction  to  restrain  such  solicitation."  Leggott  v.  Bar- 
rett, 15  Ch.  Div.  306,  Ginesi  v.  Cooper,  14  Ch.  Div.  596,  and  a  number 
of  other  cases  cited,  follow  Labouchere  v.  Dawson. 

The  correct  rule  is,  we  think,  laid  down  in  Cottrell  v.  Manufactur- 
ing Co.,  54  Conn.  138,  6  Atl.  791.     The  court  say:     "Cottrell  did  not 
require  Babcock  to  agree,  and  the  latter  did  not  agree  to  abstain  from 
the  manufacturing  of  printing  presses.     By  purchasing  the  good  will 
merely  Cottrell  secured  the  right  to  conduct  the  old  business  at  the 
old  stand,  with  the  probability  in  his  favor  that  old  customers  would 
continue  to  go  there.     If  he  desired  more,  he  should  have  secured  it 
by  positive  agreement.     The  matter  of  good  will  was  in  his  mind. 
Presumptively  he  obtained  all  that  he  desired.     At  any  rate,  the  ex- 
press contract  is  the  measure  of  his  right;    and  since  that  conveys  a 
good  will  in  terms,  but  says  no  more,  the  court  will  not  upon  inference 
deny  to  the  vendor   the  possibility  of  successful   competition  by   all 
lawful  m.eans  with  the  vendee  in  the  same  business.   No  restraint  upon 
trade  may  rest  upon  inference.     Therefore,  in  the  absence   of  any 
express  stipulation  to  the  contrary,  Babcock  might  lawfully  establish 
a  similar  business  at  the  next  door,  and  by  advertisement,  circular, 
card,  and  personal  solicitation  invite  all  the  world,  including  the  old 
customers  of  Cottrell  &  Babcock,  to  come  there  and  purchase  of  him ; 
being  very  careful  always  when  addressing  individuals  or  the  public, 
either  through  the  eye  or  the  ear,  not  to  lead  any  one  to  believe  that 
the  presses  which  he  ofifered  for  sale  were  manufactured  by  the  plain- 
tiflfs,  or  that  he  was  the  successor  to  the  business  of  Cottrell  &  Bab- 
cock, or  that  Cottrell  was  not  carrying  on  the  business  formerly  con- 
ducted by  that  firm.    That  he  may  do  this  by  advertisements  and  gen- 
eral circulars  courts  are   substantially  agreed,   we  think.     But  some 
have  drawn  the  line  here  and  barred  personal  solicitation.     They  per- 
mit the  vendor  of  a  good  will  to  establish  a  like  business  at  the  next 


Ch.  2)        RELATIONS   OF   THE   PARTNERS   BETWEEN   THEMSELVES  1271 

door,  and,  by  the  potential  instrumentalities  or  the  newspapers  and 
general  circulars  ask  old  customers  to  buy  at  the  old  place,  and  with- 
hold from  him  only  the  instrumentality  of  highest  power,  viz.,  per- 
sonal solicitation.  To  deny  him  the  use  of  the  newspapers  and  gen- 
eral circulars  is  to  make  successful  business  impossible,  and  there- 
fore is  to  impose  an  absolute  restraint  upon  the  right  to  trade.  This 
the  courts  could  not  do,  except  upon  express  agreement.  But  possi- 
bly the  old  customers  might  not  see  these ;  and  in  some  cases,  the 
courts  have  undertaken  to  preserve  this  possibility  for  the  advan- 
tage of  the  vendor,  and  found  a  legal  principle  upon  it.  Other  courts 
have  been  of  the  opinion  that  no  legal  principle  can  be  made  to  rest 
upon  this  distinction;  that  to  deny  the  vendor  personal  access  to  old 
customers  even  would  put  him  at  such  disadvantage  in  competition 
as  to  endanger  his  success ;  that  they  ought  not  upon  inference  to 
bar  him  from  trade,  either  totally  or  partially;  and  that  all  restraint 
of  that  nature  must  come  from  his  positive  agreement.  And  such, 
we  think,  is  the  present  tendency  of  the  law." 

Good  will  may  be  said  to  be  those  intangible  advantages  or  inci- 
dents which  are  impersonal,  so  far  as  the  grantor  is  concerned,  and 
attach  to  the  thing  conveyed.  Where  it  consists  of  the  advantages  of 
location,  it  follows  an  assignment  of  the  lease  of  location.  Again,  it 
may  not  depend  at  all  upon  location,  as  in  the  case  of  a  newspaper, 
and  it  would  follow  an  assignment  of  all  interest  in  the  plant,  property, 
effects,  and  business.  A  partnership  name  may  become  impersonal 
after  the  death  of  the  partners,  and  it  is  then  treated  like  a  fictitious 
or  corporate  name.  A  surname  may  become  impersonal  when  it  is 
attached  to  an  article  of  manufacture,  and  becomes  the  name  by  which 
such  article  is  known  in  the  market,  and  the  right  to  use  the  name 
may  in  consequence  follow  a  grant  of  the  right  to  manufacture  that 
article,  or  a  sale  of  the  business  of  manufacturing  such  article;  and 
where  the  right  to  manufacture  is  exclusive,  the  right  to  the  use  of 
the  name  as  applied  to  that  article  becomes  likewise  exclusive.  It 
appears,  however,  that  in  the  first  bill  of  sale  which  was  prepared  the 
words,  "including  the  good  will  attendant  upon  said  business,"  were 
inserted,  but  were  objected  to,  stricken  out,  and  a  new  bill  of  sale 
prepared,  omitting  any  reference  to  good  will.  But  it  is  said  that  this 
clause  was  objected  to  because,  in  the  opinion  of  the  objector,  it  might 
preclude  him  from  engaging  in  the  same  business,  whereas,  under  the 
law,  he  would  have  such  a  right  had  the  clause  remained.  The  only 
use,  however,  which  complainants  now  propose  to  make  of  the  clause, 
treated  as  a  part  of  the  instrument,  is  to  restrict  that  right  to  engage 
in  business  by  taking  away  one  of  its  incidents.  Adopting  the  lan- 
guage used  in  Churton  v.  Douglas,  Johns.  Eng.  Ch.  174,  with  refer- 
ence to  the  right  of  plaintiff  to  continue  the  use  of  the  old  firm  name, 
"I  think  the  defendant  is  fully  entitled  to  the  benefit  of  the  observa- 
tion that  it  was  proposed  to  him  to  insert  such  a  provision,  and  that 
he  refused  it.  I  think,  therefore,  that  this  case  goes  a  step  higher 
than  the  authorities,  and  the  defendant  is  entitled  to  put  his  case  in 
the  highest  possible  form  with  regard  to  his  right"  to  engage  in  the 
same  line  of  business. 

II.  The  next  question  relates  to  the  use  by  defendants  of  the  firm 
name  of  Farrand,  Williams  &  Clark.  It  is  clear  that  complainants 
have  no  right  to  continue  their  business  under  the  old  firm  name.  The 
rule  that  upon  a  dissolution  of  a  firm  neither  partner  has  the  right  to 


1272  PARTNERSHIP  (Part  5 

use  the  firm  name,  aS  well  as  the  other  rule  that  a  retiring  partner 
has  no  right  to  use  the  old  firm  name,  are  both  subject  to  the  exception 
that  a  person  has  the  right  to  use  his  own  name  unless  he  has  express- 
ly covenanted  otherwise.  In  case  A.  B.  should  sell  out  his  business 
to  C.  D.,  in  the  absence  of  a  grant  to  C.  D.  of  the  right  to  use  the  name 
of  A.  B.,  or  an  agreement  to  the  contrary,  is  there  any  doubt  but  that 
A.  B.  would  have  the  right  to  engage  in  the  same  line  of  business  in 
his  own  name  ?  In  that  case,  such  a  probability  would  naturally  sug- 
gest itself  to  C.  D.,  and,  if  he  desired  to  get  the  advantage  of  A.  B.'s 
abstinence  from  business,  he  would  insist  upon  an  agreement  to  that 
effect. 

In  the  present  case,  Mr.  Farrand's  name  had  been  at  the  head  of  the 
firm  name  for  nearly  half  a  century,  and  the  name  of  another  of  the 
retiring  members  corresponded  with  the  only  other  surname  used  in 
the  old  firm  name.  It  must  have  been  evident  to  complainants  that 
in  any  event  the  name  of  the  new  firm  would  be  similar  to  that  of  the 
old  firm.  If  complainants  desired  any  protection  against  such  a  use 
of  the  names  of  the  retiring  members,  they  should  have  inserted  a  pro- 
vision to  that  effect  in  the  bill  of  sale.  The  right  to  continue  the  use 
of  a  firm  name,  as  well  as  a  restriction  upon  the  use  by  a  retiring 
partner  of  his  own  name,  are  proper  subjects  of  bargain,  sale,  and 
agreement.  Here  neither  have  been  purchased.  Complainants  have 
purchased  the  business  of  the  old  firm.  They  have  the  right  to  ad- 
vertise themselves  as  succeeding  to  and  continuing  that  business.  The 
exercise  of  such  a  right  does  not  conflict  with  any  right  reserved  by 
defendants.  Complainants,  by  such  a  holding  out,  commit  no  fraud, 
misrepresentation,  or  deception.  They  publish  the  truth  only.  Defend- 
ants have  the  right  to  use  their  own  names,  or  any  collocation  of  their 
own  names.  They  have  not  adopted  the  old  firm  name,  although  it 
would  have  been  appropriate.  They  have  adopted  no  fictitious  name. 
There  is  no  deception  in  the  use  of  the  name  adopted  by  them.  The 
business  of  the  old  firm  is  a  separate  and  distinct  business.  Defend- 
ants have  no  right  to  advertise  their  business  as  a  continuation  of  the 
old  firm  business.  They  are  subject  to  the  rule  already  laid  down, 
that  no  man  has  the  right  to  sell  or  advertise  his  own  goods  or  busi- 
ness as  that  of  another,  and  so  mislead  the  public  and  injure  such 
other  person,    *    *    * 

The  same  principle  obtains  with  reference  to  trade-marks.  One 
may  have  a  right  in  his  own  name  as  a  trade-mark,  but  he  cannot  have 
such  a  right  as  against  another  person  of  the  same  name,  unless  the 
defendant  use  a  form  of  stamp  or  label  so  like  that  used  by  the  plain- 
tiff as  to  represent  that  the  defendant's  goods  are  of  the  plaintiff's 
manufacture.  *  *  *  The  tests  applied  by  all  the  authorities  in  this 
class  of  cases  are :  Is  a  corporate  or  trade  or  fictitious  name  simu- 
lated? Is  the  name  assumed  or  adopted  false  in  fact?  Is  it  used  in 
connection  with  locality  or  other  representations,  so  as  to  convey  the 
impression  that  the  business  is  a  continuation  of  the  old  business? 
Defendants  are  not  responsible  for  the  blunders  made  by  clerks,  postal 
clerks,  mail  carriers,  telephone  employes,  or  newspaper  reporters. 
*    *    * 

Any  collocation  of  the  names  of  Farrand  and  Williams  would  create 
some  confusion.  Defendant  Clark  had  been  connected  with  the  old 
business  for  30  years,  and  Williams,  the  son-in-law  of  Mr.  Farrand, 
for  21  years.    Defendants  are  using  their  own  names  only.    They  went 


Ch.  2)       RELATIONS   OF   THE  PARTNERS   BETWEEN  THEMSELVES  1273 

into  business  on  Woodward  avenue,  several  blocks  from  the  old  stand. 
In  every  letter  head,  bill  head,  card,  or  advertisement  in  which  their 
firm  name  appears  they  give  the  individual  names  of  the  members  of 
the  firm,  the  new  place  of  business,  and  in  no  case  have  they  represent- 
ed that  they  are  successors  to  the  old  firm.  The  bill  heads  used  by 
the  old  firm  had  a  cut  of  the  old  stand  on  the  left-hand  upper  corner, 
about  three  inches  square.  Those  of  the  new  firm  contain  no  cut,  and 
less  than  half  of  the  amount  of  matter.  It  would  be  exceedingly  diffi- 
cult to  prepare  two  bill  heads  more  unlike.  The  letter  heads  of  the 
old  firm  contained  two  cuts — one  of  the  old  stand,  at  the  left  hand,  and 
one  of  the  Peninsular  White  Lead  &  Color  Works,  on  the  right.  The 
dissimilarity  is  marked.  The  envelopes  used  by  the  old  firm  contain 
eight  printed  lines  on  the  upper  left-hand  corner,  occupying  an  inch 
and  three-quarters  of  space.  Those  used  by  the  new  firm  contain 
five  lines,  occupying  about  three-quarters  of  an  inch  in  space.  There 
has  been  no  attempt  at  imitation  in  words  or  type.  On  March  15th 
they  announced,  through  circulars  distributed  generally,  that  they  had 
engaged  in  business  at  32  and  ,34  Woodward  avenue;  that  they  ex- 
pected to  have  their  new  store  ready  for  occupancy  in  a  few  days; 
and  that  the  work  of  getting  a  new  stock  of  goods  would  be  pushed  as 
fast  as  possible.  On  April  7th  they  issued  another  circular  announc- 
ing that  they  were  now  prepared  to  fill  orders,  and  hoping  that  the 
friendly  acquaintance  of  many  years  would  be  continued.  An  ad- 
vertisement is  produced,  wherein  defendants  say:  "Though  it  may 
seem  paradoxical,  it  is  nevertheless  true,  that  the  wholesale  drughouse 
of  Farrand,  Williams  &  Clark  is  both  the  oldest  and  the  newest  repre- 
sentative of  this  important  commercial  industry  in  Detroit."  But  in 
the  same  advertisement  they  announce  the  dissolution  of  the  old  firm, 
their  retirement  from  said  firm,  and  the  formation  and  business  location 
of  the  new  firm. 

It  is  difficult  to  imagine  how  such  an  advertisement  would  mislead 
the  public.  It  contains  no  false  colors.  Both,  parties  advertised  exten- 
sively in  the  city  and  state  papers  and  in  the  trade  journals;  complain- 
ants giving  the  names  of  their  individual  members,  and  their  new  firm 
name,  and  advertising  themselves  as  the  successors  to  Farrand,  Wil- 
liams &  Co. ;  and  defendants  giving  the  names  of  their  individual 
members,  and  the  name  and  business  location  of  the  new  firm.  Com- 
plainants sent  out  circulars  to  the  trade  generally,  informing  it  of  the 
dissolution  of  the  old  firm,  the  fact  that  they  were  the  successors,  and 
giving  their  firm  name;  and  defendants  sent  out  circulars  announcing 
their  withdrawal  and  the  formation  of  a  new  firm.  There  is  no  doubt 
but  that  the  dissolution  of  this  firm,  the  fact  that  complainants  had 
bought  out  the  interests  of  defendants,  the  name  adopted  by  com- 
plainants, the  formation  of  the  new  firm,  the  names  of  its  members, 
•  and  the  defendants'  firm  name,  have  been  most  extensively  adver- 
tised by  both  parties,  not  only  in  the  city,  but  throughout  the  state 
and  Union.  Nearly  50  letters  have  been  received  by  the  old  firm., 
since  the  dissohition,  addressed  -to  Farrand  &  Williams ;  Farrand  & 
Williams  Paint  Co. ;  Farrand  &  Williams  Drug  Co. ;  Farrand,  Sheley 
&  Brooks;  Farrand,  Williams  &  Sheley;  Farrand,  Williams,  Sheley 
&  Co. ;  Farrand,  Williams  &  Brooks  ;  Farrand  &  Co. ;  Williams,  Far- 
rand &  Co.;  Farrand,  Sheley  &  Brooks;  Williams  &  Farrand;  Wil- 
liams, Farrand  &  Co. ;  and  WiUiams  &  Co.  It  cannot  be  said  that  any 
act  of  defendants  is  responsible  for  these  blunders.     Confusion  is  in- 


1274  PARTNERSHIP  (Part  5 

• 

separable  from  the  dissolution  of  an  old  firm  and  the  composition 
of  two  firms  from  its  membership,  especially  when  the  name  of  but 
one  of  these  who  remain  has  appeared  in  the  firm  name,  and  the  new 
firm  is  composed  of  one  whose  name  for  nearly  half  a  century  has 
stood  at  the  head  of  the  firm  name,  and  the  surname  of  another  re- 
tiring member  is  the  same  as  the  only  other  name  used  in  the  old  firm 
name.  *  *  *  These  proofs  do  not  tend  to  show  any  appropriation 
by  defendants  of  the  old  firm  name,  or  any  attempt  to  secure  the  cor- 
respondence addressed  to  the  old  firm,  or  that  the  customers  have  been 
deceived  or  misled,  or  that  defendants  have  practiced  any  fraud,  con- 
cealment, or  deception.    *    *    * 

Complainants  have,  under  the  authorities  cited,  an  undoubted  right 
to  protection  in  the  proprietary  rights  acquired  by  the  old  firm,  and  in 
the  use  of  such  trade-marks  as  were  in  use  by  the  old  firm,  and  de- 
fendants have  no  right  to  so  imitate  the  labels  in  use  by  the  old  firm 
as  to  convey  the  belief  that  the  goods  labeled  are  from  the  old  house. 
The  use,  however,  of  the  words,  "Sold  by  Farrand,  Williams  &  Co." 
or  "Prepared  by  Farrand,  Williams  &  Co.,"  upon  a  label,  will  not  be 
protected  as  a  trade-mark  or  trade-name  and  the  right  to  use  that  name 
in  that  connection  did  not  pass  under  the  bill  of  sale. 

The  decree  of  the-court  below  must  be  afiirmed  as  of  February  27, 
1891,  and  the  bill  dismissed,  with  costs  to  defendants. 

Morse  and  Grant,  JJ.,  concurred  with  AlcGrath,  J.  Long,  J.,  did 
not  sit.     Champlin,  C.  J.,  dissented. 


SECTION  6.— PARTNER'S  INTEREST  IN  THE 
•  PARTNERSHIP 

Uniform  Partnership  Act,  Section  26.  A  partner's  interest  in 
the  partnership  is  his  share  of  the  profits  and  surplus,  and  the  same 
is  personal  property. 

Section  27.  (1)  A  conveyance  by  a  partner  of  his  interest  in 
the  partnership  does  not  of  itself  dissolve  the  partnership,  nor,  as 
against  the  other  partners  in  the  absence  of  agreement,  entitle  the 
assignee,  during  the  continuance  of  the  partnership,  to  interfere  in 
the  management  or  administration  of  the  partnership  business  or 
affairs,  or  to  require  any  information  or  account  of  partnership 
transactions,  or  to  inspect  the  partnership  books ;  but  it  merely  en- 
titles the  assignee  to  receive  in  accordance  with  his  contract  the 
profits  to  which  the  assigning  partner  v/ould  otherwise  be  entitled. 

(2)  In  case  of  a  dissolution  of  the  partnership,  the  assignee  is 
entitled  to  receive  his  assignor's  interest  and  may  require  an  ac-- 
count  from  the  date  only  of  the. last  account  agreed  to  by  all  the 
partners. 

Section  28.  (1)  On  due  application  to  a  competent  court  by  any 
judgment  creditor  of  a  partner,  the  court  which  entered  the  judg- 
ment, order,  or  decree,  or  any  other  court,  may  charge  the  interest 
of  the  debtor  partner  with  payment  of  the  unsatisfied  amount  of 
such  judgment  debt  with  interest  thereon;  and  may  then  or  later 
appoint  a  receiver  of  his  share  of  the  profits,  and  of  any  other 


Ch.  2)        RELATIONS   OF   TIIK    PARTNERS   BETWEEN   THEMSELVES  1275 

money  due  or  to  fall  due  to  him  in  respect  of  the  partnership,  and 
make  all  other  orders,  directions,  accounts  and  inquiries  which  the 
debtor  partner  might  have  made,  or  which  the  circumstances  of 
the  case  may  require. 

(2)  The  interest  charged  may  be  redeemed  at  any  time  before 
foreclosure,  or  in  case  of  a  sale  being  directed  by  the  court  may 
be  purchased  without  thereby  causing  a  dissolution : 

(a)  With  separate  property,  by  ony  one  or  more  of  the  part- 
ners, or 

(b)  With  partnership  property,  by  any  one  or  more  of  the  part- 
ners, vv^ith  the  consent  of  all  the  partners  whose  interests  are  not 
so  charged  or  sold. 

(3)  Nothing  in  this  act  shall  be  held  to  deprive  a  partner  of  his 
right,  if  any,  under  the  exemption  laws,  as  regards  his  interest  in 
the  partnership.  

SECTION  7.— SHARING  OF  PROFITS  AND  LOSSES 

Uniform  Partnership  Act,  Section  18.  (a)  Subject  to  any  agree- 
ment between  them,  each  partner  shall  *  *  *  share  equally 
in  the  profits  and  surplus  remaining  after  all  liabilities,  including 
those  to  partners,  are  satisfied;  and  must  contribute  toward  the 
losses,  whether  of  capital  or  otherwise,  sustained  by  the  partner- 
ship according  to  his  share  in  the  profits. 


WHITCOMB  V.  CONVERSE  et   al. 

(Supreme    Judicial    Court    of    Massachusetts,    1875.     119    Mass.    38, 
20  Am.  Rep.  311.) 

Bill  in  equity  by  a  partner  in  the  late  firm  of  Converse,  Whitcomb 
&  Co.,  against  the' other  partners,  James  C.  Converse,  Walter  Stanton, 
and  Edward  Blagden,  to  compel  contribution  to  the  losses  incurred 
by  the  partnership.  The  partnership  agreement  provided  for  carrying 
on  of  a  dry  goods  commission  business  on  the  following  terms :  Whit- 
comb was  to  contribute  $50,000  to  the  capital,  receive  7  per  cent,  on 
the  same  and  25  per  cent,  of  the  net  profits.  Converse  was  to  con- 
tribute $25,000.  receive  7  per  cent,  interest  on  the  same,  and  25  per 
cent,  of  the  net  profits.  Blagden  and  Stanton  were  each  to  contribute 
all  their  time  to  the  business  and  each  to  receive  25  per  cent,  of  the 
net  profits.  Whitcomb  put  m  $25,000  of  the  $50,000  which  he  was  to 
contribute.  The  partnership  having  been  dissolved  by  mutual  con- 
sent, a  settlement  of  its  affairs  showed  a  loss  of  about  $25,000.  Blag- 
den, at  the  time  of  the  dissolution,  was,  ever  since  has  been,  and  now 
is,  insolvent  and  unable  to  pay  any  part  of  said  loss.  Stanton  con- 
tended that  he  was  not  liable  to  make  good  any  of  the  losses,  and,  if 
liable,  he  was  not  liable  to  make  good  any  part  of  the  share  which  Blag- 
den ought  to  have  contributed.  The  cause  was  reserved  for  the  opinion 
of  the  court. 

Gray,  C.  J.  In  the  absence  of  controlHng  agreement,  partners  must 
bear  the  losses  in  the  same  proportion  as  the  profits  of  the  partnership, 
even  if  one  contributes  the  whole  capital,  and  the  other  nothing  but 


1276  PARTNERSHIP  (Part  5 

his  labor  or  services.  3  Kent,  Com.  28,  29.  Whether  a  loss  of  capital 
is  a  partnership  loss,  to  be  borne  by  all  the  partners,  depends  upon  the 
nature  and  extent  of  the  contract  of  partnership. 

If,  as  is  not  unfrequently  the  case  in  a  partnership  for  a  single  ad- 
venture, the  mere  use  of  the  capital  is  contributed  by  one  partner,  and 
the  partnership  is  in  the  profits  and  losses  only,  the  capital  remains  the 
property  of  the  individual  partner  to  whom  it  originally  belonged,  any 
loss  or  destruction  of  it  falls  upon  him  as  the  owner,  and,  as  it  never 
becomes  the  property  of  the  partnership,  the  partnership  owes  him 
nothing  in  consideration  thereof.     Story,  Part.  §§  27,  29.     *     *     * 

But  where,  as  is  usual  in  an  ordinary  mercantile  partnership,  a 
partnership  is  created  not  merely  in  profits  and  losses,  but  in  the 
property  itself,  the  property  is  transferred  from  the  original  owners 
to  the  partnership,  and  becomes  the  joint  property  of  the  latter.  A 
corresponding  obligation  arises  on  the  part  of  the  partnership  to  pay 
the  value  thereof  to  the  individuals  who  originally  contributed  it. 
Such  payment  cannot,  indeed,  be  demanded  during  the  continuance 
of  the  partnership,  nor  are  the  contributors,  in  the  absence  of  agree- 
ment or  usage,  entitled  to  interest :  but  if  the  assets  of  the  partnership, 
upon  a  final  settlement,  are  insufficient  to  satisfy  this  obligation,  all 
the  partners  must  bear  it  in  the  same  proportion  as  other  debts  of 
the  partnership.  *  *  *  Only  two  cases  were  cited  in  the  learned 
argument  for  the  defendant  Stanton  in  which  opinions  inconsistent 
with  this  view  have  been  expressed.  The  one  is  Everly  v.  Durborow, 
1  Leg.  Gaz.  R.  (Pa.)  127,  a  nisi  prius  decision,  with  no  reference  to 
authorities,  except  an  early  edition  of  Lindley  on  Partnership,  which 
has  been  corrected  by  the  learned  author,  *  *  *  conformably  to  the 
adjudged  cases.  The  other  is  Cameron  v.  Watson,  10  Rich.  Eq.  (S. 
C.)  64.  That  was  a  bill  in  equity  to  settle  the  affairs  of  a  partnership, 
to  which  Cameron  had  contributed  labor  and  Watson  capital.  The 
master,  to  whom  the  case  was  referred,  allowed  the  claim  of  Watson 
for  so  much  of  the  capital  as  he  had  not  withdrawn  during  the  con- 
tinuance of  the  partnership,  but  disallowed  his  claim  for  interest  there- 
on. *  *  *  Cameron  excepted  to  the  allowance  of  Watson's  claim  for 
capital,  and  Watson  excepted  to  the  disallowance  of  interest.  The 
chancellor,  before  whom  the  exceptions  were  heard  in  the  first  in- 
stance, overruled  the  exceptions  of  Cameron,  and  also  that  of  Watson 
as  regarded  interest  before  the  dissolution  of  the  partnership,  but 
sustained  it  so  far  as  to  allow  him  interest  after  the  dissolution.  *  *  * 
The  Court  of  Appeals,  although  in  one  part  of  its  opinion  appearing 
to  discountenance  Watson's  claim  for  capital,  ended  by  confirming 
the  master's  report  in  every  particular.  *  *  *  So  that  the  final 
judgment,  while  it  disallowed  Watson's  claim  for  interest,  established 
his  claim  for  capital,  and  was  in  exact  accordance  with  our  conclusion. 

In  the  case  at  bar  the  partnership  was  not  for  a  single  enterprise, 
but  for  the  transaction  of  a  commission  business  in  New  York  and  Bos- 
ton for  a  year.  Converse  and  Whitcomb  contributed  the  whole  capital, 
in  unequal  proportions.  Converse  was  to  contribute  "such  time  as  he 
may  be  able  to  give."  and  Whitcomb  and  the  other  two  partners.  Blag- 
den  and  Stanton,  were  each  "to  contribute  all  his  time  to  the  business." 
Those  partners  who  contributed  the  capital  did  not  contribute  merely 
the  use  thereof,  but  the  capital  itself,  and  were  by  express  agreement 
to  receive  interest  thereon  at  rates  specified  in  the  articles  of  copart- 
nership.   The  partners  were  by  agreement  to  receive  each  one-fourth 


Ch.  2)       RELATIONS  OF  THE   PARTNERS  BETWEEN  THEMSELVES  1277 

of  the  net  profits,  and  by  implication  of  law  must  share  the  losses  in 
the  same  proportion.  The  capital  contributed  became  the  property 
of  the  partnership ;  and  the  partnership,  consisting  of  all  the  partners, 
became  liable  to  Whitcomb  and  Converse,  respectively,  for  the  amount 
of  capital  paid  in  by  them. 

Blagden,  one  of  the  partners,  being  insolvent  and  unable  to  discharge 
any  part  of  the  obligation,  it  must  rest  in  equity  upon  the  three  solvent 
partners  in  equal  proportions.    *    *    * 

Decree  for  the  plaintiff  accordingly. 


SECTION   8.— PARTNER'S    RIGHT    TO    REPAYMENT    OF 
CONTRIBUTIONS 

Uniform  Partnership  Act,  Section  18  (a)  Subject  to  any  agree- 
ment between  them  each  partner  shall  be  repaid  his  contributions, 
whether  by  way  of  capital  or  advances  to  the  partnership  property. 
*  *  *  (c)  A  partner,  who  in  aid  of  the  partnership  makes  any 
payment  or  advance  beyond  the  amount  of  capital  which  he  agreed 
to  contribute  shall  be  paid  interest  from  the  date  of  the  payment  or 
advance,  (d)  A  partner  shall  receive  interest  on  the  capital  con- 
tributed by  him  only  from  the  date  when  repayment  should  be 
made. 


FOLSOM    V.    MARLETTE. 
(Supreme  Court  of  Nevada,  1S97.     23  Nev.  459,  49  Pac.  39.) 

Suit  by  G.  N.  Folsom  against  S.  H.  Marlette.  From  a  judgment  in 
favor  of' plaintiff,  and  from  an  order  denying  a  new  trial,  defendant 
appeals. 

Belknap.  C.  J.  This  is  a  suit  for  an  accounting  between  partners,  in 
which  each  demands  a  balance  due  from  the  other.  The  partnership 
was  formed  on  the  29th  day  of  September,  1880,  and  continued  until 
the  27th  day  of  May,  1890,  when  it  was  dissolved.  Its  business  was 
that  of  contracting  for  the  cutting  of  cord  wood  and  logs,  and  the 
sawing  of  timber,  to  which  the  business  of  merchandising  was  sub- 
sequently added.  They  were  equal  partners.  The  district  court  or- 
dered judgment  in  favor  of  respondent  for  the  sum  of  $6,540.49.  From 
the  judgment  and  an  order  refusing  a  new  trial,  defendant  has  ap- 
pealed.    *     *     * 

Respondent  paid  to  the  creditors  of  the  firm,  after  it'  had  discon- 
tinued business,  a  short  time  prior  to  its  dissolution,  the  sum  of  $16,- 
747.72.  The  district  court  allowed  interest  upon  this  sum  amounting 
to  the  sum  of  $7,224.06.  The  money  thus  paid  is  properly  treated 
as  an  advancement  for  the  benefit  of  the  firm.  Lindley,  in  his  work 
upon  Partnership,  says :  "An  advance  by  a  partner  to  a  firm  is  not 
treated  as  an  increase  of  his  capital,  but  rather  as  a  loan,  on  which 
interest  ought  to  be  paid ;  and,  by  usage,  interest  is  payable  on  money 
bona  fide  advanced  by  one  partner  for  partnership  purposes,  at  least 
when  the  advance  is  made  with  the  knowledge  of  the  other  partners." 
Volume  1,  p.  390.  The  propriety  of  this  charge  admits  of  no  ques- 
tion.    The  firm  had  no  capital.     It  had  been  in  the  habit  of  paying 


1278  PARTNERSHIP  (Part  5 

interest  at  its  banker's  upon  overdrafts  for  a  long  time.  Appellant 
has  not  suggested  in  his  testimony  that  this  money  was  not  advanced 
with  his  knowledge  and  acquiescence.  Under  these  circumstances, 
the  charge  of  interest  is  equitable.     *     *     * 

The  case  will  be  remanded  to  the  district  court,  with  instructions 
to  modify  its  judgment,  *  *  *  and  to  allow  him  simple  interest 
at  the  rate  of  7  per  cent,  per  annum,  instead  of  10  per  cent,  per  annum, 
upon  the  advances  made  by  him  after  they  had  ceased  to  do  business 
together.     *     *     * 


SECTION   9.— PARTNER'S   RIGHT   OF   INDEMNITY 

Uniform  Partnership  Act,  Section  18.  (b)  Subject  to  any 
agreement  between  them,  the  partnership  must  indemnify  every 
partner  in  respect  of  payments  made  and  personal  liabilities  rea- 
sonably incurred  by  him  in  the  ordinary  and  proper  conduct  of  its 
business,  or  for  the  preservation  of  its  business  or  property. 


SECTION  10.— PARTNER'S  RIGHT  TO  AN  ACCOUNTING 

Uniform  Partnership  Act,  Section  22.  Any  partner  shall  have 
the  right  to  a  formal  account  as  to  partnership  affairs :  (a)  If  he  is 
wrongfully  excluded  from  the  partnership  business  or  possession  of 
its  property  by  his  co-partners;  (b)  if  the  right  exists  under  the 
terms  of  any  agreement;  (c)  as  provided  by  section  21;  (d) 
whenever  other  circumstances  render  it  just  and  reasonable.^ 


LORD  et  al.  v.  HULL. 

(Court  of  Appeals  of  New  York,  1904.     178  N.  T.  9.  70  N.  E.  G9. 
102  Am.  St.  Rep.  484.) 

Action  by  Lord  and  others  against  their  copartner,  Hull,  for  an 
accounting  without  dissolution.  Murchison  was  made  a  co-defendant 
with  Hull,  because  of  a  disagreement  between  plaintiffs  and  Hull  as 
to  payments  on  a  contract  with  Murchison.     Judgment  below  for 

6  Lewis'  Note  to  Section  22. — Ordinarily  a  partner  is  not  entitled  to  a  for- 
mal account,  except  on  dissolution.  He  has  equal  access  with  his  partners 
to  the  partner.ship  books,  and  there  is  no  reason  why  they  should  constantly 
render  to  him  accoimts  in  the  formal  sense  of  that  word,  which  is  the  sense 
in  which  it  is  here  used.  When,  however,  he  is  excluded  from  the  business 
or  the  possession  of  partnership  propertj',  without  any  express  agreement 
authorizing  such  exclusion,  he  should  have  tlie  right  to  demand  a  formal 
account  from  his  partners,  without  necessarily  requiring  him  to  dissolve  the 
partnership. 

The  reason  for  clause  (d)  is  that  there  frequently  arises  circumstances 
which  impose  on  one  or  more  of  the  partners  the  duty  of  rendering  a  for- 
mal account  to  the  co-partner,  as  where  one  partner  is  traveling  for  a  long 
period  of  time  on  partnership  business,  and  the  other  partners  are  in  pos- 
session of  the  partnership  boolvS.  These  various  circumstances  cannot  be  de- 
tailed in  any  act.  In  view  of  the  wording  of  clause  (d),  the  total  effect  of 
this  section  is  to  emphasize  the  fact,  that  a  partner,  the  partnership  uot 
being  dissolved,  has  not,  necessarily,  the  right  to  demand  formal  accounts, 
except  at  particular  times  and  under  particular  circumstances. 


Ch.  2)       RELATIONS   OF   THE   PARTNERS   BETWEEN   THEMSELVES  127& 

plaintiffs  ac^ainst  defendant  Hull,  and  for  defendant  Murchison  against 
the  plaintiffs  and  the  defendant  Hull. 

Vann,  J.  This  action  was  brought  by  two  copartners  against  the 
third  for  an  accounting,  without  a  dissolution,  and  it  is  not  surprising 
that  a  challenge  is  interposed  to  the  jurisdiction  of  the  court.  The 
contract  of  copartnership  has  existed  as  long  as  the  common  law, 
and  a  vast  amount  of  business  has  been  transacted  by  persons  working 
together  under  this  relation.  The  law  upon  the  subject  is  founded 
on  the  custom  of  merchants,  who  have  thus,  in  effect,  made  their  own 
law,  yet  we  find  no  well-considered  case  which  approves  of  such  an 
action  as  the  one  now  before  us.  While  the  novelty  of  an  action^  is  by 
no  means  conclusive  against  it,  still  it  is  suggestive,  when  the  history 
of  the  law  relating  to  the  subject  shows  many  occasions  and  few 
efforts. 

The  general  rule  is  that  a  court  of  equity,  in  a  suit  by  one  partner 
against  another,  will  not  interfere  in  matters  of  internal  regulation,  or 
except  with  a  view  to  dissolve  the  partnership,  and  by  a  final  decree 
to  adjust  all  its  affairs.  Story  on  Partnership,  §  229.  *  *  *  It  is 
not  its  office  "to  enter  into  a  consideration  of  mere  partnership  squab- 
bles" *  *  *  or  "on  every  occasion  to  take  the  management  of 
every  playhouse  and  brewhouse."  *  *  *  if  the  members  of  a 
firm  cannot  agree  as  to  the  method  of  conducting  their  business,  the 
courts  will  not  attempt  to  conduct  it  for  them.  Aside  from  the  in- 
convenience of  constant  interference,  as  litigation  is  apt  to  breed  hard 
feelings,  easy  appeals  to  the  courts  to  settle  the  differences  of  a 
going  concern  would  tend  to  do  away  with  mutual  forbearance,  fo- 
ment discord,  and  lead  to  dissolution.  It  is  to  the  interest  of  the  law 
of  partnership  that  frequent  resort  to  the  courts  by  copartners  should 
not  be  encouraged,  and  they  should  realize  that,  as  a  rule  they  must 
settle  their  own  differences,  or  go  out  of  business.  As  a  learned 
writer  has  said:  "A  partner  who  is  driven  to  a  court  of  equity,  as 
the  only  means  by  which  he  can  get  an  accounting  from  his  copart- 
ners, may  be  supposed  to  be  ir^  a  position  which  will  be  benefited  by 
a  dissolution;  in  order  words,  such  a  partnership  as  that  ought  to 
be  dissolved."  Parsons  on  Partnership  (4th  Ed.)  §  206.  "If  a  con- 
tinuance of  the  partnership  is  contemplated,"  as  another  commen- 
tator has  said,  "or  if  an  accounting  of  only  part  of  the  partnership 
concerns  is  allowed,  no  complete  justice  can  be  done  between  the 
partners,  and  the  fluctuations  of  a  continuing  business  will  render  the 
accounting  which  is  correct  to-day  incorrect  to-morrow ;  and  to  enter- 
tain such  bills  on  behalf  of  a  partner  would  involve  the  court  in  inces- 
sant litigation,  foment  disputes,  and  needlessly  drag  partners  not  in 
fault  before  the  public  tribunals."  2  Bates  on  Partnership,  § 
910.     *     *     * 

While  a  forced  accounting  without  a  dissolution  is  not  impossible, 
it  is  by  no  means  a  matter  of  course,  for  facts  must  be  alleged  and 
proved  showing  that  it  is  essential  to  the  continuance  of  the  business, 
or  that  some  special  and  unusual  reason  exists  to  make  it  necessary. 
Thus,  Mr.  Lindley,  upon  whom  reliance  was  placed  by  the  courts 
below,  mentions  three  classes  of  cases  as  exceptions  to  the  general 
rule:  "(1)  Where  one  partner  has  sought  to  withhold  from  his  co- 
partner the  profits  arising  from  some  secret  transaction;  (2)  where 
the  partnership  is  for  a  term  of  years  still  unexpired,  and  one  partner 
has  sought  to  exclude  or  expel  his  copartner,  or  drive  him  to  a  dis- 


1280  PARTNERSHIP  (Part  5 

solution;  (3)  where  the  partnership  has  proved  a  failure,  and  the 
partners  are  too  numerous  to  be  made  parties  to  the  action,  and  a 
limited  account  will  result  in  justice  to  them  all."  The  plaintiffs  claim 
that  this  case  belongs  to  the  second  class,  and  the  courts  below  have 
so  held ;  but,  as  we  think,  it  does  not  come  under  any  head  of  Mr. 
Lindley's  classification,  which  is  correct  as  far  as  it  goes,  and  it  goes 
as  far  in  the  direction  of  the  plaintiffs'  theory  as  any  just  classifi- 
cation that  can  be  made. 

There  is  neither  allegation  nor  evidence  that  Hull  tried  to  exclude 
or  expel  the  plaintiffs,  or  to  drive  them  to  a  dissolution,  or  that  he  did 
anything  in  iDad  faith  or  with  an  ulterior  purpose.  The  controversy 
was  confined  to  one  point  of  difference — the  Murchison  contract — 
which  was  a  matter  of  internal  regulation.  There  was  no  dispute 
about  anything  else.  The  plaintiffs  claimed  that  the  contract  bound 
the  firm,  and  that  it  included  all  work  done  or  to  be  done  for  Mr. 
Clark,  while  Hull  claimed  that  it  did  not  bind  the  firm,  and  that,  if  it 
did,  it  embraced  only  a  part  of  that  work.  There  was  no  difference 
in  the  computation  of  balances,  or  claim  that  the  articles  had  been 
violated  by  either  side,  except  with  reference  to  that  contract.  The 
plaintiffs  insisted  that  Hull  had  drawn  out  more  than  his  share  of  the 
profits,  because  he  drew  one-third  of  the  income  without  leaving  one- 
third  of  the  part  going  to  Murchison,  and  that  thus  there  was  a  bal- 
ance against  him.  Hull  claimed  that  the  plaintiffs,  in  paying  any- 
thing to  Murchison,  wasted  the  assets  of  the  firm,  and  thus  there  was 
a  balance  against  them.  When  the  interlocutory  judgment  was  made, 
the  parties  at  once  stipulated  the  respective  balances  on  the  basis 
of  that  decree,  and  thus  obviated  a  reference,  so  that  final  judgment 
was  entered  without  delay.  Neither  party  desired  an  accounting, 
except  as  an  excuse  to  sustain  or  defeat  the  Murchison  contract. 

Exclusion  from  a  small  portion  of  the  profits,  paid  or  withheld  in 
good  faith  on  account  of  that  contract,  was  not  exclusion  from  the 
affairs  of  the  firm,  yet  an  accounting  was  sought  only  as  a  means  of 
settling  the  dispute  over  that  particular  subject,  which  related  simply 
to  a  detail  in  the  management  of  the  business.  No  discovery  was 
asked  for.  There  was  no  claim  that  Hull  was  insolvent,  or  that  he 
had  suppressed  any  fact,  or  had  made  secret  profits,  or  had  been  guilty 
of  bad  conduct,  or  that  the  books  had  not  been  properly  kept,  or  that 
the  plaintiffs  had  been  denied  access  to  the  books.  There  was  no 
evidence  that  any  partner  had  refused  tO'  give  an  account  of  all  moneys 
received  by  him,  or  that  there  was  error  or  omission  of  any  kind  in 
the  accounts  of  the  firm,  except  as  limited  to  the  Murchison  agree- 
ment. It  was  easy  to  test  the  validity  of  that  contract  by  simply  with- 
holding payment,  forcing  Murchison  to  sue,  and  raising  the  question 
by  answer.  That  was  not  an  equitable,  but  a  legal,  question.  Mur- 
chison's  claim  did  not  differ  from  that  of  any  firm  creditor,  except 
that  the  partners  were  at  odds  over  its  validity.  "No  action  can  be 
maintained  by  one  partner  against  the  other  in  respect  to  particular 
items  of  account  pertaining  to  the  partnership  business."  Thompson 
V.  Lowe,  111  Ind.  274,  12  N.  E.  477. 

An  accounting  without  a  dissolution  has  never  been  allowed,  under 
the  circumstances  of  this  case,  by  any  court  in  this  country  or  in 
England,  so  far  as  we  can  learn  from  the  authorities  cited  by  counsel 
or  discovered  by  ourselves.  A  brief  review  of  the  leading  cases  will 
show  that  the  principle  upon  which  they  rest  has  no  application  to  the 


Ch.  2)        RELATIONS   OF   THE   PARTNERS   BETWEEN  THEMSELVES  1281 

facts  of  the  case  before  us.  In  Fairthorne  v.  Weston,  3  Hare's  Ch. 
R.  387,  the  plaintiff  bought  into  the  business  of  an  attorney,  paying 
£700  down,  and  agreeing  to  pay  700  more  at  the  end  of  five  years, 
when  the  defendant  was  to  retire,  and  the  business  was  to  belong  to 
the  plaintiff.  During  the  five  years  the  parties  were  to  be  copartners, 
sharing  the  profits  and  expenses  equally.  After  a  while  the  defend- 
ant,-for  the  fraudulent  purpose  of  getting  rid  of  his  contract,  received 
money,  and  refused  to  account  for  it,  excluded  the  plaintiff  from  all 
knowledge  and  control  over  the  business,  used  insulting  language 
toward  him,  and  violated  the  copartnership  agreement  in  other  ways, 
and  all  in  order  to  bring  about  a  dissolution.  A  bill  filed  for  an  ac- 
counting, without  a  dissolution,  was  sustained  upon  the  ground  that 
the  defendant  was  violating  the  contract  in  order  to  compel  the  plaintiff 
to  submit  to  a  dissolution  upon  very  injurious  terms,  and  that  the 
court  had  power  to  support  as  well  as  dissolve  a  partnership.  In 
Richards  v.  Davis.  2  Russell  &  M.  347,  a  copartnership  for  a  long 
term  had  not  expired,  and  the  acting  partner  excluded  the  others  "from 
the  means  of  ascertaining  the  state  of  the  partnership  affairs."  A  bill 
for  an  accounting,  and  to  permit  the  plaintiffs  "to  have  access  to  all 
the  books  of  the  partnership,"  was  sustained ;  but  the  court  refused 
to  make  an  order  "for  carrying  on  the  partnership  concerns,  unless 
with  a  view  to  dissolution."     *     *     * 

With  respect  to  occasional  breaches  of  agreement  between  part- 
ners, when  they  are  not  of  so  grievous  a  nature  as  to  make  it  impos- 
sible that  the  partnership  should  continue,  the  court  stands  neuter; 
but  when  it  finds  that  the  acts  complained  of  are  of  such  a  character 
as  to  show  that  the  partners  cannot  continue  partners,  and  that  relief 
cannot  be  given  but  by  a  dissolution,  the  court  will  decree  it,  although 
it  is  not  specifically  asked.     *     *     * 

A  court  of  equity  will  not  take  cognizance  of  an  action  for  an  ac- 
counting as  a  mere  incident  to  the  settlement  of  a  solitary  matter 
in  dispute  between  partners,  when  it  is  not  vital  to  either  party  or  to 
the  business,  and  dissolution  is  not  sought.  Actions  to  establish  a 
partnership,  the  existence  of  which  was  denied  by  the  partner  in  con- 
trol to  give  a  partner  access  to  the  books  after  persistent  refusal,  or 
to  permit  him  to  take  part  in  the  business  from  which  he  had  been 
excluded,  are  founded  on  intentional  and  continuous  wrongdoing, 
which,  unless  arrested,  might  subvert  the  partnership.  When  one  par- 
ty seizes  or  absorbs  the  entire  business,  or  usurps  rights  of  his  co- 
partner which  are  essential  to  his  safety  or  the  safety  of  the  firm,  or 
persists  in  misconduct  so  gross  as  to  threaten  destruction  to  the 
interests  of  all,  the  court  may  intervene  to  restore  the  rights  of  the 
innocent  party,  or  to  rescue  a  paying  business  from  ruin.  Extreme 
necessity  only,  however,  will  justify  interference  without  a  dissolu- 
tion. 

There  was  no  sufficient  reason  for  an  appeal  to  a  court  of  equity  m 
the  case  under  consideration.  There  was  no  equity  in  the  bill  as  filed 
by  the  plaintiffs,  and  none  in  the  case  made  for  them  by  the  evidence. 
The  defendant  Murchison  had  an  adequate  remedy  at  law,  and  he  can 
take  nothing  from  his  intrusion  into  the  litigation,  under  the  circum- 
stances, for  the  questionable  order  admitting  him  as  a  defendant  did 
not  create  a  cause  of  action,  nor  add  to  the  jurisdiction  of  the  court. 
All  the  parties  should  be  put  back  where  they  were  before  the  action 
B.&  B.Bus.Law— 81 


1282  PARTNERSHIP  (Part  5 

was  commenced,  and  hence  it  is  our  duty  to  reverse  the  judgments 
below  and  dismiss  the  complaint,  with  costs  to  the  defendant  Hull 
against  the  plaintiffs  and  the  defendant  Murchison. 
Judgments  reversed. 


CENTRAL,  TRUST  &  SAFE  DEPOSIT  CO.  v.  RESPASS. 

(Court  of  Appeals  of  Kentucky,  1902.     112  Ky.  606,  66  S.  W.  421, 
56  L.  R.  A.  479,  99  Am.  St.  Rep.  317.) 

Action  by  Jerome  B.  Respass  against  the  executors  of  Solomon  L. 
Sharp  for  a  settlement  of  partnership  accounts.  Judgment  granting 
relief  sought,  and  defendants  appeal. 

Du  RelIvE,  J.  Jerome  B.  Respass  and  Solomon  L.  Sharp  appear 
to  have  formed  a  copartnership,  extending  over  several  years,  in  the 
business  of  managing  a  racing  stable,  and,  in  connection  with  that 
business,  were  engaged  in  "bookmaking,"  or  making  wagers  upon 
race  horses.  They  seem,  also,  to  have  had  an  interest  in  a  pool  room 
at  Newport.  For  the  book  business  a  separate  account  was  kept  by  a 
cashier  employed  for  the  purpose.  They  had  no  regular  time  for  mak- 
ing settlements  with  each  other,  but  at  various  times,  when  requested 
the  cashier  made  out  statements  of  the  booking  business  of  the  firm. 
It  appears  from  the  testimony  of  Bernard,  the  cashier,  that  Sharp  in 
November,  1897,  handed  him  $4,724,  and  told  him  to  deposit  it  to 
his  (Sharp's)  credit  in  the  Merchants'  National  Bank  of  Cincinnati, 
Ohio,  which  was  done.  Sharp  appears  to  have  stated  at  the  time  that 
one-half  of  this  fund  belonged  to  Respass.  It  appears  further  that 
this  was  the  "bank  roll"  of  the  bookmaking  concern,  in  which  each 
partner  had  an  equal  interest.  At  the  same  time  he  remarked  that 
Respass  had  paid  out  $1,500  for  the  firm,  and  that  he  would  see  him 
in  a  few  days  and  settle  with  him.  Sharp  died  suddenly,  before  any 
such  settlement  was  made.  The  money  in  the  bank  roll  was  on  de- 
posit to  Sharp's  credit.  The  racing  business  of  the  firm  seems  to  have 
been  almost  entirely  in  the  hands  of  Respass,  who  attended  to  the 
horses,  trained  them,  entered  them  in  races,  and  at  times  wagered  on 
them  for  the  benefit  of  the  firm,  which  divided  the  profits  or  shared 
the  losses,  as  the  case  might  be.  Respass  brought  suit  against 
Sharp's  executors  for  a  settlement  of  the  partnership  accounts.  The 
horses  in  the  racing  stable  were  sold  under  order  of  court,  and  vari- 
ous claims  against  the  fund  in  court  were  made  by  Respass  for  ex- 
penses incurred  in  keeping,  shoeing,  clipping,  training,  and  caring  for 
the  various  horses,  as  well  as  for  entering  certain  of  the  horses  in 
stakes,  and  for  wagers  paid  upon  the  horses  "Fair  Deceiver"  and 
"Shannon."  The  business  of  breeding,  training,  and  racing  horses  for 
purses  is  legal.  The  partnership  for  that  purpose  can  undoubtedly 
be  settled  by  the  chancellor.  The  only  question  presented  as  to  this 
matter  is  upon  the  correctness  of  the  settlement  made.     *     *    * 

Another  item  to  which  exception  is  taken  consists  of  $700;  being 
the  amount  of  two  bets  made,  lost,  and  paid  by  Respass  on  the  horses 
"Fair  Deceiver"  and  "Shannon."  In  view  of  the  statutory  law  of 
Kentucky,  *  *  *  we  are  unable  to  see  how  any  legal  consideration 
can  exist  for  a  promise  to  reimburse  to  a  partner  any  portion  of  any 
sum  lost  upon  a  bet  on  a  horse  race.  *  *  *  We  think  it  is  well 
settled  tliat  a  man  who  lends  money  to  another,  to  be  then  bet  on  a 


Ch.  2)        RELATIONS   OF   THE   PARTNERS   BETWEEN  THEMSELVES  1283 

horse  race,  cannot  recover  it  back.  And  so  it  would  seem  that  if  A. 
agrees  with  B,  that  B.  shall  advance  the  money,  and  himself  bet  upon 
a  horse  race  for  their  joint  account,  no  action  will  lie  by  B.  to  com- 
pel A.  to  respond  for  his  share  of  a  bet  which  is  lost.  The  statement 
of  this  proposition  seems  to  decide  it.  It  is  a  contract  for  an  illegal 
venture.  The  whole  contract  is  illegal.  No  right  of  action  can  arise 
out  of  that  contract.  This  is  exactly  the  position  of  Respass  as  to 
the  two  bets.  He  advanced  the  money  to  make  them  for  himself  and 
Sharp,  relying  upon  Sharp's  express  or  implied  agreement  to  pay  half 
the  losses  if  loss  should  be  incurred.  Such  a  contract  cannot  be  en- 
forced in  this  state. 

A  closer  question  is  presented  by  the  claim  for  a  division  of  the 
"bank  roll."  This  $4,724  was,  as  found  by  the  chancellor,  earned  by 
the  firm  composed  of  Respass  and  Sharp  in  carrying  on  an  illegal 
business — that  of  "bookmaking" — in  the  state  of  Illinois.  But  though 
this  amount  had  been  won  upon  horse  races  in  Chicago,  it  is  claimed 
that,  though  secured  illegally,  "the  transaction  has  been  closed,  and 
the  appellee  is  only  seeking  his  share  from  the  realized  profits  from 
the  illegal  contracts,  if  they  are  illegal."  On  the  other  hand,  it  is 
claimed  for  appellants  that,  as  to  the  bank  roll,  this  proceeding  is  a 
bill  fot  an  accounting  of  profits  from  the  business  of  gambling. 

It  does  not  seem  to  be  seriously  contended  that  the  business  of 
"bookmaking,"  whether  carried  on  in  Chicago  or  in  this  common- 
wealth, was  legal,  for  by  the  common  law  of  this  country  all  wagers 
are  illegal.  Irwin  v.  Williar,  110  U.  S.  510,  4  Sup.  Ct.  160,  28  L.  Ed. 
225.  One  of  the  most  interesting  cases  upon  this  subject  is  that  of 
Everet  v,  Williams,  the  celebrated  Highwaymen's  Case,  an  account  of 
which  is  given  in  9  Law  Quart.  Rev.  197.  That  was  a  bill  for  an  ac- 
counting of  a  partnership  in  the  business  of  highwaymen,  though  the 
true  nature  of  the  partnership  was  veiled  in  ambiguous  language.  The 
bill  set  up  the  partnership  between  defendant  and  plaintiff,  who  was 
"skilled  in  dealing  in  several  sorts  of  commodities";  that  they  "prb- 
ceeded  jointly  in  the  said  dealings  with  good  success  on  Hounslow 
Heath,  where  they  dealt  with  a  gentleman  for  a  gold  watch" ;  that 
defendant  had  informed  plaintiff  that  Finchley  "was  a  good  and  con- 
venient place  to  deal  in,"  such  commodities  being  "very  plenty"  there, 
and  if  they  were  to  deal  there  "it  would  be  almost  all  gain  to  them" ; 
that  they  accordingly  "dealt  with  several  gentlemen  for  divers  watches, 
rings,  swords,  canes,  hats,  cloaks,  horses,  bridles,  saddles,  and  other 
things,  to  the  value  of  i200  and  upwards" ;  that  a  gentleman  at  Black- 
heath  had  several  articles  which  defendant  thought  "might  be  had  for 
a  little  or  no  money,  in  case  they  could  prevail  on  the  said  gentleman 
to  part  with  the  said  things" ;  and  that,  "after  some  small  discourse 
with  the  said  gentleman,"  the  said  things  were  dealt  for  "at  a  very 
cheap  rate."  The  dealings  were  alleged  to  have  amounted  to  £2,000 
and  upwards.  This  case,  while  interesting  from  the  views  it  gives  of 
the  audacity  of  the  parties  and  their  solicitors,  sheds  little  light  upon 
the  legal  questions  involved,  for  the  bill  was  condemned  for  scandal 
and  impertinence;  the  solicitors  were  taken  into  custody,  and  "fyned" 
£50  each  for  "reflecting  upon  the  honor  and  dignity  of  this  court"; 
the  counsel  whose  name  was  signed  to  the  bill  was  required  to  pay  the 
costs ;  and  both  the  litigants  were  subsequently  hanged,  at  Tyburn  and 
Maidstone,  respectively,  while  one  of  the  solicitors  was  transported. 
This  case  is  found  referred  to  in  the  cases  of  Sykes  v.  Beadon,  11 


1284  PARTNERSHIP  (Part  5 

Ch  Div.  170,  195,  and  McMullen  v.  Hoffman,  174  U.  S.  639,  19  Sup. 
Ct.  839,  43  L.  Ed.  1117.    *    *    * 

In  the  case  at  bar  there  was  no  division  of  the  unlawful  gains  made 
by  Sharp  at  Chicago.  There  was  no  new  transaction  with  reference 
to  them,  such  as  the  investment  of  the  fund,  or  any  part  of  it,  in  hors- 
es, for  their  joint  account.  There  was  not  even  an  accounting  of  the 
gains,  accompanied  by  a  promise  to  pay  to  Respass  the  amount  ascer- 
tained to  be  due  him  under  the  terms  of  the  illegal  partnership  agree- 
ment. There  was  simply  a  termination  by  death  of  an  illegal  partner- 
ship, with  unlawful  gains  in  the  hands  of  one  of  the  partners,  an  ac- 
counting for  which  is  here  sued  for.    *    *    * 

We  conclude  that  in  this  country,  in  the  case  of  a  partnership  in  a 
business  confessedly  illegal,  whatever  may  be  the  doctrine  where  there 
has  been  a  new  contract  in  relation  to,  or  a  new  investment  of,  the 
profits  of  such  illegal  business,  and  whatever  may  be  the  doctrine  as 
to  the  rights  or  liabilities  of  a  third  person  who  assumes  obligations 
with  respect  to  such  profits,  or  by  law  becomes  responsible  therefor, 
the  decided  weight  of  authority  is  that  a  court  of  equity  will  not  en- 
tertain a  bill  for  an  accounting. 

The  judgment  of  the  chancellor  is  therefore  reversed,  and  the  cause 
remanded,  with  directions  to  enter  a  judgment  in  accordance  with  this 
opinion. 


SECTION    11.— FIDUCIARY    RELATION    OF    PARTNERS 

Uniform  Partnership  Act,  Section  21.  (1)  Every  partner  must 
account  to  the  partnership  for  any  benefit,  and  hold  as  trustee  for 
it  any  profits  derived  by  him  without  the  consent  of  the  other 
partners  from  any  transaction  connected  with  the  formation,  con- 
duct, or  liquidation  of  the  partnership  or  from  any  use  by  him  of 
its  property.' 


MITCHELL  V.  REED. 
(Commission  of  Appeals  of  New  York,  1874.     61  N.  Y.  123,  19  Am.  Rep.  252.) 

Appeal  from  judgment  of  the  General  Term  of  the  Supreme  Court 
in  the  First  Judicial  Department,  affirming  a  judgrnent  in  favor  of  de- 
fendant, entered  upon  decision  of  the  court  at  Special  Term. 

This  action  was  brought  to  have  certain  leases,  obtained  by  the 
defendant  during  the  existence  of  a  copartnership  between  him  and 
plaintiff,  for  terms  to  commence  at  its  termination,  of  premises  leased 

7  Leicis'  Note  to  Section  21  (0— This  paragrapli  removes  a  doubt  in  tlie 
existing  law.  At  present  it  is  not  clear  whether  the  oblir-,'ation  to  account, 
where  the  partner  has  money  or  other  property  in  his  hands,  is  or  is  not  an 
obligation  in  the  nature  of  a  trust.  For  instance:  A.,  B.,  and  C.  are  part- 
ners. A.,  as  a  result  of  a  transaction  connected  with  the  conduct  of  the 
partnership,  has  in  his  hands,  so  that  it  may  be  traced,  a  specific  sum  of  money 
or  other  property.  A.  is  insolvent.  Is  the  claim  of  the  partnership  against 
A.  a  claim  against  him  as  an  ordinary  creditor,  or  is  it  a  claim  to  the  -spe- 
cific property  or  money  in  his  hands.  Tlie  words  "and  hold  as  trustee  for 
the  partnership  any  profits"  indicate  clearly  that  the  partnership  can  claim 
as  their  own  any  property  or  money  that  can  be  traced. 


Ch.  2)       RELATIONS  OF  THE  PARTNERS  BETWEEN   THEMSELVES  1285 

and  occupied  by  the  firm,  declared  to  have  been  taken  for  the  part- 
nership, and  to  have  it  adjudged  that  the  defendant  held  them  as 
trustee  for  the  partnership.     *     *     * 

The  court  found,  as  conclusions  of  law,  that  the  defendant.  Reed, 
was  the  sole  owner  of  the  leases  executed  to  him  as  aforesaid,  and 
that  the  plaintiff  had  no  right,  title,  or  interest  in  or  to  them,  or  either 
of  them,  and  that  the  defendant  have  judgment  accordingly,  to  which 
plaintiff  duly  excepted.    Judgment  was  rendered  accordingly. 

Earl,  C.  The  relation  of  partners  with  each  other  is  one  of  trust 
and  confidence.  Each  is  the  general  agent  of  the  firm,  and  is  bound 
to  act  in  entire  good  faith  to  the  other.  The  functions,  rights,  and 
duties  of  partners  in  a  great  measure  comprehend  those  both  of  trus- 
tees and  agents,  and  the  general  rules  of  law  applicable  to  such  char- 
acters are  applicable  to  them.  Neither  partner  can,  in  the  business  and 
affairs  of  the  firm,  clandestinely  stipulate  for  a  private  advantage  to 
himself.  He. can  neither  sell  to  nor  buy  from  the  firm  at  a  concealed 
profit  to  himself.  Every  advantage  which  he  can  obtain  in  the  busi- 
ness of  the  firm  must  inure  to  the  benefit  of  the  firm.  These  principles 
are  elementary,  and  are  not  contested.  *  *  *  j^  ^^^g  ^ggn  fre- 
quently held  that  when  one  partner  obtains  the  renewal  of  a  partner- 
ship lease  secretly,  in  his  own  name,  he  will  be  held  a  trustee  for  the 
firm  as  to  the  renewed  lease.  It  is  conceded  that  this  is  the  rule  where 
the  partnership  is  for  a  limited  term,  and  either  partner  takes  a  lease 
commencing  within  the  term ;  but  the  contention  is  that  the  rule  does 
not  apply  where  the  lease  thus  taken  is  for  a  term  to  commence  after 
the  expiration  of  the  partnership  by  its  own  limitation,  and  whether 
this  contention  is  well  founded  is  one  of  the  grave  questions  to  be  de- 
termined upon  this  appeal. 

It  is  not  necessary,  in  maintaining  the  right  of  the  plaintiff  in  this 
case,  to  hold  that  in  all  cases  a  lease  thus  taken  shall  inure  to  the  ben- 
efit of  the  firm,  but  whether,  upon  the  facts  of  this  case,  these  leases 
ought  to  inure  to  the  benefit  of  this  firm.  I  will  briefly  allude  to  some 
of  the  prominent  features  of  this  case.  These  parties  had  been  part- 
ners for  some  years.  They  were  equal  in  dignity,  although  their  in- 
terests differed.  The  plaintiff  was  not  a  mere  subordinate  in  the  firm, 
but,  so  far  as  appears,  just  as  important  and  efficient  in  its  affairs  as 
the  defendant.  They  procured  the  exclusive  control  of  the  leases  of 
the  property,  to  terminate  May  1,  1871,  and  their  partnership  was  to 
terminate  on  the  same  day.  They  expended  many  thousand  dollars 
in  fitting  up  the  premises,  a  portion  thereof  after  the  new  leases  were 
obtained,  and  they  expended  a  very  large  sum  in  furnishing  them. 
By  their  joint  skill  and  influence  they  built  up  a  very  large  and  profita- 
ble business,  which  largely  enhanced  the  rental  value  of  the  premises. 
More  than  two  years  before  the  expiration  of  their  leases  and  of  their 
partnership  the  defendant  secretly  procured,  at  an  increased  rent,  in 
his  own  name,  the  new  leases,  which  are  of  great  value.  Although 
the  plaintiff  was  in  daily  intercourse  with  the  defendant,  he  knew  noth- 
ing of  these  leases  for  about  a  year  after  they  had  been  obtained.  There 
is  no  proof  that  the  lessors  would  not  have  leased  to  the  firm  as 
readily  as  to  the  defendant  alone.  The  permanent  fixtures,  by  the 
terms  of  the  leases,  at  their  expiration  belonged  to  the  lessors.  But- 
the  movable  fixtures  and  the  furniture  were  worth  vastly  more  to  be 
kept  and  used  in  the  hotel  than  to  be  removed  elsewhere. 

Upon  these  facts  I  can  entertain  no  doubt,  both  upon  principle  and 


1286  PARTxXERsriip  (Part  5 

authority,  that  these  leases  should  be  held  to  inure  to  the  benefit  of  the 
firm.  If  the  defendant  can  hold  these  leases,  he  could  have  held  them 
if  he  had  secretly  obtained  them  immediately  after  the  partnership 
commenced,  and  had  concealed  the  fact  from  the  plaintiff  during  the 
whole  term.  There  would  thus  have  been,  during  the  whole  term,  in 
making  permanent  improvements  and  in  furnishing  the  hotel,  a  con- 
flict between  his  duty  to  the  firm  and  his  self-interest.  Large  invest- 
ments and  extensive  furnishings  would  add  to  the  value  of  his  lease, 
and  defendant  would  be  under  constant  temptation  to  make  them. 
While  he  might  not  yield  to  the  temptation,  and  while  proof  might 
show  that  he  had  not  yielded,  the  law  will  not  allow  a  trustee  thus 
situated  to  be  thus  tempted,  and  therefore  disables  him  from  making 
a  contract  for  "his  own  benefit.  *  *  *  It  matters  not  that  the 
court  at  Special  Term  found  upon  the  evidence  that  the  improvements 
were  judicious  and  prudent  for  the  purposes  of  the  old  term.  The 
plaintiff  was  entitled  to  the  unbiased  judgment  as  to  such  improve- 
ments, uninfluenced  by  his  private  and  separate  interest.  "But,  further, 
the  parties  owned  together  a  large  amount  of  hotel  property  in  the 
form  of  furniture  and  supplies,  considerably  exceeding,  as  I  infer, 
$100,000  in  value.  Assuming  that  the  partnership  was  not  to  be  con- 
tinued after  the  1st  day  of  May,  1871,  this  property  was  to  be  sold, 
or  in  some  way  disposed  of  for  the  benefit  of  the  firm,  and  each  part- 
ner owed  a  duty  to  the  firm  to  dispose  of  it  to  the  best  advantage. 
Neither  could,  without  the  violation  of  his  duty  to  the  firm  place  the 
property  in  such  a  situation  that  it  would  be  sacrificed,  or  that  he 
could  purchase  it  for  his  separate  benefit,  at  a  great  profit.  Much  of 
this  property,  such  as  mirrors,  carpets,  etc.,  was  fitted  for  use  in  this 
hotel,  and  it  is  quite  manifest  that  all  of  it  would  sell  better  with  a 
lease  of  the  hotel  than  it  would  to  be  removed  therefrom.  It  is  clear 
that  one  or  both  of  these  parties  could  obtain  advantageous  leases  of 
the  hotel  for  a  term  of  years,  and  hence,  if  the  parties  had  determined 
to  dissolve  their  partnership,  it  would  have  been  a  measure  of  ordi- 
nary prudence  to  have  obtained  the  leases  and  transferred  property 
with  the  leases  as  the  only  mode  of  realizing  its  value.  This  was  de- 
feated by  the  act  of  the  defendant,  if  he  is  allowed  to  hold  these  leases, 
and  thus  place  himself  in  a  position  where  the  property  must  be  largely 
sacrificed  or  purchased  by  himself  at  a  great  advantage. 

This  the  law  will  not  tolerate.  The  language  of  Lord  Eldon,  in 
Featherstonhaugh  v.  Fenspoint,  17  Ves.  311,  a  case  in  many  respects 
resembling  this,  is  quite  in  point.  He  says:  "If  they  [the  defendants] 
can  hold  this  lease,  and  the  partnership  stock  is  not  brought  to  sale, 
they  are  by  no  means  on  equal  terms.  The  stock  cannot  be  of  equal 
value  to  the  plaintiff,  who  was  to  carry  it  away  and  seek  some  place  in 
which  to  put  it,  as  to  the  defendants,  who  were  to  continue  it  in  the 
place  where  the  trade  was  already  established ;  and  if  the  stock  was 
sold  the  same  construction  would  give  them  an  advantage  over  the  bid- 
ders. In  effect  they  w^ould  have  secured  the  good  will  of  the  trade 
to  themselves  in  exclusion  of  their  partner."  For  these  reasons,  in- 
dependently of  the  consideration  that  the  leases  themselves  had  a  value 
to  which  the  firm  was  entitled,  upon  other  grounds  and  upon  author- 
ities, to  be  hereafter  cited,  the  plaintiff,  who  commenced  his  suit  about 
one  year  before  the  term  of  the  partnership  expired,  was,  upon  undis- 
puted principles  and  authorities  applicable  to  all  trustees  and  persons 


Ch.  2)        RELATIONS   OF   THE   PARTNERS   BETWEEN   THEMSELVES  1287 

holding  a  fiduciary  relation  to  others,  entitled  to  the  relief  he  prayed 

J-^Y*  ^         ^         ^ 

I  am  therefore  of  opinion  that  the  judgment  should  be  reversed,  and 
new  trial  granted ;  costs  to  abide  the  event. 


LATTA  V.  KILBOURN. 

(Supremo  Court  of  the  Unitecl  States,  1S93.     150  U.  S.  524,  14  Sup.  Ct.  201, 

87   L.  Ed.   1169.) 

Bill  by  appellees,  Kilbourn  and  Olmstead,  as  members  of  a  dis- 
solved partnership,  against  appellant,  Latta,  another  member  thereof, 
for  an  account  of  profits  made  by  the  latter  in  certain  transactions  al- 
leged to  have  been  within  the  scope  of  the  partnership  business,  and 
which,  as  claimed,  it  was  his  duty  to  have  conducted  for  the  benefit  of 
the  firm,  instead  of  for  his  individual  advantage.  Kilbourn  and  Latta 
had  been  partners  in  carrying  on  business  as  real  estate  brokers.  Their 
business  was  one  of  agency,  and  consisted  in  negotiatging  and  making 
sales  and  purchases  of  real  property  for  others.  Afterwards  one 
Olmstead  was  admitted  to  the  firm,  the  scope  of  the  partnership  busi- 
ness remaining  unchanged.  During  the  existence  of  both  firms,  each 
member  thereof,  with  the  knowledge  of  the  others,  had  purchased  real 
estate  and  other  property  on  his  individual  account,  and  no  question 
was  ever  made  of  the  right  to  do  so,  nor  did  any  partner  ever  claim 
that  the  profits  realized  from  such  purchases  should  be  treated  as  be- 
longing to  the  partnership  or  subject  to  division  among  its  members. 
By  special  agreement  and  as  a  special  venture  they  had  several  times 
bought  real  estate  and  property  on  joint  speculation  and  had  divided 
the  profits.  During  the  existence  of  the  firm  Latta  entered  into  an 
agreement  with  one  Stearns  by  which  they  undertook  to  engage  in 
the  buying  and  selling  of  real  estate  on  joint  speculation.  These  spec- 
ulations resulted  in  large  profits,  and  the  present  action  is  to  compel 
Latta  to  account  for  his  share  of  those  profits  and  share  them  with 
his  copartners,  Olmstead  and  Kilbourn. 

The  court  below  entered  a  decree  requiring  Latta  to  account  to  his 
former  partners  for  this  share  of  these  profits.    From  this  decree  Latta 

appealed. 

Jackson,  j.  *  *  *  fhe  court  below  based  its  opinion  upon  two 
grounds:  First,  that  the  scope  of  the  copartnership  business  and 
agreement,  as  alleged  in  the  third  paragraph  of  the  bill,  (quoted 
above),  was  established,  and  that  the  appellant  could  not  engage  in 
purchases  of  real  estate  on  his  own  account  or  in  connection  with 
others,  except  by  the  consent  of  his  copartners,  without  violating  the 
duty  and  obligation  which  he  owed  to  his  firm;  and,  secondly,  that 
even  if  the  copartnership  did  not  include  the  business  of  buying  and 
selling  real  estate  on  partnership  account,  still  the  appellant  could  not 
employ  the  knowledge  and  information  acquired  in  the  course  of  the 
partnership  business  in  respect  to  the  real  estate  market  in  making 
purchases  or  transactions  for  his  own, benefit. 

The  general  principles  on  which  the  court  proceeded  admit  of  no 
question,  it  being  well  settled  that  one  partner  cannot,  directly  or  in- 
directly, use  partnership  assets  for  his  own  benefit;  that  he  cannot, 
in  conducting  the  business  of  a  partnership,  take  any  profit  clandes- 
tinely for  himself ;    that  he  cannot  carry  on  the  business  of  the  part- 


1288  PARTNERSHIP  (Part  5 

nership  for  his  private  advantage;  that  he  cannot  carry  on  another 
business  in  competition  or  rivah-y  with  that  of  the  firm,  thereby  de- 
priving it  of  the  benefit  of  his  time,  skill,  and  fidelity,  without  being 
accountable  to  his  copartners  for  any  profit  that  may  accrue  to  him 
therefrom;  that  he  cannot  be  permitted  to  secure  for  himself  that 
which  it  is  his  duty  to  obtain,  if  at  all,  for  the  firm  of  which  he  is  a 
member;  nor  can  he  avail  himself  of  knowledge  or  information  which 
may  be  properly  regarded  as  the  property  of  the  partnership,  in  the 
sense  that  it  is  available  or  useful  to  the  firm  for  any  purpose  within 
the  scope  of  the  partnership  business. 

It  therefore  becomes  necessary,  in  testing  the  liability  of  the  appel- 
lant to  account  for  the  profits  realized  from  the  transactions  with 
Stearns,  to  consider  and  ascertain  what  was  the  scope  of  the  partner- 
ship agreement  in  reference  to  the  purchase  and  sale  of  real  estate. 
This  is  the  underlying  and  essential  fact  on  which  rests  the  proper 
determination  of  the  question  whether  the  appellant,  in  engaging_  in 
the  joint  enterprises  with  Steams,  violated  any  duty  or  obligation 
which  he  owed  to  the  firm  of  Kilbourn  &  Latta.  In  other  words,  the 
question  on  this  branch  of  the  case  depends  entirely  upon  this :  Were 
or  were  not  those  transactions  within  the  scope  of  the  firm  business,^  in 
respect  to  which  Latta  owed  a  duty  to  his  firm,  or  in  respect  to  which 
he  could  properly  be  said  to  be  the  agent  of  the  firm?    *    *    * 

The  proofs  in  the  present  case  not  only  fail  to  break  down  his  denial 
on  this  point,  but,  on  the  contrary,  affirmatively  establish  that  neither 
under  the  first  nor  the  second  firm  of  Kilbourn  &  Latta  did  the  part- 
nership agreement  extend  to  the  business  of  buying  and  selling  real 
estate  either  for  investment  or  for  speculation  on  firm  account.  Nei- 
ther of  the  appellees  testified  to  the  contrary.  The  appellee  Kilbourn, 
when  pressed  upon  the  question,  evaded  a  reply  thereto;  and  Olm- 
stead,  in  his  sworn  testimony,  failed  to  support  the  allegation  of  the 
bill  as  made  on  that  particular  subject.  On  the  other  hand,  the  tes- 
timony of  the  appellant  fully  supported  the  denial  of  his  answer,  and 
he  is  corroborated  by  all  the  facts  and  circumstances  in  the  case,  such 
as  the  character  of  the  business  as  advertised  and  as  actually  con- 
ducted.    *     *     * 

The  court  below  was  in  error  in  finding  as  a  matter  of  fact  that 
the  partnership  extended  to  the  buying  and  selling  of  real  estate  for 
the  account  of  the  firm.  There  is,  therefore,  no  right  on  the  partof 
the  complainants  to  relief  in  this  cause,  based  upon  the  consideration 
that  the  scope  and  character  of  the  partnership  business  embraced  the 
purchase  and  sale  of  real  estate,  either  for  the  firm  alone  or  jointly 
with  others. 

The  further  allegation  of  the  bill  "that  all  profits  resiilting  from  op- 
erations in  real  estate  by  any  member  of  the  firm  of  Kilbourn  &  Latta 
during  the  existence  of  said  partnership  should  belong  to  said  firm, 
and  be  entered  upon  the  books  of  the  firm,  and  be  paid  into  the  part- 
nership account;  and  that  no  member  of  said  firm  should  engage  in 
the  business  of  buying  and  selling  real  estate  in  the  said  District  on 
his  own  account,  or  with  any  other  person  or  persons,  except  in 
cases  where  the  proposed  transaction  had  been  explained  to  the  said 
firm,  and  the  firm  had  declined  to  take  any  part  therein," — was  also 
positively  denied  by  the  answer  of  the  appellant  under  oath.  There 
is  no  testimony  in  the  cause  to  overcome  that  denial.  On  the  contrary, 
the  evidence  establishes  that  there  was  no  such  restriction  or  limita- 


Ch.  2)        KELATIONS   OF   THE   PARTNERS   BETWEEN   THEMSELVES  1289 

tion  imposed  upon  the  individual  members.  So  that  the  complain- 
ants were  entitled  to  no  relief  on  that  ground. 

But,  aside  from  the  foregoing  questions  of  fact,  how  stands  the 
case  on  the  assumption  that  there  was  a  new  stipulation  or  agreement 
when  Olmstead  was  taken  into  the  firm  (as  claimed  by  Kilbourn  and 
Olmstead,  and  as  set  out  above)  that  knowledge  and  information  ob- 
tained by  any  member  of  the  firm  as  to  bargains  in  real  estate  should 
be.  first  communicated  to  the  firm,  with  the  view  of  giving  the  firm,  or 
the  members  thereof,  the  first  opportunity  of  purchasing,  before  any 
individual  member  thereof  could  act  upon  such  knowledge  or  infor- 
mation for  his  own  benefit?  Can  the  agreement  to  furnish  informa- 
tion as  to  bargains  in  real  estate,  and  give  copartners  the  option  of 
taking  benefit  of  such  bargains,  be  considered  as  so  enlarging  the 
scope  of  the  partnership  business  as  to  include  therein  the  purchase 
and  sale  of  real  estate  on  joint  account?  It  would  be  a  perversion  of 
language  and  a  confusion  of  ideas  to  treat  such  a  stipulation,  if  it 
were  clearly  established,  as  creating  a  partnership  in  future  options 
to  buy  what  did  not  already,  by  the  terms  of  the  copartnership,  come 
within  the  scope  and  character  of  the  partnership  business.  That  al- 
leged stipulation,  instead  of  enlarging  the  partnership  business,  was 
manifestly  a  restriction  and  limitation  upon  the  power  and  authority 
of  the  copartners  to  bind  the  firm,  or  the  members  thereof,  in  any 
real  estate  transaction,  until  each  member  had  expressly  consented  or 
agreed  to  join  in  the  particular  purchase,  specially  submitted  for  con- 
sideration. 

By  the  well-settled  law  of  partnership  each  member  of  the  firm  is 
both  a  principal  and  an  agent  to  represent  and  bind  the  firm  and  his 
associate  partners  in  dealings  and  transactions  within  the  scope  of  the 
copartnership.  No  express  authority  is  necessary  to  confer  this  agen- 
cy or  fiduciary  relation  in  respect  to  the  business  of  the  firm.  If 
the  buying  and  selling  of  real  estate  was  a  part  of  the  business  of 
Kilbourn  &  Latta,  the  alleged  stipulation  about  giving  an  option  to 
the  firm  and  the  members  thereof  to  accept  special  bargains  would  have 
been  an  idle  arrangement.  But  under  the  alleged  stipulation  each 
and  every  purchase  of  real  estate  was  a  special  and  individual  trans- 
action or  enterprise,  requiring  the  special  assent  and  agreement  of 
each  partner  thereto,  before  it  became  a  subject  of  partnership,  or 
was  brought  within  the  scope  of  the  partnership  business.  Under 
the  operation  of  the  agreement,  a  partner  who  purchased  real  estate, 
either  on  joint  or  partnership  account,  did  so  not  under  or  by  virtue 
of  the  partnership  articles,  or  under  authority  derived  from  the  part- 
nership business  and-  his  implied  agency  to  represent  the  firm  therein, 
but  solely  and  exclusively  from  the  special  assent  or  agreement  of 
his  associates  to  engage  in  that  particular  purchase.  So  that  each  par- 
cel of  real  estate  to  be  acquired,  as  well  as  the  agreement  to  purchase 
the  same,  was- first  made  the  subject  of  a  special  arrangement.  It  is 
difficult  to  understand  how,  under  such  circumstances  and  conditions, 
a  copartnership  could  properly  be  said  to  include  or  extend  to  the 
business  of  purchasing  and  selling  real  estate. 

The  special  subject  of  each  purchase,  as  admitted  by  Kilbourn,  like 
the  purchase  of  bonds  and  other  securities,  did  not  and  could  not 
come  within  the  operation  of  the  copartnership,  or  become  a  part  of 
the  partnership  agreement  until  each  particular  piece  of  property  had 
been  selected  and  agreed  upon.    It  is  undoubtedly  true  that,  under  this 


1290  PARTNERSHIP  (Part  5 

alleged  agreement,  if  a  partner  had  submitted  to  the  firm  or  his  as- 
sociates tlie  question  of  buying  a  particular  parcel  of  land,  and  they 
had  agreed  to  make  that  purchase,  he  would  thereafter  have  occupied 
an  agency  or  fiduciary  relation  in  respect  to  that  particular  piece  of 
property.  But  the  question  here  is  whether  his  failure  to  give  the  firm, 
or  his  copartners,  the  opportunity  of  making  an  election  to  buy  cer- 
tain real  estate,  and  his  making  the  purchase  thereof  for  his  own  ac- 
count, or  jointly  with  another,  is  such  a  violation  of  his  fiduciary 
relations  to  the  firm  and  his  associates  in  respect  to  copartnership 
business  as  to  entitle  the  latter  to  call  him  to  account  for  profits  re- 
alized in  such  transactions.  In  other  words,  will  the  violation  of  his 
undertaking  to  give  to  the  firm,  or  his  associates,  the  opportunity  or 
option  to  engage  in  any  particular  transaction,  not  within  the  scope 
of  the  firm's  business,  entitle  the  copartners  to  convert  him  into  a  con- 
structive trustee  in  respect  to  the  profits  realized  therefrom?    *     *     * 

We  are  clearly  of  opinion  that  the  alleged  new  stipulation  that  each 
copartner  should  furnish  to  the  firm,  or  to  the  members  thereof,  in- 
formation as  to  bargains  in  real  estate,  and  give  it  or  them  the  option 
to  engage  in  the  acquisition  thereof  before  acting  upon  such  informa- 
tion for  his  own  benefit,  neither  enlarged  the  scope  of  the  partnership 
so  as  to  make  it  include  the  purchases  and  sales  of  real  estate,  nor  pre- 
cluded any  member  of  the  firm  from  making  purchases  on  his  own 
account  or  jointly  with  others;  and  that  the  act  of  the  appellant  in 
purchasing  property  with  Stearns  was  no  such  a  violation  of  his  duty 
and  obligation  to  the  firm  of  Kilbourn  &  Latta,  or  to  the  members 
thereof,  as  to  entitle  tlie  appellees  to  share  in  the  profits  which  he 
realized  therefrom. 

In  respect  to  the  second  ground,  on  which  the  court  below  rested 
its  judgment,  that  the  appellant  could  not  take  advantage  of  the  skill, 
knowledge,  and  information  as  to  the  real-estate  market  acquired  in 
the  course  of  his  connection  with  the  partnership  of  Kill5ourn  &  Latta, 
so  as  to  gain  any  profit  individually  therefrom,  but  was  bound  to 
share  with  his  copartners  all  the  beneficial  results  which  could  be 
derived  from  his  knowledge  or  information  on  that  subject,  we  need 
not  do  more  than  to  say  that  this  proposition  is  wholly  unsupported 
either  by  the  authorities  or  by  any  legal  principle  applicable  to  part- 
nership law. 

It  is  well  settled  that  a  partner  may  traffic  outside  of  the  scope  of 
the  firm's  business  for  his  own  benefit  and  advantage,  and  without 
going  into  the  authorities  it  is  sufficient  to  cite  the  thoroughly  consid- 
ered case  of  Aas  v.  Benham,  [1891]  2  Ch.  244,  255,  in  which  , it  was 
sought  to  make  one  partner  accountable  for  profits  realized  from  an- 
other business,  on  the  ground  that  he  availed  himself  of  information 
obtained  by  him  in  the  course  of  his  partnership  business,  or  by  rea- 
son of  his  connection  with  the  firm,  to  secure  individual  advantage  in 
the  new  enterprise.  It  was  there  laid  down  by  Lord  Justice  Lindley 
that  if  a  member  of  a  partnership  firm  avails  himself  of  information 
obtained  by  him  in  the  course  of  the  transaction  of  the  partnership 
business,  or  by  reason  of  his  connection  with  the  firm,  for  any  pur- 
pose within  the  scope  of  the  partnership  business,  or  for  any  purpose 
which,  would  compete  with  the  partnership  business,  he  is  liable  to  ac- 
count to  the  firm  for  any  benefit  he  may  have  obtained  from  the  use 
of  such  information;  but  if  he  uses  the  information  for  purposes 
which  are  wholly  without  the  scope  of  the  partnership  business,  and 


Ch.  2)        RELATIONS   OF   Till:   PARTNERS   BETWEEN   THEMSELVES  1201' 

not  competing  with  it,  the  firm  is  not  entitled  to  an  account  of  such 
benefits. 

It  was  further  laid  down  in  that  case  *  *  *  that  "it  is  not  the 
source  of  the  information,  but  the  use  to  which  it  is  applied,  which  is 
important  in  such  matters.  To  hold  that  a  partner  can  never  derive 
any  personal  benefits  from  information  which  he  obtains  as  a  partner 
would  be  manifestly  absurd."  And  it  was  said  by  Lord  Justice  Bow- 
en  that  the  character  of  information  acquired  from  the  partnership 
transaction,  or  from  connection  with  the  firm,  which  the  partner 
might  not  use  for  his  private  advantage,  is  such  information  as  belongs 
to  the  partnership  in  the  sense  of  property  which  is  valuable  to  the 
partnership,  and  in  which  it  has  a  vested  right. 

Tested  by  these  principles,  it  cannot  be  properly  said  that  Latta  used 
any  information  which  was  partnership  property,  so  as  to  render  him 
chargeable  with  the  profits  made  therefrom.  His  knowledge  of  the 
real  estate  market,  or  in  respect  to  profitable  investments  therein,  was 
not  used  in  competition  with  the  business  of  the  firm,  nor  in  any  man- 
ner so  as  to  come  within  the  scope  of  the  firm's  business.    *     *     * 

We  are  clearly  of  opinion,  upon  the  whole  case,  that  the  decree 
should  be  reversed,  and  the  cause  remanded  to  the  court  below  with 
directions  to  dismiss  the  bill  at  the  costs  of  the  appellees,  and  it  is 
accordingly  so  ordered.    *     *     * 


BLOOM  et  al  v.  LOFGREX  et  al. 
(Suprpme  Court  of  Minnesota,  1896.     64  Minn.  1,  65  N.  W.  960) 

Action  by  Louis  Bloom  and  others  against  C.  F.  Lofgren  and  oth- 
ers. Verdict  for  plaintiffs,  and  from  an  order  refusing  a  new  trial, 
Lofgren  appeals. 

CoLLiN^S,  J.  From  the  evidence  adduced  upon  the  trial  of  this  ac- 
tion, it  was  well  established  that  the  writing  designated  as  "Exhibit  A" 
never  became  a  contract  between  defendant  Lofgren  and  the  other 
persons  who  signed  it,  for  there  was  nothing  tending  to  show  that  the 
former  ever  accepted  its  terms  and  conditions.  To  the  contrary,  it 
appeared  that  he  did  not,  and  that  it  was  wholly  superseded  by  the 
oral  agreement  entered  into  April  15,  1891,  after  the  writing  was  signed. 
And,  even  if  it  had  been  binding  on  the  signers  up  to  that  time,  it  is 
clear  that  its  terms  and  conditions  were  changed  and  modified  at  the 
meeting  of  Lofgren  and  his  associates  on  that  day.  It  was  then  agreed 
that  Lofgren  should  purchase  the  horse  in  question  of  the  supposed 
owner.  Walker,  for  cash,  for  the  association ;  that  he  should  buy  for 
$1,800  if  he  could  not  buy  for  a  less  sum;  that  he  should  advance  the 
necessary  money ;  and  that  he  should  take  the  notes  of  such  persons 
as  could  not  make  immediate  payment,  payable  at  a  future  time,  bear- 
ing 10  per  cent,  interest.  This  was  the  final  contract,  and,  as  before 
stated,  modified  or  entirely  superseded  the  writing.  If  Lofgren  had 
previously  purchased  the  horse  at  $1,200, — and  it  was  admitted  that  he 
had, — he  fraudulently  imposed  upon  those  with  whom  he  was  dealing, 
his  actual  or  proposed  copartners  in  the  transaction.  The  law  will  not 
permit  him  to  retain  and  enjoy  the  fruits  of  his  fraudulent  representa- 
tions that  Walker  was  still  the  owner,  that  the  lowest  cash  price  was 
$1,800,  and  his  later  representations  of  the  same  nature,  that  he  had 
bought  the  animal  as  authorized,  and  had  paid  $1,800  for  him.     In 


1292  PARTNERSHIP  (Part  5 

their  dealings  with  each  other,  partners  occupy  positions  of  trust,  and 
are  required  to  exercise  the  most  scrupulous  good  faith  towards  each 
other.  Nor  is  this  requirement  confined  to  persons  who  are  actually 
copartners,  but  it  extends  to  those  negotiating  for  a  partnership  not  yet 
formed.  All  of  the  findings  of  fact  were  supported  by  the  evidence. 
Order  affirmed. 


EXCHANGE  BANK  OF  LEON  et  al.  v.  GARDNER  et  al. 
(Supreme  Court  of  Iowa,  1897.     104  Iowa,  176,  73  N.  W.  591.) 

Suit  in  equity  for  an  accounting,  and  to  recover  of  defendant  Gard- 
ner $15,000  on  account  of  poor  investments  made  by  him  as  one  of 
the  partners  and  cashier  of  plaintiff  banking  partnership.  Gardner  was 
accused  of  negligently  purchasing  and  renewing  notes,  to  the  loss  of 
the  partnership.     Judgment  for  defendants.     Plaintiffs   appeal. 

Robinson,  J,  *  *  *  It  must  be  admitted  that  Gardner  did  not 
exercise  the  highest  degree  of  care  and  diligence  which  was  possible 
in  purchasing  the  notes  in  controversy ;  and  the  question  we  are  re- 
quired to  determine  is  whether,  in  view  of  the  facts  disclosed  by  the 
record,  his  failure  to  exercise  greater  care  and  diligence  than  he  did 
makes  him  liable  for  the  loss  which  followed  the  investments.  There 
is  no  evidence  whatever  that  he  acted  in  bad  faith,  nor  do  we  think 
'that  he  exceeded  his  authority  in  purchasing  Kansas  City  paper.  Mon- 
ey of  the  bank  was  invested  in  Chicago,  and  a  little  later  investments 
were  made  in  Sioux  City  and  Minneapolis  paper.  It  is  not  at  all  proba- 
ble that  all  of  those  investments  were  made  without  the  knowledge  of 
the  president  of  the  bank ;  and,  even  if  not  known  at  the  time  they  were 
made,  they  were  certainly  known  within  a  short  time  thereafter,  and 
we  are  satisfied  that  Gardner's  authority  to  make  them  was  not  then 
questioned.  That  he  was  making  an  honest  effort  to  invest  properly 
a  portion  of  the  idle  money  of  the  bank  is  clearly  shown,  and  that 
no  question  in  regard  to  the  Kansas  City  investments  was  made  until 
after  the  Winner  failure  is,  we  think,  also  established.  It  was  the  duty 
of  Gardner  to  act  in  good  faith  and  with  entire  honesty  in  transacting 
all  the  business  of  the  bank,  and  to  exercise  as  high  a  degree  of  care 
and  skill  as  is  generally  exercised  by  business  men  in  the  management 
of  such  business.  *  *  *  But  he  was  not  liable  for  honest  errors 
in  judgment,  nor  for  the  failure  to  take  the  utmost  precaution  possible 
in  making  investments  for  the  bank.  *  *  *  Applying  these  rules, 
we  conclude  that  he  was  not  so  negligent  in  the  transactions  in  ques- 
tion as  to  be  liable  for  the  resulting  losses. 

This  conclusion  makes  it  unnecessary  to  determine  questions  in  re- 
gard to  ratification  and  waiver  discussed  in  the  arguments  of  counsel. 
The  judgment  of  the  district  court  appears  to  be  sustained  by  the  evi- 
dence, and  is  affirmed. 


SECTION   12.— PARTNER'S  RIGHT  TO  PARTICIPATE  IN 

MANAGEMENT 

Uniform  Partnership  Act,  Section  18.  (e)  Subject  to  any  agree- 
ment between  them,  all  partners  have  equal  rights  in  the  manage- 
ment and  conduct  of  the  partnership  business. 

(h)  Subject   to   any   agreement   between   them   any   difference 


Ch.  2)       RELATIONS  OF   THE   PARTNERS  BETWEEN  THEMSELVES  1293 

arising  as  to  ordinary  matters  connected  with  the  partnership 
business  may  be  decided  by  a  majority  of  the  partners ;  but  no  act 
in  contravention  of  any  agreement  between  the  partners  may  be 
done  rightfully  without  the  consent  of  all  the  partners. 

(g)  Subject  to  any  agreement  between  them  no  person  can 
become  a  member  of  a  partnership  without  the  consent  of  all  the 
partners. 


JOHNSTON  &  CO.  V.  BUTTON'S  ADM'R. 
(Supreme  Court  of  Alabama,  1855.     27  Ala.  245.) 

GoLDTHWATTE,  J.  The  evidence  in  this  case  tended  to  show  that  the 
appellants  and  one  Vanderslice  carried  on  in  copartnership  a  steam 
sawmill,  which  by  the  articles  of  copartnership  was  to  continue  at  least 
five  years ;  that  the  note  sued  on  was  given  with  the  concurrence  of 
two  of  the  partners,  Fogg  and  Vanderslice,  for  supplies  necessary  for 
the  hands  engaged  in  carrying  on  the  mill,  which  had  been  ordered  by 
one  of  them.  Upon  these  facts  alone  there  can  be  no  doubt  that  the 
firm  would  be  bound.  The  furnishing  of  supplies  to  those  engaged  in 
the  immediate  direction  of  the  business  was  essential  to  the  conduct- 
ing of  it,  and  within  the  scope  of  the  purpose  for  which  the  individ- 
uals had  associated ;  and  the  authority  of  either  of  the  partners  to 
purchase  such  supplies,  and  give  the  note  of  the  firm,  cannot  be  ques- 
tioned. 

The  principal  ground  of  objection,  however,  is  that  the  evidence 
proved  that,  before  the  goods  were  furnished  and  the  note  given,  the 
appellant  Johnston  gave  notice  to  the  public  that  he  would  not  be  re- 
sponsible for  any  future  debt  contracted  on  account  of  the  copartner- 
ship, and  that  this  notice  was  brought  home  to.  the  party  with  whom 
the  debt  was  contracted ;  and  it  is  insisted  that  its  effect  was  to  revoke 
the  authority  of  the  other  partners,  so  far  as  he  was  concerned,  to  bind 
the  firm  from  that  time. 

It  is  to  be  observed  that  in  the  present  case  the  contract  was 
concurred  in  by  two  members  of  the  firm ;  and  the  question,  therefore, 
is  as  to  the  right  of  the  majority  to  bind  the  other  partners,  against 
their  dissent,  as  to  matters  appertaining  to  the  common  business,  and 
in  the  absence  of  any  stipulation  conferring  that  power  in  the  articles 
of  copartnership.  This  question  is  a  new  one  in  this  court,  and,  in- 
deed, we  have  found  no  case  in  which  it  has  been  expressly  decided. 
Both  in  England  and  the  United  States  there  are  cases  which  assert 
the  general  proposition  that  a  partner  may  protect  himself  against  the 
consequences  of  a  future  contract,  by  giving  notice  of  his  dissent  to 
the  party  with  whom  it  is  about  to  be  made.  *  *  *  And  where 
the  firm  consists  of  but  two  persons,  and  there  is  nothing  in  the  articles 
to  prevent  each  from  having  an  equal  voice  in  the  direction  and  con- 
trol of  the  common  business,  the  correctness  of  the  proposition  can- 
not be  questioned.  In  such  case  the  duty  of  each  partner  would  re- 
quire him  not  to  enter  into  any  contract  from  which  the  other  in  good 
faith  dissented ;  and,  if  he  did,  it  would  be  a  violation  of  the  obliga- 
tions which  were  imposed  by  the  nature  of  the  partnership.  It  would 
not,  in  fact,  be  the  contract  of  the  firm ;  and  the  party  with  whom  it 
was  made,  having  notice,  could  not  enforce  it  as  such.  So,  if  the 
firm  was  composed  of  more  than  two  persons,  and  one  of  them  dis- 


1294  PARTNERSHIP  (Part  5 

sented,  the  party  with  whom  the  contract  is  made  acts  at  his  peril,  and 
cannot  hold  the  dissenting  partner  liable,  unless  his  liability  results 
from  the  articles  or  from  the  nature  of  the  partnership  contract.  All 
the  cases  can  be  sustained  on  this  principle ;  and  it  is  in  strict  analogy 
with  the  civil  law,  which  holds,  where  the  stipulations  of  the  partner- 
ship expressly  intrust  the  direction  and  control  of  the  business  to  one 
of  the  partners,  that  the  dissent  of  the  other  would  not  avail,  if  the 
contract  were  made  in  good  faith.  Pothier,  Traite  du  Com.  de  Soc. 
Nos.  71,  90.  And  such,  also,  we  think,  is  the  rule  of  the  common  law. 
Const.  V.  Harris,  Turn.  &  Russ.  496;  Story  on  Part.  §  121.  XVere  it 
otherwise  it  would  be  denying  to  parties  the  right  to  make  their  own 
contracts.  If  our  views  as  to  the  governing  force  of  express  stipula- 
tions are  correct,  the  effect  of  such  terms  or  conditions  as  result  by 
clear  implication  from  the  articles,  or  arise  out  of  the  nature  of  the 
partnership,  must  be  the  same.  It  is  as  if  they  had  been  expressly 
provided. 

Now,  whenever  a  partnership  is  formed  by  more  than  two  persons, 
we  think  that  in  the  absence  of  any  express  provision  to  the  contrary 
there  is  always  an  implied  understanding  that  the  acts  of  the  majority 
are  to  prevail  over  those  of  the  minority  as  to  all  matters  within  the 
scope  of  the  common  business ;  and  such  we  understand  to  be  the 
doctrine  asserted  by  Lord  Eldon  in  Const,  v.  Harris,  supra,  and  such 
was  the  opinion  of  Judge  Story.  Story  on  Part.  §  123 ;  3  Kent's  Com. 
(5th  Ed.)  45.  The  rule  as  thus  laid  down  is  certainly  more  reasonable 
and  just  than  to  allow  the  minority  to  stop  the  operations  of  the  con- 
cern against  the  views  of  the  majority.  We  do  not  say  that  it  would 
be  a  bona  fide  transaction,  so  as  to  bind  the  firm,  if  the  majority  choose 
wantonly  to  act  without  information  to  or  consultation  with  the  mi- 
nority. *  *  *  But  when,  as  in  the  present  case,  the  one  partner 
has  given  notice,  and  expressed  his  dissent  in  advance,  there  could 
be  no  reason  or  propriety  in  requiring  him  to  be  consulted  by  the  other 
two. 

We  do  not  consider  the  cases  to  which  we  have  been  referred,  hold- 
ing that  one  partner  has  the  right  at  pleasure  to  dissolve  a  partner- 
ship, although  the  articles  provide  that  it  is  to  continue  for  a  specified 
term  (Marquand  v.  Mfg.  Co.,  17  Johns.  [N.  Y.]  525;  Skinner  v.  Day- 
ton, 19  Johns.  [N.  Y.]  513,  10  Am.  Dec.  286),  as  having  any  bearing 
on  the  case  under  consideration.  Conceding  they  are  law — which  is 
doubtful  (Story  on  Partn.  &  275,  note  3,  and  cases  there  cited) — the 
decision  rests  solely  upon  the  ground  that  the  limitation  on  the  right 
of  dissolution  is  incompatible  with  the  nature  of  the  copartnership 
contract ;  and  this  principle  does  not  militate  against  the  position  we 
have  asserted.  The  dissent,  in  the  present  case,  cannot  be  regarded 
as  a  dissolution;  for,  if  effectual,  it  would  not  necessarily  produce  that 
result,  although  it  might  operate  to  change  the  mode  of  conducting  the 
business.  In  other  words,  it  might  be  carried  on  Avithout  contracting 
debts. 

Our  conclusion  is  that  the  act,  being  concurred  in  by  two  of  the 
partners,  was,  under  the  circumstances,  the  act  of  the  firm,  and  that 
the  charge,  asserting  the  proposition  that  the  dissent  of  one  partner 
against  the  other  two  would  necessarily  exonerate  him,  was  properly 
refused. 

Judgment  [for  plaintiff]  affirmed. 


Ch.  2)       RELATIONS   OF   THE   PARTNERS   BETWEEN   THEMSELVES  1295 


APPEAL  OF  JENNINGS   et  al. 

(Supreme  Ck)urt  of  Pennsylvania,  1888,     16  Atl.  19,  2  L.  R.  A.  43.) 

Bill  by  Joseph  G.  Beale  against  Benjamin  F.  Jennings,  John  Davis, 
Robert  Flenniken,  and  T.  D.  Jennings,  all  parties  being  of  the  firm 
of  Jennings,  Beale  &  Co.,  Limited,  to  enjoin  the  removal  of  the  loca- 
tion of  the  steel-works  of  the  firm.  The  opinion  of  the  court  was  as 
follows :  "The  facts  in  this  case  present  but  a  single  question.  It  is 
whether  the  majority  of  the  copartnership  of  Jennings,  Beale  &  Co., 
Limited,  have  authority  to  change  the  location  of  their  works,  against 
the  will  of  the  minority.  The  partnership  was  formed  for  the  man- 
ufacture and  sale  of  steel,  and  the  location  of  their  works  was  stated 
in  their  certificate  of  association  to  be  Leechburg,  Armstrong  coun- 
ty, Pa.  It  seems  evident  that  the  location  of  works  for  the  manu- 
facture of  steel  is  not  a  matter  of  indifference.  Any  business,  to  be 
successful,  must  be  properly  surrounded.  This  is  so  much  the  case 
with  the  manufacture  of  steel  that  few  places  in  our  whole  land  are 
adapted  for  it,  and  therefore  few  are  chosen  for  such  works.  This 
being  a  palpable  truth,  a  court,  in  construing  an  instrument  intended 
as  the  basis  of  such  a  copartnership,  could  not  regard  the  place  men- 
tioned for  the  location  of  the  works  as  a  matter  of  indifference,  or  in 
any  other  light  than  a  material  element  in  the  contract  of  the  parties. 
If  that  be  true,  it  could  of  course  be  changed  ohly  with  the  consent 
of  all  the  members.  If  a  majority  were  determined  to  abandon  the 
works  in  Leechburg,  and  erect  new  works  in  some  part  of  Allegheny 
county,  it  would  plainly  be  a  new  enterprise ;  and  yet  no  distinction 
in  principle  can,  to  our  minds,  be  made  between  that  and  what  is 
here  proposed.  The  majority  of  Jennings,  Beale  &  Co.,  Limited,  are 
about  to  remove  part  of  their  works  from  Leechburg  to  some  place 
in  Allegheny  county,  with  a  view  to  the  removal  of  the  entire  works 
thither  in  the  future.  Thus  they  would  undertake  a  venture  to  which 
the  plaintiff  never  committed  himself,  and  would  destroy  the  works 
they  have  agreed  to  operate.  In  our  opinion,  tliis  is  such  a  departure 
from  the  enterprise  contemplated  in  the  agreement  of  the  parties,  that 
•constitutes  such  an  irreparable  injury  to  the  property  and  right  of 
the  plaintiff,  as  entitles  him  to  the  injunction  heretofore  granted.  The 
injunction  is  therefore  continued  until  the  further  order  of  the 
court."     Whereupon  defendants  appeal. 

Per  Curiam.    Decree  affirmed,  at  costs  of  appellants. 


SECTION    13.— PARTNER'S    RIGHT    TO    INFORMATION 

Uniform  Partnership  Act,  Section  19.  The  partnership  books 
shall  be  kept,  subject  to  any  agreement  between  the  partners,  at 
the  principal  place  of  business  of  the  partnership,  and  every 
partner  shall  at  all  times  have  access  to  and  may  inspect  and  copy 
any  of  them. 

Section  20.  Partners  shall  render  on  demand  true  and  full  in- 
formation of  all  things  affecting  the  partnership  to  any  partner  or 
the  legal  representative  of  any  deceased  partner  under  legal  disa-* 
bility. 


1296  PARTNERSHIP  (Part  5 

SECTION  14.— PARTNER'S  RIGHT  TO  REMUNERATION 

FOR  SERVICES 

Uniform  Partnership  Act,  Section  18.  (f)  Subject  to  any  agree- 
ment between  them,  no  partner  is  entitled  to  remuneration  for  act- 
ing in  the  partnership  business,  except  that  a  surviving  partner 
is  entitled  to  reasonable  compensation  for  his  services  in  winding 
up  the  partnership  affairs. 


GAY  V.  HOUSEIHOLDER. 

(Supreme  Court  of  Appeals  of  West  Virginia,  1912.     71  W.  Va.  277, 
76  S.  E.  450,  Ann.  Cas.  1914C,  297.) 

Bill  by  Pat  Gay  against  W.  C.  Householder.  Decree  for  defendant, 
and  plaintiff  appeals. 

Miller,  J.    This  suit  is  to  settle  a  partnership.     *     *     * 

Now  as  to  the  salary  item.  There  is  substantial  agreement  between 
the  parties  as  to  what  the  original  contract  of  co-partnership  was,  and 
that  not  a  word  was  then  said  about  salary.  Householder  makes 
some  pretension  that  afterwards  something  was  said  by  him  to  Gay 
about  salary,  but  Gay  denies  this.  He  swears  that  Householder 
thought  when  they  made  the  contract  that  as  he  was  to  finance  the 
enterprise,  and  furnish  the  stock  or  capital  to  run  it,  an  equal  share 
of  the  profits  would  be  fair  compensation.  It  required  considerable 
capital  to  furnish  the  live  stock  and  keep  the  business  stocked  up  with 
meat  and  other  articles  dealt  in,  besides  the  time  required  of  Gay  in 
doing  so.  The  general  rule  is  well  established,  that  one  partner  is  not 
entitled  to  compensation  for  his  services  in  attending  to  partnership 
affairs,  unless  there  be  a  contract  therefor,  express  or  implied.  *  *  * 
No  express  agreement  is  proven,  and  we  cannot  say,  on  the  facts 
proven,  that  one  is  implied.     *     *     * 

Another  assignment  of  error  is  the  allowance  to  John  Wallace,  ex- 
pert accountant,  $20.00,  for  work  done  on  the  firm's  books,  and  in 
making  up  the  account.  We  are  not  disposed  to  disturb  this  item. 
True  Householder  should  have  furnished  the  account  without  assist- 
ance of  an  expert  accountant,  but  it  was  a  proper  expense  incurred  by 
the  commissioner  or  receiver,  and  we  think  the  item  was  a  proper 
disbursement  of  the  firm  assets. 

Affirmed  in  part,  and  reversed  in  part. 


LTNDSEY  V.  STRANAHAN. 

(Supreme  Court  of  Pennsylvania,  1889.     129  Pa.  635,   18  AH.  524.) 

Suit  in  account  render  by  J.  K.  Lindsey  against  J.  A.  Stranahan, 
to  settle  the  copartnership  business  existing  under  the  name  of  J. 
K.  Lindsey  &  Co.     Decree  for  defendant,  and  plaintiff  appeals. 

Per  Curiam.  There  is  but  a  single  question  in  this  case :  Is  J.  R. 
Lindsey,  the  plaintiff,  entitled  to  compensation  for  his  services  as  a 
partner?  It  is  conceded  that  there  was  no  express  contract  that  he 
should  be  paid  for  such  services,  and  there  is  no  principle  better  set- 


Ch.  2)        RELATIONS   OF   THE   PARTNERS   BETWEEN   THEMSELVES  1297 

tied  than  that  the  law  will  not  imply  a  contract  in  such  cases.  The 
reason  is  that  the  partner  is  but  attending  to  his  own  affairs.  This 
rule  is  inexorable ;  as  much  so  as  that  between  parent  and  child. 
Were  it  otherwise,  we  might  have  a  contract  between  the  partners  up- 
on the  settlement  of  every  partnership  account  as  to  the  value  of  their 
respective  services.  It  is  true  this  principle  may  work  hardship  in 
particular  cases, — almost  every  general  rule  does ;  but  that  is  a  weak 
argument  against  the  soundness  of  the  rule.  When  the  copartnership 
agreement  contemplates  that  one  partner  shall  manage  the  business, 
or  do  more  than  his  share  of  the  work,  it  is  easy  to  provide  for  his 
compensation  in  the  agreement  itself ;  and  if  no  such  stipulation  is 
then  made,  as  before  said,  the  law  will  not  imply  one.  Even  where  a 
liquidating  or  surviving  partner  settles  up  the  business,  it  has  been  re- 
peatedly held  that  he  is  not  entitled  to  compensation  for  doing  so, 
although,  in  such  case,  he  performs  all  the  services.  *  *  * 
Judgment  affirmed. 
B.&B.Bus.Law— 82 


1298  PARTNERSHIP  (Part  5 

CHAPTER  III 
RELATIONS  OF  PARTNERS  TO  THIRD  PERSONS 

Section 

1.  Scope  of  a  Partner's  Power  in  General. 

2.  Particular  Powers. 

3.  Powers  with  Respect  to  Partnership  Realty. 

4.  Powers  Arising  by  Estoppel. 

.5.     Liability  of  Partners,  When  Joint,  or  .Toint  and  Several. 
6.    Right  of  a  Creditor  of  a   Partner  in   the  Partner's  Individual  Capacity 
with  Respect  to  Partnership  Property. 


SECTION  1.— SCOPE  OF  A  PARTNER'S  POWER  IN 
GENERAL 

Uniform  Partnership  Act,  Section  9.  (1)  Every  partner  is  an 
agent  of  the  partnership  for  the  purpose  of  its  business,  and  the 
act  of  every  partner,  including  the  execution  in  the  partnership 
name  of  any  instrument,  for  apparently  carrying  on  in  the  usual 
way  the  business  of  the  partnership  of  which  he  is  a  member  binds 
the  partnership,  unless  the  partner  so  acting  has  in  fact  no  au- 
thority to  act  for  the  partnership  in  the  particular  matter,  and 
the  person  with  whom  he  is  dealing  has  knowledge  of  the  fact 
that  he  has  no  such  authority.* 

(2)  An  act  of  a  partner  which  is  not  apparently  for  the  carrying 
on  of  the  business  of  the  partnership  in  the  usual  way  does  not 
bind  the  partnership  unless  authorized  by  the  other  partners. 


WINSHIP  et  al.  v.  BANK  OF  THE  UNITED  STATES. 
(Supreme  Court  of  the  United  States,  1831.     5  Pet.  529,  8  L.  Ed.  216.) 

Marshall,  C.  j.  *  ^=  *  This  was  an  action  brought  in  the 
court  for  the  first  circuit  and  district  for  Massachusetts,  against 
John  Winship,  Amos  Binney  and  John  Binney,  merchants  and  part- 
ners, trading  under  the  name  and  firm  of  John  Winship,  as  indorser 
of  several  promissory  notes,  made  by  Samuel  Jacques,  Jun.  *  *  "*" 
A  verdict  was  found  for  the  plaintiffs,  and  judgment  entered  there- 
on ;  which  is  brought  before  this  court  by  writ  of  error.     *     *     * 

The  third  instruction  asked  in  the  Circuit  Court,  goes  to  the  con- 
struction of  the  articles  of  co-partnership.  The  plaintiff  in  error 
contends  that  those  articles  gave  Winship  no  authority  to  raise  money 
on  the  credit  of  the  firm,  or  to  bind  it  by  his  signature,  for  the  pur- 
pose of  borrowing  money. 

The  instruction  given  was,  that  if  the  particular  terms  of  the  ar- 

1  Lewis'  Note  to  8ecti07i  9  (1). — The  words  "including  the  execution  in  the 
partnership  name  of  any  instrument"  avoid  any  possible  doubt  as  to  whether 
a  partner  has  the  authority,  in  the  ordinary  course  of  business,  to  enter  into 
formal  contracts  for  his  partnership,  or  to  convey  partnership  property  when 
the  conveyance  is  the  result  of  a  sale  in  the  ordinary  course  of  partnership 
'business. 


Ch.  3)  RELATIONS   OF   PARTNERS   TO   THIRD   PERSONS  1299 

tides  were  unknown  to  the  public,  they  had  a  right  to  deal  with  the 
firm  in  respect  to  the  business  thereof,  upon  the  general  principles 
and  presumptions  of  limited  partnerships  of  a  like  nature,  and  that 
any  special  restrictions  did  not  affect  them ;  that  in  such  partner- 
ships, it  was  within  the  general  authority  of  the  partners  to  make  and 
indorse  notes,  and  to  obtain  advances  and  credits  for  the  business  and 
benefit  of  the  firm,  and  if  such  was  the  general  usage  of  trade,  the 
authority  must  be  presumed  to  exist,  but  that  it  did  not  extend  to 
transactions  beyond  the  scope  and  object  of  the  co-partnership ;  that 
in  the  present  articles,  Winship  was  in  effect  constituted  the  active 
partner,  and  has  general  authority  to  transact  the  business  of  the 
firm,  and  a  right  to  bind  the  firm  in  transacting  its  ordinary  busi- 
ness with  persons  ignorant  of  any  private  restriction,  to  the  same 
extent  that  partners  in  such  limited  partnerships  usually  possess. 

The  amount  of  the  charge  is,  that  if  Winship  and  the  two  Binneys 
composed  a  joint  company  for  carrying  on  the  soap  and  candle  busi- 
ness on  the  credit  of  the  company,  in  the  manner  usually  practiced  in 
such  partnerships,  notwithstanding  any  secret  restriction  on  his  pow- 
ers, in  any  agreement  between  the  parties ;  provided  such  restriction 
was  unknown  to  the  lender. 

The  counsel  for  the  plaintiff  in  error  has  objected  to  this  instruc- 
tion with  great  force  of  reasoning.  He  contends  very  truly,  that  in 
fact  scarcely  any  unlimited  partnerships  exist.  They  are  more  or  less 
extensive ;  they  may  extend  to  many  or  to  few  objects ;  but  all  are  in 
some  degree  limited. 

That  the  liability  of  a  partner  arises  from  pledging  his  name,  if  his 
name  is  introduced  into  the  firm,  or  from  receiving  profits  if  he  is  a 
secret  partner. 

No  man  can  be  pledged  but  by  himself.  If  he  is  to  be  bound  by 
another,  that  other  must  derive  authority  from  him.  The  power  of 
an  agent  is  limited  by  the  authority  given  him ;  and  if  he  transcends 
that  authority,  the  act  cannot  affect  his  principal,  he  acts  no  longer 
as  an  agent.  The  same  principle  applies  to  partners.  One  binds  the 
others,  so  far  only  as  he  is  the  agent  of  the  others. 

If  the  truth  of  these  propositions  be  admitted,  yet  their  influence  on 
the  case  may  be  questioned.  Partnerships  for  commercial  purposes, 
for  trading  with  the  world,  for  buying  and  selling  from  and  to  a 
great  number  of  individuals,  are  necessarily  governed  by  many  gen- 
eral principles,  which  are  known  to  the  public,  which  subserve  the 
purpose  of  justice,  and  which  society  is  concerned  in  sustaining.  One 
of  these  is,  that  a  man  who  shares  in  the  profit,  although  his  name 
may  not  be  in  the  firm,  is  responsible  for  all  its  debts.  Another,  more 
applicable  to  the  subject  under  consideration,  is,  that  a  partner,  cer- 
tainly the  acting  partner,  has  power  to  transact  the  whole  business 
of  the  firm,  whatever  that  may  be,  and  consequently  to  bind  his  part- 
ners in  such  transactions,  as  entirely  as  himself.  This  is  a  general 
power,  essential  to  the  well  conducting  of  business ;  which  is  im- 
plied in  the  existence  of  a  partnership.  When  then  a  partnership  is 
formed  for  a  particular  purpose,  it  is  understood  to  be  in  itself  a 
grant  of  power  to  the  acting  members  of  the  company  to  transact  its 
business  in  the  usual  way.  If  that  business  be  to  buy  and  sell,  then 
the  individual  buys  and  sells  for  the  company,  and  every  person  with 
whom  he  trades  in  the  way  of  its  business,  has  a  right  to  consider 
him  as  the  company,  whoever  may  compose  it. 


1300  PARTNERSHIP  (Part  5 

It  is  usual  to  buy  and  sell  on  credit ;  and  if  it  be  so,  the  partner 
who  purchases  on  credit  in  the  name  of  the  firm  must  bind  the  firm. 
This  is  a  general  authority  held  out  to  the  world,  to  which  the  world 
has  a  right  to  trust.  The  articles  of  co-partnership  are  perhaps  never 
published.  They  are  rarely  if  ever  seen,  except  by  the  partners  them- 
selves. The  stipulations  they  may  contain  are  to  regulate  the  con- 
duct and  rights  of  the  parties,  as  between  themselves.  The  trading 
world,  with  whom  the  company  is  in  perpetual  intercourse,  cannot 
individually  examine  these  articles,  but  must  trust  to  the  general 
powers  contained  in  all  partnerships.  The  acting  partners  are  iden- 
tified with  the  company,  and  have  power  to  conduct  its  usual  busi- 
ness, in  the  usual  way.  This  power  is  conferred  by  entering  into 
the  partnership,  and  is  perhaps  never  to  be  found  in  the  articles.  If 
it  is  to  be  restrained,  fair  dealing  requires  that  the  restriction  should  be 
made  known.  These  stipulations  may  bind  the  partners ;  but  ought 
not  to  afifect  those  to  whom  they  are  unknown,  and  who  trust  to  the 
general  and  well  established  commercial  law.     *     *     ^ 

The  counsel  for  the  plaintiff  in  error  supposes,  that  though  these 
principles  may  be  applicable  to  an  open  avowed  partnership,  they  are 
inapplicable  to  one.  that  is  secret. 

Can  this  distinction  be  maintained?  If  it  could,  there  would  be  a 
difference  between  the  responsibility  of  a  dormant  partner,  and  one 
whose  name  was  to  the  articles.  But  their  responsibility,  in  all  part- 
nership transactions,  is  admitted  to  be  the  same.  Those  who  trade 
with  a  firm  on  the  credit  of  individuals  whom  they  believe  to  be 
members  of  it,  take  upon  themselves  the  hazard  that  their  belief  is 
well  founded.  If  they  are  mistaken,  they  must  submit  to  the  conse- 
quences of  their  mistake ;  if  their  behef  be  verified  by  the  fact,  their 
claims  on  the  partners,  who  were  not  ostensible,  are  as  valid  as  on 
those  whose  names  are  in  the  firm.  This  distinction  seems  to  be 
founded  on  the  idea  that,  if  partners  are  not  openly  named,  the  re- 
sort to  them  must  be  connected  with  some  knowledge  of  the  secret 
stipulations  between  the  partners,  which  may  be  inserted  in  the  ar- 
ticles. But  this  certainly  is  not  correct.  The  responsibility  of  un- 
avowed  partners  depends  on  the  general  principles  of  commercial  law, 
not  on  the  particular  stipulation  of  the  articles.     *     *     * 

We  think  there  is  no  error  in  the  opinions  given  by  the  judge  to  the 
jury.     *     *     *     The  judgment  is  affirmed.     *     *  '* 


GORDON   V.    AUMILLER. 

(Supreme  Court  of  Wash!n£;ton,  1020.     109  Wash.  496.  187  Pac.  354, 
9  A.   L.   R.   369:) 

Action  by  J.  H.  Gordon  against  W.  C.  Marburger  and  another, 
wherein  W.  J.  Aumiller  intervened.  The  plaintifif,  Gordon,  com- 
menced this  action  against  the  defendant  Marburger,  seeking  an  ac- 
counting of  their  partnership  affairs  and  the  appointment  of  a  receiver 
to  take  charge  of  their  partnership  property,  pending  the  settlement 
of  their  dififerences.  The  partnership  had  been  for  the  growing  of 
potatoes.  Marburger  had  borrowed  money  from  Aumiller,  giving 
his  notes  therefor,  secured  by  a  chattel  mortgage  on  the  potatoes  of 
the  firm.  From  a  judgment  for  the  plaintiff,  Gordon,  the  intervener. 
Aumiller,  appeals. 


Ch.  3)       RELATIONS  OF  PARTNERS  TO  THIRD  PERSONS         1301 

Parker,  J.  *  *  *  It  is  conceded  that  the  business  relation  be- 
tween them  was  that  of  a  nontrading  partnership,  and  that  Marburger's 
power  to  contract  debts  and  incumber  the  partnership  property  was 
limited  accordingly.  In  Snively  v.  Matheson,  12  Wash.  88,  40  Pac. 
628,  50  Am.  St.  Rep.  877,  Judge  Dunbar,  reviewing  the  law  touching 
the  power  of  one  partner  of  a  nontrading  partnership  to  bind  the  other 
partners,  or  the  partnership  property  to  the  detriment  of  the  other  part- 
ners, speaking  for  the  court,  said :  "The  presumption  is  that  one  part- 
ner has  no  power  to  bind  the  other  partners.  Hence,  before  recovery 
can  be  obtained  upon  a  contract  entered  into  by  one  partner  in  a  non- 
trading  partnership  against  the  other  partners,  it  must  be  affirmatively 
shown  by  the  party  attempting  to  bind  the  noncontracting  partners, 
either  that  the  authority  to  bind  was  conferred  by  the  articles  of  incor- 
poration, or  that  authority  had  been  specially  conferred,  or  that  it  had 
been  the  custom  of  such  partnership  to  recognize  this  right  to  such  an 
extent  as  would  give  innocent  dealers  a  right  to  rely  upon  the  cus- 
tom." 

It  was  also  recognized  as  the  law  in  that  decision  that,  in  the  doing 
of  acts  ordinarily  necessary  to  be  done  by  one  partner  in  the  perform- 
ance of  partnership  duties  assigned  to  such  partner,  he  can  bind  the 
other  partners  and  their  interest  in  the  partnership  property.  It  is 
plain,  however,  that  in  this  partnership  Marburger  had  no  duties  to 
perform  in  the  partnership  business  rendering  it  at  all  necessary  for 
him  to  borrow  money  to  further  the  partnership  interests,  nor  was 
there  any  custom  of  dealing  by  either  of  the  partners  touching  the 
partnership  business  in  the  least  suggesting  that  Marburger  was  au- 
thorized to  borrow  money  for  the  partnership  or  incumber  its  prop- 
erty. The  contentions  of  counsel  for  Marburger  are  rested  upon 
die  theory  that  Gordon  was  a  silent  or  dormant  partner,  and  that 
Aumiller  was  warranted  in  dealing  with  Marburger  upon  the  assump- 
tion that  he  was  the  sole  owner  of  the  potatoes.  It  is  true  that  Au- 
miller testified  in  substance  that  he  had  no  notice  of  Gordon's  interest 
in  the  potatoes  until  after  he  had  made  all  of  the  three  loans  to  Mar- 
burger. It  is  hard  to  believe  that  Aumiller  was  wholly  ignorant  of  * 
Gordon's  interest  in  the  potatoes,  in  view  of  the  fact  that  Aumiller 
prepared  the  rent  receipt  evidencing  the  leasing  of  the  land  to  both 
Marburger  and  Gordon  for  the  raising  of  these  potatoes.  The  chattel 
mortgage  given  by  Marburger  to  Aumiller  to  secure  the  first  loan 
of  $150  described  the  crop  of  potatoes  as  being  then  growing  upon 
the  same  land,  describing  it,  and  referring  to  it  as  belonging  to  Henry 
Pagel,  which  mortgage  was  executed  on  June  12th,  only  1  month  and 
12  days  after  Aumiller  had  prepared  the  rent  receipt  for  Marburger. 
Surely  this  ought  to  be  held  to  be  sufficient  to  at  least  put  Aumiller 
upon  inquiry  as  to  the  probability  of  Gordon  being  interested  in  the 
potatoes.  This  significant  fact,  together  with  the  fact  that  Gordon 
made  no  efifort  to  conceal,  and  did  no  act  tending  to  conceal,  the  ex- 
istence of  the  partnership  relation  between  him  and  Marburger  and 
the  fact  that  this  was  purely  a  nontrading  partnership,  we  think,  com- 
pels the  conclusion  that  in  no  event  can  Aumiller  at  this  time  be 
heard  to  say,  as  against  the  rights  of  Gordon,  that  he  was  led  to  believe 
that  Marburger  was  the  sole  owner  of  the  potatoes,  with  absolute  right 
to  borrow  money  and  sectu-e  the  payment  of  the  same  by  incumbering 
them.     *     *     * 

The  judgment  Is  affirmed. 


1302  PARTNERSHIP  (Part  5 

SECTION  2.— PARTICULAR  POWERS 

Uniform  Partnership  Act,  Section  9.  (3)  Unless  authorized  by 
the  other  partners  or  unless  they  have  abandoned  the  business, 
one  or  more  but  less  than  all  the  partners  have  no  authority  to : 

(a)  Assign  the  partnership  property  in  trust  for  creditors  or 
on  the  assignee's  promise  to  pay  the  debts  of  the  partnership; 

(b)  Dispose  of  the  good  will  of  the  business ; 

(c)  Do  any  other  act  which  would  make  it  impossible  to  carry 
on  the  ordinary  business  of  the  partnership ; 

(d)  Confess  a  judgment; 

(e)  Submit  a  partnership  claim  or  liability  to  arbitration  or  ref- 
erence. 

(4)  No  act  of  a  partner  in  contravention  of  a  restriction  on  au- 
thority shall  bind  the  partnership  to  persons  having  knowledge 
of  the  restriction. 

Section  11.  An  admission  or  representation  made  by  any  part- 
ner concerning  partnership  affairs  within  the  scope  of  his  authority 
as  conferred  by  this  act  is  evidence  against  the  partnership.- 

Section  12.  Notice  to  any  partner  of  any  matter  relating  to 
partnership  affairs,  and  the  knowledge  of  the  partner  acting  in 
the  particular  matter,  acquired  while  a  partner  or  then  present  to 
his  mind,  and  the  knowledge  of  any  other  partner  who  reasonably 
could  and  should  have  communicated  it  to  the  acting  partner,  op- 
erate as  notice  to  or  knowledge  of  the  partnership,  except  in  the 
case  of  a  fraud  on  the  partnership  committed  by  or  with  the  con- 
sent of  that  partner.^ 

2  Lewis'  t^ote  to  Section  ii.— Admissions  before  dissolution  concerning  a 
particular  matter  should  bind  tlie  partnership  only  where  the  partner  has 
authority  to  act  in  the  particular  matter,  and  after  dissolution  only  if  nec- 
essary' to  wind  up  the  business.  Where  the  partner  has  no  authority  to  act 
and  the  person  with  whom  he  is  dealing  knows  he  has  no  authority,  or  where 
the  admission  is  made  after  dissolution  and  is  not  for  the  winding  up  of 
partnership  affairs,  it  should  not  affect  the  partnership.  If  it  is  not  the  act 
of  the  partnership  then  it  should  not  affect  the  partnership.  If  it  is  not  tlie 
act  of  the  partnership  then  it  should  not  be  evidence  against  it.  The  words 
"within  the  scope  of  his  authority,  as  conferred  by  this  act"  produce  this 
result. 

3  Leivis'  Note  to  Section  12. — At  present,  there  is  no  confusion  in  the  law 
when  the  "notice"  is  given  to  the  partner  while  he  is  a  partner.  In  such 
case  the  effect  is  the  same  as  if  notice  was  had  by  all  the  partners.  Where 
the  knowledge  or  notice  has  been  received  by  the  partner  before  he  became 
a  partner,  and  his  partners  are  ignorant  of  this,  and  he  is  not  the  partner 
acting  in  the  particular  matter,  there  is  no  doubt  that  there  has  been  nei- 
ther knowledge  of  or  notice  to  the  partnership.  Where,  however,  the  part- 
ner acting  in  the  particular  matter  acquired  knowledge  before  he  became  a 
partner,  and  the  knowledge  is  then  present  in  his  mind,  the  weight  of  au- 
thority, and,  it  is  submitted,  of  reason,  appears  to  be  that  the  partnership 
should  be  charged  with  knowledge.  Mechem  on  Agency,  p.  721.  The  words 
"acquired  while  a  partner  or  then  present  to  his  mind"  effect  the  result  de- 
sired. 

It  is  not  clear  what  the  present  law  is  when  "knowledge,  which  is  not  the 
knowledge  that  may  come  from  notice,  has  been  obtained  by  a  partner  after 
the  formation  of  the  partnership,  but  the  partner  having  such  "knowledge" 
Is  not  the  one  acting  in  the  particular  matter.     It  seems  clear  that  in  this 


Ch.  3)       RELATIONS  OF  PARTNERS  TO  THIRD  PERSONS         1303 

SECTION  3.— POWERS  WITH   RESPECT  TO   PARTNER- 
SHIP REALTY 

Uniform  Partnership  Act,  Section  10.*  (1)  Where  title  to  real 
property  is  in  the  partnership  name,  any  partner  may  convey  title 
to  such  property  by  a  conveyance  executed  in  the  partnership 
name;  but  the  partnership  may  recover  such  property  unless  the 
partner's  act  binds  the  partnership  under  the  provisions  of  para- 
graph (1)  of  section  9,  or  unless  such  property  has  been  conveyed 
by  the  grantee  or  a  person  claiming  through  such  grantee  to  a 
holder  for  value  without  knowledge  that  the  partner,  in  making  the 
conveyance,  has  exceeded  his  authority. 

(2)  Where  title  to  real  property  is  in  the  name  of  the  partner- 
ship, a  conveyance  executed  by  a  partner,  in  his  own  name,  passes 
the  equitable  interest  of  the  partnership,  provided  the  act  is  one 
within  the  authority  of  the  partner  under  the  provisions  of  para- 
graph (1)  of  section  9. 

(3)  Where  title  to  real  property  is  in  the  name  of  one  or  more 
but  not  all  the  partners,  and  the  record  does  not  disclose  the  right 
of  the  partnership,  the  partners  in  whose  name  the  title  stands  may 
convey  title  to  such  property,  but  the  partnership  may  recover 
such  property  if  the  partners'  act  does  not  bind  the  partnership 
under  the  provisions  of  paragraph  (1)  of  section  9,  unless  the  pur- 
chaser or  his  assignee,  is  a  holder  for  value,  without  knowledge. 

(4)  Where  the  title  to  real  property  is  in  the  name  of  one  or 
more  or  all  the  partners,  or  in  a  third  person  in  trust  for  the  part- 
nership, a  conveyance  executed  by  a  partner  in  the  partnership 
name,  or  in  his  own  name,  passes  the  equitable  interest  of  the 
partnership,  provided  the  act  is  one  within  the  authority  of  the 
partner  under  the  provisions  of  paragraph  (1)  of  section  9. 

(5)  Where  the  title  to  real  property  is  in  the  names  of  all  the 
partners  a  conveyance  executed  by  all  the  partners  passes  all  their 
rights  in  such  property. 


SECTION  4.— POWERS   ARISING  BY   ESTOPPEL 

Uniform  Partnership  Act,  Section  4.  (2)  The  law  of  estoppel 
shall  apply  under  this  act. 

(3)  The  law  of  agency  shall  apply  under  this  act. 

case  the  partnership  should  be  charged  only  when  the  partner  having  "knowl- 
edge" had  reason  to  believe  that  the  fact  related  to  a  matter  which  had  some 
possibility  of  being  the  subject  of  partnership  business,  and  then  only  if 
he  was  so  situated  that  he  could  communicate  it  to  the  partner  acting  in 
the  particular  matter  before  such  partner  gave  binding  effect  to  his  act. 
The  words  "who  reasonably  could  and  should  have  communicated  it  to  the 
acting  partner"  accomplish  this  result. 

4  Lewis'  Note  to  Section  10. — The  adoption  of  this  section  does  away  with 
the  existing  uncertainty  surrounding  the  subject  of  the  conveyance  of  real 
property  belonging  to  a  partnership. 


1304  PARTNERSHIP  (Part  5 


BATs^C  OF  MONONGAHELA  VALLEY  v.  WESTON  et  al. 
(Court  of  Appeals  of  New  York,  1902.     172  N.  Y.  259,  64  N.  E.  946.) 

William  W.  Weston  and  his  two  brothers  were  partners  under  the 
firm  name  of  Weston  Bros.  The  other  members  remained  silent  during 
many  years,  while  William  made  or  indorsed  in  the  firm's  name  many 
notes  for  his  individual  purposes ;  the  notes  aggregating  more  than 
$1,000,000.  Finally  the  partnership  was  dissolved.  After  dissolu- 
tion, but  before  any  notice  of  dissolution  was  given,  William  indorsed, 
in  the  firm  name,  for  his  individual  purposes,  the  two  notes  now  sued 
upon  by  a  bank  which  discounted  them.  One  note  was  for  $6,500,  and 
the  other  for  $5,000.  From  a  judgment  in  favor  of  the  defendants, 
William  W.  Weston's  partners,  the  bank,  plaintiff,  appeals. 

O'Brien,  J,  *  *  *  It  appears  without  any  dispute,  since  the 
facts  were  testified  to  by  Abijah  Weston  himself,  that  for  10  years 
prior  to  the  indorsement  of  the  notes  in  question  he  knew  that  his 
brother  who  made  the  indorsement  on  these  notes  was  using  the  firm 
name  for  the  accommodation  of  others  by  indorsing  notes  in  the  name 
of  the  firm  outside  the  partnership  business.  He  had  warned  him 
against  this  course  of  business  several  times,  and  forbid  him  to  do  it 
any  more.  *  *  *  The  brother  and  member  of  the  firm  who  was 
thus  engaged  for  years  in  using  the  firm  name  to  give  credit  to  the  pa- 
per of  parties  outside  the  partnership  business  was  all  the  time  acting 
or  assuming  to  act  as  the  agent  of  the  firm.  When  one  partner,  with 
the  knowledge  of  the  other  partners,  uses  the  firm  name  and  indorse- 
ment to  give  credit  to  others  in  matters  foreign  to  the  partnership 
business,  and  this  course  of  conduct  is  allowed  by  the  other  partners 
to  continue  during  a  long  series  of  years,  the  question  must  always 
arise  as  to  how  far  the  habitual  exercise  of  such  an  agency  or  authority, 
originally  irregular  or  even  void,  is  cured  by  acquiescence,  or  made 
binding  upon  the  firm  as  such  by  the  doctrines  of  negligence  or  estop- 
pel;  and  this  brings  us  to  the  exceptions  taken  to  the  charge  of  the 
learned  trial  judge  in  submitting  the  case  to  the  jury. 

The  plaintiff's  counsel  requested  the  court  to  charge  that,  when  the 
defendant  became  aware  of  the  persistent  and  continued  use  of  the 
firm  name  by  his  brother  outside  the  business  of  the  firm,  it  became 
his  duty  to  take  some  public  action  for  the  protection  of  outside  parties. 
The  court  refused  to  charge  the  request,  and  the  plaintiff's  counsel  ex- 
cepted. We  think  that  the  request  embodied  a  correct  and  important 
principle  applicable  to  the  proofs  in  the  case,  and  that  affected  the  issue 
between  the  parties  from  various  directions,  and  should  have  been 
charged.  *  *  *  The  right  of  one  partner  to  use  the  firm  name  rests 
upon  those  rules  and  principles  applicable  to  the  relations  of  principal 
and  agent.  The  principal  will  be  often  bound  by  the  act  oi  his  agent 
in  excess  or  abuse  of  his  actual  authority  as  between  the  principal  and 
third  persons,  who,  believing  and  having  the  right  to  believe  that  the 
agent  was  acting  within  and  not  exceeding  his  authority,  would  sus- 
tain loss  if  the  act  was  not  considered  that  of  the  principal.  The  doc- 
trine is  established  to  prevent  fraud,  and  proceeds  also  upon  the  ground 
that,  when  one  of  two  innocent  persons  must  suffer  from  the  act  of  a 
third  person,  he  shall  sustain  the  loss  who  has  enabled  the  third  person 
to  do  the  injury.  *  *  *  When  a  partnership  firm,  having  knowledge 
of  the  continued  and  persistent  conduct  of  one  of  its  members  in  lend- 


Ch.  3)  RELATIONS   OF  PARTNERS  TO  THIRD   PERSONS  1305 

ing  the  credit  of  the  firm  to  others  by  means  of  accommodation  pa- 
per, neglects  to  promptly  and  actively  condemn  the  unauthorized  act, 
and  to  seek  judicial  redress  after  knowledge  of  the  committal  of  it, 
that  will  be  deemed  an  acquiescence  in  it,  and,  if  innocent  third  persons 
have  been  led  thereby  to  put  themselves  in  a  position  from  which  they 
cannot  be  taken  without  loss,  if  the  act  were  held  invalid,  the  other 
partners  will  be  estopped  from  questioning  it.  *  *  * 
Judgment  reversed. 


SECTION  5.— LIABILITY  OF  PARTNERS,  WHEN  JOINT 
OR  JOINT  AND  SEVERAL 

Uniform  Partnership  Act,  Section  15.  All  partners  are  liable: 
(b)  Jointly  for  all  debts  and  obligations  of  the  partnership;  but 
any  partner  may  enter  into  a  separate  obligation  to  perform  a 
partnership  contract.^ 

B  Leivis'  Note  to  Section  15  f&;.— The  actual  condition  of  the  American 
statute  law  affecting  the  nature  of  partnership  liability  is  as  follows: 

In  the  following  states,  by  specific  declaration  of  statutes,  all  partnership 
liability  is  made  both  joint  and  several:  Mississippi.  Missouri,  New  Mexico, 
Alabama,  Maryland,  West  Virginia,  Iowa,  Kansas.  Minnesota,  North  Caro- 
lina, and  Arkansas.  In  some  of  these  states  the  liability  is  merely  "deem- 
ed to  be  joint  and  several  for  the  purposes  of  suit."  In  some  of  the  states 
referred  to  the  statutes  are  general — that  is,  they  include  all  joint  liability 
—while  in  others  there  is  the  general  statement,  followed  by  specific  enumera- 
tion of  partnership  liability.  But  in  all  the  states  referred  to  the  statutes 
taljen  as  a  whole,  effect,  not  only  partnership  liability,  but  also  all  joint 
liability. 

In  Illinois  the  court  refused  to  interpret  a  general  statute  making  all 
liability  joint  and  several  so  as  to  include  partnership  liability,  Fleming  v. 
Ross,  225  111.  149,  80  N.  E.  92,  S  Ann.  Cas.  314  (1907) ;  also  the  courts  of 
Colorado,  Erskine  v.  Russell,  43  Colo.  453,  96  Pac.  249  (1908).  •  In  New  York, 
though  the  statute  apparently  made  partners  liable  jointly  and  severally,  the 
court  refused  so  to  interpret  the  act.  Seligman  v.  Friedlander,  138  App.  Div. 
784,  123  N.  y.  Supp.  583  (1910). 

In  Texas,  Oklahoma,  Montana,  Pennsylvania,  New  York,  Colorado,  Illi- 
nois, North  Dakota,  South  Dakota,  Ohio,  Massachusetts,  New  Jersey,  Geor- 
gia, Vermont,  Virginia,  Rhode  Island,  Kentucky,  Michigan,  Maine,  Connec- 
ticut, Idaho,  and  Indiana,  partnership  liability  is  joint.  In  many  of  these 
states,  however,  the  results  of  joint  liability,  as  known  to  the  common  law, 
have  been  modified  by  statute  and  decision.  The  extent  of  the  -modification 
varies.  In  some  each  partner  must  be  sued  severally,  or  all  jointly ;  an  ela- 
tion being  required.  In  some  the  partnership  may  be  sued  in  the  partnership 
name,  and  thereafter  the  partners  separately  until  satisfaction  is  had.  In 
all  the  estate  of  the  deceased  partner  is  subject  to  liability,  but  in  some 
only  after  action  first  had  against  the  survivors;  in  others,  proof  of  no 
partnership  property  must  first  be  made;  in  others,  proceedings  may  be 
first  had  against  the  estate. 

The  purpose  of  the  statutes  in  those  states  which  have  made  the  liability 
Joint  and  several  was  to  effect  certain  procedural  results,  rather  than  to 
affect  the  substantive  law.  Where,  therefore,  a  state  has  already  declared 
the  liability  to  be  joint  and  several,  then  the  principle  of  uniformity  wo\ild 
not  be  affected  by  that  state  so  altering  this  paragraph  as  to  make  the  lia- 
bility joint  and  several,  as  this  change  would  affect  only  the  procedural  law 
and  "this  act  is  one  to  make  uniform  the  substantive  law  of  partnership. 


1306  PARTNERSHIP  (Part  5 


MASON  V.  ELDRED  et  al. 
(Supreme  Court  of  the  United  States,  1867.  6  Wall.  231,  18  I>.  Ed.  783.) 
On  certificate  of  division  between  the  judges  of  the  Circuit  Court 
of  Wisconsin.  The  plaintiff,  Mason,  sued  in  the  Circuit  Court  for 
Wisconsin  Anson  Eldred,  EUsha  Eldred,  and  one  Balcom,  tradmg 
as  partners,  upon  a  partnership  note  of  theirs.  Process  was  served 
on  Anson  Eldred  alone,  who  alone  appeared  and  pleaded  non  assump- 
sit. On  the  trial,  the  note  being  put  in  evidence  by  the  plaintiff,  El- 
dred offered  the  record  of  a  judgment  in  one  of  the  state  courts  of 
Michigan,  showing  that  Mason  had  already  brought  suit  in  that  court 
on  the  same  note  against  the  partnership,  where,  though  Elisha  Eldred 
was  alone  served  and  alone  appeared,  judgment  in  form  had  been  pass- 
ed against  all  the  defendants  for  the  full  amount  due  upon  the  note. 
The  evidence  being  objected  to  by  the  plaintiff,  because  not  admissible 
under  the  pleadings,  and  because  it  appeared  on  the  face  of  the  rec- 
ord that  there  was  no  judgment  against  either  of  the  defendants  nam- 
ed, except  Elisha  Eldred,  who  alone,  as  appeared  also,  was  served  or 
appeared,  and  because  it  was  insufficient  to  bar  the  plaintiff's  action, 
the  question  whether  it  was  evidence  under  the  issue  in  bar  oi,  and 
to  defeat,  recovery  against  Anson  Eldred,  was  certified  to,  this  court 
for  decision  as  one  on  which  the  judges  of  the  Circuit  Court  were 
opposed. 

Field,  J.  The  counsel  of  the  plaintiff  suggests  that  the  question 
presented  by  the  certificate  of  the  judges  of  the  Circuit  Court  is  di- 
visible into  two  parts:  (1)  Whether  the  record  of  the  judgment  re- 
covered in  Michigan  was  admissible  under  the  pleadings;  and  (2) 
whether,  if  admissible,  the  judgment  constituted  a  bar  to  the  present 
action.  We  think,  however,  that  the  admissibility  of  the  record  de- 
pends upon  the  operation  of  the  judgment. 

If  the  note  in  suit  was  merged  in  the  judgment,  then  the  judgment 
is  a  bar  to  the  action,  and  an  exemplification  of  its  record  is  admissi- 
ble; for  it  has  long  been  settled  that  under  the  pleas  of  the  general 
issue  in  assumpsit  evidence  may  be  received  to  show,  not  merely  that 
the  alleged  cause  of  action  never  existed,  but  also  to  show  that  it  did 
not  subsist  at  the  commencement  of  the  suit.  *  *  *  Qn  the  other 
hand,  if  the  note  is  not  thus  merged,  it  still  forms  a  subsisting  cause 
of  action,  and  the  judgment  is  immaterial  and  irrelevant. 

The  question,  then,  for  determination,  relates  to  the  operation  of 
the  judgment  upon  the  note  in  suit. 

The  plaintiff  contends  that  a  copartnership  note  is  the  several  ob- 
ligation of  each  copartner,  as  well  as  the  joint  obligation  of  all,  and 
that  a  judgment  recovered  upon  the  note  against  one  copartner  is  not 
a  bar  to  a  suit  upon  the  same  note  against  another  copartner;  and 
the  latter  position  is  insisted  upon  as  the  rule  of  the  common  law, 
independent  of  the  joint  debtor  act  of  Michigan. 

It  is  true  that  each  copartner  is  bound  for  the  entire  amount  due 
on  copartnership  contracts,  and  that  this  obligation  is  so  far  several 
that,  if  he  is  sued  alone  and  does  not  plead  the  nonjoinder  of  his  co- 
partners a  recovery  may  be  had  against  him  for  the  whole  amount  due 
upon  the  contract  and  a  joint  judgment  against  the  copartners  maybe 
enforced  against  the  property  of  each.  But  this  is  a  different  thing 
from  the  liability  which  arises  from  a  joint  and  several  contract.  There 
the  contract  contains  distinct  engagements,  that  of  each  contractor  in- 


Ch.  3)  RELATIONS   OF   PARTiNLRS   TO   THIRD    PERSONS  1307 

dividually,  and  that  of  all  jointly,  and  different  remedies  may  be  pursued 
upon  each.  The  contractors  may  be  sued  separately  on  their  several 
engagements,  or  together  on  their  joint  undertaking.  But  in  copartner- 
ships there  is  no  such  several  liability  of  the  copartners.  The  copart- 
nerships are  formed  for  joint  purposes.  The  members  undertake 
joint  enterprises,  they  assume  joint  risks,  and  they  incur  in  all  cases 
joint  liabilities.  In  all  copartnership  transactions  this  comn^n  risk 
and  liability  exists.  Therefore  it  is  that  in  suits  upon  these  transac- 
tions all  the  copartners  must  be  brought  in,  except  when  there  is 
some  ground  of  personal  release  from  liability,  as  infancy  or  a  dis- 
charge in  bankruptcy;  'and,  if  not  brought  in,  the  omission  may  be 
pleaded  in  abatement.  The  plea  in  abatement  avers  that  the  alleged 
promises  upon  which  the  action  is  brought  were  made  jointly  with 
another,  and  not  with  the  defendant  alone,  a  plea  which  would  be 
without  meaning,  if  the  copartnership  contract  was  the  several  con- 
tract of  each  copartner. 

The  language  of  Lord  Mansfield  in  giving  the  judgment  of  the 
King's  Bench  in  Rice  v.  Shute,  Burr.  2511,  "that  all  contracts  with 
partners  are  joint  and  several,  and  every  partner  is  liable  to  pay  the 
whole,"  must  be  read  in  connection  with  the  facts  of  the  case,  and, 
when  thus  read,  does  not  warrant  the  conclusion  that  the  court  in- 
tended to  hold  a  copartnership  contract  the  several  contract  of  each 
copartner,  as  well  as  the  joint  contract  of  all  the  copartners,  in  the 
sense  in  which  these  terms  are  understood  by  the  plaintiff's  counsel, 
but  only  that  the  obligation  of  each  copartner  was  so  far  several  that 
in  a  suit  against  him  judgment  would  pass  for  the  whole  demand,  if 
the  nonjoinder  of  his  copartners  was  not  pleaded  in  abatement. 

The  plea  itself,  which,  as  the  court  decided,  must  be  interposed  in 
such  cases,  is  inconsistent  with  the  hypothesis  of  a  several  liability. 

For  the  support  of  the  second  position,  that  a  judgment  against 
one  copartner  on  a  copartnership  note  does  not  constitute  a  bar  to  a 
suit  upon  the  same  not  against  another  copartner,  the  plaintiff  relies 
upon  the  case  of  Sheehy  v.  Mandeville  &  Jamesson,  decided  by  this 
court,  and  reported  in  6  Cranch,  254,  3  L.  Ed.  215.  In  that  case  the 
plaintiff  brought  a  suit  upon  a  promissory  note  given  by  Jamesson 
for  a  copartnership  debt  of  himself  and  Mandeville.  A  previous  suit 
had  been  brought  upon  the  same  note  against  Jamesson  alone,  and 
judgment  recovered.  To  the  second  suit  against  the  two  copartners 
the  judgment  in  the  first  action  was  pleaded  by  the  defendant  Mande- 
ville, and  the  court  held  that  it  constituted  no  bar  to  the  second  action, 
and  sustained  a  demurrer  to  the  plea. 

The  decision  in  this  case  has  never  received  the  entire  approbation 
of  the  profession,  and  its  correctness  has  been  doubted  and  its  au- 
thority disregarded  in  numerous  instances  by  the  highest  tribunals  of 
different  states.  It  was  elaborately  reviewed  by  the  Supreme  Court 
of  New  York  in  the  case  of  Robertson  v.  Smith,  18  Johns.  459,  9  Am. 
Dec.  227,  where  its  reasoning  was  declared  unsatisfactory,  and  a 
judgment  rendered  in  direct  conflict  with  its  adjudication. 

In  the  Supreme  Court  of  Massachusetts  a  ruling  similar  to  that  of 
Robertson  v.  Smith  was  made.  Ward  v.  Johnson,  13  Mass.  148.  In 
Wann  v.  McNulty,  2  Oilman,  359,  43  Am.  Dec.  58,  the  Supreme 
Court  of  Illinois  commented  upon  the  case  of  Sheehy  v.  Mandeville 
and  declined  to  follow  it  as  authority.  The  court  observed  that,  not- 
withstanding the  respect  which  it  felt  for  the  opinions  of  the  Supreme 


1308  PARTNERSHIP  (Part  5 

Court  of  the  United  States,  it  was  well  satisfied  that  the  rule  adopted 
by  the  several  state  courts — referring  to  those  of  New  York,  Massa- 
chusetts, Maryland,  and  Indiana — was  more  consistent  with  the  prin- 
ciples of  law  and  was  supported  by  better  reasons. 

In  Smith  V.  Black,  9  Serg.  &  R.  142,  11  Am.  Dec.  686,  the  Supreme 
Court  of  Pennsylvania  held  that  a  judgment  recovered  against  one 
of  two  partners  was  a  bar  to  a  subsequent  suit  against  both,  though 
the  new  defendant  was  a  dormant  partner  at  the  time  of  the  contract 
and  was  not  discovered  until  after  the  judgment.  "No  principle," 
said  that  court,  "is  better  settled  than  that  a  judgment  once  rendered 
absorbs  and  merges  the  whole  cause  of  action,  and  that  neither  the 
matter  nor  the  parties  can  be  severed,  unless,  indeed,  where  the  cause 
of  action  is  joint  and  several,  which,  certainly,  actions  against  part- 
ners are  not."  In  its  opinion  the  court  referred  to  Sheehy  v.  Mande- 
ville,  and  remarked  that  the  decision  in  that  case,  however  much  en- 
titled to  respect  from  the  character  of  the  judges  who  composed  the 
Supreme  Court  of  the  United  States,  was  not  of  binding  authority, 
and  it  was  disregarded. 

In  King  v.  Hoare,  13  Mees.  &  W.  495,  the  question  whether  a  judg- 
ment recovered  against  one  of  two  joint  contractors  was  a  bar  to  an 
action  against  the  other  was  presented  to  the  Court  of  Exchequer 
and  was  elaborately  considered.  The  principal  authorities  were  re- 
viewed, and  the  conclusion  reached  that  by  the  judgment  recovered 
the  original  demand  had  passed  in  rem  judicatam  and  could  not  be 
made  the  subject  of  another  action.  In  the  course  of  the  argument  the 
case  of  Sheehy  v.  Mandeville  was  referred  to  as  opposed  to  the  con- 
clusion reached,  and  the  court  observed  that  it  had  the  greatest  re- 
spect for  any  decision  of  Chief  Justice  Marshall,  but  that  the  reason- 
ing attributed  to  him  in  the  report  of  that  case  was  not  satisfactory. 
Mr.  Justice  Story,  in  Trafton  v.  United  States,  3  Story,  651,  Fed.  Cas. 
No.  14,135,  refers  to  this  case  in  the  Exchequer,  and  to  that  of  Sheehy 
V.  Mandeville,  and  observes  that  in  the  first  case  the  Court  of  Ex- 
chequer pronounced  what  seemed  to  him  a  very  sound  and  satisfactory 
judgment,  and  as  to  the  decision  in  the  latter  case  that  he  had  for 
years  entertained  great  doubts  of  its  propriety. 

The  general  doctrine  maintained  in  England  and  the  United  States 
may  be  briefly  stated.  A  judgment  against  one  upon  a  joint  contract 
of  several  persons  bars  an  action  against  the  others,  though  the  latter 
were  dormant  partners  of  the  defendant  in  the  original  action,  and 
this  fact  was  unknown  to  the  plaintiff  when  that  action  was  com- 
menced. When  the  contract  is  joint,  and  not  joint  and  several,  the 
entire  cause  of  action  is  merged  in  the  judgment.  The  joint  liability 
of  the  parties  not  sued  with  those  against  whom  the  judgment  is  re- 
covered being  extinguished,  their  entire  liability  is  gone.  They  can- 
not be  sued  separately,  for  they  have  incurred  no  several  obligation. 
They  cannot  be  sued  jointly  with  the  others,  because  judgment  has 
been  already  recovered  against  the  latter,  who  would  otherwise  be  sub- 
jected to  two  suits  for  the  same  cause. 

If,  therefore,  the  common-law  rule  were  to  govern  the  decision  of 
this  case,  we  should  feel  obliged,  notwithstanding  Sheehy  v.  Mande- 
ville, to  hold  that  the  promissory  note  was  merged  in  the  judgment  of 
the  court  of  Michigan,  and  that  the  judgment  would  be  a  bar  to  the 
present  action.  But  by  a  statute  of  that  state  (2  Comp.  Laws  Mich. 
1857,  p.  1219,  c.  133),  the  rule  of  the  common  law  is  changed  with 


Ch.  3)       RELATIONS  OF  PARTNERS  TO  THIRD  PERSONS        1309 

respect  to  judgments  upon  demands  of  joint  debtors,  when  some  only 
of  the  parties  are  served  with  process.  The  statute  enacts  that  "in 
actions  against  two  or  more  persons  jointly  indebted  upon  any  joint 
obligation,  contract,  or  liability,  if  the  process  against  all  of  the 
defendants  shall  have  been  duly  served  upon  either  of  them,  the  de- 
fendant so  served  shall  answer  to  the  plaintiff,  and  in  such  case  the 
judgment,  if  rendered  in  favor  of  the  plaintiff,  shall  be  against  all  the 
defendants  in  the  same  manner  as  if  all  had  been  served  with  pro- 
cess," and  that  "such  judgment  shall  be  conclusive  evidence  of  the  lia- 
bilities of  the  defendant  who  was  served  with  process  in  the  suit,  or, 
who  appeared  therein,  but  against  every  other  defendant  it  shall  be 
evidence  only  of  the  extent  of  the  plaintiff's  demand,  after  the  liability 
of  such  defendant  shall  have  been  established  by  other  evidence." 

Judgments  in  cases  of  this  kind  against  the  parties  not  served  with 
process,  or  who  do  not  appear  therein,  have  no  binding  force  upon 
them  personally.  The  principal  is  as  old  as  the  law,  and  is  of  uni- 
versal justice,  that  no  one  shall  be  personally  bound  until  he  has  had 
his  day  in  court,  which  means  until  citation  is  issued  to  him,  and  op- 
portunity to  be  heard  is  aft'orded.  D'Arcy  v.  Ketchum,  1  How.  165. 
13  L.  Ed.  648.  Nor  is  the  demand  against  the  parties  not  sued  merged 
in  the  judgment  against  the  party  brought  into  court.  The  statute 
declares  what  the  effect  of  the  judgment  against  him  shall  be  with 
respect  to  them.  It  shall  only  be  evidence  of  the  extent  of  the  plain- 
tiff's demand  after  their  liability  is  by  other  evidence  established.  It 
is  entirely  within  the  power  of  the  state  to  limit  the  operation  of  the 
judgment  thus  recovered.  The  state  can  as  well  modify  the  conse- 
quences of  a  judgment  in  respect  to  its  effect  as  a  merger  and  ex- 
tinguishment of  the  original  demand  as  it  can  modify  the  operation 
of  the  judgment  in  any  other  particular. 

A  similar  statute  exists  in  the  state  of  New  York,  and  the  highest 
tribunals  of  New  York  and  Michigan,  in  construing  these  statutes, 
have  held,  notwithstanding  the  special  proceedings  which  they  au- 
thorize against  the  parties  not  served  to  bring  them  afterward  before 
the  court,  if  found  within  the  state,  that  such  parties  may  be  sued 
upon  the  original  demand.     *     *     * 

Following  these  authorities,  and  giving  the  judgment  recovered  in 
Michigan  the  same  effect  and  operation  that  it  would  have  in  that 
state,  we  answer  the  question  presented  in  the  certificate  that  the  ex- 
emplification of  the  record  of  the  judgment  recovered  against  the 
defendant  Elisha  Eldred,  offered  by  the  defendant  Anson  Eldred, 
is  not  admissible  in  evidence  in  bar  of,  and  to  defeat,  a  recovery 
against  the  latter. 


STOUT  V.  BAKER,  Sheriff. 
(Supreme  Court  of  Kansas,  1884.    32  Kan.  113,  4  Pac.  141.) 

HuRD,  J.  Devier  &  Blackburn  recovered  a  judgment  in  the  district 
court  of  Kingman  county,  on  the  twenty-third  day  of  October,  1882. 
against  Stout  &  Wingert,  by  their  partnership  name,  for  $90.74,  and 
costs  of  suit.  Execution  was  issued  on  this  judgment  to  the  defend- 
ant in  error,  as  sheriff  of  Kingman  count}^,  under  which  he  levied  on 
and  took  into  his  possession  the  buggy  in  controversy  in  this  suit. 
The  plaintiff  in  error  commenced  suit  in  a  justice's  court,  filed  his 
affidavit  and  bond  for  a  delivery  of  the  buggy  to  him,  and  the  justice 


1310  PARTNERSHIP  (Part  5 

issued  the  proper  process,  and,  by  virtue  thereof,  the  bugg}'  was  taken 
from  the  defendant  and  deHvered  to  the  plaintiff.  The  bill  of  par- 
ticulars in  this  suit  in  the  justice's  court  states  that  S.  S.  Baker,  sher- 
iff", "on  the  thirteenth  day  of  March,  1883,  did  levy  on  a  certain  phae- 
ton, buggy,  or  wagon,  as  the  property  of  Stout  &  Wingert,  according 
to  an  execution,  *  *  *  but  is  the  individual  and  private  property  of 
the  plaintiff  herein,  and  that  said  buggy  or  wagon  is  exempt  from  levy 
on  execution  or  writ  of  attachment,  and  that  the  plaintiff  has  been 
damaged  in  the  premises  to  the  amount  of  ten  dollars,  for  which  he 
prays  judgment."  On  the  trial  the  justice  of  the  peace  rendered  judg- 
ment in  favor  of  the  plaintiff  for  the  possession  of  the  buggy  and  costs 
of  suit.  The  defendant  appealed  from  the  judgment  to  the  district 
court  of  Kingmxan  county.  At  the  April  term  of  the  said  district  court 
the  cause  was  tried  by  the  court  without  a  jury,  and  the  court  made 
general  findings  in  these  words :  "The  court,  after  hearing  the  evi- 
dence and  argument  of  counsel,  does  find  that  the  right  of  property 
and  of  possession  thereof,  as  set  out  in  the  plaintiff's  petition,  was  in 
the  defendant  at  the  commencement  of  the  action,  and  that  the  value 
thereof  was  one  hundred  dollars" — and  then  rendered  judgment  on 
these  findings  against  the  plaintiff  for  the  return  of  the  property  in 
dispute  to  the  defendant,  and,  if  return  cannot  be  had,  then  for  its 
value  in  the  sum  of  $100,  and  costs.  The  plaintiff  filed  his  motion 
for  a  new  trial,  which  was  overruled,  and  he  made  his  case  for  this 
court  and  brings  the  cause  here  by  petition  in  error.  He  brings  up 
a  record  of  all  the  evidence  and  proceedmgs  in  the  cause.    *    *    * 

The  second  objection  is  that,  under  the  judgment  and  execution 
against  Stout  &  Wingert  as  partners,  the  individual  property  of  the 
plaintiff  in  error  could  not  be  legally  seized.  We  doubt  whether  this 
cjuestion  can  properly  arise  under  the  evidence.  *  *  *  Assuming 
that  the  second  point  can  be  and  is  properly  raised,  we  need  only  say, 
in  answer  to  it,  that  the  record  shows  that  the  summons  in  the  suit 
was  served  on  both  defendants,  and  that  the  return  of  the  service 
shows  the  full  names  of  each,  and  the  plaintiff  by  his  full  name  was 
one  of  the  defendants  served.  Both  defendants  appeared  in  the  suit 
in  the  district  court.  By  such  service  and  appearance  both  of  the  de- 
fendants are  individually  as  well  as  partners  bound  by  the  judgment. 
*  *  *  These  defendants  were  jointly  and  severally  liable  on  this 
judgment,  (section  4,  c.  21,  Comp.  Laws,  1879,)  and  we  think  an  exe- 
cution on  it  might  be  legally  levied  upon  the  partnership  property  of 
both  or  the  individual  property  of  either.    *    *    * 

We  find  no  error  in  the  rulings  of  the  court,  and  the  judgment  is 
affirmed. 


Uniform  Partnership  Act,  Section  15.  (a)  All  partners  are  li- 
able jointly  and  severally  for  everything  chargeable  to  the  partner- 
ship under  sections  13  and  14. 

Section  13.  Where,  by  any  wrongful  act  or  omission  of  any 
partner  acting  in  the  ordinary  course  of  the  business  of  the  part- 
nership, or  with  the  authority  of  his  co-partners,  loss  or  injury  is 
caused  to  any  person,  not  being  a  partner  in  the  partnership,  or 
any  penalty  is  incurred,  the  partnership  is  liable  therefor,  to  the 
same  extent  as  the  partner  so  acting  or  omitting  to  act. 


Ch.  3)        RELATIONS  OF  PARTNERS  TO  THIRD  PERSONS         131t 

Section  14.  The  partnership  is  bound  to  make  good  the  loss: 
(a)  Where  one  partner  acting  within  the  scope  of  his  apparent 
authority  receives  mohey  or  property  of  a  third  person  and  mis- 
applies it;  and  (b)  where  the  partnership  in  the  course  of  its 
business  receives  money  or  property  of  a  third  person  and  the  mon- 
ey or  property  so  received  is  misapplied  by  any  parties  while  it  is 
in  the  custody  of  the  partnership. 


MURPPIY  V.  COPPTETERS  et  al. 
(Supreme  Court  of  California,  1902.     136  Cal.  317,  68  Pac.  970.) 

Gray,  C.  This  action  was  brought  by  plaintiff  for  the  negligent  kill- 
ing of  her  son  by  defendants,  while  said  son  was  at  work  as  a  plumber 
in  the  Call  Building  on  the  30th  day  of  September,  1897.  The  son 
was  at  work  in  a  certain  shaft  at  the  rear  of  the  elevator  shaft  on  the 
second  floor.  In  the  same  shaft,  above,  at  about  the  seventeenth  floor, 
an  employe  of  appellants  named  Johnson  was  engaged  in  fastening 
an  iron  ladder  in  place  by  means  of  iron  anchors,  and  the  evidence 
indicates  that  it  was  by  Johnson  dropping  one  of  these  anchors  down 
the  open  shaft  that  the  son  came  to  his  death.  The  plaintiff,  upon 
a  trial  and  verdict  in  her  favor  for  $2,250,  had  judgment  for  that 
amount.  The  appeal  is  from  this  judgment  and  from  an  order  deny- 
ing a  new  trial.    *    *    * 

Nor  was  it  necessary  to  bring  suit  against  appellants  as  copartners  ; 
for,  when  a  cause  of  action  for  tort  exists  against  a  copartnership, 
the  several  partners  may  be  sued  individually,  if  so  preferred.  We 
quote  from  Lindley  on  Partnership,  at  page  283 :  "Supposing  a  tort 
to  be  imputable  to  a  firm,  an  action  in  respect  to  it  may  be  brought 
against  all  or  any  of  the  partners.  If  some  of  them  only  are  sued,  they 
cannot  insist  upon  the  other  partners  being  joined  as  defendants;  and 
this  rule  applies  even  where  the  tort  in  question  is  committed  by  an 
agent  or  servant  of  the  firm,  and  not  otherwise  by  the  firm  itself." 
*    *    * 

The  judgment  and  order  appealed  from  should  be  affirmed. 


Uniform  Partnership  Act,  Section  13.  Where,  by  any  wrongful 
act  or  omission  of  any  partner  acting  in  the  ordinary  course  of  the 
business  of  the  partnership,  or  with  the  authority  of  his  co-part- 
ners, loss  or  injury  is  caused  to  any  person,  not  being  a  partner  in 
the  partnership,  or  any  penalty  is  incurred,  the  partnership  is  li- 
able therefor  to  the  same  extent  as  the  partner  so  acting  or  omit- 
ting to  act. 

Section  14.     The  partnership  is  bound  to  make  good  the  loss : 

(a)  Where  one  partner  acting  within  the  scope  of  his  apparent 
authority  receives  money  or  property  of  a  third  person  and  mis- 
applies it;    and 

(b)  Where  the  partnership  in  the  course  of  its  business  receives 
money  or  property  of  a  third  person  and  the  money  or  property  so 
received  is  misapplied  by  any  partner  while  it  is  in  the  custody  of 
the  partnership. 


1312  PARTNERSHIP  (Part  5 

SECTION  6.— RIGHT  OF  A  CREDITOR  OF  A  PARTNER  IN 

THE  PARTNER'S  INDIVIDUAL  CAPACITY  WITH 

RESPECT  TO  PARTNERSHIP  PROPERTY 

Uniform  Partnership  Act,  Section  25.  (2)  (c)  A  partner's 
right  in  specific  partnership  property  is  not  subject  to  attachment 
or  execution,  except  on  a  claim  against  the  partnership.     *     *     * 

Section  28.  (1)  On  due  application  to  a  competent  court  by 
any  judgment  creditor  of  a  partner,  the  court  which  entered  the 
judgment,  order,  or  decree,  or  any  other  court,  may  charge  the  in- 
terest of  the  debtor  partner  v/ith  payment  of  the  unsatisfied  amount 
of  such  judgment  debt  with  interest  thereon;  and  may  then  or 
later  appoint  a  receiver  of  his  share  of  the  profits,  and  of  any  other 
money  due  or  to  fall  due  to  him  in  respect  of  the  partnership, 
and  m.ake  all  other  orders,  directions,  accounts  and  inquiries  which 
the  debtor  partner  might  have  made,  or  which  the  circumstances 
of  the  case  may  require.     *     *     *  e 

Section  32.  (2)  On  application  by  or  for  a  partner  the  court 
shall  decree  a  dissolution  on  the  application  of  the  purchaser  of  a 
partner's  interest  in  sections  28  or  29 :  (a)  After  the  termination 
of  the  specified  term  or  particular  undertaking ;  (b)  at  any  time  if 
the  partnership  was  a  partnership  at  will  when  the  interest  was 
assigned  or  when  the  charging  order  was  issued. 


JOHNSON  V.  WINGFIELD  et  al. 

(Court  of  Chancery  Appeals  of  Tennessee,  1S97.     42  S.  "W.  203.) 

Barton,  J.  This  cause  is  before  us  on  bill  and  demurrer.  The  de- 
murrer was  sustained,  and  the  bill  dismissed.  Complainant  appealed, 
and  assigns  errors.  The  main  question  presented  in  the  case  is  whether 
in  this  state  specific  property  belonging  to  the  firm  is  subject  to  levy 
for  the  individual  debt  of  one  of  the  members  of  the  firm.  The  case 
made  in  the  bill  substantially  is  as  follows :  The  complainant  shows 
and  avers  that  he  had  obtained  before  a  justice  of  the  peace  in  Harnil- 
ton  county  two  judgments  against  the  defendant  Wingfield,  on  whjch 
executions  had  been  issued  and  certified,  in  pursuance  of  section  3786 
of  the  Code  of  Tennessee,  to  Hamblen  county,  where  executions  had 
been  issued,  which  were  placed  in  the  hands  of  a  constable,  and  by  him. 
on  the  2d  day  of  January,  1896,  levied  on  the  interest  of  Nisbet  Wing- 
field  in  a  lot  of  iron  pipe  and  other  material,  the  property  of  the  firm 
of  J.  N.  Hazelhurst  &  Co.,  a  firm  composed  of  J.  N.  Hazelhurst  and 
Nisbet  Wingfield,  in  which  firm,  it  is  alleged,  Hazelhurst  and  Wing- 
field  were  equal  partners.     *    *     *     The  defendants  filed  a  demurrer 

6  Leims'  Note  to  Section  28  (1) . — This  provision  is  taken  from  section  23  (2) 
of  the  English  Partnership  Act.  The  operation  of  the  provision  has  given 
great  satisfaction.  The  iudg^ment  creditor  does  not  acquire  any  greater 
ritihts  than  the  debtor  is  entitle-d  to  for  his  own  benefit.  Sutton  v.  English 
&  Colonial  Produce  Co.,  [1902]  2  Ch.  502;  Howard  v.  Sadler,  [1893]  1  Q.  B. 
1 ;  Cooper  v.  Griffin,  [1S92]  1  Q.  B.  740 ;  Scott  v.  Lord  Hastings,  4  K.  &  J. 
633  (1S.jS). 


Ch.  3)       RELATIONS  OF  PARTNERS  TO  THIRD  PERSONS         1313 

and  answer,  the  demurrer  being  incorporated  in  the  answer ;  the  sub- 
stance and  point  of  demurrer  being  that  a  levy  cannot  be  made  on  a 
certain,  specific  part  of  partnership  property  for  the  individual  debt 
of  one  of  the  members  of  the  firm,  as  the  bill  shows  was  done  in  this 
case,  and  that,  to  reach  a  partner's  interest  in  partnership  property, 
the  levy  must  be  made  upon  all  the  partnership  property.  The  point 
is  made  that  the  partnership  owned  as  an  entirety  the  particular  as- 
sets of  the  partnership,  and  had  a  right  to  use  the  same  in  the  business 
of  the  partnership;  that  the  purchaser  would  be  required  simply  to 
take  the  interest  of  the  debtor  partner,  and  would  have  no  right  to 
maintain  this  bill  for  trover  or  conversion  of  the  specific  property  levied 
on.  *  *  *  As  stated,  the  demurrer  was  sustained,  and  the  bill  was 
dismissed.    *    *    "•' 

The  main  question  presented  has  been  before  our  Supreme  Court  in 
a  number  of  cases,  and  the  subject  seems  to  be  surrounded  by  many 
perplexities.  One  of  the  earlier  and  the  leading  case  in  this  state  on 
the  subject  is  that  of  Haskins  v.  Everett,  4  Sneed,  531.  This  was  an 
action  of  replevin  brought  by  Haskins  &  Reynolds  against  James 
Everett,  to  recover  certain  personal  property  belonging  to  the  firm 
of  Haskins  &  Reynolds,  which  had  been  levied  on  by  an  execution  in 
the  hands  of  a  constable,  issued  on  a  judgment  recovered  by  one  Brow- 
den  against  Haskins  for  his  individual  debt.  Judge  Caruthers,  in  his 
opinion,  stated  that  the  question  was  whether  partnership  property  can 
be  taken  in  execution  and  sold  for  the  private  debt  of  one  of  the  mem- 
bers. The  circuit  judge  held  that  it  could,  and  gave  judgment  for 
the  value  of  the  property,  and  also  for  $43.  damages  for  the  detention 
of  the  property  which  had  been  taken  in  the  action,  against  the  com- 
plainants, Haskins  &  Reynolds ;  and  this  judgment  was  affirmed 
by  the  Supreme  Court.  Judge  Caruthers,  in  his  opinion,  says :  "What- 
ever doubts  and  difficulties  may  have  existed  on  this  subject,  the  law  is 
now  well  settled  that  partnership  property  may  be  seized  and  the  in- 
terest of  one  partner  sold  for  his  individual  debt.  The  purchaser, 
however,  only  takes  the  interest  of  such  judgment  debtor  after  the 
settlement  and  adjustment  of  the  partnership  accounts,  and  not  his 
proportion  of  the  property  sold.  What  that  interest  is  cannot  generally 
be  ascertained  until  a  final  adjustment  and  settlement  of  the  partner- 
ship concerns.  The  eft'ect  of  the  sale  and  purchase  is  only  to  place 
the  purchaser  in  the  shoes  of  the  partner  whose  interest  he  buys,  and 
make  him  a  tenant  in  common  with  the  other  partners.  This  is  a  nec- 
essary consequence  of  the  rule  that  each  partner  has  a  lien  upon  the 
firm  property,  as  well  for  the  debts  due  by  the  firm  as  his  own  share 
and  proportion  thereof.  The  judgment  creditor  or  the  purchaser  under 
him  must  take  the  interest  sold  subject  to  all  such  liens  and  claims. 
To  ascertain  the  interest  sold,  the  purchaser  or  any  of  the  other  part- 
ners may  file  a  bill  for  the  settlement  of  the  partnership.  The  great 
uncertainty  of  the  value  of  the  interest  purchased  ( for  it  may  be  noth- 
ing, or  more  or  less  than  the  amount  bid)  does  not  affect  the  princi- 
ple^'   *     *     * 

Referring  to  authorities  outside  of  the  state:  The  confusion  and 
perplexity  in  which  this  question  is  involved  is  not  confined  to  our  own 
state,  but  is  found  in  the  annunciations  of  the  text  writers  on  this  sub- 
ject, and  in  the  decisions  of  nearly  all  of  the  courts  of  last  resort  of  the 
United  States  and  in  England.  'Mr.  Freeman,  in  his  work  on  Exe- 
B.&  B.Bus.Law— 83 


1314  PARTNEUsiiiP  (Part  5 

cutions  (2d  Ed.  §  125),  in  treating  of  the  matter,  says:  "It  is  uni- 
versally conceded  that,  except  where  some  statutory  provision  to  the 
contrary  has  been  enacted,  the  interest  of  the  partner  is  liable  to  an 
execution  for  his  individual  debts.  *  *  *  Confessedly,  a  sale  under 
an  execution  against  one  partner  does  not  divest  the  title  of  the  part- 
nership in  the  property.  It  transfers  only  such  interest  as  remains  in 
the  judgment  debtor  upon  the  settlement  and  adjustment  of  the  affairs 
of  the  partnership.  As  the  rights  of  the  partnership  are  paramount, 
it  would  seem  that  they  would  preclude  the  officer  serving  the  writ 
from  taking  the  property  into  his  exclusive  possession,  even  for  the 
purposes  of  levy  and  sale.  And  this  view  has  been  maintained  with 
great  force  in  several  decisions  pronounced  in  the  supreme  court  of 
New  Hampshire.  The  authorities  elsewhere  are  almost  unanimous 
in  affirming  that  the  officer  may,  in  levying  on  the  interest  of  a  partner, 
assume  exclusive  possession  of  the  chattels  of  the  firm,  and  retain  it 
until  the  sale.  It  is  also  undoubted  that  the  interest  subject  to  exe- 
cution is,  at  least  in  equity,  in  no  respect  greater  than  that  held  by  the 
defendant;  that  it  is  subject  to  the  paramount  claims  against  the  part- 
nership, and  is  in  fact  nothing  beyond  the  right  to  demand  an  account- 
ing, and  to  share  in  the  surplus  that  may  remain  after  all  the  partnership 
obligations  have  been  discharged.  Whether  the  levy  can  be  upon  any 
specific  part  of  the  goods  of  the  firm,  and  whether,  by  the  sale,  the 
purchaser  acquires  any  interest  in  the  property  sold,  beyond  the  right 
to  call  for  an  accounting,  are  questions  upon  which  the  authorities  are 
not  agreed.  The  earlier  cases  were  determined  when  partnerships 
were  regarded  as  mere  co-tenancies.  Hence  those  cases,  and  such  mod- 
ern cases  as  have  been  controlled  by  them,  place  sales  under  execution 
for  the  separate  debt  of  a  co-partner  very  much  on  the  same  ground 
as  a  sale  for  a  separate  debt  of  a  co-tenant.  Therefore,  according  to 
this  view,  an  officer  can,  under  such  an  execution,  levy  upon  a  part  as 
well  as  upon  the  whole  of  the  chattels  of  the  firm ;  and  it  can,  by  his 
sale,  transfer  a  moiety  of  the  legal  title,  together  with  the  right  to  take 
and  hold  possession  against  the  other  partners,  leaving  them  without 
any  other  means  of  enforcing  the  rights  of  the  partnership  than  by 
proceedings  in  chancery.  But  the  courts  have  gradually  progressed 
towards  a  realization  of  the  true  nature  of  partnerships,  and  have 
therefore  come  to  understand  that  they  are  materially  different  from 
co-tenancies.  A  co-partner  has  no  right  to  any  specific  chattel  belong- 
ing to  the  firm,  nor  has  he  any  right  as  against  the  firm  to  take  or  hold 
exclusive  possession  of  any  such  chattel.  The  real  ownership  of  all 
the  chattels  is  vested  in  the  firm.  The  interest  of  each  partner  is  mere- 
ly a  right  to  share  in  the  proceeds  of  these  chattels  after  all  the  part- 
nership obligations  have  been  satisfied.  Upon  what  principle  can  the 
purchaser  at  an  execution  sale  be  sustained  in  the  exercise  of  rights 
to  which  the  defendant  was  never  entitled?  Clearly,  vtpon  no  principle 
whatever.  The  precedents  made  at  an  early  day,  when  the  law  of 
partnership  was  imperfectly  understood,  are  losing  their  force  as 
authorities.  Their  place  is  being  supplied  by  a  line  of  decisions  des- 
tined to  grow  in  favor  and  in  number  declaring  that  the  creditor  of  an 
individual  partner  cannot  sell  any  specific  article,  but  only  the  partner's 
interest  in  the  whole  of  the  partnership  assets  and  that  the  purchaser 
does  not  acquire  the  right  to  hold  possession  of  the  property  purchased 
as  against  the  other  member  of  the  firm,  but  only  an  interest  in  the 
proceeds,    after    the   business   of    the    firm    shall    have    been    settled. 


Ch.  3)        RELATIONS  OF  PARTNERS  TO  THIRD  PERSONS         1315 

Though  the  right  of  the  officer  to  seize  the  property  of  the  partnership 
under  an  execution  against  one  of  its  members  is  conceded,  it  must  be 
exercised,  as  far  as  possible,  in  harmony  with  the  rights  of  the  other 
partners,  and  not  in  hostihty  to  them.  His  power  to  take  and  dehver 
possession  of  the  corpus  of  the  property  is  merely  incidental  of  the 
right  to  reach  the  interest  of  the  debtor,  and  is  to  be  exercised  only 
as  a  means  to  that  end.  Consequently,  if  he  exceeds  that  limit,  and 
undertakes  to  interfere  with  the  rights  of  the  other  partners  to  a  great- 
er extent  than  is  necessary  to  reach  the  interest  of  the  debtor  partner, 
he  undertakes  to  sell  the  entire  property,  though  his  act  is  nugatory, 
such  interference  renders  him  liable  as  a  trespasser  ab  initio." 

In  the  same  authority  (section  254)  it  is  said:  "  *  *  *  The  ma- 
jority of  the  decisions  on  this  subject  are  based  on  the  false_ assumption 
that  a  co-partnership  is  a  co-tenancy,  and  therefore  sustains  the  offi- 
cer in  taking  exclusive  possession  of  the  partnership  property  under  a 
writ  against  one  member  alone.  *  *  *  The  minority,  based  on  more 
correct  perceptions  of  the  nature  of  a  co-partnership  and  the  rights  of 
its  respective  members,  will  not  permit  a  writ  against  one  member  to 
be  used  to  seize  all  the  assets  and  to  suspend  the  business  of  the  farm. 
The  law  with  respect  to  the  levy  of  a  writ  on  a  partner's  interest  m 
firm  property  involves  many  perplexities,  the  solution  of  which  is 
worthy  of  legislative  aid.  To  deny  the  right  to  make  such  a  levy  may 
very  seriously  embarrass  creditors  of  a  debtor  amply  able  to  discharge 
their  debt ;  while  to  admit  the  right  may  involve  the  co-partners,  and 
perhaps  the  creditors  of  the  firm,  in  very  serious  inconvenience  and 
substantial  loss.  Where  the  levy  is  permitted,  its  ultimate  effect  is  to 
confer  on  the  purchaser  thereunder  nothing  beyond  the  right  to  an 
accounting.  This  is  all  the  judgment  debtor  has,  and  therefore  all  he 
can    transfer,    whether    the    transfer    be    voluntary    or    involuntary. 

These  extracts  will  show  into  what  confusion  this  subject  has  fallen 
by  reason  of  the  early  decisions  in  all  the  states,  evidently  based,  as 
stated  by  the  text  writers  from  whom  we  have  quoted,  on  an  erro- 
neous conception,  or,  rather,  a  failure  to  recognize  the  true  status  of 
partnership  property.  It  is  well  settled  everywhere  that,  as  to  partner- 
ship property,  partners  are  trustees  of  the  partnership,  as  to  each 
other,  and  the  advantages  derived  from  it  inure  to  the  benefit  of  the 
firm.  And  it  is  undoubtedly  true  that  a  firm  or  its  members  could, 
by  injunction,  or  other  appropriate  remedy,  prevent  a  partner  from 
diverting  partnership  property  to  his  individual  use,  to  the  damageof 
the  firm,  and  could  prevent  him  from  exercising  rights  of  possession 
and  control  which  would  be  destructive  of  the  purposes,  or  an  injury 
to  the  business,  of  the  firm.  It  is  also  well  settled,  as  a  general  rule, 
that  an  execution  cannot  reach  any  higher  interest  in  property  than 
the  debtor  himself  has ;  and  yet  all  these  decisions  which  justify  an 
officer  in  taking  exclusive  possession  of  firm  property  would  seem  to 
ignore  these  just  principles,  which  are  so  absolutely  necessary  to  the 
successful  operation  of  partnership  business. 

It  would  seem  to  be  a  contradiction  of  terms  and  principles  to  hold 
that  the  officer  only  takes  and  the  purchaser  only  gets  the  interest 
which  a  partner  may  have  in  partnership  property  after  a  firm  has 
been  wound  up  and  liquidated,  and  the  partner's  ultimate  interest  thus 
ascertained,  and  that  an  officer  may  seize  partnership  property,  and 
retain  exclusive  possession  of  it  until  the  sale,  he  thus  being  enabled 


1316  PARTNERSHIP  (Part  5 

to  do  what  the  individual  partner  would  have  no  right  to  do.  And  it 
also  seems  a  violation  of  fundamental  rights,  and  the  taking  of  private 
property  without  compensation,  to  hold,  *  *  *  that  where  a  part- 
nership has  endeavored  to  assert  its  rights  of  possession  by  a  replevin 
suit  as  against  an  officer  who  had  levied  on  the  property  for  the  indi- 
vidual debt  of  one  of  its  members,  it  would  be  liable  for  damages  for 
the  use  and  detention  of  its  own  property.  *  *  *  It  seems  to  be 
clear  that,  as  long  as  property  has  not  been  converted  by  a  partner,  and 
is  being  used,  or  subject  to  be  used,  for  the  legitimate  purposes  of  the 
partnership,  no  partner  has  any  certain  or  exclusive  or  special  inter- 
est in  any  specific  partnership  property,  but  it  is  the  property  of  the 
entity,  the  firm.  How,  then,  can  a  creditor  or  an  officer  take  any  spe- 
cific interest  in  any  particular  piece  of  property  belonging  to  the  firm 
under  such  an  execution,  levy,  and  sale?  *  *  *  In  other  words, 
does  the  levy  on  specific  property  appropriate  any  specific  property,  or 
only  the  debtor's  interest  in  the  firm? 

It  would  seem  that  by  far  the  more  sensible  and  enlightened  method 
of  reaching  a  partner's' interest  in  the  firm  would  be  by  garnishment, 
as  provided  by  statute  in  Georgia;  and,  as  said  in  Freem.  Ex'ns,  it 
would  seem  to' be  a  subject  deserving  of  legislative  attention.  *  *  * 
But,  whatever  trouble  may  arise  from  these  holdings,  we  do  not  feel 
at  liberty,  in  this  court,  to  depart  from  what  we  understand  to  be 
well-settled  principles  in  this  state.  Nor  do  we  wish  to  be  understood 
as  criticising  the  holdings  of  our  supreme  court  upon  this  subject, 
further  than  to  call  attention  to  the  seeming  inconsistencies  that  arise 
therefrom,  and  which  are  common  to  all  the  earlier  cases  in  almost 
every  state  in  the  Union,  as  well  as  in  England.  But,  for  the  purposes 
of  this  case,  we  may  state  that  the  decisions  in  this  state  from  which  we 
have  above  quoted  settle  the  following  points:  (1)  That  partnership 
property  may  be  levied  on  by  the  creditor  for  the  individual  debt  of  a 
member  of  the  firm.  (2)  That  specific  property  may  be  levied  on,  and  it 
is  not  necessary  that  the  execution  be  levied  upon  all  the  property  of  the 
firm.  (3)  That  the  officer  may,  and  that  in  fact  it  is  his  duty  to, 
take  actual  possession  of  the  property  levied  on,  and  to  retain  it  until 
the  sale  is  made.  (4)  That  the  purchaser  only  takes  the  interest  of 
such  judgment  debtor  after  the  settlement  and  adjustment  of  the  part- 
nership accounts.  *  *  *  (5)  That,  as  stated  by  Judge  Freeman  in 
Bank  v.  Gray,  12  Lea,  459,  a  levy  is  necessary  in  order  to  fix  a  lien  so 
as  to  authorize  the  filing  of  a  bill. 

These  points  being  settled,  it  results,  in  our  opinion,  that  the  chan- 
cellor was  in  error  in  dismissing  the  complainant's  bill.  While  we  think 
that  Hazelhurst  had  the  right  to  use,  and  properly,  whether  by  him- 
self, or  by  the  new  firm  of  Hazelhurst  &  Co.,  used,  the  iron  which  had 
been  levied  on,  in  carrying  out  the  contract  and  business  of  the  old 
firm,  still  it  is  the  logical  effect  of  the  decisions  which  we  have  quoted 
that  the  creditor,  Johnson,  having  the  right  to  have  the  property  levied 
on,  by  the  sale  and  purchase  took  whatever  interest  Wingfield  had  in 
this  property  at  that  time,  which  could  only  be  ascertained  by  an  ac- 
counting, and  that  this  he  has  a  right  to  do.  If  it  shall  turn  out  on  an 
accounting  that  at  the  time  of  the  levy  the  liabilities  of  the  firm,  as 
claimed  in  the  answer  filed  with  the  demurrer,  exceeded  the  assets,  and 
that  the  firm  was  insolvent,  then  Johnson  will,  of  course,  take  nothing 
by  his  purchase;  and  it  is  also  clear  that  Johnson's  interest  could  not 
exceed  the  value  of  Wingfield's  share  in  all  the  partnership  assets  after 


Ch.  3)       RELATIONS  OF  PARTNERS  TO  THIRD  PERSONS         1317 

all  partnership  debts  were  paid,  and  all  charges  against  him  in  favor  of 
Hazelhurst  were  settled.  The  logical  result  of  our  cases  on  this  sub- 
ject seems  to  be  that  the  taking  by  the  officer  has  practically  the  same 
effect  as  the  withdrawal  and  conversion  of  that  amount  of  property 
by  the  debtor  member  of  the  firm,  subject  to  being  compelled  to  re- 
turn such  an  amount  of  the  property  after  the  exhaustion  of  other 
partnership,  property  as  might  be  necessary  to  pay  all  partnership  debts, 
and  to  secure  to  the  other  partner  his  just  share  and  division  of  the 
partnership  assets. 

For  these  reasons  the  decree  of  the  chancellor  will  be  reversed,  and 
the  cause  remanded  to  be  further  proceeded  with,  with  directions  to 
refer  the  cause  to  the  master  to  take  an  account,  and  to  ascertain  and 
report  the  condition  of  the  old  firm  of  Hazelhurst  &  Co.  at  the  time 
of  the  levies  made,  as  shown  in  the  bill ;  and  the  complainant  will  be 
entitled  to  a  decree  for  the  value  of  Wingfield's  interest  in  the  property 
levied  on,  if  any,  on  the  lines  indicated  in  this  opinion.  The  decree 
of  the  chancellor  is  reversed,  the  demurrer  overruled,  and  the  cause 
remanded,  as  stated,  and  the  defendants  will  pay  the  costs  of  the  ap- 
peal. 


1318  PARTNERSHIP  (Part  5 

CHAPTER  IV 
CAUSES  OF  DISSOLUTION 

Section 

1.  Nature  of  Dissolution  in  General. 

2.  Causes  of  Dissolution  Not  Based  on  Breach  of  the  Partnership  Agreement. 

3.  Dissolution  Caused  by  Breach  of  Partnership  Agreement. 

4.  Dissolution   Caused  by  Business   Becoming  Illegal. 

5.  Dissolution  Effected  by  Court  Decree. 

6.  Effect  of  Assignment  of  a  Partner's  Interest. 


SECTION  1.— NATURE  OF  DISSOLUTION  IN  GENERAL 
Uniform  Partnership  Act,  Section  29.  The  dissolution  of  a 
partnership  is  the  change  in  the  relation  of  the  partners  caused  by 
any  partner  ceasing  to  be  associated  in  the  carrying  on  as  dis- 
tinguished from   the  winding   up   of  the   business.^ 


SECTION  2.— CAUSES  OE  DISSOLUTION  NOT  BASED  ON 
BREACH  OF  THE  PARTNERSHIP  AGREEMENT 

Uniform  Partnership  Act,  Section  3L  (1)  Dissolution  is  caused 
without  violation  of  the  agreement  between  the  partners: 

(a)  By  the  termination  of  the  definite  term  or  particular  under- 
taking specified  in  the  agreement, 

(b)  By  the  express  will  of  any  partner  when  no  definite  term 
or  particular  undertaking  is  specified, 

(c)  By  the  express  will  of  all  the  partners  who  have  not  assigned 
their  interests  or  suffered  them  to  be  charged  for  their  separate 
debts,  either  before  or  after  the  termination  of  any  specified  term 
or  particular  undertaking. 

(d)  By  the  expulsion  of  any  partner  from  the  business  bona 
fide  in  accordance  with  such  power  conferred  by  the  agreement 
between  the  partners. 

Section  31.  (4)  Dissolution  is  caused  by  the  death  of  any  part- 
ner. 

(5)  Dissolution  is  caused  by  the  bankruptcy  of  any  partner 
or  the  partnership. 

1  Lerms'  Note  to  Section  29. — As  used  by  the  legal  profession,  the  term 
"dissolution"  designates,  not  only  the  single  act  of  the  termination  of  the 
actual  conduct  of  the  ordinary  business,  but  also  often  the  series  of  acts 
thereafter  until  the  final  settlement  of  all  partnership  affairs.  It  is  also 
frequently  said  that  dissolution,  nlthough  the  word  is  used  to  designate  only 
the  termination,  of  ordinary  business  relations,  terminates  the  partnership; 
it  being  at  the  same  time  explained  that  the  partnership  thereafter  continues 
to  exist  for  the  purpose  of  suing  and  being  sued  in  the  process  of  winding 
up  partnership  affairs.  Certainty  demands  that  this  confusion  should  be  re- 
moved, if  possible.  In  this  act  dissolution  designates  the  point  in  time  when 
the  partners  cease  to  carry  on  the  business  together;  termination  is  the 
point  in  time  when  all  the  partnership  affairs  are  wound  up ;  winding  up  the 
process  of  settling  partnership  affairs  after  dissolution. 


Ch.  4)  CAUSES   OF  DISSOLUTION 


1319 


SECTION  3.— DISSOLUTION  CAUSED  BY  BREACH  O^ 
PARTNERSHIP  AGREEMENT 
Uniform  Partnership  Act,  Section  31.  (2)  Dissolution  is  caused 
in  contravention  of  the  agreement  between  the  partners,  where 
the  circumstances  do  not  permit  a  dissolution  under  any  other 
provision  of  this  section,  by  the  express  will  of  any  partner  at  any 
time.^ 


SECTION  4.— DISSOLUTION  CAUSED  BY  BUSINESS 
BECOMING  ILLEGAL 

Uniform  Partnership  Act,  Section  31.  (3)  Dissolution  is  caused 
by  any  event  which  makes  it  unlawful  for  the  business  of  the 
partnership  to  be  carried  on  or  for  the  members  to  carry  it  on  in 
partnership. 


SECTION  5.— DISSOLUTION  EFFECTED  BY  COURT 

DECREE 

Uniform  Partnership  Act,  Section  32.  (1)  On  the  application 
by  or  for  a  partner  the  court  shall  decree  a  dissolution  whenever — 

(a)  A  partner  has  been  declared  a  lunatic  in  any  judicial  pro- 
ceeding or  is  shown  to  be  of  unsound  mind. 

(b)  A  partner  becomes  in  any  other  way  incapable  of  perform- 
ing his  part  of  the  partnership  contract. 

(c)  A  partner  has  been  guilty  of  such  conduct  as  tends  to  affect 
prejudicially  the  carrying  on  of  the  business. 

2  Lewis'  Note  to  Section  «.— Paragraph  (2)  will  settle  a  matter  on  which 
at  present  considerable  confusion  and  uncertainty  exists.  The  paragraph  as 
drawn  allows  a  partner  to  dissolve  a  partnership  in  contravention  of  the 
agreement  between  the  partners.  This  is  supported  by  the  weight  of  au- 
thoritv.  Civ.  Code  Cal.  S  2417;  Civ.  Code  S.  D.  1903,  §  1736;  Gen.  St.  Okl. 
1908,  §  4850 ;  Civ.  Code  N.  D.  1905,  §  5848 ;  Civ.  Code  Mont.  1895,  §  3262 ;  Civ. 
Code,  Ga.  1895,  §  2633;  Skinner  v.  Dayton,  19  Johns.  (N.  Y.)  513,  537,  10  Am. 
Dec.  286  (1822) ;  Mason  v.  Connell,  1  Whart.  (Pa.)  381,  388  (1836) ;  Monroe 
V.  Conner,  15  Me.  178,  32  Am.  Dec.  148  (1838);  Cape  Sable  Co.'s  Case,  3 
Bland  (Md.)  606,  674  (1840) ;  Slemmer's  Appeal,  58  Pa.  168.  176.  98  Am.  Dec. 
255  (1868)  ;  Solomon  v.  Kirkwood,  55  Mich.  256,  21  N.  W.  336  (1884)  ;  Carr  v. 
Hertz,  54  N.  J.  Eq.  127,  33  Atl.  194  (1895) ;  Moore  v.  Price,  116  Ala.  247,  22 
South  531  (1896) ;  Karrick  v.  Hannaman,  168  U.  S.  328,  334,  18  Sup.  Ct.  135, 
42  L.  Ed.  484  (1897) ;  Lapenta  v.  Lettieri,  72  Conn.  377,  44  Atl.  730,  77  Am. 
St.  Rep.  315  (1899) ;  Clements  v.  Norris,  8  Ch.  Div.  129,  133  (1878).  The 
English  law  is  opposed  to  this  view.  Lindley,  601 ;  Crawshay  v.  Maule.  1 
Swanst.  Ch.  509  (1818);  Featherstonhaugh  v.  Fenwick,  17  Ves.  298  (1810); 
Peacock  v.  Peacock,  16  Ves.  49  (1809) ;  Ferrero  v.  Buhlmeyer,  34  How.  Prac. 
(N.  Y.)  33  (1867) ;    Story,  §  275. 

The  relation  of  partners  is  one  of  agency.  The  agency  is  such  a  personal 
one  that  equity  cannot  enforce  it,  even  where  the  agreement  provides  that 
the  partnership  shall  continue  for  a  definite  time.  The  power  of  any  partner 
to  terminate  the  relation,  even  though  in  d6ing  so  he  breaks  a  contract, 
should,  it  is  submitted,  be  recognized. 

The  rights  of  the  parties  upon  a  dissolution  in  contravention  of  the  agree- 
ment are  safeguarded  by  section  38  (2),  infra. 


1320  PARTNERSHIP  (Part  5 

(d)  A  partner  wilfully  or  persistently  commits  a  breach  of  the 
partnership  agreement,  or  otherwise  so  conducts  himself  in  mat- 
ters relating  to  the  partnership  business  that  it  is  not  reasonably 
practicable  to  carry  on  the  business  in  partnership  with  him. 

(e)  The  business  of  the  partnership  can  only  be  carried  on  at 
a  loss. 

(f)  Other  circumstances  render  a  dissolution  equitable. 
Section   32.     (2)  The   court   shall   decree   a   dissolution   on  the 

application  of  the  purchaser  of  a  partner's  interest  under  sections 
28  or  29 :  (a)  After  the  termination  of  the  specified  term  or  par- 
ticular undertaking,  (b)  At  any  time  if  the  partnership  was  a 
partnership  at  will  when  the  interest  was  assigned  or  when  the 
charging  order  was  issued. 

Section  28.  (1)  On  due  application  to  a  competent  court  by  any 
judgment  creditor  of  a  partner,  the  court  which  entered  the  judg- 
ment order  or  decree,  or  any  other  court,  may  charge  the  interest 
of  the  debtor  partner  with  paym.ent  of  the  unsatisfied  amount  of 
such  judgment  debt  with  interest  thereon;  and  may  then  or  later 
appoint  a  receiver  of  his  share  of  the  profits,  and  of  any  other 
money  due  or  to  fall  due  to  him  in  respect  of  the  partnership,  and 
make  all  other  orders,  directions,  accounts  and  inquiries  which  the 
debtor  partner  might  have  made,  or  which  the  circumstances  of 
the  case  may  require.  (2)  The  interest  charged  may  be  redeemed 
at  any  time  before  foreclosure,  or  in  case  of  a  sale  being  directed 
by  the  court  may  be  purchased  without  thereby  causing  a  disso- 
lution: (a)  with  separate  property,  by  any  one  or  more  of  the 
partners,  or  (b)  with  partnership  property,  by  any  one  or  more  of 
the  partners  with  the  consent  of  all  the  partners  whose  interests 
are  not  so  charged  or  sold.  (3)  Nothing  in  this  Act  shall  be  held 
to  deprive  a  partner  of  his  right,  if  any,  under  the  exemption  laws, 
as  regards  his  interest  in  the  partnership. 


HAVNER  V.  STEPHENS. 

(Court  of  Appeals  of  Kentucky,  1900.     58  S.  W.  .372,  22  Ky.  Law  Rep.  498.) 

Action  by  Robert  Havner  against  John  Stephens  for  the  dissolution 
of  a  partnership.     Judgment  for  defendant,  and  plaintiff  appeals. 

BuRNAM,  J.  This  is  an  appeal  from  a  judgment  of  the  lower  court 
sustaining  a  general  demurrer  to  the  plaintiff's  petition,  upon  the 
ground  that  it  does  not  state  facts  sufficient  to  support  a' cause  of  ac- 
tion. It  is  alleged,  in  substance,  that  plaintiff  and  defendant  were  con- 
ducting a  sawmill  business,  as  co-partners ;'  that  they  were  equally 
interested  in  the  enterprise ;  that  each  member  was  to  be  consulted 
as  to  the  management  of  the  business,  and  to  participate  jointly  in  its 
management ;  that  some  tim.e  after  the  formation  of  the  partnership, 
and  while  the  business  was  being  conducted  satisfactorily,  the  defend- 
ant, without  right,  refused  to  allow  the  plaintiff  to  have  anything  to  do 
with  the  management  of  the  business,  or  to  receive  any  portion  of 
its  profits  or  earnings ;  that  he  had  taken  entire  control  of  the  monev, 
accounts,  and  property  of  the  firm,  and  converted  them  to  his  own 


Ch.  4)  CAUSES  OF  DISSOLUTION  1321 

use;  that  the  defendant  was  insolvent — and  asks  a  dissolution  and 
settlement  of  the  firm's  business,  and  that  the  property  be  sold  to  apply 
to  the  payment  of  the  debts,  and  for  a  division  of  the  surplus  in  ac- 
cordance with  the  rights  of  the  parties. 

In  an  action  by  one  partner  against  another,  seeking  a  dissolution 
of  the  partnership  and  a  settlement  of  the  accounts  growing  out  of  the 
partnership  business,  the  essential  allegations  are  the  fact  of  the  part- 
nership, and  the  terms  thereof,  the  rights  and  interests  of  the  parties 
therein,  and  the  grounds  for  seeking  dissolution.  It  is  not  necessary 
to  allege  the  specific  indebtedness  of  the  firm.  These  are  matters  of 
detail,  to  be  determined  from  the  testimony.  If,  as  alleged,  the  de- 
fendant is  insolvent,  and  has  taken  possession  of  the  partnership's 
property  and  converted  the  same  to  his  own  use,  and  refused  to  con- 
sult or  allow  the  plaintiff  to  participate  in  the  management  of  the 
firm's  business,  it  is  a  sufficient  ground  to  dissolve  the  partnership, 
and  to  entitle  the  plaintifif  ic  the  settlement  thereof.  The  averments 
of  the  petition  are  sufficient,  and  good  on  demurrer. 

For  reasons  indicated,  the  judgment  is  reversed,  and  the  cause  re- 
manded for  proceedings  consistent  herewith. 


ROSENSTEIN  v.   BURNS. 

(United  States  Circuit  Court,  D.  Massaoliusetts.  1882.    "41  Fed.  841,  affirmed 
135  U.  S.  449,  10  Sup.  Ct.  817,  34  L-.  Ed.  193.) 

Nelson,  J.  This  bill  is  brought  to  procure  a  dissolution  and  winding 
up  of  the  affairs  of  a  partnership  entered  into  between  the  parties  un- 
der a  written  agreement  for  the  canning  of  fish  and  the  manufacture 
of  pomace  and  fish  guano,  and  to  continue  for  the  term  of  five  years 
from  July  1,  1881.  The  copartnership  agreement  provides  that  the 
plaintiffs  shall  furnish  the  capital  with  which  to  carry  on  the  busi- 
ness, and  shall  furnish,  also,  all  materials  at  cost ;  that  the  defendants 
shall  have  charge  of  and  superintend  the  manufacturing  department 
at  the  factory  in  Gloucester,  keep  correct  books,  and  submit  weekly 
statements  of  the  business  to  the  plaintiffs,  make  good  and  market- 
able goods,  at  the  lowest  possible  cost,  in  such  quantities  as  the 
plaintiffs  should  deem  advisable ;  and  that  all  g^oods  made,  except 
in  certain  specified  cases,  should  be  shipped  to  the  plaintiffs,  and  be 
sold  by  them  in  New  York.  The  grounds  upon  which  the  dissolu- 
tion is  asked  for  are  the  willful  and  persistent  neglect  of  the  defend- 
ants to  comply  with  the  terms  of  the  written  agreement,  that  the  busi- 
ness is  being  conducted  at  a  great  loss,  and  that  the  plaintiffs  were 
induced  to  enter  into  the  partnership,  and  contribute  their  capital 
to  the  concern,  through  certain  false  and  fraudulent  representations 
of  the  defendants  as  to  the  nature  and  extent  of  the  business.  The 
defendants  demur  to  the  bill     *     *     *     fQ,-  want  of  equity.     *     *     * 

The  bill  states  a  plain  case  for  equitable  relief.  A  partner  is  under 
no  obligation  to'  continue  a  member  of  a  partnership  when  his  co- 
partner persistently  and  willfully  violates  the  essential  conditions  upon 
which  the  contract  of  the  partnership  rests.  He  is  not  under  the 
necessity  of  remaining  in  the  firm,  and  resorting  to  his  action  at  law 
upon  the  partnership  contract  for  redress.  He  is  at  liberty  to  with- 
draw himself  and  his  capital  from  the  concern  whenever  it  becomes 
reasonably  certain  that  the  business  can  no  longer  be  carried  on  at  a 
profit,  whether  through  the  misconduct  of  his  copartner  or  from  a 


1322  rARTNKnsiiip  (Part  5 

failure  of  the  business  itself.  So,  if  he  has  been  induced  to  enter  into 
the  partnership  contract  through  the  deceit  of  his  copartner,  he 
may  withdraw  whenever  the  fraud  practiced  upon  him  becomes  known. 
In  neither  case  is  he  required  to  continue  in  the  firm  until  the  part- 
nership expires  by  limitation  of  time,  but  is  at  liberty  at  once  to  ask 
for  a  dissolution  and  a  winding  up  of  the  affairs  of  the  partner- 
ship.    *     *     * 

Demurrer  overruled. 


CHILDERS  et  al.  v.  NEEDY. 

(Supreme  Court  of  Appeals  of  West  Virjrinis.  1S99.    47  "W.  Va.  70,  34  S.  E.  828, 
49  L.  R.  A.  468,  81  Am.  St.  Rep.  777.) 

Bill  by  J.  M.  Childers  and  another  against  S.  H.  Neely.  Judgment 
for  plaintiffs,  and  defendant  appeals. 

Brannon,  J.  Childers  and  Ramey  filed  a  bill  in  equity  in  the  circuit 
court  of  Tyler  against  Neely,  praying  that  a  partnership  between 
them  be  dissolved,  an  account  taken  "of  all  its  accounts,  dealings,  and 
transactions  whatever,"  and  that  a  manager  be  appointed  to  take 
charge  of  the  property.  The  business  was  oil  production.  *  *  * 
The  decrees  made  a  partial  account,  decreed  its  balance  against  Neely, 
and  denied  him  further  participation  in  the  partnership,  and  he  ap- 
pealed.    *     *     * 

The  bill  demanded  a  dissolution.  It  showed  abundant  cause,  and 
the  evidence  shows  abundant  cause,  of  dissolution.  The  bill  charges 
that  the  plaintiffs  and  Neely  made  a  settlement  to  a  certain  date,  but 
that  they  had  been  unable  to  get  Neely  to  make  a  settlement  since 
then ;  that  he  was  violent  and  abusive,  had  threatened  them  with  vio- 
lence, and  declared  he  would  have  nothing  more  to  do  with  them; 
that  he  would  not  contribute  to  expenses ;  that  bills  remained  unpaid  ; 
and  that  because  of  the  unsatisfactory  condition  of  the  business,  and 
the  "disagreements,  dissensions,  and  disaffections  between  the  part- 
ners, the  property  and  business  were  suffering."  The  evidence  shows 
these  disagreements  and  dissensions.  Thus,  it  was  plain  that  the 
business  was  hopeless  of  success  and  prosperity,  and  the  interests  of 
all  parties  demanded  absolute  dissolution  at  the  hands  of  the  law. 
Reconciliation,  harmony,  and  success  were  utterly  beyond  hope. 
*  *  *  Therefore  the  court  should  have  decreed  dissolution  ab- 
solute, and  directed  an  account  of  the  partnership,  and  wound  it  up. 
But  it  decreed  no  dissolution,  but,  on  the  contrary,  suffered  the  part- 
nership still  to  subsist,  and,  indeed,  go  on  in  the  sole  hands  and  man- 
agement of  Ramey,  excluding  Neely  therefrom,  and  decreed  that  the 
settlement  by  the  commissioner  should  only  apply  to  its  date,  leaving 
it  open  to  future  account.  The  decree  perpetuated  the  injunction, 
forever  prohibiting  Neely  from  participation  in  the  business,  and  pro- 
vided that  when  he  should  pay  $487.15  found  due  from  him,  and  costs, 
the  injunction  should  cease.     *     *     * 

If  ever  there  were  cases  which,  by  bill  and  proof,  called  for  dissolu- 
tion and  final  account,  not  partial,  this  is  one.  And  besides  the  show- 
ing of  bill  and  proof,  a  petition  for  rehearing  alleged  that  Ramey  had 
sold  the  boilers.  The  evidence  so  shows.  This  would  charge  Ramey 
to  credit  of  Neely.  There  was  partnership  property  in  Ramey's  hands. 
There  could  only  one  adequate  relief  be  given, — dissolution,  sale  of  the 
property  entire,  and  full  account.    But  no  provision  was  made  for  dis- 


Ch.  4)  CAUSES  OP   DISSOLUTION 


132a 


solution,  sale,  or  full  account, — only  a  partial  settlement  and  decree 
against  Neely  for  the  sum  found  by  it.  The  bill  alleged  that  the  prop- 
erty could  not  be  divided  in  kind.  If  the  injunction  applied  to  prop- 
erty belonging  to  the  firm,  on  which  a  lien  rested  for  the  other  part- 
ners, it  would  be  proper  to  continue  it  until  final  account  and  decree. 
*  *  *  But  Neely's  share  of  the  oil  was  his  separate  property.  And 
I  do  not  see  why  he  should,  without  cause,  be  excluded  from  par- 
ticipation, letting  Ramev  have  sole  control.  A  receiver,  impartial  be- 
tween them,  was  proper,  under  the  circumstances.     *     *     * 

Therefore  we  dissolve  the  injunction,  reverse  the  decree,  overrule 
the  demurrer  to  the  bill,  and  remand  for  further  proceedings  as  herein 
indicated,  and  further  according  to  principles  governing  courts  of 
equity  in  such  cases. 

SECTION  6.— EFFECT  OF  ASSIGNMENT  OF  A  PART- 
NER'S INTEREST 

Uniform  Partnership  Act,  Section  27.  (1)  A  conveyance  by  a 
partner  of  his  interest  in  the  partnership  does  hot  of  itself  dissolve 
the  partnership,  nor,  as  against  the  other  partners  in  the  absence 
of  agreement,  entitle  the  assignee,  during  the  continuance  of  the 
partnership,  to  interfere  in  the  management  or  administration  of 
the  partnership  business  or  affairs,  or  to  require  any  information 
or  account  of  partnership  transactions,  or  to  inspect  the  partner- 
ship books;  but  it  merely  entitles  the  assignee  to  receive  in  ac- 
cordance with  his  contract  the  profits  to  which  the  assigning  part- 
ner would  otherwise  be  entitled.^ 

(2)  In  case  of  a  dissolution  of  the  partnership,  the  assignee  is 
entitled  to  receive  his  assignor's  interest  and  may  require  an  ac- 
count from  the  date  only  of  the  last  account  agreed  to  by  all  the 
partners. 

HAWOBTH  V.  JACKSON. 
(Supreme  Court  of  Oregon,  1916.     80  Or.  132,  156  Pac.  590.) 

Action  by  J.  Brooks  Haworth  and  another  against  Frank  A,  Jackson 
and  others.  From  an  order  dismissing  the  suit  as  to  defendants  Jack- 
son and  Burpee  and  decree  dismissing  it  as  to  defendant  Manning, 
the  plaintififs  appeal. 

In  substance,  the  plaintiffs  declare  that  they  and  the  defendant  Man- 
ning associated  themselves  together  and  purchased  an  auto  truck  con- 

3  Letvis'  Note  to  Section  27  (1).—In  re  the  subject  of  this  paragraph,  see 
George,  153;  Beale's  Parsons,  §§  106,  305,  306;  Story,  §§  272,  377,  308; 
Bates,  §§  158-168,  931-933;  Lindley,  397  et  seq.,  620;  Jas.  Parsons,  §  175; 
Collyer,  151.  161;  Kent.  59.  These  authorities  on  the  whole  state  that  the 
mere  assignment  dissolves  the  partnership.  Many  such  assignments,  how- 
ever, are  merelv  by  way  of  collateral  secirrity  for  a  loan,  the  assigning  part- 
ner in  no  wise  intending  to  end  the  partnership  relation.  If  he  neglects  his 
personal  relation  the  other  partners  may  dissolve  the  partnership  under 
section  31  of  this  act.  But  the  mere  fact  of  assignment,  without  more,  should 
not  be  said  in  all  cases  to  be  an  act  of  dissolution.  The  change  in  the  exist- 
ing law  follows  a  similar  change  of  the  English  law  embodied  in  section  31 
of  the  English  Partnership  Act. 


1324  PARTNERSHIP  (Part  5 

tracting  to  pay  $3,815  for  the  same.  The  sum  of  $1,975  was  paid  in 
cash.  The  remainder  was  to  be  paid  in  four  equal  installments  of  $460 
each.  With  this  as  a  commencement,  they  formed  a  partnership  ac- 
cording to  a  certain  written  agreement,  which  recites  that  the  title  to 
the  property  remained  in  the  original  owner,  the  Packard  Company, 
until  the  full  purchase  price  should  be  paid.  They  say  they  carried  out 
all  the  stipulations  of  this  contract,  but  that  the  defendant  Manning 
misappropriated  moneys  to  himself  belonging  to  the  partnership,  _  did 
not  keep  full  or  true  accounts  of  the  moneys  received  from  the  earnings 
of  the  machine,  and  has  failed  to  divide  the  profits  of  the  business; 
that,  although  he  was  permitted  to  handle  the  moneys  of  the  con- 
cern and  pay  therefrom  its  liabilities,  he  allowed  the  last  installment 
of  $460  to  remain  unpaid,  and  the  plaintiffs  were  compelled  to  assume 
the  payment  of  the  note  therefor  then  in  the  hands  of  the  defendant 
Jackson.  They  charge  the  latter  with  knowledge  of  their  interest  in 
the  property,  and  that  he,  well  knowing  that  they  had  both  a  legal^  and 
equitable  interest  therein,  "without  any  notice  to  the  plaintiffs  or  either 
of  them,  attempted  to  execute  an  alleged  and  pretended  transfer  of 
the  said  auto  truck  to  the  defendant  Herman  S.  Burpee,  in  order  to 
cheat  and  defraud  the  plaintiffs,  without  any  right  either  in  law  or 
equity  so  to  do,  and  without  in  any  way  giving  the  plaintiffs  or  either 
of  them  a  right  to  pay  or  redeem  the  same,  and  without  taking  any 
action  either  in  law  or  equity  seeking  to  enforce  the  ownership  of  the 
said  truck  or  the  equitable  lien  upon  said  truck."  They  further  aver 
that  they  are  ready,  willing,  and  able  to  pay  $315,  principal  and  interest 
thereon,  which  they  say  is  the  balance  due  on  the  last  installment  men- 
tioned. They  tender  that  amount  into  court  for  the  benefit  of  Jackson 
or  the  owner  and  holder  of  the  purchase  price  note.  They  pray  for  a 
decree  dissolving  the  partnership  between  themselves  and  Manning; 
that  they  be  adjudged  to  be  the  owners  of  the  truck  subject  to  any 
claim  which  Manning  or  his  assignees  may  have  in  the  same ;  that  the 
$315  tendered  be  declared  to  be  full  payment  of  the  purchase  price 
of  the  truck  which  is  to  be  thereby  freed  from  any  lien  on  account  there- 
of ;  and  that  the  defendants  and  each  of  them  be  enjoined  from  claim- 
ing any  interest  in  the  same. 

Burnett,  J.  As  between  the  plaintiffs  and  Manning,  this  is  a  suit 
to  dissolve  the  partnership  and  for  an  accounting  concerning  the  affairs 
thereof.    *    *    * 

The  sale  of  Manning's  interest  to  Armstrong  worked  out  a  disso- 
lution of  the  partnership,  and  it  was  not  necessary  that  the  c'onsent  of 
the  plaintiffs  be  obtained;  "for  what  a  man  hath  that  also  can  he  sell." 
"In  most  jurisdictions,  in  this  country,  althsugh  not  in  England,  a 
partner  may  work  a  dissolution  of  the  firm  by  withdrawing  or  selling 
his  share  in  the  partnership  or  by  selling  the  entire  firm's  property 
without  the  consent  of  his  copartners."    30  Cyc.  653. 

This  rests  upon  the  doctrine  that,  while  a  partner  may  thus  withdraw 
from  the  firm,  he  cannot  force  upon  his  former  associates  a  new  one 
without  their  consent.  All  that  remains  is  the  obligation  to  account 
to  the  original  partners  concerning  the  transactions  of  the  late  firm. 
*    *    * 

It  is  so  ordered.    *    *    * 


Ch.  5)  EFFECT   OF  DISSOLUTION   AS   TO  PARTNERS  1325 


CHAPTER  V 

EFFECT  OF  DISSOLUTION   UPON  THE   RELATIONS  OF 
THE  PARTNERS  BETWEEN  THEMSELVES 

Section 

1.  Effect,  as  Between  the  Partners,  of  a  Dissolution  Not  Caused  by  the  Act, 

Bankruptcy,  or  Death  of  a  Partner. 

2.  Effect,  as  Between   the  Partners,  of  a   Dissolution   Caused  by  the  Act, 

Bankruptcy,  or  Death  of  a   Partner. 

3.  Liability  of  a  Partner  to  His  Co-Partners  for  Wrongfully  Causing  a  Dis- 

solution. 

4.  Power  of  the  Partners  to  Wind  up  the  Partnership  Affairs. 

5.  Rights  of  Partners  After  Dissolution  with  Respect  to  the  Disposition  of 

Partnership  Assets. 

6.  Relations  of  the  Partners  After  Dissolution  upon  Their  Election  to  Con- 

tinue the  Business. 

7.  Right  of  a  Partner  Wlio  has  Wrongfully  Caused  a  Dissolution. 

8.  Right  of  a  Partner  Who  has  Rescinded  a  Partnership  Contract  for  Fraud. 


SECTION  1.— EFFECT,   AS   BETWEEN   THE   PARTNERS, 

OF  A  DISSOLUTION  NOT  CAUSED  BY  THE  ACT, 

BANKRUPTCY,  OR  DEATH  OF  A  PARTNER 

Uniform  Partnership  Act,  Section  30.  On  dissolution  the  part- 
nership is  not  terminated,  but  continues  until  the  winding  up  of 
partnership  affairs  is  completed. 

Section  33.  (1)  (a)  Except  so  far  as  may  be  necessary  to  wind 
up  partnership  affairs  or  to  complete  transactions  begun  but  not 
then  finished,  dissolution  terminates  all  authority  of  any  partner 
to  act  for  the  partnership,  with  respect  to  the  partners,  when  the 
dissolution  is  not  by  the  act,  bankruptcy  or  death  of  a  partner. 


SECTION  2.— EFFECT,   AS   BETWEEN   THE   PARTNERS, 

OF    A    DISSOLUTION    CAUSED    BY    THE    ACT, 

BANKRUPTCY,  OR  DEATH  OF  A  PARTNER 

Uniform  Partnership  Act,  Section  30.  On  dissolution  the  part- 
nership is  not  terminated,  but  continues  until  the  winding  up  of 
partnership  affairs  is  completed. 

Section  33.  (1)  (b)  Except  so  far  as  may  be  necessary  to 
wind  up  partnership  affairs  or  to  complete  transactions  begun  but 
not  then  finished,  dissolution  terminates  all  authority  of  any  part- 
ner to  act  for  the  partnership,  with  respect  to  the  partners,  when 
the  dissolution  is  by  such  act,  bankruptcy  or  death  of  a  partner, 
in  cases  where  section  34  so  requires. 

Section  34.  Where  the  dissolution  is  caused  by  the  act,  death 
or  bankruptcy  of  a  partner,  each  partner  is  liable  to  his  co-partners 
for  his  share  of  any  liability  created  by  any  partner  acting  for  the 
partnership  as  if  the  partnership  had  not  been  dissolved  unless. 


1326  PARTNERSHIP  (Part  5 

(a)  the  dissolution  being  by  act  of  any  partner,  the  partner  acting 
for  the  partnership  had  knowledge  of  the  dissolution,  or  (b)  the 
dissolution  being  by  the  death  or  bankruptcy  of  a  partner,  the 
partner  acting  for  the  partnership  had  knowledge  or  notice  of 
the  death  or  bankruptcy.^ 

1  Lewis'  Note  to  Section  S'/. — Tliisj  section  relates  only  to  a  partner's  lia- 
bility to  his  co-partner,  where  a  co-partner,  after  dissolution,  cavLserl  by  the 
act  of  one  of  the  parties  or  by  the  death  or  bankruptcy  of  a  partner,  makes  a 
contract  in  the  course  of  partnership  business. 

As  worded,  where  the  dissolution  has  been  caused  by  the  act  of  one  of  the 
parties,  if  the  partner  acting  is  subject  to  a  liability  to  third  persons,  he  can 
call  on  his  co-partners  to  contribute  towards  this  liability  to  the  same  extent 
as  if  there  had  been  no  dissolution,  provided  he  had  no  knowledge  of  the 
diSvSolution,  at  the  time  of  the  act.  Mere  notice,  not  producing  knowledge, 
would  not  be  sufficient.  This  provision  makes  certain  that  which  is  now 
uncertain.  Thvis  A.,  B.,  and  C.  are  partners.  A.,  in  accordance  with  his  right, 
or  in  contravention  of  the  agreement  between  the  partners,  declares  a  dis- 
solution of  the  partnership.  B.,  subsequently,  makes  a  contract,  for  the  part- 
nership in  ignorance  of  the  dissohition.  B.  under  this  act  would  have  the 
right  to  call  upon  A.  and  C.  to  assume  their  share  of  the  burden.  The  Com- 
missioners believe  that  to  relieve  A.  and  C.  of  this  duty  to  B.,  B.  ought  to 
have  more  than  "notice"  as  "notice"  is  defined  in  section  3,  supra.  "Notice" 
should  l>e,  it  is  submitted,  sufhcient  in  all  cases  where  the  fact  to  be  notified 
is  an  ordinary  business  fact,  as  notice  to  third  persons  of  the  dissolution  of 
a  partnership.  But  it  is  not  customary  for  partners  to  dis.solve  a  partner- 
ship at  a  time  not  previously  specified,  without  consultation  with  their  co- 
partners. Such  dissolution  may  or  may  not  amount  to  a  breach  of  partner- 
ship contract;  but,  in  any  event,  if  done  without  consultsition,  it  is  out  of 
the  ordinary  course.  This  fact  should  not  deprive  the  partner  of  a  right 
to  terminate  a  relationship  Avhich  must  necessarily  depend  on  mutual  good 
will  and  confidence ;  but  if  the  partner  .^o  terminating  wishes  to  show  that 
he  should  not  be  required  by  his  partners  to  be  liable,  for  his  share  of  the 
loss  due  to  a  partnership  contract  thereafter  made  by  them,  he  should  be 
able  to  prove  that  they  had  "knowledge"  that  he  had  dissolved  the  partner- 
ship at  the  tinie  they  made  the  contract. 

Clause  (b)  makes  a  change  in  the  law.  Beale's  Parsons,  §§  309,  310,  318, 
342,  343,  .351;  Mechem.  §§  245.  258,  259,  260,  261,  266:  Collver,  §§  102,  103, 
30  Cyc.  653,  670;  Story,  §§  265  et  seq.,  319,  334,  336;  Bates,  570  et  seq. ; 
Conyngton,  §§  53,  72;  Burdick,  .56;  Shumaker,  §§  119,  120;  8  Kent.  Com.  53. 
At  present,  where  the  partnership  is  terminated  by  oi^eration  of  law — i.  e., 
by  death,  bankruptcy,  by  being  unlawful,  or  by  decree  of  court — every  person 
"must  take"  notice  of  such  facts.  This  statement  is  made  generally  and 
includes  the  partners.  As  to  the  partners,  to  whom  only  this  provision  re- 
lates, the  Commissioners  agre<^  that  they  must  not  expect  relief  if  the  part- 
nership or  the  business  is  unlawful,  or  if  they  have  actual  knowledge  or 
notice  of  dissolution  by  decree  of  court ;  but  the  Comrais^sioners  do  not  be- 
lieve that  the  partners  do  have  actual  knowledge  or  should  "take  notice"  of 
the  death  or  of  the  bankruptcy  of  any  one  partner.  In  the  case  of  the  death, 
to  hold  that  a  partner  acting  for  the  partnership  bona  fide,  in  ignorance  of 
the  death  of  one  of  his  co-partners,  must  assume  the  entire  liability,  even 
though  all  other  partners  are  ignorant  of  the  death  of  the  partner,  and 
even  though  such  deceased  partner  was  entirely  inactive,  and  may  have  re- 
sided at  any  distance  from  the  actual  place  of  business,  is  entirely  imjust  to 
the  acting  partner  or  partners.  The  rule  of  tlie  common  law  has  been  modi- 
fied as  to  the  law  of  acency.  Story  on  Agency  tlS82)  .598;  Ca.ssiday  v  :\Ic- 
Kenzie,  4  Watts  &  S.  (Pa.)  282,  39  Am.  Dec.  76  (1842)  ;  Civ.  Code  Cah  §  2.35G- 
Rev.  Code  Dak.  1877,  §§  1150,  1151 :  Rev.  Code  Md.  1878,  p.  388,  art.  44,  §  31  ; 
Saunders"  Rev.  Civ.  Code  La.  1909,  §  3032;  Gen.  Stat.  S.  C.  1882,  §  1302; 
Kent,  Comm.  646;  Mechem  on  Agency,  §  245;  Blackwood  Wright  '(2d  Eng! 
Ed.)  on  Principal  and  Agent,  332  et  seq.;  English  Conveyancing  Act  (1881)  § 
47 ;  English  Bankruptcy  Act  (1883)  §  38.  See  Lindley,  240  et  seq.  The  Com- 
mi.ssioners  believe  that  the  partnership  law  should  follow  this  modification. 

What  has  been  said  of  the  death  of  a  partner  applies  also  to  the  bankrupt- 
cy of  a  partner.  If  there  are  a  number  of  partners,  and  one  of  them  becomes 


Ch.  5)  EFFECT   OF   DISSOLUTION   AS   TO  PARTNERS  '     1327 

Section  3.  (1)  A  person  has  "knowledge"  of  a  fact  within  the 
meaning  of  this  Act  not  only  when  he  has  actual  knowledge  there- 
of, but  also  when  he  has  knowledge  of  such  other  facts  as  in  the 
circumstances  shows  bad  faith.  (2)  A  person  has  "notice"  of  a 
fact  within  the  meaning  of  this  Act  when  the  person  who  claims 
the  benefit  of  the  notice  (a)  states  the  fact  to  such  person,  or  (b) 
delivers  through  the  mail,  or  by  other  means  of  communication,  a 
written  statement  of  the  fact  to  such  person  or  to  a  proper  per- 
son at  his  place  of  business  or  residence. 


SECTION  3.— LIABILITY  OF  A  PARTNER  TO  HIS 
CO-PARTNERS     FOR     WRONGFULLY 
CAUSING  A  DISSOLUTION 
Uniform  Partnership  Act,  Section  38.     (2)   (a)   (II)  When  dis- 
solution is  caused  in  contravention  of  the  partnership  agreement 
each  partner  who  has  not  caused  dissolution  wrongfully  shall  have 
the  right,  as  against  each  partner  who  has  caused  the  dissolution 
wrongfully,  to  damages  for  breach  of  the  agreement. 


FLETCHER  v.  REED. 
(Supreme  Judicial  Court  of  Massachusetts,  1S81.     131  Mass.  312.) 

Morton,  J.  This  is  a  bill  inequity  brought  to  settle  the  affairs  of  a 
partnership.     *     *     * 

The  master  finds  that  the  copartnership  between  the  parties  was 
formed  by  an  oral  agreement,  for  an  indefinite  time,  to  which  no  ex- 
ception is  taken.  A  partnership  for  an  indefinite  period  is  in  law  a 
partnership  at  the  will  of  the  partners,  and  either  partner  may  with- 
draw when  he  pleases,  and  dissolve  the  partnership,  if  he  acts  without 
any  fraudulent  purpose.  It  follows  that  the  master  rightly  ruled  that 
the  defendants  were  not  entitled  to  be  allowed  for  any  damages  which 
they  contended  were  caused  by  the  withdrawal  of  the  plaintiff  from 
the  firm.    *    *    * 

Decree  for  the  plaintiff. 

SECTION  4.— POWER  OF  THE  PARTNERS  TO  WIND  UP 
THE  PARTNERSHIP  AFFAIRS 
Uniform  Partnership  Act,  Section  37.  Unless  otherwise  agreed, 
the  partners  who  have  not  wrongfully  dissolved  the  partnership  or 
the  legal  representative  of  the  last  surviving  partner,  not  bank- 
rupt, has  the  right  to  wind  up  the  partnership  affairs:  Provided, 
however,  that  any  partner,  his  legal  representative,  or  his  assignee, 
upon  cause  shown,  may  obtain  winding  up  by  the  court. 

bankrupt,  and  another,  having  no  knowledge  or  notice  of  this  fact,  makes  a 
contract  in  the  ordinary  course  of  the  business,  there  appears  no  reason  why 
he  should  not  be  able  to  call  on  his  other  partners,  not  bankrupt  or  deceased, 
to  contribute  towards  any  loss  which  his  separate  estate  may  sustain  on 
account  of  the  contract. 


1328  PARTNERSHIP  ^  (Part  5 


STEWART  et  al.  V.  ROBINSON  et  al. 

(Court  of  Appeals  of  New  York,  1SS9.     115  N.  T.  328,  22  N.  E.  160, 
5  I/.   R.   A.  410.) 

Danforth,  J.  The  defendants  are  brought  before  the  court  as  trus- 
tees and  executors  of  the  estate  of  Joseph  Cohvell,  deceased.  It  ap- 
pears that  Colwell,  in  his  life-time,  and  one  Samuel  S.  Hepworth, 
carried  on  business  as  copartners  under  the  name  of  S.  S.  Hepworth 
&  Co.,  for  the  manufacture  and  sale  of  centrifugal  machines  and  some 
other  machinery,  under  articles  of  agreement,  one  of  which  was  en- 
tered into  February  22,  1877,  and  provided  for  the  continuance  of  the 
partnership  for  five  years  from  January  1,  1877.  *  *  *  Before 
the  expiration  of  the  stipulated  time,  and  on  the  18th  of  October,  1881, 
a  further  agreement  was  made  that  the  copartnership  should  continue 
until  dissolved  by  mutual  consent  or  terminated  by  six  months'  notice 
in  writing  by  one  party  to  the  other,  and  that,  "in  the  event  of  die  death 
of  either,  the  business  shall  be  continued  by  the  survivor  until  the  ex- 
piration of  five  years  from  the  1st  day  of  February  next  succeeding 
such  death ;  the  estate  of  the  deceased  partner  to  have  the  same  share 
and  interest  in  the  profits,  and  to  bear  the  same  share  of  the  losses  of 
the  business,  as  would  have  been  received  and  borne  by  the  deceased 
partner  had  he  lived:  Provided,  however,  that  if  the  survivor  shall 
think  it  necessary  to  employ  an  additional  clerk  in  consequence  of  the 
death  of  the  deceased  partner,  in  such  case  the  expense  shall  be  charged 
to  and  shall  be  borne  by  the  share  in  the  profits  of  the  deceased  part- 
ner." 

The  firm  business  was  thereafter  continued  under  these  instruments 
until  the  1st  day  of  June,  1882,  when  Colwell  died,  leaving  children 
and  a  will.  He  appointed  the  above-named  defendants  executors  and 
trustees,  and  gave  them,  in  trust  for  his  children,  the  greater  part  of 
his  estate,  and  directed  a  distribution  of  the  whole,  making  no  refer- 
ence to  the  business  of  the  firm  of  S.  S.  Hepworth  &  Co.,  or  to  it  in 
any  way,  or  to  the  agreement  above  set  out,  and  revoking  all  other 
wills  theretofore  made  by  him.  It  also  appeared  that  from  the  death 
of  Colwell  to  September,  1887,  the  business  of  S.  S.  Hepworth  &  Co. 
was  continued  and  carried  on  by  Samuel  S.  Hepworth,  he  assuming  to 
do  so  under  th.e  agreements  of  February  23,  1877,  and  October  13, 
1881.  In  the  course  of  that  business,  in  September  or  October,  1887, 
or  five  years  after  Cohvell's  death,  he  contracted  debts  with  the  plain- 
tiff and  with  other  persons  or  firms  in  the  name  of  S.  S.  Hepworth  & 
Co.,  for  some  of  which  he  gave  promissory  notes  in  that  name,  and 
others  of  which  rest  in  account.  On  the  4th  of  October,  1887,  Hep- 
worth individually  and  as  surviving  partner  was  insolvent  to  the  ex- 
tent of  about  $500,000,  and  on  that  day  made  an  assignment  in  both 
capacities  for  tlie  benefit  of  his  creditors.  The  individual  debts  of 
Colwell  have  been  paid,  and  property  remains  in  the  hands  of  his  ex- 
ecutors. The  plaintiffs,  either  as  original  creditors  or  by  assignment, 
are  the  owners  of  the  debts  contracted  by  Hepworth,  and  set  out  in 
the  complaint,  amounting  in  the  aggregate  to  about  $15,000,  and  they 
seek  to  recover  the  amount  from  the  individual  estate  of  Colwell,  and 
in  the  mean  time  ask  for  the  appointment  of  a  receiver  of  his  prop- 
erty, assets,  and  estate,  and  an  account  thereof  from  the  defendants 
as  his  representatives. 


Ch.  5)  EFFECT   OF  DISSOLUTION   AS   TO   PARTNERS  1329 

Various  defenses  were  interposed  by  them,  but,  so  far  as  material 
upon  this  appeal,  their  effect  depends  upon  the  single  question  whether 
the  general  estate  of  Colwell  was  by  virtue  of  the  above  agreements 
rendered  liable  for  debts  contracted  by  Hepworth  in  the  firm  name, 
after  the  death  of  Colwell.  The  trial  court  and  the  general  term  have 
held  against  the  plaintiffs,  and  the  defendants  had  judgment  accord- 
ingly. 

It  is  a  general  rule  that  a  contract  of  partnership  is  dissolved  by  the 
death  of  one  of  the  parties,  whether  entered  into  for  a  fixed  time  or 
not,  and  that  after  his  death  the  former  partner  cannot  bind  the  es- 
tate of  the  decedent  by  new  contracts,  and,  although  the  partnership  be 
expressly  extended  to  executors,  they  could  not  be  compelled  to  carry 
it  on,  and  would  be  entitled  to  a  dissolution  and  an  account  of  the  as- 
sets, subject  to  the  liabilities  of  the  firm  incurred  up  to  the  time  of  dis- 
solution. These  are  familiar  and  well-settled  principles.  Here  the  rep- 
resentatives of  the  deceased  partner  were  not  to  be  partners  with  the 
survivors,  nor  Avere  they  to  have  anything  to  do  with  the  conduct  of 
the  business  or  its  management ;  on  the  contrary,  the  business  is  "to  be 
continued  by  the  survivor."  We  have  only  to  inquire,  therefore,  wheth- 
er the  partnership  agreements  take  the  case  out  of  the  general  rule. 
The  frame  of  the  last  articles  shows  that  the  parties  contemplated  and 
bargained  for  a  continuance  of  the  business  for  the  term  of  five  years 
from  the  1st  of  February  next  preceding  the  death  of  either,  but  the 
residue  of  the  clause  containing  this  stipulation  depends  to  some  ex- 
tent for  its  interpretation  upon  the  preceding  or  original  article.  The 
second  agreement  refers  to  the  first  as  containing  the  terms  and  con- 
ditions on  which  the  business  is  to  go  on ;  and  looking  there  we  find 
that  the  capital,  however  represented,  by  money,  tools,  machinery,  or 
material,  was  not  to  exceed  $4,000,  and  was  to  be  provided  by  Col- 
well and  to  remain  his  individual  property.  That  contribution  made 
him  an  equal  partner,  and  upon  dissolution  of  the  firm,  was  to  be 
repaid  to  him,  with  interest,  iDcfore  any  division  of  surplus  earnings 
should  be  made.  Death  of  a  partner,  however,  was  not  as  of  course 
to  work  a  dissolution,  but  the  wife  and  children  of  the  decedent  were 
immediately  to  succeed  to  his  interest  in  the  business,  which  thence- 
forward was  to  be  prosecuted  for  their  benefit  and  that  of  the  surviv- 
ing partner. 

We  do  not  need  to  ascertain  whether  this  clause  could  have  any 
effect  without  the  assent  of  the  parties  named,  for  it  never  came  into 
operation,  being  suspended  by  that  of  the  agreement  of  October  13th, 
which  provides  for  the  continuance  of  the  business  "by  the  survivor,'' 
and  the  distribution  of  profits  or  losses  "to  the  estate  of  the  deceased 
partner,  as  would  have  been  received  and  borne  by  him  had  he  lived." 
It  is  to  be  seen,  therefor,  that  the  capital  invested  was  to  remain  the 
same.  It  was  not  to  exceed  $4,000.  It  belonged  to  Colwell,  but  was 
to  continue  in  the  business  notwithstanding  his  death,  and  could  not 
be  withdrawn  until  the  expiration  of  five  years  from  that  event.  So 
much  the  surviving  partner  might  insist  upon.  I  do  not  see  that  he 
could  rightfully  exact  more,  and,  if  he  could  not,  how  could  third  per- 
sons? There  is  in  fact  no  partnership,  for  there  are  no  partners. 
There  is  a  surviving  partner.  Under  the  first  article  it  might  be  said 
that,  if  the  wife  and  children  assented,  they  would  have  become  part- 
ners. The  executors  cannot  be  deemed  partners,  for  that  capacity  has 
B.&  B.Bus.Law— 84 


1330  PARTNERSHIP  (Part  5 

not  been  put  upon  them,  nor  have  they  assumed  it  directly  or  indi- 
rectly by  taking  any  part  of  the  management  of  the  business.  They 
knew  of  its  continuance,  and  loaned  Hepworth  money  upon  security. 
Nothing  more.  A  new  partnership  was  not  formed;  nor  can  one  be 
implied!  But  it  is  said  the  "estate"  of  the  deceased  partner  is  to  share 
in  profits  or  bear  a  portion  of  the  losses.  Of  what?  Not  a  partner- 
ship, but  a  business  conducted  by  a  surviving  partner.  An  estate  can- 
not  be  a  partner.  I  think  the  provision  in  the  agreement  means  noth- 
ing more  than  that  the  capital  actually  invested  in  the  business  before 
or  at  the  death  of  the  partner  shall  continue  to  be  so  subject  or  liable. 
The  general  rule  already  adverted  to  does,  upon  the  death  of  a 
partner,  terminate  the  power  of  his  associate  or  copartner  to  contract 
new  debts  on  the  credit  of  the  firm.  Assuming,  with  the  appellant, 
that  this  general  result  of  law  may  be  varied  by  an  express  agreement, 
it  will  then  depend  upon  the  particular  terms  of  that  agreement  to  what 
extent  the  estate  of  a  deceased  partner  may  be  bound  by  the  surviv- 
ing member  of  the  firm,  "whether  his  estate  shall  be  generally  liable 
for  all  the  debts,  or  only  to  the  extent  of  the  property  embraced  and 
left  in  the  partnership  to  be  employed  by  the  survivors."  Story,  Partn. 
201a.  But  it  is  said  in  Burwell  v.  Mandeville's  Ex'rs,  2  How.  560, 
1 1  L.  Ed.  378 :  Nothing,  however,  but  the  clearest  and  most  unambig- 
uous language,  showing  in  the  most  positive  manner  an  intention  on 
the  part  of  the  testator  to  render  his  general  assets  liable  for  debts 
contracted  after  his  death,  will  justify  a  court  in  extending  the  lia- 
bility of  his  estate  beyond  the  actual  fund  employed  therein  at  the  time 
of  his  death.     *     *     * 

In  the  case  now  before  us  the  directions  or  authority  are  such  only 
as  we  said  in  the  former  case  would  be  insufficient  to  enable  a  creditor 
to  reach  the  general  assets  of  an  estate.  They  are  almost  literally  in 
every  sense  substantially  the  same  as  those  actually  presented  by  Bur- 
well  V.  Mandeville's  Ex'rs,  supra,  and  in  view  of  the  decisions  thus 
referred  to  it  would  be  useless  to  go  on  in  this  discussion  as  a  new  one, 
or  do  more  than  call  attention  to  the  terms  of  the  contract  on  which 
appellants  must  succeed  or  fail  in  their  contention  against  the  decision 
of  the  court  below :  First.  The  "capital"  is  fixed  at  $4,000,  the  sole 
property  of  Colwell.  Second.  It  is  with  that  capital  that  "the  business 
of  the  copartnership  is  to  be  conducted."  Third.  The  profits  of  the 
business  are  to  be  divided  between  the  parties  at  convenient  periods. 
Fourth.  At  the  dissolution  of  the  partnership  and  the  liquidation  of  its 
business  the  cash  capital  is  to  be  repaid  before  any  division  of  surplus 
earnings.  These  terms  and  conditions  are  by  reference  incorporated 
into  the  new  agreement  on  which  the  appellants  rely.  The  second  agree- 
ment repeats  the  same  general  language.  In  the  event  of  death  "the  busi- 
ness" shall  be  continued,  i.  e.,  the  business  already  described  as  em- 
ploying a  certain  capital,  not  an  additional  capital ;  and  the  profits  and 
losses  of  the  same  "business"  are  to  be  shared  in  the  same  manner  as 
if  the  deceased  partner  were  alive,  with  only  one  addition ;  ^  the  survivor 
may,  if  he  thinks  necessary  in  consequence  of  his  partner's  death,  em- 
ploy an  additional  clerk,  the  expense  of  whose  employment  shall  be 
borne  by  "the  share  of  the  profits  of  the  deceased  partner."  Here  are 
no  words  from  which  can  be  implied  an  intention  to  bring  into  the 
concern  other  capital,  or  make  new  debts  a  charge  upon  any  assets 
outside  of  those  already  pledged  to  the  business  of  the  firm.  It  is 
nothing  more  than  an  authority  to  the  surviving  partner  to  continue 


Ch.  5)  EFFECT    OF    DISSOLUTION    AS    TO    PARTNERS  1331 

an  existing  business,  and  therefore  within  the  authorities  cited;  and 
upon  reason  and  common  sense  the  plaintiffs  cannot  have  the  relief  they 
seek  in  this  action. 

The  respondents  assail  the  validity  of  the  agreement  for  any  pur- 
pose. I  do  not  think  it  necessary  to  determine  the  question  so  raised. 
It  is  enough  to  dispose  of  the  present  case  that  we  -find  no  language 
on  the  part  of  the  deceased  which  indicates  any  intention  on  his  part 
to  put  in  hazard  his  general  estate,  or  which  by  fair  construction  fur- 
nishes any  ground  for  the  present  action.  It  follows  that  the  judg- 
ment appealed  from  should  be  affirmed,  with  costs.  All  concur,  ex- 
cept Earl,  J.,  not  voting. 


SECTION  5.— RIGHTS  OF  PARTNERS  AFTER  DISSO- 
LUTION WITH   RESPECT  TO  THE  DISPOSI- 
TION    OF     PARTNERSHIP     ASSETS 

Uniform  Partnership  Act,  Section  38.*  (1)  When  dissolution 
is  caused  in  any  way,  except  in  contravention  of  the  partnership 
agreement,  each  partner,  as  against  his  co-partners  and  all  per- 
sons claiming  through  them  in  respect  of  their  interests  in  the 
partnership,  unless  otherwise  agreed,  may  have  the  partnership 
property  applied  to  discharge  its  liabilities,  and  the  surplus  applied 
to  pay  in  cash  the  net  amount  owing  to  the  respective  partners. 
But  if  dissolution  is  caused  by  expulsion  of  a  partner,  bona  fide 
under  the  partnership  agreement,  and  if  the  expelled  partner  is 
discharged  from  all  partnership  liabilities,  either  by  payment  or 
agreement  under  section  36  (2)  he  shall  receive  in  cash  only  the 
net  amount  due  him  from  the  partnership. 

(2)  When  dissolution  is  caused  in  contravention  of  the  part- 
nership agreement  each  partner  who  has  not  caused  dissolution 
wrongfully  shall  have  all  the  rights  specified  in  paragraph  (1)  of 
this  section. 


SECTION  6.— RELATIONS    OF    THE    PARTNERS    AFTER 
DISSOLUTION  UPON  THEIR  ELECTION  TO 
•  CONTINUE    THE    BUSINESS 
Uniform  Partnership  Act,   Section  38.     (2)    (b)   When  dissolu- 
tion is  caused  in  contravention  of  the  partnership  agreement,  the 
partners  who  have  not  caused  the  dissolution  wrongfully,  if  they 
all   desire  to  continue  the  business   in  the  same  name,   either  by 
themselves  or  jointly  with  others,  may  do  so,  during  the  agreed 
term   for  the   partnership  and  for  that  purpose  may   possess   the 
partnership  property,  provided  they  secure  the  payment  by  bond 
approved  by  the  court,  or  pay  to  any  partner  who  has  caused  the 

2  Lewis'  "Note  to  Section  S8. — The  rifjht  given  to  eacli  partner,  where  no- 
agreement  to  the  contrary  has  been  made,  to  have  his  share  of  the  surplus 
paid  to  him  in  cash,  makes  certain  an  existing  uncertainty.  At  present  it  is 
not  certain  whether  a  partner  may  or  may  not  insist  on  a  pliysical  partition 
(tf  the  property  remaining  after  third  persons  have  been  paid. 


1332  PARTNERSHIP  (Part  5 

dissolution  wrongfully,  the  value  of  his  interest  in  the  partnership 
at  the  dissolution,  less  any  damages  recoverable  under  clause 
(2a  II)  of  this  section,  and  in  like  manner  indemnify  him  against 
all  present  or  future  partnership  liabilities. 

Section  38.  (2)  (c)  (II)  If  the  business  is  continued  under 
paragraph  (2b)  of  this  section,  a  partner  who  has  caused  the  dis- 
solution wrongfully  shall  have  the  right  as  against  his  co-partners 
and  all  claiming  through  them  in  respect  of  their  interests  in  the 
partnership,  to  have  the  value  of  his  interest  in  the  partnership, 
less  any  damages  caused  to  his  co-partners  by  the  dissolution,  as- 
certained and  paid  to  him  in  cash,  or  the  payment  secured  by  bond 
approved  by  the  court,  and  to  be  released  from  all  existing  lia- 
bilities of  the  partnership;  but  in  ascertaining  the  value  of  the 
partner's  interest  the  value  of  the  good  will  of  the  business  shall 
not  be  considered. 

Section  23.  (1)  When  a  partnership  for  a  fixed  term  or  par- 
ticular undertaking  is  continued  after  the  termination  of  such  term 
or  particular  undertaking  without  any  express  agreement,  the 
rights  and  duties  of  the  partners  remain  the  same  as  they  were 
at  such  termination,  so  far  as  is  consistent  with  a  partnership  at 
will. 

Section  23.  (2)  A  continuation  of  the  business  by  the  partners 
or  such  of  them  as  habitually  acted  therein  during  the  term,  with- 
out anv  settlement  or  liquidation  of  the  partnership  affairs,  is 
prima  facie  evidence  of  a  continuation  of  the  partnership. 


SECTION  7.— RIGHT  OF  A  PARTNER  WHO  HAS  WRONG- 
FULLY CAUSED  A  DISSOLUTION 

The  rights  of  a  partner  who  has  wrongfully  caused  a  dissolu- 
tion, in  the  event  of  a  continuance  of  the  partnership,  were  re- 
ferred to  in  the  preceding  section.  When  the  business  is  not  con- 
tinued, the  following  sections  govera  the  rights  of  the  partner  who 
wrongfully  caused  the  dissolution : 

Uniform  Partnership  Act,  Section  38.  (2)  (c)  (I)  If  the  busi- 
ness is  not  continued  under  the  provisions  of  paragraph  (2b)  a 
partner  who  has  caused  the  dissolution  wrongfully  shall  have  all 
the  rights  of  a  partner  under  paragraph  (1)  subject  to  clause 
(2a  II)  of  this  section. 

Paragraph  (1)  and  clause  (2a  II)  are  as  follows: 

Section  38.  (1)  When  dissolution  is  caused  in  any  way 
*  *  *  each  partner,  as  against  his  co-partners  and  all  persons 
claiming  through  them  in  respect  of  their  interests  in  the  partner- 
ship, unless  otherwise  agreed,  may  have  the  partnership  property 
applied  to  discharge  its  liabilities,  and  the  surplus  applied  to  pay 
in  cash  the  net  amount  owing  to  the  respective  partners.  But  if 
dissolution  is  caused  by  expulsion  of  a  partner,  bona  fide  under 
the   partnership  agreement,   and  if  the  expelled  partner  is  dis- 


Ch.  5)  EFFECT   OP   DISSOLUTION   AS   TO  PARTNERS  1333 

charged  from  all  partnership  liabilities,  either  by  payment  or  agree- 
ment under  section  36  (2)  he  shall  receive  in  cash  only  the  net 
amount  due  him  from  the  partnership. 

Section  36  (2)  refers  to  dischargee  by  novation. 

Section  38.  (2a  II)  Each  partner  who  has  not  caused  dissolu- 
tion wrongfully  shall  have  the  right,  as  against  each  partner  who 
has  caused  the  dissolution  wrongfully,  to  damages  for  breach  of 
the  agreement. 

Section  43.  The  right  to  an  account  of  his  interest  shall  accrue 
to  any  partner,  or  his  legal  representative,  as  against  the  winding 
up  partners  or  the  surviving  partners  or  the  person  or  partner- 
ship continuing  the  business,  at  the  date  of  dissolution,  in  the  ab- 
sence of  any  agreement  to  the  contrary. 


SECTION  8.— RIGHT    OF   A    PARTNER   WHO    HAS    RE- 
SCINDED A  PARTNERSHIP  CONTRACT  FOR  FRAUD 

Uniform  Partnership  Act,  Section  39.  Where  a  partnership  con- 
tract is  rescinded  on  the  ground  of  the  fraud  or  misrepresentation 
of  one  of  the  parties  thereto,  the  party  entitled  to  rescind  is,  with- 
out prejudice  to  any  other  right,  entitled  (a)  to  a  lien  on,  or  right 
of  retention  of,  the  surplus  of  the  partnership  property  after  sat- 
isfying the  partnership  liabilities  to  third  persons  for  any  sum  of 
money  paid  by  him  for  the  purchase  of  an  interest  in  the  partner- 
ship and  for  any  capital  or  advances  contributed  by  him ;  and  (b) 
to  stand,  after  all  liabilities  to  third  persons  have  been  satisfied,  in 
the  place  of  the  creditors  of  the  partnership  for  any  payments 
made  by  him  in  respect  of  the  partnership  liabilities;  and  (c)  to 
be  indemnified  by  the  person  guilty  of  the  fraud  or  making  the 
representation  against  all  debts  and  liabilities  of  the  partnership. 


# 


1334  PARTNERSHIP  (Part  5 


CHAPTER  VI 

EFFECT  OF  DISSOLUTION   UPON  THE   RELATIONS  OF 
THE  PARTNERS  TO  THIRD  PARTIES 

Section 

1.  Effect,  as  to  Third  Parties,  of  a  Dissolution  upon  Partnersliip  Liabilities 

Existing  Prior  to  Dissolution, 

2.  Effect,  as  to  Third  Parties,  of  a  Dissolution  upon  Transactions  Subsequent 

to  Dissolution. 

3.  Rights  of  Creditors  of  the  Dissolved  Partnership  Against  the  Individuals 

or  Partnei-ship  Continuing  the  Business. 

4.  Priorities  Among  Claimants  in  the  Settlement  of  a  Partnership  Estate. 


SECTION  L— EFFECT,  AS  TO  THIRD  PARTIES,  OF  A 
DISSOLUTION  UPON   PARTNERSHIP  LIABILI- 
TIES EXISTING  PRIOR  TO  DISSOLUTION 
Uniform  Partnership  Act,  Section  36.     (1)  The  dissolution  of 
the  partnership  does  not  of  itself  discharge  the  existing  liability 
of  any  partner, 

(2)  A  partner  is  discharged  from  any  existing  liability  upon 
dissolution  of  the  partnership  by  an  agreement  to  that  effect  be- 
tween himself,  the  partnership  creditor  and  the  person  or  part- 
nership continuing  the  business;  and  such  agreement  may  be  in- 
ferred from  the  course  of  dealing  between  the  creditor  having 
knowledge  of  the  dissolution  and  the  person  or  partnership  con- 
tinuing the  business, 

(3)  Where  a  person  agrees  to  assume  the  existing  obligations 
of  a  dissolved  partnership,  the  partners  whose  obligations  have 
been  assumed  shall  be  discharged  from  any  liability  to  any  credi- 
tor of  the  partnership  who,  knowing  of  the  agreement,  consents 
to  a  material  alteration  in  the  nature  or  time  of  payment  of  such 
obligations. 

(4)  The  individual  property  of  a  deceased  partner  shall  be  liable 
for  all  obligations  of  the  partnership  incurred  while  he  was  a  part- 
ner and  subject  to  the  prior  payment  of  his  separate  debts. 


WADHAMS  et  al.  v.  PAGE  et  al. 
(Supreme  Court  of  Washington,  1890.  1  Wash.  420,  25  Pac.  462.) 
Dunbar,  J.  This  was  an  action  by  plaintiffs  and  appellants  to  re- 
cover a  balance  alleged  to  be  due  from  defendants  and  appellees  on 
account,  amounting  to  $203.43,  with  interest  thereon  at  the  rate  of 
10  per  cent,  per  annum  from  the  3d  day  of  April,  A.  D.  1884.  Service 
of  summons  was  had  only  on  defendant  Joseph  Green.  The  defendant 
Green,  for  an  affirmative  defense,  alleged  that  on  the  23d  day  of  Feb- 
ruary, A.  D.  1884,  he  and  one  Alfred  Page  were  doing  business  under 
the  firm  name  of  Page  &  Green;  that  on  or  about  the  3d  day  of  April, 
1884,  they  dissolved  partnership;  that  at  said  time  there  was  due  Wad- 
hams  &  Elliott  about  the  sum  of  $203 ;   that  the  said  Page  continued 


Ch,  6)  EFP^ECT  OF  DISSOLUTION  AS  TO  TUIRD   PARTIES  1335 

to  nm  and  manage  the  said  business  of  the  said  partnership ;  that  the 
said  Page  was  to  pay  the  said  Wadhams  &  EUiott  the  said  amount  due 
said  firm ;  that  Wadhams  &  ElUott  were  notified  of  said  dissolution ; 
that  they  accepted  the  said  Alfred  Page  for  the  said  indebtedness  due 
them  from  said  firm  of  Page  &  Green,  and  transferred  the  account  of 
Page  &  Green  to  the  said  Alfred  Page,  and  held  the  said  Page  only 
for  the  said  amount  of  indebtedness,  and  did  then  and  there  release 
the  defendant  Green  from  any  obligation  or  indebtedness  due  to  plain- 
tifts  by  the  said  firm  of  Page  &  Green.  The  affirmative  matter  in  de- 
fendant's answer  was  denied  in  plaintiffs'  reply.  Payment  of  the  said 
indebtedness  was  also  alleged  in  the  answer,  but  no  attempt  was  made 
to  prove  the  payment  on  the  trial,  except  as  stated'  in  the  affirmative 
answer.  The  jury  found  a  verdict  in  favor  of  defendants,  judgment 
was  rendered  in  accordance  therewith,  and  from  said  judgment  plain- 
tiffs appeal  to  this  court,  also  alleging  certain  errors  in  the  instruction 
.of  the  court. 

While  a  "novation"  was  pleaded  as  an  affirmative  defense  in  this 
action,  there  was  no  proof  tending  to  show  that  Wadhams  &  Elliott 
had  ever,  by  express  or  implied  contract,  agreed  to  extinguish  defend- 
ant Green's  liability  by  siibstituting  or  accepting  Page  as  the  payor  of 
the  debt  incurred  by  the  partnership  of  Page  &  Green.  It  is  true  that 
the  testimony  of  Green  showed  that  it  was  agreed  between  Page  and 
Green  that  Page  should  assume  this  debt,  and  that  Green  should  be 
discharged,  and  that  Wadhams  &  Elliott  were  notified  of  the  disso- 
lution and  of  the  agreement  between  Page  and  Green.  But  the  promise 
of  one  partner  to  pay  the  debt  of  another,  for  which  he  is  already 
bound,  is  no  consideration  for  an  agreement  to  release  the  other  part- 


ner. 


*     * 


In  order  to  give  any  weight  to  an  agreement  whereby  liabilities  are 
extinguished,  it  is  essential  that  all  parties  in  interest  should  be  par- 
ties to  the  agreement.  It  would  certainly  be  a  loose  and  unjust  law 
that  would  allow  obligations  to  be  thrown  off  or  transferred  at  the 
will  of  the  obligor.  Such  is  not  the  law.  If  one  partner  transfers  his 
liability  to  another,  and  the  creditor  does  not  assent  to  the  transfer, 
his  rights  are  not  affected.  As  stated  by  Mr.  Lindley,  in  his  excellent 
work  on  Partnership,  it  cannot  be  too  often  repeated  that,  merely  by 
retiring,  a  partner  gets  rid  of  no  liabilities  as  to  past  transactions  unless 
there  is  some  statutory  enactment  applicable  to  his  case ;  and  the  same 
observation  applies  to  a  total  dissolution.  To  use  the  words  of  Mr. 
Justice  Hkath  :  "When  a  partnership  is  dissolved,  it  is  not  dissolved 
with  regard  to  things  past,  but  only  with  regard  to  things  future. 
With  regard  to  things  past  the  partnership  continues."  Indeed,  so 
improbable  was  the  idea  that  a  creditor  would  release  a  part  of  his  se- 
curity, and  rely  on  one  debtor  when  he  before  had  two,  without  taking 
any  other  security,  that  some  of  the  early  English  courts  held  that 
where  a  partnership  had  been  dissolved,  one  member  retiring  and  the 
other  continuing  the  business,  and  agreeing  to  pay  the  debts  of  the  old 
firm,  where  the  creditors  knew  of  the  arrangement,  and  consented  to 
it,  and  transferred  the  debt  to  the  new  firm,  and  where  there  was  strong 
testimonv  outside  of  this  fact  showing  that  the  creditors  had  agreed  to 
discharge  the  defendant,  and  look  to  the  other  partner,  the  retiring 
partner  was  liable ;  and  the  fact  that  no  person  had  become  liable  to 
the  defendant  who  was  not  so  originally  was  relied  upon  by  the  court 
as  showing  that  there  was  no  consideration  for  the  alleged  discharge. 


1336  PARTNERSHIP  (Part  5 

The  most  noted  cases  holding  this  doctrine  were  Lodge  v.  Dicas,  3 
Barn.  &  Aid.  611,  and  David  v.  Ellice,  5  Barn.  &  C.  196.  But,  while 
this  doctrine  has  been  modified  by  the  later  decisions  and  authorities, 
no  court  that  we  know  of  has  gone  so  far  as  to  hold  that  the  simple 
agreement  between  the  partners  that  one  of  them  should  be  discharged, 
and  notice  to  the  creditors  of  said  agreement,  will  affect  the  rights  of 
the  creditors,  or  be  construed  as  any  implied  promise  on  the  part  of 
the  creditor  to  discharge  either  partner.  But  the  opposite  doctrine 
has  been  enunciated  by  many  courts.    *    *    * 

The  judgment  is  reversed,  and  the  case  remanded  to  the  lower  court, 
with  instructions  to  grant  a  new  trial ;   and  it  is  so  ordered.    *    *    * 


MOTLEY  V.  WICKOFF. 
(Snpreme  Court  of  Michigan,  1S97.     113  Mich.  231,  71  N.  W.  520.) 

Action  by  Ara  E.  Motley  against  James  Wickoff.  There  was  a 
judgment  for  plaintiff,  and  defendant  brings  error.    Affirmed, 

Montgomery,  J.  This  case  was  determined  by  the  circuit  court 
upon  an  agreed  state  of  facts.  The  defendant  and  one  Gill,  as  C9- 
partners,  became  indebted  to  the  plaintiff  in  the  sum  of  about  $140. 
In  April,  1891,  Wickoff  retired  from  the  firm  of  Wickoff  &  Gill,  and 
Gill,  in  consideration  of  the  partnership  property  all  being  turned  over 
to  him,  assumed  the  payment  of  all  the  partnership  debts.  After  the 
dissolution  of  the  firm,  and  before  this  action  was  brought,  the  amount 
had  been  reduced  from  $140  to  $116,  by  payments  to  plaintiff  made  by 
Gill.  It  further  appears  that  Gill,  shortly  after  the  dissolution,  stated 
to  plaintiff  that  he  had  assumed,  and  agreed  with  Wickoff  to  pay,  all 
the  partnership  indebtedness,  and  that  to  said  statement  plaintiff  re- 
plied, "All  right ;  pay  as  fast  as  you  can ;"  that,  some  time  after  the 
dissolution,  defendant  saw  the  plaintiff,  and  stated  to  him  that,  ac- 
cording to  the  terms  of  the  dissolution  between  himself  and  Gill,  Gill 
was  to  pay  the  sum  due  and  owing  to  the  plaintiff,  and  asked  plaintiff 
if  he  would  release  him  (defendant)  from  the  indebtedness,  to  which 
plaintiff  replied  that  he  would.  Upon  this  state  of  facts,  the  case  was 
submitted  to  the  court  upon  a  stipulation  that  the  plaintiff  was  entitled 
to  recover  if  the  court  should  find  that  the  defendant  has  not  been  re- 
leased from  the  indebtedness.  The  court  found,  as  matter  of  law,  that 
there  was  no  consideration  for  the  promise  of  the  plaintiff  to  defend- 
ant to  release  him  from  his  liability  on  the  partnership  indebtedness, 
and  entered  judgment  for  the  amount  claimed,  with  costs. 

Defendant  suggests,  rather  than  urges,  that  the  case  is  one  where 
the  rule  adverted  to  in  Webber  v.  Alderman,  102  Mich.  639,  61  N.  W. 
57,  namely,  that  where  the  surety  is  induced  by  the  promise  of  the  cred- 
itor to  forego  or  relinquish  means  of  indemnity  to  which  he  might 
otherwise  have  resorted,  by  the  promise  of  the  creditor  to  exonerate 
the  surety,  this  may  work  an  equitable  estoppel  to  deprive  the  promisor 
of  the  power  to  retract,  is  applicable.  But  there  are  no  facts  found  in 
this  case  which  make  this  rule  at  all  pertinent.  There  is  no  finding 
that  the  responsibility  of  Gill  has  in  any  way  been  changed,  or  that 
defendant  has  changed  his  position  in  the  matter  because  of  any  as- 
surances given  by  plaintiff. 

The  case  must  turn  upon  the  question  of  whether  there  was  a  con- 
sideration to  support  the  promise  to  look  to  Gill  alone.  The  authori- 
ties are  not  agreed  upon  the  question  of  whether  the  agreement  of  one 


Ch.  6)      EFFECT  OF  DISSOLUTION  AS  TO  THIRD  PARTIES       1337 

joint  debtor  or  co-partner  to  pay  the  debt  upon  which  the  two  are 
liable  is  a  sufficient  consideration  to  support  a  release  of  his  co-debtor. 
The  modern  English  doctrine  appears  to  be  that  such  an  undertaking 
is  a  sufficient  consideration,  on  the  ground  that  the  sole  liability  of  one 
of  two  debtors  may,  under  many  circumstances,  be  more  beneficial 
and  convenient  than  the  joint  liability  of  two,  and  that  whether  it 
was  actually  a  benefit  in  each  particular  case  will  not  be  inquired  into, 
but  that  the  changed  relation  will  be  held  to  be  a  sufficient  considera- 
tion. See  Thompson  v.  Percival,  5  Barn.  &  Adol.  925,  and  Lyth  v. 
Ault,  7  Welsh.,  H.  &  G.  669. 

This  doctrine  has  also  found  support  in  this  country,  to  the  extent 
stated  in  Collyer  v.  Moulton,  9  R.  I.  90,  98  Am.  Dec.  370,  in  which  it 
was  said:  "If,  by  a  mutual  arrangement  between  the  plaintiff  Collyer 
and  the  two  defendants,  Moulton  had  been  released  from  his  liability 
for  the  work  already  done,  and  a  new  promise  made  by  Bromley,  the 
other  defendant,  to  pay  for  it,  this  would  have  been  a  release  for  a 
valuable  consideration;  one  debt  would  have  been  substituted  for  the 
other."  *  *  *  In  the  case  of  Johnson  v.  Emerick,  70  Mich.  215,  38 
N.  W.  223,  Mr.  Justice  Champlin,  speaking  for  the  court,  said:  "Such 
discharge  from  liability  is  based  upon  the  express  or  imphed  assent 
of  the  creditor,  upon  a  sufficient  consideration ;  and  a  creditor,  know- 
ing of  such  relaFion,  who  goes  on  and  deals  with  the  other  partners 
with  reference  to  the  debt,  may  well  be  held  to  have  assented  to  the 
arrangement,  and  j:o  have  accepted  the  responsibility  and  promise  of 
the  partner  assuming  to  pay  such  debt.  This  consideration  need  not 
be  a  money  consideration.  It  may  be  the  obtaining  of  an  additional 
security,  better  terms  of  payment,  negotiable  securities  which  the  cred- 
itor may  use  in  his  business,  or  any  other  benefit,  or  it  may  be  the  loss 
of  some  right  or  disadvantage  suffered  by  the  surety  through  the  act 
of  the  creditor." 

In  the  present  case  it  will  be  noted  that  the  transfer  of  the  firm 
property  by  defendant  to  Gill  was  not  induced  by  any  promise  of  plain- 
tiff, but  had  occurred  before  any  promise  of  release  was  made ;  nor 
does  it  appear,  as  before  stated,  that  the  defendant  lost  any  rights; 
nor  was  any  security  taken  or  accepted  by  the  plaintiff;  nor  does  it 
appear  that  the  time  for  the  payment  of  the  debt  was  extended.  Plain- 
tiff" relies  upon  Walstrom  v.  Hopkins,  103  Pa.  St.  118,  and  Manufac- 
turing Co.  V.  Jennings,  29  Kan.  657,  44  Am.  Rep.  668.  In  the  latter 
case  it  was  claimed  that  the  plaintiff  had  due  notice  of  the  dissolution 
of  the  firm,  and  the  assumption  of  the  liabilities  by  Whitney,  and  that 
they  accepted  him  for  the  payment  of  the  bill  of  exchange.  The  court 
said :  "The  dissolution  of  the  partnership,  the  taking  of  all  the  part- 
nership property,  and  the  assumption  of  all  partnership  liabilities  by 
Whitney,  in  no  manner  released  defendant.  The  alleged  promise  of 
plaintiff  was  made  after  the  dissolution,  and  not  as  an  inducement  to  or 
consideration  of  it.  The  acceptance  has  never  been  paid.  *  *  *  No 
additional  security  of  any  kind  was  furnished.  The  acceptance  was 
not  destroyed,  and  new  paper  given.  The  plaintiff  received  absolutely 
no  consideration,  and,  even  if  it  did  promise  that  it  would  look  to 
Whitney,  such  promise  was  entirely  without  consideration,  and  in  no 
manner  discharged  the  defendant."  In  Walstrom  v.  Hopkins  it  was 
held  that  a  promise  by  a  creditor  of  a  firm  to  release  a  partner  who  had 
retired  from  the  firm,  and  to  look  to  the  continuing  partner  only,  for 
the  payment  of  his  debt,  unless  founded  upon  a  legal  consideration, 


1338  PARTNERSHIP  (Part  o 

is  nudum  pactum,  and  cannot  be  enforced.  The  weight  of  authority 
favors  the  contention  that  the  promise  of  the  continuing  partner  may 
be  a  sufficient  consideration  to  support  the  release  of  the  outgoing  part- 
ner. But,  in  the  absence  of  such  concurring  or  binding  promise,  we 
think  no  well-considered  case  can  be  found,  holding  that  the  mere 
agreement  between  the  partners  will  of  itself  support  the  agreement  of 
the  creditor  to  release  the  outgoing  partner.  Such  an  agreement  does 
not  establish  a  privity  between  the  continuing  partner  and  the  credi- 
tor, entitling  him  to  sue  such  creditor  individually.  It  is  only  a  pri- 
vate executory  contract,  intended  to  regulate  the  rights,  duties,  and 
obligations  of  the  co-partners  between  themselves,  consequent  upon 
a  dissolution  of  the  firm.     *     *     * 

In  the  present  case  there  was  not  only  no  extension  of  time,  no  ac- 
ceptance of  the  paper  of  the  individual  partner,  but  the  stipulation  does 
not  show  an  express  agreement  made  to  plaintiff  by  Gill  to  pay  the  debt. 
The  finding  is  that  Gill  stated  to  plaintiff  that  he  had  agreed  with 
Wickoff  to  pay  all  partnership  indebtedness,  and  that  to  this  the 
plaintiff  replied,  "All  right;  pay  as  fast  as  you  can."  It  will  be  noted 
that  this  was  not  simultaneous  with  the  release  of  Wickoff,  nor  did  it 
in  terms  establish  a  privity  between  Gill  and  plaintiff  as  to  the  obliga- 
tion of  Gill  to  pay  the  debt  individually. 

We  think  the  judgment  should  be  affirmed.  The  other  justices 
concurred. 


PRESTON   V.    GARRARD. 

(Supreme  Court  of  Georgia,  1904.     120  Ga.  689,  48  S.  E.  118, 
102  Am.  St.  Rep.  124.) 

Action  by  E.  H.  Garrard  against  J.  W.  Preston  and  another.  Judg- 
ment for  plaintiff,  and  defendant  Preston  brings  error. 

Garrard  brought  suit  against  J.  W.  Preston  and  E.  M.  Brown,  as 
partners,  on  a  promissory  note  dated  February  24,  1899,  and  due  one 
year  after  date.  Preston  filed  a  plea  setting  forth  that  the  firm  was 
dissolved  on  December  27,  1900,  all  of  the  debts  of  the  firm  being  as- 
sumed by  Brown ;  that  the  dissolution  was  known  to  plaintiff's  agent, 
who  acted  for  her  in  making  the  loan  for  which  the  note  was  given, 
and  that  the  fact  that  Brown  had  assumed  the  debts  of  the  firm  was 
also  known  to  this  agent,  who  recognized  Brown  as  the  principal  debt- 
or by  treating  with  him  as  such  thereafter ;  that  on  June  18,  1902, 
plaintiff,  through  her  agent,  agreed  with  Brown,  upon  a  sufficient 
consideration,  that  she  would  extend  the  time  of  payment  of  the  note 
sued  on  to  February  24,  1903 ;  that  this  extension  was  granted  without 
the  knowledge  or  consent  of  the  defendant.  The  plea  alleges  that  by 
reason  of  these  facts  the  defendant  became,  after  the  dissolution  of 
the  firm,  merely  a  surety  for  Brown  upon  the  debts  of  the  firm  which 
he  has  assumed  to  pay ;  and  that  the  extension  of  the  time  of  payment 
of  the  note  sued  on  without  the  defendant's  knowledge  or  consent  re- 
leased him  from  all  liability  on  the  debt.  The  court  struck  this  plea  on 
oral  motion,  and  the  defendant  excepted. 

Cobb,  J.  It  is  well  settled  that,  where  a  partnership  is  dissolved  by 
the  retirement  of  one  of  the  members,  and  the  continuing  partner  as- 
sumes the  payment  of  the  debts  of  the  firm,  the  retiring  partner,  as 
between  himself  and  his  copartner,  is  no  longer  a  principal  debtor,  but 
merely  a  surety  for  the  latter  upon  the  debts  of  the  firm.     *     *     * 


Ch.  6)  EFKIOCT   OF   DISSOLUTION   AS   TO   THIRD    PARTIES  1339 

Some  disagreement  among  the  courts  has  arisen  in  fixing  the  rights 
of  creditors  after  dissokition  by  the  retirement  of  one  member  and  the 
assumption  of  the  debts  by  the  other.  Of  course,  if  a  creditor  is  a 
party  to  the  agreement  made  between  the  partners,  he  will  be  bound 
by  it,  and  must  deal  with  the  retiring  partner  as  a  surety.  All  are 
agreed  as  to  this.  The  difficulty  has  arisen  in  determining  whether 
mere  knowledge  by  the  creditor  of  the  dissolution  and  the  agree- 
ment of  the  partners  would  require  him  to  deal  thereafter  with  the 
retiring  partner  as  a  surety  with  reference  to  past  transactions  of  the 
firm. 

The  case  of  Oakeley  v.  Pasheller,  4  CI.  &  F.  207,  a  decision  made 
by  the  House  of  Lords  in  1836,  was  supposed  to  have  held  that  mere 
knowledge  of  these  things  by  the  creditor  would  require  him  to  treat 
the  retiring  partner  as  a  surety,  and  that,  if  he  extended  the  time  of 
payment  oi  his  debt  without  the  retiring  partner's  knowledge  or  con- 
sent, he  would  be  released.  But  in  the  case  of  Swire  v.  Redman,  L.  R. 
1  Q.  p.  536,  Cockburn,  C.  J.,  shows  very  clearly  that  the  House  of 
Lords  did  not,  in  Oakeley  v.  Pasheller,  intend  to  rule  as  was  supposed, 
but  merely  to  hold  that  the  retiring  partner  would  be  released  only  in 
the  event  the  creditor  consented  to  the  arrangement  between  the  part- 
ners. Some  American  courts  have  followed  what  was  supposed  to  be 
the  ruling  in  Oakeley  v.  Pasheller,  and  others  have  adopted  the  decision 
in  Swire  V.  Redman,  which  was  to  the  efifect  that  something  more  than 
mere  knowledge  on  the  part  of  the  creditor  is  required — that  he  must 
expressly  consent  to  the  arrangement  between  the  partners  before  he 
will  be  bound  by  it ;  and  that  in  the  absence  of  such  consent  he  can 
deal  with  the  retiring  partner  as  a  principal  debtor  and  as  an  active 
partner  so  far  as  past  transactions  are  concerned. 

Cases  like  Swire  v.  Redman  proceed  on  the  theory  that  when  a 
creditor's  rights  once  become  fixed  by  contract  no  agreement  on  the 
part  of  the  other  parties  to  the  contract  can  affect  those  rights  or 
change  their  relation  to  the  creditor  so  far  as  he  is  concerned ;  that  it 
is  wholly  immaterial  that  the  creditor  was  informed  of  such  an  agree- 
ment ;  that  the  partnership  still  continues  relatively  to  his  debt ;  and 
that  any  arrangement  which  he  makes  with  the  continuing  partner 
in  behalf  of  the  partnership  will  be  binding  on  the  other.  The  other 
line  of  decisions  holds  that  whenever  the  relationship  of  principal  and 
surety  arises  between  partners  after  dissolution  and  the  assumption 
by  one  partner  of  the  debts  of  the  firm,  every  one  having  notice  of 
the  dissolution  and  the  agreement  between  them  is  bound  to  take  no- 
tice of  the  relationship  which  the  law  creates,  and  act  accordingly; 
that  while  a  creditor  holding  an  obligation  of  the  firm  may  regard  the 
retiring  partner  as  an  active  partner,  so  far  as  his  debt  is  concerned,  as 
long  as  he  does  nothing  to  affect  the  status  of  his  claim,  the  moment 
he,  with  knowledge  of  the  dissolution  and  the  agreement,  does  any- 
thing which  would  release  an  ordinary  surety,  the  retiring  partner 
will  be  entirely  released  from  his  obligation ;  that  this  is  no  hardship 
on  the  creditor,  because  he  can  protect  himself  by  granting  no  indul- 
gence to  the  continuing  partner,  who  has  become  alone  the  principal 
debtor,  or  doing  anything  without  the  retiring  partner's  consent  which 
would  affect  the  status  of  the  claim  to  the  prejudice  of  the  surety  part- 


ner. 


*     *     * 


Strong  arguments  can  be  made  in  support  of  either  view  of  this  ques- 
tion, and  we  would  experience  some  difficulty  in  determining  on  prin- 


1340  PARTNERSHIP  (Part  5 

ciple  what  the  rule  ought  to  be.  Previous  decisions  of  this  court  have, 
however,  settled  that  the  rule  to  be  followed  in  this  state  is  the  one 
supposed  to  have  been  announced  in  Oakeley  v.  Pasheller.  The  ear- 
liest case  on  the  subject  is  that  of  Stone  v.  Chamberlin,  20  Ga.  259. 
It  was  there  held  that  where  a  creditor  of  a  partnership,  with  knowl- 
edge that  it  had  been  dissolved  by  the  retirement  of  one  of  the  mem- 
bers, took  a  note  in  renewal  of  another  given  by  the  firm  before  the  dis- 
solution, and  extended  the  time  of  payment  of  the  original  indebted- 
ness, without  the  knowledge  or  consent  of  the  retiring  partner,  he 
would  be  discharged.  There  was  nothing  to  show  that  the  renewal 
note   was    expressly  taken    in    settlement   of   the    old    indebtedness. 

*  *  *  The  only  effect  of  the  new  note,  therefore,  so  far  as  the  re- 
tiring partner  was  concerned,  was  to  extend  the  time  of  payment  of 
the  old  indebtedness;  and  this  extension  operated  as  a  release  of 
the  retiring  partner.  While  the  word  "surety"  is  not  used  in  the  opin- 
ion, the  decision  was  evidently  based  on  the  theory  that  the  retiring 
partner  was  a  surety,  and  as  such  released  by  the  extension.  This 
came  out  more  clearly  when  the  case  was  again  before  this  court. 
Chamberlain .V.  Stone,  24  Ga.  310.  There  Judge  Benning  said:  "The 
taking  of  the  new  note  by  the  plaintiff  was  at  least  a  suspension  of  the 
right  to  demand  payment  of  the  debt  until  the  new  note  fell  due ;  and 
therefore  the  eft'ect  was  to  put  the  debt  in  such  a  condition  that  Stone 
would  not  longer  have  the  right  to  pay  it  up  immediately  and  demand 
contribution  from  Johnson,  but  would  have  to  wait  till  the  note  fell 
due  before  he  could  pay  it  up  and  demand  contribution."     *     *     * 

The  Code  provides  that  after  dissolution  a  partner  has  no  power 
to  renew  or  continue  an  existing  liability  of  the  partnership.  Civ. 
Code  1895,  §  2659.  It  was  accordingly  held  in  First  National  Bank 
V.  Ells,  68  Ga.  192,  that  where  a  creditor,  with  knowledge  of  the  dis- 
solution, allowed  one  of  the  partners  to  make  a  payment  on  a  draft 
which  had  been  accepted  by  the  firm,  and  substitute  a  new  draft  in 
its  place,  without  the  knowledge  of  the  other  partner,  the  latter  was  re- 
leased. *  *  *  Under  these  decisions  mere  notice  of  the  dissolu- 
tion and  of  the  agreement  between  the  partners  that  the  continuing 
partner  was  to  assume  the  payment  of  the  firm  debts  prevented  the 
plaintiff  in  this  case  from  extending  the  time  of  payment  of  the  orig- 
inal indebtedness,  without  the  knowledge  or  consent  of  the  defend- 
ant   Preston.      Notice    to    the   creditor   must,   however,   be   actual. 

*  *  *  The  extension  of  the  time  of  payment,  under  the  circum- 
stances alleged  in  the  plea,  had  the  effect  of  releasing  the  defendant ; 
and  the  court  erred  in  striking  the  plea. 

Judgment  reversed.     *     *     * 


SECTION  2.— EFFECT,  AS  TO  THIRD  PARTIES,  OF 

A   DISSOLUTION   UPON   TRANSACTIONS 

SUBSEQUENT  TO  DISSOLUTION 

Uniform  Partnership  Act,  Section  30.  On  dissolution  the  part- 
nership is  not  terminated,  but  continues  until  the  winding  up  of 
partnership  affairs  is  completed. 

Section  33.  (2)  Except  so  far  as  may  be  necessary  to  wind  up 
partnership  affairs  or  to  complete  transactions  begun  but  not  then 
finished,  dissolution  terminates  all  authority  of  any  partner  fo  act 


Ch.  0)  EFFECT   OF  DISSOLUTION  AS  TO   THIRD   PARTIES  1341 

for  the  partnership  with  respect  to  persons  not  partners  as  de- 
clared in  section  35. 

Section  35.^  (1)  After  dissolution  a  partner  can  bind  the  part- 
nership except  as  provided  in  paragraph  (3),  (a)  by  any  act  ap- 
propriate for  winding  up  partnership  affairs  or  completing  trans- 
actions unfinished  at  dissolution,  (b)  by  any  transaction  which 
would  bind  the  partnership  if  dissolution  had  not  taken  place,  pro- 
vided the  other  party  to  the  transaction  (I)  had  extended  credit 
to  the  partnership  prior  to  dissolution  and  had  no  knowledge  or 
notice  of  the  dissolution;  or  (II)  though  he  had  not  so  extended 
credit,  had  nevertheless  known  of  the  partnership  prior  to  disso- 
lution, and,  having  no  knowledge  or  notice  of  dissolution,  the  fact 
of  dissolution  had  not  been  advertised  in  a  newspaper  of  general 
circulation  in  the  place  (or  in  each  place  if  more  than  one)  at  which 
the  partnership  business  was  regularly  carried  on. 

(2)  The  liability  of  a  partner  under  paragraph  (lb)  shall  be 
satisfied  out  of  partnership  assets  alone  when  such  partner  had 
been  prior  to  dissolution  (a)  unknown  as  a  partner  to  the  person 
with  whom  the  contract  is  made;  and  (b)  so  far  unknown  and 
inactive  in  partnership  affairs  that  the  business  reputation  of  the 
partnership  could  not  be  said  to  have  been  in  any  degree  due  to 
his  connection  with  it. 

(3)  The  partnership  is  in  no  case  bound  by  any  act  of  a  partner 
after  dissolution  (a)  where  the  partnership  is  dissolved  because  it 
is  unlawful  to  carry  on  the  business,  unless  the  act  is  appropriate 
for  winding  up  partnership  affairs;  or  (b)  where  the  partner  has 
become  a  bankrupt,  or  (c)  where  the  partner  has  no  authority  to 
v^^ind  up  partnership  affairs,  except  by  a  transaction  with  one 
who  (I)  had  extended  credit  to  the  partnership  prior  to  dissolu- 
tion and  had  no  knowledge  or  notice  of  his  want  of  authority ;  or 
(II)  had  not  extended  credit  to  the  partnership  prior  to  dissolur 
tion,  and,  having  no  knowledge  or  notice  of  his  want  of  author- 
ity, the  fact  of  his  want  of  authority  has  not  been  advertised  in  the 
manner  provided  for  advertising  the  fact  of  dissolution  in  para- 
graph (lb  II). 

(4)  Nothing  in  this  section  shall  affect  the  liability  under  sec- 
tion 16  of  any  person  who  after  dissolution  represents  himself  or 
consents  to  another  representing  him  as  a  partner  in  a  partner- 
ship engaged  in  carrying  on  business. 

1  Leiois'  Note  to  Section  35. — At  present  in  most  jurisdictions  it  is  doubt- 
ful whettier  "such  tliird  person"  shall  have  "had  dealings  with  the  partner- 
ship prior  to  the  dissolution"  or  A\hether  as  in  clause  (d)  as  drafted  these 
dealiners  must  have  taken  the  form  of  an  extension  of  credit.  In  support  of 
the  provision,  as  written,  see  Beale's  Parsons,  §  319 ;  Mechem,  §  262 ;  Bur- 
dick,  57 ;  2  Bates,  §§  613,  614 ;  30'  Cyc.  671 ;  Civ.  Code  Cal.  §  2453.  There  is 
also  authority  for  merely  requirinir  that  such  "third  person"  shall  have 
had  dealings  "with  the  partnership.  James  Parsons,  §§  179,  180,  181 ;  Lindley. 
249;  Pollocl?;,  98;  3  Kent,  Comm.  67;  Collyer,  163,  note;  Shumaker,  §  121; 
Mechem,  261,  262  ;    Bates,  612,  613. 

The  practical  impossibility  of  the  partners  knowing,  by  any  feasible  system 
of  bookkeeping,  all  the  persons  with  whom  they  have  had  dealings,  unless 
credit  has  been  extended,  supports  the  wording  adopted  by  the  Commissioners. 


1342  PARTNERSHIP  (Part  5 

Section  3.^  (1)  A  person  has  "knowledge"  of  a  fact  within  the 
meaning  of  this  act  not  only  when  he  has  actual  knowledge  there- 
of, but  also  when  he  has  knowledge  of  such  other  facts  as  in  the 
circumstances  shows  bad  faith. 

(2)  A  person  has  "notice"  of  a  fact  within  the  meaning  of  this 
act  when  the  person  who  claims  the  benefit  of  the  notice  (a)  states 
the  fact  to  such  person,  or  (b)  delivers  through  the  mail,  or  by 
other  means  of  communication,  a  written  statement  of  the  fact  to 
such  person  or  to  a  proper  person  at  his  place  of  business  or  resi- 
dence. 

2  Leicis'  Note  to  Sectioii  3. — The  word  "notice,"  in  judicial  opinions  and 
in  other  lejjal  writings,  is  often  used  when  "l^nowledge,"  as  here  defined,  is 
intended.  This  has  led  to  a  great  deal  of  confusion,  of  which  the  extraor- 
dinary expression  "constructive  notice"  is  evidence.  To  avoid  this  confusion, 
the  word  "notice"  as  here  defined  designates  definite  things  only,  which,  if 
proved  to  have  been  done,  enable  the  person  doing  them  to  assert  that  notice 
has  been  had  and  claim  the  benefit  thereof,  irrespective  of  whether  the  per- 
son charged  has  had  knowledge  or  not.  By  adhering  strictly  to  this  con- 
ception tiiroughout  the  act,  the  things  v/hich  a  person  must  do  in  order  to  be 
confident  that  he  can  claim  the  benefit  of  "notice"  are  made  plain. 

A  definition  of  the  word  "knowledge"  enables  it  to  be  indicated  clearly 
when  "knowledge,"  as  distinguished   from  "notice,"  must  be  had. 

The  present  law  in  regard  to  that  which  must  be  done  by  the  person  who 
desires  to  be  in  a  position  to  claim  the  benefit  of  "notice"  is  in  considerable 
confusion.  Under  our  case  law,  as  a  rule,  in  ordinary  transactions,  except 
those  which  relate  to  commercial  paper,  no  one  has  had  "notice"  until  bo 
has  "knowledge"  \  though,  of  course,  "notice"  to  an  agent  is  notice  to  a 
principal.  Whether  the  delivery  of  a  letter  containing  a  "statement  of  a 
fact"  would  or  would  not  be  sufficient,  if  the  addressee  did  not  read  the 
letter,  is  doubtful.  The  court  might  ^Yell  hold  that  the  addressee,  by  his 
neglect  to  read  the  statement,  was  estopped  from  denying  that  he  had 
"notice."  The  change  in  the  law,  if  it  is  a  change,  which  the  present  section 
as  now  drawn  effects,  is,  it  is  submitted,  in  the  right  direction.  The  section 
does  not  go  to  the  extent  of  saying  that  the  mere  deiwsit  of  a  "written  state- 
ment of  the  fact"  in  the  mail  is  enough  to  charge  the  addressee  with  "no- 
tice." The  addressor,  by  selecting  the  post  office,  telegraph,  or  other  public 
service  corporation  as  the  method  by  which  the  letter  shall  be  transferred, 
makes  them  his  agents,  not  the  agents  of  the  addressee.  On  the  other  hand, 
the  section  does  go  to  the  extent  of  declaring  that,  if  such  written  statement 
is  received  at  the  residence  or  place  of  business  of  the  addressee  in  the  usual 
way,  the  addressor,  having  done  all  that  was  reasonably  possible  to  do  to 
give  the  addressee  "knowledge,"  should  have  the  benefit  of  his  diligence. 

The  section  as  drawn,  in  dealing  with  the  character  of  the  "statement  of 
fact,"  where  the  statement  is  not  a  verbal  statement  merely  requires  a  "writ- 
ten statement."  The  omission  of  the  word  "printed"  is  after  deliberation. 
To  insert  the  word  "printed"  might  raise  a  doubt  as  to  the  effect  of  the  de- 
livery of  a  newspaper  containing  a  "statement  of  the  fact."  There  ought  to 
be  no  doubt  that  this  is  an  insufficient  statement.  Unquestionably,  such  de- 
livery is  not  a  delivery  of  a  "written  statement  of  the  fact" ;  but,  on  the 
other  hand  if  a  printed  or  typewitten  statement  of  the  fact — as  the  dissolu- 
tion of  the  partnership — is  made  on  a  separate  card,  which  is  inclosed  in  an 
envelope  and  given  to  the  addressee,  there  would  appear  to  be  no  doubt  that 
any  court  would  hold  that  "a  written  statement  of  the  fact"  had  been  de- 
livered to  .such  person.  The  principle  is  clear.  Nothing  should  be  regarded 
as  "a  written  statement  of  the  fact"  which  is  not  so  prepared  as  to  cause  the 
one  to  whom  it  is  addressed,  as  a  reasonably  prudent  man,  to  read  it.  An  ex- 
act definition  of  the  character  of  the  statement  which  is  to  be  made  is  prac- 
tically impossible;  neither  do  we  believe  it  to  be  desirable.  Tlie  words  em- 
ployed, "written  statement  of  the  fact,"  do  not  preclude  the  statement  from 
being  typewritten  or  printed,  but  they  do  emphasize — that  which  it  is  nec- 
essary to  emphasize — that  the  statement  must  be  a  separate  statement  of 
the  fact  made  to  the  addressee,  and  not  a  general  statement,  for  all  the  world 
to  read  or  not,  as  fancy  dictates. 


Ch.  6)  EFFECT  OF   DISSOLUTION  AS  TO  THIRD   PARTIES  134o 

MEYEll  et  al.  v.  KROHN  et  al. 
(Supreme  Court  of  Illinois,  18S5.     114  111.  574,  2  N.  E.  495.) 

MuLKEY,  C.  J.  Moses  Krohn  and  Leopold  Feiss,  wholesale  mer- 
chants at  Cincinnati,  Ohio,  doing  business  as  partners  under  the  firm 
name  of  Krohn,  Feiss  &  Co.,  brought  to  the  June  term,  1883,  of  the 
Adams  county  circuit  court  an  action  of  assumpsit  against  John  Meyer, 
Moses  Bachrack,  Solomon  Hoffheimer,  and  Eva  Hoffheimer,  as  part- 
ners, lately  doing  business  at  Galesburg,  Illinois,  under  the  name  and 
style  of  Hoffheimer  &  Co.  The  declaration  was  in  the  usual  form, 
containing  the  common  counts  and  six  special  counts  on  bills  of  ex- 
change payable  to  appellees,  and  drawn  by  them  upon  and  accepted  by 
Hoffheimer  &  Co.  The  bills  were  given  at  different  times,  in  due  course 
of  trade,  for  goods  and  merchandise  sold  by  the  plaintiffs  to  the  de- 
fendants. The  first  of  these  bills  bears  date  August  12,  1879,  and 
the  last,  November  25th  of  the  same  year,  and  the  whole  series,  interest 
included,  together  with  a  small  account,  amounts,  in  the  aggregate,  to 
near  $1,100.  The  Hoffheimers  made  no  defense.  The  appellants  sev- 
erally filed  pleas  in  abatement,  denying  the  partnership  at  the  time 
of  making  the  bills  of  exchange,  and  the  purchase  of  the  goods  sued 
for.  The  plaintiffs  traversed  these  pleas,  and  also  severally  replied  in 
substance  that  appellants,  on  the  1st  day  of  January,  1878,  and  for  two 
years  prior  thereto,  were  members  of  the  firm  of  Hoffheimer  &  Co., 
during  which  two  years  appellees  had  sold  goods  to  said  firm;  and 
that  at  the  time  of  making  the  said  bills  of  exchange,  etc.,  appellees 
had  no  notice  that  appellants  had  ceased  to  be  members  of  the  firm 
of  Hoffheimer  &  Co.  Appellants  took  issue  on  these  replications,  and 
also  severally  rejoined  that  they  were,  during  the  said  two  years,  as 
between  themselves,  partners  under  the  firm  name  of  John  Meyer  & 
Co. ;  and  that  this  firm  and  their  co-defendants  composed  the  firm  of 
Hoffheimer  &  Co. ;  and  that  the  appellants  were  not  otherwise  mem- 
bers of  the  latter  firm.  The  court  sustained  demurrers  to  these  rejoin- 
ders, and  the  appellants  stood  by  them.  By  a  second  rejoinder  the  ap- 
pellants severally  alleged  that,  at  the  time  of  the  making  of  tlie  alleged 
promises  sued  on,  the  appellees  did  have  notice  of  tlie  withdrawal  of  the 
appellants  from  the  firm  of  Hoffheimer  &  Co.,  concluding  to  the  coun- 
try. The  cause  was  then  tried  upon  the  issues  formed  as  above  stated, 
resulting  in  a  verdict  and  judgment  in  favor  of  plaintiffs  for  $1,093.21. 
On  appeal  to  the  Appellate  Court  for  the  Third  District  this  judgment 
was  affirmed,  and  the  present  appeal  brings  before  us  for  review  the 
judgment  of  the  latter  court.     *     *     * 

As  indicated  by  the  pleadings,  and  as  the  evidence  tends  to  show, 
appellants  were  members  of  the  firm  of  Hoffheimer  &  Co.  prior  to  the 
second  of  January,  1878,  and  as  such  members  of  the  firm  were  cus- 
tomers of  appellees.  On.  that  day  appellants  withdrew  from  the  firm, 
but  the  business  continued  to  be  carried  on  by  the  Hoff'heimers  just 
as  it  had  been  before,  and,  as  claimed  by  appellees,  without  any  notice 
of  appellants'  retirement  from  the  firm.  Whether  appellees  had  such 
notice  or  not  was  put  directly  in  issue  by  the  pleading,  and  this  was  the 
controlling  one  in  the  case.  The  question  of  fact  thus  put  in  issue  has 
been  decided  adversely  to  appellants,  and  this  court  is  not  permitted  to 
review  it.     *     *    '* 


1344  PARTNERSHIP  (Part  5 

The  evidence  relating  to  the  question  of  notice  of  appellants'  with- 
drawal from  the  firm  is  circumstantial,  and  by  no  means  conclusive. 
That  a  general  notice  was  prepared  and  inserted  in  a  newspaper  pub- 
lished in  Galesburg  at  the  time  of  their  withdrawal  is  conceded,  and 
that  a  copy  of  this  notice  was  mailed  at  Galesburg  by  appellants  in  an 
envelope  properly  addressed  to  appellees  at  Cincinnati,  their  place  of 
business  and  residence,  is  proven  by  the  testimony  of  appellants.^  That 
no  such  notice  was  ever  received  by  appellees  is  established  just  as 
clearly  by  their  testimony.  This  question,  with  other  questions  of 
facts,  was  properly  left  to  the  jury.  If,  as  matter  of  law,  in  order  to 
release  appellants  from  further  responsibility,  it  was  necessary  for 
them  to  prove,  not  only  the  preparing  and  mailing  of  the  notice  of 
their  withdrawal,  but  also  that  it  was  actually  received  by  appellees, 
then,  for  the  purpose  of  supporting  the  judgment  below,  we  must  as- 
sume that  the  jury  found,  as  matter  of  fact,  that  the  notice  was  never 
received. 

The  important  question  in  the  case,  so  far  as  this  court  is  concerned, 
is  whether  the  law  is  as  just  suggested,  and  this  question  is  presented 
by  instructions  both  given  and  refused.    The  court,  in  behalf  of  ap- 
pellees, instructed  the  jury,  in  substance,  that  although  they  might  be- 
lieve from  the  evidence  that  the  appellants  prepared  and  sent,  in  a 
letter  or  envelope  properly  addressed,  to  the  appellees  at  Cincinnati  a 
notice  of  their  withdrawal  from  the  firm,  yet  if  they  further  believed 
from  the  evidence  that  appellees  never  received  such  notice,  and  that 
neither  they  nor  their  lawfully  authorized  agents  otherwise  received  no- 
tice or  had  knowledge  of  such  withdrawal  or  dissolution  of  the  firm, 
then  the  appellants  had  failed  to  establish  notice  within  the  meaning 
of  the  law.    On  the  other  hand,  the  court  refused  to  instruct  the  juiy 
at  the  instance  of  appellants  that  it  was  sufficient  for  the  purpose  of 
establishing  notice  to  prove  the  prepaying  and  sending  a  notice  in  the 
manner  above  stated.     We  have  no  doubt  of  the  correctness  of  the 
ruling  of  the  court  on  this  subject.     The  general  rule,  as  we  under- 
stand it,  is  this :  As  to  persons  who  have  never  had  any  business  trans- 
actions with  the  firm,  notice  by  publication  is  sufficient ;  but  as  to  those 
who  have  had  previous  deahngs  with  it,  actual  notice,  or  its  equivalent, 
must  be  shown.    This  rule  seems  to  be  supported  by  an  unbroken  cur- 
i-ent  of  authorities,  and  it  is  certainly  promotive  of  justice  and  fair 
dealing.     To  hold  that  the  mere  mailing  of  notices  to  patrons  of  a 
firm  is  sufficient,  without  regard  to  whether  they  were  ever  received 
or  not,  as  is  claimed  by  appellants,  would  be  to  establish  by  judicial 
legislation  a  species  of  constructive  notice  hitherto  unknown  to  the 
law,  so  far  as  we  are  advised.    It  is  doubtless  true  that-proof  of  the  mail- 
ing of  notices  properly  addressed  is  prima  facie  evidence  of  their  hav- 
ing been  received  by  the  party  addressed.    But  this  is  a  mere  presump- 
tion of  fact,  which  may  be  rebutted,  as  was  done  in  this  case.     To 
give  it  the  effect  contended  for  would  be  to  declare  it  a  presumptio 
juris  et  de  jure,  for  which  we  find  no  authority.     Moreover,  it  would 
be  but  to  invite  the  grossest  frauds  upon  distant  merchants  who  would 
have  no  adequate  means  of  protecting  themselves. 

We  prefer  to  leave  the  question  with  the  jury,  where  we  understand 
the  law  leaves  it,  unfettered  and  unembarrassed  by  any  artificial  rule  of 
evidence  that  might  prevent  them  from  finding  the  real  truth.  Per- 
ceiving no  cause  for  disturbing  the  judgment  of  the  appellate  court, 
it  will  therefore  be  affirmed.     *     *     * 


Ch.  6)  EFFECT   OF   DISSOLUTION  AS   TO   THIRD   PARTIES  1345 

SECTION  3.— RIGHTS  OF  CREDITORS  OF  THE  DISSOLV- 
ED    PARTNERSHIP     AGAINST     THE     INDIVIDUAL 
OR  PARTNERSHIP  CONTINUING  THE  BUSINESS 

Uniform  Partnership  Act,  Section  17.^  A  person  admitted  as  a 
partner  into  an  existing  partnership  is  liable  for  all  the  obliga- 
tions of  the  partnership  arising  before  his  admission  as  though  he 
had  been  a  partner  when  such  obligations  were  mcurred,  except 
that  this  liability  shall  be  satisfied  only  out  of  partnership  prop- 
erty. 

3  Leicis'  'Note  to  Section  17. — The  present  section  eliminates  tlie  diffiailty 
whir-h  {irises  when  a  new  partner  is  admitted  without  liquidation  of  firm 
debts.  The  present  theory  of  the  common  law  is  that  a  new  partnership  is 
formed;  all  the  property  of  the  partnership  which  existed  up  to  the  moment 
of  the  entrance  of  the  new  partner  ])eins  transferred  to  the  new  partner- 
ship. The  result  of  this  theory  is  that,  if  the  business  fails,  the  creditors 
who  have  extended  credit  after  the  admission  of  the  new  partner  have  a 
prior  claim  on  the  assets  in  the  business.  The  inequitable  character  of  this 
result  has  led  the  courts,  where  no  notice  of  the  change  of  membership  is  had 
by  the  creditors,  to  be  diligent  in  finding  an  assumption  of  liability  on  the 
part  of  the  new  partnership  of  the  debts  of  the  old  partnership. 

Though  this  section  changes  the  formal  statement  of  the  law,  which  is  to 
the  effect  that  an  incoming  partner  is  not  liable  for  debts  contracted  before 
his  admission,  as  a  matter  of  fact  the  section  as  worded  conforms  to  the 
actual  decisions  of  the  courts,  which,  however,  are  arrived  at  by  making 
every  effort  to  impress  an  assumption  of  liability  on  the  part  of  the  new 
partnership,  formed  as  a  result  of  the  admission  of  the  new  partner,  of  the 
debts  of  the  old  partnership. 

The  difficulty,  which  is  overcome  by  this  section  as  worded,  is  illustrated 
by  the  common  case  where  all  the  property  of  the  existing  partnership  is 
taken  over,  without  notice  of  any  break  in  the  conduct  of  business,  by  the 
new  partnership,  composed  of  all  the  members  of  the  existing  partnership 
and  the  incoming  partner,  thereby  depriving  the  existing  partnership  of  all 
its  property.  Both  the  existing  and  the  subsequent  creditors  may  believe  it 
is  one  and  the  same  partnership ;  but,  as  stated,  such  w^ould  not  be  the  case 
under  the  present  law.  There  is  no  peculiar  equity  in  the  subsequent  cred- 
itors, giving  tlaem  a  right  to  be  preferred,  as  against  the  property  employed 
in  the  business,  to  the  existing  creditors.  The  incoming  partner  partakes  of 
the  benefit  of  the  partnership  property  and  an  established  business.  He  has 
every  means  of  obtaining  full  knowledge  and  protecting  himself,  becaase  he 
may  insist  on  the  liquidation  or  settlement  of  existing  partnership  debts. 
The  creditors  have  no  means  of  protecting  themselves.  So  as  to  preserve  the 
present  law  as  nearly  as  possible.  It  is  declared  that  the  liability  of  the  in- 
coming partner  shall  be  satisfied  only  out  of  partnership  property.  It  there- 
fore results  that  existing  and  subsequent  creditors  have  equal  rights  as 
against  partnership  property  and  the  separate  property  of  all  the  previously 
existing  members  of  the  partnership,  while  only  the  subsequent  creditors  have 
rights  against  the  separate  estate  of  the  newly  admitted  partner. 

The  section  should  be  read  in  connection  with  section  41,  infra.  Both  sec- 
tions are  based  on  the  principle  that,  where  there  has  been  one  continuous 
business,  the  fact  that  A.  has  been  admitted  to  the  business,  or  C.  ceased  to 
be  connected  with  it,  should  not  be  allowed  to  cause,  as  at  present,  endless 
confusion  as  to  the  claims  of  the  creditors  on  the  property  employed  in  the 
business,  but  that  all  the  creditors  of  the  business,  irrespective  of  the  times 
when  they  became  creditors  and  the  exact  combinations  of  pei-sons  then  own- 
ing the  business,  should  have  equal  rights  in  such  property.  The  recognition 
of  this  principle  solves  one  of  the  most  perplexing  problems  of  present  part- 
nership law. 

B.&  B.Bus.Law— 85 


1346  PARTNERSHIP  (Part  5 

Uniform  Partnership  Act,  Section  41.  (1)  When  any  new  part- 
ner is  admitted  into  an  existing  partnership,  or  when  any  partner 
retires  and  assigns  (or  the  representative  of  the  deceased  partner 
assigns)  his  rights  in  partnership  property  to  two  or  more  of  the 
partners,  or  to  one  or  more  of  the  partners  and  one  or  more  third 
persons,  if  the  business  is  continued  without  Hquidation  of  the 
partnership  affairs,  creditors  of  the  first  or  dissolved  patnership 
are  also  creditors  of  the  partnership  so  continuing  the  business.* 

4  Leuns'  Note  to  Section  1,1  fij.— As  origiBally  passed  by  the  Conference, 
parasraph  1  of  section  41  read  as  follows: 

'•When  any  partner  retires  and  assigns  (or  the  representative  of  a  deceased 
partner  assigns)  his  rights  in  partnership  property  to  t\YO  or  more  of  the  part- 
ners, or  to  one  or  more  of  the  partners  and  one  or  more  third  persons,  who 
continue  the  business  without  liquidation  of  the  partnership  affairs,  creditors 
of  the  dissolved  partnership  are  also  creditors  of  the  partnership  so  continu- 
ing the  business." 

It  was  subsequently  pointed  out  that  section  41  did  not  cover  the  situation 
which  arises  when  a' partnership  is  dissolved  and  a  new  partnership  formed 
by  the  introduction  of  a  new  partner  into  the  business  without  the  liquidation 
of  the  affairs  of  the  first  partnership,  and  that  it  would  be  best  not  to  rely  on 
section  17,  supra,  to  take  care  of  the  situation.  The  paragraph,  reworded, 
as  now  pi-inted,  was  submitted  to  the  Commissioners  present  at  the  last 
Conference  and  thev  have  signified  their  approval  of  the  change. 

The  section  as  a  whole  deals  primarily  with  the  rights  of  creditors  when 
a  new  partner  is  admitted  or  a  partner  retires,  is  expelled  or  dies,  and  the 
business  is  continued  without  liquidation  of  the  debts  of  the  partnership  dis- 
solved by  the  change  in  personnel. 

At  present  the  whole  subject  is  in  doubt  and  confusion.  It  is  universally 
admitted  that  any  change  in  membership  dissolves  a  partnership,  and  cre- 
ates a  new  partnership.  This  section  as  drafted  does  not  alter  that  rule. 
Neither  does  it  alter  the  rule  that  on  any  change  of  personnel  the  property 
of  the  dissolved  partnership  becomes  the  property  of  the  partnership  contin- 
uing the  business.  At  present,  however,  creditors  of  the  dissolved  partner- 
ship do  not  become  creditors  of  the  new  partnership  Thus,  If  A.,  B..  and  C. 
are  partners,  and  A.  assigns  to  B.  and  C.  who  continue  the  business  without 
any  agreement  to  pay  the  partnership  debts,  under  the  present  law  the  prop- 
erty of  the  first  partnership  becomes  the  property  of  the  second  partnership ; 
but  the  creditors  of  the  first  partnership  are  not  the  creditors  of  the  second 
partnership,  though  they  are  the  creditors  of  all  the  members  of  that  part- 
ner.ship.  Such  CTcditors^  therefore,  are  often  unable  to  secure  satisfaction  of 
their  claims,  thoucrh  at  the  time  of  the  assig7iment  the  partnership  was  sol- 
vent, and  the  l;)usiness  may  have  been  continued  by  the  second  partnership 
without  any  notification  of  the  change  in  membership.  On  the  other  hand, 
the  creditors  of  the  second  partnership  may  be  paid  in  full  out  of  the  proper- 
ty. This  inequitable  result  the  courts  have  attempted,  in  not  a  few  instances, 
to'  prevent,  by  declaring  that  the  assignment  of  the  property  of  the  first 
partnership  to  the  second  partnership  was  a  fraud  on  the  creditors  of  the 
first  partnership,  though  no  fraud  was  intended,  the  result  being  that  the 
creditors  of  the  second  partnership  are  postponed  imtil  the  creditors  of  the 
first  partnership  are  paid  in  full. 

The  paragraph  as  drawn  changes  the  law  in  the  case  supposed,  and  thereby 
does  away  with  an  injustice.  In  making  the  creditors  of  the  first  partnership 
creditors  of  the  second  it  prevents  such  an  assignment  from  affecting  the 
rights  of  partnership  ci-editors  in  the  proiierty  embarked  in  the  business. 

Again,  in  the  case  supposed,  if  B.  and  C.  promise  to  pay  the  debts  of  the 
partnership  of  A.,  B.,  and  C,  it  is  uncertain  whether  the  court  will  hold 
that  they  promise  as  individuals  or  as  a  new  partnership.  If  as  individuals, 
the  old  partnershp  creditors  are  not  creditors  of  the  new  partnership.  If  A. 
and  B.  are  considered  as  promising  as  a  new  partnership,  then  whetlier  the 
old  partnership  creditors  can  sue  the  new  partnership  as  beneficiaries  de- 
pends on  the  jurisdiction.  The  paragraph  as  drawn  ends  this  uncertainty. 
In  every  case  the  creditors  of  the  first  partnership  become  creditors  of  the 
second  though,  of  course,  they  do  not  cease  to  be  creditors  of  the  first  part- 
nership.    As,  however,  the  first  partnership  has   assigned  all   its   property, 


Ch.  6)  EFFECT   OF   DISSOLUTION   AS   TO   THIRD   PARTIES  1347 

(2)  When  all  but  one  partner  retire  and  assign  (or  the  repre- 
sentative of  a  deceased  partner  assigns)  their  rights  in  partnership 
property  to  the  remaining  partner,  who  continues  the  business 
without  liquidation  of  partnership  affairs,  either  alone  or  with 
others,  creditors  of  the  dissolved  partnership  are  also  creditors 
of  the  person  or  partnership  so  continuing  the  business.'' 

(3)  When  any  partner  retires  or  dies  and  the  business  of  the 
dissolved  partnership  is  continued  as  set  forth  in  paragraphs  (1) 
and  (2)  of  this  section,  with  the  consent  of  the  retired  partners 
or  the  representative  of  the  deceased  partner,  but  without  any 
assignment  of  his  right  in  partnership  property,  rights  of  creditors 
of  the  dissolved  partnership  and  of  the  creditors  of  the  person  or 
partnership  continuing  the  business  shall  be  as  if  such  assignment 
had  been  made.® 

(4)  When  all  the  partners  or  their  representatives  assign  their 
rights  in  partnership  property  to  one  or  more  third  persons  who 
promise  to  pay  the  debts  and  who  continue  the  business  of  the 
dissolved  partnership,  creditors  of  the  dissolved  partnership  are 
also  creditors  of  the  person  or  partnership  continuing  the  busi- 
ness.' 

this  is  of  little  value  to  such  creditors,  unless  the  assignees  have  promised  the 
retiring  partner  an  additional  consideration  beyond  the  payment  of  the 
debts.    The  status  of  such  additional  consideration  is  treated  in  paragrapii 

(8),  infra.  .  .        .     ^      ^         ^.^ 

The  paragraph  as  a  whole,  as  M'ell  as  this  entire  section,  is  based  on  the 
opinion  that  \\hen  there  is  a  continuous  business  carried  on  first  by  A.,  B.. 
and  C,  and  by  A.,  B.,  C,  and  D.,  or  by  B.  or  O.,  or  by  B.  and  C,  or  by 
B  and  D.,  or  by  C.  and  D.,  or  bv  B.,  C,  and  D.,  without  any  liquidation  of  the 
affair  of  A..  B.,  and  C,  both  justice  and  business  convenience  require  that 
all  the  creditors  of  the  business,  irrespective  of  the  exact  grouping  of  the 
owners  at  the  times  their  respective  claims  had  their  origin,  should  be  treated 
alike,  all  being  given  an  equal  claim  on  the  property  embarked  in  the  busi- 
ness.   Compare  note  to  section  17,  supra. 

5Leivis'  Note  to  Section  J,l  C.?;.— Where  all  the  partners  assign  to  one 
partner,  the  partnership  creditors  are,  under  this  paragraph,  the  separate 
creditors  of  the  partner  continuing  the  business,  where  he  continues  the  busi- 
ness alone,  whether  such  partner  promises  to  pay  the  debts  of  the  dissolve<l 
partnerhip  or  not.  If  he  takes  one  or  more  new  partners,  and  they  continue 
the  business  with  the  property  of  the  dissolved  partnership,  the  creditors  of 
the  dissolved  partnership  are  the  creditors  of  the  partnerhip  continuing 
the  business.  This  paragraph  changes  the  present  law  to  the  same  extent 
as  paragraph  (1). 

6  Leicis'  Note  to  Section  U  ("5;.— The  paragraph  extends  the  principle  of 
the  first  and  second  paragraphs  of  the  section  to  the  case  where  the  business 
is  continued  by  two  or  more  of  the  partners,  alone  or  with  others,  after  the 
retirement  or  death  of  a  partner  without  any  formal  assignment  to  them  of 
the  retired  or  deceased  partner's  rights  in  partnership  property.  The  neg- 
lect of  the  retiring  partners  or  of  the  representatives  of  the  deceased  partner 
should  not,  as  at  present,  create  inextricable  confusion  between  the  creditors 
of  the  first  and  second  partnership  in  regard  to  their  respective  rights  in  the 
property  employed  in  the  business.  Both  classes  of  creditors  should  be  ahead 
of  the  claim  of  such  retired  partner  or  the  representative  of  the  deceased 
partner,  and  both  classes  of  creditors  should  also  have  equal  rights  in  the 
property.  This  paragraph  probably  effects  a  change  in  the  present  law, 
though  the  same  result  is  often  now  brought  about  by  implying  a  promise  to 
pay  the  debts  of  the  dissolved  partnership  on  the  part  of  the  person  or  part- 
nership continuing  the  business. 

t  Lewis'  Note  to  Section  41  (4). — The  existing  law  in  relation  to  the  subject- 
matter  c-overed  by  this  paragraph  is  so  uncertain  that  it  is  not  possible  to  say 


1348  PARTNERSHIP  (Part  5 

(5)  When  any  partner  wrongfully  causes  a  dissolution  and  the 
remaining  partners  continue  the  business  under  the  provisions  of 
section  38  (2b),  either  alone  or  with  others,  and  without  liquida- 
tion of  the  partnership  affairs,  creditors  of  the  dissolved  partner- 
ship are  also  creditors  of  the  person  or  partnership  continuing  the 
business. 

(6)  When  a  partner  is  expelled  and  the  remaining  partners  con- 
tinue the  business  either  alone  or  with  others,  without  liquidation 
of  the  partnership  affairs,  creditors  of  the  dissolved  partnership 
are  also  creditors  of  the  person  or  partnership  continuing  the 
business. 

(7)  The  liability  of  a  third  person  becoming  a  partner  in  the  part- 
nership continuing  the  business,  under  this  section  to  the  credi- 
tors of  the  dissolved  partnership  shall  be  satisfied  out  of  partner- 
ship property  only.** 

(8)  When  the  business  of  a  partnership  after  dissolution  is  con- 
tinued under  any  conditions  set  forth  in  this  section  the  creditors 
of  the  dissolved  partnership,  as  against  the  separate  creditors  of 
the  retiring  or  deceased  partner  or  the  representative  of  the  de- 
ceased partner,  have  a  prior  right  to  any  claim  of  the  retired  part- 
ner or  the  representative  of  the  deceased  partner  against  the  per- 
son or  partnership  continuing  the  business,  on  account  of  the  re- 
tired or  deceased  partner's  interest  in  the  dissolved  partnership  or 
on  account  of  any  consideration  promised  for  such  interest  or  for 
his  right  in  partnership  property.^ 

whether  its  adoption  would  modify  the  law.  The  paragraph  does  not  apply 
to  the  case  where  the  third  person  or  persons  do  not  promise  to  pay  the  debts 
of  the  dissolved  partnership.  In  that  case  the  creditors  of  the  dissolved  part- 
nership have  no  claim  on  the  partnership  continuing  the  business,  or  its  prop- 
erty, unless  the  assignment  can  be  set  aside  as  a  fraud  on  creditors,  or  is 
affected  by  a  Sales  in  Bulk  Act.  Where,  however,  there  has  been  a  promise  to 
pay  the  debts  of  the  dissolved  partnership,  then  the  creditors  of  the  dissolved 
partnership  are  not  only  creditors  of  the  promisor  or  promisors — which,  in  the 
United  States,  they  would  ho  as  beneficiaries — but  under  this  paragraph,  if 
the  business  of  the  dissolved  partnership  is  continued  by  a  partnership,  the 
creditors  of  the  dissolved  partnership  become  creditors  of  the  partnership 
continuing  the  business,  not  merely  the  separate  or  joint  creditors  of  the 
partners  in  such  partnership. 

8  Lewis'  'Note  to  Section  Jfl  (7). — The  paragraph  merely  reiterates  the  prin- 
ciple of  section  17,  supra,  which  is  that  an  incoming  partner  should  be  liable 
for  the  existing  debts  of  the  partnership,  but  that  this  liability  should  be 
limited  to  his  right  in  partnershp  property.  Though  in  cases  under  this  sec- 
tion the  person  who  joins  the  business  on  the  dissolution  of  the  first  part- 
nership is  not  an  incoming  partner,  because  the  first  partnership  is  dissolved. 
Under  the  circumstances,  his  liability  for  the  debts  of  the  business  contracted 
before  his  admission  should  be  the  same  as  that  of  an  incoming  partner,  if 
confusion  is  to  be  avoided  in  respect  to  the  rights  in  the  property  employed 
in  the  busines,s,  between  the  creditors  who  were  creditors  before  he  joined  the 
business  and  tho'^e  who  became  creditors  afterwards. 

»  Leiois'  Note  to  Section  J/l  (8). — Suppose  A.,  B.,  and  C.  are  partners  and  A. 
retires,  assigning  his  interest  to  B.  and  C,  who  continue  the  business  with 
the  property  of  the  dissolved  partnersliip,  pi'omising  to  pay  A.  $2,000.  On 
tlie  subsequent  failure  of  both  partnerships  under  paragraph  (1)  of  this  sec- 
tion, the  creditors  of  the  first  partnership  would  be  also  creditors  of  the 
second.  By  the  assignment  the  property  employed  in  the  business  would  he 
the  property  of  the  second  partnership.  By  his  contract  A.  would  be  a  credi- 
tor of  the  second  partnership  for  $2,000;    but  this  claim,  A.  being  insolvent, 


Ch.  6)  EFFECT  OF  DISSOLUTION  AS  TO   THIRD   PARTIES  1349 

(9)  Nothing  in  this  section  shall  be  held  to  modify  any  right  of 
creditors  to  set  aside  any  assignment  on  the  ground  of  fraud. 

(10)  The  use  by  the  person  or  partnership  continuing  the  busi- 
ness of  the  partnership  name,  or  the  name  of  a  deceased  partner 
as  part  thereof,  shall  not  of  itself  make  the  individual  property  of 
the  deceased  partner  liable  for  any  debts  contracted  by  such  per- 
son or  partnership. 

Uniform  Partnership  Act,  Section  42.  When  any  partner  re- 
tires or  dies  and  the  business  is  continued  under  any  of  the  condi- 
tions set  forth  in  section  41  (1,  2,  3,  5,  6),  or  section  38  (2b),  with- 
out any  settlement  of  accounts  as  between  him  or  his  estate  and 
the  person  or  partnership  continuing  the  business,  unless  other- 
wise agreed,  he  or  his  legal  representative  as  against  such  persons 
or  partnership  may  have  the  value  of  his  interest  at  the  date  of 
dissolution  ascertained,  and  shall  receive  as  an  ordinary  creditor 
an  amount  equal  to  the  value  of  his  interest  in  the  dissolved  part- 
nership with  interest,  or,  at  his  option  or  at  the  option  of  his  legal 
representative,  in  lieu  of  interest,  the  profits  attributable  to  the 
use  of  his  right  in  the  property  of  the  dissolved  partnership :  Pro- 
vided, that  the  creditors  of  the  dissolved  partnership  as  against 
the  separate  creditors,  or  the  representative  of  the  retired  or  de- 
ceased partner,  shall  have  priority  on  any  claim  arising  under  this 
section,  as  provided  by  section  41  (8)  of  this  act. 


SECTION  4.— PRIORITIKS  AMONG  CLAIMANTS  IN  THE 
SETTLEMENT  OF  A  PARTNERSHIP  ESTATE 

Uniform  Partnership  Act,  Section  40,  In  settling  accounts  be- 
tween the  partners  after  dissolution,  the  following  rules  shall  be 
observed,  subject  to  any  agreement  to  the  contrary: 

(a)  The  assets  of. the  partnership  are: 

I.  The  partnership  property; 

II.  The  contributions  of  the  partners  necessary  for  the  payment 
of  all  the  liabilities  specified  in  clause  (b)  of  this  paragraph.^" 

would  belong  under  the  wording  of  this  paragraph,  not  to  A.'s  separate  es- 
tate, but  to  the  creditors  of  the  first  partnership. 

The  uncertainty  of  existing  law  renders  it  impossible  to  say  whether  the 
adoption  of  this  paragraph  would  change  the  law.  The  Commissioners  be- 
lieve that  certainty  of  the  law  is  essential,  and  that  the  rule  stated  in  the 
paragraph  is  sound.  A.,  in  the  case  put,  has  sold  his  property  rights  in  the 
partnership  before  settling  with  the  creditors  of  the  partnership,  and  there- 
fore those  creditors  should  have  an  equitable  lien  on  the  consideration  of  the 
sale  as  against  the  separate  creditors  of  the  retiring  partner,  or  as  against 
the  representatives  of  a  deceased  partner  who  have  sold  the  rights  of  their 
decedent  to  the  persons  continuing  the  business. 

'^0  Leids'  Note  to  Section  40  (a)  II. — The  adoption  of  this  clause  will  end 
the  present  confusion  as  to  whether  the  contributions  of  the  partners  towards 
the  losses  of  the  partnership  are  partnership  assets  or  not.  See  In  re  Ber- 
tenshaw,  157  Fed.  363,  S.5  C.  C.  A.  61.  17  L.  R.  A.  (N.  S.)  886,  13  Ann.  Cas. 
986  (1907) ;  In  re  Forbes  (D.  C.)  128  Fed.  137  (1904) ;  Barry  v.  Foyles,  1  Pet. 
311,  7  L.  Ed.  1.57  (1S2S) ;  George  M.  West  Co.  v.  Lea  Bros.,  174  U.  S.  590,  19 
Sup.  Ct.  836,  43  L.  Ed.  1098  (1899) ;    Vaccaro  v.  Security  Bank,  103  Fed.  43G, 


1350  PARTNERSHIP  (Part  5 

(b)  The  liabilities  of  the  partnership  shall  rank  in  order  of  pay- 
ment   as  follows: 

I.  Those  owing  to  creditors  other  than  partners ; 

II.  Those  owing  to  partners  other  than  for  capital  and  profits; 

III.  Those  owing  to  partners  in  respect  of  capital; 

IV.  Those  owing  to  partners  in  respect  of  profits. 

(c)  The  assets  shall  be  applied  in  the  order  of  their  declaration 
in  clause  (a)  of  this  paragraph  to  the  satisfaction  of  the  liabilities. 

(d)  The  partners  shall  contribute,  as  provided  by  section  18  (a), 
the  amount  necessary  to  satisfy  the  liabilities ;  but  if  any,  but  not 
all,  of  the  partners  are  insolvent,  or,  not  being  subject  to  process, 
refuse  to  contribute,  the  other  partners  shall  contribute  their 
share  of  the  liabilities,  and,  in  the  relative  proportions  in  which 
they  share  the  profits,  the  additional  amount  necessary  to  pay  the 
liabilities. 

(e)  An  assignee  for  the  benefit  of  creditors  or  any  person  ap- 
pointed by  the  court  shall  have  the  right  to  enforce  the  contribu- 
tions specified  in  clause  (d)  of  this  paragraph. 

(f)  Any  partner  or  his  legal  representative  shall  have  the  right 
to  enforce  the  contributions  specified  in  clause  (d)  of  this  para- 
graph, to  the  extent  of  the  amount  which  he  has  paid  in  excess  of 
his  share  of  the  liability. 

(g)  The  individual  property  of  a  deceased  partner  shall  be  lia- 
ble for  the  contributions  specified  in  clause  (d)  of  this  paragraph. 

(h)  When  partnership  property  and  the  individual  properties 
of  the  partners  are  in  the  possession  of  a  court  for  distribution, 
partnership  creditors  shall  have  priority  on  partnership  property 
and  separate  creditors  on  individual  property,  saving  the  rights  of 
lien  or  secured  creditors  as  heretofore. 

(i)   Where  a  partner  has  become  bankrupt,  or  his  estate  is  in- 
solvent, the  claims  against  his  separate  property  shall  rank  in  the 
following  order: 
T.  Those  owing  to  separate  creditors; 

II.  Those  owing  to  partnership  creditors; 

III.  Those  owing  to  partners  by  way  of  contribution. 


RODGERS  V.  MEiRANDA  et  al. 
(Supreme  Court  of  Ohio,  1857.     7  Ohio  St.  ISO.) 

The  original  proceeding  was  a  petition  for  an  order  of  distribution 
of  the  separate  or  individual  assets  of  an  insolvent  debtor,  as  between 
separate  and  partnership  creditors. 

It  appears  from  the  record  that  about  the  13th  of  June,  1854,  Peter 
Murray,  an  insolvent  debtor,  made  an  assignment  of  all  his  estate,  real 
and  personal,  to  the  plaintiff,  in  trust  for  the  payment  of  their  rcspec- 

43  C.  O.  A.  279  (1900) ;  In  re  Mercur,  122  Fed.  384,  58  C.  C.  A.  472  (1903). 
The  Commissioners  believe  that  tlie  opinion  that  such  contributions  are  as- 
sets is  supported  by  the  better  reasoning    See  In  re  Forbes,  supra. 


Ch.  (l)  KFFKCT   OF  DISSOLUTION   AS   TO   THIRD   PARTIES  1351 

tive  demands.  Though  possessed  of  a  large  and  valuable  estate,  it 
had  been  found  insufficient  to  pay  his  separate  debts  and  liabilities  in 
full.  At  the  date  of  his  failure  and  assignment  he  was  a  partner 
with  John  W.  Dever  in  a  mercantile  firm  under  the  name  and  style 
of  Dever  &  Murray,  which  firm  had  also  become  insolvent,  and  like- 
wise Dever,  and  the  firm  had  made  an  assigimient  of  the  partner- 
ship property  and  assets  about  the  same  time  to  John  Meranda,  one  of 
the  defendants,  in  trust  for  the  payment  of  the  joint  debts  or  liabilities 
of  the  firm. 

In  this  condition  of  affairs  the  partnership  creditors,  although  they 
have  filed  their  claims  with  the  assignee  of  the  firm  for  their  distribu- 
tive shares  out  of  the  partnership  property,  claim  the  right  to  be  ad- 
mitted to  a  participation  in  the  dividends  of  the  separate  estate  of 
Murray,  pari  passu  with  his  individual  creditors ;  while  the  latter  deny 
the  right,  and  insist  that  his  separate  estate  shall  be  applied  to  the 
satisfaction  of  his  individual  debts  in  preference  to  his  partnership 
debts. 

It  appears,  further,  that  Murray,  besides  advancing  his  part  of  the 
capital  of  the  firm  also  loaned  money  to  the  firm  to  a  large  amount, 
for  which  he  held  the  obligations  of  the  firm,  which  obligations,  by 
the  assignment  of  Murray,  came  into  the  hands  of  the  plaintiff,  who 
has  presented  the  same  to  the  assignee  of  the  firm,  and  claims  to  have 
the  same  paid  out  of  the  assets  of  the  firm,  pari  passu  with  the  other 
partnership  debts.  The  other  creditors  resist  this,  and  plaintiff  asks 
an  order  of  distribution  to  that  effect  out  of  partnership  assets. 

Defendants  demurred  to  the  petition.  The  court  below  sustained 
the  demurrer,  and  gave  judgment  in  favor  of  the  defendants;  and  this 
petition  in  error  is  filed  to  review  and  reverse  that  judgment. 

BartlKy,  C.  J.  Two  questions  are  presented  for  determination  in 
this  case.  The  first  is  whether,  in  the  distribution  of  the  assets  of 
insolvent  partners,  where  there  are  both  individual  and  partnership 
assets,  the  individual  creditors  of  a  partner  are  entitled  to  be  first 
paid  out  of  the  individual  effects  of  their  debtor,  before  the  partner- 
ship creditors  are  entitled  to  any  distribution  therefrom.  It  is  well 
settled  that,  in  the  distribution  of  the  assets  of  insolvent  partners, 
the  partnership  creditors  are  entitled  to  a  priority  in  the  partnership 
effects,  so  that  the  partnership  debts  must  be  settled  before  any  division 
of  the  partnership  funds  can  be  made  among  the  individual  cred- 
itors of  the  several  partners.  This  is  incident  to  the  nature  of  part- 
nership property.  It  is  the  right  of  a  partner  to  have  the  partnership 
property  applied  to  the  purposes  of  the  firm,  and  the  separate  interest 
of  each  partner  in  the  partnership  property  is  his  share  of  the  surplus 
after  the  payment  of  the  partnership  debts.  And  this  rule,  which 
gives  the  partnership  creditors  a  preference  in  the  partnership  effects, 
would  seem  to  produce,  in  equity,  a  corresponding  and  a  correlative 
rule,  giving  a  preference  to  the  individual  creditors  of  a  partner  in 
his  separate  property;  so  that  partnership  creditors  can,  in  equity, 
only  look  to  the  surplus  of  the  separate  property  of  a  partner,  after 
the  payment  of  his  individual  debts,  and,  on  the  other  hand,  the  in- 
dividual creditors  can  in  like  manner  only  claim  distribution  from  the 
debtor's  interest  in  the  surplus  in  the  joint  fund  after  the  satisfaction 
of  the  partnership  creditors. 

The  correctness  of  this  rule,  however,  has  been  much  controverted; 
and  there  has  not  been  always  a  perfect  concurrence  in  the  reasons 


1352  PARTNERSHIP  (Part  5 

assigned  for  it  by  those  courts  which  have  adhered  to  it.  By  some 
it  has  been  said  to  be  an  arbitrary  rule,  estabUshed  from  consid- 
erations of  convenience ;  by  others,  that  it  rests  on  the  basis  that  a 
primary  HabiHty  attaches  to  the  fund  on  which  the  credit  is  given — 
that  in  contracts  with  a  partnership,  credit  is  given  on  the  supposed 
responsibiUty  of  the  firm,  while  in  contracts  with  a  partner  as  an 
individual  reliance  is  supposed  to  be  placed  on  his  separate  respon- 
sibility. *  *  *  And,  again,  others  have  assigned  as  a  reason  for 
the  rule  that  the  joint  estate  is  supposed  to  be  benefited  to  the  extent 
of  every  credit  which  is  given  to  the  firm,  and  that  the  separate  es- 
tate is,  in  like  manner,  presumed  to  be  enlarged  by  the  debts  con- 
tracted by  the  individual  partner,  and  that  there  is  consequently  a 
clear  equity  in  confining  the  creditors,  as  to  preference,  to  each  estate 
respectively,  which  has  been  thus  benefited  by  their  transactions. 
*  *  :i<  g^|.  thgse  reasons  are  not  entirely  satisfactory.  So  im- 
portant a  rule  must  have.a  better  foundation  to  stand  upon  than  a  mere 
consideration  of  convenience;  and  practically  it  is  undeniable  that 
those  who  give  credit  to  a  partnership  look  to  the  individual  respon- 
sibility of  the  partners,  as  well  as  that  of  the  firm,  and  also  those 
who  contract  with  a  partner  in  his  separate  capacity  place  reliance  on 
his  various  resources  or  means,  whether  individual  or  joint.  And 
inasmuch  as  individual  debts  are  often  contracted  to  raise  means 
which  are  put  into  the  business  of  a  partnership,  and  also  partnership 
effects  often  withdrawn  from  the  firm  and  appropriated  to  the  sepa- 
rate use  of  the  partners,  it  cannot  be  practically  true  that  the  sep- 
arate estate  has  been  benefited  to  the  extent  of  every  credit  given 
to  each  individual  partner,  nor  that  the  joint  estate  has  retained  from 
the  separate  estate  of  each  partner  the  benefit  of  every  credit  given 
to  the  firm.  Unsatisfactory  reasons  may  weaken  confidence  in  a  rule 
which  is  well  founded. 

What,  then,  is  the  true  foundation  of  the  rule  which  gives  the  individ- 
ual creditor  a  preference  over  the  partnership  creditor  in  the  dis-. 
tribution  of  the  separate  estate  of  a  partner?  To  say  that  it  is  a  rule 
of  general  equity,  as  has  been  som.etimes  said,  is  not  a  satisfactory 
solution  of  the  difficulty;  for  the  question  is  whether  it  be  a  rule 
of  equity  or  not.  In  the  distribution  of  the  assets  of  insolvents, 
equality  is  equity ; .  and  to  say  that  the  rule  which  gives  the  individual 
creditor  a  preference  over  the  partnership  creditor  in  the  separate 
estate  of  the  partner  is  a  rule  of  equality  does  not  still  rid  the  subject 
of  difficulty.  For,  leaving  the  rule  to  stand  which  gives  the  preference 
to  the  joint  creditors  in  the  partnership  property,  and  perfect  equality 
between  the  joint  and  individual  creditors  is  perhaps,  rarely  attainable. 
That  it  is,  however,  more  equal  and  just,  as  a  general  rule,  than  any 
other  which  can  be  devised,  consistently  with  the  preference  to  the 
partnership  creditors  in  the  joint  estate,  cannot  be  successfully  con- 
troverted. It  originated  as  a  consequence  of  the  rule  of  priority  of 
partnership  creditors  in  the  joint  estate,  and,  for  the  purpose  of  jus- 
tice, became  necessary  as  a  correlative  rule.  With  what  semblance 
of  equity  could  one  class  of  creditors,  in  preference  to  the  rest,  be  ex- 
clusively entitled  to  the  partnership  fund,  and,  concurrently  with  the 
rest,  entitled  to  the  separate  estate  of  each  partner?  The  joint  cred- 
itors are  no  more  meritorious  than  the  separate  creditors ;  and  it 
frequently  happens  that  the  separate  debts  are  contracted  to  raise 
means  to  carry  on  the  partnership  business. 


Ch.  G)  EFFECT   OF   DISSOLUTION   AS   TO   THIRD   PARTIES  1353 

Independent  of  this  rule,  the  joint  creditors  have,  as  a  .i^eneral  thing, 
a  great  advantage  over  the  separate  creditors.  Besides  being  ex- 
clusively entitled  to  the  partnership  fund,  they  take  their  distributive 
shares  in  the  surplus  of  the  separate  estate  of  each  of  the  several 
partners  after  the  payment  of  the  separate  creditors  of  each.  It  is 
a  rule  of  equity  that,  where  one  creditor  is  in  a  situation  to  have  two  or 
more  distinct  securities  or  funds  to  rely  on,  the  court  will  not  allow 
him,  neglecting  his  other  funds,  to  attach  himself  to  one  of  the  funds 
to  the  prejudice  of  those  who  have  a  claim  upon  that  and  no  other 
to  depend  on.  And  besides  the  advantage  which  the  joint  creditors 
have,  arising  from  the  fact  that  the  partnership  fund  is  usually  much 
the  largest,  as  men  in  trade,  in  a  great  majority  of  cases,  embark 
their  all,  or  the  chief  part  of  their  property,  in  it,  and  besides  their 
distributive  rights  in  the  surplus  of  the  separate  estate  of  the  other 
partners,  the  joint  creditors  have  a  degree  of  security  for  their  debts 
and  facilities  for  recovering  them  which  the  separate  creditors  have 
not.  They  can  sell  both  the  joint  and  the  separate  estate  on  an  execu- 
tion, while  the  separate  creditor  can  sell  only  the  separate  property  and 
the  interest  in  the  joint  effects  that  may  remain  to  the  partners,  after 
the  accounts  of  the  debts  and  effects  of  the  firm  are  taken,  as  between 
the  firm  and  its  creditors,  and  also  as  between  the  partners  themselves. 
With  all  these  advantages  in  favor  of  the  partnership  creditors,  it  would 
be  grossly  inequitable  to  allow  them  the  exclusive  benefit  of  the  joint 
fund,  and  then  a  concurrent  right  with  individual  creditors  to  an  equal 
distribution  in  the  separate  estate  of  each  partner.  What  equality  and 
justice  is  there  in  allowing  partnership  creditors,  who  have  been  paid  80 
per  cent,  on  their  debts  out  of  the  joint  fund,  to  come  in  pari  passu  with 
the  individual  creditors  of  one  of  the  partners,  whose  separate  prop- 
erty will  not  pay  20  per  cent,  to  his  separate  creditors?  How  could 
that  be  said  to  be  an  equal  distribution  of  the  assets  of  insolvents 
among  their  creditors? 

It  is  true  that  an  occasional  case  may  arise  where  the  joint  effects 
are  proportionably  less  than  the  separate  assets  of  an  insolvent  part- 
ner. But,  as  a  general  thing,  a  very  decided  advantage  is  given  to  the 
partnership  creditors,  notwithstanding  this  preference  of  the  individ- 
ual creditors  in  the  separate  property;  and  that  advantage,  arising 
out  of  the  nature  of  a  partnership  contract,  is  unavoidable.  Some 
general  rule  is  necessary ;  and  that  must  rest  on  the  basis  of  the  unal- 
terable preference  of  the  partnership  creditors  in  the  joint  effects,  and 
their  further  right  to  some  claim  in  the  separate  property  of  each  of 
the  several  partners.  The  preference,  therefore,  of  the  individual  cred- 
itors of  a  partner  in  the  distribution  of  his  separate  estate  results  as  a 
principle  of  equity  from  the  preference  of  partnership  creditors  in  the 
partnership  funds,  and  their  advantages  in  having  different  funds  to 
resort  to,  while  the  individual  creditors  have  but  one. 

It  has  been  argued  that  partnership  contracts  are  several  as  well 
as  joint,  and  consequently  have  an  equal  legal  right  with  separate 
creditors  upon  the  individual  property  of  a  partner.  But  the  right  of 
partnership  creditors  against  the  separate  property  of  individual  part- 
ners in  proceedings  at  law  is  not  in  controversy.  The  question  here 
relates  to  the  relative  equitable  rights  of  two  classes  of  creditors 
in  the  distribution  of  the  estates  of  insolvents.  Much  of  the  confu- 
sion upon  this  subject  has  probably  arisen  from  confounding  the 
abstract  rights  of  creditors  in  proceedings  at  law  with  their  relative 


1354  PARTNERSHIP  (Part  5 

rights  to  an  equitable  adjustment  in  marshaling  the  assets  of  insol- 
vents in  chancery. 

The  rule  here  adopted  appears  to  have  been  followed  in  England 
for  nearly  a  century  and  a  half.  We  find  it  distinctly  recognized  in 
the  case  of  Ex  parte  Crowder,  2  Vern.  706,  decided  in  1715.  And  in 
Ex  parte  Cook,  2  P.  Wms.  500,  Lord  Chancellor  King  declared  it  set- 
tled as  a  rule  of  convenience  in  bankruptcy  that  joint  creditors  should 
be  first  paid  out  of  the  partnership  estate  and  the  separate  creditors 
out  of  the  separate  estate  of  each  partner,  and,  if  there  be  a  surplus 
of  the  joint  creditors,  the  share  of  each  partner  should  be  distributed 
to  his  separate  creditors,  and  if,  on  the  other  hand,  there  should  be 
a  surplus  of  the  separate  estate  of  a  partner  after  the  satisfaction  of  his 
individual  creditors,  it  should  be  applied  to  any  deficiency  of  the  joint 
funds  in  the  satisfaction  of  the  partnership  debts.  Lord  Hardwicke 
followed  the  same  rule,  in  Ex  parte  Hunter,  1  Atk.  228.  But  it  ap- 
pears that  in  Ex  parte  Hodgson,  2  Bro.  C.  C.,  decided  in  1785,  Lord 
Thurlow  made  an  innovation  on  the  rule  in  bankruptcy,  declaring  that 
there  was  no  distinction  between  joint  and  separate  creditors,  that 
they  ought  to  be  paid  out  of  the  bankrupt's  estate  and  his  moiety  of  the 
joint  estate,  and  that  the  joint  creditors  ought  to  come  in  pari  passu 
with  the  separate  creditors.  This  ruling  of  Lord  Thurlow  appears 
to  have  had  reference  to  proceedings  at  law  and  in  bankruptcy,  for  it 
is  said  that,  consistently  therewith,  it  was  competent  for  the  assignees 
to  confine  the  joint  creditors,  where  there  was  a  joint  estate,  to  that 
fund  exclusively,  by  filing  a  bill  in  equity  against  the  other  partners 
and  obtaining  an  injunction  on  the  order  in  bankruptcy. 

But  how  far  this  innovation  went,  in  practice,  to  affect  the  ultimate 
rights  of  the  parties,  is  wholly  immaterial,  inasmuch  as  Lord  Lough- 
borough, in  Ex  parte  Elton,  3  Ves.  Jr.  238,  in  the  year  1796,  re- 
stored the  rule  which  previously  prevailed,  holding  that  the  rule  intro- 
duced by  the  Case  of  Hodgson  was  inconvenient,  inasmuch  as  every  or- 
der which  he  passed  in  bankruptcy,  giving  a  joint  creditor  a  dividend 
out  of  the  separate  estate  of  a  partner,  would  give  rise  to  a  bill  in  eq- 
uity, on  the  part  of  the  separate  creditors,  to  restrain  the  order  and 
secure  the  application  of  the  separate  estate  to  the  satisfaction  of 
the  separate  debts ;  and,  although  it  was  adjudged  that  a  joint  creditor 
might  prove  his  claim  under  a  separate  commission,  yet  he  could  not 
receive  any  dividend  therefrom  until  the  amount  of  his  distribution 
in  the  joint  fund  could  be  ascertained  and  the  claims  of  the  separate 
creditors  satisfied.  And  the  opinion  of  the  Lord  Chancellor,  in  this 
case,  puts  an  end  to  the  assertion,  which  has  been  sometimes  made, 
that  this  rule  was  peculiar  to  proceedings  in  bankruptcy.  Touching 
this  he  said:  "If  it  stands  as  a  rule  of  law,  we  must  consider  what 
I  have  always  understood  to  be  settled  by  a  vast  variety  of  cases, 
not  only  bankruptcy,  but  upon  general  equity,  that  the  joint  estate 
is  applicable  to  partnership  debts  and  the  separate  estate  to  the  sep- 
arate debts."  Again,  in  speaking  of  the  inconvenience  of  Lord  Thur- 
low's  rule,  he  said :  "What  I  order  here  to-day,  sitting  in  bankruptcy, 
I  shall  forbid  to-morrow,  sitting  in  chancery ;  for  it  is  quite  of  course 
to  stop  the  dividend  on  a  bill  filed.  The  plain  rule  of  distribution  is 
that  each  estate  shall  bear  its  own  debts.  The  equity  is  so  plain  that 
it  is  of  course  upon  a  bill  filed." 

Lord  Eldon,  with  some  characteristic  doubts  and  misgivings,, con- 
sistently followed  this  rule  of  his  immediate  predecessor.      [Citing 


Ch.  G)  KFFECT   OP   DISSOLUTIOX   AS   TO   TIIIUD    TAUTIES  1355 

cases.]  And  it  has  ever  since  remained  the  settled  law  of  England, 
applicable,  not  simply  to  proceedings  in  bankruptcy,  but  as  a  general 
rule  of  equity,  in  the  distribution  of  the  assets  of  insolvents. 

The  supposition  that  this  rule  arose  from  any  provision  of  the  stat- 
utes concerning  bankruptcy  in  England  is  a  mistake.  It  was  long 
and  well  settled  as  a  rule  of  equity  before  any  statute  was  enacted 
touching  this  subject.  It  does  not  appear  to  have  been  sanctioned 
by  any  positive  enactment  until  St.  6  Geo.  IV,  c.  16,  §  16. 

It  is  not  a  little  remarkable  that  this  rule  of  equity,  so  long  settled 
and  acted  on  in  England,  should  have  encountered  so  much  opposition 
as  it  has  in  the  courts  of  the  several  states  of  this  country. 

In  Pennsylvania  the  rule  was  discarded  by  a  majority  of  the  court 
in  the  case  of  Bell  v.  Newman,  5  Serg.  &  R.  (Pa.)  78,  decided  in  1819. 
And  the  rule  adopted  in  that  case  was  that  where  a  surviving  partner 
dies  indebted  to  partnership  and  also  to  individual  creditors,  and 
leaving  joint  assets  and  also  separate  assets,  the  separate  creditors 
should  receive  as  much  out  of  the  separate  property  as  the  joint  cred- 
itors could  receive  from  the  separate  portion  or  share  of  such  part- 
ner in  the  joint  property,  and  that  then  the  balance  of  the  separate 
property  should  be  divided  pro  rata  among  both  classes  of  creditors. 
This  was  placed  partly  on  the  ground  of  equity  and  partly  on  the 
ground  of  a  statute  directing  equality  of  distribution  of  the  assets 
of  deceased  persons.  Judge  Gibson,  however,  dissented,  insisting 
forcibly  on  the  rule  adopted  in  England  as  a  general  principle  found- 
ed in  equity. 

And  it  has  been  insisted  that  this  case  did  not  strictly  fall  within 
the  application  of  the  principle,  inasmuch  as  the  estate  to  be  dis- 
tributed in  that  case  was  the  estate  of  a  surviving  partner,  against 
\yhich  the  claims  of  the  joint  creditors  were  as  purely  legal  as  those 
of  the  separate  creditors.  And  Chief  Justice  Tilghman  remarked,  in 
the  opinion  of  the  case,  that  "no  rule  was  intended  to  be  laid  down 
which  may  affect  cases  differently  circumstanced." 

The  case  of  Sperry's  Estate,  1  Ashm.  (Pa.)  347,  did  not  directly 
affect  the  question,  inasmuch  as  it  came  fully  wnthin  the  exception  that 
where  there  is  no  joint  fund,  and  no  solvent  partner,  the  separate  and 
joint  creditors  should  be  paid  ratably  out  of  the  separate  estate. 
The  question  was  again  brought  to  the  attention  of  the  court  in  that 
state  in  Walker  v.  Eyth,  25  Pa.  216,  where  the  court  expresses  the 
opinion  that  it  is  a  rule  of  equity  "that,  where  there  are  partnership 
and  separate  creditors,  each  estate  should  be  applied  exclusively  to 
the  payment  of  its  own  creditors,  the  joint  estate  to  the  joint  cred- 
itors and  the  separate  estate  to  the  separate  creditors."  But  the  ques- 
tion was  not  directly  decided ;  the  decision  of  the  case  being  put  upon 
another  ground.  So  that  the  general  principle,  in  a  case  proper  for 
its  application,  is  said  to  remain  still  an  open  question  in  Pennsyl- 
vania.    *     *     * 

In  Virginia  the  question  was  presented  in  1848,  in  the  case  of  Mor- 
ris' Adm\  V.  Morris  Adm'r,  4  Grat.  (Va.)  293,  and  was  elaborately 
discussed  on  both  sides ;  but  the  court  was  equally  divided  on  the 
question  of  adoption  of  the  rule  as  a  general  rule  of  equity,  and  the  de- 
cision was  put  on  other  grounds. 

In  New  Jersey,  in  the  case  of  Wisham  v.  Lippincott,  9  N.  J.  Eq. 
353,  the  rule  was  doubted  as  a  general  principle  of  equity,  although 
not  decided. 


1356  PARTNERSHIP  (Part  5 

In  Vermont,  in  the  case  of  Bardwell  v.  Perry  et  al.,  19  Vt.  292,  47 
Am.  Dec.  687,  the  rule  was  discarded  as  a  principle  of  equity,  with  this 
qualification:  That  the  separate  creditors  could  require,  in  equity, 
that  the  joint  creditors  should  first  exhaust  the  partnership  funds, 
before  coming  in  with  the  separate  creditors  of  a  partner  for  a  pro 
rata  distribution  out  of  his  separate  estate. 

It  does  not  appear  that  the  doctrine  of  the  English  courts  on  this 
subject  was  ever  adopted  as  a  rule  of  equity  by  the  courts  of  Massa- 
chusetts ;  but  it  is  said  that  a  statute  was  enacted  in  that  state  in  1838, 
providing,  as  a  rule  for  the  distribution  of  insolvents'  estates,  that  the 
net  proceeds  of  the  separate  estate  shall  go  to  the  separate  creditors  . 
and  that  of  the  partnership  estate  to  the  joint  creditors. 

The  rule  appears  to  have  been  discarded  in  Connecticut,  in  the  case 
of  Camp  V.  Grant  et  al.,  21  Conn.  41,  54  Am.  Dec.  321,  and  also  in 
Mississippi,  in  the  case  of  Dahlgren  v.  Duncan,  7  Smedes  &  M.  (Miss.) 
280,  but  adopted  in  Alabama,  in  Bridge  v.  McCullough's  Adm'rs,  27 
Ala.  661. 

In  New  York  it  has  been  adjudged  that  "the  rule  of  equity  was  uni- 
form and  stringent  that  the  partnership  property  of  a  firm  shall  all 
be  applied  to  the  partnership  debts  to  the  exclusion  of  the  creditors 
of  the  individual  members  of  the  firm,  and  that  creditors  of  the  latter 
are  to  be  first  paid  out  of  the  separate  effects  of  their  debtor  before 
the  partnership  creditors  can  claim  anything  therefrom."  Jackson 
V.  Cornell,  1  Sandf.  Ch.  348.  The  history  of  the  English  riile  was 
somewhat  reviewed  by  Chancellor  Kent  in  Murray  v.  Murray,^  5 
Johns.  Ch.  60,  and  upon  full  consideration  adopted  as  a  rule  of  equity 
by  Chancellor  Walworth  in  Wilder  v.  Keeler,  3  Paige,  167,  23  Am. 
Dec.  781,  Payne  v.  Matthews,  6  Paige,  19,  29  Am.  Dec.  738,  and 
Hutchinson  v.  Smith,  7  Paige,  26. 

■  The  same  doctrine  was  adopted  by  Chantellor  Desaussure  in 
South  Carolina  as  early  as  1811  in  Woddrop  v.  Ward,  3  Desaus.  203, 
and  also  by  the  Supreme  Court  of  New  Hampshire  in  Jarvis  v. 
Brooks,  23  N.  H.  136. 

The  subject  was  very  fully  reviewed  in  the  Court  of  Appeals  of 
Maryland  in  McCuUoh  v.  Dashiell's  Adm'r,  1  Har.  &  G.  96,  18  Am. 
Dec.  271,  wherein  it  was  settled  in  that  state  that  in  equity  the  individ- 
ual creditors  of  a  partner  were  entitled  to  a  preference  over  the  joint 
creditors  in  a  distribution  of  the  separate  estate  of  their  debtor. 

And  the  same  doctrine  was  settled  by  the  Supreme  Court  of  the 
United  States,  on  full  consideration,  in  Murrill  v.  Neil,  8  How.  414,  12 
L.  Ed.  1135.  And  it  has  been  laid  down  generally  by  the  elementary 
writers,  both  in  England  and  in  this  country,  as  a  settled  rule  of  eq- 
uity.    *     *     =? 

The  remaining  matter  for  determination,  in  this  case,  involves  the 
inquiry  whether,  in  case  of  an  indebtedness  for  money  lent  to  the  part- 
nership by  a  partner  who  afterward  becomes  insolvent,  the  separate 
creditors  of  the  latter  shall  be  entitled  therefor  to  a  pro  rata  distribu- 
tion with  the  partnership  creditors,  out  of  the  joint  fund.     *     *     * 

It  was  at  one  time  held  to  be  the  law  *  *  *  that  if  a  partner  has 
loaned  money  to  the  partnership,  or  the  partnership  has  loaned  money 
to  the  separate  estate  of  one  of  the  partners,  according  to  the  equitable 
rule  of  distribution  of  the  assets  after  insolvency,  in  the  former  case, 
the  separate  creditors  of  the  partner  would  be  entitled  to  an  equal  share 
out  of  the  joint  assets  to  the  extent  of  the  debt  created  for  the  money 


Ch.  6)  EFFECT   OF   DISSOLUTION  AS  TO  THIRD   PARTIES  1357 

lent,  and  that,  in  the  latter  case,  the  partnership  creditors  would  be 
entitled  to  payment  to  the  same  extent,  out  of  the  individual  estate  of 
the  partner.  *  *  *  But  this  doctrine  has  long  since  been  over- 
ruled, and  the  contrary  appears  now  to  be  well  settled.     *     *     * 

This  doctrine  proceeds  upon  the  principle  that,  in  the  distribution 
of  the  assets  of  insolvents,  the  equities  of  the  creditors,  whether  joint 
or  separate,  must  be  worked  out  through  the  medium  of  the  partners ; 
that  creditors  can  only  step  into  the  shoes  of  their  immediate  debtors 
in  reaching  their  effects  where  there  are  conflicting  claims ;  and  that 
inasmuch  as  an  individual  partner  could  not  himself  come  in  and  com- 
pete with  the  partnership  creditors,  who  are  in  fact  his  own  creditors, 
in  the  distribution  of  the  fund,  and  thereby  prejudice  those  who  were 
not  only  creditors  of  the  partnership  but  also  of  himself,  therefore  the 
separate  creditors  of  a  partner  could  not  enforce  any  claim  to  a  dis- 
tributive share  of  the  joint  effects  against  the  partnership  creditors, 
which  could  not  have  been  enforced  by  the  partner  himself  for  his  own 
benefit.  The  rule,  however,  that  these  several  funds  are  to  be  thus 
administered  as  they  stood  at  the  time  of  the  insolvency  is  to  be  received 
with  this  important  limitation:  That  it  does  not  apply  in  case,  either 
where  the  effects  obtained,  creating  the  debt,  were  taken  from  the 
separate  estate  to  augment  the  joint  estate,  or  from  the  joint  estate  to 
augment  the  separate  estate,  fraudulently,  or  under  circumstances 
from  which  fraud  may  be  inferred,  or  under  which  it  would  be  implied. 

In  the  case  before  us,  however,  it  is  not  pretended  that  the  firm  ob- 
tained the  borrowed  money  from  Murray  improperly.  The  separate 
creditors  of  Murray,  therefore,  are  not,  on  account  of  this  claim  for 
money  lent  by  Murray  to  the  firm,  entitled  to  participate  with  the  part- 
nership creditors  in  the  distribution  of  the  joint  effects. 

Judgment  of  the  common  pleas  reversed ;  and  ordered  that  the  sep- 
arate effects  of  Peter  Murray  be  distributed  pro  rata  first  among  his 
individual  creditors,  before  any  application  thereof  be  made  to  the  pay- 
ment of  the  partnership  debts  of  Dever  &  Murray,  and  that  the  part- 
nership eff'ects  be  applied  first  to  the  payment  of  the  partnership  debts, 
irrespective  of  the  claim  of  the  partner,  Peter  Murray,  for  money 
loaned  by  him  to  the  firm. 


IVES  et  al.  v.  MAHONEY  et  al. 
(Supreme  Court  of  Minnesota,  1S9S.     71  Minn.  155,  73  N.  W.  720.) 

In  re  assignment  of  Arthur  H,  Ives  and  Amos  P.  Ireland,  as  co- 
partners under  the  firm  name  of  Ives,  Ireland  &  Co.  From  an  order 
of  distribution  to  Stephen  Mahoney,  receiver  of  the  Irish-American 
Bank,  and  others,  Alfonso  B.  Hawkins,  as  assignee  of  Ives,  Ireland 
&  Co.,  appeals. 

Start,  C.  J.  Arthur  H.  Ives  and  Amos  P.  Ireland,  partners  under 
the  firm  name  of  Ives,  Ireland  &  Co.,  duly  made  an  assignment  of  all 
of  their  partnership  and  unexempt  individual  property,  for  the  bene- 
fit of  their  creditors,  under  the  insolvent  laws  of  this  state.  The  net 
assets  of  the  partnership,  for  distribution,  amount  to  $3,151.65,  and 
the  partnership  debts  are  $19,736.34.  Ireland's  net  individual  assets 
are  $4,000;  and  his  individual  debts,  $2,997.47.  Ives'  net  assets  are 
$100,  and  his  personal  debts,  $415.40.  Included  in  the  firm  debts 
proved  is  that  of  the  Irish-American  Bank,  for  $4,078.89,  which  is 


1358  PARTNERSHIP  (Part  5 

based  upon  the  notes  of  the  firm  given  to  the  bank  for  a  loan  by  it  to 
the  firm,  in  the  sum  of  $4,000,  and  signed  by  the  firm,  and  by  Ireland 
in  his  individual  name.  There  is  also  included  in  the  firm  debts  that 
of  the  St.  Anthony  Falls  Bank,  for  $5,512.50,  which  is  based  upon 
notes  executed  by  the  firm  to  it  for  a  loan  of  $5,500,  but  none  of  the 
notes  were  signed  by  either  of  the  individual  partners.  Each  of  these 
banks  made  the  loan  to  the  firm  in  express  reliance  upon  the  individ- 
ual property  and  credit  of  Ireland.  The  trial  court,  by  its  order  of 
distribution,  directed  the  assignee  to  pay  the  net  assets  of  the  firm, 
pro  rata,  to  the  firm  creditors,  including  the  Irish-American  Bank; 
net  individual  assets  of  Ireland,  pro  rata,  to  his  individual  creditors, 
excluding  the  firm  creditors,  except  the  Irish-American  Bank,  which 
was  included  therein  to  the  full  amount  of  its  debt,  without  any  de- 
duction for  the  payment  thereon  it  was  to  receive  by  its  dividend 
from  the  firm  assets  ;  and  the  net  assets  of  Ives  to  his  individual 
creditors.  The  assignee  and  certain  firm  creditors  appealed  from 
this  order.  The  appeals  present  two  general  questions  for  our  deci- 
sion. They  are,  did  the  trial  court  err  (a)  in  distributing  the  firm 
assets  to  the  firm  creditors,  and  the  individual  assets  to  the  individual 
creditors?  (b)  in  directing  a  dividend  to  be  paid  to  the  Irish- Ameri- 
can Bank  from  both  funds? 

The  trial  court  adopted  the  geneial  equity  rule  in  insolvency  and 
bankruptcy  for  the  distribution  of  firm  and  individual  assets,  respec- 
tively, which  is  that,  where  there  are  both  partnership  and  individual 
assets  for  distribution,  the  partnership  assets  will  be  first  applied  to 
the  payment  of  partnership  debts,  and  the  individual  assets,  in  like 
manner,  to  the  payment  of  the  individual  debts  of  the  partners.  If 
there  is  a  surplus  in  either  fund  after  paying  in  full  the  creditors  to 
whom  it  primarily  belongs,  it  is  carried  to  the  other  fund,  and  dis- 
tributed as  a  part  thereof.  The  rule  seems  to  be  limited  to  cases 
where  there  are  substantial  firm  assets  for  distribution.  This  we  do 
not  decide.  The  first  half  of  the  rule,  that  equity  gives  to  the  firm 
creditors  priority  in  the  firm  assets  over  the  creditors  of  the  individ- 
ual partners,  is  conclusively  settled,  and  everywhere  accepted  as  the 
law;  but  the  other  and  reciprocal  half  of  the  rule,  that  the  separate 
debts  of  the  partners  are  to  be  first  paid  from  the  individual  assets, 
has  been  controverted  by  able  courts  in  this  country,  while  those 
which  have  adhered  to  it  have  not  always  agreed  as  to  tlie  reasons  for 
its  adoption. 

The  principles  upon  which  the  rule  rests  are  clearly  stated  in  the 
dissenting  opinion  of  Chief  Justice  Gibson  in  the  case  of  Bell  v.  New- 
man, 5  Serg.  &  R.  (Pa.)  91,  and  the  opinion  of  Chief  Justice  Bartley 
in  Rodgers  v.  Meranda,  7  Ohio  St.  179.  The  latter  wrote  thus  of  the 
rule:  "That  it  is,  however,  more  equal  and  just,  as  a  general  rule, 
than  any  other  which  can  be  devised,  consistently  with  the  preference 
to  the  partnership  creditors  in  the  joint  estate,  cannot  be  successfully 
controverted.  It  originated  as  a  consequence  of  the  rule  of  priority 
of  partnership  creditors  in  the  joint  estate,  and,  for  the  purposes  of 
justice,  became  necessary,  as  a  correlative  rule.  With  what  semblance 
of  equity  could  one  class  of  creditors,  in  preference  to  the  rest,  be  ex- 
clusively entitled  to  the  partnership  fund,  and  concurrently  with  the 
rest  entitled  to  the  separate  estate  of  each  partner?  The  joint  cred- 
itors are  no  more  meritorious  than  the  separate  creditors,  and  it  fre- 
quently happens  that  the  separate  debts  are  contracted  to  carry  on  the 


Ch.  6)  EFFECT   OF   DISSOLUTION  AS  TO   THIRD   PARTIES  1359 

partnership  business."  Judge  Story,  in  his  time,  declared  the  rule  to 
be  firmly  established.  He,  however,  questioned  its  equity  and  proprie- 
ty, but  added,  "Such  as  it  is,  however,  it  is  for  the  public  repose  that 
it  should  be  left  undisturbed,  as  it  may  not  be  easy  to  substitute  any 
other  rule  which  would  uniformly  work  with  perfect  equality  and 
equity  in  the  mass  of  intricate  transactions  connected  with  commer- 
cial operations."  Story,  Partn.  §§  Z77 ,  382.  The  rule  was  expressly 
approved  by  Chancellor  Kent,  who  declared  it  to  rest  upon  just  and 
obvious  principles  of  equity,  and  to  be  settled  by  a  series  of  English 
and  American  decisions.  3  Kent,  Comm.  *6.S.  Prof.  Parsons  de- 
clared it  to  be  distinctively  settled,  and  a  simple  rule,  eminently  prac- 
tical, and  founded  upon  obvious  principles  of  poHcy.  T.  Pars.  Partn. 
pp.  382,  383. 

Whatever  question  there  may  have  been  as  to  this  rule  half  a  cen- 
tury ago,  it  is  now  thoroughly  and  decidedly  established  by  the  great 
weight  and  number  of  adjudged  cases,  and  must  be  followed,  unless  it 
is  contrary  to  the  letter  or  spirit  of  our  insolvency  law.  The  assignee 
claims  that  it  is  so,  in  that  it  violates  the  fundamental  principles  of 
equal  distribution  and  no  preferences,  upon  which  the  insolvency  law 
rests,  and  asks  us  to  adopt  the  Kentucky  rule,  which  is,  in  effect,  that 
where  a  firm  is  insolvent,  and  there  are  both  firm  and  individual  as- 
sets to  be  distributed  to  farm  and  individual  creditors,  the  partnership 
assets  are  to  be  distributed  exclusively  to  the  firm  creditors ;  then  the 
individual  creditors  are  to  receive  a  percentage  on  their  claims  from 
the  individual  assets,  equal  to  that  received  by  the  firm  creditors  on 
their  claims  from  the  partnership  assets ;  and  the  balance,  if  any,  to 
all  of  the  creditors,  pro  rata.  Bank  v.  Keizer,  2  Duv.  169.  The  orig- 
inal of  this  rule  seems  to  be  the  rule  adopted  in  Pennsylvania,  in  Bell 
v.  Newman,  5  Serg.  &  R.  78,  for  the  distribution  of  firm  and  indi- 
vidual assets,  in  a  case  where  a  surviving  partner  died,  leaving  both 
partnership  and  separate  creditors,  and  firm  and  separate  assets  in 
the  hands  of  his  administrator.  Gibson,  J.,  dissented,  and,  in  his  opin- 
ion, ably  vindicated  the  equity  rule,  and  tersely  stated  the  objections 
to  the  rule  laid  down  in  the  opinion  of  the  court,  in  these  words :  "It 
is  evident,  therefore,  the  rule  would  operate  unequally,  by  making 
the  separate  creditors  share  their  fund  with  the  joint  creditors,  where 
it  happens  to  be  the  largest,  without  subjecting  the  latter  to  share 
theirs  under  like  circumstances.  It  may  be  said,  it  is  impossible  to 
put  them  on  a  footing  in  this  respect.  I  grant  that  it  cannot  be  done 
on  any  plan  of  participating  in  the  same  fund,  but  you  precisely  put 
them  on  a  footing  by  making  each  fund  bear  the  burden  of  its  own 
debts;  and,  if  that  of  the  separate  creditors  should  happen  to  be  the 
most  productive,  I  know  not  on  what  principle  of  equity  they  can  be 
deprived  of  the  advantage."  Bell  v.  Newman  was  practically  over- 
ruled in  Black's  Appeal,  44  Pa.  503,  and  the  equity  rule  adopted.  The 
objections  to  the  now  discarded  rule  of  Pennsylvania  apply  precisely 
to  the  Kentucky  rule,  which  has  not,  so  far  as  we  are  advised,  been 
followed  by  any  other  court. 

As  to  the  claim  that  the  equity  rule  Is  contrary  to  the  express  pro- 
hibition of  our  insolvency  law  as  to  preferences,  it  is  to  be  noted  that 
the  equity  rule  is  the  unquestioned  rule  in  England  for  the  distribution 
in  bankruptcy  of  the  firm  and  separate  assets,  and  was  expressly 
adopted  by  section  14  of  the  federal  bankruptcy  act  of  1841,  and  sec- 
tion 36  of  the  act  of  1867.    This  is  significant  for  the  prohibition  of 


13G0  PARTNERSHIP  (Part  5 

preferences  is  a  pronounced  feature  of  all  bankrupt  laws,  and  especial- 
ly so  of  the  bankrupt  acts  of  1841  and  1867.  If  it  be  held  that  the 
prohibition  of  preferences  in  our  insolvency  law  abrogates  any  part 
of  the  equity  rule,  the  whole  thereof  is  annulled,  and  firm  and  indi- 
vidual assets  constitute  a  single  fund,  to  be  distributed  to  firm  and  in- 
dividual creditors  pro  rata.  It  is  clear  that  the  law  cannot  be  so  con- 
strued, and  that  the  prohibition  as  to  preferences  relates  to,  and  is 
directed  against,  the  acts  of  the  insolvents.  The  same  suggestions 
apply  with  equal  force  to  the  claim  that  the  requirement  of  the  insol- 
vency law  of  equality  in  the  distribution  of  the  net  assets  to  the  cred- 
itors abrogates  the  equity  rule.  It  is  difficult  to  see  upon  what  prin- 
ciple we  can  consistently  hold,  as  we  are,  in  effect,  asked  to  do  by 
the  assignee,  that  the  equity  rule  is  annulled  by  the  provisions  of  the 
insolvent  law  forbidding  preferences,  and  requiring  equality  of  dis- 
tribution, and  adopt  in  place  of  it  the  Kentucky  rule;  for  the  latter 
permits  the  firm  creditors  to  have  the  exclusive  benefit  of  the  firm  as- 
sets, if  they  are  greater  and  pay  a  greater  dividend  to  firm  creditors 
than  the  individual  assets  do  to  individual  creditors;  but,  if  they  are 
less,  then,  and  only  then,  the  two  classes  of  creditors  share  equally. 
The  firm  creditors  never  share  their  fund  with  the  separate  creditors, 
but  the  latter  must  share  theirs  with  the  former,  whenever  it  is  the 
largest.  If  one  of  these  rules  is  forbidden  by  the  insolvency  law,  the 
other  is,  also. 

The  fact  that  the  insolvency  law  contains  no  directions  for  the  mar- 
shaling the  assets  of  insolvents  where  there  are  different  classes  of 
creditors  and  different  funds,  indicates  that  it  was  the  intention  of 
the  legislature  to  leave  the  settled  equity  rule  in  force.  The  insol- 
vency law's  requirement  of  equality  and  no  preferences  is  subordinate 
to  the  settled  equities  and  priorities  of  partnership  creditors  in  and  to 
the  firm  assets,  and  the  correlative  equities  and  priorities  of  the  sepa- 
rate creditors  in  and  to  the  separate  assets,  when  the  assets  are  mar- 
shaled and  distributed  by  the  court  in  insolvency  proceedings.  The 
direction  of  the  statute  for  the  equal  distribution  of  the  insolvent's 
property  means  a  distribution  in  accordance  with  the  recognized  rules 
of  equity.  See  Hanson  v.  Metcalf,  46  Minn.  25,  48  N.  W.  441 ;  Kells 
v.  McClure,  69  Minn.  60,  71  N.  W.  827. 

It  is  further  urged  that  the  rule  of  distribution  and  priority  in  the 
insolvency  court  and  probate  court  should  be  the  same,  and  that  the 
equity  rule  cannot  be  followed  in  the  latter  court,  in  the  allowance 
and  payment  of  claims  against  the  estate  of  a  deceased  partner,  be- 
cause the  Probate  Code  (Gen.  St.  1894,  §  4521)  provides,  in  effect, 
that  when  two  or  more  persons  are  indebted  on  a  joint  contract,  and 
one  of  them  dies,  his  estate  is  liable  thereon,  and  it  may  be  allowed  by 
the  probate  court  as  if  it  were  joint  and  several.  We  are  not  called 
upon  here  to  construe  this  statute,  or  determine  what  the  rule  of  dis- 
tribution in  the  probate  court  would  be.  It  may,  however,  be  sug- 
gested, without  deciding  the  question,  that  it  seems  to  be  well  settled 
in  other  states  that  statutes  making  partnership  debts  joint  and  sev- 
eral, and  statutes  providing  for  the  allowance  of  joint  claims  in  the 
probate  court  as  if  joint  and  several,  are  not  intended  to  abrogate  all 
equitable  priorities  of  partnership  and  individual  creditors,  respec- 
tively, in  the  partnership  and  individual  estates,  or  to  introduce  any 
new  rule  for  marshaling  the  assets  of  the  joint  and  separate  estates. 
2  Bates,  Partn.  §  828. 


Ch.  6)  EFFECT   OF  DISSOLUTION  AS  TO  THIRD   PARTIES  1361 

The  claim  of  the  Irish-American  Bank  was  based  upon  promissory 
notes  executed  by  the  firm  of  Ives,  Ireland  &  Co.,  and  by  Ireland  in 
his  individual  name ;  and  for  this  reason  the  trial  court  permitted  the 
bank  to  receive  a  dividend  on  the  full  amount  of  its  claim,  from  both 
the  partnership  and  individual  funds.  The  trial  court's  order  in  this 
respect  is  claimed  to  be  erroneous,  for  the  reason  that  the  considera- 
tion of  the  notes  determines  the  character  of  the  debt,  which  was  for 
money  loaned  to,  and  used  by,  the  firm ;  hence  it  is  immaterial  wheth- 
er or  not  the  individual  name  of  the  partner  is  on  the  notes,  for  with 
or  without  it  they  represent  a  partnership  debt,  for  which  he  is  liable ; 
consequently  the  bank  has  no  equities  superior  to  the  other  firm  cred- 
itors. The  question  of  double  proof  in  such  a  case  is  not  a  new 
one.  It  was  at  one  time  the  rule  in  England  that  a  creditor  holding  a 
note  signed  by  the  firm  and  an  individual  partner  must,  in  bankrupt- 
cy, elect  which  estate  he  would  prove  his  claim  against.  The  rule  is, 
and  always  has  been,  otherwise  in  this  country,  and  it  is  settled  by  a 
very  decided  weight  of  authority  that  such  double  proof  is  permissible. 
T.  Pars.  Partn.  p.  390;  2  Bates,  Partn.  §  841;  17  Am.  &  Eng.  Enc. 
Law,  1210;  Emery  v.  Bank,  7  N.  B.  R.  217,  Fed.  Cas.  No.  4,446; 
In  re  Bradley,  2  Biss.  515,  Fed.  Cas.  No.  1,772;  Ex  parte  Nason,  70 
Me.  363 ;   Bank  v.  Hall,  160  Mass.  171,  35  N.  E.  666. 

It  is  true,  as  claimed,  that  the  federal  bankrupt  law  provided  for 
double  proof  in  certain  cases ;  but  Judge  Clifford,  in  Emery  y.  Bank, 
clearly  indicates,  independent  of  the  statute,  that  where  a  creditor  has 
taken  the  precaution,  before  parting  with  his  money,  to  secure  an  ex- 
press written  contract  for  its  repayment  from  both  the  firm  and  the 
individual  partner,  his  right  is  clear,  in  case  of  bankruptcy,  to  the' 
benefit  of  his  caution,  and  to  prove  his  claim  against,  and  receive  a 
dividend  from,  the  fund  belonging  tc  the  partnership,  and  also  from 
the  estate  of  the  individual  partner.  This  precise  question  was  in- 
volved in  the  cases  of  Ex  parte  Nason  and  Bank  v.  Hall,  supra,  and  in 
each  the  rule  as  to  double  proof  was  maintained  on  principle.  In  the 
last-named  case  the  court,  after  citing  the  authorities  in  support  of 
the  rule,  concludes  thus:  "In  view  of  the  modern  decisions,  and  the 
general  agreement  of  opinion,  we  think  it  unnecessary  to  argue  elab- 
orately for  the  right  of  a  creditor  who  has  required  two  contracts, 
binding  two  distinct  estates,  to  insist  upon  both." 

Our  conclusion  on  this  question  is  that  the  Irish-American  Bank 
was  entitled  to  receive  a  dividend  on  its  claim  from  both  funds.  The 
trial  court,  however,  directed  a  dividend  to  be  paid  to  it  from  both 
funds,  concurrently,  on  the  full  amount  of  its  debt.  There  are  au- 
thorities sustaining  this  part  of  the  order,  but  it  is  manifestly  in- 
equitable to  other  creditors.  When  the  bank  receives  a  dividend  from 
the  firm  assets,  the  primary  fund  for  the  payment  of  its  claim,  its 
debt  is  paid  pro  tanto ;  and  to  permit  it  to  receive  a  dividend  from 
the  individual  assets,  on  the  part  of  its  debt  paid  from  the  firm  assets, 
to  the  prejudice  of  other  creditors,  is  not  just,  and  therefore  not  legal, 
in  the  absence  of  any  statute  declaring  it  to  be  so.  It  follows  that  the 
order  appealed  from  must  be  modified  so  as  to  permit  the  bank  to  re- 
ceive a  dividend  from  the  individual  assets  of  Ireland  only  on  the 
balance  of  its  claim  after  applying  as  a  payment  its  dividend  from 
the  firm  assets,  and  that  this  case  must  be  remanded,  with  direction 
to  the  district  court  to  so  do.  So  ordered,  without  statutory  costs. 
B.&  B.Bus.Law— S6 


13(>2  PARTNERSHIP  (Part  5 

MiTCHKLi.,  J.  I  concur,  except  in  the  result  arrived  at  as  to  the 
claim  of  the  Irish-American  Bank.  I  think  the  consideration  of  the 
debt  should,  in  this  case,  determine  the  class  to  which  the  claim  be- 
longs, and  that,  notwithstanding  the  authorities  cited  to  the  contrary, 
the  claim  of  the  bank  should  be  treated  as  exclusively  a  partnership 
debt.  A  partnership  is  but  an  aggregation  of  individuals,  and  not  an 
entity  distinct  from  the  members  composing  it.  It  is  wholly  incon- 
sistent with  the  spirit  and  purposes  of  our  insolvent  law  to  permit  one 
dealing  with  a  partnership  to  obtain  a  preference  by  securing  on  the 
evidence  of  the  debt  the  signatures  of  the  members  of  the  firm,  in- 
dividually, in  addition  to  their  signatures  by  their  firm  name.  There 
is  nothing  in  the  general  equity  rule  for  the  distribution  of  partnership 
and  individual  assets  which  requires  any  such  result. 

Canty,  J.    I  concur  with  Air.  Justice  MitchelIv. 


DARBY   V.   GILLIGAN  et   al. 

(Supreme  Court  of  Appeals  of  West  Virginia,  1889.    33  W.  Va.  246, 
10  S.  E.  400,  6  L.  R.  A.  740.) 

Snyder,  P.  Appeal  from  a  decree  of  the  circuit  court  of  Taylor 
•county,  pronounced  March  28,  1887,  in  the  suit  of  Darby  &  Co.  and 
others  against  John  J.  Gilligan  and  others.  The  suit  was  brought  to 
set  aside  a  trust-deed  made  by  said  Gilligan  to  John  T.  McGraw,  trus- 
tee; to  enjoin  said  trustee  from  disposing  of  the  property  thus  con- 
veyed to  him;  and  to  have  the  same  applied  to  the  payment  of  the 
plaintiffs'  debts.  On  September  17,  1883,  the  said  Gilligan  and  James 
Burns  entered  into  an  agreement  in  writing,  whereby  they  agreed  to 
form  a  partnership  for  conducting  a  general  merchandising  business 
in  the  town  of  Grafton,  Taylor  county,  Gilligan  having  prior  to  that 
time  been  merchandising  at  the  same  place,  and  having  then  on  hand 
a  stock  of  goods,  which  he  put  into  the  firm  at  the  value  of  $2,000, 
and  Burns  paid  into  the  firm  $1,O0Oj  Upon  this  capital  stock,  they 
agreed  that  Gilligan  should  have  a  two-thirds  and  Burns  a  one-third 
interest  in  the  assets,  business,  and  profits  of  the  partnership.  At  the 
time  this  partnership  was  formed,  Gilligan  was  indebted  to  the  First 
National  Bank  of  Grafton  and  others  in  the  sum  of  $1,100,  for  money 
borrowed  and  put  into  the  mercantile  business  while  he  was  conduct- 
ing it  alone.  During  the  carrying  on  of  the  business  by  the  firm,  the 
firm  contracted  debts  to  the  plaintiffs  and  others,  and  the  partners  so 
managed  the  business  that  they  and  the  firm  became  indebted,  to  in- 
solvency. Afterwards,  on  February  27,  1885,  by  a  contract  in  writ- 
ing, the  partnership  was  dissolved,  upon  the  terms  that  in  considera- 
tion of  $1,000,  for  which  Gilligan  executed  to  Burns  his  note,  paya- 
ble one  year  from  that  date,  Burns  withdrew  from  the  firm,  and  Gilli- 
gan assumed,  and  agreed  to  pay,  all  the  then  existing  indebtedness  of 
the  firm.  About  two  months  after,  on  April  24,  1885,  Gilligan  con- 
veyed to  John  T.  McGraw  the  whole  of  the  assets  of  the  late  firm,  in 
trust,  to  secure  all  his  debts,  including  the  debts  due  the  plaintiffs  and 
others  by  said  firm ;  but  in  said  conveyance  he  preferred  the  afore- 
said $1,100  due  to  the  Grafton  Bank  and,  others,  the  note  for  $1,000 
given  to  Burns  as  aforesaid,  which  had  been  assigned  by  him  to  Anna 
Burns,  and  other  individual  debts,  amounting  in  the  aggregate  to  more 
than  the  value  of  the  assets  conveyed. 


Ch.  6)  EFFECT   OF   DISSOLUTION  AS   TO   THIRD   PARTIES  1368 

Upon  these  facts  the  plaintiffs,  the  appellants  here,  contend  that 
this  attempt  of  Gilli^an  to  prefer  and  pay  his  individual  debts  out  of 
the  said  assets  is  a  fraud  upon  the  firm  creditors,  which,  according  to 
well-settled  principles,  a  court  of  equity  will  not  permit.  Ordinarily 
the  partnership  estate  is  liable  for  the  payment  of  the  firm  debts,  in 
preference  to  the  individual  debts  of  the  partners.  This  is  the  right  of 
the  partners  inter  se.  The  creditors  of  the  partnership  have  no  such 
right  of  priority  over  the  creditors  of  the  partners  individually,  other- 
wise than  by  substitution  to  the  rights  of  the  partners  inter  se.  The 
partners  may  release  this  right,  and,  if  they  do  so  lx)na  fide,  the  cred- 
itors of  the  partnership  caimot  complain ;  for  it  is  not  their  right,  ex- 
cept subject  to  the  proper  disposition  and  control  of  the  partners  them- 
selves, to  whom  it  belongs.  This  right  is  generally  called  the  "part- 
ner's lien."  It  differs  from  a  common-law  lien  in  that  it  is  not  de- 
pendent on  possession,  and  any  single  partner  can  convey  a  good  title 
to  specific  chattels  by  a  bona  fide  sale  in  the  course  of  trade;  and  a 
lien  does  not  involve  the  right  to  deal  with  the  property,  whereas  the 
partner's  equity  is  a  right  to  have  it  applied  for  certain  purposes,  and 
the  one  partner  cannot  assert  the  lien  as  a  sole  plaintiff'.  The  existence 
of  this  equity  may  be  explained  in  a  variety  of  ways,  as  on  an  implied 
contract  that  the  assets  shall  not  be  used  for  private  purposes;  on 
the  doctrine  of  suretyship,  since  each  partner  is  liable  in  solido  for 
the  debts,  and  therefore,  inter  se,  virtually  a  surety  for  the  copartners 
for  their  proportions,  and  entitled  to  have  the  assets  applied  so  as  to 
relieve  him.  The  partners  have  jointly  the  same  right  of  absolute 
disposition  of  their  joint  property  that  any  individual  has.  They  may 
sell  it,  pledge  it,  convert  it  into  other  forms,  divide  it  up  among  them- 
selves, devote  it  to  the  payment  of  all  or  part  of  the  debts,  or  exercise 
other  ownership  over  it,  subject  only  to  each  other's  rights,  and  to  the 
operation  of  statutes  forbidding  voluntary  or  fraudulent  conveyances, 
to  hinder,  delay,  and  defraud  creditors. 

It  is  clear  from  what  has  preceded  that  while  the  partnership  is 
solvent  and  going  on  the  partners  may,  by  unanimous  assent  or  joint 
act,  do  what  they  please  with  the  assets,  if  the  act  is  bona  fide.  Where 
in  such  case,  one  partner  sells  or  assigns  his  interest  to  the  other, 
bona  fide,  for  a  valuable  consideration,  or  an  agreement  to  pay  the 
debts  of  the  firm,  and  indemnify  against  them,  this  will  change  the 
joint  into  a  separate  property.  The  only  question  is  upon  the  bona 
fides  of  the  transaction.  If  such  an  arrangement  could  not  be  made, 
a  partner  never  could  retire.  Bates,  Partn.  §§  559,  820,  824;  Story, 
Partn.  §§  97,  360.  On  the  other  hand,  according  to  the  better  reason 
and  the  weight  of  authority,  if  the  firm  is  insolvent,  or  on  the  eve  of 
insolvency,  and  both  of  the  partners  are  insolvent,  a  purchase  by  one 
partner  of  the  interest  of  the  other,  in  consideration  of  the  fomier's 
assumption  of  all  the  debts  of  the  firm,  will  be  regarded  as  a  purchase 
upon  a  consideration  which  is  of  no  value  whatever ;  and,  no  equiva- 
lent having  been  given,  the  transfer  is  in  effect  voluntary,  and  its  only 
effect,  if  sustained,  would  be  to  hinder  partnership  creditors,  and  hence 
is  deemed  ineff'ectual  to  convert  the  joint  property  into  separate  prop- 
erty, as  against  the  firm  creditors.     *     *     * 

In  the  case  at  bar  the  firm  as  well  as  the  individual  partners  were  in- 
debted, to  insolvency,  at  the  time  the  contract  of  dissolution  was  made 
by  the  terms  of  which  Gilligan  assumed  to  pay,  not  only  the  debts  of 
the  firm,  but  $1,000  to  Burns.     As  the  firm  and  Gilligan  were  then: 


1364  PARTNERSHIP  (Part  5 

both  insolvent,  there  was  no  valuable  consideration  for  either  this 
assumption  of  the  firm  debts  or  said  $1,000.  Less  than  two  months 
after  this  transaction,  Gilligan,  without  paying  a  single  firm  debt,  so 
far  as  the  record  shows,  assigned  all  the  assets  in  such  a  manner  as 
to  devote  the  whole  of  them  to  the  payment  of  his  individual  debts. 
It  seems  to  me  plain  that  to  uphold  this  scheme,  against  the  rights  of 
the  social  creditors,  would  violate,  not  only  the  general  principles  of 
equity,  but  the  express  provisions  of  our  statute  against  voluntary  and 
fraudulent  conveyances.  It  is,  however,  claimed  for  the  appellees 
that  if  this  transaction  is  held  void  as  to  the  firm  creditors,  then,  for 
the  like  reasons,  the  act  of  Gilligan  in  putting  his  own  stock  of  goods 
into  the  firm  must  be  held  void  as  to  his  individual  creditors.  But 
there  is  no  analogy  in  the  two  transactions.  It  does  not  appear  that 
either  Burns  or  Gilligan  was  insolvent  at  that  time,  and  it  does  ap- 
pear that  Burns  paid  into  the  concern  $1,000,  and  also  that  the  debts 
due  the  plaintiffs  and  others  were  contracted  by  the  firm  on  the  faith 
of  the  social  assets. 

For  these  reasons  the  decree  of  the  circuit  court  is  reversed,  and 
the  cause  remanded.     *     *     * 


Ch.  7)  LIMITED  PARTNERSHIPS  13G5 

CHAPTER  VII 
LIMITED  PARTNERSHIPS 

EXPLANATORY  NOTE  AS  TO  THE  UNIFORM  LIMITED 
•    PARTNERSHIP  ACT  BY  WILLIAM  DRAPER  LEWIS.  ^ 

The  business  reason  for  the  adoption  of  acts  making  provisions 
for  limited  or  special  partners  is  that  men  in  business  often  desire 
to  secure  capital  from  others.  There  are  at  least  three  classes  of 
contracts  which  can  be  made  with  those  from  whom  the  capital 
is  secured:  One,  the  ordinary  loan  on  interest;  another,  the  loan 
where  the  lender,  in  lieu  of  interest,  takes  a  share  in  the  profits  of 
the  business;  third,  those  cases  in  which  the  person  advancing 
the  capital  secures,  besides  a  share  in  the  profits,  some  measure 
of  control  over  the  business. 

At  first,  in  the  absence  of  statutes,  the  courts,  both  in  this  coun- 
try and  in  England,  assumed  that  one  who  is  interested  in  a  busi- 
ness is  bound  by  its  obligations,  carrying  the  application  of  this 
principle  so  far,  that  a  contract  where  the  only  evidence  of  inter- 
est was  a  share  in  the  profits  made  one  who  supposed  himself  a 
lender,  and  who  was  probably  unknown  to  the  creditors  at  the 
times  they  extended  their  credits,  unlimitedly  liable  as  a  partner 
for  the  obligations  of  those  actually  conducting  the  business. 

Later  decisions  have  much  modified  the  earlier  cases.  The  lend- 
er, who  takes  a  share  in  the  profits,  except  possibly  in  one  or  two 
of  our  jurisdictions,  does  not  by  reason  of  that  fact  run  a  risk  of 
being  held  as  a  partner.  If,  however,  his  contract  falls  within  the 
third  class  mentioned,  and  he  has  any  measure  of  control  over  the 
business,  he  at  once  runs  serious  risk  of  being  held  liable  for  the 
debts  of  the  business  as  a  partner;  the  risk  increasing  as  he  in- 
creases the  amount  of  his  control. 

The  first  Limited  Partnership  Act  was  adopted  by  New  York 
in  1822 ;  the  other  commercial  states,  during  the  ensuing  30  years, 
following  her  example.  Most  of  the  statutes  follow  the  language 
of  the  New  York  statute,  with  little  material  alteration.  These 
statutes  were  adopted,  and  to  a  considerable  degree  interpreted  by  the 
courts,  during  that  period  when  it  was  generally  held  that  any  interest 
in  a  business  should  make  the  person  holding  the  interest  liable  for 
its  obligations.  As  a  result  the  courts  usually  assume  in  the  in- 
terpretation of  these  statutes  two  principles  as  fundamental: 

First.  That  a  limited  (or  as  he  is  also  called  a  special)  partner 
is  a  partner  in  all  respects  like  any  other  partner,  except  that,  to 
obtain  the  privilege  of  a  limitation  on  his  liability,  he  has  con- 

1  Proceedings  of  the  Twenty-Sixth  Annual  Meeting  of  National  Conference 
of  Commissioners  on  Uniform  State  Laws,  p.  3S4  (1916). 


1366  PARTNERSHIP  (Part  5 

formed  to  the  statutory  requirements  in  respect  t6  filing  a  certifi- 
cate and  refraining  from  participation  in  the  conduct  of  the  busi- 
ness. 

Second.  The  limited  partner,  on  any  failure  to  follow  the  re- 
quirements in  regard  to  the  certificate  or  any  participation  in  the 
conduct  of  his  business,  loses  his  privilege  of  limited  liability  and 
becomes,  as  far  as  those  dealing  with  the  business  are  concerned, 
in  all  respects  a  partner. 

The  courts  in  thus  interpreting  the  statutes,  although  they  made 
an  American  partnership  with  limited  members  something  very 
different  from  the  French  Societe  en  Commandite,  from  which  the 
idea  of  the  original  statutes  was  derived,  unquestionably  carried 
out  the  intent  of  those  responsible  for  their  adoption.  This  is 
shown  by  the  very  wording  of  the  statutes  themselves.  For  in- 
stance, all  the  statutes  require  that  all  partners,  limited  and  gen- 
eral, shall  sign  the  certificate,  and  nearly  all  state  that :  "If  any 
false  statement  be  made  in  such  certificate  all  the  persons  inter- 
ested in  such  partnership  shall  be  liable  for  all  the  engagements 
thereof  as  general  partners." 

The  practical  result  of  the  spirit  shown  in  the  language  and  in 
the  interpretation  of  existing  statutes,  coupled  with  the  fact  that 
a  man  may  now  lend  money  to  a  partnership  and  take  a  share  in 
the  profits  in  lieu  of  interest,  without  running  serious  danger  of 
becoming  bound  for  partnership  obligations,  has,  to  a  very  great 
extent,  deprived  the  existing  statutory  provisions  for  limited  part- 
ners of  any  practical  usefulness.  Indeed,  apparently  their  use  is 
largely  confined  to  associations  in  which  those  who  conduct  the 
business  have  not  more  than  one  limited  partner. 

One  of  the  causes  forcing  business  into  the  corporate  form,  in 
spite  of  the  fact  that  the  corporate  form  is  ill  suited  to  many  busi- 
ness conditions,  is  the  failure  of  the  existing  limited  partnership 
acts  to  meet  the  desire  of  the  owners  of  a  business  to  secure  nec- 
essary capital  under  the  existing  limited  partnership  form  of  busi- 
ness association. 

The  draft  herewith  submitted  proceeds  on  the  following  as- 
sumptions: 

First.  No  public  policy  requires  a  person  who  contributes  to  the 
capital  of  a  iDUsiness,  acquires  an  interest  in  the  profits,  and  some 
degree  of  control  over  the  conduct  of  the  business,  to  become 
bound  for  the  obligations  of  the  business,  provided  creditors  have 
no  reason  to  believe  at  the  times  their  credits  were  extended  that 
such  person  was  so  bound. 

Second.  That  persons  in  business  should  be  able,  while  remain- 
ing themselves  liable  without  limit  for  the  obligations  contracted 
in  its  conduct,  to  associate  with  themselves  others  who  contribute 
to  the  capital  and  acquire  rights  of  ownership,  provided  that  such 
contributors  do  not  compete  with  creditors  for  the  assets  of  the 
partnership. 


Ch.  7)  LIMITED   PARTNERSHIPS  1367 

The  attempt  to  cany  out  these  ideas  has  led  to  the  incorpora- 
tion into  the  draft  submitted  of  certain  features,  not  found  in,  or 
differing  from,  existing  limited  partnership  acts : 

First.  In  the  draft,  the  person  who  contributes  the  capital, 
though  in  accordance  with  custom  called  a  limited  partner,  is  not 
in  any  sense  a  partner.  He  is,  however,  a  member  of  the  associa- 
tion.   See  section  1. 

Second.  As  limited  partners  are  not  partners  securing  limited 
liability  by  filing  a  certificate,  the  association  is  formed  when  sub- 
stantial compliance,  in  good  faith,  is  had  with  the  requirements 
for  a  certificate.  Section  2  (2).  This  provision  eliminates  the 
difficulties  which  arise  from  the  recognition  of  de  facto  associa- 
tions, made  necessary  by  the  assumption  that  the  association  is 
not  formed,  unless  a  strict  compliance  with  the  requirements  of 
the  act  is  had. 

Third.  The  limited  partner  not  being  in  any  sense  a  principal  in 
the  business,  failure  to  comply  with  the  requirements  of  the  act  in 
respect  to  the  certificate,  while  it  may  result  in  the  non-formation 
of  the  association,  does  not  make  him  a  partner  or  liable  as  such. 
The  exact  nature  of  his  liability  in  such  cases  is  set  forth  in  sec- 
tion  11. 

Fourth.  The  limited  partner,  while  not  as  such  in  any  sense  a 
partner,  may  become  a  partner  as  any  person  not  a  member  of  the 
association  may  become  a  partner,  and,  becoming  a  partner,  may 
nevertheless  retain  his  rights  as  limited  partner;  this  last  provi- 
sion enabling  the  entire  capital  embraced  in  the  business  to  be  di- 
vided between  the  limited  partners,  all  the  general  partners  being 
also  limited  partners.    Section  12. 

Fifth.  The  limited  partner  is  not  debarred  from  loaning  money 
or  transacting  other  business  with  the  partnership  as  any  other 
non-member,  provided  he  does  not,  in  respect  to  such  transactions, 
accept  from  the  partnership  collateral  security,  or  receive  from 
any  partner  or  the  partnership  any  payment,  conveyance,  or  re- 
lease fom  liability,  if  at  the  time  the  assets  of  the  partnership  are 
not  sufficient  to  discharge  its  obligations  to  persons  not  general  or 
limited  partners.     Section  13. 

Sixth.  The  substitution  of  a  person  as  limited  partner  in  place 
of  an  existing  limited  partner,  or  the  withdrawal  of  a  limited  part- 
ner, or  the  addition  of  new  limited  partners,  does  not  necessarily 
dissolve  the  association.  Sections  8,  16  (2b).  No  limited  partner, 
however,  can  withdraw  his  contribution  until  all  liabilities  to  credi- 
tors are  paid.     Section  16  (la). 

Seventh.  As  limited  partners  are  not  principals  in  transactions 
of  the  partnership,  their  liability,  except  for  known  false  state- 
ments in  the  certificate  (section  7),  is  to  the  partnership,  not  to 
creditors  of  the  partnership  (section  17).  The  general  partners 
cannot,  however,  waive  any  liability  of  the  limited  partners  to  the 
prejudice  of  such  creditors.     Section  17  (3). 


1368  PARTNERSHIP  (Part  5 

UNIFORM  LIMITED  PARTNERSHIP  ACT 
Section  1.  Limited  Partnership  Defined.  A  limited  partner- 
ship is  a  partnership  formed  by  two  or  more  persons  under  the 
provisions  of  section  2,  having  as  members  one  or  more  general 
partners  and  one  or  more  limited  partners.  The  limited  partners 
as  such  shall  not  be  bound  by  the  obligations  of  the  partnership. 

Section  2.  Formation.  (1)  Two  or  more  persons  desiring  to 
form  a  limited  partnership  shall 

(a)   Sign  and  swear  to  a  certificate,  which  shall  state— 

I.  The  name  of  the  partnership; 

II.  The  character  of  the  business; 

III.  The  location  of  the  principal  place  of  business; 

IV.  The  name  and  place  of  residence  of  each  member;  general 
and  limited  partners  being  respectively  designated; 

V.  The  term  for  which  the  partnership  is  to  exist; 

VI.  The  amount  of  cash  and  a  description  of  and  the  agreed  val- 
ue of  the  other  property  contributed  by  each  limited  partner; 

VII.  The  additional  contributions,  if  any,  agreed  to  be  made  by 
each  limited  partner  and  the  times  at  which  or  events  on  the  hap- 
pening of  which  they  shall  be  made; 

VIII.  The  time,  if  agreed  upon,  when  the  contribution  of  each 
limited  partner  is  to  be  returned ; 

IX.  The  share  of  the  profits  or  the  other  compensation  by  way 
of  income  which  each  limited  partner  shall  receive  by  reason  of 
his   contribution ; 

X.  The  right,  if  given,  of  a  limited  partner  to  substitute  an  as- 
signee as  contributor  in  his  place,  and  the  terms  and  conditions 
of  the  substitution; 

XI.  The  right,  if  given,  of  the  partners  to  admit  additional  lim- 
ited partners; 

XII.  The  right,  if  given,  of  one  or  more  of  the  limited  partners 
to  priority  over  other  limited  partners,  as  to  contributions  or  as 
to  compensation  by  way  of  income,  and  the  nature  of  such  prior- 
ity; 

XIII.  The  right,  if  given,  of  the  remaining  general  partner  or 
partners  to  continue  the  business  on  the  death,  retirement  or  in- 
sanity of  a  general  partner ;  and 

XIV.  The  right,  if  given,  of  a  limited  partner  to  demand  and 
receive  property  other  than  cash  in  return  for  his  contribution. 

(b)  File  for  record  the  certificate  in  the  office  of  (here  designate 
the  proper  office). 

(2)  A  limited  partnership  is  formed  if  there  has  been  substantial 
compliance  in  good  faith  with  the  requirements  of  paragraph  (1). 

Section  3,  Business  Which  may  be  Carried  on.  A  limited  part- 
nership may  carry  on  any  business  which  a  partnership  without 
limited  partners  may  carry  on,  except  (here  designate  the  busi- 
ness to  be  prohibited). 


Ch.  7)  LIMITED   PARTNERSHIPS  1369 

Section  4.  Character  of  Limited  Partner's  Contribution.  The 
contribution  of  a  limited  partner  may  be  cash  or  other  property, 
but  not  services. 

Section  5.  A  Name  Not  to  Contain  Surname  of  Limited  Part- 
ner— Exceptions.  (1)  The  surname  of  a  limited  partner  shall  not 
appear  in  the  partnership  name,  unless — 

(a)  It  is  also  the  surname  of  a  general  partner;   or 

(b)  Prior  to  the  time  when  the  limited  partner  became  such  the 
business  had  been  carried  on  under  a  name  in  which  his  surname 
appeared. 

(2)  A  limited  partner  whose  name  appears  in  a  partnership 
name  contrary  to  the  provisions  of  paragraph  (1)  is  liable  as  a 
general  partner  to  partnership  creditors  who  extend  credit  to  the 
partnership  without  actual  knowledge  that  he  is  not  a  general 
partner. 

Section  6.  Liability  for  False  Statements  in  Certificate.  If  the 
certificate  contains  a  false  statement,  one  who  suffers  loss  by  re- 
liance on  such  statement  may  hold  liable  any  party  to  the  certifi- 
cate who  knew  the  statement  to  be  false — 

(a)  At  the  time  he  signed  the  certificate;    or 

(b)  Subsequently,  but  within  a  sufficient  time  before  the  state- 
ment was  relied  upon  to  enable  him  to  cancel  or  amend  the  cer- 
tificate, or  to  file  a  petition  for  its  concellation  or  amendment  as 
provided  in  section  25  (3). 

Section  7.  Limited  Partner  Not  Liable  to  Creditors.  A  limit- 
ed partner  shall  not  become  liable  as  a  general  partner  unless,  in 
addition  to  the  exercise  of  his  rights  and  powers  as  a  limited  part- 
ner, he  takes  part  in  the  control  of  the  business. 

Section  8.  Admission  of  Additional  Limited  Partners.  After 
the  formation  of  a  limited  partnership,  additional  limited  partners 
may  be  admitted  upon  filing  an  amendment  to  the  original  cer- 
tificate in  accordance  with  the  requirements  of  section  25. 

Section  9.  Rights,  Powers  and  Liabilities  of  a  General  Part- 
ner. (1)  A  general  partner  shall  have  all  the  rights  and  powers 
and  be  subject  to  all  the  restrictions  and  liabilities  of  a  partner  in 
a  partnership  without  limited  partners,  except  that  without  the 
written  consent  or  ratification  of  the  specific  act  by  all  the  limited 
partners,  a  general  partner  or  all  of  the  general  partners  have  no 
authority  to — 

(a)  Do  any  act  in  contravention  of  the  certificate; 

(b)  Do  any  act  which  would  make  it  impossible  to  carry  on  the 
ordinary  business  of  the  partnership; 

(c)  Confess  a  judgment  against  the  partnership; 

(d)  Possess  partnership  property,  or  assign  their  rights  in  spe- 
cific partnership  property,  for  other  than  a  partnership  purpose; 

(e)  Admit  a  person  as  a  general  partner; 

(f)  Admit  a  person  as  a  limited  partner,  unless  the  right  so  to 
do  is  given  in  the  certificate; 


1370  PARTNERSHIP  (Part  5 

(g)  Continue  the  business  with  partnership  property  on  the 
death,  retirement  or  insanity  of  a  general  partner,  unless  the  right 
so  to  do  is  given  in  the  certificate. 

Section  10.  Rights  of  a  Limited  Partner.  (1)  A  limited  part- 
ner shall  have  the  same  ri^^hts  a-  a  p;eneral  partner  to — 

(a)  Have  the  partnership  books  kept  at  the  principal  place  of 
business  of  the  partnership,  and  at  all  times  to  inspect  and  copy 
any  of  them; 

(b)  Have  on  demand  true  and  full  information  of  all  things  af- 
fecting the  partnership,  and  a  formal  account  of  partnership  af- 
fairs whenever  circumstances  render  it  just  and  reasonable;    and 

(c)  Have  dissolution  and  winding  up  by  decree  of  court. 

(2)  A  limited  partner  shall  have  the  right  to  receive  a  share  of 
the  profits  or  other  compensation  by  way  of  income,  and  to  the 
return  of  his  contribution  as  provided  in  sections  15  and  16. 

Section  11.  Status  of  Person  Erroneously  Believing  Himself 
a  Limited  Partner.  A  person  who  has  contributed  to  the  capital 
of  a  business  conducted  by  a  person  or  partnership  erroneously 
believing  that  he  has  become  a  limited  partner  in  a  limited  part- 
nership, is  not,  by  reason  of  his  exercise  of  the  rights  of  a  limited 
partner,  a  general  partner  with  the  person  or  in  the  partnership 
carrying  on  the  business,  or  bound  by  the  obligations  of  such  per- 
son or  partnership;  provided  that  on  ascertaining  the  mistake  he 
promptly  renounces  his  interest  in  the  profits  of  the  business,  or 
other  compensation  by  way  of  income. 

Section  12.  One  Person  Both  General  and  Limited  Partner. 
(1)  A  person  may  be  a  general  partner  and  a  limited  partner  in 
the  same  partnership  at  the  same  time. 

(2)  A  person  who  is  a  general,  and  also  at  the  same  time  a  lim- 
ited partner,  shall  have  all  the  rights  and  powers  and  be  subject 
to  all  the  restrictions  of  a  general  partner ;  except  that,  in  respect  to 
his  contribution,  he  shall  have  the  rights  against  the  other  mem- 
bers which  he  would  have  had  if  he  were  not  also  a  general  part- 
ner. 

Section  13.  Loans  and  Other  Business  Transactions  with  Lim- 
ited Partner.  (1)  A  limited  partner  also  may  loan  money  to  and 
transact  other  business  with  the  partnership,  and,  unless  he  is  also 
a  general  partner,  receive  on  account  of  resulting  claims  against 
the  partnership,  with  general  creditors,  a  pro  rata  share  of  the  as- 
sets.   No  limited  partner  shall  in  respect  to  any  such  claim — 

(a)  Receive  or  hold  as  collateral  security  any  partnership  prop- 
erty ;    or 

(b)  Receive  from  a  general  partner  or  the  partnership  any  pay- 
ment, conveyance,  or  release  from  liability,  if  at  the  time  the  as- 
sets of  the  partnership  are  not  sufficient  to  discharge  partnership 
liabilities  to  persons  not  claiming  as  general  or  limited  partners. 

(2)  The  receiving  of  collateral  security,  or  a  payment,  convey- 
ance, or  release  in  violation  of  the  provisions  of  paragraph  (1)  is  a 
fraud  on  the  creditors  of  the  partnership. 


Ch.  7)  LIMITED   PARTNERSHIPS 


1371 


Section  14.  Relation  of  Limited  Partners  Inter  Se.  Where 
there  are  several  limited  partners,  the  members  may  agree  that 
one  or  more  of  the  limited  partners  shall  have  a  priority  over  other 
limited  partners  as  to  the  return  of  their  contributions,  as  to  their 
compensation  by  way  of  income,  or  as  to  any  other  matter.  If 
such  an  agreement  is  made  it  shall  be  stated  in  the  certificate,  and 
in  the  absence  of  such  a  statement  all  the  limited  partners  shall 
stand  upon  equal  footing. 

Section  15.  Compensation  of  Limited  Partner.  A  limited  part- 
ner may  receive  from  the  partnership  the  share  of  the  profits  or 
the  compensation  by  way  of  income  stipulated  for  in  the  certifi- 
cate; provided,  that  after  such  payment  is  made,  whether  front 
the  property  of  the  partnership  or  that  of  a  general  partner,  the 
partnership  assets  are  in  excess  of  all  liabilities  of  the  partnership 
except  liabilities  to  limited  partners  on  account  of  their  contribu- 
tions and  to  general  partners. 

Section  16.  Withdrawal  or  Reduction  of  Limited  Partner's 
Contribution.  (1)  A  limited  partner  shall  not  receive  from  a  gen- 
eral partner  or  out  of  partnership  property  any  part  of  his  contri- 
bution until — 

(a)  All  liabiHties  of  the  partnership,  except  liabilities  to  gen- 
eral partners  and  to  limited  partners  on  account  of  their  contribu- 
tions, have  been  paid  or  there  remains  property  of  the  partnership 
sufficient  to  pay  them; 

(b)  The  consent  of  all  members  is  had,  unless  the  return  of  the 
contribution  may  be  rightfully  demanded  under  the  provisions  of 
paragraph  (2)  ;  and 

(c)  The  certificate  is  cancelled  or  so  amended  as  to  set  forth  the 
withdrawal  or  reduction. 

(2)  Subject  to  the  provisions  of  paragraph  (1)  a  limited  part- 
ner may  rightfully  demand  the  return  of  his  contribution — 

(a)  On  the  dissolution  of  a  partnership ;   or 

(b)  When  the  date  specified  in  the  certificate  for  its  return  has 
arrived ;    or 

(c)  After  he  has  given  six  months'  notice  in  writing  to  all  other 
members,  if  no  time  is  specified  in  the  certificate  either  for  the  re- 
turn of  the  contribution  or  for  the  dissolution  of  the  partnership. 

(3)  In  the  absence  of  any  statement  in  the  certificate  to  the 
contrary,  or  the  consent  of  all  members,  a  limited  partner,  irre- 
spective of  the  nature  of  his  contribution,  has  only  the  right  to 
demand  and  receive  cash  in  return  for  his  cpntribution. 

(4)  A  limited  partner  may  have  the  partnership  dissolved  and 
its  affairs  wound  up  when — 

(a)  He  rightfully  but  unsuccessfully  demands  the  return  of  his 
contribution ;    or 

(b)  The  other  liabilities  of  the  partnership  have  not  been  i>aid, 
or  the  partnership  property  is  insufficient  for  their  payment  as  re- 
quired by  paragraph  (la)  and  the  limited  partner  would  otherwise 
be  entitled  to  the  return  of  his  contribution. 


1372  PARTNERSHIP  (Part  5 

Section  17.  Liability  of  Limited  Partner  to  Partnership.  (1) 
A  limited  partner  is  liable  to  the  partnership — 

(a)  For  the  difference  between  his  contribution  as  actually  made 
and  that  stated  in  the  certificate  as  having  been  made ;   and 

(b)  For  any  unpaid  contribution  which  he  agreed  in  the  cer- 
tificate to  make  in  the  future  at  the  time  and  on  the  conditions 
stated  in  the  certificate. 

(2)  A  limited  partner  holds  as  trustee  for  the  partnership — 

(a)  Specific  property  stated  in  the  certificate  as  contributed 
by  him,  but  which  was  not  contributed  or  which  has  been  wrong- 
fully returned;    and 

(b)  Money  or  other  property  wrongfully  paid  or  conveyed  to 
him  on  account  of  his  contribution. 

(3)  The  liabilities  of  a  limited  partner  as  set  forth  in  this  sec- 
tion can  be  waived  or  compromised  only  by  the  consent  of  all 
members;  but  a  waiver  or  compromise  shall  not  affect  the  right 
of  a  creditor  of  a  partnership,  who  extended  credit  or  whose  claim 
arose  after  the  filing  and  before  a  cancellation  or  amendment  of 
the  certificate,  to  enforce  such  liabilities. 

(4)  When  a  contributor  has  rightfully  received  the  return  in 
whole  or  in  part  of  the  capital  of  his  contribution,  he  is  neverthe- 
less liable  to  the  partnership  for  any  sum,  not  in  excess  of  such 
return  with  interest,  necessary  to  discharge  its  liabilities  to  all 
creditors  who  extended  credit  or  whose  claims  arose  before  such 
return. 

Section  18.  Nature  of  Limited  Partner's  Interest  in  Partner- 
ship. A  limited  partner's  interest  in  the  partnership  is  personal 
property. 

Section  19.  Assignment  of  Limited  Partner's  Interest.  (1)  A 
limited  partner's  interest  is  assignable. 

(2)  A  substituted  limited  partner  is  a  person  admitted  to  all  the 
rights  of  a  limited  partner  who  has  died  or  has  assigned  his  inter- 
est in  a  partnership. 

(3)  An  assignee,  who  does  not  become  a  substituted  limited 
partner,  has  no  right  to  require  any  information  or  account  of  the 
partnership  transactions  or  to  inspect  the  partnership  books;  he 
is  only  entitled  to  receive  the  share  of  the  profits  or  other  compen- 
sation by  way  of  income,  or  the  return  of  his  contribution,  to  which 
his  assignor  would  otherwise  be  entitled. 

(4)  An  assignee  shall  have  the  right  to  become  a  substituted 
limited  partner  if  all  the  members  (except  the  assignor)  consent 
thereto  or  if  the  assignor,  being  thereunto  empowered  by  the  cer- 
tificate, gives  the  assignee  that  right. 

(5)  An  assignee  becomes  a  substituted  limited  partner  when 
the  certificate  is  appropriately  amended  in  accordance  with  sec- 
tion 25. 

(6)  The  substituted  limited  partner  has  all  the  rights  and  pow- 
ers, and  is  subject  to  all  the  restrictions  and  liabilities  of  his  as- 
signor, except  those  liabilities  of  which  he  was  ignorant  at  the 


Ch.  7)  LIMITED   PARTNERSHIPS  1373 

time  he  became  a  limited  partner  and  which  could  not  be  ascer- 
tained from  the  certificate. 

(7)  The  substitution  of  the  assignee  as  a  limited  partner  does 
not  release  the  assignor  from  liability  to  the  partnership  under 
sections  6  and  17. 

Section  20.  Effect  of  Retirement,  Death  or  Insanity  of  a  Gen- 
eral Partner.  The  retirement,  death  or  insanity  of  a  general  part- 
ner dissolves  the  partnership,  unless  the  business  is  continued  by 
the  remaining  general  partners — 

(a)  Under  a  right  so  to  do  stated  in  the  certificate;  or 

(b)  With  the  consent  of  all  members. 

Section  21.  Death  of  Limited  Partner.  (1)  On  the  death  of 
a  limited  partner  his  executor  or  administrator  shall  have  all  the 
rights  of  a  limited  partner  for  the  purpose  of  settling  his  estate, 
and  such  power  as  the  deceased  had  to  constitute  his  assignee  a 
substituted    limited   partner. 

(2)  The  estate  of  a  deceased  limited  partner  shall  be  liable  for 
all  his  liabilities  as  a  limited  partner. 

Section  22.  Rights  of  Creditors  of  Limited  Partner.  (1)  On 
due  application  to  a  court  of  competent  jurisdiction  by  any  judg- 
ment creditor  of  a  limited  partner,  the  court  may  charge  the  in- 
terest of  the  indebted  limited  partner  with  payment  of  the  unsat- 
isfied amount  of  the  judgment  debt;  and  may  appoint  a  receiver, 
and  make  all  other  orders,  directions,  and  inquiries  which  the  cir- 
cumstances of  the  case  may  require. 

In  those  states  where  a  creditor  on  beginning  an  action  can  at- 
tach debts  due  the  defendant  before  he  has  obtained  a  judgment 
against  the  defendant  it  is  recommended  that  paragraph  1  of  this 
section  read  as  follows : 

On  due  application  to  a  court  of  competent  jurisdiction  by  any 
creditor  of  a  limited  partner,  the  court  may  charge  the  interest  of 
the  indebted  limited  partner  with  payment  of  the  unsatisfied 
amount  of  such  claim ;  and  may  appoint  a  receiver,  and  make  all 
other  orders,  directions,  and  inquiries  which  the  circumstances  of 
the  case  may  require. 

(2)  The  interest  may  be  redeemed  with  the  separate  property 
of  any  general  partner,  but  may  not  be  redeemed  with  partner- 
ship property. 

(3)  The  remedies  conferred  by  paragraph  (1)  shall  not  be 
deemed  exclusive  of  others  which  may  exist. 

(4)  Nothing  in  this  act  shal^  be  held  to  deprive  a  limited  part- 
ner of  his  statutory  exemption. 

Section  23.  Distribution  of  Assets.  (1)  In  settling  accounts 
after  dissolution  the  liabilities  of  the  partnership  shall  be  entitled 
to  payment  in  the  following   order: 

(a)  Those  to  creditors,  in  the  order  of  priority  as  provided  by 
law,  except  those  to  limited  partners  on  account  of  their  contribu- 
tions, and  to  general  partners; 


1374  PARTNERSHIP  (Part  5 

(b)  Those  to  limited  partners  in  respect  to  their  share  of  the 
profits  and  other  compensation  by  way  of  income  on  their  con- 
tributions ; 

(c)  Those  to  limited  partners  in  respect  to  the  capital  of  their 
contributions ; 

(d)  Those  to  general  partners  other  than  for  capital  and  profits ; 

(e)  Those  to  general  partners  in  respect  to  profits; 

(f)  Those  to  general  partners  in  respect  to  capital. 

(2)  Subject  to  any  statement  in  the  certificate  or  to  subsequent 
agreement,  limited  partners  share  in  the  partnership  assets  in 
respect  to  their  claims  for  capital,  and  in  respect  to  their  claims 
for  profits  or  for  compensation  by  way  of  income  on  their  con- 
tributions respectively,  in  proportion  to  the  respective  amounts 
of  such  claims. 

Section  24.     When  Certificate  Shall  be  Cancelled  or  Amended. 

(1)  The  certificate  shall  be  cancelled  when  the  partnership  is 
dissolved  or  all  limited  partners  cease  to  be  such. 

(2)  A  certificate  shall  be  amended  when — 

(a)  There  is  a  change  in  the  name  of  the  partnership  or  in  the 
amount  or  character  of  the  contribution  of  any  limited  partner; 

(b)  A  person  is  substituted  as  a  limited  partner; 

(c)  An  additional  limited  partner  is  admitted; 

(d)  A  person  is  admitted  as  a  general  partner; 

(e)  A  general  partner  retires,  dies,  or  becomes  insane,  and  the 
business  is  continued  under  section  20; 

(f)  There  is  a  change  in  the  character  of  the  business  of  the 
partnership ; 

(g)  There  is  a  false  or  erroneous  statement  in  the  certificate ; 
(h)  There  is  a  change  in  the  time  as  stated  in  the  certificate  for 

the  dissolution  of  the  partnership  or  for  the  return  of  a  contribu- 
tion ; 

(i)  A  time  is  fixed  for  the  dissolution  of  the  partnership,  or  the 
return  of  a  contribution,  no  time  having  been  specified  in  the  cer- 
tificate ;  or 

(j)  The  members  desire  to  make  a  change  in  any  other  state- 
ment in  the  certificate  in  order  that  it  shall  accurately  represent 
the  agreement  between  them. 

Section  25.  Requirements  for  Amendment  and  for  Cancella- 
tion of  Certificate.     (1)  The  writing  to  amend  a  certificate  shall — 

(a)  Conform  to  the  requirements  of  section  2  (la)  as  far  as  nec- 
essary to  set  forth  clearly  the  change  in  the  certificate  which  it  is 
desired  to  make;  and  , 

(b)  Be  signed  and  sworn  to  by  all  members,  and  an  amendment 
substituting  a  limited  partner  or  adding  a  limited  or  general  part- 
ner shall  be  signed  also  by  the  member  to  be  substituted  or  added, 
and  when  a  limited  partner  is  to  be  substituted,  the  amendment 
shall  also  be  signed  by  the  assigning  limited  partner. 

(2)  The  writing  to  cancel  a  certificate  shall  be  signed  by  all 
anembers. 


Ch.  7)  '    LIMITED   PARTNERSHIPS  1375 

(3)  A  person  desiring  the  cancellation  or  amendment  of  a  cer- 
tificate, if  any  person  designated  in  paragraphs  (1)  and  (2)  as  a 
peJTson  who  must  execute  the  writing  refuses  to  do  so,  may  peti- 
tion the  (here  designate  the  proper  court)  to  direct  a  cancellation 
or  amendment  thereof. 

(4)  If  the  court  finds  that  the  petitioner  has  a  right  to  have  the 
writing  executed  by  a  person  who  refuses  to  do  so,  it  shall  order 
the  (here  designate  the  responsible  official  in  the  office  designated 
in  section  2)  in  the  office  where  the  certificate  is  recorded  to  record 
the  cancellation  or  amendment  of  the  certificate;  and  where  the 
certificate  is  to  be  amended,  the  court  shall  also  cause  to  be  filed 
for  record  in  said  office  a  certified  copy  of  its  decree  setting  forth 
the  amendment. 

(5)  A  certificate  is  amended  or  canceled  when  there  is  filed  for 
record  in  the  office  (here  designate  the  office  designated  in  section 
2)  where  the  certificate  is  recorded — 

(a)  A  writing  in  accordance  with  the  provisions  of  paragraph 
(1),  or  (2);   or 

(b)  A  certified  copy  of  the  order  of  court  in  accordance  with  the 
provisions  of  paragraph   (4). 

(6)  After  the  certificate  is  duly  amended  in  accordance  with  this 
section,  the  amended  certificate  shall  thereafter  be  for  all  purposes 
the  certificate  provided  for  by  this  act. 

Section  26.  Parties  to  Actions.  A  contributor,  unless  he  is  a 
general  partner,  is  not  a  proper  party  to  proceedings  by  or  against 
a  partnership,  except  where  the  object  is  to  enforce  a  limited  part- 
ner's right  against  or  liability  to  the  partnership. 

Section  27.  'Name  of  Act.  This  act  may  be  cited  as  the  Uni- 
form Limited  Partnership  Act. 

Section  28.  Rules  of  Construction.  (1)  The  rule  that  statutes 
in  derogation  of  the  common  law  are  to  be  strictly  construed  shall 
have  no  application  to  this  act. 

(2)  This  act  shall  be  so  interpreted  and  construed  as  to  effect 
its  general  purpose  to  make  uniform  the  law  of  those  states  which 
enact  it. 

(3)  This  act  shall  not  be  so  construed  as  to  impair  the  obligations 
of  any  contract  existing  when  the  act  goes  into  effect,  nor  to  affect 
any  action  or  proceedings  begun  or  right  accrued  before  this  act 
takes  effect. 

Section  29.  Rules  for  Cases  Not  Provided  for  in  This  Act.  In 
any  case  not  provided  for  in  this  act  the  rules  of  law  and  equity, 
including  the  law  m-erchant,  shall  govern. 

Section  30.  Provisions  for  Existing  Limited  Partnerships.  (1) 
A  limited  partnership  formed  under  any  statute  of  this  state  prior 
to  the  adoption  of  this  act,  may  become  a  limited  partnership  un- 
der this  act  by  complying  with  the  provisions  of  Section  2;  pro- 
vided the  certificate  sets  forth — 

(a)  The  amount  of  the  original  contribution  of  each  limited  part- 
ner, and  the  time  when  the  contribution  was  made ;  and 


1376  PARTNERSHIP  (Part  5 

(b)  That  the  property  of  the  partnership  exceeds  the  amount 
sufficient  to  discharge  its  liabilities  to  persons  not  claiming  as  gen- 
eral or  limited  partners  by  an  amount  greater  than  the  sum  of  the 
contributions  of  its  limited  partners. 

(2)  A  limited  partnership  formed  under  any  statute  of  this  state 
prior  to  the  adoption  of  this  act,  until  or  unless  it  becomes  a  lim- 
ited partnership  under  this  act,  shall  continue  to  be  governed  by 
the  provisions  of  (here  insert  proper  reference  to  the  existing 
limited  partnership  act  or  acts),  except  that  such  partnership  shall 
not  be  renewed  unless  so  provided  in  the  original  agreement. 

Section  31.  Act  (Acts)  Repealed.  Except  as  affecting  exist- 
ing limited  partnerships  to  the  extent  set  forth  in  section  30,  the 
act  (acts)  of  (here  designate  the  existing  limited  partnership  act 
or  acts)  is  (are)  hereby  repealed. 


PART  VI 
CORPORATIONS 

Chapter 

Introduction. 
I.     Organization  of  a  Conwration. 
II.     Contracts   of  Promoters. 
III.     Corporate  Powers. 

IV.     The  Relation  of  Stocl^holders  to  the  Corporation. 
V.     The  Relation  of  Creditors  to  the  Corporation. 
VI.     Relation  of  the  Corporation  to  the  State. 


INTRODUCTION 

The  law  of  private  corporations  is  that  branch  of  the  law  which 
prescribes  the  rights  and  liabilities  and  other  relations  of  the  vari- 
ous persons  who  may  be  interested  in  the  conduct  of  a  business 
organized  in  a  particular  way.  The  law  of  partnerships  and  of 
corporations  taken  together  comprise  what  has  been  called  the  law 
of  business  associations.  The  chapters  devoted  to  the  subject  of 
partnership  have  shown  what  the  relations  of  the  partners  are  as 
between  themselves  and  as  to  third  parties  under  the  normal  cir- 
cumstances which  arise  during  the  conduct  of  the  business.  The 
law  of  private  corporations  is  similarly  concerned  with  the  estab- 
lishment of  a  form  of  business  organization  which  produces  legal 
relations  of  different  nature  and  extent. 

Surveying  the  broad  outlines  of  the  law  of  partnership,  with  a 
view  of  determining  whether  or  not,  in  the  light  of  particular  sit- 
uations, it  is  desirable  to  establish  and  conduct  a  business  enter- 
prise in  this  form,  the  following  aspects  of  the  partnership  form 
of  organization  stand  out  rather  distinctly:  (1)  Each  partner  is 
liable  individually  for  the  debts  of  the  firm.  (2)  The  interest  of 
the  individual  partner  in  specific  partnership  property  is  not  a 
subject  of  transfer.  (3)  The  interest  of  a  partner  in  the  partner- 
ship— that  is,  his  interest  in  the  profits  and  surplus— may  be  trans- 
ferred by  him.  (4)  The  interest  of  each  partner  to  participate  in 
the  management  is  not  the  subject  of  transfer.  An  individual  part- 
ner cannot,  therefore,  transfer  to  another  person  all  of  the  rights, 
privileges,  and  powers  which  he  possesses.  (4)  The  partnership 
relation  is  of  an  unstable  nature.  It  may  readily  be  dissolved. 
While  a  dissolution  does  not  necessarily  interrupt  the  continuance 
of  the  business,  the  risk  that  it  may  seriously  cripple  the  business 
or  terminate  it  is  always  present.  These  aspects  of  the  partner- 
ship relation  from  a  business  standpoint  may  be  regarded  as  dis- 
advantageous. 

The  economic  reasons  which  have  operated  to  produce  the  cor- 
porate form  of  business  organization  are  to  be  found  in  the  desire 
to  devise  some  method  by  which  individuals  may  combine  their 
B.&  B.BUS.LAW— S7  (1377) 


1378  CORPORATIONS  (Part  6 

resources  for  a  common  end  without  incurring  these  risks  incident 
to  the  partnership  relation.  Specificall)^  the  desire  is  to  establish 
a  form  of  organization  which  (1)  eliminates  the  individual  lia- 
bility of  each  owner  of  the  business  for  the  debts  of  the  business; 
(2)  which  enables  an  owner  to  transfer  his  entire  interest  with 
respect  to  the  business,  his  property  interest,  his  interest  with 
respect  to  profits,  and  his  privileges  of  participating  in  the  man- 
agement; and  (3)  which  is  not  liable  to  interruption  by  the  various 
acts  which  cause  a  dissolution  of  a  partnership.  The  law  of  cor- 
porations accomplishes  these  objects. 

Obviously,  a  group  of  individuals  should  not,  of  their  own  will, 
be  able  to  accomplish  these  results.  The  granting  and  exercise  of 
special  privileges,  such  as  these,  ought  to  be  and  are  within  the 
control  of  the  state.  A  business  possessing  these  incidents  may 
not,  therefore,  be  organized  without  the  consent  of  the  state. 
Individuals  may  secure  these  special  privileges  by  a  special  act 
of  the  state  Legislature,  where  the  Constitution  does  not  forbid, 
but  it  is  much  more  common  for  the  Legislature  to  enact  a  general 
law  prescribing  the  method  of  organization  of  business  enterprises 
in  the  corporate  form. 

It  is  common  to  speak  of  a  corporation  as  though  it  were  some- 
thing separate  and  distinct  from  the  members  who  compose  it.^  It 
is  referred  to  as  an  intangible  thing,  as  an  entity.  It  is  convenient 
to  so  regard  the  corporation,  and,  when  understood,  simplifies  the 
discussion  of  problems  incident  to  the  conduct  of  a  business  by 
individuals  who  by  law  possess  these  special  privileges.  But  this 
convenient  designation  of  a  group  of  individuals  as  a  legal  entity 
should  not  blind  one  to  the  facts.  Human  beings  conduct  business. 
Business  requires  capital.  Capital  must  be  contributed  by  indi- 
viduals. A  contribution  of  capital  does  not  mean  its  transfer  to 
some  other  person  necessarily.  Nor  may  capital  be  contributed  to 
an  intangible  thing.  An  individual  conducting  his  own  business 
contributes  capital  to  that  business  by  employing  certain  property 
belonging  to  him  with  particular  objects  in  view.  Where  two  or 
more  persons  combine  their  property  for  the  pui-pose  of  using  it 
with  a  view  to  profit,  this  merely  means  that  they  commingle  it, 
sell  it  or  permit  it  to  be  sold  by  others,  or  use  it  in  the  manufacture 
of  goods  for  sale.  These  are  physical  acts.  The  legal  efifect  to  be 
given  to  them  arises  from  the  law.  And  so,  where  two  or  more 
persons  desire  to  engage  in  business  with  limited  liability,  with  full 
power  of  transferring  .their  entire  interest  therein,  and  without 
incurring  the  risks  that  the  business  be  terminated  by  the  death  of 
a  member,  a  sale  of  the  interest  of  a  member,  or  otherwise,  these 
privileges  are  conferred  upon  them  by  their  compliance  with  the 
conditions  established  by  law.  After  obtaining  these  privileges,  it 
is  common  to  speak  of  the  broad  legal  effect  of  these  facts  as  the 
organization  of  a  corporation. 

If  A.,  B.,  and  C.  organize  a  partnership  and  also  a  corporation, 
and  conduct  these  two  business  enterprises  in  buildings   side  by 


INTRODUCTION 


1379 


side,  the  physical  facts  would  appear  very  much  alike;  but  the 
legal  relations  between  A.,  B.,  and  C,  and  between  A.,  B.,  C.  and 
third  persons,  would  be  very  different,  and  sooner  or  later  physical 
facts  would  arise  because  of  the  relations  which,  to  a  close  ob- 
server, or  even  to  a  casual  observer,  would  show  that  the  two  busi- 
ness organizations  were  different.  The  law  of  corporations  is 
therefore  taken  up  with  the  establishment  of  the  legal  relations  be- 
tween the  parties  so  organized  and  the  legal  relations  which  may 
arise  between  those  conducting  the  business  and  third  persons. 

Just  as  in  other  branches  of  the  law,  the  first  question  is  to  as- 
certain what  facts  will  operate  to  confer  upon  individuals  these 
special  privileges.  A  statute  authorizing  the  incorporation  of 
business  enterprises  will  provide  that  certain  acts  must  be  done  as 
conditions  precedent  to  the  right  to  do  business  in  the  corporate 
form.  Usually  these  formalities  are  relatively  simple.  The  par- 
ties seeking  incorporation  must  declare  their  intentions,  state  the 
purposes  for  which  they  desire  a  charter,  give  the  names  of  certain 
interested  parties,  the  amount  of  capital  to  be  employed,  the  name 
and  location  of  the  proposed  business,  etc.  In  other  words,  the 
law  will  require  the  parties  to  make  a  fairly  detailed  disclosure  of 
their  intentions,  and  will  usually  require  that  this  information  be 
filed  with  some  public  officer,  so  that  it  will  be  open  to  the  public. 
A  subordinate  problem,  but  nevertheless  an  important  one,  arises 
at  this  point.  The  law  will  not  only  prescribe  what  must  be  done 
before  the  parties  may  be  said  to  be  incorporated,  but  also  the  law 
must  prescribe  the  effect  of  a  failure  to  conform  to  these  require- 
ments. If  the  failures  to  comply  with  the  statute  were  of  the  same 
kind  and  degree,  the  problem  would  not  be  a  difficult  one;  but  the 
various  detailed  requirements  of  a  general  incorporation  act  will 
not  all  be  of  the  same  importance.  Consequently  a  failure  to  com- 
ply with  some  of  the  requirements  may  produce  certain  results, 
while  a  failure  to  comply  with  other  requirements  may  produce 
quite  different  results. 

Having  established  what  constitutes  a  corporation,  the  gen- 
eral problem  thereafter  is  to  determine  the  nature  and  extent  of 
the  relations  of  the  parties  who  have  so  organized  themselves,  and 
to  ascertain  what  their  relations  are  to  all  other  persons. 


1380  COKPORATIONS  (Part  6 

CHAPTER  I 
ORGANIZATION  OF  A  CORPORATION 

Section 

1.  Effect  of  Complete  Organization — The  Corporate  Entity. 

2.  When  Corporate  Entity  may  be  Disregarded. 

3.  Effect  of   Incomplete  Organization. 


SECTION  1.— EFFECT  OF  COMPLETE  ORGANIZATION— 
THE  CORPORATE  ENTITY 


PEOPLE  ex  rel.  NATIONAL  EXP.   CO.  v.  COLEMAN  et  al.,   Tax 
Commissioners. 

(Court  of  Appeals  of  New  York.  1892.     133  N.  Y.  279,  31  N.  E.  96, 
16  L.  R.  A.  183.) 

Proceedings  on  the  relation  of  Lock  W.  Winchester,  as  treasurer 
of  the  National  Express  Company,  to  review  the  action  of  the  tax  com- 
missioners in  taxing  the  company  on  its  capital  stock  as  a  corporation. 
From  a  judgment  of  the  general  term,  affirming  a  judgment  of  the 
special  term  "vacating  the  assessment,  the  commissioners  appeal. 

Finch,  J.  The  relator  was  taxed  upon  its  capital,  on  the  ground 
that  it  had  become  a  corporation,  within  the  meaning  of  the  provision 
of  the  Revised  Statutes  which  enacts  that  "all  moneyed  or  stock  cor- 
porations deriving  an  income  or  profit  from  their  capital,  or  other- 
wise, shall  be  liable  to  taxation  on  their  capital  in  the  manner  here- 
inafter prescribed."  1  Rev.  St.  pt.  1,  c.  13,  tit.  4,  §  1.  The  company 
was  formed  as  a  joint-stock  company  or  association,  in  1853,  by  a 
written  agreement  of  eight  individuals  with  each  other,  the  whole 
force  and  effect  of  which,  in  constituting  and  creating  the  organiza- 
tion, rested  upon  the  common-law  rights  of  the  individuals,  and 
their  power  to  contract  with  each  other.  The  relation  they  assumed 
was  wholly  the  product  of  their  mutual  agreement,  and  dependent 
in  no  respect  upon  the  grant  or  authority  of  the  state.     *     *     * 

There  is  no  doubt,  therefore,  that,  when  the  company  was  formed 
and  went  into  operation,  the  law  recognized  a  distinction  and  sub- 
stantial difference  between  joint-stock  companies  and  corporations, 
and  never  confused  one  with  the  other;  and  that  the  existing  stat- 
ute which  taxed  the  capital  of  corporations  had  no  reference  to  or 
operation  upon  joint-stock  companies  or  associations.  But  two 
things  have  since  occurred.  The  legislature,  while  steadily  preserving 
the  distinction  of  names,  has,  with  equal  persistence,  confused  the 
things,  by  obliterating  substantial  and  characteristic  marks  of  dif- 
ference ;  until  it  is  now  claimed  that  the  joint-stock  associations  have 
grown  into  and  become  corporations  by  force  of  the  continued  be- 
stowal upon  them  of  corporate  attributes.  It  is  said,  and  very  prob- 
ably correctly  said,  that  the  legislature  may  create  a  corporation  with- 
out explicitly  declaring  it  to  be  such,  by  the  bestowal  of  a  corporate 
franchise  or  corporate  attributes,  and  the  cases  of  banking  associa- 
tions are  referred  to  as  instances  of  actual  occurrence.     *     *  _  *    _ 

It  is  added  that  such  result  may  happen  even  without  the  legislative 


Ch.  1)  ORGANIZATION   OF  A   CORPORATION  1381 

intent,  and  because  the  gift  of  corporate  powers  and  attributes  is 
tantamount  to  a  corporate  creation.  It  is  then  asserted  that  a  series 
of  statutes,  beg-inning:  with  the  act  of  1849,  has  ended  in  the  gift  to  joint- 
stock  associations  of  every  essential  attribute  possessed  by  and  char- 
acteristic of  corporations  (Laws  1853,  c.  53 ;  Laws  1854,  c.  245  ;  Laws 
1867,  c.  289) ;  that  the  lines  of  distinction  between  the  two,  however 
far  apart  in  the  beginning,  have  steadily  converged,  until  they  have 
melted  into  each  other  and  become  identical ;  that  every  distinguishing 
mark  and  characteristic  has  been  obliterated ;  and  no  reason  remains 
why  joint-stock  associations  should  not  be,  in  all  respects,  treated  and 
regarded  as  corporations.    Some  of  this  contention  is  true. 

The  case  of  People  v.  Wemple,  117  N.  Y.  136,  22  N.  E.  1046,  6  L. 
R.  A.  303,  shows  very  forcibly  how  almost  the  full  measure  of  cor- 
porate attributes  has,  by  legislative  enactment,  been  bestowed  upon 
joint-stock  associations,  until  the  difference,  if  there  be  one,  is  obscure, 
elusive,  and  difficult  to  see  and  describe.  And  yet  the  truth  remains 
that  all  along  the  line  of  legislation  the  distinctive  names  have  been 
retained  as  indicative  and  representative  of  a  difference  in  the  organi- 
zations themselves.     *     *     * 

This  persistent  distinction  in  the  language  of  the  statutes  I  should 
not  be  inclined  to  disregard  or  treat  as  of  no  practical  consequence, 
when  seeking  to  arrive  at  the  true  intent  and  proper  construction 
of  the  statute,  even  if  I  were  unable  to  discover  any  practical  or  sub- 
stantial difference  between  the  two  classes  of  organizations  upon  which 
it  could  rest  or  out  of  which  it  grew ;  for  the  distinction  so  sedulously 
and  persistently  observed  would  strongly  indicate  the  legislative  intent, 
and  so  the  correct  construction. 

But  I  think  there  was  an  original  and  inherent  difference  between 
the  corporate  and  joint-stock  companies,  known  to  our  law,  which 
legislation  has  somewhat  obscured,  but  has  not  destroyed,  and  that 
difference  is  the  one  pointed  out  by  the  learned  counsel  for  the  re- 
spondent, and  which  impresses  me  as  logical,  and  well  supported  by 
authority.  It  is  that  the  creation  of  the  corporation  merges  in  the 
artificial  body  and  drowns  in  it  the  individual  rights  and  liabilities  of 
the  members,  while  the  organization  of  a  joint-stock  company  leaves 
the  individual  rights  and  liabilities  unimpaired  and  in  full  force.  The 
idea  was  expressed  in  Supervisors  of  Niagara  v.  People,  7  Hill,  512, 
and  in  Gifford  v.  Livingston,  2  Denio,  380,  by  the  statement  that  the 
corporators  lost  their  individuality,  and  merged  their  individual  char- 
acters into  one  artificial  existence ;  and  upon  these  authorities  a  cor- 
poration is  defined,  on  behalf  of  the  respondents,  to  be  "an  artificial 
person  created  by  the  sovereign  from  natural  persons,  and  in  which 
artificial  person  the  natural  persons  of  which  it  is  composed  become 
merged  and  nonexistent." 

I  am  conscious  that  legal  definitions  invite  and  provoke  criticism, 
because  the  instances  are  rare  in  which  they  prove  to  be  perfectly  ac- 
curate; and  yet  this  one  offered  to  us  may  be  accepted,  if  it  suc- 
cessfully bears  some  sufficient  test.  In  putting  it  on  trial,  we  may 
take  the  nature  of  the  individual  liability  of  the  corporators  on  the  one 
hand,  and  of  the  associates  on  the  other,  for  the  debts  contracted  by 
their  respective  organizations,  as  a  sufficient  test  of  the  difference  be- 
tween them,  and  contrast  their  nature  and  character.  It  is  an  essen- 
tial and  inherent  characteristic  of  a  corporation  that  it  alone  is  pri- 
marily liable  for  its  debts,  because  it  alone  contracts  them,  except  as 


1382  CORPORATIONS  (Part  6 

that  natural  and  necessary  consequence  of  its  creation  is  modified  in 
the  act  of  its  creation  by  some  expHcit  command  of  the  statute  which 
either  imposes  an  express  liabiHty  upon  the  corporators  in  the  nature 
of  a  penalty,  or  affirmatively  retains  and  preserves  what  would  have 
been  the  common-law  liability  of  the  members  from  the  destruction 
involved  in  the  corporate  creation.  In  other  words,  the  individual 
liability  of  the  members,  as  it  would  have  existed  at  common  law, 
is  lost  by  their  creation  into  a  corporation,  and  exists  thereafter  only 
by  force  of  the  statute,  upon  some  new  and  modifying  conditions,  to 
some  partial  or  changed  extent,  and  so  far  preventing  by  the  inter- 
vention of  an  express  command  the  total  destruction  of  individual  lia- 
bilities which  otherwise  would  flow  from  the  inherent  efifect  of  the  cor- 
porate creation.  The  penalties  sometimes  imposed  are  of  course  new 
statutory  liabilities  which  never,,  at  common  law,  rested  upon  the  indi- 
vidual members.  The  retained  liability  occasionally  established  is  in 
the  nature  and  a  parcel  of  such  original  liabilitv,  as  we  had  occasion 
to  show  in  Rogers  v.  Decker,  131  N.  Y.  490,  30  N.  E.  571,  but  is  re- 
tained by  force  of  the  express  command  of  the  statute,  and  in  that  man- 
ner saved  from  the  destruction  which  otherwise  would  follow  the 
simple  creation  of  the  corporation.  Ordinarily  these  individual  liabil- 
ities exist  upon  other  than  common-law  conditions,  and  make  the  cor- 
porators rather  sureties  or  guarantors  of  the  corporation  than  original 
debtors,  since  in  general  their  liability  arises  after  the  usual  remedies 
against  the  corporation  have  been  exhausted.  But.  where  that  is  not 
so,  the  invariable  truth  is  that  the  creation  of  the  corporation  nec- 
essarily destroys  the  common-law  liability  of  the  individual  members 
for  its  "debts,  and  requires  at  the  hands  of  the  creating  power  an  affirm- 
ative imposition  of  new  personal  Habilities,  or  a  specific  retention  of 
old  ones  from  the  destruction  which  would  otherwise  follow. 

Exactly  the  opposite  is  true  of  joint-stock  companies.  Their  for- 
mation destroys  no  part  or  portion  of  their  common-law  liability  for 
the  debts  contracted.  Those  debts  are  their  debts,  for  which  they 
must  answer.  Permission  to  sue  their  president  or  treasurer  is  only 
a  convenient  mode  of  enforcing  that  liability,  but  in  no  manner  cre- 
ates or  saves  it.  The  statute  of  1853  did  interfere  with  it.  That  act  re- 
quired, in  the  first  instance,  a  suit  against  the  president  or  treasurer, 
and  so  a  preliminary  exhaustion  of  the  joint  property.  But  that  act 
was  modal,  and  determined  the  procedure.  It  suspended  the  common- 
law  right,  but  recognized  its  existence.  We  so  held  in  Witherhead 
V.  Allen,  4  Abb.  Dec.  628,  and  at  the  same  time  said  that  the  associa- 
tions were  not  corporations,  but  mere  partnership  concerns.  Even 
that  mode  of  procedure  has  been  modified  by  the  Code,  (sections  1922, 
1923,)  so  that  the  creditor,  at  his  option,  may  sue  the  associates  without 
first  bringing  his  action  gainst  the  president  or  treasurer.  These  last 
and  quite  recent  enactments  show  that  the  legislative  intent  is  still  to 
preserve  and  not  destroy  the  original  difference  between  the  two 
classes  of  organizations ;  to  maintain  in  full  force  the  common-law 
HabiHty  of  associates,  and  not  to  substitute  for  it  that  of  corporators ; 
and,  preserving  in  continued  operation  that  normal  and  distinctive 
difference,  to  evince  a  plain  purpose  not  to  merge  the  two  organiza- 
tions in  one,  or  destroy  the  boundaries  which  separate  them.  That 
intent,  once  clearly  ascertained,  determines  the  construction  to  be 
adopted,  and  may  be  the  only  rehable  test  in  view  of  the  power  of  the 
state  to  clothe  one  organization  with  all  the  attributes  of  the  other. 


Ch.  1)  ORGANIZATION  OF  A  CORPORATION  1383 

The  drift  of  legislation  has  been  to  lessen  and  obscure  the  original 
and  characteristic  difference.  On  the  one  hand,  corporations  have 
been  created  with  positive  provisions  retaining  more  or  less  the  indi- 
vidual liability  of  the  members,  and  on  the  other,  the  joint-stock  com- 
panies have  been  clothed  with  most  of  the  corporate  attributes ;  but 
enough  of  the  original  difference  remains  to  show  that  our  legislation 
not  only  carefully  preserves  the  distinction  of  names,  but  sufficient, 
also,  of  the  original  difiference  of  character  and  quality  to  disclose  a 
clear  intent  not  to  merge  the  two.  We  may  thus  see  upon  what  the 
legislative  intent  to  preserve  them  as  separate  and  distinct  is  founded, 
and  what  distinguishing  characteristics  remain.  The  formation  of  the 
one  involves  the  merging  and  destruction  of  the  common-law  liability 
of  the  members  for  the  debts,  and  requires  the  substitution  of  a  new, 
or  retention  of  the  old,  liability  by  an  affirmative  enactment  which 
avoids  the  inherent  efifect  of  the  corporate  creation';  in  the  other 
the  common-law  liability  remains  unchanged  and  unimpaired,  and 
needing  no  statutory  intervention  to  preserve  or  restore  it.  The  debt 
of  the  corporation  is  its  debt,  and  not  that  of  its  members ;  the  debt  of 
the  joint-stock  company  is  the  debt  of  the  associates,  however  en- 
forced. The  creation  of  the  corporation  merges  and  drowns  the  liabil- 
ity of  its  corporators ;  the  creation  of  the  stock  company  leaves  un- 
harmed and  unchanged  the  liability  of  the  associates.  The  one  de- 
rives its  existence  from  the  contract  of  individuals;  the  other,  from 
the  sovereignty  of  the  state.  The  two  are  alike,  but  not  the  same. 
More  or  less  they  crowd  upon  and  overlap  each  other,  but  without 
losing  their  identity ;  and  so,  while  we  cannot  say  that  the  joint-stock 
company  is  a  corporation,  we  can  say,  as  we  did  say,  in  Van  Aernam 
v.  Bleistein,  102  N.  Y.  360,  7  N.  E.  537,  that  a  joint-stock  company  is 
a  partnership,  with  some  of  the  powers  of  a  corporation.  Beyond 
that  we  do  not  think  it  is  our  duty  to  go. 

The  order  should  be  affirmed,  with  costs. 


BUTTON  V.  HOFF]\rAN. 

(Supreme  Court  of  Wisconsin,  1884.     61  Wis.  20,  20  N.  W.  667, 
50  Ara.  Rep.  131.) 

Orton,  J.  This  is  an  action  of  replevin  in  which  the  title  of  the 
plaintifif  to  the  property  was  put  in  issue  by  the  answer.  In  his  in- 
structions to  the  jury  the  learned  judge  of  the  circuit  court  said :  "I 
think  the  testimony  is  that  the  plaintiff  had  the  title  to  the  property." 
The  evidence  of  the  plaintiff's  title  was  that  the  property  belonged 
to  a  corporation  known  as  "The  Hayden  &  Smith  Manufacturing 
Company,"  and  that  he  purchased  and  became  the  sole  owner  of  all  of 
the  capital  stock  of  said  corporation.  As  the  plaintiff  in  his  testimony 
expressed  it,  "I  bought  all  the  stock.  I  own  all  the  stock  now.  I  be- 
came the  absolute  owner  of  the  mill.  It  belonged  at  that  time  to  the 
company,  and  I  am  the  company."  There  was  no  other  evidence  of 
the  condition  of  the  corporation  at  the  time.  Is  this  sufficient  evidence 
of  the  plaintiff's  title  ?  We  think  not.  The  learned  counsel  of  the 
respondent  in  his  brief  says :  "The  property  had  formerly  belonged  to 
the  Hayden  &  Smith  Manufacturing  Company,  but  the  respondent 
had  purchased  and  become  the  owner  of  all  the  stock  of  the  company, 
and  thus  became  its  sole  owner." 


1384  CORPORATIONS  (Part  6 

From  the  very  nature  of  a  private  business  corporation,  or,  indeed, 
of  any  corporation,  the  stockholders  are  not  the  private  and  joint 
owners  of  its  property.  The  corporation  is  the  real,  though  artifi- 
cial, person  substituted  for  the  natural  person  who  procured  its  crea- 
tion, and  have  pecuniary  interests  in  it,  in  which  all  its  property  is 
vested,  and  by  which  it  is  controlled,  managed,  and  disposed  of.  It 
must  purchase,  hold,  grant,  sell,  and  convey  the  corporate  property, 
and  do  business,  sue  and  be  sued,  plead  and  be  impleaded,  for  cor- 
porate purposes,  by  its  corporate  name.  The  corporation  must  do  its 
business  in  a  certain  way,  and  by  its  regularly  appointed  officers  and 
agents,  whose  acts  are  those  of  the  corporation  only  as  they  are  within 
the  powers  and  purposes  of  the  corporation.  In  an  ordinary  copart- 
nership the  members  of  it  act  as  natural  persons  and  as  agents  for 
each  other,  and  with  unlimited  liability.  But  not  so  with  a  corpora- 
tion ;  its  members,  as  natural  persons,  are  merged  into  the  corporate 
identity.  *  *  *  a  share  of  the  capital  stock  of  a  corporation  is 
defined  to  be  a  right  to  partake,  according  to  the  amount  subscribed, 
of  the  surplus  profits  obtained  from  the  use  and  disposal  of  the  cap- 
ital stock  of  the  company  to  those  purposes  for  which  the  company  is 
constituted.  *  *  *  The  corporation  is  the  trustee  for  the  manage- 
ment of  the  property,  and  the  stockholders  are  the  mere  cestui  que 
trust.     *     *     * 

The  right  of  alienation  or  assignment  of  the  property  is  in  the  cor- 
poration alone,  and  this  right  is  not  affected  by  making  the  stockhold- 
ers individually  liable  for  the  corporate  debts.  *  *  *  The  prop- 
erty of  the  corporation  is  the  mere  instrument  whereby  the  stock  is 
made  to  produce  the  profits,  which  are  the  dividends  to  be  declared 
from  time  to  time  by  corporate  authority  for  the  benefit  of  the  stock- 
holders, while  the  property  itself,  which  produces  them,  continues  to 
belong  to  the  corporation.  *  *  *  The  corporation  holds  its  prop- 
erty only  for  the  purposes  for  which  it  was  permitted  to  acquire  it, 
and  even  the  corporation  cannot  divert  it  from  such  use,  and  a  share- 
holder has  no  right  to  it,  or  the  profits  arising  therefrom,  until  a  law- 
ful division  is  made  by  the  directors  or  other  proper  officers  of  the 
corporation,  or  by  judicial  determination.  *  *  *  A  conveyance 
of  all  the  capital  stock  to  a  purchaser  gives  to  such  purchaser  only  an 
equitable  interest  in  the  property  to  carry  on  business  under  the  act  of 
incorporation  and  in  the  corporate  name,  and  the  corporation  is  still 
the  legal  owner  of  the  same.  *  *  *  a  legal  distribution  of  the 
property  after  a  dissolution  of  the  corporation  and  settlement  of  its 
affairs,  is  the  inception  of  any  title  of  a  stockholder  to  it,  although 
he  be  the  sole  stockholder.     *     *     * 

These  general  principles  sufficiently  establish  the  doctrine  that  the 
owner  of  all  the  capital  stock  of  a  corporation  does  not,  therefore,  own 
its  property,  or  any  of  it,  and  does  not  himself  become  the  corpora- 
tion, as  a  natural  person,  to  own  its  property,  and  do  its  business  in 
his  own  name.  While  the  corporation  exists  he  is  a  mere  stockhold- 
er of  it,  and  nothing  else.  The  consequences  of  a  violation  of  these 
principles'  would  be  that  the  stockholders  would  be  the  private  and 
joint  owners  of  the  corporate  property,  and  they  could  assume  the 
powers  of  the  corporation,  and  supersede  its  functions  in  its  use  and 
disposition  for  their  own  benefit  without  personal  liability,  and  thus 
destroy  the  corporation,  terminate  its  business,  and  defraud  its  cred- 
itors.   The  stockholders  would  be  the  owners  of  the  property,  and,  at 


Ch.  1)  ORGANIZATION   OF  A  CORPORATION  1385 

the  same  time,  it  would  belong  to  the  corporation.  One  stockholder 
owning  the  whole  capital  stock  could,  of  course,  do  what  several  stock- 
holders could  lawfully  do.     *     *     * 

The  want  of  title  to  the  property  being  fatal  to  the  plaintiff's  re- 
covery in  the  action  between  the  present  parties,  other  alleged  errors 
will  not  be  considered. 

The  judgment  of  the  circuit  court  is  reversed,  and  the  cause  re- 
manded for  a  new  trial. 


COMIMONWEALTH  v.  ILLINOIS  CENT.  R.  CO. 

(Court  of  Appeals  of  Kentucky,  1913.    152  Ky.  320,  ir.3  S.  W.  459, 
45  L.  R.  A.  [N.  S.]  344,  Ann.  Cas.  1915B,  G17.) 

Se;ttli:,  J.  The  appellee,  Illinois  Central  Railroad  Company,  was 
indicted  in  the  court  below  for  the  crime  of  involuntary  manslaughter, 
committed,  as,  in  substance,  alleged,  by  its  servants  in  charge  of  an 
engine  and  cars,  which  they  unlawfully  and  with  gross  and  \yillful 
negligence  ran  at  unreasonable  speed  into  another  of  appellee's  cars, 
in  which  John  Benedict  was  a  passenger,  whereby  the  latter  was  killed. 
The  circuit  court  sustained  a  demurrer  to  and  dismissed  the  indict- 
ment, and  from  the  judgment  manifesting  those  rulings  the  common- 
wealth has  appealed. 

The  question  presented  for  decision  by  the  appeal,  is:  Will  an  in- 
dictment lie  against  a  corporation,  such  as  a  railroad  company,  for  in- 
voluntary manslaughter?  The  rule,  as  announced  in  the  text-books 
and  by  the  decisions,  is  that  a  corporation  cannot,  in  general,  be  in- 
dicted for  ordinary  crimes  and  misdemeanors  that  involve  a  criminal 
or  immoral  intent,  such  as  are  often  grouped  in  books  of  the  common 
law  under  the  threefold  designation  of  treason,  felony,  or  breach  of 
the  peace.  There  has  been  no  departure  from  the  above  rule  in  this 
jurisdiction.  We  have,  it  is  true,  held  that  a  corporation  is  liable  to 
indictment  whenever  the  offense  consists  either  in  a  misfeasance  or  non- 
feasance of  duties  to  the  public,  and  the  corporation  can  be  reached 
for  punishment  as  by  a  fine  and  the  seizure  of  its  property;  and  that 
if  the  penalty  prescribed  for  the  offense  be  both  fine  and  imprisonment 
the  statute  is  inoperative  as  to  the  imprisonment,  as  that  part  of  the 

punishment  cannot,  from  the  nature  of  the  offender,  be  carried  out. 
*     *     * 

An  interesting  discussion  of  the  doctrine  in  question  is  contained  in 
volume  5,  §§  5620  and  5621,  Thompson  on  Corporations.  In  section 
5621  it  is,  among  other  things,  said:  "Corporations  cannot  be  indicted 
for  offenses  which  derive  their  criminality  from  evil  intention,  or  which 
consist  in  a  violation  of  those  social  duties  which  appertain  to  men 
and  subjects..  They  cannot  be  guilty  of  treason  and  felony;  of  perjury 
or  offenses  against  the  person.  But  beyond  this  there  is  no  good  rea- 
son for  their  exemption  from  the  consequences  of  unlawful  and  wrong- 
ful acts  committed  by  their  agents  in  pursuance  of  authority  derived 
from  them.  *  *  *  Though  a  corporation  is  not  subject  to  im- 
prisonment, still  it  may  be  punished  by  a  fine,  and  the  fine  may  be  en- 
forced against  its  property,  or  it  may  have  its  charter  forfeited  for 
abuse." 

In  section  5621  it  is  also  said:  "The  corporation  cannot  be  prose- 
cuted for  a  crime,  where  the  punishment  prescribed  cannot  be  imposed 
upon  a  corporation.    Thus  a  corporation  cannot  be  indicted  for  a  fel- 


1386  CORPORATIONS  (Part  6 

ony,  because  the  punishment  for  felony  is  death  or  imprisonment. 
But  if  the  penalty  provides  for  fine  or  imprisonment,  then  the  corpo- 
ration may  be  indicted,  because  punishment  by  fine  may  be  imposed 
for  the  offense.  A  corporation  cannot,  in  the  nature  of  things,  be 
guilty  of  treason,  felony,  or  perjury.  So  a  corporation  cannot  be 
prosecuted  for  larceny,  assault  and  battery,  or  homicide.  But  it  has 
been  held  that  a  corporation,  owner  of  a  steam  vessel,  may  be  guilty 
of  manslaughter  under  the  federal  statute,  which  provides  that  every 
owner  of  a  vessel  through  whose  misconduct,  fraud,  or  violation  of 
law  lives  are  lost  on  such  vessel,  shall  be  deemed  guilty  of  manslaugh- 
ter, and  upon  conviction  thereof  shall  be  sentenced  to  confinement  at 
hard  labor,  though  it  cannot  be  subjected  to  the  punishment  imposed; 
and  this  fact  has  been  held  not  to  affect  the  right  of  the  government 
to  prosecute  individuals  under  said  statute,  who  aid  and  abet  the  cor- 
poration in  the  commission  of  a  crime."  1  Bishop's  New  Criminal  Law, 
§§  417-419,  421,  422.    *    *    * 

The  crimes  murder  and  manslaughter  are  not  defined  by  statute  in 
this  state,  though  the  punishment  for  the  former  and  voluntary  man- 
slaughter is  prescribed  by  statute,  but  both  are  defined  by  the  common 
law  and  accepted  by.  the  courts  of  the  state  as  thereby  defined.  In- 
voluntary manslaughter,  a  lesser  degree  of  manslaughter,  is  an  offense 
at  the  common  law  for  which  no  penalty  is  prescribed  by  statute  in 
this  state;  consequently  the  punishment  inflicted  upon  persons  con- 
victed in  the  state  of  involuntary  manslaughter  is  that  prescribed  by 
the  common  law  for  the  offense,  viz.,  a  fine  in  any  amount,  or  impris- 
onment in  jail  any  length  of  time,  or  both,  in  the  discretion  of  the 
jury.     *     *     * 

It  is  insisted  for  the  commonwealth  that,  as  involuntary  manslaugh- 
ter is  but  a  misdemeanor,  the  commission  of  which  does  not  require  an 
intent,  it  is  an  offense  for  which  a  corporation  may  be  indicted,  and,  if 
convicted,  punished  by  a  fine,  although  it  could  not  be  imprisoned  in 
jail,  if  imprisonment  were  a  part  of  or  all  the  punishment  inflicted  by 
the  verdict  of  the  jury.  This  contention  is,  in  our  opinion,  unsound 
for  two  reasons :  First,  because,  however  certain  its  civil  liability 
therefor  when  committed  by  its  servants  in  the  apparent  scope  of  their 
authority,  a  corporation  cannot  be  criminally  prosecuted  for  offenses 
against  the  person,  such  as  assault  and  battery  or  homicide.  Second, 
because  involuntary  manslaughter  is  homicide,  and  homicide  is  the 
killing  of  one  human  being  by  another  human  being. 

Involuntary  manslaughter  is  the  killing  by  one  person  of  another 
person  in  doing  some  unlawful  act  not  amounting  to  a  felony,  nor 
likely  to  endanger  life,  and  without  an  intention  to  kill,  or  where  one 
kills  another  while  doing  a  lawful  act  in  an  unlawful  manner.     *     *     * 

We  are  aware  that  section  457,  Kentucky  Statutes,  declares  that  "the 
word  'person'  may  extend  and  be  applied  to  bodies  politic  and  corpo- 
rate, societies,  communities,  and  the  public  generally,  as  well  as  in- 
dividuals, partnerships,  persons  and  joint  stock  companies."  But  in 
a  case  of  homicide,  though  it  be  involuntary  manslaughter,  it  would, 
we  think,  be  giving  the  word  "person"  a  tortured  meaning  to  say  that 
it  includes  a  corporation.  The  word  "person"  may  include  in  its 
meaning  a  corporation,  but  it  does  not  in  all  cases  necessarily  do  so. 
Besides,  as  in  homicide  of  whatever  degree  there  must  be  a  killing 
by  orle  person  of  another  person,  the  word  "another"  can  only  mean 
another  member  of  the  same  class  as  the  slayer,  and  a  corporation, 


Ch.  1)  ORGANIZATION   OF   A   CORPORATION  1387 

though  a  "person"  in  law,  is  but  an  artificial  person,  and  therefore  not 
of  the  class  to  which  the  person  slain  belongs.     *     '■'"     ''' 

While  the  tendency  of  the  later  cases  is  to  extend  the  doctrine  of  cor- 
porate civil  liability  for  torts  involving  personal  violence  to  criminal 
prosecutions,  in  most  states  in  which  that  has  been  done,  the  indict- 
ments provided  for  ^re  designed  mainly  to  furnish  a  civil  remedy  in 
favor  of  the  estate  of  the  deceased,  although  in  the  form  of  a  criminal 
action ;  therefore  the  decisions  in  those  states  are  of  little  importance 
in  determining  the  question  before  us. 

Manifestly,  a  corporation  cannot  be  indicted  for  a  form  of  homicide, 
the  only  punishment  for  which  is  death  or  imprisonment ;  for,  being  an 
intangible  thing,  it  cannot  be  subject  to  such  penalties.  But,  as  inti- 
mated by  the  learned  commentator  in  a  footnote  to  People  v.  Rochester 
R.  &  L.  Co.,  195  N.  Y.  102,  88  N.  E.  22,  21  L.  R.  A.  (N.  S.)  908,  133 
Am.  St.  Rep.  770,  16  Ann.  Cas.  837,  as  to  the  lesser  degrees,  at  least 
those  not  involving  actual  intent,  for  which  the  penalty  prescribed  may 
be  a  fine,  it  would  seem  that  an  indictment  might  be  made  to  lie,  if 
authorized  by  a  statute  including  corporations. 

It  is  patent,  however,  that  we  have  no  such  statute  in  this  state ; 
and  the  statute  which  provides  that  the  word  "person"  may  include  a 
corporation  makes  of  the  corporation  only  an  artificial  person,  incapa- 
ble, without  a  legislative  enactment  to  that  effect,  of  committing  a  crime 
which  the  common  law  declares  to  be  involuntary  manslaughter. 

In  our  view  of  the  law  the  circuit  court  ruled  correctly  in  sustaining 
the  demurrer.    Wherefore  the  judgment  is  affirmed. 


SECTION  2.— WHEN  CORPORATE  ENTITY  MAY  BE 
DISREGARDED 


PEOPLE  V.   NORTH   RIVER   SUGAR  REFINING    CO. 

(Court  of  Appeals  of  New  York,  1890.     121  N.  Y.  582,  24  N.  E.  834, 
9  L.  R.  A.  3.3,  18  Am.  St.  Rep.  843.) 

Action  in  the  nature  of  a  quo  warranto  brought  by  the  people  of 
the  state  of  New  York  for  the  forfeiture  of  defendant's  corporate 
franchises,  and  for  its  dissolution.  From  a  judgment  affirming  a  decree 
for  its  dissolution  defendant  appeals. 

Finch,  J.  The  judgment  sought  against  the  defendant  is  one  of 
corporate  death.  The  state,  which  created,  asks  us  to  destroy,  and  the 
penalty  invoked  represents  the  extreme  rigor  of  the  law.     *     *     * 

Two  questions,  therefore,  open  before  us :  First,  has  the  defendant 
coj-poration  exceeded  or  abused  its  powers?  and,  second,  does  that 
excess  or  abuse  threaten  or  harm  the  public  welfare? 

The  first  question  requires  us  to  ascertain  what  the  defendant  cor- 
poration has  done  in  violation  of  its  duty,  or  omitted  to  do  in  perform- 
ance of  its  duty.  We  find  disclosed  by  the  proof  that  it  has  become  an 
integral  part  and  constituent  element  of  a  combination  which  possesses 
over  it  an  absolute  control,  which  has  absorbed  most  of  its  corporate 
functions,  and  dictates  the  extent  and  manner  and  terms  of  its  entire 
business  activity.  Into  that  combination,  which  drew  into  its  control 
16  other  corporations  engaged  in  the  refining  of  sugar,  the  defendant 
has  gone,  in  some  manner  and  by  some  process,  for  as  an  unquestiona- 


1388  CORPORATIONS  (Part  6 

ble  truth  we  find  it  there.  All  its  stock  has  been  transferred  to  the 
central  association  of  11  individuals  denominated  a  "board."  In  ex- 
change it  has  taken  and  distributed  to  its  own  stockholders  certificates 
of  the  board,  carrying  a  proportionate  interest  in  what  it  describes  as 
its  capital  stock.     *     *     * 

But  that  truth  does  not  alone  solve  the  problem  presented.  We  are 
yet  to  ascertain  whether  the  corporation  became  the  subordinate  and 
servant  of  the  board  by  its  own  voluntary  action,  or  the  will  and  power 
of  others  than  itself ;  by  force  of  a  contract  to  which  it  was  in  reality 
a  party,  or  as  the  simple  consequence  of  a  change  of  owners ;  by  its 
fault  or  its  misfortune;  by  a  sale  or  by  a  trust.  For  if  it  has  done 
nothing — if  what  has  happened  and  all  that  has  happened  is  ascertained 
to  be  that  the  stockholders  of  the  defendant,  one  or  many,  sold  abso- 
lutely to  the  11  men  who  constituted  the  board  their  entire  stock,  and 
the  latter,  by  force  of  their  proprietorship  and  as  owners,  have  merely 
chosen  directors  in  their  own  interest,  and  are  only  managing  their 
property  in  their  own  way  as  any  absolute  owners  may — if  that  is  the 
truth,  and  the  entire  and  exact  truth,  it  is  difficult  to  see  wherein  the 
corporation  has  sinned,  or  what  it  has  done  beyond  merely  omitting 
for  a  time  to  carry  on  its  business.  That  is  the  theory  upon  which  the 
appellants  stand,  and  which  they  submit  to  our  examination.     *     *     * 

The  combination,  therefore,  framed  by  the  deed  was  a  trust ;  and,  if 
created  by  the  corporations,  or  in  any  respect  the  consequence  or  prod- 
uct of  their  action,  some  inevitable  results  would  be  certain  to  follow. 
But  here  we  encounter  the  stronghold  of  the  appellant's  argument,  which 
is  that,  if  the  corporations  are  in  some  manner  in  the  combination,  they 
are  there  solely  as  the  result  of  a  contract  other  than  their  own ;  are 
there  without  corporate  action  on  their  part;  and  so  are  sufferers, 
and  not  sinners.  The  reasoning  leading  to  that  result  is  so  severely 
technical  as  to  have  suggested  a  justification  almost  reminding  one  of 
an  apology.  We  are  called  upon  to  sever  the  corporation,  the  abstract 
legal  entity,  from  the  living  and  acting  corporators ;  as  it  were,  to 
separate  in  our  thought  the  soul  from  the  body,  and,  admitting  the 
sins  of  the  latter,  to  adjudge  that  the  former  remains  pure.     *     *     * 

And  yet  it  is  argued  that  the  corporation,  the  legal  entity,  has  done 
nothing.  *  *  *  j  think  there  may  be  actual  corporate  conduct 
which  is  not  formal  corporate  action ;  and  where  that  conduct  is  di- 
rected or  produced  by  the  whole  body  both  of  officers  and  stockholders, 
by  every  living  instrumentality  which  can  possess  and  wield  the  cor- 
porate franchise,  that  conduct  is  of  a  corporate  character,  and,  if  illegal 
and  injurious,  may  deserve  and  receive  the  penalty  of  dissolution. 

The  abstract  idea  of  a  corporation,  the  legal  entity,  the  impalpable 
and  intangible  creation  of  human  thought,  is  itself  a  fiction,  and  has 
been  appropriately  described  as  a  figure  of  speech.  It  serves  very  well 
to  designate  in  our  minds  the  collective  action  and  agency  of  many 
individuals  as  permitted  by  the  law ;  and  the  substantial  inquiry  always 
is  what,  in  a  given  case,  has  been  that  collective  action  and  agency. 
As  between  the  corporation  and  those  with  whom  it  deals,  the  manner 
of  its  exercise  usually  is  material,  but,  as  between  it  and  the  state, 
the  substantial  inquiry  is  only  what  that  collective  action  and  agency 
has  done;  what  it  has  in  fact  accomplished;  what  is  seen  to  be  its 
eflfective  work ;  what  has  been  its  conduct.  It  ought  not  to  be  other- 
wise.    The  state  gave  the  franchise,  the  charter,  not  to  the  impalpa- 


Ch.  1)  ORGANIZATION  OF  A  CORPORATION  1389 

ble,  intangible,  and  almost  nebulous  fiction  of  our  thought,  but  to  the 
corporators,  the  individuals,  the  acting  and  living  men,  to  be  used  by 
them,  to  rebound  to  their  benefit,  to  strengthen  their  hands,  and  add 
energy  to  their  capital.  If  it  is  taken  away,  it  is  taken  from  them  as 
individuals  and  corporators,  and  the  legal  fiction  disappears.  The  ben- 
efit is  theirs,  the  punishment  is  theirs,  and  both  must  attend  and  depend 
upon  their  conduct ;  and  when  they  all  act,  collectively,  as  an  aggre- 
gate body,  without  the  least  exception,  and  so  acting  reach  results  and 
accomplish  purposes  clearly  corporate  in  their  character,  and  affecting 
the  vitality,  the  independence,  the  utility,  of  the  corporation  itself,  we 
cannot  hesitate  to  conclude  that  there  has  been  corporate  conduct  which 
the  state  may  review,  and  not  be  defeated  by  the  assumed  innocence 
of  a  convenient  fiction.     *     *     * 

And  so  we  have  reached  our  conclusion,  and  it  appears  to  us  to  have 
been  established  that  the  defendant  corporation  has  violated  its  char- 
ter, and  failed  in  the  performance  of  its  corporate  duties,  and  that  in 
respects  so  material  and  important  as  to  justify  a  judgment  of  disso- 
lution. Having  reached  that  result,  it  becomes  needless  to  advance  into 
the  wider  discussion  over  monopolies  and  competition  and  restraint  of 
trade,  and  the  problems  of  political  economy.  Our  duty  is  to  leave 
them  until  some  proper  emergency  compels  their  consideration.  With- 
out either  approval  or  disapproval  of  the  views  expressed  upon  that 
branch  of  the  case  by  the  courts  below,  we  are  enabled  to  decide  that 
in  this  state  there  can  be  no  partnerships  of  separate  and  independent 
corporations,  whether  directly  or  indirectly,  through  the  medium  of  a 
trust ;  no  substantial  consolidations  which  avoid  and  disregard  the 
statutory  permissions  and  restraints ;  but  that  manufacturing  corpora- 
tions must  be  and  remain  several  as  they  were  created,  or  become  one 
under  the  statute.  The  judgment  appealed  from  should  be  affirmed, 
with  costs.     *     *     * 


DONOVAN  V.  PURTELL. 

r Supreme  Court  of  Illinois,  1905.     216  111.  629,  75  N.  E.  334, 
1  L.  R.  A.  [N.  S.]  176.) 

Action  by  Julia  Purtell  against  Joseph  T.  Donovan.  From  a  judg- 
ment of  the  Appellate  Court,  affirming  a  judgment  for  plaintiff,  de- 
fendant appeals. 

This  is  an  action  in  assumpsit,  begun  by  appellee  against  appellant 
on  November  24,  1903,  by  attachment  in  the  circuit  court  of  St.  Clair 
County.  A  bill  of  particulars  was  filed,  which,  besides  the  items  for 
money  loaned  and  due  in  1901,  contains  items  for  money  lent  by  appel- 
lee to  appellant  in  the  name  of  the  Fidelity  Realty  Company  in  1901, 
and  for  money  lent  to  appellant  by  appellee  and  promised  to  be  paid 
by  him  in  the  name  of  the  J.  T.  Donovan  Real  Estate  Company  in  1901. 
The  general  issue  was  filed  to  the  declaration.  A  trial  was  had  before 
the  court  and  jury,  resulting  in  a  verdict  in  favor  of  appellee  against 
appellant  for  the  sum  of  $1,430,  from  which  the  plaintiff  remitted  the 
sum  of  $71.80,  making  the  amount  of  the  verdict  $1,358.20,  which  re- 
mittitur was  approved  by  the  court.  Motion  for  new  trial  was  over- 
ruled, and  judgment  rendered  on  the  verdict  in  favor  of  appellee 
against  appellant  for  $1,358.20  and  costs. 

Magrudkr,  J.  *  *  *  The  salient  facts  of  this  case  are  that  the 
appellee  had  a  note  and  trust  deed  for  $1,200  against  a  man  named 


1390  CORPORATIONS  (Part  6 

Hayden;  that  they  became  due  in  January,  1901,  and  she  took  them 
to  the  office  of  the  appellant,  with  directions  to  him,  or  to  his  son  in 
the  same  office  with  him,  to  collect  them  for  her  and  reinvest  the  mon- 
ey ;  that  the  money  was  collected  by  appellant,  or  some  one  of  his  sons 
in  the  office  with  him,  either  in  his  own  name  or  in  the  name  of  one  of 
the  corporations  doing  business  in  his  office,  and  which  he  controlled 
and  managed.  The  evidence  tends  to  show  that  the  $1,200  belonging 
to  appellee  went  into  appellant's  hands,  or  into  the  hands  of  some  one 
or  more  of  his  sons  or  clerks.  Appellee's  money,  therefore,  was  had 
and  received  by  the  appellant.  Appellant  turned  over  to  Miss  Slaterly, 
appellee's  agent  and  friend  acting  for  her  while  she  was  out  of  the  city, 
a  note  for  $1,200,  payable  in  three  years,  together  with  certain  inter- 
est notes,  and  a  trust  deed  securing  the  same  upon  a  25-foot  lot  in  St. 
Louis.  *  *  *  The  principal  note  for  $1,200.  and  the  interest  notes, 
dated  January  19,  1901,  were  signed  by  the  Fidelity  Realty  Company, 
by  J.  M.  Donovan,  president.  They  were  payable  to  the  order  of 
George  N.  Cooper,  a  clerk  in  appellant's  office,  who  indorsed  them  with- 
out recourse.  The  trust  deed  securing  them  was  made  to  appellant,  as 
trustee.  The  evidence  tends  to  show  that  appellant  controlled  and 
managed  the  Fidelity  Realty  Company,  and,  the  trust  deed  being  made 
to  himself  as  trustee  and  the  notes  being  made  to  the  order  of  his 
clerk,  the  conclusion  is  almost  irresistible,  in  the  light  of  the  facts  set 
forth  in  the  statement  preceding  this  opinion,  that  the  papers  thus  pre- 
pared, were  really  the  papers  of  the  appellant,  though  nominally  those 
of  a  corporation  in  his  office  and  under  his  control. 

The  written  deed  of  guaranty,  dated  January  22,  1901,  was  signed 
by  the  J.  T.  Donovan  Real  Estate  Company,  by  J.  T.  Donovan,  presi- 
dent. It  begins  as  follows  :  "Witnesseth.  that  for  and  in  consideration 
of  the  sum  of  $1,200,  paid  to  us  by  Miss  Julia  Purtell.  we  have  assigned 
and  transferred  to  her  certain  notes  of  Fidelity  Realty  Company,  dated 
January  19,  1901,  secured  by  a  deed  of  trust,"  etc.  Appellant  signed 
this  indenture,  and  in  it  recites  that  the  sum  of  $1,200,  belonging  to 
Miss  Purtell,  was  paid  to  "us,"  meaning  thereby  the  J.  T.  Donovan 
Real  Estate  Company,  of  which  he  was  president.  In  this  guaranty 
he  also  recites  that  "we  have  assigned  and  transferred  to  her  certain 
notes,"  etc.  The  notes  were  indorsed  without  recourse  by  his  clerk. 
Cooper;  but,  in  view  of  the  recital  thus  quoted,  Cooper  merely  acted 
for  the  appellant  or  his  company,  the  J.  T.  Donovan  Real  Estate  Com- 
pany. *  *  "  The  evidence  also  tends  to  show  that  there  were  judg- 
ments then  existing  against  the  Fidelity  Realty  Company,  and  that  it 
had  no  financial  standing  whatever,  but  that  it  was,  as  is  said  by  one  of 
the  witnesses,  "gotten  up  to  keep  the  property  out  of  judgment."  The 
proof  shows  that  none  of  these  corporations,  controlled  by  appellant, 
paid  their  debts.  One  of  the  witnesses  swears  that,  "when  any  adjust- 
ment was  to  be  made,  Mr.  Donovan  would  use  the  property  of  any  of 
these  companies  to  make  it,  indiscriminately.  He  would  settle  the 
debts  of  the  J.  T.  Donovan  Real  Estate  Company  with  these  properties, 
no  matter  to  which  company  it  [they]  belonged."     r     *     * 

The  evidence  tends  to  show  that,  although  the  appellant  and  his  sons 
turned  over  to  appellee  these  worthless  securities  in  exchange  for  her 
money,  yet  that  appellant  himself  received  the  money  and  used  it  for 
his  own  private  purposes,  and  sought  to  escape  personal  liability  by 
covering  up  the  transaction  in  the  name  of  a  corporation,  which  was 
entirely  under  his  own  control.    *    *    * 


Ch.  1)  ORGANIZATION   OP   A   CORPORATION  1391 

Appellant  was  president  of  the  J.  T.  Donovan  Real  Estate  Company, 
and  his  son,  Joseph  M.  DondVan,  was  the  vice  president  of  that  com- 
pany, and  Joseph  M.  Donovan,  the  appellant's  son,  was  the  president 
of  the  Fidelity  Realty  Company.  Both  of  these  concerns  were  con- 
trolled, managed,  and  dominated  by  the  appellant,  J.  T.  Donovan.  The 
officer  or  controlling  manager  of  a  corporation  cannot  use  it  and  its 
name  for  the  transaction  of  his  own  private  business  and  to  escape 
personal  liability  on  his  part.  The  theory  upon  which  the  appellant 
defends  this  suit  is  that  the  liability  to  appellee  was  not  his  liability, 
but  that  of  the  corporation  known  as  the  Fidelity  Realtv  Company. 
*  *  *  In  the  case  of  Bank  v.  Trebein  Co.,  59  Ohio  St.  316,  52  N.  E. 
834,  it  was  said :  "The  fiction  by  which  an  ideal  legal  entity  is  attribut- 
ed to  a  duly  formed  incorporated  company,  existing  separate  and 
apart  from  the  individuals  composing  it,  is  of  such  general  utility  and 
application  as  frequently  to  induce  the  belief  that  it  must  be  universal, 
and  be  in  all  cases  adhered  to,  although  the  greatest  frauds  may  there- 
by be  perpetrated  under  the  fiction  as  a  shield.  But  modern  cases, 
sustained  by  the  best  text  writers,  confine  the  fiction  to  the  purposes 
for  which  it  was  adopted — convenience  in  the  transaction  of  business 
and  in  suing  and  being  sued  in  its  corporate  name,  and  the  continuance 
of  its  rights  and  liabilities,  unaft'ected  by  changes  in  its  corporate 
members — and  have  repudiated  it  in  all  cases  where  it  has  been  in- 
sisted on  as  a  protection  to  fraud  or  any  other  illegal  transaction."  In 
Cook  on  Corporations  (5th  Ed.,  663),  it  is  said:  "A  corporation  is 
often  organized  to  act  as  a  'cloak'  for  frauds.  Such  cases  as  these 
are  becoming  common,  and  the  courts  are  becoming  more  and  more 
inclined  to  ignore  the  corporate  existence,  when  necessary,  in  order 
to  circumvent  the  fraud."  *  *  *  So,  in  the  case  at  bar,  appellant, 
as  an  officer  of  one  or  more  of  the  corporations  here  involved,  was 
guilty  of  such  a  fraud  in  transferring  to  appellee  these  worthless  se- 
curities in  payment  of  the  money  which  he  owed  her  that  he  can  be 
held  liable  personally  for  the  loss  inflicted  upon  her.    *    *    * 

For  the  reasons  above  stated,  we  are  of  the  opinion  that  the  judg- 
ments of  the  lower  courts  were  correct.  Accordingly  the  judgment 
of  the  Appellate  Court,  affirming  that  of  the  circuit  court,  is  affirmed. 


SECTION  3.— EFFECT  OF  INCOMPLETE  ORGANIZATION 


BERGERON  v.  HOBBS  et  al. 

(Supreme  Court  of  Wisconsin,  1897.     96  Wis.  641,  71  N.  W.  1056, 

60  Am.  Rep.  85.) 

Action  by  J.  A.  Bergeron  against  A.  A.  Hobbs  and  others.  From  a 
judgment  on  a  verdict  directed  for  plaintiff,  defendants  appeal. 

The  defendants,  under  the  name  of  Bayfield  Agricultural  Associa- 
tion, employed  several  persons  to  perform  labor  in  improving  their 
grounds  and  in  erecting  fences  and  buildings.  Time  checks  given  by 
the  defendants  to  such  laborers,  for  such  labor,  were  assigned  to  the 
plaintiff,  who  brings  this  action  to  recover  their  amount,  alleging  that 
the  defendants  were  a  co-partnership.  The  defendants  alleged  that 
they  were  members  of  a  corporation,  and  denied  that  they  were  co- 
partners, or  liable  as  such.     This  was  the  issue  which  was  tried.     It 


1392  CORPORATIONS  (Part  6 

appeared  upon  the  trial  that  articles  of  organization  of  the  defendants 
as  the  Bayfield  County  Agricultural  Association,  and  a  certificate  show- 
ing the  election  of  officers,  had  been  recorded  in  the  office  of  the  reg- 
ister of  deeds  of  Bayfield,  but  were  not  on  file  there.  They  had  been 
deposited,  with  instruction  to  record  and  return  them,  which  had  been 
complied  with.  When  the  testimony  of  both  sides  was  in,  the  court 
directed  a  verdict  for  the  plaintiff  for  the  amount  of  the  time  checks. 
From  a  judgment  on  that  verdict  the  defendants  appeal. 

Newman,  j.  *  *  *  There  are  two  questions  raised  on  this  ap- 
peal:  (1)  Was  the  mere  recording  of  the  articles  of  incorporation, 
with  the  certificate  of  the  election  of  officers,  without  the  intention  or 
fact  of  the  papers  themselves  remaining  in  the  office,  a  sufficient  com- 
pliance with  the  statute,  so  that  the  organization  of  the  corporation 
became  complete,  as  upon  a  proper  filing  of  the  papers  themselves? 
And  (2)  if  the  recording  was  not  sufficient  for  that  purpose,  are  the 
defendants  liable  to  the  plaintiff  only  as  a  de  facto  corporation,  or  are 
they  liable  as  co-partners? 

1.  The  statute  (section  1460,  Rev.  St.)  provides  that,  upon  the  filing 
of  "a  certificate  of  organization,  *  *  *  with  a  copy  of  the  con- 
stitution, *  *  *  ij^  |.|^g  office  of  the  register  of  deeds  of  the  county, 
such  society  shall  have  all  the  powers  of  a  corporation,  necessary  to 
promote  the  objects  thereof."  It  cannot  be  doubted  that  the  filing  of 
the  proper  papers  in  the  proper  office  is  made,  by  the  statute,  a  condi- 
tion precedent  to  the  vesting  of  corporate  powers.  The  court  may  not 
be  able  to  clearly  define  the  respect  wherein  the  mere  recording  and 
removal  of  the  papers  from  the  office  fails  to  serve  the  full  purpose 
which  the  legislature  intended  to  accomplish  by  the  filing  of  them. 
The  legislature,  no  doubt,  had  good  and  sufficient  reasons  for  its  choice 
of  means  to  promote  its  purpose.  For  the  court  it  is  not  a  question 
of  equivalents.  A  literal  filing  of  the  papers  is  necessary  because  it 
is  so  written  in  the  law.  The  term  "filing"  and  the  verb  "to  file,"  as 
related  to  this  subject,  include  the  idea  that  the  paper  is  to  remain  in 
its  proper  order  on  file  in  the  office.  A  paper  is  said  to  be  filed  when 
it  is  delivered  to  the  proper  officer,  and  by  him  re,ceived,  to  be  kept  on 
file.  *  *  *  The  statute  is  plain  and  easy  of  observance.  Valuable 
rights  and  exemption  from  personal  liability  are  to  be  secured  by  its 
observance.  It  is  no  undue  severity  to  require  its  strict  observance. 
The  defendants  had  not  observed  it,  and  had  not  secured  corporate 
powers. 

Had  the  defendants  secured  immunity  from  individual  liability? 
No  doubt,  as  a  general  rule,  where  an  attempt  to  organize  a  corpora- 
tion fails,  by  omission  of  some  substantial  step  or  proceeding  required 
by  the  statute,  its  members  or  stockholders  are  liable  as  partners  for 
its  acts  and  contracts.  *  *  *  But  the  defendants'  contention  is 
that  they  are  not  within  this  rule,  because  they  are,  at  least  de  facto, 
a  corporation,  and  their  right  to  be  a  corporation  cannot  be  inquired' 
into  in  a  collateral  action,  but  only  in  a  direct  action  for  that  purpose  by 
the  state.  The  infirmity  of  the  defendants'  contention  is  in  the  as- 
sumption that  they  are,  de  facto,  a  corporation.  In  order  to  secure 
this  immunity  from  inquiry  into  its  right  to  be  a  corporation  in  a  col- 
lateral action,  its  action,  as  a  corporation,  must  be  under  a  color,  at 
least,  of  right.  It  is  immaterial  that  they  have  carried  on  business 
under  the  supposed  authority  to  act  as  a  body  corporate,  in  entire  good 
faith.     If  they  had  not  color  of  legal  right,  they  have  obtained  no  im- 


Ch.  1)  ORGANIZATION  OF   A  CORPORATION  1393 

munity  from  individual  liability  for  the  debts  of  the  supposed  corpora- 
tion. Until  the  articles  of  incorporation  are  filed  in  the  office  of  the 
register  of  deeds  of  the  county,  there  is  no  color  of  legal  right  to  act  as 
a  corporation.  The  filing  of  such  paper  is  a  condition  precedent  to  the 
right  to  so  act.  So  long  as  an  act,  required  as  a  condition  precedent, 
remains  undone,  no  immunity  from  individual  liability  is  secured. 
*  *  *  The  defendants  are  not  a  corporation  either  de  jure  or  de 
facto,  but  are  liable  for  the  plaintiff's  claim,  as  partners.  It  was  not 
necessary  to  prove  a  co-partnership  by  evidence.  That  was  established 
by  implication  of  law.  Nor  was  it  necessary  to  prove  that  the  debt  was 
unpaid.  There  was  no  presumption  that  it  had  been  paid  to  be  re- 
butted. The  judgment  of  the  circuit  court  is  right,  and  must  be  af- 
firm.ed.    The  judgment  of  the  circuit  court  is  affirmed. 

Marshall,  J.  (dissenting).  With  the  decision  that  the  defendants 
failed  to  comply  with  all  the  conditions  precedent  to  the  corporate 
.existence  of  the'agricultural  association  I  concur,  but  from  the  decision 
that  because  of  such  failure  such  association  was  not  a  corporation 
de  facto  I  respectfully  dissent ;  hence  dissent  from  the  conclusion  reach- 
ed that  the  defendants  are  personally  liable  to  plaintiff,  and  that  the 
judgment  should  be  affirmed,  but.  on  the  contrary,  hold  that  it  should 
be  reversed.  *  *  *  jf  ^.g  hold  with  Missouri,  Arkansas,  and  some 
other  states,  that  unless  all  the  steps  necessary  to  the  creation  of  the 
corporation  have  been  taken  there  is  no  corporate  existence,  and  that 
the  members  of  the  association  are  personally  liable,  we,  in  effect, 
say  that  it  is  not  sufficient  to  enable  such  members  to  escape  personal 
liability  to  show  that  their  organization  is  a  corporation  de  facto ;  that 
nothing  short  of  a  corporation  de  jure  will  do.  But  if  we  adopt  the 
growing  doctrine,  supported,  as  we  shall  show,  by  the  overwhelming 
weight  of  authority  in  this  country,  that  a  person  who  contracts  with 
a  de  facto  corporation,  the  members  of  the  latter  and  such  person 
believing,  in  good  faith,  in  its  legal  existence,  such  members  cannot 
be  held  personally  liable,  then  we  concede,  necessarily,  that  it  is  not 
essential  to  freedom  from  such  liability  that  all  the  statutory  requisites 
to  the  existence  of  a  corporation  be  complied  with,  because,  when  that 
is  done,  the  organization,  obviously,  is  not  a  corporation  de  facto  only ; 
it  is  a  corporation  de  jure.  This  is  too  plain  to  admit  of  serious  discus- 
sion. 

While  the  decision  in  this  case,  as  I  read  the  opinion  of  the  court,  in 
one  view,  goes  upon  the  ground  that  the  members  of  a  de  facto  cor- 
poration are  not  responsible  personally,  inasmuch  as  it  may  be  held 
that  the  decision  really  is  to  the  effect  that  personal  liability  exists  be- 
cause all  the  conditions  precedent  to  a  corporation  dejure  were  not 
complied  with,  some  reference  to  authorities  on  the  subject  of  whether 
to  escape  such  liability  it  is  necessary  that  the  corporation  exist  in 
fact  may  be  proper. 

The  development  of  the  law  on  this  subject  has  been  rapid  in  recent 
years  in  the  direction  of  holding  that  the  state  only  can  challenge  the 
legality  of  the  exercise  of  corporate  powers.  The  ancient  doctrine  was 
that  all  contracts  made  by  a  corporation  in  excess  of  its  powers  were 
void.  That  has  not  been  changed,  but  the  doctrine  has  grown  up,  and 
become  well-nigh  universal,  that  the  state  only  can  raise  the  question 
by  proceedings  to  punish  the  corporation.  Our  court  is  fully  commit- 
ted to  such  doctrine.  John  V.  Farwell  Co.  v.  Wolf,  96  Wis.  10,  70  N. 
B.«&  B.Bus.Law— 88 


1304  CORPORATIONS  (Part  6 

W.  289,  71  N.  W.  109,  37  L.  R.  A.  138,  65  Am.  St.  Rep.  22.  Follow- 
ing closely  upon  the  growth  of  such  doctrine,  as  applied  to  transac- 
tions in  excess  of  corporate  powers,  where  there  is  no  question  as  to 
the  existence  of  the  corporation,  it  has  been  extended,  so  as  to  prevent 
private  persons,  who  have  contracted  with  a  de  facto  corporation,  from 
questioning  its  existence;  holding  that  sovereign  power  only  can  raise 
that  question.  This  court  having  fully 'adopted  the  doctrine  where 
there  is  a  corporation  in  fact,  how  it  can  be  rejected  where  the  cor- 
]X)ration  is  de  facto  merely  is  not  perceived,  inasmuch  as  a  control- 
ling reason  for  it  in  the  one  case  applies  equally  to  the  other.  In  both 
cases  there  is  an  exercise  of  powers  that  can  only  be  lawfully  exercised 
by  sovereign  authority ;  hence  the  unauthorized  exercise  of  power  con- 
stitutes a  public  offense,  not  against  any  individual,  but  against  the 
sovereignty  of  the  state.  A  few  authorities  of  the  multitude  that  exist 
on  the  question  under  discussion  will  be  referred  to.     *     *    * 

The  foregoing  citation  of  authorities  has  been  carried  to  great  length, 
but  warranted,  in  my  judgment,  from  the  importance  of  the  question 
involved.  After  carefully  examining  such  authorities,  and  the  reason- 
ing on  which  the  doctrine  discussed  is  based,  we  are  unable  to  under- 
stand how  any  other  conclusion  can  be  reached  than  that  a  decision 
cannot  be  made  that  plaintiff  in  this  case  can  attack  the  existence  of 
the  agricultural  association  as  a  corporation,  if  it  were  such  de. facto, 
without  holding  in  direct  conflict  with  the  decision  in  John  V.  Farwell 
Co.  v.  Wolf,  supra,  which  is  supported  by  the  highest  authorities  in  this 
country,  and  which  the  court  certainly  would  not  wish  to  question. 
True,  there  are  some  authorities  still  holding  to  the  ancient  doctrine 
that  any  one  can  challenge  the  existence  of  a  corporation  or  the  legal- 
ity of  its  acts,  but  the  trend  of  modern  authority  is  to  fence  in,  within 
constantly  narrowing  limits,  the  cases  where  private  persons  can  attack 
either  the  existence  of  a  corporation  or  the  legality  of  its  exercise  of 
powers;  and  in  the  humble  opinion  of  the  writer,  the  theory  that  a 
private  person  can  so  attack  a  corporation  will  disappear  altogether  in 
the  near  future,  either  by  the  courts  that  adhere  to  the  ancient  doctrine 
voluntarily  changing  their  rule  on  the  subject,  or  by  its  being  changed 
by  statute.  Illinois  has  adhered  as  rigidly  as  any  state  to  the  doctrine 
that  a  creditor  may  raise  the  question  of  want  of  legal  incorporation, 
yet,  in  the  recent  case  of  Winget  v.  Association,  128  111.  Q ,  21  N.  E. 
12,  it  was  held  that,  if  a  person  contracts  with  a  corporation  de  facto, 
and  receives  the  benefit  of  such  contract,  he  cannot  be  permitted  to 
allege  any  defect  in  the  organization  of  the  corporation  as  affecting 
its  capacity  to  make  the  contract,  even  if  the  law  under  which  it  was 
organized  was  unconstitutional;  that  objection  to  the  corporate  exist- 
ence is  available  only  on  behalf  of  the  sovereign  power  of  the  state. 
That  is  carrying  the  doctrine  under  discussion  further  than  is  necessary 
for  the  purposes  of  this  case,  and  beyond  the  general  rule  that  there 
cannot  be  a  de  facto  corporation  under  an  unconstitutional  law,  be- 
cause it  is  absolutely  necessary  to  the  existence  of  a  de  facto  corpora- 
tion that  there  be  a  valid  law  under  which  it  might  exist  de  jure. 

So  we  say  the  law  is  that  he  who  deals  with  a  de  facto  corporation 
cannot  attack  its  legal  existence,  though  in  administering  it  courts  do 
not  agree  as  to  all  the  reasons  for  the  doctrine.  By  some  it  rests  on 
the  ground  that  courts  can  only  enforce  contracts  actually  made  by 
parties,  cannot  make  contracts  for  them ;  by  others  upon  the  ground 
of  estoppel ;   by  others  upon  the  broad,  universally  established  princi- 


Cll.  1)  ORGANIZATION  OF  A  CORPORATION  1395^ 

pie  that  only  the  state  can  question  the  existence  of  a  corporate  organi- 
zation, or  the  legality  of  its  exercise  of  powers ;  and  by  still  others 
upon  the  ground  that  broad  principles  of  justice  and  public  policy  re- 
quire that  persons  who,  in  good  faith,  assume  to  exercise  corporate 
powers,  and  have  a  de  facto  right  so  to  do,  should  not  be  compelled, 
in  all  their  business  transactions,  in  all  courts  and  places,  to  be  ready 
to  successfully  meet  attacks  upon  their  right  in  this  regard;  that _  so 
long  as  the  law  exists  under  which  they  might  legally  do  the  very  thing 
they  assume  to  do,  and  the  failure  td  comply  with  the  law  is  a  mere 
usurpation  of  power,  which  only  concerns  the  community  in  its  sov- 
ereign capacity,  without  prejudice  to  the  individual  members  of  the 
state,  justice,  and  the  certainty  of  contracts,  upon  which  prosperous 
business  in  the  complicated,  practical  affairs  of  life  depend,  require 
that  such  persons,  as  against  all  but  the  state,  shall  be  regarded  as  that 
which  they  assume  to  be,  and  might  in  fact  be,  except  for  some  act  on 
their  part  not  attributable  to  bad  faith.  In  our  judgment,  all  of  the 
reasons  strongly  support  the  doctrine,  and  either  is  sufficient,  particu- 
larly the  one  sanctioned  by  this  court  in  John  V.  Farwell  Co.  v.  Wolf, 
supra,  that  only  the  state  can  question  the  legality  of  corporate  ex- 
istence when  there  is  a  colorable  right  to  so  exist. 

It  only  remains  to  be  considered  whether  the  association  in  question 
was  a  de  facto  corporation.  My  brethren  say  no,  and,  as  I  understand 
it,  because  there  was  a  failure  to  perform  some  condition  precedent 
to  its  being  a  corporation  de  jure.  I  must  assume  that  such  is  really 
not  the  doctrine  of  this  court,  for  the  essential  element  of  a  mere  cor- 
poration de  facto  is  failure  to  comply  with  some  provision  of  law 
requisite  to  its  legal  existence.  Where  such  conditions  are  all  com- 
plied with,  then  the  corporation  becomes  an  Organization  de  jure,  as 
well  as  de  facto,  and  the  doctrine  pertaining  to  the  latter  class  of  offi- 
cial bodies  has  no  application  whatever.  If  it  were  the  law  that  a. 
corporation  must  be  such  de  jure  in  order  to  be  such  de  facto,  obvi- 
ously, the  doctrine  pertaining  to  the  latter,  upon  which  much  learning 
has  been  displayed  by  the  courts  and  text  writers,  would  stand  as  the 
result  of  much  useless  expenditure  of  mental  energy.  The  true  doc- 
trine is  that  it  is  sufficient  to  constitute  a  corporation  de  facto,  as  against 
one  who  has  recognized  its  corporate  existence,  that  there  be  a  law 
under  which  it  might  exist  de  jure,  an  attempt  in  good  faith  to  or- 
ganize under  such  law,  and  a  subsequent  user  of  the  assumed  cor- 
porate powers.     This  is  not  an  open  question  in  this  state.     *     *     * 

One  of  the  earliest  and  best  considered  cases  on  this  subject  is 
Union  Church  v.  Pickett,  19  N.  Y.  482.  The  corporation  claimed  to 
exist  under  a  general  law.  Such  law  required  the  making,  acknowl- 
edging, and  recording  of  a  certificate  of  organization,  showing  certain 
facts.  That  was  complied  with,  except  that  the  certificate  did  not  show 
the  existence  of  all  facts  requisite  to  a  legal  corporation.  After  act- 
ing as  a  corporation  for  some  time,  in  an  action  brought  as  such,  to 
which  a  private  person  was  a  party,  its  corporate  existence  was  chal- 
lenged. On  the  question  thus  presented,  Mr.  Justice  Seldon,  speaking 
for" the  court,  said:  "It  has  been  repeatedly  held  that,  as  against  all 
persons  who  have  entered  into  contracts  with  bodies  assuming  to  act 
in  a  corporate  capacity,  it  is  sufficient  for  such  bodies  to  show  them- 
selves to  be  corporations  de  facto,  and  to  that  end  two  things  are  neces- 
sary: (1)  The  existence  of  a  charter  or  some  law  under  which  a  cor- 
poration with  the  powers  assumed  might  lawfully  be  created;  and  (2) 


1396  CORPORATIONS  (Part  6 

a  user  by  the  party  to  the  suit  of  the  rights  claimed  to  be  conferred 
by  such  charter  or  law.  The  rule  established  by  law,  as  well  as  by 
reason,  is  that  parties  recognizing  the  existence  of  corporations,  by 
dealing  with  them,  have  no  right  to  object  to  any  irregularity  in  their 
organization.  As  long  as  it  is  overlooked  or  tolerated  by  the  state,  it  is 
not  for  individuals  to  call  it  in  question."  And  further,  in  effect,  if  the 
law  exists,  and  the  record  exhibits  a  bona  fide  attempt  to  organize 
under  it,  or  there  is  even  a,  sliglu  evidence  of  user,  that  is  all  that  is 
required  to  establish  the  corporation  de  facto ;  and  evidence,  in  a  con- 
test between  it  and  one  who  has  dealt  with  it  as  a  corporation,  of  de- 
fects in  its  organization,  short  of  such  as  would  show  a  want  of  good 
faith  on  the  part  of  those  concerned  in  the  proceedings,  would  be  wholly 
immaterial.     *     *     * 

The  condition  precedent  which  defendants  here  failed  to  perform 
was  that  as  to  filing  in  the  office  of  the  register  of  deeds  of  their  con- 
stitution and  certificate  of  organization.  They  recorded  their  articles 
of  organization,  which  were  adopted,  in  form,  under  the  general  in- 
corporating act,  not  that  relating  specially  to  agricultural  societies; 
so  that  the  record,  speaking  with  reference  to  the  papers  required  to 
be  on  file  with  the  register  of  deeds,  was  not  merely  defective;  it  did 
not  exist  at  all.  Now  it  may  be  contended  that,  while  such  official  rec- 
ord need  not  show  that  all  the  steps  requisite  to  the  organization  of 
the  corporation  were  taken,  in  order  to  give  it  colorable  existence,  an 
official  record  of  some  sort,  showing  an  attempt  to  comply  with  the  law, 
is  necessary.  *  *  *  This  may  be  deemed  to  signify  that  the  rec- 
ord referred  to  must  be  an  official  record, — the  record  which  the  law 
requires  shall  be  made.  The  same  language  is  used  in  Ang.  &  A.  Corp. 
§  635,  but  a  careful  examination  of  the  authorities  will  clearly  show  that 
the  record  intended  is  not  the  record  of  the  corporation  papers  re- 
quired by  law.  The  word  "record"  refers  solely  to  the  acts  shown 
by  the  evidence  to  have  been  actually  done  by  the  persons  assuming 
to  act  as  a  corporation,  by  way  of  complying  with  the  law  authorizing 
its  organization.  Such  facts  constitute  the  record,  in  a  legal  sense, 
of  their  doings,  and  by  such  record  it  must  appear  that  they,  in  good 
faith,  intended  to  acquire  corporate  power. 

In  V.anneman  v.  Young,  52  N.  J.  Law,  403,  20  Atl.  53,  there  was,  as 
here,  an  absolute  failure  to  comply  with  the  law  in  respect  to  the  offi- 
cial record.  The  certificate  of  incorporation  was  not  filed  in  the  office 
of  the  secretary  of  state.  That,  under  the  New  Jersey  law,  was  es- 
sential to  corporate  existence.  Plaintiff  sold  to  the  pretended  corpora- 
tion some  merchandise,  and,  upon  payment  therefor  not  being  made, 
suit  was  brought  by  him  against  the  members  of  the  corporation,  to 
charge  them  personally  as  partners,  upon  the  ground  that  the  corpora- 
tion had  no  legal  existence.  In  deciding  the  question  thus  presented, 
Mr.  Justice  Dixon  said,  in  effect:  "The  statute  authorized  the  incor- 
poration of  the  associates.  They  attempted  to  organize  under  its  pro- 
visions. The  contract  was  entered  into  by  plaintiff  on  the  assumption 
that  he  was  dealing  with  a  corporation  de  jure.  The  failure  of  the 
associates  to  comply  with  the  statute  did  not,  in  the  least,  impair  the 
rights  which  the  plaintiff  intended  to  secure  by  his  contract.  Un- 
der these  circumstances,  the  plaintiff  cannot  bring  into  question  the 
legality  of  the  corporation.  Where  the  law  authorizes  a  corporation, 
and  there  is  an  effort  in  good  faith  to  organize  under  the  law,  and, 
as  a  result  of  such  effort,  corporate  functions  are  assumed  and  ex- 


Ch.  1)  ORGANIZATION  OP  A  CORPORATION  1397 

ercised,  the  organization  becomes  a  corporation  de  facto.  *  *  * 
and  its  existence  can  only  be  inquired  into  in  a  direct  proceeding  brought 
in  the  name  of  the  state.  No  private  person  having  dealings  with  a  de 
facto  corporation  can  be  permitted  to  say  that  it  is  not  a  corporation 
de  jure."  In  McTighe  v.  Construction  Co.,  94  Ga.  309,  21  S.  E.  701, 
32  L.  R.  A.  208,  47  Am.  St.  Rep.  153,  there  was  a  general  law  under 
which  the  organization  might  have  been  incorporated.  It  organized 
under  a  special  law  that  was  held  unconstitutional.  There  was  an  en- 
tire absence,  it  will  be  observed,  of  any  official  record  of  any  act  done 
under  the  general  law.  It  was  held  that  the  special  law  was  unconsti- 
tutional and  void ;  hence  that  the  organization  had  no  de  jure  existence ; 
nevertheless,  that  it  was  a  corporation  de  facto ;  that  the  essentials 
of  a  de  facto  corporation  were  all  present:  (1)  A  law  under  which  the 
organization  might  have  been  incorporated;  (2)  a  bona  fide  attempt 
to  become  incorporated;  and  (3)  an  assumption  and  exercise  of  the 
powers  of  a  corporation,  unchallenged  by  the  state. 

The  foregoing  authorities  are  believed  to  fairly  state  the  law  in  re- 
spect to  what  is  necessary  to  constitute  a  corporation  de  facto.  The 
very  meaning  of  the  term  "de  facto"  indicates  that  nothing  more  is  nec- 
essary to  the  existence  of  a  de  facto  corporation  than  the  exercise  of 
corporate  powers  in  good  faith.  Corporation  de  facto, — that  is,  a  cor- 
poration from  the  fact  that  it  is  acting  as  such  under  color  of  right  in 
good  faith.  The  existence  of  the  law,  and  some  attempt  to  comply 
with  it,  are  essential,  because  without  them  there  can  be  no  assumption 
of  the  right  to  corporate  existence  in  good  faith.  Persons  cannot  be 
said  to  honestly  claim  the  right  to  corporate  existence,  in  the  absence 
of  any  law  authorizing  the  organization,  or  in  the  absence  of  some 
honest  attempt  to  comply  with  such  law.  The  law  and  such  attempt, 
or  user  of  the  franchise,  whatever  mistakes  may  be  made  in  so  doing, 
- — such  as  the  filing  of  articles  of  organization  when  they  are  required 
to  be  recorded,  or  the  recording  of  articles  when  they  are  required  to 
be  filed,  or  the  filing  of  such  articles  in  the  wrong  office,  or  any  other 
of  the  numerous  mistakes  that  might  be  made, — ftiake  a  corporation 
good  everywhere,  in  all  courts  and  places,  till  successfully  challenged 
by  the  state.  There  is  hardly  any  end  of  authority,  all  in  harmony  on 
this  subject.     *     *     * 

From  the  foregoing,  we  are  warranted  in  asserting  that,  by  well- 
settled  principles  of  law,  the  agricultural  association  with  whom  plain- 
tiff contracted  was  a  de  facto  corporation.  Every  element  necessary 
to  make  it  such  appears  clearly  by  the  record.  There  was  a  law  under 
which  it  might  have  existed.  The  association  prepared  their  consti- 
tution, and  adopted  it  in  the  form  of  ordinary  articles  of  organization, 
under  the  general  incorporating  act,  and  by  mistake  they  filed  it  for 
record,  and  it  was  recorded  and  returned,  instead  of  filing  it  to  be  left 
in  the  office,  as  the  law  requires.  They  supposed  that  they  had  cor- 
porate existence  by  reason  of  the  recording  of  their  articles  of  organi- 
zation. They  assumed  to  act  as  a  corporation,  and  exercised  corporate 
powers  for  a  considerable  length  of  time,  and,  for  aught  that  appears, 
in  the  utmost  good  faith.  Certainly,  the  existence  of  the  law,  the  mak- 
ing and  recording  of  articles  of  organization,  in  an  honest  attempt  to 
become  a  corporation,  and  the  honest  assumption  and  exercise  of  cor- 
porate powers,  prima  facie  establishes  good  faith.  Plaintiff  supposed 
that  the  corporation  was  a  corporate  body  till  long  after  his  contract 
relations  with  the  association  ceased.     Now  to  allow  him  to  come  in 


1398  CORPORATIONS  (Part  6 

and  say  that  the  corporation  did  not  exist  which  all  supposed  had  legal 
existence;  that,  though  the  officers  of  the  association  and  plaintiff 
contracted  for  a  corporate  liability  on  the  part  of  the  former,  it  shall 
be  held,  nevertheless,  that  the  members  of  such  association  are  bound 
as  partners,  in  direct  violation  of  the  well-settled  law  that  such  an  as- 
sociation, under  the  circumstances,  was  a  de  facto  corporate  body; 
that,  as  between  the  parties,  the  relations  are  the  same  in  all  respects 
as  though  the  corporation  had  a  de  jure  existence,  and  contrary  to 
the  settled  doctrine,  as  I  believe,  of  this  and  most  other  courts, — is 
what  the  judgment  in  this  case  does,  in  my  opinion. 

I  think  the  judgment  of  the  circuit  court,  holding  the  defendants 
liable  as  partners,  was  wrong,  and  that  it  should  be  reversed,  and  the 
cause  remanded  for  a  new  trial. 


Ch.  2)  CONTRACTS  OF  PROMOTERS  1399 

CHAPTER  II 
CONTRACTS  OF  PROMOTERS 

Section 

1.  Relation  of  the  Promoter  to  the  Corporation. 

2.  Relation  of  the  Subscriber  to  the  Corporation  on  Promoters'  Contracts. 


SECTION  1.— RELATION  OF  THE  PROMOTER  TO  THE 

CORPORATION 


WEATHEflRFORD,  M.  W.  &  N    W.  RY.  CO.  V.  GRANGER. 

(Supreme  Court  of  Texas,  1894.    86  Tex.  350,  24  S.  W.  795, 
40  Am.  St.  Rep.  837.) 

Gaines,  J.  This  suit  was  brought  by  the  defendant- in  error  against 
the  plaintiif  in  error  to  recover  upon  open  account  for  services  ren- 
dered. The  plaintiff  in  the  trial  court  obtained  a  judgment  which  was 
affirmed  by  the  Court  of  Civil  Appeals.     *     *     * 

The  trial  judge,  as  conclusions  of  fact,  found,  in  substance,  that 
some  kind  of  a  company  was  form.ed  to  build  the  railroad  from 
Weatherford  to  Mineral  Wells;  that  Anderson  was  the  "principal 
mover  in  said  scheme,  and  was  so  recognized  by  all  parties  ;"^  that  he 
employed  plaintiff  to  assist  him  in  procuring  a  bonus  and  in  other- 
wise advancing  the  enterprise,  and  that  the  plaintiff  rendered  services 
under  said  employment  both  before  and  after  the  articles  of  the  com- 
pany were  filed;  that  the  bonus  was  raised,  and  was,  after  its  incor- 
poration, accepted  by  said  company.  *  *  *  Although  the  trial 
court  found  that  the  services  for  which  plaintiff  sued  were  rendered 
in  part  before  and  in  part  after  the  filing  of  the  articles,  their  value 
was  assessed  as  an  entirety  at  $500,  and  judgment  was  rendered  for 
the  whole  amount.  In  this  there  was  error.  We  are  of  opinion  that, 
under  the  circumstances  of  this  case  as  shown  by  the  evidence,  the 
defendant  corporation  cannot  be  held  liable  to  the  plaintiff  for  any 
services  rendered  by  him  before  it  was  brought  into  legal  existence. 

Upon  the  question  as  to  the  liability  of  a  corporation  growing  out 
of  contracts  made  on  its  behalf  by  its  proinoters  there  is  considerable 
diversity  and  some  conflict  of  opinion.  But  there  are  some  proposi- 
tions affecting  this  question  upon  which  the  authorities  seem  to  be 
in  substantial  accord.  A  promoter,  though  he  purport  to  act  on  be- 
half of  the  projected  corporation,  and  not  for  himself,  cannot  be  treat- 
ed as  agent,  because  the  nominal  principal  is  not  then  in  existence; 
and  hence,  where  there  is  nothing  more  than  a  contract  by  a  promoter, 
in  which  he  undertakes  to  bind  the  future  corporation,  it  is  generally 
conceded  that  it  cannot  be  enforced.  *  *  *  The  promoters  them- 
selves are  liable  upon  the  contract,  unless  the  person  with  whom  they 
engage  agrees  to  look  to  some  other  fund  for  payment.  *  *  *  fhe 
statute,  however,  which  authorizes  the  incorporation,  may  provide  that 
the  corporation,  when  formed,  shall  pay  the  necessary  expenses  of 
promoting  the  scheme.  In  such  a  case,  though  the  right  of  action  is 
dependent  upon  the  contract,  the  liability  is  created  by  the  statute. 
*    *    * 

It  is  also  generally  held  that  contracts  by  promoters,  made  on  be- 
half of  the  corporation  within  the  scope  of  its  general  authority,  may 


1400  CORPORATIONS  (Part  6 

be  adopted  by  the  latter  after  its  organization.  Some  of  the  courts 
say  they  may  be  ratified,  but  ratification  presupposes  a  principal  ex- 
isting at  the  time  of  tlie  agent's  action,  and  it  seems  to  us,  therefore, 
that  the  term  is  not  apphcable  in  its  technical  sense.  *  *  *  With 
the  exception  of  the  law  courts  of  England,  the  rule  is  also  very  gen- 
erally recognized  that  if  a  contract  be  made  on  behalf  of  a  corporation 
by  its  promoters,  and  the  corporation,  after  its  organization,  with  a 
knowledge  of  the  facts,  accept  its  benefits,  it  must  take  it  with  its 
burdens;  and,  if  the  other  party  has  performed  the  stipulation  bind- 
ing upon  him,  it  may  be  enforced  as  against  the  corporation.  *  *  * 
But  as  to  the  application  of  the  rule  last  announced  the  courts  differ 
in  opinion.     *     *     * 

Having  exercised  rights  and  enjoyed  benefits  secured  to  it  by  the 
terms  of  a  contract  made  by  its  promoters  in  its  behalf,  a  corporation 
should  be  held  estopped  to  deny  its  validity.  Again,  where  the  pro- 
moters of  a  corporation  have  made  a  contract  in  its  behalf,  to  be  per- 
formed after  it  is  organized,  it  may  be  deemed  a  continuing  orfer  on 
part  of  the  other  party  to  the  agreement,  unless  withdrawn  by  him, 
and  may  be  accepted  and  adopted  by  the  corporation  after  such  or- 
ganization; and  the  exercise  of  any  right  inconsistent  with  the  non- 
existence of  such  contract  ought  to  be  deemed  conclusive  evidence  of 
such  adoption.  But  there  are  some  cases  which  go  a  step  further. 
^.  *  *  jj-^  pj^]j  y  Railway  Co.,  28  Vt.  401,  a  corporator  was  held  en- 
titled to  recover  for  necessary  services  in  organizing  the  company,  al- 
though there  was  no  express  promise  by  any  one  that  he  should  be 
paid.  Unless  the  charter  of  the  company  provided  for  the  payment 
of  such  expenses,  this  decision,  we  think,  is  unsupported  by  author- 
ity. It  is  generally  held  that,  in  the  absence  of  such  provision  in  the 
act  of  incorporation  in  case  of  a  special  charter,  or  in  the  general 
law,  or  in  the  articles  of  incorporation  under  a  general  law,  no  im- 
plied promise  can  be  imputed  to  a  corporation  to  pay  for  the  services 
of  a  corporator  or  promoter  before  the  corporation  comes  into  ex- 
isteioce.  A  contract  made  by  promoters  may  be  adopted  by  a  corpora- 
tion expressly  or  impliedly  by  exercising  rights  under  it ; '  but  other- 
wise it  is  not  binding  upon  such  corporations.     *     *     * 

Now,  when  it  is  said  that  when  a  corporation  accepts  the  benefit  of 
a  contract  made  by  its  promoters  it  takes  it  cum  onere,  it  is  important 
to  understand  distinctly  what  is  meant.  There  is,  so  far  as  this  mat- 
ter is  concerned,  a  radical  difference  between  a  promise  made  on  be- 
half of  the  future  corporation  in  the  contract  itself,  the  benefits  of 
which  the  corporation  has  accepted,  and  the  promise  in  a  previous  con- 
tract to  pay  for  services  in  procuring  the  latter  to  be  made.  This  is 
well  illustrated  by  the  facts  of  the  present  case.  Here  a  proposition 
was  made  on  behalf  of  the  company,  by  its  promoters,  that  if  a  bonus 
should  be  subscribed  and  paid  to  it,  it  would  build  its  road  between 
certain  points,  and  would  carry  coal  at  a  certain  stipulated  rate.  By 
accepting  the  bonus,  the  company  became  bound  to  fulfill  the  stipula- 
tions of  that  contract.  That  was  the  burden  which  it  took  with  the 
benefit  of  the  agreement.  But  it  also  appears  that  one  of  the  pro- 
moters promised  the  plaintiff  that  if  he  would  assist  in  procuring  sub- 
scribers to  the  bonus  the  company  would  pay  him  for  his  services. 
This  was  no  part  of  the  contract  the  benefits  of  which  were  taken  by 
the  defendant.  The  benefits  of  a  contract  are  the  advantages  which 
result  to  either  party  from  a  performance  by  the  other,  and  in  like 


Ch.  2)  CONTRACTS  OF  PROMOTERS  14:01 

manner  its  burdens  are  such  as  its  terms  impose.  A  more  accurate 
manner  of  stating  the  nature  of  the  plaintifif's  demand  is  to  say  that 
the  defendant  has  accepted  the  benefit  of  the  plaintiff's  services,  and 
should  pay  for  them. 

It  is  true  in  one  sense  that  the  company  has  had  the  benefit  of  plain- 
tiff's services,  and  it  is  equally  true  that  it  would  have  had  that  benefit 
if  the  services  had  been  rendered  under  an  employment  by  the  sub- 
scribers to  the  bonus ;  and  yet  in  the  latter  case  it  could  not  be  claim- 
ed that  the  company  would  be  liable  for  such  services  unless  payment 
for  them  by  the  company  were  made  one  of  the  terms  of  the  contract 
between  the  company  and  the  subscribers.  In  Re  Rotherham,  etc., 
Co.,  50  Law  T.  (N.  S.)  219,  in  the  opinion  of  one  of  the  justices,  this 
language  is  used:  "It  is  said  that  Mr.  Peace  has  an  equity  against 
the  company  because  the  company  had  the  benefit  of  his  labor.  What 
does  that  mean?  If  I  order  a  coat  and  receive  it,  I  get  the  benefit  of 
the  labor  of  the  cloth  manufacturer,  but  does  any  one  dream  that  I 
am  under  any  liability  to  him?  It  is  a  mere  fallacy  to  say  that  be- 
cause a  person  gets  the  benefit  of  work  done  by  somebody  else  he 
is  liable  to  pay  the  person  who  did  the  work." 

There  is  more  doubt  as  to  the  plaintift''s  right  to  recover  for  his 
legal  services  in  advising  as  to  the  articles  of  incorporation,  and  in 
correcting  and  preparing  this  paper.  Such  services  are  usually  nec- 
essary, and  it  would  seem  that  the  corporation  should  pay  for  them. 
Such  payment  is  frequently  provided  for  in  the  act  of  incorporation 
or  in  the  articles  when  the  incorporation  is  effected  under  a  general 
law.  When  such  is  the  case,  persons  who  take  stock  in  the  com- 
pany are  chargeable  with  notice  that  a  liability  for  this  purpose  has 
already  been  created,  and  it  is  proper  for  the  corporation  to  discharge 
it.  But,  in  the  absence  of  such  provision  in  the  statute  or  in  the  arti- 
cles, it  may  be  unjust  to  shareholders  to  charge  the  corporation  with 
liabilities  of  which  they  had  no  actual  knowledge  at  the  time  they  ac- 
cepted the  shares.  We  therefore  hold  with  some  hesitation  that  claims 
for  the  necessary  expenses  of  the  organization  under  our  statute 
should  not  be  excepted  from  the  general  rule  applicable  to  contracts 
made  before  the  corporation  has  come  into  legal  existence. 

Applying  the  rules  we  have  announced  to  the  case  before  us,  it  is 
apparent  that  the  plaintiff  has  recovered,  in  part  at  least,  for  services 
for  which  the  defendant  was  not  bound  to  pay.  He  made  his  contract 
before  the  company  had  a  legal  existence  as  a  corporation,  with  a  sin- 
gle promoter ;  and  it  is  a  matter  of  no  moment  that  the  promoter  was 
the  general  manager  of  the  project,  and  became  the  owner  of  the  ma- 
jority of  the  stock  upon  its  organization.  There  were  other  stock- 
holders. The  law  requires  that  there  should  be  10  at  least.  *  *  * 
The  evidence  does  not  disclose  that  his  contract  with  Anderson  was 
actually  known  to  any  other  person,  nor  do  we  see  any  other  circum- 
stance from  which  knowledge  should  necessarily  be  inferred.  Since 
Anderson  had  no  power  to  bind  the  future  corporation,  but  could 
bind  himself,  the  inference  from  his  assisting  Anderson  would  be  that 
he  was  acting  gratuitously,  or  that  Anderson  had  agreed  to  pay  him. 
Anderson  was  interested  in  shifting  his  contract  upon  the  company, 
and  it  may  be  doubted  whether,  although  he  became  a  director,  no- 
tice to  him  could  be  deemed  notice  to  the  company.  The  court  of  civil 
appeals  find,  however,  that  the  company  had  notice.     *     *     * 

The  plaintiff's  contract  with  Anderson,  though  made  by  latter  on 


1402  CORPORATIONS  (Part  6 

behalf  of  the  company,  was  not  a  lien,  incumbrance,  or  burden  upon 
the  contract  between  the  subscribers  to  the  bonus  and  the  defendant, 
and  it  incurred  no  liability  on  the  former  contract  by  accepting  the 
benefit  of  the  latter.  The  evidence  was  sufficient  to  sustain  a  recovery 
by  plaintiff  for  the  value  of  his  services  rendered  after  the  corpora- 
tion was  created;  but  the  court  below  failed  to  find  separately  the 
reasonable  worth  of  such  services.  Therefore  the  entire  judgment 
must  be  reversed. 

We  deem  it  proper  to  say  in  conclusion  that  if  the  opinion  in  the 
case  of  McDonough  v.  Bank,  34  Tex.  309,  is  to  be  construed  as  hold- 
ing that  by  merely  accepting  the  benefit  of  the  plaintiff's  labor  the  de- 
fendant ratified  and  became  bound  under  the  promoter's  contract,  it 
does  not  meet  our  approval.  Whether  the  contract  in  that  case  was 
one  which  the  bank  had  the  power  to  ratify  is,  to  say  the  least,  a 
doubtful  question;  but  it  is  one  that  does  not  concern  us  here,  and 
upon  which  we  express  no  opinion.  The  judgments  of  the  district 
court  and  of  the  Court  of  Civil  Appeals  are  reversed,  and  the  cause 
remanded.  

CUSHION  HEEL  SHOE  CO.  v.  HARTT. 

(Supreme  Court  of  Indiana,  1914.    ISl  Ind.  167,  103  N.  E.  1063, 
50  L.  R.  A.  [N.  S.]  979.) 

Action  by  Obder  M.  Hartt  against  the  Cushion  Heel  Shoe  Company. 
Judgment  for  plaintiff,  and  defendant  appeals. 

Spencer,  J.  It  appears  from  the  record  in  this  case  that  in  April, 
1909,  appellee,  who  was  experienced  in  the  manufacture  of  shoes, 
inserted  in  a  shoe  journal  an  advertisement  for  a  shoe  factory  to  lo- 
cate in  the  city  of  Ft.  Wayne.  Among  the  answers  which  he  received 
thereto  was  one  from  a'  man  named  Johnson,  who  was  the  patentee  of 
a  certain  cushion  heel  shoe.  Johnson  came  to  Ft.  Wayne,  and  with 
him  appellee  went  to  the  president  of  the  Commercial  Club  whom  they 
interested  in  the  proposition  of  starting  appellant  company.  Subscrip- 
tion lists  were  prepared  and  appellee  started  out  to  get  subscribers  to 
the  undertaking.  He  testified  that  Johnson  then  promised  him  the 
position  of  superintendent  when  the  factory  should  be  established,  and 
also  promised  that  he  (appellee)  should  be  paid  for  his  time  and  money 
spent  in  securing  the  stock  subscriptions ;  that  after  the  company  was 
organized  appellee  talked  with  several  of  the  directors  and  officers 
of  appellant  company  and  told  them  that  he  expected  to  be  paid  for  his 
services;  that  one  of  the  directors  said  to  appellee:  "I  believe  you 
should  be  compensated.  I  have  told  the  people,  the  directors,  to  settle 
with  you."  No  testimony  was  introduced  to  show  that  the  board  of  di- 
rectors ever  acted  on  appellee's  claim,  but  it  is  his  contention  that, 
by  accepting  the  results  of  his  services  and  receiving  the  benefits 
thereof,  appellant  is  now  bound  on  an  implied  contract  to  pay  for 
such  ser\'ice. 

It  is  certain  that,  under  ordinary  circumstances,  a  corporation  cannot 
be  successfully  sued  on  a  contract  made  for  its  benefit  by  its  projectors 
before  its  incorporation.  Contracts  of  this  character,  however,  are 
not  void,  but  voidable,  and  it  is  well  settled  in  nearly  all  jurisdictions 
that,  in  so  far  as  they  are  not  ultra  vires,  such  contracts  may  become 
binding  on  the  corporation  if  ratified  by  it,  either  expressly  or  by  im- 
pUcation,  after  its  organization.    *     *    * 

But  the  rule  that  a  corporation  may  be  bound,  like  any  individual, 


Ch.  2)  CONTRACTS  OP  PROMOTERS  1403 

by  an  implied  contract  is  limited  in  its  application  to  contracts  in  which 
the  promoters  of  such  corporation  are  interested.  The  law  does  not 
prohibit  a  promoter  from  dealing  with  his  company,  and  a  corporation 
has  the  right  to  purchase  property  from  its  promoters  and  to  pay  them 
for  their  services  if  it  so  elects;  but  the  burden  is  on  the  promoter 
to  show  that  he  acts  openly  and  in  good  faith  in  such  transactions.  A 
promoter  of  a  corporation,  who  brings  about  its  organization  and  aids 
in  securing  subscriptions  thereto,  is  considered  in  law  as  occupying 
a  fiduciary  relationship  toward  such  corporation  and  toward  its  stock- 
holders. *  *  *  It  will  be  observed  that  this  relationship  is  twofold. 
It  extends  toward  the  corporation  as  a  separate  legal  entity  and  charges 
the  promoter  v/ith  fair  dealing  in  respect  to'  corporate  property. 
*  *  *  It  extends  also  toward  the  .stockholders  in  respect  to  their 
property  rights  in  their  stock  and  toward  those  who,  it  is  expected, 
will  buy  such  stock.    *    *    * 

Applying  this  latter  rule,  the  Supreme  Court  of  Massachusetts  uses 
this  language  in  Hayward  v.  Leeson,  supra,  176  Mass.  at  page  320,  57 
N.  E.  661,  49  L.  R.  A.  725:  "The  persons  to  whom  the  promoters 
owe  the  duty,  which  they  owe  by  reason  of  their  fiduciary  relation,  are 
the  persons  who  put  their  money  into  the  enterprise  at  the  invitation 
of  the  promoters,  that  is  to  say,  the  future  stockholders.  It  is  to  the 
future  stockholders  that  the  promoters  must  make  the  disclosure  of 
the  remuneration  which  is,  or  is  to  be,  paid  to  them,  and  it  is  the  con- 
sent of  the  future  stockholders  that  must  be  obtained  to  make  that 
payment  valid ;  if  the  promoters  undertake  to  make  to  themselves 
remuneration  for  their  services  as  promoters,  without  making  a  full 
disclosure  of  the  fact  to  the  future  stockholders,  their  principals,  and 
getting  their  consent,  they  are  guilty  of  a  fraud.  Promoters  can  make 
the  necessary  disclosure  of  the  remuneration  they  stipulate  for  by  in- 
cluding in  the  prospectus  a  full  statement  thereof ;  if  such  a  statement 
is  not  made  therein,  they  cannot  honestly  take  any  remuneration  for 
promoters'  services,  unless  it  is  voted  by  the  stockholders  after  the 
capital  stock  has  been  taken  by  the  public."    *    *    * 

We  are  aware  that  cases  may  be  found  which  seem  to  sustain  ap- 
pellee's position,  but,  as  is  suggested  in  10  Cyc.  at  page  265,  "it  is  diffi- 
cult to  understand  how  the  corporation  could  be  estopped  by  accepting 
benefits  which  it  had  no  power  to  reject,  without  uncreating  itself." 
We  believe  that  the  better  reason  and  the  weight  of  authority  support 
the  holding  that,  in  the  absence  of  statutory  or  charter  provisions,  a 
corporation  will  be  held  liable  for  services  rendered  by  its  promoters 
before  incorporating  only  when,  by  express  action  taken  after  it  has 
become  a  legal  entity,  it  recognizes  or  affirms  such  claim.  The  evi- 
dence before  us  does  not  indicate  such  an  affirmance.    *    *    * 

Judgment  reversed. 


MOORE  et  al.  v.  WARNEiR  GOAL  &  LAND  CO. 

(Supreme  Court  of  Alabama,  1912.     178  Ala.  234,  59  South.  219, 
Ann.  Cas.  191oB,  173.) 

DowDELL,  C.  J.  The  Warrior  Coal  &  Land  Company,  a  corporation 
organized  under  the  laws  of  this  state,  files  this  bill  against  its  promo- 
ter, Walter  Moore,  and  his  alleged  guilty  confederates,  and  the  bill 
also  makes  all  of  the  stockholders  of  the  complainant  parties  respond- 
ent.    The  bill  charges  infidelity  and  fraud  in  the  organization  of  the 


1404  CORPORATIONS  (Part  6 

corporation  by  the  promoter,  both  prior  and  subsequent  to  the  issu- 
ance of  its  charter,  and  seeks  to  have  an  accounting  by  the  promoter, 
and  prays  also  the  cancellation  of  the  certificates  of  stock  in  said  cor- 
poration illegally  issued  to  the  promoter.    *    *    * 

The  case  as  made  by  the  bill  is  fairly  summarized  in  brief  of  counsel 
for  appellee  as  follows :  Walter  Moore,  as  a  promoter,  induced  J.  B. 
Cavanaugh  and  others  to  go  into  the  scheme  of  forming  a  corporation, 
the  Warrior  Coal  &  Land  Company,  complainant  in  this  bill,  upon  the 
basis  of  all,  including  himself  and  his  associates,  paying  for  stock  at 
par,  the  money  to  be  used  for  buying  coal  lands  through  him,  the  said 
Moore ;  such  lands  to  be  turned  in  to  the  company  at  cost  and  paid 
for  with  money  derived  from  such  issuance  of  stock.  Moore  was  to 
organize  the  company,  handle  the  money,  do  the  buying,  and,  in  fact, 
do  everything.  He  was  intrusted  with,  and  exercised  such  manage- 
ment and  control  from  the  time  of  the  formation  of  the  project  before 
the  company  was  actually  formed,  until  several  years  after  it  was  or- 
ganized. The  bill  specifically  and  in  detail  sets  out  a  series  of  con- 
cealments, frauds,  and  misrepresentations  practiced  by  said  Moore, 
running  down  to  a  short  while  before  the  filing  of  the  bill,  practiced 
by  him  to  such  effect  that  the  innocent  stockholders  holding  original 
issues  had  contributed  for  such  stock  at  par  $116,000,  of  which  only 
about  $90,000'  has  been  so  expended  by  him ;  that  he  and  his  guilty 
associates  owed  the  company  on  that  account  alone  $26,000,  besides 
$29,000  for  stock  issued  without  consideration  to  Moore  and  sold  to 
innocent  holders ;  and  that  there  was  left  outstanding,  in  the  names  of 
Moore  and  his  associates  in  the  fraud,  $73,500  at  par  of  stock  for 
which  nothing  was  paid.  C.  S.  Simmons,  one  of  the  respondents,  was 
used  by  the  said  Moore  as  the  company's  trustee  for  conduit  of  title 
from  the  vendors  to  the  company.  Only  money  so  paid  into  the  com- 
pany was  used  in  the  purchase  of  the  lands.    *     *     * 

Moore  and  his  confederates  organized  the  company  on  August  17, 
1906,  and  soon  thereafter  said  Cavanaugh,  for  his  associates,  resumed 
sending,  and  continued  to  send,  in  money  until  he  had  sent  Moore, 
for  the  company,  $107,500  for  which  stock  at  par,  as  agreed,  w\as 
issued.  Moore  represented  during  the  negotiation,  and  before  the 
company  was  formed,  that  he  and  his  associates  had  arranged  to  pay 
in  for  stock  at  par,  under  such  understanding  with  Cavanaugh,  ap- 
proximately $80,000,  which  was  false.  Moore,  as  president  of  the 
company  and  Simmons,  as  secretary,  issued  shares  to  dummies,  in 
whose  names  original  certificates  of  shares  were  made  out,  later  can- 
celing the  same  and  reissuing  them  to  Moore.  *  *  *  Moore  had 
paid  in  nothing  for  himself,  but  had  then  already  been  furnished  by 
Cavanaugh,  for  himself  and  associates,  $47,500.  Steve  Smith  had  paid 
in  nothing,  and  Simmons  had  paid  in  nothing.  The  lands  had  not  been 
acquired  from  the  original  owners,  or,  if  any,  only  a  small  part,  and 
payment  had  been  made  out  of  the  $47,500  furnished  by  Cavanaugh 
and  his  associates.    *    *    * 

Moore  and  Simmons  each  interposed  the  general  demurrer  which 
tests  the  equity  of  the  bill  as  to  him.  These  demurrers  were  overruled 
by  the  chancellor,  and  the  present  appeal  is  prosecuted  from  the  decree 
overruling  the  demurrers.    *     *    * 

Moore  was  a  promoter  of  the  complainant  corporation,  and  his  re- 
lation as  such  to  the  corporation  as  well  as  to  those  whom  he  might 
induce  to  put  their  money  into  the  project  and  become  stockholders, 


Ch.  2)  CONTRACTS  OF  PROMOTERS  1405 

was  of  a  fiduciary  character,  calling  for  the  utmost  good  faith  and 
fair  dealing.     *     *  * 

The  following  principles  of  law  may  be  deduced  in  respect  to  the 
relations  promoters  occupy  to  the  corporation  and  to  those  whom  they 
induce  to  enter  into  the  enterprise  and  become  stockholders,  as  well 
as  towards  each  other,  and  the  duties  they  owe  to  the  company  and  the 
stockholders.  Their  relation  is  of  a  fiduciary  character,  calling  for  the 
utmost  good  faith,  and  they  will  not  be  permitted  to  take  secret  profits 
in  the  form  of  stock  or  otherwise.  Where  their  interests  are  antagonis- 
tic, they  cannot  be  silent ;  they  must  disclose.  A  failure  to  inform  is 
a  fraud.  Their  position  is,  in  a  sense,  that  of  a  trustee,  and  they  may 
be  held  to  an  accounting  for  any  breach  of  the  trust.  The  corporation 
is  a  proper  party  in  such  cases  to  file  the  bill  and  to  obtain  relief ;  it 
is  not  necessary  to  rescind  or  set  aside  the  transaction.  The  bill  may, 
however,  be  maintained  by  the  injured  shareholders,  where  redress 
cannot  be  had  through  the  corporation,  because  of  being  under  control 
of  the  perpetrators  of  the  wrong. 

Applying  the  principles  of  law  as  stated  to  the  facts  charged  in  the 
bill,  which  are  to  be  taken  as  true  on  demurrer,  we  think  there  can  be 
no  doubt  as  to  the  equity  of  the  bill.  The  project  proposed  by  the 
promoters  was  to  organize  a  corporation  and  issue  shares  of  stock, 
for  money  paid  in,  at  par  value,  and  with  this  money  to  purchase  coal 
in  place  in  lands  in  small  tracts  and  body  the  same  up  into  one  tract, 
and  by  so  doing  increase  the  value  of  the  holding,  and,  as  a  result,_  give 
a  greater  value  to  the  shares  of  stock  issued  for  the  money  so  paid  in. 
Such  was  the  inducement  held  out  by  the  promoters  and  those  pay- 
ing in  their  money  .have  an  equity  in  preserving  and  carrying  out  the 
project,  and  to  this  end  to  call  to  an  accounting  the  unfaithful  pro- 
moters who,  by  their  fraud,  have  thwarted  the  project. 

It  is  no  answer  to  this  theory  of  the  bill  to  say  that  the  lands  convey- 
ed to  the  corporation  and  now  held  by  it  were  sold  to  it  at  a  fair  price 
and  are  equal  in  value  to  the  par  value  of  the  total  capital  stock  of 
the  corporation.  Those  who  were  induced  to  pay  in  money  for  s>tock 
upon  the  representations  made  by  the  promoters  were  entitled  to  have 
the  lands  at  cost  and  to  be  purchased  under  the  proposed  scheme.   *  *   * 

The  bill,  moreover,  seeks  the  cancellation  of  shares  of  stock  charged 
to  have  been  fraudulently  issued,  and  also  to  have  an  accounting  for 
money  charged  to  have  been  fraudulently  used  or  misappropriated  by 
Moore  and  his  confederates.  Taking  the  statements  of  the  bill  as 
true,  and  which  we  must  do  on  the  general  demurrer  for  want  of  equity, 
interposed  by  the  respondents  Moore  and  Simmons,  we  have  no  doubt 
that  the  bill  contains  equity,  and  hold  consequently  that  there  was  no 
error  in  overruHng  the  demurrer.    The  decree  will  be  affirmed.    *    *    * 


SECTION  2.— RELATION  OF  THE  SUBSCRIBER  TO  THE 
CORPORATION  ON  PROMOTERS'  CONTRACTS 


WRIGHT  BROS.  v.  MERCHANTS'   &  PLANTERS'  PACKET  CO. 

(Supreme  Court  of  Mississippi.  19in.     104  Miss.  507,  61   Soutli.  550, 

Ann.  Cas.  1915C,  1111.) 

Certain  business  men  of  the  city  of  Vicksburg  undertook  the  or- 
ganization of  a  packet  company  for  the  purpose  of  plying  a  steamboat 
on  the  Yazoo  river,  in  order  to  secure  better  service  and  rates.     The 


1406  CORPORATIONS  (Part  6 

promotion  of  the  undertaking  was  in  the  liands  of  C.  J.  Searles  and 
others,  who  secured  subscription  to  the  capital  stock  of  tlie  company. 
Searles  approached  C.  G.  Wright  of  the  firm  of  Wright  Bros.,  hard- 
ware merchants,  and  asked  for  a  subscription,  and  was  told  by  Wright 
that  they  would  help,  and  would  let  him  know  later  about  the  amount, 
Searles  entered  the  name  of  Wright  Bros,  on  the  subscription  list,  but 
left  the  amount  blank.  Afterward,  at  a  meeting  of  the  promoters,  when 
some  proposition  was  to  be  voted  upon,  C.  G.  Wright  voted  $500  of 
stock  in  the  name  of  Wright  Bros.  This  was  before  the  organization 
of  the  corporation,  and  Wright  claims  that  before  organization  he  ad- 
vised Searles  that  he  would  withdraw  his  subscription.  The  corpora- 
tion was  subsequently  organized,  and  met  with  financial  reverses,  and 
suit  was  brought  against  the  firm  of  Wright  Bros,  for  the  unpaid  sub- 
scription appearing  on  the  subscription  list,  and  a  judgment  secured 
for  the  full  amount. 

Smith,  C.  J.  Appellee  instituted  this  suit  in  the  court  below  to  re- 
cover from  appellants  the  sum  of  $500,  alleged  to  have  been  subscribed 
by  them  to  its  capital  stock  prior  to  its  organization.  In  addition  to 
the  general  issue,  appellants  filed  several  special  pleas,  one  of  which 
set  up  that  they  had  withdrawn  their  subscription  to  the  capital  stock 
of  appellee,  and  notified  the  promoters  thereof,  prior  to  appellee's  or- 
ganization as  a  corporation,  to  which  plea  a  demurrer  was  interposed 
and  sustained.  This  demurrer  should  have  been  overruled,  for  the 
reason  that,  in  the  absence  of  a  special  agreement  to 'the  contrary,  sup- 
ported by  a  valuable  consideration,  a  subscription  to  the  capital  stock 
of  a  corporation,  thereafter  to  be  organized,  is  nothing  more  than  an 
offer  of  a  specific  sum  to  the  use  of  the  corporation*  when  it  comes  into 
existence,  and  therefore,  under  familiar  principles  of  law,  may  be 
withdrawn  at  any  time  before  the  organization  of  the  corporation. 
While  there  are  authorities  to  the  contrary,  this  view  is  in  accord  with 
the  great  weight  thereof  and  of  reason,  as  will  appear  from  an  ex- 
amination of  1  Thompson  on  Corporations  (2d  Ed.)  §  518;  1  Cook  on 
Corporations,  §  167.     *     *     * 

While  this  question  seems  not  to  have  been  heretofore  presented  to 
this  court  for  decision,  the  rule  as  herein  announced  was  evidently  un- 
derstood to  be  the  correct  one  by  the  judges  who  composed  the  High 
Court  of  Errors  and  Appeals  when  the  case  of  Hayne  v.  Beauchamp, 
5  Smedes  &  M.  515,  was  decided;  for  Judge  Sharkey,  in  delivering  the 
opinion  therein,  used  the  following  language:  "But  it  is  insisted  that 
a  distinction  is  to  be  taken  between  those  cases  in  which  the  subscrip- 
tion is  made  to  an  existing  corporation,  and  a  mere  subscription  in  view 
of  a  subsequent  charter.  True,  there  is  a  distinction.  In  the  latter 
case  the  subscription,  or  the  undertaking  is  not  always  obligatory;  in 
the  first  it  is,"  etc.  And  Judge  Clayton,  in  his  dissenting  opinion,  said: 
"Before  the  bank  went  into  operation,  and  incurred  liabilities,  he  [re- 
ferring to  a  subscriber  to  its  capital  stock]  might  have  withdrawn ;  to 
permit  him  to  do  so  afterwards  would,  in  my  apprehension,  violate 
some  of  the  elementary  principles  of  law  and  justice."     *     *     * 

Reversed  and  remanded. 


Ch.  3)  CORPORATE  POWERS 

CHAPTER  III 
CORPORATE  POWERS 

Section 

1.  Scope    of   Corporate   Powers. 

2.  Ultra  Vires  Contracts. 


1407 


vSECTION  1.— SCOPE  OF  CORPORATE  POWERS 
There  are  two  main  questions  relating  to  corporate  powers: 
(1)  What  transaction  may  be  entered  into  by  a  corporation,  such 
that  the  resulting  legal  relations  will  be  the  same  as  those  pro- 
duced by  the  same  kind  of  transaction  when  entered  into  by  in- 
dividuals? (2)  What  is  the  abnormal  effect  produced  upon  the  re- 
lations of  the  parties  when  the  corporation  has  entered  into  some 
transaction  which  admittedly  lies  outside  its  powers?  The  case 
following  deals  with  the  second  of  these  questions.  No  cases  have 
been  inserted  which  raise  individual  problems  involving  the  first 
question.  With  respect  to  this  question  the  general  principle  is 
fairly  clear.  The  corporation  will  possess  only  such  power  as 
has  been  conferred  upon  it.  The  source  of  this  power,  in  the 
first  instance,  is  the  state  incorporating  it.  Other  states  in  which 
the  corporation  may  engage  in  business  may  also  affect  transac- 
tions which  are  governed  by  the  laws  of  that  state.  Where  a 
corporation  is  incorporated  by  special  act  the  source  and  extent 
of  its  power  is  the  statute  which  created  the  corporate  entity. 
Where  the  corporation  is  incorporated  under  the  provisions  of  an 
incorporation  law,  the  source  and  extent  of  corporate  powers  is  the 
statute  or  statutes  under  which  the  corporation  was  organized. 

In  determining  the  scope  of  power  of  a  particular  corporation 
statutes  other  than  the  incorporation  law  itself  must  be  taken  into 
consideration.  Statutes  enacted  under  the  police  power  of  the 
states,  either  prior  to  or  subsequent  to  incorporation  will  operate 
as  limitations  upon  corporate  powers.  Limitations  will  be  found 
not  only  in  the  actual  text  of  the  statutes  but  will  rest  in  the  na- 
ture of  the  corporate  organization  itself,  as,  for  example,  the  ques- 
tion as  to  whether  a  corporation  may  purchase  its  own  stock ;  the 
English  rule  and  the  rule  in  some  of  the  states  of  the  United  States 
being  that  such  a  purchase  cannot  be  made,  while  the  majority  rule 
is  that  a  corporation  may  purchase  its  own  stock  when  made  in 
good  faith  and  the  rights  of  creditors  are  not  prejudiced  thereby. 
The  powers  of  a  corporation  may  not  be  as  extensive  as  the  stat- 
utes of  the  state  of  incorporation  permit.  Such  a  situation  as  this 
arises  when  the  articles  of  incorporation  place  limitations  upon  cor- 
porate activities  in  addition  to  those  found  in  legislative  acts. 
In  its  broader  aspects,  therefore,  the  problem  of  determining  the 
extent  of  corporate  powers  is  a  problem  of  interpreting  the  various 


1408  CORPORATIONS  (Part  6 

statutes  of  the  state  and  of  the  articles  of  incorporation  in  the  light 
of  transactions  which  have  in  fact  been  entered  into.  The  determi- 
nation of  these  questions  will  vary  according  to  the  kind  of  corpo- 
ration which  is  concerned  with  the  transaction  under  examination. 
It  might  be  held  in  one  case  that  a  particular  corporation  did  not 
have  power  to  enter  into  a  contract  of  suretyship,  but  such  rule 
would  obviously  not  apply  to  surety  companies.  The  powers  of 
banking  corporations,  manufacturing  companies,  railroad  com- 
panies, and  religious  corporations  could  not  be  coextensive.  In  the 
process  of  reasoning  the  ascertainment  of  the  scope  of  a  corpora- 
tion's power  is  not  essentially  different  from  that  involved  in  de- 
termining the  scope  of  an  agent's  power. 


SECTION  2.— ULTRA  VIRES  CONTRACTS 


APPLETON  V.  CITIZENS'  CENTRAL  NATIONAL  BANK  OF  NEW  YORK. 

(Court  of  Appeals  of  New  York,  1908.     190  N.  Y.  417,  83  N.  E.  470, 
32  L.  R.  A.  [N.  S.]  543.) 

CuLLEN,  C.  J.  This  action  is  brought  by  the  plaintiff  as  receiver  of 
a  dissolved  bank  against  the  defendant,  who  is  the  successor  of  the 
Central  National  Bank  of  the  city  of  New  York.  *  *  *  The  plain- 
tiff has  been  defeated  on  the  theory  that  the  execution  of  the  guaranty 
by  the  defendant  bank  was  ultra  vires,  and  not  binding  upon  it,  and 
upon  this  ground  the  judgments  below  are  sought  to  be  sustained. 
Had  the  guaranty  been  limited  to  the  amount  which  the  bank,  under 
its  agreement  with  Samuels,  was  to  receive  out  of  the  loan,  we  should 
be  entirely  clear  that  it  was  within  the  legitimate  powers  of  the  bank 
under  the  decisions  of  the  Supreme  Court  of  the  United  States. 
^     ^     ^ 

We  think,  however,  that  the  defendant's  power  to  guarantee  was  lim- 
ited by  the  extent  of  its  interest  in  the  subject-matter  of  the  guaranty. 
To  allow  a  bank  to  guarantee  the  payment  by  one  of  its  debtors  of  a 
larger  sum  in  order  that  the  bank  might  receive  or  retrieve  a  lesser  sum 
would  be  to  permit  it  to  enter  upon  very  hazardous  speculation,  and  au- 
thorize very  wild  and  unsafe  banking.  *  *  *  Y/g  j^^y  assume 
that  the  contract  was  ultra  vires.  We  may  further  assume  that  in  trans- 
actions by  national  banks  we  should  adopt  the  law  of  ultra  vires  as 
it  prevails  in  the  Federal  courts,  and  not  the  local  law  on  the  sub- 
ject. Yet  the  defendant,  in  our  opinion,  became  plainly  liable  for 
the  amount  which  it  received  under  the  ultra  vires  contract.  The  law 
which  obtains  in  this  state  and  in  several  other  jurisdictions  is  that, 
where  one  party  has  received  the  full  benefit  of  an  ultra  vires  con- 
tract, he  cannot  plead  the  invalidity  of  the  contract  to  defeat  an  action 
upon  it  by  the  other  party.     *     *     * 

A  contrary  rule  obtains  in  the  Supreme  Court  of  the  United  States. 
There  it  is  held  that  the  execution  of  an  ultra  vires  contract  by  one 
party  cannot  confer  upon  it  validity  or  authorize  the  other  party  to 
sue  on  its  obligations  (Central  Transportation  Co.  v.  Pullman's  Palace 
Car  Co.,  139  U.  S.  24,  11  Sup.  Ct.  478,  35  L.  Ed.  55);   but  at  the 


Ch.  3)  CORPORATE   POWERS  1409 

same  time  it  is  also  held  that  a  party  cannot  retain  money  or  property 
received  by  it  under  an  ultra  vires  contract  when  it  refuses  to  perform 
that  contract  (Logan  County  Bank  v.  Tov^nsend,  139  U.  S.  67,  11  Sup. 
Ct.  496,  35  L.  Ed.  107).  It  was  there  said  by  Judge  Harlan :  "The  bank, 
in  this  case  insisting  that  it  obtained  the  bonds  of  the  plaintiff  in  vio- 
lation of  the  act  of  Congress,  is  bound,  upon  being  made  whole,  to  re- 
turn them  to  him.  No  exemption  or  immunity  from  this  principle  of 
right  and  duty  is  given  by  the  national  banking  act.  'The  obligation 
to  do  justice,'  this  court  said  in  Marsh  v.  Fulton  County,  10  Wall. 
(U.  S.)  676,  684,  19  L.  Ed.  1040,  'rests  upon  all  persons,  natural  and 
artificial,  and  if  a  county  obtains  the  money  or  property  of  others  with- 
out authority,  the  law,  independently  of  any  statute,  will  compel  resti- 
tution or  compensation.'  "  In  a  great  many  cases  the  difference  be- 
tween the  law  prevailing  in  the  federal  courts  and  that  in  our  own 
would  lead  to  great  difference  in  results.  Tn  this  case,  however,  as  the 
plaintiff  disclaims  any  right  to  recover  beyond  the  amount  actually 
received  by  the  defendant,  the  result  is  exactly  the  same  whether  we 
adopt  one  rule  or  the  other.  Whatever  the  difference  of  view  there 
may  be  as  to  the  effect  of  ultra  vires  on  corporate  contracts,  in  no 
jurisdiction  can  a  party  retain  what  it  has  received  under  such  a  con- 
tract, and  refuse  to  perform  the  contract.     *     *     * 

Nor  is  there  any  force  in  the  suggestion  that  this  action  is  not  brought 
in  disaffirmance  of  the  contract  for  money  had  and  received,  but  on 
the  contract  of  guaranty.  All  the  facts  are  set  forth  in  the  complaint, 
and  if  these  facts  entitle  the  plaintiff"  to  relief  on  any  theory,  then  the 
complaint  states  a  good  cause  of  action. 

The  judgments  of  the  Appellate  Division  and  Special  Term  should 
be  reversed,  and  judgment  rendered  for  plaintiff'  on  demurrer. 
*     *     * 


HARRIS  et  al.  v.  INDEPENDENCE  GAS  CO.  et  al. 

(Supreme  Court  of  Kansas.  1907.     7G  Kan.  750,  92  Pac.  1123,  13  L.  R.  A. 

[N.  S.]  1171.) 

Mason,  J.  Cornelius  Carr  and  his  wife  executed  to  the  Independence 
Gas  Company  an  oil  and  gas  lease— that  is,  an  instrument  granting 
the  right  to  explore  a  tract  of  land  for  oil  or  gas,  and  to  appropriate 
either  if  found.  The  company  is  a  Kansas  corporation,  and,  at  the 
time  of  the  execution  of  the  lease,  the  only  purpose  mentioned  in  its 
charter  was  "to  dig  or  mine  for  natural  gas,  and  sell  the  same  for 
heat  and  lighting  purposes."  Later,  an  amendment  was  made  adding 
thereto  the  mining  and  selling  of  oil.  What  are  called  the  "gas  rights" 
under  the  lease  have  been  transferred  to  another  gas  company,  and 
no  point  is  raised  with  regard  to  them.  The  Carrs,  claiming  that  the 
lease  so  far  as  it  related  to  oil  was  void,  because  at  the  time  it  was 
executed  the  lessee  had  no  authority  to  engage  in  the  oil  business,  un- 
dertook to  grant  the  oil  privileges  anew  to  C.  C.  Harris,  who,  upon 
that  ground,  brought  an  action  against  the  Independence  Company 
to  cancel  all  of  its  contract  excepting  that  portion  relating  to  gas — 
joining  his  grantors  as  coplaintiffs.  The  trial  court  sustained  a  de- 
murrer to  a  petition  setting  out  substantially  these  facts,  and  this  pro- 
ceeding is  brought  to  review  that  ruling. 
B.&  B.Bus.Law— 89 


1410  CORPORATIONS  -  (Part  6 

The  defendant  maintains:  (1)  That  it  had  the  imphed  power  to 
produce  and  market  oil  as  an  incident  to  th*e  express  power  granted 
to  it  to  produce  and  market  gas  ;  (2)  that  if  it  originally  lacked  such 
power  the  defect  was  supplied  by  the  charter  amendment ;  and  (3) 
that  even  if  it  had  no  authority  to  enter  into  the  contract  the  plaintiffs 
cannot  take  advantage  of  the  fact.  It  will  only  be  necessary  to  con- 
sider the  questions  involved  in  the  third  proposition. 

Although  the  decisions  relating  to  the  doctrine  of  ultra  vires  are 
characterized  by  some  confusion,  as  well  as  by  much  conflict,  they 
admit  of  classification  into  fairly  well-defined  groups,  and  exhibit  a 
development  in  the  direction  of  restricting  the  scope  of  its  operation. 
Those  courts  which  accord  it  the  most  favorable  treatment — allow  it 
the  largest  field  of  action — proceed  upon  the  conception  that  a  corpo- 
ration, being  the  creature  of  the  state,  possesses  no  power  whatever 
beyond  that  granted  in  its  charter,  and  cannot  directly  or  indirectly 
acquire  rights i  or  incur  liabilities,  under  any  contract  not  thereby 
authorized.  They  refuse,  under  any  circumstances,  to  enforce  or 
give  eft'ect  to  an  unauthorized  contract  as  such,  but,  where  it  has  been 
acted  upon,  will  protect  the  parties  against  hardship  and  injustice,  by 
allowing  whatever  relief  may  be  suited  to  the  facts  of  the  case — for 
instance,  by  permitting  either  party  to  recover  money  or  property 
which  has  been  parted  with  in  the  transaction,  or  to  have  compensation 
therefor.     '''     '^     * 

The  theory  is  consistent  and  logical,  but  its  practical  effect  is  so  to 
circumscribe  the  power  of  the  court  as  to  make  the  relief  furnished  at 
times  inadequate  to  the  occasion.  In  a  larger  number  of  jurisdictions, 
although  the  same  conception  of  corporate  capacity  is  adopted,  its  eft'ect 
is  greatly  changed  by  the  application  of  another  principle.  Here  the 
courts  concede  that  a  corporation  has  no  power  to  make  a  contract  ex- 
cept such  as  is  conferred  by  its  charter,  expressly,  or  by  necessary  impli- 
cation. But  they  hold  that  as  it  must  have  some  discretion  in  the  man- 
ner of  carrying  out  the  purposes  of  its  creation — some  freedom  of  ac- 
tion— it  is  amenable  to  the  same  rules  of  conduct  as  a  natural  person, 
and  may  estop  itself  to  question  the  validity  of  an  agreement  it  has  as- 
sumed to  make  or  may  acquire  the  right  to  invoke  a  similar  estoppel  in 
its  own  behalf.  Where  this  theory  is  accepted,  recovery  may  be  had 
upon  a  contract  which  is  in  fact  void,  simply  because  its  validity  cannot 
be  put  in  issue.     *     *     * 

These  cases  have  been  criticised  for  the  use  they  make  of  the  word 
"estoppel."  as  descriptive  of  the  principle  upon  which  they  are  based. 
It  is  argued  that,  as  a  a  corporation  must  know  the  terms  of  its  own 
charter,  and  as  one  dealing  with  it  is  charged  with  like  knowledge,  nei- 
ther party  to  an  ultra  vires  contract  can  be  misled  in  that  respect,  and 
therefore  there  must  always  be  lacking  an  essential  element  of  what 
could,  with  technical  accuracy,  be  called  estoppel.  This,  however,  is  a 
mere  question  of  terminology.  The  requirement  that  one  shall  be 
consistent  in  conduct — shall  not  occupy  contradictory  positions,  shall 
not  retain  the  advantages  of  a  transaction,  and  reject  its  burdens — is 
often  spoken  of  as  a  form  of  estoppel.  The  term  is  convenient,  and,  if 
inaccurate,  is  not  misleading.  This  rule  of  estoppel  affords  a  good 
working  hypothesis  to  accomplish  just  results.  If  it  fails  to  accom- 
plish all  that  might  be  desired  in  a  practical  way,  it  is  because  it  is  not 
made  sufficiently  far-reaching.  It  is  generally  held  to  be  inapplicable 
to  purely  executory  contracts,  one  reason  stated  being  that,  "Where 


Ch.  3)  CORPORATE    POWERS  1411 

neither  party  has  acted  uj^on  the  contract,  the  only  injustice,  caused 
by  a  refusal  to  enforce  it,  is  the  loss  to  the  parties  of  prospective  prof- 
its, and  this  is  too  slight  a  consideration  to  weigh  against  the  reasons 
of  public  policy  for  declaring  it  void  and  not  enforceable."  29  A.  &  E. 
Encycl.  of  L.  49,  50. 

It  might  seem  reasonable  that  a  system  which  attempts  not  only  to 
protect  a  party  to  an  ultra  vires  contract  from  actual  loss,  but,  where 
equity  requires  it,  to  insure  to  him  the  actual  fruits  of  his  bargain, 
ought,  for  the  sake  of  completeness  and  symmetry,  to  enable  him  to 
insist  upon  the  performance  even  of  a  purely  executory  contract.  It 
certainly,  seems  against  conscience  that  one  who  has  entered  into  a 
contract  in  the  expectation  of  deriving  a  proht  from  it,  may,  upon  dis- 
covering the  probability  of  a  loss,  repudiate  it,  and  escape  responsibil- 
ity by  raising  the  question  of  want  of  corporate  capacity.  Parties 
to  a  contract,  who  deal  with  each  other  upon  the  assumption  that  one 
of  them  is  a  corporation,  are  ordinarily  precluded  from  questioning 
the  validity  of  its  organization.     *     *     * 

A  large  majority  of  the  adjudications  on  the  subject  of  ultra  vires 
fall  into  one  or  the  other  of  the  two  groups  already  referred  to.  The 
conception  of  corporate  power,  upon  which  they  depend,  has  been 
styled  that  of  "special  capacities,"  in  distinction  from  that  of  "gen- 
eral capacities."  *  *  *  fiie  conception,  designated  by  the  latter 
term,  is,  in  brief,  that  while  a  corporation  has  no  right  to  exceed  the 
Hmits  of  its  charter  it  has  the  power  to  do  so.  The  theory  was  elab- 
orated in  the  opinion  of  Chief  Justice  Comstock,  in  the  celebrated  case 
of  Bissell  v.  Mich.  So.  &  Nor.  Ind.  R.  Cos.,  22  N  Y.  258,  where  it 
was  said:  "Like  natural  persons,  they  (corporations)  can  overleap 
the  legal  and  moral  restraints  imposed  upon  them ;  in  other  words, 
they  are  capable  of  doing  wrong.  *  ''-  *  The  distinction  between 
power  and  right  is  no  more  to  be  lost  sight  of  in  respect  to  artificial 
than  in  respect  to  natural  persons.  *  *  *  Why,  it  may  be  asked, 
does  the  law  provide  the  remedy  of  quo  warranto  against  corporations 
for  usurpation  and  abuse  of  power?  Is  it  not  the  very  foundation  of 
that  proceeding,  that  corporations  can,  and  do,  perform  acts,  and 
usurp  franchises  beyond  the  rightful  authority  conferred  by  their  char- 
ters? Most  assuredly  this  is  so.  The  sovereign  power  of  the  state 
interposes,  alleges  the  excess  of  abuse,  and.  on  that  ground,  demands 
from  the  courts  a  sentence  of  forfeiture.''     *     *     * 

This  theory,  logically  followed  out,  would  obviously  make  all  cor- 
porate contracts,  executory  as  well  as  executed,  enforceable  between 
the  parties.  It  has  not,  however,  met  with  any  large  acceptance,  at 
least  in  the  form  stated.  *  *  *  But  a  recent  tendency  has  been 
developed  to  reach  substantially  the  same  result  by  a  somewhat  differ- 
ent course  of  reasoning,  resulting  in  a  doctrine  which  is  thus  stated 
in  10  Cyc.  1164:  "A  most  important  doctrine  connected  with  this  sub- 
ject, and  one  which  arises  above  the  mere  principle  of  estoppel,  is  that, 
whether  a  corporation  has  acted  without  authority  conferred  on  it  by 
the  Legislature,  or  has  acted  in  contravention  to  an  act  of  the  Legis- 
lature, cannot  be  set  up  collaterally,  by  individuals  who  deal  with  it, 
or  by  third  persons,  but  can  be  set  up  only  by  the  state  in  a  direct 
proceeding  to  forfeit  its  charter,  to  oust  it  of  some  particular  franchise, 
or  to  subject  it  to  punishment;  or  where  the  question  is  otherwise 
litigated  between  the  state  and  the  corporation." 

The  cases  applying  or  discussing  the  doctrine  are  collected  in  notes 


1412  CORPOKATIONS  (Part  6 

to  this  text,  and  to  succeeding  paragraphs  in  the  same  work.  The 
principle  referred  to,  if  sound,  is  manifestly  sufficient  in  itself  to  defeat 
the  defense  of  ultra  vires,  even  when  interposed  against  the  enforce- 
ment of  an  executory  contract,  but  it  must  be  admitted  that,  in  prac- 
tice, it  seems  to  have  been  applied  only  where  the  agreements  had 
been  at  least  partially  performed.  It  seems  often  to  have  been  invoked, 
however,  in  aid  of  the  ordinary  doctrine  of  estoppel,  in  cases  where 
the  contract  upon  one  side  or  the  other  had  already  been  performed. 
The  best  and  most  complete  expression  of  it  is  found  in  the  decisions 
of  the  Wisconsin  court.  In  Farwell  Co.  v.  Wolf,  96  Wis.  10,  70  N. 
W.  289,  71  N.  W.  109,  37  L.  R.  A.  138,  65  Am.  St.  Rep.  22,  it^is  said: 
"Judge  Thompson,  in  his  valuable  treatise  on  the  Law  of  Corpora- 
tions, vol.  5,  §§  6033-6038,  commenting  on  the  subject,  appears  to  dep- 
recate the  prevalence  of  the  'new  doctrine,'  and  to  argue  against  its 
further  extension,  upon  the  ground  that  it  practically  destroys  the 
effect  of  the  doctrine  of  ultra  vires,  as  applied  to  the  unauthorized 
exercise  of  corporate  power;  but  the  learned  author  is  manifestly  in 
error  in  that  respect.  Such  doctrine,  notwithstanding  the  limitation 
which  modern  development  has  placed  on  the  means  by  which  it  rnay 
be  called  into  use,  still  exists,  and  may  and  will  continue  to  exist, 
adapted  as  fully  as  ever  to  restrain  the  abuse  of  corporate  franchises 
and  authority,  and  to  punish  such  abuse,  whenever  the  state,  in  its 
sovereign  capacity,  sees  fit  to  exercise  it.  That  such  doctrine  cannot 
be  resorted  to  as  a  weapon  for  attack  and  defense  in  the  hands  of 
mere  private  persons,  and  used  as  a  ready  means  of  embarrassing 
business  operations  by  and  with  corporate  bodies,  which  directly  or 
indirectly  touch  and  administer  to  human  desires  at  every  turn  of 
the  individual  in  modern  life,  while  its  effectiveness  for  all  essential 
purposes  of  restraint  and  punishment  is  fully  preserved,  furnishes  no 
cause  for  regret,  but  rather  cause  for  gratification  at  the  evidence  of 
how  certainly  principles,  by  natural  growth  and  development,  adapt 
the  law  and  its  administration  to  the  everchanging  needs  of  advancing 
civilization,  so  as  best  to  promote  justice  and  the  common  welfare. 
When  a  corporation  offends  against  the  law  of  its  creation,  such  of- 
fense is  against  the  sovereignty  of  the  state ;  hence,  it  is  most  proper 
that  the  state  should  apply  the  remedy,  and  be  charged  with  the  sole 
responsibility  in  that  regard,  and  such  is  the  law  by  the  trend  of  mod- 
ern authorities,  which  we  approved."     *     *     * 

The  question  whether  a  corporation  has  a  legal  existence  is  a  ques- 
tion whether  it  has  capacity  to  act  at  all ;  this  is  essentially  of  the  same 
character  as  the  question  whether  it  has  capacity  to  enter  into  a  par- 
ticular contract — in  other  words,  whether  it  has  a  legal  existence  for 
that  purpose.  The  state  grants  the  corporation  the  right  to  do  busi- 
ness under  limitations  expressed  in  language  to  which  both  agree. 
Whether  the  language  of  the  charter  shall  be  interpreted  to  authorize 
a  given  act  is  a  matter  between  the  parties  to  it.  If  the  state  is  satis- 
fied with  the  construction  upon  which  the  corporation  acts,  no  reason 
is  apparent  why  it  should  be  open  to  question  by  a  stranger,  much 
less  by  one  who  has  recognized  it  as  valid  by  contracting  with  the  cor- 
poration upon  that  basis.     *     *     * 

No  Kansas  statute  declares  that  a  contract  made  by  a  corporation  in 
excess  of  its  legitimate  powers  shall  be  void ;  or  in  terms  permits  the 
question  of  corporate  capacity  to  be  raised  by  one  of  the  parties. 
Where  it  is  held  that  no  recovery  can  ever  be  had  upon  an  ultra  vires 


Ch.  3)  CORPORATE   POWERS  1413 

contract,  as  such,  whatever  relief  is  afiforded  is  log-Ically  made  to  turn 
upon  whether  and  how  far  the  agreement  has  been  acted  upon. 
Where  a  recovery  is  sometimes  permitted  under  the  contract  itself,  upon 
the  principle  of  estoppel,  the  question  whether  it  has  been  carried  out 
is  likewise  of  manifest  importance,  there  being-  a  difference  in  degree, 
at  least,  between  the  attitude  of  one  who  has  merely  entered  into  an  en- 
gagement in  expectation  of  obtaining  an  advantage  from  it,  and  that 
of  one  who  has  actually  reaped  its  benefits  in  whole  or  in  part.  But  the 
doctrine  that  only  the  state  can  challenge  the  validity  of  acts  done  un- 
der color  of  a  corporate  charter,  if  accepted,  must  necessarily  protect 
an  executory  contract  from  collateral  attack,  equally  with  one  that  has 
been  executed.  The  court  is  convinced  of  the  soundness  of  the  view 
that,  in  the  absence  of  special  circumstances  affecting  the  matter,  nei- 
ther party  to  even  an  executory  contract  should  be  allowed  to  defeat  its 
enforcement  by  the  plea  of  ultra  vires.  The  doctrine  is  logical  in  the- 
ory, simple  in  application,  and  just  in  result.  *  *  * 
Upon  these  considerations  the  judgment  is  affirmed. 


1414  CORroRATioNS  CPart  6 


CHAPTER  IV 

THE  RELATION  OF  STOCKHOLDERS  TO  THE 
CORPORATION 

Section 

1.  Nature  of  a  Share  of  Stock. 

2.  Rights  of  the  I'referred  Stockholder. 

3.  Right  to  Inspect  Corporate  Boolvs. 

4.  Right  to  Participate  in  New  Issue.s  of  Stock. 

5.  Stockliolders'  iNIeetjngs. 

6.  Voting  Trusts. 

7.  Rights  of  the  Minority. 

8.  Right  to  ^Maintain  Actions  upon  Corporate  Causes  of  Action. 

9.  Rights  with  Respect  to  Declared  Dividends  and  Surplus. 

10.  Apportionment  of  Interests  Between  Life  Tenant  and  Remainderman. 

11.  Rights  of  the  Corporation  Against  Officers  and  Directors. 

12.  Rights  and  Liabilities  of  Parties  with  Respect  to  Transfers  of  Stock 


SECTION  1.— NATURE  OF  A  SHARE  OF  STOCK 


UNITED    STATES    RADIATOR    CORPORATION    v.    STATE. 

(Court  of  Appeals  of  New  York,  19ia.    20s  N.  Y.  144,  101  N.  E.  783, 
46  L.  R.  A.  [N.  S.]  585.) 

Claim  by  the  United  States  Radiator  Company  against  the  State 
of  New  York  for  refund  of  taxes  paid  under  protest  on  stock  trans- 
fers.    From  a  judgment  dismissing  the  claim,  claimant  appeals, 

Collin,  J.  The  action  is  to  recover  from  the  state  of  New  York 
a  sum  paid  by  the  plaintiff,  under  protest  and  without  prejudice  to  its 
rights,  for  stock  transfer  stamps. 

The  facts  w-ere  agreed  upon  by  the  parties  for  submission  to  the 
Court  of  Claims.  The  plaintiff",  a  corporation,  purchased  certain  as- 
sets of  each  of  four  corporations.  Under  the  contracts  of  purchase, 
each  of  the  four  corporations  was  entitled  to  a  designated  number  of 
shares  of  the  capital  stock  of  the  plaintiff'  as  a  consideration  for  the 
sale.  Each  of  the  four  corporations  and  a  trust  company  entered 
into  a  lawful  voting  trust  agreement,  which  provided  that  the  trust 
company  as  voting  trustee  should  hold  and  vote  for  a  designated  pe- 
riod the  full  number  of  the  shares  of  stock  to  which  the  four  corpora- 
tions were  so  entitled  and  a  certificate  for  those  shares  was  issued 
by  the  plaintiff,  upon  the  request  of  each  of  the  four  corporations,  to 
the  trust  company,  which  thus  became  the  record  owner  of  the  shares 
for  voting  purposes.  Each  of  the  four  corporations  (no  condition 
forbidding)  requested  the  issue  to  each  stockholder  therein  by  the 
trust  company  of  a  certificate  for  the  number  of  shares  proportion- 
ate to  the  number  of  the  shares  of  its  stock  owned  by  him,  and  there- 
upon the  trust  company  issued  to  each  stockholder  of  the  fotu*  cor- 
porations a  certificate  that  he,  the  stockholder,  was  the  owner  of  a 
designated  number  of  shares  of  the  capital  stock  of  the  plaintiff  de- 
posited with  and  to  be  held  by  the  trust  company  under  the  agreement 
as  voting  trustee,  and  might  transfer  the  certificate,  and  that  all  divi- 
dends received  by  the  trust  company  should  be  paid  to  the  holder  of 


Ch.  4)  THE   RELATION   OF   STOCKHOLDERS   TO   COKl'ORATION  1415 

the  certificate  who  should  at  the  termination  of  the  voting  trust  agree- 
ment, upon  surrender  of  the  certihcate,  be  entitled  to  receive  a  cer- 
tificate or  certificates  of  the  plaintiff  for  said  shares  of  capital  stock. 
Pursuant  to  the  decision  of  the  Comptroller  of  the  State  that  the  cer- 
tificates of  the  trust  company  were  taxable  under  section  270  of  the 
Tax  Law  (Consol.  Laws  1909,  c.  60),  the  plaintiff  paid  for  the  ti'ans- 
fer  stamps  without  prejudice  to  its  rights,  and  brings  this  action  to 
recover  the  sum  paid.     '■'     *     * 

The  section  imposes  the  tax  upon  all  agreements  or  instruments  for 
the  transfer  of  shares  of  corporate  stock.  It  is  in  the  nature  of  an 
excise  tax  on  the  transfer.  *  *  *  The  language  expresses  clearly 
the  intention  of  the  Legislature  that  every  transfer  of  or  agreement  to 
transfer  a  share  in  the  capital  stock  of  a  corporatio^i,  or  in  other  and 
definitive  words,  a  right  to  share  in  the  dividends  declared  by  the  di- 
rectors of  a  corporation  from  its  surplus  profits  and  in  the. assets  upon 
the  distribution  of  them  pro  rata  among  the  shareholders  at  its  dis- 
solution shall  be  subject  to  the  tax. 

A  share  of  corporate  stock  is  the  right  which  the  shareholder  has 
to  participate  according  to  the  number  of  shares  in  the  surplus  profits 
of  the  corporation  on  a  division,  and  in  the  assets  or  capital  stock 
'  remaining  after  payment  of  its  debts  on  its  dissolution  or  the  termina- 
tion of  its  active  existence  and  operation.  *  *  *  It  is  created  by 
the  joint  action  of  the  corporation  and  the  shareholder.  It  imports  a 
contribution  to  the  capital  stock  made  by  the  shareholder  and  accepted 
by  the  corporation.  When  a  corporation  has  agreed  that  a  person 
shall  be  entitled  to  a  certain  number  of  shares  for  a  consideration 
permitted  by  law  and  executed  by  the  person,  those  shares  come  into 
existence  and  are  owned  by  him. 

The  statement  in  the  certificate  of  incorporation  or  charter  of  the 
corporation  that  the  capital  stock  is  a  designated  amount  divided  in- 
to a  certain  number  of  shares,  each  of  a  named  value,  creates  neither 
shares  nor  capital  stock.  It  expresses  the  power  of  the  corporation 
to  accjuire  a  capital  stock.  It  creates  potential  shares  which,  trans- 
ferred into  actual  shares  by  the  accjuisition  of  members  and  their  pay- 
ments, produce  the  money  or  property  which,  put  into  a  single  corpo- 
rate fund,  is  the  actual  capital  or  capital  stock  on  which  the  corporate 
business  is  undertaken  and  in  which  are  the  shares.  It  also  fixes  the 
sum  of  the  payment  necessary  to  create  a  share. 

The  certificate  of  the  corporation  for  the  shares,  or  the  stock  cer- 
tificate, is  not  necessary  to  the  existence  of  the  shares  or  their  owner- 
ship. It  is  merely  the  written  evidence  of  those  facts.  It  expresses 
the  contract  between  the  shareholder  and  the  corporation  and  his  co- 
shareholders.  But  it  is  the  payment,  or  the  obligation  to  pay  for 
shares  of  stock,  accepted  by  the  corporation,  that  creates  both  the 
shares  and  their  ownership.  *  *  '^  Flour  City  National  Bank  v. 
Shire,  88  App.  Div.  401,  84  N.  Y.  Supp.  810.  affirmed  179  N.  Y.  587, 
72  N.  E.  1141.  In  the  last  case  cited,  Judge  Hiscock,  then  Justice 
Hiscock,  writing  for  the  court,  said :  "The  company  having  thus  ac- 
quired property  under  an  agreement  to  give  therefor  to  various  people 
certain  interests  or  shares  in  its  capital  stock,  we  think  that  such  lat- 
ter persons,  immediately  upon  the  acceptance  of  transfers  by  the  cor- 
poration, became  entitled  to  and  vested  with  said  interests  or  shares, 
and  that  no  further  steps  were  necessary  to  accomplish  this  latter 
result.     It  may  be  admitted  at  once  that  ordinarily  the  coriX)ration 


1416  CORPORATIONS  (Part  6 

would  issue  certificates  for  these  shares  of  capital  stock,  but  it  is  too 
well  settled  to  pemiit  of  doubt  that  said  certificates  would  be  merely 
representative  of  and  not  the  real  interest  in  the  property  and  assets 
of  the  corporation  constituting  its  actual  capital  stock."    *     *    * 

Each  of  the  four  coi-porations  became,  upon  the  transfer  of  its  as- 
sets to  the  plaintiff,  the  owner  of  the  shares  of  the  capital  stock  of  the 
plaintiff,  which  were  the  consideration  for  it.  The  transaction  did 
not  involve  a  transfer  of  those  shares.  The  shares  were  not  trans- 
ferred to  the  vendor  corporation  by  plaintift';  they  were  created  by 
the  transaction.  At  no  time  were  they  owned  by  the  plaintiff.  At 
the  instant  of  their  creation  they  were  owned  by  the  vendor  corpora- 
tion, which  might  at  any  time  thereafter  transfer  them,  and  any 
transfer  of  them  by  it  would  be  subject  to  the  tax  imposed  by  said 
section  270. 

The  four  corporations  did  not  transfer  the  shares  owned  by  them 
to  the  trust  company.  They  caused  the  record  title  to  them  to  be 
placed  in  the  trust  company  temporarily  and  for  an  expressed  and 
limited  purpose.  They  remained  the  owners  of  the  stock.  Their 
ownership  was  subject  to  the  right  of  the  trust  company  to  vote  the 
shares  at  corporate  elections,  but  the  power  to  transfer  the  shares, 
subject  to  the  right  of  the  trust  company  to  vote  them,  remained  in  ' 
the  corporations.  The  trust  company  could  not  sell  or  agree  to  sell 
the  shares.  It  had  no  assignable  interest  in  them.  It  had  evidence  in 
the  certificate  that  it  as  trustee  held  the  legal  title,  but  this  was  notice 
of  the  existence  of  the  trust  agreement  which  disclosed  the  ownership 
of  the  corporations. 

The  valid  request  of  each  of  the  four  corporations  to  the  trust  com- 
pany that  it  issue  its  certificate  to  each  of  the  holders  of  shares  of  the 
stock  of  those  corporations  for  shares  of  the  stock  of  the  plaintiff 
proportionate  to  his  holding,  and  the  compliance  of  the  trust  company, 
was  a  transfer  of  the  shares  by  the  corporations  to  their  shareholders. 
Upon  the  completion  of  those  acts  the  corporations  ceased  having  the 
right  to  receive  the  dividends  declared  upon  those  shares  and  the 
shareholders  acquired  it.  The  ownership  of  the  shares  is  in  their 
stockholders  severally,  as  certified  by  the  trust  company,  by  virtue  of 
the  assignment  of  it  inherent  in  the  request  and  the  execution  of  the 
request  by  the  trust  company.  The  appellant  does  not  assert  or  claim 
that  the  corporations  own  the  shares.  It,  on  the  contrary  concedes 
that  their  shareholders  are  the  owners,  but  asserts  that  they  were  such 
through  and  from  the  time  of  the  purchase  by  the  plaintiff  of  the  as- 
sets of  the  corporations,  and  therefore  there  was  no  transfer  of  the 
shares  from  the  corporations  to  them — an  assertion  erroneous,  as  al- 
ready stated. 

The  appellant  urges,  with  ability  and  earnestness,  that  if  the  four 
corporations  did  in  the  first  instance  own  the  shares,  the  transfer  of 
them  to  the  shareholders  was  a  division  among  the  true  owners  of 
their  own  property,  and  therefore  not  a  taxable  transfer.  Without 
deciding  whether  or  not  the  conclusion  correctly  expresses  the  law,  it 
suffices  in  this  case  to  point  out  that  the  premise  given  for  its  sup- 
port is  fallacious.  While  conditions  may  exist  under  which  equity 
will  consider  the  shareholders  as  the  proprietors  and  the  ultimate  ben- 
eficiaries of  the  corporate  interests,  the  fact  is  that  a  corporation  is  an 
individual  being  incapacitated  through  statutory  powers  to  acquire 
the  title  to,  own,  and  dispose  of  real  and  personal  property,  enter  in- 


Cll.  4)         THE  RELATION  OF   STOCKHOLDERS  TO   CORPORATION  1417 

to  contracts,  engage  in  business,  sue  and  be  sued  and  taxed.  It  is  the 
owner  of  all  the  corporate  property,  real  and  personal,  and  within  the 
powers  conferred  upon  it  by  the  charter  can  deal  with  it  as  absolutely 
as  a  private  individual  can  with  his  own.  The  whole  title  to  it  is  in 
the  corporation,  and  the  shareholders  are  neither  tenants  in  common 
nor  in  any  legal  sense  the  owners  of  it.  *  *  *  A  shareholder  can- 
not acquire  title  to  any  of  the  property  of  the  corporation  through  the 
operation  of  the  law  as  an  administrator  acquires  the  title  to  the  per- 
sonal property  of  his  intestate.  A  corporate  act  alone  can  affect  that 
result.  When  the  act,  as  did  the  act  in  the  present  case,  transfers  to 
the  shareholders  shares  of  the  capital  stock  of  another  corporation,  it 
is  taxable  under  said  section  270. 

The  judgment  should  be  affirmed,  without  costs.     *     *    * 


SECTION  2.— RIGHTS  OF  THE  PREFERRED  STOCK- 
HOLDERS 


STl^JRNBEEGH  et  al.  v.  BROCK  et  al. 

(Supreme  Court  of  Pennsylvania,  1909.     225  Pa.  279,  74  Atl.  166, 
24  L.  R.  A.  [N.  S.]  1078,  133  Am.  St.  Rep.  877.) 

Potter,  J.  On  July  7,  1899,  four  manufacturing  concerns,  the 
Pennsylvania  Bolt  &  Nut  Company,  J.  H.  Sternbergh  &  Son,  the  Leb- 
anon Iron  Company,  and  the  East  Lebanon  Iron  Company,  entered  into 
an  agreement,  by  which  they  were  to  transfer  to  a  proposed  corpora- 
tion the  whole  of  their  respective  "plants,  franchises,  good  will,  busi- 
ness, patents,  trade-marks,  and  property  of  every  sort  and  kind."  The 
agreement  further  provided  that  they  should  receive  for  the  property 
so  transferred  full-paid  and  nonassessable  preferred  stock  of  the  pro- 
posed corporation  of  the  par  value  of  $50  per  share,  of  which  $3,000,- 
000  worth  were  to  be  issued  and  divided  among  them  in  designated  pro- 
portions. The  agreement  also  provided:  "The  said  preferred  stock 
shall  have  an  accumulative  preference  of  five  per  cent.  (5%)  dividend 
annually,  payable  quarterly  on  the  first  days  of  January,  April,  July 
and  October,  and  the  first  preference  as  to  the  distribution  of  the  as- 
sets of  the  company ;  and  further  none  of  the  property  or  franchises 
of  the  proposed  company  can  be  mortgaged  without  the  consent  of 
at  least  a  majority  of  the  preferred  stock."  Common  stock  to  the  ex- 
tent of  $17,000,000  was  also  to  be  issued,  divided  into  340,000  shares, 
with  a  par  value  of  $50  each,  upon  which  $5  per  share  was  to  be  paid 
in  cash.  In  pursuance  of  this  agreement,  the  American  Iron  &  Steel 
Company  was  incorporated  on  August  21,  1899,  under  the  laws  of 
Pennsylvania,  for  the  manufacture  of  iron  and  steel  products.     *     *     * 

By  resolution  adopted  at  the  stockholders'  meeting  of  August  23, 
1899,  it  was  provided  "that  the  preferred  stock  whose  issue  was  there- 
by authorized  to  the  amount  of  $3,000,000  should  be  entitled  (a)  'to  re- 
ceive a  cumulative  yearly  dividend  of  five  per  cent.,  payable  quarterly 
on  the  first  days  of  January,  April,  July,  and  October,  in  each  year, 
before  any  dividends  shall  be  set  apart  or  paid  on  the  common  stock ; 
(b)  to  be  paid  in  full  both  principal  and  accrued  dividends  in  the  event 
of  liquidation  or  dissolution  of  the  company  before  any  amount  shall 


1418  coRroKATioNs  (Part  6 

be  paid  to  the  holders  of  the  common  or  general  stock ;  (c)  to  require 
the  consent  in  writing  of  a  majority  of  the  holders  thereof  to  the  crea- 
tion of  any  mortgage.'  "  *  '''  '■'  From  the  organization  of  the  com- 
pany until  the  year  1907  the  holders  of  preferred  stock  were  paid  the 
stipulated  5  per  cent,  annual  dividend,  and  no  more,  while  all  profits 
above  the  amount  so  paid  were  distributed  by  dividends  to  the  com- 
mon stockholders.  In  March,  1907,  a  quarterly  dividend  of  2  per  cent, 
was  declared  by  the  directors  upon  all  the  stock,  both  preferred  and 
common,  which  was  at  the  rate  of  8  per  cent,  per  annum. 

J.  H.  Sternbergh,  who  was  a  holder  of  the  common  stock,  filed  this 
bill  in  equity  against  the  directors  and  treasurer  of  the  company  and 
the  corporation  itself,  alleging  that  the  preferred  stockholders  were 
not  entitled  to  receive  more  than  5  per  cent,  per  annum  on  the  par 
value  of  their  stock,  and  praying  the  court  to  enjoin  the  payment  to 
them  of  the  dividend  declared  in  excess  of  one-quarter  of  that  amount. 

*       ^;       * 

Three  questions  are  raised  by  the  arguments  of  counsel  on  this  ap- 
peal: 

(1)  Whether  preferred  stock  issued  by  a  company  incorporated  un- 
der the  corporation  act  of  1874  is  limited  as  to  dividends  to  the  amount 
of  its  preference ;  or  whether,  after  payment  of  an  equal  amount  as 
dividend  on  the  common  stock,  it  is  entitled  to  participate  in  the  dis- 
tribution of  the  remaining  profits,  if  any. 

(2)  Whether,  under  the  agreement  and  resolution  in  the  present  case, 
the  preferred  stockholders  can  receive  dividends  of  more  than  5  per 
cent,  per  annum  on  the  par  value  of  their  stock. 

(3)  Whether  the  alleged  fact  that  for  a  long  series  of  years  the 
preferred  stockholders  were  paid  without  objection  on  their  part  only 
5  per  cent,  per  annum  and  the  entire  balance  of  profits  was  paid  to 
the  common  stockholders  is  to  be  considered  in  determining  the  present 
rights  of  the  parties.     *     *     * 

Where  there  is  no  stipulation  in  the  contract  to  the  contrary,  the 
w-eight  of  authority  clearly  favors  the  right  of  preferred  stockholders 
to  share  with  the  common  stockholders  in  all  profits  distributed,  after 
the  latter  have  received  an  amount  equal  to  the  stipulated  dividend  on 
the  preferred  stock.  "In  the  absence  of  special  provisions,  the  holders 
of  preferred  stock  in  a  corporation  are  in  precisely  the  same  position, 
both  with  respect  to  the  corporation  itself  and  with  respect  to  creditors 
of  the  corporation,  as  the  holders  of  common  stock,  except  only  that 
they  are  entitled  to  receive  dividends  on  their  shares,  to  the  extent 
guaranteed  or  agreed  upon  before  any  dividends  can  be  paid  to  the 
holders  of  common  stock."  2  Clark  &  Marshall  on  Priv.  Corp.  (1901) 
§  417c.  "A  share  of  stock  is  a  share  of  stock,  whether  preferred  or 
common."  1  Cook  on  Corps.  §  269,  note.  See,  also,  1  Elliott  on  Rail- 
roads (2d  Ed.)  §  84;  2  Beach  on  Priv.  Corp.  §  501.  We  do  not  find 
anything  in  the  agreement  or  resolution  in  the  present  case  which  limited 
the  preferred  stockholders  to  a  dividend  of  5  per  cent,  per  annum  upon 
their  stock. 

With  regard  to  the  contention  that  the  court  should  follow  the  con- 
struction placed  upon  the  contract,  which  it  is  alleged  the  parties  fol- 
lowed for  a  series  of  years — that  is,  by  paying  to  the  preferred  stock- 
holders only  the  stipulated  5  per  cent,  dividends,  and  awarding  the  re- 
maining profits  to  the  common  stockholders — the  trial  judge  does  not 
find  that  any  such  construction  was  established,  and  he  further  finds 


Ch.  4)  THE   RKLATl'OX   OF   STOCKIIOLDKUS   TO   CORPORATION  1410 

that,  except  in  the  years  1905  and  1906,  the  dividends  paid  on  the  com- 
mon stock  were  less  than  5  per  cent,  of  its  par  value.  In  discussing 
this  feature  he  says:  "Has  there  grown  up  any  usage  in  the  com- 
pany at  variance  with  the  rights  of  the  preferred  stockholders  as  ascer- 
tainable from  a  fair  reading  of  the  resolutions  under  which  the  pre- 
ferred shares  were  issued?  The  plaintiffs  assert  that  there  is  such  a 
custom,  and,  in  support  of  their  statement,  point  to  the  dividend.s  paid 
on  the  common  stock  during  the  first  16  months  of  the  company's  ex- 
istence, which  aggregated  $1.25  per  share  on  the  common  stock,  a  re- 
turn of  more  than  18  per  cent,  per  annum  on  the  sum  paid  in  on  this 
stock,  while  during  the  same  period  the  holders  of  preferred  stock  ac- 
cepted without  murmur  dividends  at  the  yearly  rate  of  5  per  cent,  on 
their  shares. 

The  effect  of  this  evidence  is  entirely  overcome,  however,  by  the 
consideration  that  the  dividends  paid  on  the  common  stock  yielded  less 
than  2  per  cent,  on  its  par  value.  It  is  to  be  assumed  that,  before  the 
holders  of  preferred  stock  could  claim  more  than  the  5  per  cent,  divi- 
dends that  they  received,  the  holders  of  the  common  stock  were  en- 
titled to  receive  a  dividend  of  the  same  percentage  on  the  par  value  of 
their  shares.  To  refuse  them  this  right  would  be  unjust.  _  True  it_  is 
that  they  had  paid  in  only  10  per  cent,  of  the  amount  of  their  subscrip- 
tions, and  that  the  company  had  the  use  of  but  a  comparatively  small 
part  of  what  they  were  obligated  to  pay  in  if  called  on,  but  the  com- 
pany enjoyed  the  credit  of  having  such  a  resource  as  the  unpaid  sub- 
scriptions to  its  stock,  and  the  common  stockholders  had  at  risk  in 
'the  venture,  not  only  what  money  they  had  paid  in,  but  all  for  which 
they  were  still  liable.  It  was  proper,  therefore,  that  the  par  value  of 
their  stock  should  be  taken  as  the  basis  of  their  share  in  the  company's 
profits,  and,  until  they  received  more  than  5  per  cent,  per  annum  on  that 
basis  (which  they  never  did  prior  to  1905),  the  holders  of  preferred 
stock  had  no  reason  to  complain."  This  conclusion  commends  itself 
to  us.     '■''     *     '•' 

We  see  no  need  in  the  present  case  for  looking  beyond  the  terms  of 
the  contract.  We  think  it  was  properly  construed  by  the  court  below. 
The  assignments  of  error  are  overruled,  and  the  decree  is  affirmed. 


SECTION  3.— RIGHT  TO  INSPECT  CORPORATE  BOOKS 


POWELSON  V.  TENNESSEE  E.VSTERN  EEECTRIC  CO.  et  al. 

(Supreme   Judicial  Court    of  IMa.ssafhusetts.    1915.     220   Mass.    .-^.SO, 
107  N.  E.  907,   Ann.  Cas.  1917A,  102.) 

Dit  CouRCY,  T-  This  is  a  petition  in  equity  under  section  30  of  the 
business  corporation  law,  seeking  an  inspection  of  the  stock  and  trans- 
fer books  of  the  defendant  corporation.  It  is  provided  in  that  section 
that  "the  stock  and  transfer  books  of  every  corporation,  which  shall 
contain  a  complete  list  of  all  stockholders,  their  residences  and  the 
amount  of  stock  held  by  each,  shall  be  kept  at  an  office  of  the  corpo- 
ration in  this  commonwealth  for  the  inspection  of  its  stockholders." 
Liability  for  damage  caused  by  a  refusal  to  exhibit  the  books,  etc.,  is 
specified ;   and  the  section  concludes  as  follows :    "The  Supreme  Judi- 


1420  CORPORATIONS  (Part  6 

cial  Court  or  the  superior  court  shall  have  jurisdiction  in  equity,  upon 
petition  of  a  stockholder,  to  order  any  or  all  of  said  copies,  books  or 
records  to  be  exhibited  to  him  and  to  such  other  stockholders  as  may 
become  parties  to  said  petition,  at  such  a  place  and  time  as  may  be 
designated  in  the  order.". 

The  preliminary  objection  that  Powelson,  as  one  of  the  three  voting 
trustees,  cannot  exercise  the  rights  of  a  stockholder  under  the  statute 
need  not  be  considered.  It  is  admitted  that  the  intervening  petitioner, 
the  Tennessee  Mutual  Development  Company,  was  the  owner  of  ten 
shares  of  the  common  stock  of  the  defendant  corporation,  that  it  duly 
made  a  demand  to  inspect  the  stock  and  transfer  books  of  the  electric 
company,  and  that  the  demand  was  refused.  It  has  become  a  party 
to  the  petition  and  can  invoke  the  statute.  Hereinafter  it  will  be  re- 
ferred to  as  the  plaintiff. 

It  is  settled  that  the  common-law  right  of  a  stockholder  to  inspect 
the  books  of  a  corporation  is  a  qualified  and  not  an  absolute  right. 
=1=  *  *  Where  the  right  has  been  given  by  statute  it  has  been  de- 
cided in  many  jurisdictions  that  unless  the  statute  imposes  restrictions 
or  limitations,  the  right  is  absolute,  and  the  motive  or  purpose  of  the 
stockholder  in  seeking  to  exercise  it  is  not  the  proper  subject  of  judi- 
cial inquiry.     *     *     * 

The  scope  of  our  statute  is  narrower  than  the  common-law  right  of 
inspection,  as  it  deals  only  with  the  records,  stock  and  transfer  books. 
The  present  application  is  confined  to  the  stock  and  transfer  books 
and  is  made  for  the  alleged  purpose  of  obtaining  a  complete  list  of  the 
stockholders  and  their  residences.  The  right  of  a  stockholder  to  ob- 
tain this  information  has  been  recognized  by  the  Legislature  of  this 
commonwealth  since  1858.  *  *  *  The  language  of  St.  1903,  c.  437, 
§  30,  and  the  history  of  the  legislation  on  the  subject  indicate  that  the 
stockholder's  right  to  know  the  names,  addresses  and  extent  of  inter- 
est of  his  associates  in  the  common  enterprise,  who  with  him  must  elect 
directors  to  manage  the  business  of  the  company,  is  an  absolute  right. 

As  we  construe  the  report,  however,  it  is  not  necessary  to  decide 
whether  a  stockholder  is  entitled  to  the  relief  here  asked  for  regardless 
of  his  motive  or  purpose.  The  single  justice,  after  hearing  the  parties, 
ruled  that  the  plaintiff  should  have  the  right  to  make  the  inspection 
prayed  for.  It  is  reasonably  to  be  inferred  that  he  was  satisfied  that 
the  plaintiff  was  acting  in  good  faith.  The  fact,  if  it  is  a  fact,  that 
Powelson,  by  reason  of  prior  litigation,  desires  to  change  the  adminis- 
tration of  the  company,  and  has  instituted  these  proceedings  with  that 
in  view,  is  entirely  consistent  with  an  honest  belief  that  a  change  in 
management  and  policy  will  advance  the  interests  of  the  corporation 
and  his  own  rights  as  a  stockholder.     *     *     * 

The  order  for  inspection  is  to  issue  as  prayed  for.  The  details  as  to 
time  and  manner  will  be  designated  in  the  order  as  settled  by  a  single 
justice. 

Ordered  accordingly. 


Ch.  4)         THE   RELATION  OF  STOCKHOLDERS  TO   CORPORATION  1421 

SECTION  4.— RIGHT  TO  PARTICIPATE  IN  NEW  ISSUES 

OF  STOCK 


STOKES  V.  CONTINENTAL  TRUST  CO.  OF  CITY  OF  NEW  YORK. 

(Court  of  Api>eals  of  New  York,  1906.     186  N.  Y.  28.5,  78  N.  E.  1090, 
12  L.  R.  A.  LN.  S.]  9G9,  9  Ann.  Cas.  738.) 

This  action  was  brought  by  a  stockholder  to  compel  his  corporation 
to  issue  to  him  at  par  such  a  proportion  of  an  increase  made  in  its 
capital  stock  as  the  number  of  shares  held  by  him  before  such  increase 
bore  to  the  number  of  all  the  shares  originally  issued,  and  in  case 
such  additional  shares  could  not  be  delivered  to  him  for  his  damages 
in  the  premises. 

Vann,  j,  *  *  *  Thus  the  question  presented  for  decision  is 
whether  according  to  the  facts  found  the  plaintiff  had  the  legal  right 
to  subscribe  for  and  take  the  same  number  of  shares  of  the  new 
stock  that  he  held  of  the  old?  The  subject  is  not  regulated  by  stat- 
ute, and  the  question  presented  has  never  been  directly  passed  upon 
by  this  court,  and  only  to  a  limited  extent  has  it  been  considered  by 
courts  in  this  state.     *     *     * 

In  other  jurisdictions  the  decisions  support  the  claim  of  the  plain- 
tiff. *  *  *  The  leading  authority  is  Gray  v.  Portland  Bank,  de- 
cided in  1807  and  reported  in  3  Mass.  364,  3  Am.  Dec.  156.  *  *  * 
The  court  held  that  stockholders  who  held  old  stock  had  a  right  to 
subscribe  for  and  take  new  stock  in  proportion  to  their  respective 
shares.  As  the  corporation  refused  this  right  to  the  plaintiff  he  was 
permitted  to  recover  the  excess  of  the  market  value  above  the  par 
value,  with  interest.  In  the  course  of  its  argument  the  court  said: 
"A  share  in  the  stock  or  trust  when  only  the  least  sum  has  been  paid 
in  is  a  share  in  the  power  of  increasing  it  when  the  trustee  determines 
or  rather  when  the  cestuis  que  trustent  agree  upon  employing  a  great- 
er sum.  *  *  *  A  vote  to  increase  the  capital  stock,  if  it  was  not  the 
creation  of  a  new  and  disjointed  capital,  was  in  its  nature  an  agree- 
ment among  the  stockholders  to  enlarge  their  shares  in  the  amount  or 
in  the  number  to  the  extent  required  to  effect  that  increase.  *  *  * 
If  from  the  progress  of  the  institution  and  the  expense  incurred  in  it 
any  advance  upon  the  additional  shares  might  be  obtained  in  the  mar- 
ket, this  advance  upon  the  shares  relinquished  belonged  to  the  whole, 
and  was  not  to  be  disposed  of  at  the  will  of  a  majority  of  the  stock- 
holders to  the  partial  benefit  of  some  and  exclusion  of  others."  This 
decision  has  stood  unquestioned  for  nearly  a  hundred  years  and  has 
been  followed  generally  by  courts  of  the  highest  standing.  It  is  the 
foundation  of  the  rule  upon  the  subject  that  prevails,  almost  without 
exception,  throughout  the  entire  country.     *     *     * 

In  Jones  v.  Morrison,  31  Minn.  140,  152,  16  N.  W.  854,  it  was 
said :  "When  the  proposition  that  a  corporation  is  trustee  of  the 
corporate  property  for  the  benefit  of  the  stockholders  in  proportion 
to  the  stock  held  by  them  is  admitted  (and  we  find  no  well-considered 
case  which  denies  it),  it  covers  as  well  the  power  to  issue  new  stock 
as  any  other  franchise  or  property  which  may  be  of  value,  held  by 
the  corporation.  The  value  of  that  power,  where  it  has  actual  value, 
is  given  to  it  by  the  property  acquired  and  the  business  built  up  with 


1422  CORPORATIONS  (Part  G 

the  money  paid  by  the  subsisting  stockholders.  It  happens  not  infre- 
quently that  corporations,  instead  of  distributing  their  profits  in  the 
way  of  dividends  to  stockholders,  accumulate  them  till  a  large  sur- 
plus is  on  hand.  No  one  would  deny  that,  in  such  case,  each  stock- 
holder has  an  interest  in  the  surplus  which  the  courts  will  protect. 
No  one  would  claim  that  the  officers,  directors  or  majority  of  the 
stockholders,  without  the  consent  of  all,  could  give  away  the  surplus, 
or  devote  it  to  any  other  than  the  general  purposes  of  the  corporation. 
But  when  new  stock  is  issued,  each  share  of  it  has  an  interest  in  the 
surplus  equal  to  that  pertaining  to  each  share  of  the  original  stock. 
And  if  the  corporation,  either  through  the  officers,  directors  or  major- 
ity of  stockholders,  may  dispose  of  the  new  stock  to  whomsoever  it 
will,  at  whatever  price  it  may  fix,  then  it  has  the  power  to  diminish  the 
value  of  each  share  of  old  stock  by  letting  in  other  parties  to  an  equal 
interest  in  the  surplus  and  in  the  good  will  or  value  of  the  established 
business."     *     =:=     * 

If  the  right  claimed  by  the  plaintifif  was  a  right  of  property  be- 
longing to  him  as  a  stockholder,  he  could  not  be  deprived  of  it  by 
the  joint  action  of  the  other  stockholders,  and  of  all  the  directors  and 
officers  of  the  corporation.  What  is  the  nature  of  the  right  acquired 
by  a  stockholder  through  the  ownership  of  shares  of  stock?  What 
rights  can  he  assert  against  the  will  of  a  majority  of  the  stockholders, 
and  all  the  officers  and  directors?  While  he  does  not  own  and  cannot 
dispose  of  any  specific  property  of  the  corporation,  yet  he  and  his  as- 
sociates own  the  corporation  itself,  its  charter,  franchises,  and  all 
rights  conferred  thereby,  including  the  right  to  increase  the  stock. 
He  has  an  inherent  right  to  his  proportionate  share  of  any  dividend 
declared,  or  of  any  surplus  arising  upon  dissolution,  and  he  can  pre- 
vent waste  or  misappropriation  of  the  property  of  the  corporation  by 
those  in  control.  •  Finally,  he  has  the  right  to  vote  for  directors  and 
upon  all  propositions  subject  by  law  to  the  control  of  the  stockholders, 
and  this  is  his  supreme  right  and  main  protection.  Stockholders  have 
no  direct  voice  in  transacting  the  corporate  business,  but  through  their 
right  to  vote  they  can  select  those  to  whom  the  law  intrusts  the  power 
of  management  and  control. 

A  corporation  is  somewhat  like  a  partnership,  if  one  were  possible, 
conducted  wholly  by  agents,  where  the  copartners  have  power. to  ap- 
point the  agents,  but  are  not  responsible  for  their  acts.  The  power  tos 
manage  its  afi^airs  resides  in  the  directors,  who  are  its  agents,  but  the 
power  to  elect  directors  resides  in  the  stockholders.  This  right  to 
vote  for  directors,  and  upon  propositions  to  increase  the  stock  or 
mortgage  the  assets,  is  about  all  the  power  the  stockholder  has.  So 
long  as  the  management  is  honest,  within  the  corporate  powers,  and  in- 
volves no  waste,  the  stockholders  cannot  interfere,  even  if  the  admin- 
istration is  feeble  and  unsatisfactory,  But  must  correct  such  evils 
through  their  power  to  elect  other  directors.  Hence,  the  power  of 
the  individual  stockholder  to  vote  in  proportion  to  the  number  of  his 
shares  is  vital,  and  cannot  be  cut  ofl:"  or  curtailed  by  the  action  of  all 
the  other  stockholders,  even  with  the  co-operation  of  the  directors  and 
officers. 

In  the  case  before  us  the  new  stock  came  into  existence  through 
the  exercise  of  a  right  belonging  wholly  to  the  stockholders.  As  the 
right  to  increase  the  stock  belonged  to  them,  the  stock  when  increased 
belonged  to  them  also,  as  it  was  issued  for  money  and  not  for  property 


Ch.  4)  THE    lUOLATIOX   OF   STOCKHOLDERS   TO   CORPORATION  1423 

or  for  some  purpose  other  than  the  sale  thereof  for  money.  By  the 
increase  of  stock  the  voting  power  of  the  plaintifif  was  reduced  one- 
half,  and  while  he  consented  to  the  increase  he  did  not  consent  to  the 
disposition  of  the  new  stock  by  a  sale  thereof  to  Blair  &  Co.  at  less 
than  its  market  value,  nor  by  sale  to  any  person  in  any  way  except  by 
an  allotment  to  the  stockholders.  The  increase  and  sale  involved  the 
transfer  of  rights  belonging  to  the  stockholders  as  part  of  their  in- 
vestment. The  issue  of  new  stock  and  the  sale  thereof  to  Blair  &  Co. 
was  not  only  a  transfer  to  them  of  one-half  the  voting  power  of  the 
old  stockholders,  but  also  of  an  equitable  right  to  one-half  the  surplus 
which  belonged  to  them.  In  other  words,  it  was  a  partial  division  of 
the  property  of  the  old  stockholders.  The  right  to  increase  stock  is 
not  an  asset  of  the  corporation  any  more  than  the  original  stock  when 
it  was  issued  pursuant  to  subscription.  The  ownership  of  stock  is  in 
the  nature  of  an  inherent  but  indirect  power  to  control  the  corpora- 
tion. The  stock  when  issued  ready  for  delivery  does  not  belong  to 
the  corporation  in  the  way  that  it  holds  its  real  and  personal  property, 
with  power  to  sell  the  same,  but  is  held  by  it  with  no  power  of  aliena- 
tion in  trust  for  the  stockholders,  who  are  the  beneficial  owners,  and 
become  the  legal  owners  upon  paying  therefor.  *  *  *  It  has  the 
same  voting  power  as  the  old,  share  for  share.  The  stockholders  de- 
cided to  enlarge  their  holdings,  not  by  increasing  the  amount  of  each 
share,  but  by  increasing  the  number  of  shares.  The  new  stock  be- 
longed to  the  stockholders  as  an  inherent  right  by  virtue  of  their  be- 
ing stockholders,  to  be  shared  in  proportion  upon  paying  its  par  value 
or  the  value  per  share  fixed  by  vote  of  a  majority  of  the  stockholders, 
or  ascertained  by  a  sale  at  public  auction. 

While  the  corporation  could  not  compel .  the  plaintifif  to  take  new 
shares  at  any  price,  since  they  were  issued  for  money  and  not  for 
property,  it  could  not  lawfully  dispose  of  those  shares  without  giving 
him  a  chance  to  get  his  proportion  at  the  same  price  that  outsiders 
got  theirs.  He  had  an  inchoate  right  to  one  share  of  the  new  stock  for 
each  share  owned  by  him  of  the  old  stock,  provided  he  was  ready  to 
pay  the  price  fixed  by  the  stockholders.  If  so  situated  that  he  could 
not  take  it  himself,  he  was  entitled  to  sell  the  right  to  one  who  could, 
as  is  frequently  done.  Even  this  gives  an  advantage  to  capital,  but 
capital  necessarily  has  some  advantage.  Of  course,  there  is  a  dis- 
tinction when  the  new  stock  is  issued  in  payment  for  property,  but 
that  is  not  this  case.  The  stock  in  question  was  issued  to  be  sold  for 
money  and  was  sold  for  money  only.  A  majority  of  the  stockholders, 
as  part  of  their  power  to  increase  the  stock,  may  attach  reasonable 
conditions  to  the  disposition  thereof,  such  as  the  requirement  that  ev- 
ery old  stockholder  electing  to  take  new  stock  shall  pay  a  fixed  price 
therefor,  not  less  than  par,  however,  owing  to  the  limitation  of  the 
statute.  They  may  also  provide  for  a  sale  in  parcels  or  bulk  at  public 
auction,  when  every  stockholder  can  bid  the  same  as  strangers.  They 
cannot,  however,  dispose  of  it  to  strangers  against  the  protest  of  any 
stockholder  who  insists  that  he  has  a  right  to  his  proportion.  Other- 
wise the  majority  could  deprive  the  minority  of  their  proportionate 
power  in  the  election  of  directors  and  their  proportionate  right  to 
share  in  the  surplus,  each  of  which  is  an  inherent,  pre-emptive,  and 
vested  right  of  property.  It  is  inviolable,  and  can  neither  be  taken 
away  nor  lessened  without  consent,  or  a  waiver  implying  consent. 
The  plaintifif  had  power,  before  the  increase  of  stock,  to  vote  on  221 


1424  CORPORATIONS  (Part  6 

shares  of  stock,  out  of  a  total  of  5,000,  at  any  meeting  held  by  the 
stockholders  for  any  purpose.  By  the  action  of  the  majority,  taken 
against  his  will  and  protest,  he  now  has  only  one-half  the  voting  pow- 
er that  he  had  before,  because  the  number  of  shares  has  been  doubled 
while  he  still  owns  but  221.  This  touches  him  as  a  stockholder  in 
such  a  way  as  to  deprive  him  of  a  right  of  property.  Blair  &  Co.  ac- 
quired  virtual   control,   while   he   and   the  other  stockholders   lost  it. 

We  are  not  discussing  equities,  but  legal  rights,  for  this  is  an  action 
at  law,  and  the  plaintiff  was  deprived  of  a  strictly  legal  right.  If  the 
result  gives  him  an  advantage  over  other  stockholders,  it  is  because 
he  stood  upon  his  legal  rights,  while  they  did  not.  The  question  is 
what  were  his  legal  rights,  not  what  his  profit  may  be  under  the  sale 
to  Blair  &  Co.,  but  what  it  might  have  been  if  the  new  stock  had  been 
issued  to  him  in  proportion  to  his  holding  of  the  old.  The  other  stock- 
holders could  give  their  property  to  Blair  &  Co.,  but  they  could  not 
give  his.  A  share  of  stock  is  a  share  in  the  power  to  increase  the 
stock,  and  belongs  to  the  stockholders  the  same  as  the  stock  itself. 
When  that  power  is  exercised,  the  new  stock  belongs  to  the  old  stock- 
holders in  proportion  to  their  holding  of  old  stock,  subject  to  compli- 
ance with  the  lawful  terms  upon  which  it  is  issued.  When  the  new 
stock  is  issued  in  payment  for  property  purchased  by  the  corporation, 
the  stockholders'  right  is  merged  in  the  purchase,  and  they  have  an 
advantage  in  the  increase  of  the  property  of  the  corporation  in  pro- 
portion to  the  increase  of  stock.  When  the  new  stock  is  issued  for 
money,  while  the  stockholders  may  provide  that  it  be  sold  at  auction 
or  fix  the  price  at  which  it  is  to  be  sold,  each  stockholder  is  entitled  to 
his  proportion  of  the  proceeds  of  the  sale  at  auction,  after  he  has  had 
a  right  to  bid  at  the  sale,  .or  to  his  proportion  of  the  new  stock  at  the 
price  fixed  by  the  stockholders. 

We  are  thus  led  to  lay  down  the  rule  that  a  stockholder  has  an  in- 
herent right  to  a  proportionate  share  of  new  stock  issued  for  money 
only  and  not  to  purchase  property  for  the  purposes  of  the  corporation 
or  to  effect  a  consolidation,  and  while  he  can  waive  that  right,  he  can- 
not be  deprived  of  it  without  his  consent  except  when  tne  stock  is 
issued  at  a  fixed  price  not  less  than  par,  and  he  is  given  the  right  to 
take  at  that  price  in  proportion  to  his  holding,  or  in  some  other  eq- 
uitable way  that  will  enable  him  to  protect  his  interest  by  acting  on 
his  own  judgment  and  using  his  own  resources.  This  rule  is  just  to 
all  and  tends  to  prevent  the  tyranny  of  majorities  which  needs  re- 
straint, as  well  as  virtual  attempts  to  blackmail  by  small  minorities 
which  should  be  prevented.    *    *     * 

The  learned  trial  court,  however,  did  not  measure  the  damages  ac- 
cording to  law.  The  plaintiff  was  not  entitled  to  the  difference  be- 
tween the  par  value  of  the  new  stock  and  the  market  value  thereof,  for 
the  stockholders  had  the  right  to  fix  the  price  at  which  the  stock 
should  be  sold.  They  fixed  the  price  at  $450  a  share,  and  for  the 
failure  of  the  defendant  to  offer  the  plaintiff"  his  share  at  that  price 
we  hold  it  liable  in  damages.  His  actual  loss,  therefore,  is  $100  per 
share,  or  the  difference  between  $450,  the  price  that  he  would  liave 
been  obliged  to  pay  had  he  been  permitted  to  purchase,  and  the  mar- 
ket value  on  the  day  of  sale,  which  was  $550.  This  conclusion  re- 
quires a  reversal  of  the  judgment  rendered  bv  the  Apoellate  Division 
and  a  modification  of  that  rendered  by  the  trial  court.  . 

The  order  appealed  from  should  be  reversed  and  the  judgment  of 


Ch.  4)  THE   RELATION   OF   STOCKHOLDERS   TO   CORPORATION  1425 

the  trial  court  modified  by  reducing  the  damages  from  the  sum  of 
$99,450,  with  interest  from  January  30,  1902,  to  the  sum  of  $22,100, 
with  interest  from  that  date,  and  by  striking  out  the  extra  allowance  of 
costs,  and  as  thus  modified  the  judgment  of  the  trial  court  is  affirmed. 
*    *    * 


SECTION  5.— STOCKHOLDERS'  MEETINGS 


PEOPLE  ex  rel.   CARIES   v.   .AIATTHIESSEN. 

(Supreme  Court  of  Illinois,  1915.     269  111.  499,  109  N.  E.  1056, 
Ami.  Cas.  1916E,  1035.) 

Cookp:,  J.  The  people,  on  the  relation  of  Mary  Hegeler  Carus,  in- 
dividually, and  as  trustee  under  the  will  of  Edward  C.  Hegeler,  de- 
ceased, appellee,  riled  an  information  in  the  nature  of  a  quo  warranto 
in  the  circuit  court  of  La  Salle  county  against  the  appellant,  F.  W. 
Matthiessen,  calling  upon  him  to  show  by  what  authority  he  was  ex- 
ercising the  office  of  director  of  the  Matthiessen  &  Hegeler  Zinc 
Company,  an  Illinois  corporation.  The  plea  of  appellant  set  forth  his 
election  as  a  director  on  December  18,  1913,  and  averfed  title  to  the 
office  by  virtue  of  such  election.  The  circuit  court  found  that  the  ap- 
pellant had  been  duly  and  regularly  elected  a  director  of  the  com- 
pany at  a  stockholders'  meeting  held  December  18,  1913,  and  a  judg- 
ment of  not  guilty  was  entered.  This  judgment,  on  appeal,  was  re- 
versed by  the  Appellate  Court  for  the  Second  District,  and  a  judgment 
of  ouster  was  entered.  The  cause  is  brought  here  by  appeal  on  a  cer- 
tificate of  importance. 

The  sole  question  involved  is  whether  the  meeting  of  December  18, 
1913,  was  a  legal  meeting  of  the  stockholders  of  the  corporation.  It 
is  the  claim  of  appellee  that,  as  the  notice  of  the  meeting  required  by 
law  was  not  given,  any  action  taken  was  invalid,  while  appellant  con- 
tends that  sufficient  notice  was  given,  and,  if  not,  that  all  the  stock- 
holders were  present,  and  it  was  therefore  immaterial  whether  notice 
waS' given.  *  *  *  Section  6  of  the  act  of  1857,  under  which  the 
company  was  organized,  and  which  became  a  part  of  the  charter  of  the 
corporation,  provides  that  an  annual  election. of  directors  shall  be 
held  at  such  time  and  place  as  the  board  may  designate,  and  a  writ- 
ten or  printed  notice  of  such  election  shall  be  given  to  each  stock- 
holder personally  or  sent  to  him  through  the  mail  at  least  fifteen  days 
before  the  day  of  the  election,  and  the  election  shall  be  made  by 
such  of  the  stockholders  as  shall  attend  for  that  purpose,  either  in 
person  or  by  proxy.  It  is  conceded  that  the  notice  required  by  this 
section  of  the  statute  was  not  given  of  the  meeting  of  December  18, 
1913.  The  by-laws  of  the  company  provide  that  the  annual  meeting 
of  the  stockholders  for  the  election  of  a  board  of  four  directors  shall 
be  held  at  the  office  of  the  company,  in  the  city  of  La  Salle,  on  De- 
cember 18th  of  each  year,  excepting  when  that  day  shall  fall  on  Sun- 
day, in  which  case  the  meeting  shall  be  held  on  the  following  day. 
The  hour  for  holding  the  meeting  is  not  fixed  in  the  by-laws. 

There  was  no  material  controversy  as  to  the  facts.  It  appears  that 
the  notice  of  the  annual  meeting  required  by  the  statute  had  never 
B.&  B.Bus.Law— 90 


1426  CORPORATIONS  (Part  6 

Iteen  given,  but  ever  since  the  organization  of  the  company  the  stock- 
holders met  by  common  consent  some  time  during  December  18th  of 
each  year,  usually  about  the  hour  of  10  o'clock  a.  m.,  for  the  annual 
election  of  the  board  of  directors.  If  for  any  reason  it  did  not  suit  the 
convenience  of  either  appellant  or  Hegeler  to  meet  at  the  office  of  the 
company,  the  meeting,  by  consent  of  all  the  stockholders,  was  held 
elsewhere.  The  stock  was  held  by  a  very  limited  number  of  persons, 
and  the  business  was  transacted  harmoniously;  two  members  of  the 
Matthiessen  family  and  two  members  of  the  Hegeler  family  being 
elected  to  the  board  of  directors  each  year.  After  the  death  of  Edward 
C.  Hegeler  211  shares  of  the  Hegeler  stock  were  held  by  Mrs.  Cams 
as  trustee  under  the  will  of  her  father,  one  share  was  held  by  Mrs. 
Carus  in  her  own  right,  and  one  share  by  C.  B.  Lihme,  a  son-in-law 
of  Edward  C.  Hegder.  Mrs.  Carus  was  a  director  and  president  of  the 
company,  and  Lihme  was  the  other  director  representing  the  Heg- 
eler interests.    This  was  the  situation  on  December  18,  1913. 

On  December  17,  1913,  appellant  and  others  instituted  quo  war- 
ranto proceedings  against  Lihme  to  contest  his  right  to  hold  the  office 
of  director  in  the  company,  and  summons  in  that  case  was  served  on 
him  either  that  evening  or  the  next  morning.  Mrs.  Carus  and  Lihrhe 
went  to  the  office  of  the  company  in  La  Salle  about  10  o'clock  the 
morning  of  December  18,  1913.  They  found  there  present  all  the 
Matthiessen  stockholders,  either  in  person  or  by  proxy.  Lihme  was 
much  excited  over  the  action  w'hich  had  been  instituted  against  him, 
and  he  at  once  demanded  of  appellant  that  no  election  be  held  and  no 
business  be  transacted  at  that  time.  Some  of  the  witnesses  testify 
that  he  demanded  that  the  meeting  adjourn  until  some  time  in  the  fu- 
ture, but  all  the  testimony  is  to  the  effect  that  he  demanded  that  no 
action  be  taken  that  day.  While  Lihme  was  engaged  in  making  his 
demands  a  member  of  the  Matthiessen  family  moved  that  appellant 
be  made  the  chairman  of  the  meeting,  and  this  motion  was  put  and 
declared  carried.  Mrs.  Carus  was  in  the  same  way  selected  as  secre- 
tary of  the  meeting.  About  the  time  the  vote  was  being  taken  on 
Mrs.  Carus  as  secretary  she  and  Lihme  withdrew  from  the  room. 
Mrs.  Carus  said  nothing  whatever  while  she  was  in  the  room,  and 
neither  she  nor  Lihme  voted  on  the  two  motions  put  while  they  were 
present. 

It  is  contended  that,  as  Lihme  continued  to  demand  that  the  meet- 
ing adjourn  after  appellant  had  been  selected  as  chairman  and  had 
taken  charge  of  the  meeting,  he  thus  participated  to  the  extent  that 
he  is  bound  by  the  action  of  the  meeting.  Lihme  did  nothing  but  pro- 
test against  the  taking  of  any  action  or  the  transaction  of  any  busi- 
ness at  that  time ;  but,  be  the  effect  of  his  actions  what  it  may,  Mrs. 
Carus  said  nothing  and  did  nothing  that  could  be  construed  as  con- 
senting to  the  holding  of  the  meeting.  Unless  the  provisions  of  the 
by-laws  constituted  sufficient  notice  of  the  annual  meeting  or  the  phys- 
ical presence  alone  of  Mrs.  Carus  constituted  a  waiver  of  the  stat- 
utory notice,  the  meeting  was  not  a  legal  one,  and  any  election  held 
thereat  would  be  invalid.  After  Mrs.  Carus  and  Lihme  had  departed, 
the  election  was  held,  and  appellant  was  elected  as  one  of  the  directors 
for  the  ensuing  year. 

While  the  trial  court  held,  as  a  proposition  of  law,  that  a  by-law  of 
a  corporation  which  names  a  day,  but  not  the  hour,  for  the  holding 
of  the  annual  meeting,  is  insufficient  notice  to  the  stockholders  of  the 


Ch.  4)       Tin;  kklation  of  .STOCKriOLnKRS  to  roiu'OKATiON  1427 

time  of  hoklinp^  the  meeting-,  it  took  the  view  that  no  stockholder  can 
urge  the  invalidity  of  such  meeting  for  want  of  notice,  unless  he  has 
been  injured  or  deprived  of  some  substantial  right  by  lack  of  notice ; 
that,  where  all  the  stockholders  are  present  on  the  day  and  at  the 
place  fixed  in  the  by-laws  and  at  an  hour  at  which  for  over  20  years 
it  was  customary  to  hold  the  annual  meeting,  and  where  each  stock- 
holder knew  that  the  annual  election  for  director  was  then  about  to 
take  place,  in  law  each  stockholder  had  the  right  and  opportunity  to 
participate  in  the  meeting,  and  was  not  injured  by  lack  of  notice  or 
deprived  of  any  substantial  right,  and  cannot  urge  the  invalidity  of 
the  meeting  on  the  ground  of  lack  of  notice.  The  court  properly  held 
that  the  by-laws  did  not  constitute  notice  to  the  stockholders  of  the 
holding  of  the  annual  meeting  for  the  election  of  directors.  Section 
6  of  the  act  under  which  this  company  was  incorporated  provides  that 
this  meeting  shall  be  held  at  such  time  and  place  as  the  board  of  direc- 
tors may  designate,  and  expressly  requires  written  notice  to  be  given  the 
stockholders  each  year.  Had  the  by-laws  provided  the  hour  at  which 
the  annual  meeting  should  be  held  on  each  December  18th,  it  would 
have  amounted  to  no  more  than  the  designation  of  the  time  and  place 
of  the  meeting  by  the  board,  and  would  not  take  the  place  of  the  notice 
required  by  the  statute.  That  notice  is  indispensable  unless  it  is  waived 
by  all  the  stockholders,  either  expressly  or  by  consenting  to  or  par- 
ticipating in  the  meeting. 

Did  Lihme  waive  notice  by  demanding  that  no  business  be  trans- 
acted, and  by  demanding  a  pledge  of  the  chairman,  after  he  had  been 
selected,  that  the  meeting  do  nothing  but  adjourn,  or  did  Lihme  and 
Mrs.  Carus  waive  notice  by  their  mere  presence  at  the  meeting?  By 
nothing  which  he  did  or  said  did  Lihme  recognize  the  right  of  the 
meeting  to  organize  or  to-  transact  business.  His  effort  to  secure  a 
pledge  from  appellant,  even  after  he  had  been  selected  by  his  faction 
as  chairman,  that  the  meeting  do  nothing  but  adjourn,  amounted  to  no- 
'more  than  an  offer  to  submit  to  the  jurisdiction  of  the  meeting,  pro- 
vided no  business  whatever  should  be  transacted.  His  offer  was  not 
accepted,  and  he  withdrew,  protesting  againkt  the  holding  of  the 
meeting. 

This  court  has  never  been  called  upon  to  decide  whether  the  mere 
presence  of  a  stockholder  at  an  annual  meeting  for  the  election  of  di- 
rectors, with  full  opportunity  to  participate,  is  alone  sufficient  to  con- 
stitute a  waiver  of  notice  and  deprive  him  of  the  right  to  reply  upon 
lack  of  notice.  The  text  in  10  Cyc.  326,  that  where  notice  is  required 
by  statute,  the  meeting  cannot  be  legally  held  unless  the  notice  be  ex- 
plicitly given  in  respect  of  the  day,  hour,  and  place  or  the  stockhold- 
ers are  all  present  and  consenting,  but  if  a  single  member  having  the 
right  to  be  present  and  vote  is  not  duly  notified  and  is  absent,  or  being 
present,  refuses  to  consent  to  the  holding  of  the  meeting,  its  proceed- 
ings will  be  void,  states  the  correct  rule  and  is  supported  by  authority. 
*  *  *  Neither  Mrs.  Carus  nor  Lihme  having  consented  to  the 
holding  of  the  meeting  or  participated  in  it  in  any  way,  the  meeting  of 
December  18,  1913,  was  not  legally  held,  and  appellant  has  no  valid 
title  to  the  office  of  director  of  the  company  by  virtue  of  any  action 
taken  at  that  meeting. 

The  judgment  of  the  Appellate  Court  is  affirmed. 


1428  CORPORATIONS  (Part  6 

SECTION  6.— VOTING  TRUSTS 


LTJTHY  et  al.  t.  REAM  et  al. 

(Supreme  Court  of  Illinois,  1915.     270  111.  170,  110  N.  E.  373, 
Ann.  Cas.  1917B,  368.) 

Dunn,  J.  Ferd.  Luthy,  Daniel  W.  Voorhees,  George  T.  Page,  and 
Tliomas  Cahill  filed  a  bill  in  chancery  in  the  circuit  court  of  Peoria 
county  against  Henry  Ream,  Benjamin  D.  Brewster,  William  Holly, 
the  Peiu  Plow  &  Wheel  Company  (a  corporation),  and  other  persons, 
stockholders  in  the  corporation,  the  object  of  which  was  to  procure  the 
cancellation  of  a  certain  voting  trust  agreement  of  stockholders  of  the 
corporation  as  to  Thomas  Cahill,  the  setting  aside  of  the  action  of  the 
directors  of  the  corporation  fixing  salaries  of  Henry  Ream,  Benjamin 
D.  Brewster,  and  William  Holly,  as  president,  vice  president,  and 
treasurer,  respectively,  of  the  corporation,  a  return  of  the  amount  of 
the  salaries  received  by  them,  and  the  issue  of  a  certificate  of  70  shares 
of  the  capital  stock  of  the  corporation  to  Thomas  Cahill.  Answers 
were  filed,  and  after  a  hearing  the  court  rendered  a  decree  granting 
the  relief  prayed  for.  Upon  an  appeal  by  some  of  the  defendants,  the 
Appellate  Court  for  the  Second  District  reversed  the  decree,  except 
so  far  as  it  held  the  fixing  of  the  salaries  of  the  officers  illegal,  and 
required  the  amount  received  by  them  to  be  refunded.  Cornplainants 
have  appealed  from  this  judgment;  the  court  having  certified  that 
the  case  involves  questions  of  law  of  such  importance  that  it  should 
be  passed  upon  by  the  Supreme  Court. 

The  Peru  Plow  &  Wheel  Company  is  a  corporation  organized  under 
the  laws  of  Illinois,  having  a  capital  stock  of  $400,000,  engaged  in 
the  manufacture  of  plows,  metal  wheels,  and  farm  implements.  The 
complainants  are  the  owners  of  2,027  of  the  4,000  shares  of  its  stock ; 
Thomas  Cahill  being  the  owner  of  70  shares  purchased  in  November, 
1912.  In  September,  1912,  41  of  the  stockholders,  owning  2,001  shares 
of  the  stock,  entered  into  the  trust  agreement  in  controversy.  After 
reciting  that  the  stockholders  deemed  it  to  their  interest  that  all  of 
their  stock  should  be  voted  as  a  unit  upon  all  questions  affecting  the 
business  and  management  of  the  company,  and  that  Henry  Ream  had 
consented  to  hold  and  vote  such  stock  on  behalf  of  the  stockholders, 
the  agreement  provided ;    *    *  * 

"(1)  The  said  trustee  shall  hold,  control,  and  vote  said  stock  as  if 
he  was  the  owner  of  all  of  said  stock. 

"(2)  Said  trustee  shall  determine  how  said  stock  shall  be  voted 
upon  any  question,  at  any  time  and  every  meeting  of  the  stockholders. 

"(3)  All  of  said  stock  so  held  by  the  trustees  shall  be  voted  as  a 
unit.    *    *    * 

"(9)  The  rights,  duties,  and  powers  hereby  conferred  upon  said 
trustee  shall  expire  and  wholly  cease  on  the  1st  day  of  September,  A. 
D.  1922,  and  the  trustee  shall  at  said  time  assign  and  transfer  to  the 
persons  who  then  hold  trustee's  certificates  evidencing  their  ownership 
of  shares  of  stock  the  amount  of  stock  to  which  each  holder  thereof  is 
shown  by  his  trustee's  certificate  to  be  entitled.     *     *     *  " 

The  certificates  of  stock  of  the  stockholders  signing  the  agreement 
were  canceled,  and  two  certificates,  for  2,001  shares  in  the  aggregate, 
were  issued  to  Ream  as  trustee.    He  issued  to  each  stockholder  a  trus- 


Ch.  4)  THE   KELATIOX   OF   STOCKHOLDERS   TO   CORPORATION  1429 

tee's  certificate  stating  that  the  stockholder  to  whom  it  was  issued 
was  the  owner  of  a  certain  number  of  shares  of  the  capital  stock  of 
the  Peru  Plow  &  Wheel  Company  held  by  him  as  trustee,  subject  and 
pursuant  to  the  terms,  conditions,  and  stipulations  of  a  certain  agree- 
ment between  him,  as  trustee,  and  certain  stockholders  of  the  said 
Peru  Plow  &  Wheel  Company  joining  in  the  said  agreement  of  date 
September  4,  1912,  a  copy  of  which  agreement  was  on  file  with  the 
trustee,  and  reference  _was  had  to  it  as  to  all  the  terms,  conditions, 
and  requirements  of  the  trust.  The  certificates  were  stated  to  be  trans- 
ferable only  on  the  books  of  the  trustee  by  the  owner  thereof  in  per- 
son or  by  attorney,  upon  its  surrender  properly  indorsed,  when  like 
new  certificates  would  be  issued  to  the  proper  owner  of  record.  On 
the  back  of  each  certificate  was  a  form  for  its  assignment. 

Among  the  stockholders  signing  the  agreement  were  Kate  Cahill, 
John  D.  Cahill,  and  Cornelius  J.  Cahill,  who  together  owned  70  shares 
of  the  stock.  They  sold  their  shares  to  the  appellant  Thomas  Cahill, 
and  assigned  to  him  their  trust  certificate.  He  presented  the  certificate 
so  assigned  to  him  to  Henry  Ream,  who  was  president  of  the  corpora- 
tion, and  demanded  that  a  certificate  should  be  issued  to  him  by  the 
president  and  secretary  of  the  corporation  for  70  shares  of  its  capi- 
tal stock ;  but  the  said  Henry  Ream  refused  to  issue  such  certificate, 
and  stated  that  said  70  shares  of  stock  were  included  in  the  trust 
agreement,  and  that  he  could  not  and  would  not  issue  a  certificate  for 
them  to  Thomas  Cahill  for  that  reason.  Thomas  Cahill  thereupon 
notified  him  that  as  the  owner  of  70  shares  he  withdrew  the  same  from 
the  said  trust  agreement  and  would  no  longer  be  bound  thereby,  and 
demanded  that  a  certificate  be  issued  to  him  free  from  any  restraint, 
obligation,  or  condition  under  said  trust  agreement;  but  said  Henry 
Ream  refused  to  issue  such  certificate.    *    *    * 

The  efifect  of  the  agreement  was  to  place  the  legal  title  of  the  majority 
of  the  stock  in  Henry  Ream,  who  was  given  the  power  to  vote  the 
stock  for  10  years  upon  all  questions  and  at  every  meeting  of  the  stock- 
holders according  to  his  own  discretion,  uncontrolled  by  the  stockhold- 
ers in  any  way.  He  then  owned  37  shares  of  stock,  and  thus  the  en- 
tire control  of  the  corporation  was  conferred  upon  the  owner  of  less 
than  1  per  cent,  of  the  stock,  with  no  power  in  the  owners  of  the  re- 
maining 99  per  cent,  to  interfere  in  any  way.  We  have  held  that  it 
is  legitimate  for  the  owners  of  a  majority  of  the  stock  of  a  corporation 
to  combine  for  the  Durpose  of  controlling  the  corporation.  *  *  * 
Venner  v.  Chicago  City  Railway  Co.,  258  111.  523,  101  N.  E.  949.  In 
this  case,  however,  the  agreement  goes  much  farther  than  any  case 
which  has  heretofore  arisen  in  this  court.  The  voting  power  of  the 
stock  is  absolutely  separated  from  its  ownership  for  a  term  of  years, 
so  that  the  real  owners  of  the  property  are  during  that  time  entirely 
divested  of  its  management  and  control,  or  of  any  participation  therein. 

Our  law  contemplates  that  corporations  shall  be  controlled  by  a  ma- 
jority of  the  stockholders,  acting  through  directors  elected  b}^  them  in 
person  or  by  proxy,  and  it  has  been  held  that  a  by-law  of  a  corporation 
which  authorizes  bondholders  to  vote  for  directors  at  stockholders' 
meetings  is  in  violation  of  both  the  constitutional  and  statutory  pro- 
visions requiring  directors  to  be  elected  by  a  majority  of  the  shares  of 
stock  of  the  corporation.  *  *  *  it  Yv^as  said  in  Shepaug  Voting 
Trust  Cases,  60  Conn.  579,  24  Atl.  41 :  "It  is  the  pohcy  of  our  law 
that  an  untrammeled  power  to  vote  shall  be  incident  to  the  ownership 


1430  coRPOKATioxs  (Part  6 

of  the  stock,  and  a  contract  by  which  the  real  owner's  power  is  ham- 
pered by  a  provision  therein  that  he  shall  vote  just  as  somebody  else 
dictates  is  objectionable.  I  think  it  against  the  policy  of  our  law  for 
a  stockholder  to  contract  that  his  stock  shall  be  voted  just  as  some 
one  who  has  no  beneficial  interest  or  title  in  or  to  the  stock  directs, 
saving  to  himself  simply  the  title,  the  right  to  dividends,  and  perhaps 
the  right  to  cast  the  vote  directed,  willing  or  unwilling,  whether  it  be 
for  his  interest,  for  the  interest  of  other  stockholders,  or  for  the  in- 
terest of  the  corporation,  or  otherwise.  This  I  conceive  to  be  against 
the  policy  of  the  law,  whether  the  power  so  to  vote  be  for  five  years 
or  for  ail  time.  It  is  the  policy  of  our  law  that  ownership  of  stock 
shall  control  the  property  and  the  management  of  the  corporation ; 
and  this  cannot  be  accomplished,  and  this  good  policy  is  defeated,  if 
stockholders  are  permitted  to  surrender  all  their  discretion  and  will, 
in  the  important  matter  of  voting,  and  suffer  themselves  to  be  mere 
passive  instruments  in  the  hands  of  some  agent,  who  has  no  interest 
in  the  stock,  equitable  or  legal,  and  no  interest  in  the  general  prosperity 
of  the  corporation.  And  this  is  not  entirely  for  the  protection  of  the 
stockholder  himself,  but  to  compel  a  compliance  wath  the  duty  which 
each  stockholder  owes  his  fellow  stockholder  to  so  use  such  power 
and  means  as  the  law  and  his  ownership  of  stock  give  him  that  the 
general  interest  of  stockholders  shall  be  protected,  and  the  gen- 
eral welfare  of  the  corporation  sustained,  and  its  business  con- 
ducted by  its  agents,  managers,  and  officers,  so  far  as  may  be,  upon 
prudent  and  honest  business  principles,  and  with  just  as  little  tempta- 
tion to  and  opportunity  for  fraud,  and  the  seeking  of  individual  gains 
at  the  sacrifice  of  the  general  welfare,  as  is  possible.  This,  I  take  it.  is 
the  duty  that  one  stockholder  in  a  corporation  owes  to  his  fellow  stock- 
holder; and  he  cannot  be  allowed  to  disburden  himself  of  it  in  this 
way.  He  may  shirk  it,  perhaps,  by  refusing  to  attend  stockholders' 
meetings,  or  by  declining  to  vote  when  called  upon ;  but  the  law  will 
not  allow  him  to  strip  himself  of  the  power  to  perform  his  duty.  To 
this  extent,  at  least,  a  stockholder  stands  in  fiduciary  relation  to  his 
fellow  stockholders." 

"The  theory  upon  which  the  capital  of  numerous  persons  is  asso- 
ciated in  various  proportions  in  the  shape  of  a  trading  corporation,  to 
be  managed  by  a  committee  of  the  stockholders,  is  that  such  committee 
shall  truly  represent  and  be  subject  to  the  will  of  the  majority  in  in- 
terest of  the  stockholders.  The  security  of  the  small  stockholders  is 
found  in  the  natural  disposition  of  each  stockholder  to  promote  the 
best  interests  of  all,  in  order  to  promote  his  individual  interests.  A 
member  of  an  ordinary  partnership  has  an  additional  security  in  the 
personal  character  of  each  of  his  partners,  and  may  decline  to  be  as- 
sociated with  any  whom  he  does  not  know  and  approve.  But  a  stock- 
holder in  a  corporation  cannot  control  the  personnel  of  his  associates 
and  must  rely  upon  their  self-interest  alone.  Upon  the  foundation 
of  the  natural  disposition  of  persons  to  promote  their  own  interests 
rests  the  rule,  established  in  this  state  in  the  famous  case  of  Tavlor 
V.  Griswold,  14  N.  J.  Law,  222  [27  Am.  Dec.  33],  that  a  trading  cor- 
poration could  not,  wihout  special  legislative  authority,  make  a  by- 
law authorizing  a  stockholder  to  vote  by  proxy.  *  *  *  "  Cone  v. 
Russell,  48  N.  J.  Eq.  208,  21  Atl.  847. 

While  the  pooling  of  stock  for  the  purpose  of  electing  directors  and 
officers  and  controlling  the  management  and  business  of  the  corpora- 


Ch.  4)  THE   RELATION   OF   STOCKHOLDERS   TO   CORPORATION  1431 

tion  is  not  necessarily  illegal,  an  agreement  the  purpose  and  effect  of 
which  are  to  permit  the  affairs  of  the  corporation  to  be  managed  by 
the  determination  of  persons  other  than  its  stockholders  or  by  a  mi- 
nority of  its  own  stockholders  is  invalid.  *  *  *  'pj^g  principle  to  be 
deduced  from  the  cases  is  that  the  holders  of  the  majority  of  the  shares 
of  stock  in  a  corporation  may  control  its  management,  and  every  person 
who  becomes  an  owner  of  stock  has  a  right  to  believe  that  the  cor- 
poration will,  and  to  insist  that  it  shall,  be  managed  by  the  majority,; 
that  the  power  to  vote  is  inherenty  attached  to  and  inseparable  from 
the  real  ownership  of  each  share,  and  can  only  be  delegated  by  proxy, 
with  power  of  revocation;  that  each  stockholder  must  be  free  to  cast 
his  vote,  whether  by  himself  or  by  proxy,  for  the  best  interest  of  the 
corporation;  and  that  each  stockholder  has  the  right  to  demand  that 
every  other  stockholder,  if  he  desires  to  do  so,  shall  have  the  right  to 
exercise  at  each  annual  meeting  his  own  judgment  as  to  the  best  inter-, 
est  of  all  the  stockholders,  untrammeled  by  dictation,  and  unfettered 
by  the  obligation  of  any  contract. 

There  is  no  such  thing  as  an  irrevocable  proxy  to  vote  stock  not 
coupled  with  any  interest  in  the  stock  itself  other  than  the  right  to 
vote  it.  A  proxy,  though  stated  to  be  irrevocable,  may  be  revoked  at 
any  time.  *  *  *  This  contract  gave  to  Henry  Ream  alone  the  pow- 
er for  ten  years  to  elect  three  of  the  five  directors  of  the  corporation 
and  to  formulate  and  determine  its  policy,  unrestrained  and  uninflu- 
enced by  all  the  other  stockholders  or  any  of  them.  The  surrender 
of  their  duties  by  the  stockholders  is  complete,  and  the  majority  have 
no  power  to  direct  the  trustee ;  for  he  alone  is  to  determine  how  the 
stock  shall  be  voted,  and  to  vote  it,  upon  any  question,  at  any  time 
and  every  meeting  of  the  stockholders.  He  no  longer  represents  the 
majority  of  the  stock,  for  70  shares  have  been  sold  to  the  complainant 
Cahill,  who  has  the  entire  beneficial  interest  therein.  Other  shares 
may* be  sold,  so  that  before  the  expiration  of  the  trust  the  trustee,  who 
originally  represented  a  majority  of  the  stock,  but  now  represents  only 
a  minority,  may  represent  only  his  own  37  shares,  and  yet,  if  the  trust 
agreement  is  to  be  enforced,  have  absolute  management  and  control 
of  the  corporation. 

In  Smith  v.  San  Francisco  &  North  Pacific  Railroad  Co.,  115  Cal. 
584,  47  Pac.  582,  35  L.  R.  A.  309,  56  Am.  St.  Rep.  119,  it  was  held 
than  an  agreement  by  several  purchasers  of  stock  in  a  corporation 
to  vote  it  as  a  unit  for  five  years,  in  accordance  with  the  decision  of 
the  majority,  is  binding  upon  the  parties  and  irrevocable.  In  Carnegie 
Trust  Co.  v.  Security  Life  Ins.  Co.  of  America,  111  Va.  1,  68  S.  E.  412, 
31  L.  R.  A.  (N.  S.)  1186,  21  Ann.  Cas.  1287,  the  Supreme  Court  of 
Virginia  held  that  an  agreement  among  stockholders  to  place  their 
stock  in  the  hands  of  trustees  for  25  years,  to  enable  the  trustees  to 
manage  the  corporation,  constitutes  a  valid  trust.  These  cases  are  in- 
consistent with  the  views  which  we  have  expressed  and  the  cases  cited 
in  support  of  them,  but  in  our  judgment  the  latter  cases  state  the  true 
rule. 

Although  Thomas  Cahill  purchased  his  stock  with  notice  of  the 
agreement,  that  agreement  was  not  binding  upon  him  or  his  vendors 
if  he  or  they  wished  to  withdraw  from  it,  and  upon  his  demand  for 
a  certificate  of  stock  he  was  entitled  to  receive  it.  The  other  com- 
plainants have  a  right,  also,  as  stockholders,  to  prevent  the  trustee 
from  voting  stock  which  he  has  no  right  to  vote. 


1432  CORPORATIONS  (Part  6 

The  Appellate  Court  erred  in  reversing  the  dv:;cree  of  the  circuit  court 
in  part,  and  its  judgment  will  be  reversed,  and  the  decree  of  the  circuit 
court  will  be  affirmed. 

Judgment  reversed. 


BOWDITCH  et  al.  v.  JACKSON  CO.  et  al. 

(Supreme  Court  of  New  Hampshire,  1912.     76  N.  H.   351,  82  Atl.  1015, 
L.  R.  A.  1917A,  1174,  Ann.  Cas.  1913A,  366.) 

PeaslEE,  J.  *  *  *  The  legality  of  the  votes  passed  at  the 
meeting  of  the  Jackson  stockholders  is  questioned  on  account  of  the 
nature  of  the  trust  agreement  under  which  the  majority  of  the  stock 
was  then  held,  and  because  the  trustees  voted  more  than  one-eighth 
•  of  the  entire  stock.  While  the  decisions  upon  the  first  question  are 
not  entirely  in  accord,  yet  substantially  all  of  them  recognize  that  an 
agreement  to  vote  stock  in  a  certain  way  may  be  valid.  The  rule  is  well 
stated  in  the  case  chiefly  relied  upon  by  the  plaintiffs.  "If  the  trans- 
fer of  the  legal  title  to  the  stock  is  made  and  accepted  under  an  agree- 
ment of  the  stockholder  which  deprives  him  of  all  power  to  direct  the 
trustee,  and  all  opportunity  to  exercise  his  own  judgment  in  respect 
to  the  management  of  the  affairs  of  the  corporation,  then  whether  the 
transaction  is  open  to  the  objection  of  other  stockholders,  as  depriving 
them  of  the  right  they  have  to  the  aid  of  their  costockholders,  must  be 
dependent  upon  the  purposes  for  which  the  trust  was  created  and  the 
powers  that  were  conferred.  If  stockholders,  upon  consideration,  de- 
termine and  adjudge  that  a  certain  plan  for  conducting  and  managing 
the  affairs  of  the  corporation  is  judicious  and  advisable,  I  have  no 
doubt  that  they  may  by  powers  of  attorney,  or  the  creation  of  a  trust, 
or  the  conveyance  to  a  trustee  of  their  stock,  so  combine  or  pool  their 
stock  as  to  provide  for  the  carrying  out  of  the  plan  so  determined  upon. 
But  if  stockholders  combine  by  either  mode  to  intrust  and  confide  to 
others  the  formulation  and  execution  of  a  plan  for  the  management  of 
the  affairs  of  the  corporation,  and  exclude  themselves,  by  acts  made 
and  attempted  to  be  made  irrevocable  for  a  fixed  period,  from  the  ex- 
ercise of  judgment  thereon,  or  if  they  reserve  to  themselves  any  ben- 
efit to  be  derived  from  such  a  plan  to  the  exclusion  of  other  stock- 
holders who  do  not  come  into  the  combination,  then  in  my  judgment 
such  combination  and  the  acts  done  to  effectuate  it  are  contrary  to  pub- 
lic policy,  and  other  stockholders  have  a  right  to  the  interposition  of  a 
court  of  equity  to  prevent  its  being  put  into  operation."  Kreissl  v. 
Distilling  Co.,  61  N.  J.  Eq.  5,  14,  47  Atl.  471,  475. 

An  examination  of  the  cases  generally  will  disclose  that  in  nearly  all 
of  them  where  the  agreement  was  held  invalid  there  were  stipulations 
or  covenants  which  infringed  this  rule.  The  propositions  that  "it  is  as 
legitimate  for  a  majority  of  stockholders  to  combine  as  for  other  peo- 
ple," and  that  the  combination  is  unlawful  only  if  "the  gain  w^as  to 
be  at  the  expense  of  the  corporation,  or  in  some  w^ay  was  to  work  a 
wrong  to  the  other  stockholders"  (Brightman  v.  Bates,  175  Mass.  105, 
110,  55  N.  E.  809,  810),  are  generally  recognized  as  sound  law. 
*  *  *  Even  the  cases  holding  the  particular  agreements  then  under 
consideration  to  be  invalid  usually  recognize  the  proposition  that  there 
may  be  a  valid  voting  trust.  Shepaug  Voting  Trust  Cases,  60  Conn. 
579,  24  Atl.  32.    *    *    * 


Ch.  4)         THE   RELATION   OF   STOCKHOLDERS  TO   CORPORATION  1433 

Judged  by  these  standards,  the  agreement  in  the  present  case  seems 
unobjectionable.  The  trust  is  to  terminate  at  the  end  of  a  year  in  any 
event.  It  contemplates  the  winding  up  of  the  corporation  within  that 
time,  and  sets  out  in  detail  the  plan  of  sale  and  dissolution  for  which 
the  trustees  were  authorized  to  vote.  It  further  provides  that  the  trus- 
tees shall  not  vote  so  as  to  substantially  change  the  company's  busi- 
ness, except  as  specifically  authorized.  There  is  nothing  here  which 
seeks  to  work  a  wrong  to  the  corporation,  to  confer  a  benefit  upon 
those  joining  in  the  trust,  or  to  turn  the  management  of  the  stock- 
holders' affairs  over  to  strangers.  Judged  by  the  strictest  rule  of  a 
stockholder's  right  to  the  free  and  honest  judgment  of  his  costock- 
holders,  the  agreement  here  made  by  more  than  three-fourths  of  the 
stockholders  is  a  legitimate  arrangement  for  carrying  out  their  purpose 
to  close  out  the  affairs  of  the  company. 

The  argument  that  each  stockholder  is  entitled  to  the  presence  of  his 
associates  to  the  end  that  they  shall  reason  and  be  reasoned  with  is  not 
of  weight  here.  The  rule  of  the  common  law  was  that  no  member  of 
a  corporation  could  vote  by  proxy.  *  *  *  But  the  charter  of  this 
company  introduces  a  different  doctrine.  *  *  *  It  is  not  necessary 
to  now  consider  the  effect  of  the  act  of  1842,  forbidding  all  proxy  vot- 
ing. *  *  *  The  act  of  1842  was  repealed  four  years  later,  and  the 
principle  of  general  proxy  voting  was  adopted.  *  *  *  'p^g  limita- 
tion of  the  right,  incorporated  in  the  revision  of  1867  was  removed  in 
1901 ;  so  that  now  a  proxy  can  represent  more  than  one  stockholder, 
and  one  stockholder  can  be  proxy  for  another.  *  *  *  Whether  the 
charter  or  the  general  law  applies  here,  the  rule  is  that  one  or  many 
stockholders  may  be  represented  at  the  stockholders'  meeting  by  an 
agent.     *     *     * 

Case  discharged.    All  concurred. 


SECTION  7.— RIGHTS   OF  THE   MINORITY 


BO^YmTCH  et  al.  v.  JACKSON  OO.  et  al. 

(Supreme  Court  of  New  Hampshire.  1912.    76  N.  H.  351,  82  Atl.  1014, 
L.  R.  A.  1917A,  1174,  Ann.  Cas.  1913A,  366.) 

PeasleE,  J.  The  main  question  in  this  case  is  whether  a  going 
business  corporation  can  be  closed  out  and  dissolved  upon  the  motion 
of  the  majority  of  its  stockholders  and  against  the  protest  of  the  mi- 
nority. The  question  is  a  new  one  in  this  state,  although  it  has  fre- 
quently been  considered  (both  in  cases  where  it  was  necessarily  involved 
and  those  where  it  was  not)  by  the  courts  in  other  states.  The  deci- 
sions and  dicta  are  conflicting  and  are  quite  evenly  divided.  =s=  *  * 
The  only  case  in  this  state  having  a  direct  bearing  upon  the  subject  is 
Dow  V.  Railroad,  67  N.  H.  1,  36  Atl.  510.  In  that  case  there  was 
an  attempt  to  change  the  business  of  the  corporation ;  and  while  any 
expression  of  opinion  on  the  question  here  involved  was  carefully  avoid- 
ed, yet  the  opinion  of  Chief  Justice  Doe  contains  an  exhaustive  and 
illuminating  discussion  of  the  nature  of  a  corporation  and  the  source 
of  the  power  of  the  majority  to  act  for  it.     The  majority  have  the 


1434  CORroRATiONS  (Part  6^ 

agency  which  in  a  partnership  each  partner  possesses.  Do  they,  in  ad- 
dition thereto,  have  the  power  each  partner  has  to  compel  a  dissohi- 
tion?  The  corporation  being  an  outgrowth  of  the  law  of  partnership, 
it  would  be  reasonable  to  expect  that  so  important  an  incident  to  the 
joint  undertaking  as  the  right  to  terminate  the  enterprise  would  not  be 
lost  by  the  change  in  the  form  of  the  association. 

The  fiction  that  the  corporation  is  a  being  independent  of  those 
who  are  associated  as  its  stockholders  is  not  favored  in  this  state. 
:!=  *  *  Decisions  based  upon  the  idea  that  there  is  something  sacred 
in  the  life  of  an  ordinary  business  corporation,  so  that  action  looking 
to  its  extermination  is  in  the  nature  of  a  fraud  upon  the  state,  *  *  * 
are  not  authority  in  a  jurisdiction  where  a  different  view  of  the  nature 
of  the  association  is  entertained.  The  question  is  not  one  of  power 
granted  by  the  state.  It  relates  solely  to  the  agreement  of  individuals 
with  each  other. 

Did  the  stockholders  who  united  to  form  the  Jackson  Company  in 
1830  understand  that  the  business  must  be  continued  perpetually,  pro- 
vided a  profit  could  be  made  and  some  stockholder  objected  to  closing 
it  out,  or  did  they  understand  that  the  enterprise  could  be  brought  to 
an  end  at  such  time  as  the  majority  believed  to  be  for  the  best  inter- 
est of  all  concerned  ?  The  latter  seems  the  more  reasonable  and  proba- 
ble conclusion. 

Much  has  been  said  in  the  cases  upholding  the  right  of  the  minority 
to  prevent  a  sale  and  dissolution,  concerning  the  protection  of  their 
rights  and  saving  their  property  from  pillage  by  the  majority.  Just 
how  the  majority,  which  sells  its  "own  property  at  the  same  time  and 
for  the  same  price  it  sells  that  of  the  minority,  gains  an  advantage  over 
the  latter  is  not  readily  apparent.  Cases  might  be  supposed,  and  un- 
doubtedly occur,  where  the  majority  do  obtain  some  undue  advantage 
from  the  sale.  No  one  contends  that  such  a  sale  is  valid.  But  because 
the  power  of  the  majority  may  be  abused,  it  does  not  follow  that  it 
does  not  exist.  If  such  a  conclusion  were  to  be  drawn,  minorities  would 
always  rule.  The  plain  common  sense  of  the  matter  is  that  this  is  a 
business  venture,  to  be  carried  on  as  such  so  long  as  it  appears  to  be 
good  business  judgment  to  do  so.  When  the  time  comes  that  a  ma- 
jority in  interest  believe  that  their  affairs  should  be  wound  up  and 
the  proceeds  distributed,  the  rational  rule  is  that  this  should  be  done. 
And  since  the  question  here  is  of  a  business  nature,  and  the  limita- 
tions of  the  power  of  the  majority  are  fixed  by  the  understanding  of 
the  business  men  who  made  the  original  compact,  business  considera- 
tions have  more  than  ordinary  weight  in  determining  what  the  con- 
tract was. 

It  is  admitted  on  all  sides  that  the  majority  may  sell  out  if  the  cor- 
poration is  insolvent.  And  when  brought  face  to  face  with  the  ques- 
tion whether  they  must  wait  until  the  stockholders'  investment  is  all 
lost  before  taking  action,  the  conclusion  has  been  that  if  insolvency  is 
imminent  action  may  be  taken.  And  the  same  is  true  if  it  is  imprudent 
to  continue.  *  *  *  Qng  reason  only  is  given  why  the  power  exists 
in  these  cases :  It  is  reasonable  to  suppose  that  such  authority  was  con- 
templated, because  this  is  what  sound  business  judgment  dictates  should 
be  done.  The.  difference  between  these  cases  and  the  present  one  is  of 
degree  only,  not  of  kind.  The  majority  are  not  obliged  to  wait  until 
all  possibilicy  that  the  corporation  can  go  on  longer  has  been  negatived. 
Some  of  the  cases  have  stated  that  such  is  the  rule ;   but  the  result  of 


Ch.  4)  THE   RKLATION   OF   STOCKHOLDERS   TO   CORPORATION  1435 

this  would  be  to  compel  the  majority  to  continue  a  losing  business 
until  their  investment  was  entirely  wiped  out.  To  avoid  so  absurd  a 
result,  it  has  been  said  they  could  close  out  when  insolvency  seemed  to 
be  approaching.  And  so  various  forms  of  expression  have  been  used  to 
indicate  the  time  when  the  majority  could  take  action. 

All  these  are  fairly  summed  up  in  the  statement  that  the  majority 
may  close  out  the  affairs  of  the  company  when  it  can  no  longer  make 
a  reasonable  profit.  It  is  believed  no  court  would  now  hold  that  the 
rights  of  the  minority  were  more  extensive  than  this  rule  implies. 

If  the  majority  may  sell  to  prevent  greater  losses,  why  may  they 
not  also  sell  to  make  greater  gains  ?  *  *  *  In  a  limited  sense,  the 
majority  act  as  trustees  for  all  the  stockholders.  When  their  acts  are 
impugned  by  the  minority,  it  is  not  the  function  of  the  court  to  set  its 
judgment  against  theirs  in  settling  the  wisdom  or  policy  of  proposed 
action.  By  the  contract  of  association,  all  questions  of  this  nature  were 
committed  to  the  majority  for  final  decision.     ^'-     *     * 

The  whole  difficulty  is  probably  an  outgrowth  of  the  early  idea  that 
a  corporation  possessed  peculiar  attributes  of  longevity  and  sanctity. 
But  as  pointed  out  in  Dow  v.  Railroad,  67  N.  H.  1,  8,  26,  36  Atl.  510, 
no  such  theory  prevails  here.  The  business  corporation  is  brought 
into  being  solely  for  the  purpose  of  more  conveniently  carrying  out  the 
joint  undertaking  of  the  part  owners.  The  line  of  distinction  between 
tTiis  form  of  association  and  certain  partnerships  is  but  a  shadowy  one. 
It  is  not  reasonable  or  natural  to  expect  that  when  this  boundary  is 
passed  great  changes  in  the  relation  of  the  parties  will  result.  A  more 
radical  change  than  that  here  claimed  could  not  easily  be  imagined. 
In  the  partnership,  one  partner  may  compel  a  winding  up  from  mere 
whim.  In  the  absence  of  an  agreement  to  go  on  for  a  fixed  period 
of  time,  nothing  short  of  a  fraudulent  purpose  will  prevent  his  taking 
valid  action  to  close  out  the  firm  at  will.  *  *  *  By  the  rule  here 
contended  for,  the  change  of  the  association  into  a  corporation  has 
carried  the  rule  to  the  opposite  extreme.  The  authority  to  wind  up  is 
lost,  and  the  owner  of  the  smallest  share  may  prevent  such  action, 
though  it  is  desired  by  all  his  associates.  The  practical  reasons  against 
such  a  proposition  are  apparent.  The  probabilities  are  opposed  to  the 
idea  that  the  associates  intended  to  enter  into  such  a  compact.     *     *     * 

The  action  taken  by  a  majority  of  the  stockholders  of  the  Jackson 
Company  whereby,  as  a  part  of  the  process  of  winding  up  the  com- 
pany, they  voted  to  sell  all  its  property  to  the  Nashua  Company,  was 
within  the  power  impliedly  given  to  them  when  the  company  was 
formed.  The  charges  that  there  was  fraud  in  the  sale  and  that  it  was 
for  an  inadequate  price  have  been  disproved. 

Case  discharged.     All  concurred. 


CHICAGO  HANSOM  CAB  CO.  et.  al.  v.  TEiRKES. 

(Supreme  Court  of  Illinois,  1892.     141  111.  320,  30  N.  E.  667, 
33  Am.  St.  Rep.  315.) 

Bill  by  Charles  T.  Yerkes  against  the  Chicago  Hansom  Cab  Com- 
pany, Warren  Springer,  Rose  Aberrethy,  and  others,  to  set  aside  a 
•conveyance,  and  for  an  injunction  and  the  appointment  of  a  receiver. 
ComplainaiU  filed  a   supplemental  bill  to  wind  up  the  affairs  of  the 


1436  CORPORATIONS  (Part  G 

cab  company.  Complainant  obtained  a  decree,  and  Springer  and 
Abernethy  appeal. 

The  secretary  and  one  of  the  stockholders  of  a  corporation  whose 
business  was  unprofitable  secretly  agreed  to  purchase  all  the  stock  and 
the  property  of  the  corporation.  Accordingly  they  purchased,  in  the 
names  of  third  parties,  all  the  stock,  except  that  of  complainant,  who 
held  a  little  more  than  one-third  of  the  stock.  A  resolution  was  pass- 
ed, against  complainant's  vote,  authorizing  the  president  and  secretary 
to  sell  all  the  corporate  property,  which  they  accordingly  sold  to  a 
nominal  purchaser  for  the  benefit  of  the  secretary  and  said  stock- 
holder. 

ScHOLFiKLD,  J.  *  *  *  From  the  foregoing  statement  it  is  clear 
that  when  Needham  entered  into  the  contract  with  Springer  the  for- 
mer was  a  director  in  the  Chicago  Hansom  Cab  Company,  and  its 
secretary.  As  director,  he  owed  the  duty  to  the  company  to  preserve 
its  property  and  protect  the  company  against  loss,  so  far  as  that  could 
be  done  by  the  exercise  of  ordinary  care  and  diligence;  and  he  could 
not  himself  become  the  purchaser  of  any  property  of  the  corporation 
which  it  was  his  duty  to  sell.  *  *  *  T^g  contract  between  Need- 
ham  and  Springer  requires  the  purchase  of  all  the  property  of  the  cab 
company,  and  the  subsequent  transfer  of  the  personal  property  to 
Needham.  It  is  an  entire  and  indivisible  contract,  and  Needham  is 
therefore  directly  interested  in  every  part  of  the  claimed  contract  of 
sale  by  the  company  to  Springer.  But  it  is  claimed  the  authority  to 
make  this  sale  is  derived  from  a  vote  of  a  majority  of  the  stockhold- 
ers.   *    *    * 

The  question  is  therefore  presented  whether,  after  it  is  determined 
to  wmd  up  a  corporation  and  settle  its  business,  it  is  competent  for  a 
holder  of  a  majority  of  its  shares  of  stock  to  make  or  ratify  a  sale 
of  all  its  property  to  himself,  against  the  protest  of  a  holder  of  a 
minority  of  its  shares,  and  in  disregard  of  his  rights.  That  a  holder 
of  a  majority  of  the  shares  of  stock  in  a  corporation  may,  where  the 
law  authorizes  a  vote  of  stockholders,  so  vote  upon  any  matter  of  pol- 
icy in  the  conduct  of  the  corporation  as  to  best  subserve  his  own  in- 
terests, and  that  this  may  relate  to  the  ceasing  to  do  corporate  busi- 
ness, the  winding  up  of  its  affairs,  and  the  sale  of  its  property,  we  do 
not  question.  But  the  authorities  cited  by  counsel  for  appellant  *  *  * 
concede  that  even  in  such  cases  the  action  resulting  from  such  vote 
must  not  be  so  detrimental  to  the  corporation  itself  as  to  lead  to  the 
necessary  inference  that  the  interests  of  the  majority  of  the  sharehold- 
ers lie  wholly  outside  of,  and  in  opposition  to,  the  interests  of  the  cor- 
poration and  of  the  minority  of  the  shareholders,  and  that  their  action 
is  a  wanton  or  a  fraudulent  destruction  of  the  rights  of  such  minor- 
ity. In  the  cases  cited,  and,  so  far  as  we  are  informed,  in  all  other 
cases  where  the  majority  of  the  stockholders  may  by  their  votes  law- 
fully affect  the  interests  of  the  minority  of  the  stockholders,  the  in- 
terests of  the  minority  are,  theoretically  at  least,  protected,  either  by 
directors  or  trustees  of  the  corporation,  who  it  will  not  be  presumed 
will  betray  their  trust  by  acting  in  the  interest  of  one  stockholder  to 
the  prejudice  of  another,  or  by  reason  of  the  transaction  being  such 
as  is  presumed  to  be  alike  beneficial  to  all  stockholders,  as  where  the 
corporate  property  is  in  good  faith  appropriated  to  the  payment  of 
the  corporate  debts,  or  is  sold  at  a  fair  sale ;  and  no  case  cited  or  with- 
in our  knowledge  goes  to  the  extent  of  holding  that  a  majority  of  the 


Ch.  4)  THE   RELATION   OF   STOCKHOLDERS   TO   CORPORATION  1437 

Stockholders  may  take  the  property  of  the  corporation,  and  retain  it, 
if  the  minority  shall  elect  to  deny  its  right  to  acquire  title  to  it  in 
that  way. 

Undovibtedly,  if  in  such  case  the  minority  of  the  stockholders  shall 
elect  to  treat  the  majority  as  purchasers,  they  may  do  so,  and  require 
them  to  account  for  the  value  of  the  property.  Here  Springer,  who, 
through  Pullman,  Himrod,  Hagerty,  Cotton,  and  Cutler,  assumes  to 
ratify  this  sale,  is  the  same  Springer  who,  with  Needham,  is  the  pur- 
chaser of  the  property.  In  other  words,  he  assumes  to  ratify  a  sale 
to  himself.  But  a  man  cannot  be  both  buyer  and  seller  in  the  same 
transaction;  and,  where  he  assumes  to  be  such,  his  action  simply 
amounts  to  a  taking  of  the  property,  and  would  be  quite  as  valid 
without  as  with  the  circumlocution  of  the  form  of  a  sale  through  dum- 
mies. The  right  of  a  majority  of  the  stockholders  to  sell  the  corporate 
property  can  by  no  reasonable  construction  be  held  to  involve  the  right 
to  seize  the  property  to  their  own  use.  A  sale  conducted,  as  it  must 
be,  fairly  and  openly,  cannot,  theoretically,  operate  to  the  prejudice 
of  one  stockholder  more  than  to  another.  There  is  in  such  case  no 
presumptive  antagonism  between  the  different  stockholders.  But 
where,  under  pretense  of  a  sale  to  themselves,  the  majority  seize  the 
propertv,  and  undertake  to  invest  themselves  with  title,  their  interests 
are  wholly  hostile ;  for  the  gain  of  the  one  is  the  loss  of  the  other.  It 
is  a  general  rule  administered  by  courts  of  equity  that  where  one  per- 
son has  the  power  of  disposition  of  the  property  of  another,  without 
the  consent  of  that  other,  he  shall  not  be  allowed  to  become  person- 
ally interested  in  it  himself ;  and  this  without  regard  to  any  question 
of  fairness  in  the  immediate  transaction,  for  he  shall  not  be  allowed 
to  occupy  a  position  where  self-interest  would  tempt  a  betrayal  of 
duty.  This  rule  is  plainly  applicable  here,  and  it  has  been  so  applied 
in  adjudicated  cases.  It  is  said  in  Cook,  Stocks,  §  656:  "It  is  illegal 
and  fraudulent  for  the  majority  of  the  stockholders  to  purchase  the 
property  of  the  company  at  a  sale  authorized  by  themselves.  Such 
a  purchase  by  the  majority  may  be  set  aside  in  the  same  way  and  to 
the  same  extent  that  a  purchase  of  corporate  property  by  a  director 
may  be  set  aside."    *    *    * 

It  appears  from  the  evidence  that  the  directors  of  the  corporation 
were  in  the  interest  and  under  the  control  of  Springer,  so  that  a  de- 
mand upon  the  corporation  to  bring  suit  against  him  would  have  been 
unavailing;  and  the  suit  is  therefore  properly  brought  by  Yerkes. 
*    *    * 

We  are  unable  to  perceive  any  sufficient  reason  for  reversing  the 
decree  below.    It  is  therefore  affirmed. 


SECTION    8.— RIGHT    TO    MAINTAIN    ACTIONS    UPON 
CORPORATE  CAUSES  OF  ACTION 


KESSLER  et  al.  v.  ENSLET  00.  et  al. 

(United  States  Circuit  Court,  N.  D.  Alabama,  S.  D.,  1903.     123  Fed.  546.) 

All  of  the  property  of  a  land  company  which  owned  a  town  site 

and  surrounding  lands  was  sold  under  two  judgments  against  it  for 

a  price  of  about  $16,000,  but  leaving  the  company  the  right  to  redeem 


1438  CORPORATIONS  (Part  6 

within  two  years.  The  company  owed  in  all  about  $120,000,  and  by 
a  subsequent  arrangement,  assented  to  by  its  stockholders,  the  prop- 
erty, together  with  the  right  of  redemption,  was  vested  in  trustees 
with  power  to  make  sales,  to  pay  all  debts,  and  to  hold  or  pay  over 
the  surplus,  if  any,  to  the  company.  Four  years  afterward  certain 
stockholders  applied  to  two  successive  boards  of  directors,  and  also 
to  a  meeting  of  the  stockholders,  asking  that  proceedings  be  insti- 
tuted to  set  aside  the  conveyances  and  to  recover  the  property.  Such 
action  having  been  refused  by  the  directors  and  also  by  the  stock- 
holders by  a  very  large  majority  vote,  minority  stockholders  brought 
suit  for  such  relief  in  behalf  of  the  corporation,  alleging  that  the  sale 
under  the  judgments  was  brought  about  through  the  fraud  of  a  ma- 
jority of  the  directors,  who  controlled  the  judgments,  and  who  form- 
ed another  company  which  purchased  certain  of  the  lands  from  the 
trustees;  that  by  concealing  such  facts  they  obtained  the  approval  of 
all  such  transactions  by  the  stockholders.  It  further  appeared  from 
the  bill  that  at  the  time  complainants  requested  the  corporation  to 
bring  the  suit  such  directors  were  out  of  office,  and  did  not  own  or 
control  a  majority  of  the  stock,  and  it  was  not  charged  that  they  then 
exercised  any  influence  over  the  other  stockholders.  On  demurrer 
to  bill. 

Jones,  District  Judge.  This  case  has  been  ably  and  elaborately  ar- 
guedi  It  is  unnecessary,  however,  to  decide  all  the  interesting  ques- 
tions discussed.  The  right  to  maintain  the  bill  depends  upon  a  few 
controlling  issues,  which  will  now  be  considered. 

Equity  permits  a  stockholder  to  maintain  a  bill  to  enforce  the  rights 
of  his  corporation., solely  to  prevent  a  failure  of  justice.  ^■'-  *  *  To 
entitle  the  stockholder  to  relief,  it  is  not  enough  that  the  governing 
body  has  refused  to  act,  or  that  the  refusal  evinces  mistaken  judg- 
ment. The  stockholder  who  seeks  redress  as  to  any  corporate  act 
wdiich  the  charter  permits  the  corporation  to  perform  must  show  either 
that  the  governing  body  is  so  disorganized  that  it  cannot  act ;  or  that 
it  is  interested  adversely  to  the  corporation,  or  under  the  dominion 
of  those  who  are ;  or  will  be  required  to  disapprove  its  own  breaches 
of  trust,  as  distinguished  from  mistakes  or  errors  of  judgment;  or 
that  its  refusal  will  endanger  the  rights  and  franchises  of  the  corpo- 
ration, or  result  in  irreparable  loss  and  injury;  or  that  its  attitude, 
under  the  situation  presented  by  the  bill,  discloses  negligence  or  in- 
difference to  the  interest  of  the  corporation,  in  such  degree  as  amounts 
to  the  practical  equivalent  of  bad  faith;  or  else  bring  forward  other 
pertinent  facts  which  challenge  and  impeach  the  fitness  of  the  gov- 
erning body  to  properly  decide  the  question  at  issue.  Even  then,  if 
the  case  will  admit  of  delay,  the  complaining  stockholder  must  appeal 
from  the  decision  of  the  directors  to  the  body  of  the  stockholders  at 
large,  and  the  facts  averred  in  the  bill  must  plainly  put  them  in  the 
wrong,  before  the  court  will  feel  authorized  to  entertain  the  com- 
plaint of  the  stockholder.  Hawes  v.  Oakland,  104  U.  S.  450,  26  L. 
Ed.  827.    *    *    * 

It  not  being  charged  in  this  case  that  either  of  the  two  boards,  or 
the  body  of  the  stockholders,  who  declined  to  bring  or  authorize  the 
bringing  of  this  suit,  were  themselves  guilty  participants  in  any  of 
the  frauds  complained  of,  or  in  any  wise  interested  adversely  to  the 
corporation,  or  under  the  dominion  or  control  of  those  who  were  in- 
strumental in  bringing  about  the  sales  sought  to  be  avoided,  or  that 


Ch.  4)  THE   RELATION   OF   STOCKHOLDERS   TO   CORPORATION  1439 

they  acted  otherwise  than  in  the  exercise  of  honest  judgment  as  to 
the  interest  of  the  Land  Company,  their  decision  not  to  litigate  is 
binding  upon  the  court,  unless  that  refusal  will  result  in  enforcing 
some  ultra  vires  or  illegal  act  of  the  corporation,  or  evinces  such 
recklessness  and  indifference  to  the  rights  of  the  corporation  as 
amounts  to  bad  faith  or  fraud,  or  will  needlessly  work  the  practical 
destruction  of  the  corporate  enterprise.  To  properly  determine  these 
questions  the  court  must  look  to  the  status  and  condition  of  aft'airs  as 
they  reasonably  appeared  to  the  stockholders,  under  the  facts  set 
forth  in  the  bill,  at  the  time  of  entering  into  the  transactions  now 
sought  to  be  set  aside,  and  then  weigh  their  decision  not  to  disturb 
them  in  the  light  of  existing  conditions  at  the  time  that  decision  was 
made.     *     *     * 

Making  due  allowance  for  the  charges  on  "information  and  belief," 
and  for  facts  so  stated  as  to  amount  to  no  more  than  the  opinion  of 
the  pleader,  the  bill  charges  actual  fraud  of  a  grave  nature,  not 
merely  constructive  fraud,  upon  all  the  defendants  except  Barker. 
On  the  facts  stated,  a  court  of  equity  would  unquestionably  have 
set  aside  the  sale  on  seasonable  application.  Nevertheless,  under 
decisions  which  are  controlling  here,  the  transactions  complained  of 
were  not  void  as  to  the  corporation,  but  merely  voidable.  *  *  * 
The  title  conveyed  by  the  proceedings  complained  of  was  not  bad 
until  the  Land  Company  made  it  good,  but  remained  good  until  it  was 
made  bad.  It  was  a  defeasible  title  which  would  ripen  into  a  good 
title  if  not  seasonably  avoided.  The  conveyances  were  not  ultra 
vires  the  corporation.  The  Land  Company  was  formed  for  the  pur- 
pose of  selling  this  very  land,  and  the  sales  were  made  in  the  exer- 
cise of  the  corporate  power  of  providing  for  the  debts  of  the  company.. 
The  power  must  reside  somewhere  in  every  corporation,  when  it 
has  been  defrauded,  whether  by  its  own  officers  or  third  persons,  ta 
determine  what  course  it  will  pursue  with  reference  to  the  fraud.  The 
fact  that  the  corporation  has  been  defrauded  does  not  strip  it  of 
power  to  elect  to  stand  upon  the  transaction  as  made.  Every 
wronged  person,  who  is  sui  juris,  has  that  right  against  the  wrong- 
doer. If  the  corporate  tribunal  exercises  its  judgment  upon  the  ques- 
tion honestly,  and  is  not  adversely  interested,  or  under  the  control 
of  other  infliiences  which  sway  it  from  a  fair  and  impartial  judgment, 
from  the  standpoint  of  the  interest  of  the  corporation  itself,  a 
decision  not  to  disturb  the  fraud,  unless  it  evinces  such  recklessness 
and  negligence  as  amounts  to  bad  faith,  is  not  a  fraud  upon  the 
objecting  stockholders,  though  it  results  in  a  refusal  to  redress  a 
fraud  upon  the  corporation.  The  duty  which  the  corporation,  or  its 
governing  body,  owes  its  stockholders  in  such  cases,  is  to  fairly  and 
impartially  consider  the  question  of  redressing  the  wrong,  and  not 
to  commit  a  corporate  fraud  upon  its  stockholders  by  refusing  to  set 
aside  the  fraud  upon  the  corporation  from  selfish  interest  or  other 
bad  motives,  or  from  such  negligence  and  indifference  as  is  equivalent 
to  bad  faith,  and  amounts  to  a  clear  breach  of  trust,  as  distinguished 
from  mere  bad  judgment. 

Complainants  cite  Mason  v.  Harris,  L.  R.  11  Chan.  Div.  97,  in 
support  of  their  contention  that  the  grievances  complained  of  were 
either  incapable  of  ratification,  or  that  the  refusal  to  redress  them, 
under  the  circumstances  here  .disclosed,  amounts  to  a  fraud  upon  the 
minority.     They  quote  the  following  paragraph  from  the  opinion  in 


1440  CORPORATIONS  (Part  6 

that  case:  "Whenever  a  fraud  is  committed  by  persons  who  com- 
mand the  majority  vote,  the  minority  can  sue.  The  reason  is  plain, 
as,  unless  such  suit  were  allowed,  it  would  put  it  in  the  power  of  the 
majority  to  defraud  the  minority  with  impunity.  If  the  majority 
were  to  make  a  fraudulent  sale  and  put  the  money  in  their  own  pock- 
ets, would  it  be  reasonable  to  say  that  the  majority  could  affirrn  the 
sale?"  The  court  was  there  speaking  of  the  injustice  of  compelling  a 
stockholder  to  abide  the  judgment  of  those  who  were  interested  in 
upholding  the  fraud.  It  was  referring  to  the  fitness  of  the  govern- 
ing body  at  the  time  the  individual  stockholder  seeks  redress.  Al- 
though the  defendants  here  had  "command  of  the  majority  vote" 
at  the  time  of  the  grievance  complained  of,  by  reason  of  the  deceit 
charged  in  the  bill,  whereby  the  majority  was  overreached  and  de- 
ceived, just  as  the  complaining  stockholders  charge  they  were,  the 
fact  that  the  majority  had  been  thus  deceived  into  voting  for  the 
proposition  does  not  disqualify  it  from  passing  on  the  matter  when 
discovery  is  made.  It  is  not  to  be  driven  from  the  judgment  seat 
merely  because  it  has  been  the  victim  of  fraud.  It  must  be  shown  to 
have  some  adverse  interest,  or  to  be  under  ulterior  influences  which 
prevent  it  from  fairly  determining  what  is  to  the  best  interest  of  the 
corporation,  under  all  the  circumstances,  in  view  of  the  nature  and 
result  of  the  fraud  practiced  upon  it. 

To  bring  this  case  within  the  rule  of  Mason's  Case,  supra,  the  de- 
fendants must  "command  the  majority  vote"  at  the  time  redress  is 
sought.  Other  cases  cited  in  behalf  of  complainants  on  this  point 
relate  either  to  ultra  vires  or  illegal  acts  of  the  corporation,  as  where 
the  governing  body  to  which  application  for  redress  must  be  made 
has  itself  either  defrauded  the  corporation,  or  is  under  the  control  of 
those  who  overreached  it,  or  is  otherwise  shown  to  be  an  unfit  tribunal 
to  determine  the  policy  of  the  corporation ;  or,  where  the  act  com- 
plained of  not  only  affects  the  rights  of  the  corporation  against  the 
person  sought  to  be  sued,  but  also  involves  some  wrong  by  the  cor- 
poration to  separate  and  individual  rights  of  the  stockholders  against 
their  corporation.  The  principle  which  forbids  the  majority  of  the 
corporation  to  profit  at  the  expense  of  the  minority,  by  condoning 
a  fraud  against  their  corporation,  is  wholesome,  and  not  in  any  wise 
questioned.  We  have  no  such  case  here.  The  great  body  of  the 
stockholders  who  agreed  to  the  transactions  complained  of  in  the 
first  instance,  and  afterwards  refused  to  set  them  aside,  are  shown  to 
have  been  ignorant  of  the  fraud  at  the  time  it  was  committed,  and 
are  not  shown  then,  or  at  any  subsequent  period,  to  have  been  influ- 
enced by  any  interest  adverse  to  the  corporation,  or  by  any  motive 
which  unfits  them  to  pass  upon  the  matter.  Their  vote  refusing  to 
disturb  the  transaction  could  not  put  any  fruits  of  the  wrong  in  their 
pockets.  They  gained  nothing  which  the  minority  lost.  They  ap- 
plied the  identical  measure  of  justice  to  themselves  and  the  dissenting 
stockholders.  As  they  constituted  almost  the  entire  body  of  stock- 
holders, almost  the  entire  burden  of  any  loss  entailed  by  their  deci- 
sion would  fall  upon  them.  On  the  face  of  the  bill,  there  was  un- 
selfish determination. 

The  recovery  sought  by  this  bill  is  for  the  benefit  of  the  corpora- 
tion. The  bill  is  filed  solely  in  right  of  the  corporation,  and  does  not 
seek  to  enforce  any  separate  or  individual  right  of  the  stockholders. 
The  corporation  is  only  a  nominal  defendant.     It  is  the  real  plaintifif. 


Ch.  4)  THE   RELATION   OF   STOCKHOLDERS   TO   CORPORATION  1441 

It  is  clear  upon  principle,  in  such  a  case,  that  the  stockholders  cannot 
maintain  the  suit,  if  the  corporation  itself  is  not  in  position  to  do  so. 
It  is  an  elementary  principle  of  law  that  one  claiming  through  and  in 
subordination  to  a  party  estopped  is  himself  estopped.  The  cases 
which  permit  a  recovery  in  behalf  of  the  corporation,  in  avoidance  of 
transactions  which  it  is  estopped  to  rescind,  because  it  has  consum- 
mated them  and  retained  the  benefit,  are  those  in  which  the  corpora- 
tion has  entered  into  some  ultra  vires  or  illegal  transaction,  done 
something  involving  infraction  of  some  direct  right  of  the  sharehold- 
er against  the  corporation — as  where,  without  the  authority  of  law,  it 
subordinates  the  exercise  of  its  corporate  powers  and  control  of  its 
property  to  the  dominion  of  a  rival,  or  embarks  in  enterprises  not 
authorized  by  the  charter,  or  takes  some  action  impairing  the  rights 
of  the  stockholders  as  among  themselves,  as  by  unlawfully  issuing 
preferred  stock,  and  the  like.  In  such  cases  the  illegal  transaction  is 
a  distinct  wrong  of  the  corporation,  against  the  rights  of  the  stockhold- 
ers separately  and  individually.  It  gives  each  stockholder  a  right  to 
restrain  its  action  and  to  compel  it  to  retrace  its  steps.  In  such  cases, 
justice  can  generally  be  done  only  by  returning  the  corporation  to  its 
original  status,  and  restoring  the  stockholder's  rightful  legal  status 
towards  it,  by  ripping  up  the  whole  transaction,  although  the  corpo- 
ration itself,  as  such,  may  be  estopped  to  complain.  The  stockholders 
in  this  case  are  seeking  to  enforce  no  such  right.  They  demand  the 
enforcement  of  a  right  which  belongs  to  the  corporation  solely,  as 
such.  The  sales  complained  pf  are  not  ultra  vires  the  corporation, 
and  were  not  forbidden  by  statute.  The  grievances  relate  to  transac- 
tions wholly  intra  vires.  The  corporation  has  deliberately  refused  to 
disturb  them.  This  solemn  corporate  decision  puts  an  end  to  any 
right  of  the  dissenting  stockholder  to  disaffirm  or  to  compel  the  cor- 
poration to  avoid  the  transaction. 

An  analysis  of  the  premises  of  the  argument  in  support  of  the  con- 
trary conclusion  shows  that  it  is  unsound.  The  transactions  here 
complained  of  not  being  void,  but  merely  voidable,  who  can  avoid 
them?  Certainly,  only  the  parties  to  the  transaction,  no  rights  of 
creditors  being  involved.  There  are  only  two  parties — the  corpora- 
tion and  the  fraudulent  grantees.  The  latter  cannot  set  up  their  own 
misconduct  to  avoid  the  transaction.  The  former  can  act  only  by 
its  governing  body  or  by  the  stockholders  collectively.  There  is  but 
one  subject-matter,  and  that  is  the  sale  and  purchase  of  the  land. 
The  transactions  must  either  be  good  as  to  the  Land  Company  or 
bad  as  to  the  Land  Company.  They  must  either  be  avoided  in  toto 
or  must  stand  in  toto.  If  one  stockholder,  acting  for  himself,  can 
affirm,  another,  acting  for  himself,  can  disaffirm.  There  is  but  one 
thing  to  affirm,  and  it  must  either  be  binding  upon  all  the  stockholders 
or  not  binding  on  any  of  them.  The  power  to  affirm  or  to  disaffirm 
in  a  case  of  this  kind  is  not  an  individual  prerogative,  but  the  right 
and  power  of  the  whole  body  of  stockholders  collectively.  This  col- 
lective body  must  act  and  decide  according  to  the  vote  of  the  ma- 
jority. "The  rule  is  that  the  majority  governs,  and  every  stockholder 
contracts  that  such  shall  be  the  rule."  Morawetz  on  Corporations,  § 
474.  When,  therefore,  the  majority,  in  such  a  case  as  this,  refuses 
to  disaffirm,  all  right  of  the  majority  to  disaffirm  is  gone.  There  can 
be  but  one  disaffirmance,  and  that  must  be  the  disaffirmance  of  the 
B.&  B.Bus.Law— 91 


1442  coRi'ORATioNS  (Part  6 

governing  body  of  the  corporation.  A  majority  of  the  stockholders,  in 
a  case  of  this  kind,  represent  the  ultimate  corporate  sovereignty, 
within  the  limits  of  its  charter,  and  can  bind  the  minority  by  its  re- 
fusal to  disaffirm  as  to  a  matter  intra  vires.  The  only  remedy  of  the 
minority  is  to  appeal  to  a  court  of  equity  to  enforce  the  rights  of  the 
corporation,  if  the  majority  has  acted  fraudulently,  or  in  bad  faith  to 
the  minority,  in  refusing  to  redress  a  fraud  upon  the  corporation. 
*    *    *    That  charge  is  not  made  here.    *    *     * 

It  may  or  may  not  be,  as  argued  for  complainants,  that  the  Land 
Company,  though  not  now  in  a  position  which  entitles  it  to  the  aid  of 
a  court  of  equity  to  compel  a  reconveyance  of  the  land  or  to  disturb 
the  purchaser's  possession,  is  nevertheless  entitled  to  personal  re- 
course against  the  defendants  "for  the  damage  and  loss  which  the 
Ensley  Land  Company  and  stockholders  have  sufit'ered  by  reason  of 
the  transactions  complained  of,"  etc.  Such  relief,  however,  is  merely 
incidental  to  the  equitable  cause  of  action,  and  when  that  fails  the 
bill  should  not  be  retained  to  administer  relief  which  is  merely  inci- 
dental, and  ordinarily  a  matter  purely  of  legal  cognizance. 

The  demurrers  are  sustained,  and  the  cost  decreed  against  com- 
plainants. If  the  complainants  desire  to  amend,  they  may  apply  for 
leave. 


SECTION   9.— RIGHTS   WITH    RESPECT   TO   DECLARED 
DIVIDENDS  AND  SURPLUS 


SEARLES  V.  GEBBIE  et  al. 

(Supreme  Court  of  New  York,  Appellate  Division,  1906.     115  App.  Div.  778, 

101  N.  Y.  Supp.  199.) 

Spring,  J.  The  defendant  Mohawk  Condensed  Milk  Company  is  a 
domestic  corporation  with  a  paid-up  capital  stock  of  $60,000,  and  the 
plaintiff  is  a  stockholder  thereof,  owning  stock  of  the  par  value  of  $L- 
000,  and  until  January,  1905,  was  one  of  the  directors  of  the  corpora- 
tion.    The  other  defendants  are  its  present  officers  and  directors. 

A  brief  summary  of  the  salient  allegations  of  the  complaint  is  neces- 
sary for  a  comprehension  of  the  questions  at  issue  on  this  appeal.  On 
the  14th  day  of  July,  1902,  the  directors  of  said  corporation  at  a  regu- 
lar meeting  declared  a  dividend  of  50  per  cent,  on  its  capital  stock, 
payable  on  the  1st  of  August  thereafter.  At  the  time  of  the  declaration 
of  the  dividend  there  was  on  hand  a  surplus  of  net  earnings  of  more 
than  $100,000,  and  in  February,  1905,  these  earnings  aggregated  $108,- 
000.  The  plaintifT  has  not  been  paid  his  dividend  of  $500  although  he 
has  demanded  it  and  he  seeks  to  recover  that  sum  of  the  corporation 
in  this  action.  The  complaint  further  alleges :  That  in  1905  the  stock- 
holders by  resolution  voted  to  increase  the  capital  stock  of  said  com- 
pany to  $240,000,  and  the  directors  were  ordered  to  take  the  legal  pro- 
ceedings essential  to  make  effective  this  increase.  The  directors  there- 
upon proceeded  to  provide  for  such  increase  by  allowing  those  taking 
the  new  stock  to  do  so  at  par,  thus  ignoring  the  "more  than  twice  par" 
value  of  the  present  stock  by  reason  of  the  existing  surplus  and  which 
had  been  earned  by  the  present  capital.  The  directors  in  their  plan  of 
increase  expect  to  allow  each  of  the  present  stockholders  to  subscribe 


Ch.  4)  THE    RKLATIOX   OF   STOrKIIOLDERS   TO   CORPORATION  144.*? 

for  three  times  his  present  holding  of  stock,  paying  therefor  in  cash, 
and  the  plaintiff  was  so  advised  and  permitted  to  so  subscribe  for  the 
$3,000  of  stock,  which  would  represent  his  aliquot  share  of  the  in- 
creased capital.  That  the  defendant  directors  have  each  subscribed  for 
their  shares  of  said  increase  and  they  control  said  corporation  and  own 
a  majority  of  its  stock.  In  January,  1905,  the  plaintiff  was  dropped 
from  the  directorship  and  there  were  other  changes  in  that  body,  and 
the  plaintiff  charges  that  the  election  of  new  officers  "was  pursuant  to 
a  fraudulent  agreement  or  understanding"  among  these  majority  stock- 
holders to  refuse  to  pay  the  said  dividend,  "and  thereby  to  reappropri- 
ate  said  dividend  to  the  company,  and  to  share  in  said  dividends  and 
receive  the  benefits  thereof,  under  their  new  subscription  to  increase 
the  capital  stock  of  the  said  company,  their  said  new  subscriptions 
being  at  par,  whereas  the  old  stock  of  said  company  is  fully  worth 
considerable  more  than  $200  on  a  share."  That  the  plaintiff  has  "pro- 
tested" against  this  proposed  issue  of  new  stock,  and  has  requested  the 
corporation  to  commence  an  action  in  equity  to  restrain  its  issue  and 
also  to  require  the  corporation  to  pay  the  dividend  declared,  and  upon 
refusal  this  action  was  commenced  on  his  own  behalf  as  a  minority 
stockholder,  and  for  the  benefit  of  all  other  stockholders  similarly  sit-' 
uated  who  desire  to  participate  therein.  The  relief  asked  for  is  the 
payment  of  the  dividend  to  the  plaintiff  and  to  restrain  the  proposed 
increase  of  the  capital  stock.    *    *    * 

There  is  a  clean-cut  cause  of  action  at  law  set  forth  against  the  cor- 
poration. Upon  the  declaration  of  the  dividend  the  sum  of  $500  be- 
came due  the  plaintiff  from  the  corporation.  It  became  the  debtor  of 
the  plaintiff".  *  *  *  'pj-jg  directors  were  not  personally  chargeable 
with  the  payment  of  this  dividend  unless  they  converted  it  to  their 
own  use,  or  by  some  act  changed  their  relation  to  it.  At  any  time  after 
the  date  fixed  for  the  payment  of  the  dividend  the  plaintiff  could  have 
maintained  an  action  at  law  against  the  corporation  to  recover  this 
sum.  Nor  was  a  suit  in  equity  proper  for  an  adequate  remedy  at  law 
existed,  and  the  directors  would  not  be  proper  parties  defendant  in  an 
action  to  recover  this  sum.  They  are  not  the  debtor,  but  the  corpora- 
tion is  the  party  liable.  Now,  where  the  amount  of  the  dividend  has 
been  segregated  or  set  apart  into  a  distinct  fund  for  the  purpose  of 
paying  the  dividend  and  is  within  the  dominion  of  the  directors,  who 
refuse  to  use  it  for  the  purpose  intended,  they  become  trustees  of  the 
fund,  and  an  action  in  equity  may  be  maintained  to  reach  the  fund 
and  to  charge  the  directors  with  official  misconduct.  *  *  *  f  he 
complaint  contains  every  allegation  essential  to  constitute  a  perfect 
cause  of  action  to  recover  this  dividend  of  the  corporation,  and  the 
facts  alleged  are  supplemented  in  the  demand  for  judgment  that  the 
corporation  be  required  to  pay  the  dividend  with  interest.    *    *    * 


DODGE  et  al.  v.  FORD  MOTOR  CO.  et  al. 

(Supreme  Court  of  Mir-hiffan,  1919.     204  Mich.  459,  170  X.  W.  668, 
3  A.   L.   R.  413.) 

Action  by  John  F.  Dodge  and  Horace  E.  Dodge  against  the  Ford 
Motor  Company  and  others.  Decree  for  plaintiffs,  and  defendants 
appeal. 

The  Ford  Motor  Company  is  a  corporation,  organized  and  existing 
under  Act  No.  232  of  the  Public  Acts  of  1903.     The  articles  of  as- 


1444  CORPORATIONS  (Part  6 

sociation  were  executed  June  16,  1903,  and  acknowledged  on  that  day 
by  the  parties  associating.  In  the  articles  the  capital  stock  is  fixed  at 
the  sum  of  $150,000,  with  1,500  shares  of  the  par  value  of  $100  each. 
It  is  recited  therein  that  the  amount  of  capital  stock  subscribed  is 
$100,000,  and  that  said  sum  is  actually  paid  in,  $49,000  in  cash  and 
$51,000  in  other  property.  The  other  property  described  is:  Letters 
patent,  issued  and  applied  for,  valued  at  $40,000;  machinery  and 
stock,  $10,000;    contracts  for  supplies,  $1,000. 

The  parties  in  the  first  instance  associating,  who  signed  the  articles, 
included  Henry  Ford,  whose  subscription  was  for  255  shares,  John 
F.  Dodge,  Horace  E.  Dodge,  the  plaintiffs,  Horace  H.  Rackham  and 
James  Couzens,  who  each  subscribed  for  50  shares,  and  several  other 
persons.  The  company  began  business  in  the  month  of  June.  1903. 
In  the  year  1908,  its  articles  were  amended  and  the  capital  stock  in- 
creased from  $150,000  to  $2,000,000,  the  number  of  shares  being  in- 
creased to  20,000;  and  in  the  certificate,  made  in  November,  1908, 
evidencing  the  increase  of  capital  stock,  it  w^as  recited :  "The  amount 
of  capital  stock  subscribed  is  the  sum  of  two  million  ($2,000,000)  dol- 
lars; the  amount  of  said  stock  actually  paid  in  at  the  date  thereof  is 
the  sum  of  two  million  ($2,000,000)  dollars,  of  which  one  hundred 
thousand  ($100,000)  dollars  represents  the  capital  stock  originally 
subscribed  and  paid  in,  and  one  million  nine  hundred  thousand  ($1,- 
900,000)  dollars  by  surrender  to  the  corporation  by  all  stockholders 
of  their  claim  to  dividends  duly  declared  by  the  board  of  directors 
payable  out  of  surplus." 

The  business  of  the  company  continued  to  expand.  The  cars  it 
manufactured  met  a  public  demand,  and  were  profitably  marketed,  so 
that,  in  addition  to  regular  quarterly  dividends  equal  to  5  per  cent, 
monthly  on  the  capital  stock  of  $2,000,000,  its  board  of  directors  de- 
clared and  the  company  paid  special  dividends:  December  13,  1911, 
$1,000,000;  May  15,  1912,  $2',000,000;  Julv  11.  1912,  $2,000,000; 
June  16.  1913,  $10,000,000:  Mav  14,  1914,  $2^000,000:  June  12,  1914, 
$2,000,000;  Julv  6,  1914,  $2,000,000;  Julv  23,  1914,  $2,000,000;  Au- 
gust 23,  1914,  $3,000,000;  Mav  28,  1915,  $10,000,000;  October  13, 
1915,  $5,000,000,  a  total  of  $41,000,000  in  special  dividends.  Sales  and 
profits  for  several  vears  were  :  Year  ending  Sept.  30,  1910,  18,664  cars, 
$4,521,509.51.  Year  ending  Sept.  30.  1911,  34.446  cars,  $6,275,031.07. 
Year  ending  Sept.  30,  1912,  68,544  cars,  $13,057,312.24.  Year  ending 
Sept.  30,  1913,  168,304  cars,  $25,046,767.43.  Year  ending  Sept.  30, 
1914,  248,307  cars,  $30,338,454.63.  Ten  months  ending  July  31,  1915, 
264,351  cars,  $24,641,423.17.  Three  vears  ending  July  31,  1916,  472,- 
350  cars,  $59,994,918.01. 

The  surplus  above  capital  stock  was,  September  30,  1912,  $14,745,- 
095.67,  and  was  increased  year  by  vear  to  $28,124,173.68,  $48,827,- 
032.07,  $59,135,770.66.  July  31,  1916,  it  was  $111,960,907.53.  Orig- 
inally, the  car  made  by  the  Ford  Motor  Company  sold  for  more  than 
$900.  From  time  to  time,  the  selling  price  was  lowered  and  the  car  itself 
improved  until  in  the  vear  ending  Julv  31,  1916,  it  sold  for  $440.  Up 
to  July  31,  1916,  it  had  sold  1,272,986  cars  at  a  profit  of  $173,895,416.- 
06.  As  the  cars  in  use  multiplied,  sales  of  parts  and  of  repairs  increas- 
ed, so  that,  in  the  year  ending  July  31,  1916,  the  gross  profits  from 
repairs  and  parts  was  $3,915,778.94;  sales  being  more  than  $600,000 
for  each  of  the  months  of  May,  June,  and  July.  For  the  year  begin- 
ning August  1,  1916,  the  price  of  the  car  was  reduced  $80  to  $360. 


Ch.  4)         THE   RELATION   OF   STOCKHOLDERS  TO   CORPORATION  1445 

The  following  is  admitted  to  be  a  substantially  correct  statement  of 
the  financial  affairs  of  the  company  on  July  31,  191C: 

Assets. 

Working — 

Cash  on  hand  and  in  hank $  52,550,771  92 

Michigan    municipal   honds 1,259,029  01 

Accounts    receivahle ' 8,292,778  41 

Merchandise  and  supplies 31,895,434  69 

Investments— outside     9,200  00 

Expense    inventories 434,055  19 

Plant- 
Land     5.232,156  10 

Buildings  and   fixtures 17,293.293  40 

Machinery  and  power  plant S,8!K>.342  31 

Factory    equipment 3,808.201  02 

Tools   ■ 1,690.088  54 

Patterns    170.019  77 

Patents 64,339  85 

Office     equipment 431,249  37 

Total  assets $132,088,219  58 

Lia)iilities. 

Worlving — 

Accounts   pavable " $  7,680,866  17 

Contract   deposits 1,519.296  40 

Accrued   pay    rolls 847,953  68 

Accrued     salaries 338,268  86 

Accrued     expenses 1,175.070  72 

Contract    rebates 2,199,986  00 

Buyers'  P.  S.   rebate 48,099  00 

Reserves — 

For   fire  insurance 57,493  89 

For  depreciation  of  plant 4,200,275  33 

Total     liabilities $  18,127.312  05 

Surplus    111,960.907  53 

Capital    stock 2,000,000  00 

Total .$132,088,219  58 

The  following  statement  gives  details  of  the  business  of  the  Ford 
Motor  Company  for  the  fiscal  year  July  31,  1915,  to  July  31,  1916: 

Number  of  cars  made  in  year 508,000 

Total   business    done $206,867,347  46 

Profit  for  the   year 59,994,118  01 

Cash  in  hand  and  in  banks 52,550.771  92 

Materials  on  hand 31,895,434  69 

Cars  in  transit  and  at  branch  assembling  plants   (about   2^2   weeks' 

output)    35,650 

Cars  sold  during  year 472,350 

Employed  at  home  plant 34,489 

Eujployed  at  home  offices 1,028 

Total  employes  in  Detroit  plant  getting  $5  a  day  or  more 27,002 

Employed  at  84  branch  plants 14,355 

Total  employes    (all   plants) 49,872 

Total  employes  getting  $5  a  day  or  more 36,626 

From  a  mere  assembling  plant,  the  plant  of  the  Ford  Motor  Com- 
pany came  to  be  a  manufacturing  plant,  in  which  it  made  many  of 
the  parts  of  the  car  which  in  the  beginning  it  had  purchased  from 
others.  At  no  time  has  it  been  able  to  meet  the  demand  for  its  cars 
or  in  a  large  way  to  enter  upon  the  manufacture  of  motor  trucks. 

No  special  dividend  having  been  paid  after  October,  1915  (a  special 
dividend  of  $2,000,000  was  declared  in  November,  1916,  before  the 


1446  coRroRATioxs  (Part  G 

filing  of  the  answers),  the  plaintiffs,  who  together  own  2,000  shares, 
or  one-tenth  of  the  entire  capital  stock  of  the  Ford  Motor  Company, 
on  the  2d  of  November.  1916.  filed  in  the  circuit  court  for  the  county  of 
Wayne,  in  chancery,  their  bill  of  complaint,  which  bill  was  later, 
upon  leave  granted,^  on  April,  26,  1917,  amended,  in  which  bill  they 
charge  that  since  1914  they  have  not  been  represented  on  the  board 
of  directors  of  the  Ford  Motor  Company,  and  that  since  that  time  the 
policy  of  the  board  of  directors  has  been  dominated  and  controlled 
absolutely  by  Henry  Ford,  the  president  of  the  company,  who  owns 
and  for  several  years  has  owned  58  per  cent,  of  the  entire  capital  stock 
of  the  company';  that  the  directors  of  the  company  are  Henry  Ford, 
David  H.  Gray,  Horace  H.  Rackham,  F.  L.  Klingensmith.  and  James 
Couzens,  and  the  executive  officers  Henry  Ford,  president,  F.  L. 
Klingensmith,  treasurer,  and  Edsel  B.  Ford,  son  of  Henry  Ford, 
secretary;  that  after  the  filing  of  the  original,  and  before  the  filing  of 
the  amended,  bill,  at  the  annual  meeting  of  the  stockholders,  David  H. 
Gray  retired  from  the  board  of  directors  and  Edsel  B.  Ford  was  elect- 
ed and  is  acting  as  a  director. 

Setting  up  that  on  the  31st  of  July,  1916.  the  end  of  its  last  fiscal 
year,  the  said  Henry  Ford  gave  out  for  publication  a  statement  of  the 
"financial  condition  of  the  company  (the  same  as  hereinabove  set  out), 
that  for  a  number  of  years  a  regular  dividend,  payable  quarterly,  equal 
to  5  per  cent,  monthly  upon  the  authorized  capital  stock,  and  the  special 
dividends  hereinbefore  referred  to,  had  been  paid,  it  is  charged  that 
notwithstanding  the  earnings  for  the  fiscal  year  ending  July  31,  1916, 
the  Ford  IMotor  Company  has  not  since  that  date  declared  any  special 
dividends :  "And  the  said  Henry  Ford,  president  of  the  company, 
has  declared  it  to  be  the  settled  policy  of  the  company  not  to  pay  in 
the  future  any  special  dividends,  but  to  put  back  into  the  business  for 
the  future  all  of  the  earnings  of  the  company,  other  than  the  regular 
dividend  of  five  per  cent.  (5%)  monthly  upon  the  authorized  capital 
stock  of  the  company — two  million  dollars  ($2,000,000)." 

This  declaration  of  the  future  policy,  it  is  charged  in  the  bill  was 
published  in  the  public  press  in  the  city  of  Detroit  and  throughout  the 
United  States  in  substantially  the  following  language :  "  'My  ambi- 
tion,' declared  Mr.  Ford,  'is  to  employ  still  more  men ;  to  spread  the 
benefits  of  this  industrial  .system  to  the  greatest  possible  number,  to 
help  them  build  up  their  lives  and  their  homes.  To  do  this,  we  are 
putting  the  greatest  share  of  our  profits  back  into  the  business.'  " 

It  is  charged  further  that  the  said  Henry  Ford  stated  to  plaintift's 
personally,  in  substance,  that  as  all  the  stockholders  had  received  back 
in  dividends  more  than  they  had  invested  they  were  not  entitled  to 
receive  anything  additional  to  the  regular  dividend  of  5  per  cent,  a 
month,  and  that  it  was  not  his  policy  to  have  larger  dividends  declared 
in  the  future,  and  that  the  profits  and  earnings  of  the  company  would 
be  put  back  into  the  business  for  the  purpose  of  extending  its  opera- 
tions and  increasing  the  number  of  its  employes,  and  that,  inasmuch 
as  the  profits  were  to  be  represented  by  investment  in  plants  and  capital 
investment,  the  stockholders  would  have  no  right  to  complain.  It  is 
charged  (paragraph  16)  that  the  said  Henry  Ford,  "dominating  and 
controlling  the  policy  of  said  company,  has  declared  it  to  be  his  pur- 
pose— and  he  has  actually  engaged  in  negotiations  looking  to  carrying 
such  purposes  into  effect — to  invest  millions  of  dollars  of  the  company's 
money  in  the  purchase  of  iron  ore  mines  in  the  Northern  Peninsula 


Ch.  4)  THE   RELATION   OF   STOCKHOLDERS   TO   CORPORATION  1447 

of  Michigan  or  state  of  Minnesota;  to  acquire  by  purchase  or  have 
built  ships  for  the  purpose  of  transporting  such  ore  to  smelters  to  be 
erected  on  the  River  Rouge  adjacent  to  Detroit  in  the  county  of  Wayne 
and  state  of  Michigan;  and  to  construct  and  install  steel  manufac- 
turing plants  to  produce  steel  products  to  be  used  in  the  manufacture 
of  cars  at  the  factory  of  said  company;  and  by  this  means  to  de- 
prive the  stockholders  of  the  company  of  the  fair  and  reasonable  re- 
turns upon  their  investment  by  way  of  dividends  to  be  declared  upon 
their  stockholding  interest  in  said  company." 

Plaintiffs  ask  for  an  injunction  to  restrain  the  carrying  out  of  the  al- 
leged declared  policy  of  Mr.  Ford  and  the  company,  for  a  decree  re- 
quiring the  distribution  to  stockholders  of  at  least  75  per  cent,  oi  the 
accumulated  cash  surplus,  and  for  the  future  that  they  be  required  to 
distribute  all  of  the  earnings  of  the  company  except  such  as  may  be 
reasonably  required  for  emergency  purposes  in  the  conduct  of  the  busi- 
ness. 

The  cause  came  on  for  hearing  in  open  court  on  the  21st  of  May, 
1917.  A  large  volume  of  testimony  was  laken,  with  the  result  that  a 
decree  was  entered  December  5,  1917,  in  and  by  which  it  is  decreed  that 
within  30  days  from  the  entry  thereof  the  directors  of  the  Ford  Motor 
Company  declare  a  dividend  upon  all  of  the  shares  of  stock  in  an  amount 
equivalent  to  one-half  of,  and  payable  out  of,  the  accumulated  cash 
surplus  of  said  Ford  Motor  Company,  on  hand  at  the  close«of  the  fiscal 
year  ending  July  31,  1916,  less  the  aggregate  amount  of  the  special 
dividends  declared  and  paid  after  the  filing  of  the  bill  and  during  the 
year  ending  July  31,  1917;  the  amount  to  be  declared  being  $19,275,- 
385.96. 

OsTRANDER,  C.  J.  *  *  *  The  case  for  plaintiffs  must  rest  upon 
the  claim,  and  the  proof  in  support  of  it,  that  the  proposed  expansion 
of  the  business  of  the  corporation,  involving  the  further  use  of  profits 
as  capital,  ought  to  be  enjoined  because  inimical  to  the  best  interests 
of  the  company  and  its  shareholders,  and  upon  the  further  claim  that 
in  any  event  the  withholding  of  the  special  dividend  asked  for  by  plain- 
tiffs is  arbitrary  action  of  the  directors  requiring  judicial  interference. 

The  rule  which  will  govern  courts  in  deciding  these  questions  is  not 
in  dispute.  It  is,  of  course,  differently  phrased  by  judges  and  by  au- 
thors, and,  as  the  phrasing  in  a  particular  instance  may  seem  to  lean 
for  or  against  the  exercise  of  the  right  of  judicial  interference  with 
the  actions  of  corporate  directors,  the  context,  or  the  facts  before  the 
court,  must  be  considered.  This  court,  in  Hunter  v.  Roberts,  Throp 
&  Co.,  83  Mich.  63,  71,  47  N.  W.  131,  134,  recognized  the  rule  in  the 
following  language :  "It  is  a  well-recognized  principle  of  law  that  the 
directors  of  a  corporation,  and  they  alone,  have  the  power- to  declare  a 
dividend  of  the  earnings  of  the  corporation,  and  to  determine  its 
amount.  *  *  *  Courts  of  equity  will  not  interfere  in  the  manage- 
ment of  the  directors  unless  it  is  clearly  made  to  appear  that  they  are 
guilty  of  fraud  or  misappropriation  of  the  corporate  funds,  or  refuse 
t'o  declare  a  dividend  when  the  corporation  has  a  surplus  of  net  profits 
which  it  can,  without  detriment  to  its  business,  divide  among  its  stock- 
holders, and  when  a  refusal  to  do  so  would  amount  to  such  an  abuse 
of  discretion  as  would  constitute  a  fraud,  or  breach  of  that  good  faith 
which  they  are  bound  to  exercise  towards  the  stockholders.". 

In  Cook  on  Corporations  (7th  Ed.)  §  545,  it  is  expressed  as  follows: 
"The  board  of  directors  declare  the  dividends,  and  it  is  for  the  direc- 


1448  CORPORATIONS  (Part  6 

tors,  and  not  the  stockholders,  to  determine  whether  or  not  a  dividend 
shall  be  declared.  When,  therefore,  the  directors  have  exercised  this 
discretion  and  refused  to  declare  a  dividend,  there  will  be  no  inter- 
ference by  the  courts  with  their  decision,  unless  they  are  guilty  of  a 
willful  abuse  of  their  discretionary  powers,  or  of  bad  faith  or  of  a 
neglect  of  duty.  It  recjuires  a  very  strong  case  to  induce  a  court  of 
equity  to  order  the  directors  to  declare  a  dividend,  inasmuch  as  equity 
has  no  jurisdiction,  unless  fraud  or  a  breach  of  trust  is  involved. 
There  have  been  many  attempts  to  sustain  such  a  suit,  yet,  although  the 
courts  do  not  disclaim  jurisdiction,  they  have  quite  uniformly  refused 
to  interfere.  The  discretion  of  the  directors  will  not  be  interfered  with 
by  the  courts,  unless  there  has  been  bad  faith,  willful  neglect,  or  abuse 
of  discretion.  Accordingly,  the  directors  may,  in  the  fair  exercise  of 
their  discretion,  invest  profits  to  extend  and  develop  the  business,  and 
a  reasonable  use  of  the  profits  to  provide  additional  facilities  for  the 
business  cannot  be  objected  to  or  enjoined  by  the  stockholders." 

In  Morawetz  on  Corporations  (2d  Ed.)  §  447,  it  is  stated :  "Profits 
earned  by  a  corporation  may  be  divided  among  its  shareholders,  but 
it  is  not  a  violation  of  the  charter  if  they  are  allowed  to  accumulate 
and  remain  invested  in  the  company's  business.  The  managing  agents 
of  a  corporation  are  impliedly  invested  with  a  discretionary  power  with 
regard  to  the  time  and  manner  of  distributing  its  profits.  They  may 
apply  profits  in  payment  of  floating  or  funded  debts,  or  in  development 
of  the  company's  business ;  and  so  long  as  they  do  not  abuse  their  dis- 
cretionary powers,  or  violate  the  company's  charter,  the  courts  cannot 
interfere.  But  it  is  clear  that  the  agents  of  a  corporation,  and  even 
the  majority,  cannot  arbitrarily  withhold  profits  earned  by  the  com- 
pany, or  apply  them  to  any  use  which  is  not  authorized  by  the  com- 
pany's charter.  The  nominal  capital  of  a  company  does  not  necessarily 
limit  the  scope  of  its  operations ;  a  corporation  may  borrow  money  for 
the  purpose  of  enlarging  its  business,  and  in  many  instances  it  may  use 
profits  for  the  same  purpose.  But  the  amount  of  the  capital  contributed 
by  the  shareholder's  is  an  important  element  in  determining  the  limit 
beyond  which  the  company's  business  cannot  be  extended  by  the  in- 
vestment of  profits.  If  a  corporation  is  formed  with  a  capital  of  $100,- 
OCO,  in  order  to  carry  on  a  certain  business,  no  one  would  hesitate  to 
say  that  it  would  be  a  departure  from  the  intention  of  the  founders 
to  withhold  profits,  in  order  to  develop  the  company's  business,  until 
the  sum  of  $500,000  had  been  amassed,  unless  the  company  was  formed 
mainly  for  the  purpose  of  accumulating  the  profits  from  year  to  year. 
The  question  in  each  case  depends  upon  the  use  to  which  the  capital 
is  put  and  the  meaning  of  the  company's  charter.  If  a  majority  of  the 
shareholders  or  the  directors  of  a  corporation  wrongfully  refuse  to 
declare  a  dividend  and  distribute  profits  earned  by  the  company,  any 
shareholder  feeling  aggrieved  may  obtain  relief  in  a  court  of  equity. 
It  may  often  be  reasonable  to  withhold  part  of  the  earnings  of  a 
corporation  in  order  to  increase  its  surplus  fund,  when  it  would  not  be 
reasonable  to  withhold  all  the  earnings  for  that  purpose.  The  share- 
holders forming  an  ordinary  business  corporation  expect  to  obtain  the 
profits  of  their  investment  in  the  form  of  regular  dividends.  To  with- 
hold the  entire  profits  merely  to  enlarge  the  capacity  of  the  company's 
business  would  defeat  their  just  expectations.  After  the  business 
of  a  corporation  has  been  brought  to  a  prosperous  condition,  and  nec- 
essary provision  has  been  made  for  future  prosperity,  a  reasonable 


Ch.  4)  THE   RELATION   OE   STOCKHOLDERS   TO   CORPORATION  1449 

share  of  the  profits  should  be  applied  in  the  payment  of  regular  divi- 
dends, though  a  part  may  be  reserved  to  increase  the  surplus  and  en- 
large the  business  itself."     *     *     * 

It  is  not  necessary  to  multiply  statements  of  the  rvile.  To  develop 
the  points  now  discussed,  and  to  a  considerable  extent  they  may  be  de- 
veloped together  as  a  single  point,  it  is  necessary  to  refer  with  some 
particularity  to  the  facts. 

When  plaintiffs  made  their  complaint  and  demand  for  further  divi- 
dends, the  Ford  Motor  Company  had  concluded  its  most  prosperous 
year  of  business.  The  demand  for  its  cars  at  the  price  of  the  preced- 
ing year  continued.  It  could  make  and  could  market  in  the  year  be- 
ginning August  1,  1916,  more  than  500,000  cars.  Sales  of  parts  and  re- 
pairs would  necessarily  increase.  The  cost  of  materials  was  likely  to 
advance,  and  perhaps  the  price  of  labor ;  but  it  reasonably  might  have 
expected  a  profit  for  the  year  of  upwards  of  $60,000,000.  It  had  as- 
sets of  more  than  $132,000,000,  a  surplus  of  almost  $112,000,000,  and 
its  cash  on  hand  and  municipal  bonds  were  nearly  $54,000,000.  Its 
total  liabilities,  including  capital  stock,  was  a  little  over  $20,000,000. 
It  had  declared  no  special  dividend  during  the  business  year  except  the 
October,  1915,  dividend.  It  had  been  the  practice,  under  similar  cir- 
cumstances, to  declare  larger  dividends.  Considering  only  these  facts, 
a  refusal  to  declare  and  pay  further  dividends  appears  to  be  not  an 
exercise  of  discretion  on  the  part  of  the  directors,  but  an  arbitrary  re- 
fusal to  do  what  the  circumstances  required  to  be  done.  These  facts 
and  others  call  upon  the  directors  to  justify  their  action,  or  failure  or 
refusal  to  act. 

In  justification,  the  defendants  have  offered  testimony  tending  to 
prove,  and  which  does  prove,  the  following  facts :  It  had  been  the 
policy  of  the  corporation  for  a  considerable  time  to  annually  reduce  the 
selling  price  of  cars,  while  keeping  up,  or  improving,  their  quality.  As 
early  as  in  June,  1915,  a  general  plan  for  the  expansion  of  the  pro- 
ductive capacity  of  the  concern  by  a  practical  duplication  of  its  plant 
had  been  talked  over  by  the  executive  officers  and  directors  and  agreed 
upon;  not  all  of  the  details  having  been  settled,  and  no  formal  ac- 
tion of  directors  having  been  taken.  The  erection  of  a  smelter  was 
considered,  and  engineering  and  other  data  in  connection  therewith  se- 
cured. In  consequence,  it  was  determined  not  to  reduce  the  selling 
price  of  cars  for  the  year  beginning  August  1,  1915,  but  to  maintain 
the  price  and  to  accumulate  a  large  surplus  to  pay  for  the  proposed 
expansion  of  plant  and  equipment,  and  perhaps  to  build  a  plant  for 
smelting  ore.  It  is  hoped,  by  Mr.  Ford,  that  eventually  1,000,000  cars 
will  be  annually  produced.  The  contemplated  changes  will  permit 
the  increased  output. 

The  plan,  as  affecting  the  profits  of  the  business  for  the  year  begin- 
ning August  1,  1916,  and  thereafter,  calls  for  a  reduction  in  the  selling 
price  of  the  cars.  It  is  true  that  this  price  might  be  at  any  time  in- 
creased, but  the  plan  called  for  the  reduction  in  price  of  $80  a  car. 
The  capacity  of  the  plant,  without  the  additions  thereto  voted  to  be 
made  (without  a  part  of  them  at  least),  would  produce  more  than  600,- 
000  cars  annually.  This  number,  and  more,  could  have  been  sold  for 
$440  instead  of  $360,  a  difference  in  the  return  for  capital,  labor,  and 
materials  employed  of  at  least  $48,000,000.  In  short,  the  plan  does 
not  call  for  and  is  not  intended  co  produce  immediately  a  more  profita- 
ble business,  but  a  less  profitable  one ;  not  only  less  profitable  than  for- 


1450  conroRATioNS  (Part  6 

merly,  but  less  profitable  than  it  is  admitted  it  might  be  made.  The 
apparent  immediate  effect  will  be  to  diminish  the  value  of  shares  and 
the  returns  to  shareholders. 

It  is  the  contention  of  plaintiffs  that  the  apparent  effect  of  the  plan 
is  intended  to  be  the  continued  and  continuing  effect  of  it,  and  that  it 
is  deliberately  proposed,  not  of  record  and  not  by  official  corporate  dec- 
laration, but  nevertheless  proposed,  to  continue  the  corporation  hence- 
forth as  a  semi-eleemosynary  institution  and  not  as  a  business  institu- 
tion. In  support  of  this  contention,  they  point  to  the  attitude  and  to 
the  expressions  of  Mr.  Henry  Ford. 

Mr.  Henry  Ford  is  the  dominant  force  in  the  business  of  the  Ford 
Motor  Company.  No  plan  of  operations  could  be  adopted  unless  he 
consented,  and  no  board  of  directors  can  be  elected  whom  he  does  not 
favor.  One  of  the  directors  of  the  company  has  no  stock.  One  share 
was  assigned  to  him  to  qualify  him  for  the  position,  but  it  is  not  claimed 
that  he  owns  it.  A  business,  one  of  the  largest  in  the  world,  and  one 
of  the  most  profitable,  has  been  built  up.  It  employs  many  men,  at 
good  pay.  "My  ambition,"  said  Mr.  Ford,  "is  to  employ  still  more 
men,  to  spread  the  benefits  of  this  industrial  system  to  the  greatest 
possible  number,  to  help  them  build  up  their  lives  and  their  homes. 
To  do  this  we  are  putting  the  greatest  share  of  our  profits  back  in  the 
business."  "With  regard  to  dividends,  the  company  paid  sixty  per 
cent,  on  its  capitalization  of  two  million  dollars,  or  $1,200,000,  leav- 
ing $58,000,000  to  reinvest  for  the  growth  of  the  company.  This  is 
Mr.  Ford's  policy  at  present,  and  it  is  understood  that  the  other  stock- 
holders cheerfully  accede  to  this  plan."  He  had  made  up  his  mind 
in  the  summer  of  1916  that  no  dividends  other  than  the  regular  divi- 
dends should  be  paid,  "for  the  present."     *     *     * 

The  record,  and  especially  the  testimony  of  Mr.  Ford,  convinces 
that  he  has  to  some  extent  the  attitude  towards  the  shareholders  of 
one  who  has  dispensed  and  distributed  to  them  large  gains  and  that  they 
should  be  content  to  take  what  he  chooses  to  give.  His  testimony  cre- 
ates the  impression,  also,  that  he  thinks  the  Ford  Motor  Company  has 
made  too  much  money,  has  had  too  large  profits,  and  that,  although 
large  profits  might  be  still  earned,  a  sharing  of  them  with  the  public, 
by  reducing  the  price  of  the  output  of  the  company,  ought  to  be  under- 
taken. We  have  no  doubt  that  certain  sentiments,  philanthropic  and 
altruistic,  creditable  to  Mr.  Ford,  had  large  influence  in  determining 
the  policy  to  be  pursued  by  the  Ford  Motor  Company — the  policy  which 
has  been  herein  referred  to. 

It  is  said  by  his  counsel  that  "although  a  manufacturing  corpora- 
tion cannot  engage  in  humanitarian  works  as  its  principal  business,  the 
fact  that  it  is  organized  for  profit  does  not  prevent  the  existence  of 
implied  powers  to  carry  on  with  humanitarian  motives  such  charitable 
works  as  are  incidental  to  the  main  business  of  the  corporation." 
*     *     * 

In  discussing  this  proposition,  counsel  have  referred  to  decisions  such 
as  Hawes  v.  Oakland,  104  U.  S.  450,  26  L.  Ed.  827.  *  *  *  These 
cases,  after  all,  like  all  others  in  which  the  subject  is  treated,  turn 
finally  upon  the  point,  the  question,  whether  it  appears  that  the  di- 
rectors were  not  acting  for  the  best  interests  of  the  corporation.  We 
do  not  draw  in  question,  nor  do  counsel  for  the  plaintiffs  do  so,  the 
validity  of  the  general  proposition  stated  by  counsel  nor  the  soundness 
of  the  opinions  delivered  in  the  cases  cited.     The  case  presented  here 


Ch.  4)  THE   RELATION   OF   STOCKHOLDKKS   TO   COKPOHATION  1451 

is  not  like  any  of  them.  The  difference  between  an  incidental  hu- 
manitarian expenditure  of  corporate  funds  for  the  benefit  of  the  em- 
ployes, like  the  building  of  a  hospital  for  their  use  and  the  employ- 
ment of  agencies  for  the  betterment  of  their  condition,  and  a  general 
purpose  and  plan  to  benefit  mankind  at  the  expense  of  others,  is  ob- 
vious. There  should  be  no  confusion  (of  which  there  is  evidence) 
of  the  duties  which  Mr.  Ford  conceives  that  he  and  the  stockholders 
owe  to  the  general  public  and  the  duties  which  in  law  he  and  his  co- 
directors  owe  to  protesting,  minority  stockolders.  A  business  corpora- 
tion is  organized  and  carried  on  primarily  for  the  profit  of  the  stock- 
holders. The  powers  of  the  directors  are  to  be  employed  for  that  end. 
The  discretion  of  directors  is  to  be  exercised  in  the  choice  of  means 
to  attain  that  end,  and  does  not  extend  to  a  change  in  the  end  itself, 
to  the  reduction  of  profits,  or  to  the  non-distribution  of  profits  among 
stockholders  in  order  to  devote  them  to  other  purposes. 

There  is  committed  to  the  discretion  of  directors,  a  discretion  to  be 
exercised  in  good  faith,  the  infinite  details  of  business,  including  the 
wages  which  shall  be  paid  to  employes,  the  number  of  hours  they  shall 
work,  the  conditions  under  which  labor  shall  be  carried  on,  and  the 
price  for  which  products  shall  be  offered  to  the  public. 

It  is  said  by  appellants  that  the  motives  of  the  board  members  are 
not  material  and  will  not  be  inquired  into  by  the  court  so  long  as  their 
acts  are  within  their  lawful  powers.  As  we  have  pointed  out,  and 
the  proposition  does  not  require  argument  to  sustain  it,  it  is  not  within 
the  lawful  powers  of  a  board  of  directors  to  shape  and  conduct  the 
affairs  of  a  corporation  for  the  merely  incidental  benefit  of  shareholders 
and  for  the  primary  purpose  of  benefiting  others,  and  no  one  will 
contend  that,  if  the  avowed  purpose  of  the  defendant  directors  was  to 
sacrifice  the  interests  of  shareholders,  it  would  not  be  the  duty  of  the 
courts  to  interfere. 

We  are  not,  however,  persuaded  that  we  should  interfere  with  the 
proposed  expansion  of  the  business  of  the  Ford  Motor  Company.  In 
view  of  the  fact  that  the  selling  price  of  products  may  be  increased 
at  any  time,  the  ultimate  results  of  the  larger  business  cannot  be  cer- 
tainl)'  estimated.  The  judges  are  not  business  experts.  It  is  recog- 
nized that  plans  must  often  be  made  for  a  long  future,  for  expected 
competition,  for  a  continuing  as  well  as  an  immediately  profitable  ven- 
ture. The  experience  of  the  Ford  Motor  Company  is  evidence  of  cap- 
able management  of  its  aft'airs.  It  may  be  noticed,  incidentally,  that  it 
took  from  the  public  the  money  required  for  the  execution  of  its  plan, 
and  that  the  very  considerable  salaries  paid  to  Mr.  Ford  and  to  certain 
executive  officers  and  employes  were  not  diminished.  We  are  not  sat- 
isfied that  the  alleged  motives  of  the  directors,  in  so  far  as  they  are 
reflected  in  the  conduct  of  the  business,  menace  the  interests  of  share- 
holders. It  is  enough  to  say,  perhaps,  that  the  court  of  equity  is  at  all 
times  open  to  complaining  shareholders  having  a  just  grievance. 

Assuming  the  general  plan  and  policy  of  expansion,  and  the  details 
of  it  to  have  been  sufficiently,  formally,  approved  at  the  October  and 
November,  1917,  meetings  of  directors,  and  assuming  further  that  the 
plan  and  policy  and  the  details  agreed  upon  were  for  the  best  ultimate 
interest  of  the  company  and  therefore  of  its  shareholders,  what  does 
it  amount  to  in  justification  of  a  refusal  to  declare  and  pay  a  special 
dividend  or  dividends?  The  Ford  Motor  Company  was  able  to  esti- 
mate with  nicety  its  income  and  profit.     It  could  sell  more  cars  than 


1452  CORPORATIONS  (Part  6 

it  could  make.  Having  ascertained  what  it  would  cost  to  produce  a  car 
and  to  sell  it,  the  profit  upon  each  car  depended  upon  the  selling  price. 
That  being  fixed,  the  yearly  income  and  profit  was  determinable,  and, 
within  slight  variations,  was  certain. 

There  was  appropriated — voted — for  the  smelter  $11,325,000.  As  to 
the  remainder  voted,  there  is  no  available  way  for  determining  how 
much  had  been  paid  before  the  action  of  directors  was  taken  and  how 
much  was  paid  thereafter;  but  assuming  that  the  plans  required  an 
expenditure  sooner  or  later  of  $9,895,000  for  duplication  of  the  plant, 
and  for  land  and  other  expenditures  $3,000,000,  the  total  is  $24,220,000. 
The  company  was  continuing  business,  at  a  profit — a  cash  busmess. 
If  the  total  cost  of  proposed  expenditures  had  been  immediately  with- 
drawn in  cash  from  the  cash  surplus  (money  and  bonds)  on  hand  Au- 
gust 1,  1916,  there  would  have  remained  nearly  $30,000,000. 

Defendants  say,  and  it  is  true,  that  a  considerable  cash  balance 
must  be  at  all  times  carried  by  such  a  concern.  But,  as  has  been  stated, 
there  was  a  large  daily,  weekly,  monthly,  receipt  of  cash.  The  output 
was  practically  continuous  and  was  continuously,  and  within  a  few 
days,  turned  into  cash.  Moreover,  the  contemplated  expenditures  were 
not  to  be  immediately  made.  The  large  sum  appropriated  for  the 
smelter  plant  was  payable  over  a  considerable  period  of  time.  So 
that,  without  going  further,  it  would  appear  that,  accepting  and  ap- 
proving the  plan  of  the  directors,  it  was  their  duty  to  distribute  on  or 
near  the  1st  of  August,  1916,  a  very  large  sum  of  money  to  stock- 
holders. 

In  reaching  this  conclusion,  we  do  not  ignore,  but  recognize,  the 
validity  of  the  proposition  that  plaintififs  have  from  the  beginning  profit- 
ed by,  if  they  have  not  lately,  officially,  participated  .in,  the  general 
policy'  of  expansion  pursued  by  this  corporation.  We  do  not  lose  sight 
of  the  fact  that  it  had  been,  upon  an  occasion,  agreeable  to  the  plain- 
tiffs to  increase  the  capital  stock  to  $100,000,000  by  a  stock  dividend 
of  $98,000,000.  These  things  go  only  to  answer  other  contentions  now 
made  by  plaintiiifs,  and  do  not  and  cannot  operate  to  estop  them  to  de- 
mand proper  dividends  upon  the  stock  they  own.  It  is  obvious  that 
an  annual  dividend  of  60  per  cent,  upon  $2,000,000,  or  $1,200,000,  is 
the  equivalent  of  a  very  small  dividend  upon  $100,000,000,  or  more._ 

The  decree  of  the  court  below  fixing  and  determining  the  specific 
amount  to  be  distributed  to  stockholders  is  affirmed.  In  other  respects, 
except  as  to  the  allowance  of  costs,  the  said  decree  is  reversed. 
4i     -^     ^ 

SECTION   10.— APPORTIONMENT   OF   INTEREST 

BETWEEN    LIFE    TENANT    AND 

REMAINDERMAN 


EisxER  V.  maoo:mber. 

(Supreme  Court  of  the  United  States,  1919.     252  IT.  S.  189,  40  Sup.  Ct.  189, 
64   L.  Ed.  521,  9  A.  L,  R.  1570.) 

Mr.  Justice  BrandEis  (dissenting).  *  *  *  In  Gibbons  v.  Ma- 
hon,  136  U.  S.  549,  10  Sup.  Ct.  1057,  34  L.  Ed.  525,  the  court  was  re- 
quired to  determine  how,  in  the  administration  of  an  estate  in  the 
District  of  Columbia,  a  stock  dividend,  representing  profits,  receiv- 
ed after  the  decedent's  death,  should  be  disposed  of  as  between  life 


Ch.  4)  TilE   RELATION   OF   STOCKHOLDERS   TO   CORPORATION  1453 

tenant  and  remainderman.  The  question  was  in  essence :  What  shall 
the  intention  of  the  testator  be  presumed  to  have  been?  On  this 
question  there  was  great  diversity  of  opinion  and  practice  in  the  courts 
of  EngHsh-speaking  countries.  Three  well-defined  rules  were  then 
competing  for  acceptance;  two  of  these  involve  an  arbitrary  rule  of 
distribution,  the  third  equitable  apportionment.     *     *     * 

1.  The  so-called  English  rule,  declared  in  1799,  by  Brander  v. 
Brander,  4  Ves.  Jr.  800,  that  a  dividend  representing  profits,  whether 
in  cash,  stock  or  other  property,  belongs  to  the  life  tenant  if  it  was  a 
regular  or  ordinary  dividend,  and  belongs  to  the  remainderman  if  it 
was  an  extraordinary  dividend. 

2.  The  so-called  Massachusetts  rule,  declared  in  1868  by  Minot  v. 
Paine,  99  Mass.  101,  96  Am.  Dec.  705,  that  a  dividend  represent- 
ing profits,  whether  regular,  ordinary  or  extraordinary,  if  in  cash  be- 
longs to  the  life  tenant,  and  if  in  stock  belongs  to  the  remainderman. 

3.  The  so-called  Pennsylvania  rule  declared  in  1857  by  Earp's  Ap- 
peal, 28  Pa.  368,  that  where  a  stock  dividend  is  paid,  the  court  shall 
inquire  into  the  circumstances  under  which  the  fund  had  been  earn- 
ed and  accumulated  out  of  which  the  dividend,  whether  a  regular,  an 
ordinary  or  an  extraordinary  one,  was  paid.  If  it  finds  that  the  stock 
dividend  was  paid  out  of  profits  earned  since  the  decedent's  death, 
the  stock  dividend  belongs  to  the  life  tenant;  if  the  court  finds  that 
the  stock  dividend  was  paid  from  capital  or  from  profits  earned  be- 
fore the  decedent's  death,  the  stock  dividend  belongs  to  the  remain- 
derman. 

This  court  adopted  in  Gibbons  v.  Mahon  as  the  rule  of  administra- 
tion for  the  District  of  Columbia  the  so-called  Massachusetts  rule, 
the  opinion  being  delivered  in  1890  by  Mr.  Justice  Gray.  Since  then 
the  same  question  has  come  up  for  decision  in  many  of  the  states. 
The  so-called  Massachusetts  rule,  although  approved  by  this  court, 
has  found  favor  in  only  a  few  states.  The  so-called  Pennsylvania 
rule,  on  the  other  hand,  has  been  adopted  since  by  so  many  of  the 
states  (including  New  York  and  California),  that  it  has  come  to  be 
known  as  the  "American  rule."  Whether,  in  view  of  these  facts  and 
the  practical  results  of  the  operation  of  the  two  rules  as  shown  by 
the  experience  of  the  30  years  which  have  elapsed  since  the  decision 
in  Gibbons  v.  Mahon,  it  might  be  desirable  for  this  court  to  recon- 
sider the  question  there  decided,  as  some  other  courts  have  done  (see 
29  Harvard  Law  Review,  551).  we  have  no  occasion  to  consider  in 
this  case.  For,  as  this  court  there  pointed  out  (136  U.  S.  560,  10 
Sup.  Ct.  1059  [34  L.  Ed.  525]),  the  question  involved  was^  one  "be- 
tween the  owners  of  successive  interests  in  particular  shares,"  and  not 
*  *  *  a  question  "between  the  corporation  and  the  government, 
and  [which]  depended  upon  the  terms  of  a  statute  carefully  fram- 
ed to  prevent  corporations  from  evading  payment  of  the  tax  upon 
their  earnings."     *     *     *  

In  re  OSBORNE. 

(Court  of  Appeals  of  New  York.  1913.     209  N.  Y.  450,  103  N.  E.  723. 
50  L.  R.  A.  [N.   S.]  510,  Ann.  Cas.  1915A,  298.) 

Chasi:,  J.  Eugene  La  Grove  died  a  resident  of  this  state  October 
4,  1908,  leaving  a  will  which  was  duly  probated  and  by  the  fourth 
paragraph  of  which  a  trust  was  created  as  follows:  "All  the  rest, 
residue  and  remainder  of  my  property  and  estate,  real,  personal  and 


1454  coRroKATioNS  (Part  6 

mixed  of  every  description  and  wheresoever  situated  of  which  I  may 
die  seized  or  possessed  *  *  '^  I  give,  devise,  and  bequeath  to  my 
executor  and  trustee  hereinafter  named  in  trust,  to  hold  said  property 
and  estate  and  invest  and  reinvest  the  same  and  to  collect  the  rents, 
issues,  income  and  profits  therefrom,  and  to  pay  the  net  rents,  issues, 
income  and  profits  therefrom  quarterly  to  my  wife.  Ivy  Lee  La  Grove 
from  the  time  of  my  death  during  the  term  of  her  natural  life,  and, 
upon  her  death,  to  divide  the  principal  into  as  many  shares  as  my  wife 
shall  leave  children  by  our  marriage  her  surviving  *  *  *  but  in 
the  event  that  my  said  wife  shall  die  leaving  no  issue  her  surviving, 
then  at  her  death  the  principal  so  set  apart  for  her  benefit  shall  be 
paid  to  such  person  or  persons  as  would  be  entitled  to  share  in  her 
estate  were  she  to  die  intestate  under  the  statute  of  distribution  in 
force  at  the  time  of  her  death  in  the  state  of  New  York."  The  tes- 
tator did  not  leave  any  descendants.  Ivy  Lee  La  Grove,  who  was 
his  wife,  is  living.  The  rest,  residue,  and  remainder  of  the  property, 
as  provided  by  the  fourth  paragraph  of  the  will,  is  held  in  trust  by 
James  W.  Osborne  as  trustee  pursuant  to  the  provisions  of  such  par- 
agraph,   *    *    * 

The  principal  part  of  the  estate  of  the  testator  consisted  of  3,000 
shares  of  the  stock  of  the  Singer  Manufactvu^ing  Company,  a  cor- 
poration organized  and  existing  under  the  laws  of  the  state  of  New 
Jersey.  The  capital  stock  of  the  Singer  Manufacturing  Company  at 
the  time  of  the  death  of  the  testator  was  $30,000,000.  On  that  day 
it  had  a  surplus  of  accumulated  earnings  arising  exclusively  from 
the  business  of  the  company  amounting  to  $37,604,206.  On  June  17, 
1910,  such  surplus  had  increased  to  $51,560,757.  On  March  31,  1910, 
the  executor  sold  80  shares  of  the  stock  of  said  company.    *    *     * 

On  June  17,  1910,  the  board  of  directors  of  said  company  adopted 
a  further  resolution  as  follows:  "Resolved  that  the  directors  declare 
and  they  do  now  declare  a  stock  dividend  of  thirty  millions  of  dollars, 
or  one  hundred  per  cent  on  the  present  issued  capital  stock  of  this 
company  payable  forthwith  to  the  stockholders  of  record  on  the  16th 
day  of  June  instant  out  of  said  increase  of  stock,  and  that  the  presi- 
dent and  treasurer  be  and  they  hereby  are  authorized  and  directed 
to  issue  forthwith  to  the  several  stockholders  of  record  on  the  said 
16th  day  of  June  instant,  certificates  for  so  many  shares  of  fully  paid 
and  nonassessable  stock  as  said  shareholders  shall  severally  be  entitled 
to  in  payment  of  said  dividends."  Thereupon,  and  on  the  same  day^. 
June  17,  1910,  said  company  paid  over  and  delivered  to  James  W. 
Osborne  as  such  executor  a  stock  dividend  of  2,920  shares  of  the 
par  value  of  $100  each,  being  one  share  of  increased  capital  stock  of 
said  company  for  each  share  of  old  stock  theretofore  held  by  said  Os- 
borne as  executor,  and  said  stock  remains  in  the  possession  of  said 
Osborne  as  such  executor  and  trustee. 

After  the  death  of  La  Grove,  and  prior  to  the  payment  to  Osborne 
as  such  executor  of  the  stock  dividend,  regular  cash  dividends  had 
been  paid  on  said  stock  amounting  in  the  aggregate  to  $242,564.18, 
which  has  been  paid  from  time  to  time  by  said  executor  to  said  Ivy 
Lee  La  Grove,  the  beneficiary  under  the  trust,  as  provided  by  said  will. 

The  troublesome  question  as  to  who  is  entitled  to  extraordinary 
dividends  declared  upon  stock  held  in  trust  as  between  life  beneficia- 
ries under  the  trust  and  the  remaindermen  is  again  presented  to  us 
for  our  consideration. 


Ch.  4)    THK  RELATION  OF  STOCKHOLDERS  TO  CORPORATION      1455 

The  question  has  been  considered  by  the  courts  in  this  and  other 
states  and  countries  in  many  and  various  forms  from  time  to  time 
since  the  decisions  and  opinions  of  the  courts  have  been  pubHshed. 
It  has  been  said  that  no  question  before  the  courts  has  been  more 
troublesome.  Certainly  none  has  resulted  in  greater  contrariety  of 
views.  Decisions  that  are  apparently  contradictoi-y  either  in  the  same 
court  or  in  the  courts  of  different  states  and  countries  have,  however, 
been  caused  in  part  by  different  facts  and  circumstances  existing  in 
the  cases  decided,  and  the  effect  necessarily  given  to  the  language  of 
the  will  or  instrument  creating  the  trust  in  the  particular  cases  in 
which  the  decisions  have  been  rendered. 

In  determining  who  is  entitled  to  a  dividend  upon  stock  held  in 
trust,  the  intention  of  the  testator  or  the  maker  of  the  trust  must  be 
carried  out  when  such  intent  is  clear,  so  far  as  such  intent  does  not 
result  in  an  unlawful  accumulation  of  income.  Very  many  cases 
arise,  however,  where  the  testator  or  maker  of  the  trust  had  not  con- 
sidered the  possibility  of  enormous  dividends  being  declared  by  cor- 
porations to  effectuate  their  reorganization  or  in  the  division  of  ac- 
cumulated profits,  made  necessary  by  new  statutes,  changed  circum- 
stances, and  modern  rules  and  conditions,  or,  if  such  testator  or  mak- 
er of  the  trust  had  considered  such  possibility,  he  failed  to  express 
himself  in  the  instrument  creating  the  trust  so  as  to  show  any  clear 
intention  regarding  the  same. 

In  England,  as  far  back  as  1799,  it  was  established  as  a  rule  that 
all  extraordinary  or  unusual  dividends  declared  during  the  continua- 
tion of  a  life  estate,  whether  payable  in  cash  or  in  stock,  belong  to 
the  corpus  of  the  fund  and  not  to  the  income.  Brander  v.  Brander, 
4  Ves.  Jr.  800.  The  decision  in  the  case  cited  was  repeatedly  followed 
and  the  rule  restated.  The  rule  in  England  as  stated  in  the  earlier 
cases  has  been  materially  modified,  and  dividends  of  cash  are  now  held 
to  belong  to  the  life  tenant  and  stock  dividends  to  the  remainderman, 
subject,  perhaps,  to  an  examination  of  the  facts  and  circumstances  in 
each  case  in  applying  the  rule  as  stated.  Bouche  v.  Sproule,  L.  R. 
12  App.  Cas.  385. 

In  Massachusetts,  in  Minot  v.  Payne,  reported  in  99  Mass.  108,  96 
Am.  Dec.  705,  it  is  said:  "A  simple  rule  is  to  regard  cash  dividends, 
however  large,  as  income;  and  stock  dividends,  however  made,  as 
capital."  The  courts  of  that  state  have  followed  such  rule,  taking  un- 
to themselves,  however,  the  right  to  determine  whether  a  stock  divi- 
dend is  in  effect  a  distribution  of  cash  to  be  treated  the  same  as  a 
cash  dividend. 

In  Pennsylvania  it  was  held  in  Earp's  Appeal,  reported  in  28  Pa. 
368,  that  ordinary  dividends  on  stock  held  in  trust  belong  to  the  per- 
son entitled  to  the  income  of  the  trust  fund,  but  that  extraordinary 
dividends  should  be  apportioned  between  the  life  estate  man  and  the 
remainderman  in  accordance  with  the  amount  thereof  accumulated 
before  and  after  the  creation  of  the  trust. 

The  question  has  been  considered  by  the  courts  of  nearly  every 
state  in  the  Union  and  by  the  federal  courts.  It  would  be  quite  im- 
possible to  reconcile  the  many  reported  decisions.  An  effort  to  de- 
termine the  weight  of  authority  would  be  difficult,  and  extend  this 
opinion  to  unjustifiable  length.  It  is  not  our  purpose,  therefore,  to 
analyze  or  attempt  to  state  the  decisions  of  other  jurisdictions  or  to 


1456  coRroRATioxs  (Part  6 

refer  to  them  except  as  we  have  herein  to  illustrate  the  extent  of  the 
conflict  regarding  the  question  now  considered. 

In  this  state  the  question  was  considered  in  Clarkson  v.  Clark«;on, 
18  Barb.  646  (1855).  In  that  case  one  Clarkson  died  in  September, 
1845,  leaving  a  will  by  which  he  left  parts  of  his  estate  in  trust  for 
two  of  his  children  respectively.  The  trustees  were  directed  to  in- 
vest the  same  and  pay  the  "interest,  dividends  and  proceeds  arising 
from  the  two  said  respective  shares  and  portions  from  time  to  time,  as 
they  shall  be  received,  to  my  said  daughters  *  *  *  for  and  during 
the  term  of  their  natural  lives  respectively;  and  upon  the  decease  of 
either  of  said  daughters,  *  *  *  to  assign,  transfer  and  pay  over 
the  share"  as  therein  provided.     *     *     * 

The  earlier  and  also  the  latest  decisions  in  this  state  clearly  rec- 
ognize and  assert  that  where  extraordinary  dividends  intrench  upon 
the  capital  of  the  trust  fund  they  should  be  returned  to  such  trust 
fund  so  far  as  necessary  to  preserve  the  same.  Recognizing  as  we 
must  that  a  testator  or  maker  of  a  trust  may,  if  he  chooses,  provide 
that  a  part  of  the  principal  of  a  trust  fund  be  paid  to  a  life  bene- 
ficiary of  the  trust,  and  that  the  courts  must  carry  out  such  inten- 
tion, all  of  the  decisions  in  this  state  can  be  sustained  without  violat- 
ing the  right .  when  it  is  not  so  controlled  by  the  instrument  creating 
the  trust,  to  have  the  principal  of  the  trust  fund  kept  unimpaired  by 
the  division  of  accumulated  surplus  among  life  beneficiaries. 

It  is  conceded  that  the  capital  of  a  corporation  cannot  be  divided 
among  the  life  beneficiaries.  It  is  not  alone  the  capital  of  the  cor- 
poration that  should  be  preserved,  but  the  capital  of  the  trust  fund, 
whether  invested  by  the  trustees  in  stocks  of  corporations  at  a  pre- 
mium, or  acquired  from  the  testator  or  maker  of  the  trust.  The  sur- 
plus of  the  corporation  existing  at  the  formation  of  the  trust  or  when 
the  stock  is  purchased  represents  a  part  of  the  capital  of  the  estate 
as  fully  as  does  the  capital  of  the  corporation.  The  division  by  cor- 
porations of  their  surplus,  accumulated  through  a  long  period  of  years 
in  very  large  amounts,  is  now  comparatively  common,  when  until 
within  a  very  recent  time  such  division  of  enormous  amounts  was 
seldom,  if  ever,  made. 

Recently  a  well-known  bank  in  this  state  with  a  capital  of  $3CX),000 
and  a  large  surplus  divided  its  surplus  by  declaring  an  extra  dividend 
of  v$2,70O,0OO,  or  900  per  cent,  and  increased  its  capital  stock  to  $3,000,- 
000,  allowing  its  stockholders  to  subscribe  for  the  increase  and  pay 
for  the  same  by  the  dividend  thus  declared. 

Another  well-known  bank  in  this  state  with  a  capital  of  $500,000 
and  a  very  large  surplus  divided  its  surplus  by  declaring  an  extra 
dividend  of  $9,500,000,  or  1900  per  cent.,  and  increased  its  capital 
stock  to  $10,000,000  allowing  its  stockholders  to  subscribe  for  the 
increase  and  to  pay  for  the  same  by  the  dividend  thus  declared.  In- 
stances of  the  declaration  of  very  large  extraordinary  dividends  by 
corporations  within  the  last  few  years  could  be  multiplied  in  great 
numbers. 

We  refer  to  these  cases  simply  to  illustrate  the  great  injustice  that 
may  be  done  to  the  ultimate  beneficiaries  of  a  trust  fund  if  a  large 
part  of  such  fund  as  invested  must  necessarily,  by  reason  of  an  ex- 
traordinary dividend  and  an  arbitrary  rule,  be  paid  over  to  the  life 
beneficiaries  of  the  trust.  If  dividends  by  a  corporation  payable  out 
of   surplus  earnings  whenever  accumulated  must  be  paid  to  the  life 


Ch.  4)  THE    RELATION   OF   STOCKHOLDERS   TO   CORPORATION  1457 

beneficiaries  of  the  trust  unless  special  provision  to  the  contrary  is 
made  in  the  will  or  instrument  creating  the  trust,  it  will  make  the  re- 
tention or  purchase  of  stocks  by  a  trustee  in  corporations  having  a 
large  surplus  a  matter  of  questionable  propriety.  It  must  also  be  re- 
'membered  that  if  all  such  dividends  are  adjudged  to  constitute  in- 
come as  a  matter  of  law,  then  their  retention  in  the  trust,  even  by 
direction  of  the  testator  or  maker  of  the  trust,  would,  in  many  in- 
stances, amount  to  an  unlawful  accumulation  of  income. 

We  think  that  in  each  case  the  court  should  look  into  the  facts,  cir- 
cumstances, and  nature  of  the  transaction,  and  determine  the  nature 
of  the  dividend  and  the  rights  of  the  contending  parties  according  to 
justice  and  equity. 

In  Cook  on  Corporations  (6th  Ed.  c.  33,  §  552)  it  is  said :  "Where 
shares  of  stock  are  held  by  an  estate,  and  the  income  of  the  estate  is 
to  go  to  a  life  tenant  for  Hfe,  and  the  remainder  to  another  party, 
the  question  of  whether  the  life  tenant  or  the  remainderman  is  en- 
titled to  a  stock  dividend  or  extraordinary  cash  dividend  is  a  per- 
plexing one.  The  stock  dividend  or  extraordmary  cash  dividend  may 
represent  profits  which  were  earned  or  accumulated  before  the  life 
tenancy  began.  In  that  case  it  is  clear  that  in  justice  the  remainder- 
man should  receive  it.  If,  however,  it  was  earned  after  the  life  ten- 
ancy began,  it  is  clear  that  the  life  tenant  should  have  it.  If  it  was 
earned  partly  before  and  partly  after  the  life  tenancy  began,  then  it 
is  apparent  that  in  justice  some  apportionment  should  be  made  if 
possible." 

In  Thompson  on  Corporations  (2d  Ed.  §  5414)  it  is  said:  "The 
courts  now  inquire  into  the  actual  nature  and  source  of  dividends  for 
the  purpose  of  determining  their  character,  and,  as  between  the  life 
tenant  and  remainderman,  if  they  are  found  to  represent  earnings 
that  accrued  prior  to  the  creation  of  the  trust,  they  belong  to  the 
corpus  of  the  trust;  or  if  they  represent  the  natural  growth  and  in- 
crease in  the  value  of  the  corporate  plant  and  business,  whether  that 
growth  and  increase  took  place  before  or  after  the  trust  was  cre- 
ated, they  are  to  such  extent  capital.  The  court,  in  making  the  in- 
quiry, concerns  itself  with  the  substance  of  the  transaction,  and  not 
the  form  in  which  the  corporation  has  seen  fit  to  clothe  it,  and  the 
fact  that  a  dividend  is  distributed  in  cash  or  stock  is  said  to  be  of 
little  importance  in  determining  whether  it  is  capital  or  income.  *  =^  * 
The  object  of  the  inquiry  in  every  case  should  be  to  do  justice  to  the 
life  tenant  and  remainderman,  and  at  the  same  time  effectuate  the  in- 
tention of  the  creator  of  the  trust;  and  on  this  theory  in  order  to 
effectuate  such  intention  and  to  do  justice  between  the  parties,  a  court 
may,  under  the  circumstances  of  a  given  case,  apportion  a  dividend 
between  the  life  tenant  and  the  remainderman." 

It  is  manifest  that  any  apportionment  of  a  dividend  is  more  or  less 
troublesome  in  the  practical  handling  of  trust  estates.  It  may  be  nec- 
essary in  many  cases  to  make  the  apportionment  of  dividends  in  an 
accounting  by  the  trustee  where  all  the  parties  interested  are  bound 
thereby.  The  dividends  usually  declared  by  corporations  are  the  or- 
dinary dividends  such  as  are  declared  from  year  to  year  or  at  other 
regular  dividend  periods.  Extraordinary  dividends  are  the  exception. 
In  all  cases  of  ordinary  dividends  the  courts  uniformly  hold  that  they 
should  be  paid  to  the  life  beneficiary  of  the  trust  in  conformity  with 
B.«fcB.Bus.LAW— 92 


1458  CORPORATIONS  (Part  6 

the  general  rule  that  dividends  are  deemed  to  have  been  earned  as  of 
the  date  of  their  declaration.  In  cases  of  extraordinary  and  unusual 
dividends  declared  in  whole  or  in  part  from  earnings  actually  accu- 
mulated prior  to  the  creation  of  the  trust  or  the  purchase  of  the  stock, 
an  adherence  to  the  rule  that  dividends  are  deemed  to  have  been 
earned  as  of  the  date  of  their  declaration  in  many  cases  shocks  the 
sense  of  justice. 

Notwithstanding  the  difficulty  in  many  cases  of  apportioning  div- 
idends, it  is  wiser  and  better  to  leave  an  apportionment  to  courts  of 
equity,  in  preference  to  adhering  to  a  rule  that  depends  more  upon 
its  simplicity  and  convenience  of  enforcement  than  upon  justice  and 
right.  The  distinction  between  ordinary  and  extraordinary  dividends 
is  necessary  to  make  a  workable  rule,  and  at  the  same  time  pre- 
serve the  integrity  of  the  trust  fund.  The  integrity  of  the  trust  fund 
and  rights  of  the  life  beneficiary  under  the  trust  should  each  be  con- 
sidered, determined,  and  preserved  by  a  court  of  equity.  As  far  as 
the  courts  in  this  state  have  made  statements  to  the  contrary,  it  has 
been  in  opinions  where  such  statements  have  been  unnecessary  to  the 
determination  of  the  case  then  under  consideration,  and  such  state- 
ments are  disapproved.  It  should  be  held:  (1)  Ordinary  dividends, 
regardless  of  the  time  when  the  surplus  otit  of  which  they  are  paya- 
ble was  accumulated,  should  be  paid  to  the  life  beneficiary  of  the 
trust.  (2)  Extraordinary  dividends,  payable  from  the  accumulated 
earnings  of  the  company,  whether  payable  in  cash  or  stock,  belong 
to  the  life  beneficiary,  unless  they  intrench  in  whole  or  in  part  upon 
the  capital  of  the  trust  fund  as  received  from  the  testator  or  maker  of 
the  trust  or  invested  in  the  stock,  in  which  case  such  extraordinary 
dividends  should  be  returned  to  the  trust  fund  or  apportioned  between 
the  trust  fund  and  the  life  beneficiary  in  such  a  way  as  to  preserve 
the  integrity  of  the  trust  fund. 

It  has  been  argued  that  the  will  in  this  case  as  quoted  shows  that 
the  testator  intended  that  the  value  of  the  stock  of  the  Singer  Manu- 
facturing Company  owned  by  him  at  his  decease  should  be  preserved 
inviolate,  and  it  is  also  argued  that  it  was  not  the  intent  of  said  cor- 
poration, as  shown  by  the  resolution  quoted,  to  distribute  the  sur- 
plus of  the  corporation,  but  to  capitalize  it  so  that  thereafter  it  should 
be  incapable  of  distribution.  It  is  not  necessary  to  discuss  the  ques- 
tion so  presented,  in  view  of  the  decision  that  we  are  making  herein. 
This  case  is  one  that  requires  an  apportionment  of  the  dividend. 
There  is  no  dispute  about  the  portion  thereof  that  was  earned  prior 
to  the  creation  of  the  trust,  and  the  decree  of  the  surrogate  and  order 
of  the  Appellate  Division  should  be  modified  so  as  to  award 
i395655iy'5^56o.r,-  parts  of  the  stock  dividend  to  the  respondent,  and  di- 
recting that  the  remainder  thereof  be  retained  as  a  part  of  the  capital 
of  the  trust  fund,  and,  as  thus  modified,  the  order  and  decree  should 
be  affirmed,  with  costs  to  the  appellant  and  respondent  payable  out 
of  the  estate. 

Gray,  J.,  dissents.    *    *    * 


Ch.  4)  THE   RELATION   OF   STOCKHOLDERS   TO   CORPORATION  1459 

SECTION  11.— RIGHTS  OF  THE  CORPORATION  AGAINST 
OFFICERS  AND  DIRECTORS 


BKICGS  V.   SrAULDING  et  al. 

(Supreme  Court  of  the  United  States.  1891.     141  U.  S.  132,  11  Sup.  Ct.  924, 

35  L.  Ed.  662.) 

Briggs  exhibited  his  bill,  as  receiver  of  the  First  National  Bank 
of  Buffalo,  against  Reuben  Porter  Lee,  Francis  E.  Coit,  Elbridge  G. 
Spaulding,  William  H.  Johnson,  and  Thomas  W.  Gushing,  as  directors 
of  that  bank,  and  Anne  Vought  as  executrix  of  John  H.  Vought,  and 
Frank  S.  Coit  and  Joseph  C.  Barnes,  as  administrators  of  Charles  C. 
Coit,  former  directors. 

Mr.  Chief  Justice  FuLLKR  delivered  the  opinion  of  the  court. 

In  the  language  of  appellant's  counsel,  the  bill  was  framed  upon  the 
theory  of  a  breach  by  the  defendants  as  directors  "of  their  common- 
law  duties  as  trustees  of  a  financial  corporation,  and  of  breaches  of 
special  restrictions  and  obligations  of  the  national  banking  act."  And 
it  is  claimed  that  the  defendants  should  have  been  held  liable  for  the 
losses  which  occurred  through  loans  of  the  bank's  funds  and  moneys 
during  their  term  of  office  as  directors  to  Lee,  his  father,  his  wift, 
and  certain  designated  persons,  which  were  the  principal  losses,  though 
there  were  others  smaller  in  amount  for  which  they  were  responsible. 

:|:        ^       sf; 

It  is  not  contended  that  the  defendants  knowingly  violated,  or  per- 
mitted the  violation  of,  any  of  the  provisions  of  the  banking  act,  or 
that  they  were  guilty  of  any  dishonesty  in  administering  the  affairs 
of  the  bank;  but  it  is  charged  that  they  did  not  diligently  perform  du- 
ties devolved  upon  them  by  the  act.  *  *  *  Jt  does  not  follow  that 
the  executive  officers  should  have  been  left  to  control  the  business  of 
the  bank  absolutely  and  without  supervision,  or  that  the  statute  fur- 
nishes a  justification  for  the  pursuit  of  that  course.  Its  language  does 
enable  individual  directors  to  say  that  they  were  guilty  of  no  viola- 
tion of  a  duty  directly  devolved  upon  them.  Whether  they  were  re- 
sponsible for  any  neglect  of  the  board  as  such,  or  in  failing  to  obtain 
proper  action  on  its  part,  is  another  question.  Indeed,  it  is  frankly 
stated  by  counsel  that,  "although  special  provisions  of  the  statute  are- 
quoted  and  relied  upon,  these  do  not  create  the  cause  of  action,  but 
merely  furnish  the  standard  of  duty  and  the  evidence  of  wrong  doing;" 
and  .section  556,  Mor.  Priv.  Corp.,  is  cited,  which  is  to  the  effect  that 
"the  liability  of  directors  for  damages  caused  by  acts  expressly  pro- 
hibited by  the  company's  charter  or  act  of  incorporation  is  not  created 
by  force  of  the  statutory  prohibition.  The  performance  of  acts  which 
are  illegal  or  prohibited  by  law  may  subject  the  corporation  to  a  for- 
feiture of  its  franchises,  and  the  directors  to  criminal  liability;  but 
this  would  not  render  them  civilly  liable  for  damages.  The  liability 
of  directors  to  the  corporation  for  damages  caused  by  unauthorized 
acts  rests  upon  the  common-law  rule,  which  renders  every  agent  liable 
who  violates  his  authority  to  the  damage  of  his  principal.  A  statutory 
prohibition  is  material,  under  these  circumstances,  merely  as  indicating 
an  express  restriction  placed  upon  the  powers  delegated  to  the  directors 
when  the  corporation  was  formed." 

It  is  perhaps  unnecessary  to  attempt  to  define  with  precision  the  de- 


1460  CORPORATIONS  (Part  6 

grce  of  care  and  prudence  which  dn-ectors  must  exercise  in  the  per- 
formance of  their  duties.  The  degree  of  care  required  depends  upon 
the  subject  to  which  it  is  to  be  appHed,  and  each  case  has  to  be  de- 
termined in  view  of  all  the  circumstances.  They  are  not  insurers  of 
the  fidelity  of  the  agents  whom  they  have  appointed,  who  are  not  their 
agents,  but  the  agents  of  the  corporation;  and  they  cannot  be  held 
responsible  for  losses  resulting  from  the  wrongful  acts  or  omissions 
of  other  directors  or  agents,  unless  the  loss  is  a  consequence  of  their 
own  neglect  of  duty,  either  for  failure  to  supervise  the  business  with 
attention,  or  in  neglecting  to  use  proper  care  in  the  appointment  of 
agents.  *  *  *  Bank  directors  are  often  styled  "trustees,"  but  not 
m  any  technical  sense.  The  relation  between  the  corporation  and  them 
is  rather  that  of  principal  and  agent,  certainly  so  far  as  creditors  are 
concerned,  between  whom  and  the  corporation  the  relation  is  that  ot 
contract,  and  not  of  trust.  But,  undoubtedly,  under  circumstances, 
they  may  be  treated  as  occupying  the  position  of  trustees  to  cestui  que 
trust. 

In  Percy  v.  Millaudon,  8  Mart.  (N.  S.)  68,  which  has  been  cited  as 
a  leading  case  for  more  than  60  years,  the  supreme  court  of  Louisiana, 
through  Judge  Porter,  declared  that  the  correct  mode  of  ascertaining 
whether  an  agent  is  in  fault  "is  by  inquiring  whether  he  neglected  the 
exercise  of  that  diligence  and  care  which  was  necessary  to  a  successful 
discharge  of  the  duty  imposed  on  him.  That  diligence  and  care  must 
again  depend  on  the  nature  of  the  undertaking.  There  are  many  things 
which,  in  their  management,  require  the  utmost  diligence  and  most 
scrupulous  attention,  and  where  the  agent  who  undertakes  their  direc- 
tion renders  himself  responsible  for  the  slightest  neglect.  There  are 
others  where  the  duties  imposed  are  presumed  to  call  for  nothing  more 
than  ordinary  care  and  attention,  and  where  the  exercise  of  that  de- 
gree of  care  suffices.  The  directors  of  banks,  from  the  nature  of  their 
undertaking,  fall  within  the  class  last  mentioned,  while  in  the  discharge 
of  their  ordinary  duties.  It  is  not  contemplated  by  any  of  the  charters 
which  have  come  under  our  observation,  and  it  was  not  by  that  of  the 
Planters'  Bank,  that  they  should  devote  their  whole  time  and  atten- 
tion to  the  institution  to  which  they  are  appointed,  and  guard  it  from 
iniury  by  constant  superintendence.  Other  officers,  on  whom  compen- 
sation is  bestowed  for  the  employment  of  their  time  in  the  afifairs  of 
the  bank,  have  the  immediate  management.  In  relation  to  these  offi- 
cers the  duties  of  directors  are  those  of  control,  and  the  neglect  which 
would  render  them  responsible  for  not  exercising  that  control  properly 
must  depend  on  circumstances,  and  in  a  great  measure  be  tested  by 
the  facts  of  the  case.  If  nothing  has  come  to  their  knowledge  to  awak- 
en suspicion  of  the  fidelity  of  the  president  and  cashier,  ordinary  at- 
tention to  the  affairs  of  the  institution  is  sufficient.  If  they  become 
acquainted  with  any  fact  calculated  to  put  prudent  men  on  their  guard, 
a  degree  of  care  commensurate  with  the  evil  to  be  avoided  is  required, 
and  a  want  of  that  care  certainly  makes  them  responsible." 

Spering's  Appeal,  71  Pa.  11,  10  Am.  Rep.  684,  was  the  case  of  a  bill 
filed  by  Sparing,  as  assignee  of  a  trust  company,  against  its  directors 
and  others,  to  compel  them  to  make  good  losses  sustained  by  the  de- 
positors on  the  ground  of  fraudulent  mismanagement  of  the  affairs 
of  the  company ;  and  Judge  Sharswood,  speaking  for  the  court,  said : 
"It  is  by  no  means  a  well-settled  point  what  is  the  precise  relation 
which  directors  sustain  to  stockholders.     They  are,  undoubtedly,  said 


Ch.  4)  THE   RELATION   OF   STOCKHOLDERS   TO   CORPORATION  14GI 

in  many  authorities  to  be  trustees,  but  that,  as  I  apprehend,  is  only  in  a 
general  sense,  as  we  term  an  agent  or  any  other  bailee  intrusted  with 
the  care  and  managment  of  the  property  of  another.  It  is  certain  that 
they  are  not  technical  trustees.  They  can  only  be  regarded  as  man- 
dataries— persons  who  have  gratuitously  undertaken  to  perform  cer- 
tain duties,  and  who  are  therefore  bound  to  a]:)ply  ordinary  skill  and 
diligence,  but  no  more.  *  *  *  We  are  dealing  now  with  their  re- 
sponsibility to  stockholders,  not  to  outside  parties — creditors  and  de- 
positors. It  is  unnecessary  to  consider  what  the  rule  may  be  as  to 
them.  Upon  a  close  examination  of  all  the  reported  cases,  although 
there  are  many  dicta  not  easily  reconcilable,  yet  I  have  found  no  judg- 
ment or  decree  which  has  held  directors  to  account,  except  when  they 
have  themselves  been  personally  guilty  of  some  fraud  on  the  corpora- 
tion, or  have  known  and  connived  at  some  fraud  in  others,  or  where 
such  fraud  might  have  been  prevented  had  they  given  ordinary  at- 
tention to  their  duties.  I  do  not  mean  to  say  by  any  means  that  their 
responsibility  is  limited  to  these  cases,  and  that  there  might  not  exist 
such  a  case  of  negligence,  or  of  acts  clearly  ultra  vires,  as  would  make 
perfectly  honest  directors  personally  liable.  But  it  is  evident  that  gen- 
tlemen selected  by  the  stockholders  from  their  own  body  ought  not  to 
be  judged  by  the  same  strict  standard  as  the  agent  or  trustee  of  a  pri- 
vate estate.  Were  such  a  rule  applied,  no  gentlemen  of  character  and 
responsibility  would  be  found  willing  to  accept  such  places."    *     *     * 

The  theory  of  this  bill  is  that  the  defendants  are  liable,  not  to  stock- 
holders nor  to  creditors,  as  such,  but  to  the  bank,  for  losses  alleged 
to  have  occurred  during  their  period  of  office,  because  of  their  inat- 
tention. If  particular  stockholders  or  creditors  have  a  cause  of  action 
against  the  defendants  individually,  it  is  not  sought  to  be  proceeded 
on  here,  and  the  disposition  of  the  questions  arising  thereon  would  de- 
pend upon  different  considerations.     *     *     * 

No  one  of  the  defendants  is  charged  with  the  misappropriation  or 
misapplication  of  or  interference  with  any  property  of  the  bank  nor 
with  carelessness  in  respect  to  any  particular  property,  but  with  the 
omission  of  duty  which,  if  performed,  would  have  prevented  certain 
specified  losses,  in  respect  of  which  complainant  seeks  to  charge  them. 

The  doctrine  that  one  trustee  is  not  liable  for  the  acts  or  defaults  of 
his  co-trustees,  and  while,  if  he  remains  merely  passive,  and  does  not 
obstruct  the  collection  by  a  co-trustee  of  moneys,  is  not  liable  for 
waste,  is  conceded  ;  but  it  is  argued  that  if  he  himself  receives  the 
funds,  and  either  delivers  them  over  to  his  associate,  or  does  any  act 
by  which  they  come  into  the  possession  of  the  latter  or  under  his  con- 
trol, and  but  for  which  he  would  not  have  received  them,  such  trustee 
is  liable  for  any  loss  resulting  from  the  waste,  -^  ^  *  and  that  this 
case  comes  within  the  rule  as  thus  qualified.  Treated  as  a  cause  of 
action  in  favor  of  the  corporation,  a  liability  of  this  kind  should  not 
lightly  be  imposed  in  the  absence  of  any  element  of  positive  misfea- 
sance, and  solely  upon  the  ground  of  passive  negligence ;  and  it  must 
be  made  to  appear  that  the  losses  for  which  defendants  are  required 
to  respond  were  the  natural  and  necessary  consequence  of  omission 
on  their  part.    *     *    * 

We  pass,  then,  to  the  inquiry  as  to  the  liability  of  defendant  Spauld- 
•j^g_  *  *  *  Spaulding  had  had  a  large  and  various  experience,  and, 
as  a  member  of  congress,  drafted  the  original  national  banking  act,  was 
president  of  a  leading  bank,  and  connected  with  several  financial  cor- 


1462  •  CORPORATIONS  (Part  6 

porations,  and  testified  that  the  practice  of  banks,  so  far  as  he  knew, 
all  over  the  country,  was  to  a  large  extent  to  carry  on  the  business 
through  their  executive  officers,  especially  where  these  officers  held  a 
majority  of  the  stock;  that  when  he  purchased  his  stock  he  believed 
this  bank  was  being  conducted  by  its  duly  authorized  officers,  and  his 
judgment  was  that  his  duty  as  a  director  was  discharged  if  he  attended 
the  meetings  to  which  he  was  summoned,  performed  such  duties  as 
were  specifically  required  of  him,  and  gave  such  advice  as  was  asked 
from  him;  'that  his  summers  were  spent  upon  his  farm  in  the  coun- 
try ;  that  in  1882  he  was  72  years  of  age ;  that  he  was  in  a  measure 
retired  from  business,  so  that  he  gave  very  little  attention  to  the  affairs 
of  his  own  bank,  but  was  ready  to  give  any  advice  or  suggestions  when 
called  upon  for  that  purpose  upon  any  special  matters ;  that  for  many 
years  it  had  been  the  practice  in  the  corporations  in  which  he  was  a 
director  to  treat  him  as  an  advisory  director,  and  not  as  a  director  oc- 
cupied in  the  daily  management  of  their  affairs ;  and  that  he  accepted 
the  position  upon  the  understanding  that  he  should  occupy  this  rela- 
tion. *  *  *  He  further  stated  that  he  never  received  or  expected 
to  receive  any  compensation  or  benefit  from  the  bank  as  a  director; 
that  Lee  was  the  owner  of  a  large  majority  of  the  stock;  that,  as  is 
customary  in  such  cases,  Lee  had  assumed,  to  a  large  extent,  the  man- 
agement and  control  of  the  bank,  with  the  knowledge  of  the  other 
directors,  and  with  tlie  knowledge  of  the  stockholders  of  the  bank, 
and  most,  if  not  all,  of  the  depositors  therein ;  and  upon  information 
and  belief  "that  long  before  he  became  a  stockholder  of  said  bank,  and 
up  to  the  time  he  became  such  stockholder,  and  while  he  was  such 
stockholder,  it  was  understood  by  all  persons  having  dealings  with  the 
said  bank  that  the  said  Lee  practically  administered  the  affairs  there- 
of, as  its  chief  executive  officer."     *     *     * 

The  losses  which  it  is  claimed  rendered  it  insolvent,  and  for  the  re- 
covery of  which  losses  this  action  was  instituted,  occurred  by  reason 
of  the  discounting  by  Lee  of  the  paper  of  persons  engaged  with  him 
in  outside  business  and  speculations,  who  were  not  adequately  responsi- 
ble for  their  engagements.  The  vice  in  the  situation  lay,  not  in  the 
reports  nor  in  the  books,  upon  their  face,  but  in  the  unreliability  of 
the  bills  receivable.  Were  these  defendants  guilty  of  negligence  in 
allowing  Lee  to  remain  in  charge  of  the  bank?  *  *  *  j^  appears 
that  Lee  went  into  the  employment  of  this  bank  in  1868,  being  then 
18  years  old,  and  so  remained'  until  April  14,  1882,  occupying  in  suc- 
cession the  positions  of  messenger  boy,  bookkeeper,  teller,  assistant 
cashier,  cashier,  vice  president,  and  president.  *  *  *  His  general 
character  was  good,  his  reputation  for  integrity  and  financial  capacity 
excellent,  and  he  possessed  the  confidence  of  his  fellow-citizens.  L'poii 
the  10th  of  January,  1882,  he  was  the  owner  of  two-thirds  of  the  stock 
of  the  bank,  and  had  apparently  a  greater  interest  than  any  other  per- 
son in  seeing  that  its  affairs  were  so  managed  that  its  capital  would 
remain  unimpaired.  *  *  '''  We  think  no  jury  would  have  been 
justified  in  finding  defendants  guilty  of  negligence  in  retaining  Lee  in 
the  management  of  the  bank.     *     *     * 

But  it  is  contended  that  defendants  should  have  insisted  on  meet- 
ings of  the  board  of  directors.  *  *  *  Here,  again,  it  should  be  ob- 
served that  even  trustees  are  not  liable  for  the  wrongful  acts  of  their 
co-trustees  unless  they  connive  at  them  or  are  guilty  of  negligence  con- 
ducive to  their  commission,  and  that  Lee  and  Vought  had  long  been 


Ch.  4)  THE   RELATION   OP   STOCKHOLDERS   TO   CORPORATION  1463 

directors.  It  is  shown  that  for  14  years  the  affairs  of  the  bank  had 
been  left  wholly  with  the  president  and  cashier,  and  that  from  the  10th 
of  January  to  the  stoppage  of  the  bank  the  business  was  done  as  it 
had  always  been  done.  No  bonds  had  been  required  of  the  officers 
for  at  least  14  years.  No  meetings  were  held  by  the  board  of  direc- 
tors except  the  annual  meeting  and  meetings  to  declare  dividends,  or 
on  some  special  occasion.  *  *  *  /^\\  ^\-^[a,  -^as  not  as  it  should  have 
been,  and  ought  not  to  be  countenanced ;  but  the  facts  have  an  im- 
portant bearing  on  the  question  whether  Spaulding  and  Johnson  should 
be  held  liable  because  they  did  not  at  once  endeavor  to  change  the  en- 
tire methods  of  doing  business,  and  enter  upon  an  exhaustive  inves- 
tigation of  the  assets.  Would  ordinarily  prudent  and  diligent  men 
have  done  so  under  similar  cirumstances  ?  It  is  not  so  much  a  ques- 
tion of  holding  meetings  as  of  examination,  searching  and  thorough ; 
an  overhauling  of  the  bills  receivable,  and  the  detection  of  the  uncol- 
lectible indebtedness  which  rendered  the  bank  insolvent.     *     *     * 

Would  it  not  have  been  the  exercise  of  an  extraordinary  degree  of 
care  if  these  defendants  had  insisted  within  the  first  90  days  upon 
making  such  an  examination?  Certainly  it  cannot  be  laid  down  as  a 
rule  that  there  is  an  invariable  presumption  of  rascality  as  to  one's 
agents  in  business  transactions,  and  that  the  degree  of  watchfulness 
must  be  proportioned  to  that  presumption.     *     *     * 

It  must  be  remembered  that  in  cases  turning  upon  questions  of  fact 
in  order  to  reverse,  we  must  be  prepared  to  hold  that  the  findings  were 
not  justified,  and  this  we  cannot  do,  taking  into  consideration  all  the 
facts  contained  in  this  voluminous  record,  which  we  have  attempted 
thoroughly  to  explore.  The  turning  point,  so  far  as  defendants  Spauld- 
ing and  Johnson  are  concerned,  (and  we  include  with  them  Francis 
E.  Coit,)  is  whether  under  all  the  circumstances  they  were  guilty  of 
negligence,  producing  any  of  the  losses  in  question,  not  affirmatively, 
but  because  they  did  not  prevent  them ;  and  this  depends  upon  whether 
they  should  have  made  an  examination  of  the  books  and  assets  of  the 
bank,  and  whether,  if  they  had,  that  would  have  enabled  them  to  dis- 
cover such  a  condition  of  affairs  as  would  have  resulted  in  placing  the 
bank  in  liquidation,  and  whether  thereby  some  of  the  losses  would  have 
been  averted.  Without  reviewing  the  various  decisions  on  the  sub- 
ject, we  hold  that  directors  must  exercise  ordinary  care  and  prudence 
in  the  administration  of  the  affairs  of  a  bank,  and  that  this  includes 
something  more  than  officiating  as  figure-heads.  They  are  entitled  un- 
der the  law  to  commit  the  banking  business,  as  defined,  to  their  duly- 
authorized  officers,  but  this  does  not  absolve  them  from  the  duty  of 
reasonable  supervision,  nor  ought  they  to  be  permitted  to  be  shielded 
from  liability  because  of  want  of  knowledge  of  wrongdoing,  if  that 
ignorance  is  the  result  of  gross  inattention;  but  in  this  case  we  dx) 
not  think  these  defendants  fairly  liable  for  not  preventing  loss  by  put- 
ting the  bank  into  liquidation  within  90  days  after  they  became  di- 
rectors, and  it  is  really  to  that  the  case  becomes  reduced  at  last.  For 
the  reasons  given,  the  decree  will  be  affirmed. 

Harlan,  J.,  (dissenting.)  Mr.  Justice  Gray,  Mr.  Justice  Brewer, 
Mr.  Justice  Brown,  and  myself  are  unable  to  concur  in  the  opinion 
and  judgment  of  the  court.  But  we  are  of  opinion  that,  under  the  evi- 
dence, the  defendants  Elbridge  G.  Spaulding,  Francis  E.  Coit,  and  W. 
H.  Johnson  became  respectively  liable  for  such  of  those  losses  as 
could  have  been  prevented  by  proper  diligence  upon  their  part  as  di- 


1464  CORPORATIONS  (Part  6 

rectors.  It  would  serve  no  useful  purpose  to  refer  in  detail  to  all  the 
evidence  establishing  their  dereliction  of  duty.  In  our  opinion,  the 
proof  is  clear  and  convincing  that  a  considerable  part  of  the  amount 
lost  to  the  bank,  and  therefore  to  its  stockholders  and  depositors,  could 
have  been  saved  if  they  had  exercised  such  care  in  the  supervision 
and  management  of  the  bank's  business  as  men  of  ordinary  diligence 
exercise  in  respect  to  their  own  business.  In  fact,  those  gentlemen, 
while  they  were  directors,  had  no  knowledge  whatever  of  what  was 
being  done  by  Lee  in  the  conduct  of  the  bank.  They  took  his  word 
that  all  was  right,  and  gave  no  attention  whatever  to  the  management 
of  its  business.  Their  eyes  were  as  completely  closed  to  what  he  did 
from  day  to  day  in  directing  the  affairs  of  the  bank,  as  if  they  had  de- 
liberately determined  not  to  see  and  not  to  know  how  he  controlled  its 
business.     *     *     * 

In  the  case  of  Mr.  Spaulding  there  are  absolutely  no  circumstances 
of  a  mitigating  character.  He  was  learned  in  the  law,  and  had  large 
experience  in  banking.  He  accepted  the  position  of  director  to  ac- 
commodate Lee.  and  without  any  examination  of  the  condition  of  the 
bank.  Lee  told  him  the  bank  was  all  right ;  and  upon  that,  and  that 
alone,  he  rested  with  implicit  confidence.  Having  taken  the  oath  re- 
quired by  the  statute,  that  he  would,  so  far  as  the  duty  devolved  upon 
him,  diligently  and  honestly  administer  the  affairs  of  the  association, 
and  having  ascertained  that  the  executive  officers  were  in  charge  of 
the  bank,  performing  the  duties  belonging  to  their  respective  positions, 
he  did  not,  he  says,  "go  any  further."  Under  such  circumstances,  and 
as  he  interpreted  the  national  banking  act,  he  felt  himself  "relieved 
from  any  specified  duty."  *  *  *  It  is  plain  from  the  evidence  that 
if,  with  his  long  experience  in  banking  business,  he  had  given  one  hour, 
or  at  the  utmost  a  few  hours'  time,  in  any  week  while  he  was  director, 
to  ascertain  how  this  bank  was  being  managed,  he  would  have  dis- 
covered enough  that  was  wrong  and  reckless  to  have  saved  the  as- 
sociation, its  stockholders  and  depositors,  many,  if  not  all,  the  losses 
thereafter  occurring.  Upon  his  theory  of  duty,  the  only  need  for 
directors  of  a  national  bank  is  to  meet,  take  the  required  oath  to  ad- 
minister its  business  diligently  and  honestly,  turn  over  all  its  affairs  to 
the  control  of  some  one  or  more  of  its  officers,  and  never  go  near  the 
bank  again,  unless  they  are  notified  to  come  there,  or  until  they  are 
informed  that  there  is  something  wrong ;  and  when  it  is  ascertained  that 
these  officers,  or  some  of  them,  while  in  full  control,  have  embezzled 
or  recklessly  squandered  the  assets  of  the  bank,  the  only  comfort  that 
swindled  stockholders  and  depositors  have  is  the  assurance,  not  that 
the  directors  have  themselves  diligently  administered  the  affairs  of 
the  bank,  or  diligently  supervised  the  conduct  of  those  to  whom  its 
affairs  were  committed  by  them,  but  that  they  had  confidence  in  the 
integrity  and  fidelity  of  its  officers  and  agents,  and  relied  upon  their 
assurance  that  all  was  right.  No  bank  can  be  safely  administered 
in  that  way.  Such  a  system  cannot  be  properly  characterized  otherwise 
than  as  a  farce.  It  cannot  be  tolerated  without  peril  to  the  business 
interests  of  the  country.     *     *     * 


Ch.  4)  THE   RELATION   OF   STOCKHOLDERS   TO   CORPORATION  1405 

SECTION    12.— RIGHTS  AND   LIABILITIES   OF  PARTIES 
WITH  RESPECT  TO  TRANSFERS  OF  STOCK 


NATIONAL   SAFE   DEPOSIT,    SAVINGS   &   TRT^ST    CO.    OF    THE 
DISTRICT  OF  COLUMBIA  v.  HIBBS. 

(Supreme  Court  of  the  Fnited  States,  1013.     229  U.  S.  391,  33  Sup.  Ct.  818, 

57   L.    Ed.   1241.) 

Mr.  Justice  Day  delivered  the  opinion  of  the  court. 

This  case  is  in  this  court  upon  writ  of  error  to  the  judgment  of 
the  court  of  appeals  of  the  District  of  Columbia  *  *  *  affirming 
the  judgment  of  the  supreme  court  of  the  District  of  Columbia. in  an 
action  brought  by  the  plaintiff  in  error,  hereinafter  called  the  bank, 
against  the  "defendant  in  error,  for  the  alleged  conversion  of  certain 
shares  of  stock.  The  case  was  tried  upon  an  agreed  statement  of 
facts,  from  which  it  appears : 

The  plaintiff  in  error  has  been  doing  a  general  banking  business  in 
the  city  of  Washington,  including  the  making  of  loans  to  its  custom- 
ers on  promissory  notes  secured  by  stock  collateral,  and  to  a  limited 
extent;  the  buying  and  selling  of  stock  for  its  customers  and  occasion- 
ally for  itself. 

On  March  12,  1903,  the  bank  made  a  loan  to  one  T.  M.  Kelley  of 
$12,500,  for  which  he  gave  his  promissory  note,  payable  on  demand, 
and  deposited  with  the  bank  certain  stock  certificates  of  the  Mergen- 
thaler  Linotype  Company  as  collateral  security.  Each  of  the  certifi- 
cates stood  in  the  name  of  T.  M.  Kelley,  and  on  its  face  recited  that 
it  was  transferable  by  him,  in  person  or  by  proxy,  only  upon  the  books 
of  the  company  upon  surrender  of  the  certificate,  and  each  upon  its 
back  contained  an  assignment  with  power  of  attorney  to  transfer  the 
stock  upon  the  books  of  the  company,  signed  in  blank  by  Kelley, 
whose  signature  was  duly  attested. 

One  Willard  H.  Myers  had  been  in  the  continuous  employ  of  the 
bank  for  over  twenty  years,  and  had  committed  no  acts  inconsistent 
with  his  duty  to  the  bank,  and  was  trusted  as  a  faithful  employee. 
During  the  last  ten  years  of  his  employment  he  had  been  general  book- 
keeper and  assistant  note  teller,  a  part  of  his  duties  being  to  receive 
and  enter  upon  the  cash  book  of  the  bank  the  payment  of  loans  by 
customers,  and  to  procure  from  one  of  the  officers  of  the  bank  and 
deliver  to  such  customers  the  collateral  security  pledged  for  the  loans, 
it  being  usual,  in  the  ordinary  course  of  business,  for  the  bank  to  thus 
deliver  certificates  to  him  upon  his  request.  He  had  no  authority 
and  it  was  not  a  part  of  his  employment  to  dispose  of,  by  sale,  pledge, 
or  otherwise,  any  stock  held  as  collateral  by  the  bank,  or  owned  by  it 
or  any  of  its  customers. 

On  May  26,  1904,  Myers  requested  the  secretary  of  the  bank  to 
procure  from  the  vault  where  such  securities  were  kept  the  certificates 
deposited  by  Kelley,  whereupon  the  secretary  delivered  the  certificates 
to  Myers,  in  the  usual  course  of  business,  for  the  purpose  of  having 
them  returned  to  Kelley,  similar  requests  having  been  made  by  Myers 
prior  thereto.  Kelley  had  not  paid  the  loan  or  asked  for  the  delivery 
of  the  stock,  and  Myers  made  no  entry  in  the  cash  book. 

The  day  following,  May  27th,  Myers  delivered  two  of  such  certifi- 


1466  ^  CORPORATIONS  (Part  6 

cates  to  the  cashier  of  the  defendant  in  error,  a  stock  broker,  for  sale 
on  his  account,  and  at  the  request  of  the  cashier,  as  was  tlie  usual 
custom  where  the  signatures  of  the  assignor  and  attesting  witness  are 
unknown,  Myers,  as  a  further  identification  of  such  signatures,  signed 
his  name  to  the  attestation  clause  of  the  assignment.  The  defendant 
in  error  being  out  of  the  city,  the  certificates  were  turned  over  to 
another  broker,  by  whom  they  were  on  that  day  sold  on  the  Washing- 
ton stock  exchange,  and  on  the  same  day  Myers  received  the  check  of 
the  defendant  in  error  for  the  proceeds  of  the  sale,  which  he  subse- 
quently cashed. 

Myers  did  not  represent  to  the  cashier  of  the  defendant  in  error  that 
he  was  selling  the  stock  for  the  bank,  or  that  he  was  acting  for  it  in 
any  way,  or  indicate  that  he  did  not  own  the  stock,  nor  did  the  defend- 
ant in  error  or  his  cashier  know  or  have  cause  to  suspect  that  the 
stock  did  not  belong  to  Myers.  The  stock  was  sold,  however,  without 
the  knowledge  or  consent  of  the  bank  or  Kelley.  By  the  custom  of 
banks,  brokers,  and  others  dealing  in  stock,  which  custom  was  known 
to  the  bank,  the  possession  of  stock  certificates  assigned  in  blank  and 
attested,  as  were  the  certificates  here  in  controversy,  has  been  recog- 
nized, in  the  absence  of  knowledge  or  cause  of  suspicion  to  the  con- 
trary, as  evidence  of  ownership  or  of  authority  to  sell,  pledge,  or  other- 
wise deal  with  such  certificates  as  the  owner  might  do. 

Certain  of  the  other  certificates  deposited  by  Kelley  were  disposed 
of  by  Myers,  some  in  like  manner,  through  the  defendant  in  error,  for 
which  Myers  received  the  proceeds,  others  being  hypothecated  with 
the  American  Security  &  Trust  Company,  while  the  rest  were  sur- 
rendered by  Myers  to  the  authorities. 

In  this  case 'conflicting  legal  principles  are  invoked  and  relied  upon. 
For  the  defendant  in  error  the  familiar  principle  "that  where  one  of 
two  innocent  persons  must  sufi:'er  by  the  acts  of  a  third,  he  who  has 
enabled  such  third  person  to  occasion  the  loss  must  sustain  it"  is  ad- 
vanced. The  plaintiff  in  error  invokes  the  principle  that  where  the 
owner  of  property,  such  as  stock  certificates,  has  lost  it  by  the  crim- 
inal or  fraudulent  act  of  another,  the  owner,  not  voluntarily  or  negli- 
gently conferring  upon  such  another  the  indicia  of  ownership  or  ap- 
parent title,  cannot  be  deprived  of  his  property  by  the  attempted  trans- 
fer of  title  to  a  third  person  for  value,  no  matter  how  innocent  the 
purchaser  may  be  of  knowledge  of  the  crime  or  fraud  by  which  the 
property  was  acquired. 

In  this  case  the  diligence  of  counsel  has  called  to  the  attention  of 
the  court  many  cases  more  or  less  applicable  to  the  facts  herein  in- 
volved. We  will  not  stop  to  pass  them  in  review.  It  is  enough  to 
say  that  they  have  been  attentively  considered. 

Stock  certificates  are  a  peculiar  kind  of  property.  Although  not 
negotiable  paper,  strictly  speaking,  they  are  the  basis  of  commercial 
transactions  large  and  small,  and  are  frequently  sold  in  open  market 
as  negotiable  securities  are.  In  First  Nat.  Bank  v.  Lanier,  11  Wall. 
369,  377,  20  L.  Ed.  172,  174,  this  court  said:  "Stock  certificates  of  all 
kinds  have  been  constructed  in  a  way  to  invite  the  confidence  of  busi- 
ness men,  so  that  they  have  become  the  basis  of  commercial  transac- 
tions in  all  the  large  cities  of  the  country,  and  are  sold  in  open  mar- 
ket the  same  as  other  securities.  Although  neither  in  form  or  char- 
acter negotiable  paper,  they  approximate  to  it  as  nearly  as  practicable. 
*     *     *     Whoever  in  good  faith  buys  the  stock,  and  produces  to  the 


Ch.  4)  THE   RELATION   OF   STOCKHOLDERS   TO   CORPORATION  1407 

corporation  the  certificates,  regularly  assigned,  with  power  to  transfer, 
is  entitled  to  have  the  stock  transferred  to  him." 

These  principles  are  well  known  to  business  men  and  are  constantly 
acted  upon  by  them.  This  circumstance  should  be  given  due  weight 
in  determining  the  rights  of  the  parties  in  this  case.  *  *  *  "j^ 
Scollans  V.  E.  H.  Rollins  &  Sons,  179  Mass.  346,  60  N.  E.  983,  88  Am. 
St.  Rep.  386,  it  is  admitted  that  the  general  principle  there  laid  down 
would  not  apply  to  an  instrument  indorsed  in  blank  and  stolen  before 
it  had  been  transferred.  We  shall  not  examine  the  premises  of  this 
defense  because  we  cannot  accept  the  conclusion.  The  qualification  of 
the  rule,  as  not  applying  when  the  instrument  is  stolen,  is  not  based 
upon  the  name  of  the  agent's  crime,  but  upon  the  fact  that,  in  the  ordi- 
nary and  typical  case  of  theft,  the  owjier  has  not  intrusted  the  agent 
with  the  document,  and  therefore  is  not  considered  to  have  done 
enough  to  be  estopped  as  against  a  purchaser  in  good  faith.  He  cer- 
tainly has  not  done  enough  if  the  estoppel  is  based  upon  the  principle 
that  when  one  of  two  innocent  persons  is  to  suffer,  the  sutTerer  should 
be  the  one  whose  confidence  put  into  the  hands  of  the  wrongdoer  the 
means  of  doing  the  wrong.  But  in  a  case  like  the  present,  the  agent  has 
been  intrusted  with  the  converted  property,  and  it  is  totally  immaterial 
whether,  by  a  stretch  which  extends  larceny  beyond  the  true  field  of 
trespass,  his  wrong  has  been  brought  within  the  criminal  law  or  not. 
The  ground  of  the  estoppel  is  present  and  the  estoppel  arises.  The 
distinction  is  not  new.  On  the  one  side  are  cases  like  Knox  v.  Eden 
Musee  American  Co.,  148  N.  Y.  441,  42  N.  E.  988,  31  L.  R.  A.  779, 
51  Am.  St.  Rep.  700,  where  an  agent  or  servant  simply  had  access  to 
a  document  remaining  in  the  possession  of  the  owner;  on  the  other, 
cases  like  Pennsylvania  R.  Co.'s  Appeal,  86  Pa.  80,  where  possession  is 
intrusted  to  the  agent  for  one  purpose  and  he  uses  it  for  another.  It 
cannot  matter  in  the  latter  class  that  the  agent  intended  the  fraud 
from  the  outset." 

We  think  this  case  correctly  states  the  principle,  and,  applied  to  the 
case  in  hand,  is  decisive  of  it.  Here  one  of  two  innocent  persons  must 
.sufifer  and  the  question  at  last  is.  Where  shall  the  loss  fall?  It  is  unde- 
niable that  the  broker  obtained  the  stock  certificates,  containing  all  the 
indicia  of  ownership  and  possible  of  ready  transfer,  from  one  who  had 
possession  with  the  bank's  consent,  and  who  brought  the  certificates 
to  him,  apparently  clothed  wuth  the  full  ownership  thereof  by  all  the 
tests  usually  applied  by  business  men  to  gain  knowledge  upon  the 
subject  before  making  a  purchase  of  such  property.  On  the  other 
hand,  the  bank,  for  a  legitimate  purpose,  with  confidence  in  one  of 
its  own  employees,  intrusted  the  certificates  to  him,  with  every  evi- 
dence of  title  and  transferability  upon  them.  The  bank's  trusted  agent, 
in  gross  breach  of  his  duty,  whether  with  technical  criminality  or  not 
is  unimportant,  took  such  certificates,  thus  authenticated  with  evi- 
dence of  title,  to  one  who,  in  the  ordinary  course  of  business,  sold 
them  to  parties  who  paid  full  value  for  them.  In  such  case  we  think  the 
principles  which  underlie  equitable  estoppel  place  the  loss  upon  him 
whose  misplaced  confidence  has  made  the  wrong  possible. 

Applying  this  principle,  we  think  the  Court  of  Appeals  was  right  in 
affirming  the  judgment  of  the  Supreme  Court,  and  its  judgment  is  af- 
firmed. 


1468  CORPORATIONS  (Part  6 

UNIFORM  STOCK  TRANSFER  ACT 

Section  1.  Title  to  a  certificate  and  to  the  shares  represented 
thereby  can  be  transferred  only: 

(a)  By  delivery  of  the  certificate  indorsed  either  in  blank  or  to  a 
specified  person  by  the  person  appearing  by  the  certificate  to  be 
the  owner  of  the  shares  represented  thereby,  or 

(b)  By  delivery  of  the  certificate  and  a  separate  document  con- 
taining a  written  assignment  of  the  certificate  or  a  power  of  at- 
torney to  sell,  assign,  or  transfer  the  same  or  the  shares  repre- 
sented thereby,  signed  by  the  person  appearing  by  the  certificate 
to  be  the  owner  of  the  shares  represented  thereby.  Such  assign- 
ment or  power  of  attorney  may  be  either  in  blank  or  to  a  specified 
person. 

The  provisions  of  this  section  shall  be  applicable  although  the 
charter  or  articles  of  incorporation  or  code  of  regulations  or  by- 
laws of  the  corporation  issuing  the  certificate  and  the  certificate 
itself,  provide  that  the  shares  represented  thereby,  shall  be  trans- 
ferable only  on  the  books  of  the  corporation  or  shall  be  registered 
by  a  registrar  or  transferred  by  a  transfer  agent. 

Section  2.  Nothing  in  this  act  shall  be  construed  as  enlarging 
the  powers  of  an  infant  or  other  person  lacking  full  legal  capacity, 
or  of  a  trustee,  executor  or  administrator,  or  other  fiduciary,  to 
make  a  valid  indorsement,  assignment  or  power  of  attorney. 

Section  3.  Nothing  in  this  act  shall  be  construed  as  forbidding  a 
corporation — 

(a)  To  recognize  the  exclusive  right  of  a  person  registered  on 
its  books  as  the  owner  of  shares  to  receive  dividends,  and  to  vote 
as  such  owner,  or 

(b)  To  hold  liable  for  calls  and  assessments  a  person  registered 
on  its  books  as  the  owner  of  shares. 

Section  4.  The  title  of  a  transferee  of  a  certificate  under  a  power 
of  attorney  or  assignment  not  written  upon  the  certificate,  and 
the  title  of  any  person  claiming  under  such  transferee,  shall  cease 
and  determine  if,  at  any  time  prior  to  the  surrender  of  the  certifi- 
cate to  the  corporation  issuing  it,  another  person,  for  value  in  good 
faith,  and  without  notice  of  the  prior  transfer,  shall  purchase  and 
obtain  delivery  of  such  certificate  with  the  indorsement  of  the 
person  appearing  by  the  certificate  to  be  the  owner  thereof,  or 
shall  purchase  and  obtain  delivery  of  such  certificate  and  the 
written  assignment  or  power  of  attorney  of  such  person,  though 
contained  in  a  separate  document. 

Section  5.  The  delivery  of  a  certificate  to  transfer  title  in  ac- 
cordance with  the  provisions  of  section  1,  is  effectual,  except  as 
provided  in  section  7,  though  made  by  one  having  no  right  of 
possession  and  having  no  authority  from  the  owner  of  the  certifi- 
cate or  from  the  person  purporting  to  transfer  the  title. 

Section  6.     The  indorsement  of  a  certificate  by  the  person  ap- 


Ch.  4)  TIIR    RELATION   OF   STOCKHOLDERS   TO   CORPORATION  1409 

pearing  by  the  certificate  to  be  the  owner  of  the  shares  represented 
thereby  is  effectual,  except  as  provided  in  section  7,  though  the  in- 
dorser  or  transferor — 

(a)  Was  induced  by  fraud,  duress  or  mistake,  to  make  the  in- 
dorsement or  delivery,  or 

(b)  Has  revoked  the  delivery  of  the  certificate,  or  the  authority 
given  by  the  indorsement  or  delivery  of  the  certificate,  or 

(c)  Has  died  or  become  legally  incapacitated  after  the  indorse- 
ment, whether  before  or  after  the  deUvery  of  the   certificate,   of 

(d)  Has  received  no  consideration. 

Section  7.     If  the  indorsement  or  delivery  of  a  certificate — 

(a)  Was  procured  by  fraud  or  duress,  or 

(b)  Was  made  under  such  mistake  as  to  make  the  indorsement 
or  delivery  inequitable ;    or 

If  the  delivery  of  a  certificate  was  made — 

(c)  Without  authority  from  the  owner,  or 

(d)  After  the  owner's  death  or  legal  incapacity,  the  possession 
of  the  certificate  may  be  reclaimed  and  the  transfer  thereof  re- 
scinded, unless: 

(1)  The  certificate  has  been  transferred  to  a  purchaser  for  value 
in  good  faith  without  notice  of  any  facts  making  the  transfer 
wrongful,  or 

(2)  The  injured  person  has  elected  to  waive  the  injury,  or  has 
been  guilty  of  laches  in  endeavoring  to  enforce  his  rights. 

Any  court  of  appropriate  jurisdiction  may  enforce  specifically 
such  right  to  reclaim  the  possession  of  the  certificate  or  to  rescind 
the  transfer  thereof,  and,  pending  litigation,  may  enjoin  the  further 
transfer  of  the  certificate  or  impound  it. 

Section  8.  Although  the  transfer  of  a  certificate  or  of  shares 
represented  thereby  has  been  rescinded  or  set  aside,  nevertheless, 
if  the  transferee  has  possession  of  the  certificate  or  of  a  new  cer- 
tificate representing  part  or  the  whole  of  the  same  shares  of  stock, 
a  subsequent  transfer  of  such  certificate  by  the  transferee,  medi- 
ately or  immediately,  to  a  purchaser  for  value  in  good  faith,  with- 
out notice  of  any  facts  making  the  transfer  wrongful,  shall  give 
such  purchaser  an  indefeasible  right  to  the  certificate  and  the 
shares  represented  thereby. 

Section  9.  The  delivery  of  a  certificate  by  the  person  appearing 
by  the  certificate  to  be  the  owner  thereof  without  the  indorsement 
requisite  for  the  transfer  of  the  certificate  and  the  shares  represent- 
ed thereby,  but  with  intent  to  transfer  such  certificate  or  shares, 
shall  impose  an  obligation,  in  the  absence  of  an  agreement  to  the 
contrary,  upon  the  person  so  delivering,  to  complete  the  transfer 
by  making  the  necessary  indorsement.  The  transfer  shall  take 
effect  as  of  the  time  when  the  indorsement  is  actually  made.  This 
obligation  may  be  specifically  enforced. 

Section  10.  An  attempted  transfer  of  title  to  a  certificate  or  to 
the  shares  represented  thereby  without  delivery  of  the  certificate 
shall  have  the  effect  of  a  promise  to  transfer  and  the  obligation, 


1470  CORPORATIONS  (Part  6 

if  any,  imposed  by  such  promise  shall  be  determined  by  the  law 
governing  the  formation  and  performance  of  contracts. 

Section  11.  A  person  who  for  value  transfers  a  certificate,  in- 
cluding one  who  assigns  for  value  a  claim  secured  by  a  certificate, 
unless  a  contrary  intention  appears,  warrants — 

(a)  That  the  certificate  is  genuine; 

(b)  That  he  has  a  legal  right  to  transfer  it,  and 

(c)  That  he  has  no  knowledge  of  any  fact  which  would  impair 
the  validity  of  the  certificate. 

In  the  case  of  an  assignment  of  a  claim  secured  by  a  certificate, 
the  liability  of  the  assignor  upon  such  warranty  shall  not  exceed 
the  amount  of  the  claim. 

Section  12.  A  mortgagee,  pledgee,  or  other  holder  for  security 
of  a  certificate  who  in  good  faith  demands  or  receives  payment  of 
the  debt  for  which  such  certificate  is  security,  whether  from  a 
party  to  a  draft  drawn  for  such  debt,  or  from  any  other  person, 
shall  not  by  so  doing  be  deemed  to  represent  or  to  warrant  the 
genuineness  of  such  certificate,  or  the  value  of  the  shares  repre- 
sented thereby. 

Section  13.  No  attachment  or  levy  upon  shares  of  stock  for 
which  a  certificate  is  outstanding  shall  be  valid  until  such  certifi- 
cate be  actually  seized  by  the  officer  making  the  attachment  or 
levy,  or  be  surrendered  to  the  corporation  which  issued  it,  or  its 
transfer  by  the  holder  be  enjoined.  Except  were  a  certificate  is 
lost  or  destroyed,  such  corporation  shall  not  be  compelled  to  issue 
a  new  certificate  for  the  stock  until  the  old  certificate  is  surren- 
dered to  it. 

Section  14.  A  creditor  whose  debtor  is  the  owner  of  a  certificate 
shall  be  entitled  to  such  aid  from  courts  of  appropriate  jurisdiction, 
by  injunction  and  otherwise,  in  attaching  such  certificate  or  in 
satisfying  the  claim  by  means  thereof  as  is  allowed  at  law  or  in 
equity,  in  regard  to  property  which  cannot  readily  be  attached  or 
levied  upon  by  ordinary  legal  process. 

Section  15.  There  shall  be  no  lien  in  favor  of  a  corporation 
upon  the  shares  represented  by  a  certificate  issued  by  such  corpora- 
tion ^nd  there  shall  be  no  restriction  upon  the  transfer  of  shares  so 
represented  by  virtue  of  any  by-laws  of  such  corporation,  or  other- 
wise, unless  the  right  of  the  corporation  to  such  lien  or  the  re- 
striction is  stated  upon  the  certificate. 

Section  16.  The  alteration  of  a  certificate,  whether  fraudulent 
or  not  and  by  whomsoever  made,  shall  not  deprive  the  owner  of  his 
title  to  the  certificate  and  the  shares  originally  represented  there- 
by, and  the  transfer  of  such  a  certificate  shall  convey  to  the  trans- 
feree a  good  title  to  such  certificate  and  to  the  shares  originally 
represented  thereby. 

Section  17.  Where  a  certificate  has  been  lost  or  destroyed,  a 
court  of  competent  jurisdiction  may  order  the  issue  of  a  new  cer- 
tificate therefor  on  service  of  process  upon  the  corporation  and 
on  reasonable  notice  by  publication,  and  in  any  other  way  which 


Ch.  4)  THE   RKLATION   OF   STOCKHOLDERS   TO   CORPORATION  1471 

the  court  may  direct,  to  all  persons  interested,  and  upon  satis- 
factory proof  of  such  loss  or  destruction  and  upon  the  giving  of  a 
bond  with  sufficient  surety  to  be  approved  by  the  court  to  protect 
the  corporation  or  any  person  injured  by  the  issue  of  the  new  cer- 
tificate from  any  liability  or  expense,  which  it  or  they  may  incur 
by  reason  of  the  original  certificate  remaining  outstanding.  The 
court  may  also  in  its  discretion  order  the  payment  of  the  corpora- 
tion's reasonable  costs  and  counsel  fees. 

The  issue  of  a  new  certificate  under  an  order  of  the  court  as  pro- 
vided in  this  section,  shall  not  relieve  the  corporation  from  lia- 
bility in  damages  to  a  person  to  whom  the  original  certificate 
has  been  or  shall  be  transferred  for  value  without  notice  of  the  pro- 
ceedings or  of  the  issuance  of  the  new  certificate. 

Section  18.  In  any  case  not  provided  for  by  this  act,  the  rules  of 
law  and  equity,  including  the  law  merchant,  and  in  particular  the 
rules  relating  to  the  law  of  principal  and  agent,  executors,  admin- 
istrators and  trustees,  and  to  the  effect  of  fraud,  misrepresentation, 
duress  or  coercion,  mistake,  bankruptcy,  or  other  invalidating 
cause,  shall  govern. 

Section  19.  This  act  shall  be  so  interpreted  and  construed  as  to 
effectuate  its  general  purpose  to  make  uniform  the  law  of  those 
states  which  enact  it. 

Section  20.  A  certificate  is  indorsed  when  an  assignment  or  a 
power  of  attorney  to  sell,  assign,  or  transfer  the  certificate  or  the 
shares  represented  thereby  is  written  on  the  certificate  and  signed 
by  the  person  appearing  by  the  certificate  to  be  the  owner  of  the 
shares  represented  thereby,  or  when  the  signature  of  such  person 
is  written  without  more  upon  the  back  of  the  certificate.  In  any  of 
such  cases  a  certificate  is  indorsed,  though  it  has  not  been  deliv- 
ered. 

Section  21.  The  person  to.  whom  a  certificate  was  originally 
issued  is  the  person  appearing  by  the  certificate  to  be  the  owner 
thereof,  and  of  the  shares  represented  thereby,  until  and  unless 
he  indorses  the  certificate  to  another  specified  person,  and  there- 
upon such  other  specified  person  is  the  person  appearing  by  the 
certificate  to  be  the  owner  thereof  until  and  unless  he  also  in- 
dorses the  certificate  to  another  specified  person.  Subsequent 
special  indorsements  may  be  made  with  like  effect. 

Section  22.  (1)  In  this  act,  unless  the  context  or  subject-matter 
otherwise  requires — 

"Certificate"  means  a  certificate  of  stock  in  a  corporation  organ- 
ized under  the  laws  of  this  state  or  of  another  state  whose  laws  are 
consistent  with  this  act. 

"Delivery"  means  voluntary  transfer  of  possession  from  one 
person  to  another. 

"Person"  includes  a  corporation  or  partnership  or  two  or  more 
persons  having  a  joint  or  common  interest. 

To  "purchase"  includes  to  take  as  mortgagee  or  as  pledgee. 

"Purchaser"  includes  mortgagee  and  pledgee. 


1472  CORPORATIONS  (Part  G 

"Shares"  means  a  share  or  shares  of  stock  in  a  corporation  organ- 
ized under  the  laws  of  this  state  or  of  another  state  whose  laws 
are  consistent  with  this  act. 

"State"  includes  state,  territory,  district  and  insular  posses- 
sions of  the  United  States. 

"Transfer"  means  transfer  of  legal  title. 

"Title"  means  legal  title  and  does  not  include  a  merely  equitable 
or  beneficial  ownership  or  interest. 

"Value"  is  any  consideration  sufficient  to  support  a  simple  con- 
tract. An  antecedent  or  pre-existing  obligation,  whether  for  mon- 
ey or  not,  constitutes  value  where  a  certificate  is  taken  either  in 
satisfaction  thereof  or  as  security  therefor. 

(2)  A  thing  is  done  "in  good  faith"  within  the  meaning  of  this 
act,  when  it  is  in  fact  done  honestly,  whether  it  be  done  negH- 
gently  or  not. 

Section  23.  The  provisions  of  this  act  apply  only  to  certificates 
issued  after  the  taking  effect  of  this  act. 

Section  24.  All  acts  or  parts  of  acts  inconsistent  with  this  act 
are  hereby  repealed. 

Section  25.  This  act  m.ay  be  cited  as  the  Uniform  Stock  Trans- 
fer Act.i 

1  The  Uniform  Stock  Transfer  Act  has  heen  adopted  in  Connecticut.  Illinois, 
Louisiana,  Maryland.  Massachusetts,  INIichisnn.  New  Jersey,  New  York,  Ohio, 
Pennsylvania,  Rhode  Island,  Soufth  Dakota,  Tennessee,  Wisconsin,  and 
Alaska. 


Ch.  5)    THE  RELATION  OP  CREDITORS  TO  THE  CORPORATION     1473 


CHAPTER  V 
THE  RELATION  OF  CREDITORS  TO  THE  CORPORATION 

Section 

1.  Rights  of  Corporation  Creditors  Against  a   Purcliaser  of  the  Assets   of 

tlie  Debtor  Company. 

2.  Priorities  Among  the  Various  Classes  of  Creditors  in  General. 

3.  Current    Operating   Expenses    to    he    Paid    out    of    Current    Earnings    in 

Preference  to  Claims  of   Secured  Creditors. 

4.  Rights  of  Unsecured  Creditors  Arising  upon  Reorganization 

5.  Rights  of  Creditors  Against  Stockholders. 


SECTION    1.— RIGHTS    OF    CORPORATION    CREDITORS 

AGAINST  A  PURCHASER  OF  THE  ASSETS 

OF  THE  DEBTOR  COMPANY 


»{jy  ZIECNIER  V.  C.  G.  BRETTING  MFG.  CO. 

(Supreme  Court  of  Wisconsin.  1911.     147  Wis.  252,  133  N.  W.  139, 
Ann.  Cas.  1912D,  1275.) 

Action  by  W.  W.  Ziemer  against  the  C.  G.  Bretting  Manufacturing 
Company.     J^^dgment  for  defendant.     Plaintiff  appeals. 

Timlin,  j.  *  *  *  It  appeared  that  C.  G.  Bretting  carried  on  a 
foundry  business,  under  the  name  of  the  C.  G.  Bretting  Manufacturing 
Company,  at  Ashland,  Wis.,  prior  to  his  death,  which  occurred  in  A. 
D.  1904.  *  *  *  C.  G.  Bretting  left  surviving  him  his  widow  and 
three  sons,  Ralph  Bretting,  William  Henry  Bretting,  and  Henry  L. 
Bretting.  These  four  may  be  said  to  have  owned  the  foundry  plant 
and  business  as  widow  and  heirs  of  C.  G.  Bretting,  deceased.  *  *  * 
On  or  about  March  16,  1907,  Jane  Bretting,  Sam  Wheeler,  and  C._A. 
Lamoreaux  executed  articles  of  incorporation  of  the  C.  G.  Bretting 
Manufacturing  Company,  and  caused  the  same  to  be  duly  filed  with 
the  Secretary  of  State  and  recorded  with  the  register  of  deeds  of 
Ashland  county.  This  corporation  was  empowered  by  such  articles 
to  carry  on  a  similar  business  to  that  carried  on  by  the  natural  per- 
sons aforesaid,  under  the  same  name,  and  at  the  same  place. 

The  plaintiff  was  employed  as  a  molder  by  the  C.  G.  Bretting  Man- 
ufacturing Company  in  April,  1907,  and  on  June  19,  1907,  while  in 
that  employment,  was  injured  by  reason  of  alleged  defective  appli- 
ances. *  *  *  On  September  12,  1907,  Jane  Bretting  and  her  three 
sons  executed  a  transfer  of  this  property  to  the  corporation.  The 
corporation  used  the  same  books  of  account  as  its  predecessor,  con- 
tinuing the  same  accounts,  without  rest  or  break.     *     *     * 

The  question  is  whether  the  corporation  is  liable  to  an  employe,  in- 
jured in  consequence  of  a  defective  appliance  on  June  19,  1907.  *  *  * 
There  is  a  line  of  authority  which  may  be  fairly  said  to  hold  that 
where  copartners  or  other  joint  owners  of  a  solvent  going  business 
transform  themselves  into  a  corporation,  to  which  the  joint  property 
is  transferred  in  exchange  for  shares  of  stock,  there  must,  in  order 
B.&  B.Bus.Law— 93 


1474  coRroRATiONS  (Part  G 

to  bind  the  new  corporation  for  the  HabiHties  of  the  former  partner- 
ship, be  an  express  assumption  by  the  corporation  of  such  Uabilities. 

*  *  *  There  are  also  cases  which  hold  that  no  such  express  agree- 
ment need  be  shown,  but  seem  to  go  upon  the  presumption  that  such 
liabilities  are  assumed  under  these  circumstances,  *  *  *  A  third 
line  of  cases  holds  that  the  assumption  of  liabilities  may  be  express 
or  implied,  and  the  latter  rule  has  been  established  for  this  court  in 
Pratt  V.  Oshkosh  Match  Co.,  89  Wis.  406,  62  N.  W.  84.    *    *    * 

This  agreement  on  the  part -of  the  corporation  may  be  proven,  like 
any  other  fact,  by  any  competent  evidence  which  will  estabUsh  either 
an  express  or  an  implied   valid  agreement  to  assume  the  liabilities. 

*  *  *  The  evidence  of  assumption  in  the  instant  case  is  as  follows : 
(1)  The  identity  in  name;  (2)  the  almost  complete  identity  of  inter- 
est; (3)  the  continuation  of  the  same  business  at  the  same  place; 
(4)  the  identity  of  property;  (5)  the  use  of  the  old  books,  without 
break  or  rest  in  the  accounts ;  and  (6)  the  resolution  to  take  the  prop- 
erty of  the  former  associates  as  of  date  of  April  1st.  This  last  is 
very  significant.  In  order  to  take  the  property  as  of  April  1st,  the 
corporation  would  necessarily  acquire  all  increase  or  increment  accru- 
ing after  that  date,  and  be  subject  to  all  diminution  or  loss  occurring 
after  that  date  in  the  ordinary  vicissitudes  of  business.  If  the  co- 
partners sold  goods  or  merchandise  after  April  1st  on  credit,  the  ac- 
count, including  the  profit  on  the  transaction,  would  go  to  the  cor- 
poration. If,  by  reason  of  breach  of  warranty  on  this  sale,  a  liability 
accrued  to  the  purchaser,  the  corporation  would  be  chargeable  with 
this  liability.  No  other  reasonable  effect  could  be  given  to  the  resolu- 
tion to  take  the  property  as  of  date  of  April  1st.     *     *     * 

The  plaintiff  was  not  in  the  employment  of  the  corporation  at  the 
time  he  was  injured,  but  was  in  the  employment  of  the  precedent  man- 
agers and  owners  of  the  business;  and,  assuming  that  there  was  an 
outstanding  liability  of  such  manager  and  owners  to  the  plaintiff,  in- 
curred in  the  operation  of  this  business  and  accruing  on  June  19, 
1908,  when  the  corporation  took  over  this  property  as  of  April  1, 
1908,  and  continued  the  same  account  books  under  the  same  name, 
at  the  same  place,  for  the  purpose  of  continuing  the  same  business, 
it  assumed  by  this  form  of  resolution  the  liability  to  the  plaintiff  if 
any  such  liability  existed.  It  follows  that  the  judgment  of  the  cir- 
cuit court  must  be  reversed,  and  the  cause  remanded  for  a  new  trial. 


LUDECKE  V.  DES  MOINES  CABINET  CO.  et  al. 

(Supreme  Court  of  Iowa,   190S.     140  Iowa,  223,  118   N.  W.   456, 
32  L.  R..  A.  [N.  S.]  616.) 

DiiEMivR,  J.  Plaintiff"  recovered  judgment  against  the  Des  Moines 
Cabinet  Company  December  31,  1900,  in  the  sum  of  $325  for  breach 
of  a  contract  of  employment.  The  cabinet  company  was  a  corporation 
organized  under  the  laws  of  this  state,  and  at  all  times  material  to  our 
inquiry  the  entire  stock  of  the  corporation  was  owned  by  defendant 
Hartung.  On  the  15th  day  of  August,  1900,  and  after  plaintiff  had 
commenced  his  suit  against  the  cabinet  company,  Hartung,  as  presi- 
dent of  that  company,  sold  and  transferred  to  the  Wells  &  Antes  Un- 
dertaking Company,  also  an  Iowa  corporation,  all  the  assets  of  the 
cabinet  company,  the  consideration  named  being  $3,500.  Instead  of 
cash  Hartung  individually  received  35  shares  of  the  stock  of  the  un- 


Ch.  5)    THE  RELATION  OF  CREDITORS  TO  THE  CORPORATION     1475 

dertaking  company,  which  he  immediately  hypothecated  for  his  private 
account.  Plaintifif,  after  obtaining  his  judgment,  caused  execution 
to  issue  against  the  cabinet  company,  which  was  returned  no  property 
found.  He  thereupon  brought  this  suit  in  equity,  alleging  that  when  the 
undertaking  company  purchased  the  property,  it  knew  of  plaintiff's 
claim,  and  with  intent  to  hinder,  delay,  and  defraud  him  it  took  pos- 
session of  all  the  assets  of  the  cabinet  company,  and  converted  the 
same  to  its  own  use  without  other  consideration  than  the  issuance  of 
its  own  stock  in  payment  therefor ;  that  by  reason  of  the  transfer  the 
undertaking  company  became  possessed  of  all  of  the  assets  of  the  cab- 
inet company,  leaving  nothing  for  the  payment  of  its  debts. 

Upon  the  trial  plaintiff  withdrew  all  charges  of  fraud  and  deceit, 
"except  such  fraud  as  may  arise  from  the  transaction  between  the  par- 
ties at  law."  As  we  understand  it,  plaintiff  relies  upon  a  single  propo- 
sition in  this  case,  and  that  is  that,  where  one  corporation  transfers  all 
its  assets  to  another  corporation,  and  thus  practically  ceases  to  exist 
without  having  paid  its  debts,  the  purchasing  corporation  takes  the 
property  subject  to  an  equitable  lien  or  charge  in  favor  of  the  creditors 
of  the  selling  corporation,  and  this  without  reference  to  the  question 
of  actual  fraud.  If  the  affirmative  of  this  proposition  be  held,  it  must 
be  upon  the  theory  that  the  assets  of  a  corporation  are  in  the  nature 
of  a  trust  fund  for  the  payment  of  its  debts,  and  that  a  sale  of  the 
entire  property  works  a  dissolution  of  the  selling  corporation,  and 
iustifies  an  accounting  at  the  suit  of  creditors.  Plaintiff  also  claims 
that  under  the  facts  disclosed  by  this  record  he  became  entitled  to  a 
judgment  against  the  undertaking  company  and  its  successor  in  inter- 
est for  the  amount  of  the  judgment  he  obtained  against  the  cabinet 
company.  The  trial  court  was  evidently  of  this  opinion,  for  it  ren- 
dered judgment  against  all  the  defendants  personally,  and  also  es- 
tablished a  lien  to^the  amount  of  the  judgment  against  the  property 
of  the  cabinet  company  sold  by  Hartung  to  the  undertaking  company, 
and  directed  its  sale  under  special  execution. 

Appellants  challenge  that  part  of  the  decree  rendering  personal 
judgment  against  the  undertaking  company,  the  successor  to  the  assets 
of  the  cabinet  company,  and  we  are  constrained  to  sustain  them  in  this 
position.  In  order  to  render  the  purchasing  company  personally  liable 
for  the  debts  of  the  selling  corporation,  it  must  appear  that  (a)  there 
be  an  agreement  to  assume  such  debts;  (b)  the  circumstances  sur- 
rounding the  transaction  must  warrant  a  finding  that  there  was  a  con- 
solidation of  the  two  corporations;  or  (c)  that  the  purchasing  cor- 
poration was  a  mere  continuation  of  the  selling  corporation;  or  (d) 
that  the  transaction  was  fraudulent  in  fact.  *  *  *  None  of  these 
things  appear  in  this  case,  and  in  our  opinion  the  court  was  in  error  in 
rendering  a  personal  judgment  against  the  purchasing  corporation. 

Little  is  said  specifically  of  that  part  of  the  decree  which  establishes 
plaintift''s  judgment  against  the  cabinet  company  as  a  lien  upon  the 
property  purchased  by  the  undertaking  company,  although  we  assume 
that  appellants'  counsel  are  adopting  the  same  theories  with  reference 
thereto  that  they  urge  against  the  personal  judgment.  The  cases  they 
cite  do  not  go  to  this  extent,  however,  although  there  are  some  which 
sustain  the  proposition  that  the  purchasing  corporation  takes  the  prop- 
erty fre8  from  all  debts  or  claims  against  the  selling  one.  A  great 
many  authorities  in  this  country  hold  to  the  doctrine  that,  if  one  cor- 
poration transfers  all  its  assets  to  another,  and  thus  practically  ceases 


1476  CORPORATIONS  (Part  6 

to  exist,  without  having  paid  its  debts,  the  purchasing  corporation  takes 
the  property  subject  to  an  equitable  lien  or  charge  in  favor  of  the  cred- 
itors of  the  selling  corporation.  Some  courts  announce  a  modified 
doctrine  declaring  that  the  principle  has  no  application  to  a  sale  made 
in  the  usual  course  of  business,  nor  to  a  bona  fide  sale  for  a  full  con- 
sideration in  cash  or  its  equivalent. 

Although  announcing  in  general  terms  the  first  proposition,  we  are 
probably  committed  to  the  modified  one  in  Warfield  v.  Marshall  Can- 
ning Co.,  72  Iowa,  666,  34  N.  W.  467.  2  Am.  St.  Rep.  263.  It  has  been 
broadly  asserted  by  courts  of  the  highest  standing  that  the  capital 
stock  of  a  corporation  is  a  fund  for  the  payment  of  its  debts.  "It  is 
a  trust  fund  of  which  the  directors  are  trustees.  *  *  *  The  capital 
stock  paid  in,  and  promised  to  be  paid  in,  is  a  fund  which  the  trustees 
cannot  squander  or  give  away."  Upton  v.  Tribilcock,  91  U.  S.  45,  23 
L.  Ed.  203.  This  modern  or  so-called  American  doctrine  has  never 
been  recognized  in  England,  nor  does  it  exist  at  common  law ;  and, 
while  at  one  time  quite  generally  adopted  in  this  country,  it  is  now  be- 
Heved  to  be  unsupported  to  its  full  extent  by  any  considerable  number 
of  courts.  Indeed  the  court  which  first  announced  it  has  largely  receded 
from  its  former  position,  and  now  says  that  no  trust  in  its  true  sense 
exists ;  that  all  that  was  intended  by  the  previous  expressions  was  to 
announce  the  existence  of  an  equitable  right,  which  will  be  enforced 
whenever  a  court  of  equity,  at  the  instance  of  a  proper  party,  has  tak- 
en possession  of  its  assets.  "It  is  never  understood  that  there  is  a 
specific  lien  or  a  direct  trust."  See  Hollins  v.  Iron  Co.,  150  U.  S.  371, 
14Sup.  Ct.  127,  37  L.Ed.  1113. 

We  have  recently  gone  over  this  matter  in  the  case  of  State  Trust 
Co.  v.  Turner,  111  Iowa,  664,  82  N.  W.  1029,  53  L.  R.  A.  136,  and  have 
repudiated  the  trust-fund  doctrine  as  broadly  announced  in  some  of 
the  earlier  cases  in  this  country.  The  creditors  of  a  corporation  in  a 
proper  case  have  an  equitable  right  or  lien  upon  the  assets  of  a  cor- 
poration. But  a  corporation,  like  a  partnership,  may  transfer  its 
property  in  good  faith  to  a  bona  fide  purcliaser,  and  such  purchaser 
will  hold  it  free  from  the  debts  of  the  corporation.  The  statutes  of  this 
state,  however,  prohibit  the  diversion  of  corporate  funds  to  other  ob- 
jects than  those  mentioned  in  its  articles,  *  *  *  and  it  is  a  well- 
settled  rule  of  the  common  law  that  the  stockholders  of  a  corporation 
cannot  divide  its  property  or  assets  among  themselves  without  first 
paying  the  corporate  debts.  The  rules  thus  announced  have  been-  stated 
very  clearly  in  Mclver  v.  Young  Hardware  Co.,  144  N.  C.  478,  57  S. 
E.  i69,  119  Am.  St.  Rep.  970.  *  *  *  The  instant  case  seems  to  call 
for  a  rather  full  discussion  of  the  so-called  "trust-fund"  doctrine,  and 
we   have  perhaps   said  enough   to  indicate  our  view  of  the   matter. 

*  5)5  * 

Going  now  to  the  facts  of  the  case,  it  will  be  observed  that  the  exact 
point  for  decision  is  ^  narrow  one.  Plaintifif  was  a  creditor  of  the  Des 
INIoines  Cabinet  Company,  holding  an  unliquidated  demand  against  it, 
which  was  in  suit  when  the  cabinet  company  sold  its  assets  to  the  un- 
dertaking company.  The  undertaking  company  acquired  practically 
all  of  the  assets  of  the  cabinet  company  by  purchase,  and  it  issued  in 
payment  therefor  certain  of  its  shares  of  stock,  not  to  the  cabinet 
company  for  proper  distribution,  but  to  Hartung  individually,  who  im- 
mediately pledged  the  same  as  security  for  his  individual  debts,  leaving 
nothing  from  which  plaintifif  could  collect  his  judgment,  which  he  ob- 


Ch.  5)         THE  RELATION  OP   CREDITORS  TO  THE  CORPORATION  1477 

tained  in  due  course.  The  charge  of  actual  fraud — that  is,  of  intent 
to  hinder,  delay,  and  defraud  plaintiff  in  the  collection  of  his  claim — 
has  been  withdrawn,  and  reliance  is  placed  upon  the  general  doctrine 
that  plaintiff,  under  this  brief  recitation  of  the  facts,  is  entitled  in 
equity  to  enforce  his  judgment  against  the  property  of  the  cabinet  com- 
pany which  was  received,  and  is  still  held,  by  the  undertaking  com- 
pany, on  the  theory  that  he  has  an  equitable  lien  upon  this  property, 
or  that  the  facts  show  a  case  of  legal  fraud  entitling  him  to  proceed 
against  the  property.  We  do  not  recognize  the  trust- fund  doctrine  to 
the  extent  that  it  has  obtained  in  some  of  the  courts;  but  are  of  opin- 
ion that  corporate  creditors  are  entitled  in  equity  to  the  payment  of 
their  debts  before  any  distribution  of  corporate  property  is  made  among 
the  stockholders,  and  recognize  the  right  of  a  creditor  of  a  corporation 
to  follow  its  assets  or  property  into  tlie  hands  of  any  one  who  is  not 
a  good-faith  holder  in  the  ordinary  course  of  business. 

We  must  also  enforce  our  statute  which  prohibits  the  diversion  of 
corporate  funds  and  the  payment  of  dividends  not  earned.  So  that,  in 
its  last  analysis,  the  question  here  is.  Is  the  undertaking  company  and 
its  successor  in  interest  such  a  bona  fide  purchaser  as  that  it  may  hold 
the  assets  of  the  cabinet  company  free  from  the  debts  of  that  corpora- 
tion? The  answer  to  this  must  be  in  the  negative,  and  for  these  among 
other  reasons :  It  issued  to  Hartung  individually  whatever  of  con- 
sideration it  paid  for  the  assets  of  the  cabinet  company,  knowing  be- 
fore it  finally  issued  its  stock  that  it  was  being  used  by  Hartung  for 
his  own  private  ends.  It  did  not  buy  the  property  in  the  usual  course 
of  business.  On  the  contrary,  it  took  it  over,  and  issued  its  own  stock 
in  payment  therefor,  which  did  not  go  to  the  corporation  from  which 
it  purchased.  That  it  did  not  take  the  property  free  from  liability 
for  corporate  debts  under  such  circumstances  is  held  by  practically 
all.  of  the  cases  which  we  have  been  able  to  find  or  which  have  been 
cited  by  counsel.  In  Thompson  on  Corporations,  §  6547,  it  is  said: 
"Where  one  corporation  transfers  all  its  assets  to  another  corpora- 
tion, and  thus  practically  ceases  to  exist,  without  having  paid  its  debts, 
the  purchasing  corporation  takes  the  property  subject  to  an  equitable 
lien  or  charge  in  favor  of  the  creditors  of  the  selling  corporation. 
*  *  *  And  while  the  right  to  follow  a  trust  fund  into  the  hands  of 
a  third  party  depends  upon  the  answer  to  the  inquiry  whether  such 
third  party  took  it  with  knowledge  of  the  trust,  the  case  being  one 
where  the  trustee  who  transferred  it  to  him  had  a  power  of  disposi- 
tion, yet  in  such  a  case  as  we  are  supposing,  where  one  corporation 
transfers  all  its  assets  to  another,  not  in  the  ordinary  course  of  busi- 
ness, the  very  circumstances  of  the  case  imply  full  knowledge,  on  the 
part  of  the  transferee,  of  all  the  facts  necessary  to  charge  the  property 
in  his  hands  with  the  debts  of  the  transferror,  and  the  case  is  still 
clearer  where  the  corporation  receiving  the  transfer  agrees  to  assume 
and  pay  the  debts  of  the  corporation  making  it,  in  which  case,  under 
the  principles  of  equity,  and  under  the  modern  Codes  of  Procedure, 
the  creditors  of  the  transferring  corporation  may  maintain  a  direct 
action  against  the  transferee  corporation  upon  the  contract,  as  a  con- 
tract made  for  their  benefit.  *  *  *  The  theory  under  which  these 
cases  proceed  is  that  the  purchasing  corporation  is  not  a  good- faith 
buyer  for  value,  in  that  the  transaction  is  an  unusual  one;  and  the 
purchasing  company  is  held  to  acknowledge  that  the  property  it  buys 
is  subject  to  the  payment  of  corporate  debts,  and  the  buyer  is  not  a  bona 


1478  CORPORATIONS  (Part  6 

fide  purchaser  for  value.  *  *  *  There  are  a  very  few  cases  which 
hold  to  a  contrary  doctrine,  as,  for  example,  O'Bear  Co.  v.  Volfer, 
106  Ala.  205,  17  South.  525,  28  h.  R.  A.  707,  54  Am.  St.  Rep.  31. 

For  appellant  it  is  argued  that  the  plaintiff  should  have  followed  the 
stock  received  by  H'artung,  That  proposition  is  very  satisfactorily 
answered  in  Hibernia  Co.  v.  St.  Louis  Co.  (C.  C)  13  Fed.  516,  where 
it  is  said  that  a  creditor  in  such  cases  is  not  required  to  run  the  chances 
of  following  and  recovering  the  value  of  the  shares  of  the  stock  after 
they  are  placed  upon  the  market.  *  *  *  On  account  of  the  im- 
portance of  the  questions  presented,  we  have  given  the  case  careful 
consideration,  and  have  come  to  the  conclusion  that,  while  there  is 
no  personal  liability  on  the  part  of  the  undertaking  company  as  suc- 
cessor in  interest  to  the  plaintiff,  yet  it  holds  the  property  received 
from  the  cabinet  company  subject  to  the  payment  of  plaintiff's  claim, 
and  that  the  trial  court  was  right  in  establishing  a  lien  against  it  and 
ordering  a  sale  on  special  execution.  The  decree  must  be  modified  to 
the  extent  indicated;  but,  as  this  is  of  no  material  benefit  to  the  de- 
fendant, as  the  property  is  worth  very  much  more  than  plaintiff's  claim, 
we  think  that  the  mociification  should  be  without  cost  to  appellee. 

The  decree  will  be  modified,  and,  as  so  modified,  will  stand. 


•  LAXGPIORNE  V.  RICHMOND   RY.  CO.   et  al. 

(Supreme  Court  of  Appeals  of  Virginia,  1895.    91  Va.  369,  22  S.  E.  159.) 

Buchanan,  J.  *  *  *  The  declaration  contains  but  one  count, 
and  that  is  for  an  injury  alleged  to  have  been  done  the  plaintiff  by 
the  Richmond  Railway  Company.  The  declaration  alleges  substan- 
tiall}^,  after  giving  a  history  of  the  organization  of  the  first-named  com- 
pany, and  of  three  deeds  of  trust  that  it  had  given  upon  its  property, 
works,  and  franchises  to  secure  its  creditors,  that  there  had  been  a 
sale  under  the  second  and  third  deeds  of  trust,  subject  to  the  lien  of 
the  first,  and  that  certain  parties,  who  were  the  owners  and  officers 
of  the  corporation,  became  the  purchasers  at  such  sale  of  its  works 
and  property,  and  continued  to  carry  on  the  business  of  said  cor- 
poration, subject  to  the  first  lien  or  deed  of  trust,  adopting  the  name 
of  the  Richmond  City  Railway  Company,  by  which  last  name  said 
corporation  has  since  been  known  and  called ;  that  on  or  about  the 
2d  day  of  Januaiy,  1882,  said  Parker  Campbell,  president  of  the  said 
Richmond  Railway  Company,  and  styling  himself  president  of  the 
Richmond  City  Railway  Company,  filed  a  petition  with  the  common 
council  of  the  city  of  Richmond  praying  for  the  extension  of  the 
charter  of  the  said  Richmond  Railway  Company;  that  said  petition 
was  granted,  and  on  the  17th  of  May,  1882,  said  common  council  of 
the  city  of  Richmond  passed  an  ordinance  extending  the  charter  of 
the  Richmond  Railway  Company,  and  continuing  to  it  its  powers  and 
privileges  until  the  31st  of  December,  1900;  that  by  an  act  of  the 
general  assembly  of  Virginia  passed  17th  day  of  March,  1884,  the 
said  Richmond  City  Railway  Company  was  "recognized"  as  the  same 
corporation  chartered  by  and  under  the  act  of  assembly  of  20th  of 
March,  1860,  and  the  ordinance  thereunder,  and  contract  with  the  city 
of  Richmond  of  the  17th  May,  I860,'  and  subsequent  amendments 
thereto,  under  the  name  of  the  Richmond  Railway  company;  that, 
under  and  by  virtue  of  statutes  of  Virginia  for  such  case  made  and 


Ch.  5)         THE   RELATION   OF   CREDITORS  TO   THE   CORPORATION  1479 

provided,  the  said  defendant  the  Richmond  City  Railway  Company, 
by  deed  dated  October,  1890,  and  recorded  in  the  clerk's  office  oi  the 
chancery  court  the  20th  November,  1890,  conveyed  to  the  Richmond 
Railway  &  Electric  Company  all  its  works,  property,  and  franchises, 
and,  by  such  sale  and  the  statutes  aforesaid,  became  consolidated  with 
the  said  Richmond  Railway  &  Electric  Company,  subject  to  the  fol- 
lowing provision,  in  the  said  conveyance  contained,  to  wit:  "The 
foregoing  conveyance  is  made  subject  to  the  payment  by  the  Rich- 
mond Railway  and  Electric  Company  of  all  the  liabilities  of  the  party 
of  the  first  part  which  may  not  have  been  discharged  prior  to  this  con- 
veyance."    *     *     * 

Whether  the  Richmond  Railway  Company  and  the  Richmond  City 
Railway  Company  was  the  same  corporation  or  not,  or  whether  there 
had  been  a  consolidation  of  the  Richmond  City  Railway  Company 
with  the  Richmond  Railway  &  Electric  Company,  as  alleged  in  the 
declaration,  would  depend  upon  the  evidence  introduced  upon  these 
questions,  and  could  not  properly  be  the  subject  of  a  demurrer  to  the 
declaration.     *     *     * 

The  grounds  of  demurrer  relied  on  are  that  there  is  a  misjoinder  of 
causes  of  action,  of  the  form  of  action,  and  of  parties.  The  declara- 
tion states  a  good  cause  of  action  against  the  Richmond  Railway  Com- 
pany for  the  injury  complained  of.  It  alleges  that  the  Richmond 
City  Railway  Company  is  one  and  the  same  corporation  as  the  Rich- 
mond Railway  Company.  It  also  alleges  the  authority  of  the  Rich- 
mond City  Railway  Company  to  consolidate  with  the  Richmond  Rail- 
way &  Electric  Company,  and  that  a  consolidation  has  been  made  by 
which  the  last-named  company  acquired  all  the  works,  property,  and 
franchises  of  the  Richmond  City  Railway  Company,  and  assumed  all 
its  liabilities.  Such  a  consolidation  as  is  alleged  in  the  declaration 
not  only  renders  the  property  and  works  of  the  old  company,  which 
passed  to  the  company  with  which  it  is  consolidated,  subject  to  the 
liabilities  of  the  old  company,  but  also  makes  the  new  or  sui-viving 
company  responsible  for  them.  Where  two  railroad  companies  unite 
or  become  consolidated  under  the  authority  of  law,  the  presumption  is, 
until  the  contrary  appears,  that  the  united  or  consolidated  company 
has  all  the  powers  and  privileges  and  is  subject  to  all  the  restrictions 
and  liabilities  of  those  out  of  which  it  is  created.  *  *  *  The  cor- 
poration which  is  created  by  such  consolidation,  or  the  surviving  cor- 
poration, where  another  or  others  are  merged  into  it  or  consolidated 
with  it,  is  ordinarily  deemed  the  same  as  each  of  the  corporations 
which  formed  it  for  the  purpose  of  answering  for  the  liabilities  of 
the  old  corporation,  and  may  be  sued  under  its  new  name  or  under 
the  name  of  the  surviving  company  for  their  debts  as  if  no  change 
had  been  made  in  the  name  or  in  the  organization  of  the  original  cor-, 
porations.     *    *     * 

The  privity,  some  cases  say,  necessary  to  support  this  action,  is 
created  by  the  statute  authorizing  the  consolidation  and  the  purchase 
and  conveyance  under  it.  Other  authorities  place  the  right  to  bring 
such  action  on  the  ground  that  the  effect  of  the  consolidation  is,  as 
to  the  liabilities  of  the  old  company,  not  to  dissolve  the  corporation 
which  is  the  immediate  debtor,  but  to  continue  its  existence  in  the 
consolidated  corporation.     *     *     * 

Since,  by  authority  of  law  and  the  act  of  the  parties,  the  consoli- 
dated corporations  are  molded  into  one  with  none  of  their  rights  im- 


1480  CORPORATIONS  •  (Part  0 

paired,  and  none  of  their  responsibilities  lessened,  there  is  no  good 
reason  why  the  same  proceedings  may  not  be  had  against  the  new 
corporation  as  might  have  been  had  against  the  old  to  compel  pay- 
ment of  liabilities.  It  avoids  circuity  of  action.  It  allows  the  party 
with  whom  the  contract  was  made  or  to  whom  the  injury  was  done 
to  proceed  directly  against  the  corporation  which,  by  virtue  of  the 
consolidation  proceedings,  is  made  liable  for  it. 

In  this  case,  as  the  plaintiff  had  instituted  his  action  to  recover 
damages  from  the  consolidated  corporation  for  the  injury  alleged  to 
have  been  done  him  by  the  corporation  consolidated  with  it,  it  was 
necessary  for  him  to  allege  generally  the  authority  of  the  old  com- 
panies to  consolidate,  and  the  fact  that  they  had  consolidated,  and 
under  what  name,  in  order  to  show  the  liability  of  the  new  or  consol- 
idated corporation  for  the  injury  sued  for.     *     *     * 

The  declaration  states  a  good  cause  of  action,  not  only  against  the 
Richmond  Railway  Company,  known  also  as  the  Richmond  City  Rail- 
way Company,  but  also  against  the  Richmond  Railway  &  Electric 
Company.  To  this  there  can  be  no  objection,  as  it  was  necessary  to 
state  a  good  cause  of  action  against  both  the  Richmond  City  Railway 
Company  and  the  Richmond  Railway  &  Electric  Company;  other- 
wise there  could  be  no  recovery  against  the  last-named  company,  since 
its  liability  depends  upon  the  liability  of  the  Richmond  City  Railway 
Company.  But  the  defect  in  the  declaration  is  in  joining  them  as 
defendants.  They  are  not  jointly  liable.  One  is  liable  for  committing 
the  alleged  injury;  the  other  is  liable  by  reason  of  the  consolidation 
proceedings.  The  plaintiff  has  the  right  to  sue  either  for  the  injury 
alleged  to  have  been  done,  but  has  no  right  to  sue  both  in  the  same 
action  at  law.  If  an  action  at  law  be  brought  against  two  or  more  per- 
sons, it  must  appear  from  the  declaration  that  the  contract  or  tort 
upon  which  it  is  brought  is  a  joint  contract  or  a  joint  tort.     *     *     * 

On  these  grounds,  it  was  proper  for  the  trial  court  to  sustain  the 
demurrer  to  the  declaration,  and  its  judgment  must  be  affirmed. 


SECTION    2.— PRIORITIES   AMONG   THE    VARIOUS 
CLASSES  OF  CREDITORS  IN  GENERAL 


WESTERN  UNION  TELEGRAPH  CO.   v.   UNITED   STATES   &  MEXICAN 

TRUST  CO.  et  al. 

(United  States  Circuit  Court  of  Appeals,  Eicrlith  Circuit,  1915.    221  Fed.  545, 

137  C.  C.  A.  113.) 

Sanborn,  Circuit  Judge.  The  property  of  an  insolvent  railroad  cor- 
poration in  the  custody  of  a  court  in  a  suit  to  foreclose  a  mortgage 
upon  it  is  charged  with  a  trust  for  the  benefit,  first,  of  the  holders 
of  preferential  claims  superior  in  equity  to  the  lien  of  the  mortgage ; 
second,  of  the  holders  of  the  lien  of  the  mortgage  and  of  other  such 
liens  in  their  order  of  priority ;  third,  of  the  unsecured  or  general  cred- 
itors of  the  mortgagor ;  and,  fourth,  of  its  stockholders.  Any  plan  or 
scheme  threatened  or  executed  whereby  the  holders  of  the  bonds 
secured  by  the  mortgage  and  the  stockholders  secure,  or  intend  or  un- 
dertake to  secure,  to  the  stockholders,  by  contract,  foreclosure  sale, 
or  other  device,  an  equal  or  a  greater  benefit  from  the  property  than 
is  thereby  secured  to,  or  offered  to  and  rejected  by,  the  general  cred- 


Ch.  5)    THE  RELATION  OF  CREDITORS  TO  THE  CORPORATION     1481 

iters,  is  such  a  breach  or  threatened  breach  of  trust  as  entitles  any 
complaining  creditor  to  relief  in  a  court  of  equity.  A  purchase  through 
a  foreclosure  sale,  or  otherwise,  of  the  property  of  an  insolvent  cor- 
poration by  a  new  corporation,  pursuant  to  a  plan  or  scheme  of  the 
bondholders  and  stockholders  of  the  insolvent  company,  whereby  the 
stockholders  thereof  derive,  by  receipt  of  stock  or  bonds  of  the 
new  company,  or  otherwise,  benefits  equal  to  or  greater  than  those 
received  by,  or  openly  offered  to  and  rejected  by,  its  general  cred- 
itors, is  fraudulent  in  law  as  to  the  latter,  and  renders  the  new  cor- 
poration and  the  property  it  purchased  at  such  sale  liable  for  the 
claims  of  such  creditors  against  the  old  company,  at  least  to  the  extent 
of  the  value  of  the  interest  secured  by  the  stockholders  of  the  old 
company  in  excess  of  the  value  of  the  interest  secured  by,  or  openly 
offered  to  and  rejected  by,  the  unsecured  creditors.  Northern  Pacific 
Ry.  Co.  V.  Boyd,  177  Fed.  804,  101  C.  C.  A.  18.    *    *    * 


SECTION  3.— CURRENT  OPERATING  EXPENSES  TO  BE 
PAID  OUT  OF  CURRENT  EARNINGS  IN  PREFER- 
ENCE TO  CLAIMS  OF  SECURED  CREDITORS 


SOUTHERN  RY.  CO.  v.  CARNEGIE  STEEL  CO. 

(Supreme  Court  of  the  United  States.  1900.     176  U.  S.  257,  20  Sup.  Ct  347, 

44  L.  Ed.  458.) 

Harlan,  T-  *  *  *  It  appears  from  the  above  statement  that  the 
property  in  "the  hands  of  the  receivers  in  the  Clyde  or  insolvency  suit 
was  surrendered  to  the  receivers  in  the  foreclosure  suit  under  an 
order  that  expressly  reserved  power  in  the  court  to  adjudge  and  de- 
cree in  the  Clyde  suit  upon  the  rights  of  creditors  asserting  claims 
against  the  property  of  the  railroad  company  or  its  income  in  pref- 
erence to  mortgage  debts.  Besides,  the  decree  of  sale  provided  that 
the  purchaser  or  purchasers,  or  his  or  their  assigns,  under  any  decretal 
sale  should,  as  a  part  of  the  consideration,  in  addition  to  any  sum 
bid,  take  the  property  upon  the  express  condition  that  he  or  they 
would  pay  and  satisfy  (among  other  specified  claims)  all  claims  there- 
tofore "filed  in  this  case  or  in  either  of  the  causes  consoUdated  here- 
in, but  only  when  said  court  shall  allow  such  claims  and  adjudge  the 
same  to  be  prior  in  Hen  or  superior  in  equity  to  the  mortgage  fore- 
closed in  this  suit,  and  in  accordance  with  the  order  or  orders  of  the 
court  allowing  such  claims  and  adjudging  with  respect  thereto."  And 
the  right  was  distinctly  reserved  to  retake  and  resell  the  property  in 
case  the  purchaser  or  purchasers,  or  his  or  their  assigns,  failed  or  neg- 
lected to  comply  with  the  order  of  court  in  respect  of  the  payment  of 
such  prior  liens.  These  conditions  were  repeated  in  the  order  con- 
firming the  sale.  So  that  the  right  of  the  Carnegie  Company  to  have 
its  claims  determined  upon  their  merits  is  not  at  all  affected  by  the 
sale  of  the  property  held  by  the  receivers  in  the  consolidated  cause, 
or  by  the  fact  of  its  transfer  to  the  Soutliern  Railway  Company,  And 
we  add  that  the  above  reservation  in  the  orders  and  decree  of  the  Cir- 
cuit Court  left  it  open  for  the  Southern  Railway  Company  to  contest, 
upon  their  merits,  any  claims  allowed  after  its  purchase  under  the  de- 
cree of  sale. 


1482  coRroRATiONS  (Part  6 

The  respective  rights  of  the  mortgagees  of  a  raih'oad  company 
and  of  parties  having  claims  against  it  at  the  time  its  property  passed 
into  the  hands  of  receivers  have  been  frequently  the  subject  of  con- 
sideration by  this  court.  But  as  counsel  differ  as  to  the  scope 
and  effect  of  former  decisions,  it  is  necessary  to  examine  them  and 
ascertain  whether  those  decisions  embrace  the  case  now  before  the 
court. 

The  leading  case  is  Fosdick  v.  Schall,  99  U.  S.  235,  252,  ,253,  25  L. 
Ed.  339,  which  related  to  a  claim  against  a  railroad  company  for  rent 
of  cars.  In  that  case  Chief  Justice  Waite  delivered  the  unanimous 
judgment  of  the  court.  After  observing  that  the  business  of  all  rail- 
road companies  was  done  to  a  greater  or  less  extent  on  credit,  and 
that  this  credit  was  longer  or  shorter  as  the  necessities  of  the  case 
required  said :  "The  income  out  of  which  the  mortgagee  is  to  be  paid 
is  the  net  income  obtained  by  deducting  from  the  gross  earnings 
what  is  required  for  necessary  operating  and  managing  expenses, 
proper  equipment  and  useful  improvements.  Every  railroad  mort- 
gagee in  accepting  his  security  impliedly  agrees  that  the  current  debts 
made  in  the  ordinary  course  of  business  shall  be  paid  from  the  cur- 
rent receipts  before  he  has  any  claim  upon  the  income.  If  for  the  con- 
venience of  the  moment  something  is  taken  from  what  may  not  im- 
properly be  called  the  current  debt  fund,  and  put  into  that  which  be- 
longs to  the  mortgage  creditors,  it  certainly  is  not  inequitable  for 
the  court,  when  asked  by  the  mortgagees  to  take  possession  of  the 
future  income  and  hold  it  for  their  benefit,  to  require  as  a  condition 
of  such  an  order  that  what  is  due  from  the  earnines  to  the  current  debt 
shall  be  paid  by  the  court  from  the  future  current  receipts  before  any- 
thing derived  from  that  source  goes  to  the  mortgagees.  In  this  way 
the  court  will  only  do  what,  if  a  receiver  should  not  be  appointed,  the 
company  ought  itself  to  do.  For  even  though  the  mortgage  may 
in  terms  give  a  lien  upon  the  profits  and  income,  until  possession  of 
the  mortgaged  premises  is  actually  taken  or  something  equivalent 
done,  the  whole  earnings  belong  to  the  company  and  are  subject  to  its 
control." 

The  court  further  said :  "The  mortgagee  has  his  strict  rights  which 
he  may  enforce  in  the  ordinary  way.  If  he  asks  no  favors  he  need 
grant  none.  But  if  he  calls  upon  a  court  of  chancery  to  put  forth  its 
extraordinary  powers  and  grant  him  purely  equitable  relief,  he  may 
with  propriety  be  required  to  submit  to  the  operation  of  a  rule  which 
applies  in  such  cases,  and  do  equity  in  order  to  get  equity.  The  ap- 
pomtment  of  a  receiver  is  not  a  matter  of  strict  right.  Such  an  ap- 
plication calls  for  the  exercise  of  judicial  discretion ;  and  the  chan- 
cellor should  so  mould  his  order  that  while  favoring  one  injustice  is 
not  dcme  to  another.  If  this  cannot  be  accomplished  the  application 
should  ordinarily  be  denied.  We  think  also  that  if  no  such  order  is 
made  when  the  receiver  is  appointed,  and  it  appears  in  the  progress 
of  the  cause  that  bonded  interest  has  been  paid,  additional  equipment 
provided,  or  lasting  and  valuable  improvements  made  out  of  earn- 
ings which  ought  in  equity  to  have  been  employed  to  keep  down 
debts  for  labor,  supplies  and  the  like,  it  is  within  the  power  of  the  court 
to  use  the  income  from  the  receivership  to  discharge  obligations 
which,  but  for  the  diversion  of  funds,  would  have  been  paid  in  the 
ordinary  course  of  business.  This,  not  because,  in  a  sense,  the  offi- 
cers of  the  company  are  trustees  of  the  earnings  for  the  benefit  of 


Ch.  5)         THE   RKLATION   OF   CUEDITOKS   TO   THE   CORPORATION  1483 

the  different  classes  of  creditors  and  stockholders;  and  if  they  give 
to  one  class  of  creditors  that  which  properly  belongs  to  another,  the 
court  may  upon  an  adjustment  of  the  accounts,  so  use  the  income 
which  conies  into  its  own  hands  as,  if  practicable,  to  restore  the  parties 
to  their  original  equitable  rights.  While,  ordinarily,  this  power  is 
confined  to  the  appropriation'  of  the  income  of  the  receivership  and 
the  proceeds  of  moneyed  assets  that  have  been  taken  from  the  com- 
pany, cases  may  arise  where  equity  will  require  the  use  of  the  pro- 
ceeds of  the  sale  of  the  mortgaged  property  in  the  same  way.  *  *  * 
No  fixed  and  inflexible  rule  can  be  laid  down  for  the  government  of 
the  courts  in  all  cases.  Each  case  will  necessarily  have  its  own  pecul- 
iarities, which  must  to  a  greater  or  less  extent  influence  the  chan- 
cellor when  he  comes  to  act.  The  power  rests  upon  the  fact  that  in 
the  administration  of  the  affairs  of  the  company  tlie  mortgage  cred- 
itors have  got  possession  of  that  which  in  equity  belonged  to  the  whole 
or  a  part  of  the  general  creditors.  Whatever  is  done,  therefore,  must 
be  with  a  view  to  a  restoration  by  the  mortgage  creditors  of  that  which 
they  have  thus  inequitably  obtained.  It  follows  that  if  there  has  been 
in  realitv  no  diversion,  there  can  be  no  restoration;  and  that  the 
amount  of  the  restoration  should  be  made  to  depend  upon  the  amount 
of  the  diversion.     *     *     * " 

In  Hale  v.  Frost,  99  U.  S.  389,  25  L.  Ed.  419,  it  appeared  that  a 
receiver  was  appointed  in  a  suit  brought  by  trustees  to  foreclose  mort- 
gages executed  by  a  railroad  company.  He  was  appointed  May  19, 
1875,  at  which  tinie  the  company  owed  employes  for  back  wages  and 
was  indebted  for  current  supplies.  To  the  Union  Car  Spring  Manu- 
facturing Company  it  was  indebted  for  springs  and  spirals  furnished 
in  March  and  April  before  the  appointment  of  the  receiver,  and  which 
he  continued  to  use.  It  was  also  indebted  to  Hale,  Ayer  &  Co.  for 
supplies  to  the  machinery  department  and  for  materials  for  construc- 
tion purposes;  and  on  the  13th  day  of  February,  1873,  a  given  amount 
was  due  them,  as  evidenced  by  the  notes  of  the  railroad  company 
falling  due  on  that  day.  The  judges  who  heard  the  case  in  the  court 
of  original  jurisdiction  were  divided  in  opinion  on  the  following 
points  made  by  intervening  creditors:  (1)  That  the  railway  mortgage 
was  a  prior  lien  only  upop  the  net  earnings  of  the  road,  after  the  pay- 
ment of  all  the  operating  expenses,  while  the  road  was  in  the  posses- 
sion of  the  company.  *  *  *  (3)  That  the  net  earnings  of  the  road, 
while  in  the  possession  of  the  court  and  operated  by  its  receiver, 
were  not  necessarily  and  exclusively  the  property  of  the  mortgagees, 
but  were  subject  to  the  disposal  of  the  chancellor  in  the  payment  of 
claims  which  had  superior  equities,  if  such  should  be  found  to  exist, 
and  that  the  intervening  petitioners'  claims  had  superior  equities  to 
those  of  the  mortgagees.  The  petitions  were  dismissed  and  the  in- 
tervenors  appealed.  This  court,  speaking  by  Chief  Justice  Waite, 
said :  "The  first  question  certified  in  this  case  is  answered  in  the  affirm- 
ative, upon  the  authority  of  Fosdick  v.  Schall.  The  third  question 
is  answered  in  the  same  way  upon  the  same  authority.  The  Union 
Car  Spring  Manufacturing  Company  is  entitled  to  payment  in  full, 
and  Hale,  Ayer  &  Co.  to  payment  of  so  much  of  their  claim  only  as 
is  for  supplies  to  the  machinery  department.     *     *     *  "  ^„,    ^„ 

In  Burnham  v.  Bowen,  111  U.  S.  776,  780,  783,  4  Sup.  Ct.  675,  28 
L.  Ed.  596,  it  appeared  that  the  trustees  of  a  mortgage  covering  all 
the  property  of  a  railroad  company  and  all  the  revenues  and  income 


H84  coRroRATioNS  (Part  6 

thereof,  brought  suit  to  foreclose  the  mortgage  and  had  a  receiver  ap- 
pointed. In  the  order  appointing  the  receiver  no  special  provision 
was  made  for  the  payment  of  debts  owing  for  current  expenses. 
When  the  receiver  took  possession  the  railroad  company  was  indebted 
for  coal  used  on  locomotives — a  debt  contracted  by  the  company  in 
the  ordinary  course  of  a  continuing  business,  and  which  would  have 
been  paid  out  of  current  earnings  at  the  time  agreed  on  if  the  company 
had  remained  in  possession.  The  debt  due  the  coal  company  was  evi- 
denced by  the  acceptances  of  the  railroad  company,  which  were  for 
different  amounts,  maturing  a  month  apart,  thus  implying,  as  this 
court,  said,  monthly  settlements  of  monthly  accounts,  with  a  some- 
what extended  credit  to  meet  the  business  requirements  of  the  rail- 
road company,  A  decree  was  entered  finding  the  amount  due  to  Bow- 
en,  the  holder  of  the  acceptances,  and  declaring  that  the  mortgaged 
property  in  the  hands  of  the  trustees  under  the  decree  of  foreclosure 
was  equitably  bound  for  the  payment  thereof. 

Chief  Justice  Waite,  delivering  the  unanimous  judgment  of  this 
court,  said:  "In  our  opinion  the  view  which  the  Circuit  Court  took 
of  this  case  was  the  correct  one.  The  company  had  never  paid  its 
bonded  interest.  From  the  very  beginning  it  was  in  default  in  this 
particular,  yet  the  mortgage  trustees  suffered  it  to  keep  possession 
and  manage  the  property.  The  maintenance  of  the  road  and  prosecu- 
tion of  its  business  were  essential  to  the  preservation  of  the  security 
of  the  bondholders.  The  business  of  every  railroad  company  is  nec- 
essarily done  more  or  less  on  credit,  all  parties  understanding  that 
current  expenses  are  to  be  paid  out  of  current  earnings.  Consequent- 
ly, it  almost  always  happens  that  the  current  income  is  incumbered 
to  a  greater  or  less  extent  with  current  debts  made  in  the  prosecution 
of  the  business  out  of  which  the  income  is  derived.  As  was  said  in 
Fosdick  V.  Schall,  99  U.  S.  235,  252,  25  L.  Ed.  339,  the  income  (of 
a  railroad  company)  out  of  which  the  mortgage  is  to  be  paid  is  the 
net  income  obtained  by  deducting  from  the  gross  earnings  what  is 
required  for  necessary  operating  and  managing  expenses,,  proper 
equipment  and  useful  improvements.     *     *     * " 

It  was  contended  in  that  case  that  no  part  of  the  income,  prior  to 
the  receiver's  appointment,  was  used  to  pay  mortgage  interest  or  to 
put  permanent  improvements  on  the  property,  or  to  increase  the 
equipment,  and  therefore  there  was  no  such  diversion  of  the  funds 
belonging  in  equity  to  the  labor  and  supply  creditors  as  to  make  it 
proper  to  use  the  income  of  the  receivership  to  pay  them.  Touching 
that  contention,  this  court  said:  "The  debt  due  Bowen  was  incur- 
red to  keep  the  road  running,  and  thus  preserve  the  security  of  the 
bond  creditors.  If  the  trustees  had  taken  possession  under  the  mort- 
gage, they  would  have  been  subjected  to  similar  expenses  to  do  what 
the  company,  with  their  consent  and  approbation,  was  doing  for  them. 
*  *  *  So  far  as  anything  appears  on  the  record,  the  failure  of  the 
company  to  pay  the  debt  to  Bowen  was  due  alone  to  the  fact  that  the 
expenses  of  running  the  road  and  preserving  the  security  of  the  bond- 
holders were  greater  than  the  receipts  from  the  business.  Under  these 
circumstances  we  think  the  debt  was  a  charge  in  equity  on  the  contin- 
uing income,  as  well  as  that  which  came  into  the  hands  of  the  court 
after  the  receiver  was  appointed  as  that  before.  When,  therefore,  the 
court  took  the  earnings  of  the  receivership  and  applied  them  to  the 
payment  of  the  fixed  charges  on  the  railroad  structures,  thus  increasing 


Ch.  5)         THE   RELATION   OF   CREDITORS  TO   THE   CORPORATION  1485 

the  security  of  the  bondholders  at  the  expense  of  the  labor  and  sup- 
ply creditors,  there  was  such  a  diversion  of  what  is  denominated  in 
Fosdick  V.  Schall  the  'current  debt  fund/  as  to  make  it  proper  to  re- 
quire the  mortgagees  to  pay  it  back.  So  far  as  current  expense  cred- 
itors are  concerned,  the  court  should  use  the  income  of  the  receiver- 
ship in  the  way  the  company  would  have  been  bound  in  equity  and 
good  conscience  to  use  it  if  no  change  in  the  possession  had  been 
made.     *    *     * " 

The  opinion  in  that  case  thus  concluded:  "We  do  not  now  hold, 
any  more  than  we  did  in  Fosdick  v.  Schall  or  Huidekoper  v.  Locomo- 
tive Works,  99  U.  S.  258,  260,  25  L.  Ed.  344,  that  the  income  of  a 
railroad  in  the  hands  of  a  receiver,  for  the  benefit  of  mortgage  cred- 
itors who  have  a  lien  upon  it  under  their  mortgage,  can  be  taken  away 
from  them  and  used  to  pay  the  general  creditors  of  the  road.  All 
we  then  decided,  and  all  we  now  decide,  is,  that  if  the  current  earn- 
ings are  used  for  the  benefit  of  mortgage  creditors  before  current  ex- 
penses are  paid,  the  mortgage  security  is  chargeable  in  equity  with 
the  restoration  of  the  fund  which  has  been  thus  improperly  applied  to 
their  use."    *    *     * 

In  St.  Louis,  Alton,  etc.,  Railroad  v.  Cleveland,  Columbus,  etc.. 
Railway,  125  U.  S.  658,  673,  8  Sup.  Ct.  1011,  31  L.  Ed.  832.  the  court, 
speaking  by  Mr.  Justice  Matthews,  after  stating  that  ordinarily  the 
unsecured  debts  of  an  insolvent  railroad  company  cannot  take  prece- 
dence in  the  distribution  of  the  proceeds  of  a  sale  of  the  property  it- 
self over  those  creditors  who  are  secured  by  prior  and  express  liens, 
said:  "There  are  cases,  it  is  true,  where,  owing  to  special  circum- 
stances, an  equity  arises  in  favor  of  certain  classes  of  creditors  of  an 
insolvent  railroad  corporation  otherwise  unsecured,  by  which  they  are 
entitled  to  outrank  in  priority  of  payment,  even  upon  a  distribution  of 
the  proceeds  of  a  sale  of  the  body  of  the  property,  those  who  are  se- 
cured by  prior  mortgage  liens."  "The  rule,"  the  court  said,  "govern- 
ing in  all  these  cases  was  stated  by  Chief  Justice  Waite  in  Burnham 
V.  Bowen,  111  U.  S.  776,  783,  4  Sup.  Ct.  675,  28  L.  Ed.  596,  as  fol- 
lows :  'That  if  current  earnings  are  used  for  the  benefit  of  mortgage 
creditors  before  current  expenses  are  paid,  the  mortgage  security  is 
chargeable  in  equity  with  the  restoration  of  the  fund  which  has  been 
thus  improperly  applied  to  their  use.'  There  has  been  no  departure 
from  this  rule  in  any  of  the  cases  cited;  it  has  been  adhered  to  and 
reaffirmed  in  them  all." 

In  Kneeland  v.  American  Loan  &  Trust  Co.,  136  U.  S.  89,  97,  10 
Sup.  Ct.  950,  34  L.  Ed.  379,  this  court  said:  "The  appointment  of  a 
receiver  vests  in  the  court  no  absolute  control  over  the  property,  and 
no  general  authority  to  displace  vested  contract  liens.  Because  in. 
a  few  specified  and  limited  cases  this  court  has  declared  that  unsecured 
claims  were  entitled  to  priority  over  mortgage  debts,  an  idea  seems 
to  have  obtained  that  a  court  appointing  a  receiver  acquires  power  to 
give  such  preference  to  any  general  and  unsecured  claims.  It  has 
been  assumed  that  a  court  appointing  a  receiver  could  rightfully  bur- 
den the  mortgaged  property  for  the  payment  of  any  unsecured  in- 
debtedness. Indeed,  we  are  advised  that  some  courts  have  made  the 
appointment  of  a  receiver  conditional  upon  the  payment  of  all  unse- 
cured indebtedness,  in  preference  to  the  mortgaged  liens  sought  to  be 
enforced.  Can  anything  be  conceived  which  more  thoroughly  destroys 
the  sacredness  of  contract  obligations?    One  holding  a  mortgage  debt 


1486  i^  CORPORATIONS  (Part  6 

upon  a  railroad  has  the  same  right  to  demand  and  expect  of  the  court 
respect  for  his  vested  and  contracted  priority  as  a  holder  of  a  mort- 
gage on  a  farm  or  lot.  So,  when  a  court  appoints  a  receiver  of  rail- 
road property,  it  has  no  right  to  make  that  receivership  conditional  on 
the  payment  of  other  than  those  few  unsecured  claims  which,  by  the 
rulings  of  this  court,  have  been  declared  to  have  an  equitable  priority. 
No  one  is  bound  to  sell  a  railroad  company  or  to  work  for  it,  and  who- 
ever has  dealings  with  a  company  when  property  is  mortgaged  must 
be  assumed  to  have  dealt  with  it  on  the  faith  of  its  personal  respon- 
sibility, and  not  in  expectation  of  subsequently  displacing  the  priority 
of  the  mortgage  liens.  It  is  the  exception,  and  not  the  rule,  that  such 
priority  of  liens  can  be  displaced."  Again :  "It  is  the  exception,  and 
not  the  rule,  that  such  priority  of  liens  can  be  displaced.  We  em- 
phasize this  fact  of  the  sacredness  of  contract  liens,  for  the  reason 
that  there  seems  to  be  growing  an  idea  that  the  chancellor,  in  the  ex- 
ercise of  his  equitable  powers,  has  unlimited  discretion  in  this  matter 
of  the  displacement  of  vested  liens."     *     *     * 

It  is  apparent  from  an  examination  of  the  above  cases  that  the  de- 
cision in  each  one  depended  upon  its  special  facts.  This  court  has 
uniformly  refrained  from  laying  down  any  rule  as  absolutely  con- 
trolling in  every  case  involving  the  right  of  unsecured  creditors  of  a 
corporation,  whose  property  is  in  the  hands  of  a  receiver,  to  have  their 
demands  paid  out  of  net  earnings  in  preference  to  mortgage  creditors. 
But  it  may  be  safely  affirmed,  upon  the  authority  of  former  decisions, 
that  a  railroad  mortgagee  v/hen  accepting  his  security  impliedly  agrees 
that  the  current  debts  of  a  railroad  company  contracted  in  the  or- 
dinary course  of  its  business  shall  be  paid  out  of  current  receipts  be- 
fore he  has  any  claim  upon  such  income;  that,  within  this  rule,  a 
debt  not  contracted  upon  the  personal  credit  of  the  company  but  to 
keep  the  railroad  itself  in  condition  to  be  used  wnth  reasonable  safety 
for  the  transportation  of  persons  and  property,  and  with  the  expecta- 
tion of  the  parties  that  it  was  to  be  met  out  of  the  current  receipts  of 
the  company,  may  be  treated  as  a  current  debt ;  that  whether  the 
debt  was  contracted  upon  the  personal  credit  of  the  company,  without 
any  reference  to  its  receipts,  is  to  be  determined  in  each  case  by  the 
amount  of  the  debt,  the  time  and  terms  of  payment,  and  all  other  cir- 
cumstances attending  the  transaction;  and  that  when  current  earn^ 
ings  are  used  for  the  benefit  of  mortgage  creditors  before  current  ex- 
penses are  paid,  the  mortgage  security  is  chargeable  in  equity  with 
the  restoration  of  any  funds  thus  improperly  diverted  from  their 
primary  use.     *     *     * 

Can  the  decree  below  be  sustained  consistently  with  these  princi- 
ples? Are  the  debts  due  the  Carnegie  Company  of  the  class  desig- 
nated in  the  adjudged  cases  as  current  debts  contracted,  not  on  the 
personal  credit  of  the  railroad  company,  but  in  the  ordinary  course 
of  its  business  and  to  be  met  out  of  current  receipts  ?    *    *    * 

All  the  rails  furnished  by  ihe  Carnegie  Company  were  not  supplied 
under  one  contract — a  circumstance  not  to  be  ignored  when  determin- 
ing whether  the  debts  were  of  the  kind  that  would  ordinarily  be  met 
out  of  current  receipts.     *     *     * 

What  was  the  condition  of  the  roads  owned  and  controlled  by  the 
Danville  Company  at  the  time  the  rails  were  purchased  and  used? 
It  was  in  the  power  of  the  railroad  company  and  its  receivers,  who 
had  possession  of  the  books  of  the  company,  to  have  furnished  evi- 


Ch.  5)         THE   RELATION   OF   CREDITORS   TO   THE   CORPORATION  1487 

flence  on  this  point  that  would  have  removed  all  possible  doubt.  But 
there  is  enough  in  the  record  to  show  that  the  rails  purchased  from 
the  Carnegie  Company  were  needed  in  order  that  the  roads  in  ques- 
tion might  be  kept  by  the  railroad  company  in  that  condition  of  safety 
which  its  duty  to  the  public  and  to  the  mortgage  bondholders  re- 
quired.    *     *     * 

It  is  apparent  that  the  purchases  of  new  steel  rails  while  the  rail- 
roads were  in  possession  of  receivers  were  made  in  the  ordinary 
course  of  business  and  were  properly  chargeable  upon  and  payable 
out  of  current  receipts  in  preference  to  the  claims  of  mortgage  cred- 
itors. In  every  substantial  sense  the  expenses  thus  incurred  were 
operating  expenses.  They  were  incurred  in  the  interest  of  mortgage 
creditors,  the  value  of  whose  securities  depended  upon  the  unity  of  the 
Danville  system  being  preserved  and  the  interests  of  all  concerned 
not  allowed  to  go  to  ruin.  Why  should  a  different  rule  be  applied  to 
the  contracts  made  with  the  Carnegie  Company  shordy  before  the  ap- 
pointment of  receivers  in  the  Clyde  suit,  the  original  contract  being 
for  only  2,500  tons,  and  the  last  one  for  only  1,656  tons?  *  *  * 
No  one  will  say  that  the  use  of  these  rails  did  not  add  directly  to  the 
value  of  the  securities  of  mortgage  creditors.  Within  the  reason  of 
the  rule  adverted  to,  the  debts  contracted  with  the  Carnegie  Coni- 
pany  were  as  much  current  debts  in  the  ordinary  course  of  the  busi- 
ness of  the  railroad  company  as  were  the  debts  contracted  by  the 
receivers  under  the  orders  of  court,  when  they  purchased  new  rails 
to  put  the  road  in  safe  condition,  or  when  they  purchased  at  one  time 
four  passenger  locomotives,  and  at  another  time  eight  passenger  and 
freight  locomotives,  the  cost  of  which  was  charged  upon  the  income 
in  their  hands.  Is  it  to  be  said  that  such  expenses  incurred  by  the 
receivers  were  preferential  debts,  but  that  debts  incurred  by  the  rail- 
road company  shortly  prior  to  the  receivership  for  rails  needed  to 
keep  its  road  in  safe  condition  for  use  are  not  of  that  class?    *    *    * 

These  figures  show  that  both  during  the  receivership  in  the  Clyde 
suit  and  the  receivership  in  the  foreclosure  suit  immense  sums  were 
expended  in  paying  interest,  sinking  fund  and  car  trust  debts,  and 
for  construction  and  equipment,  which  were  all  for  the  benefit  of 
mortgage  creditors,  and  which,  to  the  extent  necessary,  should  have 
been  applied  in  payment  of  preferential  claims,  including  those  of  the 
Carnegie  Company.  It  is  a  clear  case  of  a  diversion  of  income  from 
the  payment  of  current  debts  in  the  interest  of  mortgage  creditors. 
*    *     * 

We  must  not  be  understood  as  saying  that  a  general  unsecured  cred- 
itor of  an  insolvent  railroad  corporation  in  the  hands  of  a  receiver 
is  entitled  to  priority  over  mortgage  creditors  in  the  distribution  of 
net  earnings  simply  because  that  which  he  furnished  to  the  company 
prior  to  the  appointment  of  the  receiver  was  for  the  preservation  of 
the  property  and  for  the  benefit  of  the  mortgage  securities.  That,  no 
doubt,  is  an  important  element  in  the  matter.  Before,  however,  such 
a  creditor  is  accorded  a  preference  over  mortgage  creditors  in  the 
distribution  of  net  earnings  in  the  hands  of  a  receiver  of  a  railroad 
company,  it  should  reasonably  appear  from  all  the  circumstances,  in- 
cluding the  amount  involved  and  the  terms  of  payment,  that  the  debt 
was  one  fairly  to  be  regarded  as  part  of  the  operating  expenses  of 
the  railroad  incurred  in  the  ordinary  course  of  business,  and  to  be  met 
out  of  current  receipts.    *     *    * 


1488  CORPORATIONS  (Part  6 

Our  conclusion  is  that  as  current  earnings  which  should  have  been 
applied  in  meeting  current  expenses  or  liabilities,  including  the  debt 
due  the  Carnegie  Company,  were  diverted  for  the  benefit  of  mort- 
gage creditors,  it  was  the  duty  of  the  court  to  see  that  that  company 
was  reinstated  in  its  claim  of  priority  over  the  mortgage  creditors  in 
the  distribution  or  application  of  the  net  earnings  of  the  property. 
That  duty  was  properly  performed  by  the  Circuit  Court,  and  the  de- 
cree of  the  Circuit  Court  of  Appeals  affirming  the  judgment  of  the 
Circuit  Court  is  affirmed. 


SECTION  4.— RIGHTS  OF  UNSECURED  CREDITORS 
ARISING  UPON  REORGANIZATION 


CENTRAL  IMPROVEMENT  CO.   v.    CAMBRIA   STEEL  CO.  et   al. 
GUARDIAN   TRUST  CO.   v.   SAME. 

(United  States  Circuit  Court  of  Appeals,  Eisjlith  Circuit,  1913.    210  Fed.  696, 

127  C.  C.  A.  184.) 

Before  Sanborn,  Circuit  Judge,  and  Marshali.  and  William  H. 
MuNGE^R,  District  Judges. 

Per  Curiam.  The  paramount  issue  in  these  cases  is :  Did  the 
Southern  Company  become  liable  to  pay  the  unsecured  debt  of  the 
Belt  Company  to  the  Trust  Company  by  participating  in  the  execution 
of  a  scheme  whereby  it  acquired  the  title  to  the  property  of  the  Belt 
Company,  deprived  its  creditor,  the  Trust  Company,  of  recourse  there- 
to by  execution  to  collect  its  claim  and  yet  reserved  to  itself  and  other 
stockholders  of  the  Belt  Company  an  equity  in  its  property  and  a  ben- 
efit therefrom  more  valuable  than  the  amount  of  the  Trust  Company's 
claim?  After  exhaustive  arguments  and  briefs  and  a  review  of  the 
master's  report  on  which  this  case  came  to  this  court,  the  conclusion 
was  reached  that  this  question  should  be  answered  in  the  affirmative. 

"^         ^         ^ 

The  history  of  this  litigation,  the  issues,  and  many  of  the  facts  found 
by  the  master  are  set  forth  m  our  former  opinion.  Central  Improve- 
ment Co.  V.  Cambria  Steel  Co.,  201  Fed.  811,  120  C.  C.  A.  121. 

From  all  the  facts  pertinent  to  the  issue  which  are  set  forth  in  many 
printed  pages  of  his  report,  the  master  deduced  this  decisive  conclu- 
sion: "That  the  Southern  Company  is  not  liable  in  any  way  for  the 
floating  indebtedness  of  the  Belt  Company."     *     *     * 

It  is  conceded  that  by  the  transaction  described  in  the  former  opin- 
ion of  this  court  and  deemed  by  it  violative  of  the  rights  of  the  Trust 
Company,  a  creditor  of  the  Belt  Company,  if  that  transaction  be  valid, 
was  deprived  of  legal  recourse  to  the  property  of  the  Belt  Company 
to  obtain  payment  of  that  company's  debt  to  the  Trust  Company  of 
about  $360,000.  At  that  time  the  Southern  Company,  by  an  exchange 
of  its  stock  and  bonds  for  the  stock  and  bonds  of  the  Belt  Company, 
and  by  a  formal  foreclosure  by  itself,  as  holder  of  about  89  per  cent, 
of  its  bonds,  by  means  of  its  representative,  the  Provident  Company, 
trustee  for  the  bondholders,  against  and  with  the  consent  of  itself  as 
the  holder  of  about  97  per  cent,  of  its  stock,  and  by  a  foreclosure  sale 
of  the  property  of  the  Belt  Company  to  itself  obtained  the  title  to  the 
Belt  Company's  property  to  itself,  the  bondholders  of  the  Belt  Company 


Ch.  5)         THE   RELATION   OF   CREDITORS  TO  THE   CORRORATION  1489 

secured  about  $1,330,000  par  value  of  the  bonds  and  $250,000  of  the 
preferred  stock  of  the  Southern  Company,  aggregating  at  their  par  val- 
ue $1,580,000  for  their  $1,000,000  par  value  of  bonds  of  the  Belt  Com- 
pany, and  the  stockholders  of  the  Belt  Company  secured  for  their  $4,- 
750,000  par  value  of  the  stock  of  that  company  about  $1,187,500  par. 
value  of  the  preferred  stock  and  about  $3,562,500  par  value  of  the  com- 
mon stock,  in  all  about  $4,750,000  par  value  of  the  stock  of  the  South- 
ern Company. 

The  following  propositions  of  law  are  deemed  incontestable : 

"A  reorganization  of  an  insolvent  railroad  company,  by  which  both 
its  mortgage  bondholders  and  its  stockholders,  in  exchange  for  their 
bonds  and  stocks,  are  given  an  interest  in  the  new  company,  which 
purchases  the  property  of  the  old  company  at  a  foreclosure  sale  made 
pursuant  to  such  plan  of  reorganization  and  by  the  consent  of  the  old 
company  and  its  stockholders,  is  fraudulent  in  law  as  to  unsecured 
creditors  of  the  old  company  whose  claims  are  left  unpaid,  and  ren- 
ders the  new  company  liable  for  the  claims  of  such  creditors,  at  least 
to  the  extent  of  the  value  of  the  interest  in  the  new  company  secured 
by  the  stockholders  of  the  old  company."     *     *     * 

Where  such  a  transaction  is  consummated  without  offering  to  the 
unsecured  creditor  a  fair  share  of  the  benefits  to  be  derived  from  the 
vesting  of  the  title  in  the  purchaser  at  the  foreclosure  sale,  the  intent 
or  purpose  to  deprive  him  of  recourse  to  the  property  to  collect  his 
debt  becomes  immaterial  and  the  fact  that  it  has  that  effect  charges 
the  purchaser  with  liability. 

"As  against  him  the  sale  is  void  in  equity,  regardless  of  the  motive 
with  which  it  was  made ;  for  if  such  contract  reorganization  was  con- 
summated in  good  faith  and  in  ignorance  of  the  existence  of  the  cred- 
itor, yet  when  he  appeared  and  established  his  debt  the  subordinate  in- 
terest of  the  old  stockholders  would  still  be  subject  to  his  claim  in  the 
hands  of  the  reorganized  company."  Northern  Pacific  Rv.  Co.  v.  Boyd, 
228  U.  S.  482,  502,  33  Sup.  Ct.  554,  559  (57  L.  Ed.  931). 

"For,  if  purposely  or  unintentionally  a  single  creditor  was  not  paid 
or  provided  for  by  the  reorganization,  he  could  assert  his  superior 
rights  against  the  subordinate  rights  of  the  old  stockholders  in  the 
property  transferred  to  the  new  company.  They  [the  stockholders  of 
the  old  company]  were  in  the  position  of  insolvent  debtors  who  could 
not  reserve  an  interest  as  against  creditors.  Their  original  contribu- 
tion to  the  capital  stock  was  subject  to  the  payment  of  debts.  The 
property  was  a  trust  fund  charged  primarily  with  the  payment  of 
corporate  liabilities.  Any  device,  whether  by  private  contract  or  judi- 
cial sale  under  consent  decree,  whereby  stockholders  were  preferred 
before  the  creditors  was  invalid.  Being  bound  by  the  debts,  the  pur- 
chase of  their  property,  by  their  new  company,  for  their  benefit,  put 
the  stockholders  in  the  position  of  a  mortgagor  buying  at  his  own  sale. 
If  they  did  so  in  good  faith  and  in  ignorance  of  Boyd's  claim  they  were 
none  the  less  bound  to  recognize  his  superior  right  in  the  property,  when 

years  later  his  contingent  claim  was  liquidated  and  established." 
*     *     * 

The  plan  of  reorganization  was  made  November  7,  1899,  and  it  be- 
came effective  December  20,  1899.    This  plan  was  made  a  part  of  the 
reorganization  agreement,  and  it  stated  that  it  was  expected  and  in- 
tended that  the  property  of  the  Gulf  Company  would  be  purchased 
B.&  B.Bus.Law— 94 


1490  CORPORATIONS  (Part  6 

by  the  reorganized  committee,  that  a  successor  of  the  company  would 
be  organized  to  which  this  property  and  the  stocks  and  bonds  of  the 
Belt  Company  deposited  under  the  plan  would  be  conveyed,  that  all 
this  property  was  to  be  made  subject  to  the  mortgage  of  the  new  com- 
pany, and  that  it  was  "intended,  as  soon  as  practicable,  that  the  new 
company  acquire  the  property  of  the  terminal  companies  in  fee  and 
bring  them  directly  under  the  lien  of  the  mortgage,"  and  the  acquisi- 
tion of  the  stocks  and  bonds  of  that  company  and  their  pledge  under 
that  mortgage  were  but  the  means  to  the  accomplishment  of  this  end 
which  the  plan  contemplated. 

It  is  conceded  that  the  organization  of  the  Southern  Cornpany,  its 
purchase  of  the  Gulf  Company  property,  its  exchange  of  its  stocks 
and  bonds  for  those  of  the  Belt  Company,  and  its  possession  and  con- 
trol of  its  property  on  April  1,  1900,  by  means  of  its  ownership  of  this 
stock,  were  steps  in  the  execution  of  the  scheme.  But  the  reorganiza- 
tion committee  did  not  cease  its  work  until  October  1,  1900,  and  be- 
fore that  date  the  Southern  Company  by  its  representative,  the  Provi- 
dent Company,  had,  on  September  6,  1900,  commenced  the  suit  to  fore- 
close the  Belt  mortgage  and  to  put  its  property  in  the  hands  of  re- 
ceivers and  had  caused  the  Belt  Company  to  consent  to  the  receiver- 
ship. For  what  purpose  did  the  Southern  Company  take  these  steps? 
It  had  the  possession  and  absolute  control  of  the  Belt  Property  by  its 
ownership  of  89  per  cent,  of  its  bonds  and  97  per  cent,  of  its  stock. 
A  default  on  its  bonds  was  in  reaUty  a  default  of  itself  to  itself.  Fore- 
closure could  give  it  no  more  power  over  the  Belt  Company  than  it 
already  had.  For  what  purpose  then  was  the  foreclosure?  Evidently 
to  carry  out  the  reorganization  agreement,  as  it  was  within  the  power 
and  as  it  was  the  duty  of  the  committee  and  of  that  company,  its  crea- 
ture, to  do,  to  acquire  the  property  of  the  Belt  Company  in  fee  and 
bring  it  directly  under  the  lien  of  the  mortgage.  Why  did  the  South- 
ern Company  exchange  its  stock  for -the  stock  of  the  Belt  Company? 
Was  it  not  for  the  purpose  of  silencing  the  opposition  of  the  Belt  stock- 
holders to  the  coming  foreclosure,  and  to  its  acquisition  of  the  fee 
of  the  Belt  Company's  property,  and  was  not  the  scheme  of  reorgani- 
zation the  primary  cause,  the  vesting  of  the  fee  of  the  Belt  property 
in  the  Southern  Company  by  the  foreclosure  the  object  and  effect  of 
that  scheme  to  attain  that  end?  To  the  minds  of  the  members  of  this 
court  the  record  in  this  case  leaves  no  alternative  but  to  answer  these 
questions  in  the  affirmative.     *     *     * 

Another  argument  is  that  the  Trust  Company  is  entitled  to  no  re- 
lief because  the  equitable  interest  of  the  creditors  in  the  property  of 
the  Belt  Company  was  of  no  value.  This  contention  is  founded  on 
the  findings  of  the  master  that  there  was  no  direct  testimony  of  the 
fair  value  of  the  Belt  Company's  propert}^  at  or  before  the  time  of  the 
foreclosure,  no  proof  that  it  was  worth  more  than  the  $1,000,000  for 
which  it  was  sold  at  the  foreclosure  sale,  and  therefore  that  it  was 
sold  at  its  fair  market  value.  The  mortgage  was  $1,000,000,  and  the 
deduction  is  that  the  equitable  interest  of  the  creditors  was  valueless. 
But  the  crucial  issue  here  was  not  what  the  fair  market  value  of  the 
mortgaged  property  was,  nor  was  it  how  much  more  the  mortgaged 
property  was  worth  than  the  amount  of  the  mortgage.  Although  evi- 
dence upon  these  subjects  would  have  been  competent  in  the  considera- 
tion of  the  real  issue  here  in  the  absence  of  an  estoppel,  that  issue  was : 
What  was  the  equitable  interest  of  the  creditors   in  the  mortgaged 


Ch.  5)    THE  RELATION  OF  CREDITORS  TO  THE  CORPORATION     1491 

property  of  the  Belt  Company  worth  during  the  execution  of  the 
scheme  and  immediately  after  the  foreclosure  sale  and  the  appropria- 
tion of  it  thereby  by  the  Southern  Company,  the  trustee  for  the  cred- 
itors, to  itself,  for  a  trustee  who  violates  his  trust  may  not  profit  there- 
by? *  *  *  The  creditors  were  entitled  to  the  highest  value  their 
interest  had  during  this  time,  either  for  the  purpose  of  sale  or  for 
the  purpose  of  preventing  a  foreclosure  of  the  mortgage  upon  the  Belt 
property,  or  for  the  purpose  of  compromising  their  claims  or  condi- 
tioning the  foreclosure,  or  for  the  purpose  of  the  present  or  future 
control  of  the  property.  •♦ 

"If  the  value  of  the  road  justified  the  issuance  of  stock  in  exchange 
for  old  shares,  the  creditors  were  entitled  to  the  benefit  of  that  value, 
whether  it  was  present  or  prospective,  for  dividends  or  only  for  pur- 
poses of  control.  In  either  event  it  was  a  right  of  property  out  of 
which  the  creditors  were  entitled  to  be  paid  before  the  stockholders 
could  retain  it  for  any  purpose  whatever."  Northern  Pacific  Ry.  Co. 
v.  Boyd,  228  U.  S.  508,  33  Sup.  Ct.  561,  57  L.  Ed.  931. 

The  report  of  the  master  discloses  other  facts  than  that  he  received 
no  direct  evidence  of-  the  fair  market  value  of  the  property  except  the 
bid  at  the  foreclosure  sale,  which  leave  no  doubt  that  the  equitable  in- 
terest of  the  creditors  was  worth  much  more  than  the  amount  of  the 
Trust  Company's  claim,  $360,000.  That  report  shows  that  the  South- 
ern Company  paid  $1,330,000  of  its  bonds  and  $250,000  of  its  preferred 
stock,  or  $1,580,000  of  its  new  bonds  and  stock  for  the  $1,000,000  of 
the  old  bonds  of  the  Belt  Company.  The  fact  to  which  counsel  call 
attention,  that  the  new  bonds  drew  but  3  per  cent,  interest  per  annum 
while  the  old  bonds  drew  5  per  cent.,  has  not  been  overlooked.  But 
even  so,  the  reorganization  committee  and  the  Southern  Company  would 
not  have  given  for  these  old  bonds  a  bonus  of  33  per  cent,  in  new  bonds 
and  $250,000  in  the  stock  of  the  Southern  Company  unless  the  old 
bonds  had  been  well  secured.  The  master's  report  also  shows  that 
the  Southern  Company  gave  $1,187,500  of  its  preferred  stock  and  $3,- 
562,500  of  its  common  stock  to  the  stockholders  of  the  Belt  Company 
for  their  equitable  interest  in  the  property  of  that  company,  that  at 
the  same  time  stockholders  of  the  Gulf  Company  paid,  and  the  South- 
ern Company  received,  $10  per  share  in  cash  and  an  equal  number 
of  shares  of  the  stock  of  the  Gulf  Company  for  tens  of  thousands  of 
shares  of  the  Southern  Company's  common  stock.  That  stock  must 
therefore  have  been  worth  at  least  the  $10  cash  per  share  which  was 
paid  for  it,  and  it  was  worth  as  much  more  as  the  value  of  the  stock 
of  the  Gulf  Company.  The  preferred  stock  of  the  Southern  Com- 
pany could  not  have  been  worth  less  than  its  common  stock.  The 
Southern  Company  therefore  paid  in  value  at  least  $475,000  for  the 
equitable  interest  of  the  stockholders  of  the  Belt  Company  in  its  prop- 
erty when  it  gave  them  $4,750,000  of  its  preferred  and  common  stock 
for  their  stock  in  that  company.  But  the  equitable  interest  of  the  cred- 
itors in  the  property  of  the  "Belt  Company  was  superior  to  that  of  the 
stockholders,  and  its  value  could  not  have  been  less,  and  was  undoubt- 
edly greater,  than  the  $475,000.  That  interest  was  therefore  worth 
more  than  enough  to  have  paid  the  $360,000  which  the  Belt  Company 
owed  to  the  Trust  Company,  and  the  Southern  Company  cannot  escape 
liability  on  the  ground  that  it  was  worthless.  The  fact  that  at  the 
foreclosure  sale,  where  there  was  no  competition,  the  Belt  Company 
was  bid  in  at  $1,000,000,  fails  to  disprove  or  to  even  render  doubtful 


1492  CORPORATIONS  (Part  G 

this  conclusion,  and  the  Southern  Company  which  gave  $4,750,000 
of  its  full  paid  stock,  which  it  was  readily  selling  for  $10  cash  per 
share,  and  Gulf  stock  of  equal  amount,  for  the  inferior  stock  of  the 
Belt  Company,  cannot  be  heard  to  say  that  the  superior  equity  of  the 
creditors  therein  was  worthless.  Northern  Pacific  Ry.  Co.  v.  Boyd, 
228  U.  S.  508,  33  Sup.  Ct.  554,  57  L.  Ed.  931.     *     *     * 

Deliberate  consideration  has  been  given  to  the  earnest  objection  to 
the  consideration  by  this  court  of  the  question  of  the  value  of  this 
equitable  interest  of  the  creditors  in  the  Belt  property  on  the  ground 
that  the  master  found  that  there  was  no  direct  evidence  that  the  prop- 
erty of  the  Belt  Company  was  worth  more  than  $1,000,000,  and  hence 
that  this  was  its  fair  value,  that  no  exception  was  taken  to  that  find- 
ing, and  that  the  evidence  is  not  here.  But  because  the  finding  of  the 
fair  market  value  of  the  mortgaged  property  is  not  conclusive  of  the 
value  of  the  creditors'  equity  therein,  and  because  other  facts  and 
findings  contained  in  the  master's  report,  all  of  which  are  available  to 
this  court  for  the  determination  of  that  issue,  have  convinced  that  the 
value  of  that  equity  was  more  than  $475,000,  the  objection  of  coun- 
sel has  not  been  thought  fatal  to  the  consideration  and  determination 
of  this  question.     *     *     * 

It  is  another  contention  of  counsel  for  the  Southern  Company  that 
the  remedy  of  the  Trust  Company  in  this  court  of  equity  is  limited 
to  the  subjection  of  the  property  of  the  Belt  Company  in  the  posses- 
sion of  the  Southern  Company  to  the  payment  of  its  claim  and  that  it 
may  not  have  a  decree  that  the  Southern  Company  pay  it.  This  court 
does  not  concede  the  soundness  of  this  position.     *     *     * 

The  question,  however,  is  not  material  in  the  case  at  bar  because 
the  transaction  was  a  conveyance  of  the  property  of  the  Belt  Com- 
pany in  fraud  of  creditors  and  a  breach  of  trust  by  the  Southern  Com- 
pany, which  company,  with  full  knowledge  of  all  the  facts,  actively 
participated  in  the  entire  transaction  and  thereby  acquired  the  prop- 
erty of  the  Belt  Company,  so  that  that  property  and  the  improvements 
the  Southern  Company  has  made  thereon,  free  from  the  $1,000,000 
Belt  mortgage  and  free  from  any  charge  for  the  expenses  which  the 
Southern  Company  has  made  thereon,  stands  in  its  hands  charged  with 
a  trust  to  pay  the  claim  of  the  Trust  Company  against  the  Belt  Com- 
pany which  the  court  may  execute  by  a  seizure  and  sale  by  its  master 
or  receiver.     *     *     * 

And  if  the  Southern  Company  has  disposed  of  the  property  or  de- 
stroyed it,  or  placed  it  beyond  the  reach  of  the  Trust  Company  or 
the  court,  or  given  a  mortgage  or  incumbrance  upon  it  to  a  party  with- 
out notice,  the  court  has  plenary  power,  and  it  is  its  duty  to  require 
the  Southern  Company  to  account  for  and  pay  over  the  proceeds  of 
the  property  or  the  value  of  it,  or  the  proceeds  of  the  mortgage,  or 
the  amount  of  it,  to  the  extent  of  the  Trust  Company's  claim,  and  to 
so  conduct  its  proceedings  and  mold  its  decrees  that  full  relief  may  be 
secured  by  the  Trust  Company.  '  And  as  the  property  of  the  Belt  Com- 
pany was  worth  many  times  the  amount  of  the  claim  of  the  Trust 
Company  at  the  time  of  its  transfer  to  the  Southern  Company,  the  ulti- 
mate result  will  be  the  same  whether  the  decree  be  for  the  seizure 
and  sale  of  the  Belt  property  or  for  the  payment  of  the  claim  of  the 
Trust  Company  by  the  Southern  Company,  for  it  must  ultimately 
be  paid  either  out  of  the  property  in  its  hands  or  by  the  Southern  Com- 
pany itself.     *     *     * 


Ch.  5)         THE   RELATION   OF  CREDITORS  TO  THE   CORPORATION  1493 

And  the  conclusion  of  the  whole  matter  is  *  *  *  that  the  South- 
ern Company  is  indebted  to  and  should  pay  to  the  Trust  Company  the 
amount  of  the  indebtedness  of  the  Belt  Company  to  the  Trust  Com- 
pany, that  is  to  say,  the  sum  of  $639,658.86  and  interest  from  the  date 
of  the  former  decree  on  $473,723.59  at  6  per  cent,  per  annum,  on 
$46,565.76  at  7  per  cent,  per  annum,  and  on  $119,369.51  at  8  per  cent, 
per  annum,  and  the  costs  of  this  suit ;  that  the  Trust  Company's  right 
to  and  equity  in  the  property  of  the  Belt  Company  which  was  trans- 
ferred to  the  Southern  Company  by  means  of  the  exchange  of  the  stock 
of  the  Belt  Company  for  the  stock  of  the  Southern  Company  and  by 
the  foreclosure  proceedings,  sale,  and  conveyance,  and  otherwise,  was 
and  is  prior  in  time  and  superior  in  equity  and  right,  to  the  extent 
necessary  to  pay  that  debt,  to  the  right,  title,  and  equity  of  the  South- 
ern Company  therein.     *     *     * 

Let  the  decree  be  reversed,  and  let  the  cases  be  remanded  to  the 
District  Court,  with  directions  to  render  a  decree  for  the  Trust  Com- 
pany in  accord  with  the  views  expressed  in  this  opinion.^ 


SECTION  5.— RIGHTS  OF  CREDITORS  AGAINST 
STOCKHOLDERS 


CLARK  V.  BEVER. 

(Supreme  Court  of  the  Tnited   States.  1891.     1.39  U.  S.  96,  11  Sup.  Ct.  468, 

35  L.  Ed.  88.) 

In  the  year  1872,  the  Burlington,  Cedar  Rapids  &  Minnesota  Rail- 
way Company — of  which  at  the  time  the  intestate,  George  Greene, 
was  president,  as  well  as  a  stockholder,  and  of  which  he  continued  to 
be  president  until  February,  1875 — had  a  settlement  with  the  North- 
western Construction  Company,  of  which  also  Greene  was  a  member, 
for  work  done  in  building  a  part  of  its  road.  This'  settlement  showed 
the  sum  of  $70,000  to  be  due  the  construction  company.  The  railway 
company,  being  unable  to  pay  this  claim  in  money,  delivered  to  the 
construction  company  3,500  shares  of  its  stock,  at  20  cents  on  the 
dollar,  each  share  being  for  $100,  and  the  same  was  accepted  in 
full  satisfaction  of  the  debt.  The  stock,  which  was  not  worth  any- 
thing in  the  market,  was  issued  directly  to  the  members  of  the  con- 
struction company,  the  intestate  Greene  receiving  910  shares  as  his 
portion.  No  other  payment  than  this  20  per  cent,  was  made  for  or 
on  account  of  the  stock.  The  good  faith  of  the  parties  in  making  this 
arrangement  is  not  impugned  by  allegation  or  proof.  The  construc- 
tion company  was  reluctant  to  take  the  stock,  and  insisted  upon  pay- 
ment in  cash.  What  the  original  stockholders  paid  for  their  shares 
does  not  appear ;  nor  does  the  record  show  whether  or  not  Greene 
exercised  any  of  the  privileges  of  a  stockholder.     *     *     * 

Clark,  the  plaintiff  below,  a  citizen  of  Ohio,  being  the  holder  of  50 
gold  bonds  of  $1,000  each  of  the  Burlington,  Cedar  Rapids  &  Min- 
nesota Railway  Company,  dated  June  1,  1874,  payable  in  the  year  1914, 

1  See  the  collection  of  papers,  Some  Legal  Phases  of  Corporate  Finaneins:, 
Reorganization  and  Regulation  by  Stetson,  Lynde,  Cravath  et  al.,  and  the 
article  by  Samuel  Spring,  on  Upset  Prices  in  Corporate  Reorganization,  in 
.32  Harvard  Law  Review,  489. 


1494  CORPORATIONS  (Part  6 

and  bearing  interest  at  7  per  cent,  per  annum, — which  bonds  were 
part  of  a  series  of  2.000  each  for  $1,000,  secured  by  mortgage  upon 
the  company's  net  income,  rolling  stock,  and  additions,  and  con- 
vertible at  the  option  of  the  holder  into  capital  stock, — ^brought  suit 
to  recover  the  amount  due  thereon,  and  on  the  4th  of  June,  1878,  re- 
covered judgment  against  the  railroad  company  for  the  sum  of 
$65,517,  to  bear  interest  from  that  date.  We  infer,  though  the  record 
contains  no  distinct  statement  or  proof  on  the  subject,  that  the  bonds 
became  due  and  payable  prior  to  this  suit,  on  account  of  default  in  the 
payment  of  interest.  Execution  was  issued  upon  the  judgment,  and 
was  returned  August  10,  1880,  "No  property  found." 

The  present  suit  was  commenced  July  5,  1881,  by  Clark  against  the 
administrator  of  Greene,  a  citizen  of  Iowa,  in  the  circuit  court  for 
Linn  county  in  that  state.  The  petition,  after  setting  out  the  foregoing 
judgment,  the  return  of  the  execution  thereon  unsatisfied,  and  the 
ownership  of  the  910  shares  of  stock  by  Greene  up  to  his  death,  and 
by  his  estate  since,  alleged  "that  of  the  value  of  said  shares  of  stock 
owned  by  said  decedent  there  has  been  paid  only  the  sum  of  eighteen 
thousand  two  hundrd  dollars,  or  about  twenty  per  centum  of  the  full 
value  of  said  stock,  and  there  is  still  due  upon  said  shares  a  balance 
of  eighty  per  centum  of  rheir  full  value,  amounting  to  the  sum  of 
seventy-two  thousand  and  eight  hundred  dollars ;  that  the  said  balance 
due  upon  said  shares  was  a  trust  fund  in  the  hands  of  said  decedent 
for  the  payment  of  said  judgment,  and  is  still  a  trust  fund  for  the  pur- 
pose in  the  hands  of  decedent's  administrator.     *    *    * 

The  court  below  *  *  *  held,  as  matter  of  law,  that  upon  the  evi- 
dence the  intestate,  Greene,  by  taking  the  910  shares  of  stock  upon 
which  the  20  per  cent,  was  paid,  did  not  become  liable  to  pay  anything 
further  on  account  thereof  to  creditors  of  the  railway  company;  and, 
pursuant  to  its  direction,  the  jury  returned  a  verdict  for  the  defendant. 

Mr.  Justice  Harlan,  after  stating  the  facts  in  the  foregoing  lan- 
guage, delivered  the  opinion  of  the  court.    *    *    * 

We  come  now  to  consider  the  principaf  questions  in  the  case.  They 
relate  to  the  liability  of  the  defendant  for  the  difference  between  the 
face 'value  of  the  stock  issued  to  Greene  in  1872,  and  the  value  at  which 
it  was  rated  in  the  settlement  of  that  year  with  the  Burlington,  Cedar 
Rapids  &  Minnesota  Railway  Company.  The  general  proposition  ad- 
vanced by  the  plaintiff  is  that  it  was  not  competent  for  the  railway 
company  to  issue  to  Greene  and  his  associates  in  discharge  of  its  debt 
to  them,  amounting  to  $70,000,  3,500  shares  of  stock  of  the  par  value 
of  $350,000,  although  the  settlement  upon  that  basis  may  have  been 
demanded  by  the  best  interests  of  the  company,  and  was  made  in  good 
faith,  without  intention  to  harm  the  corporation  or  to  defraud  its  cred- 
itors, existing  or  subsequent,  and  although  the  stock  at  the  time  "was 
not  worth  anything  in  the  market;"  and  that  Greene  took  the  910 
shares  issued  to  him  for  20  per  cent,  of  its  face  value,  subject  to  the 
implied  condition  that  he  should  be  liable  for  any  unpaid  debts  of  the 
corporation  to  the  extent  of  the  difference  between  the  face  value  of 
the  stock  and  the  amount  at  which  it  was  taken  by  him.  It  is  not  con- 
tended that  such  liability  arises  from  the  relations  Green  held  to  the 
two  companies  making  the  settlement  of  1872,  but  from  the  obligations 
the  law  imposed  for  the  benefit  of  creditors  both  upon  the  corporation 
issuing  the  stock  and  its  stockholders.    *    *    * 


Ch.  5)    THE  RELATION  OF  CREDITORS  TO  THE  rORPORATSON     14:9;j 

The  statutory  provisions  that  are  supposed  by  the  plaintiff  to  sustain 
his  position,  which  were  in  force  when  the  stock  in  question  was  issued, 
are  found  in  title  10,  c.  52,  of  the  Revision  of  the  Statutes  of  Iowa  of 
1860.     *    *    * 

The  argument  in  behalf  of  the  plaintiff  assumes  that,  consistently 
with  these  statutory  provisions,  no  one  can,  under  any  circumstances 
whatever,  become  the  owner  of  the  stock  of  an  Iowa  corporation,  ex- 
cept subject  to  the  condition  that,  where  property  of  the  corporation 
cannot  be  found,  the  private  property  of  the  stockholder  may  be  seized 
under  execution  in  favor  of  a  judgment  creditor  to  the  extent  of  the 
difference  between  what  he  actually  paid  for  the  stock,  whether  in  mon- 
ey or  in  property,  and  its  face  value.  And  it  is  fvirther  insisted  that, 
independently  of  the  statute,  such  is  the  doctrine  of  general  law  re- 
lating to  subscriptions  to  the  stock  of  corporations,  as  announced  by 
this  court  in  several  cases.  We  are  of  opinion  that  neither  of  these  po- 
sitions can  be  maintained. 

The  local  statute  undoubtedly  proceeds  upon  the  ground  that  unpaid 
installments  of  stock  subscribed  constitute — no  other  rule  being  pre- 
scribed by  legislative  enactment — a  trust  fund  for  the  benefit  of  cred- 
itors. But  it  does  not  declare  that  a  corporation  is  without  power, 
under  any  circumstances  whatever,  to  dispose  of  its  stock  at  less  than 
par,  or  that  stock  purporting  to  be  full  paid  shall,  in  all  cases,  and 
without  reference  to  the  circumstances  under  which  it  was  acquired, 
be  deemed  unpaid  to  the  extent  that  the  amount  given  for  it  by  the 
owner,  whether  in  money  or  in  property,  was  less  than  its  face  value. 
On  the  contrary,  the  statute  itself  imposes  no  express  restriction  upon 
the  disposition  by  a  corporation  of  its  stock  except  such  as  is  imposed 
upon  individuals,  and  prescribes  no  rule  in  respect  to  the  liability  of 
a  stockholder  to  creditors  except  that  when  corporate  property  cannot 
be  found  to  pay  a  judgment  creditor  his  private  property  may  be  seized 
under  the  execution  to  the  extent  of  any  unpaid  installments  on  the 
stock  owned  by  him.  Whether  any  such  indebtedness  really  exists 
upon  the  part  of  a  particular  stockholder,  and  whether  he-in  law  or  in 
fact  owes  any  sum  on  the  stock  held  by  him,  was  left  by  the  statute 
to  be  determined  in  each  case,  upon  its  own  circumstances,  and  in  ac- 
cordance with  the  principles  of  general  law  touching  the  rights  and 
liabilities  of  creditors  and  stockholders.  If  the  legislature  had  intended 
that  the  acquisition  of  stock  at  less  than  its  face  value  should  be  con- 
clusive evidence  in  every  case  that  the  stock,  as  between  creditors  and 
stockholders,  is  "unpaid,"  it  would  have  been  easy  to  so  declare,  as  has 
been  done  in  some  of  the  states.  If  such  a  rule  be  demanded  by  con- 
siderations of  public  policy,  the  remedy  is  with  the  legislative  depart- 
ment of  the  government  creating  the  corporation.  A  rule  so  explicit 
and  unbending  could  be  enforced  without  injustice  to  any  one,  for  all 
would  have  notice  from  the  statute  of  the  will  of  the  legislature.  It 
is  not  for  the  courts,  by  mere  interpretation  of  a  statute,  not  justified 
by  its  language,  to  accomplish  objects  that  are  within  the  exclusive 
province  of  legislation.    *    *    * 

Do  the  decisions  of  this  court  require  us  to  hold,  in  such  a  case, 
that  a  creditor  taking  stock  in  payment  of  his  claim  is  bound  to  other 
creditors  for  the  face  value  of  the  stock?  The  plaintiff  contends  that 
our  decisions  are  to  that  effect.  Let  us  see.  In  Sawyer  v.  Hoag,  17 
Wall.  610,  620,  21  L.  Ed.  731,  it  was  held  that  the  capital  stock  of  a 
corporation,   especially  its  unpaid  subscriptions,   is  a  trust  fund  sub 


1496  CORPORATIONS  (Part  6 

modo  for  the  benefit  of  its  general  creditors.  *  *  *  There  is  no 
dispute  here  as  to  the  soundness  of  this  general  principle.  The  dis- 
pute is  as  to  its  application  to  a  case  like  the  present  one.  We  can  be 
aided  in  solving  this  inquiry  by  ascertaining  the  character  of  the  par- 
ticular cases  in  which  it  has  been  applied  by  this  court.  In  Sawyer  v.- 
Hoag,  a  subscription  of  $5,000  to  the  stock  of  an  insurance  company 
for  which  the  subscriber  paid  in  full,  but  received  in  return  the  check 
of  the  corporation  for  $4,250  under  an  agreement  that  the  debt  for 
the  stock  should  be  extinguished,  and  the  amount  of  the  check  should 
be  treated  simply  as  a  loan  of  money  to  the  stockholder,  was  held  to 
be  a  mere  device  to  evade  the  rule  that  unpaid  subscriptions  of  stock 
constitute  a  trust  fund  for  the  benefit  of  the  creditors  of  the  coi'pora- 
tion;  consequently,  that  the  stock  there  in  question  was  to  be  re- 
garded, as  between  the  corporation  and  creditors,  to  be  unpaid  to 
the  extent  of  the  amount  received  back  from  the  corporation  under  the 
pretense  of  a  loan.  *  *  *  in  Webster  v.  Upton,  91-  U.  S.  65,  23 
L.  Ed.  384,  a  person  holding  certificates  of  stock,  by  transfer  from 
the  original  subscriber,  and  standing  ttpon  the  books  of  the  corpora- 
tion as  a  stockholder^  was  held  liable  for  the  balance  due  upon  the 
stock,  without  proof  of  an  "express"  promise  upon  his  part  to  pay, 
*  *  *  and  in  Pullman  v.  Upton,  96  U.  S.  328,  24  L.  Ed.  818,  that 
a  transferee  of  stock  M^ho  caused  the  transfer  to  be  made  to  himself,  as 
collateral  security  for  a  debt  of  the  transferrer,  was  liable  for  the  bal- 
ance due  on  such  stock.  *  *  *  j^  Scovill  v.  Thayer,  105  U.  S.  143, 
26  L.  Ed.  968,  it  was  declared,  among  other  things,  that  a  contract 
between  a  corporation  and  its  stockholders,  that  they  should  never  be 
called  upon  to  pay  any  other  assessment  than  that  paid  at  the  outset, 
wlTile  good  as  between  the  corporation  and  the  stockholders,  was  a 
fraud  in  law  upon  creditors,  which  they  could  have  set  aside  whenever 
their  rights  intervened  and  their  claims  were  unsatisfied.  In  Richard- 
son V.  Green,  133  U.  S.  30,  10  Sup.  Ct.  280,  33  L.  Ed.  516,  it  was  held 
that  the  issuing  by  a  corporation  of  bonus  stock  was  in  violation  of  a 
statute  of  the  state  declaring  it  to  be  unlawful  to  issue  certificates  of 
stock  until  the  shares  were  fully  paid,  and  that  one  exercising  the  priv- 
ileges and  powers  oi  a  stockholder  in  a  corporation  was  not  exempt 
from  the  liabilities  attaching  to  a  bona  fide  stockholder  who  took 
shares  purporting  to  be,  but  which  in  fact  were  not,  fully  paid. 

This  detailed  statement  of  the  above  cases  has  been  made  because  of 
the  confident  assertion  that  they  rest  upon  doctrines  necessarily  re- 
quiring the  reversal  of  the  judgment.  We  do  not  concur  in  this  view. 
In  all  of  these  cases,  except  one,  there  was  an  actual  subscription  of 
a  given  amount.  They  were  cases  of  promises  to  pay  the  company 
the  amount  subscribed,  not  of  sales  by  it.  According  to  those  cases, 
a  stockholder,  becoming  such  by  formal  subscription  or  by  transfer 
upon  the  books  of  the  corporation,  cannot  be  discharged  to  the  injury 
of  creditors  by  any  agreement,  arrangement,  or  device  to  which  cred- 
itors do  not  give  their  assent,  and  by  which  the  stockholder  is  to  pay 
less  than  the  amount  due  upon  such  stock.     *     *     * 

The  present  case  presents  features  that  are  not  to  be  found  in  the 
others.  It  is  not  the  case  of  an  ordinary  subscription  of  stock  in  a 
given  amount.  Nor  is  it,  strictly,  one  of  an  ordinary  purchase  of  stock 
for  purposes  of  investment.  It  is  the  case  of  a  creditor  of  an  insol- 
vent railroad  corporation  which,  in  consequence  of  its  inability  to  pay 
creditors  in  money,  was  threatened  with  bankruptcy,  and  which  re- 


Ch.  5)         THE   RELATION   OF  CREDITORS  TO  THE   CORPORATION  1497 

fused  or  was  unable  to  pay  except  in  stock  that  was  without  market 
value.  To  say  that  a  public  corporation,  charged  with  public  duties, 
may  not  relieve  itself  from  embarrassment  by  paying  its  debt  in  stock 
at  its  real  value — there  being  no  statute  forbidding  such  a  transac- 
tion— without  subjecting  the  creditor,  surrendering  his  debt,  to  the 
liability  attaching  to  stockholders  who  have  agreed,  expressly  or  im- 
pliedly, to  pay  the  face  value  of  stock  subscribed  by  them,  is,  in  effect, 
to  compel  them  either  to  suspend  operations  the  moment  they  become 
unable  to  pay  their  current  debts,  or  to  borrow  money  secured  by 
mortgage  upon  the  corporate  property.  We  do  not  think  the  statute 
of  Iowa  can  be  properly  construed  to  cause  such  a  result  in  respect 
to  corporations  organized  under  its  laws. 

We  must  not  be  understood  as  modifying  in  any  respect_  the  prin- 
ciples laid  down  in  the  cases  above  cited.  *  *  *  As  said  by  this 
court  in  Peters  v.  Bain,  133  U.  S.  670,  691,  10  Sup.  Ct.  354,  33  L. 
Ed.  696,  "unpaid  subscriptions  to  stocks  are  assets,  and  have  fre- 
quently been  treated  by  courts  of  equity  as  if  impressed  with  a  trust 
sub  modo,  in  the  sense  that  neither  the  stockholders  nor  the  corpora- 
tions can  misappropriate  subscriptions  so  far  as  creditors  are  con- 
cerned."   *    *    * 

Judgment  affirmed. 

DOWNER  V.  UNION  LAND  CO.  OF  ST.  PAUL  et  al. 
(Supreme  Court  of  Minnesota,  1911.     113  Minn.  410,  129  N.  W.  777.) 

Start,  C.  J.  This  is  an  appeal  by  the  plaintiff  from  an  order  of  the 
district  court  of  the  county  of  Ramsey  overruling  his  demurrer  to  the 
second  alleged  defense  in  the  answer  of  the  defendant  Willius.   *  *   * 

The  here  material  allegations  of  the  complaint,  briefly  stated,  are 
to  the  effect  following :  The  defendant  Union  Land  Company,  *  *  * 
on  April  5,  1887,  issued  17,000  shares  of  its  capital  stock,  of  the  par 
value  of  $100  each,  as  full  paid  to  its  organizers,  of  which  50  shares 
were  delivered  to  the  defendant  Willius,  hereafter  referred  to  as  the 
defendant.  The  company,  after  such  issue  of  stock,  became  indebted 
in  the  sum  of  $98,000,  and  thereafter,  for  the  purpose  of  securing 
the  money  to  pay  such  indebtedness,  it  issued  its  bonds,  amounting 
in  the  aggregate  to  $126,000,  with  10  per  cent,  annual  interest,  paya- 
ble to  trustees  or  bearer  February  1,  1894.  The  plaintiff  purchased  6 
of  such  bonds,  each  for  $500,  and  paid  therefor  $3,000,  relying  upon 
the  representation  that  the  17,000  shares  of  stock  so  issued  had  been 
paid  for  in  full.  None  of  his  bonds,  or  any  part  thereof,  were  paid, 
except  interest  to  August  1,  1895.  He  recovered  a  judgment  against 
the  company  in  the  district  court  of  the  county  of  Ramsey,  on  Feb- 
ruary 5,  1902,  for  the  amount  due  on  the  bonds,  $4,979.83.  Execu- 
tion was  issued  on  the  judgment  and  returned'  satisfied  only  to  the 
extent  of  $1,023.87.  The  balance  of  the  judgment  has  never  been 
paid  and  the  company  is  insolvent.  The  organizers  and  stockholders 
of  the  company,  including  the  defendant,  with  the  intent  of  acquiring 
the  17,000  shares  of  stock  as  full  paid,  when  in  fact  they  were  not, 
purchased  1,476  acres  of  land,  for  which  they  paid  only  $679,289, 
which  was  more  than  it  was  worth.  They  caused  this  land,  with  cash 
sufficient  to  make  the  price  actually  paid  for  the  stock  not  more  than 
$850,000,  to  be  transferred  and  turned  over  to  the  company  in  pay- 
ment of  the  17,000  shares  of  stock,  an  overvaluation  of  the  land  of 


1498  CORPORATIONS  (Part  6 

more  than  $790,000.  Such  valuation  was  not  the  result  of  mistake, 
but  was  a  gross  overvaluation,  intentionally  made  by  all  the  parties 
to  the  transaction,  with  the  knowledge  of  all  the  past  and  present 
stockholders  of  the  company,  and  with  the  intent  to  exiable  such  stock- 
holders to  acquire,  and  they  did  thereby  acquire,  each  his  respective 
portion  of  the  17,000  shares  of  the  capital  stock,  by  paying  to  the  com- 
pany therefor  not  to  exceed  $50  per  share.  The  17,000  shares  so  is- 
sued are  the  only  portion  of  the  authorized  capital  stock  of  the  com- 
pany which  was  ever  issued.    *     *    * 

The  complaint  prays,  in  effect,  judgment  against  the  company  for 
the  amount  due  on  the  original  judgment,  and  that  each  of  the  de- 
fendant stockholders  be  required  to  pay  so  much  of  the  difference  be- 
tween the  par  value  of  his  stock  and  the  amount  actually  paid  by  him 
therefor  as  may  be  necessary  to  pay  the  judgment  against  the  com- 
pany, and  for  general  relief. 

The  answer  of  the  defendant  avers  four  alleged  defenses,  viz.: 
(1)  The  stock  was  in  fact  fully  paid.  (2)  The  plaintiff's  bonds  con- 
tained an  express  agreement  that  the  stockholders  should  in  no  wise 
be  liable  for  their  payment.  (3)  The  action  is  barred  by  the  statute 
of  limitations.     (4)  Laches. 

The  plaintiff  replied  to  all  the  alleged  defenses,  except  the  second, 
to  which  he  demurred.    The  trial  court  overruled  the  demurrer.   *   *   * 

The  pivotal  question  presented  by  the  record  is  whether  the  contract 
as  to  stockholders'  liability  contained  in  the  bonds  is  a  defense  on  the 
merits  to  this  action.  The  demurrer  admits  the  execution  of  the  con- 
tract, the  consideration  therefor,  and,  therefore,  its  validity.  Counsel 
for  defendant  contend  that  such  contract  is  an  absolute  bar  to  this  ac- 
tion, and  cite  in  support  of  the  claim,  with  others,  the  case  of  Brown 
V.  Eastern  Slate  Co.  et  al.,  134  Mass.  590.  *  *  *  Another  case  re- 
lied on  is  U.  S.  V.  Stanford,  161  U.  S.  412,  16  Sup.  Ct.  576,  40  L. 
Ed.  751.    *    *    * 

These  cases  sustain  the  proposition  that,  if  a  person  contracting 
with  a  corporation  expressly  agrees  to  look  only  to  the  corporation 
and  its  property  for  the  payment  of  his  debt  against  it,  such  agreement 
will  be  a  waiver  of  the  constitutional  or  statutory  liability  of  stock- 
holders for  tlie  payment  of  the  debt.  It  is  clear  that  the  agreement 
contained  in  the  bonds,  which  we  have  quoted,  released  the  stockhold- 
ers from  any  and  all  liability  for  the  payment  of  the  bonds  imposed 
by  the  Constitution  or  statute,  and  from  all  liability  whatever,  in  the 
absence  of  any  element  of  fraud;  that  is,  if  they  had  then  paid  the 
full  par  value  of  their  stock  as  represented  by  the  issuance  of  it  as  full 
paid.  This  is  not  an  action  to  enforce  any  constitutional  or  statutory 
liability  of  the  defendant  for  the  payment  of  the  bonds ;  but  it  is,  in 
effect,  one  to  compel  the  defendants  to  make  good,  so  far  as  may  be 
necessary  to  satisfy  the  plaintiff's  judgment  against  the  corporation, 
their  alleged  representation,  alleged  to  have  been  relied  upon  by  him, 
that  the  assets  of  the  corporation  had  been  increased  to  the  full  par 
value  of  their  stock,  when  in  fact  only  one-half  thereof  had  been  paid. 
The  question,  then,  in  its  last  analysis,  is  whether  such  a  liability  was 
within  the  contemplation  of  the  parties  when  the  bond  agreement  was 
made,  and  did  the  plaintiff"  thereby  waive  such  liability  in  case  he 
might  thereafter  discover  for  the  first  time  the  facts  upon  which  lia- 
bility must  rest?  The  right  of  a  creditor  to  maintain  such  an  action 
is  settled  by  the  repeated  decisions  of  this  court.     *     *     * 


Ch.  5)         THE   RELATION  OF  CREDITORS  TO  THE   CORPORATION  1499 

The  basis  of  the  action  is  not  contract,  but  fraud,  for  the  reason 
that:  People  deal  with  the  corporation  and  give  it  credit  on  the  faith 
of  its  stock,  and  they  have  the  right  to  assume  that  it  has  a  paid-in 
capital  to  the  amount  which  it  represents  itself  as  having.  If  the  rep- 
resentation is  false,  it  is  a  fraud  on  creditors ;  and,  in  case  the  cor- 
poration becomes  insolvent,  ecjuity  will  compel  the  holders  of  bonus 
stock,  or  stock  not  in  fact  paid  in  full,  to  make  the  representation 
good,  by  paying  the  balance  due  on  iheir  stock  to  the  extent  necessary 
to  pay  creditors  whose  debts  were  contracted  subsequent  to  the  is- 
suing of  the  stock  as  fully  paid,  and  who  are  presumed  to  have  relied 
on  the  representation.  It  is  the  misrepresentation  of  fact  in  stating 
the  amount  of  capital  to  be  greater  than  it  is  in  fact  which  is  the  basis 
of  the  liability  of  the  stockholders  in  such  cases.  A  certificate  for 
paid-up  shares  in  a  corporation  is  simply  a  written  statement  in  the 
name  of  the  corporation  that  the  holder  thereof  is  a  stockholder,  and 
that  the  full  par  value  of  his  shares  has  been  paid  to  the  corporation. 
If  the  shares  in  fact  have  not  been  so  paid  for,  the  certificate  that 
they  have  been  is  a  false  representation  that  the  assets  of  the  corpora- 
tion have  been  increased  to  the  amount  of  the  par  value  of  the  stock 
so  issued. 

The  very  basis  of  this  action  clearly  indicates  that  the  alleged  liabil- 
ity sought  to  be  enforced  in  this  action  was  not  within  the  contempla- 
tion of  the  parties  at  the  time  the  bond  agreement  was  made,  and  that 
it  was  not  waived  thereby.    *    *    * 

It  was  alleged  in  the  second  defense,  and  admitted  by  the  demur- 
rer, that  no  representations  were  ever  made  to  the  plaintiff  that  the 
shares  of  stock  were  fully  paid,  except  the  fact  that  they  were  issued 
as  fully  paid ;  that  he  made  no  inquiries  either  as  to  the  amount  there- 
of, or  the  amount  paid  thereon;  and  that  he  had  no  information  in 
regard  thereto.  It  is  urged,  in  effect,  on  behalf  of  the  defendant,  that 
in  view  of  this  admission  the  plaintiff  did  not  rely  on  any  representa- 
tion that  the  stock  was  fully  paid.  We  cannot  concur  in  this  view  of 
the  effect  of  the  allegations  referred  to.  The  complaint  expressly  al- 
kge^  that  the  plaintiff",  relying  upon  the  representation  that  the  shares 
had  been  paid  in  full,  purchased  and  paid  for  his  bonds.     *     *     * 

With  reference  to  a  trial  of  this  issue  we  deem  it  proper  to  say 
that  the  presumption  of  reliance  by  creditors  upon  the  representation 
that  stock  issued  as  fully  paid  is  so  in  fact  is  only  prima  facie.  The 
rule  in  such  cases  is  that:  "It  is  only  those  creditors  who  have  relied, 
or  who  can  fairly  be  presumed  to  have  relied,  upon  the  professed 
amount  of  capital,  in  whose  favor  the  law  will  recognize  and  enforce 
an  equity  against  the  holders  of  'boiir.s  stock.'  "    *     *     * 

It  follows  that  the  demurrer  to  the  defense  should  have  been  sus- 
tained. 

Reversed. 


1500  coRPORATioxs  (Part  6 


CHAPTER  VI 
RELATION  OF  THE  CORPORATION  TO  THE  STATE 

Section 

1.  Power  to  Alter  the  Charter. 

2.  Police  Powers  of  tlie  State. 

3.  Taxing  Powers  of  the  State. 

4.  Powers  with  Respect  to  Foreign  Corporations. 


SECTION  1.— POWER  TO  ALTER  THE  CHARTER 


THE  RAILROAD  TAX  CASES. 

SAN  MATEO  COUNTY  v.  SOUTHERN  PAC.  R.  CO, 

(Circuit  Court  of  the  United  States,  1882.     13  Fed.  722.) 

Field,  j,  *  *  *  The  state,  in  the  creation  of  corporations,  or 
iri  amending  their  charters,  or  rather  in  passing  or  amending  general 
laws  under  which  corporations  may  be  formed  and  altered,  possesses 
no  power  to  withdraw  them  when  created,  or  by  amendment,  from  'the 
guaranties  of  the  federal  constitution.  It  cannot  impose  the  condition 
that  they  shall  not  resort  to  the  courts  of  law  for  the  redress  of  in- 
juries or  the  protection  of  its  property;  that  they  shall  make  no  com- 
plaint if  their  goods  are  plundered  and  their  premises  invaded;  that 
they  shall  ask  no  indemnity  if  their  lands  be  seized  for  public  use,  or 
be  taken  without  due  process  of  law,  or  that  they  shall  submit  with- 
out objection  to  unequal  and  oppressive  burdens  arbitrarily  imposed 
upon  them;  that,  in  other  words,  over  them  and  their  property  the 
state  may  exercise  unlimited  and  irresponsible  power.  Whatever  the 
state  may  do,  even  with  the  creations  of  its  own  will,  it  must  do 
in  subordination  to  the  inhibitions  of  the  federal  constitution.  It  jnay 
confer,  by  its  general  laws,  upon  corporations  certain  capacities  of  do- 
ing business,  and  of  having  perpetual  succession  in  their  members. 
It  may  make  its  grant  in  these  respects  revocable  at  pleasure ;  it  may 
make  the  grant  subject  to  modifications  and  impose  conditions  upon 
its  use,  and  reserve  the  right  to  change  these  at  will.  But  whatever 
property  the  corporations  acquire  in  the  exercise  of  the  capacities  con- 
ferred, they  hold  under  the  same  guaranties  which  protect  the  prop- 
erty of  individuals  from  spoliation.  It  cannot  be  taken  for  public  use 
without  compensation.  It  cannot  be  taken  without  due  process  of  law, 
nor  can  it  be  subjected  to  burdens  different  from  those  laid  upon  the 
property  of  individuals  under  like  circumstances. 

The  state  grants  to  railroad  corporations  formed  under  its  laws  a 
franchise,  and  over  it  retains  control,  and  may  withdraw  or  modify  it. 
By  the  reservation  clause  it  retains  power  only  over  that  which  it 
grants ;  it  does  not  grant  the  rails  on  the  road ;  it  does  not  grant  the 
depots  alongside  of  it;  it  does  not  grant  the  cars  on  the  track,  nor  the 
engines  which  move  them,  and  over  them  it  can  exercise  no  po^^jer 
except  such  as  may  be  exercised  through  its  control  over  the  fran- 
chise, and  such  as  may  be  exercised  with  reference  to  all  property  used 
by  carriers  for  the  public.     The  reservation  of  power  over  the  fran- 


Ch.  6)     RELATION  OF  THE  CORPORATION  TO  THE  STATE       1501 

chise — that  is.  over  that  which  is  granted — makes  its  grant  a  condi- 
tional or  revocable  contract,  whose  obligation  is  not  impaired  by  its 
revocation  or  change.  The  Supreme  Court  established,  in  the  Dart- 
mouth College  Case,  that  the  charter  of  a  private  corporation  is  a  con- 
tract between  the  corporators  and  the  state,  and  that  it  was,  thereiore, 
within  the  prohibition  of  the  federal  constitution  against  the  impair- 
ment of  contracts.  To  avoid  this  result  the  states  have  generally  in- 
serted clauses  in  their  constitutions  reserving  a  right  to  repeal,  alter, 
or  amend  charters  granted  by  their  legislatures,  or  to  repeal,  alter,  or 
amend  the  general  laws  under  which  corporations  are  allowed  to  be 
formed.  The  reservation  relates  only  to  the  contract  of  incorpora- 
tion, which,  without  such  reservation,  would  be  irrepealable.  It  re- 
moves the  impediment  to  legislation  touching  the  contract.  It  places  the 
corporation  in  the  same  position  it  would  have  occupied  had  the  su- 
preme court  held  that  charters  are  not  contracts,  and  that  laws  repeal- 
ing or  altering  them  did  not  impair  the  obligation  of  contracts.  The 
property  of  the  corporation,  acquired  in  the  exercise  of  its  faculties,  is 
held  independently  of  such  reserved  power,  and  the  state  can  only 
exercise  over  it  the  control  which  it  exercises  over  the  property  of 
individuals  engaged  in  similar  business.     *     *     * 


SECTION  2.— POLICE  POWERS  OF  THE  STATE 


ATLANTIC  COAST  LINE  R.  CO.  v.  CITY  OF  GOLDSBORO. 

(Supreme  Court  of  the  United  States.  1914.     232  U.  S.  548,  34  Sup.  Ct.  364, 

58   L.   Ed.   721.) 

Mr.  Justice  Pitney  delivered  the  opinion  of  the  court. 

The  Atlantic  Coast  Line  Railroad  Company,  plaintiff  in  error,  has 
succeeded  to  the  ownership  of  the  property,  franchises,  and  rights  of 
the  Wilmington  &  Raleigh  Railroad  Company,  which  was  chartered 
by  the  general  assembly  of  North  Carolina  in  the  year  1833,  and  whose 
name  was  afterwards  changed  to  Wilmington  &  Weldon  Railroad  Com- 
pany. Under  its  charter  powers  the  original  company  constructed  its 
railroad  from  Wilmington  to  and  into  Wayne  county,  North  Caro- 
lina, passing  through  the  place  which  later,  and  in  the  year  1847,  be- 
came incorporated  as  the  town  of  Goldsboro,  now  the  city  of  Goldsboro, 
defendant  in  error.     *     *     * 

In  November,  1909,  the  board  of  aldermen  passed  an  ordinance  or 
ordinances  containing  the  following  provisions :  Section  1  rendered 
it  unlawful  for  any  railroad  company  to  run  any  freight  or  passenger 
train  on  East  or  West  Center  streets  at  a  rate  of  speed  exceeding  four 
miles  per  hour,  and  required  the  companies  to  have  flagmen  proceed 
50  feet  in  front  of  every  train  to  warn  persons  of  its  approach.  Sec- 
tion 2  provided  that  the  shifting  limits  on  East  and  West  Center  streets 
should  be  from  Spruce  street  to  the  city  limits  on  the  south,  and  from 
Ash  street  to  the  city  limits  on  the  north ;  thus  excluding  the  four 
blocks  between  Spruce  and  Ash  streets.  Section  3  declared  it  to  be 
unlawful  for  any  railroad  company  to  do  any  shifting  within  those  four 
blocks  at  any  other  time  than  between  the  hours  of  6:30  and  8:30 
a.  m.,  and  between  4:30  and  6:30  p.  m.  Section  4  rendered  it  unlaw- 
ful for  any  railroad  company  to  place  any  car  and  allow  it  to  stand 


1502  CORPORATIONS  (Part  6 

for  a  longer  period  than  five  minutes  at  any  point  on  East  and  West 
Center  streets  within  the  same  four  blocks.  Section  5  required  all  rail- 
road companies  owning  tracks  on  East  and  West  Center  streets  be- 
tween Walnut  and  Vine  (four  blocks)  to  lower  the  tracks  so  as  to  make 
them  conform  to  the  grade  line  of  the  streets,  and  to  fill  in  the  tracks 
between  the  rails ;  the  required  lowering  being  specified  as  six  inches 
from  Walnut  to  Mulberry,  ten  inches  between  Mulberry  and  Ash, 
and  eighteen  inches  between  Ash  and  Vine  streets.  Substantial  penal- 
ties were  prescribed  for  violations  of  these  prohibitions. 

Plaintiff  in  error  began  this  action  against  the  city  of  Goldsboro  in 
the  superior  court  of  Wayne  county,  seeking  to  restrain  the  enforce- 
ment of  the  ordinances.  A  temporary  restraining  order  was  granted. 
At  the  hearing,  the  objection  to  the  enforcement  of  section  1  was  aban- 
doned by  plaintiff;  as  to  the  other  sections  the  court  vacated  the  re- 
straining order.  Upon  appeal,  the  Supreme  Court  of  North  Carolina 
affirmed  the  judgment.  155  N.  C.  356,  71  S.  E.  514.  The  present 
writ  of  error  *  *  *  is  based  iipon  the  insistence,  made  in  the 
state  courts  and  there  overruled,  that  the  ordinances  impair  the  obliga- 
tion of  the  contract  contained  in  the  charter  of  the  company,  in  con- 
travention of  section  10,  art.  1,  of  the  federal  Constitution,  and  deprive 
the  company  of  its  property  without  due  process  of  law,  in  contraven- 
tion of  the  Fourteenth  Amendment.     *     *     * 

We  must  therefore  treat  the  ordinances  as  legislation  enacted  by 
virtue  of  the  lawmaking  power  of  the  state.  They  are  manifestly  an 
exertion  of  the  police  power,  and  the  question  is  whether,  viewed  in 
that  light,  they  run  counter  to  the  "contract"  or  "due  process"  clauses. 
That  a  railroad  charter  may  embody  a  contract,  within  the  'meaning 
of  the  Constitution,  hardly  needs  to  be  stated.  Dartmouth  College  v. 
Woodward,  4  Wheat.  518,  4  L.  Ed.  629.  In  the  present  case  the  su- 
preme court  of  North  Carolina  held  that  by  the  Constitution  oi  the 
state,  the  charter  was  subject  to  alteration  or  repeal  at  the  legislative 
will.  If  the  right  of  repeal  was  indeed  thus  reserved,  the  result  is 
obvious.  Greenwood  v.  Union  Freight  R.  Co.,  105  U.  S.  13,  21,  26 
L.  Ed.  961,  965.  *  *  *  We  are  not  referred  to  and  are  unable 
to  find,  in  the  state  Constitution  as  it  existed  when  the  charter  now  in 
question  was  granted,  any  reservation  of  the  right  of  repeal,  and  will 
assume  for  present  purposes  that  the  contract  was  not  thus  qualified, 
and  deal  only  with  the  question  whether  it  has  been  impaired.  *  *  * 
Adopting  the  extreme  assumption  that  the  railroad  company  has  still 
a  complete  and  unqualified  ownership  of  every  portion  of  the  strip  of 
land  that  was  originally  acquired  in  fee  simple,  and  as  proprietor  might 
lawfully  exercise  its  dominion  by  excluding  the  public  from  it ;  yet  it 
does  not  do  this,  but  permits,  and  long  has  permitted,  the  public  to  use 
material  portions  of  the  strip  for  ordinary  street  purposes;  it  appar- 
ently excludes  the  public  from  no  portion  except  as  the  existence  of  the 
tracks  and  the  passage  of  trains  may  have  such  a  tendency  or  effect. 
And  thus  the  company,  at  least  for  the  time,  devotes  its  property  in 
part  to  public  uses  that  are  more  or  less  inconsistent  with  the  railroad 
uses,  and  under  conditions  such  as  to  render  the  railroad  operations 
necessarily  a  source  of  danger  to  the  public  while  enjoying  the  per- 
mitted use.  Under  such  circumstances  the  state,  in  the  exercise  of  the 
police  power,  may  legitimately  extend  the  application  of  the  principle 
that  underlies  the  maxim,  "Sic  utere  tuo  ut  alienum  non  laedas,"  so  faj: 
as  may  be  requisite  for  the  protection  of  the  public. 


Ch.  6)     RELATION  OF  THE  CORPORATION  TO  THE  STATE       1503 

For  it  is  settled  that  neither  the  "contract"  clause  nor  the  "due 
process"  clause  has  the  effect  of  overriding  the  power  of  the  state  to 
establish  all  regulations  that  are  reasonably  necessary  to  secure  the 
health,  safety,  good  order,  comfort,  or  general  welfare  of  the  commu- 
nity; that  this  power  can  neither  be  abdicated  nor  bargained  away, 
and  is  inalienable  even  by  express  grant ;  and  that  all  contract  and 
property  rights  are  held  subject  to  its  fair  exercise.  Slaughter  House. 
Cases,  16  Wall.  36,  62,  21  L.  Ed.  394,  404;  Munn  v.  Illinois,  94  U. 
S.  113,  125,  24  L.  Ed.  77,  84;  *  *  *  Mugler  v.  Kansas,  123  U. 
S.  623,  665,  31  L.  Ed.  205,  211,  8  Sup.  Ct.  273.  *  *  *  And  the 
enforcement  of  vmcompensated  obedience  to  a  regulation  established  un- 
der this  power  for  the  public  health  or  safety  is  not  an  unconstitutional 
taking  of  property  without  compensation  or  without  due  process  of 
law.  Chicago,  B.  &  O.  R.  Co.  v.  Chicago,  166  U.  S.  226,  255,  41  L. 
Ed.  979,  991,  17  Sup.'Ct.  581 ;  *  *  *  Chicago,  B.  &  Q.  R.  Co.  v. 
Illinois,  200  U.  S.  561,  591,  592,  50  L.  Ed.  596,  608,  609,  26  Sup.  Ct. 
341,  4  Ann.  Cas.  1175. 

Of  course,  if  it  appear  that  the  regulation  under  criticism  is  not  in 
any  way  designed  to  promote  the  health,  comfort,  safety,  or  welfare  of 
the  community,  or  that  the  means  employed  have  no  real  and  substan- 
tial relation  to  the  avowed  or  ostensible  purpose,  or  that  there  is  wan- 
ton or  arbitrary  interference  with  private  rights,  the  question  arises 
whether  the  law-making  body  has  exceeded  the  legitimate  bounds  of 
the  police  power. 

The  ordinances  now  in  question  must  be  considered  in  view  not  only 
of  the  charter  and  property  rights  of  plaintiff  in  error,  but  of  the  actual 
situation  that  has  developed  and  now  exists  in  Goldsboro,  with  the 
consent  and  long  acquiescence  of  plaintiff  in  error  and  its  predecessors 
in  interest.  A  town  of  considerable  size  and  importance  has  grown  up 
along  the  line  of  the  railroad.  The  strip  of  land  130  feet  in  width,  so 
far  as  it  is  not  occupied  by  the  railroad  tracks,  for  many  years  has  been 
and  still  is  used  for  the  ordinary  purposes  of  a  street.  The  supreme 
court  of  North  Carolina  found,  upon  adequate  evidence,  that  it  is  the 
main  business  street  of  the  town,  frequently  crowded  with  pedestrians 
and  vehicles ;  and  that  the  operation  of  trains  along  it,  notwithstand- 
ing the  utmost  care  of  the  railroad  company,  tends  to  obstruct  the  cross- 
ings and  is  fraught  with  danger  to  life  and  property.  There  are,  with- 
in the  blocks  covered  by  the  ordinances,  two  main  lines  of  railway  be- 
sides that  of  plaintiff  in  error.  These,  of  course,  complicate  the  sit- 
uation by  narrowing  the  spaces  available  for  ordinary  travel  north  and 
south  on  East  and  West  Center  streets,  and  must  also  enhance  the 
dangers  at  the  crossings. 

It  is  very  properly  conceded  that  the  company  may  be  required  to 
limit  the  speed  of  its  trains,  and  to  have  flagmen  precede  them  to  warn 
persons  of  their  approach ;  and  that  the  company  may  be  required  to 
change  its  grade  at  the  street  crossings.     *     *     * 

The  regulations  in  question  are  thus  found  to  be  fairly  designed  ta 
promote  the  public  health,  safety,  and  welfare :  the  measures  adopted 
appear  to  be  reasonably  suited  to  the  purposes  they  are  intended  to  ac- 
complish ;  and  we  are  unable  to  say  that  there  is  any  unnecessaiy  inter- 
ference with  the  operations  of  the  railroad,  or  with  the  property  rights 
of  plaintiff  in  error.  Therefore,  no  violation  of  the  "contract"  or  "due 
process"  clauses  is  shown. 

Judgment  affirmed. 


1504  CORPORATIONS  (Part  6 

SECTION  3.— TAXING  POWERS  OF  THE  STATE 


HAWLEY  V.  CITY  OF  MALDEN. 

(Supreme  Court  of  the  United  States,  1914.     232  U.  S.  1,  34  Sup.   Ct.  201, 
58  L.  Ed.  477,  Ann.  Cas.  1916C,  842.) 

Mr.  Justice  Hughes  delivered  the  opinion  of  the  courts 

The  plaintiff  in  error,  a  resident  of  the  city  of  Maiden,  brought 
this  action  to  recover  the  amount  of  certain  taxes  which  he  had  paid 
under  protest.  The  taxes  were  assessed  upon  shares  which  he  held 
in  foreign  corporations  most  of  which  did  no  business  and  had  no 
property  within  the  state  of  Massachusetts.  It  was  alleged  that  the 
levy  and  collection  were  in  violation  of  the  due  process  and  equal  pro- 
tection clauses  of  the  Fourteenth  Amendment.  Demurrer  to  the 
declaration  was  sustained  by  the  superior  court,  and  the  case  was  re- 
ported to  the  Supreme  Judicial  Court  of  the  commonwealth,  which 
directed  judgment  for  the  defendant.    *     *     * 

It  is  contended  that  the  shares  were  not  within  the  jurisdiction  of 
the  state,  and  hence  that  the  enforcement  of  the  tax  constitutes  an 
unconstitutional  deprivation  of  property. 

The  power  thus  challenged,  as  the  state  court  points  out,  has  been 
continuously  exercised  by  the  state  of  Massachusetts  for  more  than 
three-quarters  of  a  century;  *  *  *  ^^d  the  rulings  in  the  state 
cases  *  *  *  proceed  upon  the  view  that  shares  are  personal  prop- 
erty, and,  having  no  situs  elsewhere,  are  taxable  by  the  state  of  the 
owner's  domicile,  whether  the  corporations  be  foreign  or  domestic. 

It  is  said  that  the  question  of  the  constitutional  validity  of  such 
taxation  has  not  hitherto  been  raised  definitely  in  this  court  and  has 
not  been  directly  passed  upon.  There  is  no  doubt,  however,  that  the 
existence  of  the  state  authority  has  invariably  been  assumed.    *    *    * 

To  support  the  contention  that  this  familiar  state  action,  hitherto 
assumed  to  be  valid,  is  fundamentally  violative  of  the  federal  Consti- 
tution, the  plaintiff  in  error  invokes  the  doctrine  that  a  state  has  no 
right  to  tax  the  property  of  its  citizens  when  it  is  permanently  located 
in  another  jurisdiction.  *  *  *  But  these  decisions  did  not  involve 
the  question  of  the  taxation  of  intangible  personal  property ;  *  *  * 
nor  do  they  apply  to  tangible  personal  property  which,  although  physi- 
cally outside  the  state  of  the  owner's  domicile,  has  not  acquired  an 
actual  situs  elsewhere.  *  *  *  When  we  are  dealing  with  the  in- 
tangible interest  of  the  shareholder,  there  is  manifestly  no  question  of 
physical  situs,  so  far  as  this  distinct  property  right  is  concerned,  and 
the  jurisdiction  to  tax  it  is  not  dependent  upon  the  location  of  the 
lands  and  chattels  of  the  corporation.     *     *     * 

While  the  shareholder's  rights  are  those  of  a  member  of  the  cor- 
poration entitled  to  have  the  corporate  enterprise  conducted  in  ac- 
cordance with  its  charter,  they  are  still  in  the  nature  of  contract  rights 
or  choses  in  action.  *  *  *  As  such,  in  the  absence  of  legislation 
prescribing  a  different  rule,  they  are  appropriately  related  to  the  per- 
son of  the  owner,  and,  being  held  by  him  at  his  domicile,  constitute 
property  with  respect  to  which  he  is  under  obligation  to  contribute 
to  the  support  of  the  government  whose  protection  he  enjoys.    *    *    * 

Undoubtedly,  the  state  in  which  a  corporation  is  organized  may 
provide,  in  creating  it,  for  the  taxation  in  that  state  of  all  its  shares, 


Ch,  G)     RELATION  OF  THE  CORPORATION  TO  THE  STATE       1505 

whether  owned  by  residents  or  nonresidents.  *  *  *  fhis  is  by 
virtue  of  the  authority  of  the  creating  state  to  determine  the  basis  of 
organization  and  the  HabiHties  of  shareholders.  *  *  *  So,  by  rea- 
son of  its  dominant  power  to  provide  for  the  organization  and  conduct 
of  national  banks,  Congress  has  fixed  the  places  at  which  alone 
shares  in  those  institutions  may  be  taxed.  *  *  *  Whether,  in  the 
case  of  corporations  organized  under  state  laws,  a  provision  by  the 
state  of  incorporation,  fixing  the  situs  of  shares  for  the  purpose  of 
taxation,  by  whomever  owned,  would  exclude  the  taxation  of  the 
shares  by  other  states  in  which  their  owners  reside,  is  a  question  which 
does  not  arise  upon  this  record  and  need  not  be  decided.  No  such 
provision  is  here  involved,  and  the  present  case  must  be  determined  by 
the  application  of  the  established  principle  which  has  been  stated. 

The  real  ground  of  complaint  in  this  class  of  cases  is  not  that  the 
shares  are  taxed  in  one  place  rather  than  in  another,  but  that  they  are 
taxed  at  all,  when  presumably  the  property  and  franchises  of  the 
corporation  which  give  to  the  shares  their  value  are  also  taxed.  As 
to  this  we  may  repeat  what  was  said  in  Kidd  v.  Alabama,  188  U.  S. 
730,  23  Sup.  Ct.  401,  47  L.  Ed.  669:  "No  doubt  it  would  be  a  great 
advantage  to  the  country  and  to  the  individual  states  if  principles  of 
taxation  could  be  agreed  upon  which  did  not  conflict  with  each  oth- 
er, and  a  common  scheme  could  be  adopted  by  which  taxation  of  sub- 
stantially the  same  property  in  two  jurisdictions  could  be  avoided. 
But  the  Constitution  of  the  United  States  does  not  go  so  far." 

The  judgment  is  affirmed. 


EISNER  V.  MAOOMBER, 

(Supreme  Court  of  the  Uniterl  States,  1919.    252  U.  S.  1S9,  40  Sup.  Ct.  189. 
64  L.  Ed.  521,  9  A.  D.  B.  1570.) 

Mr.  Justice  Pitney  delivered  the  opinion  of  the  Court. 

This  case  presents  the  question  whether,  by  virtue  of  the  Sixteenth 
Amendment,  Congress  has  the  power  to  tax,  as  income  of  the  stock- 
holder and  without  apportionment,  a  stock  dividend  made  lawfully 
and  in  good  faith  against  profits  accumulated  by  the  corporation  since 
March  1,  1913. 

It  arises  under  the  Revenue  Act  of  September  S,  1916,  *  _  *  * 
which  plainly  evinces  the  purpose  of  Congress  to  tax  stock  dividends 


as  mcome. 


*     * 


In  view  of  the  importance  of  the  matter,  and  the  fact  that  Congress 
in  the  Revenue  Act  of  1916  declared  *  *  *  that  a  "stock  dividend 
shall  be  considered  income,  to  the  amount  of  its  cash  value,"  we  will 
deal  at  length  with  the  constitutional  question,  incidentally  testing 
the  soundness  of  our  previous  conclusion. 

The  Sixteenth  Amendment  must  be  construed  in  connection  with 
the  taxing  clauses  of  the  original  Constitution  and  the  effect  attributed 
to  them  before  the  amendment  was  adopted.  In  Pollock  v.  Farmers' 
Loan  &  Trust  Co.,  158  U.  S.  601,  15  Sup,  Ct.  912,  39  L.  Ed.  1108, 
under  the  Act  of  August  27,  1894  (28  Stat.  509,  553,  c.  349,  §  27),  it 
was  held  that  taxes  upon  rents  and  profits  of  real  estate  and  upon  re- 
turns from  investments  of  personal  property  were  in  effect  direct  tax- 
es upon  the  property  from  which  such  income  arose,  imposed  by  rea- 
B.&  B.Bus.Law— 95 


1506  CORPORATIONS  (Part  6 

son  of  ownership;  and  that  Congress  could  not  unpose  such  taxes 
without  apportioning  them  among  the  states  according  to  population, 
as  required  by  article  1,  §  2,  cl.  3,  and  section  9,  cl.  4,  of  the  original 
Constitution. 

Afterwards,  and  evidently  in  recognition  of  the  limitation  upon 
the  taxing  power  of  Congress  thus  determined,  the  Sixteenth  Amend- 
ment was  adopted,  in  words  lucidly  expressing  the  object  to  be  accom- 
plished : 

"The  Congress  shall  have  power  to  lay  and  collect  taxes  on  in- 
comes, from  whatever  source  derived,  without  apportionment  among 
the  several  states,  and  without  regard  to  any  census  or  enumeration." 

As  repeatedly  held,  this  did  not  extend  the  taxing  power  to  new 
subjects,  but  merely  removed  the  necessity  which  otherwise  might 
exist  for  an  apportionment  among  the  states  of  taxes  laid  on  income. 

*  *  *  It  becomes  essential  to  distinguish  between  what  is  and  what 
is  not  "income,"  as  the  term  is  there  used,  and  to  apply  the  distinc- 
tion, as  cases  arise,  according  to  truth  and  substance,  without  re- 
gard to  form.  Congress  cannot  by  any  definition  it  may  adopt  con- 
clude the  matter,  since  it  cannot  by  legislation  alter  the  Constitution. 

*  *     * 

The  fundamental  relation  of  "capital"  to  "income"  has  been  much 
discussed  by  economists,  the  former  being  likened  to  the  tree  or  the 
land,  the  latter  to  the  fruit  or  the  crop;  the  former  depicted  as  a 
reservoir  supplied  from  springs,  the  latter  as  the  outlet  stream,  to  be 
measured  by  its  flow  during  a  period  of  time.  For  the  present  pur- 
pose we  require  only  a  clear  definition  of  the  term  "income,"  as  used 
in  common  speech,  in  order  to  determine  its  meaning  in  the  amend- 
ment, and,  having  formed  also  a  correct  judgment  as  to  the  nature  of 
a  stock  dividend,  we  shall  find  it  easy  to  decide  the  matter  at  issue. 

=K      *      * 

"Income  may  be  defined  as  the  gain  derived  from  capital,  from  la- 
bor, or  from  both  combined,"  provided  it  be  understood  to  include 
profit  gained  through  a  sale  or  conversion  of  capital  assets,  to  which 
it  was  applied  in  the  Doyle  Case,  247  U.  S.  183,  185,  38  Sup.  Ct. 
467,  469,  62  L.  Ed.  1054. 

Brief  as  it  is,  it  indicates  the  characteristic  and  distinguishing  at- 
tribute of  income  essential  for  a  correct  solution  of  the  present  con- 
troversy. The  government,  although  basing  its  argument  upon  the 
definition  as  quoted,  placed  chief  emphasis  upon  the  word  "gain," 
which  was  extended  to  include  a  variety  of  meanings ;  while  the  sig- 
nificance of  the  next  three  words  was  either  overlooked  or  miscon- 
ceived. "Derived — from — capital;"  "the  gcdn — derived — from — cap- 
ital," etc.  Here  we  have  the  essential  matter:  not  a  gain  accruing  to 
capital ;  not  a  growth  or  increment  of  value  in  the  investment ;  but 
a  gain,  a  profit,  something  of  exchangeable  value,  proceeding  from 
the  property,  severed  from  the  capital,  however  invested  or  employed, 
and  coming  in,  being  "derived" — that  is,  received  or  dra^vn  by  the  re- 
cipient (the  taxpayer)  for  his  separate  use,  benefit  and  disposal — that 
is  inccfme  derived  from  property.  Nothing  else  answers  the  descrip- 
tion. 

The  same  fundamental  conception  is  clearly  set  forth  in  the  Six- 
teenth Amendment — "incomes,  from  whatever  source  derived" — the 
essential  thought  being  expressed  with  a  conciseness  and  lucidity  en- 
tirely in  harmony  with  the  form  and  style  of  the  Constitution. 


Ch.  G)     RELATION  OF  THE  CORPORATION  TO  THE  STATE       1507 

Can  a  stock  dividend,  considering  its  essential  character,  be  brought 
within  the  definition?  To  answer  this,  regard  must  be  had  to  the  na- 
ture of  a  corporation  and  the  stockholder's  relation  to  it.    *    *     * 

Certainly  the  interest  of  the  stockholder  is  a  capital  interest,  and  his 
certificates  of  stock  are  but  the  evidence  of  it.  They  state  the  num- 
ber of  shares  to  which  he  is  entitled  and  indicate  their  par  value  and 
how  the  stock  may  be  transferred.  They  show  that  he  or  his  assign- 
ors, immediate  or  remote,  have  contributed  capital  to  the  enterprise, 
that  he  is  entitled  to  a  corresponding  interest  proportionate  to  the 
whole,  entitled  to  have  the  property  and  business  of  the  company  de- 
voted during  the  corporate  existence  to  attainment  of  the  common  ob- 
jects, entitled  to  vote  at  stockholders'  meetings,  to  receive  dividends 
out  of  the  corporation's  profits  if  and  when  declared,  and.  in  the 
event  of  liquidation,  to  receive  a  proportionate  share  of  the  net  assets, 
if  any,  remaining  after  paying  creditors.  Short  of  liquidation,  or 
until  dividend  declared,  he  has  no  right  to  withdraw  any  part  of 
either  capital  or  profits  from  the  common  enterprise ;  on  the  contrary, 
his  interest  pertains  not  to  any  part,  divisible  or  indivisible,  but  to  the 
entire  assets,  business,  and  affairs  of  the  company.  Nor  is  it  the  in- 
terest of  an  owner  in  the  assets  themselves,  since  the  corporation  has 
full  title,  legal  and  equitable,  to  the  whole.  The  stockholder  has  the 
right  to  have  the  assets  employed  in  the  enterprise,  with  the  incidental 
rights  mentioned;  but,  as  stockholder,  he  has  no  right  to  withdraw, 
only  the  right  to  persist,  subject  to  the  risks  of  the  enterprise,  and 
looking  only  to  dividends  for  his  return.  If  he  desires  to  dissociate 
himself  from  the  company  he  can  do  so  only  by  disposing  of  his  stock. 

For  bookkeeping  purposes,  the  company  acknowledges  a  liability' 
in  form  to  the  stockholders  equivalent  to  the  aggregate  par  value  of 
their  stock,  evidenced  by  a  "capital  stock  account."  If  profits  have 
been  made  and  not  divided  they  create  additional  bookkeeping  liabil- 
ities under  the  head  of  "profit  and  loss,"  "undivided  profits,"  "sur- 
plus account,"  or  the  like.  None  of  these,  however,  gives  to  the  stock- 
holders as  a  body,  much  less  to  any  one  of  them,  either  a  claim  against 
the  going  concern  for  any  particular  sum  of  money,  or  a  right  to  any- 
particular  portion  of  the  assets  or  any  share  in  them  unless  or  until 
the  directors  conclude  that  dividends  shall  be  made  and  a  part  of  the 
company's  assets  segregated  from  the  common  fund  for  the  purpose. 
The  dividend  normally  is  payable  in  money,  under  exceptional  cir- 
cumstances in  some  other  divisible  property ;  and  when  so  paid,  then 
only  (excluding,  of  course,  a  possible  advantageous  sale  of  his  stock 
or  winding-up  of  the  company)  does  the  stockholder  realize  a  profit 
or  gain  which  becomes  his  separate  property,  and  thus  derive  income 
from  the  capital  that  he  or  his  predecessor  has  invested.     *     *     * 

The  profits  of  a  corporation,  as  they  appear  upon  the  balance  sheet 
at  the  end  of  the  year,  need  not  be  in  the  form  of  money  on  hand  in 
excess  of  what  is  required  to  meet  current  liabilities  and  finance  cur- 
rent operations  of  the  company.  Often,  especially  in  a  growing  busi- 
ness, only  a  part,  sometimes  a  small  part,  of  the  year's  profits  is  in 
property  capable  of  division;  the  remainder  having  been  absorbed  in 
the  acquisition  of  increased  plant,  equipment,  stock  in  trade,  or  ac- 
counts receivable,  or  in  decrease  of  outstanding  liabilities.  When 
only  a  part  is  available  for  dividends,  the  balance  of  the  year's  profits 
is  carried  to  the  credit  of  undivided  profits,  or  surplus,  or  some  other 
account  having  like  significance.     If  thereafter  the  company  finds  it- 


1508  coRroRATiONS  (Part  6 

self  in  funds  beyond  current  needs  it  may  declare  dividends  out  of 
such  surplus  or  undivided  profits ;  otherwise  it  may  go  on  for  years 
conducting  a  successful  business,  but  requiring  more  and  more  work- 
ing capital  because  of  the  extension  of  its  operations,  and_  therefore 
unable  to  declare  dividends  approximating  the  amount  of  its  profits. 
Thus  the  surplus  may  increase  until  it  equals  or  even  exceeds  the  par 
value  of  the  outstanding  capital  stock.  This  may  be  adjusted  upon 
the  books  in  the  mode  adopted  in  the  case  at  bar — ^by  declaring  a 
"stock  dividend." 

This,  however,  is  no  more  than  a  book  adjustment,  in  essence  not 
a  dividend  but  rather  the  opposite ;  no  part  of  the  assets  of  the  com- 
pany is  separated  from  the  common  fund,  nothing  distributed  except 
paper  certificates  that  evidence  an  antecedent  increase  in  the  value  of 
the  stockholder's  capital  interest  resulting  from  an  accumulation  of 
profits  by  the  company,  but  profits  so  far  absorbed  in  the  business  as 
to  render  it  impracticable  to  separate  them  for  withdrawal  and  dis- 
tribution. In  order  to  make  the  adjustment,  a  charge  is  made  against 
surplus  account  with  corresponding  credit  to  capital  stock  account, 
equal  to  the  proposed  "dividend" ;  the  new  stock  is  issued  against  this 
and  the  certificates  delivered  to  the  existing  stockholders  in  pro- 
portion to  their  previous  holdings.  This,  however,  is  merely  book- 
keeping that  does  not  affect  the  aggregate  assets  of  the  corporatipn  or 
its  outstanding  Habilities;  it  aft'ects  only  the  form,  not  the  essence, 
of  the  "liability"  acknowledged  by  the  corporation  to  its  own  share- 
holders, and  this  through  a  readjustment  of  accounts  on  one  side  of 
the  balance  sheet  only,  increasing  "capital  stock"  at  the  expense  of 
"surplus" ;  it  does  not  alter  the  pre-existing  proportionate  interest  of 
any  stockholder  or  increase  the  intrinsic  value  of  his  holding  or  of 
the  aggregate  holdings  of  the  other  stockholders  as  they  stood  before. 
The  new  certificates  simply  increase  the  number  of  the  shares,  with 
consequent  dilution  of  the  value  of  each  share. 

A  "stock  dividend"  shows  that  the  company's  accumulated  profits 
have  been  capitaUzed,  instead  of  distributed  to  the  stockholders  or 
retained  as  surplus  available  for  distribution  in  money  or  in  kind 
should  opportunity  offer.  Far  from  being  a  realization  of  profits  of 
the  stockholder,  it  tends  rather  to  postpone  such  realization,  in  that 
the  fund  represented  by  the  new  stock  has  been  transferred  from  sur- 
plus to  capital,  and  no  longer  is  available  for  actual  distribution. 

The  essential  and  controlling  fact  is  that  the  stockholder  has  re- 
ceived nothing  out  of  the  company's  assets  for  his  separate  use  and 
benefit;  on  the  contrary,  every  dollar  of  his  original  investment,  to- 
gether with  whatever  accretions  and  accumulations  have  resulted 
from  employment  of  his  money  and  that  of  the  other  stockholders  in 
the  business  of  the  company,  still  remains  the  property  of  the  com- 
pany, and  subject  to  business  risks  which  may  result  in  wiping  out  the 
entire  investment.     *     *     * 

It  is  said  that  a  stockholder  may  sell  the  new  shares  acquired  in  the 
stock  dividend ;  and  so  he  may,  if  he  can  find  a  buyer.  It  is  equally 
true  that  if  he  does  sell,  and  in  doing  so  realizes  a  profit,  such  profit, 
like  any  other,  is  income,  and  so  far  as  it  may  have  arisen  since  tlie 
Sixteenth  Amendment  is  taxable  by  Congress  without  apportionment. 
The  same  would  be  true  were  he  to  sell  some  of  his  original  shares  at 
a  profit.  But  if  a  shareholder  sells  dividend  stock  he  necessarily  dis- 
poses of  a  part  of  his  capital  interest,  just  as  if  he  should  sell  a  part 


Ch.  6)     RELATION  OF  THE  CORPORATION  TO  THE  STATE       1509 

of  his  old  stock,  either  before  or  after  the  dividend.  What  he  retains 
no  longer  entitles  him  to  the  same  proportion  of  future  dividends  as 
before  the  sale.  His  part  in  the  control  of  the  company  hkewise  is 
diminished.     *    *     * 

Yet,  without  selling,  the  shareholder,  unless  possessed  of  other  re- 
sources, has  not  the  wherewithal  to  pay  an  income  tax  upon  the  divi- 
dend stock.  Nothing  could  more  clearly  show  that  to  tax  a  stock  div- 
idend is  to  tax  a  capital  increase,  and  not  income,  than  tliis  demon- 
stration that  in  the  nature  of  things  it  requires  conversion  of  capital 
in  order  to  pay  the  tax. 

Throughout  the  argument  of  the  government,  in  a  variety  of  forms, 
runs  the  fundamental  error  already  mentioned — a  failure  to  appraise 
correctly  the  force  of  the  term  "income"  as  used  in  the  Sixteenth 
Amendment,  or  at  least  to  give  practical  effect  to  it.  Thus  the  gov- 
ernment contends  that  the  tax  "is  levied  on  income  derived  from  cor- 
porate earnings,"  when  in  truth  the  stockholder  has  "derived"  noth- 
ing except  paper  certificates -which,  so  far  as  they  have  any  effect,  de- 
ny him  present  participation  in  such  earnings.     *     *     * 

We  have  no  doubt  of  the  power  or  duty  of  a  court  to  look  through 
the  form  of  the  corporation  and  determine  the  question  of  the  stock- 
holder's right,  in  order  to  ascertain  whether  he  has  received  income 
taxable  by  Congress  without  apportionment.  But,  looking  through 
the  form,  we  cannot  disregard  the  essential  truth  disclosed,  ignore 
the  substantial  difference  between  corporation  and  stockholder,  treat 
the  entire  organization  as  unreal,  look  upon  stockholders  as  partners, 
when  they  are  not  such,  treat  them  as  having  in  equity  a  right  to  a 
partition  of  the  corporate  assets,  when  they  have  none,  and  indulge  the 
fiction  that  they  have  received  and  realized  a  share  of  the  profits  of 
the  company  which  in  truth  they  have  neither  received  nor  realized. 
We  must  treat  the  corporation  as  a  substantial  entity  separate  from 
the  stockholder,  not  only  because  such  is  the  practical  fact  but  be- 
cause it  is  only  by  recognizing  such  separateness  that  any  dividend — 
even  one  paid  in  money  or  property — can  be  regarded  as  income  of 
the  stockholder.     *     *     * 

It  is  said  there  is  no  difference  in  principle  between  a  simple  stock 
dividend  and  a  case  where  stockholders  use  money  received  as  cash 
dividends  to  purchase  additional  stock  contemporaneously  issued  by  the 
corporation.  But  an  actual  cash  dividend,  with  a  real  option  to  the 
stockholder  either  to  keep  the  money  for  his  own  or  to  reinvest  it  in 
new  shares,  would  be  as  far  removed  as  possible  from  a  true  stock  divi- 
dend, such  as  the  one  we  have  under  consideration,  where  nothing  of 
value  is  taken  from  the  company's  assets  and  transferred  to  the  indi- 
vidual ownership  of  the  several  stockholders  and  thereby  subjected  to 
their  disposal. 

The  government's  reliance  upon  the  supposed  analogy  between  a 
dividend  of  the  corporation's  own  shares  and  one  made  by  distributing 
shares  owned  by  it  in  the  stock  of  another  company,  calls  for  no  com- 
ment beyond  the  statement  that  the  latter  distributes  assets  of  the  com- 
pany among  the  shareholders  while  the  former  does  not.     *     *     * 

That  Congress  has  power  to  tax  shareholders  upon  their  property 
interests  in  the  stock  of  coroprations  is  beyond  question,  and  that  such 
interests  might  be  valued  in  view  of  the  condition  of  the  company, 
including  its  accumulated  and  undivided  profits,  is  equally  clear.  But 
that  this  would  be  taxation  of  property  because  of  ownership,  and  hence 


1510  coRroRATioNS  (Part  6 

would  require  apportionment  under  the  provisions  of  the  Constitution, 
is   settled  beyond  peradventure  by  previous  decisions   of  this  court. 

N^         ^         ^ 

Thus,  from  every  point  of  view  we  are  brought  irresistibly  to  the 
conclusion  that  neither  under  the  Sixteenth  Amendment  nor  otherwise 
has  Congress  power  to  tax  without  apportionment  a  true  stock  dividend 
made  lawfully  and  in  good  faith,  or  the  accumulated  profits  behind  it, 
as  income  of  the  stockholder.  The  Revenue  Act  of  1916,  in  so  far  as 
if  imposes  a  tax  upon  the  stockholder  because  of  such  dividend,  con- 
travene? the  provisions  of  article  1,  §  2,  cl.  3,  and  article  1,  §  9,  cl, 
4,  of  the  Constitution,  and  to  this  extent  is  invalid,  notwithstanding 
the  Sixteenth  Amendment. 

Judgment  affirmed.    *    *    * 

Mr.  Justice  Holmes  dissenting,  with  whom  concurred  Mr.  Justice 
Day. 

Mr.  Justice  BrandEis  dissenting,  with  whom  concurred  Mr.  Justice 
Clarke. 


SECTION  4.— POWERS  WITH  RESPECT  TO  FOREIGN 
CORPORATIONS 


ST.  OLAIR  et  al.  v.  COX. 

(Supreme  Court  of  the  United  States.  1882.     106  I^  S.  350,  1  Sup.  Ct.  354. 

27   L.   Ed.   222.) 

Field,  J.  This  doctrine  of  the  exemption  of  a  corporation  from  suit 
in  a  state  other  than  that  of  its  creation,  was  the  cause  of  much  incon- 
venience and  often  of  manifest  injustice.  *  *  *  f  o  meet  and  obviate 
this  inconvenience  and  injustice,  the  legislatures  of  several  states  in- 
terposed and  provided  for  service  of  process  on  officers  and  agents  of 
foreign  corporations  doing  business  therein.  While  the  theoretical 
and  legal  view,  that  the  domicile  of  a  corporation  is  only  in  the  state 
where  it  is  created,  was  admitted,  it  was  perceived  that  when  a  for- 
eign corporation  sent  its  officers  and  agents  into  other  states  and 
opened  offices,  and  carried  on  its  business  there,  it  was,  in  effect,  as 
much  represented  by  them  there  as  in  the  state  of  its  creation.  As  it 
'was  protected  by  the  laws  of  those  states,  allowed  to  carry  on  its  busi- 
ness within  their  borders,  and  to  sue  in  their  courts,  it  seemed  only 
right  that  it  should  be  held  responsible  in  those  courts  to  obligations 
and  liabilities  there  incurred.    *    *    * 

A  corporation  of  one  state  cannot  do  business  in  another  state  with- 
out the  latter's  consent,  express  or  implied,  and  that  consent  may  be 

accompanied  with  such  conditions  as  it  may  think  proper  to  impose. 
*    *    * 

The  state  may,  therefore,  impose  as  a  condition  upon  which  a  for- 
eign corporation  shall  be  permitted  to  do  business  within  her  limits, 
that  it  shall  stipulate  that  in  any  litigation  arising  out  of  its  transac- 
tions in  the  state,  it  will  accept  as  sufficient  the  service  of  process  on 
its  agents  or  persons  specially  designated,  and  the  condition  would 
be  eminently  fit  and  just.  And  such  condition  and  stipulation  may 
be  implied  as  well  as  expressed.  If  a  state  permits  a  foreign  cor- 
poration to  do  business  within  her  limits,  and  at  the  same  time  pro- 
vides that  in  suits  against  it  for  business  there  done,  process  shall  be 


Ch.  G)     RELATION  OF  THE  CORPORATION  TO  THE  STATE       1511 

served  upon  its  agents,  the  provision  is  to  be  deemed  a  condition  of 
the  permission ;  and  corporations  that  subsequently  do  business  in 
the  state  are  to  be  deemed  to  assent  to  such  condition  as  fully  as 
though  they  had  specially  authorized  their  agents  to  receive  service 
of  the  process.  Such  condition  must  not,  however,  encroach  upon 
that  principle  of  natural  justice  which  requires  notice  of  a  suit  to  a 
party  before  he  can  be  bound  by  it.  It  must  be  reasonable;  and  the 
service  provided  for  should  be  only  upon  such  agents  as  may  be  prop- 
erly deemed  representatives  of  the  foreign  corporation.     *     *     * 

We  do  not,  however,  understand  the  laws  as  authorizing  the  service 
of  a  copy  of  the  writ,  as  a  summons,  upon  an  agent  of  a  foreign  cor- 
poration unless  the  corporation  be  engaged  in  business  in  the  state, 
and  the  agent  be  appointed  to  act  there.  We  so  construe  the  words 
"agent  of  such  corporation  within  this  state."  They  do  not  sanction 
service  upon  an  officer  or  agent  of  the  corporation  who  resides  in  an- 
other state,  and  is  only  casually  in  the  state,  and  not  charged  with  any 
business  of  the  corporation  there.    *    *    * 


MAHAR  V.  HARRINGTON  PARK  VILLA  SITES  et  al. 

(Court  of  Appeals  of  New  York,  1912.     204  N.  Y.  231,  97  N.  E.  587, 
38  L.  R.  A.  FN.  S.]  210.) 

WiLLARD  BartlETT,  J.  *  *  *  f|-,g  complaint  alleges  that  at 
the  city  ot  New  York,  about  July  27,  1909,  the  plaintiff  had  negotia- 
tions with  the  defendants  regarding  the  sale  by  the  defendants  and  the 
purchase  by  the  plaintiff  of  certain  lots  of  land  situated  at  Harrington 
Park,  N.  J. ;  that  thereafter  the  defendants  and  plaintiff  entered  into 
a  written  agreement  for  the  sale  of  said  property  to  the  plaintiff; 
that  the  contract  required  plaintiff  to  pay  to  the  Harrington  Park  Villa 
Sites,  as  a  part  payment  thereon,  the  sum  of  $500,  and  plaintiff  de- 
livered to  said  defendant  a  check  on  the  Carnegie  Trust  Company, 
drawn  to  its  order,  v/hich  check  was  afterwards  duly  indorsed  by  said 
defendant  and  paid;  that  the  Harrington  Park  Villa  Sites,  at  the  time 
named,  was  a  foreign  corporation,  other  than  a  money  corporation, 
organized  and  existing  under  the  laws  of  New  Jersey,  and  had  an 
office  for  the  transaction  of  its  business  in  the  city  of  New  York,  and 
the  transaction  relating  to  and  the  making  of  the  agreement  above 
named  took  place  in  the  city  and  state  of  New  York ;  that  at  the  time 
of  the  making  of  said  agreement  the  Plarrington  Park  Villa  Sites  had 
not  filed  with  the  Secretary  of  State  of  New  York  the  statement  re- 
quired by  law,  and  had  not  paid  the  tax  or  obtained  a  certificate  to 
enable  it.  as  a  foreign  stock  corporation,  other  than  a  money  corpora- 
tion, to  do  business  in  the  state  of  New  York,  and  at  said  times  was 
doing  business  in  violation  of  section  15  of  the  general  corporation 
law ;  and  that  the  plaintiff  under  said  contract  deposited  with  the  de- 
fendants the  said  sum  of  $500,  and  before  the  commencement  of  this 
action  demanded  from  them  the  aforesaid  sum,  no  part  of  which  has 
been  paid.  Upon  these  facts  the  plaintiff"  demanded  judgment  against 
the  defendants  for  the  sum  of  $500  and  costs.    *    *    * 

The  theory  upon  which  the  complaint  has  been  upheld  by  the  Ap- 
pellate Division  is  that  the  contract  therein  mentioned  was  void,  be- 
cause made  by  a  foreign  stock  corporation,  other  than  a  moneyed  cor- 
poration, doing  business  in  the  state  of  New  York  in  violation  of  the 


1512  CORPORATIONS  (Part  6 

provision  of  section  15  of  the  general  corporation  law;  *  *  *  and 
hence  that  there  was  a  failure  of  consideration  for  the  payment  of  the 
$500  by  the  plaintiff,  and  an  action  lies  to  recover  back  the  money. 
*  *  *  The  only  penalty  which  the  general  corporation  law  itself 
prescribes  for  a  disregard  of  the  provisions  of  this  section  is  a  disabih- 
ty  to  sue  upon  such  a  contract  in  the  courts  of  New  York.  "No  foreign 
stock  corporation  doing  business  in  this  state  shall  maintain  any  ac- 
tion in  this  state  upon  any  contract  made  by  it  in  this  state,  unless 
prior  to  the  making  of  such  contract  it  shall  have  procured  such  cer- 
tificate." Consol.  Laws,  c.  23,  §  15.  This  prohibition  would  be  effec- 
tive to  prevent  the  appellant  from  suing  the  respondent  upon  the 
contract  alleged  in  the  complaint ;  but,  in  my  opinion,  it  is  not  opera- 
tive to  wholly  invalidate  the  contract.  I  think  that  the  penalty  imposed 
upon  a  foreign  stock  corporation  for  doing  business  in  New  York  with- 
out the  certificate  of  authority  required  by  section  15  of  the  general 
corporation  law  is  limited  to  that  thus  prescribed  in  the  section  itself. 
No  doubt  the  Legislature  could  have  gone  further  and  declared  all 
contracts  to  be  void  which  were  made  by  a  foreign  stock  corporation 
doing  business  in  this  state  without  having  obtained  the  certificate; 
but  it  has  not  done  so.    *    *    * 

The  Supreme  Court  of  the  United  States  has  distinctly  held  that  a 
contract  made  by  a  foreign  corporation  with  a  citizen  of  another  state 
is  not  necessarily  void  because  the  corporation  had  not  complied  with 
the  laws  of  such  other  state  imposing  conditions  upon  it  as  a  prerequi- 
site to  the  lawful  transaction  of  business  therein.     *    *     * 

If  I  am  right  in  assuming  that  the  only  infirmity  in  the  contract 
mentioned  in  the  complaint  is  the  disability  of  one  of  the  parties  to  it, 
namely,  the  foreign  corporation,  to  sue  upon  it  in  the  courts  of  this 
state,  it  remains  a  valid  and  effective  instrument  in  all  other  respects. 
There  is  not  a  word  in  the  complaint  to  indicate  any  other  defect. 
Here,  then,  we  have  the  case  of  a  contract  which  is  not  void  and  upon 
which  the  plaintiff  has  made  a  payment,  which  he  was  expressly  re- 
quired to  make  by  its  very  terms,  and  where  there  is  no  intimation 
that  the  defendant  corporation  has  failed  in  any  respect  to  comply  with 
the  conditions  on  its  part.  It  is  manifest  that  these  facts  afford  no 
basis  for  any  legal  claim  whatever. 

The  complaint  fails  to  disclose  a  cause  of  action,  and  therefore  the 
order  of  the  Appellate  Division  should  be  reversed,  and  the  order  of 
the  Appellate  Term  affirmed,  with  costs  in  both  courts,  and  the  question 
certified  answered  in  the  negative.    *    *    * 


DICTIONARY  OF  LEGAL  TERMS 

(Abridged   and  Adapted   from  Black's  Law   Dictionary.) 


AB  INITIO.  Latin.  From  the  be- 
ginning. E.  g.,  void  ab  initio.  An 
agreement  is  said  to  be  "void  ab  initio" 
if  it  has  at  no  time  had  any  legal  va- 
lidity. 

ABROGATE.  To  annul;  to  repeal. 
A  statute  may  abrogate  a  rule  of  the 
common  law. 

ABSTRACT  OF  TITLE.  A  con- 
densed history  of  the  title  to  land,  con- 
sisting of  a  synopsis  or  summary  of  the 
material  or  operative  portion  of  all  the 
conveyances,  of  whatever  kind  or  na- 
ture, which  in  any  manner  affect  said 
land,  or  any  estate  or  interest  therein, 
together  with  a  statement  of  all  liens, 
charges,  or  liabilities  to  which  the  same 
may  be  subject,  and  of  which  it  is  in 
any  way  material  for  purchasers  to  be 
apprised. 

ACCEPTANCE.       In    contracts    and 

sales.  The  act  of  a  person  to  whom  a 
thing  is  offered  or  tendered  by  another, 
whereby  he  receives  the  thing  with  the 
intention  of  retaining  it,  such  intention 
being  evidenced  by  a  sufficient  act. 

in  negotiable  instruments.  Acceptance 
of  a  bill  of  exchange.  The  act  by  which 
the  person  on  whom  a  bill  of  exchange 
is  drawn  (called  the  "drawee")  assents 
to  the  request  of  the  drawer  to  pay  it, 
or,  in  other  words,  engages,  or  makes 
himself  liable  to  pay  it  when  due.  2 
Bl.  Comm.  469.  Under  the  Negotiable 
Instruments  Law,  "the  acceptance  must 
be  in  writing  and  signed  by  the  drawee." 

ACCOMMODATION  PAPER.  An  ac- 
commodation bill  or  note  is  one  to  which 
the  accommodating  party,  be  he  accept- 
or, drawer,  or  indorser,  has  put  his 
name,  without  consideration,  for  the 
purpose  of  benefiting  or  accommodating 
some  other  party  who  desires  to  raise 
money  on  it  and  is  to  provide  for  the 
bill  or  note  when  due. 

ACCORD  AND  SATISFACTION.    An 

agreement  between  two  persons,  one  of 
whom  has  a  right  of  action  against  the 
other,  that  the  latter  should  do  or  give, 
and  the  former  accept,  something  in  sat- 


isfaction of  the  right  of  action  different 
from,  and  usually  less  than,  what  might 
be  legally  enforced.  When  the  agree- 
ment is  executed,  and  satisfaction  has 
been  made,  it  is  called  "accord  and  sat- 
isfaction." Accord  and  satisfaction  is 
the  substitution  'of  another  agreement 
between  the  parties  in  satisfaction  of 
the  former  one,  and  execution  of  the 
latter  agreement.  Such  is  the  definition 
of  this  sort  of  defense  usually  given. 
But  a  broader  application  of  the  doc- 
trine has  been  made  in  later  times, 
where  one  promise  or  agreement  is  set 
up  in  satisfaction  of  a  prior  one,  unless 
it  has  been  expressly  accepted  as  such; 
as,  where  a  new  promissory  note  has 
been  given  in  lieu  of  a  former  one,  to 
have  the  effect  of  a  satisfaction  of  the 
former,  it  must  have  been  accepted  on 
an  express  agreement  to  that  effect. 

ACCOUNT.  A  detailed  statement  of 
the  mutual  demands  in  the  nature  of 
debt  and  credit  between  parties,  arising 
out  of  contracts  or  some  fiduciary  rela- 
tion. 

Account  closed.  An  account  to  which 
no  further  additions  can  be  made  on  ei- 
ther side,  but  which  remains  still  open 
for  adjustment  and  set-off,  which  dis- 
tinguishes it  from  account  stated. 

Account  current.  An  open  or  running 
or  unsettled  account  between  two  par- 
ties. 

Account  rendered.  An  account  made 
out  by  the  creditor,  and  presented  to 
the  debtor  for  his  examination  and  ac- 
ceptance. When  accepted,  it  becomes 
an  account  stated. 

Account  stated.  The  settlement  of  an 
account  between  the  parties,  with  a  bal- 
ance struck  in  favor  of  one  of  them; 
an  account  rendered  by  the  creditor,  and 
by  the  debtor  assented  to  as  correct,  ei- 
ther expressly,  or  by  implication  of  law 
from  the  failure  to  object. 

ACKNOWLEDGMENT.  In  convey- 
ancing. The  act  by  which  a  party  who 
has  executed  an  instrument  of  convey- 
ance as  grantor  goes  before  a  compe- 
tent officer,  or  court,  and  declares  or 
acknowledges  the  same  as  his  genuine 


B.&  B.Bus.Law 


(1513) 


1514 


DICTIONARY   OF   LEGAL   TERMS 


and  voluntary  act  and  deed.  The  cer- 
tificate of  the  officer  on  such  instrument 
that  it  has  been  so  acknowledged. 

The  term  is  also  used  of  the  act  of  a 
person  who  avows  or  admits  the  truth 
of  certain  facts  which,  if  established, 
will  entail  a  civil  liability  upon  him. 
Thus,  the  debtor's  ackuowlt'dgment  of 
the  creditor's  demand  or  right  of  action 
will  revive  the  enforceability  of  a  debt 
barred  by  the  statute  of  limitations. 

ACTION.  A  lawsuit.  A  right  of  ac- 
tion;   1.  e.,  a  right  to  bring  suit. 

ACT  OF  GOD.  Any  misadventure  or 
casualty  is  said  to  be  caused  by  the 
"act  of  God,"  when  it  happens  by  the 
direct,  immediate,  and  exclusive  opera- 
tion of  the  forces  of  nature,  uncon- 
trolled and  uninfluenced  by  the  power 
of  man,  and  without  human  interven- 
tion, and  is  of  such  a  character  that  it 
could  not  have  been  prevented  or  es- 
caped from  by  any  amount  of  foresight 
or  prudence,  or  by  any  reasonable  de- 
gree of  care  or  diligence,  or  by  the  aid 
of  any  appliances  which  the  situation 
of  the  party  might  reasonably  require 
him  to  use.  Any  accident  produced  by 
any  physical  cause  which  is  irresistible, 
such  as  lightning,  tempests,  perils  of 
the  seas,  inundations,  earthquakes;  and 
also  the  sudden  death  or  illness  of  per- 
sons. 

ADJUDICATION.  The  giving  or  pro- 
nouncing of  a  judgment  in  a  case;  also 
the  judgment  given.  The  term  is  prin- 
cipally used  in  bankruptcy  proceedings; 
the  adjudication  being  the  order  which 
declares    the   debtor   to  be   a  bankrupt. 

ADMINISTRATOR.  In  the  most 
usual  sense,  is  a  person  to  whom  let- 
ters of  administration — that  is,  an  au- 
thority to  administer  the  estate  of  a 
deceased  person— have  been  granted  by 
the  proper  court.  He  resembles  an  ex- 
ecutor, but  is  appointed  by  the  court, 
without  any  nomination  by  the  deceased. 
An  administrator  of  the  estate  is  ap- 
pointed, if  the  deceased  has  made  no 
will,  or  has  named  no  executor  in  his 
will. 

ADVERSE  POSSESSION.  The  ac- 
tual, open,  and  notorious  possession  and 
enjoyment  of  real  property,  or  of  any 
estate  lying  in  grant,  continued  for  a 
certain  length  of  time,  held  adversely 
and  in  denial  and  opposition  to  the  title 
of  another  claimant,  or  under  circum- 
stances which  indicate  an  assertion  or 
color  of  right  or  title  on  the  part  of 
the  person  maintaining  it,  as  against 
another  person  who  is  out  of  posses- 
sion. 

AFFIANT.  The  person  who  makes 
and  subscribes  an  affidavit.  The  word 
is   used,   in   this   sense,   interchangeably 


with  "deponent."  But,  the  latter  term 
should  be  reserved  as  the  designation 
of  one  who  makes  a  deposition. 

AFFIDAVIT.  A  written  or  printed 
declaration  or  statement  of  facts,  made 
voluntarily,  and  confirmed  by  the  oath 
or  affirmation  of  the  party  making  it, 
taken  before  an  officer  having  authority 
to  administer  such  oath. 

A  FORTIORI.  Lat.  By  a  stronger 
reason. 

AGENCY.  A  relation,  created  either 
by  express  or  implied  contracts  or  by 
law,  whereby  one  party  (called  the  prin- 
cipal) delegates  the  transaction  of  some 
lawful  business  or  the  power  to  do  cer- 
tain acts  for  him  or  in  relation  to  his 
rights  or  property,  with  more  or  less 
discretionary  power,  to  another  person 
(called  the  agent,  attorney  in  fact,  or 
proxy)  who  undertakes  to  manage  Ihe 
affair  and  render  him  an  account 
thereof. 

AGENT.  One  who  represents  and 
acts  for  another  under  the  relation  of 
agency. 

ALLEGATION.  The  assertion,  dec- 
laration, or  statement  of  a  party  to  an 
action,  made  in  a  pleading,  setting  out 
what  he  expects  to  prove. 

ALLEGE.  To  state,  recite,  assert,  or 
charge;    to  make  an  allegation. 

ANIMO  CONTRAHENDI.  Lat.  With 
the  intention  of  contracting. 

ANNUL.  To  cancel;  make  void;  de- 
stroy. To  annul  a  judgment  or  judicial 
proceeding  is  to  deprive  it  of  all  force 
and  operation,  either  ab  initio  or  pro- 
spectively as  to  future  transaction. 

ANSWER.  In  pleading.  Any  plead- 
ing setting  up  matters  of  fact  by  way 
of  defense.  In  chancery  pleading,  the 
term  denotes  a  defense  in  writing,  made 
by  a  defendant  to  the  allegations  con- 
tained in  a  bill  or  information  filed  by 
the  plaintiff  against  him.  In  pleading, 
under  the  Codes  of  Civil  Procedure,  the 
answer  is  the  formal  written  statement 
made  by  a  defendant  setting  forth  the 
ground  of  his  defense;  corresponding  to 
what,  in  actions  under  the  common-law 
practice,  is  called  the  "plea." 

APPEAL.  In  civil  practice.  The 
complaint  to  a  superior  court  of  an  in- 
justice done  or  error  committed  by  an 
inferior  one,  whose  judgment  or  deci- 
sion the  court  above  is  called  upon  to 
correct  or  reverse.  The  removal  of  a 
cause  from  a  court  of  inferior  to  one  of 
superior  jurisdiction,  for  the  purpose  of 
obtaining  a  review  and  retrial. 

APPELLANT.  The  party  who  takes 
an  appeal  from  one  court  or  jurisdic- 
tion. 


DICTIOXAKY   OF   LEGAL   TERJLS 


1515 


APPELLEE.  The  party  in  a  cause 
against  whom  an  appeal  is  taken;  that 
is,  the  party  who  has  an  interest  ad- 
verse to  setting  aside  or  revej.'sing  the 
judgment. 

APPRAISE.  In  practice.  To  fix  or 
set  a  price  or  value  upon;  to  fix  and 
state  the  true  value  of  a  thing,  and, 
usually,  in  writing. 

ARBITRATION.  In  practice.  The 
investigation  and  determination  of  a 
matter  or  matters  of  difference  between 
contending  parties,  by  one  or  more  un- 
oflicial  persons,  chosen  by  the  parties, 
and  called  "arbitrators,"  or  "referees." 

ARREST  OF  JUDGMENT.  In  prac- 
tice. The  act  of  staying  a  judgment,  or 
refusing  to  render  judgment  in  an  ac- 
tion at  law,  after  verdict,  for  some  mat- 
ter intrinsic  appearing  on  the  face  of 
the  record,  which  would  render  the 
judgment,  if  given,  erroneous  or  rever- 
sible. 

ASSUMPSIT.  Latin.  He  undertook; 
he  promised.  A  promise  or  engagement 
by  which  one  person  assumes  or  under- 
takes to  do  some  act  or  pay  something 
to  another.  It  may  be  either  oral  or 
in  writing,  but  is  not  under  seal.  It  is 
express,  if  the  promisor  puts  his  en- 
gagement in  distinct  and  definite  lan- 
guage; it  is  implied,  where  the  law  in- 
fers a  promise  (though  no  formal  one 
has  passed)  from  the  conduct  of  the 
party  or  the  circumstances  of  the  case. 

In  practice.  A  form  of  action  which 
lies  for  the  recovery  of  damages  for  the 
non-performance  of  a  parol  or  simple 
contract,  or  a  contract  that  is  neither 
of  record  nor  under  seal. 

The  ordinary  division  of  this  action  is 
into  (1)  common  or  indebitatus  assump- 
sit, brought  for  the  most  part  on  an 
implied  promise;  and  (2)  special  as- 
sumpsit, founded  on  an  express  prom- 
ise. 

The  action  of  assumpsit  differs  from 
trespass  and  trover,  which  are  founded 
on  a  tort,  not  upon  a  contract;  from 
covenant  and  debt,  which  are  appropri- 
ate where  the  ground  of  recovery  is  a 
sealed  instrument,  or  special  obligation 
to  pay  a  fixed  sura;  and  from  replevin, 
which  seeks  the  recovery  of  specific 
property,  if  attainable,  rather  than  of 
damages. 

ASSURANCE.  In  conveyancing.  A 
deed  or  instrument  of  conveyance.  The 
legal  evidences  of  the  transfer  of  prop- 
erty are  in  England  called  the  "common 
assurances"  of  the  kingdom,  whereby 
every  man's  estate  is  assured  to  him, 
and  all  controversies,  doubts,  and  diffi- 
culties are  either  prevented  or  removed. 

ATTACHMENT.  The  act  or  process 
of    taking,    apprehending,    or    seizing    a 


person's  prof)f'rty,  by  virtue  of  a  writ, 
and  bringing  the  same  into  the  custody 
of  the  law,  used  either  for  the  purpose 
of  bringing  a  p(;rson  before  the  court, 
of  acquiring  jurisdiction  over  the  prop- 
erty seized,  to  compel  an  appearance,  to 
furnish  security  for  debt  or  costs,  or  to 
arrest  a  fund  in  the  hands  of  a  third 
person  who  may  become  liable  to  pay 
it  over.  Also  the  writ  or  other  process 
for  the  accomplishment  of  the  purposes 
above  enumerated,  this  being  the  more 
common  use  of  the  word. 

ATTESTATION.  The  act  of  wit- 
nessing an  instrument  in  writing,  at  the 
request  of  the  party  making  the  same, 
and  subscribing  it  as  a  witness.  Exe- 
cution and  attestation  are  clearly  dis- 
tinct formalities;  the  former  being  the 
act  of  the  party,  and  the  latter  of  the 
witnesses  only. 

ATTORNEY.  In  the  most  general 
sense,  this  term  denotes  an  agent  or 
substitute,  or  one  who  is  appointed  and 
authorized  to  act  in  the  place  or  stead 
of  another. 

It  is  "an  ancient  English  word,  and 
signifieth  one  that  is  set  in  the  turne. 
stead,  or  place  of  another;  and  of  these 
some  be  private  *  *  *  and  some  be 
publike,  as  attorneys  at  law."  Co. 
Litt.     51b. 

One  who  is  appointed  by  another  to 
do  something  in  his  absence,  and  who 
has  authority  to  act  in  the  place  and 
turn  of  him  by  whom  he  is  delegated. 

When  used  with  reference  to  the  pro- 
ceedings of  courts,  the  term  always 
means  "attorney  at  law." 

AWARD,  v.  To  grant,  concede,  ad- 
judge to.  Thus,  a  jury  awards  damag- 
es;   the  court  awards  an  injunction. 

AWARD,  n.  The  decision  or  deter- 
mination rendered  by  arbitrators  or 
commissioners,  or  other  private  or  ex- 
trajudicial deciders,  upon  a  controversy 
submitted  to  them;  also  the  writing  or 
document  embodying  such  decision. 

B 

BAIL,  y.  To  procure  the  release  of 
a  person  from  legal  custody,  by  under- 
taking that  he  shall  appear  at  the  time 
and  place  designated  and  submit  him- 
self to  the  jurisdiction  and  judgment  of 
the   court. 

BAIL,  n.  In  practice.  The  sureties 
who  procure  the  release  of  a  person 
under  arrest,  by  becoming  responsible 
for  his  appearance  at  the  time  and 
place  designated.  Those  persons  who 
become  sureties  for  the  appearance  of 
the  defendant  in  court. 

BAILEE.  In  the  law  of  contracts. 
One    to    whom    goods    are    bailed;     the 


1516 


DICTIONARY   OP   LEGAL  TERMS 


party  to  whom  personal  property  is  de- 
livered under  a  contract  of  bailment. 

BAILMENT.  A  delivery  of  goods  or 
personal  property,  by  one  person  to  an- 
other in  trust  for  the  execution  of  a 
special  object  upon  or  in  relation  to 
such  goods,  beneficial  either  to  the  bail- 
or or  bailee  or  both,  and  upon  a  con- 
tract, express  or  implied,  to  perform 
the  trust  and  carry  out  such  object,  and 
thereupon  either  to  redeliver  the  goods 
to  the  bailor  or  otherwise  dispose  of  the 
same  in  conformity  with  the  purpose  of 
the  trust. 

BAILOR.  The  party  who  bails  or  de- 
livers goods  to  another,  in  the  contract 
of   bailment. 

BANKRUPT.  A  person  who  has 
committed  an  act  of  bankruptcy;  one 
who  has  done  some  act  or  suffered  some 
act  to  be  done  in  consequence  of  which, 
under  the  laws  of  his  country,  he  is  lia- 
ble to  be  proceeded  against  by  his  cred- 
itors for  the  seizure  and  distribution 
among  them  of  his  entire  property. 

BARTER.  A  contract  by  which  par- 
ties exchange  goods  or  commodities  for 
other  goods.  It  differs  from  sale,  in 
this:  That  in  the  latter  transaction 
goods  or  property  are  always  exchanged 
for  money. 

BATTERY.  Any  unlawful  beating,  or 
other  wrongful  physical  violence  or  con- 
straint, inflicted  on  a  human  being  with- 
out consent. 

BENEFICIARY.  A  person  having  the 
enjoyment  of  property  of  which  a  trus- 
tee, executor,  etc.,  has  the  legal  posses- 
sion. The  person  to  whom  a  policy  of 
insurance  is  payable. 

BEQUEATH,  To  give  personal  prop- 
erty by  will  to  another. 

BEQUEST.  A  gift  by  will  of  per- 
sonal property;    a  legacy. 

BID.  An  offer  by  an  intending  pur- 
chaser to  pay  a  designated  price  for 
property  which  is  about  to  be  sold  at 
auction. 

BILL.  A  formal  declaration,  com- 
plaint, or  statement  of  particular  things 
in  writing.  As  a  legal  term,  this  word 
has  many  meanings  and  applications, 
the  more  important  of  which  are  enu- 
merated below. 

BILL  OF  LADING.  In  common  law. 
The  written  evidence  of  a  contract  for 
the  carriage  and  delivery  of  goods  sent 
by  sea  for  a  certain  freight.  A  written 
memorandum,  given  by  the  person  in 
command  of  a  merchant  vessel,  ac- 
knowledging the  receipt  on  board  the 
ship  of  certain  specified  goods,  in  good 
order  or  "apparent  good  order,"  which 
he  undertakes,  in  consideration  of  the 


payment  of  freight,  to  deliver  in  like 
good  order  (dangers  of  the  sea  ex- 
cepted) at  a  designated  place  to  the 
consignee,  therein  named  or  to  his  as- 
signs. The  term  is  often  applied  to  a 
similar  receipt  and  undertaking  given  by 
a  carrier  of  goods  by  land.  A  bill  of 
lading  is  an  instrument  in  writing, 
signed  by  a  carrier  or  his  agent,  de- 
scribing the  freight  so  as  to  identify  it, 
stating  the  name  of  the  consignor,  the 
terms  of  the  contract  for  carriage,  and 
agreeing  or  directing  that  the  freight  be 
delivered  to  the  order  or  assigns  of  a 
specified  person  at  a  specified  place. 

BILL  OF  PARTICULARS.  In  prac- 
tice. A  written  statement  or  specifica- 
tion of  the  particulars  of  the  demand 
for  which  an  action  at  law  is  brought, 
or  of  a  defendant's  set-off  against  such 
demand  (including  dates,  sums,  and 
items  in  detail),  furnished  by  one  of  the 
parties  to  the  other,  either  voluntarily 
or  in  compliance  with  a  judge's  order 
for  that  purpose. 

BILL  OF  SALE.  In  contracts.  A 
written  agreement  under  seal,  by  which 
one  person  assigns  or  transfers  his 
right  to  or  interest  in  goods  and  per- 
sonal chattels  to  another.  An  instru- 
ment by  which,  in  particular,  the  prop- 
erty in  ships  and  vessels  is  conveyed. 


CAPITAL.  Partnership.  "The  capi- 
tal of  a  partnership  is  the  aggregate  of 
the  sums  contributed  by  its  members  to 
establish  or  continue  the  partnership 
business."  Gilmore  on  Partnership,  p." 
132. 

Corporations.  In  reference  to  a  cor- 
poration, it  is  the  aggregate  of  the  sum 
subscribed  and  paid  in,  or  secured  to  be 
paid  in,  by  the  shareholders,  with  the 
addition  of  all  gains  or  profits  realized 
in  the  use  and  investment  of  those  sums, 
or,  if  loss  have  been  incurred,  then  it  is 
the  residue  after  deducting  such  losses. 

CAPITAL  STOCK.  The  common  stock 
or  fund  of  a  corporation.  The  sum  of 
money  raised  by  the  subscriptions  of 
the  stockholders,  and  divided  into 
shares.  It  is  said  to  be  the  sum  upon 
which  calls  may  be  made  upon  the 
stockholders,  and  dividends  are  to  be 
paid. 

CAUSE  OF  ACTION.  Matter  for 
which  an  action  may  be  brought.  The 
ground  on  which  an  action  may  be  sus- 
tained.    The  right  to  bring  a  suit. 

CAVEAT  EMPTOR.  Let  the  buyer 
take  care.  This  maxim  summarizes  the 
rule  that  the  pui-chaser  of  an  article 
must  examine,  judge,  and  test  it  for 
himself,  being  bound  to  discover  any  ob- 
vious defects  or  imperfections. 


DICTIONARY   OF  LEGAL  TERMS 


1517 


CERTIFICATE    OF    DEPOSIT.      In 

the  practice  of  bankers.  This  is  a  writ- 
ing acknowledging  that  the  person 
named  has  deposited  in  the  bank  a  spec- 
ified sum  of  money,  and  that  the  same 
is  held  subject  to  be  drawn  out  on  his 
own  check  or  order,  or  that  of  some 
other  person  named  in  the  instrument 
as  payee. 

CERTIFICATE  OF  STOCK.  A  cer- 
tificate of  a  corporation  or  joint-stock 
company  that  the  person  named  is  the 
owner  of  a  designated  number  of  shares 
of  its  stock;  given  when  the  subscrip- 
tion is  fully  paid  and  the  "scrip  certifi- 
cate" taken  up. 

CESTUI   QUE  TRUST.     He  who  has 

a  right  to  a  beneficial  interest  in  and 
out  of  an  estate  the  legal  title  to  which 
is  vested  in  another.  2  Washb.  Real 
Prop.  163.  The  person  who  possess- 
es the  equitable  right  to  property  and 
receives  the  rents,  issues,  and  profits 
thereof,  the  legal  estate  of  which  is 
vested  in  a  trustee.  It  has  been  pro- 
posed to  substitute  for  this  uncouth 
term  the  English  word  "beneficiary," 
and  the  latter,  though  still  far  from  uni- 
versally adopted,  has  come  to  be  quite 
frequently  used.  It  is  equal  in  preci- 
sion to  the  antiquated  and  unwieldy 
Norman  phrase,  and  far  better  adapted 
to  the  genius  of  our  language. 

CHAMPERTY.  A  bargain  made  by  a 
stranger  with  one  of  the  parties  to  a 
suit,  by  which  such  third  person  under- 
takes to  carry  on  the  litigation  at  his 
own  cost  and  risk,  in  consideration  of 
receiving,  if  he  wins  the  suit,  a  part  of 
the  land  or  other  subject  sought  to  be 
recovered  by  the  action, 

CHANCELLOR.  In  American  law, 
this  is  the  name  given  in  some  states  to 
the  judge  (or  the  presiding  judge)  of  a 
court  of  chancery.  In  England,  besides 
being  the  designation  of  the  chief  judge 
of  the  Court  of  Chancery,  the  term  is 
used  as  the  title  of  several  judicial  of- 
ficers attached  to  bishops  or  other  high 
dignitaries  and  to  the  universities. 

CHANCERY.  Equity;  equitable  ju- 
risdiction; a  court  of  equity;  the  sys- 
tem of  jurisprudence  administered  in 
courts  of  equity. 

CHARTER.  An  instrument  emanat- 
ing from  the  sovereign  power,  in  the  na- 
ture of  a  grant,  authorizing  the  forma- 
tion of  a  corporation.  Under  modern 
statutes,  a  charter  is  usually  granted 
by  the  state  secretary  of  state,  who 
acts  under  general  statutory  authority 
conferred  by  the  state  legislature. 

CHARTER  PARTY.  A  contract  by 
which  an  entire  ship,  or  some  principal 
part  thereof,  is  let  to  a  merchant  for 


the    conveyance    of    goods    on    a    deter- 
mined voyage  to  one  or  more  places. 

CHATTEL.  An  article  of  personal 
property;  any  species  of  property  not 
amounting  to  a  freehold  or  fee  in  land. 

CHATTEL  MORTGAGE.  An  instru- 
ment of  sale  of  personalty  conveying 
the  title  of  the  property  to  the  mortga- 
gee with  terms  of  defeasance;  and,  if 
the  terms  of  redemption  are  not  com- 
plied with,  then,  at  common  law,  the  ti- 
tle becomes  absolute  in  the  mortgagee. 

CHECK.  A  draft  or  order  upon  a 
bank  or  banking  house,  purporting  to  be 
drawn  upon  a  deposit  of  funds,  for  the 
payment  at  all  events  of  a  certain  sum 
of  money  to  a  certain  person  therein 
named,  or  to  him  or  his  order,  or  to 
bearer,  and  payable  instantly  on  de- 
mand. 

CHOSE  IN  ACTION.  A  right  to 
personal  things  of  which  the  owner  has 
not  the  possession,  but  merely  a  right 
of  action  for  their  possession.  2  Bl. 
Comm.  389,  397;    1  Chit.  Pr.  99. 

A  right  to  receive  or  recover  a  debt, 
demand,  or  damages  on  a  cause  of  ac- 
tion ex  contractu,  or  for  a  tort  con- 
nected with  contract,  but  which  cannot 
be  made  available  without  recourse  to 
an  action. 

CHOSE  IN  POSSESSION.  A  thing 
in  possession,  as  distinguished  from  a 
thing  in  action, 

CIVIL.  In  contradistinction  to  "crim- 
inal," it  indicates  the  private  rights  and 
remedies  of  men,  as  members  of  the 
community,  in  contrast  to  those  which 
are  public  and  relate  to  the  govern- 
ment; thus,  we  speak  of  civil  process 
and  criminal  process,  civil  jurisdiction 
and  criminal  jurisdiction. 

CIVIL  LAW.  The  "Roman  law"  and 
the  "civil  law"  are  convertible  phrases, 
meaning  the  same  system  of  jurispru- 
dence; it  is  now  frequently  denominated 
the  "Roman  civil  law." 

CLIENT.  A  person  who  employs  or 
retains  an  attorney,  or  counsellor,  to 
appear  for  him  in  courts,  advise,  assist, 
and  defend  him  in  legal  proceedings,  and 
to  act  for  him  in  any  legal  business. 

CLOSE.  A  portion  of  land,  as  a  field, 
inclosed,  as  by  a  hedge,  fence,  or  other 
visible  inclosure. 

CODE.  A  collection  or  compendium 
of  laws.  A  complete  system  of  positive 
law,  scientifically  arranged,  or  promul- 
gated by  legislative  authority. 

COLLATERAL.  By  the  side;  at  the 
side;  attached  upon  the  side.  Not  lin- 
eal, but  upon  a  parallel  or  diverging 
line.  Additional  or  auxiliary;  supple- 
mentary;   co-operating. 


1518 


DICTIONARY   OP   LEGAL  TERMS 


COLLATERAL  SECURITY.  A  se- 
curity given  in  addition  to  the  direct 
security,  and  subordinate  to  it,  intended 
to  guarantee  its  validity  or  convertibil- 
ity or  insure  its  performance;  so  that, 
if  the  direct  security  fails,  the  creditor 
may  fall  back  upon  the  collateral  secu- 
rity. Collateral  security,  in  bank  phrase- 
ology, means  some  security  additional  to 
the  personal  obligation  of  the  borrower. 

COLOR.  An  appearance  or  sem- 
blance, as  distinguished  from  a  reality. 
Hence,  color  of  title. 

COMITY  OF  NATIONS  AND 
STATES.  The  most  appropriate  phrase 
to  express  the  true  foundation  and  ex- 
tent of  the  obligation  of  the  laws  of  one 
nation  within  the  territories  of  another. 
It  is  derived  altogether  from  the  volun- 
tary consent  of  the  latter;  and  it  is  in- 
admissible when  it  is  contrary  to  its 
known  policy,  or  prejudicial  to  its  inter- 
est. In  the  silence  of  any  positive  rule 
affirming  or  denying  or  restraining  the 
operation  of  foreign  laws,  courts  of  jus- 
tice presume  the  tacit  adoption  of  them 
by  their  own  government,  unless  repug- 
nant to  its  policy,  or  prejudicial  to  its 
interests.  It  is  not  the  comity  of  the 
courts,  but  the  comity  of  the  nation, 
which  is  administered  and  ascertained  in 
the  same  way,  and  guided  by  the  same 
reasoning,  by  which  all  other  principles 
of  the  municipal  law  are  ascertained 
and  guided. 

COMMERCIAL  LAW.  A  phrase  used 
to  designate  the  whole  body  of  substan- 
tive jurisprudence  applicable  to  the 
rights,  intercourse,  and  relation  of  per- 
sons engaged  in  commerce,  trade,  or 
mercantile  pursuits.  It  is  not  a  very 
scientific  or  accurate  term.  As  foreign 
commerce  is  carried  on  by  means  of 
shipping,  the  term  has  come  to  be  used 
occasionally  as  synonymous  with  "mar- 
itime law;"  but,  in  strictness,  the 
phrase  "commercial  law"  is  wider,  and 
includes  many  .  transactions  or  legal 
questions  which  have  nothing  to  do  with 
shipping  or  its  incidents. 

COMMERCIAL  PAPER.  The  term 
"commercial  paper"  means  bills  of  ex- 
change, promissory  notes,  bank  checks, 
and  other  negotiable  instruments  for  the 
payment  of  money,  which,  by  their  form 
and  on  their  face,  purport  to  be  such 
instruments  as  are,  by  the  law-mer- 
chant, recognized  as  falling  under  the 
designation  of  "commercial  paper." 

COMMISSION.  A  warrant  or  author- 
ity or  letters  patent,  issuing  from  the 
government,  or  one  of  its  departments, 
or  a  court,  empowering  a  person  or  per- 
sons named  to  do  certain  acts,  or  to  ex- 
e;rcise  jurisdiction,  or  to  perform  the 
duties  and  exercise  the  authority  of  an 


office  (as  in  the  case  of  an  officer  in 
the  army  or  navy). 

Also,  in  private  affairs,  it  signifies  the 
authority  or  instructions  under  which 
one  person  transacts  business  or  nego- 
tiates for  another. 

In  a  derivative  sense,  a  body  of  per- 
sons to  whom  a  commission  is  directed. 
A  board  or  committee  officially  appoint- 
ed and  empowered  to  perform  certain 
acts  or  exercise  certain  jurisdiction  of 
a  public  nature  or  relation;  as  a  "com- 
mission of  assize." 

In  commercial  law.  The  recompense 
or  reward  of  an  agent,  factor,  broker, 
or  bailee,  when  the  same  is  calculated 
as  a  percentage  on  the  amount  of  his 
transactions  or  on  the  profit  to  the 
principal.  But  in  this  sense  the  word 
often  occurs  in  the  plural. 

COMMISSION  MERCHANT.  A  fac- 
tor. 

COMMITTEE.  A  term  applied,  in 
some  states,  to  the  guardian  of  an  in- 
sane person. 

COMMON      CARRIER.        Of     goods. 

"One  who  holds  himself  out  to  trans- 
port for  hire  the  goods  of  such  as 
choose  to  employ  him."  Goddard  on 
Bailments  and  Carriers,  §  191. 

Of  passengers.  "Such  as  bold  them- 
selves out  for  hire  to  carry  all  persons 
indifferently  who  apply  for  passage." 
Id.  §  317. 

COMMON  COUNTS.  Certain  general 
counts  or  forms  inserted  in  a  declara- 
tion in  an  action  to  recover  a  money 
debt,  not  founded  on  the  circumstances 
of  the  individual  case,  but  intended  to 
guard  against  a  possible  variance,  and 
to  enable  the  plaintiff  to  take  advantage 
of  any  ground  of  liability  which  the 
proof  may  disclose  within  the  general 
scope  of  the  action.  In  the  action  of 
assumpsit,  these  counts  are  as  follows: 
For  goods  sold  and  delivered,  or  bar- 
gained and  sold;  for  work  done;  for 
money  lent;  for  money  paid;  for  mon- 
ey received  to  the  use  of  the  plaintiff; 
for  interest;  or  for  money  due  on  an 
account  stated. 

COMMON  LAW.  As  distinguished 
from  the  Roman  law,  the  modern  civil 
law,  the  canon  law.  and  other  systems, 
the  common  law  is  that  body  of  law  and 
juristic  theory  which  was  originated, 
developed,  and  formulated  and  is  admin- 
istered in  England,  and  has  obtained 
among  most  of  the  states  and  peoples 
of  Anglo-Saxon  stock. 

As  distinguished  from  law  created  by 
the  enactment  of  legislatures,  the  com- 
mon law  comprises  the  body  of  those 
principles  and  rules  of  action,  relating 
to  the  government  and  security  of  per- 
sons   and  property,   which   derive   their 


DICTIONARY  OF   LEGAL  TERMS 


1519 


authority  solely  from  usages  and  cus- 
toms of  immemorial  antiquity,  or  from 
the  judgments  and  decrees  of  tlie  courts 
recognizing,  affirming,  and  enforcing  such 
usages  and  customs,  and,  in  this  sense, 
particularly  the  ancient  unwritten  law 
of  England. 

As  distinguished  from  equity  law,  it  is 
a  body  of  rules  and  principles,  written 
or  unwritten,  which  are  of  fixed  and 
immutable  authority,  and  which  must  be 
applied  to  controversies  rigorously  and 
in  their  entirety,  and  cannot  be  modi- 
fied to  suit  the  peculiarities  of  a  spe- 
cific case,  or  colored  by  any  judicial 
discretion,  and  which  rests  confessedly 
upon  custom  or  statute,  as  distinguished 
from  any  claim  to  ethical  superiority. 

COMPLAINT.     In   civil   practice.     In 

those  states  having  a  Code  of  Civil 
Procedure,  the  complaint  is  the  first  or 
initiatory  pleading  on  the  part  of  the 
plaintiff  in  a  civil  action.  It  corre- 
sponds to  the  declaration  in  the  common 
law  practice. 

in  criminal  law.  A  charge,  preferred 
before  a  magistrate  having  jurisdiction, 
that  a  person  named  (or  a  certain  per- 
son whose  name  is  unknown)  has  com- 
mitted a  certain  offense,  with  an  offer 
to  prove  the  fact,  to  the  end  that  a 
prosecution  may  be  instituted.  It  is  a 
technical  term,  descriptive  of  proceed- 
ings before  a  magistrate. 

COMPOSITION.  An  agreement,  made 
upon  a  sufficient  consideration,  between 
an  insolvent  or  embarrassed  debtor  and 
his  creditors,  whereby  the  latter,  for 
the  sake  of  immediate  payment,  agree 
to  accept  a  dividend  less  than  the  whole 
amount  of  their  claims,  to  be  distrib- 
uted pro  rata,  in  discharge  and  satis- 
faction of  the  whole. 

COMPOS   MENTIS,     Sound  of  mind. 
COMPOUNDING    A    FELONY.     The 

offense  committed  by  a  person  who, 
having  been  directly  injured  by  a  felony, 
agrees  with  the  criminal  that  he  will 
not  prosecute  him,  on  condition  of  the 
latter's  making  reparation,*- or  on  re- 
ceipt of  a  reward  or  bribe  not  to  pros- 
ecute. 

The  offense  of  taking  a  reward  for 
forbearing  to  prosecute  a  felony;  as 
where  a  party  robbed  takes  his  goods 
again,  or  other  amends,  upon  an  agree- 
ment not  to  prosecute. 

COMPROMISE.  An  arrangement  ar- 
rived at,  either  in  court  or  out  of  court, 
for  settling  a  dispute  upon  what  ap- 
pears to  the  parties  to  be  equitable 
terms,  having  regard  to  the  uncertainty 
they  are  in  regarding  the  facts,  or  l^e 
law  and  the  facts  together. 

CONFESSION  OF  JUDGMENT.    The 

act  of  a  debtor  in  permitting  judgment 


to  be  entered  against  him  by  his  credi- 
tor, for  a  stipulated  sum,  by  a  written 
statement  to  that  effect  or  by  warrant 
of  attorney,  without  the  institution  of 
legal  proceedings  of  any  kind. 

CONFLICT  OF  LAWS.  An  opposi- 
tion, conflict,  or  antagonism  between 
different  laws  of  the  same  state  or  sov- 
ereignty upon  the  same  subject-matter. 

A  similar  inconsistency  between  the 
municipal  laws  of  different  states  or 
countries,  arising  in  the  case  of  persons 
who  have  acquired  rights  or  a  status, 
or  made  contracts,  or  incurred  obliga- 
tions, within  the  territory  of  two  or 
more  states. 

That  branch  of  jurisprudence,  arising 
from  the  diversity  of  the  laws  of  dif- 
ferent nations  in  their  application  to 
rights  and  remedies,  which  reconciles 
the  inconsistency,  or  decides  which  law 
or  system  is  to  govern  in  the  particular 
case,  or  settles  the  degree  of  force  to 
be  accorded  to  the  law  of  a  foreign 
country  (the  acts  or  rights  in  question 
having  arisen  under  it),  either  where  it 
varies  from  the  domestic  law,  or  where 
the  domestic  law  is  silent  or  not  ex- 
clusively applicable  to  the  case  in  point. 
In  this  sense  it  is  more  properly  called 
"private   international  law." 

CONNIVANCE.  The  secret  or  indi- 
rect consent  or  permission  of  one  per- 
son to  the  commission  of  an  unlawful  or 
criminal  act. 

CONSANGUINITY.  Kinship;  blood 
relationship;  the  connection  or  relation 
of  persons  descended  from  the  same 
stock  or  common  ancestor. 

CONSERVATOR.  A  guardian  of  an 
insane  person's  estate. 

CONSIDERATION.  The  inducement 
to  a  cohtract.  The  cause,  motive,  price, 
or  impelling  influence  which  induces  a 
contracting  party  to  enter  into  a  con- 
tract. 

Any  benefit  conferred,  or  agreed  to  be 
conferred,  upon  the  promisor,  by  any 
other  person,  to  which  the  promisor  is 
not  lawfully  entitled,  or  any  prejudice 
suffered,  or  agreed  to  be  suffered,  by 
such  person,  other  than  such  as  he  is 
at  the  time  of  consent  lawfully  bound  to 
suffer,  as  an  inducement  to  the  promis- 
or, is  a  good  consideration  for  a  prom- 
ise. 

CONSIGNEE.  In  mercantile  law. 
One  to  whom  a  consignment  is  made. 
The  person  to  whom  goods  are  shipped 
for  sale. 

CONSIGNMENT.  The  act  or  pro- 
cess of  consigning  goods;  the  transpor- 
tation of  goods  consigned;  an  article 
or  collection  of  goods  sent  to  a  factor 
to  be  sold;  goods  or  property  sent,  by 
the  aid  of  a  common  carrier,  from  one 


1520 


DICTIONARY  OF  LEGAL  TERMS 


person  in  one  place  to  another  person 
in  another  place. 

CONSIGNOR.  One  who  sends  or 
makes  a  consignment.  A  shipper  of 
goods. 

CONSPIRACY.  In  criminal  law.  A 
combination  or  confederacy  between  two 
or  more  persons  formed  for  the  purpose 
of  committing,  by  their  joint  efforts, 
some  unlawful  or  criminal  act,  or  some 
act  which  is  innocent  in  itself,  but  be- 
comes unlawful  when  done  by  the  con- 
certed action  of  the  conspirators,  or  for 
the  purpose  of  using  criminal  or  unlaw- 
ful means  to  the  commission  of  an  act 
not  in  itself  unlawful. 

CONSTRUCTIVE.  That  which  is  es- 
tablished by  the  mind  of  the  law  in  its 
act  of  construing  facts,  conduct,  cir- 
cumstances, or  instruments;  that  which 
has  not  the  character  assigned  to  it  in 
its  own  essential  nature,  but  acquires 
such  character  in  consequence  of  the 
way  in  which  it  is  regarded  by  a  rule 
or  policy  of  laAv;  hence,  inferred,  im- 
plied, made  out  by  legal  interpretation. 

Constructive  assent.  An  assent  or 
consent  imputed  to  a  party  from  a  con- 
struction or  interpretation  of  his  con- 
duct; as  distinguished  from  one  which 
he  actually  expresses. 

CONTRA.  Lat.  Opposite,  contrary. 
Where  a  decision  is  said  to  be  contra, 
it  is  on  the  opposite  side  of  the  ques- 
tion. 

CONTRACT.  "In  its  broadest  sense. 
an  agreement  whereby  one  or  more  of 
the  parties  acquire  a  right,  in  rem  or  in 
personam,  in  relation  to  some  person, 
thing,  act,  or  forbearance."  Clark  on 
Contracts  (3d  Ed.)  p.  1. 

CONTRIBUTION.  In  common  law. 
The  sharing  of  a  loss  or  payment  among 
several.  The  act  of  any  one  or  several 
of  a  number  of  co-debtors,  co-sureties, 
etc.,  in  reimbursing  one  of  their  number 
who  has  paid  the  whole  debt  or  suffered 
the  whole  liability,  each  to  the  extent  of 
his  proportionate  share. 

CONVERSION.  An  unauthorized  as- 
sumption and  exercise  of  the  right  of 
ownership  over  goods  or  personal  chat- 
tels belonging  to  another,  to  the  altera- 
tion of  their  condition  or  the  exclusion 
of  the  owner's  rights. 

Constructive  conversion.  An  implied 
or  virtual  conversion,  which  takes  place 
where  a  person  does  such  acts  in  refer- 
ence to  the  goods  of  another  as  amount 
in  law  to  the  appropriation  of  the  prop- 
erty to  himself. 

CORPORATION.  An  artificial  person 
or  legal  entity,  created  by  or  under  the 
authority  of  the  laws  of  a  state  or  na- 
tion, composed  in  some  rare  instances 


of  a  single  person  and  his  successors, 
being  the  incumbents  of  a  particular  of- 
fice, but  ordinarily  consisting  of  an  as- 
sociation of  numerous  individuals,  who 
subsist  as  a  body  politic  under  a  special 
denomination,  which  is  regarded. in  law 
as  having  a  personality  and  existence 
distinct  from  that  of  its  several  mem- 
bers, and  which  is,  by  the  same  author- 
ity, vested  with  the  capacity  of  contin- 
uous succession,  irrespective  of  changes 
in  its  membership,  either  in  perpetuity 
or  for  a  limited  term  of  years,  and  of 
acting  as  a  unit  or  single  individual  in 
matters  relating  to  the  common  purpose 
of  the  association,  within  the  scope  of 
the  powers  and  authorities  conferred  up- 
on such  bodies  by  law. 

CORPOREAL  PROPERTY.  Such  aa 
affects  the  senses,  and  may  be  seen  and 
handled  by  the  body,  as  opposed  to  in- 
corporeal property  which  cannot  be 
seen  or  handled,  and  exists  only  in  con- 
templation. Thus,  a  house  is  corporeal, 
but  the  annual  rent  payable  for  its  oc- 
cupation is  incorporeal.  Corporeal  prop- 
erty is,  if  movable,  capable  of  manual 
transfer;  if  immovable,  possession  of  it 
may  be  delivered  up.  But  incorporeal 
property  cannot  be  so  transferred,  but 
some  other  means  must  be  adopted  for 
its  transfer,  of  which  the  most  usual  is 
an  instrument  in  writing. 

COSTS.  A  pecuniary  allowance,  made 
to  the  successful  party  (and  recovera- 
ble from  the  losing  party),  for  his  ex- 
penses in  prosecuting  or  defending  a 
suit  or  a  distinct  proceeding  within  a 
suit. 

COUNT,  n.  In  pleading.  The  differ- 
ent parts  of  a  declaration,  each  of 
which,  if  it  stood  alone,  would  consti- 
tute a  ground  for  action,  are  the  counts 
of  the  declaration.  Used  also  to  sig- 
nify the  several  parts  of  an  indictment, 
each  charging  a  distinct  offense. 

C0UNTERCLAIIV1.  A  claim  pre- 
sented by  a  defendant  in  opposition  to 
or  deduction  from  the  claim  of  the 
plaintiff.  A  species  of  set-off  or  re- 
coupment introduced  by  the  codes  of 
civil  procedure  in  several  of  the  states, 
of  a  broad  and  liberal  character. 

COURT.  In  practice.  An  organ  of 
the  government,  belonging  to  the  judi- 
cial department,  whose  function  is  the 
application  of  the  laws  to  controversies 
brought  before  it  and  the  public  admin- 
istration of  justice. 

COURT  ABOVE— COURT  BELOW. 

In  appellate  practice,  the  "court  above" 
is  the  one  to  which  a  cause  is  removed 
for  review,  whether  by  appeal,  writ  of 
error,  or  certiorari;  while  the  "court 
below"  is  the  one  from  which  the  case 
is  being  removed. 


DICTIONARY  OF   LEGAL  TERMS 


1521 


COVENANT.  An  agreement,  conven- 
tion, or  promise  of  two  or  more  par- 
ties, by  deed  in  writing,  signed,  sealed, 
and  delivered,  by  which  either  of  the 
parties  pledges  himself  to  the  other  that 
something  is  either  done  or  shall  be 
done,  or  stipulates  for  the  truth  of  cer- 
tain facts.  A  promise  coutained  in  such 
an  agreemvnt. 

COVERT.  Covered,  protected,  shel- 
tered. A  pound  covert  is  one  that  is 
close  or  covered  over,  as  distinguished 
from  pound  overt,  which  is  open  over- 
head. A  feme  covert  is  so  called,  as 
being  under  the  wing,  protection  or  cov- 
er of  her  husband. 

COVERTURE.  The  condition  or 
state  of  a  married  woman. 

CRIME.  A  crime  is  an  act  commit- 
ted or  omitted,  in  violation  of  a  public 
law,  either  forbidding  or  commanding  it; 
a  breach  or  violation  of  some  public 
right  or  duty  due  to  a  whole  commu- 
nity, considered  as  a  community  in  its 
social  aggregate  capacity,  as  distin- 
guished from  a  civil  injury. 

D 

DAMAGE.  Loss,  injury,  or  deterio- 
ration, caused  by  the  negligence,  design, 
or  accident  of  one  person  to  another,  in 
respect  of  the  latter's  person  or  prop- 
erty. 

DAMAGES.    1.  The  plural  of  damage. 

2.  Compensation  claimed  or  awarded 
in  a  judicial  proceeding  for  damage  or 
for  the  invasion  of  a  legal  right.  Bauer 
on  Damages,  p.  1. 

DEBT.  A  sum  of  money  due  to  cer- 
tain and  express  agreement;  as  by  bond 
for  a  determinate  sum,  a  bill  or  note,  a 
special  bargain,  or  a  rent  reserved  on  a 
lease,  where  the  amount  is  fixed  and 
specific,  and  does  not  depend  upon  any 
subsequent  valuation  to  settle  it. 

DECEIT.  A  fraudulent  and  cheating 
misrepresentation,  artifice,  or  device, 
used  by  one  or  more  persons  to  deceive 
and  trick  another,  who  is  ignorant  of 
the  true  facts,  to  the  prejudice  and 
damage  of  the  party  imposed  upon. 

DECREE.  In  practice.  The  judg- 
ment of  a  court  of  equity  or  admiralty, 
answering  to  the  judgment  of  a  court  of 
common  law. 

DEED.  A  sealed  instrument,  con- 
taining a  contract  or  covenant,  delivered 
by  the  party  to  be  bound  thereby,  and 
accepted  by  the  party  to  whom  the  con- 
tract or  covenant  runs. 

DE  FACTO.  In  fact,  in  deed,  actu- 
ally. 

DE  JURE.  Of  right;  legitimate; 
lawful;   by  right  and  just  title. 

B.&  B.Bus.Law— 96 


DEL  CREDERE.  An  agreement  by 
which  a  factor,  when. he  sells  goods  on 
credit,  for  an  additional  commission 
(called  a  "del  credere  commission"), 
undertakes  that  the  purchase  price  will 
be  paid  the  seller.  The  del  credere  fac- 
tor is  usually  held  to  have  undertaken  a 
primary  and  absolute  liability,  but  some 
cases  hold  that  he  is  a  mere  surety. 

DELICTUM.    Lat.    A  tort. 

DEMISE.  1.  A  conveyance  of  an  es- 
tate to  another  for  life,  for  years,  or 
at  will;    a  lease. 

2.  Death  or  decease. 

DEMURRER.  In  pleading.  The  for- 
mal mode  of  disputing  the  sufficiency  in 
law  of  the  pleading  of  the  other  side. 
In  effect  it  is  an  allegation  that,  even  if 
the  facts  as  stated  in  the  pleading  to 
which  objection  is  taken  be  true,  yet 
their  legal  consequences  are  not  such  as 
to  put  the  demurring  party  to  the  ne- 
cessity of  answering  them  or  proceeding 
further  with  the  cause. 

An  objection  made  by  one  party  to  his- 
opponent's  pleading,  alleging  that  he 
ought  not  to  answer  it,  for  some  defect 
in  law  in  the  pleading.  It  admits  the 
facts,  and  refers  the  law  arising  there- 
on to  the  court. 

It  imports  that  the  objecting  party 
will  not  proceed,  but  will  wait  the  judg- 
ment of  the  court  whether  he  is  bound 
so  to  do. 

In  Equity.  An  allegation  of  a  defend- 
ant, which,  admitting  the  matters  of 
fact  alleged  by  the  bill  to  be  true,  shows 
that  as  they  are  therein  set  forth  they 
are  insufficient  for  the  plaintiff  to  pro- 
ceed upon  or  to  oblige  the  defendant  to 
answer,  or  that,  for  some  reason  appar- 
ent on  the  face  of  the  bill,  or  on  ac- 
count of  the  omission  of  some  matter 
which  ought  to  be  contained  therein,  or 
for  want  of  some  circumstances  which 
ought  to  be  attendant  thereon,  the  de- 
fendant ought  not  to  be  compelled  to 
answer  to  the  whole  bill,  or  to  some 
certain  part  thereof. 

DE  NOVO.    Lat.    Anew. 

DEPONENT.  One  who  makes  oath 
to  a  written  statement. 

DEPOSIT.  In  banking  law.  The  act 
of  placing  or  lodging  money  in  the  cus- 
tody of  a  bank  or  banker,  for  safety  or 
convenience,  to  be  withdrawn  at  the  will 
of  the  depositor  or  under  rules  and  reg- 
ulations agreed  on;  also  the  money  so 
deposited. 

DEPOSITION.  The  testimony  of  a 
witness  taken  upon  interrogatories,  not 
in  court,  but  intended  to  be  used  in 
court. 

DESCENT.     Hereditary  succession. 


1522 


DICTIONARY   OF   LEGAL  TERMS 


DESCRIPTIO  PERSON/E.    Lat.    De 

scription  of  the  person. 

DETUR  DIGNIORI.  Lat.  Let  it  be 
given  to  him  who  is  more  worthy. 

DEVISE,  A  testamentary  disposition 
of  land  or  realty;  a  gift  of  real  prop- 
erty by  the  last  will  and  testament  of 
the  donor. 

DICTUM.  The  word  is  generally 
used  as  an  abbreviated  form  of  obiter 
dictum,  "a  remark  by  the  way,"  that 
is,  an  observation  or  remark  made  by  a 
judge  in  pronouncing  an  opinion  upon  a 
cause,  concerning  some  rule,  principle, 
or  application  of  law,  or  the  solution  of 
a  question  suggested  by  the  case  at  bar, 
but  not  necessarily  involved  in  the  case 
or  essential  to  its  determination;  any 
statement  of  the  law  enunciated  by  the 
court  merely  by  way  of  illustration,  ar- 
gument, analogy,  or  suggestion. 

DISCOUNT.  In  a  general  sense,  an 
allowance  or  deduction  made  from  a 
gross  sum  on  any  account  whatever.  In 
a  more  limited  and  technical  sense,  the 
taking  of  interest  in  advance.  By  the 
language  of  the  commercial  world  and 
the  settled  practice  of  banks,  a  discount 
by  a  bank  means  a  drawback  or  deduc- 
tion made  upon  its  advances  or  loans  of 
money,  upon  negotiable  paper  or  other 
evidences  of  debt  payable  at  a  future 
day,  which  are  transferred  to  the  bank. 
DISHONOR.  In  mercantile  law  and 
usage.  To  refuse  or  decline  to  accept  a 
bill  of  exchange,  or  to  refuse  or  neglect 
to  pay  a  bill  or  note  at  maturity. 

DIVIDEND.  A  fund  to  be  divided. 
The  share  allotted  to  each  of  several 
persons  entitled  to  share  in  a  division  of 
profits  or  property.  Thus,  dividend  may 
denote  a  fund  set  apart  by  a  corpora- 
tion out  of  its  profits,  to  be  apportioned 
among  the  shareholders,  or  the  propor- 
tional amount  falling  to  each.  In  bank- 
ruptcy proceedings,  a  dividend  is  a  pro- 
portional payment  to  the  creditors  out 
of  the  insolvent  estate. 

DOMICILE.  That  place  in  which  a 
man  has  voluntarily  fixed  the  habitation 
of  himself  and  family,  not  for  a  mere 
special  or  temporary  purpose,  but  with 
the  present  intention  of  making  a  per- 
manent home,  until  some  unexpected 
event  shall  occur  to  induce  him  to  adopt 
some  other  permanent  home. 

DORMANT  PARTNER.  See  Part- 
ners. 

DOWER.  The  provision  which  the 
law  makes  for  a  widow  out  of  lands  or 
tenements  of  her  husband,  for  her  sup- 
port and  the  nurture  of  her  children. 
Co.  Litt.  30a.  Dower  is  an  estate  for 
life  of  the  widow  in  a  certain  portion  of 
the  estate  of  her  husband,  to  which  she 


I  has    not   relinquished   her   right   during 
the  marriage. 

DRAWEE.  A  person  to  whom  a  bill 
of  exchange  is  addressed,  and  who  is  re- 
quested to  pay  the  amount  of  money 
therein  named. 


DRAWER.  The  person  drawing  a  bill 
of  exchange  and  addressing  it  to  the 
drawee. 

DUEBILL.  A  brief  written  acknowl- 
edgment of  a  debt.  It  is  not  made  pay- 
able to  order,  like  a  promissory  note. 

DURESS.  Unlawful  constraint  exer- 
cised upon  a  person,  whereby  he  is 
forced  to  do  some  act  against  his  will. 

E 

EARNEST.  The  payment  of  a  part 
of  the  price  of  goods  sold,  or  the  deliv- 
ery of  part  of  such  goods,  for  the  pur- 
pose of  binding  the  contract. 

EASEMENT.  A  right  in  the  owner 
of  one  parcel  of  land,  by  reason  of  such 
ownership,  to  use  the  land  of  another 
for  a  special  purpose  not  inconsistent 
with  a  general  property  in  the  owner. 
2  Washb.  Real  Prop.  25. 

A  private  easement  is  a  privilege, 
service,  or  convenience  which  one  neigh- 
bor has  of  another,  by  prescription, 
grant,  or  necessary  implication,  and 
without  profit;  as  a  way  over  his  land, 
a  gateway,  watercourse,  and  the  like. 
Kitch.  105. 

EJECTMENT.  An  action  of  which 
the  purpose  is  to  determine  whether  the 
title  to  certain  land  is  in  the  plaintiff  or 
is  in  the  defendant. 

ELECTION.  The  act  of  choosing  or 
selecting  one  or  more  from  a  greater 
number  of  persons,  things,  courses, 
rights,  or  remedies. 

EMANCIPATION.  The  act  by  which 
an  infant  is  set  at  liberty  from  the  con- 
trol of  parent  or  guardian  and  made  his 
own  master. 

EMBEZZLEMENT.  The  fraudulent 
appropriation  to  his  own  use  or  benefit 
of  property  or  money  intrusted  to  him 
by  another,  by  a  clerk,  agent,  trustee, 
public  officer,  or  other  person  acting  in 
a  fiduciary  character. 

EMBLEMENTS.  The  vegetable  chat- 
tels called  "emblements"  are  the  corn 
and  other  growth  of  the  earth  which  are 
produced  annually,  not  spontaneously, 
but  by  labor  and  industry,  and  thence 
are  called  "fructus  industriales." 

EMINENT  DOMAIN.  Eminent  do- 
main is  the  right  of  the  people  or  gov- 
ernment to  take  private  property  for 
public  use. 

ENTIRETY.  The  whole,  in  contradis- 
tinction    to    a    moiety     or    part    only. 


DICTIONARY   OF   LEGAL   TERMS 


1523 


When  land  is  conveyed  to  husband  and 
wife,  they  do  not  take  by  moieties,  but 
both  are  seised  of  the  entirety.  Par- 
ceners, on  the  other  hand,  liave  not  an 
entirety  of  interest,  but  each  is  prop- 
erly entitled  to  the  whole  of  a  distinct 
moiety. 

The  word  is  also  u.sed  to  designate 
that  which  the  law  considers  as  one 
whole,  and  not  capable  of  being  divided 
into  parts.  Thus,  a  judgment,  it  is  held, 
is  an  entirety,  and,  if  void  as  to  one  of 
the  two  defendants,  cannot  be  valid  as 
to  the  other.  So,  if  a  contract  is  an 
entirety,  no  part  of  the  consideration  is 
due  until  the  whole  has  been  performed. 

EQUITABLE.  Just,  fair,  and  right. 
Existing  in  equity;  available  or  sustain- 
able only  in  equity,  or  only  upon  the 
rules  and  principles  of  equity. 

EQUITABLE      ASSIGNMENT.       An 

assignment  which,  though  invalid  at  law, 
will  be  recognized  and  enforced  in  eq- 
uity; e.  g.,  an  assignment  of  a  chose  in 
action,  or  of  future  acquisitions  of  the 
assignor. 

EQUITY.  In  one  of  its  technical 
meanings,  equity  is  a  body  of  jurispru- 
dence, or  field  of  jurisdiction,  differing 
in  its  origin,  theory,  and  methods  from 
the  common  law. 

In  a  still  more  restricted  sense,  it  is 
a  system  of  jurisprudence,  or  branch  of 
remedial  justice,  administered  by  cer- 
tain tribunals,  distinct  from  the  com- 
mon-law courts,  and  empowered  to  de- 
cree "equity^"  in  the  complex  of  well- 
settled  and  well-understood  rules,  prin- 
ciples, and  precedents. 

Equity  also  signifies  an  equitable 
right;  1.  e.,  a  right  enforceable  in  a 
court  of  equity.  Hence  a  bill  of  com- 
plaint which  did  not  show  that  the 
plaintiff  had  a  right  entitling  him  to  re- 
lief was  said  to  be  demurrable  for  want 
of  equity;  and  certain  rights  now  rec- 
ognized in  all  the  courts  are  still  known 
as  "equities,"  from  having  been  origi- 
nally recognized  only  in  the  court  of 
chancery. 

EQUITY    OF    REDEMPTION.      The 

right  of  the  mortgagor  of  an  estate  to 
redeem  the  same  after  it  has  been  for- 
feited, at  law,  by  a  breach  of  the  con- 
dition of  the  mortgage,  upon  paying  the 
amount  of  debt,  intere.st  and  costs. 

ERROR.  A  mistaken  judgment  or  in- 
correct belief  as  to  the  existence  or  ef- 
fect of  matters  of  fact,  or  a  false  or 
mistaken  conception  or  application  of 
the  law. 

Such  a  mistaken  or  false  conception 
or  application  of  the  law  to  the  facts  of 
a  cause  as  will  furnish  ground  for  a  re- 
view of  the  proceedings  upon  a  writ  of 
error;   a  mistake  of  law,  or  false  or  ir- 


regular application  of  it,  such  as  viti- 
ates the  proceedings  and  warrants  the 
reversal  of  the  judgment. 

"Error"  is  also  used  as  an  elliptical 
expression  for  "writ  of  error";  as,  in 
saying  that  error  lies;  that  a  judgment 
may  be  reversed  on  error. 

Assignment  of  errors.  In  practice. 
The  statement  of  the  i)laintiff's  case  on 
a  writ  of  error,  setting  forth  the  errors 
complained  of;  corresponding  with  the 
declaration  in  an  ordinary  action.  A 
specification  of  the  errors  upon  which 
the  appellant  will  rely,  with  such  full- 
ness as  to  give  aid  to  the  court  in  the 
examination  of  the  transcript. 

Harmless  error.  In  appellate  prac- 
tice. An  error  committed  in  the  prog- 
ress of  the  trial  below,  but  which  was 
not  prejudicial  to  the  rights  of  the 
party  assigning  it,  and  for  which,  there- 
fore, the  court  will  not  reverse  the 
judgment;  as,  where  the  error  was  neu- 
tralized or  corrected  by  subsequent  pro- 
ceedings in  the  case,  or  where,  notwith- 
standing the  error,  the  particular  is?ue 
was  found  in  that  party's  favor,  or 
where,  even  if  the  error  had  not  been 
committed,  he  could  not  have  been  le- 
gally entitled  to  prevail. 

Reversible  error.  In  appellate  prac- 
tice. Such  an  error  as  warrants  the  ap- 
pellate court  in  reversing  the  judgment 
before  it. 

ESCROW.  The  state  or  condition  of 
a  deed  which  is  conditionally  held  by  a 
third  person,  or  the  possession  and  re- 
tention of  a  deed  by  a  third  person 
pending  a  condition;  as  when  an  in- 
strument is  said  to  be  delivered  "in  es- 
crow." 

ESTATE.  The  interest  which  any 
one  has  in  lands,  or  in  any  other  sub- 
ject of  property. 

In  another  sense,  the  term  denotes  the 
property  (real  or  personal)  in  which 
one  has  a  right  or  interest;  the  sub- 
ject-matter of  ownership;  the  corpus  of 
property. 

In  a  wider  sense,  the  term  "estate" 
denotes  a  man's  whole  financial  status 
or  condition — tlie  aggregate  of  his  inter- 
ests and  concerns,  so  far  as  regards  his 
situation  with  reference  to  wealth  or  its 
objects,  including  debts  and  obligations, 
as  well  as  possessions  and  rights. 

ESTOPPEL.  A  bar  or  impediment 
raised  by  the  law,  which  precludes  a 
man  from  alleging  or  from  denying  a 
certain  fact  or  state  of  facts,  in  conse- 
quence of  his  previous  allegation  or  de- 
nial or  conduct  or  admission,  or  in  con- 
sequence of  a  final  adjudication  of  the 
matter  in  a  court  of  law. 

EVICTION.  Dispossession  by  pro- 
cess of  law;   the  act  of  depriving  a  per- 


1524 


DICTIONARY   OF   LEGAL  TERMS 


son  of  the  possession  of  lands  which  he 
has  held,  in  pursuance  of  the  judgment 
of  a  court. 

EVIDENCE.  Any  species  of  proof, 
or  probative  matter,  legally  presented 
at  the  trial  of  an  issue,  by  the  act  of 
the  parties  and  through  the  medium  of 
witnesses,  records,  documents,  concrete 
objects,  etc.,  for  the  purpose  of  induc- 
ing belief  in  the  minds  of  the  court  or 
jury  as  to  their  contention. 

EXCEPTION.  In  practice.  A  for- 
mal objection  to  the  action  of  the  court, 
during  the  trial  of  a  cause,  in  refusing 
a  request  or  overruling  an  objection; 
implying  that  the  party  excepting  does 
not  acquiesce  in  the  decision  of  the 
court,  but  will  seek  to  procure  its  re- 
versal, and  that  he  means  to  save  the 
benefit  of  his  request  or  objection  in 
some  future  proceeding. 

EXCHANGE.      In    conveyancing.      A 

mutual  grant  of  equal  interests  (in  lands 
or  tenements),  the  one  in  consideration 
of  the  other. 

In  commercial  law.  A  negotiation  by 
which  one  person  transfers  to  another 
funds  which  he  has  in  a  certain  place, 
either  at  a  price  agreed  upon  or  which 
is  fixed  by  commercial  usage. 

'in  taw  of  personal  property.  Ex- 
change of  goods  is  a  commutation, 
transmutation,  or  transfer  of  goods  for 
other  goods,  as  distinguished  from 
"sale,"  which  is  a  transfer  of  goods  for 
money. 

EX  CONTRACTU.  From  or  out  of 
a  contract.  In  both  the  civil  and  com- 
mon law,  rights  and  causes  of  action 
are  divided  into  two  classes— those  aris- 
ing ex  contractu  (from  a  contract) ; 
and  those  arising  ex  delicto  (from  a  de- 
lict or  tort). 

EX  DELICTO.  From  a  delict,  tort, 
fault,  crime,  or  malfeasance.  In  both 
the  civil  and  the  common  law,  obliga- 
tions and  causes  of  action  are  divided 
into  two  great  classes^those  arising  ex 
contractu  (out  of  a  contract) ;  and 
those  ex  delicto. 

EX  DOLO  MALO  NON  ORITUR 
ACTIO.  Out  of  fraud  no  action  arises; 
fraud  never  gives  a  right  of  action.  No 
court  will  lend  its  aid  to  a  man  who 
founds  his  cause  of  action  upon  an  im- 
moral or  illegal  act. 

EXECUTED.  Completed;  carried  in- 
to full  effect;  already  done  or  per- 
formed; taking  effect  immediately;  now 
in  existence  or  in  possession;  convey- 
ing an  immediate  right  or  possession. 
The  opposite  of  executory. 

EXECUTION.  The  completion,  ful- 
fillment, or  perfecting  of  anything,  or 
carrying   it   into    operation   and    effect. 


The  signing,  sealing,  and  delivery  of  a 
deed.  The  signing  and  publication  of  a 
will.  The  performance  of  a  contract 
according  to  its  terms. 

EXECUTOR.  A  person  appointed  by 
a  testator  to  carry  out  the  directions 
and  requests  in  his  will,  and  to  dispose 
of  the  property  according  to  his  testa- 
mentary provisions  after  his  decease. 

EXECUTORY.  That  which  is  yet  to 
be  executed  or  performed;  that  which 
remains  to  be  carried  into  operation  or 
effect;  incomplete;  depending  upon  a 
future  performance  or  event.  The  op- 
posite of  executed. 

EXEMPLARY.  Punitive,  punitory, 
for  punishment. 

EXEMPLARY  DAMAGES.  Damag- 
es on  an  increased  scale,  awarded  to 
the  plaintiff  over  and  above  what  will 
barely  compensate  him  for  his  property 
loss,  where  the  wrong  done  to  him  was 
aggravated  by  circumstances  of  violence, 
oppression,  malice,  fraud,  or  wanton 
and  wicked  conduct  on  the  part  of  the 
defendant,  and  are  intended  to  punish 
the  defendant  for  his  evil  behavior. 

EXEMPTION.  A  privilege  allowed 
by  law  to  a  judgment  debtor,  by  which 
he  may  hold  property  to  a  certain 
amount,  or  certain  classes  of  property, 
free  from  all  liability  to  levy  and  sale 
on  execution  or  attachment. 

EX  GRATIA.  Lat.  Out  of  grace; 
as  a  matter  of  favor  or  indulgence; 
gratuitous. 

EX  MERO  MOTU.  Lat.  Of  his  own 
mere  motion;    of  his  own  accord. 

EX  PARTE.  Lat.  On  one  side  only; 
by  or  for  one  party;  done  for,  in  behalf 
of.  or  on  the  application  of,  one  party 
only. 

EXPRESS.  Made  known  distinctly 
and  explicitly,  and  not  left  to  inference 
or  implication.  Declared  in  terms;  set 
forth  in  words.  Manifested  by  direct 
and  appropriate  language,  as  distin- 
guished from  that  which  is  inferred 
from  conduct.  The  word  is  usually  con- 
trasted with  "implied." 

EX  TURPI  CONTRACTU  NON  OR- 
ITUR  ACTIO.  Lat.  Out  of  an  im- 
moral or  illegal  contract  an  action  does 
not  arise.  A  contract  founded  upon  an 
illegal  or  immoral  consideration  cannot 
be  enforced  by  action.  2  Kent,  Comm. 
466. 


FACTOR.  A  commercial  agent,  em- 
ployed by  a  principal  to  sell  merchan- 
dise consigned  to  him  for  that  purpose, 
for  and  in  behalf  of  the  principal,  but 
usually  in  his  own  name,  being  intrusted 


DICTIONARY   OF  LEGAL  TERMS 


1525 


with  the  possession  and  control  of  the 
goods,  and  being  remunerated  by  a  com- 
mission. 

FEE  SIMPLE.  In  English  law.  A 
freehold  estate  of  inheritance,  absolute 
and  unqualified.  It  stands  at  the  head 
of  estates  as  the  highest  in  dignity  and 
the  most  ample  in  extent;  since  every 
other  kind  of  estate  is  derivable  there- 
out, and  mergeable  therein. 

FELONY.  In  American  law.  The 
term  has  no  very  definite  or  precise 
meaning,  except  in  some  cases  where  it 
is  defined  by  statute.  For  the  most 
part,  the  state  laws,  in  describing  any 
particular  offense,  declare  whether  or 
not  it  shall  be  considered  a  felony. 
Apart  from  this,  the  word  seems  merely 
to  imply  a  crime  of  a  graver  or  more 
atrocious  nature  than  those  designated 
as  "misdemeanors." 

FEME.    L.     Fr.     A  woman. 

Feme  covert.    A  married  woman. 

Feme  sole.    A  single  woman, 

FICTION.  An  assumption  or  suppo- 
sition of  law  that  something  which  is  or 
may  be  false  is  true,  or  that  a  state  of 
facts  exists  which  has  never  really  tak- 
en place. 

FIDUCIARY.  As  an  adjective  it 
means  of  the  nature  of  a  trust;  having 
the  characteristics  of  a  trust;  analo- 
gous to  a  trust;  relating  to  or  founded 
upon  a  trust  or  confidence. 

F.  0.  B.  Free  on  board.  "If  a  quo- 
tation is  f.  o.  b.,  the  seller  undertakes 
for  the  price  named  to  deliver  the  goods 
on  board  car  or  ship  at  a  designated 
place,  free  of  charges  to  the  buyer." 
Whitaker's  Foreign  Exchange,  p.  335. 

FORCIBLE  DETAINER.  The  of- 
fense of  violently  keeping  possession  of 
lands  and  tenements,  with  menaces, 
force,  and  arms,  and  without  the  au- 
thority of  law. 

FORCIBLE  ENTRY.  An  offense 
against  the  public  peace,  or  private 
wrong,  committed  by  violently  taking 
possession  of  lands  and  tenements  with 
menaces,  force,  and  arms,  against  the 
will  of  those  entitled  to  the  possession, 
and  without  the  authority  of  law. 

FORECLOSURE.  A  proceeding  by 
which  the  rights  of  the  mortgagee  of 
real  property  are  enforced.  This  pro- 
cedure varies  greatly  in  different  states. 
The  property  is  commonly  put  up  at 
public  auction  and  sold  to  the  highest 
bidder.  The  mortgagee  gets  out  of  the 
proceeds  the  amount  of  his  debt,  with 
costs.  The  remaining  portion  of  the 
proceeds,  if  any,  goes  to  the  debtor,  the 
mortgagor.  If  the  property  sells  at  a 
price  less  than  the  amount  of  the  debt 


and  costs,  judgment  is  given  against  the 
mortgagor  for  the  deficiency. 

FORGERY.  In  criminal  law.  The 
falsely  making  or  materially  altering, 
with  intent  to  defraud,  any  writing 
which,  if  genuine,  might  apparently  be 
of  legal  efficacy  or  the  foundation  of  a 
legal  liability. 

FRANCHISE.  A  special  privilege 
conferred  by  government  upon  an  'ndi- 
vidual  or  corporation,  and  which  does 
not  belong  to  the  citizens  of  the  country 
generally,  of  common  right. 

FRAUD.  Fraud  consists  of  some  de- 
ceitful practice  or  willful  device,  re- 
sorted to  with  intent  to  deprive  another 
of  his  right,  or  in  some  manner  to  do 
him  an  injury.  As  distinguished  from 
negligence,  it  is  always  positive,  inten- 
tional. 

FREEHOLD.  An  estate  in  land  or 
other  real  property,  of  uncertain  dura- 
tion; that  is,  either  of  inheritance  or 
which  may  possibly  last  for  the  life  of 
the  tenant  at  the  least  (as  distin- 
guished from  a  leasehold),  and  held  by 
a  free  tenure. 

FRUCTUS  INDUSTRIALES.  Indus- 
trial fruits,  or  fruits  of  industry.  Those 
fruits  of  a  thing,  as  of  land,  which  are 
produced  by  the  labor  and  industry  of 
the  occupant,  as  crops  of  grain;  as  dis- 
tinguished from  such  as  are  produced 
solely  by  the  powers  of  nature. 

FRUCTUS  NATURALES.  Those 
products  which  are  produced  by  the 
powers  of  nature  alone;  as  wool,  met- 
als, milk,  the  young  of  animals. 

FUNGIBLE  THINGS.  Movable  goods, 
which  may  be  estimated  and  replaced 
according  to  weight,  measure,  and  num- 
ber. Things  belonging  to  a  class,  which 
do  not  have  to  be  dealt  with  in  specie. 

G 

GARNISH,  V.  To  issue  process  of 
garnishment  against  a  person. 

GARNISHEE.     One  garnished. 

GARNISHMENT.  In  the  process  of 
attachment.  A  warning  to  a  person  in 
whose  hands  the  effects  of  another  are 
attached  not  to  pay  the  money  or  deliv- 
er the  property  of  the  defendant  in  his 
hands  to  him,  but  to  appear  and  answer 
the  plaintiff's  suit. 

GENERAL    AND    SPECIAL    ISSUE. 

The  former  is  a  plea  which  traverses 
and  denies,  briefly  and  in  general  and 
summary  terms,  the  whole  declaration, 
indictment,  or  complaint,  without  ten- 
dering new  or  special  matter. 

GENERAL  VERDICT.  A  verdict 
whereby    the    jury    find    either   for    the 


1526 


DICTIONARY   OF   LEGAL   TERMS 


plaintiff  or  for  the  defendant  in  general 
terms;    the  ordinary  form  of  verdict. 

GRATIS  DICTUM.  A  voluntary  as- 
sertion; a  statement  which  a  party  is 
not  legally  bound  to  make,  or  in  which 
he  is  not  held  to  precise  accuracy. 

GRAVAMEN.  Lat.  The  burden  or 
gist  of  a  charge. 

GUARANTY,  n.  A  promise  to  an- 
swer for  the  payment  of  some  debt,  or 
the  performance  of  some  duty,  in  case 
of  the  failure  of  another  person,  who, 
in  the  first  instance,  is  liable  to  such 
payment  or  performance. 

GUARDIAN.  A  guardian  is  a  person 
lawfully  invested  with  the  power,  and 
charged  with  the  duty,  of  taking  care 
of  the  person  and  managing  the  prop- 
erty and  rights  of  another  person,  who, 
for  some  peculiarity  of  status,  or  defect 
or  age,  understanding,  or  self-control, 
is  considered  incapable  of  administering 
his  own  affairs. 

H 

HEARSAY.  A  term  applied  to  that 
species  of  testimony  given  by  a  witness 
who  relates,  not  what  he  knows  per- 
sonally, but  what  others  have  told  him, 
or  what  he  has  heard  said  by  others. 

HEIR.  At  common  law.  A  person 
who  succeeds,  by  the  rules  of  law,  to 
an  estate  in  lands,  tenements,  or  here- 
ditaments, upon  the  death  of  his  ances- 
tor, by  descent  and  right  of  relation- 
ship. 

HEREDITAMENTS.  Things  capable 
of  being  inherited,  be  it  corporeal  or  in- 
corporeal, real,  personal,  or  mixed,  and 
including  not  only  lauds  and  everything 
thereon,  but  also  heirlooms,  and  certain 
furniture  which,  by  custom,  may  de- 
scend to  the  heir  together  with  the  land. 


IMPLIED.  This  word  is  used  in  law 
as  contrasted  with  "express";  1.  e., 
where  the  intention  in  regard  to  the 
subject-matter  is  not  manifested  by  ex- 
plicit and  direct  words,  but  is  gathered 
by  implication  or  necessary  deduction 
from  the  circumstances,  the  general 
language,  or  the  conduct  of  the  parties. 

INCHOATE.  Imperfect;  unfinished; 
begun,  but  not  completed;  as  a  con- 
tract not  executed  by  all  the  parties. 

INCORPOREAL.  Without  body;  not 
of  material  nature;  the  opposite  of 
■'corporeal." 

INDEMNITY.  An  indemnity  is  a  col- 
lateral contract  or  assurance,  by  which 
one  person  engages  to  secure  another 
against  an  anticipated  loss  or  to  pre- 
vent him   from   being   damnified  by   the 


legal  consequences  of  an  act  or  forbear- 
ance on  the  part  of  one  of  the  parties 
or  of  some  third  person. 

INDENTURE.  A  deed  to  which  two 
or  more  persons  are  parties,  and  in 
which  these  enter  into  reciprocal  and 
corresponding  grants  or  obligations  to- 
wards each  other;  whereas  a  deed  poll 
is  properly  one  in  which  only  the  party 
making  it  executes  it,  or  binds  himself 
by  it  as  a  deed,  though  the  grantors  or 
grantees  therein  may  be  several  in  num- 
ber. 

INDICIA.     Lat.      Signs;    indications. 

INDORSEE.  The  person  to  whom  a 
biU  of  exchange,  promissory  note,  bill 
of  lading,  etc.,  is  assigned  by  indorse- 
ment, giving  him  a  right  to  sue  thereon. 

INDORSEMENT.       The     act     of     a 

payee,  drawee,  accommodation  indorser, 
or  holder  of  a  negotiable  instrument  in 
writing  his  name  upon  the  back  of  same, 
with  or  without  further  words,  whereby 
the  property  in  same  is  transferred  to 
another. 

INDORSER.  He  who  makes  an  in- 
dorsement. 

INFANT.  A  person  within  age,  not 
of  age,  or  not  of  full  age;  a  person  un- 
der the  age  of  twenty-one  years;  a  mi- 
nor. 

IN  H/EC  F(EDERA  NON  VENI- 
MUS.  Lat.  We  did  not  enter  into 
these  bonds;  we  did  not  make  this  con- 
tract. 

IN  INVITUM.  Lat.  Against  an  un- 
willing party. 

INJUNCTION.  A  prohibitive  writ  is- 
sued by  a  court  of  equity,  at  the  suit  of 
a  party  complainant,  directed  to  a  party 
defendant  in  the  action,  or  to  a  party 
made  a  defendant  for  that  purpose,  for- 
bidding the  latter  to  do  some  act,  or  to 
permit  his  servants  or  agents  to  do 
some  act,  which  he  is  threatening  or  at- 
tempting to  commit,  or  restraining  him 
in  the  continuance  thereof,  such  act  be- 
ing unjust  and  inequitable,  injurious  to 
the  plaintiff,  and  not  such  as  can  be 
adequately  redressed  by  an  action  at 
law. 

INJURY.  Any  wrong  or  damage  done 
to  another,  either  in  his  person,  rights, 
reputation,  or  property. 

IN  LIMINE.  Lat.  On  or  at  the 
threshold;  at  the  very  beginning;  pre- 
liminarily. 

IN  PARI  DELICTO.  Lat.  In  equal 
fault;    equally  culpable  or  criminal. 

In  pari  delicto,  potior  est  conditio 
possidentis  [defendentis].  In  a  case  of 
equal  or  mutual  fault  (between  two 
parties),  the  condition  of  the  party  in 
possession   [or  defending]   is  the  better 


DICTIONARY   OF  LEGAL  TERMS 


1521 


one.  This  maxim  is  often  applied  to 
cases  in  which  a  plaintiff  seeks  to  pro- 
cure, under  an  illegal  contract,  money 
or  other  property  in  the  possession  of 
the  defendant,  or  to  get  a  judgment  or 
decree  of  any  kmd,  under  such  a  con- 
tract. 

INSOLVENCY.  The  condition  of  a 
person  who  is  insolvent;  inability  to 
pay  one's  debts;  lack  of  means  to  pay 
one's  debts.  Such  a  relative  condition 
of  a  man's  assets  and  liabilities  that 
the  former,  if  all  made  immediately 
available,  would  not  be  sufficient  to  dis- 
charge the  latter.  Or  the  condition  of 
a  person  who  is  unable  to  pay  his  debts 
as  they  fall  due,  or  in  the  usual  course 
of  trade  and  business. 

IN  SPECIE.  Lat.  In  kind.  Spe- 
cific;   specifically. 

IN  STATU  QUO.  Lat.  In  the  con- 
dition or  state  (in  which  it  was). 

INSURABLE  INTEREST.  Such  a 
real  and  substantial  interest  in  spe- 
cific property  as  will  sustain  a  contract 
to  indemnify  the  person  interested 
against  its  loss.  If  the  assured  had  no 
real  interest,  the  contract  would  be  a 
mere  w'ager  policy. 

INSURANCE.  A  contract  whereby, 
for  a  stipulated  consideration,  one  party 
undertakes  to  compensate  the  other  for 
loss  on  a  specified  subject  by  specified 
perils.  The  party  agreeing  to  make  the 
compensation  is  usually  called  the  "in- 
surer" or  "underwriter";  the  other,  the 
"insured"  or  "assured";  the  written 
contract,  a  "policy";  the  events  insured 
against,  "risks"  or  "perils";  and  the 
subject,  right,  or  interest  to  be  pro- 
tected, the  "insurable  interest."  Insur- 
ance is  a  contract  whereby  one  under- 
takes to  indemnify  another  against  loss, 
damage,  or  liability  arising  from  an  un- 
known or  contingent  event.  Civ.  Code 
Cal.  §  2527.  It  must  be  borne  in  mind, 
however,  that,  although  the  usual  defi- 
nition fits  policies  of  fire  and  marine 
insurance,  it  does  not  apply  strictly  to 
policies  of  life  insurance.  Life  insur- 
ance is  not  a  contract  of  indemnity,  but 
a  contract  to  pay  a  specified  sum  upon 
the  occurrence  of  a  certain  event;  as, 
the  death  of  the  insured. 

INSURER.  The  underwriter  or  in- 
surance company  with  whom  a  contract 
of  insurance  is  made. 

INTERPLEADER.  When  two  or 
more  persons  claim  the  same  thing  (or 
fund)  of  a  third,  and  he,  laying  no 
claim  to  it  himself,  is  ignorant  which  of 
them  has  a  right  to  \t,  and  fears  he 
may  be  prejudiced  by  their  proceeding 
against  him  to  recover  it,  he  may  file  a 
bill  in   equity   against  them,   the   object 


of  which"  is  to  make  them  litigate  their 
title  between  themselves,  instead  of  liti- 
gating it  with  him,  and  such  a  bill  is 
called  a  "bill  of  interpleader." 

INTER  SE,  or  INTER  SESE.  Lat. 
Between  or  among  themselves. 

INTERVENER.  An  intervener  is  a 
person  who  voluntarily  interposes  in  an 
action  or  other  proceeding  with  the 
leave  of  the  court. 

I NTESTATE.    Without  making  a  will. 


JOINT.  United;  combined;  undivided; 
done  by  or  against  two  or  more  united- 
ly;   shared  by  or  between  two  or  more. 

A  "joint"  bond,  note,  or  other  obliga- 
tion is  one  in  which  the  obligors  or 
makers  (being  two  or  more  in  number) 
bind  themselves  jointly,  but  not  sever- 
ally, and  which  must  therefore  be  pros- 
ecuted in  a  joint  action  against  them 
all.  A  "joint  and  several"  bond  or  note 
is  one  in  which  the  obligors  or  makers 
bind  themselves  both  jointly  and  indi- 
vidually to  the  obligee  or  payee,  and 
which  may  be  enforced  either  by  a  joint 
action  against  them  all  or  by  separate 
actions  against  any  one  or  more  at  the 
election  of  the  creditor. 

JOINTLY.  Acting  together  or  in 
concert  or  co-operation;  holding  in 
common  or  interdependently,  not  sepa- 
rately. Persons  are  "jointly  bound"  in 
a  bond  or  note  when  both  or  all  must 
be  sued  in  one  action  for  its  enforce- 
ment, not  either  one  at  the  election  of 
the  creditor. 

Jointly  and  severally.  Persons  who 
bind  themselves  "jointly  and  severally" 
in  a  bond  or  note  may  all  be  sued  to- 
gether for  its  enforcement,  or  the  cred- 
itor may  select  any  one  or  more  as  the 
object  of  his  suit. 

JOINT-STOCK  COMPANY.  A  part- 
nership with  a  capital  divided  into 
transferable  shares.  Gilmore  on  Part- 
nership. 

JOINT  TENANCY  "exists  when  a 
single  estate  in  land  is  owned  by  two 
or  more  persons  claiming  under  one  in- 
strument;* its  most  important  charac- 
teristic being  that,  unless  the  statute 
otherwise  provides,  the  interest  of  each 
joint  tenant,  upon  his  death,  inures  to 
the  benefit  of  the  surviving  joint  tenant 
or  tenants,  to  the  exclusion  of  his  own 
heirs,  devisees,  or  personal  representa- 
tives." Tiffany  on  Real  Property,  p. 
368. 

JUDGMENT.  The  official  and  au- 
thentic decision  of  a  court  of  justice 
upon  the  respective  rights  and  claims  of 
the  parties  to  an  action  or  suit  therein 


1528 


DICTIONARY   OF  LEGAL  TERMS 


litigated  and  submitted  to  its  'determi- 
nation. 

JUDGMENT  DEBTS.  Debts,  wheth- 
er on  simple  contract  or  by  specialty, 
for  the  recovery  of  which  judgment  has 
been  entered  up,  either  upon  a  cognovit 
or  upon  a  warrant  of  attorney  or  as  the 
result  of  a  successful  action. 

JUDGMENT  IN  PERSONAM.  A 
judgment  against  a  particular  person, 
as  distinguished  from  a  judgment 
against  a  thing  or  a  right  or  status. 
The  former  class  of  judgments  are  con- 
clusive only  upon  parties  and  privies; 
the  latter  upon  all  the  world. 

JUDGMENT  IN  REM.  A  judgment 
in  rem  is  an  adjudication,  pronounced 
upon  the  status  of  some  particular  sub- 
ject-matter, by  a  tribunal  having  com- 
petent authority  for  that  purpose.  It 
differs  from  a  judgment  in  personam,  in 
this:  That  the  latter  judgment  is  in 
form,  as  well  as  substance,  between  the 
parties  claiming  the  right;  and  that  it 
is  so  inter  partes  appears  by  the  record 
itself. 

JUDGMENT  NOTE.  A  promissory 
note,  embodying  an  authorization  to  any 
attorney,  or  to  a  designated  attorney,  or 
to  the  holder,  or  the  clerk  of  the  court, 
to  enter  an  appearance  for  the  maker 
and  confess  a  judgment  against  him  for 
a  sum  therein  named,  upon  default  of 
payment  of  the  note. 

JUDICIAL.  Belonging  to  the  ofhce 
of  a  judge;    as  judicial  authority. 

JURAT.  The  clause  written  at  the 
foot  of  an  affidavit,  stating  when, 
where,  and  before  whom  such  affidavit 
was  sworn. 

JURISDICTION.  The  power  and  au- 
thority constitutionally  conferred  upon 
(or  constitutionally  recognized  as  exist- 
ing in)  a  court  or  judge  to  pronounce 
the  sentence  of  the  law,  or  to  award 
the  remedies  provided  by  law,  upon  a 
state  of  facts,  proved  or  admitted,  re- 
ferred to  the  tribunal  for  decision,  and 
authorized  by  law  to  be  the  subject  of 
investigation  or  action  by  that  tribunal, 
and  in  favor  of  or  against  persons  (or 
a  res)  who  present  themselves,  or  who 
are  brought,  before  the  court  in  some 
manner  sanctioned  by  law  as  proper  and 
sufficient. 


LACHES.  Negligence,  consisting  in 
the  omission  of  something  which  a  party 
might  do,  and  might  reasonably  be  ex- 
pected to  do,  towards  the  vindication  or 
enforcement  of  his  rights.  The  word 
is  generally  the  synonym  of  "remiss- 
ness," "dilatorincss,"  "unreasonable  or 
unexcused  delay";  the  opposite  of  "vig- 
ilance";   and  means  a  want  of  activity 


and  diligence  in  making  a  claim  or  mov- 
ing for  the  enforcement  of  a  right  (par- 
ticularly in  equity)  which  will  affqrd 
ground  for  presuming  against  it,  or  for 
refusing  relief,  where  that  is  discre- 
tionary with  the  court. 

LANDLORD.  He  of  whom  lands  or 
tenements  are  holdcn.  He  who,  being 
the  owner  an  estate  in  land,  has  leased 
the  same  for  a  term  of  years,  on  a  rent 
reserved,  to  another  person,  called  the 
"tenant." 

LAPSE,  n.  In  the  law  of  wills.  The 
failure  of  a  testamentary  gift  in  conse- 
quence of  the  death  of  the  devisee  or 
legatee  during  the  life  of  the  testator, 

LARCENY.  In  criminal  law.  The 
wrongful  and  fraudulent  taking  and 
carrying  away  by  one  person  of  the 
mere  personal  goods  of  another  from 
any  place,  with  a  felonious  intent  to 
convert  them  to  his  (the  taker's)  use, 
and  make  them  his  property,  without 
the  consent  of  the  owner. 

LAW  MERCHANT.  The  system  of 
rules,  customs,  and  usages  generally 
recognized  and  adopted  by  merchants 
and  traders,  and  which  either  in  its 
simplicity  or  as  modified  by  common 
law  or  statutes,  constitutes  the  law  for 
the  regulation  of  their  transactions  and 
the  solution  of  their  controversies. 

LEASE.  A  conveyance  of  lands  or 
tenements  to  a  person  for  life,  for  a 
term  of  years,  or  at  will,  in  considera- 
tion of  a  return  of  rent  or  some  other 
recompense.  The  person  who  so  con- 
veys such  lands  or  tenements  is  termed 
the  "lessor,"  and  the  person  to  whom 
they  are  conveyed,  the  "lessee";  and 
when  the  lessor  so  conveys  lands  or 
tenements  to  a  lessee,  he  is  said  to 
lease,  demise,  or  let  them. 

LEASEHOLD.  An  estate  in  realty 
held  under  a  lease;  an  estate  for  a  fixed 
term  of  years. 

LEGACY.  A  bequest  or  gift  of  per- 
sonal property  by  last  will  and  testa- 
ment. 

LEGAL  TENDER.  That  kind  of 
coin,  money,  or  circulating  medium 
which  the  law  compels  a  creditor  to  ac- 
cept in  payment  of  his  debt,  when  ten- 
dered by  the  debtor  in  the  right  amount. 

—) 

LESSEE.  He  to  whom  a  lease  is 
made. 

LESSOR.    He  who  grants  a  lease. 

LET,  V.  In  conveyancing.  To  de- 
mise or  lease.  "To  let  and  set"  is  an 
old  expression. 

LETTERS    OF    ADMINISTRATION. 

The  formal  instrument  of  authority  and 
appointment  given  an  administrator  by 
the    proper    court,    empowering   him   to 


DICTIONARY  OF   LEGAL  TERMS 


1529 


enter  upon  the  discharge  of  his  duties 
as  adrainisti'ator. 

LETTERS    TESTAMENTARY.     The 

formal  instrument  of  authority  and  ap- 
pointment given  to  an  executor  by  the 
proper  court,  empowering  him  to  enter 
upon  the  discharge  of  his  oflice  as  ex- 
ecutor. 

LEVY,  V.  To  raise;  execute;  exact; 
collect;  gather;  take  up;  seize.  Thus, 
to  levy  (raise  or  collect)  a  tax;  to 
levy  (raise  or  set  up)  a  nuisance;  to 
levy  (acknowledge)  a  fine;  to  levy  (in- 
augurate) war;  to  levy  an  execution — 
i.  e.,  to  levy  or  collect  a  sum  of  money 
on  an  execution. 

LIEN.  A  qualified  right  of  property 
which  a  creditor  has  in  or  over  specific 
property  of  his  debtor,  as  security  for 
the  debt  or  charge  or  for  performance 
of  some  act. 

LIFE  ESTATE.  An  estate  whose 
duration  is  limited  to  the  life  of  the 
party  holding  it,  or  of  some  other  per- 
son; a  freehold  estate,  not  of  inherit- 
ance. 

LIFE  TENANT.  One  who  holds  an 
estate  in  lands  for  the  period  of  his 
own  life  or  that  of  another  certain  per- 
son. 

LIMITED  PARTNERSHIP.  A  part- 
nership consisting  of  one  or  more  gen- 
eral partners,  jointly  and  severally  re- 
sponsible as  ordinary  partners,  and  by 
whom  the  business  is  conducted,  and 
one  or  more  special  partners,  contrib- 
uting in  cash  payments  a  specific  sum 
as  capital  to  the  common  stock,  and 
who  are  not  liable  for  the  debts  of  the 
partnership  beyond  the  fund  so  contrib- 
uted. 

LIQUIDATED.  Ascertained;  deter- 
mined; fixed;  settled;  made  clear  or 
manifest.  Cleared  away;  paid;  dis- 
charged. 

LIQUIDATED  ACCOUNT.  An  ac- 
count whereof  the  amount  is  certain  and 
fixed,  either  by  the  act  and  agreement 
of  the  parties  or  by  operation  of  law; 
a  sum  which  cannot  be  changed  by  the 
proof;  it  is  so  much  or  nothing;  l?ut 
the  term  does  not  necessarily  refer  to 
a  writing. 

LIQUIDATED  AND  UNLIQUIDAT- 
ED  DAMAGES.  The  former  term  is 
applicable  when  the  amount  of  the  dam- 
ages has  been  ascertained  by  the  judg- 
ment in  the  action,  or  when  a  specific 
sum  of  money  has  been  expressly  stip- 
ulated by  the  parties  to  a  bond  or  other 
contract  as  the  amount  of  damages  to 
be  recovered  by  either  party  for  a 
breach  of  the  agreement  by  the  other. 

LIS  PENDENS.  A  suit  pending;  that 
legal  process,  in  a  suit  regarding  land. 


which  amounts  to  legal  notice  to  all  the 
world  that  there  is  a  dispute  as  to  the 
title.  In  equity  the  filing  of  the  bill  and 
serving  a  subpoena  creates  a  lis  pen- 
dens, except  when  statutes  require  some 
record. 

LOCUS  P(ENITENTI/E.  A  place  for 
repentance;  an  opportunity  for  chang- 
ing one's  mind;  a  chance  to  withdraw 
from  a  contemplated  bargain  or  contract 
before  it  results  in  a  definite  contrac- 
tual liability.  Also  used  of  a  chance  af- 
forded to  a  person,  by  the  circumstanc- 
es, of  relinquishing  the  intention  which 
he  has  formed  to  commit  a  crime,  be- 
fore the  perpetration  thereof. 

L.  S.  An  abbreviation  for  "locus  si- 
gilli,"  the  place  of  the  seal;  i.  e.,  the 
place  where  a  seal  is  to  be  affixed,  or  a 
scroll  which  stands  instead  of  a  seal. 


M 

MAINTENANCE.  An  unauthorized 
and  officious  interference  in  a  suit  in 
which  the  offender  has  no  interest,  to 
assist  one  of  the  parties  to  it,  against 
the  other,  with  money  or  advice  to 
prosecute  or  defend  the  action. 

MALFEASANCE.  The  wrongful  or 
unjust  doing  of  some  act  which  the  doer 
has  no  right  to  perform,  or  which  he 
has  stipulated  by  contract  not  to  do.  It 
differs  from  "misfeasance"  and  "non- 
feasance"   (which  titles  see). 

MALUM  IN  SE.  A  wrong  in  itself; 
an  act  or  case  involving  illegality  frpm 
the  very  nature  of  the  transaction,  upon 
principles  of  natural,  moral,  and  public 
law.  An  act  is  said  to  be  malum  in  se 
when  it  is  inherently  and  essentially 
evil— that  is,  immoral  in  its  nature  and 
injurious  in  its  consequences— without 
any  regard  to  the  fact  of  its  being  no- 
ticed or  punished  by  the  law  of  the 
state.  Such  are  most  or  all  of  the  of- 
fenses cognizable  at  common  law  (with- 
out the  denouncement  of  a  statute);  as 
murder,  larceny,  etc. 

MALUM  PROHIBITUM.  A  wrong 
prohibited;  a  thing  which  is  wrong  be- 
cause prohibited;  an  act  which  is  not 
inherently  immoral,  but  becomes  so  be- 
cause its  commission  is  expressly  for- 
bidden by  positive  law;  an  act  involv- 
ing an  illegality  resulting  from  positive 
law.     Contrasted  with  malum  in  se. 

MANDAMUS,  Lat.  We  command. 
A  legal  writ  compelling  the  defendant  to 
do  an  official  duty. 

MANDATE.  A  bailment  of  property 
in  regard  to  which  the  bailee  engages  to 
do  some  act  without  reward.  Story, 
BaUm.  §  137. 


1530 


DICTIONARY   OF   LEGAL  TERMS 


MATURITY.  In  mercantile  law.  The 
time  when  a  bill  of  exchange  or  prom- 
issory note  becomes  due. 

MECHANIC'S  LIEN.  A  species  of 
lien  created  by  statute  in  most  of  the 
states,  which  exists  in  favor  of  persons 
who  have  performed  work  or  furnished 
material  in  and  for  the  erection  of  a 
building.  Their  lien  attaches  to  the 
land  as  well  as  the  building,  and  is  in- 
tended to  secure  for  them  a  priority  of 
payment. 

MERGER.  The  fusion  or  absorption 
of  one  thing  or  right  into  another;  gen- 
erally spoken  of  a  case  where  one  of 
the  subjects  is  of  less  dignity  or  im- 
portance than  the  other.  Here  the  less 
important  ceases  to  have  an  independ- 
ent existence. 

MINOR.  An  infant  or  person  who  is 
under  the  age  of  legal  competence.  A 
term  derived  from  the  civil  law,  which 
described  a  person  under  a  certain  age 
as  less  than  so  many  years.  Minor 
viginti  quinque  annis,  one  less  than 
twenty-five  years  of  age. 

MISDEMEANOR.  In  criminal  law. 
A  general  name  for  criminal  offenses  of 
every  sort,  punishable  by  indictment  or 
special  proceedings,  which  do  not  in  law 
amount  to  the  grade  of  felony. 

MISFEASANCE.  A  misdeed  or  tres- 
pass. The  doing  what  a  party  ought  to 
do  improperly.  The  improper  perform- 
ance of  some  act  which  a  man  may  law- 
fully do. 

ISIisfeasance,  strictly,  is  not  doing  a 
lawful  act  in  a  proper  manner,  omitting 
to  do  it  as  it  should  be  done,  while  mal- 
feasance is  the  doing  an  act  wholly 
wrongful,  and  nonfeasance  is  an  omis- 
sion to  perform  a  duty,  or  a  total  neg- 
lect of  duty.  But  "misfeasance"  is  oft- 
en carelessly  used  in  the  sense  of  "mal- 
feasance." 

MISREPRESENTATION.  An  inten- 
tional false  statement  respecting  a  mat- 
ter of  fact,  made  by  one  of  the  parties 
to  a  contract,  which  is  material  to  the 
contract  and  influential  in  producing  it. 

MORTGAGE.  An  estate  created  by  a 
conveyance  absolute  in  form,  but  in- 
tended to  secure  the  performance  of 
some  act,  such  as  the  payment  of 
money,  and  the  like,  by  the  grantor  or 
some  other  person,  and  to  become  void 
if  the  act  is  performed  agreeably  to  the 
terms  prescribed  at  the  time  of  making 
such  conveyance. 

A  conditional  conveyance  of  land,  de- 
signed as  a  security  for  the  payment  of 
money,  the  fulfillment  of  some  contract, 
or  the  performance  of  some  act.  and  to 
be  void  upon  such  payment,  fulfillment, 
or  performance. 

A    debt    by    specialty,    secured    by    a 


pledge  of  lands,  of  which  the  legal  own- 
ership is  vested  in  the  creditor,  but  of 
which,  in  equity,  the  debtor  and  those 
claiming  under  him  remain  the  actual 
owners,  until  debarred  by  judicial  sen- 
tence or  their  own  laches. 

The  foregoing  definitions  are  applica- 
ble to  the  common-law  conception  of  a 
mortgage.  Rut  in  many  states,  in  mod- 
ern times,  it  is  regarded  as  a  mere  lien, 
and  not  as  creating  a  title  or  estate.  It 
is  a  pledge  or  security  of  particular 
property  for  the  payment  of  a  debt,  or 
the  performance  of  some  other  obliga- 
tion, whatever  form  the  transaction 
may  take,  but  is  not  regarded  as  a  con- 
veyance in  effect,  though  it  may  be  cast 
in   the  form  of  a  conveyance. 

MUTUUM.  Lat.  In  the  law  of  baU- 
ments.  A  loan  for  consumption;  a  loan 
of  chattels,  upon  an  agreement  that  the 
borrower  may  consume  them,  returning 
to  the  lender  an  equivalent  in  kind  and 
quantity, 

N 

NEGLIGENCE.  The  omission  to  do 
something  which  a  reasonable  man, 
guided  by  those  considerations  which 
ordinarily  regulate  the  conduct  of  hu- 
man affairs,  would  do,  or  doing  some- 
thing which  a  prudent  and  reasonable 
man  would  not  do.  It  must  be  deter- 
mined in  all  cases  by  reference  to  the 
situation  and  knowledge  of  the  parties 
and  all  the  attendant  circumstances. 

Negligence,  in  its  civil  relation,  is 
such  an  inadvertent  imperfection,  by  a 
responsible  human  agent,  in  the  dis- 
charge of  a  legal  duty,  as  immediately 
produces,  in  an  ordinary  and  natural 
sequence,  a  damage  to  another. 

NEGLIGENCE     VEL      NON.       Lat. 

Negligence  or  not. 

NEGOTIABLE.  An  instrument  em- 
bodying an  obligation  for  the  payment 
of  money  is  called  "negotiable"  when 
the  legal  title  to  the  instrument  itself 
and  to  the  whole  amount  of  money  ex- 
pressed upon  its  face,  with  the  right  to 
sue  therefor  in  his  own  name,  may  be 
transferred  from  one  person  to  another 
without  a  formal  assignment,  but  by 
mere  indorsement  and  delivery  by  the 
holder  or  by  delivery  only. 

NIL  DEBET.  Lat.  He  owes  noth- 
ing. 

NOMINAL  AND  SUBSTANTIAL 
DAMAGES.  Nominal  damages  are  a 
trifling  sum  awarded  to  a  plaintiff  in  an 
action,  where  there  is  no  substantial 
loss  or  injury  to  be  compensated,  but 
still  the  law  recognizes  a  technical  in- 
vasion of  his  rights  or  a  breach  of  the 
defendant's  duty,  or  in  cases  where,  al- 
though there  has  been  a  real  injury,  the 


DICTIONARY   OF   LEGAL  TERMS 


1531 


plaintiff's  evidence  entirely  fails  to  show 
its  amount. 

NOMINAL  PARTNER.  A  poison  who 
appears  to  be  a  partner  in  a  firm,  or  is 
so  represented  to  persons  dealing  with 
the  firm,  or  who  allows  his  name  to  ap- 
pear in  the  style  of  the  firm  or  to  be 
used  in  its  business,  in  the  character  of 
a  partner,  but  who  has  no  actual  inter- 
est in  the  firm  or  business. 

NON  ASSUMPSIT.  The  general  is- 
sue in  the  action  of  assumpsit,  being  a 
plea  by  which  the  defendant  avers  that 
"he  did  not  undertake"  or  promise  as 
alleged. 

NON  COMPOS  MENTIS.  Lat.  Not 
sound  of  mind;    insane. 

NON  EST  FACTUM.  Lat.  It  was 
not  made. 

NONFEASANCE.  The  neglect  or 
failure  of  a  person  to  do  some  act  which 
he  ought  to  do. 

NONSUIT.  Not  following  up  the 
cause;  failure  on  the  part  of  a  plaintiff 
to  continue  the  prosecution  of  his  suit. 
An  abandonment  or  renunciation  of  his 
suit,  by  a  plaintiff,  either  by  omitting  to 
take  the  next  necessary  steps,  or  vol- 
untarily relinquishing  the  action,  or  pur- 
suant to  an  order  of  the  court.  An  or- 
der or  judgment,  granted  upon  the  trial 
of  a  cause,  that  the  plaintiff  has  aban- 
doned, or  shall  abandon,  the  further 
prosecution  of  his  suit. 

NOTARY  PUBLIC.  A  public  officer 
whose  function  is  to  attest  and  certify, 
by  his  hand  and  official  seal,  certain 
classes  of  documents,  in  order  to  give 
them  credit  and  authenticity  in  foreign 
jurisdictions;  to  take  acknowledgments 
of  deeds  and  other  conveyances,  and 
certify  the  same;  and  to  perform  cer- 
tain official  acts,  chiefly  in  commercial 
matters,  such  as  the  protesting  of  notes 
and  bills,  the  noting  of  foreign  drafts, 
and  marine  protests  in  cases  of  loss  or 
damage. 

NUDUM  PACTUM.  Lat.  A  naked 
pact;  a  bare  agreement;  a  promise  or 
undertaking  made  without  any  consider- 
ation for  it. 

NUISANCE.  That  class  of  wrongs 
that  arise  from  the  unreasonable,  un- 
warrantable, or  unlawful  use  by  a  per- 
son of  his  own  property,  either  real  or 
personal,  or  from  his  own  improper,  in- 
decent, or  unlawful  personal  conduct, 
working  an  obstruction  of  or  injury  to 
the  right  of  another  or  of  the  public, 
and  producing  such  material  annoyance, 
inconvenience,  discomfort,  or  hurt  that 
the  law  will  presume  a  consequent  dam- 
age. 


o 

OATH.  An  external  pledge  or  assev- 
oraLion,  made  in  verification  of  state- 
ments made  or  to  bo  made,  coupled  with 
an  appeal  to  a  sacred  or  venerated  ob- 
ject, in  evidence  of  the  serious  and  rev- 
erent state  of  mind  of  the  party,  or  with 
an  invocation  to  a  supreme  being  to 
witness  the  words  of  the  party  and  to 
visit  him  with  punishment  if  they  be 
false. 

OBITER  DICTUM.  A  remark  made, 
or  opinion  oxpress(>d,  by  a  judge,  in  liis 
decision  upon  a  cause,  "by  the  way"; 
that  is,  incidentally  or  collaterally,  and 
not  directly  upon  the  question  before 
him,  or  upon  a  point  not  necessarily  in- 
volved in  the  determination  of  the 
cause,  or  introduced  by  way  of  illustra- 
tion, or  analogy  or  argument. 

OMNIS  RATIHABITIO  RETRO- 
TRAHITUR  ET  MANDATO  PRIORI 
/EQUIPARATUR.  Lat.  Every  ratifi- 
cation relates  back  and  is  equivalent  to 
a  prior  authority.  Broom,  'Max.  757, 
871. 

ORDINANCE.  The  term  is  used  to 
designate  the  enactments  of  the  legis- 
lative body  of  a  municipal  corporation. 

OSTENSIBLE  AGENCY.  An  implied 
or  presumptive  agency,  which  exists 
where  one,  either  intentionally  or  from 
want  of  ordinary  care,  induces  another 
to  believe  that  a  third  person  is  his 
agent,  though  he  never  in  fact  employed 
him. 

OSTENSIBLE  PARTNER.  A  part- 
ner whose  name  is  made  known  and  ap- 
pears to  the  world  as  a  partner,  and 
who  is  in  reality  such. 

OUTLAWED,  when  applied  to  a 
promissory  note,  means  debarred  by  the 
statute  of  limitations. 

OYER.  In  modern  practice.  A  copy 
of  a  bond  or  specialty  sued  upon,  given 
to  the  opposite  party,  in  lieu  of  the  old 
practice  of  reading  it. 


PAR.  In  commercial  law.  Equal; 
equality.  An  equality  subsisting  be- 
tween the  nominal  or  face  value  of  a 
bill  of  exchange,  share  of  stock,  etc., 
and  its  actual  selling  value.  When  the 
values  are  thus  equal,  the  instrument  or 
share  is  said  to  be  "at  par";  if  it  can 
be  sold  for  more  than  its  nominal 
worth,  it  is  "above  par";  if  for  less,  it 
is  "below  par." 

PARI  PASSU.  Lat.  By  an  equal 
progress;    ratably;    without  preference. 

PARTICEPS.  Lat.  A  participant; 
a  sharer;  anciently,  a  part  owner,  or 
parcener. 


1532 


DICTIONARY   OF  LEGAL  TERMS 


PARTICEPS  CRIMINIS.  A  partici- 
pant in  a  crime;  an  accomplice.  One 
who  shares  or  co-operates  in  a  criminal 
offense,  tort,  or  fraud. 

PARTITION.  The  dividing  of  lands 
held  by  joint  tenants,  coparceners,  or 
tenants  in  common,  into  distinct  por- 
tions, so  that  they  may  hold  them  in 
severalty.  And.  in  a  less  technical 
sense,  any  division  of  real  or  personal 
property  between  co-owners  or  co-pro- 
prietors. 

PARTNERSHIP.  A  voluntary  con- 
tract between  two  or  more  competent 
persons  to  place  their  money,  effects, 
labor,  and  skill,  or  some  or  all  of  them, 
in  lawful  commerce  or  business,  with 
the  understanding  that  there  shall  be  a 
proportional  sharing  of  the  profits  and 
losses  between  them. 

PART  PERFORMANCE.  The  doing 
some  portion,  yet  not  the  whole,  of 
what  either  party  to  a  contract  has 
agreed  to  do. 

PATENT,  n.  A  grant  of  some  privi- 
lege, property,  or  authority,  made  by 
the  government  or  sovereign  of  a  coun- 
try to  one  or  more  individuals. 

In  English  law.  A  grant  by  the  sov- 
ereign to  a  subject  or  subjects,  under 
the  great  seal,  conferring  some  author- 
ity, title,  franchise,  or  property;  termed 
"letters  patent"  from  being  delivered 
open,  and  not  closed  up  from  inspection. 

in  American  law.  The  instrument  by 
which  a  state  or  government  grants 
public  lands  to  an  individual. 

A  grant  made  by  the  government  to 
an  inventor,  conveying  and  securing  to 
him  the  exclusive  right  to  make  and  sell 
his  invention  for  a  term  of  years. 

PAWN,  n.  A  bailment  of  goods  to  a 
creditor,  as  security  for  some  debt  or 
engagement;  a  pledge.  Story,  Bailm. 
art.  7. 

PAYEE.  The  person  in  whose  favor 
a  negotiable  instrument  is  made  or 
drawn;  the  person  to  whom  a  negotia- 
ble instrument  is  made  payable. 

PAYER,  or  PAYOR.  One  who  pays, 
or  who  is  to  make  a  payment;  particu- 
larly the  person  who  makes  or  is  to 
make  payment  of  a  negotiable  instru- 
ment. 

PERFORM.  To  perform  an  obliga- 
tion or  contract  is  to  execute,  fulfill,  or 
accomplish  it  according  to  its  terms. 
This  may  consist  either  in  action  on  the 
part  of  the  person  bound  by  the  con- 
tract or  in  omission  to  act,  according  to 
the  nature  of  the  subject-matter;  but 
the  term  is  usually  applied  to  any  action 
in  discharge  of  a  contract  other  than 
payment. 


PERFORMANCE.  The  fulfillment  or 
accomplishment  of  a  promise,  contract, 
or  other  obligation  according  to  its 
terms. 

Part  performance.  The  doing  some 
portion,  yet  not  the  whole,  of  what  ei- 
ther party  to  a  contract  has  agreed 
to  do. 

Specific  performance.  Performance  of 
a  contract  in  the  specific  form  in  which 
it  was  made,  or  according  to  the  pre- 
cise terms  agreed  upon.  This  is  fre- 
quently compelled  by  a  bill  in  equity 
filed  for  the  purpose.  2  Story,  Eq.  PI. 
§  712  et  seq.  The  doctrine  of  specific 
performance  is  that,  where  damages 
would  be  an  inadequate  compensation 
for  the  breach  of  an  agreement,  the 
contractor  will  be  compelled  to  perform 
specifically  what  he  has  agreed  to  do. 
Sweet. 

PERJURY.  In  criminal  law.  The 
willful  assertion  as  to  a  matter  of  fact, 
opinion,  belief,  or  knowledge,  made  by 
a  witness  in  a  judicial  proceeding  as 
part  of  his  evidence,  either  upon  oath 
or  in  any  form  allowed  by  law  to  be 
substituted  for  an  oath,  whether  such 
evidence  is  given  in  open  court,  or  in 
an  affidavit,  or  otherwise,  such  assertion 
being  known  to  such  witness  to  be  false, 
and  being  intended  by  him  to  mislead 
the  court,  jury  or  person  holding  the 
proceeding. 

PER  SE.  Lat.  By  himself  or  itself; 
in  itself;  taken  alone;  inherently;  in 
isolation;  unconnected  with  other  mat- 
ters. 

PERSONALTY.  Personal  property; 
movable  property;    chattels. 

PERSONAL  PROPERTY.  (See  Per- 
sonalty.) 

PLAINTIFF.  A  person  who  brings 
an  action;  the  party  who  complains  or 
sues  in  a  personal  action  and  is  so 
named  on  the  record. 

PLAINTIFF  IN  ERROR.  The  party 
who  sues  out  a  writ  of  error  to  review 
a  judgment  or  other  proceeding  at  law. 

PLEA.     In  common-law  practice.     A 

pleading;  any  one  in  the  series  of 
pleadings.  More  particularly,  the  first 
pleading  on  the  part  of  the  defendant. 
In  the  strictest  sense,  the  answer  which 
the  defendant  in  an  action  at  law  makes 
to  the  plaintiff's  declaration,  and  in 
which  he  sets  up  matter  of  fact  as  de- 
fense, thus  distinguished  from  a  demur- 
rer, which  interposes  objections  on 
grounds  of  law. 

In  equity.  A  special  answer  showing 
or  relying  upon  one  or  more  things  as 
a  cause  why  the  suit  should  be  either 
dismissed  or  delayed  or  barred. 


DICTIONARY  OF  LEGAL  TERMS 


1533 


PLEAD.  To  make,  deliver,  or  file 
any  pleading:  to  conduct  the  pleadings 
in  a  cause.  To  interpose  any  pleading 
in  a  suit  which  contains  allegations  of 
fact;  in  this  sense  the  word  is  the  an- 
tithesis of  "demur."  More  particularly, 
to  deliver  in  a  formal  manner  the  de- 
fendant's answer  to  the  plaintiff's  decla- 
ration, or  to  the  indictment,  as  the  case 
may  be. 

PLEADING.  The  peculiar  science  or 
system  of  rules  and  principles,  estab- 
lished in  the  common  law,  according  to 
which  the  pleadings  or  responsive  alle- 
gations of  litigating  parties  are  framed, 
with  a  view  to  preserve  technical  pro- 
priety and  to  produce  a  proper  issue. 

The  process  performed  by  the  parties 
to  a  suit  or  action,  in  alternately  pre- 
senting written  statements  of  their  con- 
tention, each  responsive  to  that  which 
precedes,  and  each  serving  to  narrow 
the  field  of  controversy,  until  there 
evolves  a  single  point,  affirmed  on  one 
side  and  denied  on  the  other,  called  the 
"issue,"  upon  which  they  then  go  to 
trial. 

The  act  or  step  of  interposing  any 
one  of  the  pleadings  in  a  cause,  but  par- 
ticularly one  on  the  part  of  the  defend- 
ant; and,  in  the  strictest  sense,  one 
which  sets  up  allegations  of  fact  in  de- 
fense to  the  action. 

PLEDGE,  n.  A  bailment  of  goods  to 
a  creditor,  as  security  for  some  debt  or 
engagement;  a  pawn.  Story,  Bailm. 
art.  7. 

PLEDGEE.  The  party  to  whom 
goods  are  pledged,  or  delivered  in 
pledge. 

PLEDGOR.  The  party  delivering 
goods  in  pledge;    the  party  pledging. 

POLICE  POWER.  The  power  vested 
in  a  state  to  establish  laws  and  ordi- 
nances for  the  regulation  and  enforce- 
ment of  public  order  and  tranquillity. 
The  power  vested  in  the  legislature  to 
make,  ordain,  and  establish  all  manner 
of  wholesome  and  reasonable  laws,  stat- 
utes, and  ordinances,  either  with  penal- 
ties or  without,  not  repugnant  to  the 
constitution,  as  they  shall  judge  to  be 
for  the  good  and  welfare  of  the  com- 
monwealth, and  of  the  subjects  of  the 
game.  The  police  power  of  the  state  is 
an  authority  conferred  by  the  American 
constitutional  system  upon  the  individ- 
ual states,  through-  which  they  are  en- 
abled to  establish  a  special  department 
of  police;  adopt  such  regulations  as 
tend  to  prevent  the  commission  of  fraud, 
violence,  or  other  offenses  against  the 
state;  aid  in  the  arrest  of  criminals;  and 
secure  generally  the  comfort,  health, 
and  prosperity  of  the  state,  by  preserv- 
ing the  public  order,  preventing  a  con- 
flict of  rights  in  the  common  intercourse 


of  the  citizens,  and  insuring  to  each  an 
uninterrupted  enjoyment  of  all  the  priv- 
ileges conferred  upon  him  by  the  laws 
of  liis  country.  It  is  true  that  the  leg- 
islation which  secures  to  all  protection 
in  their  rights,  and  the  equal  use  and 
enjoyment  of  their  property,  embraces 
an  almost  infinite  variety  of  subjects. 
Whatever  affects  the  peace,  good  order, 
morals,  and  health  of  the  community 
comes  within  its  scope;  and  every  one 
must  use  and  enjoy  his  property  sub- 
ject to  the  restrictions  which  such  leg- 
islation imposes.  What  is  termed  the 
"police  power"  of  the  state,  which, 
from  the  language  often  used  respecting 
it,  one  would  suppose  to  be  an  undefined 
and  irresponsible  element  in  govern- 
ment, can  only  interfere  with  the  con- 
duct of  individuals  in  their  intercourse 
with  each  other,  and  in  the  use  of  their 
property,  so  far  as  may  be  required  to 
secure  these  objects. 

POLICY  OF  INSURANCE.  A  mer- 
cantile instrument  in  writing,  by  which 
one  party,  in  consideration  of  a  premi- 
um, engages  to  indemnify  another 
against  a  contingent  loss,  by  making  him 
a  payment  in  compensation,  whenever 
the  event  shall  happen  by  which  the  los^ 
is  to  accrue. 

POST-DATE.  To  date  an  instru- 
ment as  of  a  time  later  than  that  at 
which  it  is  really  made. 

POWER     OF     APPOINTMENT.       A 

power  or  authority  conferred  by  one 
person  by  deed  or  will  upon  another 
(called  the  "donee")  to  appoint,  that  is, 
to  select  and  nominate,  the  person  or 
persons  who  are  to  receive  and  enjoy 
an  estate  or  an  income  therefrom  or 
from  a  fund,  after  the  testator's  de.ath, 
or  the  donee's  death,  or  after  the  ter- 
mination of  an  existing  right  or  inter- 
est. 

POWER  OF  ATTORNEY.  An  in- 
strument authorizing  a  person  to  act  as 
the  agent  or  attorney  of  the  person 
granting  it. 

PREMIUM.  The  sum  paid  or  agreed 
to  be  paid  by  an  assured  to  the  under- 
writer as  the  consideration  for  the  in- 
surance; being  a  certain  rate  per  cent, 
on  the  amount  insured. 

PRESENTMENT.  The  production  of 
a  bill  of  exchange  to  the  drawee  for  his 
acceptance,  or  to  the  drawer  or  accept- 
or for  payment;  or  of  a  promissory 
note  to  the  party  liable,  for  payment  of 
the  same. 

PRESUMPTION.  An  inference  af- 
firmative or  disaffirmative  of  the  truth 
or  falsehood  of  any  proposition  or  fact 
drawn  by  a  process  of  probable  reason- 
ing in  the  absence  of  actual  certainty  of 


1534 


DICTIONARY   OF   LEGAL   TERMS 


its  truth  or  falsehood,  or  until  such  cer- 
tainty can  be  ascertained. 

PRIMA  FACIE.  Lat.  At  first  sight; 
on  the  first  appearance;  on  the  face  of 
it;  so  far  as  can  be  judged  from  the 
first  disclosure;    presumably. 

A  litigating  party  is  said  to  have  a 
prima  facie  case  when  the  evidence  in 
his  favor  is  sufficiently  strong  for  his 
opponent  to  be  called  on  to  answer  it. 

PRINCIPAL.  In  the  law  of  agency. 
The  employer  or  constitutor  of  an 
agent;  the  person  who  gives  authority 
to  an  agent  or  attorney  to  do  some  act 
for  him. 

PROBATE.  The  act  or  process  of 
proving  a  will.  The  proof  before  an 
ordinary,  surrogate,  register,  or  other 
duly  authorized  person  that  a  document 
produced  before  him  for  official  recog- 
nition and  registration,  and  alleged  to 
be  the  last  will  and  testament  of  a  cer- 
tain deceased  person,  is  such  in  reality. 

PROCESS.  In  practice.  This  word 
is  generally  defined  to  be  the  means  of 
compelling  the  defendant  in  an  action 
to  appear  in  court. 

PROCURATION.  Agency;  proxy;  the 
act  of  constituting  another  one's  attor- 
ney in  fact;  action  under  a  power  of 
attorney  or  other  constitution  of  agen- 
cy. Indorsing  a  bill  or  note  "by  procu- 
ration" (or  per  proc.)  is  doing  it  as 
proxy  for  another  or  by  his  authority. 

PROMISSORY  NOTE.  A  promise  or 
engagement,  in  writing,  to  pay  a  speci- 
fied sum  at  a  time  therein  limited,  or 
on  demand,  or  at  sight,  to  a  person 
therein  named,  or  to  his  order,  or 
bearer. 

PROMOTERS.  In  the  law  relating 
to  corporations,  those  persons  are  called 
the  "promoters"  of  a  company  who  first 
associate  themselves  together  for  the 
purpose  of  organizing  the  company,  is- 
suing its  prospectus,  procuring  sub- 
scriptions to  the  stock,  securing  a  char- 
ter, etc. 

PROSECUTE.  To  follow  up;  to  car- 
ry on  an  action  or  other  judicial  pro- 
ceeding; to  proceed  against  a  person 
criminally. 

PRO  TANTO.  Lat.  For  so  much; 
as  far  as  it  goes. 

PROTEST.  A  notarial  act,  being  a 
formal  statement  in  writing  made  by  a 
notary  under  his  seal  of  office,  at  the 
request  of  the  holder  of  a  bill  or  note, 
in  which  such  bill  or  note  is  described, 
and  it  is  declared  that  the  same  was  on 
a  certain  day  presented  for  payment 
(or  acceptance,  as  the  case  may  be), 
and  that  such  payment  or  acceptance 
was  refused,  and  stating  the  reasons,  if 
any.  given  for  such  refusal,  whereupon 


the  notary  protests  against  all  parties 
to  such  instrument,  and  declares  that 
they  will  be  held  responsible  for  all  loss 
or  damage  arising  from  its  dishonor. 

PROXY.  A  person  who  is  substi- 
tuted or  deputed  by  another  to  repre- 
sent him  and  act  for  him,  particularly 
in  some  meeting  or  public  body.  Also 
the  instrument  containing  the  appoint- 
ment of  such  person. 


QUA.  Lat.  As;  in  the  character  or 
capacity  of.  E.  g.,  "the  trustee  qua 
trustee." 

QUANTUM  MERUIT.  As  much  as 
he  deserved. 

In  pleading.  The  common  count  in  an 
action  of  assumpsit  for  work  and  labor, 
founded  on  an  implied  assumpsit  or 
promise  on  the  part  of  the  defendant  to 
pay  the  plaintiff  as  much  as  he  rea- 
sonably deserved  to  have  for  his  labor. 

QUASI.  Lat.  As  if;  as  it  were; 
analogous  to.  This  term  is  used  in  le- 
gal phraseology  to  indicate  that  one 
subject  resembles  another,  with  which 
it  is  compared,  in  certain  characteris- 
tics, but  that  there  are  also  intrinsic 
differences  between  them. 

QUASI  CONTRACT.  In  the  civil 
law.  A  contractual  relation  arising  out 
of  transactions  between  the  parties 
which  give  them  mutual  rights  and  obli- 
gations, but  do  not  involve  a  specific 
and  express  convention  or  agreement 
between  them. 

QUIET,  V.  To""pacify;  to  render  se- 
cure or  unassailable  by  the  removal  of 
disquieting  causes  or  disputes.  This  is 
the  meaning  of  the  word  in  the  phrase 
"action  to  quiet  title,"  which  is  a  pro- 
ceeding to  establish  the  plaintiff's  t'itle 
to  land  by  bringing  into  court  an  ad- 
verse claimant  and  there  compelling 
him  either  to  establish  his  claim  or  be 
forever  after  estopped  from  asserting  it. 

QUITCLAIM  DEED.  A  deed  of  con- 
veyance operating  by  way  of  release; 
that  is,  intended  to  pass  any  title,  in- 
terest, or  claim  which  the  grantor  may 
have  in  the  premises,  but  not  profess- 
ing that  such  title  is  valid,  nor  contain- 
ing any  warranty  or  covenants  for  title. 

QUO  WARRANTO.  A  name  com- 
monly applied,  in  the  United  States,  to 
an  "information  in  the  nature  of  a  quo 
warranto,"  an  action  compelling  the  de- 
fendant to  show  by  what  warrant  he 
exercises  certain  powers  or  privileges. 
The  proceeding  is  used  to  test  the  right 
of  a  person  to  public  ofhce,  or  the  right 
of  a  private  or  public  corporation  to  ex- 
ercise  certain  franchises. 


DICTIONARY   OF   LEGAL  TERMS 


1535 


R 

RATIFICATION.  The  confirmation 
of  a  previous  act  done  eitlier  by  tlie 
party  himself  or  by  another;  confirma- 
tion of  a  voidable  act. 

REAL  ESTATE.  (See  Real  Prop- 
erty.) 

REALTY.      (See  Real  Property.) 

REAL  PROPERTY.  A  general  term 
for  lands,  tenements,  and  heredita- 
ments; property  which,  on  the  death  of 
the  owner  intestate,  passes  to  his  heir. 
Real  property  is  either  corporeal  orjn- 
corporeal. 

RECEIPT.  A  receipt  is  the  written 
acknowledgment  of  the  receipt  of  mon- 
ey, or  a  thing  of  value,  without  contain- 
ing any  affirmative  obligation  upon  ei- 
ther party  to  it;  a  mere  admission  of  a 
fact  in  writing. 

Also  the  act  or  transaction  of  accept- 
ing or  taking  anything  delivered. 

RECEIVER.  A  receiver  is  an  indif- 
ferent person  between  the  parties  ap- 
pointed by  the  court  to  collect  and  re- 
ceive the  rents,  issues,  and  profits  of 
land,  or  the  produce  of  personal  estate, 
or  other  things  which  it  does  not  seem 
reasonable  to  the  court  that  either  par- 
ty should  do;  or  where  a  party  is  in- 
competent to  do  so,  as  in  the  case  of 
an  infant.  The  remedy  of  the  appoint- 
ment of  a  receiver  is  one  of  the  very 
oldest  in  the  court  of  chancery,  and  is 
founded  on  the  inadequacy  of  the  rem- 
edy to  be  obtained  in  the  court  of  ordi- 
nary jurisdiction. 

RECOGNIZANCE.  An  obligation  of 
record,  entered  into  before  some  court 
of  record,  or  magistrate  duly  author- 
ized, with  condition  to  do  some  particu- 
lar act;  as  to  appear  at  the  assizes,  or 
criminal  court,  to  keep  the  peace,  to 
pay  a  debt,  or  the  like.  It  resembles  a 
bond,  but  differs  from  it  in  being  an 
acknowledgment  of  a  former  debt  upon 
record. 

RECOUPMENT.  Recoupment  is  a 
right  of  the  defendant  to  have  a  deduc- 
tion from  the  amount  of  the  plaintiff's 
damages,  for  the  reason  that  the  plain- 
tiff has  not  complied  with  the  cross-ob- 
ligations or  independent  covenants  aris- 
ing under  the  same  contract. 

"Recoupment"  differs  from  "set-off" 
in  this  respect:  that  any  claim  or  de- 
mand the  defendant  may  have  against 
the  plaintiff  may  be  used  as  a  set-off, 
while  it  is  not  a  subject  for  recoupment 
unless  it  grows  out  of  the  very  same 
transaction  which  furnishes  the  plain- 
tiff's cause  of  action. 

RELATOR.  The  person  upon  whose 
complaint,  or  at  whose  instance,  an  ^- 


formation  or  writ  of  quo  warranto  is 
filed,  and  who  is  quasi  the  plaintiff  in 
the  proceeding. 

RELEASE.  The  relinquishment,  eon- 
cession,  or  giving  up  of  a  right,  claim, 
or  privilege,  by  the  person  in  whom  it 
exists  or  to  whom  it  accrues,  to  the 
person  against  whom  it  might  have  been 
demanded  or  enforced. 

REMAINDER.  An  estate  limited  to 
take  effect  and  be  enjoyed  after  another 
estate  is  determined.  As,  if  a  man 
seised  in  fee-simple  grants  lands  to  A. 
for  twenty  years,  and,  after  the  deter- 
mination of  the  said  term,  then  to  B. 
and  his  heirs  forever,  here  A.  is  tenant 
for  years,  remainder  to  B.  in  fee. 

REMEDY.  The  means  by  which  the 
violation  of  a  right  is  prevented,  re- 
dressed, or  compensated.  Though  a 
remedy  may  be  by  the  act  of  the  party 
injured,  by  operation  of  law,  or  by 
agreement  between  the  injurer  and  the 
injured,  we  are  chiefly  concerned  with 
one  kind  of  remedy,  the  judicial  remedy, 
which  is  by  action  or  suit. 

REMITTITUR  DAMNA.  (Lat.)  Usu- 
ally shortened  to  Remittitur.  An  entry 
made  on  record,  in  cases  where  a  jury 
has  given  greater  damages  than  a  plain- 
tiff has  declared  for,  remitting  the  ex- 
cess. 

RENT.  The  compensation,  either  in 
money,  provisions,  chattels,  or  labor,  re- 
ceived by  the  owner  of  the  soil  from 
the  occupant  thereof. 

REPLEVIN.  A  personal  action  ex 
delicto  brought  to  recover  possession  of 
goods  unlawfully  taken  (generally,  but 
not  only,  applicable  to  the  taking  of 
goods  distrained  for  rent),  the  validity 
of  which  taking  it  is  the  mode  of  con- 
testing, if  the  party  from  whom  the 
goods  were  taken  wishes  to  have  them 
back  in  specie,  whereas,  if  he  prefer  to 
have  damages  instead,  the  validity  may 
be  contested  by  action  of  trespass  or 
unlawful  distress. 

REPLEVIN  BOND.  A  bond  exe- 
cuted to  indemnify  the  officer  who  exe- 
cuted a  writ  of  replevin  and  to  indem- 
nify the  defendant  or  person  from 
whose  custody  the  property  was  taken 
for  such  damages  as  he  may  sustain. 

RESCISSION.  Rescission,  or  the  act 
of  rescinding,  is  where  a  contract  is 
canceled,  annulled,  or  abrogated  by  the 
parties,  or  one  of  them. 

RESIDENCE.  Living  or  dwelling  in 
a  certain  place  permanently  or  for  a 
considerable  length  of  time.  The  place 
where  a  man  makes  his  home,  or  where 
he  dwells  permanently  or  for  an  ex- 
tended period  of  time. 


1536 


DICTIONARY  OF   LEGAL  TERMS 


RESIDUARY.  Pertaining  to  the  res- 
idue; constituting  the  residue;  giving 
or  bequeathing  the  residue;  receiving  or 
entitled  to  the  residue. 

RESIDUARY  DEVISEE.  The  per- 
son named  in  a  will,  who  is  to  take  all 
the  real  property  remaining  over  and 
above  the  other  devises. 

RESIDUARY  ESTATE.  The  remain- 
ing part  of  a  testator's  estate  and  ef- 
fects, after  payment  of  debts  and  lega- 
cies; or  that  portion  of  his  estate 
which  has  not  been  particularly  devised 
or  bequeathed. 

RESIDUARY  LEGATEE.  The  per- 
son to  whom  a  testator  bequeaths  the 
residue  of  his  personal  estate,  after  the 
payment  of  such  other  legacies  as  are 
specifically  mentioned  in  the  will. 

RESPONDEAT  SUPERIOR.     Let  the 

master  answer.  This  maxim  means  that 
a  master  is  liable  in  certain  cases  for 
the  wrongful  acts  of  his  servant,  and  a 
principal  for  those  of  his  agent. 

RESPONDENT.  The  party  who 
makes  an  answer  to  a  bill  or  other  pro- 
ceeding in  chancery. 

The  party  who  appeals  against  the 
judgment  of  an  inferior  court  is  termed 
the  "appellant";  and  he  who  contends 
against  the  appeal,  the  "respondent." 

REVOCATION.  The  recall  of  some 
power,  authority,  or  thing  granted,  or  a 
destroying  or  making  void  of  some  deed 
that  had  existence  until  the  act  of  rev- 
ocation made  it  void.  It  may  be  either 
general,  of  all  acts  and  things  done  be- 
fore; or  special,  to  revoke  a  particular 
thing. 

RIGHT  OF  ACTION.  The  right  to 
bring  suit;  a  legal  right  to  maintain  an 
action,  growing  out  of  a  given  transac- 
tion or  state  of  facts  and  based  thereon. 

RIGHT  OF  ENTRY.  A  right  of  en- 
try is  the  right  of  taking  or  resuming 
possession  of  land  by  entering  on  it  in 
a  peaceable  manner. 

RIGHT  TO  REDE:EM.  The  term 
"right  of  redemption,"  or  "right  to  re- 
deem," is  familiarly  used  to  describe  the 
estate  of  the  debtor  when  under  mort- 
gage, to  be  sold  at  auction,  in  contra- 
distinction to  an  absolute  estate,  to  be 
set  off  by  appraisement.  It  would  be 
more  consonant  to  the  legal  character 
of  this  interest  to  call  it  the  "debtor's 
estate  subject  to  mortgage." 


SATISFACTION.  The  act  of  satis- 
fying a  party  by  paying  what  is  due  to 
him  (as  on  a  mortgage,  lien,  or  con- 
tract), or  what  is  awarded  to  him,  by 
the  judgment   of  a  court  or  otherwise. 


Thus,  a  judgment  is  satisfied  by  the 
payment  of  the  amount  due  to  the  party 
who  has  recovered  such  judgment,  or  by 
his  levying  the  amount. 

SCIENTER.    Lat.    Knowingly. 

SCINTILLA.  Lat.  A  spark;  a  re- 
maining particle;    the  least  particle. 

SCIRE  FACIAS.  Lat.  In  practice. 
A  judicial  writ,  founded  upon  some  rec- 
ord, and  requiring  the  person  against 
whom  it  is  brought  to  show  cause  why 
the  party  bringing  it  should  not  have 
advantage  of  such  record,  or  (in  the 
case  of  a  scire  facias  to  repeal  letters 
patent)  why  the  record  should  not  be 
annulled  and  vacated. 

The  most  common  application  of  this 
writ  is  as  a  process  to  revive  a  judg- 
ment, after  the  lapse  of  a  certain  time, 
or  on  a  change  of  parties,  or  otherwise 
to  have  execution  of  the  judgment,  in 
which  cases  it  is  merely  a  continuation 
of  the  original  action. 

SCROLL  or  SCRAWL.  A  mark  in- 
tended to  supply  the  place  of  a  seal, 
made  with  a  pen  or  other  instrument  of 
writing. 

SEAL.  An  impression  upon  wax,  wa- 
fer, or  some  other  tenacious  substance 
capable  of  being  impressed. 

SEISIN.  Possession  with  an  intent 
on  the  part  of  him  who  holds  it  to 
claim  a  freehold  interest. 

SET-OFF.  A  counterclaim  or  cross- 
demand;  a  claim  or  demand  which  the 
defendant  in  an  action  sets  off  against 
the  claim  of  the  plaintiff",  as  being  his 
due,  whereby  he  may  extinguish  the 
plaintiff's  demand,  either  in  whole  or  in 
part,  according  to  the  amount  of  the 
set-off. 

SET  UP.  To  bring  forward  or  allege, 
as  something  relied  upon  or  deemed 
sufficient;  to  propose  or  interpose,  by 
way  of  defense,  explanation,  or  justifi- 
cation; as,  to  set  up  the  statute  of  lim- 
itations—i.  e.,  offer  and  rely  upon  it  as 
a  defense  to  a  claim. 

SEVERANCE.  The  cutting  of  the 
crops,  such  as  corn,  grass,  etc.,  or  the 
separating  of  anything  from  the  realty. 
Brown. 

SHELLEY'S  CASE,  RULE  IN.  "That 
rule  is  that,  where  a  life  estate  is  given 
to  A.,  with  a  future  interest  to  A.'s 
heirs  (the  use  of  the  particular  word 
'heirs'  being  necessary),  the  whole  gift 
is  construed  as  one  'to  A.  and  his  heirs,' 
at  once  giving  an  estate  to  A.  in  fee.^' 
Albert  M.  Kales,  in  5  Am.  Law  &  Pro- 
ced.  105. 

SILENT  PARTNER.  Popular  name 
for  dormant  partners  or  special  part- 
ners. 


DICTIONARY   OF  LEGAL  TERMS 


1537 


SIMPLE  CONTRACT.  A  contract 
based  upon  consideration  and  not  upon 
form. 

SPECIAL  INDORSEMENT.  An  in- 
dorsement in  full,  which  specifically 
nanu-s  the  indorsee. 

SPECIAL  PARTNER.  A  member  of 
a  limited  partnership,  who  furnishes 
certain  funds  to  the  common  stock,  and 
whose  liability  extends  no  further  than 
the  fund  furnished. 

SPECIAL  PROPERTY.  Property  of 
a  qualified,  temporary,  or  limited  na- 
ture; as  distinguished  from  absolute, 
general,  or  unconditional  property.  Such 
is  the  property  of  a  bailee  in  the  article 
bailed,  of  a  sheriff  in  goods  temporarHy 
in  his  hands  under  a  levy,  of  the  finder 
of  lost  goods  while  looking  for  the  own- 
er, of  a  person  in  wild  animals  which  he 
has  caught. 

SPECIALTY.  A  writing  sealed  and 
delivered,  containing  some  agreement. 

SPECIAL  VERDICT.  A  special  find- 
ing of  the  facts  of  a  case  by  a  jury, 
leaving  to  the  court  the  application  of 
the  law  to  the  facts  thus  found. 

SPOLIATION.  In  torts.  Destruc- 
tion of  a  thing  by  the  act  of  a  stranger, 
as  the  erasure  or  alteration  of  a  writ- 
ing by  the  act  of  a  stranger,  is  called 
"spoliation."  This  has  not  the  effect  to 
destroy  its  character  or  legal  effect. 

SS.  An  abbreviation  used  in  that 
part  of  a  record,  pleading,  or  affidavit, 
called  the  "statement  of  the  venue." 
Commonly  translated  or  read,  "to  wit," 
and  supposed  to  be  a  contraction  of 
"scilicet." 

STATUS.  The  status  of  a  person  is 
his  legal  position  or  condition. 

STATUTE,  n.  An  act  of  the  legis- 
lature. 

STATUTE  OF  FRAUDS.  A  cele- 
brated English  statute,  passed  in  1677, 
and  which  has  been  adopted,  in  a  more 
or  less  modified  form,  in  nearly  all  of 
the  United  States.  Its  chief  character- 
istic is  the  provision  that  no  action 
shall  be  brought  on  certain  contracts 
unless  there  be  a  note  or  memorandum 
thereof  in  writing,  signed  by  the  party 
to  be  charged  or  by  his  authorized 
agent. 

STATUTE  OF  LIMITATION.  A 
statute  prescribing  limitations  to  the 
right  of  action  on  certain  described 
causes  of  action;  that  is,  declaring  that 
no  suit  shall  be  maintained  on  such 
causes  of  action  unless  brought  within 
a  specified  period  after  the  right  ac- 
crued. 

STATUTORY    UNDERTAKING.      A 

penal  bond,  given,  as  i-equired  by  stat- 

B.&  B.Bus.Law— 97 


ute,  in  connection  with  certain  legal  pro- 
ceedings, "('ommon  examples  of  statu- 
tory undertaking  are:  The  bond  given 
by  a  plaintiff  in  an  injunction  suit,  as 
security  to  the  defendant  for  damages 
caused  by  the  issuance  of  an  interlocu- 
tory injunction,  such  damages,  within 
the  amount  of  the  penalty,  to  be  col- 
lected by  the  defendant  if  the  injunction 
is  found  to  have  been  wrongfully  issued; 
and  the  bond  given  for  a  very  similar 
purpose  in  attachment  or  replevin." 
Bauer  on  Damages,  p.  98,  note. 

STOCK.  In  corporation  law.  The 
capital  or  principal  fund  of  a  corpora- 
tion or  joint-stock  company,  formed  by 
the  contributions  of  subscribers  or  the 
sale  of  shares,  and  considered  as  the 
aggregate  of  a  certain  number  of  shares 
severally  owned  by  the  members  or 
stockholders  of  the  corporation;  also 
the  proportional  part  of  the  capital 
which  is  owned  by  an  individual  stock- 
holder; also  the  incorporeal  property 
which  is  represented  by  the  holding  of 
a  certificate  of  stock,  and  in  a  wider 
and  more  remote  sense,  the  right  of  a 
shareholder  to  participate  in  the  gen- 
eral management  of  the  company  and  to 
share  proportionally  in  its  net  profits  or 
earnings  or  in  the  distribution  of  as- 
sets on  dissolution. 

STOPPAGE  IN  TRANSITU.     The  act 

by  which  the  unpaid  vendor  of  goods 
stops  their  progress  and  resumes  pos- 
session of  them,  while  they  are  in 
course  of  transit  from  him  to  the  pur- 
chaser, and  not  yet  actually  delivered  to 
the  latter. 

STRICTISSIMI  JURIS.  Lat.  Of  the 
strictest  right  or  law. 

SUBAGENT.  An  under-agent;  a  sub- 
stituted agent;  an  agent  appointed  by 
one  who  is  himself  an  agent. 

SUBP(ENA.  The  process  by  which 
the  attendance  of  a  witness  is  required 
is  called  a  "subpoena."  It  is  a  writ  or 
order  directed  to  a  person,  and  requir- 
ing his  attendance  at  a  particular  time 
and  place  to  testify  as  a  witness.  It 
may  also  require  him  to  bring  with  him 
any  books,  documents,  or  other  things 
under  his  control,  which  he  is  bound  by 
law  to  produce  in  evidence. 

SUBROGATION.  The  substitution  of 
one  thing  for  another,  or  of  one  person 
into  the  place  of  another  with  respect 
to  rights,  claims,  or  securities. 

Subrogation  denotes  the  putting  a 
third  person  who  has  paid  a  debt  in  the 
place  of  the  creditor  to  whom  he  has 
paid  it,  so  as  that  he  may  exercise 
against  the  debtor  all  the  rights  which 
the  creditor,  if  unpaid,  might  have  done. 

SUBSCRIBE.  In  the  law  of  con- 
tracts.    To   write   under;    to   write  the 


1538 


DICTIONARY   OF   LEGAL   TERMS 


name  undfr:    to   write  the  name  at  the 
bottom  or  l'ikI  of  a  writing. 

SUBSTANTIVE  LAW.  The  part  of 
the  law  which  the  courts  are  estab- 
lished to  administer,  as  opposed  to  the 
rules  according  to  which  the  substantive 
law  itself  is  administered.  That  part  of 
the  law  which  creates,  defines,  and  reg- 
ulates rights,  as  opposed  to  adjective  or 
remedial  law,  which  prescribes  the 
method  of  enforcing  rights  or  obtaining 
redress  for  their  invasion. 

SUI  GENERIS.  Lat.  Of  its  own 
kind  or  class. 

SUI  JURIS.  Lat.  Of  his  own  right; 
having  legal  capacity  to  manage  his  own 
affairs. 

SUIT.  "Suit"  is  a  generic  term,  of 
comprehensive  signification,  and  applies 
to  any  proceeding  in  a  court  of  justice 
in  which  the  plaintiff  pursues,  in  such 
court,  the  remedy  which  the  law  af- 
fords him  for  the  redress  of  an  injury 
or  the  recovery  of  a  right. 

SUMMARY,  adj.  Immediate;  peremp- 
tory; off-hand;  without  a  jury;  pro- 
visional;   statutory. 

SUMMON.  In  practice.  To  serve  a 
summons;  to  cite  a  defendant  to  appear 
in  court  to  answer  a  suit  which  has 
been  begun  against  him;  to  notify  the 
defendant  that  an  action  has  been  insti- 
tuted against  him,  and  that  he  is  re- 
quired to  answer  to  it  at  a  time  and 
place  named. 

SUMMONS,  in  practice.  A  writ,  di- 
rected to  the  sheriff  or  other  proper  of- 
ficer, requiring  him  to  notify  the  per- 
son named  that  an  action  has  been  com- 
menced against  him  in  the  court  whence 
the  writ  issues,  and  that  he  is  required 
to  appear,  on  a  day  named,  and  answer 
the  complaint  in  such  action. 

SURETY.  A  surety  is  one  who  at 
the  request  of  another,  and  for  the  pur- 
pose of  securing  to  him  a  benefit,  be- 
comes responsible  for  the  performance 
by  the  latter  of  some  act  in  favor  of  a 
third  person,  or  hypothecates  property 
as  security  therefor. 


TENANT.  In  the  broadest  sense,  one 
who  holds  or  possesses  lands  or  tene- 
ments by  any  kind  of  right  or  title, 
whether  in  fee,  for  life,  for  years,  at 
will,   or  otherwise.     Cowell. 

In  a  more  restricted  sense,  one  who 
holds  lands  of  another;  one  who  has  the 
temporary  use  and  occupation  of  real 
property  owned  by  another  person 
(called  the  "landlord"),  the  duration  and 
terms  of  his  tenancy  being  usually  fixed 
by  an  instrument  called  a  "lease." 


TENDER.  An  offer  of  money;  the 
act  by  which  one  produces  and  oft'ers  to 
a  person  holding  a  claim  or  demand 
against  him  the  amount  of  money  which 
he  considers  and  admits  to  be  due,  in 
satisfaction  of  such  claim  or  demand, 
without  any  stipulation  or  condition. 

TERM.  Of  court.  The  word  "term" 
when  used  with  reference  to  a  court, 
signifies  the  space  of  time  during  which 
the  court  holds  a  session.  A  "session" 
signifies  the  time  during  the  term  when 
the  court  sits  for  the  transaction  of 
business,  and  the  session  commences 
when  the  court  convenes  for  the  term, 
and  continues  until  final  adjournment, 
either  before  or  at  the  expiration  of  the 
term.  The  "term"  of  the  court  is  the 
time  prescribed  by  law  during  which  it 
may  be  in  "session."  The  "session"  of 
the  court  is  the  time  of  its  actual  sit- 
ting. 

TESTATOR.  One  who  makes  or  has 
made  a  testament  or  will;  one  who  dies 
leaving  a  will. 

TITLE.  The  means  whereby  the 
owner  of  lands  or  of  personalty  has  the 
just  possession  of  his  property.  See 
Co.  Litt.  345;    2  Bl.  Comm.  195. 

TORT.  Wrong;  injury;  the  opposite 
of  right.  So  called,  according  to  Lord 
Coke,  because  it  is  "wrested,"  or  crook- 
ed, being  contrary  to  that  which  is  right 
and  straight.     Co.  Litt.  15Sb. 

In  modern  practice,  "tort"  is  con- 
stantly used  as  an  English  word  to  de- 
note a  wrong  or  wrongful  act,  for  which 
an  action  will  lie,  as  distinguished  from 
a  "contract."     3  Bl.  Comm.  IIT. 

A  tort  is  a  legal  wrong  committed  up- 
on the  person  or  property  independent 
of  contract.  It  may  be  either  (1)  a  di- 
rect invasion  of  some  legal  right  of  the 
individual;  (2)  the  infraction  of  some 
public  duty  by  which  special  damage  ac- 
crues to  the  individual;  (3)  the  viola- 
tion of  some  private  obligation  by  which 
like  damage  accrues  to  the  individual. 
In  the  former  case,  no  special  damage 
is  necessary  to  entitle  the  party  to  re- 
cover. In  the  two  latter  cases,  such 
damage  is  necessary.  Code  Ga.  1882,  § 
2951. 

TORT-FEASOR.  One  who  commits 
or  is  guilty  of  a  tort. 

TORTIOUS.  Wrongful;  of  the  na- 
ture of  a  tort.  Formerly  certain  modes 
of  conveyance  (e.  g.,  feoffments,  fines, 
etc.)  had  the  effect  of  passing  not  mere- 
ly the  estate  of  the  person  making  the 
conveyance,  but  the  whole  fee  simple,  to 
the  injury  of  the  person  really  entitled 
to  the  fee;  and  they  were  hence  called 
"tortious  conveyances."  Litt.  par.  611; 
Co.  Litt.  271b.  note  1;    .^'iOh.  note  1. 


DICTIONARY   OF   LEGAL   TKRMS 


1539 


But  this  oporation  has  been  taken  away. 
Sweet. 

TRESPASS.  Any  misfeasance  or  act 
of  one  man  whereby  another  is  injuri- 
ously treated  or  damnified.    3  Bl.  Comm. 

An  injury  or  misfeasance  to  the  per- 
son, property,  or  rights  of  another  per- 
son, done  with  force  and  violence,  ei- 
ther actual  or  implied  by  law. 

In  the  strictest  sense,  an  entry  on  an- 
other's ground,  without  a  lawful  author- 
ity, and  doing  some  damage,  however 
inconsiderable,  to  his  real  property.  3 
Bl.  Comm.  209. 

In  practice.  A  form  of  action,  at  the 
common  law,  which  lies  for  redress  in 
the  shape  of  money  damages  for  any 
unlawful  injury  done  to  the  plaintiff,  in 
respect  either  to  his  person,  property, 
or  rights,  by  the  immediate  force  and 
violence  of  the  defendant. 

Trespass  de  bonis  asportatis.  (Tres- 
pass for  goods  carried  away.)  In  prac- 
tice. The  technical  name  of  that  spe- 
cies of  trespass  for  injuries  to  personal 
property  which  lies  where  the  injuj-y 
consists  in  carrying  away  the  goods  or 
property. 

Trespass  on  the  case.  The  form  of 
action,  at  common  law,  adapted  to  the 
recovery  of  damages  for  some  injury 
resulting  to  a  party  from  the  wrongful 
act  of  another,  unaccompanied  by  direct 
or  immediate  force,  or  which  is  the  in- 
direct or  secondary  consequence  of  such 
act.  Commonly  called  "case,"  or  "ac- 
tion on  the  case." 

Trespass  quare  clausum  fregit.  (Tres- 
pass wherefore  he  broke  the  close,  or 
trespass  for  breaking  the  close.)  The 
common-law  action  for  damages  for  an 
unlawful  entry  or  trespass  upon  the 
plaintiff's  land. 

TROVER.  In  common-law  practice, 
the  action  of  trover  (or  trover  and 
conversion)  is  a  species  of  action  on  the 
case,  and  originally  lay  for  the  recovery 
of  damages  against  a  person  who  had 
"found"  another's  goods  and  wrongfully 
converted  them  to  his  own  use.  Subse- 
quently the-  allegation  of  the  loss  of  the 
goods  by  the  plaintiff  and  the  finding  of 
them  by  the  defendant  was  merely  ficti- 
tious, and  the  action  became  the  remedy 
for  any  wrongful  interference  with  or 
detention  of  the  goods  of  another. 

TRUST.  An  equitable  or  beneficial 
right  or  title  to  land  or  other  property, 
held  for  the  beneficiary  by  another  per- 
son, in  whom  resides  the  legal  title  or 
ownership,  recognized  and  enforced  by 
courts  of  chancery. 

TRUST  DEED.  An  instrument  in 
use    in    many    states,    taking    the    place 


and  serving  the  uses  of  a  common-law 
mortgage,  by  which  the  legal  title  to 
real  property  is  placed  in  one  or  more 
trustees,  to  secure  the  repayment  of  a 
sum  of  money  or  the  performance  of 
other  conditions. 

TRUSTEE.  The  person  appointed,  or 
required  by  law,  to  execute  a  trust;  one 
in  whom  an  estate,  interest,  or  power 
is  vested,  under  an  express  or  implied 
agreement  to  administer  or  exercise  it 
for  the  benefit  or  to  the  use  of  another. 

TRUSTEE  PROCESS.  The  name 
given,  in  the  New  England  states,  to  the 
process  of  garnishment  or  foreign  at- 
tachment. 

u 

ULTRA  VIRES.  A  term  used  to  ex- 
press the  action  of  a  corporation  which 
is  beyond  the  powers  conferred  upon  it 
by  its  charter,  or  the  statutes  under 
which  it  was  instituted.  13  Am.  Law 
Rev.  632. 

UNDERTAKING.  A  promise,  engage- 
ment, or  stipulation.  Each  of  the 
promises  made  by  the  parties  to  a  con- 
tract, considered  independently  and  not 
as  mutual,  may,  in  this  sense,  be  de- 
nominated an  "undertaking." 

UNDERWRITER.  The  person  who 
insures  another  in  a  fire  or  life  policy; 

the  insurer. 

A  person  who  joins  with  others  in  en- 
tering into  a  marine  policy  of  insurance 
as  insurer. 

UNILATERAL.  One-sided;  ex  par- 
te; having  relation  to  only  one  of  two 
or  more  persons  or  things. 

USURY.  Unlawful  interest;  a  pre- 
mium or  compensation  paid  or  stipu- 
lated to  be  paid  for  the  use  of  money 
borrowed  or  returned,  beyond  the  rate 
of  interest  established  by  law.  Web- 
ster. 

V 

VALID.  Of  binding  force.  A  deed, 
will,  or  other  instrument,  which  has  re- 
ceived all  the  formalities  required  by 
law,  is  said  to  be  valid. 

VALIDITY.  This  term  is  used  to 
signify  legal  sufficiency,  in  contradis- 
tinction to  mere  regularity. 

VENDEE.  A  purchaser  or  buyer; 
one  to  whom  anything  is  sold.  Gener- 
ally used  of  the  transferee  of  real  prop- 
erty, one  who  acquires  chattels  by  sale 
being  called  a  "buyer." 

VENDITIONI  EXPONAS.  Lat.  You 
expose  to  sale.  This  is  the  name  of  a 
writ  of  execution,  requiring  a  sale  to 
be  made,  directed  to  a  sheriff  when  he 


1540 


DICTIONARY   OF   LEGAL   TERMS 


has  levied  upon  goods  under  a  fieri  fa- 
cias, but  returned  that  they  remained 
unsold  for  want  of  buyers;  and  in  some 
jurisdictions  it  is  issued  to  cause  a  sale 
to  be  made  of  lands,  seized  under  a  for- 
mer writ,  after  they  have  been  con- 
demned or  passed  upon  by  an  inquisi- 
tion. Frequently  abbreviated  to  "vend. 
ex." 

VENDOR.  The  person  who  transfers 
property  by  sale,  particularly  real  es- 
tate, "seller"  being  more  commonly  used 
for  one  who  sells  personalty. 

VENIRE.  Lat.  To  come;  to  appear 
in  court.  This  word  is  sometimes  used 
as  the  name  of  the  writ  for  summoning 
a  jury,  more  commonly  called  a  "venire 
facias." 

VENIRE  FACIAS  DE  NOVO.   A 

fresh  or  new  venire,  which  the  court 
grants  when  there  has  been  some  im- 
propriety or  irregularity  in  returning 
the  jury,  or  where  the  verdict  is  so  im- 
perfect or  ambiguous  that  no  judgment 
can  be  given  upon  it,  or  where  a  judg- 
ment is  reversed  on  error,  and  a  new 
trial  awarded. 

VERDICT.  The  formal  and  unani- 
mous decision  or  finding  of  a  jury,  im- 
paneled and  sworn  for  the  trial  of  a 
cause,  upon  the  matters  or  questions 
duly  submitted  to  them  upon  the  trial. 

VESTED.  Accrued;  fixed;  settled; 
absolute;  having  the  character  or  giv- 
ing the  rights  of  absolute  ownership; 
not  contingent;  not  subject  to  be  de- 
feated by  a  condition  precedent. 

VINDICTIVE  DAMAGES.  Exem- 
plary damages  are  damages  on  an  in- 
creased scale,  awarded  to  the  plaintiff 
over  and  above  what  will  barely  com- 
pensate him  for  his  property  loss,  where 
the  wrong  done  to  him  was  aggravated 
by  circumstances  of  violence,  oppres- 
sion, malice,  fraud,  or  wanton  and 
wicked  conduct  on  the  part  of  the  de- 
fendant, and  are  intended  to  solace  the 
plaintiff  for  mental  anguish,  laceration 
of  his  feelings,  shame,  degradation,  or 
other  aggravations  of  the  original 
wrong,  or  else  to  punish  the  defendant 
for  his  evil  behavior  or  to  make  an  ex- 
ample of  him,  for  which  reason  they  are 
also  called  "punitive"  or  "punitory" 
damages  or  "vindictive"  damages,  and 
(vulgarly)  "smart  money." 

VOID.  Null;  ineffectual,  nugatory; 
having  no  legal  force  or  binding  effect; 
unable,  in  law,  to  support  the  purpose 
for  which  it  was  intended. 

VOIDABLE.  That  may  be  avoided, 
or  declared  void;  not  absolutely  void, 
or  void  in  itself.  Most  of  the  acts  of 
infants  are  "voidable"  only,  and  not  ab- 
solutely void. 


VOLUNTARY.  Free;  without  com- 
pulsion or  solicitation. 

Without  consideration;  without  valu- 
able consideration;    gratuitous. 

VOLUNTEER.     In  conveyancing,  one 

who'  holds  a  title  under  a  voluntary 
conveyance;  i.  e.,  one  made  without 
consideration,  good  or  valuable,  to  sup- 
port it. 

A  person  who  gives  his  services  with- 
out any  express  or  implied  promise  of 
remuneration  in  return  is  called  a  "vol- 
unteer," and  is  entitled  to  no  remuner- 
ation for  his  services,  nor  to  any  com- 
pensation for  injuries  sustained  by  him 
in  performing  what  he  has  undertaken. 
Sweet.  Also  one  who  oflSciously  pays 
the  debt  of  another. 


w 

WAGER.  A  wager  is  a  contract  by 
which  two  or  more  parties  agree  that  a 
certain  sum  of  money  or  other  thing 
shall  be  paid  or  delivered  to  one  of 
them  on  the  happening  of  an  uncertain 
event  or  upon  the  ascertainment  of  a 
fact  which  is  in  dispute  between  them. 

WAIVER.  The  renunciation,  repudi- 
ation, abandonment,  or  surrender  of 
some  claim,  right,  privilege,  or  of  the 
opportunity  to  take  advantage  of  some 
defect,  irregularity,  or  wrong. 

WARD.  An  infant  or  insane  person 
placed  by  authority  of  law  under  the 
care  of  a  guardian. 

WARRANT,  v.  In  contracts.  To  en- 
gage or  promise  that  a  certain  fact  or 
state  of  facts,  in  relation  to  the  sub- 
ject-matter, is,  or  shall  be,  as  it  is  rep- 
resented to  be. 

WARRANT,  n.  A  writ  or  precept 
from  a  competent  authority  in  pursu- 
ance of  law,  directing  the  doing  of  an 
act,  and  addressed  to  an  officer  or  per- 
son competent  to  do  the  act,  and  af- 
fording him  protection  from  damage,  if 
he  does  it. 

WARRANTY.     In  real  property  law. 

A  real  covenant  by  the  grantor  of  lands, 
for  himself  and  his  heirs,  to  warrant 
and  defend  the  title  and  possession  of 
the  estate  granted,  to  the  grantee  and 
his  heirs,  whereby  either  upon  voucher, 
or  judgment  in  the  writ  of  warrahtia 
chartre,  and  the  eviction  of  the  grantee 
by  paramount  title,  the  grantor  was 
bound  to  recompense  him  with  other 
lands  of  equal  value. 

In  sales  of  personal  property.  A  war- 
ranty is  a  statement  or  representation 
made  by  the  seller  of  goods,  contempo- 
raneously with  and  as  a  part  of  the 
contract    of    sale,    though    collateral    to 


DICTIONARY   OF  LEGAL  TERMS 


1541 


the  express  object  of  it,  having  refer- 
ence to  the  character,  quality,  or  title 
of  the  goods,  and  by  which  he  promises 
or  undertakes  to  insure  that  certain 
facts  are  or  shall  be  as  he  then  repre- 
sents them. 

A  Avarranty  is  an  engagement  by 
which  a  seller  assures  to  a  buyer  the 
existence  of  some  fact  affecting  the 
transaction,  whether  past,  present,  or 
future. 

In  contracts.  An  undertaking  or  stip- 
ulation, in  writing,  or  verbally,  that  a 
certain  fact  in  relation  to  the  subject 
of  a  contract  is  or  shall  be  as  it  is 
stated  or  promised  to  be. 
A  warranty  differs  from  a  representa- 
»  tion  in  that  a  warranty  must  always  be 
given  contemporaneously  with,  and  as 
part  of,  the  contract;  whereas,  a  rep- 
resentation precedes  and  induces  to  the 
contract.  And,  while  that  is  their  dif- 
ference in  nature,  their  difference  in 
consequence  or  effect  is  this:  That,  up- 
on breach  of  warranty  (or  false  war- 
ranty), the  contract  remains  binding, 
and  damages  only  are  recoverable  for 
the  breach;  whereas,  upon  a  false  rep- 
resentation, the  defrauded  party  may 
elect  to  avoid  the  contract,  and  recover 
the  entire  price  paid.     Brown. 


WILL.  A  will  is  the  legal  expression 
of  a  man's  wishes  as  to  the  disposition 
of  his  property  after  his  death. 

An  instrument  in  writing,  executed  in 
form  of  law,  by  which  a  person  makes 
a  disposition  of  his  property,  to  take 
effect  after  his  death. 

WRIT  OF  ENTRY.  A  real  action  to 
recover  the  possession  of  land  where 
the  tenant  (or  owner)  has  been  dis- 
seised or  otherwise  wrongfully  dispos- 
sessed. 

WRIT  OF  ERROR.  A  writ  issued 
from  a  court  of  appellate  jurisdiction, 
directed  to  the  judge  or  judges  of  a 
court  of  record,  requiring  them  to  re- 
mit to  the  appellate  court  the  record  of 
an  action  before  them,  in  which  a  final 
judgment  has  been  entered,  in  order 
that  examination  may  be  made  of  cer- 
tain errors  alleged  to  have  been  com- 
mitted, and  that  the  judgment  may  be 
reversed,  corrected,  or  affirmed,  as  the 
case  may  require. 

A  writ  of  error  is  defined  to  be  a 
commission  by  which  the  judges  of  one 
court  are  authorized  to  examine  a  rec- 
ord upon  which  a  judgment  was  given 
in  another  court,  and,  on  such  examina- 
tion, to  affirm  or  reverse  the  same,  ac- 
cording to  law. 


INDEX 


[THE  I'IGURES  RKFEK  TO  PAGES] 


ACCEPTANCE, 
Of  offer,  55-81. 

Time  of  taking  effect,  55-62. 

Nature  of  acts  or  language  essential  to  constitute,  G2-81. 

Silence  alone  not  acceptance,  78-80. 

Silence  coupled  with  retention  of  goods,  SO,  81. 

Of  goods,  nature  and  consequences  of,  1190-1193. 
Of  bill  of  exchange,  statutory  definition  of,  700. 

See  Negotiable  Instruments,  Bill  of  Exchange,  etc. 

ACCOMMODATION  INDORSEE,  885-898. 

ACCOMMODATION  PARTIES,  720,  885-898. 
See  Negotiable  Instruments. 

ACCORD  AND  SATISFACTION,  275,  276. 

ACCOUNTANT,  EXPERT, 

Liability  of,  581-583, 

ACCOUNTING, 

Partner's  right  to,  1278-1284. 

ACCOUNT  STATED,  276-278. 

AGENCY,  part  II,  484-630. 
In  general,  484-488. 
Agent's  power,  source  and  scope  of,  489-496. 

Selling  agent,  power  of,  491-496. 

Incidental  authority,  493. 

Express  authority,  492. 

Implied  authority.  494.  495,  499-501,  505,  506,  508.  509. 

Power  by  necessity,  495. 

Power  by  estoppel,  490-4W,  496-498,  500-503,  510-518. 

Tliird  persons  must  ascertain  agent's  authority,  499,  500,  508,  518, 
519. 

Secret  instructions  to  agent,  502,  518,  519. 

Money,  implied  power  to  borrow,  503,  504. 

Chattels,  power  to  sell  does  not  arise  from  mere  possession,  504.  505. 

Single  prior  purchase  by  agent  without  actual  authority  does  not  es- 
tablish course  of  dealing  so  as  to  estop  principal  from  repudiating 
subsequent  purchases,  505. 

Implied  authority  of  real  estate  agent  to  sign  contract  of  sale.  505, 
506. 

Implied  authority  of  salesman  to  warrant  quality  of  goods,  506,  .507. 

Implied  authority  of  agent  authorized  to  sell  and  convey  real  estate, 
to  make  usual  warranty,  507. 

Implied  authority  of  salesman  to  receive  payment,  508. 

No  implied  authority  of  agent  to  deliver  principal's  goods  in  pay- 
ment of  agent's  debt,  508. 

No  implied  authority  of  agent,  under  special  authority,  to  sell  on 
credit,  in'  absence  of  special  custom,  508. 

General  power,  authority  to  use  necessary  means  to  end  is  implied, 
508,  509. 

Imi)lied  authority  of  chauffeur  to  contract  for  repairs,  509.  510. 

Implied  authority  to  delegate  exercise  of  power,  512-515. 

Third  party,  suspicious  circumstances  creating  disability  of,  to  rely 
upon  power  by  estoppel,  515, 

B,&  B. Bus. Law  (1543) 


1544  INDEX 

[The  figures  refer  to  pages] 

AGENCY— Continued, 

Implied  autliority  of  general  agent  with  special  powers,  518,  519. 
Ratification.  490,  491. 
See  Ratification. 
Disclosed  principal,  rights  and  liabilities  of,  520-529. 
Signature  of  agent's  name  alone,  effect  of,  520-522. 
Signature  of  agent's  name  with  description  as  agent,  522-526. 
Knowiedge  of  agent  as  knowledge  of  principal.  526-529. 
Undisclosed  principal,  rights  and  liabilities  of,  529-537. 

Election  to  hold  undisclosed  principal  or  agent,  530,  531. 
Judgment   against   agent,   when   bar    to   actioa  against   undisclosed 

principal,  5.30,  531. 
Accounts,  settlement  of,  between  undisclosed  principal  and  agent,  as 

affecting  liability  of  principal  to  third  party.  531,  532. 
Sealed  instrument,  rules  of  undisclosed  principal  not  applicable  to, 

532. 
Liability  of  undisclosed  principal  on  contracts  of  agent  in  charge  of 
store  as  ostensible  owner,  536,  .537. 
Termination  of  relation,  565-5S1. 
What  constitutes,  565-573. 

Death  of  principal.  565.  571-573. 
Destruction  of  subject-matter,  565. 
Determination  of  principal's  estate  by  sale,  565. 
Circumstances  putting  third  persons  on  inquiry  as  to  termina- 
tion, 567-571. 
Notice  to  third  parties,  of  termination,  565-571. 
Irrevocable  powers,  573-577. 
Effect  of  termination.  577,  578. 
Discharge,  when  justified,  579,  580,  583-586. 

Incompetency,  as  justifying  discharge.  579.  580. 
Dishonesty  as  justifying  discharge,  583-586. 
Right  of  principal  to   require   obedience  to   orders  likely   to   cause 
agent  to  abandon  employment.  580,  581. 
Rights  of  principal  against  agent.  579-596. 

Incompetency  of  agent  as  giving  right  to  recover  back  from  agent 

his  compensation  and  damages.  5Si-5S3. 
Duty   of  agent  to   keep  principal's   money  separate  from  his  own, 

588-590. 
No   right   to   use   confidential  information   to   principal's  detriment, 

586-588. 
Right  of  principal  to  follow  funds  embezzled  by  agent,  590-594. 
Liability  of  remitting  bank  for  loss  occurring  by  reason  of  negligence 
or  insolvency  of  agent  bank,  594-596. 
Rights  of  agent  against  principal,  597-610. 

WTien  broker's  commission  is  earned,  597,  598. 

No  right  to  use  influence  over  principal  for  his  own  profit,  598. 

Quantum  meruit,  agent's  right  to  recover,  .599. 

Disability  of  discharged  employe  to  recover  for  avoidable  loss,  599- 

601. 
Constructive  service,  theory  of,  600,  601. 
Damages,  measure  of,  for  wrongful  discharge,  599-601. 
Right  to  reimbursement  for  expenditures  for  legal  services,  602. 
Rights   of   servant   against   master   under   workmen's   compensation 
acts,  603-610. 
Third  persons,  relations  of,  to  agent,  611-630. 

When  agent  may  sue  third  person  in  agent's  name,  611-614. 

Suit  by  principal  as  extinguishing  right  of  agent  to  sue,  611. 

When  agent-consignee  may  sue  carrier,  612-614.  • 

Right  of  agent  to  sue  third  person  for  malicious  interference  witn 

contract  of  employment,  614,  615. 
Judgment  in  favor  of  agent  against  third  person  as  bar  to  action  by 

principal,  614. 
Right  of  third  person  to  sue  agent  on  implied  warranty  of  authority, 

615,  616. 
Rule  that  agent  failing  to  bind  principal  is  himself  bound  on  con- 
tract, 617. 


INDEX  1545 

[The  figures  refer  to  pages] 

AGENCY— Continued, 

No  warranty  by  agent  that  prtncipal  has  legal  capacity,  617-fil9. 
Liability  of  agents  of  unincorporated  society,  to  third  persons,  G19, 

620. 
Liability  of  agent  to  third  persons,  for  torts,  620-626. 
Agent  not  liable  to  third  person  for  mere  broach  of  agency  contract, 

624. 
When  agent  is  not  liable  for  tort  of  sub-agents,  624-626. 
Agent  not  liable  in  tort  action  for  prediction  that  notes  will  be  paid, 

626-630. 
Distinction  between  misfeasance  and  non-feasance  of  agent — Effect 
upon  liability,  622-623.  630. 
See,  also.  Torts  of  Agent. 

ALTERATION, 

Discharge  of  negotiable  instrument  by,  283,  938-940. 

ANOMALOUS  INDORSEE,  886.  887. 

ARBITRATION  AGREEMENTS, 
Legality  of,  3.30. 

ARBITRATION  AND  AWARD,  278. 

ASSIGNMENT.  259-273. 

Nature  and  requisites  of.  2.!i9-26.5. 

Interests  capable  of.  265-270. 

Nature  and  extent  of  interest  acquired  by  assignee,  270-273. 

ATTACHMENT  OF  PROPERTY,  406-410. 

AUCTION,  33. 

AUTOMOBILE. 

Validity  and  effect  of  statute  making  owner  liable  for  injuries  occasioned 
by  negligent  operation  of  his  automobile  driven  with  his  express  or  im- 
plied consent,  555,  556. 

BAILMENTS,  444-469. 
Ordinary,  444-451. 
For  carriage.  451-466. 
Pledge,  467-t6U. 

BANK, 

General  relation  of,  to  depositor,  864.  936. 
Liability  of,  to  depositor  for  dishonor  of  check,  868.  869. 
Effect  of  negligence  of  depositor  in  examining  returned  vouchers  and  fail- 
ure to  report  forgery  promptly,  870.  871. 
No  right  in  drawee  bank  to  demand  indorsement  of  payee  of  check.  746. 
See  Negotiable  Instruments;    Check;    Certified  Checks;    Drawee. 

BANKRUPTCY,  28.3-288,  421-442. 
Discharge  in,  283-288. 

What  debts  may  be  discharged,  284-287. 

What  bankrupts  cannot  procure  a  discharge  of  debts,  287,  288. 
Provable  debts,  2S4-287. 
As  remedy,  421-442. 

In  general,  421,  422. 

Voluntary  and  involuntary  bankrupts,  distinctions  between,  422-424. 
Who  may  be  voluntary  bankrupts,  422-424. 

Circumstances  under  which  persons  subject  to  bankruptcy  proceed- 
ings may  be  adjudged  bankrupt,  424-433. 
Acts  of  bankruptcy,  425-433. 
Enumerated,  425. 
Fraudulent  conveyances,  425-427. 
Preferential  transfers,  427,  428. 

Preferences  obtained  through  legal  proceedings,  428-4.30. 
Making  general  assignment  or  applying  for  receivership  or  trus- 
teeship, or  occurrence  of  receivership  or  trusteeship,  430. 
Admission  in  writing  of  inability  to  pay  debts  and  willingness 

to  be  adjudged  bankrupt,  431,  432. 
Act  of  bankruptcy  must  have  been  within  four  months,  432. 
Time  from  which  four  months  begins  to  run,  432,  433. 


1546  INDEX 

[The  figures  refer  to  pages] 

BAAKRUPTCY— Continued, 

Administration  of  the  estate,  433-435. 
Title  to  bankrupt's  property  in  trustee,  435-437. 
Power  of  trustee  to  avoid  transfer  by  bankrupt,  437. 
Recovery  of  property  and  dissolution  of  liens,  437—439 
Claims,  payment  of,  439,  440. 

BEARER, 

Of  negotiable  instrument,  statutory  definition  of,  725. 

BIDS, 

Advertisements  for,  vphether  constituting  offer,  31-33. 

BILL  OF  EXCHANGE,  696,  700-709. 
Statutory  definition  of,  696. 
Acceptance,  700-709. 

Requisites  of,  700,  702-707. 

Riglit  of  holder  to  require  acceptance  written  on  bill,  700. 

Written  on  paper  other  than  bill,  700,  702-707. 

Pi-ouiise  to  accept,  as  acceptance.  700. 

Of  bill  incomplete,  overdue,  or  dishonored,  700. 

Subsequent  acceptance  as  of  date  of  first  presentment,  700,  701, 

Drawee  may  wait  24  hours  to  decide  whether  to  accept,  701. 

Destruction  of  bill,  or  refusal  to  return,  by  drawee,  701. 

General  and  qualified,  701. 

Effect  of  acceptance  to  pay  at  particular  place,  701. 

Conditional,  701. 

Partial,  701. 

Local,  701. 

Qualified  as  to  time,  701. 

Of  one  or  more  drawees,  but  not  of  all,  701. 

For  honor,  697,  701,  871-873. 

Wliether  neglect  or  failure  to  return  bill  is,  707-709. 
Bills  in  a  set,  702,  873. 

See    Negotiable    Instruments ;     Presentment ;     Notice    of    Dishonor ; 
Protest. 

BILL  OF  LADING, 

Liabilitj'  of  carrier  on  false,  510-512. 

BULK  SALES  ACTS,  1054-1062. 

BUYER, 

Implied  authority  of  agent  designated  as,  501-503. 

CANCELLATION, 

Of  negotiable  instrument  as  discharge,  283,  937. 

CAPACITY,  344-361. 
In  general,  344,  345. 
Disaffirmance,  345-347.  , 

Infancy,  344-361. 
Ratification,  356-359. 
Necessaries,  contracts  for,  359-361. 
Necessaries,  rule  under  Sales  Act,  801. 
Insane  persons,  344,  345. 
Intoxicated  persons,  344. 
Married  women,  344. 
Corporations,  344. 

Incapacity  as  defense  on   negotiable  instrument   against   holder  in   due 
course,  838,  839. 

CARRIERS,  451-466. 
In  general,  451-466. 

Right  of  consignee  to  sue  carrier,  613,  614. 
Estoppel  of,  to  deny  agent's  authority  to  issue  false  bill  of  lading,  510-512. 

CERTIFIED  CHECKS, 

Effect  of  certification,  701,  862-865. 

CHAUFFEUR, 

Implied  authority  to  contract  for  rei>;iirs,  500.  510. 


INDEX  154:7 

[The  figures  refer  to  pages] 

CHECK, 

Statutory  definition  of,  f>96. 

Not  an  assignment  of  funds,  863. 

Time  of  presentment  of,  in  order  to  charge  drawer,  91  o  920. 

See   Negotiable   Instruments;    Certified   Checks;    Drawee;    Drawer, 
etc. 

"C.  I.  F."  CONTRACT, 

Construed,  1022-1024. 

CONDITIONAL  SALES,  985-9S8. 

CONDITIONS, 

See  Performance  of  Contracts. 

CONSIDERATION.  93-139,  714-720. 
In  general,  93-95. 
In  unilateral  contracts,  95-99. 
Suffering  detriment  as,  95,  96. 
Promise  not  to  sue  as,  99. 

Intention  to  create  legal  relations  as  affecting  operation  of  doctrine,  98. 
Ceasing  to  complain  as,  97,  98. 

Performance  of,  or  promise  to  perform,  a  pre-existing  legal  duty,  100-^5. 
Payment  of  lesser  sum  as  consideration  for  release  of  greater  liqui- 
dated debt,  100-104. 
Debtor's  refraining  from  seeking  discharge  in  bankruptcy,  104. 
Payment  of  agreed  sum  as  consideration  for  release  of  unliqviidated 

indebtedness,  104,  105. 
Performance  of  pre-existing  official  duty  as  consideration  for  con- 
tract with  private  individual  for  reward,  105,  106. 
Performance  of  pre-existing  contract  obligation  as  consideration  for 
promise  of  other  party  to  contract  to  pay  additional  compen- 
sation, 106-109. 
Doctrine  of  "unforeseen  and  substantial  difficulties"  as  affecting 
general  rule,  108,  109. 
Duty  to  pay  interest  from  maturity  of  note,  as  pre-existing  legal  du- 
ty, 110,  111. 
Promise  to  perform  pre-existing  duty  to  third  party  as,  lll-llo. 
Promises  in  the  nature  of  gratuities,  115-120. 
Effect  of  performance  of  acts  in  reliance  upon  subscription  of  money, 

115-120. 
Illusory  promises,  120-129. 

Promise  to  supply  what  other  party  "wants  to  purchase,"  120-123. 
Promises  to  sell  and  to  buy  all  of  buyer's  requirements  of  certain 

commodity,  123-125. 
Promise  to  sell  all  of  seller's  output,  125,  126. 

Promise  to  do  one  of  several  acts  as  consideration  for  promise  to  do 
one  definite  act,  127-129. 
Promises  to  pay  for  benefit  previously  received,  129-137. 

Was  legal  relation  intended  when  benefit  was  conferred.  129-132. 
Promise  to  pay  debt  on  which  remedy  is  barred,  132-1.36. 
By  bankruptcy,  132-134. 
By  statute  of  limitations,  134-136. 
Promise  of  suretyship  or  guaranty  of  pre-existing  debt,  136-137. 
Sealed  instruments,  no  consideration  necessary  under  common  law,  138, 
139. 
Rule  changed  by  statute  in  some  states,  139. 
Rules  as  to  consideration  in  negotiable  instruments,  714-720,  800-801. 

CONTRACTS,  Part  I,  23-483. 
Special  types  of,  443-483. 

See  Offer;    Acceptance;    Consideration;    Performance  of  Contracts; 
Statute  of  Frauds,  etc. 

CORPORATIONS,  Part  VI,  1377-1512. 
Introduction,  1377-1379. 
Organization,  13S0-1398. 

Effect  of  complete  organization,  1380-1387. 

When  corporate  entity  may  be  disregarded,  1387-1391. 

Effect  of  incomplete  organization,  1391-1398. 


1548  INDEX 

[The  figures  refer  to  pages] 

CORPORATIONS— Continued, 

Promoters,  contracts  of,  1399-1406. 

Relation  of  promoter  to  corporation,  1399-1405. 

Relation  of  subscriber  to  corporation,  tinder,  1405,  1406. 
Corporate  powers,  1407-1413. 

Scope  of,  1407,  1408. 

Contracts  ultra  vires,  140S-1413. 
Stockholders,  relation  of,  to  corporation,  1414-1472. 

Share  of  stock,  nature  of,  1414-1417. 

Preferred  stockholders,  rights  of,  1417-1419. 

Corporate  books,  right  to  inspect.  1419,  1420. 

New  issues  of  stock,  right  to  participate  in,  1421-1425. 

Stockholders'  meetings,  1425-1427. 

Voting  trusts,  1428-1433. 

Minority,  rights  of,  1433-1437. 

Actions  upon  corporate  causes  of  action,  right  to  maintain,  1437-1442. 

Declared  dividends  and  surplus,  rights  in,  1442-1452. 
.  Life  tenant  and  remainderman,  apiwrtionment  between.  1452-1458. 

Officers  and  directors,  rights  of  corporation  against,  1459-1464. 

Transfers  of  stock,  rights  and  liabilities,  of  parties  as  to,  1465-1472. 

Uniform  Stock  Transfer  Act,  1468-1472. 
Creditors,  relation  of,  to  corporation,  1473-1499. 

Rights  of  corporation   creditors  against  purchaser  of  assets,   1473- 
1480. 

Priorities  among  classes  of  creditors,  1480-1481. 

Current  operating  expenses  to  be  paid  out  of  current  earnings  in 
preference  to  claims  of  secured  creditors,  1481-1488. 

Rights  of  unsecured  creditors  upon  reorganization,  1488-1493. 

Rights  of  creditors  against  stockholders,  1493-1499. 
State,  relation  of  corporation  to,  1500-1512. 

Power  to  alter  charter,  1500,  1501. 

Police  powers  of  state,  1501-1503. 

Taxing  powers  of  state,  1504-1510. 

Foreign  corporations,  1510-1512. 

CORRESPONDENCE, 

Offer  and  acceptance  by,  30,  31,  33-36,  40-42,  53-59. 

DAMAGES, 

Measure  of,  in  contract,  389-398. 
See  Remedies. 

DATE, 

Of  negotiable  instrument,  713. 

See,  also.  Negotiable  Instruments;  Negotiation  of  Negotiable  Instru- 
ments. 

DELIVERY, 

See  Negotiation  of  Negotiable  Instruments;    Sales. 

DISCHARGE  OF  CONTRACTS,  274-288. 
In  general,  274. 
Performance  as,  274. 

By  merger  into  negotiable  instrument,  278. 
By  arbitration  and  award,  278. 
By  novation,  279-282. 
By  accord  and  satisfaction,  275,  276. 
By  agreement,  274,  275. 
By  account  stated,  276-278. 
By  merger,  278. 
By  release,  282,  283. 
By  cancellation,  283. 
By  alteration,  283. 
By  bankruptcy  proceedings,  283-288. 
Statutes  of  limitation,  eftect  of,  288. 

DISCHARGE  OF  NEGOTIABLE  INSTRUMENTS,  932-950. 

See  Negotiable  Instruments. 


INDEX  1549 

[The  figures  refer  to  pages] 

DISHONOR,  922,  923,  925,  926-928. 

What  constitutes  dishonor  by  non-payment,  922. 
Legal  effect  of  dishonor  by  non-payment,  923. 
What  constitutes  dishonor  by  non-acceptance,  025. 
Legal  effect  of  dishonor  by  non-acceptance,  925. 
Notice  of,  926-930. 

When  necessary,  926. 
What  constitutes,  926. 
Time  for  giving',  926,  927. 
Place  for  giving,  927. 
By  vi'hom  it  may  be  given,  927. 
To  whom  it  must  be  given,  927,  928. 
In  whose  favor  notice  operates,  928. 
Legal  effect  of  failure  to  give.  928,  929. 
Excuses  for  failure  to  give,  929,  930. 
Excuse  for  delay  in  giving  notice,  929. 
Waiver  of  notice,  929. 

Waiver  of  protest  as  waiver  of  notice,  929. 
When  notice  not  required,  929,  930. 

Notice  of  dishonor  by  non-payment  not  neces.sary  after   notice   of 
dishonor  by  non-acceptance,  930. 
DISSOLUTION  OF  PARTNERSHIP,  1318-1364. 
Nature  of,  1318. 
Causes  of,  1318-1324. 

Causes  not  based  on  breach  of  partnership  agreement,  1318. 
By  termination  of  agreed  term,  1318. 

By  express  will  of  any  partner  where  there  is  not  term,  1318. 
By  mutual  agreement,  1318. 
By  expulsion  of  partner,  1318. 
Breach  of  partnership  agreement  as  cause,  1319. 
Business  becoming  illegal,  as  cause,  1319. 
By  court  decree,  1319-1323. 

Effect  of  assignment  of  partner's  interest,  1323,  1324. 
Effect  of,  as  among  partners,  1325-1333. 

Where  not  caused  by  act,  bankruptcy  or  death  of  partner,  132.o. 
Where  caused  by  act,  bankruptcy  or  death  of  partner,  1325-1327. 
Liability  of  partners  to   copartners  for  wrongful  dissolution,  1327. 
Power  of  partners  to  wind  up  business,  1327-1331. 
Rights  of  partners  after  dissolution  with  respect  to  disposition  of 

assets,  1331. 
Relations   of   partners   after   dissolution   upon  election   to   continue 
business,  1331,  1332.  ^  .        ,o„„    ^^oo 

Riaht  of  partner  who  has  wrongfully  caused  dissolution,  lo32,  looo. 
Effect  of,  upon  relation  of  partners  to  third  persons.  1334-1364. 

As  to  partnership  liabilities  existing  prior  to  dissolution,  1334-1340. 
As  to  transactions  after  dissolution,  1340-1344.  _      _ 

Rights  of  creditors  against  individual  or  partnership  continuing  the 

business,  1345-1349. 
Priorities  among  claimants  in  settlement  of  partnership  estate,  1349- 
1364. 
DIVISIBLE  CONTRACTS,  193-200. 

DRAWEE, 

Right  of,  to  recover  money  paid  to  holder  under  mistake,  840-854,  857,  858. 
Right  of,  as  to  instruments  payable  to  order  of  fictitious  payee,  854-862. 
Relation  of  drawee  bank  to  drawer.  862-871. 

Is  bank  protected  where  it  has  paid  check  of  deceased  drawer,  not  know- 
ing of  his  death,  865-868. 
Surrender  to,  744-746.  ^    ,      ,     ,,n 

No  right  in  drawee  bank  to  demand  indorsement  of  payee  of  check,  746. 
See  Negotiable  Instruments,  etc. 

DRAWER, 

Relation  of  drawee  bank  to,  862-871. 

See  Negotiable  Instruments ;    Drawee ;    Bill  of  Exchange,  etc. 

DURESS,  307-310,  805-806. 


1550  INDEX 

[The  figures  refer  to  pages] 

EQLTITT, 

Mistake,  equitable  remedies  for,  290-293,  294-299. 

Fraud,  equitable  remedies  for,  299,  300,  303-307. 

Undue  influence,  equitable  remedies  for,  311-313. 

Specific  performance,  410-416. 

Injunction,  416-419. 

Enforcement  of  decrees  by  attaebment  for  contempt,  419-421, 
ESTOPPEL, 

Of  principal  to  deny  agent's  power,  500-503,  510-518. 

Of  owner  to  deny  custodian's  power  to  transfer  title,  1042-1045. 
EXECUTIONS,  403. 

FICTITIOUS   PERSON, 

Paper  payable  to  order  of,  bearer  paper,  690.  691. 

Right  of  drawee  of  instruments  payable  to  order  of,  854-862. 

As  drawee,  effect  as  to  requirement  of  notice,  929.  930. 
FORGERY, 

As  defense  to  negotiable  instrument,  820,  821,  826-830. 
FRAUD,  299-307. 

In  general,  299,  300. 

Elements  of,  300,  626-630. 

Facts  constituting,  301-303. 

Voidability  of  contract  induced  by,  301. 

Breach  of  contract  not  the  same  as.  303,  304. 

Immaterial  misrepresentations  not,  304,  305. 

Silence  alone  not,  306. 

Concealment  of  facts  as,  305-307. 

Mere  incorrect  prediction  or  unfulfilled  promise,  not  fraud.  626-630. 

As  defense  against  holder  in  due  course,  801-805,  83(t-S35. 

As  to  identity,  as  affecting  title  to  negotiable  instrument,  801,  862. 
FUNGIBLE  GOODS,  1000-1002. 

GARNISHMENT,  40.3-106. 

GOOD  WILL  OF  PARTNERSHIP,  1266-1274. 

HOLDER  OF  NEGOTIABLE  INSTRUMENT,  72.5-902. 
Statutory  definition  of.  725. 
Rights  of  all  holders,  72.5-747. 

Rights  and  disabilities  of  holder  as  against  maker  and  acceptor.  798-873. 
Rights  of  holder  against  indorser  and  drawer,  874-902. 
Right  to  complete  instrument,  725,  726. 

Conditional  upon  acting  within  authority  given  and  within  reason- 
able time,  726. 
Right  to  sue  prior  parties,  726-731. 
Holder  in  due  course,  who  is.  748-797. 
In  general,  748. 

Statutory  definitions,  748,  755,  766. 
Must  be  purchaser  for  value,  748. 
Statutory  definition  of  value,  748. 
Pre-existing  debt  as  value,  74.S-750. 
Prima  facie  presumption  that  instrument  has  been  Issued  for  value, 

748,  749,  754. 
Holder  in  due  course  to  extent  of  lien,  749,  754. 
,  Holder  is  holder  for  value  in  respect  to  all  parties  who  became  such 

prior  to  giving  of  value,  749,  754. 
Bona  fide  purchaser  for  value,  750. 

Holder  in  due  course  may  enforce  to  full  amount  against  all  parties,  750. 
Mere  crediting  to  depositor's  account,  of  check  on  other  bank,  does  not 

constitute  bank  a  holder  in  due  course,  751,  752. 
What  does  constitute  payment  of  value  by  bank  to  depositor  of  check  on 

other  bank,  752-754. 
Holder  in  due  course  must  be  purchaser  before  maturity,  754-761. 
Maturity  of  instruments,  755. 

Undated  paper  payable  at  fixed  period  after  date,  755. 

Effect  of  insertion  of  wrong  date  on  paper  issued  without  date,  755.. 

Days  of  grace  abolished,  755. 


INDEX  15.j1 

[The  figures  refer  to  pages] 

HOLDER  OF  NEOOTTABLE  INSTRUMENT— (^)ntinued, 
Instruments  falling  due  on  Saturday,  755. 
I'uicliaser  of  demand  paper  an  unreasonable  time  after  issue  not  a 

holder  in  due  course,  755. 
Determination  of  reasonable  time,  755.  757. 
Time  of  payment,  method  of  computing;.  755. 
Maturity  of  demand  instruments.  756-759. 
Reasonable  time  as  affecting,  756,  757. 
Provision  that  failure  to  pay  interest  niiikcs  note  due,  effect  upon 

time  of  maturity,  759,  760. 
Transaction  between   acceptor  and  holder  of  negotiable   instrument 

cannot  advance  maturity  as  against  subsequent  holder.  IGO. 
Holder  in  due  course  is 'not  prejudiced  by  omission  of  prior  party  to 

give  notice  of  dishonor  by  non-acceptance,  756. 
Holder  in  due  course  must  be  purchaser  in  good  faith,  761-777. 
Instrument  must  be  complete  and  regular  on  its  face,  761,  764,  765. 
Omission   of   required  revenue  stamp   as  affecting  completeness 

and  regularity,  764,  765. 
Obvious  alteration,  765. 
More  than  mere  suspicion  required  to  prove  bad  faith,  765-767. 
Circumstances  indicating  bad  faith.  7G7-770.  771-775. 
Circumstances  not  indicating  bad  faith.  77.V777. 
Purchaser  of  note  prior  to  completion.  770.  771. 
Payee  may  be  holder  in  due  course,  777-78.^. 

Transferee  from  holder  in  due  course  is  holder  in  due  course,  783-7S5. 
Reacquirer,,  rights  of,  785-793. 

Rights  of  transferee  on  unindorsed  order  paper,  79.';  797. 
Maker  and  acceptor,  rights  of  holder  against,  798-873. 
In   general,   798,  799. 

Defenses    and   claims   not   available  against  holders   in  due  course, 
800-826. 
Absence  of  consideration,  800,  801. 
Fraud.  S01-S05. 
Duress,  805,  806. 

Theft  of  completed  instrument.  806-807. 
Unauthorized  completion  of  instrument  by  custodian.  808. 
Theft   of  incomplete  instrument,   accompanied  by  negligence  in 

care  of  instrument,  808-814.  . 

Material  alteration,  as  regards  instrument  in  its  original  form, 

814,  815. 
Material  change  in  completed  instrument,  effected  otherwise  than 

by  erasures  made  possible  by  negligent  execution,  816-819. 
Forgery  accompanied  by  estoppel,  820,  821. 
Discharge  before  maturity,  822,  823. 
Claims  of  ownership.  824-826. 
Defenses  and  claims  of  ownership  available  against  holders  in  due 
course,  826-840. 
Forgery,  826-840. 
Fraud,   830-835. 

Theft  of  incomplete  instrument,  835-837. 
Voidness  by  statute,  837.  838. 
Incapacity,  838,  839. 
No  title  in  instrument,  840. 
Holder  other  than  holder  in  due  course.  799. 
Rights  of  holder  against  indorsers  and  drawer,  874-902, 
In  general,  874. 

Rights  against  unqualified  indorser,  875-877. 

Rights  against  qualified  indorser  and  transferor  by  delivery,  &77-8S5. 
Rights  against  accommodation  indor.ser.  88,''(-S99. 
Rights  against  restrictive  indorstT.  898,  809. 
Rights  against  dra^^•er,  899-902. 

See  Negotiable  Instruments,  etc. 
HONOR, 

Acceptance  for,  697,  701. 

Payment  for,  871-873. 

Protest  for  non-payment  necessary  after  acceptance  for  honor.  9.30. 


1552  INDEX 

[The  figures  refer  to  pages] 

ILLEGALITY,  314-343. 
In  general,  314,  315. 
Agi-eements  in  restraint  of  trade,  315-323. 

Price-fixing  agreements  between  competitors,  315-319. 
Rule  under  Sherman  Anti-Trust  Law,  315-319. 

Agreement  between  manufacturer  and  dealer  for  control  of  prices 
and  of  use  of  commodity  through  '-license  contracts"  and  "license 
notices,"  319-323. 
Agreements  limiting  the  liability  of  bailees  and  other  persons,  324-328. 
Gambling  agreements,  328,  329. 

Agreement  to  use  political' influence,  330-332,  337-342. 
Agreement  to  resign  public  office,  337-342. 
Where  one  party  intends  illegal  act  and  other  party  knows  or  suspects 

the  intention,  332,  333. 
Usurious  contract,  333,  334.  ^ 

Interest  necessary  to  make  life  insurance  contract  legal,  334,  335. 
Same,  fire  insurance.  336,  .337. 
Effect  of  illegality,  337-342. 
Sunday  contracts,  342,  343. 

IMPOSSIBILITY  OF  PERFORMANCE, 

See  Performance  of  Contracts. 

INDEPENDENT  CONTRACTOR, 

As  distinguished  from  agent,  551-553. 

INDORSEMENT.  709-713. 
In  general,  709. 
Anomalous  indorser,  709. 

Signer  not  making  clear  in  what  capacity  he  signs,  709.  711. 
Indorsement  on  allonge,  712,  713. 
Indorsement  must  be  on  instrument.  712.  713.  746. 
See  Negotiation  of  Negotiable  Instruments,  etc. 

INFANCY,  344-361. 
INJUNCTION.  416-419. 

See  Remedies. 
INSANE  PERSONS,  344-345. 

INSOLVENT, 

Statutory  definitions  of,  431,  1105,  1106. 

INSTALLMENT  CONTRACTS, 
See  Divisible  Contracts. 

INSURANCE, 

Insurable  interest,  334-337. 
In  life  insurance,  334-335. 
In  fire  insurance,  336,  .337. 

JEST, 

Transaction  in,  not  a  contract,  36. 

JUDGMENTS,  401,  402. 

JURY, 

Instructions  to,  14. 

Verdict  of,  14. 

LEGALITY, 

See  Illegality. 

LETTERS, 

As  constituting  contract,  30,  31,  33-36.  40-42.  .53-59. 
LIMITED  PARTNERSHIP,  136.5-1376. 

Uniform  Limited   Partnership  Act,   1368-1376. 

LIQUIDATED  DAMAGES,  394-398. 

MARRIAGE   SETTLEJMENT, 

As  contract  for  benefit  of  third  party.  250. 

As  promise  to  i)erform  pre-existing  legal  duty,  111-115. 
MARRIED  WOMEN, 

Contracts  of,  344. 


INDEX  1553 

[The  figures  refer  to  pages] 

MISTAKE,  290-299. 

In  general,  290,  291. 

Mutual  mistake  of  a  matter  constituting  the  basis  of  a  contract,  291-203. 

Mutual  mistalie  as  to  value  of  subjoct-niatter,  293,  294. 

Mutual  mistake  as  to  quantity  of  subject-matter.  294,  295. 

Mistake  of  seller  in  computing  selling  price,  295,  296. 

Reformation,  of  deed  or  contract  as  remedy,  29G,  297. 

Rescission  as  remedy,  298,  299. 

Mistake  of  fact  and  mistake  of  law,  298,  299. 

Mistake  of  drawee  paying  negotiable  instrument,  840-854. 
MOTION  PICTURE  MANUFACTURER, 

Right  of,  under  contract,  to  sue  for  accounting  by  distributor  and  to  ob- 
tain return  of  films,  .399-401. 

Right  to  rescind  contract  with  distributor,  400,  401. 

NEGOTIABLE  DOCUMENTS  OF  TITLE, 
See  Sales. 

NEGOTIABLE  INSTRUMENTS,  631-950. 
In  general,  631-637. 
Formal  requisites,  638-724. 

Writing  and  signature,  639. 

Promise  or  order,  639,  640. 

Promise  or  order  must  be  unconditional,  640-655. 

Indication  of  particular  fund  for  reimbursement,  640. 

Indication  of  account  to  be  debited,  640. 

Statement  of  transaction  giving  rise  to  instrument.  640-6.50. 

Order  or  promise  to  pay  out  of  particular  fund,  640. 

Effect  of  conditional  sale  stipulations  embodied  in  note,  649,  650. 

Effect  of  stipulation  for  attorney's  fees  in  event  of  foreclosure, 

651,  652. 
Effect  of  reference  in  note  to  conditions  in  mortgage.  652,  653. 
Express  conditions  and  conditions  implied  in  law,  653-^55. 
Time  of  payment,  requirement  of  certainty  of,  656-671. 
In  general,  650-658. 
Demand  paper,  what  is,  656,  657. 
Determinable  future  time,  what  is,  656,  657. 

Contingency,  instrument  payable  upon,  not  negotiable,  656,  657. 
Installments,  negotiability  of  paper  payable  in,  656. 
Death  as  event  certain  to  happen,  658,  659. 
Dissolution  of  partnership  as  event  certain  to  happen,  659. 
Events  not  certain  to  happen,  659-661. 
Agreement,  in  note,  to  all  extensions,  661,  662. 
Agreement  that  note  shall  mature  at  once,  if  maker  fail  to  fur- 
nish additional  security  to  satisfy  holders,  663,  664, 
Acceleration  clauses,  663-671. 
Act  to  be  done  in  addition  to  payment  of  money  renders  instrument 

non-negotiable,  663,  683,  684. 
Authorization  of  confession  of  judgment  after  maturity  does  not  de- 
stroy negotiability,  664. 
Waiver  of  immunity  under  law  does  not  render  instrument  nonnego- 

tiable,   664. 
Agreement  to  pledge  more  collateral,  664-667. 
Money,  requirement  that  instrument  must  be  payable  in,  671-684. 
In  general,  671-673. 
"Current  funds,"  etc.,  meaning  and  effect  of  making  instrument 

payable  in,  671-674. 
Commodity,  instrument  payable  in,  673-674. 
Gold  coin  of  United  States,  instrument  payable  in,  675, 
Foreign  money,  675-683. 
Certainty  of  sum  to  be  paid,  684-688. 
In  general,  684,  685. 
Sum  with   interest,  685. 
Sum  to  be  paid  in  installments,  685. 

Sum  to  be  paid  in  installments  with  acceleration  clause  as  to 
whole  amount,  6S5. 
B.&  B.Bus.Law— 98 


1554  INDEX 

[The  figures  refer  to  pages] 

NEGOTIABLE  INSTRTTMENTS— Continued. 

Sum  with  attorney's  fees,  685,  686. 

Stipulation  tliat  rate  of  interest  shall  be  higher  if  instrument  is 

not  paid  at  maturity,  686-688. 
Sum  with  exchange  at  fixed  or  current  rate.  685. 
Negotiability,  requirement  of  words  of,  688-692. 
In  general,  688,  690-692. 
Words  implying  "or  order,"  689-690. 
Order  paper,  classes  of  persons  that  may  he  payee,  690. 
Bearer  paper,  what  is,  690-€92. 
Certainty  o^  payee  in  order  paper,  691,  692. 
Negotiability,  provisions  not  affecting,  692-696. 
In  general,  692. 

Provision  for  sale  of  collateral  securities,  692,  693. 
Provision  giving  holder  election  to  require  something  in  lieu 

of  payment  of  money,  693,  694. 
Provision  for  waiver  of  immunity  under  law,  694. 
Provision  authorizing  confession  of  judgment  after  maturity, 

664,  694-696. 
Failure  to  state  place  where  drawn  or  place  where  payable, 

696. 
Seal,  696. 
Parties,  designation  of,  to  negotiable  instruments,  696-713. 
Maker,  696. 
Drawer,  696. 
Drawee,  696,  699. 
Obligors  generally.  697. 

Signing  in  trade  or  assumed  name,  697. 

"I  promise  to  pay,"  signed  by  tv\'0  or  more  persons,  697. 

Signing  by  agent,  697-699. 

Liability  and  immunity  of  agent  signing  for  principal,  697- 

699. 
Signature  by  procuration,  697. 
Payee,  699. 

Cashier,  etc..  as  payee,  699. 
Acceptor,  700-709. 
In  general,  700. 
Bills  in  sets,  702. 

Bank,  instrument  payable  at,  an  order  on  bank.  696. 
Date  of  instrument,  713. 

Ambiguous  instruments,  interpretation  of,  714. 
Consideration,  714-720. 

Deemed  prima  facie  to  have  been  issued  for  valuable  consideration, 

714. 
Absence  or  failure  of,  as  defense.  715-717. 
Burden  of  proof,  715-718. 
Value  and   consideration,   718-720. 
Accommodation  party,  720. 
Deliverj^  720-724. 

Statutory  definition,  721. 
Necessity  of,  720. 
Conditional,  720. 

Effect  of  undelivered,   incomplete  instrument,   completed   and   nego- 
tiated without  authority,  721. 
Effect  of,  when  accompanied  by  oral  agreement  as  to  rights  of  par- 
ties, 722-724. 
Discharge,  932-950. 

Of  maker  and  acceptor,  932-941. 
By  payment,  933-937. 
By  cancellation,  937. 
By  material  alteration.  938-940. 
By  renunciation,  940,  941. 

By  act  which  will  discharge  simple  contract,  941,  947,  948. 
By  acquisition  of  title  by  principal  debtor,  9-11. 
Of  regular  indorsers,  941. 
Of  persons  secondarily  liable,  941. 


INDEX  1555 

[The  figures  refer  to  pages] 

NEGOTIABLE  INSTRTTMIONTS— Continued, 
Of  persons  primarily  liable,  941. 
Of  surety,  942-950. 
Of  accommodation  party,  942-945. 

See  Negotiation  of  Negotiable  Instruments;    Bill  of  Exchange; 
Drawee;   Drawer;   Dishonor;   Presentment,  etc. 

NEGOTIATION  OP  NEGOTIABLE  INSTRUMENTS.  7.31-747. 
What  constitute.Sf,  731-7.33. 

Of  order  paper,  only  by  indorsement,  727,  728,  731. 
Of  bearer  paper,  by  delivery,  731. 
Delivery,  statutory  definition  of,  731. 
Issue,  statutory  definition  of,  731. 
Indorsement,  .statutory  definition  of,  731. 
Indorsement,  kinds  of,  731. 
"Assignment"  as  indorsement,  712,  731-733. 
Indorsement,  special,  733-734. 
Indorsement  in  blank,  734^736. 
Right  of  holder  to  convert  blank  Indorsement  into  special  indorsement, 

735. 
Bearer  paper,  if  only  or  last  indorsement  is  in  blank,  735,  737. 
Right  of  holder  to  strike  out  indorsements,  736. 
Effect  of  special  indorsement  on  bearer  paper,  73G. 
Guaranty  as  indorsement,  709-712. 
Restrictive  indorsement,  737-741. 
Qualified  indorsement,  741.  742. 
Conditional  indorsement,  742. 

Transfer  of  order  paper  \Aitliout  indorsement,  743,  744. 
Surrender  of  paper  to  drawee,  744. 

Drawee  bank  cannot  require  indorsement  of  holder,  744-746. 
Indorsement  of  part  of  instrument  not  a  negotiation,  746. 
Instrument  paid  in  part  may  be  indorsed  as  to  residue,  740,  747. 
Indorsement  of  all  payees  or  indorsees  of  paper  required  where  they  are 

not  partners,  747. 
Indorsement  of  paper  payable  to  cashier,  manner  of,  747. 
Indor.sement  of  payee  or  indorsee  whose  name  is  misspelled,  747. 
Indorsement  in  representative  capacity  may  negative  personal  liability, 

747. 
Presumption   that  negotiation  was  before  instrument  was  overdue,  747. 
Presumption  that  indorsement  was  made  at  place  where  instrument  is 

dated,  747. 
Instrument  negotiable  until  restrictively  indorsed  or  discharged,  747. 
Effect  of  indorsement  or  assignment  by  infant  or  corporation  without 

capacity,  747. 
Effect  of  negotiation  back  to  prior  party,  747. 

NEWSPAPER, 

Contract  to  use  political  influence  of,  330-332. 

NOTE,  NEGOTIABLE  PROMISSORY, 

Statutory  definition  of,  696. 

See  Negotiable  Instruments;   Presentment;    Notice  of  Dishonor;   Ne- 
gotiation of  Negotiable  Instruments,  etc. 
NOTICE  OF  DISHONOR. 
See  Dishonor. 

NOVATION,  279-282. 

OFFER,  28-55. 

What  constitutes,   28-37. 

As  operative  fact,  28,  29. 

Duration  of,  37-55. 

Termination  of,  by  some  event,  38-44. 

By  lapse  of  time,  38-42. 

By  death  or  insanity,  43,   14. 
Revocation  by  offeror,  44-52. 

Words  or  conduct  amounting  to,  50. 

Necessity  of  communication  to  offeree,  50. 
Rejection  by  offeree,  52-55. 


1556  INDEX 

tThe  figures  refer  to  pages] 

OFFER  AND  ACCEPTANCE, 

Facts,  legal  effect  of.  23-28. 

By  correspondeuce,  30,  31,  33-36,  40-42,  53-59. 

Implied  in  fact  or  in  law,  81-92. 

OPTION  CONTRACTS,  48-50. 

PAROL  EVIDENCE, 

Not  admissible  to  vary  terms  of  written  contract,  532. 

PARTNERS, 

Relations  of,  between  themselves,  1241-1297. 

Partnership  property,  specific,  partner's  interest  in,  1241-1259. 

Tenancy  in  partnership,  under  Uniform  Partnership  Act,  1241-1246. 

Partnership  property,  what  constitutes,  1259-1261. 

Partnership  capital,  what  constitutes,  1261-1264. 

Partnership  realty,  acquisition  and  transfer  of,  1264-1266. 

Partnership  name  and  good  will,  1266-1274. 

Partner's  interest  in  partnership,  1274,  1275. 

Sharing  of  profits  and  losses,  1275-1277. 

Contributions,  partner's  rig'ht  to  repayment  of,  1277,  1278. 

Indemnity,  partner's  right  to,  1278. 

Accounting,   partner's   right  to,   1278-1284. 

Fiduciary  relation  of  partners,  128JH292. 

As  affecting  leases  taken  by  one  partner,  1284-1287. 

As  affecting  profits  made  by  one  partner,  12S7-1291. 

As  affecting  profits  fraudulently  made  by  one  partner  at  expense 

of  other  partners,  1291,  1292. 
Right  to  follow  funds  wrongfully  appropriated  by  copartner,  590- 

594. 
Does  not  make  partner  liable  for  honest  errors  in  judgment,  1292. 
Management,  partner's  right  to  participate  In,  1292-1295. 
General  rule,  equal  rights  to  participate,  1292. 
General  rule,  majority  governs,  1292-1294. 
Same,  exception,  1295. 

General  rule,  no  partner  admitted  without  consent  of  all  part- 
ners, 1293. 
Books  of  partnership,  partner's  right  to  inspect,  1295. 
Information  as  to  all  things  affecting  the  partnership,  right  of 
partner  to  demand,  1295. 
Remuneration  for  services,  partner's  right  to,  1296,  1297, 
Third  persons,  relations  of  partners  to,  1298-1317. 
Partner's  power,  scope  of.  in  general,  1298-1301. 
Particular  powers,  1302,  1303. 

To  make  assignment  for  creditors,  1302. 
To  dispose  of  good  will,  1302. 

To  do  act  making  it  impossible  to  carry  on  business,  1302. 
To  confess  judgment,  1302. 
To  submit  claim  to  arbitration,  1302. 

To  do  act  in  contravention  of  restriction  on  authority,  1302. 
To  sell  partnership  realty.  1303. 
Powers  arising  by  estoppel,  1303-1305. 
Liability  of  partners,  when  joint,  and  when  joint  and  several.  1305- 

1311. 
Right  of  individual  partner's  creditor  against  partnership  property, 
1312-1317. 
Causes  of  dissolution,  1318-1324. 
Effect  of  dissolution  as  among  partners,  1327-1333. 
Notice  to  one  partner  as  notice  to  other  partners,  1302. 
See  Partnership ;   Dissolution  of  Partnership,  etc. 

.  PARTNERSHIP,  Part  V,  1215-1376. 
Introduction,  1215-1217. 
What  constitutes,  1218-1240. 

The  relation  the  result  of  intention,  1218-1228. 

Estoppel  to  deny  partnership,  1228-1230. 

As  to  third  persons,  by  operation  of  law,  1230-1234. 

Distinguished  from  business  trusts,  1235-1240. 


INDEX  1557 

[The  figures  refer  to  pages] 

PARTNERSHIP— Continued, 

Causes  of  dissolution,  1318-1324. 

See  Partners;    Dissolution  of  Partnership;    Limited  Partnership,  etc. 

PAYMENT, 

Of  negotiable  instrument,  what  constitutes,  033-937. 

Of  debt,  when  negotiable  instrument  constitutes,  937,  1099. 

PENALTIES, 

As  distinguished  from  liquidated  damages,  394-398. 

PERFORMANCE  OF  CONTRACTS,  140-244. 
In  general,  140,  141. 
Interpretation  as  affecting,  141-154. 
Name  of  commodity,  144-147. 
Specifications,  reference  in,  148,  149. 
Term  specifying  amount,  149. 

Contract  made  by  correspondence — Interpretation  dependent  upon  in- 
terpretation of  letters  taken  together,  149-151. 
Interpretation  of  constitution  as  compared  with  interpretation  of  con- 
tracts, 151-154. 
Conditions  in  contracts,  154-244. 
In  general,  154-159. 
Defined.  156. 

Performance  on  time  as  a  condition,  159-164. 

Performance  to  the  satisfaction  of  another  as  a  condition,  164-166. 

Procuring  certificate  of  architect  as  a  condition,  166-170. 

Substantial  performance  In  other  types  of  contracts  as  conditions, 

170-188. 

Where  strict  performance  is  prevented  by  act  of  God,  170,  171. 

Where  performance  of  defendant  is  prevented  by  plaintiff's  own 

wrong,  171,  172. 
Where  building  on  land  contracted  to  be  sold  is  destroyed,  172, 

173. 
Effect  of  refusal  of  vendor's  wife  to  release  dower  in  conveyance 

of  realty,  173-176. 
Constructive  eviction  as  a  condition  subsequent,  176,  177. 
Singer's  presence  as  condition  precedent,  177-179. 
Furnishing   salesman  as  condition  precedent  in  sales  contract, 

179-183. 
Immaterial  breach  not  a  condition  subsequent,  183. 
Warranty  in  the  nature  of  a  condition  precedent,  184. 
Truth  of  mere  representation  as  condition,  184,  185. 
Mutually  dependent  conditions,  18.5-188. 
Breach  of  independent  condition,  187,  188. 
Tender  of  performance  as  condition,  188-193. 
Divisible  contracts,   193-200. 

Rule  under  Uniform  Sales  Act,  198,  199. 
Conditions  subsequent,  200-202. 

Prevention  as  an  excuse  for  non-performance,  202-204. 
Waiver  as  an  excuse  for  non-performance,  205-211. 
Anticipatory  breach  of  contract,  212-218. 

Right  of  party  materially  in  default  to  recover  for  his  incomplete  per- 
formance, 218-227. 
Impossibility  of  performance  as  a  condition,  227-244. 
In  general,  227-229. 
Impossibility  of  raising  crop  on  seller's  land  where  contract  does  not 

limit  subject-matter  to  crop  so  raised,  229,  2.30. 
Classes  of  events  operating  as  conditions  subsequent  to  excuse  non- 
performance, 231,  232. 
Impossibility  occasioned  by  exercise  of  war  powers  of  Congress,  2.3.3- 

235. 
Impossibility  that  might  have  been  provided  against  by  proper  stip- 
ulations in   contract,   235-237. 
Impossibility   of   construction   of  engineering  project,  occasioned   by 

unanticipated  condition  of  underlying  soil,  237-242. 
Impossibility  of  construction  of  building,  occasioned  by  destruction 
after  partial  completion,  242-244. 


1558  INDKX 

[Tte  figures  refer  to  pages] 
PLEDGES.  4B7-469. 

POTENTIAL  EXISTENCE, 
Doctrine  of,  1002,  1003. 

PREkSENTMENT,  903-925. 

Time  of,  for  payment  of  demand  notes,  903,  904. 

Time  of,  for  payment  of  demand  bills  of  exchange,  in  order  to  charge 

drawer  and  indorsers,  except  drawers  of  checks,  904-915. 
Time  of,  of  check,  to  charge  drawer,  915-920. 

Time  of,  of  instrument  b<5aring  fixed  date  of  maturity,  920,  021. 
When  not  necessary,  921. 
What  constitutes,  922. 
Place  of,  922. 
By  whom,  922. 
To  whom,  922. 

Prerequisite  to  dishonor,  922. 

Legal  effect  of  failure  to  make  due  presentment  for  payment,  923. 
Excuses  for  failure  to  present  for  payment,  923. 
For  acceptance,  923-925. 

When  presentment  for  acceptance  is  necessary,  923. 
What  constitutes  presentment  for  acceptance,  923,  924. 
liegal  effect  of  failure  to  present  for  acceptance,  924,  925. 
Excuses  for  non-presentment  for  acceptance,  925. 

PREVENTION  OF  PERFORMANCE, 

Effect  of,  202-204. 
PROFITS  AND  LOSSES, 

Sharing  of,  in  partnership,  1275-1277. 
PROMISSORY  NOTES.     See  Note,  Negotiable  Promissory;    Negotiable  In 

struments;     Presentment;    Notice  of  Dishouor,  etc. 
PROTEST, 

When  permitted,  930. 

When  necessary,  930. 

What  constitutes,  931. 

Time  for  making,  931. 

Place  for  making,  931. 

By  whom  protest  must  be  made,  931. 

For  better  security,  930. 

Legal  effect  of  failure  to  protest,  931. 

Excuses  for  failure  to  protest,  931. 

Waiver  of,  as  waivfer  of  notice,  929. 

QUASI  CONTRACT.  81-92. 

Distinction  between  contracts  implied  in  fact  and  contracts  Implied  Ix 

law,  89-92. 
Right  of  drawee  to  recover  money  paid  holder  under  mistake,  840-854, 

RATIFICATION, 

Of  contract  as  making  principal  liable  for  negligent  tort  connected  wi'Jh 
contract,  537,  538. 

Of  contract  as  adopting  disability  resulting  from  fraud  of  agent,  538-540 

Of  sale  as  carrying  with  it  power  to  receive  payment,  540. 

Of  forgery,  541-543. 

Of  contract,  by  stranger,  not  possible,  unless  stranger  is  named  by  un- 
authorized agent  as  principal,  543-545. 

Of  fire  insurance  policy  by  insured,  not  possible  after  loss,  545-547. 

REALITY  OF  CONSENT,  289-313. 

See  Mistake,  Fraud,  Duress,  Undue  Influence. 

RECEIVERSHIP,  440-442. 
RELEASE, 

Discharge  of  contract  by,  282,  283. 
REMEDIES,  388-442.  * 

In  general,  388,  389. 

Damages,  measure  of,  389-398,  1125-1127,  1205-1211. 
In  general,  389-394. 
Liquidated  damages  and  penalties,  394-398. 


INDEX  1559 

,  [The  figures  refer  to  pagesj 

REMEDIES— Continued, 
In  sales, 

In  action  by  buyer  for  bi-each  of  contract  to  sell,  1125-1127. 
In  action  by  seller  for  Itreach  of  contract  to  purchase,  1207-1211. 
In  action  by  buyer  for  breach  of  warranty,  1205-1207. 
Re.sclssion,  39S-401,  1197-1203. 
Judgments,  401,  402. 
Executions,  403. 
Garnishment,  403-406. 
Attachment  of  property,  406-410. 
Specific  performance,  410-416. 
In  general,  410-412. 

Inadequacy  of  legal  remedy  as  affecting  right  to.  412-414. 
Of  contract  to  sell  land,  412-413. 
Of  contract  to  purchase  stock,  413,  414. 

Of  contract  of  which  the  performance  would  require  much  court  su- 
pervision, 414-416. 
Of  contract  to  sell  goods,  1212-1214. 
Injunction,  416-419. 

In  general,  416,  417. 

Enjoining  employe  of  unique  value  from  working  for  competitor  in 
violation  of  contract  of  employment,  417-419. 
Attachment  for  contempt,  419-421. 
Bankruptcy,  421-422. 
See  Bankruptcy. 
Receiverships,  440-442. 
Of  buyer  of  goods,  1183-1214. 
Of  seller  of  goods,  1093-1127. 

RESCISSION  OF  CONTRACTS,  398-401. 

RESTRAINT   OF  TRADE,   AGREEMENTS  IN, 

See  Illegality. 

REWARD, 

Duration  of  public  offer  of,  38-41. 

SALES,  Part  IV,  951-1214. 

Introduction,  951,  952.  ^ 

Contract  to  sell,  statutory  definition,  975. 
Sale,  statutory  definition,  975. 
When  title  passes,  953-1035. 
Ascertained  goods,  953-988. 

General  statutory  rule.  960. 

Conduct,  usages  and  circumstances  as  showing  Intention  of  par- 
ties, 957. 
Title  passes  when  parties  intend,  954-959. 
Presumptively  title  passes  when  contract  is  made,  959-976. 
Postponement  of  time  of  payment  or  delivery  immaterial,  959. 
Where  something  remains  to  be  done  to  the  goods  by  the  seller, 

966,  967. 
"Where  only  weighing  or  measuring  must  be  done  to  ascertain 

price,  967. 
Where  sale  is  on  credit,  968-971. 
Presumption  of  immediate  passage  of  title  overcome  by  proof 

that    parties  intended  cash  sale,  971-976. 
Contracts  on  sale  or  return  and  contracts  to  sell  on  approval, 

distinction  as  to  passage  of  title,  976-984. 
Conditional  sales,  985-988. 
Unascertained  goods,  989-1035. 
In  general,  989-991. 

Unconditional  appropriation,  acts  of,  991-997.  1018. 
Unconditional  appropriation,  acts  of,  with  respect  to  only  a  por- 
tion of  the  goods,  997-1000. 
Fungible  goods,  acts  of  unconditional  appropriation  not  neces- 
sary, 1000-1002. 
Sale  of  undivided  share,  1000. 
Goods  not  in  existence  at  date  of  contract,  1002-1006. 


1560  TXDKX 

[Tbe  figures  refer  to  pages] 

SALES— Continued, 

Passing  of  title  on  delivery  to  carrier  or  other  bailee,  614,  1006- 

1027. 
"Collect  on  delivery."  effect  of,  upon  passage  of  title  on  delivery 

to  carrier,  1010,  1011. 
When  title  passes,  if  contract  requires  seller  to  deliver  to  buyer 

or  at  particular  place.  1015.  1016. 
Same,  when  freight  is  to  be  deducted  from  price,  1022. 
Under  "c.  i.  f."  contract,  1022-1024. 

Form  of  bill  of  lading,  effect  of,  upon  passing  of  title,  1028-1035. 
Effect  of  retention  of  right  of  disposal  by  seller,  1028-1033. 
Straight  bills  and  order  bills  of  lading,  1029. 
Advantages  of  retaining  the  right  of  disposal,  1033-1035. 
Powers  of  non-owners  to  transfer  title  to  innocent  purchasers,  1036-1062. 
In  general,  1036-1042. 

Does  not  arise  from  mere  possession,  504,  505. 
Estoppel  of  owner  to  deny  custodian's  power  to  transfer  title,  1042- 

1045. 
Voidable  title,  sale  by  one  having,  1046-1049. 
Seller  in  possession  of  goods  already  sold,  sale  by,  1050-1053. 
Right  of  creditors  against  goods  sold  in  seller's  possession,  1054. 
Right  of  creditors  against  goods  sold  in  violation  of  bulk  sales  acts, 
1054-1062. 
Negotiable  documents  of  title,  1063-1092. 
Introduction,  1063,  1064. 
Statutory  definition.   1004. 

Words  signifying  negotiability  or  non-uegotiabilitv,  1065. 
Negotiation,  1066-3068. 
Rights  of  indorsee,  106S-10S6. 
Rights  of  indorsee  against  indorsers,  1086-1089. 
Rights  of  creditors  against  goods  represented  by,  1090. 
Rights  of  transferees  of  non-negotiable  documents  of  title,  1090-1092. 
Remedies  of  unpaid  seller,  1093-1127. 
Introduction,  1093. 
Action  for  purchase  price,  1093-1098. 

Where  title  has  already  passed  to  buyer,  1093,  1094. 
Where  title  has  not  passed  but  buyer  has  agreed  to  pay  price  on 
day  certain.  1094-1098. 
Right  of  rescission,  1123-1125. 
Seller's  rights  against  goods  in  general,  1098-1125. 
Introduction,  1098-1099. 
Who  are  unpaid  sellers,  1099-1102. 
Under   what   circumstances    may    unpaid    seller   exercise    rights 

against  goods,  1102-1108. 
Unpaid  seller's  lion.  1099-1108,  1110.  1118-1120. 
Right  to  resell,  1102,  1120-1123. 
Loss  of  seller's  lien  by  delivery  to  carrier  or  other  bailee  without 

reserving  property  or  right  to  posse.ssion,  1104. 
Loss  of  seller's  lien  by  buyer's  lawfully  getting  possession,  1104. 
Loss  of  seller's  lien  by  waiver,  1104. 

Judgment  for  seller  for  price  of  goods  does  not  destroy  lien,  1105. 
Stoppage  in  transitu,  right  of,  110.5^1108,  1110-lllS.' 
See  Stoppage  in  Transitu,  Right  of. 
Right  to  damages  for  breach  of  contract,  1125-1127. 
Measure  of  damages,  1109,  1110. 
Warranties,  1128-1182. 

See  Warranties. 
Buyer,  rights  and  remedies  of,  1183-1214. 
Introduction,  1183. 

Right  of  buyer  to  examine  goods,  1183-1190. 
Acceptance,  nature  and  consequences  of,  1190-1193. 
Return  goods  not  accepted  because  of  noncompliance  with  contract, 

buyer  under  no  duty  to,  1193-1195. 
Breach  of  warranty,  buyer's  remedies  for,  1195-1207. 
In  general,  1195,  1190. 
Right  to  refu,se  to  accept  goods,  1196,  1197. 


INDEX  1561 

[The  figures  refer  to  pages] 

SALES— Continued, 

Right  of  rescission,  1197-1203. 

Recoupment,  setting  up  breach  of  warranty  as,  1203.  1204. 

Action  for  broach  of  warranty,  1204-1207. 

Measure  of  damages  for  breach  of  warranty,  1205-1207. 

Warranty,  existence  and  nature  of, 
•  See  Warranties. 

■  Bight  to  recover  damages  for  breach  of  contrnct  to  sell,  1207- 

1211. 

]\Ieasure  of  damages  for  breach  of  contract  to  sell,  1207-1211. 

Right  to  sue  seller  for  conversion.  1211-1212. 

Right  to  specific  performance,  1212-1214. 

SEALED  INSTRUMENTS,  137-139. 

SPECIFIC  PERFORMANCE  OF  CONTRACTS,  410-41G. 
See  Remedies. 

STATUTE  OF  FRAUDS,  362-387. 
In  general,  3G2-363. 
Contracts  of  guaranty,  363-367. 
Contracts  of  executor  and  administrator,  367,  368. 
Consideration  of  marriage,  368. 
Sales  of  land,  369-373. 
Not  to  be  performed  in  one  year,  374-376. 

Promise  to  be  performed  at  an  uncertain  time,  374-375. 
Difference  between  excuse  by  death  and  performance  by  death,  374- 
375. 
;  For  a  year's  service  to  begin  in  future,  375,  376. 

When  year  begins  and  ends,  375,  376. 
Sales  of  goods,  376-379. 

Under  Uniform  Sales  Act,  376,  377. 

One  contract  of  sale  for  several  articles,  each  under  the  value  named 
in   the   statute,    or  several   separate  contracts,   each   without   the 
statute,  378,  379. 
Part  payment,  382,  383.  ^ 

Acceptance  of  goods  as  taking  case  out  of  statute,  376,  379-o81. 
Compliance  with  the  statute.  380-387. 

Essentials  of  memorandum,  383,  384.     • 
The  signature  required,  383,  384. 
Several  letters  or  documents  as  memorandum,  386. 
Oral  ratification  of  written  agreement,  386. 
Power  to  validate  an  oral  contract,  384-387. 
Non-compliance,  effect  of,  384-387. 
As  prescribing  a  rule  of  evidence,  384.  385. 
Effect  of  full  performance  by  one  party,  372,  373. 
Part  performance,  373. 

Rescission  of  written  contract  by  parol  agreement,  386. 
Contracts  not  within,  ^  ,.^   o/..    oor- 

Promise  "for  beneficial  consideration  to  pay  another's  debt,  ofi4.  6b7. 
Promise  to  pay  debt  of  another  in  consideration  of  forbearance  to 

sue  debtor,  365,  366. 
Engagement  to  marry,  368. 
Sale  of  house,  to  be  severed,  370-372. 
Sale  of  growing  crops,  372. 

Contract  to  be  performed  at  an  uncertain  time.  o(4,  3(o. 
Contract  not  to  compete  for  five  shears,  374,  375. 
To  make  a  chattel  to  special  order,  377,  378. 

STATUTE  OF  LIMITATIONS. 

Running  of  statute  not  a  discharge,  288. 

STOPPAGE  IN  TRANSITU,  RIGHT  OF,  1105-1108,  1110-1118. 
In  general,  1105,  1110,  1111. 
Insolvent,  statutory  definitions,  1105,  1106. 
"In  transit,"  statutory  definition,  1106,  1107. 

Duration  of  "transit."  1111,  1112.  ^  ,     , 

Effect  of  indorsement  of  bill  of  lading  by  consigns*  after  earner  s  receipt 
of  stoppage  order,  1111,  1112. 


1562  INDEX 

[The  figures  refer  to  pages] 

STOPrAOE  IN  TRANSITU,  RIGHT  OF— Continued, 

Dolivery  by  carrier  to  vendee,  what  constitutes,  1113,  1114. 
Sulisequent  transit,  no  riglit  of  stoppage  in,  1114-1116. 
Sale  or  disposition  of  goods  by  buyer,  general  rule,  1116. 
Effect  of  issuance  of  negotiable  document  of  title  to  bona  fide  purchaser 
for  value,  1116-1118. 

SURETYSHIP,  4^9-483. 

In  general,  4G9— 483. 

Discharge  of  surety  on  negotiable  instrument,  942-950. 
SURPLUS, 

Rights  of  stockholder  in,  1443-1452. 

THIRD  PERSONS,  RIGHTS  OF,   IN  CONTRACTS,  245-273. 
In  general,  245. 

Contracts  for  the  benefit  of  a  donee  of  the  promisee,  245-251. 
Contracts  for  the  benefit  of  a  creditor  of  the  promisee,  251-258. 
Mortgagee    beneficiary,    252-258. 
Assignment,   nature  and  requisites  of,  259-265. 
Assignment,  interests  capable  of,  265-270. 
Assignee,  nature  and  extent  of  interest  acquired  by,  270-273. 

TORTS  OF  AGENT, 

Master's  liability  for  torts  of  servant,  547-564. 

Master  does  not  incur  disability  by  reason  of  alteration  by  agent  or  serv- 
ant outside  the  scope  of  authority,  547-551. 
Theory  underlying  master's  liability  for,  548-551. 
Doctrine  of  distinction  between  agent  and  servant,  548. 
Tort  committed  by  servant  in  charge  of  sti'eet  car,  551-553. 
Master  not  liable  for  tort  committed  by  servant  while  on  independent 

venture  of  his  own,  553-555. 
Owner  of  automobile,  Michigan  statute  as  to  liability  of,  556. 
Master's  liability  for  assault  and  battery  Iiy  servant  authorized  to  re- 
cover possession  of  master's  goods,  556,  557. 
Master's  liability  for  wrongful  arrest  by  servant,  557-560. 
Bank  not  liable  for  cashier's  wrongful  appropriation  of  special  de- 
posit, out  of  course  of  business,  560-562. 
Fraud  of  agent  as  creating  disability  in  principal  to  enforce  contract, 

562,  563. 
Fraud  of  agent  as  basis  of  tort  action  against  principal,  563,  564. 
•     Tort  of  agent  as  basis  of  tort  action  against  agent,  620,  621, 
TRADE  ACCEPTANCES,  1034,  1035. 

TRUST, 

Declaration  of,  262-265. 

As  business  organization,  1235-1240. _  j 

ULTRA  VIRES, 

Contracts,   1408-1413. 

UNDUE  INFLUENCE,  311-313. 
USURIOUS  CONTRACTS,  333,  334. 

VALUE, 

In  negotiable  instruments,  718-720. 
VERDICT,  14. 
VOTING  TRUSTS,  1428-1433. 

WARRANTIES,  1128-1182. 
In  general,  1128-1130. 
Express,  1130-1143. 

Statutory  definition,  11.30. 

AVhat  languasp  amounts  to,  11.30-1135. 

"Seller's  talk,"  1134.  1135. 

What  is  covered  by  general  warranty,  1135-1137. 

Promised  condition  as  warranty,  1137-1143. 
Implied  warranties,  1143-1177. 

In  general,  1143 


Of  title,  lip-1146 


*: 


INDIOX  1-^63 

[The  figures  refer  to  pages] 

WARRANTIES— Continued, 

Thiit  soods  sliall  correspond  to  description,  1146-1152. 

As  to  "fireproof"  safe,  1148-1151. 

Wliat  is  sale  by  description,  1151,  1152. 
Tliat   goods   correspond   to   sample,   1153-1157. 
Tliat  goods  are  merchantable,  1147,  1148,  11.58-1161. 
Tliat  goods  are  fit  for  particular  purpose,  1161-1171. 
May  arise  from  usage  of  trade,  1171.  1172. 
May  be  negatived  by  agreement,  1173-1177. 
■Riglits  of  subvendees  against  former  warrantors,  1171-11S2 

WORKMEN'S  COMPENSATION  ACTS, 

Servant's  rights  under,  603-610. 
Constitutionality  of,  151-154,  610. 

WRITING.   CONTRACTS   REQUIRED  TO  BE  IN,  362-387. 

See  Statute  of  Frauds. 


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